G.R. No.

L-28896 February 17, 1988

COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
ALGUE, INC., and THE COURT OF TAX APPEALS, respondents.
CRUZ, J.:
Taxes are the lifeblood of the government and so should be collected without unnecessary hindrance On the other hand,
such collection should be made in accordance with law as any arbitrariness will negate the very reason for government
itself. It is therefore necessary to reconcile the apparently conflicting interests of the authorities and the taxpayers so that
the real purpose of taxation, which is the promotion of the common good, may be achieved.
The main issue in this case is whether or not the Collector of Internal Revenue correctly disallowed the P75,000.00
deduction claimed by private respondent Algue as legitimate business expenses in its income tax returns. The corollary
issue is whether or not the appeal of the private respondent from the decision of the Collector of Internal Revenue was
made on time and in accordance with law.
We deal first with the procedural question.
The record shows that on January 14, 1965, the private respondent, a domestic corporation engaged in engineering,
construction and other allied activities, received a letter from the petitioner assessing it in the total amount of P83,183.85
as delinquency income taxes for the years 1958 and 1959. 1 On January 18, 1965, Algue flied a letter of protest or request
for reconsideration, which letter was stamp received on the same day in the office of the petitioner. 2 On March 12, 1965, a
warrant of distraint and levy was presented to the private respondent, through its counsel, Atty. Alberto Guevara, Jr., who
refused to receive it on the ground of the pending protest. 3 A search of the protest in the dockets of the case proved
fruitless. Atty. Guevara produced his file copy and gave a photostat to BIR agent Ramon Reyes, who deferred service of
the warrant. 4 On April 7, 1965, Atty. Guevara was finally informed that the BIR was not taking any action on the protest
and it was only then that he accepted the warrant of distraint and levy earlier sought to be served. 5 Sixteen days later, on
April 23, 1965, Algue filed a petition for review of the decision of the Commissioner of Internal Revenue with the Court of
Tax Appeals. 6
The above chronology shows that the petition was filed seasonably. According to Rep. Act No. 1125, the appeal may be
made within thirty days after receipt of the decision or ruling challenged. 7 It is true that as a rule the warrant of distraint and
levy is "proof of the finality of the assessment" 8 and renders hopeless a request for reconsideration," 9 being "tantamount
to an outright denial thereof and makes the said request deemed rejected." 10 But there is a special circumstance in the
case at bar that prevents application of this accepted doctrine.
The proven fact is that four days after the private respondent received the petitioner's notice of assessment, it filed its letter
of protest. This was apparently not taken into account before the warrant of distraint and levy was issued; indeed, such
protest could not be located in the office of the petitioner. It was only after Atty. Guevara gave the BIR a copy of the protest
that it was, if at all, considered by the tax authorities. During the intervening period, the warrant was premature and could
therefore not be served.
As the Court of Tax Appeals correctly noted," 11 the protest filed by private respondent was not pro forma and was based
on strong legal considerations. It thus had the effect of suspending on January 18, 1965, when it was filed, the
reglementary period which started on the date the assessment was received, viz., January 14, 1965. The period started
1

running again only on April 7, 1965, when the private respondent was definitely informed of the implied rejection of the said
protest and the warrant was finally served on it. Hence, when the appeal was filed on April 23, 1965, only 20 days of the
reglementary period had been consumed.
Now for the substantive question.
The petitioner contends that the claimed deduction of P75,000.00 was properly disallowed because it was not an ordinary
reasonable or necessary business expense. The Court of Tax Appeals had seen it differently. Agreeing with Algue, it held
that the said amount had been legitimately paid by the private respondent for actual services rendered. The payment was
in the form of promotional fees. These were collected by the Payees for their work in the creation of the Vegetable Oil
Investment Corporation of the Philippines and its subsequent purchase of the properties of the Philippine Sugar Estate
Development Company.
Parenthetically, it may be observed that the petitioner had Originally claimed these promotional fees to be personal holding
company income 12 but later conformed to the decision of the respondent court rejecting this assertion. 13 In fact, as the
said court found, the amount was earned through the joint efforts of the persons among whom it was distributed It has
been established that the Philippine Sugar Estate Development Company had earlier appointed Algue as its agent,
authorizing it to sell its land, factories and oil manufacturing process. Pursuant to such authority, Alberto Guevara, Jr.,
Eduardo Guevara, Isabel Guevara, Edith, O'Farell, and Pablo Sanchez, worked for the formation of the Vegetable Oil
Investment Corporation, inducing other persons to invest in it. 14 Ultimately, after its incorporation largely through the
promotion of the said persons, this new corporation purchased the PSEDC properties. 15 For this sale, Algue received as
agent a commission of P126,000.00, and it was from this commission that the P75,000.00 promotional fees were paid to
the aforenamed individuals. 16
There is no dispute that the payees duly reported their respective shares of the fees in their income tax returns and paid
the corresponding taxes thereon. 17 The Court of Tax Appeals also found, after examining the evidence, that no distribution
of dividends was involved. 18
The petitioner claims that these payments are fictitious because most of the payees are members of the same family in
control of Algue. It is argued that no indication was made as to how such payments were made, whether by check or in
cash, and there is not enough substantiation of such payments. In short, the petitioner suggests a tax dodge, an attempt to
evade a legitimate assessment by involving an imaginary deduction.
We find that these suspicions were adequately met by the private respondent when its President, Alberto Guevara, and the
accountant, Cecilia V. de Jesus, testified that the payments were not made in one lump sum but periodically and in
different amounts as each payee's need arose. 19 It should be remembered that this was a family corporation where strict
business procedures were not applied and immediate issuance of receipts was not required. Even so, at the end of the
year, when the books were to be closed, each payee made an accounting of all of the fees received by him or her, to make
up the total of P75,000.00. 20 Admittedly, everything seemed to be informal. This arrangement was understandable,
however, in view of the close relationship among the persons in the family corporation.
We agree with the respondent court that the amount of the promotional fees was not excessive. The total commission paid
by the Philippine Sugar Estate Development Co. to the private respondent was P125,000.00. 21After deducting the said
fees, Algue still had a balance of P50,000.00 as clear profit from the transaction. The amount of P75,000.00 was 60% of
the total commission. This was a reasonable proportion, considering that it was the payees who did practically everything,
from the formation of the Vegetable Oil Investment Corporation to the actual purchase by it of the Sugar Estate properties.
This finding of the respondent court is in accord with the following provision of the Tax Code:
2

SEC. 30. Deductions from gross income.--In computing net income there shall be allowed as deductions
(a) Expenses:
(1) In general.--All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on
any trade or business, including a reasonable allowance for salaries or other compensation for personal services
actually rendered; ... 22
and Revenue Regulations No. 2, Section 70 (1), reading as follows:
SEC. 70. Compensation for personal services.--Among the ordinary and necessary expenses paid or incurred in
carrying on any trade or business may be included a reasonable allowance for salaries or other compensation
for personal services actually rendered. The test of deductibility in the case of compensation payments is
whether they are reasonable and are, in fact, payments purely for service. This test and deductibility in the case
of compensation payments is whether they are reasonable and are, in fact, payments purely for service. This
test and its practical application may be further stated and illustrated as follows:
Any amount paid in the form of compensation, but not in fact as the purchase price of services, is not deductible.
(a) An ostensible salary paid by a corporation may be a distribution of a dividend on stock. This is likely to occur
in the case of a corporation having few stockholders, Practically all of whom draw salaries. If in such a case the
salaries are in excess of those ordinarily paid for similar services, and the excessive payment correspond or
bear a close relationship to the stockholdings of the officers of employees, it would seem likely that the salaries
are not paid wholly for services rendered, but the excessive payments are a distribution of earnings upon the
stock. . . . (Promulgated Feb. 11, 1931, 30 O.G. No. 18, 325.)
It is worth noting at this point that most of the payees were not in the regular employ of Algue nor were they its controlling
stockholders. 23
The Solicitor General is correct when he says that the burden is on the taxpayer to prove the validity of the claimed
deduction. In the present case, however, we find that the onus has been discharged satisfactorily. The private respondent
has proved that the payment of the fees was necessary and reasonable in the light of the efforts exerted by the payees in
inducing investors and prominent businessmen to venture in an experimental enterprise and involve themselves in a new
business requiring millions of pesos. This was no mean feat and should be, as it was, sufficiently recompensed.
It is said that taxes are what we pay for civilization society. Without taxes, the government would be paralyzed for lack of
the motive power to activate and operate it. Hence, despite the natural reluctance to surrender part of one's hard earned
income to the taxing authorities, every person who is able to must contribute his share in the running of the government.
The government for its part, is expected to respond in the form of tangible and intangible benefits intended to improve the
lives of the people and enhance their moral and material values. This symbiotic relationship is the rationale of taxation and
should dispel the erroneous notion that it is an arbitrary method of exaction by those in the seat of power.
But even as we concede the inevitability and indispensability of taxation, it is a requirement in all democratic regimes that it
be exercised reasonably and in accordance with the prescribed procedure. If it is not, then the taxpayer has a right to
complain and the courts will then come to his succor. For all the awesome power of the tax collector, he may still be
stopped in his tracks if the taxpayer can demonstrate, as it has here, that the law has not been observed.

We hold that the appeal of the private respondent from the decision of the petitioner was filed on time with the respondent
court in accordance with Rep. Act No. 1125. And we also find that the claimed deduction by the private respondent was
permitted under the Internal Revenue Code and should therefore not have been disallowed by the petitioner.
ACCORDINGLY, the appealed decision of the Court of Tax Appeals is AFFIRMED in toto, without costs.
SO ORDERED. Teehankee, C.J., Narvasa, Gancayco and Grio-Aquino, JJ., concur.

G.R. No. L-68252 May 26, 1995

COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
TOKYO SHIPPING CO. LTD., represented by SORIAMONT STEAMSHIP AGENCIES INC., and COURT OF TAX
APPEALS, respondents.
PUNO, J.:
For resolution is whether or not private respondent Tokyo Shipping Co. Ltd., is entitled to a refund or tax credit for amounts
representing pre-payment of income and common carrier's taxes under the National Internal Revenue Code, section 24 (b)
(2), as amended. 1
Private respondent is a foreign corporation represented in the Philippines by Soriamont Steamship Agencies, Incorporated.
It owns and operates tramper vessel M/V Gardenia. In December 1980, NASUTRA 2 chartered M/V Gardenia to load
16,500 metric tons of raw sugar in the Philippines. 3 On December 23, 1980, Mr. Edilberto Lising, the operations supervisor
of Soriamont Agency, 4 paid the required income and common carrier's taxes in the respective sums of FIFTY-NINE
THOUSAND FIVE HUNDRED TWENTY-THREE PESOS and SEVENTY-FIVE CENTAVOS (P59,523.75) and FORTYSEVEN THOUSAND SIX HUNDRED NINETEEN PESOS (P47,619.00), or a total of ONE HUNDRED SEVEN
THOUSAND ONE HUNDRED FORTY-TWO PESOS and SEVENTY-FIVE CENTAVOS (P107,142.75) based on the
expected gross receipts of the vessel. 5 Upon arriving, however, at Guimaras Port of Iloilo, the vessel found no sugar for
loading. On January 10, 1981, NASUTRA and private respondent's agent mutually agreed to have the vessel sail for
Japan without any cargo.
Claiming the pre-payment of income and common carrier's taxes as erroneous since no receipt was realized from the
charter agreement, private respondent instituted a claim for tax credit or refund of the sum ONE HUNDRED SEVEN
THOUSAND ONE HUNDRED FORTY-TWO PESOS and SEVENTY-FIVE CENTAVOS (P107,142.75) before petitioner
Commissioner of Internal Revenue on March 23, 1981. Petitioner failed to act promptly on the claim, hence, on May 14,
1981, private respondent filed a petition for review 6 before public respondent Court of Tax Appeals.
4

Petitioner contested the petition. As special and affirmative defenses, it alleged the following: that taxes are presumed to
have been collected in accordance with law; that in an action for refund, the burden of proof is upon the taxpayer to show
that taxes are erroneously or illegally collected, and the taxpayer's failure to sustain said burden is fatal to the action for
refund; and that claims for refund are construed strictly against tax claimants. 7
After trial, respondent tax court decided in favor of the private respondent. It held:
It has been shown in this case that 1) the petitioner has complied with the mentioned statutory
requirement by having filed a written claim for refund within the two-year period from date of payment; 2)
the respondent has not issued any deficiency assessment nor disputed the correctness of the tax
returns and the corresponding amounts of prepaid income and percentage taxes; and 3) the chartered
vessel sailed out of the Philippine port with absolutely no cargo laden on board as cleared and certified
by the Customs authorities; nonetheless 4) respondent's apparent bit of reluctance in validating the legal
merit of the claim, by and large, is tacked upon the "examiner who is investigating petitioner's claim for
refund which is the subject matter of this case has not yet submitted his report. Whether or not
respondent will present his evidence will depend on the said report of the examiner." (Respondent's
Manifestation and Motion dated September 7, 1982). Be that as it may the case was submitted for
decision by respondent on the basis of the pleadings and records and by petitioner on the evidence
presented by counsel sans the respective memorandum.
An examination of the records satisfies us that the case presents no dispute as to relatively simple
material facts. The circumstances obtaining amply justify petitioner's righteous indignation to a more
expeditious action. Respondent has offered no reason nor made effort to submit any controverting
documents to bash that patina of legitimacy over the claim. But as might well be, towards the end of
some two and a half years of seeming impotent anguish over the pendency, the respondent
Commissioner of Internal Revenue would furnish the satisfaction of ultimate solution by manifesting that
"it is now his turn to present evidence, however, the Appellate Division of the BIR has already
recommended the approval of petitioner's claim for refund subject matter of this petition. The examiner
who examined this case has also recommended the refund of petitioner's claim. Without prejudice to
withdrawing this case after the final approval of petitioner's claim, the Court ordered the resetting to
September 7, 1983." (Minutes of June 9, 1983 Session of the Court) We need not fashion any further
issue into an apparently settled legal situation as far be it from a comedy of errors it would be too much
of a stretch to hold and deny the refund of the amount of prepaid income and common carrier's taxes for
which petitioner could no longer be made accountable.
On August 3, 1984, respondent court denied petitioner's motion for reconsideration, hence, this petition for review
on certiorari.
Petitioner now contends: (1) private respondent has the burden of proof to support its claim of refund; (2) it failed to prove
that it did not realize any receipt from its charter agreement; and (3) it suppressed evidence when it did not present its
charter agreement.
We find no merit in the petition.
There is no dispute about the applicable law. It is section 24 (b) (2) of the National Internal Revenue Code which at that
time provides as follows:
5

A corporation organized, authorized, or existing under the laws of any foreign country, engaged in trade
or business within the Philippines, shall be taxable as provided in subsection (a) of this section upon the
total net income derived in the preceding taxable year from all sources within the Philippines:Provided,
however, That international carriers shall pay a tax of two and one-half per cent (2 1/2%) on their gross
Philippine billings: "Gross Philippine Billings" include gross revenue realized from uplifts anywhere in the
world by any international carrier doing business in the Philippines of passage documents sold therein,
whether for passenger, excess baggage or mail, provided the cargo or mail originates from the
Philippines. The gross revenue realized from the said cargo or mail include the gross freight charge up
to final destination. Gross revenue from chartered flights originating from the Philippines shall likewise
form part of "Gross Philippine Billings" regardless of the place or payment of the passage documents . . .
.
Pursuant to this provision, a resident foreign corporation engaged in the transport of cargo is liable for taxes depending on
the amount of income it derives from sources within the Philippines. Thus, before such a tax liability can be enforced the
taxpayer must be shown to have earned income sourced from the Philippines.
We agree with petitioner that a claim for refund is in the nature of a claim for exemption 8 and should be construed
instrictissimi juris against the taxpayer. 9 Likewise, there can be no disagreement with petitioner's stance that private
respondent has the burden of proof to establish the factual basis of its claim for tax refund.
The pivotal issue involves a question of fact whether or not the private respondent was able to prove that it derived no
receipts from its charter agreement, and hence is entitled to a refund of the taxes it pre-paid to the government.
The respondent court held that sufficient evidence has been adduced by the private respondent proving that it derived no
receipt from its charter agreement with NASUTRA. This finding of fact rests on a rational basis, and hence must be
sustained. Exhibits "E", "F," and "G" positively show that the tramper vessel M/V "Gardenia" arrived in Iloilo on January 10,
1981 but found no raw sugar to load and returned to Japan without any cargo laden on board. Exhibit "E" is the Clearance
Vessel to a Foreign Port issued by the District Collector of Customs, Port of Iloilo while Exhibit "F" is the Certification by the
Officer-in-Charge, Export Division of the Bureau of Customs Iloilo. The correctness of the contents of these documents
regularly issued by officials of the Bureau of Customs cannot be doubted as indeed, they have not been contested by the
petitioner. The records also reveal that in the course of the proceedings in the court a quo, petitioner hedged and hawed
when its turn came to present evidence. At one point, its counsel manifested that the BIR examiner and the appellate
division of the BIR have both recommended the approval of private respondent's claim for refund. The same counsel even
represented that the government would withdraw its opposition to the petition after final approval of private respondents'
claim. The case dragged on but petitioner never withdrew its opposition to the petition even if it did not present evidence at
all. The insincerity of petitioner's stance drew the sharp rebuke of respondent court in its Decision and for good reason.
Taxpayers owe honesty to government just as government owes fairness to taxpayers.
In its last effort to retain the money erroneously prepaid by the private respondent, petitioner contends that private
respondent suppressed evidence when it did not present its charter agreement with NASUTRA. The contention cannot
succeed. It presupposes without any basis that the charter agreement is prejudicial evidence against the private
respondent. 10 Allegedly, it will show that private respondent earned a charter fee with or without transporting its supposed
cargo from Iloilo to Japan. The allegation simply remained an allegation and no court of justice will regard it as truth.
Moreover, the charter agreement could have been presented by petitioner itself thru the proper use of a subpoena duces
tecum. It never did either because of neglect or because it knew it would be of no help to bolster its position. 11 For
whatever reason, the petitioner cannot take to task the private respondent for not presenting what it mistakenly calls
"suppressed evidence."
6

We cannot but bewail the unyielding stance taken by the government in refusing to refund the sum of ONE HUNDRED
SEVEN THOUSAND ONE HUNDRED FORTY TWO PESOS AND SEVENTY FIVE CENTAVOS (P107,142.75)
erroneously prepaid by private respondent. The tax was paid way back in 1980 and despite the clear showing that it was
erroneously paid, the government succeeded in delaying its refund for fifteen (15) years. After fifteen (15) long years and
the expenses of litigation, the money that will be finally refunded to the private respondent is just worth a damaged nickel.
This is not, however, the kind of success the government, especially the BIR, needs to increase its collection of taxes. Fair
deal is expected by our taxpayers from the BIR and the duty demands that BIR should refund without any unreasonable
delay what it has erroneously collected. Our ruling inRoxas v. Court of Tax Appeals 12 is apropos to recall:
The power of taxation is sometimes called also the power to destroy. Therefore it should be exercised
with caution to minimize injury to the proprietary rights of a taxpayer. It must be exercised fairly, equally
and uniformly, lest the tax collector kill the "hen that lays the golden egg." And, in order to maintain the
general public's trust and confidence in the Government this power must be used justly and not
treacherously.
IN VIEW HEREOF, the assailed decision of respondent Court of Tax Appeals, dated September 15, 1983, is AFFIRMED in
toto. No costs.
SO ORDERED. Narvasa, C.J., Regalado and Mendoza, JJ., concur.

G.R. No. 122480

April 12, 2000

BPI-FAMILY SAVINGS BANK, Inc., petitioner,

vs.
COURT OF APPEALS, COURT OF TAX APPEALS and the COMMISSIONER OF INTERNAL REVENUE,respondents.
PANGANIBAN, J.:
If the State expects its taxpayers to observe fairness and honesty in paying their taxes, so must it apply the same standard
against itself in refunding excess payments. When it is undisputed that a taxpayer is entitled to a refund, the State should
not invoke technicalities to keep money not belonging to it. No one, not even the State, should enrich oneself at the
expense of another.
The Case

Before us is a Petition for Review assailing the March 31, 1995 Decision of the Court of Appeals1 (CA) in CA-GR SP No.
34240, which affirmed the December 24, 1993 Decision2 of the Court of Tax Appeals (CTA). The CA disposed as follows:
WHEREFORE, foregoing premises considered, the petition is hereby DISMISSED for lack of merit.3
On the other hand, the dispositive portion of the CTA Decision affirmed by the CA reads as follows:
WHEREFORE, in [view of] all the foregoing, Petitioner's claim for refund is hereby DENIED and this Petition for
Review is DISMISSED for lack of merit.4
Also assailed is the November 8, 1995 CA Resolution5 denying reconsideration.
The Facts
The facts of this case were summarized by the CA in this wise:
This case involves a claim for tax refund in the amount of P112,491.00 representing petitioner's tax withheld for
the year 1989.
In its Corporate Annual Income Tax Return for the year 1989, the following items are reflected:
Income P1,017,931,831.00
Deductions P1,026,218,791.00
Net Income (Loss) (P8,286,960.00)
Taxable Income (Loss) (P8,286,960.00)
Less:
1988 Tax Credit P185,001.00
1989 Tax Credit P112,491.00
TOTAL AMOUNT P297,492.00
REFUNDABLE
It appears from the foregoing 1989 Income Tax Return that petitioner had a total refundable amount of
P297,492 inclusive of the P112,491.00 being claimed as tax refund in the present case. However,
petitioner declared in the same 1989 Income Tax Return that the said total refundable amount of
P297,492.00 will be applied as tax credit to the succeeding taxable year.
On October 11, 1990, petitioner filed a written claim for refund in the amount of P112,491.00 with the
respondent Commissioner of Internal Revenue alleging that it did not apply the 1989 refundable amount
of P297,492.00 (including P112,491.00) to its 1990 Annual Income Tax Return or other tax liabilities due
to the alleged business losses it incurred for the same year.
Without waiting for respondent Commissioner of Internal Revenue to act on the claim for refund,
petitioner filed a petition for review with respondent Court of Tax Appeals, seeking the refund of the
amount of P112,491.00.
The respondent Court of Tax Appeals dismissed petitioner's petition on the ground that petitioner failed
to present as evidence its corporate Annual Income Tax Return for 1990 to establish the fact that
petitioner had not yet credited the amount of P297,492.00 (inclusive of the amount P112,491.00 which is
the subject of the present controversy) to its 1990 income tax liability.
8

Petitioner filed a motion for reconsideration, however, the same was denied by respondent court in its
Resolution dated May 6, 1994.6
As earlier noted, the CA affirmed the CTA. Hence, this Petition.7
Ruling of the Court of Appeals
In affirming the CTA, the Court of Appeals ruled as follows:
It is incumbent upon the petitioner to show proof that it has not credited to its 1990 Annual income Tax
Return, the amount of P297,492.00 (including P112,491.00), so as to refute its previous declaration in
the 1989 Income Tax Return that the said amount will be applied as a tax credit in the succeeding year
of 1990. Having failed to submit such requirement, there is no basis to grant the claim for refund. . . .
Tax refunds are in the nature of tax exemptions. As such, they are regarded as in derogation of
sovereign authority and to be construed strictissimi juris against the person or entity claiming the
exemption. In other words, the burden of proof rests upon the taxpayer to establish by sufficient and
competent evidence its entitlement to the claim for refund.8
Issue
In their Memorandum, respondents identify the issue in this wise:
The sole issue to be resolved is whether or not petitioner is entitled to the refund of P112,491.90, representing
excess creditable withholding tax paid for the taxable year 1989.9
The Court's Ruling
The Petition is meritorious.
Main Issue:
Petitioner Entitled to Refund
It is undisputed that petitioner had excess withholding taxes for the year 1989 and was thus entitled to a refund amounting
to P112,491. Pursuant to Section 69 10 of the 1986 Tax Code which states that a corporation entitled to a refund may opt
either (1) to obtain such refund or (2) to credit said amount for the succeeding taxable year, petitioner indicated in its 1989
Income Tax Return that it would apply the said amount as a tax credit for the succeeding taxable year, 1990. Subsequently,
petitioner informed the Bureau of Internal Revenue (BIR) that it would claim the amount as a tax refund, instead of
applying it as a tax credit. When no action from the BIR was forthcoming, petitioner filed its claim with the Court of Tax
Appeals.
The CTA and the CA, however, denied the claim for tax refund. Since petitioner declared in its 1989 Income Tax Return
that it would apply the excess withholding tax as a tax credit for the following year, the Tax Court held that petitioner was
presumed to have done so. The CTA and the CA ruled that petitioner failed to overcome this presumption because it did
not present its 1990 Return, which would have shown that the amount in dispute was not applied as a tax credit. Hence,
the CA concluded that petitioner was not entitled to a tax refund.
We disagree with the Court of Appeals. As a rule, the factual findings of the appellate court are binding on this Court. This
rule, however, does not apply where, inter alia, the judgment is premised on a misapprehension of facts, or when the
appellate court failed to notice certain relevant facts which if considered would justify a different conclusion. 11 This case is
one such exception.
9

In the first place, petitioner presented evidence to prove its claim that it did not apply the amount as a tax credit. During the
trial before the CTA, Ms. Yolanda Esmundo, the manager of petitioner's accounting department, testified to this fact. It
likewise presented its claim for refund and a certification issued by Mr. Gil Lopez, petitioner's vice-president, stating that
the amount of P112,491 "has not been and/or will not be automatically credited/offset against any succeeding quarters'
income tax liabilities for the rest of the calendar year ending December 31, 1990." Also presented were the quarterly
returns for the first two quarters of 1990.
The Bureau of Internal Revenue, for its part, failed to controvert petitioner's claim. In fact, it presented no evidence at all.
Because it ought to know the tax records of all taxpayers, the CIR could have easily disproved petitioner's claim. To repeat,
it did not do so.
More important, a copy of the Final Adjustment Return for 1990 was attached to petitioner's Motion for Reconsideration
filed before the CTA. 12 A final adjustment return shows whether a corporation incurred a loss or gained a profit during the
taxable year. In this case, that Return clearly showed that petitioner incurred P52,480,173 as net loss in 1990. Clearly, it
could not have applied the amount in dispute as a tax credit.
Again, the BIR did not controvert the veracity of the said return. It did not even file an opposition to petitioner's Motion and
the 1990 Final Adjustment Return attached thereto. In denying the Motion for Reconsideration, however, the CTA ignored
the said Return. In the same vein, the CA did not pass upon that significant document.
True, strict procedural rules generally frown upon the submission of the Return after the trial.1wphi1 The law creating the
Court of Tax Appeals, however, specifically provides that proceedings before it "shall not be governed strictly by the
technical rules of evidence." 13 The paramount consideration remains the ascertainment of truth. Verily, the quest for
orderly presentation of issues is not an absolute. It should not bar courts from considering undisputed facts to arrive at a
just determination of a controversy.
In the present case, the Return attached to the Motion for Reconsideration clearly showed that petitioner suffered a net
loss in 1990. Contrary to the holding of the CA and the CTA, petitioner could not have applied the amount as a tax credit.
In failing to consider the said Return, as well as the other documentary evidence presented during the trial, the appellate
court committed a reversible error.
It should be stressed that the rationale of the rules of procedure is to secure a just determination of every action. They are
tools designed to facilitate the attainment of justice. 14 But there can be no just determination of the present action if we
ignore, on grounds of strict technicality, the Return submitted before the CTA and even before this Court. 15 To repeat, the
undisputed fact is that petitioner suffered a net loss in 1990; accordingly, it incurred no tax liability to which the tax credit
could be applied. Consequently, there is no reason for the BIR and this Court to withhold the tax refund which rightfully
belongs to the petitioner.
Public respondents maintain that what was attached to petitioner's Motion for Reconsideration was not the final adjustment
Return, but petitioner's first two quarterly returns for 1990. 16 This allegation is wrong. An examination of the records shows
that the 1990 Final Adjustment Return was attached to the Motion for Reconsideration. On the other hand, the two
quarterly returns for 1990 mentioned by respondent were in fact attached to the Petition for Review filed before the CTA.
Indeed, to rebut respondents' specific contention, petitioner submitted before us its Surrejoinder, to which was attached the
Motion for Reconsideration and Exhibit "A" thereof, the Final Adjustment Return for 1990. 17
CTA Case No. 4897
Petitioner also calls the attention of this Court, as it had done before the CTA, to a Decision rendered by the Tax Court in
CTA Case No. 4897, involving its claim for refund for the year 1990. In that case, the Tax Court held that "petitioner
suffered a net loss for the taxable year 1990 . . . ." 18 Respondent, however, urges this Court not to take judicial notice of
the said case. 19
10

As a rule, "courts are not authorized to take judicial notice of the contents of the records of other cases, even when such
cases have been tried or are pending in the same court, and notwithstanding the fact that both cases may have been
heard or are actually pending before the same judge." 20
Be that as it may, Section 2, Rule 129 provides that courts may take judicial notice of matters ought to be known to judges
because of their judicial functions. In this case, the Court notes that a copy of the Decision in CTA Case No. 4897 was
attached to the Petition for Review filed before this Court. Significantly, respondents do not claim at all that the said
Decision was fraudulent or nonexistent. Indeed, they do not even dispute the contents of the said Decision, claiming
merely that the Court cannot take judicial notice thereof.
To our mind, respondents' reasoning underscores the weakness of their case. For if they had really believed that petitioner
is not entitled to a tax refund, they could have easily proved that it did not suffer any loss in 1990. Indeed, it is noteworthy
that respondents opted not to assail the fact appearing therein that petitioner suffered a net loss in 1990 in the same
way that it refused to controvert the same fact established by petitioner's other documentary exhibits.
In any event, the Decision in CTA Case No. 4897 is not the sole basis of petitioner's case. It is merely one more bit of
information showing the stark truth: petitioner did not use its 1989 refund to pay its taxes for 1990.
Finally, respondents argue that tax refunds are in the nature of tax exemptions and are to be construed strictissimi
juris against the claimant. Under the facts of this case, we hold that petitioner has established its claim. Petitioner may
have failed to strictly comply with the rules of procedure; it may have even been negligent. These circumstances, however,
should not compel the Court to disregard this cold, undisputed fact: that petitioner suffered a net loss in 1990, and that it
could not have applied the amount claimed as tax credits.
Substantial justice, equity and fair play are on the side of petitioner. Technicalities and legalisms, however exalted, should
not be misused by the government to keep money not belonging to it and thereby enrich itself at the expense of its lawabiding citizens. If the State expects its taxpayers to observe fairness and honesty in paying their taxes, so must it apply
the same standard against itself in refunding excess payments of such taxes. Indeed, the State must lead by its own
example of honor, dignity and uprightness.
WHEREFORE, the Petition is hereby GRANTED and the assailed Decision and Resolution of the Court of Appeals
REVERSED and SET ASIDE. The Commissioner of Internal Revenue is ordered to refund to petitioner the amount of
P112,491 as excess creditable taxes paid in 1989. No costs. SO ORDERED. Melo, Purisima and Gonzaga-Reyes, JJ.,
concur. Vitug, J., abroad on official business.
PHILIPPINE BANK OF COMMUNICATIONS, petitioner, vs. COMMISSIONER OF INTERNAL REVENUE,
COURT OF TAX APPEALS and COURT OF APPEALS, respondents. [G.R. No. 112024. January 28,
1999]
DECISION
QUISUMBING, J.:
This petition for review assails the Resolution [1] of the Court of Appeals dated September 22, 1993, affirming the
Decision[2] and Resolution[3] of the Court of Tax Appeals which denied the claims of the petitioner for tax refund and tax
credits, and disposing as follows:
IN VIEW OF ALL THE FOREGOING, the instant petition for review is DENIED due course. The Decision of the Court of
Tax Appeals dated May 20, 1993 and its resolution dated July 20, 1993, are hereby AFFIRMED in toto.
SO ORDERED.[4]
The Court of Tax Appeals earlier ruled as follows:
11

WHEREFORE, petitioners claim for refund/tax credit of overpaid income tax for 1985 in the amount of P5,299,749.95 is
hereby denied for having been filed beyond the reglementary period. The 1986 claim for refund amounting to P234,077.69
is likewise denied since petitioner has opted and in all likelihood automatically credited the same to the succeeding
year. The petition for review is dismissed for lack of merit.
SO ORDERED.[5]
The facts on record show the antecedent circumstances pertinent to this case.
Petitioner, Philippine Bank of Communications (PBCom), a commercial banking corporation duly organized under
Philippine laws, filed its quarterly income tax returns for the first and second quarters of 1985, reported profits, and paid
the total income tax of P5,016,954.00. The taxes due were settled by applying PBComs tax credit memos and accordingly,
the Bureau of Internal Revenue (BIR) issued Tax Debit Memo Nos. 0746-85 and 0747-85 forP3,401,701.00 and P1,
615,253.00, respectively.
Subsequently, however, PBCom suffered losses so that when it filed its Annual Income Tax Returns for the yearended December 31, 1985, it declared a net loss of P25,317,228.00, thereby showing no income tax liability. For the
succeeding year, ending December 31, 1986, the petitioner likewise reported a net loss of P14,129,602.00, and thus
declared no tax payable for the year.
But during these two years, PBCom earned rental income from leased properties. The lessees withheld and remitted
to the BIR withholding creditable taxes of P282,795.50 in 1985 and P234,077.69 in 1986.
On August 7, 1987, petitioner requested the Commissioner of Internal Revenue, among others, for a tax credit
of P5,016,954.00 representing the overpayment of taxes in the first and second quarters of 1985.
Thereafter, on July 25, 1988, petitioner filed a claim for refund of creditable taxes withheld by their lessees from
property rentals in 1985 forP282,795.50 and in 1986 for P234,077.69.
Pending the investigation of the respondent Commissioner of Internal Revenue, petitioner instituted a Petition for
Review on November 18, 1988 before the Court of Tax Appeals (CTA). The petition was docketed as CTA Case No. 4309
entitled: Philippine Bank of Communications vs. Commissioner of Internal Revenue.
The losses petitioner incurred as per the summary of petitioners claims for refund and tax credit for 1985 and 1986,
filed before the Court of Tax Appeals, are as follows:
1985

1986

Net Income (Loss)

(P25,317,228.00)

(P14,129,602.00)

Tax Due

NIL

NIL

Quarterly tax
Payments Made

5,016,954.00

---

Tax Withheld at Source

282,795.50

234,077.69

Excess Tax Payments

P5,299,749.50*========

P234,077.69==========
12

==

====

*CTAs decision reflects PBComs 1985 tax claim as P5,299,749.95. A forty-five centavo difference was noted.
On May 20, 1993, the CTA rendered a decision which, as stated on the outset, denied the request of petitioner for a
tax refund or credit in the sum amount of P5,299,749.95, on the ground that it was filed beyond the two-year reglementary
period provided for by law. The petitioners claim for refund in 1986 amounting to P234,077.69 was likewise denied on the
assumption that it was automatically credited by PBCom against its tax payment in the succeeding year.
On June 22, 1993, petitioner filed a Motion for Reconsideration of the CTAs decision but the same was denied due
course for lack of merit.[6]
Thereafter, PBCom filed a petition for review of said decision and resolution of the CTA with the Court of
Appeals. However on September 22, 1993, the Court of Appeals affirmed in toto the CTAs resolution dated July 20,
1993. Hence this petition now before us.
The issues raised by the petitioner are:
I. Whether taxpayer PBCom -- which relied in good faith on the formal assurances of BIR in RMC No. 7-85 and
did not immediately file with the CTA a petition for review asking for the refund/tax credit of its 1985-86
excess quarterly income tax payments -- can be prejudiced by the subsequent BIR rejection, applied
retroactively, of its assurances in RMC No. 7-85 that the prescriptive period for the refund/tax credit of
excess quarterly income tax payments is not two years but ten (10).[7]
II. Whether the Court of Appeals seriously erred in affirming the CTA decision which denied PBComs claim for
the refund of P234,077.69 income tax overpaid in 1986 on the mere speculation, without proof, that there
were taxes due in 1987 and that PBCom availed of tax-crediting that year.[8]
Simply stated, the main question is: Whether or not the Court of Appeals erred in denying the plea for tax refund or
tax credits on the ground of prescription, despite petitioners reliance on RMC No. 7-85, changing the prescriptive period of
two years to ten years?
Petitioner argues that its claims for refund and tax credits are not yet barred by prescription relying on the
applicability of Revenue Memorandum Circular No. 7-85 issued on April 1, 1985. The circular states that overpaid income
taxes are not covered by the two-year prescriptive period under the tax Code and that taxpayers may claim refund or tax
credits for the excess quarterly income tax with the BIR within ten (10) years under Article 1144 of the Civil Code. The
pertinent portions of the circular reads:
REVENUE MEMORANDUM CIRCULAR NO. 7-85
SUBJECT: PROCESSING OF REFUND OR TAX CREDIT OF EXCESS CORPORATE INCOME TAX RESULTING
FROM THE FILING OF THE FINAL ADJUSTMENT RETURN
TO: All Internal Revenue Officers and Others Concerned
Sections 85 and 86 of the National Internal Revenue Code provide:
xxxxxxxxx
The foregoing provisions are implemented by Section 7 of Revenue Regulations Nos. 10-77 which provide:
xxxxxxxxx
It has been observed, however, that because of the excess tax payments, corporations file claims for recovery of overpaid
income tax with the Court of Tax Appeals within the two-year period from the date of payment, in accordance with Sections
292 and 295 of the National Internal Revenue Code. It is obvious that the filing of the case in court is to preserve the
judicial right of the corporation to claim the refund or tax credit.
It should be noted, however, that this is not a case of erroneously or illegally paid tax under the provisions of Sections 292
and 295 of the Tax Code.
13

In the above provision of the Regulations the corporation may request for the refund of the overpaid income tax or claim
for automatic tax credit. To insure prompt action on corporate annual income tax returns showing refundable amounts
arising from overpaid quarterly income taxes, this Office has promulgated Revenue Memorandum Order No. 32-76 dated
June 11, 1976, containing the procedure in processing said returns. Under these procedures, the returns are merely preaudited which consist mainly of checking mathematical accuracy of the figures of the return. After which, the refund or tax
credit is granted, and, this procedure was adopted to facilitate immediate action on cases like this.
In this regard, therefore, there is no need to file petitions for review in the Court of Tax Appeals in order to
preserve the right to claim refund or tax credit within the two-year period. As already stated, actions hereon by the
Bureau are immediate after only a cursory pre-audit of the income tax returns. Moreover, a taxpayer may recover from the
Bureau of Internal Revenue excess income tax paid under the provisions of Section 86 of the Tax Code within 10 years
from the date of payment considering that it is an obligation created by law (Article 1144 of the Civil Code).[9] (Emphasis
supplied.)
Petitioner argues that the government is barred from asserting a position contrary to its declared circular if it would
result to injustice to taxpayers.Citing ABS-CBN Broadcasting Corporation vs. Court of Tax Appeals [10] petitioner claims that
rulings or circulars promulgated by the Commissioner of Internal Revenue have no retroactive effect if it would be
prejudicial to taxpayers. In ABS-CBN case, the Court held that the government is precluded from adopting a position
inconsistent with one previously taken where injustice would result therefrom or where there has been a misrepresentation
to the taxpayer.
Petitioner contends that Sec. 246 of the National Internal Revenue Code explicitly provides for this rule as follows:
Sec. 246. Non-retroactivity of rulings-- Any revocation, modification or reversal of any of the rules and regulations
promulgated in accordance with the preceding section or any of the rulings or circulars promulgated by the Commissioner
shall not be given retroactive application if the revocation, modification, or reversal will be prejudicial to the taxpayers
except in the following cases:
a) where the taxpayer deliberately misstates or omits material facts from his return or in any document required of him by
the Bureau of Internal Revenue;
b) where the facts subsequently gathered by the Bureau of Internal Revenue are materially different from the facts on
which the ruling is based;
c) where the taxpayer acted in bad faith.
Respondent Commissioner of Internal Revenue, through the Solicitor General, argues that the two-year prescriptive
period for filing tax cases in court concerning income tax payments of Corporations is reckoned from the date of filing the
Final Adjusted Income Tax Return, which is generally done on April 15 following the close of the calendar year. As
precedents, respondent Commissioner cited cases which adhered to this principle, to wit: ACCRA Investments Corp. vs.
Court of Appeals, et al.,[11] and Commissioner of Internal Revenue vs. TMX Sales, Inc., et al..[12] Respondent Commissioner
also states that since the Final Adjusted Income Tax Return of the petitioner for the taxable year 1985 was supposed to be
filed on April 15, 1986, the latter had only until April 15, 1988 to seek relief from the court. Further, respondent
Commissioner stresses that when the petitioner filed the case before the CTA on November 18, 1988, the same was filed
beyond the time fixed by law, and such failure is fatal to petitioners cause of action.
After a careful study of the records and applicable jurisprudence on the matter, we find that, contrary to the
petitioners contention, the relaxation of revenue regulations by RMC 7-85 is not warranted as it disregards the two-year
prescriptive period set by law.
Basic is the principle that taxes are the lifeblood of the nation. The primary purpose is to generate funds for the State
to finance the needs of the citizenry and to advance the common weal. [13] Due process of law under the Constitution does
not require judicial proceedings in tax cases. This must necessarily be so because it is upon taxation that the government
chiefly relies to obtain the means to carry on its operations and it is of utmost importance that the modes adopted to
enforce the collection of taxes levied should be summary and interfered with as little as possible.[14]
14

From the same perspective, claims for refund or tax credit should be exercised within the time fixed by law because
the BIR being an administrative body enforced to collect taxes, its functions should not be unduly delayed or hampered by
incidental matters.
Section 230 of the National Internal Revenue Code (NIRC) of 1977 (now Sec. 229, NIRC of 1997) provides for the
prescriptive period for filing a court proceeding for the recovery of tax erroneously or illegally collected, viz.:
Sec. 230. Recovery of tax erroneously or illegally collected. -- No suit or proceeding shall be maintained in any court for
the recovery of any national internal revenue tax hereafter alleged to have been erroneously or illegally assessed or
collected, or of any penalty claimed to have been collected without authority, or of any sum alleged to have been excessive
or in any manner wrongfully collected, until a claim for refund or credit has been duly filed with the Commissioner; but such
suit or proceeding may be maintained, whether or not such tax, penalty, or sum has been paid under protest or duress.
In any case, no such suit or proceeding shall be begun after the expiration of two years from the date of payment of the
tax or penalty regardless of any supervening cause that may arise after payment; Provided however, That the
Commissioner may, even without a written claim therefor, refund or credit any tax, where on the face of the return upon
which payment was made, such payment appears clearly to have been erroneously paid. (Italics supplied)
The rule states that the taxpayer may file a claim for refund or credit with the Commissioner of Internal Revenue,
within two (2) years after payment of tax, before any suit in CTA is commenced. The two-year prescriptive period provided,
should be computed from the time of filing the Adjustment Return and final payment of the tax for the year.
In Commissioner of Internal Revenue vs. Philippine American Life Insurance Co.,[15] this Court explained the
application of Sec. 230 of 1977 NIRC, as follows:
Clearly, the prescriptive period of two years should commence to run only from the time that the refund is ascertained,
which can only be determined after a final adjustment return is accomplished. In the present case, this date is April 16,
1984, and two years from this date would be April 16, 1986. x x x As we have earlier said in the TMX Sales case, Sections
68,[16] 69,[17] and 70[18] on Quarterly Corporate Income Tax Payment and Section 321 should be considered in conjunction
with it.[19]
When the Acting Commissioner of Internal Revenue issued RMC 7-85, changing the prescriptive period of two years
to ten years on claims of excess quarterly income tax payments, such circular created a clear inconsistency with the
provision of Sec. 230 of 1977 NIRC. In so doing, the BIR did not simply interpret the law; rather it legislated guidelines
contrary to the statute passed by Congress.
It bears repeating that Revenue memorandum-circulars are considered administrative rulings (in the sense of more
specific and less general interpretations of tax laws) which are issued from time to time by the Commissioner of Internal
Revenue. It is widely accepted that the interpretation placed upon a statute by the executive officers, whose duty is to
enforce it, is entitled to great respect by the courts. Nevertheless, such interpretation is not conclusive and will be ignored
if judicially found to be erroneous. [20] Thus, courts will not countenance administrative issuances that override, instead of
remaining consistent and in harmony with, the law they seek to apply and implement.[21]
In the case of People vs. Lim,[22] it was held that rules and regulations issued by administrative officials to implement
a law cannot go beyond the terms and provisions of the latter.
Appellant contends that Section 2 of FAO No. 37-1 is void because it is not only inconsistent with but is contrary to the
provisions and spirit of Act. No. 4003 as amended, because whereas the prohibition prescribed in said Fisheries Act was
for any single period of time not exceeding five years duration, FAO No. 37-1 fixed no period, that is to say, it establishes
an absolute ban for all time. This discrepancy between Act No. 4003 and FAO No. 37-1 was probably due to an oversight
on the part of Secretary of Agriculture and Natural Resources. Of course, in case of discrepancy, the basic Act prevails, for
the reason that the regulation or rule issued to implement a law cannot go beyond the terms and provisions of the latter. x
x x In this connection, the attention of the technical men in the offices of Department Heads who draft rules and regulation
15

is called to the importance and necessity of closely following the terms and provisions of the law which they intended to
implement, this to avoid any possible misunderstanding or confusion as in the present case.[23]
Further, fundamental is the rule that the State cannot be put in estoppel by the mistakes or errors of its officials or
agents.[24] As pointed out by the respondent courts, the nullification of RMC No. 7-85 issued by the Acting Commissioner of
Internal Revenue is an administrative interpretation which is not in harmony with Sec. 230 of 1977 NIRC, for being contrary
to the express provision of a statute. Hence, his interpretation could not be given weight for to do so would, in effect,
amend the statute.
As aptly stated by respondent Court of Appeals:
It is likewise argued that the Commissioner of Internal Revenue, after promulgating RMC No. 7-85, is estopped by the
principle of non-retroactivity of BIR rulings. Again We do not agree. The Memorandum Circular, stating that a taxpayer may
recover the excess income tax paid within 10 years from date of payment because this is an obligation created by law, was
issued by the Acting Commissioner of Internal Revenue. On the other hand, the decision, stating that the taxpayer should
still file a claim for a refund or tax credit and the corresponding petition for review within the two-year prescription period,
and that the lengthening of the period of limitation on refund from two to ten years would be adverse to public policy and
run counter to the positive mandate of Sec. 230, NIRC, - was the ruling and judicial interpretation of the Court of Tax
Appeals. Estoppel has no application in the case at bar because it was not the Commissioner of Internal Revenue who
denied petitioners claim of refund or tax credit. Rather, it was the Court of Tax Appeals who denied (albeit correctly) the
claim and in effect, ruled that the RMC No. 7-85 issued by the Commissioner of Internal Revenue is an administrative
interpretation which is out of harmony with or contrary to the express provision of a statute (specifically Sec. 230, NIRC),
hence, cannot be given weight for to do so would in effect amend the statute.[25]
Article 8 of the Civil Code[26] recognizes judicial decisions, applying or interpreting statutes as part of the legal system
of the country. But administrative decisions do not enjoy that level of recognition. A memorandum-circular of a bureau head
could not operate to vest a taxpayer with a shield against judicial action. For there are no vested rights to speak of
respecting a wrong construction of the law by the administrative officials and such wrong interpretation could not place the
Government in estoppel to correct or overrule the same. [27] Moreover, the non-retroactivity of rulings by the Commissioner
of Internal Revenue is not applicable in this case because the nullity of RMC No. 7-85 was declared by respondent courts
and not by the Commissioner of Internal Revenue. Lastly, it must be noted that, as repeatedly held by this Court, a claim
for refund is in the nature of a claim for exemption and should be construed in strictissimi juris against the taxpayer.[28]
On the second issue, the petitioner alleges that the Court of Appeals seriously erred in affirming CTAs decision
denying its claim for refund of P234,077.69 (tax overpaid in 1986), based on mere speculation, without proof, that PBCom
availed of the automatic tax credit in 1987.
Sec. 69 of the 1977 NIRC[29] (now Sec. 76 of the 1997 NIRC) provides that any excess of the total quarterly payments
over the actual income tax computed in the adjustment or final corporate income tax return, shall either (a) be refunded to
the corporation, or (b) may be credited against the estimated quarterly income tax liabilities for the quarters of the
succeeding taxable year.
The corporation must signify in its annual corporate adjustment return (by marking the option box provided in the BIR
form) its intention, whether to request for a refund or claim for an automatic tax credit for the succeeding taxable year. To
ease the administration of tax collection, these remedies are in the alternative, and the choice of one precludes the other.
As stated by respondent Court of Appeals:
Finally, as to the claimed refund of income tax over-paid in 1986 - the Court of Tax Appeals, after examining the adjusted
final corporate annual income tax return for taxable year 1986, found out that petitioner opted to apply for automatic tax
credit. This was the basis used (vis-avis the fact that the 1987 annual corporate tax return was not offered by the petitioner
as evidence) by the CTA in concluding that petitioner had indeed availed of and applied the automatic tax credit to the
succeeding year, hence it can no longer ask for refund, as to [sic] the two remedies of refund and tax credit are alternative.
[30]

16

That the petitioner opted for an automatic tax credit in accordance with Sec. 69 of the 1977 NIRC, as specified in its
1986 Final Adjusted Income Tax Return, is a finding of fact which we must respect. Moreover, the 1987 annual corporate
tax return of the petitioner was not offered as evidence to controvert said fact. Thus, we are bound by the findings of fact
by respondent courts, there being no showing of gross error or abuse on their part to disturb our reliance thereon.[31]
WHEREFORE, the petition is hereby DENIED. The decision of the Court of Appeals appealed from is
AFFIRMED, with COSTS against the petitioner.
SO ORDERED. Bellosillo, (Chairman), Puno, Mendoza, and Buena, JJ., concur.
G.R. No. 76778 June 6, 1990
FRANCISCO I. CHAVEZ, petitioner,
vs.
JAIME B. ONGPIN, in his capacity as Minister of Finance and FIDELINA CRUZ, in her capacity as Acting Municipal
Treasurer of the Municipality of Las Pias, respondents, REALTY OWNERS ASSOCIATION OF THE PHILIPPINES,
INC., petitioner-intervenor.
Brotherhood of Nationalistic, Involved and Free Attorneys to Combat Injustice and Oppression (Bonifacio) for petitioner.
Ambrosia Padilla, Mempin and Reyes Law Offices for movant Realty Owners Association.
MEDIALDEA, J.:
The petition seeks to declare unconstitutional Executive Order No. 73 dated November 25, 1986, which We quote in full,
as follows (78 O.G. 5861):
EXECUTIVE ORDER No. 73
PROVIDING FOR THE COLLECTION OF REAL PROPERTY TAXES BASED ON THE 1984 REAL
PROPERTY VALUES, AS PROVIDED FOR UNDER SECTION 21 OF THE REAL PROPERTY TAX
CODE, AS AMENDED
WHEREAS, the collection of real property taxes is still based on the 1978 revision of property values;
WHEREAS, the latest general revision of real property assessments completed in 1984 has rendered
the 1978 revised values obsolete;
WHEREAS, the collection of real property taxes based on the 1984 real property values was deferred to
take effect on January 1, 1988 instead of January 1, 1985, thus depriving the local government units of
an additional source of revenue;
WHEREAS, there is an urgent need for local governments to augment their financial resources to meet
the rising cost of rendering effective services to the people;
NOW, THEREFORE, I. CORAZON C. AQUINO, President of the Philippines, do hereby order:

17

SECTION 1. Real property values as of December 31, 1984 as determined by the local assessors
during the latest general revision of assessments shall take effect beginning January 1, 1987 for
purposes of real property tax collection.
SEC. 2. The Minister of Finance shall promulgate the necessary rules and regulations to implement this
Executive Order.
SEC. 3. Executive Order No. 1019, dated April 18, 1985, is hereby repealed.
SEC. 4. All laws, orders, issuances, and rules and regulations or parts thereof inconsistent with this
Executive Order are hereby repealed or modified accordingly.
SEC. 5. This Executive Order shall take effect immediately.
On March 31, 1987, Memorandum Order No. 77 was issued suspending the implementation of Executive Order No. 73
until June 30, 1987.
The petitioner, Francisco I. Chavez, 1 is a taxpayer and an owner of three parcels of land. He alleges the following: that
Executive Order No. 73 accelerated the application of the general revision of assessments to January 1, 1987 thereby
mandating an excessive increase in real property taxes by 100% to 400% on improvements, and up to 100% on land; that
any increase in the value of real property brought about by the revision of real property values and assessments would
necessarily lead to a proportionate increase in real property taxes; that sheer oppression is the result of increasing real
property taxes at a period of time when harsh economic conditions prevail; and that the increase in the market values of
real property as reflected in the schedule of values was brought about only by inflation and economic recession.
The intervenor Realty Owners Association of the Philippines, Inc. (ROAP), which is the national association of ownerslessors, joins Chavez in his petition to declare unconstitutional Executive Order No. 73, but additionally alleges the
following: that Presidential Decree No. 464 is unconstitutional insofar as it imposes an additional one percent (1%) tax on
all property owners to raise funds for education, as real property tax is admittedly a local tax for local governments; that the
General Revision of Assessments does not meet the requirements of due process as regards publication, notice of
hearing, opportunity to be heard and insofar as it authorizes "replacement cost" of buildings (improvements) which is not
provided in Presidential Decree No. 464, but only in an administrative regulation of the Department of Finance; and that
the Joint Local Assessment/Treasury Regulations No. 2-86 2 is even more oppressive and unconstitutional as it imposes
successive increase of 150% over the 1986 tax.
The Office of the Solicitor General argues against the petition.
The petition is not impressed with merit.
Petitioner Chavez and intervenor ROAP question the constitutionality of Executive Order No. 73 insofar as the revision of
the assessments and the effectivity thereof are concerned. It should be emphasized that Executive Order No. 73 merely
directs, in Section 1 thereof, that:
SECTION 1. Real property values as of December 31, 1984 as determined by the local assessors
during the latest general revision of assessments shall take effect beginning January 1, 1987 for
purposes of real property tax collection. (emphasis supplied)
18

The general revision of assessments completed in 1984 is based on Section 21 of Presidential Decree No. 464 which
provides, as follows:
SEC. 21. General Revision of Assessments. Beginning with the assessor shall make a calendar year
1978, the provincial or city general revision of real property assessments in the province or city to take
effect January 1, 1979, and once every five years thereafter: Provided; however, That if property values
in a province or city, or in any municipality, have greatly changed since the last general revision, the
provincial or city assesor may, with the approval of the Secretary of Finance or upon bis direction,
undertake a general revision of assessments in the province or city, or in any municipality before the fifth
year from the effectivity of the last general revision.
Thus, We agree with the Office of the Solicitor General that the attack on Executive Order No. 73 has no legal basis as the
general revision of assessments is a continuing process mandated by Section 21 of Presidential Decree No. 464. If at all, it
is Presidential Decree No. 464 which should be challenged as constitutionally infirm. However, Chavez failed to raise any
objection against said decree. It was ROAP which questioned the constitutionality thereof. Furthermore, Presidential
Decree No. 464 furnishes the procedure by which a tax assessment may be questioned:
SEC. 30. Local Board of Assessment Appeals. Any owner who is not satisfied with the action of the
provincial or city assessor in the assessment of his property may, within sixty days from the date of
receipt by him of the written notice of assessment as provided in this Code, appeal to the Board of
Assessment Appeals of the province or city, by filing with it a petition under oath using the form
prescribed for the purpose, together with copies of the tax declarations and such affidavit or documents
submitted in support of the appeal.
xxx xxx xxx
SEC. 34. Action by the Local Board of assessment Appeals. The Local Board of Assessment Appeals
shall decide the appeal within one hundred and twenty days from the date of receipt of such appeal. The
decision rendered must be based on substantial evidence presented at the hearing or at least contained
in the record and disclosed to the parties or such relevant evidence as a reasonable mind might accept
as adequate to support the conclusion.
In the exercise of its appellate jurisdiction, the Board shall have the power to summon witnesses,
administer oaths, conduct ocular inspection, take depositions, and issue subpoena and subpoenaduces
tecum. The proceedings of the Board shall be conducted solely for the purpose of ascertaining the truth
without-necessarily adhering to technical rules applicable in judicial proceedings.
The Secretary of the Board shall furnish the property owner and the Provincial or City Assessor with a
copy each of the decision of the Board. In case the provincial or city assessor concurs in the revision or
the assessment, it shall be his duty to notify the property owner of such fact using the form prescribed
for the purpose. The owner or administrator of the property or the assessor who is not satisfied with the
decision of the Board of Assessment Appeals, may, within thirty days after receipt of the decision of the
local Board, appeal to the Central Board of Assessment Appeals by filing his appeal under oath with the
Secretary of the proper provincial or city Board of Assessment Appeals using the prescribed form stating
therein the grounds and the reasons for the appeal, and attaching thereto any evidence pertinent to the
case. A copy of the appeal should be also furnished the Central Board of Assessment Appeals, through
its Chairman, by the appellant.
19

Within ten (10) days from receipt of the appeal, the Secretary of the Board of Assessment Appeals
concerned shall forward the same and all papers related thereto, to the Central Board of Assessment
Appeals through the Chairman thereof.
xxx xxx xxx
SEC. 36. Scope of Powers and Functions. The Central Board of Assessment Appeals shall have
jurisdiction over appealed assessment cases decided by the Local Board of Assessment Appeals. The
said Board shall decide cases brought on appeal within twelve (12) months from the date of receipt,
which decision shall become final and executory after the lapse of fifteen (15) days from the date of
receipt of a copy of the decision by the appellant.
In the exercise of its appellate jurisdiction, the Central Board of Assessment Appeals, or upon express
authority, the Hearing Commissioner, shall have the power to summon witnesses, administer oaths, take
depositions, and issue subpoenas and subpoenas duces tecum.
The Central Board of assessment Appeals shall adopt and promulgate rules of procedure relative to the
conduct of its business.
Simply stated, within sixty days from the date of receipt of the, written notice of assessment, any owner who doubts the
assessment of his property, may appeal to the Local Board of Assessment Appeals. In case the, owner or administrator of
the property or the assessor is not satisfied with the decision of the Local Board of Assessment Appeals, he may, within
thirty days from the receipt of the decision, appeal to the Central Board of Assessment Appeals. The decision of the
Central Board of Assessment Appeals shall become final and executory after the lapse of fifteen days from the date of
receipt of the decision.
Chavez argues further that the unreasonable increase in real property taxes brought about by Executive Order No. 73
amounts to a confiscation of property repugnant to the constitutional guarantee of due process, invoking the cases
of Ermita-Malate Hotel, et al. v. Mayor of Manila (G.R. No. L-24693, July 31, 1967, 20 SCRA 849) and Sison v. Ancheta, et
al. (G.R. No. 59431, July 25, 1984, 130 SCRA 654).
The reliance on these two cases is certainly misplaced because the due process requirement called for therein applies to
the "power to tax." Executive Order No. 73 does not impose new taxes nor increase taxes.
Indeed, the government recognized the financial burden to the taxpayers that will result from an increase in real property
taxes. Hence, Executive Order No. 1019 was issued on April 18, 1985, deferring the implementation of the increase in real
property taxes resulting from the revised real property assessments, from January 1, 1985 to January 1, 1988. Section 5
thereof is quoted herein as follows:
SEC. 5. The increase in real property taxes resulting from the revised real property assessments as
provided for under Section 21 of Presidential Decree No. 464, as amended by Presidential Decree No.
1621, shall be collected beginning January 1, 1988 instead of January 1, 1985 in order to enable the
Ministry of Finance and the Ministry of Local Government to establish the new systems of tax collection
and assessment provided herein and in order to alleviate the condition of the people, including real
property owners, as a result of temporary economic difficulties. (emphasis supplied)

20

The issuance of Executive Order No. 73 which changed the date of implementation of the increase in real property taxes
from January 1, 1988 to January 1, 1987 and therefore repealed Executive Order No. 1019, also finds ample justification in
its "whereas' clauses, as follows:
WHEREAS, the collection of real property taxes based on the 1984 real property values was deferred to
take effect on January 1, 1988 instead of January 1, 1985, thus depriving the local government units of
an additional source of revenue;
WHEREAS, there is an urgent need for local governments to augment their financial resources to meet
the rising cost of rendering effective services to the people; (emphasis supplied)
xxx xxx xxx
The other allegation of ROAP that Presidential Decree No. 464 is unconstitutional, is not proper to be resolved in the
present petition. As stated at the outset, the issue here is limited to the constitutionality of Executive Order No. 73.
Intervention is not an independent proceeding, but an ancillary and supplemental one which, in the nature of things, unless
otherwise provided for by legislation (or Rules of Court), must be in subordination to the main proceeding, and it may be
laid down as a general rule that an intervention is limited to the field of litigation open to the original parties (59 Am. Jur.
950. Garcia, etc., et al. v. David, et al., 67 Phil. 279).
We agree with the observation of the Office of the Solicitor General that without Executive Order No. 73, the basis for
collection of real property taxes win still be the 1978 revision of property values. Certainly, to continue collecting real
property taxes based on valuations arrived at several years ago, in disregard of the increases in the value of real
properties that have occurred since then, is not in consonance with a sound tax system. Fiscal adequacy, which is one of
the characteristics of a sound tax system, requires that sources of revenues must be adequate to meet government
expenditures and their variations.
ACCORDINGLY, the petition and the petition-in-intervention are hereby DISMISSED. SO ORDERED.

[G.R. No. 125704. August 28, 1998]

PHILEX MINING CORPORATION, petitioner, vs. COMMISSIONER OF INTERNAL REVENUE, COURT OF APPEALS,
and THE COURT OF TAX APPEALS, respondents.

DECISION
ROMERO, J.:
Petitioner Philex Mining Corp. assails the decision of the Court of Appeals promulgated on April 8, 1996 in CA-G.R.
SP No. 36975[1]affirming the Court of Tax Appeals decision in CTA Case No. 4872 dated March 16, 1995 [2] ordering it to
pay the amount ofP110,677,668.52 as excise tax liability for the period from the 2nd quarter of 1991 to the 2nd quarter of
1992 plus 20% annual interest from August 6, 1994 until fully paid pursuant to Sections 248 and 249 of the Tax Code of
1977.
21

The facts show that on August 5, 1992, the BIR sent a letter to Philex asking it to settle its tax liabilities for the 2nd,
3rd and 4th quarter of 1991 as well as the 1st and 2nd quarter of 1992 in the total amount of P123,821,982.52 computed
as follows:
PERIOD COVERED BASIC TAX 25% SURCHARGE INTEREST TOTAL EXCISE
TAX DUE
2nd Qtr., 1991 12,911,124.60 3,227,781.15 3,378,116.16 19,517,021.91
3rd Qtr., 1991 14,994,749.21 3,748,687.30 2,978,409.09 21,721,845.60
4th Qtr., 1991 19,406,480.13 4,851,620.03 2,631,837.72 26,889,937.88
------------------- ----------------- ----------------- --------------------47,312,353.94 11,828,088.48 8,988,362.97 68,128,805.39
1st Qtr., 1992 23,341,849.94 5,835,462.49 1,710,669.82 30,887,982.25
2nd Qtr., 1992 19,671,691.76 4,917,922.94 215,580.18 24,805,194.88
43,013,541.70 10,753,385.43 1,926,250.00 55,693,177.13
90,325,895.64 22,581,473.91 10,914,612.97 123,821,982.52
========== ========== =========== ===========[3]
In a letter dated August 20, 1992,[4] Philex protested the demand for payment of the tax liabilities stating that it has
pending claims for VAT input credit/refund for the taxes it paid for the years 1989 to 1991 in the amount
of P119,977,037.02 plus interest. Therefore, these claims for tax credit/refund should be applied against the tax liabilities,
citing our ruling in Commissioner of Internal Revenue v. Itogon-Suyoc Mines, Inc.[5]
In reply, the BIR, in a letter dated September 7, 1992, [6] found no merit in Philexs position. Since these pending
claims have not yet been established or determined with certainty, it follows that no legal compensation can take
place. Hence, he BIR reiterated its demand that Philex settle the amount plus interest within 30 days from the receipt of
the letter.
In view of the BIRs denial of the offsetting of Philexs claim for VAT input credit/refund against its exercise tax
obligation, Philex raised the issue to the Court of Tax Appeals on November 6, 1992. [7] In the course of the proceedings,
the BIR issued a Tax Credit Certificate SN 001795 in the amount of P13,144,313.88 which, applied to the total tax liabilities
of Philex of P123,821,982.52; effectively lowered the latters tax obligation of P110,677,688.52.
Despite the reduction of its tax liabilities, the CTA still ordered Philex to pay the remaining balance
of P110,677,688.52 plus interest, elucidating its reason, to wit:

22

Thus, for legal compensation to take place, both obligations must be liquidated and demandable. Liquidated debts are
those where the exact amount has already been determined (PARAS, Civil Code of the Philippines, Annotated, Vol. IV,
Ninth Edition, p. 259). In the instant case, the claims of the Petitioner for VAT refund is still pending litigation, and still has
to be determined by this Court (C.T.A. Case No. 4707). A fortiori, the liquidated debt of the Petitioner to the government
cannot, therefore, be set-off against the unliquidated claim which Petitioner conceived to exist in its favor (see Compaia
General de Tabacos vs. French and Unson, No. 14027, November 8, 1918, 39 Phil. 34).[8]
Moreover, the Court of Tax Appeals ruled that taxes cannot be subject to set-off on compensation since claim for
taxes is not a debt or contract.[9] The dispositive portion of the CTA decision[10] provides:
In all the foregoing, this Petition for Review is hereby DENIED for lack of merit and Petitioner is hereby ORDERED to PAY
the Respondent the amount of P110,677,668.52 representing excise tax liability for the period from the 2nd quarter of 1991
to the 2nd quarter of 1992 plus 20% annual interest from August 6, 1994 until fully paid pursuant to Section 248 and 249 of
the Tax Code, as amended.
Aggrieved with the decision, Philex appealed the case before the Court of Appeals docketed as CA-G.R. CV No.
36975.[11]Nonetheless, on April 8, 1996, the Court of Appeals affirmed the Court of Tax Appeals observation. The pertinent
portion of which reads:[12]
WHEREFORE, the appeal by way of petition for review is hereby DISMISSED and the decision dated March 16, 1995 is
AFFIRMED.
Philex filed a motion for reconsideration which was, nevertheless, denied in a Resolution dated July 11, 1996.[13]
However, a few days after the denial of its motion for reconsideration, Philex was able to obtain its VAT input
credit/refund not only for the taxable year 1989 to 1991 but also for 1992 and 1994, computed as follows:[14]
Period Covered By Tax Credit Certificate Date Of Issue Amount
Claims For Vat Number
refund/credit
1994 (2nd Quarter) 007730 11 July 1996 P25,317,534.01
1994 (4th Quarter) 007731 11 July 1996 P21,791,020.61
1989 007732 11 July 1996 P37,322,799.19
1990-1991 007751 16 July 1996 P84,662,787.46
1992 (1st-3rd Quarter) 007755 23 July 1996 P36,501,147.95
In view of the grant of its VAT input credit/refund, Philex now contends that the same should, ipso jure, off-set its
excise tax liabilities[15]since both had already become due and demandable, as well as fully liquidated;[16] hence, legal
compensation can properly take place.
23

We see no merit in this contention.

In several instances prior to the instant case, we have already made the pronouncement that taxes cannot be subject
to compensation for the simple reason that the government and the taxpayer are not creditors and debtors of each other.
[17]
There is a material distinction between a tax and debt. Debts are due to the Government in its corporate capacity, while
taxes are due to the Government in its sovereign capacity. [18] We find no cogent reason to deviate from the aforementioned
distinction.
Prescinding from this premise, in Francia v. Intermediate Appellate Court,[19] we categorically held that taxes cannot
be subject to set-off or compensation, thus:
We have consistently ruled that there can be no off-setting of taxes against the claims that the taxpayer may have against
the government.A person cannot refuse to pay a tax on the ground that the government owes him an amount equal to or
greater than the tax being collected. The collection of tax cannot await the results of a lawsuit against the government.

[20]

The ruling in Francia has been applied to the subsequent case of Caltex Philippines, Inc. v. Commission on Audit,
which reiterated that:

x x x a taxpayer may not offset taxes due from the claims that he may have against the government. Taxes cannot be the
subject of compensation because the government and taxpayer are not mutually creditors and debtors of each other and a
claim for taxes is not such a debt, demand, contract or judgment as is allowed to be set-off.
Further, Philexs reliance on our holding in Commissioner of Internal Revenue v. Itogon-Suyoc Mines, Inc., wherein
we ruled that a pending refund may be set off against an existing tax liability even though the refund has not yet
been approved by the Commissioner,[21] is no longer without any support in statutory law.
It is important to note that the premise of our ruling in the aforementioned case was anchored on Section 51(d) of the
National Revenue Code of 1939. However, when the National Internal Revenue Code of 1977 was enacted, the same
provision upon which the Itogon-Suyocpronouncement was based was omitted.[22] Accordingly, the doctrine enunciated
in Itogon-Suyoc cannot be invoked by Philex.
Despite the foregoing rulings clearly adverse to Philexs position, it asserts that the imposition of surcharge and
interest for the non-payment of the excise taxes within the time prescribed was unjustified. Philex posits the theory that it
had no obligation to pay the excise liabilities within the prescribed period since, after all, it still has pending claims for VAT
input credit/refund with BIR.[23]
We fail to see the logic of Philexs claim for this is an outright disregard of the basic principle in tax law that taxes are
the lifeblood of the government and so should be collected without unnecessary hindrance. [24] Evidently, to countenance
Philexs whimsical reason would render ineffective our tax collection system. Too simplistic, it finds no support in law or in
jurisprudence.
To be sure, we cannot allow Philex to refuse the payment of its tax liabilities on the ground that it has a pending tax
claim for refund or credit against the government which has not yet been granted. It must be noted that a distinguishing
feature of a tax is that it is compulsory rather than a matter of bargain. [25] Hence, a tax does not depend upon the consent
of the taxpayer.[26] If any payer can defer the payment of taxes by raising the defense that it still has a pending claim for
refund or credit, this would adversely affect the government revenue system. A taxpayer cannot refuse to pay his taxes
when they fall due simply because he has a claim against the government or that the collection of the tax is contingent on
24

the result of the lawsuit it filed against the government.[27] Moreover, Philex's theory that would automatically apply its VAT
input credit/refund against its tax liabilities can easily give rise to confusion and abuse, depriving the government of
authority over the manner by which taxpayers credit and offset their tax liabilities.
Corollarily, the fact that Philex has pending claims for VAT input claim/refund with the government is immaterial for
the imposition of charges and penalties prescribed under Section 248 and 249 of the Tax Code of 1977. The payment of
the surcharge is mandatory and the BIR is not vested with any authority to waive the collection thereof. [28] The same
cannot be condoned for flimsy reasons,[29] similar to the one advanced by Philex in justifying its non-payment of its tax
liabilities.
Finally, Philex asserts that the BIR violated Section 106(e)[30] of the National Internal Revenue Code of 1977, which
requires the refund of input taxes within 60 days, [31] when it took five years for the latter to grant its tax claim for VAT input
credit/refund.[32]
In this regard, we agree with Philex. While there is no dispute that a claimant has the burden of proof to establish the
factual basis of his or her claim for tax credit or refund, [33] however, once the claimant has submitted all the required
documents, it is the function of the BIR to assess these documents with purposeful dispatch. After all, since taxpayers owe
honesty to government it is but just that government render fair service to the taxpayers.[34]
In the instant case, the VAT input taxes were paid between 1989 to 1991 but the refund of these erroneously paid
taxes was only granted in 1996. Obviously, had the BIR been more diligent and judicious with their duty, it could have
granted the refund earlier. We need not remind the BIR that simple justice requires the speedy refund of wrongly-held
taxes.[35] Fair dealing and nothing less, is expected by the taxpayer from the BIR in the latter's discharge of its function. As
aptly held in Roxas v. Court of Tax Appeals:[36]
"The power of taxation is sometimes called also the power to destroy. Therefore it should be exercised with caution to
minimize injury to the proprietary rights of a taxpayer. It must be exercised fairly, equally and uniformly, lest the tax collectot
kill the 'hen that lays the golden egg.' And, in the order to maintain the general public's trust and confidence in the
Government this power must be used justly and not treacherously."
Despite our concern with the lethargic manner by which the BIR handled Philex's tax claim, it is a settled rule that in
the performance of governmental function, the State is not bound by the neglect of its agents and officers. Nowhere is this
more true than in the field of taxation. [37] Again, while we understand Philex's predicament, it must be stressed that the
same is not valid reason for the non- payment of its tax liabilities.
To be sure, this is not state that the taxpayer is devoid of remedy against public servants or employees especially
BIR examiners who, in investigating tax claims are seen to drag their feet needlessly. First, if the BIR takes time in acting
upon the taxpayer's claims for refund, the latter can seek judicial remedy before the Court of Tax Appeals in the manner
prescribed by law.[38] Second, if the inaction can be characterized as willful neglect of duty, then recourse under the Civil
Code and the Tax Code can also be availed of.
Article 27 of the Civil Code provides:
"Art. 27. Any person suffering material or moral loss because a public servant or employee refuses or neglects, without just
cause, to perform his official duty may file an action for damages and other relief against the latter, without prejudice to any
disciplinary action that may be taken."
25

More importantly, Section 269 (c) of the National Internal Revenue Act of 1997 states:
"xxx xxx xxx
(c) wilfully neglecting to give receipts, as by law required for any sum collected in the performance of duty or wilfully
neglecting to perform, any other duties enjoined by law."
Simply put, both provisions abhor official inaction, willful neglect and unreasonable delay in the performance of official
duties.[39] In no uncertain terms must we stress that every public employee or servant must strive to render service to the
people with utmost diligence and efficiency. Insolence and delay have no place in government service. The BIR, being the
government collecting arm, must and should do no less. It simply cannot be apathetic and laggard in rendering service to
the taxpayer if it wishes to remain true to its mission of hastening the country's development. We take judicial notice of the
taxpayer's generally negative perception towards the BIR; hence, it is up to the latter to prove its detractors wrong.
In sum, while we can never condone the BIR's apparent callousness in performing its duties, still, the same cannot
justify Philex's non-payment of its tax liabilities. The adage "no one should take the law into his own hands" should have
guided Philex's action.
WHEREFORE, in view of the foregoing, the instant petition is hereby DISMISSED. The assailed decision of the Court
of Appeals dated April 8, 1996 is hereby AFFIRMED.
SO ORDERED. Narvasa, C.J., (Chairman), Kapunan and Purisima, JJ., concur.

G.R. No. L-25043

April 26, 1968
ANTONIO ROXAS, EDUARDO ROXAS and ROXAS Y CIA., in their own respective behalf and as judicial coguardians of JOSE ROXAS, petitioners,
vs.
COURT OF TAX APPEALS and COMMISSIONER OF INTERNAL REVENUE, respondents.
Leido, Andrada, Perez and Associates for petitioners.Office of the Solicitor General for respondents.
BENGZON, J.P., J.:
Don Pedro Roxas and Dona Carmen Ayala, Spanish subjects, transmitted to their grandchildren by hereditary succession
the following properties:
(1) Agricultural lands with a total area of 19,000 hectares, situated in the municipality of Nasugbu, Batangas
province;
(2) A residential house and lot located at Wright St., Malate, Manila; and
(3) Shares of stocks in different corporations.
To manage the above-mentioned properties, said children, namely, Antonio Roxas, Eduardo Roxas and Jose Roxas,
formed a partnership called Roxas y Compania.
AGRICULTURAL LANDS
At the conclusion of the Second World War, the tenants who have all been tilling the lands in Nasugbu for generations
expressed their desire to purchase from Roxas y Cia. the parcels which they actually occupied. For its part, the
Government, in consonance with the constitutional mandate to acquire big landed estates and apportion them among
landless tenants-farmers, persuaded the Roxas brothers to part with their landholdings. Conferences were held with the
26

farmers in the early part of 1948 and finally the Roxas brothers agreed to sell 13,500 hectares to the Government for
distribution to actual occupants for a price of P2,079,048.47 plus P300,000.00 for survey and subdivision expenses.
It turned out however that the Government did not have funds to cover the purchase price, and so a special arrangement
was made for the Rehabilitation Finance Corporation to advance to Roxas y Cia. the amount of P1,500,000.00 as loan.
Collateral for such loan were the lands proposed to be sold to the farmers. Under the arrangement, Roxas y Cia. allowed
the farmers to buy the lands for the same price but by installment, and contracted with the Rehabilitation Finance
Corporation to pay its loan from the proceeds of the yearly amortizations paid by the farmers.
In 1953 and 1955 Roxas y Cia. derived from said installment payments a net gain of P42,480.83 and P29,500.71. Fifty
percent of said net gain was reported for income tax purposes as gain on the sale of capital asset held for more than one
year pursuant to Section 34 of the Tax Code.
RESIDENTIAL HOUSE
During their bachelor days the Roxas brothers lived in the residential house at Wright St., Malate, Manila, which they
inherited from their grandparents. After Antonio and Eduardo got married, they resided somewhere else leaving only Jose
in the old house. In fairness to his brothers, Jose paid to Roxas y Cia. rentals for the house in the sum of P8,000.00 a year.
ASSESSMENTS
On June 17, 1958, the Commissioner of Internal Revenue demanded from Roxas y Cia the payment of real estate dealer's
tax for 1952 in the amount of P150.00 plus P10.00 compromise penalty for late payment, and P150.00 tax for dealers of
securities for 1952 plus P10.00 compromise penalty for late payment. The assessment for real estate dealer's tax was
based on the fact that Roxas y Cia. received house rentals from Jose Roxas in the amount of P8,000.00. Pursuant to Sec.
194 of the Tax Code, an owner of a real estate who derives a yearly rental income therefrom in the amount of P3,000.00 or
more is considered a real estate dealer and is liable to pay the corresponding fixed tax.
The Commissioner of Internal Revenue justified his demand for the fixed tax on dealers of securities against Roxas y Cia.,
on the fact that said partnership made profits from the purchase and sale of securities.
In the same assessment, the Commissioner assessed deficiency income taxes against the Roxas Brothers for the years
1953 and 1955, as follows:

Antonio Roxas
Eduardo Roxas
Jose Roxas

1953
P7,010.00
7,281.00
6,323.00

1955
P5,813.00
5,828.00
5,588.00

The deficiency income taxes resulted from the inclusion as income of Roxas y Cia. of the unreported 50% of the net profits
for 1953 and 1955 derived from the sale of the Nasugbu farm lands to the tenants, and the disallowance of deductions
from gross income of various business expenses and contributions claimed by Roxas y Cia. and the Roxas brothers. For
the reason that Roxas y Cia. subdivided its Nasugbu farm lands and sold them to the farmers on installment, the
Commissioner considered the partnership as engaged in the business of real estate, hence, 100% of the profits derived
therefrom was taxed.
The following deductions were disallowed:
ROXAS Y CIA.:
1953
27

Tickets for Banquet

S. Osmea

in

honor

of

Gifts of San Miguel beer

P 40.00
28.00

Contributions to
Philippine Air Force Chapel

100.00

Manila Police Trust Fund

150.00

Philippines Herald's fund for Manila's neediest

families
100.00
1955
Contributions
to
Contribution
Our Lady of Fatima Chapel, FEU

to
50.00

ANTONIO ROXAS:
1953
Contributions to
Pasay City Firemen Christmas Fund

25.00

Pasay City Police Dept. X'mas fund

50.00

1955
Contributions to
Baguio City Police Christmas fund

25.00

Pasay City Firemen Christmas fund

25.00

Pasay City Police Christmas fund

50.00

EDUARDO ROXAS:
1953
Contributions to
Hijas de Jesus' Retiro de Manresa

450.00

Philippines Herald's fund for Manila's neediest

families
100.00
1955
Contributions

to
Philippines
Herald's fund for Manila's
neediest families
120.00

JOSE ROXAS:
1955
28

Contributions

to
Philippines
Herald's fund for Manila's
neediest families
120.00
The Roxas brothers protested the assessment but inasmuch as said protest was denied, they instituted an appeal in the
Court of Tax Appeals on January 9, 1961. The Tax Court heard the appeal and rendered judgment on July 31, 1965
sustaining the assessment except the demand for the payment of the fixed tax on dealer of securities and the disallowance
of the deductions for contributions to the Philippine Air Force Chapel and Hijas de Jesus' Retiro de Manresa. The Tax
Court's judgment reads:
WHEREFORE, the decision appealed from is hereby affirmed with respect to petitioners Antonio Roxas, Eduardo
Roxas, and Jose Roxas who are hereby ordered to pay the respondent Commissioner of Internal Revenue the
amounts of P12,808.00, P12,887.00 and P11,857.00, respectively, as deficiency income taxes for the years 1953
and 1955, plus 5% surcharge and 1% monthly interest as provided for in Sec. 51(a) of the Revenue Code; and
modified with respect to the partnership Roxas y Cia. in the sense that it should pay only P150.00, as real estate
dealer's tax. With costs against petitioners.
Not satisfied, Roxas y Cia. and the Roxas brothers appealed to this Court. The Commissioner of Internal Revenue did not
appeal.
The issues:
(1) Is the gain derived from the sale of the Nasugbu farm lands an ordinary gain, hence 100% taxable?
(2) Are the deductions for business expenses and contributions deductible?
(3) Is Roxas y Cia. liable for the payment of the fixed tax on real estate dealers?
The Commissioner of Internal Revenue contends that Roxas y Cia. could be considered a real estate dealer because it
engaged in the business of selling real estate. The business activity alluded to was the act of subdividing the Nasugbu
farm lands and selling them to the farmers-occupants on installment. To bolster his stand on the point, he cites one of the
purposes of Roxas y Cia. as contained in its articles of partnership, quoted below:
4. (a) La explotacion de fincas urbanes pertenecientes a la misma o que pueden pertenecer a ella en el futuro,
alquilandoles por los plazos y demas condiciones, estime convenientes y vendiendo aquellas que a juicio de sus
gerentes no deben conservarse;
The above-quoted purpose notwithstanding, the proposition of the Commissioner of Internal Revenue cannot be favorably
accepted by Us in this isolated transaction with its peculiar circumstances in spite of the fact that there were hundreds of
vendees. Although they paid for their respective holdings in installment for a period of ten years, it would nevertheless not
make the vendor Roxas y Cia. a real estate dealer during the ten-year amortization period.
It should be borne in mind that the sale of the Nasugbu farm lands to the very farmers who tilled them for generations was
not only in consonance with, but more in obedience to the request and pursuant to the policy of our Government to
allocate lands to the landless. It was the bounden duty of the Government to pay the agreed compensation after it had
persuaded Roxas y Cia. to sell its haciendas, and to subsequently subdivide them among the farmers at very reasonable
terms and prices. However, the Government could not comply with its duty for lack of funds. Obligingly, Roxas y Cia.
shouldered the Government's burden, went out of its way and sold lands directly to the farmers in the same way and under
the same terms as would have been the case had the Government done it itself. For this magnanimous act, the municipal
council of Nasugbu passed a resolution expressing the people's gratitude.
The power of taxation is sometimes called also the power to destroy. Therefore it should be exercised with caution to
minimize injury to the proprietary rights of a taxpayer. It must be exercised fairly, equally and uniformly, lest the tax
collector kill the "hen that lays the golden egg". And, in order to maintain the general public's trust and confidence in the
Government this power must be used justly and not treacherously. It does not conform with Our sense of justice in the
instant case for the Government to persuade the taxpayer to lend it a helping hand and later on to penalize him for duly
answering the urgent call.

29

In fine, Roxas y Cia. cannot be considered a real estate dealer for the sale in question. Hence, pursuant to Section 34 of
the Tax Code the lands sold to the farmers are capital assets, and the gain derived from the sale thereof is capital gain,
taxable only to the extent of 50%.
DISALLOWED DEDUCTIONS
Roxas y Cia. deducted from its gross income the amount of P40.00 for tickets to a banquet given in honor of Sergio
Osmena and P28.00 for San Miguel beer given as gifts to various persons. The deduction were claimed as representation
expenses. Representation expenses are deductible from gross income as expenditures incurred in carrying on a trade or
business under Section 30(a) of the Tax Code provided the taxpayer proves that they are reasonable in amount, ordinary
and necessary, and incurred in connection with his business. In the case at bar, the evidence does not show such link
between the expenses and the business of Roxas y Cia. The findings of the Court of Tax Appeals must therefore be
sustained.
The petitioners also claim deductions for contributions to the Pasay City Police, Pasay City Firemen, and Baguio City
Police Christmas funds, Manila Police Trust Fund, Philippines Herald's fund for Manila's neediest families and Our Lady of
Fatima chapel at Far Eastern University.
The contributions to the Christmas funds of the Pasay City Police, Pasay City Firemen and Baguio City Police are not
deductible for the reason that the Christmas funds were not spent for public purposes but as Christmas gifts to the families
of the members of said entities. Under Section 39(h), a contribution to a government entity is deductible when used
exclusively for public purposes. For this reason, the disallowance must be sustained. On the other hand, the contribution to
the Manila Police trust fund is an allowable deduction for said trust fund belongs to the Manila Police, a government entity,
intended to be used exclusively for its public functions.
The contributions to the Philippines Herald's fund for Manila's neediest families were disallowed on the ground that the
Philippines Herald is not a corporation or an association contemplated in Section 30 (h) of the Tax Code. It should be
noted however that the contributions were not made to the Philippines Herald but to a group of civic spirited citizens
organized by the Philippines Herald solely for charitable purposes. There is no question that the members of this group of
citizens do not receive profits, for all the funds they raised were for Manila's neediest families. Such a group of citizens
may be classified as an association organized exclusively for charitable purposes mentioned in Section 30(h) of the Tax
Code.
Rightly, the Commissioner of Internal Revenue disallowed the contribution to Our Lady of Fatima chapel at the Far Eastern
University on the ground that the said university gives dividends to its stockholders. Located within the premises of the
university, the chapel in question has not been shown to belong to the Catholic Church or any religious organization. On
the other hand, the lower court found that it belongs to the Far Eastern University, contributions to which are not deductible
under Section 30(h) of the Tax Code for the reason that the net income of said university injures to the benefit of its
stockholders. The disallowance should be sustained.
Lastly, Roxas y Cia. questions the imposition of the real estate dealer's fixed tax upon it, because although it earned a
rental income of P8,000.00 per annum in 1952, said rental income came from Jose Roxas, one of the partners. Section
194 of the Tax Code, in considering as real estate dealers owners of real estate receiving rentals of at least P3,000.00 a
year, does not provide any qualification as to the persons paying the rentals. The law, which states: 1wph1.t
. . . "Real estate dealer" includes any person engaged in the business of buying, selling, exchanging, leasing or
renting property on his own account as principal and holding himself out as a full or part-time dealer in real estate
or as an owner of rental property or properties rented or offered to rent for an aggregate amount of three
thousand pesos or more a year: . . . (Emphasis supplied) .
is too clear and explicit to admit construction. The findings of the Court of Tax Appeals or, this point is
sustained.1wph1.t
30

To Summarize, no deficiency income tax is due for 1953 from Antonio Roxas, Eduardo Roxas and Jose Roxas. For 1955
they are liable to pay deficiency income tax in the sum of P109.00, P91.00 and P49.00, respectively, computed as
follows: *
ANTONIO ROXAS
Net income per return

P315,476.59

Add: 1/3 share, profits in Roxas y Cia.

P 153,249.15

Less amount declared

146,135.46

Amount understated

P 7,113.69

Contributions disallowed

115.00
P 7,228.69

Less 1/3 share of contributions amounting to

P21,126.06 disallowed from partnership but
allowed to partners
7,042.02

186.67

Net income per review

P315,663.26

Less: Exemptions

4,200.00

Net taxable income

P311,463.26

Tax due

154,169.00

Tax paid

154,060.00

Deficiency

P
109.00
==========

EDUARDO ROXAS
Net income per return

P 304,166.92

Add: 1/3 share, profits in Roxas y Cia

P 153,249.15

Less profits declared

146,052.58

Amount understated

P 7,196.57

Less 1/3 share in contributions amounting to

P21,126.06 disallowed from partnership but
allowed to partners
7,042.02

155.55

Net income per review

P304,322.47

Less: Exemptions

4,800.00

Net taxable income

31

P299,592.47
Tax Due

P147,250.00

Tax paid

147,159.00

Deficiency

P91.00
===========

JOSE ROXAS
Net income per return

P222,681.76

Add: 1/3 share, profits in Roxas y Cia.

P153,429.15

Less amount reported

146,135.46

Amount understated

7,113.69

Less 1/3 share of contributions disallowed from

partnership but allowed as deductions to
partners
7,042.02

71.67

Net income per review

P222,753.43

Less: Exemption

1,800.00

Net income subject to tax

P220,953.43

Tax due

P102,763.00

Tax paid

102,714.00

Deficiency

P
49.00
===========

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

Sanchez,

Castro,
took

Angeles

and

Fernando,
no

JJ.,

concur.
part.

G.R. No. 167330

June 12, 2008
PHILIPPINE HEALTH CARE PROVIDERS, INC., petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, respondent.
DECISION
32

CORONA, J.:
Is a health care agreement in the nature of an insurance contract and therefore subject to the documentary stamp tax
(DST) imposed under Section 185 of Republic Act 8424 (Tax Code of 1997)?
This is an issue of first impression. The Court of Appeals (CA) answered it affirmatively in its August 16, 2004 decision 1 in
CA-G.R. SP No. 70479. Petitioner Philippine Health Care Providers, Inc. believes otherwise and assails the CA decision in
this petition for review under Rule 45 of the Rules of Court.
Petitioner is a domestic corporation whose primary purpose is "[t]o establish, maintain, conduct and operate a prepaid
group practice health care delivery system or a health maintenance organization to take care of the sick and disabled
persons enrolled in the health care plan and to provide for the administrative, legal, and financial responsibilities of the
organization."2 Individuals enrolled in its health care programs pay an annual membership fee and are entitled to various
preventive, diagnostic and curative medical services provided by its duly licensed physicians, specialists and other
professional technical staff participating in the group practice health delivery system at a hospital or clinic owned, operated
or accredited by it.3
The pertinent part of petitioner's membership or health care agreement4 provides:
VII BENEFITS
Subject to paragraphs VIII [on pre-existing medical condition] and X [on claims for reimbursement] of this
Agreement, Members shall have the following Benefits under this Agreement:
In-Patient Services. In the event that a Member contract[s] sickness or suffers injury which requires confinement
in a participating Hospital[,] the services or benefits stated below shall be provided to the Member free of charge,
but in no case shall [petitioner] be liable to pay more than P75,000.00 in benefits with respect to anyone sickness,
injury or related causes. If a member has exhausted such maximum benefits with respect to a particular sickness,
injury or related causes, all accounts in excess of P75,000.00 shall be borne by the enrollee. It is[,] however,
understood that the payment by [petitioner] of the said maximum in In-Patient Benefits to any one member shall
preclude a subsequent payment of benefits to such member in respect of an unrelated sickness, injury or related
causes happening during the remainder of his membership term.
(a) Room and Board
(b) Services of physician and/or surgeon or specialist
(c) Use of operating room and recovery room
(d) Standard Nursing Services
(e) Drugs and Medication for use in the hospital except those which are used to dissolve blood clots in
the vascular systems (i.e., trombolytic agents)
(f) Anesthesia and its administration
(g) Dressings, plaster casts and other miscellaneous supplies
(h) Laboratory tests, x-rays and other necessary diagnostic services
(i) Transfusion of blood and other blood elements
Condition for in-Patient Care. The provision of the services or benefits mentioned in the immediately preceding
paragraph shall be subject to the following conditions:
(a) The Hospital Confinement must be approved by [petitioner's] Physician, Participating Physician or
[petitioner's] Medical Coordinator in that Hospital prior to confinement.
(b) The confinement shall be in a Participating Hospital and the accommodation shall be in accordance
with the Member[']s benefit classification.
(c) Professional services shall be provided only by the [petitioner's] Physicians or Participating
Physicians.
33

(d) If discharge from the Hospital has been authorized by [petitioner's] attending Physician or
Participating Physician and the Member shall fail or refuse to do so, [petitioner] shall not be responsible
for any charges incurred after discharge has been authorized.
Out-Patient Services. A Member is entitled free of charge to the following services or benefits which shall be
rendered or administered either in [petitioner's] Clinic or in a Participating Hospital under the direction or
supervision of [petitioner's] Physician, Participating Physician or [petitioner's] Medical Coordinator.
(a) Gold Plan Standard Annual Physical Examination on the anniversary date of membership, to be done
at [petitioner's] designated hospital/clinic, to wit:
(i) Taking a medical history
(ii) Physical examination
(iii) Chest x-ray
(iv) Stool examination
(v) Complete Blood Count
(vi) Urinalysis
(vii) Fasting Blood Sugar (FBS)
(viii) SGPT
(ix) Creatinine
(x) Uric Acid
(xi) Resting Electrocardiogram
(xii) Pap Smear (Optional for women 40 years and above)
(b) Platinum Family Plan/Gold Family Plan and Silver Annual Physical Examination.
The following tests are to be done as part of the Member[']s Annual check-up program at [petitioner's]
designated clinic, to wit:
1) Routine Physical Examination
2) CBC (Complete Blood Count)
* Hemoglobin * Hematocrit
* Differential * RBC/WBC
3) Chest X-ray
4) Urinalysis
5) Fecalysis
(c) Preventive Health Care, which shall include:
(i) Periodic Monitoring of Health Problems
(ii) Family planning counseling
(iii) Consultation and advices on diet, exercise and other healthy habits
(iv) Immunization but excluding drugs for vaccines used
(d) Out-Patient Care, which shall include:
(i) Consultation, including specialist evaluation
(ii) Treatment of injury or illness
(iii) Necessary x-ray and laboratory examination
(iv) Emergency medicines needed for the immediate relief of symptoms
(v) Minor surgery not requiring confinement
Emergency Care. Subject to the conditions and limitations in this Agreement and those specified below, a
Member is entitled to receive emergency care [in case of emergency. For this purpose, all hospitals and all
attending physician(s) in the Emergency Room automatically become accredited. In participating hospitals, the
member shall be entitled to the following services free of charge: (a) doctor's fees, (b) emergency room fees, (c)
medicines used for immediate relief and during treatment, (d) oxygen, intravenous fluids and whole blood and
human blood products, (e) dressings, casts and sutures and (f) x-rays, laboratory and diagnostic examinations
and other medical services related to the emergency treatment of the patient.] 5 Provided, however, that in no case
shall the total amount payable by [petitioner] for said Emergency, inclusive of hospital bill and professional fees,
exceed P75,000.00.
34

If the Member received care in a non-participating hospital, [petitioner] shall reimburse [him] 6 80% of the hospital
bill or the amount of P5,000.00[,] whichever is lesser, and 50% of the professional fees of non-participating
physicians based on [petitioner's] schedule of fees provided that the total amount[,] inclusive of hospital bills and
professional fee shall not exceed P5,000.00.
On January 27, 2000, respondent Commissioner of Internal Revenue sent petitioner a formal demand letter and the
corresponding assessment notices demanding the payment of deficiency taxes, including surcharges and interest, for the
taxable years 1996 and 1997 in the total amount of P224,702,641.18. The assessment represented the following:

Value Added Tax (VAT)

DST

1996

1997

54,738,434.03

68,450,258.73

45,767,596.23

100,506,030.26

55,746,352.19

124,196,610.92

The deficiency DST assessment was imposed on petitioner's health care agreement with the members of its health care
program pursuant to Section 185 of the 1997 Tax Code which provides:
Section 185. Stamp tax on fidelity bonds and other insurance policies. - On all policies of insurance or bonds or
obligations of the nature of indemnity for loss, damage, or liability made or renewed by any person,
association or company or corporation transacting the business of accident, fidelity, employer's liability,
plate, glass, steam boiler, burglar, elevator, automatic sprinkler, or other branch of insurance (except life,
marine, inland, and fire insurance), and all bonds, undertakings, or recognizances, conditioned for the
performance of the duties of any office or position, for the doing or not doing of anything therein specified, and on
all obligations guaranteeing the validity or legality of any bond or other obligations issued by any province, city,
municipality, or other public body or organization, and on all obligations guaranteeing the title to any real estate,
or guaranteeing any mercantile credits, which may be made or renewed by any such person, company or
corporation, there shall be collected a documentary stamp tax of fifty centavos (P0.50) on each four pesos
(P4.00), or fractional part thereof, of the premium charged. (emphasis supplied)
Petitioner protested the assessment in a letter dated February 23, 2000. As respondent did not act on the protest,
petitioner filed a petition for review in the Court of Tax Appeals (CTA) seeking the cancellation of the deficiency VAT and
DST assessments.
On April 5, 2002, the CTA rendered a decision,7 the dispositive portion of which read:
WHEREFORE, in view of the foregoing, the instant Petition for Review is PARTIALLY GRANTED. Petitioner is
hereby ORDERED to PAY the deficiency VAT amounting to P22,054,831.75 inclusive of 25% surcharge plus 20%
interest from January 20, 1997 until fully paid for the 1996 VAT deficiency and P31,094,163.87 inclusive of 25%
surcharge plus 20% interest from January 20, 1998 until fully paid for the 1997 VAT deficiency. Accordingly, VAT
Ruling No. [231]-88 is declared void and without force and effect. The 1996 and 1997 deficiency DST assessment
against petitioner is hereby CANCELLED AND SET ASIDE. Respondent is ORDERED to DESIST from collecting
the said DST deficiency tax.
35

SO ORDERED.8
Respondent appealed the CTA decision to the CA9 insofar as it cancelled the DST assessment. He claimed that
petitioner's health care agreement was a contract of insurance subject to DST under Section 185 of the 1997 Tax Code.
On August 16, 2004, the CA rendered its decision. 10 It held that petitioner's health care agreement was in the nature of a
non-life insurance contract subject to DST:
WHEREFORE, the petition for review is GRANTED. The Decision of the Court of Tax Appeals, insofar as it
cancelled and set aside the 1996 and 1997 deficiency documentary stamp tax assessment and ordered petitioner
to desist from collecting the same is REVERSED and SET ASIDE.
Respondent is ordered to pay the amounts of P55,746,352.19 and P68,450,258.73 as deficiency Documentary
Stamp Tax for 1996 and 1997, respectively, plus 25% surcharge for late payment and 20% interest per annum
from January 27, 2000, pursuant to Sections 248 and 249 of the Tax Code, until the same shall have been fully
paid.
SO ORDERED.11
Petitioner moved for reconsideration but the CA denied it. Hence, this petition.
Petitioner essentially argues that its health care agreement is not a contract of insurance but a contract for the provision on
a prepaid basis of medical services, including medical check-up, that are not based on loss or damage. Petitioner also
insists that it is not engaged in the insurance business. It is a health maintenance organization regulated by the
Department of Health, not an insurance company under the jurisdiction of the Insurance Commission. For these reasons,
petitioner asserts that the health care agreement is not subject to DST.
We do not agree.
The DST is levied on the exercise by persons of certain privileges conferred by law for the creation, revision, or termination
of specific legal relationships through the execution of specific instruments.12 It is an excise upon the privilege, opportunity,
or facility offered at exchanges for the transaction of the business. 13 In particular, the DST under Section 185 of the 1997
Tax Code is imposed on the privilege of making or renewing any policy of insurance (except life, marine, inland
and fire insurance), bond or obligation in the nature of indemnity for loss, damage, or liability.
Under the law, a contract of insurance is an agreement whereby one undertakes for a consideration to indemnify another
against loss, damage or liability arising from an unknown or contingent event. 14 The event insured against must be
designated in the contract and must either be unknown or contingent.15
Petitioner's health care agreement is primarily a contract of indemnity. And in the recent case of Blue Cross Healthcare,
Inc. v. Olivares,16 this Court ruled that a health care agreement is in the nature of a non-life insurance policy.
Contrary to petitioner's claim, its health care agreement is not a contract for the provision of medical services. Petitioner
does not actually provide medical or hospital services but merely arranges for the same 17 and pays for them up to the
stipulated maximum amount of coverage. It is also incorrect to say that the health care agreement is not based on loss or
damage because, under the said agreement, petitioner assumes the liability and indemnifies its member for hospital,
medical and related expenses (such as professional fees of physicians). The term "loss or damage" is broad enough to
cover the monetary expense or liability a member will incur in case of illness or injury.
Under the health care agreement, the rendition of hospital, medical and professional services to the member in case of
sickness, injury or emergency or his availment of so-called "out-patient services" (including physical examination, x-ray
and laboratory tests, medical consultations, vaccine administration and family planning counseling) is the contingent event
36

which gives rise to liability on the part of the member. In case of exposure of the member to liability, he would be entitled to
indemnification by petitioner.
Furthermore, the fact that petitioner must relieve its member from liability by paying for expenses arising from the
stipulated contingencies belies its claim that its services are prepaid. The expenses to be incurred by each member cannot
be predicted beforehand, if they can be predicted at all. Petitioner assumes the risk of paying for the costs of the services
even if they are significantly and substantially more than what the member has "prepaid." Petitioner does not bear the
costs alone but distributes or spreads them out among a large group of persons bearing a similar risk, that is, among all
the other members of the health care program. This is insurance.
Petitioner's health care agreement is substantially similar to that involved in Philamcare Health Systems, Inc. v. CA.18 The
health care agreement in that case entitled the subscriber to avail of the hospitalization benefits, whether ordinary or
emergency, listed therein. It also provided for "out-patient benefits" such as annual physical examinations, preventive
health care and other out-patient services. This Court ruled in Philamcare Health Systems, Inc.:
[T]he insurable interest of [the subscriber] in obtaining the health care agreement was his own health. The health
care agreement was in the nature of non-life insurance, which is primarily a contract of indemnity. Once
the member incurs hospital, medical or any other expense arising from sickness, injury or other stipulated
contingency, the health care provider must pay for the same to the extent agreed upon under the
contract.19 (emphasis supplied)
Similarly, the insurable interest of every member of petitioner's health care program in obtaining the health care agreement
is his own health. Under the agreement, petitioner is bound to indemnify any member who incurs hospital, medical or any
other expense arising from sickness, injury or other stipulated contingency to the extent agreed upon under the contract.
Petitioner's contention that it is a health maintenance organization and not an insurance company is irrelevant. Contracts
between companies like petitioner and the beneficiaries under their plans are treated as insurance contracts.20
Moreover, DST is not a tax on the business transacted but an excise on the privilege, opportunity, or facility offered at
exchanges for the transaction of the business.21 It is an excise on the facilities used in the transaction of the
business, separate and apart from the business itself.22
WHEREFORE, the petition is hereby DENIED. The August 16, 2004 decision of the Court of Appeals in CA-G.R. SP
No. 70479 is AFFIRMED.
Petitioner is ordered to pay the amounts of P55,746,352.19 and P68,450,258.73 as deficiency documentary stamp tax for
1996 and 1997, respectively, plus 25% surcharge for late payment and 20% interest per annum from January 27, 2000
until full payment thereof.
Costs against petitioner. SO ORDERED. Puno, C.J., Chairperson, Carpio, Azcuna, Leonardo-de Castro, JJ., concur.

G.R. No. L-23771 August 4, 1988

THE COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
LINGAYEN GULF ELECTRIC POWER CO., INC. and THE COURT OF TAX APPEALS, respondents.
37

Angel Sanchez for Lingayen Electric Power Co., Inc.

SARMIENTO, J.:
This is an appeal from the decision * of the Court of Tax Appeals (C.T.A., for brevity) dated September 15, 1964 in C.T.A.
Cases Nos. 581 and 1302, which were jointly heard upon agreement of the parties, absolving the respondent taxpayer
from liability for the deficiency percentage, franchise, and fixed taxes and surcharge assessed against it in the sums of
P19,293.41 and P3,616.86 for the years 1946 to 1954 and 1959 to 1961, respectively.
The respondent taxpayer, Lingayen Gulf Electric Power Co., Inc., operates an electric power plant serving the adjoining
municipalities of Lingayen and Binmaley, both in the province of Pangasinan, pursuant to the municipal franchise granted it
by their respective municipal councils, under Resolution Nos. 14 and 25 of June 29 and July 2, 1946, respectively. Section
10 of these franchises provide that:
...The said grantee in consideration of the franchise hereby granted, shall pay quarterly into the Provincial Treasury of
Pangasinan, one per centum of the gross earnings obtained thru this privilege during the first twenty years and two per
centum during the remaining fifteen years of the life of said franchise.
On February 24, 1948, the President of the Philippines approved the franchises granted to the private respondent.
On November 21, 1955, the Bureau of Internal Revenue (BIR) assessed against and demanded from the private
respondent the total amount of P19,293.41 representing deficiency franchise taxes and surcharges for the years 1946 to
1954 applying the franchise tax rate of 5% on gross receipts from March 1, 1948 to December 31, 1954 as prescribed in
Section 259 of the National Internal Revenue Code, instead of the lower rates as provided in the municipal franchises. On
September 29, 1956, the private respondent requested for a reinvestigation of the case on the ground that instead of
incurring a deficiency liability, it made an overpayment of the franchise tax. On April 30, 1957, the BIR through its regional
director, denied the private respondent's request for reinvestigation and reiterated the demand for payment of the same. In
its letters dated July 2, and August 9, 1958 to the petitioner Commissioner, the private respondent protested the said
assessment and requested for a conference with a view to settling the liability amicably. In his letters dated July 25 and
August 28, 1958, the Commissioner denied the request of the private respondent. Thus, the appeal to the respondent
Court of Tax Appeals on September 19, 1958, docketed as C.T.A. Case No. 581.
In a letter dated August 21, 1962, the Commissioner demanded from the private respondent the payment of P3,616.86
representing deficiency franchise tax and surcharges for the years 1959 to 1961 again applying the franchise tax rate of
5% on gross receipts as prescribed in Section 259 of the National Internal Revenue Code. In a letter dated October 5,
1962, the private respondent protested the assessment and requested reconsideration thereof The same was denied on
November 9, 1962. Thus, the appeal to the respondent Court of Appeals on November 29, 1962, docketed as C.T.A. No.
1302.
Pending the hearing of the said cases, Republic Act (R.A.) No. 3843 was passed on June 22, 1 963, granting to the private
respondent a legislative franchise for the operation of the electric light, heat, and power system in the same municipalities
of Pangasinan. Section 4 thereof provides that:
In consideration of the franchise and rights hereby granted, the grantee shall pay into the Internal Revenue office of each
Municipality in which it is supplying electric current to the public under this franchise, a tax equal to two per centum of the
38

gross receipts from electric current sold or supplied under this franchise. Said tax shall be due and payable quarterly and
shall be in lieu of any and all taxes and/or licenses of any kind, nature or description levied, established, or collected by
any authority whatsoever, municipal, provincial or national, now or in the future, on its poles, wires, insulator ... and on its
franchise, rights, privileges, receipts, revenues and profits, from which taxes and/or licenses, the grantee is hereby
expressly exempted and effective further upon the date the original franchise was granted, no other tax and/or licenses
other than the franchise tax of two per centum on the gross receipts as provided for in the original franchise shall be
collected, any provision of law to the contrary notwithstanding.
On September 15, 1964, the respondent court ruled that the provisions of R.A. No. 3843 should apply and accordingly
dismissed the claim of the Commissioner of Internal Revenue. The said ruling is now the subject of the petition at bar.
The issues raised for resolution are:
1. Whether or not the 5% franchise tax prescribed in Section 259 of the National Internal Revenue Code assessed against
the private respondent on its gross receipts realized before the effectivity of R.A- No. 3843 is collectible.
2. Whether or not Section 4 of R.A. No. 3843 is unconstitutional for being violative of the "uniformity and equality of
taxation" clause of the Constitution.
3. If the abovementioned Section 4 of R.A. No. 3843 is valid, whether or not it could be given retroactive effect so as to
render uncollectible the taxes in question which were assessed before its enactment.
4. Whether or not the respondent taxpayer is liable for the fixed and deficiency percentage taxes in the amount of
P3,025.96 for the period from January 1, 1946 to February 29, 1948, the period before the approval of its municipal
franchises.
The first issue raised by the petitioner before us is whether or not the five percent (5%) franchise tax prescribed in Section
259 of the National Internal Revenue Code (Commonwealth Act No. 466 as amended by R.A. No. 39) assessed against
the private respondent on its gross receipts realized before the effectivity of R.A- No. 3843 is collectible. It is the contention
of the petitioner Commissioner of Internal Revenue that the private respondent should have been held liable for the 5%
franchise tax on gross receipts prescribed in Section 259 of the Tax Code, instead of the lower franchise tax rates provided
in the municipal franchises (1% of gross earnings for the first twenty years and 2% for the remaining fifteen years of the life
of the franchises) because Section 259 of the Tax Code, as amended by RA No. 39 of October 1, 1946, applied to existing
and future franchises. The franchises of the private respondent were already in existence at the time of the adoption of the
said amendment, since the franchises were accepted on March 1, 1948 after approval by the President of the Philippines
on February 24, 1948. The private respondent's original franchises did not contain the proviso that the tax provided therein
"shall be in lieu of all taxes;" moreover, the franchises contained a reservation clause that they shag be subject to
amendment, alteration, or repeal, but even in the absence of such cause, the power of the Legislature to alter, amend, or
repeal any franchise is always deemed reserved. The franchise of the private respondent have been modified or amended
by Section 259 of the Tax Code, the petitioner submits.
We find no merit in petitioner's contention. R.A. No. 3843 granted the private respondent a legislative franchise in June,
1963, amending, altering, or even repealing the original municipal franchises, and providing that the private respondent
should pay only a 2% franchise tax on its gross receipts, "in lieu of any and all taxes and/or licenses of any kind, nature or
description levied, established, or collected by any authority whatsoever, municipal, provincial, or national, now or in the
future ... and effective further upon the date the original franchise was granted, no other tax and/or licenses other than the
franchise tax of two per centum on the gross receipts ... shall be collected, any provision of law to the contrary
39

notwithstanding." Thus, by virtue of R.A- No. 3843, the private respondent was liable to pay only the 2% franchise tax,
effective from the date the original municipal franchise was granted.
On the question as to whether or not Section 4 of R.A. No. 3843 is unconstitutional for being violative of the "uniformity and
equality of taxation" clause of the Constitution, and, if adjudged valid, whether or not it should be given retroactive effect,
the petitioner submits that the said law is unconstitutional insofar as it provides for the payment by the private respondent
of a franchise tax of 2% of its gross receipts, while other taxpayers similarly situated were subject to the 5% franchise tax
imposed in Section 259 of the Tax Code, thereby discriminatory and violative of the rule on uniformity and equality of
taxation.
A tax is uniform when it operates with the same force and effect in every place where the subject of it is found. Uniformity
means that all property belonging to the same class shall be taxed alike The Legislature has the inherent power not only to
select the subjects of taxation but to grant exemptions. Tax exemptions have never been deemed violative of the equal
protection clause. 1 It is true that the private respondents municipal franchises were obtained under Act No. 667 2 of the
Philippine Commission, but these original franchises have been replaced by a new legislative franchise, i.e. R.A. No. 3843.
As correctly held by the respondent court, the latter was granted subject to the terms and conditions established in Act No.
3636, 3 as amended by C.A. No. 132. These conditions Identify the private respondent's power plant as falling within that
class of power plants created by Act No. 3636, as amended. The benefits of the tax reduction provided by law (Act No.
3636 as amended by C.A. No. 132 and R.A. No. 3843) apply to the respondent's power plant and others circumscribed
within this class. R.A-No. 3843 merely transferred the petitioner's power plant from that class provided for in Act No. 667,
as amended, to which it belonged until the approval of R.A- No. 3843, and placed it within the class falling under Act No.
3636, as amended. Thus, it only effected the transfer of a taxable property from one class to another.
We do not have the authority to inquire into the wisdom of such act. Furthermore, the 5% franchise tax rate provided in
Section 259 of the Tax Code was never intended to have a universal application. 4 We note that the said Section 259 of the
Tax Code expressly allows the payment of taxes at rates lower than 5% when the charter granting the franchise of a
grantee, like the one granted to the private respondent under Section 4 of R.A. No. 3843, precludes the imposition of a
higher tax. R.A. No. 3843 did not only fix and specify a franchise tax of 2% on its gross receipts, but made it "in lieu of any
and all taxes, all laws to the contrary notwithstanding," thus, leaving no room for doubt regarding the legislative intent.
"Charters or special laws granted and enacted by the Legislature are in the nature of private contracts. They do not
constitute a part of the machinery of the general government. They are usually adopted after careful consideration of the
private rights in relation with resultant benefits to the State ... in passing a special charter the attention of the Legislature is
directed to the facts and circumstances which the act or charter is intended to meet. The Legislature consider (sic) and
make (sic) provision for all the circumstances of a particular case." 5 In view of the foregoing, we find no reason to disturb
the respondent court's ruling upholding the constitutionality of the law in question.
Given its validity, should the said law be applied retroactively so as to render uncollectible the taxes in question which were
assessed before its enactment? The question of whether a statute operates retrospectively or only prospectively depends
on the legislative intent. In the instant case, Act No. 3843 provides that "effective ... upon the date the original franchise
was granted, no other tax and/or licenses other than the franchise tax of two per centum on the gross receipts ... shall be
collected, any provision to the contrary notwithstanding." Republic Act No. 3843 therefore specifically provided for the
retroactive effect of the law.
The last issue to be resolved is whether or not the private respondent is liable for the fixed and deficiency percentage
taxes in the amount of P3,025.96 (i.e. for the period from January 1, 1946 to February 29, 1948) before the approval of its
municipal franchises. As aforestated, the franchises were approved by the President only on February 24, 1948.
Therefore, before the said date, the private respondent was liable for the payment of percentage and fixed taxes as seller
40

of light, heat, and power which as the petitioner claims, amounted to P3,025.96. The legislative franchise (R.A. No.
3843) exempted the grantee from all kinds of taxes other than the 2% tax from the date the original franchise was granted.
The exemption, therefore, did not cover the period before the franchise was granted, i.e. before February 24, 1948.
However, as pointed out by the respondent court in its findings, during the period covered by the instant case, that is from
January 1, 1946 to December 31, 1961, the private respondent paid the amount of P34,184.36, which was very much
more than the amount rightfully due from it. Hence, the private respondent should no longer be made to pay for the
deficiency tax in the amount of P3,025.98 for the period from January 1, 1946 to February 29, 1948.
WHEREFORE, the appealed decision of the respondent Court of Tax Appeals is hereby AFFIRMED. No pronouncement
as to costs. SO ORDERED.
Fernan, C.J., Narvasa, Melencio-Herrera, Gutierrez, Jr., Cruz, Paras, Feliciano, Gancayco, Padilla, Bidin, Cortes, GrioAquino and Medialdea, JJ., concur.

G.R. No. 119252 August 18, 1997

COMMISSIONER OF INTERNAL REVENUE and COMMISSIONER OF CUSTOMS, petitioners,
vs.
HON. APOLINARIO B. SANTOS, in his capacity as Presiding Judge of the Regional Trial Court, Branch 67, Pasig
City; ANTONIO M. MARCO; JEWELRY BY MARCO & CO., INC., and GUILD OF PHILIPPINE JEWELLERS,
INC., respondents.
HERMOSISIMA, JR., J.:
Of grave concern to this Court is the judicial pronouncement of the court a quo that certain provisions of the Tariff &
Customs Code and the National Internal Revenue Code are unconstitutional. This provokes the issue: Can the Regional
Trial Courts declare a law inoperative and without force and effect or otherwise unconstitutional? If it can, under what
circumstances?
In this petition, the Commissioner of Internal Revenue and the Commissioner of Customs jointly seek the reversal of the
Decision, 1 dated February 16, 1995, of herein public respondent, Hon. Apolinario B. Santos, Presiding Judge of Branch 67
of the Regional Trial Court of Pasig City.
The following facts, concisely related in the petition 2 of the Office of the Solicitor General, appear to be undisputed:
1. Private respondent Guild of Philippine Jewelers, Inc., is an association of Filipino jewelers engaged in the
manufacture of jewelries (sic) and allied undertakings. Among its members are Hans Brumann, Inc., Miladay Jewels, Inc.,
Mercelles, Inc., Solid Gold International Traders, Inc., Diagem Trading Corporation, and private respondent Jewelry by
Marco & Co., Inc. Private respondent Antonio M. Marco is the President of the Guild.
2. On August 5, 1988, Felicidad L. Viray, then Regional Director, Region No. 4-A of the Bureau of Internal
Revenue, acting for and in behalf of the Commissioner of Internal Revenue, issued Regional Mission Order No. 109-88 to
BIR officers, led by Eliseo Corcega, to conduct surveillance, monitoring, and inventory of all imported articles of Hans
Brumann, Inc., and place the same under preventive embargo. The duration of the mission was from August 8 to August
20, 1988 (Exhibit "1"; Exhibit "A").
41

3. On August 17, 1988, pursuant to the aforementioned Mission Order, the BIR officers proceeded to the
establishment of Hans Brumann, Inc., served the Mission Order, and informed the establishment that they were going to
make an inventory of the articles involved to see if the proper taxes thereon have been paid. They then made an inventory
of the articles displayed in the cabinets with the assistance of an employee of the establishment. They listed down the
articles, which list was signed by the assistant employee. They also requested the presentation of proof of necessary
payments for excise tax and value-added tax on said articles (pp. 10-15, TSN, April 12, 1993, Exhibits "2", "2-A", "3", "3A").
4. The BIR officers requested the establishment not to sell the articles until it can be proven that the necessary
taxes thereon have been paid. Accordingly, Mr. Hans Brumann, the owner of the establishment, signed a receipt for
Goods, Articles, and Things Seized under Authority of the National Internal Revenue Code (dated August 17, 1988),
acknowledging that the articles inventoried have been seized and left in his possession, and promising not to dispose of
the same without authority of the Commissioner of Internal Revenue pending investigation. 3
5. Subsequently, BIR officer Eliseo Corcega submitted to his superiors a report of the inventory conducted and a
computation of the value-added tax and ad valorem tax on the articles for evaluation and disposition. 4
6. Mr. Hans Brumann, the owner of the establishment, never filed a protest with the BIR on the preventive
embargo of the articles. 5
7. On October 17, 1988, Letter of Authority No. 0020596 was issued by Deputy Commissioner Eufracio D. Santos
to BIR officers to examine the books of accounts and other accounting records of Hans Brumann, Inc., for "stocktaking
investigation for excise tax purposes for the period January 1, 1988 to present" (Exhibit "C"). In a letter dated October 27,
1988, in connection with the physical count of the inventory (stocks on hand) pursuant to said Letter of Authority, Hans
Brumann, Inc. was requested to prepare and make available to the BIR the documents indicated therein (Exhibit "D").
8. Hans Brumann, Inc., did not produce the documents requested by the BIR. 6
9. Similar Letter of Authority were issued to BIR officers to examine the books of accounts and other accounting
records of Miladay Jewels, Inc., Mercelles, Inc., Solid Gold International Traders, Inc., (Exhibits "E", "G" and "N") and
Diagem Trading Corporation 7 for "stocktaking/investigation far excise tax purpose for the period January 1, 1988 to
present."
10. In the case of Miladay Jewels, Inc. and Mercelles, Inc., there is no account of what actually transpired in the
implementation of the Letters of Authority.
11. In the case of Solid Gold International Traders Corporation, the BIR officers made an inventory of the articles
in the establishment. 8 The same is true with respect to Diagem Traders Corporation. 9
12. On November 29, 1988, private respondents Antonio M. Marco and Jewelry By Marco & Co., Inc. filed with
the Regional Trial Court, National Capital Judicial Region, Pasig City, Metro Manila, a petition for declaratory relief with writ
of preliminary injunction and/or temporary restraining order against herein petitioners and Revenue Regional Director
Felicidad L. Viray (docketed as Civil Case No. 56736) praying that Sections 126, 127(a) and (b) and 150(a) of the National
Internal Revenue Code and Hdg. No. 71.01, 71.02, 71.03, and 71.04, Chapter 71 of the Tariff and Customs Code of the
Philippines be declared unconstitutional and void, and that the Commissioner of Internal Revenue and Customs be
prevented or enjoined from issuing mission orders and other orders of similar nature. . . .
42

13. On February 9, 1989, herein petitioners filed their answer to the petition. . . .
14 On October 16, 1989, private respondents filed a Motion with Leave to Amend Petition by including as
petitioner the Guild of Philippine Jewelers, Inc., which motion was granted. . . .
15. The case, which was originally assigned to Branch 154, was later reassigned to Branch 67.
16. On February 16, 1995, public respondents rendered a decision, the dispositive portion of which reads:
In view of the foregoing reflections, judgment is hereby rendered, as follows:
1. Declaring Section 104 of the Tariff and the Customs Code of the Philippines, Hdg. 71.01, 71.02, 71.03, and
71.04, Chapter 71 as amended by Executive Order No. 470, imposing three to ten (3% to 10%) percent tariff and
customs duty on natural and cultured pearls and precious or semi-precious stones, and Section 150 par. (a) the
National Internal Revenue Code of 1977, as amended, renumbered and rearranged by Executive Order 273,
imposing twenty (20%) percent excise tax on jewelry, pearls and other precious stones, as INOPERATIVE and
WITHOUT FORCE and EFFECT insofar as petitioners are concerned.
2. Enforcement of the same is hereby enjoined.
No cost.
SO ORDERED.
Section 150 (a) of Executive Order No. 273 reads:
Sec. 150. Non-essential goods. There shall be levied, assessed and collected a tax equivalent to 20% based
on the wholesale price or the value of importation used by the Bureau of Customs in determining tariff and
customs duties; net of the excise tax and value-added tax, of the following goods:
(a) All goods commonly or commercially known as jewelry, whether real or imitation, pearls, precious and semiprecious stones and imitations thereof; goods made of, or ornamented, mounted and fitted with, precious metals
or imitations thereof or ivory (not including surgical and dental instruments, silver-plated wares, frames or
mountings for spectacles or eyeglasses, and dental gold or gold alloys and other precious metals used in filling,
mounting or fitting of the teeth); opera glasses and lorgnettes. The term "precious metals" shall include platinum,
gold, silver, and other metals of similar or greater value. The term "imitations thereof" shall include platings and
alloys of such metals.
Section 150 (a) of Executive Order No. 273, which took effect on January 1, 1988, amended the then Section 163 (a) of
the Tax Code of 1986 which provided that:
Sec. 163. Percentage tax on sales of non-essential articles. There shall be levied, assessed and collected,
once only on every original sale, barter, exchange or similar transaction for nominal or valuable consideration
intended to transfer ownership of, or title to, the articles herein below enumerated a tax equivalent to 50% of the
gross value in money of the articles so sold, bartered, exchanged or transferred, such tax to be paid by the
manufacturer or producer:
43

(a) All articles commonly or commercially known as jewelry, whether real or imitation, pearls, precious and semiprecious stones, and imitations thereof, articles made of, or ornamented, mounted or fitted with, precious metals
or imitations thereof or ivory (not including surgical and dental instruments, silver-plated wares, frames or
mounting for spectacles or eyeglasses, and dental gold or gold alloys and other precious metal used in filling,
mounting or fitting of the teeth); opera glasses, and lorgnettes. The term "precious metals" shall include platinum,
gold, silver, and other metals of similar or greater value. The term "imitations thereof" shall include platings and
alloys of such metals;
Section 163 (a) of the 1986 Tax Code was formerly Section 194(a) of the 1977 Tax Code and Section 184(a) of the Tax
code, as amended by Presidential Decree No. 69, which took effect on January 1, 1974.
It will be noted that, while under the present law, jewelry is subject to a 20% excise tax in addition to a 10% value-added
tax under the old law, it was subjected to 50% percentage tax. It was even subjected to a 70% percentage tax under then
Section 184(a) of the Tax Code, as amended by P.D. 69.
Section 104, Hdg. Nos. 17.01, 17.02, 17.03 and 17.04, Chapter 71 of the Tariff and Customs Code, as amended by
Executive Order No. 470, dated July 20, 1991, imposes import duty on natural or cultured pearls and precious or semiprecious stones at the rate of 3% to 10% to be applied in stages from 1991 to 1994 and 30% in 1995.
Prior to the issuance of E.O. 470, the rate of import duty in 1988 was 10% to 50% when the petition was filed in the court a
quo.
In support of their petition before the lower court, the private respondents submitted a position paper purporting to be an
exhaustive study of the tax rates on jewelry prevailing in other Asian countries, in comparison to tax rates levied on the
same in the Philippines. 10
The following issues were thus raised therein:
1. Whether or not the Honorable Court has jurisdiction over the subject matter of the petition.
2. Whether the petition states a cause of action or whether the petition alleges a justiciable controversy between
the parties.
3. Whether Section 150, par. (a) of the NIRC and Section 104, Hdg. 71.01, 71.02, 71.03 and 71.04 of the Tariff
and Customs Code are unconstitutional.
4. Whether the issuance of the Mission Order and Letters of Authority is valid and legal.
In the assailed decision, the public respondent held indeed that the Regional Trial Court has jurisdiction to take cognizance
of the petition since "jurisdiction over the nature of the suit is conferred by law and it is determine[d] through the allegations
in the petition," and that the "Court of Tax Appeals has no jurisdiction to declare a statute unconstitutional much less issue
writs of certiorari and prohibition in order to correct acts of respondents allegedly committed with grave abuse of discretion
amounting to lack of jurisdiction."
As to the second issue, the public respondent, made the holding that there exists a justiciable controversy between the
parties, agreeing with the statements made in the position paper presented by the private respondents, and considering
these statements to be factual evidence, to wit:
44

Evidence for the petitioners indeed reveals that government taxation policy treats jewelry, pearls, and other
precious stones and metals as non-essential luxury items and therefore, taxed heavily; that the atmospheric cost
of taxation is killing the local manufacturing jewelry industry because they cannot compete with neighboring and
other countries where importation and manufacturing of jewelry is not taxed heavily, if not at all; that while
government incentives and subsidies exit, local manufacturers cannot avail of the same because officially many
of them are unregistered and are unable to produce the required official documents because they operate
underground, outside the tariff and tax structure; that local jewelry manufacturing is under threat of extinction,
otherwise discouraged, while domestic trading has become more attractive; and as a consequence, neighboring
countries, such as: Hongkong, Singapore, Malaysia, Thailand, and other foreign competitors supplying the
Philippine market either through local channels or through the black market for smuggled goods are the ones who
are getting business and making money, while members of the petitioner Guild of Philippine Jewelers, Inc. are
constantly subjected to bureaucratic harassment instead of being given by the government the necessary support
in order to survive and generate revenue for the government, and most of all fight competitively not only in the
domestic market but in the arena of world market where the real contest is.
Considering the allegations of fact in the petition which were duly proven during the trial, the Court holds that the
petition states a cause of action and there exists a justiciable controversy between the parties which would
require determination of constitutionality of the laws imposing excise tax and customs duty on
jewelry. 11 (emphasis ours)
The public respondent, in addressing the third issue, ruled that the laws in question are confiscatory and oppressive.
Again, virtually adopting verbatim the reasons presented by the private respondents in their position paper, the lower court
stated:
The Court finds that indeed government taxation policy trats(sic) hewelry(sic) as non-essential luxury item and
therefore, taxed heavily. Aside from the ten (10%) percent value added tax (VAT), local jewelry manufacturers
contend with the (manufacturing) excise tax of twenty (20%) percent (to be applied in stages) customs duties on
imported raw materials, the highest in the Asia-Pacific region. In contrast, imported gemstones and other precious
metals are duty free in Hongkong, Thailand, Malaysia and Singapore.
The Court elaborates further on the experiences of other countries in their treatment of the jewelry sector.
MALAYSIA
Duties and taxes on imported gemstones and gold and the sales tax on jewelry were abolished in Malaysia in
1984. They were removed to encourage the development of Malaysia's jewelry manufacturing industry and to
increase exports of jewelry.

THAILAND
Gems and jewelry are Thailand's ninth most important export earner. In the past, the industry was overlooked by
successive administrations much to the dismay of those involved in developing trade. Prohibitive import duties
and sales tax on precious gemstones restricted the growht (sic) of the industry, resulting in most of the business
being unofficial. It was indeed difficult for a government or businessman to promote an industry which did not
officially exist.
45

Despite these circumstances, Thailand's Gem business kept growing up in (sic) businessmen began to realize it's
potential. In 1978, the government quietly removed the severe duties on precious stones, but imposed a sales tax
of 3.5%. Little was said or done at that time as the government wanted to see if a free trade in gemstones and
jewelry would increase local manufacturing and exports or if it would mean more foreign made jewelry pouring
into Thailand. However, as time progressed, there were indications that local manufacturing was indeed being
encouraged and the economy was earning mom from exports. The government soon removed the 3% sales tax
too, putting Thailand at par with Hongkong and Singapore. In these countries, there are no more import duties
and sales tax on gems. (Cited in pages 6 and 7 of Exhibit "M". The Center for Research and Communication in
cooperation with the Guild of Philippine Jewelers, Inc., June 1986).
To illustrate, shown hereunder is the Philippine tariff and tax structure on jewelry and other precious and semiprecious stones compared to other neighboring countries, to wit:
Tariff on imported Jewelry and (Manufacturing) Sales Tax 10% (VAT) precious stones Excise tax
Philippines 3% to 10% to be 20% 10% VAT applied in stages
Malaysia None None None
Thailand None None None
Singapore None None None
Hongkong None None None
In this connection, the present tariff and tax structure increases manufacturing costs and renders the local jewelry
manufacturers uncompetitive against other countries even before they start manufacturing and trading. Because
of the prohibitive cast (sic) of taxation, most manufacturers source from black market for smuggled goods, and
that while manufacturers can avail of tax exemption and/or tax credits from the (manufacturing) excise tax, they
have no documents to present when filing this exemption because, or pointed out earlier, most of them source
their raw materials from the block market, and since many of them do not legally exist or operate onofficially (sic),
or underground, again they have no records (receipts) to indicate where and when they will utilize such tax
credits. (Cited in Exhibit "M" Buencamino Report).
Given these constraints, the local manufacturer has no recourse but to the back door for smuggled goods if only
to be able to compete even ineffectively, or cease manufacturing activities and instead engage in the tradinf (sic)
of smuggled finished jewelry.
Worthy of note is the fact that indeed no evidence was adduced by respondents to disprove the foregoing
allegations of fact. Under the foregoing factual circumstances, the Court finds the questioned statutory provisions
confiscatory and destructive of the proprietary right of the petitioners to engage in business in violation of Section
1, Article III of the Constitution which states, as follows:
No person shall be deprived of the life, liberty, or property without due process of law . . . . 12
Anent the fourth and last issue, the herein public respondent did not find it necessary to rule thereon, since, in his opinion,
"the same has been rendered moot and academic by the aforementioned pronouncement." 13
46

The petitioners now assail the decision rendered by the public respondent, contending that the latter has no authority to
pass judgment upon the taxation policy of the government. In addition, the petitioners impugn the decision in question by
asserting that there was no showing that the tax laws on jewelry are confiscatory and destructive of private respondent's
proprietary rights.
We rule in favor of the petitioners.
It is interesting to note that public respondent, in the dispositive portion of his decision, perhaps keeping in mind his
limitations under the law as a trial judge, did not go so far as to declare the laws in question to be unconstitutional.
However, therein he declared the laws to be inoperative and without force and effect insofar as the private respondents are
concerned. But, respondent judge, in the body of his decision, unequivocally but wrongly declared the said provisions of
law to be violative of Section 1, Article III of the Constitution. In fact, in their Supplemental Comment on the Petition for
Review, 14 the private respondents insist that Judge Santos, in his capacity as judge of the Regional Trial Court, acted
within his authority in passing upon the issues, to wit:
A perusal of the appealed decision would undoubtedly disclose that public respondent did not pass judgment on
the soundness or wisdom of the government's tax policy on jewelry. True, public respondent, in his questioned
decision, observed, inter alia, that indeed government tax policy treats jewelry as non-essential item, and
therefore, taxed heavily; that the present tariff and tax structure increase manufacturing cost and renders the local
jewelry manufacturers uncompetitive against other countries even before they start manufacturing and trading;
that many of the local manufacturers do not legally exist or operate unofficially or underground; and that the
manufacturers have no recourse but to the back door for smuggled goods if only to be able to compete even if
ineffectively or cease manufacturing activities.
BUT, public respondent did not, in any manner, interfere with or encroach upon the prerogative of the legislature
to determine what should be the tax policy on jewelry. On the other hand, the issue raised before, and passed
upon by, the public respondent was whether or not Section 150, paragraph (a) of the National Internal Revenue
Code (NIRC) and Section 104, Hdg. 71.01, 71.02, 71.03 and 71.04 of the Tariff and Customs Code are
unconstitutional, or differently stated, whether or not the questioned statutory provisions affect the constitutional
right of private respondents to engage in business.
It is submitted that public respondent confined himself on this issue which is clearly a judicial question.
We find it incongruous, in the face of the sweeping pronouncements made by Judge Santos in his decision, that private
respondents can still persist in their argument that the former did not overreach the restrictions dictated upon him by law.
There is no doubt in the Court's mind, despite protestations to the contrary, that respondent judge encroached upon
matters properly falling within the province of legislative functions. In citing as basis for his decision unproven comparative
data pertaining to differences between tax rates of various Asian countries, and concluding that the jewelry industry in the
Philippines suffers as a result, the respondent judge took it upon himself to supplant legislative policy regarding jewelry
taxation. In advocating the abolition of local tax and duty on jewelry simply because other countries have adopted such
policies, the respondent judge overlooked the fact that such matters are not for him to decide. There are reasons why
jewelry, a non-essential item, is taxed as it is in this country, and these reasons, deliberated upon by our legislature, are
beyond the reach of judicial questioning. As held in Macasiano vs. National Housing Authority: 15
The policy of the courts is to avoid ruling on constitutional questions and to presume that the acts of the political
departments are valid in the absence of a clear and unmistakable showing to the contrary. To doubt is to sustain.
This presumption is based on the doctrine of separation of powers which enjoins upon each department a
47

becoming respect for the acts of the other departments. The theory is that as the joint act of Congress and the
President of the Philippines, a law has been carefully studied and determined to be in accordance with the
fundamental low before it was finally enacted. (emphasis ours)
What we see here is a debate on the WISDOM of the laws in question. This is a matter on which the RTC is not competent
to rule. 16 As Cooley observed: "Debatable questions are for the legislature to decide. The courts do not sit to resolve the
merits of conflicting issues." 17 In Angara vs. Electoral Commission, 18 Justice Laurel made it clear that "the judiciary does
not pass upon questions of wisdom, justice or expediency of legislation." And fittingly so, for in the exercise of judicial
power, we are allowed only "to settle actual controversies involving rights which are legally demandable and enforceable",
and may not annul an act of the political departments simply because we feel it is unwise or impractical. 19 This is not to
say that Regional Trial Courts have no power whatsoever to declare a law unconstitutional. In J.M. Tuason
and Co.v. Court of Appeals, 20 we said that "[p]lainly the Constitution contemplates that the inferior courts should have
jurisdiction in cases involving constitutionality of any treaty or law, for it speaks of appellate review of final judgments of
inferior courts in cases where such constitutionality happens to be in issue." This authority of lower courts to decide
questions of constitutionality in the first instance reaffirmed in Ynos v. Intermediate Court of Appeals. 21 But this authority
does not extend to deciding questions which pertain to legislative policy.
The trial court is not the proper forum for the ventilation of the issues raised by the private respondents. The arguments
they presented focus on the wisdom of the provisions of law which they seek to nullify. Regional Trial Courts can only look
into the validity of a provision, that is, whether or not it has been passed according to the procedures laid down by law, and
thus cannot inquire as to the reasons for its existence. Granting arguendo that the private respondents may have provided
convincing arguments why the jewelry industry in the Philippines should not be taxed as it is, it is to the legislature that
they must resort to for relief, since with the legislature primarily lies the discretion to determine the nature (kind), object
(purpose), extent (rate), coverage (subjects) and situs (place) of taxation. This Court cannot freely delve into those matters
which, by constitutional fiat, rightly rest on legislative judgment. 22
As succinctly put in Lim vs. Pacquing: 23 "Where a controversy may be settled on a platform other than one involving
constitutional adjudication, the court should exercise becoming modesty and avoid the constitutional question." As judges,
we can only interpret and apply the law and, despite our doubts about its wisdom, cannot repeal or amend it. 24
The respondents presented an exhaustive study on the tax rates on jewelry levied by different Asian countries. This is
meant to convince us that compared to other countries, the tax rates imposed on said industry in the Philippines is
oppressive and confiscatory. This Court, however, cannot subscribe to the theory that the tax rates of other countries
should be used as a yardstick in determining what may be the proper subjects of taxation in our own country. It should be
pointed out that in imposing the aforementioned taxes and duties, the State, acting through the legislative and executive
branches, is exercising its sovereign prerogative. It is inherent in the power to tax that the State be free to select the
subjects of taxation, and it has been repeatedly held that "inequalities which result from a singling out or one particular
class for taxation, or exemption, infringe no constitutional limitation." 25
WHEREFORE, premises considered, the petition is hereby GRANTED, and the Decision in Civil Case No. 56736 is
hereby REVERSED and SET ASIDE. No costs. SO ORDERED. Padilla, Bellosillo, Vitug and Kapunan, JJ., concur.

G.R. No. 120082 September 11, 1996

48

MACTAN CEBU INTERNATIONAL AIRPORT AUTHORITY, petitioner,

vs.
HON. FERDINAND J. MARCOS, in his capacity as the Presiding Judge of the Regional Trial Court, Branch 20,
Cebu City, THE CITY OF CEBU, represented by its Mayor HON. TOMAS R. OSMEA, and EUSTAQUIO B.
CESA, respondents.
DAVIDE, JR., J.:
For review under Rule 45 of the Rules of Court on a pure question of law are the decision of 22 March 1995 1of the
Regional Trial Court (RTC) of Cebu City, Branch 20, dismissing the petition for declaratory relief in Civil Case No. CEB16900 entitled "Mactan Cebu International Airport Authority vs. City of Cebu", and its order of 4, May 1995 2denying the
motion to reconsider the decision.
We resolved to give due course to this petition for its raises issues dwelling on the scope of the taxing power of local
government-owned and controlled corporations.
The uncontradicted factual antecedents are summarized in the instant petition as follows:
Petitioner Mactan Cebu International Airport Authority (MCIAA) was created by virtue of Republic Act No. 6958, mandated
to "principally undertake the economical, efficient and effective control, management and supervision of the Mactan
International Airport in the Province of Cebu and the Lahug Airport in Cebu City, . . . and such other Airports as may be
established in the Province of Cebu . . . (Sec. 3, RA 6958). It is also mandated to:
a) encourage, promote and develop international and domestic air traffic in the Central Visayas and Mindanao
regions as a means of making the regions centers of international trade and tourism, and accelerating the
development of the means of transportation and communication in the country; and
b) upgrade the services and facilities of the airports and to formulate internationally acceptable standards of
airport accommodation and service.
Since the time of its creation, petitioner MCIAA enjoyed the privilege of exemption from payment of realty taxes in
accordance with Section 14 of its Charter.
Sec. 14. Tax Exemptions. The authority shall be exempt from realty taxes imposed by the National
Government or any of its political subdivisions, agencies and instrumentalities . . .
On October 11, 1994, however, Mr. Eustaquio B. Cesa, Officer-in-Charge, Office of the Treasurer of the City of Cebu,
demanded payment for realty taxes on several parcels of land belonging to the petitioner (Lot Nos. 913-G, 743, 88 SWO,
948-A, 989-A, 474, 109(931), I-M, 918, 919, 913-F, 941, 942, 947, 77 Psd., 746 and 991-A), located at Barrio Apas and
Barrio Kasambagan, Lahug, Cebu City, in the total amount of P2,229,078.79.
Petitioner objected to such demand for payment as baseless and unjustified, claiming in its favor the aforecited Section 14
of RA 6958 which exempt it from payment of realty taxes. It was also asserted that it is an instrumentality of the
government performing governmental functions, citing section 133 of the Local Government Code of 1991 which puts
limitations on the taxing powers of local government units:

49

Sec. 133. Common Limitations on the Taxing Powers of Local Government Units. Unless otherwise provided
herein, the exercise of the taxing powers of provinces, cities, municipalities, and barangay shall not extend to the
levy of the following:
a) . . .
xxx xxx xxx
o) Taxes, fees or charges of any kind on the National Government, its agencies and instrumentalities,
and local government units. (Emphasis supplied)
Respondent City refused to cancel and set aside petitioner's realty tax account, insisting that the MCIAA is a governmentcontrolled corporation whose tax exemption privilege has been withdrawn by virtue of Sections 193 and 234 of the Local
Governmental Code that took effect on January 1, 1992:
Sec. 193. Withdrawal of Tax Exemption Privilege. Unless otherwise provided in this Code, tax exemptions or
incentives granted to, or presently enjoyed by all persons whether natural or juridical,including governmentowned or controlled corporations, except local water districts, cooperatives duly registered under RA No. 6938,
non-stock, and non-profit hospitals and educational institutions, are hereby withdrawn upon the effectivity of this
Code. (Emphasis supplied)
xxx xxx xxx
Sec. 234. Exemptions from Real Property taxes. . . .
(a) . . .
xxx xxx xxx
(c) . . .
Except as provided herein, any exemption from payment of real property tax previously granted to, or
presently enjoyed by all persons, whether natural or juridical, including government-owned or controlled
corporations are hereby withdrawn upon the effectivity of this Code.
As the City of Cebu was about to issue a warrant of levy against the properties of petitioner, the latter was compelled to
pay its tax account "under protest" and thereafter filed a Petition for Declaratory Relief with the Regional Trial Court of
Cebu, Branch 20, on December 29, 1994. MCIAA basically contended that the taxing powers of local government units do
not extend to the levy of taxes or fees of any kind on an instrumentality of the national government. Petitioner insisted that
while it is indeed a government-owned corporation, it nonetheless stands on the same footing as an agency or
instrumentality of the national government. Petitioner insisted that while it is indeed a government-owned corporation, it
nonetheless stands on the same footing as an agency or instrumentality of the national government by the very nature of
its powers and functions.
Respondent City, however, asserted that MACIAA is not an instrumentality of the government but merely a governmentowned corporation performing proprietary functions As such, all exemptions previously granted to it were deemed
50

withdrawn by operation of law, as provided under Sections 193 and 234 of the Local Government Code when it took effect
on January 1, 1992. 3
The petition for declaratory relief was docketed as Civil Case No. CEB-16900.
In its decision of 22 March 1995, 4 the trial court dismissed the petition in light of its findings, to wit:
A close reading of the New Local Government Code of 1991 or RA 7160 provides the express cancellation and withdrawal
of exemption of taxes by government owned and controlled corporation per Sections after the effectivity of said Code on
January 1, 1992, to wit: [proceeds to quote Sections 193 and 234]
Petitioners claimed that its real properties assessed by respondent City Government of Cebu are exempted from paying
realty taxes in view of the exemption granted under RA 6958 to pay the same (citing Section 14 of RA 6958).
However, RA 7160 expressly provides that "All general and special laws, acts, city charters, decress [sic], executive
orders, proclamations and administrative regulations, or part or parts thereof which are inconsistent with any of the
provisions of this Code are hereby repealed or modified accordingly." ([f], Section 534, RA 7160).
With that repealing clause in RA 7160, it is safe to infer and state that the tax exemption provided for in RA 6958 creating
petitioner had been expressly repealed by the provisions of the New Local Government Code of 1991.
So that petitioner in this case has to pay the assessed realty tax of its properties effective after January 1, 1992 until the
present.
This Court's ruling finds expression to give impetus and meaning to the overall objectives of the New Local Government
Code of 1991, RA 7160. "It is hereby declared the policy of the State that the territorial and political subdivisions of the
State shall enjoy genuine and meaningful local autonomy to enable them to attain their fullest development as self-reliant
communities and make them more effective partners in the attainment of national goals. Towards this end, the State shall
provide for a more responsive and accountable local government structure instituted through a system of decentralization
whereby local government units shall be given more powers, authority, responsibilities, and resources. The process of
decentralization shall proceed from the national government to the local government units. . . . 5
Its motion for reconsideration having been denied by the trial court in its 4 May 1995 order, the petitioner filed the instant
petition based on the following assignment of errors:
I RESPONDENT JUDGE ERRED IN FAILING TO RULE THAT THE PETITIONER IS VESTED WITH
GOVERNMENT POWERS AND FUNCTIONS WHICH PLACE IT IN THE SAME CATEGORY AS AN
INSTRUMENTALITY OR AGENCY OF THE GOVERNMENT.
II RESPONDENT JUDGE ERRED IN RULING THAT PETITIONER IS LIABLE TO PAY REAL PROPERTY
TAXES TO THE CITY OF CEBU.
Anent the first assigned error, the petitioner asserts that although it is a government-owned or controlled corporation it is
mandated to perform functions in the same category as an instrumentality of Government. An instrumentality of
Government is one created to perform governmental functions primarily to promote certain aspects of the economic life of
the people. 6 Considering its task "not merely to efficiently operate and manage the Mactan-Cebu International Airport, but
more importantly, to carry out the Government policies of promoting and developing the Central Visayas and Mindanao
51

regions as centers of international trade and tourism, and accelerating the development of the means of transportation and
communication in the country," 7 and that it is an attached agency of the Department of Transportation and Communication
(DOTC), 8 the petitioner "may stand in [sic] the same footing as an agency or instrumentality of the national government."
Hence, its tax exemption privilege under Section 14 of its Charter "cannot be considered withdrawn with the passage of
the Local Government Code of 1991 (hereinafter LGC) because Section 133 thereof specifically states that the taxing
powers of local government units shall not extend to the levy of taxes of fees or charges of any kind on the national
government its agencies and instrumentalities."
As to the second assigned error, the petitioner contends that being an instrumentality of the National Government,
respondent City of Cebu has no power nor authority to impose realty taxes upon it in accordance with the aforesaid
Section 133 of the LGC, as explained in Basco vs. Philippine Amusement and Gaming Corporation; 9
Local governments have no power to tax instrumentalities of the National Government. PAGCOR is a government owned
or controlled corporation with an original character, PD 1869. All its shares of stock are owned by the National
Government. . . .
PAGCOR has a dual role, to operate and regulate gambling casinos. The latter joke is governmental, which places it in the
category of an agency or instrumentality of the Government. Being an instrumentality of the Government, PAGCOR should
be and actually is exempt from local taxes. Otherwise, its operation might be burdened, impeded or subjected to control by
a mere Local government.
The states have no power by taxation or otherwise, to retard, impede, burden or in any manner control the operation of
constitutional laws enacted by Congress to carry into execution the powers vested in the federal government. (McCulloch
v. Maryland, 4 Wheat 316, 4 L Ed. 579).
This doctrine emanates from the "supremacy" of the National Government over local government.
Justice Holmes, speaking for the Supreme Court, make references to the entire absence of power on the part of the States
to touch, in that way (taxation) at least, the instrumentalities of the United States (Johnson v. Maryland, 254 US 51) and it
can be agreed that no state or political subdivision can regulate a federal instrumentality in such a way as to prevent it
from consummating its federal responsibilities, or even to seriously burden it in the accomplishment of them. (Antieau
Modern Constitutional Law, Vol. 2, p. 140)
Otherwise mere creature of the State can defeat National policies thru extermination of what local authorities may perceive
to be undesirable activities or enterprise using the power to tax as "a toll for regulation" (U.S. v. Sanchez, 340 US 42). The
power to tax which was called by Justice Marshall as the "power to destroy" (McCulloch v. Maryland, supra) cannot be
allowed to defeat an instrumentality or creation of the very entity which has the inherent power to wield it. (Emphasis
supplied)
It then concludes that the respondent Judge "cannot therefore correctly say that the questioned provisions of the Code do
not contain any distinction between a governmental function as against one performing merely proprietary ones such that
the exemption privilege withdrawn under the said Code would apply to allgovernment corporations." For it is clear from
Section 133, in relation to Section 234, of the LGC that the legislature meant to exclude instrumentalities of the national
government from the taxing power of the local government units.
In its comment respondent City of Cebu alleges that as local a government unit and a political subdivision, it has the power
to impose, levy, assess, and collect taxes within its jurisdiction. Such power is guaranteed by the Constitution 10 and
52

enhanced further by the LGC. While it may be true that under its Charter the petitioner was exempt from the payment of
realty taxes, 11 this exemption was withdrawn by Section 234 of the LGC. In response to the petitioner's claim that such
exemption was not repealed because being an instrumentality of the National Government, Section 133 of the LGC
prohibits local government units from imposing taxes, fees, or charges of any kind on it, respondent City of Cebu points out
that the petitioner is likewise a government-owned corporation, and Section 234 thereof does not distinguish between
government-owned corporation, and Section 234 thereof does not distinguish between government-owned corporation,
and Section 234 thereof does not distinguish between government-owned or controlled corporations performing
governmental and purely proprietary functions. Respondent city of Cebu urges this the Manila International Airport
Authority is a governmental-owned corporation, 12 and to reject the application of Basco because it was "promulgated . . .
before the enactment and the singing into law of R.A. No. 7160," and was not, therefore, decided "in the light of the spirit
and intention of the framers of the said law.
As a general rule, the power to tax is an incident of sovereignty and is unlimited in its range, acknowledging in its very
nature no limits, so that security against its abuse is to be found only in the responsibility of the legislature which imposes
the tax on the constituency who are to pay it. Nevertheless, effective limitations thereon may be imposed by the people
through their Constitutions. 13 Our Constitution, for instance, provides that the rule of taxation shall be uniform and
equitable and Congress shall evolve a progressive system of taxation. 14So potent indeed is the power that it was once
opined that "the power to tax involves the power to destroy." 15 Verily, taxation is a destructive power which interferes with
the personal and property for the support of the government. Accordingly, tax statutes must be construed strictly against
the government and liberally in favor of the taxpayer. 16But since taxes are what we pay for civilized society, 17 or are the
lifeblood of the nation, the law frowns against exemptions from taxation and statutes granting tax exemptions are thus
construed strictissimi juris against the taxpayers and liberally in favor of the taxing authority. 18 A claim of exemption from
tax payment must be clearly shown and based on language in the law too plain to be mistaken. 19 Elsewise stated, taxation
is the rule, exemption therefrom is the exception. 20 However, if the grantee of the exemption is a political subdivision or
instrumentality, the rigid rule of construction does not apply because the practical effect of the exemption is merely to
reduce the amount of money that has to be handled by the government in the course of its operations. 21
The power to tax is primarily vested in the Congress; however, in our jurisdiction, it may be exercised by local legislative
bodies, no longer merely by virtue of a valid delegation as before, but pursuant to direct authority conferred by Section 5,
Article X of the Constitution. 22 Under the latter, the exercise of the power may be subject to such guidelines and limitations
as the Congress may provide which, however, must be consistent with the basic policy of local autonomy.
There can be no question that under Section 14 of R.A. No. 6958 the petitioner is exempt from the payment of realty taxes
imposed by the National Government or any of its political subdivisions, agencies, and instrumentalities. Nevertheless,
since taxation is the rule and exemption therefrom the exception, the exemption may thus be withdrawn at the pleasure of
the taxing authority. The only exception to this rule is where the exemption was granted to private parties based on
material consideration of a mutual nature, which then becomes contractual and is thus covered by the non-impairment
clause of the Constitution. 23
The LGC, enacted pursuant to Section 3, Article X of the constitution provides for the exercise by local government units of
their power to tax, the scope thereof or its limitations, and the exemption from taxation.
Section 133 of the LGC prescribes the common limitations on the taxing powers of local government units as follows:
Sec. 133. Common Limitations on the Taxing Power of Local Government Units. Unless otherwise provided
herein, the exercise of the taxing powers of provinces, cities, municipalities, and barangays shall not extend to the
levy of the following:
53

(a) Income tax, except when levied on banks and other financial institutions;
(b) Documentary stamp tax;
(c) Taxes on estates, "inheritance, gifts, legacies and other acquisitions mortis causa, except as otherwise
provided herein
(d) Customs duties, registration fees of vessels and wharfage on wharves, tonnage dues, and all other kinds of
customs fees charges and dues except wharfage on wharves constructed and maintained by the local
government unit concerned:
(e) Taxes, fees and charges and other imposition upon goods carried into or out of, or passing through, the
territorial jurisdictions of local government units in the guise or charges for wharfages, tolls for bridges or
otherwise, or other taxes, fees or charges in any form whatsoever upon such goods or merchandise;
(f) Taxes fees or charges on agricultural and aquatic products when sold by marginal farmers or fishermen;
(g) Taxes on business enterprise certified to be the Board of Investment as pioneer or non-pioneer for a period of
six (6) and four (4) years, respectively from the date of registration;
(h) Excise taxes on articles enumerated under the National Internal Revenue Code, as amended, and taxes, fees
or charges on petroleum products;
(i) Percentage or value added tax (VAT) on sales, barters or exchanges or similar transactions on goods or
services except as otherwise provided herein;
(j) Taxes on the gross receipts of transportation contractor and person engage in the transportation of passengers
of freight by hire and common carriers by air, land, or water, except as provided in this code;
(k) Taxes on premiums paid by ways reinsurance or retrocession;
(l) Taxes, fees, or charges for the registration of motor vehicles and for the issuance of all kinds of licenses or
permits for the driving of thereof, except, tricycles;
(m) Taxes, fees, or other charges on Philippine product actually exported, except as otherwise provided herein;
(n) Taxes, fees, or charges, on Countryside and Barangay Business Enterprise and Cooperatives duly registered
under R.A. No. 6810 and Republic Act Numbered Sixty nine hundred thirty-eight (R.A. No. 6938) otherwise
known as the "Cooperative Code of the Philippines; and
(o) TAXES, FEES, OR CHARGES OF ANY KIND ON THE NATIONAL GOVERNMENT, ITS AGENCIES AND
INSTRUMENTALITIES, AND LOCAL GOVERNMENT UNITS. (emphasis supplied)
Needless to say the last item (item o) is pertinent in this case. The "taxes, fees or charges" referred to are "of any kind",
hence they include all of these, unless otherwise provided by the LGC. The term "taxes" is well understood so as to need
no further elaboration, especially in the light of the above enumeration. The term "fees" means charges fixed by law or
54

Ordinance for the regulation or inspection of business activity, 24 while "charges" are pecuniary liabilities such as rents or
fees against person or property. 25
Among the "taxes" enumerated in the LGC is real property tax, which is governed by Section 232. It reads as follows:
Sec. 232. Power to Levy Real Property Tax. A province or city or a municipality within the Metropolitan Manila
Area may levy on an annual ad valorem tax on real property such as land, building, machinery and other
improvements not hereafter specifically exempted.

Section 234 of LGC provides for the exemptions from payment of real property taxes and withdraws previous exemptions
therefrom granted to natural and juridical persons, including government owned and controlled corporations, except as
provided therein. It provides:
Sec. 234. Exemptions from Real Property Tax. The following are exempted from payment of the real property
tax:
(a) Real property owned by the Republic of the Philippines or any of its political subdivisions except when the
beneficial use thereof had been granted, for reconsideration or otherwise, to a taxable person;
(b) Charitable institutions, churches, parsonages or convents appurtenants thereto, mosques nonprofits or
religious cemeteries and all lands, building and improvements actually, directly, and exclusively used for religious
charitable or educational purposes;
(c) All machineries and equipment that are actually, directly and exclusively used by local water districts and
government-owned or controlled corporations engaged in the supply and distribution of water and/or generation
and transmission of electric power;
(d) All real property owned by duly registered cooperatives as provided for under R.A. No. 6938; and;
(e) Machinery and equipment used for pollution control and environmental protection.
Except as provided herein, any exemptions from payment of real property tax previously granted to or presently
enjoyed by, all persons whether natural or juridical, including all government owned or controlled corporations are
hereby withdrawn upon the effectivity of his Code.
These exemptions are based on the ownership, character, and use of the property. Thus;
(a) Ownership Exemptions. Exemptions from real property taxes on the basis of ownership are real properties
owned by: (i) the Republic, (ii) a province, (iii) a city, (iv) a municipality, (v) a barangay, and (vi) registered
cooperatives.
(b) Character Exemptions. Exempted from real property taxes on the basis of their character are: (i) charitable
institutions, (ii) houses and temples of prayer like churches, parsonages or convents appurtenant thereto,
mosques, and (iii) non profit or religious cemeteries.
55

(c) Usage exemptions. Exempted from real property taxes on the basis of the actual, direct and exclusive use to
which they are devoted are: (i) all lands buildings and improvements which are actually, directed and exclusively
used for religious, charitable or educational purpose; (ii) all machineries and equipment actually, directly and
exclusively used or by local water districts or by government-owned or controlled corporations engaged in the
supply and distribution of water and/or generation and transmission of electric power; and (iii) all machinery and
equipment used for pollution control and environmental protection.

To help provide a healthy environment in the midst of the modernization of the country, all machinery and equipment for
pollution control and environmental protection may not be taxed by local governments.
2. Other Exemptions Withdrawn. All other exemptions previously granted to natural or juridical persons including
government-owned or controlled corporations are withdrawn upon the effectivity of the Code. 26

Section 193 of the LGC is the general provision on withdrawal of tax exemption privileges. It provides:
Sec. 193. Withdrawal of Tax Exemption Privileges. Unless otherwise provided in this code, tax exemptions or
incentives granted to or presently enjoyed by all persons, whether natural or juridical, including governmentowned, or controlled corporations, except local water districts, cooperatives duly registered under R.A. 6938, non
stock and non profit hospitals and educational constitutions, are hereby withdrawn upon the effectivity of this
Code.

On the other hand, the LGC authorizes local government units to grant tax exemption privileges. Thus, Section 192 thereof
provides:
Sec. 192. Authority to Grant Tax Exemption Privileges. Local government units may, through ordinances duly
approved, grant tax exemptions, incentives or reliefs under such terms and conditions as they may deem
necessary.

The foregoing sections of the LGC speaks of: (a) the limitations on the taxing powers of local government units and the
exceptions to such limitations; and (b) the rule on tax exemptions and the exceptions thereto. The use of exceptions of
provisos in these section, as shown by the following clauses:
(1) "unless otherwise provided herein" in the opening paragraph of Section 133;
(2) "Unless otherwise provided in this Code" in section 193;
(3) "not hereafter specifically exempted" in Section 232; and
(4) "Except as provided herein" in the last paragraph of Section 234
56

initially hampers a ready understanding of the sections. Note, too, that the aforementioned clause in section 133 seems to
be inaccurately worded. Instead of the clause "unless otherwise provided herein," with the "herein" to mean, of course, the
section, it should have used the clause "unless otherwise provided in this Code." The former results in absurdity since the
section itself enumerates what are beyond the taxing powers of local government units and, where exceptions were
intended, the exceptions were explicitly indicated in the text. For instance, in item (a) which excepts the income taxes
"when livied on banks and other financial institutions", item (d) which excepts "wharfage on wharves constructed and
maintained by the local government until concerned"; and item (1) which excepts taxes, fees, and charges for the
registration and issuance of license or permits for the driving of "tricycles". It may also be observed that within the body
itself of the section, there are exceptions which can be found only in other parts of the LGC, but the section
interchangeably uses therein the clause "except as otherwise provided herein" as in items (c) and (i), or the clause "except
as otherwise provided herein" as in items (c) and (i), or the clause "excepts as provided in this Code" in item (j). These
clauses would be obviously unnecessary or mere surplus-ages if the opening clause of the section were" "Unless
otherwise provided in this Code" instead of "Unless otherwise provided herein". In any event, even if the latter is used,
since under Section 232 local government units have the power to levy real property tax, except those exempted therefrom
under Section 234, then Section 232 must be deemed to qualify Section 133.
Thus, reading together Section 133, 232 and 234 of the LGC, we conclude that as a general rule, as laid down in Section
133 the taxing powers of local government units cannot extend to the levy of inter alia, "taxes, fees, and charges of any
kind of the National Government, its agencies and instrumentalties, and local government units"; however, pursuant to
Section 232, provinces, cities, municipalities in the Metropolitan Manila Area may impose the real property tax except
on, inter alia, "real property owned by the Republic of the Philippines or any of its political subdivisions except when the
beneficial used thereof has been granted, for consideration or otherwise, to a taxable person", as provided in item (a) of
the first paragraph of Section 234.
As to tax exemptions or incentives granted to or presently enjoyed by natural or juridical persons, including governmentowned and controlled corporations, Section 193 of the LGC prescribes the general rule, viz., they are withdrawn upon the
effectivity of the LGC, except upon the effectivity of the LGC, except those granted to local water districts, cooperatives
duly registered under R.A. No. 6938, non stock and non-profit hospitals and educational institutions, and unless otherwise
provided in the LGC. The latter proviso could refer to Section 234, which enumerates the properties exempt from real
property tax. But the last paragraph of Section 234 further qualifies the retention of the exemption in so far as the real
property taxes are concerned by limiting the retention only to those enumerated there-in; all others not included in the
enumeration lost the privilege upon the effectivity of the LGC. Moreover, even as the real property is owned by the
Republic of the Philippines, or any of its political subdivisions covered by item (a) of the first paragraph of Section 234, the
exemption is withdrawn if the beneficial use of such property has been granted to taxable person for consideration or
otherwise.
Since the last paragraph of Section 234 unequivocally withdrew, upon the effectivity of the LGC, exemptions from real
property taxes granted to natural or juridical persons, including government-owned or controlled corporations, except as
provided in the said section, and the petitioner is, undoubtedly, a government-owned corporation, it necessarily follows that
its exemption from such tax granted it in Section 14 of its charter, R.A. No. 6958, has been withdrawn. Any claim to the
contrary can only be justified if the petitioner can seek refuge under any of the exceptions provided in Section 234, but not
under Section 133, as it now asserts, since, as shown above, the said section is qualified by Section 232 and 234.
In short, the petitioner can no longer invoke the general rule in Section 133 that the taxing powers of the local government
units cannot extend to the levy of:

57

(o) taxes, fees, or charges of any kind on the National Government, its agencies, or instrumentalities, and local
government units.

I must show that the parcels of land in question, which are real property, are any one of those enumerated in Section 234,
either by virtue of ownership, character, or use of the property. Most likely, it could only be the first, but not under any
explicit provision of the said section, for one exists. In light of the petitioner's theory that it is an "instrumentality of the
Government", it could only be within be first item of the first paragraph of the section by expanding the scope of the terms
Republic of the Philippines" to embrace . . . . . ."instrumentalities" and "agencies" or expediency we quote:
(a) real property owned by the Republic of the Philippines, or any of the Philippines, or any of its political
subdivisions except when the beneficial use thereof has been granted, for consideration or otherwise, to a taxable
person.
This view does not persuade us. In the first place, the petitioner's claim that it is an instrumentality of the Government is
based on Section 133(o), which expressly mentions the word "instrumentalities"; and in the second place it fails to
consider the fact that the legislature used the phrase "National Government, its agencies and instrumentalities" "in Section
133(o),but only the phrase "Republic of the Philippines or any of its political subdivision "in Section 234(a).
The terms "Republic of the Philippines" and "National Government" are not interchangeable. The former is boarder and
synonymous with "Government of the Republic of the Philippines" which the Administrative Code of the 1987 defines as
the "corporate governmental entity though which the functions of the government are exercised through at the Philippines,
including, saves as the contrary appears from the context, the various arms through which political authority is made
effective in the Philippines, whether pertaining to the autonomous reason, the provincial, city, municipal or barangay
subdivision or other forms of local government." 27 These autonomous regions, provincial, city, municipal or barangay
subdivisions" are the political subdivision. 28
On the other hand, "National Government" refers "to the entire machinery of the central government, as distinguished from
the different forms of local Governments." 29 The National Government then is composed of the three great departments
the executive, the legislative and the judicial. 30
An "agency" of the Government refers to "any of the various units of the Government, including a department, bureau,
office instrumentality, or government-owned or controlled corporation, or a local government or a distinct unit
therein;" 31 while an "instrumentality" refers to "any agency of the National Government, not integrated within the
department framework, vested with special functions or jurisdiction by law, endowed with some if not all corporate powers,
administering special funds, and enjoying operational autonomy; usually through a charter. This term includes regulatory
agencies, chartered institutions and government-owned and controlled corporations". 32
If Section 234(a) intended to extend the exception therein to the withdrawal of the exemption from payment of real property
taxes under the last sentence of the said section to the agencies and instrumentalities of the National Government
mentioned in Section 133(o), then it should have restated the wording of the latter. Yet, it did not Moreover, that Congress
did not wish to expand the scope of the exemption in Section 234(a) to include real property owned by other
instrumentalities or agencies of the government including government-owned and controlled corporations is further borne
out by the fact that the source of this exemption is Section 40(a) of P.D. No. 646, otherwise known as the Real Property
Tax Code, which reads:
58

Sec 40. Exemption from Real Property Tax. The exemption shall be as follows:
(a) Real property owned by the Republic of the Philippines or any of its political subdivisions and any
government-owned or controlled corporations so exempt by is charter: Provided, however, that this
exemption shall not apply to real property of the above mentioned entities the beneficial use of which
has been granted, for consideration or otherwise, to a taxable person.
Note that as a reproduced in Section 234(a), the phrase "and any government-owned or controlled corporation so exempt
by its charter" was excluded. The justification for this restricted exemption in Section 234(a) seems obvious: to limit further
tax exemption privileges, specially in light of the general provision on withdrawal of exemption from payment of real
property taxes in the last paragraph of property taxes in the last paragraph of Section 234. These policy considerations are
consistent with the State policy to ensure autonomy to local governments 33 and the objective of the LGC that they enjoy
genuine and meaningful local autonomy to enable them to attain their fullest development as self-reliant communities and
make them effective partners in the attainment of national goals. 34 The power to tax is the most effective instrument to
raise needed revenues to finance and support myriad activities of local government units for the delivery of basic services
essential to the promotion of the general welfare and the enhancement of peace, progress, and prosperity of the people. It
may also be relevant to recall that the original reasons for the withdrawal of tax exemption privileges granted to
government-owned and controlled corporations and all other units of government were that such privilege resulted in
serious tax base erosion and distortions in the tax treatment of similarly situated enterprises, and there was a need for this
entities to share in the requirements of the development, fiscal or otherwise, by paying the taxes and other charges due
from them. 35
The crucial issues then to be addressed are: (a) whether the parcels of land in question belong to the Republic of the
Philippines whose beneficial use has been granted to the petitioner, and (b) whether the petitioner is a "taxable person".
Section 15 of the petitioner's Charter provides:
Sec. 15. Transfer of Existing Facilities and Intangible Assets. All existing public airport facilities, runways,
lands, buildings and other properties, movable or immovable, belonging to or presently administered by the
airports, and all assets, powers, rights, interests and privileges relating on airport works, or air operations,
including all equipment which are necessary for the operations of air navigation, acrodrome control towers, crash,
fire, and rescue facilities are hereby transferred to the Authority: Provided however, that the operations control of
all equipment necessary for the operation of radio aids to air navigation, airways communication, the approach
control office, and the area control center shall be retained by the Air Transportation Office. No equipment,
however, shall be removed by the Air Transportation Office from Mactan without the concurrence of the authority.
The authority may assist in the maintenance of the Air Transportation Office equipment.
The "airports" referred to are the "Lahug Air Port" in Cebu City and the "Mactan International AirPort in the Province of
Cebu", 36 which belonged to the Republic of the Philippines, then under the Air Transportation Office (ATO). 37
It may be reasonable to assume that the term "lands" refer to "lands" in Cebu City then administered by the Lahug Air Port
and includes the parcels of land the respondent City of Cebu seeks to levy on for real property taxes. This section involves
a "transfer" of the "lands" among other things, to the petitioner and not just the transfer of the beneficial use thereof, with
the ownership being retained by the Republic of the Philippines.

59

This "transfer" is actually an absolute conveyance of the ownership thereof because the petitioner's authorized capital
stock consists of, inter alia "the value of such real estate owned and/or administered by the airports." 38 Hence, the
petitioner is now the owner of the land in question and the exception in Section 234(c) of the LGC is inapplicable.
Moreover, the petitioner cannot claim that it was never a "taxable person" under its Charter. It was only exempted from the
payment of real property taxes. The grant of the privilege only in respect of this tax is conclusive proof of the legislative
intent to make it a taxable person subject to all taxes, except real property tax.
Finally, even if the petitioner was originally not a taxable person for purposes of real property tax, in light of the forgoing
disquisitions, it had already become even if it be conceded to be an "agency" or "instrumentality" of the Government, a
taxable person for such purpose in view of the withdrawal in the last paragraph of Section 234 of exemptions from the
payment of real property taxes, which, as earlier adverted to, applies to the petitioner.
Accordingly, the position taken by the petitioner is untenable. Reliance on Basco vs. Philippine Amusement and Gaming
Corporation 39 is unavailing since it was decided before the effectivity of the LGC. Besides, nothing can prevent Congress
from decreeing that even instrumentalities or agencies of the government performing governmental functions may be
subject to tax. Where it is done precisely to fulfill a constitutional mandate and national policy, no one can doubt its
wisdom.
WHEREFORE, the instant petition is DENIED. The challenged decision and order of the Regional Trial Court of Cebu,
Branch 20, in Civil Case No. CEB-16900 are AFFIRMED. No pronouncement as to costs. SO ORDERED. Narvasa, C.J.,
Melo, Francisco and Panganiban, JJ., concur.

G.R. No. L-30232 July 29, 1988

LUZON STEVEDORING CORPORATION, petitioner-appellant,
vs.
COURT OF TAX APPEALS and the HONORABLE COMMISSIONER OF INTERNAL REVENUE, respondents-appellees.
H. San Luis & V.L. Simbulan for petitioner-appellant.
PARAS, J.:
This is a petition for review of the October 21, 1968 Decision * of the Court of Tax Appeals in CTA Case No. 1484, "Luzon
Stevedoring Corporation v. Hon. Ramon Oben, Commissioner, Bureau of Internal Revenue", denying the various claims for
tax refund; and the February 20, 1969 Resolution of the same court denying the motion for reconsideration.
Herein petitioner-appellant, in 1961 and 1962, for the repair and maintenance of its tugboats, imported various engine
parts and other equipment for which it paid, under protest, the assessed compensating tax. Unable to secure a tax refund
from the Commissioner of Internal Revenue, on January 2, 1964, it filed a Petition for Review (Rollo, pp. 14-18) with the
Court of Tax Appeals, docketed therein as CTA Case No. 1484, praying among others, that it be granted the refund of the
amount of P33,442.13. The Court of Tax Appeals, however, in a Decision dated October 21, 1969 (Ibid., pp. 22-27), denied
the various claims for tax refund. The decretal portion of the said decision reads:

60

WHEREFORE, finding petitioner's various claims for refund amounting to P33,442.13 without sufficient
legal justification, the said claims have to be, as they are hereby, denied. With costs against petitioner.
On January 24, 1969, petitioner-appellant filed a Motion for Reconsideration (Ibid., pp. 28-34), but the same was denied in
a Resolution dated February 20, 1969 (Ibid., p. 35). Hence, the instant petition.
This Court, in a Resolution dated March 13, 1969, gave due course to the petition (Ibid., p. 40). Petitioner-appellant raised
three (3) assignments of error, to wit:
I
The lower court erred in holding that the petitioner-appellant is engaged in business as stevedore, the
work of unloading and loading of a vessel in port, contrary to the evidence on record.
II
The lower court erred in not holding that the business in which petitioner-appellant is engaged, is part
and parcel of the shipping industry.
III
The lower court erred in not allowing the refund sought by petitioner-appellant.
The instant petition is without merit.
The pivotal issue in this case is whether or not petitioner's tugboats" can be interpreted to be included in the term "cargo
vessels" for purposes of the tax exemption provided for in Section 190 of the National Internal Revenue Code, as
amended by Republic Act No. 3176.
Said law provides:
Sec. 190. Compensating tax. ... And Provided further, That the tax imposed in this section shall not
apply to articles to be used by the importer himself in the manufacture or preparation of articles subject
to specific tax or those for consignment abroad and are to form part thereof or to articles to be used by
the importer himself as passenger and/or cargo vessel, whether coastwise or oceangoing, including
engines and spare parts of said vessel. ....
Petitioner contends that tugboats are embraced and included in the term cargo vessel under the tax exemption provisions
of Section 190 of the Revenue Code, as amended by Republic Act. No. 3176. He argues that in legal contemplation, the
tugboat and a barge loaded with cargoes with the former towing the latter for loading and unloading of a vessel in part,
constitute a single vessel. Accordingly, it concludes that the engines, spare parts and equipment imported by it and used in
the repair and maintenance of its tugboats are exempt from compensating tax (Rollo, p. 23).
On the other hand, respondents-appellees counter that petitioner-appellant's "tugboats" are not "Cargo vessel" because
they are neither designed nor used for carrying and/or transporting persons or goods by themselves but are mainly
employed for towing and pulling purposes. As such, it cannot be claimed that the tugboats in question are used in carrying
and transporting passengers or cargoes as a common carrier by water, either coastwise or oceangoing and, therefore, not
61

within the purview of Section 190 of the Tax Code, as amended by Republic Act No. 3176 (Brief for RespondentsAppellees, pp. 45).
This Court has laid down the rule that "as the power of taxation is a high prerogative of sovereignty, the relinquishment is
never presumed and any reduction or dimunition thereof with respect to its mode or its rate, must be strictly construed, and
the same must be coached in clear and unmistakable terms in order that it may be applied." (84 C.J.S. pp. 659-800), More
specifically stated, the general rule is that any claim for exemption from the tax statute should be strictly construed against
the taxpayer (Acting Commissioner of Customs v. Manila Electric Co. et al., 69 SCRA 469 [1977] and Commissioner of
Internal Revenue v. P.J. Kiener Co. Ltd., et al., 65 SCRA 142 [1975]).
As correctly analyzed by the Court of Tax Appeals, in order that the importations in question may be declared exempt from
the compensating tax, it is indispensable that the requirements of the amendatory law be complied with, namely: (1) the
engines and spare parts must be used by the importer himself as a passenger and/or cargo, vessel; and (2) the said
passenger and/or cargo vessel must be used in coastwise or oceangoing navigation (Decision, CTA Case No. 1484; Rollo,
p. 24).
As pointed out by the Court of Tax Appeals, the amendatory provisions of Republic Act No. 3176 limit tax exemption from
the compensating tax to imported items to be used by the importer himself as operator of passenger and/or cargo vessel
(Ibid., p. 25).
As quoted in the decision of the Court of Tax Appeals, a tugboat is defined as follows:
A tugboat is a strongly built, powerful steam or power vessel, used for towing and, now, also used for
attendance on vessel. (Webster New International Dictionary, 2nd Ed.)
A tugboat is a diesel or steam power vessel designed primarily for moving large ships to and from piers
for towing barges and lighters in harbors, rivers and canals. (Encyclopedia International Grolier, Vol. 18,
p. 256).
A tug is a steam vessel built for towing, synonymous with tugboat. (Bouvier's Law Dictionary.) (Rollo, p.
24).
Under the foregoing definitions, petitioner's tugboats clearly do not fall under the categories of passenger and/or cargo
vessels. Thus, it is a cardinal principle of statutory construction that where a provision of law speaks categorically, the need
for interpretation is obviated, no plausible pretense being entertained to justify non-compliance. All that has to be done is to
apply it in every case that falls within its terms (Allied Brokerage Corp. v. Commissioner of Customs, L-27641, 40 SCRA
555 [1971]; Quijano, etc. v. DBP, L-26419, 35 SCRA 270 [1970]).
And, even if construction and interpretation of the law is insisted upon, following another fundamental rule that statutes are
to be construed in the light of purposes to be achieved and the evils sought to be remedied (People v. Purisima etc., et al.,
L-42050-66, 86 SCRA 544 [1978], it will be noted that the legislature in amending Section 190 of the Tax Code by Republic
Act 3176, as appearing in the records, intended to provide incentives and inducements to bolster the shipping industry and
not the business of stevedoring, as manifested in the sponsorship speech of Senator Gil Puyat (Rollo, p. 26).
On analysis of petitioner-appellant's transactions, the Court of Tax Appeals found that no evidence was adduced by
petitioner-appellant that tugboats are passenger and/or cargo vessels used in the shipping industry as an independent
business. On the contrary, petitioner-appellant's own evidence supports the view that it is engaged as a stevedore, that is,
62

the work of unloading and loading of a vessel in port; and towing of barges containing cargoes is a part of petitioner's
undertaking as a stevedore. In fact, even its trade name is indicative that its sole and principal business is stevedoring and
lighterage, taxed under Section 191 of the National Internal Revenue Code as a contractor, and not an entity which
transports passengers or freight for hire which is taxed under Section 192 of the same Code as a common carrier by water
(Decision, CTA Case No. 1484; Rollo, p. 25).
Under the circumstances, there appears to be no plausible reason to disturb the findings and conclusion of the Court of
Tax Appeals.
As a matter of principle, this Court will not set aside the conclusion reached by an agency such as the Court of Tax
Appeals, which is, by the very nature of its function, dedicated exclusively to the study and consideration of tax problems
and has necessarily developed an expertise on the subject unless there has been an abuse or improvident exercise of
authority (Reyes v. Commissioner of Internal Revenue, 24 SCRA 199 [1981]), which is not present in the instant case.
PREMISES CONSIDERED, the instant petition is DISMISSED and the decision of the Court of Tax Appeals is AFFIRMED.
SO ORDERED. Melencio-Herrera, Padilla and Sarmiento, JJ., concur.

G.R. No. L-18330

July 31, 1963

JOSE DE BORJA, petitioner-appellee,

vs.
VICENTE G. GELLA, ET AL., respondents-appellants.
David Guevara for petitioner-appellee.
Office of the Solicitor General for respondent-appellant Treasurer of the Philippines.
Assistant City Fiscal H. A. Avendano for respondent-appellant Treasurer of Pasay City.
BAUTISTA ANGELO, J.:
Jose de Borja has been delinquent in the payment of his real estate taxes since 1958 for properties located in the City of
Manila and Pasay City and has offered to pay them with two negotiable, certificates of indebtedness Nos. 3064 and 3065
in the amounts of P793.40 and P717.69, respectively. Borja was, however, a mere assignee of the aforesaid negotiable
certificates, the applicants for backpay rights covered by them being respectively Rafael Vizcaya and Pablo Batario Luna.
The offers to pay the estate taxes in question were rejected by the city treasurers of both Manila and Pasay cities on the
ground of their limited negotiability under Section 2, Republic Act No. 304, as amended by Republic Act 800, and in the
case of the city treasurer of Manila on the further ground that he was ordered not to accept them by the city mayor, for
which reason Borja was prompted to bring the question to the Treasurer of the Philippines who opined, among others, that
the negotiable certificates cannot be accepted as payment of real estate taxes inasmuch as the law provides for their
acceptance from their backpay holder only or the original applicant himself, but not his assignee. In his letter of April 29,
1960 to the Treasurer of the Philippines, however, Borja entertained hope that the certificates would be accepted for
payment in view of the fact that they are already long past due and redeemable, but his hope was frustrated. So on June
30, 1960, Borja filed an action against the treasurers of both the City of Manila and Pasay City, as well as the Treasurer of
the Philippines, to impel them to execute an act which the law allegedly requires them to perform, to wit: to accept the
63

above-mentioned certificates of indebtedness considering that they were already due and redeemable so as not to deprive
him illegally of his privilege to pay his obligation to the government thru such means.
Respondents in due time filed their answer setting up the reasons for their refusal to accept the certificates, and after the
requisite trial was held, the court a quo rendered judgment the dispositive part of which reads:
WHEREFORE, the treasurers of the City of Manila and Pasay City, their agents and other persons acting in their
behalf are hereby enjoined from including petitioner's properties in the payment of real estate, taxes, and to sell
them at public auction and respondent Treasurer of the Philippines, and the treasurers of the City of Manila and
Pasay City are hereby ordered to accept petitioner's Negotiable Certificates of Indebtedness Nos. 3064 and 3065
in the sums of P793.40 and P717.39 in payment of real estate taxes of his properties in the City of Manila and
Pasay City, respectively, without costs.
Respondents took this appeal on purely questions of law.1wph1.t
Reduced to bare essentials, the 12 errors assigned by appellants may be boiled down to the following: (a) has appellee
the right to apply to the payment of his real estate taxes to the government of Manila and Pasay cities the certificates of
indebtedness he holds while appellants have the correlative legal duty to accept the certificates in payment of said taxes?;
(b) can compensation be invoked to extinguish appellee's real estate tax liability between the latter's obligation and the
credit represented by said certificates of indebtedness?
Anent the first issue, the pertinent legal provision to be reckoned with is Section 2 of Republic Act No. 304, as amended by
Republic Act No. 800, which in part reads:
SEC. 2. The Treasurer of the Philippines shall, upon application, and within one year from the approval of this Act,
and under such rules and regulations as may be promulgated by the Secretary of Finance, acknowledge and file
requests for the recognition of the right to the salaries and wages as provided in section one hereof, and notice of
such acknowledgment shall be issued to the applicant which shall state the total amount of such salaries or
wages due to the applicant, and certify that it shall be redeemed by the Government of the Philippines within ten
years from the date of their issuance without interest: Provided, that upon application . . . a certificate of
indebtedness may be issued by the Treasurer of the Philippines covering the whole or part of the total salaries or
wages the right to which has been duly acknowledged and recognized, provided that the face value of such
certificate of indebtedness shall not exceed the amount that the applicant may need for the payment of
(1) obligations subsisting at the time of the approval of this Act for which the applicant may directly be liable to the
Government or to any of its branches or instrumentalities, or the corporations owned or controlled by the
Government, or to any citizen of the Philippines, who may be willing to accept the same for such settlement;
(2) his taxes; . . . and Provided, also, That any person who is not an alien, bank or other financial institution at
least sixty per centum of whose capital is owned by Filipinos may, notwithstanding any provision of its charter,
articles of incorporation, by-laws, or rules and regulations to the contrary, accept or discount at not more than
three and one-half per centum per annum for ten years a negotiable certificate of indebtedness which shall be
issued by the Treasurer of the Philippines upon application by a holder of a back pay acknowledgment. . . . .
To begin with, it cannot be contended that appellants are in duty bound to accept the negotiable certificates of
indebtedness held by appellee in payment of his real estate taxes for the simple reason that they were not obligations
subsisting at the time of the approval of Republic Act No. 304 which took effect on June 18, 1948. It should be noted that
the real estate taxes in question have reference to those due in 1958 and subsequent years. The law is explicit that in
order that a certificate may be used in payment of an obligation the same must be subsisting at the time of its approval
64

even if we hold that a tax partakes of this character, neither can it be contended that appellee can compel the government
to accept the alleged certificates of indebtedness in payment of his real estate taxes under proviso No. 2 abovequoted also
for the reason that in order that such payment may be allowed the tax must be owed by the applicant himself . This is the
correct implication that may be drawn from the use by the law of the words "his taxes". Verily, the right to use the backpay
certificate in settlement of taxes is given only to the applicant and not to any holder of any negotiable certificate to whom
the law only gives the right to have it discounted by a Filipino citizen or corporation under certain limitations. Here appellee
is not himself the applicant of the certificate, in question. He is merely an assignee thereof, or a subsequent holder whose
right is at most to have it discounted upon maturity or to negotiate it in the meantime. A fortiori, it may be included that,
not having the right to use said certificates to pay his taxes, appellee cannot compel appellants to accept them as he
requests in the present petition for mandamus. As a consequence, we cannot but hold that mandamus does not lie against
appellants because they have in no way neglected to perform an act enjoined upon them by law as a duty, nor have they
unlawfully excluded appellee from the use or enjoyment of a right to which be is entitled.1
We are aware of the cases2 cited by the court a quo wherein the government banking institutions were ordered to accept
the backpay certificates of petitioners in payment of their indebtedness to them, but they are not here in point because in
the cases mentioned the petitioners were applicants and original holders of the corresponding backpay certificates. Here
appellee is not.
With regard to the second issue, i.e., whether compensation can be invoked insofar as the two obligations are concerned,
Articles 1278 and 1279 of the new Civil Code provide:
ART. 1278. Compensation shall take place when two persons, in their own right, are creditors and debtors of each
other.
ART. 1279. In order that compensation may be proper, it is necessary:
(1) That each one of the obligors be bound principally, and that he be at the same time a principal creditor of the
other;
(2) That both debts consist in a sum of money, or if the things due are consumable, they be of the same kind, and
also of the same quality if the latter has been stated;
(3) That the two debts be due;
(4) That they two liquidated and demandable;
(5) That over neither of them there be any retention or controversy, commenced by third persons and
communicated in due time to the debtor.
It is clear from the above legal provisions that compensation cannot be effected with regard to the two obligations in
question. In the first place, the debtor insofar as the certificates of indebtedness are concerned is the Republic of the
Philippines, whereas the real estate taxes owed by appellee are due to the City of Manila and Pasay City, each one of
which having a distinct and separate personality from our Republic. With regard to the certificates, the creditor is the
appellee while the debtor is the Republic of the Philippines. And with regard to the taxes, the creditors are the City of
Manila and Pasay City while the debtor is the appellee. It appears, therefore, that each one of the obligors concerning the
two obligations is not at the same time the principal creditor of the other. It cannot also be said for certain that the
certificates are already due. Although on their faces the certificates issued to appellee state that they are redeemable on
65

June 18, 1958, yet the law does not say that they are redeemable from its approval on June 18, 1948 but "within ten years
from the date of issuance" of the certificates. There is no certainty, therefore, when the certificates are really redeemable
within the meaning of the law. Since the requisites for the accomplishment of legal compensation cannot be fulfilled, the
latter cannot take place with regard to the two obligations as found by the courta quo.
WHEREFORE, the decision appealed from is reversed. The petition for mandamus is dismissed. The injunction issued
against respondents-appellants is hereby lifted. No costs.
G.R. No. L-15778 , April 23, 1962
TAN TIONG BIO, ET AL., petitioners, vs. COMMISSIONER OF INTERNAL REVENUE, respondent.
Sycip, Salazar and Associates for petitioners. Office of the Solicitor General for respondent.

BAUTISTA ANGELO, J.:

On October 19, 1946, the Central Syndicate, a corporation organized under the laws of the Philippines, thru its General
Manager, David Sycip, sent a letter to the Collector of Internal Revenue advising the latter that it purchased from Dee
Hong Lue the entire stock of surplus properties which the said Dee Hong Lue had bought from the Foreign Liquidation
Commission and that as it assumed Dee Hong Lue's obligation to pay the 3-1/2% sales tax on said surplus goods, it was
remitting the sum of P43,750.00 in his behalf as deposit to answer for the payment of said sales tax with the understanding
that it would later be adjusted after the determination of the exact consideration of the sale.
On January 31, 1948, the syndicate again wrote the Collector requesting the refund of P1,103.28 representing alleged
excess payment of sales tax due to the adjustment and reduction of the purchase price in the amount of P31,522.18. Said
letter was referred to an agent for verification and report. On September 18, 1951, after a thorough investigation of the
facts and circumstances surrounding the transaction, the agent reported (1) that Dee Hong Lue purchased the surplus
goods as trustee for the Central Syndicate which was in the process of organization at the time of the bidding; (2) that it
was the representatives of the Central Syndicate that removed the surplus goods from their base at Leyte on February 21,
1947; (3) that the syndicate must have realized a gross profit of 18.8% from its sales thereof; and (4) that if the sales tax
were to be assessed on its gross sales it would still be liable for the amount of P33,797.88 as deficiency sales tax and
surcharge in addition to the amount of P43,750.00 which the corporation had deposited in the name of Dee Hong Lue as
estimated sales tax due from the latter.
Based on the above findings of the agent in charge of the investigation, the Collector decided that the Central Syndicate
was the importer and original seller of the surplus goods in question and, therefore, the one liable to pay the sales tax.
Accordingly, on January 4, 1952, the Collector assessed against the syndicate the amount of P33,797.88 and P300.00 as
deficiency sales tax, inclusive of the 25% surcharge and compromise penalty, respectively, and on the same date, in a
separate letter, he denied the request of the syndicate for the refund of the sum of P1,103.28.
On September 8, 1954, the Central Syndicate elevated the case to the Court of Tax Appeals questioning the ruling of the
Collector which denies its claim for refund as well as the assessment made against it of the sum of P33,797.88, plus the
sum of P300.00 as compromise penalty, as stated above. The Collector filed his answer thereto wherein he reiterated his
ruling and prayed that the Central Syndicate be ordered to pay the deficiency sales tax and surcharge as demanded in his
letters dated January 4, 1952 and August 5, 1954. On October 28, 1954, the syndicate filed a motion requesting that the
66

issue of prescription it has raised against the collection of the tax be first determined as a preliminary question, but action
thereon was deferred by the Court of Tax Appeals until after the trial of the case on the merits.
On November 5, 1954, the Collector filed a motion requiring the syndicate to file a bond to guarantee the payment of the
tax assessed against it which motion was denied by the Court of Tax Appeals on the ground that cannot be legally done it
appearing that the syndicate is already a non-existing entity due to the expiration of its corporate existence. In view of this
development, the Collector filed a motion to dismiss the appeal on the ground of lack of personality on the part of the
syndicate, which met an opposition on the part of the latter, but on January 25, 1955, the Court of Tax Appeals issued a
resolution dismissing the appeal primarily on the ground that the Central Syndicate has no personality to maintain the
action then pending before it. From this order the syndicate appealed to the Supreme Court wherein it intimated that the
appeal should not be dismissed because it could be substituted by its successors-in-interest, to wit: Tan Tiong Bio, Yu Khe
Thai, Alfonso Sycip, Dee Hong Lue, Lim Shui Ty, Sy Seng Tong, Sy En, Co Giap and David Sycip. And taking cue from this
suggestion, this Court ruled against the dismissal and held: "The resolution appealed from is set aside and the respondent
court is ordered to permit the substitution of the officers and directors of the defunct Central Syndicate as appellants, and
to proceed with the hearing of the appeal upon its merits." In permitting the substitution, this Court labored under the
premise that said officers and directors "may be held personally liable for the unpaid deficiency assessments made by the
Collector of Internal Revenue against the defunct syndicate."
After trial, the Court of Tax Appeals rendered decision the dispositive part of which reads as follows:
WHEREFORE, in view of the foregoing considerations, the decision of the Collector of Internal Revenue appealed from is
hereby affirmed, except with regard to the imposition of the compromise penalty of P300.00 the collection of which is
unauthorized and illegal in the absence of a compromise agreement between the parties. (Collector of Internal Revenue
vs. University of Sto. Tomas, G. R. No. L-11274, November 28, 1958; Collector of Internal Revenue vs. Bautista & Tan,
G.R. No. L-12250, May 27, 1959.) .
The petitioners Tan Tiong Bio, Yu Khe Thai, Lim Shui Ty, Alfonso Sycip, Sy En alias Sy Seng Sui, Dee Hong Lue, and Sy
Seng Tong, who appear in the Articles of Incorporation of the Central Syndicate Annex A (pp. 60-66, CTA rec.) as
incorporators and directors of the corporation, the second named being in addition its President and the seventh its
Treasurer, are hereby ordered to pay jointly and severally, to the Collector of Internal Revenue, the sum of P33,797.88 as
deficiency sales tax and surcharge on the surplus goods purchased by them from the Foreign Liquidation Commission on
July 5, 1946, from which they realized an estimated gross sales of P1,447,551.65, with costs. ..
Petitioners interposed the present appeal.
The important issues to be determined in this appeal are: (1) whether the importer of the surplus goods in question the
sale of which is subject to the present tax liability is Dee Hong Lue or the Central Syndicate who has been substituted by
the present petitioners; (2) whether the deficiency sales tax which is now sought to be collected has already prescribed;
and (3) the Central Syndicate having already been dissolved because of the expiration of its corporate existence, whether
the sales tax in question can be enforced against its successors-in-interest who are the present petitioners.
1. Petitioners contend that the Central Syndicate cannot be held liable for the deficiency sales tax in question because it is
not the importer of the surplus goods purchased from the Foreign Liquidation Commission for the reason that said surplus
goods were purchased by Dee Hong Lue as shown by the contract executed between him and the Foreign Liquidation
Commission and the fact that the Central Syndicate only purchased the same from Dee Hong Lue and not from the
Foreign Liquidation Commission as shown by Exhibit 13.
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This contention cannot be sustained. As correctly observed by the Court of Tax Appeals, the overwhelming evidence
presented by the Collector points to the conclusion that Dee Hong Lue purchased the surplus goods in question not for
himself but for the Central Syndicate which was then in the process of incorporation such that the deed of sale Exhibit 13
which purports to show that Dee Hong Lue sold said goods to the syndicate for a consideration of P1,250,000.00 (the
same amount paid by Dee Hong Lue to the Foreign Liquidation Commission) "is but a ruse to evade payment of a greater
amount of percentage tax." The aforesaid conclusion of the lower court was arrived at after a thorough analysis of the
evidence on record, pertinent portion of which we quote hereunder with approval:
Exhibit "38-A" for the respondent (p. 178, BIR rec.) shows that as early as July 23, 1946, or before the organization and
incorporation of Central Syndicate, Mr. David Sycip, who was subsequently appointed General Manager of the corporation,
together with Messrs. Sy En alias Sy Seng Sui (one of the incorporators of Central Syndicate), Serge Gordeof and Chin
Siu Bun (an employee of the same corporation), for and in the name of Central Syndicate then in the process of
organization, went to Leyte to take over the surplus properties sold by the FLC to Dee Hong Lue, which the latter held in
trust for the corporation. Exhibit 38-A, which is a certificate issued by no less than David Sycip himself who was
subsequently appointed General Manager of the corporation admits in express terms the following "... the surplus property
sold by the Foreign Liquidation Commission to Dee Hong Lue (and held in trust by the latter for the Syndicate ...."
(Emphasis ours.) We give full weight and credence to the adverse admissions made by David Sycip against the petitioners
as appearing in his certificate Exhibit 38-A (p. 178, BIR rec.) considering that at the time he made them, he was a person
jointly interested with the petitioners in the transaction over which there was yet no controversy over any sales tax liability.
(Secs. 11 and 33, Rule 123, Rules of Court; Clem vs. Forbeso, Tex. Cir App. 10 S.W. 2d 223; Street vs. Masterson, Tex.
Cir. App. 277 S.W. 407.) .
Exhibit '39' for the respondent (pp. 184-187, BIR rec.) which is a letter of Mr. Yu Khe Thai President, Director and biggest
stockholder of Central Syndicate (Exhibit A, pp. 60-65, CTA rec.) dated September 17, 1946 and addressed to the
Commanding General AFWESPAC, Manila, contains the following categorical admissions which corroborate the
admissions made by David Sycip; that the so-called Leyte 'Mystery Pile' surplus properties were owned by Central
Syndicate by virtue of a purchase from the FLC, effected in the name of Dee Hong Lue on July 5, 1946, inasmuch as
Central Syndicate was then still in the process of organization; that Dee Hong Lue held the said surplus properties in trust
until the mere formal turnover to the corporation on August 20, 1946, when the corporation had already been organized
and incorporated under the laws of the Philippines; and that on July 23, 1946 viz., twenty-two (22) days before the
incorporation of Central Syndicate on August 15, 1946 'our General Manager, Mr. David Sycip accompanied by one of our
directors, Mr. Sy En, arrived in Leyte to take over the properties.'
Before passing on to the rest of the evidence supporting the finding of respondent, we would like to call attention to this
significant detail. It is stated in the letter, Exhibit 39 (pp. 184-187, BIR rec.) of Mr. Yu Khe Thai that 'on July 23, 1946, our
General Manager, Mr. David Sycip, accompanied by one of our directors, Mr. Sy En, arrived in Leyte to take over the
properties,' We ask: Why was there such a hurry on the part of the promoters of Central Syndicate in taking over the
surplus properties when the formal agreement, Exhibit 13 (p. 66, BIR rec.), purporting to be a contract of sale of the
'Mystery Pile' between Dee Hong Lue as vendor, and the Central Syndicate, as vendee, for the amount of P1,250,000.00,
was effected twenty-eight (28) days later viz., on August 20, 1946? Is this not another clear and unmistakable indication
that from the very start, as is the theory of the respondent, the real purchasers of the 'Mystery Pile' from the FLC and as
such the 'importers' of the goods, were the Central Syndicate and/or the group of big financiers composing it before said
corporation was incorporated on August 15, 1946; and, that Dee Hong Lue acted merely as agent of these persons when
he purchased the pile from the FLC? As a general rule, one does not exercise all the acts of ownership over a property
especially if it involves a big amount until after the documents evidencing such ownership are fully accomplished.

68

Moreover, it appears that on October 3, 1946, Dee Hong Lue was investigated by Major Primitivo San Agustin, Jr., G-2 of
the Philippine Army, because of the discovery of some gun parts found in his shipment of surplus material from Palo,
Leyte.
In his sworn statement, Exhibit 16 (pp. 133-139, BIR rec.) before said officer, Dee Hong Lue admitted the following: That
he paid the FLC the amount of P1,250,000.00 "with the checks of Yu Khe Thai, maybe also Alfonso Sycip and my checks
with many others"; that "at the beginning I was trying to buy the pile for myself without telling other people and other
friends of mine." "Watkins came to me and he bid for me for P600,000 or P700,000, but later on when the price went up to
P1,250,000, I talked to my friends who said I could get money." "So, I bought it with their checks and mine" (Exhibit 16-B,
p. 138, BIR rec.) and, that after buying the "Mystery Pile", he (Dee Hong Lue) never inspected the same personally. (p.
141, BIR rec.)
In his affidavit, Exhibit 15 (p. 144, BIR rec.) Dee Hong Lue admitted that of the amount of P1,250,000.00 which he paid in
two installments sometime in July, 1946, to the FLC, P1,181,250.00 (should be P1,181,000.00) of the amount came from
the following: Yu Khe Thai who advanced to him P250,000.00; Sy Seng Tong P375,000.00; Alfonso Z. Sycip P375,000.00; Tan Tiong Bio - P125,000.00; Robert Dee Se Wee P25,000.00; and, Jose S. Lim P31,000.00 that his
understanding with these persons was that should they eventually join him in Central Syndicate, such advances would be
adjusted to constitute their investments; and, that soon after the "Mystery Pile" was purchased from the FLC, all the abovenamed persons with the exception of Robert Dee Se Wee and Jose S. Lim, formed the Central Syndicate and a reallocation of shares was made corresponding to the amounts advanced by them.
Added to these, we have before us other documentary evidence for the respondent consisting of Exhibits 18, 19, 20, 21,
23, 24, 25, 26, 27, 28 and 29 (pp. 85, 88, 92-96, 99-103, 117-128, 119-120, 121-128, BIR rec.) all tending to prove the
same thing - that the Central Syndicate and/or the group of big financiers composing it and not Dee Hong Lue was the real
purchaser (importer) of the "Mystery Pile" from the FLC; that in the contract of sale between Dee Hong Lue and the FLC
the former acted principally as agent (Article 1930, New Civil Code) of the petitioners Yu Khe Thai, Sy Seng Tong, Alfonso
Z. Sycip and Tan Tiong Bio who advanced the purchased price of P1,125,000.00 out of the P1,250,000.00 paid to the FLC,
Dee Hong Lue being the purchaser in his own right only with respect to the amount of P69,000.00; and, that the deed,
Exhibit 13 (p. 77, BIR rec.) purporting to show that Dee Hong Lue sold the "Mystery Pile" to the Central Syndicate for
consideration of P1,250.000.00 is but a ruse to evade payment of a greater amount of percentage tax. 1wph1.t
To our mind, the deed of sale, Exhibit 13 (p. 66, BIR rec.) as well as the circumstances surrounding the incorporation of the
Central Syndicate, are shrouded with as much mystery as the so-called "Mystery Pile" subject of the transaction. But, as
oil is to water, the truth and underlying motives behind these transactions have to surface in the end. Petitioners would
want us to believe that Dee Hong Lue bought in his own right and for himself the surplus goods in question for
P1,250,000.00 from the FLC and then, by virtue of a valid contract of sale, Exhibit 13 (p. 66, BIR rec.) transferred and
conveyed the same to the Central Syndicate at cost. If this be so, what need was there for Dee Hong Lue to agree in the
immediate organization and incorporation of the Central Syndicate with six other capitalists when he could very well have
disposed of the surplus goods to the public in his individual capacity and keep all the profits to himself without sharing
9/10th of it to the other six incorporators and stockholders of the newly incorporated Syndicate.
It appears that Dee Hong Lue "sold" the pile to the Central Syndicate for exactly the same price barely forty-six (46) days
after acquiring it from FLC and exactly five (5) days after the Syndicate was registered with the Securities and Exchange
Commission on August 19, 1946. This is indeed most unusual for a businessman like Dee Hong Lue who, it is to be
presumed, was out to make a killing when he acquired the surplus goods from the FLC for the staggering amount of
P1,750,000.00 in cash.
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Again, why did Dee Hong Lue waste all his time and effort not to say his good connections with the FLC by acquiring the
goods from that agency only to sell it for the same amount to the Central Syndicate? This would have been
understandable if Dee Hong Lue were the biggest and controlling stockholder of the Syndicate. He could perhaps reason
out to himself, "the profits which I am sacrificing now in this sale to the Syndicate, I will get it anyway in the form of
dividends from it after it shall have disposed of all the "Mystery Pile" to the public.' But then, how could this be possible
when Dee Hong Lue was the smallest subscriber to the capital stock of the Syndicate? It appears from the Articles of
Incorporation that of the authorized capital stock of the corporation in the amount of P500,000.00, Dee Hong Lue
subscribes to only P20,000.00 or 1/25th of the capital stock authorized and of this amount only P5,000.00 was paid by him
at the time of incorporation. So here is an experienced businessman like Dee Hong Lue who, following the theory of
petitioners' counsel, bought the "'Mystery Pile" for himself for P1,250,000.00 in cash, and after a few days sold the same at
cost to a corporation wherein he owned only 1/25th of the authorized capital stock and wherein he was not even an officer,
thus doling out to the other six incorporators and stockholders net profits in the sum conservatively estimated by the
respondent to be P206,116.45 out of a total of P229,073.83 which normally could all go to him. We take judicial notice of
the fact that as a result of our immense losses in property throughout the archipelago the during the Japanese occupation,
either through destruction or systematic commandering by the enemy and our forces, surplus properties commanded a
very good price in the open market after the liberation and that quite a number of surplus dealers made immense fortunes
out of it. We believe the respondent was quite charitable if not more than fair to the Central Syndicate in computing the
profits realized by it in the resale of the "Mystery Pile" to the public at only 18.8% of the acquisition price.
Now, from the side of the Central Syndicate. This corporation, as its articles of incorporation, Exhibit A (pp. 60-66, CTA
rec.) will show, was incorporated on August 15, 1946 with an authorized capital stock of P500,000.00 of which
P200,000.00 worth was subscribed by seven (7) persons and P50,000.00 paid-up in cash at the time of incorporation. Five
(5) days after its incorporation, as the Deed of Sale, Exhibit 13 (p. 66, BIR rec.) purports to show, the said corporation
bought from Dee Hong Lue the "Mystery Pile" for P1,250,000.00 in cash. This is indeed quite phenomenal and fantastic
not to say the utmost degree of finance considering that the corporation had a subscribed capital stock of only
P200,000.00 of which only P50,000.00 was paid-up at the time of incorporation and with not the least proof showing that it
never borrowed money in its own name from outside source to raise the enormous amount allegedly paid to Dee Hong
Lue nor evidence to show that it had by then in so short a time is five (5) days accumulated a substantial reserve to meet
Dee Hong Lue's selling price.
Furthermore, at first blush it would seem quite difficult to understand why the seven (7) incorporators and stockholders of
the Central Syndicate formed a corporation with a subscribed capital stock of only P200,000.00, and with cash on hand of
only P50,000.00 knowing fully well that there was a transaction awaiting the newly registered corporation involving an
outlay of P1,250,000.00 in cash. We believe this was done after mature deliberation and for some ulterior motive. As we
see it, the only logical answer is that the incorporator wanted to limit whatever civil liability that might arise in favor of third
persons, as the present tax liability has now arisen, up to the amount of their subscriptions, although the surplus deal they
transacted and which we believe was the only purpose in the incorporation of the Central Syndicate, was very much over
and above their authorized capital. Moreover, by limiting its capital, the corporation was also able to save on incidental
expenses, such as attorney's fee and the filing fee paid to the Securities and Exchange Commission, which were based on
the amount of the authorized capital stock.
Another mystery worth unravelling is what happened to the P1,181,240.00 (should be P1,181,000.00) which Dee Hong
Lue in his affidavit, Exhibit 15 (p. 144, BIR rec.) claims to have received from Messrs. Uy Khe Thai, Sy Seng Tong, Alfonso
Z. Sycip, Tan Tiong Bio (all incorporators of the Syndicate) and two others as 'advances' with which to pay the FLC. There
is no evidence on record to show that Dee Hong Lue ever returned this amount to those six (6) persons after he
supposedly received P1,250,000.00 from the newly incorporated Syndicate by virtue of the Deed of Sale, Exhibit 13. This
is the explanation that Dee Hong Lue gave in this regard as appearing in his affidavit, Exhibit 15: "That soon after the
70

above-mentioned property was purchased, the above parties, with the exception of Robert Dee Se Wee and Jose S. Lim
decided to join the proposed Central Syndicate and a re-allocation of shares was made for the reason that some of the
above parties in turn had to get advances from third parties." If this were true, why was it that Messrs. Yu Khe Thai, Sy
Seng Tong, Alfonso Z. Sycip and Tan Tiong Bio who advanced P250,000.00; P375,000.00 and P125,000.00 to Dee Hong
Lue were made to appear in the Articles of incorporation of the Central Syndicate as having subscribed to shares worth
only P40,000.00; P30,000.00; P30,000.00 and P20,000.00 and of having paid only P10,000.00, P7,500.00, P7,500.00,
and P5,000.00 on their subscriptions, respectively? Would it not be more in keeping with corporate practice, following the
explanation of Dee Hong Lue, to just credit those four (4) persons in the corporation with shares worth the amount
advanced by them to Dee Hong Lue?
On the basis of the above figures, the re-allocation of shares in favor of the four (4) incorporators who advanced enormous
sums for the Syndicate seems at first glance to be totally disproportionate and unfair to them. However, in the final analysis
it is not so as we will now show. Immediately after the incorporation of the Syndicate, as the evidence shows, Dee Hong
Lue was made to execute a deed of transfer under the guise of a contract of sale, conveying full and complete ownership
of the "Mystery Pile" to the newly organized corporation. So we have, on the face of the Articles of Incorporation and
Exhibit 13, a corporation with assets worth only P50,000.00 cash owning properties worth over a million pesos. Obviously,
the incorporators of the Syndicate, particularly those four who advanced enormous sums to Dee Hong Lue, are not
ordinary businessmen who could easily be taken for a ride. With the precipitated execution of the "Deed of Sale" by Dee
Hong Lue in favor of the Syndicate, transferring and conveying ownership over the entire pile to the latter, the recoupment
of their advances from the newly acquired assets of the corporation was sufficiently secured, and at the same time, by
making the document appear to be a deed of sale instead of a deed of transfer as it should be under Article 1891 of the
New Civil Code, they have reduced (at least attempted to) their sales tax liability with the argument that Dee Hong Lue
was the original "purchaser" or "importer" of the goods and therefore the taxable sale was that one made by him to the
Syndicate and not the sales made by the latter to the public. After going over the Articles of Incorporation of the Central
Syndicate and the other circumstances of this case, we draw the conclusion that it was organized just for this particular
transaction that its life span was expressly limited to two (2) years from and after the date of incorporation just to give it
time to dispose of the "Mystery Pile" to the public and then liquidate all its assets among the seven incorporatorsstockholders as in fact it was done on August 15, 1948; that from the very start, the seven (7) incorporators had intended it
to be a closed corporation without the least intention of ever selling to other persons the remaining authorized capital stock
of P300,000.00 still unsubscribed; and, that upon its liquidation, the seven (7) incorporators composing it got much more
than their investments including those who advanced P1,181,000.00 to the FLC for the corporation.
Petitioners would dispute the finding that Dee Hong Lue merely acted as a trustee of the Central Syndicate when he
purchased the surplus goods in question from the Foreign Liquidation Commission on July 5, 1946 considering that on that
date the syndicate has not yet been incorporated on the theory that no legal relation may exist between parties one of
whom has yet no legal existence. Technically this may be true, but the fact remains that it cannot be denied that Dee Hong
Lue purchased the goods on behalf of those who advanced the money for the purchase thereof who later became the
incorporators and only stockholders of the syndicate with the understanding that the amounts they had respectively
advanced would be their investment and would represent their interest in the corporation. And this is further evidenced by
the fact that this purchase made by Dee Hong Lue was later approved and adopted as the act of the Central Syndicate
itself as can be gleaned from the certificate executed by David Sycip, general manager of said syndicate, on September
16, 1946, wherein he emphasized that the persons named therein (from whom Dee Hong Lue obtained the money) merely
acted on behalf of the syndicate and in fact were the ones who went to Leyte to take over the aforesaid surplus goods. In
any event, even if Dee Hong Lue may be deemed as the purchaser of the surplus goods in his own right, nevertheless, the
corporation still may be regarded as the importer of the same goods for the reason that Dee Hong Lue transferred to it all
his rights and interests in the contract with the Foreign Liquidation Commission, and it was said corporation that took
delivery thereof from the place where they were stored in Leyte as may be seen from the letter of Dee Hong Lue to the
71

Foreign Liquidation Commission dated September 2, 1946 and the letter of the Central Syndicate to the said Commission
bearing the same date. Under these facts, it is clear that the Central Syndicate is the importer of the surplus goods as
correctly observed by Judge Umali in his concurring opinion, from which we quote: .
It is now well settled that a person who bought surplus goods from the Foreign Liquidation Commission and who removed
the goods bought from the U.S. military bases in the Philippines is considered an importer of such goods and is subject to
the sales tax or compensating tax, as the case may be. (Go Cheng Tee v. Meer, 47 O.G. 269; Saura Import and Export v.
Meer, G.R. No. L-2927, Jan. 26, 1951; P.M.P. Navigation v. Meer, G.R. No. L-4621, March 24, 1953; Soriano y Cia v. Coll.
of Int. Rev., 51 O.G. 4548.) In this case it appearing that the Central Syndicate was the owner of the 'Mystery Pile' before
its removal from Base K and that it was the one which actually took delivery thereof and removed the same from the U.S.
military base, it is the importer within the meaning of Section 186 of the Revenue Code, as it stood before the enactment of
Republic Act No. 594, and its sales of the surplus goods are the original sales taxable under said section and not the sale
to it by Dee Hong Lue.
2. Since the Central Syndicate, as we have already pointed out, was the importer of the surplus goods in question, it was
its duty under Section 183 of the Internal Revenue Code to file a return of its gross sales within 20 days after the end of
each quarter in order that the office of the internal revenue may assess the sales tax that may be due thereon, but, as the
record shows, the Central Syndicate failed to file any return of its quarterly sales on the pretext that it was Dee Hong Lue
who imported the surplus goods and it merely purchased them from said importer. This is in fact what the syndicate
intended to impress upon the Collector when it wrote to him its letter of October 19, 1946 informing him that it purchased
from Dee Hong Lue the entire stock of the surplus goods which the latter had bought from the Foreign Liquidation
Commission and was therefore depositing in his name the sum of P43,750.00 to answer for his sales tax liability, but this
letter certainly cannot be considered as a return that may set in operation the application of the prescriptive period
provided for in Section 331 of the Tax Code, for, evidently, said letter if at all could only be considered as such in behalf of
Dee Hong Lue and not in behalf of the Central Syndicate because such is the only nature and import of the letter. Besides,
how can such letter be considered as a return of the sales of the Central Syndicate when it was only on February 21, 1947
when it removed the surplus goods in question from their base at Leyte? How can such return inure to the benefit of the
syndicate when the same surplus goods which were removed on said date could not have been sold by the corporation
earlier than the aforesaid date? It is obvious that the letter of October 19, 1946 cannot possibly be considered as a return
filed by the syndicate and so cannot serve as basis for the computation of the prescriptive period of five years prescribed
by law.
Nor can the fact that the Collector did not include in the assessment a surcharge of 50% serve as an argument that a
return had already been filed, for such failure can only mean that an oversight had been committed in the non-inclusion of
said surcharge. The syndicate having failed to file its quarterly returns as required by Section 183 of the Tax Code, the
period that has to be reckoned with is that embodied in Section 332 of the same Code which provides that in case of
failure to file the return the tax may be assessed within 10 years after discovery of the falsity, fraud or omission of the
payment of the proper tax. Since it appears that the Collector discovered the failure of the syndicate to file the return only
on September 12, 1951 he has therefore up to September 18, 1961 within which to assess or collect the deficiency tax in
question. Consequently the assessment made on January 4, 1952 was made within the prescribed period.
3. Petitioners argue (1) that the Court of Tax Appeals acted in excess of its jurisdiction in holding them liable as officers or
directors of the defunct Central Syndicate for the tax liability of the latter; (2) that petitioners cannot be held liable for said
tax liability there being no statutory provision in this jurisdiction authorizing the government to proceed against the
stockholders of a defunct corporation as transferees of the corporate assets upon liquidation; (3) that assuming that the
stockholders can be held so liable, they are only liable to the extent of the benefits derived by them from the corporation
and there is no evidence showing that petitioners had been the beneficiaries of the defunct syndicate; (4) that considering
72

that the Collector instituted the present action on September 23, 1954 when he filed his answer to the appeal of
petitioners, said action was already barred by prescription pursuant to Sections 77 and 78 of the Corporation Law which
allows corporations to continue as a body corporate only for three years from its dissolution; and (5) that assuming that
petitioners are liable to pay the tax, their liability is not solidary, but only limited to the benefits derived by them from the
corporation.
It should be stated at the outset that it was petitioners themselves who caused their substitution as parties in the present
case, being the successors-in-interest of the defunct syndicate, when they appealed this case to the Supreme Court for
which reason the latter Court declared that "the respondent Court of Tax Appeals should have allowed the substitution of
its former officers and directors is parties-appellants, since they are proper parties in interest insofar as they may be (and
in fact are) held personally liable for the unpaid deficiency assessments made by the Collector of Internal Revenue against
the defunct Syndicate." In fact, because of this directive their substitution was effected. They cannot, therefore, be now
heard to complain if they are made responsible for the tax liability of the defunct syndicate whose representation they
assumed and whose assets were distributed among them.
In the second place, there is good authority to the effect that the creditor of a dissolved corporation may follow its assets
once they passed into the hands of the stockholders. Thus, recognized are the following rules in American jurisprudence:
The dissolution of a corporation does not extinguish the debts due or owing to it (Bacon v. Robertson, 18 How. 480, 15 L.
Ed., 406; Curron v. State, 16 How. 304, 14 L. Ed., 705). A creditor of a dissolve corporation may follow its assets, as in the
nature of a trust fund, into the hands of its stockholders (MacWilliams v. Excelsier Coal Co. [1924] 298 Fed. 384). An
indebtedness of a corporation to the federal government for income and excess profit taxes is not extinguished by the
dissolution of the corporation (Quinn v. McLeudon, 152 Ark. 271, 238 S.W., 32). And it has been stated, with reference to
the effect of dissolution upon taxes due from a corporation, "that the hands of the government cannot, of course, collect
taxes from a defunct corporation, it loses thereby none of its rights to assess taxes which had been due from the
corporation, and to collect them from persons, who by reason of transactions with the corporation, hold property against
which the tax can be enforced and that the legal death of the corporation no more prevents such action than would the
physical death of an individual prevent the government from assessing taxes against him and collecting them from his
administrator, who holds the property which the decedent had formerly possessed" (Wonder Bakeries Co. v. U.S. [1934]
Ct. Cl. 6 F. Supp. 288). Bearing in mind that our corporation law is of American origin, the foregoing authorities have
persuasive effect in considering similar cases in this jurisdiction. This must have been taken into account when in G.R. No.
L-8800 this Court said that petitioners could be held personally liable for the taxes in question as successors-in-interest of
the defunct corporation.
Considering that the Central Syndicate realized from the sale of the surplus goods a net profit of P229,073.83, and that the
sale of said goods was the only transaction undertaken by said syndicate, there being no evidence to the contrary, the
conclusion is that said net profit remained intact and was distributed among the stockholders when the corporation
liquidated and distributed its assets on August 15, 1948, immediately after the sale of the said surplus goods. Petitioners
are therefore the beneficiaries of the defunct corporation and as such should be held liable to pay the taxes in question.
However, there being no express provision requiring the stockholders of the corporation to be solidarily liable for its debts
which liability must be express and cannot be presumed, petitioners should be held to be liable for the tax in
question only in proportion to their shares in the distribution of the assets of the defunct corporation. The decision of the
trial court should be modified accordingly.
WHEREFORE, with the above modification, we hereby affirm the decision appealed from, with costs against petitioners.
SO ORDERED.

73

G.R. No. L-7859

December 22, 1955

WALTER LUTZ, as Judicial Administrator of the Intestate Estate of the deceased Antonio Jayme Ledesma,plaintiffappellant, vs.
J. ANTONIO ARANETA, as the Collector of Internal Revenue, defendant-appellee. Ernesto J. Gonzaga for appellant.
Office of the Solicitor General Ambrosio Padilla, First Assistant Solicitor General Guillermo E. Torres and Solicitor
Felicisimo R. Rosete for appellee.

REYES, J.B L., J.:

This case was initiated in the Court of First Instance of Negros Occidental to test the legality of the taxes imposed by
Commonwealth Act No. 567, otherwise known as the Sugar Adjustment Act.
Promulgated in 1940, the law in question opens (section 1) with a declaration of emergency, due to the threat to our
industry by the imminent imposition of export taxes upon sugar as provided in the Tydings-McDuffe Act, and the "eventual
loss of its preferential position in the United States market"; wherefore, the national policy was expressed "to obtain a
readjustment of the benefits derived from the sugar industry by the component elements thereof" and "to stabilize the
sugar industry so as to prepare it for the eventuality of the loss of its preferential position in the United States market and
the imposition of the export taxes."
In section 2, Commonwealth Act 567 provides for an increase of the existing tax on the manufacture of sugar, on a
graduated basis, on each picul of sugar manufactured; while section 3 levies on owners or persons in control of lands
devoted to the cultivation of sugar cane and ceded to others for a consideration, on lease or otherwise
a tax equivalent to the difference between the money value of the rental or consideration collected and the
amount representing 12 per centum of the assessed value of such land.
According to section 6 of the law
SEC. 6. All collections made under this Act shall accrue to a special fund in the Philippine Treasury, to be known
as the 'Sugar Adjustment and Stabilization Fund,' and shall be paid out only for any or all of the following purposes or to
attain any or all of the following objectives, as may be provided by law.
First, to place the sugar industry in a position to maintain itself, despite the gradual loss of the preferntial position
of the Philippine sugar in the United States market, and ultimately to insure its continued existence notwithstanding the
loss of that market and the consequent necessity of meeting competition in the free markets of the world;
Second, to readjust the benefits derived from the sugar industry by all of the component elements thereof the
mill, the landowner, the planter of the sugar cane, and the laborers in the factory and in the field so that all might
continue profitably to engage therein;lawphi1.net
Third, to limit the production of sugar to areas more economically suited to the production thereof; and
Fourth, to afford labor employed in the industry a living wage and to improve their living and working conditions:
Provided, That the President of the Philippines may, until the adjourment of the next regular session of the National
74

Assembly, make the necessary disbursements from the fund herein created (1) for the establishment and operation of
sugar experiment station or stations and the undertaking of researchers (a) to increase the recoveries of the centrifugal
sugar factories with the view of reducing manufacturing costs, (b) to produce and propagate higher yielding varieties of
sugar cane more adaptable to different district conditions in the Philippines, (c) to lower the costs of raising sugar cane, (d)
to improve the buying quality of denatured alcohol from molasses for motor fuel, (e) to determine the possibility of utilizing
the other by-products of the industry, (f) to determine what crop or crops are suitable for rotation and for the utilization of
excess cane lands, and (g) on other problems the solution of which would help rehabilitate and stabilize the industry, and
(2) for the improvement of living and working conditions in sugar mills and sugar plantations, authorizing him to organize
the necessary agency or agencies to take charge of the expenditure and allocation of said funds to carry out the purpose
hereinbefore enumerated, and, likewise, authorizing the disbursement from the fund herein created of the necessary
amount or amounts needed for salaries, wages, travelling expenses, equipment, and other sundry expenses of said
agency or agencies.
Plaintiff, Walter Lutz, in his capacity as Judicial Administrator of the Intestate Estate of Antonio Jayme Ledesma, seeks to
recover from the Collector of Internal Revenue the sum of P14,666.40 paid by the estate as taxes, under section 3 of the
Act, for the crop years 1948-1949 and 1949-1950; alleging that such tax is unconstitutional and void, being levied for the
aid and support of the sugar industry exclusively, which in plaintiff's opinion is not a public purpose for which a tax may be
constitutioally levied. The action having been dismissed by the Court of First Instance, the plaintifs appealed the case
directly to this Court (Judiciary Act, section 17).
The basic defect in the plaintiff's position is his assumption that the tax provided for in Commonwealth Act No. 567 is a
pure exercise of the taxing power. Analysis of the Act, and particularly of section 6 (heretofore quoted in full), will show that
the tax is levied with a regulatory purpose, to provide means for the rehabilitation and stabilization of the threatened sugar
industry. In other words, the act is primarily an exercise of the police power.
This Court can take judicial notice of the fact that sugar production is one of the great industries of our nation, sugar
occupying a leading position among its export products; that it gives employment to thousands of laborers in fields and
factories; that it is a great source of the state's wealth, is one of the important sources of foreign exchange needed by our
government, and is thus pivotal in the plans of a regime committed to a policy of currency stability. Its promotion, protection
and advancement, therefore redounds greatly to the general welfare. Hence it was competent for the legislature to find that
the general welfare demanded that the sugar industry should be stabilized in turn; and in the wide field of its police power,
the lawmaking body could provide that the distribution of benefits therefrom be readjusted among its components to
enable it to resist the added strain of the increase in taxes that it had to sustain (Sligh vs. Kirkwood, 237 U. S. 52, 59 L. Ed.
835; Johnson vs. State ex rel. Marey, 99 Fla. 1311, 128 So. 853; Maxcy Inc. vs. Mayo, 103 Fla. 552, 139 So. 121).
As stated in Johnson vs. State ex rel. Marey, with reference to the citrus industry in Florida
The protection of a large industry constituting one of the great sources of the state's wealth and therefore directly
or indirectly affecting the welfare of so great a portion of the population of the State is affected to such an extent
by public interests as to be within the police power of the sovereign. (128 Sp. 857).
Once it is conceded, as it must, that the protection and promotion of the sugar industry is a matter of public concern, it
follows that the Legislature may determine within reasonable bounds what is necessary for its protection and expedient for
its promotion. Here, the legislative discretion must be allowed fully play, subject only to the test of reasonableness; and it is
not contended that the means provided in section 6 of the law (above quoted) bear no relation to the objective pursued or
are oppressive in character. If objective and methods are alike constitutionally valid, no reason is seen why the state may
not levy taxes to raise funds for their prosecution and attainment. Taxation may be made the implement of the state's
75

police power (Great Atl. & Pac. Tea Co. vs. Grosjean, 301 U. S. 412, 81 L. Ed. 1193; U. S. vs. Butler, 297 U. S. 1, 80 L. Ed.
477; M'Culloch vs. Maryland, 4 Wheat. 316, 4 L. Ed. 579).
That the tax to be levied should burden the sugar producers themselves can hardly be a ground of complaint; indeed, it
appears rational that the tax be obtained precisely from those who are to be benefited from the expenditure of the funds
derived from it. At any rate, it is inherent in the power to tax that a state be free to select the subjects of taxation, and it has
been repeatedly held that "inequalities which result from a singling out of one particular class for taxation, or exemption
infringe no constitutional limitation" (Carmichael vs. Southern Coal & Coke Co., 301 U. S. 495, 81 L. Ed. 1245, citing
numerous authorities, at p. 1251).
From the point of view we have taken it appears of no moment that the funds raised under the Sugar Stabilization Act, now
in question, should be exclusively spent in aid of the sugar industry, since it is that very enterprise that is being protected. It
may be that other industries are also in need of similar protection; that the legislature is not required by the Constitution to
adhere to a policy of "all or none." As ruled in Minnesota ex rel. Pearson vs. Probate Court, 309 U. S. 270, 84 L. Ed. 744,
"if the law presumably hits the evil where it is most felt, it is not to be overthrown because there are other instances to
which it might have been applied;" and that "the legislative authority, exerted within its proper field, need not embrace all
the evils within its reach" (N. L. R. B. vs. Jones & Laughlin Steel Corp. 301 U. S. 1, 81 L. Ed. 893).
Even from the standpoint that the Act is a pure tax measure, it cannot be said that the devotion of tax money to
experimental stations to seek increase of efficiency in sugar production, utilization of by-products and solution of allied
problems, as well as to the improvements of living and working conditions in sugar mills or plantations, without any part of
such money being channeled directly to private persons, constitutes expenditure of tax money for private purposes,
(compare Everson vs. Board of Education, 91 L. Ed. 472, 168 ALR 1392, 1400).
The decision appealed from is affirmed, with costs against appellant. So ordered. Paras, C. J., Bengzon, Padilla, Reyes,
A., Jugo, Bautista Angelo, Labrador, and Concepcion, JJ., concur.
G.R. No. L-23645

October 29, 1968

BENJAMIN P. GOMEZ, petitioner-appellee,

vs.
ENRICO PALOMAR, in his capacity as Postmaster General, HON. BRIGIDO R. VALENCIA, in his capacity as
Secretary of Public Works and Communications, and DOMINGO GOPEZ, in his capacity as Acting Postmaster of
San Fernando, Pampanga, respondent-appellants.
Lorenzo P. Navarro and Narvaro Belar S. Navarro for petitioner-appellee.
Office of the Solicitor General Arturo A. Alafriz, Assistant Solicitor General Frine C. Zaballero and Solicitor Dominador L.
Quiroz for respondents-appellants.
CASTRO, J.:
This appeal puts in issue the constitutionality of Republic Act 1635, 1 as amended by Republic Act 2631,2 which provides as
follows:
To help raise funds for the Philippine Tuberculosis Society, the Director of Posts shall order for the period from
August nineteen to September thirty every year the printing and issue of semi-postal stamps of different
denominations with face value showing the regular postage charge plus the additional amount of five centavos for
the said purpose, and during the said period, no mail matter shall be accepted in the mails unless it bears such
semi-postal stamps: Provided, That no such additional charge of five centavos shall be imposed on newspapers.
76

The additional proceeds realized from the sale of the semi-postal stamps shall constitute a special fund and be
deposited with the National Treasury to be expended by the Philippine Tuberculosis Society in carrying out its
noble work to prevent and eradicate tuberculosis.
The respondent Postmaster General, in implementation of the law, thereafter issued four (4) administrative orders
numbered 3 (June 20, 1958), 7 (August 9, 1958), 9 (August 28, 1958), and 10 (July 15, 1960). All these administrative
orders were issued with the approval of the respondent Secretary of Public Works and Communications.
The pertinent portions of Adm. Order 3 read as follows:
Such semi-postal stamps could not be made available during the period from August 19 to September 30, 1957,
for lack of time. However, two denominations of such stamps, one at "5 + 5" centavos and another at "10 + 5"
centavos, will soon be released for use by the public on their mails to be posted during the same period starting
with the year 1958.
xxx

xxx

xxx

During the period from August 19 to September 30 each year starting in 1958, no mail matter of whatever class,
and whether domestic or foreign, posted at any Philippine Post Office and addressed for delivery in this country or
abroad, shall be accepted for mailing unless it bears at least one such semi-postal stamp showing the additional
value of five centavos intended for the Philippine Tuberculosis Society.
In the case of second-class mails and mails prepaid by means of mail permits or impressions of postage meters,
each piece of such mail shall bear at least one such semi-postal stamp if posted during the period above stated
starting with the year 1958, in addition to being charged the usual postage prescribed by existing regulations. In
the case of business reply envelopes and cards mailed during said period, such stamp should be collected from
the addressees at the time of delivery. Mails entitled to franking privilege like those from the office of the
President, members of Congress, and other offices to which such privilege has been granted, shall each also
bear one such semi-postal stamp if posted during the said period.
Mails posted during the said period starting in 1958, which are found in street or post-office mail boxes without the
required semi-postal stamp, shall be returned to the sender, if known, with a notation calling for the affixing of
such stamp. If the sender is unknown, the mail matter shall be treated as nonmailable and forwarded to the Dead
Letter Office for proper disposition.
Adm. Order 7, amending the fifth paragraph of Adm. Order 3, reads as follows:
In the case of the following categories of mail matter and mails entitled to franking privilege which are not
exempted from the payment of the five centavos intended for the Philippine Tuberculosis Society, such extra
charge may be collected in cash, for which official receipt (General Form No. 13, A) shall be issued, instead of
affixing the semi-postal stamp in the manner hereinafter indicated:
1. Second-class mail. Aside from the postage at the second-class rate, the extra charge of five centavos for
the Philippine Tuberculosis Society shall be collected on each separately-addressed piece of second-class mail
matter, and the total sum thus collected shall be entered in the same official receipt to be issued for the postage
at the second-class rate. In making such entry, the total number of pieces of second-class mail posted shall be
stated, thus: "Total charge for TB Fund on 100 pieces . .. P5.00." The extra charge shall be entered separate from
the postage in both of the official receipt and the Record of Collections.
2. First-class and third-class mail permits. Mails to be posted without postage affixed under permits issued by
this Bureau shall each be charged the usual postage, in addition to the five-centavo extra charge intended for
77

said society. The total extra charge thus received shall be entered in the same official receipt to be issued for the
postage collected, as in subparagraph 1.
3. Metered mail. For each piece of mail matter impressed by postage meter under metered mail permit issued
by this Bureau, the extra charge of five centavos for said society shall be collected in cash and an official receipt
issued for the total sum thus received, in the manner indicated in subparagraph 1.
4. Business reply cards and envelopes. Upon delivery of business reply cards and envelopes to holders of
business reply permits, the five-centavo charge intended for said society shall be collected in cash on each reply
card or envelope delivered, in addition to the required postage which may also be paid in cash. An official receipt
shall be issued for the total postage and total extra charge received, in the manner shown in subparagraph 1.
5. Mails entitled to franking privilege. Government agencies, officials, and other persons entitled to the franking
privilege under existing laws may pay in cash such extra charge intended for said society, instead of affixing the
semi-postal stamps to their mails, provided that such mails are presented at the post-office window, where the
five-centavo extra charge for said society shall be collected on each piece of such mail matter. In such case, an
official receipt shall be issued for the total sum thus collected, in the manner stated in subparagraph 1.
Mail under permits, metered mails and franked mails not presented at the post-office window shall be affixed with
the necessary semi-postal stamps. If found in mail boxes without such stamps, they shall be treated in the same
way as herein provided for other mails.
Adm. Order 9, amending Adm. Order 3, as amended, exempts "Government and its Agencies and Instrumentalities
Performing Governmental Functions." Adm. Order 10, amending Adm. Order 3, as amended, exempts "copies of periodical
publications received for mailing under any class of mail matter, including newspapers and magazines admitted as
second-class mail."
The FACTS. On September l5, 1963 the petitioner Benjamin P. Gomez mailed a letter at the post office in San Fernando,
Pampanga. Because this letter, addressed to a certain Agustin Aquino of 1014 Dagohoy Street, Singalong, Manila did not
bear the special anti-TB stamp required by the statute, it was returned to the petitioner.
In view of this development, the petitioner brough suit for declaratory relief in the Court of First Instance of Pampanga, to
test the constitutionality of the statute, as well as the implementing administrative orders issued, contending that it violates
the equal protection clause of the Constitution as well as the rule of uniformity and equality of taxation. The lower court
declared the statute and the orders unconstitutional; hence this appeal by the respondent postal authorities.
For the reasons set out in this opinion, the judgment appealed from must be reversed.
I.
Before reaching the merits, we deem it necessary to dispose of the respondents' contention that declaratory relief is
unavailing because this suit was filed after the petitioner had committed a breach of the statute. While conceding that the
mailing by the petitioner of a letter without the additional anti-TB stamp was a violation of Republic Act 1635, as amended,
the trial court nevertheless refused to dismiss the action on the ground that under section 6 of Rule 64 of the Rules of
Court, "If before the final termination of the case a breach or violation of ... a statute ... should take place, the action may
thereupon be converted into an ordinary action."
The prime specification of an action for declaratory relief is that it must be brought "before breach or violation" of the
statute has been committed. Rule 64, section 1 so provides. Section 6 of the same rule, which allows the court to treat an
action for declaratory relief as an ordinary action, applies only if the breach or violation occurs after the filing of the action
but before the termination thereof.3
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Hence, if, as the trial court itself admitted, there had been a breach of the statute before the firing of this action, then
indeed the remedy of declaratory relief cannot be availed of, much less can the suit be converted into an ordinary action.
Nor is there merit in the petitioner's argument that the mailing of the letter in question did not constitute a breach of the
statute because the statute appears to be addressed only to postal authorities. The statute, it is true, in terms provides that
"no mail matter shall be accepted in the mails unless it bears such semi-postal stamps." It does not follow, however, that
only postal authorities can be guilty of violating it by accepting mails without the payment of the anti-TB stamp. It is obvious
that they can be guilty of violating the statute only if there are people who use the mails without paying for the additional
anti-TB stamp. Just as in bribery the mere offer constitutes a breach of the law, so in the matter of the anti-TB stamp the
mere attempt to use the mails without the stamp constitutes a violation of the statute. It is not required that the mail be
accepted by postal authorities. That requirement is relevant only for the purpose of fixing the liability of postal officials.
Nevertheless, we are of the view that the petitioner's choice of remedy is correct because this suit was filed not only with
respect to the letter which he mailed on September 15, 1963, but also with regard to any other mail that he might send in
the future. Thus, in his complaint, the petitioner prayed that due course be given to "other mails without the semi-postal
stamps which he may deliver for mailing ... if any, during the period covered by Republic Act 1635, as amended, as well as
other mails hereafter to be sent by or to other mailers which bear the required postage, without collection of additional
charge of five centavos prescribed by the same Republic Act." As one whose mail was returned, the petitioner is certainly
interested in a ruling on the validity of the statute requiring the use of additional stamps.
II.
We now consider the constitutional objections raised against the statute and the implementing orders.
1. It is said that the statute is violative of the equal protection clause of the Constitution. More specifically the claim is made
that it constitutes mail users into a class for the purpose of the tax while leaving untaxed the rest of the population and that
even among postal patrons the statute discriminatorily grants exemption to newspapers while Administrative Order 9 of the
respondent Postmaster General grants a similar exemption to offices performing governmental functions. .
The five centavo charge levied by Republic Act 1635, as amended, is in the nature of an excise tax, laid upon the exercise
of a privilege, namely, the privilege of using the mails. As such the objections levelled against it must be viewed in the light
of applicable principles of taxation.
To begin with, it is settled that the legislature has the inherent power to select the subjects of taxation and to grant
exemptions.4 This power has aptly been described as "of wide range and flexibility." 5 Indeed, it is said that in the field of
taxation, more than in other areas, the legislature possesses the greatest freedom in classification. 6 The reason for this is
that traditionally, classification has been a device for fitting tax programs to local needs and usages in order to achieve an
equitable distribution of the tax burden.7
That legislative classifications must be reasonable is of course undenied. But what the petitioner asserts is that statutory
classification of mail users must bear some reasonable relationship to the end sought to be attained, and that absent such
relationship the selection of mail users is constitutionally impermissible. This is altogether a different proposition. As
explained in Commonwealth v. Life Assurance Co.:8
While the principle that there must be a reasonable relationship between classification made by the legislation
and its purpose is undoubtedly true in some contexts, it has no application to a measure whose sole purpose is to
raise revenue ... So long as the classification imposed is based upon some standard capable of reasonable
comprehension, be that standard based upon ability to produce revenue or some other legitimate distinction,
equal protection of the law has been afforded. See Allied Stores of Ohio, Inc. v. Bowers, supra, 358 U.S. at 527,
79 S. Ct. at 441; Brown Forman Co. v. Commonwealth of Kentucky, 2d U.S. 56, 573, 80 S. Ct. 578, 580 (1910).

79

We are not wont to invalidate legislation on equal protection grounds except by the clearest demonstration that it sanctions
invidious discrimination, which is all that the Constitution forbids. The remedy for unwise legislation must be sought in the
legislature. Now, the classification of mail users is not without any reason. It is based on ability to pay, let alone the
enjoyment of a privilege, and on administrative convinience. In the allocation of the tax burden, Congress must have
concluded that the contribution to the anti-TB fund can be assured by those whose who can afford the use of the mails.
The classification is likewise based on considerations of administrative convenience. For it is now a settled principle of law
that "consideration of practical administrative convenience and cost in the administration of tax laws afford adequate
ground for imposing a tax on a well recognized and defined class." 9 In the case of the anti-TB stamps, undoubtedly, the
single most important and influential consideration that led the legislature to select mail users as subjects of the tax is the
relative ease and convenienceof collecting the tax through the post offices. The small amount of five centavos does not
justify the great expense and inconvenience of collecting through the regular means of collection. On the other hand, by
placing the duty of collection on postal authorities the tax was made almost self-enforcing, with as little cost and as little
inconvenience as possible.
And then of course it is not accurate to say that the statute constituted mail users into a class. Mail users were already a
class by themselves even before the enactment of the statue and all that the legislature did was merely to select their
class. Legislation is essentially empiric and Republic Act 1635, as amended, no more than reflects a distinction that exists
in fact. As Mr. Justice Frankfurter said, "to recognize differences that exist in fact is living law; to disregard [them] and
concentrate on some abstract identities is lifeless logic."10
Granted the power to select the subject of taxation, the State's power to grant exemption must likewise be conceded as a
necessary corollary. Tax exemptions are too common in the law; they have never been thought of as raising issues under
the equal protection clause.
It is thus erroneous for the trial court to hold that because certain mail users are exempted from the levy the law and
administrative officials have sanctioned an invidious discrimination offensive to the Constitution. The application of the
lower courts theory would require all mail users to be taxed, a conclusion that is hardly tenable in the light of differences in
status of mail users. The Constitution does not require this kind of equality.
As the United States Supreme Court has said, the legislature may withhold the burden of the tax in order to foster what it
conceives to be a beneficent enterprise.11 This is the case of newspapers which, under the amendment introduced by
Republic Act 2631, are exempt from the payment of the additional stamp.
As for the Government and its instrumentalities, their exemption rests on the State's sovereign immunity from taxation. The
State cannot be taxed without its consent and such consent, being in derogation of its sovereignty, is to be strictly
construed.12 Administrative Order 9 of the respondent Postmaster General, which lists the various offices and
instrumentalities of the Government exempt from the payment of the anti-TB stamp, is but a restatement of this well-known
principle of constitutional law.
The trial court likewise held the law invalid on the ground that it singles out tuberculosis to the exclusion of other diseases
which, it is said, are equally a menace to public health. But it is never a requirement of equal protection that all evils of the
same genus be eradicated or none at all. 13 As this Court has had occasion to say, "if the law presumably hits the evil
where it is most felt, it is not to be overthrown because there are other instances to which it might have been applied."14
2. The petitioner further argues that the tax in question is invalid, first, because it is not levied for a public purpose as no
special benefits accrue to mail users as taxpayers, and second, because it violates the rule of uniformity in taxation.
The eradication of a dreaded disease is a public purpose, but if by public purpose the petitioner means benefit to a
taxpayer as a return for what he pays, then it is sufficient answer to say that the only benefit to which the taxpayer is
constitutionally entitled is that derived from his enjoyment of the privileges of living in an organized society, established and
safeguarded by the devotion of taxes to public purposes. Any other view would preclude the levying of taxes except as
80

they are used to compensate for the burden on those who pay them and would involve the abandonment of the most
fundamental principle of government that it exists primarily to provide for the common good.15
Nor is the rule of uniformity and equality of taxation infringed by the imposition of a flat rate rather than a graduated tax. A
tax need not be measured by the weight of the mail or the extent of the service rendered. We have said that
considerations of administrative convenience and cost afford an adequate ground for classification. The same
considerations may induce the legislature to impose a flat tax which in effect is a charge for the transaction, operating
equally on all persons within the class regardless of the amount involved. 16 As Mr. Justice Holmes said in sustaining the
validity of a stamp act which imposed a flat rate of two cents on every $100 face value of stock transferred:
One of the stocks was worth $30.75 a share of the face value of $100, the other $172. The inequality of the tax,
so far as actual values are concerned, is manifest. But, here again equality in this sense has to yield to practical
considerations and usage. There must be a fixed and indisputable mode of ascertaining a stamp tax. In another
sense, moreover, there is equality. When the taxes on two sales are equal, the same number of shares is sold in
each case; that is to say, the same privilege is used to the same extent. Valuation is not the only thing to be
considered. As was pointed out by the court of appeals, the familiar stamp tax of 2 cents on checks, irrespective
of income or earning capacity, and many others, illustrate the necessity and practice of sometimes substituting
count for weight ...17
According to the trial court, the money raised from the sales of the anti-TB stamps is spent for the benefit of the Philippine
Tuberculosis Society, a private organization, without appropriation by law. But as the Solicitor General points out, the
Society is not really the beneficiary but only the agency through which the State acts in carrying out what is essentially a
public function. The money is treated as a special fund and as such need not be appropriated by law.18
3. Finally, the claim is made that the statute is so broadly drawn that to execute it the respondents had to issue
administrative orders far beyond their powers. Indeed, this is one of the grounds on which the lower court invalidated
Republic Act 1631, as amended, namely, that it constitutes an undue delegation of legislative power.
Administrative Order 3, as amended by Administrative Orders 7 and 10, provides that for certain classes of mail matters
(such as mail permits, metered mails, business reply cards, etc.), the five-centavo charge may be paid in cash instead of
the purchase of the anti-TB stamp. It further states that mails deposited during the period August 19 to September 30 of
each year in mail boxes without the stamp should be returned to the sender, if known, otherwise they should be treated as
nonmailable.
It is true that the law does not expressly authorize the collection of five centavos except through the sale of anti-TB
stamps, but such authority may be implied in so far as it may be necessary to prevent a failure of the undertaking. The
authority given to the Postmaster General to raise funds through the mails must be liberally construed, consistent with the
principle that where the end is required the appropriate means are given.19
The anti-TB stamp is a distinctive stamp which shows on its face not only the amount of the additional charge but also that
of the regular postage. In the case of business reply cards, for instance, it is obvious that to require mailers to affix the antiTB stamp on their cards would be to make them pay much more because the cards likewise bear the amount of the
regular postage.
It is likewise true that the statute does not provide for the disposition of mails which do not bear the anti-TB stamp, but a
declaration therein that "no mail matter shall be accepted in the mails unless it bears such semi-postal stamp" is a
declaration that such mail matter is nonmailable within the meaning of section 1952 of the Administrative Code.
Administrative Order 7 of the Postmaster General is but a restatement of the law for the guidance of postal officials and
employees. As for Administrative Order 9, we have already said that in listing the offices and entities of the Government
exempt from the payment of the stamp, the respondent Postmaster General merely observed an established principle,
namely, that the Government is exempt from taxation.
81

ACCORDINGLY, the judgment a quo is reversed, and the complaint is dismissed, without pronouncement as to costs.
Concepcion, C.J., Reyes,
Zaldivar, J., is on leave.

J.B.L.,

Dizon,

Makalintal,

Sanchez,

Angeles

and

Capistrano,

JJ., concur.

PLANTERS PRODUCTS, INC., G.R. No. 166006

Petitioner,
Present:
YNARES-SANTIAGO, J.,
Chairperson,
AUSTRIA-MARTINEZ,
- versus - CHICO-NAZARIO,
NACHURA, and
REYES, JJ.
Promulgated:
FERTIPHIL CORPORATION,
Respondent. March 14, 2008
x--------------------------------------------------x
DECISION
REYES, R.T., J.:
THE Regional Trial Courts (RTC) have the authority and jurisdiction to consider the constitutionality of statutes, executive
orders, presidential decrees and other issuances. The Constitution vests that power not only in the Supreme Court but in
all Regional Trial Courts.
The principle is relevant in this petition for review on certiorari of the Decision[1] of the Court of Appeals (CA)
affirming with modification that of the RTC in Makati City,[2] finding petitioner Planters Products, Inc. (PPI) liable to private
respondent Fertiphil Corporation (Fertiphil) for the levies it paid under Letter of Instruction (LOI) No. 1465.
The Facts
Petitioner PPI and private respondent Fertiphil are private corporations incorporated under Philippine laws.[3] They
are both engaged in the importation and distribution of fertilizers, pesticides and agricultural chemicals.
On June 3, 1985, then President Ferdinand Marcos, exercising his legislative powers, issued LOI No. 1465 which
provided, among others, for the imposition of a capital recovery component (CRC) on the domestic sale of all grades of
fertilizers in thePhilippines.[4] The LOI provides:
3. The Administrator of the Fertilizer Pesticide Authority to include in its fertilizer pricing formula a capital
contribution component of not less than P10 per bag. This capital contribution shall be collected
until adequate capital is raised to make PPI viable. Such capital contribution shall be applied by
FPA to all domestic sales of fertilizers in the Philippines.[5] (Underscoring supplied)
Pursuant to the LOI, Fertiphil paid P10 for every bag of fertilizer it sold in the domestic market to the Fertilizer and
Pesticide Authority (FPA). FPA then remitted the amount collected to the Far East Bank and Trust Company, the depositary
bank of PPI.Fertiphil paid P6,689,144 to FPA from July 8, 1985 to January 24, 1986.[6]

82

After the 1986 Edsa Revolution, FPA voluntarily stopped the imposition of the P10 levy. With the return of
democracy, Fertiphil demanded from PPI a refund of the amounts it paid under LOI No. 1465, but PPI refused to accede to
the demand.[7]
Fertiphil filed a complaint for collection and damages[8] against FPA and PPI with the RTC in Makati. It questioned
the constitutionality of LOI No. 1465 for being unjust, unreasonable, oppressive, invalid and an unlawful imposition that
amounted to a denial of due process of law. [9] Fertiphil alleged that the LOI solely favored PPI, a privately owned
corporation, which used the proceeds to maintain its monopoly of the fertilizer industry.
In its Answer,[10] FPA, through the Solicitor General, countered that the issuance of LOI No. 1465 was a valid
exercise of the police power of the State in ensuring the stability of the fertilizer industry in the country. It also averred that
Fertiphil did not sustain any damage from the LOI because the burden imposed by the levy fell on the ultimate consumer,
not the seller.
RTC Disposition
On November 20, 1991, the RTC rendered judgment in favor of Fertiphil, disposing as follows:
WHEREFORE, in view of the foregoing, the Court hereby renders judgment in favor of the
plaintiff and against the defendant Planters Product, Inc., ordering the latter to pay the former:
1) the sum of P6,698,144.00 with interest at 12% from the time of judicial demand;
2) the sum of P100,000 as attorneys fees;
3) the cost of suit.
SO ORDERED.[11]
Ruling that the imposition of the P10 CRC was an exercise of the States inherent power of taxation, the RTC invalidated
the levy for violating the basic principle that taxes can only be levied for public purpose, viz.:
It is apparent that the imposition of P10 per fertilizer bag sold in the country by LOI 1465 is
purportedly in the exercise of the power of taxation. It is a settled principle that the power of taxation by
the state is plenary. Comprehensive and supreme, the principal check upon its abuse resting in the
responsibility of the members of the legislature to their constituents. However, there are two kinds of
limitations on the power of taxation: the inherent limitations and the constitutional limitations.
One of the inherent limitations is that a tax may be levied only for public purposes:
The power to tax can be resorted to only for a constitutionally valid public purpose. By
the same token, taxes may not be levied for purely private purposes, for building up of
private fortunes, or for the redress of private wrongs. They cannot be levied for the
improvement of private property, or for the benefit, and promotion of private
enterprises, except where the aid is incident to the public benefit. It is well-settled
principle of constitutional law that no general tax can be levied except for the purpose
of raising money which is to be expended for public use. Funds cannot be exacted
under the guise of taxation to promote a purpose that is not of public interest. Without
such limitation, the power to tax could be exercised or employed as an authority to
destroy the economy of the people. A tax, however, is not held void on the ground of
want of public interest unless the want of such interest is clear. (71 Am. Jur. pp. 371372)
In the case at bar, the plaintiff paid the amount of P6,698,144.00 to the Fertilizer and Pesticide Authority
pursuant to the P10 per bag of fertilizer sold imposition under LOI 1465 which, in turn, remitted the
83

amount to the defendant Planters Products, Inc. thru the latters depository bank, Far East Bank and
Trust Co. Thus, by virtue of LOI 1465 the plaintiff, Fertiphil Corporation, which is a private domestic
corporation, became poorer by the amount of P6,698,144.00 and the defendant, Planters Product, Inc.,
another private domestic corporation, became richer by the amount of P6,698,144.00.
Tested by the standards of constitutionality as set forth in the afore-quoted jurisprudence, it is quite
evident that LOI 1465 insofar as it imposes the amount of P10 per fertilizer bag sold in the country and
orders that the said amount should go to the defendant Planters Product, Inc. is unlawful because it
violates the mandate that a tax can be levied only for a public purpose and not to benefit, aid and
promote a private enterprise such as Planters Product, Inc.[12]
PPI moved for reconsideration but its motion was denied. [13] PPI then filed a notice of appeal with the RTC but it failed to
pay the requisite appeal docket fee. In a separate but related proceeding, this Court [14] allowed the appeal of PPI and
remanded the case to the CA for proper disposition.
CA Decision
On November 28, 2003, the CA handed down its decision affirming with modification that of the RTC, with the
following fallo:
IN VIEW OF ALL THE FOREGOING, the decision appealed from is hereby AFFIRMED, subject
to the MODIFICATION that the award of attorneys fees is hereby DELETED.[15]
In affirming the RTC decision, the CA ruled that the lis mota of the complaint for collection was the constitutionality of LOI
No. 1465, thus:
The question then is whether it was proper for the trial court to exercise its power to judicially determine
the constitutionality of the subject statute in the instant case.
As a rule, where the controversy can be settled on other grounds, the courts will not resolve the
constitutionality of a law (Lim v. Pacquing, 240 SCRA 649 [1995]). The policy of the courts is to avoid
ruling on constitutional questions and to presume that the acts of political departments are valid, absent
a clear and unmistakable showing to the contrary.
However, the courts are not precluded from exercising such power when the following requisites are
obtaining in a controversy before it:First, there must be before the court an actual case calling for the
exercise of judicial review. Second, the question must be ripe for adjudication. Third, the person
challenging the validity of the act must have standing to challenge. Fourth, the question of
constitutionality must have been raised at the earliest opportunity; and lastly, the issue of constitutionality
must be the very lis mota of the case (Integrated Bar of the Philippines v. Zamora, 338 SCRA 81 [2000]).
Indisputably, the present case was primarily instituted for collection and damages. However, a perusal of the
complaint also reveals that the instant action is founded on the claim that the levy imposed was an unlawful and
unconstitutional special assessment.Consequently, the requisite that the constitutionality of the law in question be
the very lis mota of the case is present, making it proper for the trial court to rule on the constitutionality of LOI
1465.[16]
The CA held that even on the assumption that LOI No. 1465 was issued under the police power of the state, it is still
unconstitutional because it did not promote public welfare. The CA explained:
In declaring LOI 1465 unconstitutional, the trial court held that the levy imposed under the said
law was an invalid exercise of the States power of taxation inasmuch as it violated the inherent and
constitutional prescription that taxes be levied only for public purposes. It reasoned out that the amount
84

collected under the levy was remitted to the depository bank of PPI, which the latter used to advance its
private interest.
On the other hand, appellant submits that the subject statutes passage was a valid exercise of police
power. In addition, it disputes the courta quos findings arguing that the collections under LOI 1465 was
for the benefit of Planters Foundation, Incorporated (PFI), a foundation created by law to hold in trust for
millions of farmers, the stock ownership of PPI.
Of the three fundamental powers of the State, the exercise of police power has been characterized as
the most essential, insistent and the least limitable of powers, extending as it does to all the great public
needs. It may be exercised as long as the activity or the property sought to be regulated has some
relevance to public welfare (Constitutional Law, by Isagani A. Cruz, p. 38, 1995 Edition).
Vast as the power is, however, it must be exercised within the limits set by the Constitution, which
requires the concurrence of a lawful subject and a lawful method. Thus, our courts have laid down the
test to determine the validity of a police measure as follows: (1) the interests of the public generally, as
distinguished from those of a particular class, requires its exercise; and (2) the means employed are
reasonably necessary for the accomplishment of the purpose and not unduly oppressive upon
individuals (National Development Company v. Philippine Veterans Bank, 192 SCRA 257 [1990]).
It is upon applying this established tests that We sustain the trial courts holding LOI 1465
unconstitutional. To be sure, ensuring the continued supply and distribution of fertilizer in the country is
an undertaking imbued with public interest. However, the method by which LOI 1465 sought to achieve
this is by no means a measure that will promote the public welfare. The governments commitment to
support the successful rehabilitation and continued viability of PPI, a private corporation, is an
unmistakable attempt to mask the subject statutes impartiality. There is no way to treat the self-interest
of a favored entity, like PPI, as identical with the general interest of the countrys farmers or even the
Filipino people in general. Well to stress, substantive due process exacts fairness and equal protection
disallows distinction where none is needed. When a statutes public purpose is spoiled by private
interest, the use of police power becomes a travesty which must be struck down for being an arbitrary
exercise of government power. To rule in favor of appellant would contravene the general principle that
revenues derived from taxes cannot be used for purely private purposes or for the exclusive benefit of
private individuals.[17]
The CA did not accept PPIs claim that the levy imposed under LOI No. 1465 was for the benefit of Planters Foundation,
Inc., a foundation created to hold in trust the stock ownership of PPI. The CA stated:
Appellant next claims that the collections under LOI 1465 was for the benefit of Planters Foundation,
Incorporated (PFI), a foundation created by law to hold in trust for millions of farmers, the stock
ownership of PFI on the strength of Letter of Undertaking (LOU) issued by then Prime Minister Cesar
Virata on April 18, 1985 and affirmed by the Secretary of Justice in an Opinion dated October 12, 1987,
to wit:
2. Upon the effective date of this Letter of Undertaking, the Republic shall cause FPA
to include in its fertilizer pricing formula a capital recovery component, the proceeds of
which will be used initially for the purpose of funding the unpaid portion of the
outstanding capital stock of Planters presently held in trust by Planters Foundation,
Inc. (Planters Foundation), which unpaid capital is estimated at approximately P206
million (subject to validation by Planters and Planters Foundation) (such unpaid
portion of the outstanding capital stock of Planters being hereafter referred to as the
Unpaid Capital), and subsequently for such capital increases as may be required for
the continuing viability of Planters.
85

The capital recovery component shall be in the minimum amount of P10 per bag,
which will be added to the price of all domestic sales of fertilizer in the Philippines by
any importer and/or fertilizer mother company. In this connection, the Republic hereby
acknowledges that the advances by Planters to Planters Foundation which were
applied to the payment of the Planters shares now held in trust by Planters
Foundation, have been assigned to, among others, the Creditors.Accordingly, the
Republic, through FPA, hereby agrees to deposit the proceeds of the capital recovery
component in the special trust account designated in the notice dated April 2, 1985,
addressed by counsel for the Creditors to Planters Foundation. Such proceeds shall
be deposited by FPA on or before the 15th day of each month.
The capital recovery component shall continue to be charged and collected until
payment in full of (a) the Unpaid Capital and/or (b) any shortfall in the payment of the
Subsidy Receivables, (c) any carrying cost accruing from the date hereof on the
amounts which may be outstanding from time to time of the Unpaid Capital and/or the
Subsidy Receivables and (d) the capital increases contemplated in paragraph 2
hereof. For the purpose of the foregoing clause (c), the carrying cost shall be at such
rate as will represent the full and reasonable cost to Planters of servicing its debts,
taking into account both its peso and foreign currency-denominated obligations.
(Records, pp. 42-43)
Appellants proposition is open to question, to say the least. The LOU issued by then Prime Minister
Virata taken together with the Justice Secretarys Opinion does not preponderantly demonstrate that the
collections made were held in trust in favor of millions of farmers.Unfortunately for appellant, in the
absence of sufficient evidence to establish its claims, this Court is constrained to rely on what is explicitly
provided in LOI 1465 that one of the primary aims in imposing the levy is to support the successful
rehabilitation and continued viability of PPI.[18]
PPI moved for reconsideration but its motion was denied.[19] It then filed the present petition with this Court.
Issues
Petitioner PPI raises four issues for Our consideration, viz.:
I
THE CONSTITUTIONALITY OF LOI 1465 CANNOT BE COLLATERALLY ATTACKED AND BE
DECREED VIA A DEFAULT JUDGMENT IN A CASE FILED FOR COLLECTION AND DAMAGES
WHERE THE ISSUE OF CONSTITUTIONALITY IS NOT THE VERY LIS MOTA OF THE
CASE. NEITHER CAN LOI 1465 BE CHALLENGED BY ANY PERSON OR ENTITY WHICH HASNO
STANDING TO DO SO.
II
LOI 1465, BEING A LAW IMPLEMENTED FOR THE PURPOSE OF ASSURING THE FERTILIZER
SUPPLY AND DISTRIBUTION IN THE COUNTRY, AND FOR BENEFITING A FOUNDATION CREATED
BY LAW TO HOLD IN TRUST FOR MILLIONS OF FARMERS THEIR STOCK OWNERSHIP IN
PPI CONSTITUTES A VALID LEGISLATION PURSUANT TO THE EXERCISE OF
TAXATION AND POLICE POWER FOR PUBLIC PURPOSES.
III
THE AMOUNT COLLECTED UNDER THE CAPITAL RECOVERY COMPONENT WAS REMITTED TO
THE
GOVERNMENT,AND BECAME
GOVERNMENT
FUNDS
PURSUANT
TO
AN
EFFECTIVE AND VALIDLY ENACTED LAW WHICH IMPOSED DUTIES AND CONFERRED RIGHTS
BY VIRTUE OF THE PRINCIPLE OF OPERATIVE FACT PRIOR TO ANY DECLARATION OF
UNCONSTITUTIONALITY OF LOI 1465.
86

IV
THE PRINCIPLE OF UNJUST VEXATION (SHOULD BE ENRICHMENT) FINDS NO APPLICATION IN
THE INSTANT CASE.[20](Underscoring supplied)
Our Ruling
We shall first tackle the procedural issues of locus standi and the jurisdiction of the RTC to resolve constitutional issues.
Fertiphil has locus standi because it suffered direct injury;
doctrine of standing is a mere procedural technicality which
may be waived.
PPI argues that Fertiphil has no locus standi to question the constitutionality of LOI No. 1465 because it does not
have a personal and substantial interest in the case or will sustain direct injury as a result of its enforcement. [21] It asserts
that Fertiphil did not suffer any damage from the CRC imposition because incidence of the levy fell on the ultimate
consumer or the farmers themselves, not on the seller fertilizer company.[22]
We cannot agree. The doctrine of locus standi or the right of appearance in a court of justice has been
adequately discussed by this Court in a catena of cases. Succinctly put, the doctrine requires a litigant to have a material
interest in the outcome of a case.In private suits, locus standi requires a litigant to be a real party in interest, which is
defined as the party who stands to be benefited or injured by the judgment in the suit or the party entitled to the avails of
the suit.[23]
In public suits, this Court recognizes the difficulty of applying the doctrine especially when plaintiff asserts a public
right on behalf of the general public because of conflicting public policy issues. [24] On one end, there is the right of the
ordinary citizen to petition the courts to be freed from unlawful government intrusion and illegal official action. At the other
end, there is the public policy precluding excessive judicial interference in official acts, which may unnecessarily hinder the
delivery of basic public services.
In this jurisdiction, We have adopted the direct injury test to determine locus standi in public suits. In People v.
Vera,[25] it was held that a person who impugns the validity of a statute must have a personal and substantial interest in the
case such that he has sustained, or will sustain direct injury as a result. The direct injury test in public suits is similar to the
real party in interest rule for private suits under Section 2, Rule 3 of the 1997 Rules of Civil Procedure.[26]
Recognizing that a strict application of the direct injury test may hamper public interest, this Court relaxed the
requirement in cases of transcendental importance or with far reaching implications. Being a mere procedural technicality,
it has also been held thatlocus standi may be waived in the public interest.[27]
Whether or not the complaint for collection is characterized as a private or public suit, Fertiphil has locus standi to
file it.Fertiphil suffered a direct injury from the enforcement of LOI No. 1465. It was required, and it did pay, the P10 levy
imposed for every bag of fertilizer sold on the domestic market. It may be true that Fertiphil has passed some or all of
the levy to the ultimate consumer, but that does not disqualify it from attacking the constitutionality of the LOI or from
seeking a refund. As seller, it bore the ultimate burden of paying the levy. It faced the possibility of severe sanctions for
failure to pay the levy. The fact of payment is sufficient injury to Fertiphil.
Moreover, Fertiphil suffered harm from the enforcement of the LOI because it was compelled to factor in its
product the levy.The levy certainly rendered the fertilizer products of Fertiphil and other domestic sellers much more
expensive. The harm to their business consists not only in fewer clients because of the increased price, but also in
adopting alternative corporate strategies to meet the demands of LOI No. 1465. Fertiphil and other fertilizer sellers may
have shouldered all or part of the levy just to be competitive in the market. The harm occasioned on the business of
Fertiphil is sufficient injury for purposes of locus standi.
87

Even assuming arguendo that there is no direct injury, We find that the liberal policy consistently adopted by this
Court onlocus standi must apply. The issues raised by Fertiphil are of paramount public importance. It involves not only the
constitutionality of a tax law but, more importantly, the use of taxes for public purpose. Former President Marcos issued
LOI No. 1465 with the intention of rehabilitating an ailing private company. This is clear from the text of the LOI. PPI is
expressly named in the LOI as the direct beneficiary of the levy. Worse, the levy was made dependent and conditional
upon PPI becoming financially viable. The LOI provided that the capital contribution shall be collected until adequate
capital is raised to make PPI viable.
The constitutionality of the levy is already in doubt on a plain reading of the statute. It is Our constitutional duty to squarely
resolve the issue as the final arbiter of all justiciable controversies. The doctrine of standing, being a mere procedural
technicality, should be waived, if at all, to adequately thresh out an important constitutional issue.
RTC may resolve constitutional issues; the constitutional issue
was adequately raised in the complaint; it is the lis mota of the
case.
PPI insists that the RTC and the CA erred in ruling on the constitutionality of the LOI. It asserts that the
constitutionality of the LOI cannot be collaterally attacked in a complaint for collection. [28] Alternatively, the resolution of the
constitutional issue is not necessary for a determination of the complaint for collection.[29]
Fertiphil counters that the constitutionality of the LOI was adequately pleaded in its complaint. It claims that the
constitutionality of LOI No. 1465 is the very lis mota of the case because the trial court cannot determine its claim without
resolving the issue.[30]
It is settled that the RTC has jurisdiction to resolve the constitutionality of a statute, presidential decree or an
executive order.This is clear from Section 5, Article VIII of the 1987 Constitution, which provides:
SECTION 5. The Supreme Court shall have the following powers:
xxxx
(2) Review, revise, reverse, modify, or affirm on appeal or certiorari, as the law or the Rules of
Court may provide, final judgments and orders of lower courts in:
(a) All cases in which the constitutionality or validity of any treaty,
international or executive agreement, law, presidential decree, proclamation, order,
instruction, ordinance, or regulation is in question. (Underscoring supplied)
In Mirasol v. Court of Appeals,[31] this Court recognized the power of the RTC to resolve constitutional issues, thus:
On the first issue. It is settled that Regional Trial Courts have the authority and jurisdiction to
consider the constitutionality of a statute, presidential decree, or executive order. The Constitution vests
the power of judicial review or the power to declare a law, treaty, international or executive agreement,
presidential decree, order, instruction, ordinance, or regulation not only in this Court, but in all Regional
Trial Courts.[32]
In the recent case of Equi-Asia Placement, Inc. v. Department of Foreign Affairs,[33] this Court reiterated:
There is no denying that regular courts have jurisdiction over cases involving the validity or
constitutionality of a rule or regulation issued by administrative agencies. Such jurisdiction, however, is
not limited to the Court of Appeals or to this Court alone for even the regional trial courts can take
cognizance of actions assailing a specific rule or set of rules promulgated by administrative
88

bodies. Indeed, the Constitution vests the power of judicial review or the power to declare a law, treaty,
international or executive agreement, presidential decree, order, instruction, ordinance, or regulation in
the courts, including the regional trial courts.[34]
Judicial review of official acts on the ground of unconstitutionality may be sought or availed of through any of the
actions cognizable by courts of justice, not necessarily in a suit for declaratory relief. Such review may be had in criminal
actions, as inPeople v. Ferrer[35] involving the constitutionality of the now defunct Anti-Subversion law, or in ordinary
actions, as in Krivenko v. Register of Deeds[36] involving the constitutionality of laws prohibiting aliens from acquiring public
lands. The constitutional issue, however, (a) must be properly raised and presented in the case, and (b) its resolution is
necessary to a determination of the case, i.e., the issue of constitutionality must be the very lis mota presented.[37]
Contrary to PPIs claim, the constitutionality of LOI No. 1465 was properly and adequately raised in the complaint
for collection filed with the RTC. The pertinent portions of the complaint allege:
6. The CRC of P10 per bag levied under LOI 1465 on domestic sales of all grades of fertilizer in
the Philippines, is unlawful, unjust, uncalled for, unreasonable, inequitable and oppressive because:
xxxx
(c) It favors only one private domestic corporation, i.e., defendant PPPI, and
imposed at the expense and disadvantage of the other fertilizer importers/distributors
who were themselves in tight business situation and were then exerting all efforts and
maximizing management and marketing skills to remain viable;
xxxx
(e) It was a glaring example of crony capitalism, a forced program through
which the PPI, having been presumptuously masqueraded as the fertilizer industry
itself, was the sole and anointed beneficiary;
7. The CRC was an unlawful; and unconstitutional special assessment and its imposition is
tantamount to illegal exaction amounting to a denial of due process since the persons of entities which
had to bear the burden of paying the CRC derived no benefit therefrom; that on the contrary it was used
by PPI in trying to regain its former despicable monopoly of the fertilizer industry to the detriment of other
distributors and importers.[38] (Underscoring supplied)
The constitutionality of LOI No. 1465 is also the very lis mota of the complaint for collection. Fertiphil filed the
complaint to compel PPI to refund the levies paid under the statute on the ground that the law imposing the levy is
unconstitutional. The thesis is that an unconstitutional law is void. It has no legal effect. Being void, Fertiphil had no legal
obligation to pay the levy. Necessarily, all levies duly paid pursuant to an unconstitutional law should be refunded under the
civil code principle against unjust enrichment.The refund is a mere consequence of the law being declared
unconstitutional. The RTC surely cannot order PPI to refund Fertiphil if it does not declare the LOI unconstitutional. It is the
unconstitutionality of the LOI which triggers the refund. The issue of constitutionality is the very lis mota of the complaint
with the RTC.
The P10 levy under LOI No. 1465 is an exercise of the power
of taxation.
At any rate, the Court holds that the RTC and the CA did not err in ruling against the constitutionality of the LOI.
PPI insists that LOI No. 1465 is a valid exercise either of the police power or the power of taxation. It claims that
the LOI was implemented for the purpose of assuring the fertilizer supply and distribution in the country and for benefiting
a foundation created by law to hold in trust for millions of farmers their stock ownership in PPI.
89

Fertiphil counters that the LOI is unconstitutional because it was enacted to give benefit to a private
company. The levy was imposed to pay the corporate debt of PPI. Fertiphil also argues that, even if the LOI is enacted
under the police power, it is still unconstitutional because it did not promote the general welfare of the people or public
interest.
Police power and the power of taxation are inherent powers of the State. These powers are distinct and have
different tests for validity. Police power is the power of the State to enact legislation that may interfere with personal liberty
or property in order to promote the general welfare, [39] while the power of taxation is the power to levy taxes to be used for
public purpose. The main purpose of police power is the regulation of a behavior or conduct, while taxation is revenue
generation. The lawful subjects and lawful means tests are used to determine the validity of a law enacted under the police
power.[40] The power of taxation, on the other hand, is circumscribed by inherent and constitutional limitations.
We agree with the RTC that the imposition of the levy was an exercise by the State of its taxation power. While it
is true that the power of taxation can be used as an implement of police power,[41] the primary purpose of the levy is
revenue generation. If the purpose is primarily revenue, or if revenue is, at least, one of the real and substantial purposes,
then the exaction is properly called a tax.[42]
In Philippine Airlines, Inc. v. Edu,[43] it was held that the imposition of a vehicle registration fee is not an exercise
by the State of its police power, but of its taxation power, thus:
It is clear from the provisions of Section 73 of Commonwealth Act 123 and Section 61 of the
Land Transportation and Traffic Code that the legislative intent and purpose behind the law requiring
owners of vehicles to pay for their registration is mainly to raise funds for the construction and
maintenance of highways and to a much lesser degree, pay for the operating expenses of the
administering agency. x x x Fees may be properly regarded as taxes even though they also serve as an
instrument of regulation.
Taxation may be made the implement of the state's police power (Lutz v. Araneta, 98 Phil.
148). If the purpose is primarily revenue, or if revenue is, at least, one of the real and substantial
purposes, then the exaction is properly called a tax. Such is the case of motor vehicle registration
fees. The same provision appears as Section 59(b) in the Land Transportation Code. It is patent
therefrom that the legislators had in mind a regulatory tax as the law refers to the imposition on the
registration, operation or ownership of a motor vehicle as a tax or fee. x x x Simply put, if the exaction
under Rep. Act 4136 were merely a regulatory fee, the imposition in Rep. Act 5448 need not be an
additional tax. Rep. Act 4136 also speaks of other fees such as the special permit fees for certain types
of motor vehicles (Sec. 10) and additional fees for change of registration (Sec. 11). These are not to be
understood as taxes because such fees are very minimal to be revenue-raising. Thus, they are not
mentioned by Sec. 59(b) of the Code as taxes like the motor vehicle registration fee and chauffeurs
license fee. Such fees are to go into the expenditures of the Land Transportation Commission as
provided for in the last proviso of Sec. 61.[44] (Underscoring supplied)
The P10 levy under LOI No. 1465 is too excessive to serve a mere regulatory purpose. The levy, no doubt, was a
big burden on the seller or the ultimate consumer. It increased the price of a bag of fertilizer by as much as five percent.
[45]
A plain reading of the LOI also supports the conclusion that the levy was for revenue generation. The LOI expressly
provided that the levy was imposed until adequate capital is raised to make PPI viable.
Taxes are exacted only for a public purpose. The P10 levy is
unconstitutional because it was not for a public purpose. The
levy was imposed to give undue benefit to PPI.
An inherent limitation on the power of taxation is public purpose. Taxes are exacted only for a public
purpose. They cannot be used for purely private purposes or for the exclusive benefit of private persons. [46] The reason for
this is simple. The power to tax exists for the general welfare; hence, implicit in its power is the limitation that it should be
90

used only for a public purpose. It would be a robbery for the State to tax its citizens and use the funds generated for a
private purpose. As an old United States case bluntly put it: To lay with one hand, the power of the government on the
property of the citizen, and with the other to bestow it upon favored individuals to aid private enterprises and build up
private fortunes, is nonetheless a robbery because it is done under the forms of law and is called taxation.[47]
The term public purpose is not defined. It is an elastic concept that can be hammered to fit modern
standards. Jurisprudence states that public purpose should be given a broad interpretation. It does not only pertain to
those purposes which are traditionally viewed as essentially government functions, such as building roads and delivery of
basic services, but also includes those purposes designed to promote social justice. Thus, public money may now be used
for the relocation of illegal settlers, low-cost housing and urban or agrarian reform.
While the categories of what may constitute a public purpose are continually expanding in light of the expansion
of government functions, the inherent requirement that taxes can only be exacted for a public purpose still stands. Public
purpose is the heart of a tax law. When a tax law is only a mask to exact funds from the public when its true intent is to
give undue benefit and advantage to a private enterprise, that law will not satisfy the requirement of public purpose.
The purpose of a law is evident from its text or inferable from other secondary sources. Here, We agree with
the RTC and that CA that the levy imposed under LOI No. 1465 was not for a public purpose.
First, the LOI expressly provided that the levy be imposed to benefit PPI, a private company. The purpose is
explicit from Clause 3 of the law, thus:
3. The Administrator of the Fertilizer Pesticide Authority to include in its fertilizer pricing formula a capital
contribution component of not less than P10 per bag. This capital contribution shall be collected
until adequate capital is raised to make PPI viable. Such capital contribution shall be applied by
FPA to all domestic sales of fertilizers in the Philippines.[48] (Underscoring supplied)

It is a basic rule of statutory construction that the text of a statute should be given a literal meaning. In this case,
the text of the LOI is plain that the levy was imposed in order to raise capital for PPI. The framers of the LOI did not even
hide the insidious purpose of the law. They were cavalier enough to name PPI as the ultimate beneficiary of the taxes
levied under the LOI. We find it utterly repulsive that a tax law would expressly name a private company as the ultimate
beneficiary of the taxes to be levied from the public. This is a clear case of crony capitalism.
Second, the LOI provides that the imposition of the P10 levy was conditional and dependent upon PPI becoming
financially viable. This suggests that the levy was actually imposed to benefit PPI. The LOI notably does not fix a maximum
amount when PPI is deemed financially viable. Worse, the liability of Fertiphil and other domestic sellers of fertilizer to pay
the levy is made indefinite. They are required to continuously pay the levy until adequate capital is raised for PPI.
Third, the RTC and the CA held that the levies paid under the LOI were directly remitted and deposited by FPA to
Far East Bank and Trust Company, the depositary bank of PPI. [49] This proves that PPI benefited from the LOI. It is also
proves that the main purpose of the law was to give undue benefit and advantage to PPI.
Fourth, the levy was used to pay the corporate debts of PPI. A reading of the Letter of
Understanding[50] dated May 18, 1985signed by then Prime Minister Cesar Virata reveals that PPI was in deep financial
problem because of its huge corporate debts.There were pending petitions for rehabilitation against PPI before the
Securities and Exchange Commission. The government guaranteed payment of PPIs debts to its foreign creditors. To fund
the payment, President Marcos issued LOI No. 1465. The pertinent portions of the letter of understanding read:
Republic of the Philippines
Office of the Prime Minister
Manila
91

LETTER OF UNDERTAKING
May 18, 1985
TO: THE BANKING AND FINANCIAL INSTITUTIONS
LISTED IN ANNEX A HERETO WHICH ARE
CREDITORS (COLLECTIVELY, THE CREDITORS)
OF PLANTERS PRODUCTS, INC. (PLANTERS)
Gentlemen:
This has reference to Planters which is the principal importer and distributor of fertilizer, pesticides and
agricultural chemicals in the Philippines. As regards Planters, the Philippine Government confirms its
awareness of the following: (1) that Planters has outstanding obligations in foreign currency and/or
pesos, to the Creditors, (2) that Planters is currently experiencing financial difficulties, and (3) thatthere
are presently pending with the Securities and Exchange Commission of the Philippines a petition filed at
Planters own behest for the suspension of payment of all its obligations, and a separate petition filed by
Manufacturers Hanover Trust Company, Manila Offshore Branch for the appointment of a rehabilitation
receiver for Planters.
In connection with the foregoing, the Republic of the Philippines (the Republic) confirms that it considers
and continues to consider Planters as a major fertilizer distributor. Accordingly, for and in consideration
of your expressed willingness to consider and participate in the effort to rehabilitate Planters, the
Republic hereby manifests its full and unqualified support of the successful rehabilitation and continuing
viability of Planters, and to that end, hereby binds and obligates itself to the creditors and Planters, as
follows:
xxxx
2. Upon the effective date of this Letter of Undertaking, the Republic shall cause FPA to include
in its fertilizer pricing formula a capital recovery component, the proceeds of which will be used initially
for the purpose of funding the unpaid portion of the outstanding capital stock of Planters presently held
in trust by Planters Foundation, Inc. (Planters Foundation), which unpaid capital is estimated at
approximately P206 million (subject to validation by Planters and Planters Foundation) such unpaid
portion of the outstanding capital stock of Planters being hereafter referred to as the Unpaid Capital),
and subsequently for such capital increases as may be required for the continuing viability of Planters.
xxxx
The capital recovery component shall continue to be charged and collected until payment in full
of (a) the Unpaid Capital and/or (b) any shortfall in the payment of the Subsidy Receivables, (c) any
carrying cost accruing from the date hereof on the amounts which may be outstanding from time to time
of the Unpaid Capital and/or the Subsidy Receivables, and (d) the capital increases contemplated in
paragraph 2 hereof. For the purpose of the foregoing clause (c), the carrying cost shall be at such rate
as will represent the full and reasonable cost to Planters of servicing its debts, taking into account both
its peso and foreign currency-denominated obligations.
REPUBLIC OF THE PHILIPPINES
By:
(signed)
CESAR E. A. VIRATA
Prime Minister and Minister of Finance[51]
92

It is clear from the Letter of Understanding that the levy was imposed precisely to pay the corporate debts of
PPI. We cannot agree with PPI that the levy was imposed to ensure the stability of the fertilizer industry in the country. The
letter of understanding and the plain text of the LOI clearly indicate that the levy was exacted for the benefit of a private
corporation.
All told, the RTC and the CA did not err in holding that the levy imposed under LOI No. 1465 was not for a public
purpose.LOI No. 1465 failed to comply with the public purpose requirement for tax laws.
The LOI is still unconstitutional even if enacted under the
police power; it did not promote public interest.
Even if We consider LOI No. 1695 enacted under the police power of the State, it would still be invalid for failing to comply
with the test of lawful subjects and lawful means. Jurisprudence states the test as follows: (1) the interest of the public
generally, as distinguished from those of particular class, requires its exercise; and (2) the means employed are
reasonably necessary for the accomplishment of the purpose and not unduly oppressive upon individuals.[52]
For the same reasons as discussed, LOI No. 1695 is invalid because it did not promote public interest. The law was
enacted to give undue advantage to a private corporation. We quote with approval the CA ratiocination on this point, thus:
It is upon applying this established tests that We sustain the trial courts holding LOI 1465
unconstitutional. To be sure, ensuring the continued supply and distribution of fertilizer in the country is
an undertaking imbued with public interest. However, the method by which LOI 1465 sought to achieve
this is by no means a measure that will promote the public welfare. The governments commitment to
support the successful rehabilitation and continued viability of PPI, a private corporation, is an
unmistakable attempt to mask the subject statutes impartiality. There is no way to treat the self-interest
of a favored entity, like PPI, as identical with the general interest of the countrys farmers or even the
Filipino people in general. Well to stress, substantive due process exacts fairness and equal protection
disallows distinction where none is needed. When a statutes public purpose is spoiled by private
interest, the use of police power becomes a travesty which must be struck down for being an arbitrary
exercise of government power. To rule in favor of appellant would contravene the general principle that
revenues derived from taxes cannot be used for purely private purposes or for the exclusive benefit of
private individuals. (Underscoring supplied)
The general rule is that an unconstitutional law is void; the
doctrine of operative fact is inapplicable.
PPI also argues that Fertiphil cannot seek a refund even if LOI No. 1465 is declared unconstitutional. It banks on
the doctrine of operative fact, which provides that an unconstitutional law has an effect before being declared
unconstitutional. PPI wants to retain the levies paid under LOI No. 1465 even if it is subsequently declared to be
unconstitutional.
We cannot agree. It is settled that no question, issue or argument will be entertained on appeal, unless it has
been raised in the court a quo.[53] PPI did not raise the applicability of the doctrine of operative fact with the RTC and the
CA. It cannot belatedly raise the issue with Us in order to extricate itself from the dire effects of an unconstitutional law.
At any rate, We find the doctrine inapplicable. The general rule is that an unconstitutional law is void. It produces
no rights, imposes no duties and affords no protection. It has no legal effect. It is, in legal contemplation, inoperative as if it
has not been passed.[54] Being void, Fertiphil is not required to pay the levy. All levies paid should be refunded in
accordance with the general civil code principle against unjust enrichment. The general rule is supported by Article 7 of the
Civil Code, which provides:
ART. 7. Laws are repealed only by subsequent ones, and their violation or non-observance
shall not be excused by disuse or custom or practice to the contrary.
93

When the courts declare a law to be inconsistent with the Constitution, the former shall be
void and the latter shall govern.
The doctrine of operative fact, as an exception to the general rule, only applies as a matter of equity and fair play.
It nullifies the effects of an unconstitutional law by recognizing that the existence of a statute prior to a determination of
unconstitutionality is an operative fact and may have consequences which cannot always be ignored. The past cannot
always be erased by a new judicial declaration.[56]
[55]

The doctrine is applicable when a declaration of unconstitutionality will impose an undue burden on those who
have relied on the invalid law. Thus, it was applied to a criminal case when a declaration of unconstitutionality would put
the accused in double jeopardy[57] or would put in limbo the acts done by a municipality in reliance upon a law creating it.[58]
Here, We do not find anything iniquitous in ordering PPI to refund the amounts paid by Fertiphil under LOI No.
1465. It unduly benefited from the levy. It was proven during the trial that the levies paid were remitted and deposited to its
bank account.Quite the reverse, it would be inequitable and unjust not to order a refund. To do so would unjustly enrich
PPI at the expense of Fertiphil. Article 22 of the Civil Code explicitly provides that every person who, through an act of
performance by another comes into possession of something at the expense of the latter without just or legal ground shall
return the same to him. We cannot allow PPI to profit from an unconstitutional law. Justice and equity dictate that PPI must
refund the amounts paid by Fertiphil.
WHEREFORE, the petition is DENIED. The Court of Appeals Decision dated November 28, 2003 is AFFIRMED.
SO ORDERED.
G.R. No. 101273 July 3, 1992 : CONGRESSMAN ENRIQUE T. GARCIA (Second District of Bataan), petitioner, vs.
THE EXECUTIVE SECRETARY, THE COMMISSIONER OF CUSTOMS, THE NATIONAL ECONOMIC AND
DEVELOPMENT AUTHORITY, THE TARIFF COMMISSION, THE SECRETARY OF FINANCE, and THE ENERGY
REGULATORY BOARD, respondents.
FELICIANO, J.:
On 27 November 1990, the President issued Executive Order No. 438 which imposed, in addition to any other duties,
taxes and charges imposed by law on all articles imported into the Philippines, an additional duty of five percent (5%) ad
valorem. This additional duty was imposed across the board on all imported articles, including crude oil and other oil
products imported into the Philippines. This additional duty was subsequently increased from five percent (5%) ad
valorem to nine percent (9%) ad valorem by the promulgation of Executive Order No. 443, dated 3 January 1991.
On 24 July 1991, the Department of Finance requested the Tariff Commission to initiate the process required by the Tariff
and Customs Code for the imposition of a specific levy on crude oil and other petroleum products, covered by HS Heading
Nos. 27.09, 27.10 and 27.11 of Section 104 of the Tariff and Customs Code as amended. Accordingly, the Tariff
Commission, following the procedure set forth in Section 401 of the Tariff and Customs Code, scheduled a public hearing
to give interested parties an opportunity to be heard and to present evidence in support of their respective positions.
Meantime, Executive Order No. 475 was issued by the President, on 15 August 1991 reducing the rate of additional duty
on all imported articles from nine percent (9%) to five percent (5%) ad valorem, except in the cases of crude oil and other
oil products which continued to be subject to the additional duty of nine percent (9%) ad valorem.

94

Upon completion of the public hearings, the Tariff Commission submitted to the President a "Report on Special Duty on
Crude Oil and Oil Products" dated 16 August 1991, for consideration and appropriate action. Seven (7) days later, the
President issued Executive Order No. 478, dated 23 August 1991, which levied (in addition to the aforementioned
additional duty of nine percent (9%) ad valorem and all other existing ad valorem duties) a special duty of P0.95 per liter or
P151.05 per barrel of imported crude oil and P1.00 per liter of imported oil products.
In the present Petition for Certiorari, Prohibition and Mandamus, petitioner assails the validity of Executive Orders Nos.
475 and 478. He argues that Executive Orders Nos. 475 and 478 are violative of Section 24, Article VI of the 1987
Constitution which provides as follows:
Sec. 24: All appropriation, revenue or tariff bills, bills authorizing increase of the public debt, bills of local
application, and private bills shall originate exclusively in the House of Representatives, but the Senate may
propose or concur with amendments.
He contends that since the Constitution vests the authority to enact revenue bills in Congress, the President may not
assume such power by issuing Executive Orders Nos. 475 and 478 which are in the nature of revenue-generating
measures.
Petitioner further argues that Executive Orders No. 475 and 478 contravene Section 401 of the Tariff and Customs Code,
which Section authorizes the President, according to petitioner, to increase, reduce or remove tariff duties or to impose
additional duties only when necessary to protect local industries or products but not for the purpose of raising additional
revenue for the government.
Thus, petitioner questions first the constitutionality and second the legality of Executive Orders Nos. 475 and 478, and
asks us to restrain the implementation of those Executive Orders. We will examine these questions in that order.
Before doing so, however, the Court notes that the recent promulgation of Executive Order No. 507 did not render the
instant Petition moot and academic. Executive Order No. 517 which is dated 30 April 1992 provides as follows:
Sec. 1. Lifting of the Additional Duty. The additional duty in the nature of ad valorem imposed on all imported
articles prescribed by the provisions of Executive Order No. 443, as amended, is hereby lifted; Provided,
however, that the selected articles covered by HS Heading Nos. 27.09 and 27.10 of Section 104 of the Tariff and
Customs Code, as amended, subject of Annex "A" hereof, shall continue to be subject to the additional duty of
nine (9%) percent ad valorem.
Under the above quoted provision, crude oil and other oil products continue to be subject to the additional duty of nine
percent (9%) ad valorem under Executive Order No. 475 and to the special duty of P0.95 per liter of imported crude oil and
P1.00 per liter of imported oil products under Executive Order No. 478.
Turning first to the question of constitutionality, under Section 24, Article VI of the Constitution, the enactment of
appropriation, revenue and tariff bills, like all other bills is, of course, within the province of the Legislative rather than the
Executive Department. It does not follow, however, that therefore Executive Orders Nos. 475 and 478, assuming they may
be characterized as revenue measures, are prohibited to the President, that they must be enacted instead by the
Congress of the Philippines. Section 28(2) of Article VI of the Constitution provides as follows:
(2) The Congress may, by law, authorize the President to fix within specified limits, and subject to such limitations
and restrictions as it may impose, tariff rates, import and export quotas, tonage and wharfage dues, and other
95

duties or imposts within the framework of the national development program of the Government. (Emphasis
supplied)
There is thus explicit constitutional permission 1 to Congress to authorize the President "subject to such limitations and
restrictions is [Congress] may impose" to fix "within specific limits" "tariff rates . . . and other duties or imposts . . ."
The relevant congressional statute is the Tariff and Customs Code of the Philippines, and Sections 104 and 401, the
pertinent provisions thereof. These are the provisions which the President explicitly invoked in promulgating Executive
Orders Nos. 475 and 478. Section 104 of the Tariff and Customs Code provides in relevant part:
Sec. 104. All tariff sections, chapters, headings and subheadings and the rates of import duty under Section 104
of Presidential Decree No. 34 and all subsequent amendments issued under Executive Orders and Presidential
Decrees are hereby adopted and form part of this Code.
There shall be levied, collected, and paid upon all imported articles the rates of duty indicated in the Section
under this section except as otherwise specifically provided for in this Code: Provided, that, the maximum rate
shall not exceed one hundred per cent ad valorem.
The rates of duty herein provided or subsequently fixed pursuant to Section Four Hundred One of this Code shall
be subject to periodic investigation by the Tariff Commission and may be revised by the President upon
recommendation of the National Economic and Development Authority.
xxx xxx xxx
(Emphasis supplied)
Section 401 of the same Code needs to be quoted in full:
Sec. 401. Flexible Clause.
a. In the interest of national economy, general welfare and/or national security, and subject to the limitations
herein prescribed, the President, upon recommendation of the National Economic and Development Authority
(hereinafter referred to as NEDA), is hereby empowered: (1) to increase, reduce or remove existing protective
rates of import duty (including any necessary change in classification). The existing rates may be increased or
decreased but in no case shall the reduced rate of import duty be lower than the basic rate of ten (10) per cent ad
valorem, nor shall the increased rate of import duty be higher than a maximum of one hundred (100) per cent ad
valorem; (2) to establish import quota or to ban imports of any commodity, as may be necessary; and (3) to
impose an additional duty on all imports not exceeding ten (10) per cent ad valorem, whenever necessary;
Provided, That upon periodic investigations by the Tariff Commission and recommendation of the NEDA, the
President may cause a gradual reduction of protection levels granted in Section One hundred and four of this
Code, including those subsequently granted pursuant to this section.
b. Before any recommendation is submitted to the President by the NEDA pursuant to the provisions of this
section, except in the imposition of an additional duty not exceeding ten (10) per cent ad valorem, the
Commission shall conduct an investigation in the course of which they shall hold public hearings wherein
interested parties shall be afforded reasonable opportunity to be present, produce evidence and to be heard. The
Commission shall also hear the views and recommendations of any government office, agency or instrumentality
96

concerned. The Commission shall submit their findings and recommendations to the NEDA within thirty (30) days
after the termination of the public hearings.
c. The power of the President to increase or decrease rates of import duty within the limits fixed in subsection "a"
shall include the authority to modify the form of duty. In modifying the form of duty, the corresponding ad
valorem or specific equivalents of the duty with respect to imports from the principal competing foreign country for
the most recent representative period shall be used as bases.
d. The Commissioner of Customs shall regularly furnish the Commission a copy of all customs import entries as
filed in the Bureau of Customs. The Commission or its duly authorized representatives shall have access to, and
the right to copy all liquidated customs import entries and other documents appended thereto as finally filed in the
Commission on Audit.
e. The NEDA shall promulgate rules and regulations necessary to carry out the provisions of this section.
f. Any Order issued by the President pursuant to the provisions of this section shall take effect thirty (30) days
after promulgation, except in the imposition of additional duty not exceeding ten (10) per cent ad valorem which
shall take effect at the discretion of the President. (Emphasis supplied)
Petitioner, however, seeks to avoid the thrust of the delegated authorizations found in Sections 104 and 401 of the Tariff
and Customs Code, by contending that the President is authorized to act under the Tariff and Customs Code only "to
protect local industries and products for the sake of the national economy, general welfare and/or national security." 2 He
goes on to claim that:
E.O. Nos. 478 and 475 having nothing to do whatsoever with the protection of local industries and products for
the sake of national economy, general welfare and/or national security. On the contrary, they work in reverse,
especially as to crude oil, an essential product which we do not have to protect, since we produce only minimal
quantities and have to import the rest of what we need.
These Executive Orders are avowedly solely to enable the government to raise government finances, contrary to
Sections 24 and 28 (2) of Article VI of the Constitution, as well as to Section 401 of the Tariff and Customs
Code. 3 (Emphasis in the original)
The Court is not persuaded. In the first place, there is nothing in the language of either Section 104 or of 401 of the Tariff
and Customs Code that suggest such a sharp and absolute limitation of authority. The entire contention of petitioner is
anchored on just two (2) words, one found in Section 401 (a)(1): "existing protective rates of import duty," and the second
in the proviso found at the end of Section 401 (a): "protection levels granted in Section 104 of this Code . . . . " We believe
that the words "protective" and ''protection" are simply not enough to support the very broad and encompassing limitation
which petitioner seeks to rest on those two (2) words.
In the second place, petitioner's singular theory collides with a very practical fact of which this Court may take judicial
notice that the Bureau of Customs which administers the Tariff and Customs Code, is one of the two (2) principal
traditional generators or producers of governmental revenue, the other being the Bureau of Internal Revenue. (There is a
third agency, non-traditional in character, that generates lower but still comparable levels of revenue for the government
The Philippine Amusement and Games Corporation [PAGCOR].)

97

In the third place, customs duties which are assessed at the prescribed tariff rates are very much like taxes which are
frequently imposed for both revenue-raising and for regulatory purposes. 4 Thus, it has been held that "customs duties" is
"the name given to taxes on the importation and exportation of commodities, the tariff or tax assessed upon merchandise
imported from, or exported to, a foreign country." 5 The levying of customs duties on imported goods may have in some
measure the effect of protecting local industries where such local industries actually exist and are producing
comparable goods. Simultaneously, however, the very same customs duties inevitably have the effect of producing
governmental revenues. Customs duties like internal revenue taxes are rarely, if ever, designed to achieve one policy
objective only. Most commonly, customs duties, which constitute taxes in the sense of exactions the proceeds of which
become public funds 6 have either or both the generation of revenue and the regulation of economic or social activity as
their moving purposes and frequently, it is very difficult to say which, in a particular instance, is the dominant or principal
objective. In the instant case, since the Philippines in fact produces ten (10) to fifteen percent (15%) of the crude oil
consumed here, the imposition of increased tariff rates and a special duty on imported crude oil and imported oil products
may be seen to have some "protective" impact upon indigenous oil production. For the effective, price of imported crude oil
and oil products is increased. At the same time, it cannot be gainsaid that substantial revenues for the government are
raised by the imposition of such increased tariff rates or special duty.
In the fourth place, petitioner's concept which he urges us to build into our constitutional and customs law, is a stiflingly
narrow one. Section 401 of the Tariff and Customs Code establishes general standards with which the exercise of the
authority delegated by that provision to the President must be consistent: that authority must be exercised in "the interest
of national economy, general welfare and/or national security." Petitioner, however, insists that the "protection of local
industries" is the only permissible objective that can be secured by the exercise of that delegated authority, and that
therefore "protection of local industries" is the sum total or the alpha and the omega of "the national economy, general
welfare and/or national security." We find it extremely difficult to take seriously such a confined and closed view of the
legislative standards and policies summed up in Section 401. We believe, for instance, that the protection of consumers,
who after all constitute the very great bulk of our population, is at the very least as important a dimension of "the national
economy, general welfare and national security" as the protection of local industries. And so customs duties may be
reduced or even removed precisely for the purpose of protecting consumers from the high prices and shoddy quality and
inefficient service that tariff-protected and subsidized local manufacturers may otherwise impose upon the community.
It seems also important to note that tariff rates are commonly established and the corresponding customs duties levied and
collected upon articles and goods which are not found at all and not produced in the Philippines. The Tariff and Customs
Code is replete with such articles and commodities: among the more interesting examples are ivory (Chapter 5,
5.10);castoreum or musk taken from the beaver (Chapter 5, 5.14); Olives (Chapter 7, Notes); truffles or European fungi
growing under the soil on tree roots (Chapter 7, Notes); dates (Chapter 8, 8.01); figs (Chapter 8, 8.03); caviar (Chapter 16,
16.01); aircraft (Chapter 88, 88.0l); special diagnostic instruments and apparatus for human medicine and surgery
(Chapter
90,
Notes);X-ray
generators;
X-ray
tubes;
X-ray screens, etc. (Chapter 90, 90.20); etc. In such cases, customs duties may be seen to be imposed either for revenue
purposes purely or perhaps, in certain cases, to discourage any importation of the items involved. In either case, it is clear
that customs duties are levied and imposed entirely apart from whether or not there are any competing local industries to
protect.
Accordingly, we believe and so hold that Executive Orders Nos. 475 and 478 which may be conceded to be substantially
moved by the desire to generate additional public revenues, are not, for that reason alone, either constitutionally flawed, or
legally infirm under Section 401 of the Tariff and Customs Code. Petitioner has not successfully overcome the
presumptions of constitutionality and legality to which those Executive Orders are entitled. 7

98

The conclusion we have reached above renders it unnecessary to deal with petitioner's additional contention that, should
Executive Orders Nos. 475 and 478 be declared unconstitutional and illegal, there should be a roll back of prices of
petroleum products equivalent to the "resulting excess money not be needed to adequately maintain the Oil Price
Stabilization Fund (OPSF)." 8
WHEREFORE, premises considered, the Petition for Certiorari, Prohibition and Mandamus is hereby DISMISSED for lack
of merit. Costs against petitioner. SO ORDERED.
EN BANC
ROMEO P. GEROCHI, KATULONG NG BAYAN
(KB) and ENVIRONMENTALIST CONSUMERS
NETWORK, INC. (ECN),
Petitioners,
-versusDEPARTMENT OF ENERGY (DOE), ENERGY
REGULATORY COMMISSION (ERC), NATIONAL
POWER CORPORATION (NPC), POWER SECTOR
ASSETS AND LIABILITIES MANAGEMENT
GROUP (PSALM Corp.), STRATEGIC POWER
UTILITIES GROUP (SPUG),
and PANAYELECTRIC COMPANY INC. (PECO),
Respondents.

G.R. No. 159796

Present:
PUNO, C.J.,
QUISUMBING,
YNARES-SANTIAGO,
SANDOVAL-GUTIERREZ,
CARPIO,
AUSTRIA-MARTINEZ,
CORONA,
CARPIO MORALES,
AZCUNA,
TINGA,
CHICO-NAZARIO,
GARCIA,
VELASCO, JR. and
NACHURA, JJ.

Promulgated:
July 17, 2007
x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - x
DECISION
NACHURA, J.:
Petitioners Romeo P. Gerochi, Katulong Ng Bayan (KB), and Environmentalist Consumers Network, Inc. (ECN)
(petitioners), come before this Court in this original action praying that Section 34 of Republic Act (RA) 9136, otherwise
known as the Electric Power Industry Reform Act of 2001 (EPIRA), imposing the Universal Charge,[1] and Rule 18 of the
Rules and Regulations (IRR)[2]which seeks to implement the said imposition, be declared unconstitutional. Petitioners also
pray that the Universal Charge imposed upon the consumers be refunded and that a preliminary injunction and/or
temporary restraining order (TRO) be issued directing the respondents to refrain from implementing, charging, and
collecting the said charge.[3] The assailed provision of law reads:
SECTION 34. Universal Charge. Within one (1) year from the effectivity of this Act, a universal
charge to be determined, fixed and approved by the ERC, shall be imposed on all electricity end-users
for the following purposes:
(a) Payment for the stranded debts[4] in excess of the amount assumed by the National Government and
stranded contract costs of NPC[5]and as well as qualified stranded contract costs of distribution
utilities resulting from the restructuring of the industry;
99

(b) Missionary electrification;[6]

(c) The equalization of the taxes and royalties applied to indigenous or renewable sources of energy
vis--vis imported energy fuels;
(d) An environmental charge equivalent to one-fourth of one centavo per kilowatt-hour (P0.0025/kWh),
which shall accrue to an environmental fund to be used solely for watershed rehabilitation and
management. Said fund shall be managed by NPC under existing arrangements; and
(e) A charge to account for all forms of cross-subsidies for a period not exceeding three (3) years.
The universal charge shall be a non-bypassable charge which shall be passed on and collected from all
end-users on a monthly basis by the distribution utilities. Collections by the distribution utilities and the
TRANSCO in any given month shall be remitted to the PSALM Corp. on or before the fifteenth (15th) of
the succeeding month, net of any amount due to the distribution utility. Any end-user or self-generating
entity not connected to a distribution utility shall remit its corresponding universal charge directly to the
TRANSCO. The PSALM Corp., as administrator of the fund, shall create a Special Trust Fund which
shall be disbursed only for the purposes specified herein in an open and transparent manner. All amount
collected for the universal charge shall be distributed to the respective beneficiaries within a reasonable
period to be provided by the ERC.
The Facts
Congress enacted the EPIRA on June 8, 2001; on June 26, 2001, it took effect.[7]
On April 5, 2002, respondent National Power Corporation-Strategic Power Utilities Group[8] (NPC-SPUG) filed with
respondent Energy Regulatory Commission (ERC) a petition for the availment from the Universal Charge of its share for
Missionary Electrification, docketed as ERC Case No. 2002-165.[9]
On May 7, 2002, NPC filed another petition with ERC, docketed as ERC Case No. 2002-194, praying that the proposed
share from the Universal Charge for the Environmental charge of P0.0025 per kilowatt-hour (/kWh), or a total
of P119,488,847.59,
be
approved
for
withdrawal
from
the
Special
Trust Fund (STF) managed by respondent Power Sector Assets and Liabilities Management Group (PSALM)[10] for the
rehabilitation and management of watershed areas.[11]
On December 20, 2002, the ERC issued an Order[12] in ERC Case No. 2002-165 provisionally approving the computed
amount ofP0.0168/kWh as the share of the NPC-SPUG from the Universal Charge for Missionary Electrification and
authorizing the National Transmission Corporation (TRANSCO) and Distribution Utilities to collect the same from its endusers on a monthly basis.
On June 26, 2003, the ERC rendered its Decision [13] (for ERC Case No. 2002-165) modifying its Order of December 20,
2002, thus:
WHEREFORE, the foregoing premises considered, the provisional authority granted to
petitioner National Power Corporation-Strategic Power Utilities Group (NPC-SPUG) in the Order dated
December 20, 2002 is hereby modified to the effect that an additional amount of P0.0205 per kilowatthour should be added to the P0.0168 per kilowatt-hour provisionally authorized by the Commission in
the said Order. Accordingly, a total amount of P0.0373 per kilowatt-hour is hereby APPROVED for
withdrawal from the Special Trust Fund managed by PSALM as its share from the Universal Charge for
Missionary Electrification (UC-ME) effective on the following billing cycles:
100

(a) June 26-July 25, 2003 for National Transmission Corporation (TRANSCO); and
(b) July 2003 for Distribution Utilities (Dus).
Relative thereto, TRANSCO and Dus are directed to collect the UC-ME in the amount
of P0.0373 per kilowatt-hour and remit the same to PSALM on or before the 15 th day of the succeeding
month.
In the meantime, NPC-SPUG is directed to submit, not later than April 30, 2004, a detailed
report to include Audited Financial Statements and physical status (percentage of completion) of the
projects using the prescribed format.
Let copies of this Order be furnished petitioner NPC-SPUG and all distribution utilities (Dus).
SO ORDERED.
On August 13, 2003, NPC-SPUG filed a Motion for Reconsideration asking the ERC, among others, [14] to set aside the
above-mentioned Decision, which the ERC granted in its Order dated October 7, 2003, disposing:
WHEREFORE, the foregoing premises considered, the Motion for Reconsideration filed by petitioner
National Power Corporation-Small Power Utilities Group (NPC-SPUG) is hereby GRANTED.
Accordingly, the Decision dated June 26, 2003 is hereby modified accordingly.
Relative thereto, NPC-SPUG is directed to submit a quarterly report on the following:
1. Projects for CY 2002 undertaken;
2. Location
3. Actual amount utilized to complete the project;
4. Period of completion;
5. Start of Operation; and
6. Explanation of the reallocation of UC-ME funds, if any.
SO ORDERED.[15]
Meanwhile, on April 2, 2003, ERC decided ERC Case No. 2002-194, authorizing the NPC to draw up to P70,000,000.00
from PSALM for its 2003 Watershed Rehabilitation Budget subject to the availability of funds for the Environmental Fund
component of the Universal Charge.[16]
On the basis of the said ERC decisions, respondent Panay Electric Company, Inc. (PECO) charged petitioner Romeo P.
Gerochi andall other end-users with the Universal Charge as reflected in their respective electric bills starting from the
month of July 2003.[17]
Hence, this original action.
Petitioners submit that the assailed provision of law and its IRR which sought to implement the same are unconstitutional
on the following grounds:
1)

The universal charge provided for under Sec. 34 of the EPIRA and sought to be implemented
under Sec. 2, Rule 18 of the IRR of the said law is a tax which is to be collected from all electric
end-users and self-generating entities. The power to tax is strictly a legislative function and as such,
the delegation of said power to any executive or administrative agency like the ERC is
unconstitutional, giving the same unlimited authority. The assailed provision clearly provides that the
Universal Charge is to be determined, fixed and approved by the ERC, hence leaving to the latter
complete discretionary legislative authority.

2)

The ERC is also empowered to approve and determine where the funds collected should be used.
101

3)

The imposition of the Universal Charge on all end-users is oppressive and confiscatory and
amounts to taxation without representation as the consumers were not given a chance to be heard
and represented.[18]

Petitioners contend that the Universal Charge has the characteristics of a tax and is collected to fund the
operations of the NPC. They argue that the cases[19] invoked by the respondents clearly show the regulatory purpose of the
charges imposed therein, which is not so in the case at bench. In said cases, the respective funds [20] were created in order
to balance and stabilize the prices of oil and sugar, and to act as buffer to counteract the changes and adjustments in
prices, peso devaluation, and other variables which cannot be adequately and timely monitored by the legislature. Thus,
there was a need to delegate powers to administrative bodies.[21] Petitioners posit that the Universal Charge is imposed not
for a similar purpose.
On the other hand, respondent PSALM through the Office of the Government Corporate Counsel (OGCC) contends that
unlike a tax which is imposed to provide income for public purposes, such as support of the government, administration of
the law, or payment of public expenses, the assailed Universal Charge is levied for a specific regulatory purpose, which is
to ensure the viability of the country's electric power industry. Thus, it is exacted by the State in the exercise of its inherent
police power. On this premise, PSALM submits that there is no undue delegation of legislative power to the ERC since the
latter merely exercises a limited authority or discretion as to the execution and implementation of the provisions of the
EPIRA.[22]
Respondents Department of Energy (DOE), ERC, and NPC, through the Office of the Solicitor General (OSG), share the
same view that the Universal Charge is not a tax because it is levied for a specific regulatory purpose, which is to ensure
the viability of the country's electric power industry, and is, therefore, an exaction in the exercise of the State's police
power. Respondents further contend that said Universal Charge does not possess the essential characteristics of a tax,
that its imposition would redound to the benefit of the electric power industry and not to the public, and that its rate is
uniformly levied on electricity end-users, unlike a tax which is imposed based on the individual taxpayer's ability to pay.
Moreover, respondents deny that there is undue delegation of legislative power to the ERC since the EPIRA sets forth
sufficient determinable standards which would guide the ERC in the exercise of the powers granted to it. Lastly,
respondents argue that the imposition of the Universal Charge is not oppressive and confiscatory since it is an exercise of
the police power of the State and it complies with the requirements of due process.[23]
On its part, respondent PECO argues that it is duty-bound to collect and remit the amount pertaining to the Missionary
Electrification and Environmental Fund components of the Universal Charge, pursuant to Sec. 34 of the EPIRA and the
Decisions in ERC Case Nos. 2002-194 and 2002-165. Otherwise, PECO could be held liable under Sec. 46 [24] of the
EPIRA, which imposes fines and penalties for any violation of its provisions or its IRR.[25]
The Issues
The ultimate issues in the case at bar are:
1) Whether or not, the Universal Charge imposed under Sec. 34 of the EPIRA is a tax; and
2) Whether or not there is undue delegation of legislative power to tax on the part of the ERC.[26]
Before we discuss the issues, the Court shall first deal with an obvious procedural lapse.
Petitioners filed before us an original action particularly denominated as a Complaint assailing the
constitutionality of Sec. 34 of the EPIRA imposing the Universal Charge and Rule 18 of the EPIRA's IRR. No doubt,
petitioners have locus standi. They impugn the constitutionality of Sec. 34 of the EPIRA because they sustained a direct
injury as a result of the imposition of the Universal Charge as reflected in their electric bills.
However, petitioners violated the doctrine of hierarchy of courts when they filed this Complaint directly with
us.Furthermore, the Complaint is bereft of any allegation of grave abuse of discretion on the part of the ERC or any of the
public respondents, in order for the Court to consider it as a petition for certiorari or prohibition.
102

Article VIII, Section 5(1) and (2) of the 1987 Constitution[27] categorically provides that:

SECTION 5. The Supreme Court shall have the following powers:

1. Exercise original jurisdiction over cases affecting ambassadors, other public ministers and
consuls, and over petitions for certiorari, prohibition, mandamus, quo warranto, and habeas
corpus.
2.

Review, revise, reverse, modify, or affirm on appeal or certiorari, as the law or the rules of court
may provide, final judgments and orders of lower courts in:

a) All cases in which the constitutionality or validity of any treaty, international or executive
agreement, law, presidential decree, proclamation, order, instruction, ordinance, or regulation is in question.
But this Court's jurisdiction to issue writs of certiorari, prohibition, mandamus, quo warranto, and habeas corpus,
while concurrent with that of the regional trial courts and the Court of Appeals, does not give litigants unrestrained freedom
of choice of forum from which to seek such relief. [28] It has long been established that this Court will not entertain direct
resort to it unless the redress desired cannot be obtained in the appropriate courts, or where exceptional and compelling
circumstances justify availment of a remedy within and call for the exercise of our primary jurisdiction. [29] This circumstance
alone warrants the outright dismissal of the present action.
This procedural infirmity notwithstanding, we opt to resolve the constitutional issue raised herein. We are aware
that if the constitutionality of Sec. 34 of the EPIRA is not resolved now, the issue will certainly resurface in the near future,
resulting in a repeat of this litigation, and probably involving the same parties. In the public interest and to avoid
unnecessary delay, this Court renders its ruling now.
The instant complaint is bereft of merit.
The First Issue
To resolve the first issue, it is necessary to distinguish the States power of taxation from the police power.
The power to tax is an incident of sovereignty and is unlimited in its range, acknowledging in its very nature no limits, so
that security against its abuse is to be found only in the responsibility of the legislature which imposes the tax on the
constituency that is to pay it.[30] It is based on the principle that taxes are the lifeblood of the government, and their prompt
and certain availability is an imperious need.[31] Thus, the theory behind the exercise of the power to tax emanates from
necessity; without taxes, government cannot fulfill its mandate of promoting the general welfare and well-being of the
people.[32]
On the other hand, police power is the power of the state to promote public welfare by restraining and regulating the use of
liberty and property.[33] It is the most pervasive, the least limitable, and the most demanding of the three fundamental
powers of the State. The justification is found in the Latin maxims salus populi est suprema lex (the welfare of the people is
the supreme law) and sic utere tuo ut alienum non laedas (so use your property as not to injure the property of others). As
an inherent attribute of sovereignty which virtually extends to all public needs, police power grants a wide panoply of
instruments through which the State, as parens patriae, gives effect to a host of its regulatory powers. [34] We have held that
the power to "regulate" means the power to protect, foster, promote, preserve, and control, with due regard for the
interests, first and foremost, of the public, then of the utility and of its patrons.
The conservative and pivotal distinction between these two powers rests in the purpose for which the charge is
made. If generation of revenue is the primary purpose and regulation is merely incidental, the imposition is a tax; but if
regulation is the primary purpose, the fact that revenue is incidentally raised does not make the imposition a tax.[36]
In exacting the assailed Universal Charge through Sec. 34 of the EPIRA, the State's police power, particularly its
regulatory dimension, is invoked. Such can be deduced from Sec. 34 which enumerates the purposes for which the
Universal Charge is imposed[37] and which can be amply discerned as regulatory in character. The EPIRA resonates such
regulatory purposes, thus:
103

SECTION 2. Declaration of Policy. It is hereby declared the policy of the State:

(a) To ensure and accelerate the total electrification of the country;
(b) To ensure the quality, reliability, security and affordability of the supply of electric power;
(c) To ensure transparent and reasonable prices of electricity in a regime of free and fair competition and
full public accountability to achieve greater operational and economic efficiency and enhance the
competitiveness of Philippine products in the global market;
(d) To enhance the inflow of private capital and broaden the ownership base of the power generation,
transmission and distribution sectors;
(e) To ensure fair and non-discriminatory treatment of public and private sector entities in the process of
restructuring the electric power industry;
(f) To protect the public interest as it is affected by the rates and services of electric utilities and other
providers of electric power;
(g) To assure socially and environmentally compatible energy sources and infrastructure;
(h) To promote the utilization of indigenous and new and renewable energy resources in power
generation in order to reduce dependence on imported energy;
(i) To provide for an orderly and transparent privatization of the assets and liabilities of the National
Power Corporation (NPC);
(j) To establish a strong and purely independent regulatory body and system to ensure consumer
protection and enhance the competitive operation of the electricity market; and
(k) To encourage the efficient use of energy and other modalities of demand side management.
From the aforementioned purposes, it can be gleaned that the assailed Universal Charge is not a tax, but an exaction in
the exercise of the State's police power. Public welfare is surely promoted.
Moreover, it is a well-established doctrine that the taxing power may be used as an implement of police power.
[38]
In Valmonte v. Energy Regulatory Board, et al.[39] and in Gaston v. Republic Planters Bank,[40] this Court held that the Oil
Price Stabilization Fund (OPSF) and the Sugar Stabilization Fund (SSF) were exactions made in the exercise of the police
power. The doctrine was reiterated in Osmea v. Orbos[41] with respect to the OPSF. Thus, we disagree with petitioners that
the instant case is different from the aforementioned cases. With the Universal Charge, a Special Trust Fund (STF) is also
created under the administration of PSALM.[42] The STF has some notable characteristics similar to the OPSF and the
SSF, viz.:
1)

In the implementation of stranded cost recovery, the ERC shall conduct a review to determine
whether there is under-recovery or over recovery and adjust (true-up) the level of the stranded cost
recovery charge. In case of an over-recovery, the ERC shall ensure that any excess amount shall
be remitted to the STF. A separate account shall be created for these amounts which shall be held
in trust for any future claims of distribution utilities for stranded cost recovery. At the end of the
stranded cost recovery period, any remaining amount in this account shall be used to reduce the
electricity rates to the end-users.[43]
2) With respect to the assailed Universal Charge, if the total amount collected for the same is greater
than the actual availments against it, the PSALM shall retain the balance within the STF to pay for
periods where a shortfall occurs.[44]
3) Upon expiration of the term of PSALM, the administration of the STF shall be transferred to the
DOF or any of the DOF attached agencies as designated by the DOF Secretary.[45]
The OSG is in point when it asseverates:
Evidently, the establishment and maintenance of the Special Trust Fund, under the last paragraph of
Section 34, R.A. No. 9136, is well within the pervasive and non-waivable power and responsibility of the
104

government to secure the physical and economic survival and well-being of the community, that
comprehensive sovereign authority we designate as the police power of the State.[46]
This feature of the Universal Charge further boosts the position that the same is an exaction imposed primarily in pursuit of
the State's police objectives. The STF reasonably serves and assures the attainment and perpetuity of the purposes for
which the Universal Charge is imposed, i.e., to ensure the viability of the country's electric power industry.
The Second Issue
The principle of separation of powers ordains that each of the three branches of government has exclusive
cognizance of and is supreme in matters falling within its own constitutionally allocated sphere. A logical corollary to the
doctrine of separation of powers is the principle of non-delegation of powers, as expressed in the Latin maxim potestas
delegata non delegari potest (what has been delegated cannot be delegated). This is based on the ethical principle that
such delegated power constitutes not only a right but a duty to be performed by the delegate through the instrumentality of
his own judgment and not through the intervening mind of another. [47]
In the face of the increasing complexity of modern life, delegation of legislative power to various specialized administrative
agencies is allowed as an exception to this principle.[48] Given the volume and variety of interactions in today's society, it is
doubtful if the legislature can promulgate laws that will deal adequately with and respond promptly to the minutiae of
everyday life.Hence, the need to delegate to administrative bodies - the principal agencies tasked to execute laws in their
specialized fields - the authority to promulgate rules and regulations to implement a given statute and effectuate its
policies. All that is required for the valid exercise of this power of subordinate legislation is that the regulation be germane
to the objects and purposes of the law and that the regulation be not in contradiction to, but in conformity with, the
standards prescribed by the law. These requirements are denominated as the completeness test and the sufficient
standard test.
Under the first test, the law must be complete in all its terms and conditions when it leaves the legislature such that when it
reaches the delegate, the only thing he will have to do is to enforce it. The second test mandates adequate guidelines or
limitations in the law to determine the boundaries of the delegate's authority and prevent the delegation from running riot.
[49]

The Court finds that the EPIRA, read and appreciated in its entirety, in relation to Sec. 34 thereof, is complete in all its
essential terms and conditions, and that it contains sufficient standards.
Although Sec. 34 of the EPIRA merely provides that within one (1) year from the effectivity thereof, a Universal Charge to
be determined, fixed and approved by the ERC, shall be imposed on all electricity end-users, and therefore, does not state
the specific amount to be paid as Universal Charge, the amount nevertheless is made certain by the legislative parameters
provided in the law itself. For one, Sec. 43(b)(ii) of the EPIRA provides:
SECTION 43. Functions of the ERC. The ERC shall promote competition, encourage market
development, ensure customer choice and penalize abuse of market power in the restructured electricity
industry. In appropriate cases, the ERC is authorized to issue cease and desist order after due notice
and hearing. Towards this end, it shall be responsible for the following key functions in the restructured
industry:
xxxx
(b) Within six (6) months from the effectivity of this Act, promulgate and enforce, in accordance with law,
a National Grid Code and a Distribution Code which shall include, but not limited to the following:
xxxx

105

(ii) Financial capability standards for the generating companies, the TRANSCO, distribution utilities
and suppliers: Provided, That in the formulation of the financial capability standards, the nature and
function of the entity shall be considered: Provided, further, That such standards are set to ensure that
the electric power industry participants meet the minimum financial standards to protect the public
interest. Determine, fix, and approve, after due notice and public hearings the universal charge, to be
imposed on all electricity end-users pursuant to Section 34 hereof;
Moreover, contrary to the petitioners contention, the ERC does not enjoy a wide latitude of discretion in the determination
of the Universal Charge. Sec. 51(d) and (e) of the EPIRA[50] clearly provides:
SECTION 51. Powers. The PSALM Corp. shall, in the performance of its functions and for the attainment
of its objective, have the following powers:
xxxx
(d) To calculate the amount of the stranded debts and stranded contract costs of NPC which shall
form the basis for ERC in the determination of the universal charge;
(e) To liquidate the NPC stranded contract costs, utilizing the proceeds from sales and other property
contributed to it, including the proceeds from the universal charge.
Thus, the law is complete and passes the first test for valid delegation of legislative power.
As to the second test, this Court had, in the past, accepted as sufficient standards the following: "interest of law and
order;"[51]"adequate and efficient instruction;"[52] "public interest;"[53] "justice and equity;"[54] "public convenience and
welfare;"[55]"simplicity, economy and efficiency;"[56] "standardization and regulation of medical education;" [57] and "fair and
equitable employment practices."[58] Provisions of the EPIRA such as, among others, to ensure the total electrification of
the country and the quality, reliability, security and affordability of the supply of electric power [59] and watershed
rehabilitation and management[60]meet the requirements for valid delegation, as they provide the limitations on the ERCs
power to formulate the IRR. These are sufficient standards.
It may be noted that this is not the first time that the ERC's conferred powers were challenged. In Freedom from Debt
Coalition v. Energy Regulatory Commission,[61] the Court had occasion to say:
In determining the extent of powers possessed by the ERC, the provisions of the EPIRA must not be
read in separate parts. Rather, the law must be read in its entirety, because a statute is passed as a
whole, and is animated by one general purpose and intent. Its meaning cannot to be extracted from any
single part thereof but from a general consideration of the statute as a whole. Considering the intent of
Congress in enacting the EPIRA and reading the statute in its entirety, it is plain to see that the law has
expanded the jurisdiction of the regulatory body, the ERC in this case, to enable the latter to implement
the reforms sought to be accomplished by the EPIRA. When the legislators decided to broaden the
jurisdiction of the ERC, they did not intend to abolish or reduce the powers already conferred upon
ERC's predecessors. To sustain the view that the ERC possesses only the powers and functions listed
under Section 43 of the EPIRA is to frustrate the objectives of the law.
In his Concurring and Dissenting Opinion[62] in the same case, then Associate Justice, now Chief Justice, Reynato
S. Puno described the immensity of police power in relation to the delegation of powers to the ERC and its
regulatory functions over electric power as a vital public utility, to wit:
Over the years, however, the range of police power was no longer limited to the preservation of
public health, safety and morals, which used to be the primary social interests in earlier times. Police
power now requires the State to "assume an affirmative duty to eliminate the excesses and injustices
that are the concomitants of an unrestrained industrial economy." Police power is now exerted "to further
the public welfare a concept as vast as the good of society itself." Hence, "police power is but another
name for the governmental authority to further the welfare of society that is the basic end of all
106

government." When police power is delegated to administrative bodies with regulatory functions, its
exercise should be given a wide latitude. Police power takes on an even broader dimension in
developing countries such as ours, where the State must take a more active role in balancing the many
conflicting interests in society. The Questioned Order was issued by the ERC, acting as an agent of the
State in the exercise of police power. We should have exceptionally good grounds to curtail its exercise.
This approach is more compelling in the field of rate-regulation of electric power rates. Electric power
generation and distribution is a traditional instrument of economic growth that affects not only a few but
the entire nation. It is an important factor in encouraging investment and promoting business. The
engines of progress may come to a screeching halt if the delivery of electric power is impaired. Billions
of pesos would be lost as a result of power outages or unreliable electric power services. The State thru
the ERC should be able to exercise its police power with great flexibility, when the need arises.
This was reiterated in National Association of Electricity Consumers for Reforms v. Energy Regulatory
Commission[63] where the Court held that the ERC, as regulator, should have sufficient power to respond in real time to
changes wrought by multifarious factors affecting public utilities.
From the foregoing disquisitions, we therefore hold that there is no undue delegation of legislative power to the ERC.
Petitioners failed to pursue in their Memorandum the contention in the Complaint that the imposition of the
Universal Charge on all end-users is oppressive and confiscatory, and amounts to taxation without representation. Hence,
such contention is deemed waived or abandoned per Resolution[64] of August 3, 2004.[65] Moreover, the determination of
whether or not a tax is excessive, oppressive or confiscatory is an issue which essentially involves questions of fact, and
thus, this Court is precluded from reviewing the same.[66]
As a penultimate statement, it may be well to recall what this Court said of EPIRA:
One of the landmark pieces of legislation enacted by Congress in recent years is the EPIRA. It
established a new policy, legal structure and regulatory framework for the electric power industry. The
new thrust is to tap private capital for the expansion and improvement of the industry as the large
government debt and the highly capital-intensive character of the industry itself have long been
acknowledged as the critical constraints to the program. To attract private investment, largely foreign, the
jaded structure of the industry had to be addressed. While the generation and transmission sectors were
centralized and monopolistic, the distribution side was fragmented with over 130 utilities, mostly small
and uneconomic. The pervasive flaws have caused a low utilization of existing generation capacity;
extremely high and uncompetitive power rates; poor quality of service to consumers; dismal to
forgettable performance of the government power sector; high system losses; and an inability to develop
a clear strategy for overcoming these shortcomings.
Thus, the EPIRA provides a framework for the restructuring of the industry, including the privatization of
the assets of the National Power Corporation (NPC), the transition to a competitive structure, and the
delineation of the roles of various government agencies and the private entities. The law ordains the
division
of
the
industry
into
four
(4)
distinct
sectors, namely: generation, transmission, distribution and supply.
Corollarily, the NPC generating plants have to privatized and its transmission business spun off and
privatized thereafter.[67]
Finally, every law has in its favor the presumption of constitutionality, and to justify its nullification, there must be a clear
and unequivocal breach of the Constitution and not one that is doubtful, speculative, or argumentative.[68] Indubitably,
petitioners failed to overcome this presumption in favor of the EPIRA. We find no clear violation of the Constitution which
would warrant a pronouncement that Sec. 34 of the EPIRA and Rule 18 of its IRR are unconstitutional and void.
WHEREFORE, the instant case is hereby DISMISSED for lack of merit.
107

SO ORDERED.

EN BANC
ARTURO M. TOLENTINO,
Petitioner,
G. R. No. 115455
August 25, 1994
-versusTHE SECRETARY OF FINANCE
and THE COMMISSIONER OF INTERNAL REVENUE,
Respondents.
_____________________________________________
JUAN T. DAVID,
Petitioner,
G. R. No. 115525
August 25, 1994
-versusTEOFISTO T. GUINGONA, JR., as Executive Secretary,
ROBERTO DE OCAMPO, as Secretary of Finance,
LIWAYWAY VINZONS-CHATO, as Commissioner of Internal
Revenue and their Authorized Agents or Representatives,
Respondents.
_____________________________________________
RAUL S. ROCO and the INTEGRATED BAR OF THE PHILIPPINES,
Petitioners,
G. R. No. 115543
August 25, 1994
-versusTHE SECRETARY OF THE DEPARTMENT OF FINANCE,
THE COMMISSIONERS OF THE BUREAU OF INTERNAL REVENUE
and THE BUREAU OF CUSTOMS,
Respondents.
_____________________________________________________
PHILIPPINE PRESS INSTITUTE, INC., EGP PUBLISHING CO., INC.,
PHILIPPINE JOURNALISTS, INC., JOSE L. PAVIA,
and OFELIA L. DIMALANTA,
Petitioners,
G. R. No. 115544
August 25, 1994
-versusHON. LIWAYWAY V. CHATO, in Her Capacity as Commissioner
of Internal Revenue, HON. TEOFISTO T. GUINGONA, JR., in His
Capacity as Executive Secretary and HON. ROBERTO B. DE OCAMPO,
in His Capacity as Secretary of Finance,
Respondents.
_____________________________________________________________
CHAMBER OF REAL ESTATE AND BUILDERS ASSOCIATIONS, INC.,
[CREBA],
Petitioner,
G. R. No. 115754
August 25, 1994

108

-versusTHE COMMISSIONER OF INTERNAL REVENUE,

Respondent.
________
KILOSBAYAN, INC., JOVITO R. SALONGA, CIRILO A. RIGOS,
ERME CAMBA, EMILIO C. CAPULONG, JR., JOSE T. APOLO,
EPHRAIM TENDERO, FERNANDO SANTIAGO, JOSE ABCEDE,
CHRISTINE TAN, FELIPE L. GOZON, RAFAEL G. FERNANDO,
RAOUL V. VICTORINO, JOSE CUNANAN, QUINTIN S. DOROMAL,
MOVEMENT OF ATTORNEYS FOR BROTHERHOOD, INTEGRITY
AND NATIONALISM, INC. ["MABINI"], FREEDOM FROM DEBT
COALITION, INC., PHILIPPINE BIBLE SOCIETY, INC.
and WIGBERTO TAADA,
Petitioners,
G. R. No. 115781
August 25, 1994
-versusTHE EXECUTIVE SECRETARY, THE SECRETARY OF FINANCE,
THE COMMISSIONER OF INTERNAL REVENUE and
THE COMMISSIONER OF CUSTOMS,
Respondents.
______________________________________________________
PHILIPPINE AIRLINES, INC.,
Petitioner,
G. R. No. 115852
August 25, 1994
-versusTHE SECRETARY OF FINANCE
and COMMISSIONER OF INTERNAL REVENUE,
Respondents.
______________________________________________________
COOPERATIVE UNION OF THE PHILIPPINES,
Petitioners,
G. R. No. 115873
August 25, 1994
-versusHON. LIWAYWAY V. CHATO, in Her Capacity as the Commissioner
of Internal Revenue, HON. TEOFISTO T. GUINGONA, JR., in His
Capacity as Executive Secretary and HON. ROBERTO B. DE OCAMPO,
in His Capacity as Secretary of Finance,
Respondents.
_____________________________________________________________
PHILIPPINE EDUCATIONAL PUBLISHERS ASSOCIATION, INC.chanrobles virtual law library
and ASSOCIATION OF PHILIPPINE BOOK-SELLERS,
Petitioners,
G. R. No. 115931
August 25, 1994
-versusHON. ROBERTO B. DE OCAMPO, as the Secretary of Finance,
HON. LIWAYWAY V. CHATO, as the Commissioner of Internal Revenue
and HON. GUILLERMO PARAYNO, JR., in His Capacity as the

109

Commissioner of Customs,
Respondents.
______________________________________________________________
RESOLUTION
MENDOZA, J.:

The Value-Added Tax [VAT] is levied on the sale, barter or exchange of goods and properties as well as on the sale or
exchange of services. It is equivalent to 10% of the gross selling price or gross value in money of goods or properties sold,
bartered or exchanged or of the gross receipts from the sale or exchange of services. Republic Act No. 7716 seeks to
widen the tax base of the existing VAT system and enhance its administration by amending the National Internal Revenue
Code.
These are various suits for certiorari and prohibition challenging the constitutionality of Republic Act No. 7716 on various
grounds summarized in the Resolution of July 6, 1994 of this Court, as follows:
I. Procedural Issues:
A. Does Republic Act No. 7716 violate Art. VI, Section 24 of the Constitution?
B. Does it violate Art. VI, Section 26[2] of the Constitution?
C. What is the extent of the power of the Bicameral Conference Committee?
II. Substantive Issues:
A. Does the law violate the following provisions in the Bill of Rights [Art. III]?
1. Section1
2. Section 4
3. Section 5
4. Section 10
B. Does the law violate the following other provisions of the Constitution?
1. Art. VI, Section 28[1]
2. Art. VI, Section 28[3]
These questions will be dealt with in the order they are stated above. As will presently be explained, not all of these
questions are judicially cognizable because not all provisions of the Constitution are self-executing and, therefore, judicially
enforceable. The other departments of the government are equally charged with the enforcement of the Constitution
especially
the
provisions
relating
to
them.
I. PROCEDURAL ISSUES
The contention of petitioners is that in enacting Republic Act No. 7716 or the Expanded Value-Added Tax Law, Congress
violated the Constitution because, although H. No. 11197 had originated in the House of Representatives, it was not
passed by the Senate but was simply consolidated with the Senate version [S. No. 1630] in the Conference Committee to
produce the bill which the President signed into law. The following provisions of the Constitution are cited in support of the
proposition that because Republic Act No. 7716 was passed in this manner, it did not originate in the House of
Representatives and it has not thereby become a law:
Art. VI, Section 24: All appropriation, revenue or tariff bills, bills authorizing increase of the public debt, bills of local
application, and private bills shall originate exclusively in the House of Representatives, but the Senate may propose or
concur with amendments.
Id., Section 26[2]: No bill passed by either House shall become a law unless it has passed three readings on separate
days, and printed copies thereof in its final form have been distributed to its Members three days before its passage,
except when the President certifies to the necessity of its immediate enactment to meet a public calamity or emergency.
110

Upon the last reading of a bill, no amendment thereto shall be allowed, and the vote thereon shall be taken immediately
thereafter, and the yeas and nays entered in the Journal.
It appears that on various dates between July 22, 1992 and August 31, 1993, several bills [1] were introduced in the
House of Representatives seeking to amend certain provisions of the National Internal Revenue Code relative to the
Value-Added Tax or VAT. These bills were referred to the House Ways and Means Committee which recommended for
approval a substitute measure, H. No. 11197, entitled:
AN ACT RESTRUCTURING THE VALUE-ADDED TAX [VAT] SYSTEM TO WIDEN ITS TAX BASE AND ENHANCE ITS
ADMINISTRATION, AMENDING FOR THESE PURPOSES SECTIONS 99, 100, 102, 103, 104, 105, 106, 107, 108 AND
110 OF TITLE IV, 112, 115 AND 116 OF TITLE V, AND 236, 237 AND 238 OF TITLE IX, AND REPEALING SECTIONS
113 AND 114 OF TITLE V, ALL OF THE NATIONAL INTERNAL REVENUE CODE, AS AMENDED
The bill [H. No. 11197] was considered on second reading starting November 6, 1993 and, on November 17, 1993, it was
approved
by
the
House
of
Representatives
after
third
and
final
reading.
It was sent to the Senate on November 23, 1993 and later referred by that body to its Committee on Ways and
Means.cralaw
On February 7, 1994, the Senate Committee submitted its report recommending approval of S. No. 1630, entitled:
AN ACT RESTRUCTURING THE VALUE-ADDED TAX [VAT] SYSTEM TO WIDEN ITS TAX BASE AND ENHANCE ITS
ADMINISTRATION, AMENDING FOR THESE PURPOSES SECTIONS 99, 100, 102, 103, 104, 105, 107, 108, AND 110
OF TITLE IV, 112 OF TITLE V, AND 236, 237, AND 238 OF TITLE IX, AND REPEALING SECTIONS 113, 114 and 116
OF TITLE V, ALL OF THE NATIONAL INTERNAL REVENUE CODE, AS AMENDED, AND FOR OTHER PURPOSES
It was stated that the bill was being submitted "in substitution of Senate Bill No. 1129, taking into consideration P.S. Res.
No. 734 and H.B. No. 11197."
On February 8, 1994, the Senate began consideration of the bill [S. No. 1630]. It finished debates on the bill and approved
it on second reading on March 24, 1994. On the same day, it approved the bill on third reading by the affirmative votes of
13 of its members, with one abstention. H. No. 11197 and its Senate version [S. No. 1630] were then referred to a
conference committee which, after meeting four times [April 13, 19, 21 and 25, 1994], recommended that "House Bill No.
11197, in consolidation with Senate Bill No. 1630, be approved in accordance with the attached copy of the bill as
reconciled and approved by the conferees."
The Conference Committee bill, entitled: "AN ACT RESTRUCTURING THE VALUE-ADDED TAX (VAT) SYSTEM,
WIDENING ITS TAX BASE AND ENHANCING ITS ADMINISTRATION AND FOR THESE PURPOSES AMENDING AND
REPEALING THE RELEVANT PROVISIONS OF THE NATIONAL INTERNAL REVENUE CODE, AS AMENDED, AND
FOR OTHER PURPOSES," was thereafter approved by the House of Representatives on April 27, 1994 and by the
Senate on May 2, 1994. The enrolled bill was then presented to the President of the Philippines who, on May 5, 1994,
signed it. It became Republic Act No. 7716. On May 12, 1994, Republic Act No. 7716 was published in two newspapers of
general circulation and, on May 28, 1994, it took effect, although its implementation was suspended until June 30, 1994 to
allow time for the registration of business entities. It would have been enforced on July 1, 1994 but its enforcement was
stopped because this Court, by the vote of 11 to 4 of its members, granted a temporary restraining order on June 30, 1994.
First. Petitioners' contention is that Republic Act No. 7716 did not "originate exclusively" in the House of Representatives
as required by Art. VI, Section 24 of the Constitution, because it is in fact the result of the consolidation of two distinct bills,
H. No. 11197 and S. No. 1630. In this connection, petitioners point out that although Art. VI, SS 24 was adopted from the
American Federal Constitution, [2] it is notable in two respects: the verb "shall originate" is qualified in the Philippine
Constitution by the word "exclusively" and the phrase "as on other bills" in the American version is omitted. This means,
according to them, that to be considered as having originated in the House, Republic Act No. 7716 must retain the
essence of H. No. 11197.cralaw
This argument will not bear analysis. To begin with, it is not the law but the revenue bill which is required by the
Constitution to "originate exclusively" in the House of Representatives. It is important to emphasize this, because a bill
originating in the House may undergo such extensive changes in the Senate that the result may be a rewriting of the
whole. The possibility of a third version by the conference committee will be discussed later. At this point, what is important
to note is that, as a result of the Senate action, a distinct bill may be produced. To insist that a revenue statute and not
only the bill which initiated the legislative process culminating in the enactment of the law must substantially be the same
as the House bill would be to deny the Senate's power not only to "concur with amendments" but also to "propose
111

amendments." It would be to violate the coequality of legislative power of the two houses of Congress and in fact make the
House superior to the Senate.
The contention that the constitutional design is to limit the Senate's power in respect of revenue bills in order to
compensate for the grant to the Senate of the treaty-ratifying power [3] and thereby equalize its powers and those of the
House overlooks the fact that the powers being compared are different. We are dealing here with the legislative power
which under the Constitution is vested not in any particular chamber but in the Congress of the Philippines, consisting of "a
Senate and a House of Representatives." [4] The exercise of the treaty-ratifying power is not the exercise of legislative
power. It is the exercise of a check on the executive power. There is, therefore, no justification for comparing the legislative
powers of the House and of the Senate on the basis of the possession of such nonlegislative power by the Senate. The
possession of a similar power by the U.S. Senate [5] has never been thought of as giving it more legislative powers than
the House of Representatives.cralaw
In the United States, the validity of a provision [Section 37] imposing an ad valorem tax based on the weight of vessels,
which the U.S. Senate had inserted in the Tariff Act of 1909, was upheld against the claim that the provision was a revenue
bill which originated in the Senate in contravention of Art. I, Section 7 of the U.S. Constitution.[6] Nor is the power to
amend limited to adding a provision or two in a revenue bill emanating from the House. The U.S. Senate has gone so far
as changing the whole of bills following the enacting clause and substituting its own versions. In 1883, for example, it
struck out everything after the enacting clause of a tariff bill and wrote in its place its own measure, and the House
subsequently accepted the amendment. The U.S. Senate likewise added 847 amendments to what later became the
Payne-Aldrich Tariff Act of 1909; it dictated the schedules of the Tariff Act of 1921; it rewrote an extensive tax revision bill in
the same year and recast most of the tariff bill of 1922. [7] Given, then, the power of the Senate to propose amendments,
the Senate can propose its own version even with respect to bills which are required by the Constitution to originate in the
House.
It is insisted, however, that S. No. 1630 was passed not in substitution of H. No. 11197 but of another Senate bill [S. No.
1129] earlier filed and that what the Senate did was merely to "take [H. No. 11197] into consideration" in enacting S. No.
1630. There is really no difference between the Senate preserving H. No. 11197 up to the enacting clause and then writing
its own version following the enacting clause [which, it would seem, petitioners admit is an amendment by substitution],
and, on the other hand, separately presenting a bill of its own on the same subject matter. In either case the result are two
bills on the same subject.
Indeed, what the Constitution simply means is that the initiative for filing revenue, tariff, or tax bills, bills authorizing an
increase of the public debt, private bills and bills of local application must come from the House of Representatives on the
theory that, elected as they are from the districts, the members of the House can be expected to be more sensitive to the
local needs and problems. On the other hand, the senators, who are elected at large, are expected to approach the same
problems from the national perspective. Both views are thereby made to bear on the enactment of such laws.cralaw
Nor does the Constitution prohibit the filing in the Senate of a substitute bill in anticipation of its receipt of the bill from the
House, so long as action by the Senate as a body is withheld pending receipt of the House bill. The Court cannot,
therefore, understand the alarm expressed over the fact that on March 1, 1993, eight months before the House passed H.
No. 11197, S. No. 1129 had been filed in the Senate. After all it does not appear that the Senate ever considered it. It was
only after the Senate had received H. No. 11197 on November 23, 1993 that the process of legislation in respect of it
began with the referral to the Senate Committee on Ways and Means of H. No. 11197 and the submission by the
Committee on February 7, 1994 of S. No. 1630. For that matter, if the question were simply the priority in the time of filing
of bills, the fact is that it was in the House that a bill [H. No. 253] to amend the VAT law was first filed on July 22, 1992.
Several other bills had been filed in the House before S. No. 1129 was filed in the Senate, and H. No. 11197 was only a
substitute of those earlier bills.cralaw
Second. Enough has been said to show that it was within the power of the Senate to propose S. No. 1630. We now pass
to the next argument of petitioners that S. No. 1630 did not pass three readings on separate days as required by the
Constitution [8]because the second and third readings were done on the same day, March 24, 1994. But this was because
on February 24, 1994 [9] and again on March 22, 1994, [10] the President had certified S. No. 1630 as urgent. The
presidential certification dispensed with the requirement not only of printing but also that of reading the bill on separate
days. The phrase "except when the President certifies to the necessity of its immediate enactment, etc." in Art. VI, Section
112

26[2] qualifies the two stated conditions before a bill can become a law: [i] the bill has passed three readings on separate
days and [ii] t has been printed in its final form and distributed three days before it is finally approved.
In other words, the "unless" clause must be read in relation to the "except" clause, because the two are really coordinate
clauses of the same sentence. To construe the "except" clause as simply dispensing with the second requirement in the
"unless" clause [i.e., printing and distribution three days before final approval] would not only violate the rules of grammar.
It would also negate the very premise of the "except" clause: the necessity of securing the immediate enactment of a bill
which is certified in order to meet a public calamity or emergency. For if it is only the printing that is dispensed with by
presidential certification, the time saved would be so negligible as to be of any use in insuring immediate enactment. It
may well be doubted whether doing away with the necessity of printing and distributing copies of the bill three days before
the third reading would insure speedy enactment of a law in the face of an emergency requiring the calling of a special
election for President and Vice-President. Under the Constitution, such a law is required to be made within seven days of
the convening of Congress in emergency session. [11]
That upon the certification of a bill by the President, the requirement of three readings on separate days and of printing
and distribution can be dispensed with is supported by the weight of legislative practice. For example, the bill defining the
certiorari jurisdiction of this Court which, in consolidation with the Senate version, became Republic Act No. 5440, was
passed on second and third readings in the House of Representatives on the same day [May 14, 1968] after the bill had
been certified by the
President as urgent. [12]
There is, therefore, no merit in the contention that presidential certification dispenses only with the requirement for the
printing of the bill and its distribution three days before its passage but not with the requirement of three readings on
separate days, also. It is nonetheless, urged that the certification of the bill in this case was invalid because there was no
emergency, the condition stated in the certification of a "growing budget deficit" not being an unusual condition in this
country.cralaw
It is noteworthy that no member of the Senate saw it fit to controvert the reality of the factual basis of the certification. To
the contrary, by passing S. No. 1630 on second and third readings on March 24, 1994, the Senate accepted the
President's certification. Should such certification be now reviewed by this Court, especially when no evidence has been
shown that, because S. No. 1630 was taken up on second and third readings on the same day, the members of the
Senate were deprived of the time needed for the study of a vital piece of legislation?
The sufficiency of the factual basis of the suspension of the writ of habeas corpus or declaration of martial law under Art.
VII, Section 18, or the existence of a national emergency justifying the delegation of extraordinary powers to the President
under Art. VI, Section 23[2], is subject to judicial review because basic rights of individuals may be at hazard. But the
factual basis of presidential certification of bills, which involves doing away with procedural requirements designed to
insure that bills are duly considered by members of Congress, certainly should elicit a different standard of review.
Petitioners also invite attention to the fact that the President certified S. No. 1630 and not H. No. 11197. That is because S.
No. 1630 was what the Senate was considering. When the matter was before the House, the President likewise certified
H. No. 9210 the pending in the House.cralaw
Third . Finally it is contended that the bill which became Republic Act No. 7716 is the bill which the Conference Committee
prepared by consolidating H. No. 11197 and S. No. 1630. It is claimed that the Conference Committee report included
provisions not found in either the House bill or the Senate bill and that these provisions were "surreptitiously" inserted by
the Conference Committee. Much is made of the fact that in the last two days of its session on April 21 and 25, 1994 the
Committee met behind closed doors. We are not told, however, whether the provisions were not the result of the give and
take that often mark the proceedings of conference committees.
Nor is there anything unusual or extraordinary about the fact that the Conference Committee met in executive sessions.
Often the only way to reach agreement on conflicting provisions is to meet behind closed doors, with only the conferees
present. Otherwise, no compromise is likely to be made. The Court is not about to take the suggestion of a cabal or
sinister motive attributed to the conferees on the basis solely of their "secret meetings" on April 21 and 25, 1994, nor read
anything into the incomplete remarks of the members, marked in the transcript of stenographic notes by ellipses. The
113

incomplete sentences are probably due to the stenographer's own limitations or to the incoherence that sometimes
characterize conversations. William Safire noted some such lapses in recorded talks even by recent past Presidents of the
United States.
In any event, in the United States conference committees had been customarily held in executive sessions with only the
conferees and their staffs in attendance. [13] Only in November 1975 was a new rule adopted requiring open sessions.
Even then a majority of either chamber's conferees may vote in public to close the meetings. [14] As to the possibility of an
entirely new bill emerging out of a Conference Committee, it has been explained:
Under congressional rules of procedure, conference committees are not expected to make any material change in the
measure at issue, either by deleting provisions to which both houses have already agreed or by inserting new provisions.
But this is a difficult provision to enforce. Note the problem when one house amends a proposal originating in either house
by striking out everything following the enacting clause and substituting provisions which make it an entirely new bill. The
versions are now altogether different, permitting a conference committee to draft essentially a new bill.[15]
The result is a third version, which is considered an "amendment in the nature of a substitute," the only requirement for
which being that the third version be germane to the subject of the House and Senate bills. [16]
Indeed, this Court recently held that it is within the power of a conference committee to include in its report an entirely new
provision that is not found either in the House bill or in the Senate bill. [17] If the committee can propose an amendment
consisting of one or two provisions, there is no reason why it cannot propose several provisions, collectively considered as
an "amendment in the nature of a substitute," so long as such amendment is germane to the subject of the bills before the
committee. After all, its report was not final but needed the approval of both houses of Congress to become valid as an act
of the legislative department. The charge that in this case the Conference Committee acted as a third legislative chamber
is thus without any basis.[18]
Nonetheless, it is argued that under the respective Rules of the Senate and the House of Representatives a conference
committee can only act on the differing provisions of a Senate bill and a House bill, and that contrary to these Rules the
Conference Committee inserted provisions not found in the bills submitted to it. The following provisions are cited in
support of this contention:
Rules of the Senate
Rule XII:
Section 26. In the event that the Senate does not agree with the House of Representatives on the provision of any bill or
joint resolution, the differences shall be settled by a conference committee of both Houses which shall meet within ten
days after their composition.
The President shall designate the members of the conference committee in accordance with subparagraph (c), Section 3
of Rule III.
Each Conference Committee Report shall contain a detailed and sufficiently explicit statement of the changes in or
amendments to the subject measure, and shall be signed by the conferees.
The consideration of such report shall not be in order unless the report has been filed with the Secretary of the Senate and
copies
thereof
have
been
distributed
to
the
Members. [Emphasis
added].
Rules of the House of Representatives
Rule XIV:
Section 85. Conference Committee Reports.- In the event that the House does not agree with the Senate on the
amendments to any bill or joint resolution, the differences may be settled by conference committees of both Chambers.
The consideration of conference committee reports shall always be in order, except when the journal is being read, while
the roll is being called or the House is dividing on any question. Each of the pages of such reports shall be signed by the
114

conferees. Each report shall contain a detailed, sufficiently explicit statement of the changes in or amendments to the
subject measure.
The consideration of such report shall not be in order unless copies thereof are distributed to the Members: Provided, That
in the last fifteen days of each session period it shall be deemed sufficient that three copies of the report, signed as above
provided, are deposited in the office of the Secretary General. [Emphasis added].
To be sure, nothing in the Rules limits a conference committee to a consideration of conflicting provisions. But Rule XLIV,
Section 112 of the Rules of the Senate is cited to the effect that "If there is no Rule applicable to a specific case the
precedents of the Legislative Department of the Philippines shall be resorted to, and as a supplement of these, the Rules
contained in Jefferson's Manual." The following is then quoted from the Jefferson's Manual:
The managers of a conference must confine themselves to the differences committed to them and may not include
subjects not within disagreements, even though germane to a question in issue.cralaw
Note that according to Rule XLIX, Section 112, in case there is no specific rule applicable, resort must be to the legislative
practice. The Jefferson's Manual is resorted to only as supplement. It is common place in Congress that conference
committee reports include new matters which, though germane, have not been committed to the committee. This practice
was admitted by Senator Raul S. Roco, petitioner in G. R. No. 115543, during the oral argument in these cases. Whatever,
then, may be provided in the Jefferson's Manual must be considered to have been modified by the legislative practice. If a
change is desired in the practice it must be sought in Congress since this question is not covered by any constitutional
provision but is only an internal rule of each house. Thus, Art. VI, Section 16[3] of the Constitution provides that "Each
House may determine the rules of its proceedings."
This observation applies to the other contention that the Rules of the two chambers were likewise disregarded in the
preparation of the Conference Committee Report because the Report did not contain a "detailed and sufficiently explicit
statement of changes in, or amendments to, the subject measure." The Report used brackets and capital letters to indicate
the changes. This is a standard practice in bill-drafting. We cannot say that in using these marks and symbols, the
Committee violated the Rules of the Senate and the House. Moreover, this Court is not the proper forum for the
enforcement of these internal Rules. To the contrary, as we have already ruled, "parliamentary rules are merely procedural
and with their observance the courts have no concern." [19] Our concern is with the procedural requirements of the
Constitution for the enactment of laws. As far as these requirements are concerned, we are satisfied that they have been
faithfully observed in these cases.cralaw
Nor is there any reason for requiring that the Committee's Report in these cases must have undergone three readings in
each of the two houses. If that be the case, there would be no end to negotiation since each house may seek modifications
of the compromise bill. The nature of the bill, therefore, requires that it be acted upon by each house on a "take it or leave
it" basis, with the only alternative that if it is not approved by both houses, another conference committee must be
appointed. But then again the result would still be a compromise measure that may not be wholly satisfying to both
houses.cralaw
Art. VI, Section 26[2] must, therefore, be construed as referring only to bills introduced for the first time in either house of
Congress, not to the conference committee report. For if the purpose of requiring three readings is to give members of
Congress time to study bills, it cannot be gainsaid that H. No. 11197 was passed in the House after three readings; that in
the Senate it was considered on first reading and then referred to a committee of that body; that although the Senate
committee did not report out the House bill, it submitted a version [S. No. 1630] which it had prepared by "taking into
consideration" the House bill; that for its part the Conference Committee consolidated the two bills and prepared a
compromise version; that the Conference Committee Report was thereafter approved by the House and the Senate,
presumably after appropriate study by their members. We cannot say that, as a matter of fact, the members of Congress
were not fully informed of the provisions of the bill. The allegation that the Conference Committee usurped the legislative
power of Congress is, in our view, without warrant in fact and in law.cralaw
Fourth. Whatever doubts there may be as to the formal validity of Republic Act No. 7716 must be resolved in its favor. Our
cases [20] manifest firm adherence to the rule that an enrolled copy of a bill is conclusive not only of its provisions but also
of its due enactment. Not even claims that a proposed constitutional amendment was invalid because the requisite votes
115

for its approval had not been obtained [21] or that certain provisions of a statute had been "smuggled" in the printing of the
bill [22]have moved or persuaded us to look behind the proceedings of a coequal branch of the government. There is no
reason now to depart from this rule.cralaw
No claim is here made that the "enrolled bill" rule is absolute. In fact in one case [23]we "went behind" an enrolled bill and
consulted the Journal to determine whether certain provisions of a statute had been approved by the Senate in view of the
fact that the President of the Senate himself, who had signed the enrolled bill, admitted a mistake and withdrew his
signature, so that in effect there was no longer an enrolled bill to consider.cralaw
But where allegations that the constitutional procedures for the passage of bills have not been observed have no more
basis than another allegation that the Conference Committee "surreptitiously" inserted provisions into a bill which it had
prepared, we should decline the invitation to go behind the enrolled copy of the bill. To disregard the "enrolled bill" rule in
such cases would be to disregard the respect due the other two departments of our government.cralaw
Fifth. An additional attack on the formal validity of Republic Act No. 7716 is made by the Philippine Airlines, Inc., petitioner
in G. R. No. 11582, namely, that it violates Art. VI, Section 26[1] which provides that "Every bill passed by Congress shall
embrace only one subject which shall be expressed in the title thereof." It is contended that neither H. No. 11197 nor S.
No. 1630 provided for removal of exemption of PAL transactions from the payment of the VAT and that this was made only
in the Conference Committee bill which became Republic Act No. 7716 without reflecting this fact in its title.cralaw
The title of Republic Act No. 7716 is:
AN ACT RESTRUCTURING THE VALUE-ADDED TAX [VAT] SYSTEM, WIDENING ITS TAX BASE AND ENHANCING
ITS ADMINISTRATION, AND FOR THESE PURPOSES AMENDING AND REPEALING THE RELEVANT PROVISIONS
OF THE NATIONAL INTERNAL REVENUE CODE, AS AMENDED, AND FOR OTHER PURPOSES.chanrobles virtual
law library
Among the provisions of the NIRC amended is Section 103, which originally read:
Section 103. Exempt Transactions.- The following shall be exempt from the value-added tax:
[q] Transactions which are exempt under special laws or international agreements to which the Philippines is a signatory.
Among the transactions exempted from the VAT were those of PAL because it was exempted under its franchise (P.D. No.
1590) from the payment of all "other taxes now or in the near future," in consideration of the payment by it either of the
corporate income tax or a franchise tax of 2%.
As a result of its amendment by Republic Act No. 7716, Section 103 of the NIRC now provides:
Section 103. Exempt Transactions.- The following shall be exempt from the value-added tax:
[q] Transactions which are exempt under special laws, except those granted under Presidential Decree Nos. 66, 529, 972,
1491, 1590.
The effect of the amendment is to remove the exemption granted to PAL, as far as the VAT is concerned.
The question is whether this amendment of Section 103 of the NIRC is fairly embraced in the title of Republic Act No.
7716, although no mention is made therein of P. D. No. 1590 as among those which the statute amends. We think it is,
since the title states that the purpose of the statute is to expand the VAT system, and one way of doing this is to widen its
base by withdrawing some of the exemptions granted before. To insist that P. D. No. 1590 be mentioned in the title of the
law, in addition to Section 103 of the NIRC, in which it is specifically referred to, would be to insist that the title of a bill
should be a complete index of its content.cralaw
The constitutional requirement that every bill passed by Congress shall embrace only one subject which shall be
expressed in its title is intended to prevent surprise upon the members of Congress and to inform the people of pending
legislation so that, if they wish to, they can be heard regarding it. If, in the case at bar, petitioner did not know before that
its exemption had been withdrawn, it is not because of any defect in the title but perhaps for the same reason other
statutes, although published, pass unnoticed until some event somehow calls attention to their existence. Indeed, the title
of Republic Act No. 7716 is not any more general than the title of PAL's own franchise under P. D. No. 1590, and yet no
mention is made of its tax exemption. The title of P. D. No. 1590 is:
AN ACT GRANTING A NEW FRANCHISE TO PHILIPPINE AIRLINES, INC. TO ESTABLISH, OPERATE, AND
MAINTAIN AIR TRANSPORT SERVICES IN THE PHILIPPINES AND BETWEEN THE PHILIPPINES AND OTHER
COUNTRIES.chanrobles virtual law library
116

The trend in our cases is to construe the constitutional requirement in such a manner that courts do not unduly interfere
with the enactment of necessary legislation and to consider it sufficient if the title expresses the general subject of the
statute and all its provisions are germane to the general subject thus expressed. [24]
It is further contended that amendment of petitioner's franchise may only be made by special law, in view of Section 24 of
P. D. No. 1590 which provides:
This franchise, as amended, or any section or provision hereof may only be modified, amended, or repealed expressly by
a special law or decree that shall specifically modify, amend, or repeal this franchise or any section or provision thereof.
This provision is evidently intended to prevent the amendment of the franchise by mere implication resulting from the
enactment of a later inconsistent statute, in consideration of the fact that a franchise is a contract which can be altered only
by consent of the parties. Thus in Manila Railroad Co. v.Rafferty, [25] it was held that an Act of the U.S. Congress, which
provided for the payment of tax on certain goods and articles imported into the Philippines, did not amend the franchise of
plaintiff, which exempted it from all taxes except those mentioned in its franchise. It was held that a special law cannot be
amended by a general law.
In contrast, in the case at bar, Republic Act No. 7716 expressly amends PAL's franchise [P. D. No. 1590] by specifically
excepting from the grant of exemptions from the VAT PAL's exemption under P. D. No. 1590. This is within the power of
Congress to do under Art. XII, Section 11 of the Constitution, which provides that the grant of a franchise for the operation
of a public utility is subject to amendment, alteration or repeal by Congress when the common good so requires.
II. SUBSTANTIVE ISSUES
A. Claims of Press Freedom, Freedom of Thought and Religious Freedom
The Philippine Press Institute [PPI], petitioner in G. R. No. 115544, is a non-profit organization of newspaper publishers
established for the improvement of journalism in the Philippines. On the other hand, petitioner in G. R. No. 115781, the
Philippine Bible Society [PBS], is a nonprofit organization engaged in the printing and distribution of bibles and other
religious articles. Both petitioners claim violations of their rights under Sections 4 and 5 of the Bill of Rights as a result of
the enactment of the VAT Law.cralaw
The PPI questions the law insofar as it has withdrawn the exemption previously granted to the press under Section 103 [f]
of the NIRC. Although the exemption was subsequently restored by administrative regulation with respect to the circulation
income of newspapers, the PPI presses its claim because of the possibility that the exemption may still be removed by
mere revocation of the regulation of the Secretary of Finance. On the other hand, the PBS goes so far as to question the
Secretary's power to grant exemption for two reasons: [1] The Secretary of Finance has no power to grant tax exemption
because this is vested in Congress and requires for its exercise the vote of a majority of all its members; [26] and [2] the
Secretary's duty is to execute the law.cralaw
Section 103 of the NIRC contains a list of transactions exempted from VAT. Among the transactions previously granted
exemption were:
[f] Printing, publication, importation or sale of books and any newspaper, magazine, review, or bulletin which appears at
regular intervals with fixed prices for subscription and sale and which is devoted principally to the publication of
advertisements.
Republic Act No. 7716 amended Section 103 by deleting paragraph [f] with the result that print media became subject to
the VAT with respect to all aspects of their operations. Later, however, based on a memorandum of the Secretary of
Justice, respondent Secretary of Finance issued Revenue Regulations No. 11-94 dated June 27, 1994, exempting the
"circulation income of print media pursuant to Section 4 Article III of the 1987 Philippine Constitution guaranteeing against
abridgment of freedom of the press, among others." The exemption of "circulation income" has left income from
advertisements still subject to the VAT.
It is unnecessary to pass upon the contention that the exemption granted is beyond the authority of the Secretary of
Finance to give, in view of PPI's contention that even with the exemption of the circulation revenue of print media, there is
still an unconstitutional abridgment of press freedom because of the imposition of the VAT on the gross receipts of
newspapers from advertisements and on their acquisition of paper, ink and services for publication. Even on the
assumption that no exemption has effectively been granted to print media transactions, We find no violation of press
freedom in these cases.cralaw
To be sure, We are not dealing here with a statute that on its face operates in the area of press freedom. The PPI's claim is
simply that as applied to newspapers, the law abridges press freedom. Even with due recognition of its high estate and its
117

importance in a democratic society, however, the press is not immune from general regulation by the State. It has been
held:
The publisher of a newspaper has no immunity from the application of general laws. He has no special privilege to invade
the rights and liberties of others. He must answer for libel. He may be punished for contempt of court. Like others, he must
pay equitable and nondiscriminatory taxes on his business. [27]
The PPI does not dispute this point, either.
What it contends is that by withdrawing the exemption previously granted to print media transactions involving printing,
publication, importation or sale of newspapers, Republic Act No. 7716 has singled out the press for discriminatory
treatment and that within the class of mass media the law discriminates against print media by giving broadcast media
favored treatment. We have carefully examined this argument, but we are unable to find a differential treatment of the
press by the law, much less any censorial motivation for its enactment. If the press is now required to pay a value-added
tax on its transactions, it is not because it is being singled out, much less targeted, for special treatment but only because
of the removal of the exemption previously granted to it by law. The withdrawal of exemption is all that is involved in these
cases. Other transactions, likewise previously granted exemption, have been delisted as part of the scheme to expand the
base and the scope of the VAT system. The law would perhaps be open to the charge of discriminatory treatment if the
only privilege withdrawn had been that granted to the press. But that is not the case.cralaw
The situation in the case at bar is indeed a far cry from those cited by the PPI in support of its claim that Republic Act No.
7716 subjects the press to discriminatory taxation. In the cases cited, the discriminatory purpose was clear either from the
background of the law or from its operation. For example, in Grosjean v. American Press Co., [28] the law imposed a
license tax equivalent to 2% of the gross receipts derived from advertisements only on newspapers which had a circulation
of more than 20,000 copies per week. Because the tax was not based on the volume of advertisement alone but was
measured by the extent of its circulation as well, the law applied only to the thirteen large newspapers in Louisiana, leaving
untaxed four papers with circulation of only slightly less than 20,000 copies a week and 120 weekly newspapers which
were in serious competition with the thirteen newspapers in question. It was well known that the thirteen newspapers had
been critical of Senator Huey Long, and the Long-dominated legislature of Louisiana respondent by taxing what Long
described as the "lying newspapers" by imposing on them "a tax on lying." The effect of the tax was to curtail both their
revenue and their circulation. As the U.S. Supreme Court noted, the tax was "a deliberate and calculated device in the
guise of a tax to limit the circulation of information to which the public is entitled in virtue of the constitutional
guaranties." [29] The case is a classic illustration of the warning that the power to tax is the power to destroy.cralaw
In the other case [30] invoked by the PPI, the press was also found to have been singled out because everything was
exempt from the "use tax" on ink and paper, except the press. Minnesota imposed a tax on the sales of goods in that state.
To protect the sales tax, it enacted a complementary tax on the privilege of "using, storing or consuming in that state
tangible personal property" by eliminating the residents' incentive to get goods from outside states where the sales tax
might be lower. The Minnesota Star Tribune was exempted from both taxes from 1967 to 1971. In 1971, however, the state
legislature amended the tax scheme by imposing the "use tax" on the cost of paper and ink used for publication. The law
was held to have singled out the press because [1] there was no reason for imposing the "use tax" since the press was
exempt from the sales tax and [2] the "use tax" was laid on an "intermediate transaction rather than the ultimate retail
sale." Minnesota had a heavy burden of justifying the differential treatment and it failed to do so. In addition, the U.S.
Supreme Court found the law to be discriminatory because the legislature, by again amending the law so as to exempt the
first $100,000 of paper and ink used, further narrowed the coverage of the tax so that "only a handful of publishers pay any
tax at all and even fewer pay any significant amount of tax." [31]The discriminatory purpose was thus very clear.cralaw
More recently, in Arkansas Writers' Project, Inc. v. Ragland, [32] it was held that a law which taxed general interest
magazines but not newspapers and religious, professional, trade and sports journals was discriminatory because while the
tax did not single out the press as a whole, it targeted a small group within the press. What is more, by differentiating on
the basis of contents [i.e., between general interest and special interests such as religion or sports] the law became
"entirely incompatible with the First Amendment's guarantee of freedom of the press."
These cases come down to this: that unless justified, the differential treatment of the press creates risks of suppression of
expression. In contrast, in the cases at bar, the statute applies to a wide range of goods and services. The argument that,
by imposing the VAT only on print media whose gross sales exceeds P480,000 but not more than P750,000, the law
118

discriminates [33] is without merit since it has not been shown that as a result the class subject to tax has been
unreasonably narrowed. The fact is that this limitation does not apply to the press along but to all sales. Nor is
impermissible motive shown by the fact that print media and broadcast media are treated differently. The press is taxed on
its transactions involving printing and publication, which are different from the transactions of broadcast media. There is
thus a reasonable basis for the classification.cralaw
The cases canvassed, it must be stressed, eschew any suggestion that "owners of newspapers are immune from any
forms of ordinary taxation." The license tax in the Grosjean case was declared invalid because it was "one single in kind,
with a long history of hostile misuse against the freedom of thepress." [34] On the other hand, Minneapolis Star
acknowledged that "The First Amendment does not prohibit all regulation of the press [and that] the States and the Federal
Government can subject newspapers to generally applicable economic regulations without creating constitutional
problems." [35]
What has been said above also disposes of the allegations of the PBS that the removal of the exemption of printing,
publication or importation of books and religious articles, as well as their printing and publication, likewise violates freedom
of thought and of conscience. For as the U.S. Supreme Court unanimously held in Jimmy Swaggart Ministries v. Board of
Equalization, [36] the Free Exercise of Religion Clause does not prohibit imposing a generally applicable sales and use tax
on the sale of religious materials by a religious organization.cralaw
This brings us to the question whether the registration provision of the law, [37]although of general applicability,
nonetheless is invalid when applied to the press because it lays a prior restraint on its essential freedom. The case of
American Bible Society v. City of Manila [38] is cited by both the PBS and the PPI in support of their contention that the
law imposes censorship. There, this Court held that an ordinance of the City of Manila, which imposed a license fee on
those engaged in the business of general merchandise, could not be applied to the appellant's sale of bibles and other
religious literature. This Court relied on Murdock v. Pennsylvania, [39] in which it was held that, as a license fee is fixed in
amount and unrelated to the receipts of the taxpayer, the license fee, when applied to a religious sect, was actually being
imposed as a condition for the exercise of the sect's right under the Constitution. For that reason, it was held, the license
fee "restrains in advance those constitutional liberties of press and religion and inevitably tends to suppress their
exercise." [40]
But in this case, the fee in Section 107, although a fixed amount [P1,000], is not imposed for the exercise of a privilege but
only for the purpose of defraying part of the cost of registration. The registration requirement is a central feature of the VAT
system. It is designed to provide a record of tax credits because any person who is subject to the payment of the VAT pays
an input tax, even as he collects an output tax on sales made or services rendered. The registration fee is thus a mere
administrative fee, one not imposed on the exercise of a privilege, much less a constitutional right.cralaw
For the foregoing reasons, we find the attack on Republic Act No. 7716 on the ground that it offends the free speech, press
and freedom of religion guarantees of the Constitution to be without merit. For the same reasons, we find the claim of the
Philippine Educational Publishers Association [PEPA] in G. R. No. 115931 that the increase in the price of books and other
educational materials as a result of the VAT would violate the constitutional mandate to the government to give priority to
education,
science
and
technology
[Art.
II,
Section
17]
to
be
untenable.
B. Claims of Regressivity, Denial of Due Process, Equal Protection, and Impairment of Contracts
There is basis for passing upon claims that on its face the statute violates the guarantees of freedom of speech, press and
religion. The possible "chilling effect" which it may have on the essential freedom of the mind and conscience and the need
to assure that the channels of communication are open and operating importunately demand the exercise of this Court's
power of review.cralaw
There is, however, no justification for passing upon the claims that the law also violates the rule that taxation must be
progressive and that it denies petitioners' right to due process and that equal protection of the laws. The reason for this
different treatment has been cogently stated by an eminent authority on constitutional law thus: "when freedom of the mind
is imperiled by law, it is freedom that commands a momentum of respect; when property is imperiled it is the lawmakers'
judgment that commands respect. This dual standard may not precisely reverse the presumption of constitutionality in civil
liberties cases, but obviously it does set up a hierarchy of values within the due process clause." [41]

119

Indeed, the absence of threat of immediate harm makes the need for judicial intervention less evident and underscores the
essential nature of petitioners' attack on the law on the grounds of regressivity, denial of due process and equal protection
and impairment of contracts as a mere academic discussion of the merits of the law. For the fact is that there have even
been no notices of assessments issued to petitioners and no determinations at the administrative levels of their claims so
as to illuminate the actual operation of the law and enable us to reach sound judgment regarding so fundamental
questions as those raised in these suits.cralaw
Thus, the broad argument against the VAT is that it is regressive and that it violates the requirement that "The rule of
taxation shall be uniform and equitable [and] Congress shall evolve a progressive system of taxation." [42] Petitioners in
G. R. No. 115781 quote from a paper, entitled "VAT Policy Issues: Structure, Regressivity, Inflation and Exports" by Alan A.
Tait of the International Monetary Fund, that "VAT payment by low-income households will be a higher proportion of their
incomes [and expenditures] than payments by higher-income households. That is, the VAT will be regressive." Petitioners
contend that as a result of the uniform 10% VAT, the tax on consumption goods of those who are in the higher-income
bracket, which before were taxed at a rate higher than 10%, has been reduced, while basic commodities, which before
were taxed at rates ranging from 3% to 5%, are now taxed at a higher rate.cralaw
Just as vigorously as it is asserted that the law is regressive, the opposite claim is pressed by respondents that in fact it
distributes the tax burden to as many goods and services as possible particularly to those which are within the reach of
higher-income groups, even as the law exempts basic goods and services. It is thus equitable. The goods and properties
subject to the VAT are those used or consumed by higher-income groups. These include real properties held primarily for
sale to customers or held for lease in the ordinary course of business, the right or privilege to use industrial, commercial or
scientific equipment, hotels, restaurants and similar places, tourist buses, and the like. On the other hand, small business
establishments, with annual gross sales of less than P500,000, are exempted. This, according to respondents, removes
from the coverage of the law some 30,000 business establishments. On the other hand, an occasional paper [43] of the
Center for Research and Communication cites a NEDA study that the VAT has a minimal impact on inflation and income
distribution and that, while additional expenditure for the lowest income class is only P301 or 1.49% a year, that for a
family earning P500,000 a year or more is P8,340 or 2.2%.cralaw
Lacking empirical data on which to base any conclusion regarding these arguments, any discussion whether the VAT is
regressive in the sense that it will hit the "poor" and middle-income group in society harder than it will the "rich," as the
Cooperative Union of the Philippines [CUP] claims in G. R. No. 115873, is largely an academic exercise. On the other
hand, the CUP's contention that Congress' withdrawal of exemption of producers cooperatives, marketing cooperatives,
and service cooperatives, while maintaining that granted to electric cooperatives, not only goes against the constitutional
policy to promote cooperatives as instruments of social justice [Art. XII, Section 15] but also denies such cooperatives the
equal protection of the law is actually a policy argument. The legislature is not required to adhere to a policy of "all or none"
in choosing the subject of taxation. [44]
Nor is the contention of the Chamber of Real Estate and Builders Association [CREBA], petitioner in G. R. 115754, that the
VAT will reduce the mark up of its members by as much as 85% to 90%, any more concrete. It is a mere allegation. On the
other hand, the claim of the Philippine Press Institute, petitioner in G. R. No. 115544, that the VAT will drive some of its
members out of circulation because their profits from advertisements will not be enough to pay for their tax liability, while
purporting to be based on the financial statements of the newspapers in question, still falls short of the establishment of
facts by evidence so necessary for adjudicating the question whether the tax is oppressive and confiscatory.cralaw
Indeed, regressivity is not a negative standard for courts to enforce. What Congress is required by the Constitution to do is
to "evolve a progressive system of taxation." This is a directive to Congress, just like the directive to it to give priority to the
enactment of laws for the enhancement of human dignity and the reduction of social, economic and political inequalities
[Art. XIII, Section 1] or for the promotion of the right to "quality education" [Art. XIV, Section 1]. These provisions are put in
the Constitution as moral incentives to legislation, not as judicially enforceable rights.cralaw
At all events, our 1988 decision in Kapatiran [45] should have laid to rest the questions now raised against the VAT. There
similar arguments made against the original VAT Law [Executive Order No. 273] were held to be hypothetical, with no
more basis than newspaper articles which this Court found to be "hearsay and [without] evidentiary value." As Republic Act
No. 7716 merely expands the base of the VAT system and its coverage as provided in the original VAT Law, further debate
on the desirability and wisdom of the law should have shifted to Congress.cralaw
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Only slightly less abstract but nonetheless hypothetical is the contention of CREBA that the imposition of the VAT on the
sales and leases of real estate by virtue of contracts entered into prior to the effectivity of the law would violate the
constitutional provision that "No law impairing the obligation of contracts shall be passed." It is enough to say that the
parties to a contract cannot, through the exercise of prophetic discernment, fetter the exercise of the taxing power of the
State. For not only are existing laws read into contracts in order to fix obligations as between parties, but the reservation of
essential attributes of sovereign power is also read into contracts as a basic postulate of the legal order. The policy of
protecting contracts against impairment presupposes the maintenance of a government which retains adequate authority
to secure the peace and good order of society. [46]
In truth, the Contract Clause has never been thought as a limitation on the exercise of the State's power of taxation save
only where a tax exemption has been granted for a valid consideration. [47] Such is not the case of PAL in G. R. No.
115852, and we do not understand it to make this claim. Rather, its position, as discussed above, is that the removal of its
tax exemption cannot be made by a general, but only by a specific, law.cralaw
The substantive issues raised in some of the cases are presented in abstract, hypothetical form because of the lack of a
concrete record. We accept that this Court does not only adjudicate private cases; that public actions by "nonHohfeldian" [48] or ideological plaintiffs are now cognizable provided they meet the standing requirement of the
Constitution; that under Art. VIII, Section 1, paragraph 2, the Court has a "special function" of vindicating constitutional
rights. Nonetheless the feeling cannot be escaped that We do not have before Us in these cases, a fully developed factual
record that alone can impart to our adjudication the impact of actuality [49] to insure that decision-making is informed and
well grounded. Needless to say, we do not have power to render advisory opinions or even jurisdiction over petitions for
declaratory judgment. In effect we are being asked to do what the Conference Committee is precisely accused of having
done in these cases to sit as a third legislative chamber to review legislation.cralaw
We are told, however, that the power of judicial review is not so much power as it is duty imposed on this Court by the
Constitution and that we would be remiss in the performance of that duty if we decline to look behind the barriers set by
the principle of separation of powers. Art. VIII, Section 1, paragraph 2 is cited in support of this view:
Judicial power includes the duty of the courts of justice to settle actual controversies involving rights which are legally
demandable and enforceable, and to determine whether or not there has been a grave abuse of discretion amounting to
lack or excess of jurisdiction on the part of any branch or instrumentality of the Government.cralaw
To view the judicial power of review as a duty is nothing new. Chief Justice Marshall said so in 1803 to justify the assertion
of this power in Marbury v. Madison:
It is emphatically the province and duty of the judicial department to say what the law is. Those who apply the rule to
particular cases must of necessity expound and interpret that rule. If two laws conflict with each other, the courts must
decide on the operation of each. [50]
Justice Laurel echoed this justification in 1936 in Angara v. Electoral Commission:
And when the judiciary mediates to allocate constitutional boundaries, it does not assert any superiority over the other
departments; it does not in reality nullify or invalidate an act of the legislature, but only asserts the solemn and sacred
obligation assigned to it by the Constitution to determine conflicting claims of authority under the Constitution and to
establish for the parties in an actual controversy the rights which that instrument secures and guarantees to them. [51]
This conception of the judicial power has been affirmed in several cases [52] of this Court following Angara.
It does not add anything, therefore, to invoke this "duty" to justify this Court's intervention in what is essentially a case that
at best is not ripe for adjudication. That duty must still be performed in the context of a concrete case or controversy, as
Art. VIII, Section 5[2] clearly defines our jurisdiction in terms of "cases," and nothing but "cases." That the other
departments of the government may have committed a grave abuse of discretion is not an independent ground for
exercising our power. Disregard of the essential limits imposed by the case and controversy requirement can in the long
run only result in undermining our authority as a court of law. For, as judges, what We are called upon to render is
judgment according to law, not according to what may appear to be the opinion of the day.cralaw
In the preceeding pages, We have endeavored to discuss, within limits, the validity of Republic Act No. 7716 in its formal
and substantive aspects as this has been raised in the various cases before Us. To sum up, We hold:
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[1] That the procedural requirements of the Constitution have been complied with by Congress in the enactment of the
statute;
[2] That judicial inquiry, whether the formal requirements for the enactment of statutes beyond those prescribed by the
Constitution have been observed, is precluded by the principle of separation of powers;
[3] That the law does not abridge freedom of speech, expression or the press, nor interfere with the free exercise of
religion, nor deny to any of the parties the right to an education; and
[4] That, in view of the absence of a factual foundation of record, claims that the law is regressive, oppressive and
confiscatory and that it violates vested rights protected under the Contract Clause are prematurely raised and do not justify
the grant of prospective relief by writ of prohibition.
WHEREFORE, the petitions in these cases are dismissed.
Bidin, Quiason and Kapunan, JJ., concur.
G.R. No. L-59431 July 25, 1984
ANTERO M. SISON, JR., petitioner,
vs.
RUBEN B. ANCHETA, Acting Commissioner, Bureau of Internal Revenue; ROMULO VILLA, Deputy Commissioner,
Bureau of Internal Revenue; TOMAS TOLEDO Deputy Commissioner, Bureau of Internal Revenue; MANUEL ALBA,
Minister of Budget, FRANCISCO TANTUICO, Chairman, Commissioner on Audit, and CESAR E. A. VIRATA,
Minister of Finance, respondents.
Antero Sison for petitioner and for his own behalf.
The Solicitor General for respondents.
FERNANDO, C.J.:
The success of the challenge posed in this suit for declaratory relief or prohibition proceeding 1 on the validity of Section I
of Batas Pambansa Blg. 135 depends upon a showing of its constitutional infirmity. The assailed provision further amends
Section 21 of the National Internal Revenue Code of 1977, which provides for rates of tax on citizens or residents on (a)
taxable compensation income, (b) taxable net income, (c) royalties, prizes, and other winnings, (d) interest from bank
deposits and yield or any other monetary benefit from deposit substitutes and from trust fund and similar arrangements, (e)
dividends and share of individual partner in the net profits of taxable partnership, (f) adjusted gross
income. 2 Petitioner 3 as taxpayer alleges that by virtue thereof, "he would be unduly discriminated against by the
imposition of higher rates of tax upon his income arising from the exercise of his profession vis-a-vis those which are
imposed upon fixed income or salaried individual taxpayers. 4He characterizes the above sction as arbitrary amounting to
class legislation, oppressive and capricious in character 5 For petitioner, therefore, there is a transgression of both the
equal protection and due process clauses 6 of the Constitution as well as of the rule requiring uniformity in taxation. 7
The Court, in a resolution of January 26, 1982, required respondents to file an answer within 10 days from notice. Such an
answer, after two extensions were granted the Office of the Solicitor General, was filed on May 28, 1982. 8The facts as
alleged were admitted but not the allegations which to their mind are "mere arguments, opinions or conclusions on the part
of the petitioner, the truth [for them] being those stated [in their] Special and Affirmative Defenses." 9 The answer then
affirmed: "Batas Pambansa Big. 135 is a valid exercise of the State's power to tax. The authorities and cases cited while
correctly quoted or paraghraph do not support petitioner's stand." 10 The prayer is for the dismissal of the petition for lack
of merit.
This Court finds such a plea more than justified. The petition must be dismissed.
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1. It is manifest that the field of state activity has assumed a much wider scope, The reason was so clearly set forth by
retired Chief Justice Makalintal thus: "The areas which used to be left to private enterprise and initiative and which the
government was called upon to enter optionally, and only 'because it was better equipped to administer for the public
welfare than is any private individual or group of individuals,' continue to lose their well-defined boundaries and to be
absorbed within activities that the government must undertake in its sovereign capacity if it is to meet the increasing social
challenges of the times." 11 Hence the need for more revenues. The power to tax, an inherent prerogative, has to be
availed of to assure the performance of vital state functions. It is the source of the bulk of public funds. To praphrase a
recent decision, taxes being the lifeblood of the government, their prompt and certain availability is of the essence. 12
2. The power to tax moreover, to borrow from Justice Malcolm, "is an attribute of sovereignty. It is the strongest of all the
powers of of government." 13 It is, of course, to be admitted that for all its plenitude 'the power to tax is not unconfined.
There are restrictions. The Constitution sets forth such limits . Adversely affecting as it does properly rights, both the due
process and equal protection clauses inay properly be invoked, all petitioner does, to invalidate in appropriate cases a
revenue measure. if it were otherwise, there would -be truth to the 1803 dictum of Chief Justice Marshall that "the power to
tax involves the power to destroy." 14 In a separate opinion in Graves v. New York, 15 Justice Frankfurter, after referring to
it as an 1, unfortunate remark characterized it as "a flourish of rhetoric [attributable to] the intellectual fashion of the times
following] a free use of absolutes." 16 This is merely to emphasize that it is riot and there cannot be such a constitutional
mandate. Justice Frankfurter could rightfully conclude: "The web of unreality spun from Marshall's famous dictum was
brushed away by one stroke of Mr. Justice Holmess pen: 'The power to tax is not the power to destroy while this Court
sits." 17 So it is in the Philippines.
3. This Court then is left with no choice. The Constitution as the fundamental law overrides any legislative or executive, act
that runs counter to it. In any case therefore where it can be demonstrated that the challenged statutory provision as
petitioner here alleges fails to abide by its command, then this Court must so declare and adjudge it null. The injury thus
is centered on the question of whether the imposition of a higher tax rate on taxable net income derived from business or
profession than on compensation is constitutionally infirm.
4, The difficulty confronting petitioner is thus apparent. He alleges arbitrariness. A mere allegation, as here. does not
suffice. There must be a factual foundation of such unconstitutional taint. Considering that petitioner here would condemn
such a provision as void or its face, he has not made out a case. This is merely to adhere to the authoritative doctrine that
were the due process and equal protection clauses are invoked, considering that they arc not fixed rules but rather broad
standards, there is a need for of such persuasive character as would lead to such a conclusion. Absent such a showing,
the presumption of validity must prevail. 18
5. It is undoubted that the due process clause may be invoked where a taxing statute is so arbitrary that it finds no support
in the Constitution. An obvious example is where it can be shown to amount to the confiscation of property. That would be
a clear abuse of power. It then becomes the duty of this Court to say that such an arbitrary act amounted to the exercise of
an authority not conferred. That properly calls for the application of the Holmes dictum. It has also been held that where
the assailed tax measure is beyond the jurisdiction of the state, or is not for a public purpose, or, in case of a retroactive
statute is so harsh and unreasonable, it is subject to attack on due process grounds. 19
6. Now for equal protection. The applicable standard to avoid the charge that there is a denial of this constitutional
mandate whether the assailed act is in the exercise of the lice power or the power of eminent domain is to demonstrated
that the governmental act assailed, far from being inspired by the attainment of the common weal was prompted by the
spirit of hostility, or at the very least, discrimination that finds no support in reason. It suffices then that the laws operate
equally and uniformly on all persons under similar circumstances or that all persons must be treated in the same manner,
the conditions not being different, both in the privileges conferred and the liabilities imposed. Favoritism and undue
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preference cannot be allowed. For the principle is that equal protection and security shall be given to every person under
circumtances which if not Identical are analogous. If law be looked upon in terms of burden or charges, those that fall
within a class should be treated in the same fashion, whatever restrictions cast on some in the group equally binding on
the rest." 20 That same formulation applies as well to taxation measures. The equal protection clause is, of course, inspired
by the noble concept of approximating the Ideal of the laws benefits being available to all and the affairs of men being
governed by that serene and impartial uniformity, which is of the very essence of the Idea of law. There is, however,
wisdom, as well as realism in these words of Justice Frankfurter: "The equality at which the 'equal protection' clause aims
is not a disembodied equality. The Fourteenth Amendment enjoins 'the equal protection of the laws,' and laws are not
abstract propositions. They do not relate to abstract units A, B and C, but are expressions of policy arising out of specific
difficulties, address to the attainment of specific ends by the use of specific remedies. The Constitution does not require
things which are different in fact or opinion to be treated in law as though they were the same."21 Hence the constant
reiteration of the view that classification if rational in character is allowable. As a matter of fact, in a leading case of Lutz V.
Araneta, 22 this Court, through Justice J.B.L. Reyes, went so far as to hold "at any rate, it is inherent in the power to tax
that a state be free to select the subjects of taxation, and it has been repeatedly held that 'inequalities which result from a
singling out of one particular class for taxation, or exemption infringe no constitutional limitation.'" 23
7. Petitioner likewise invoked the kindred concept of uniformity. According to the Constitution: "The rule of taxation shag be
uniform and equitable." 24 This requirement is met according to Justice Laurel in Philippine Trust Company v.
Yatco, 25 decided in 1940, when the tax "operates with the same force and effect in every place where the subject may be
found. " 26 He likewise added: "The rule of uniformity does not call for perfect uniformity or perfect equality, because this is
hardly attainable." 27 The problem of classification did not present itself in that case. It did not arise until nine years later,
when the Supreme Court held: "Equality and uniformity in taxation means that all taxable articles or kinds of property of the
same class shall be taxed at the same rate. The taxing power has the authority to make reasonable and natural
classifications for purposes of taxation, ... . 28 As clarified by Justice Tuason, where "the differentiation" complained of
"conforms to the practical dictates of justice and equity" it "is not discriminatory within the meaning of this clause and is
therefore uniform." 29 There is quite a similarity then to the standard of equal protection for all that is required is that the tax
"applies equally to all persons, firms and corporations placed in similar situation." 30
8. Further on this point. Apparently, what misled petitioner is his failure to take into consideration the distinction between a
tax rate and a tax base. There is no legal objection to a broader tax base or taxable income by eliminating all deductible
items and at the same time reducing the applicable tax rate. Taxpayers may be classified into different categories. To
repeat, it. is enough that the classification must rest upon substantial distinctions that make real differences. In the case of
the gross income taxation embodied in Batas Pambansa Blg. 135, the, discernible basis of classification is the
susceptibility of the income to the application of generalized rules removing all deductible items for all taxpayers within the
class and fixing a set of reduced tax rates to be applied to all of them. Taxpayers who are recipients of compensation
income are set apart as a class. As there is practically no overhead expense, these taxpayers are e not entitled to make
deductions for income tax purposes because they are in the same situation more or less. On the other hand, in the case of
professionals in the practice of their calling and businessmen, there is no uniformity in the costs or expenses necessary to
produce their income. It would not be just then to disregard the disparities by giving all of them zero deduction and
indiscriminately impose on all alike the same tax rates on the basis of gross income. There is ample justification then for
the Batasang Pambansa to adopt the gross system of income taxation to compensation income, while continuing the
system of net income taxation as regards professional and business income.
9. Nothing can be clearer, therefore, than that the petition is without merit, considering the (1) lack of factual foundation to
show the arbitrary character of the assailed provision; 31 (2) the force of controlling doctrines on due process, equal
protection, and uniformity in taxation and (3) the reasonableness of the distinction between compensation and taxable net
income of professionals and businessman certainly not a suspect classification,
124

WHEREFORE, the petition is dismissed. Costs against petitioner.

G.R. No. 163583

August 20, 2008

BRITISH AMERICAN TOBACCO, petitioner,

vs.
JOSE ISIDRO N. CAMACHO, in his capacity as Secretary of the Department of Finance and GUILLERMO L.
PARAYNO, JR., in his capacity as Commissioner of the Bureau of Internal Revenue, respondents.
Philip Morris Philippines Manufacturing, Inc., fortune tobacco, corp., MIGHTY CORPORATION, and JT
InTERNATIONAL, S.A., respondents-in-intervention.
DECISION
YNARES-SANTIAGO, J.:
This petition for review assails the validity of: (1) Section 145 of the National Internal Revenue Code (NIRC), as recodified
by Republic Act (RA) 8424; (2) RA 9334, which further amended Section 145 of the NIRC on January 1, 2005; (3)
Revenue Regulations Nos. 1-97, 9-2003, and 22-2003; and (4) Revenue Memorandum Order No. 6-2003. Petitioner
argues that the said provisions are violative of the equal protection and uniformity clauses of the Constitution.
RA 8240, entitled "An Act Amending Sections 138, 139, 140, and 142 of the NIRC, as Amended and For Other Purposes,"
took effect on January 1, 1997. In the same year, Congress passed RA 8424 or The Tax Reform Act of 1997, re-codifying
the NIRC. Section 142 was renumbered as Section 145 of the NIRC.
Paragraph (c) of Section 145 provides for four tiers of tax rates based on the net retail price per pack of cigarettes. To
determine the applicable tax rates of existing cigarette brands, a survey of the net retail prices per pack of cigarettes was
conducted as of October 1, 1996, the results of which were embodied in Annex "D" of the NIRC as the duly registered,
existing or active brands of cigarettes.
Paragraph (c) of Section 145, 1 states
SEC. 145. Cigars and cigarettes.
xxxx
(c) Cigarettes packed by machine. There shall be levied, assessed and collected on cigarettes packed by
machine a tax at the rates prescribed below:
(1) If the net retail price (excluding the excise tax and the value-added tax) is above Ten pesos (P10.00)
per pack, the tax shall be Thirteen pesos and forty-four centavos (P13.44) per pack;
(2) If the net retail price (excluding the excise tax and the value-added tax) exceeds Six pesos and fifty
centavos (P6.50) but does not exceed Ten pesos (10.00) per pack, the tax shall be Eight pesos and
ninety-six centavos (P8.96) per pack;
(3) If the net retail price (excluding the excise tax and the value-added tax) is Five pesos (P5.00) but
does not exceed Six pesos and fifty centavos (P6.50) per pack, the tax shall be Five pesos and sixty
centavos (P5.60) per pack;
(4) If the net retail price (excluding the excise tax and the value-added tax) is below Five pesos (P5.00)
per pack, the tax shall be One peso and twelve centavos (P1.12) per pack.
Variants of existing brands of cigarettes which are introduced in the domestic market after the effectivity of this Act
shall be taxed under the highest classification of any variant of that brand.
xxxx
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New brands shall be classified according to their current net retail price.
For the above purpose, net retail price shall mean the price at which the cigarette is sold on retail in 20 major
supermarkets in Metro Manila (for brands of cigarettes marketed nationally), excluding the amount intended to
cover the applicable excise tax and the value-added tax. For brands which are marketed only outside Metro
Manila, the net retail price shall mean the price at which the cigarette is sold in five major supermarkets in the
region excluding the amount intended to cover the applicable excise tax and the value-added tax.
The classification of each brand of cigarettes based on its average net retail price as of October 1, 1996,
as set forth in Annex "D" of this Act, shall remain in force until revised by Congress. (Emphasis supplied)
As such, new brands of cigarettes shall be taxed according to their current net retail price while existing or "old" brands
shall be taxed based on their net retail price as of October 1, 1996.
To implement RA 8240, the Bureau of Internal Revenue (BIR) issued Revenue Regulations No. 1-97,2 which classified
the existing brands of cigarettes as those duly registered or active brands prior to January 1, 1997. New brands, or those
registered after January 1, 1997, shall be initially assessed at their suggested retail price until such time that the
appropriate survey to determine their current net retail price is conducted. Pertinent portion of the regulations reads
SECTION 2. Definition of Terms.
xxxx
3. Duly registered or existing brand of cigarettes shall include duly registered, existing or active brands of
cigarettes, prior to January 1, 1997.
xxxx
6. New Brands shall mean brands duly registered after January 1, 1997 and shall include duly registered,
inactive brands of cigarette not sold in commercial quantity before January 1, 1997.
Section 4. Classification and Manner of Taxation of Existing Brands, New Brands and Variant of Existing Brands.
xxxx
B. New Brand
New brands shall be classified according to their current net retail price. In the meantime that the current net retail
price has not yet been established, the suggested net retail price shall be used to determine the specific tax
classification. Thereafter, a survey shall be conducted in 20 major supermarkets or retail outlets in Metro Manila
(for brands of cigarette marketed nationally) or in five (5) major supermarkets or retail outlets in the region (for
brands which are marketed only outside Metro Manila) at which the cigarette is sold on retail in reams/cartons,
three (3) months after the initial removal of the new brand to determine the actual net retail price excluding the
excise tax and value added tax which shall then be the basis in determining the specific tax classification. In case
the current net retail price is higher than the suggested net retail price, the former shall prevail. Any difference in
specific tax due shall be assessed and collected inclusive of increments as provided for by the National Internal
Revenue Code, as amended.
In June 2001, petitioner British American Tobacco introduced into the market Lucky Strike Filter, Lucky Strike Lights and
Lucky Strike Menthol Lights cigarettes, with a suggested retail price of P9.90 per pack. 3 Pursuant to Sec. 145 (c) quoted
above, the Lucky Strike brands were initially assessed the excise tax at P8.96 per pack.
On February 17, 2003, Revenue Regulations No. 9-2003,4 amended Revenue Regulations No. 1-97 by providing, among
others, a periodic review every two years or earlier of the current net retail price of new brands and variants thereof for the
purpose of establishing and updating their tax classification, thus:
For the purpose of establishing or updating the tax classification of new brands and variant(s) thereof, their
current net retail price shall be reviewed periodically through the conduct of survey or any other appropriate
activity, as mentioned above, every two (2) years unless earlier ordered by the Commissioner. However,
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notwithstanding any increase in the current net retail price, the tax classification of such new brands shall remain
in force until the same is altered or changed through the issuance of an appropriate Revenue Regulations.
Pursuant thereto, Revenue Memorandum Order No. 6-20035 was issued on March 11, 2003, prescribing the guidelines
and procedures in establishing current net retail prices of new brands of cigarettes and alcohol products.
Subsequently, Revenue Regulations No. 22-20036 was issued on August 8, 2003 to implement the revised tax
classification of certain new brands introduced in the market after January 1, 1997, based on the survey of their current net
retail price. The survey revealed that Lucky Strike Filter, Lucky Strike Lights, and Lucky Strike Menthol Lights, are sold at
the current net retail price of P22.54, P22.61 and P21.23, per pack, respectively. 7 Respondent Commissioner of the
Bureau of Internal Revenue thus recommended the applicable tax rate of P13.44 per pack inasmuch as Lucky Strikes
average net retail price is above P10.00 per pack.
Thus, on September 1, 2003, petitioner filed before the Regional Trial Court (RTC) of Makati, Branch 61, a petition for
injunction with prayer for the issuance of a temporary restraining order (TRO) and/or writ of preliminary injunction,
docketed as Civil Case No. 03-1032. Said petition sought to enjoin the implementation of Section 145 of the NIRC,
Revenue Regulations Nos. 1-97, 9-2003, 22-2003 and Revenue Memorandum Order No. 6-2003 on the ground that they
discriminate against new brands of cigarettes, in violation of the equal protection and uniformity provisions of the
Constitution.
Respondent Commissioner of Internal Revenue filed an Opposition8 to the application for the issuance of a TRO. On
September 4, 2003, the trial court denied the application for TRO, holding that the courts have no authority to restrain the
collection of taxes.9 Meanwhile, respondent Secretary of Finance filed a Motion to Dismiss, 10 contending that the petition is
premature for lack of an actual controversy or urgent necessity to justify judicial intervention.
In an Order dated March 4, 2004, the trial court denied the motion to dismiss and issued a writ of preliminary injunction to
enjoin the implementation of Revenue Regulations Nos. 1-97, 9-2003, 22-2003 and Revenue Memorandum Order No. 62003.11 Respondents filed a Motion for Reconsideration12 and Supplemental Motion for Reconsideration.13 At the hearing
on the said motions, petitioner and respondent Commissioner of Internal Revenue stipulated that the only issue in this
case is the constitutionality of the assailed law, order, and regulations.14
On May 12, 2004, the trial court rendered a decision 15 upholding the constitutionality of Section 145 of the NIRC, Revenue
Regulations Nos. 1-97, 9-2003, 22-2003 and Revenue Memorandum Order No. 6-2003. The trial court also lifted the writ
of preliminary injunction. The dispositive portion of the decision reads:
WHEREFORE, premises considered, the instant Petition is hereby DISMISSED for lack of merit. The Writ of
Preliminary Injunction previously issued is hereby lifted and dissolved.
SO ORDERED.16
Petitioner brought the instant petition for review directly with this Court on a pure question of law.
While the petition was pending, RA 9334 (An Act Increasing The Excise Tax Rates Imposed on Alcohol And Tobacco
Products, Amending For The Purpose Sections 131, 141, 143, 144, 145 and 288 of the NIRC of 1997, As Amended), took
effect on January 1, 2005. The statute, among others,
(1) increased the excise tax rates provided in paragraph (c) of Section 145;
(2) mandated that new brands of cigarettes shall initially be classified according to their suggested net retail price, until
such time that their correct tax bracket is finally determined under a specified period and, after which, their classification
shall remain in force until revised by Congress;
(3) retained Annex "D" as tax base of those surveyed as of October 1, 1996 including the classification of brands for the
same products which, although not set forth in said Annex "D," were registered on or before January 1, 1997 and were
127

being commercially produced and marketed on or after October 1, 1996, and which continue to be commercially produced
and marketed after the effectivity of this Act. Said classification shall remain in force until revised by Congress; and
(4) provided a legislative freeze on brands of cigarettes introduced between the period January 2, 1997 17 to December 31,
2003, such that said cigarettes shall remain in the classification under which the BIR has determined them to belong as of
December 31, 2003, until revised by Congress.
Pertinent portions, of RA 9334, provides:
SEC. 145. Cigars and Cigarettes.
xxxx
(C) Cigarettes Packed by Machine. There shall be levied, assessed and collected on cigarettes packed by
machine a tax at the rates prescribed below:
(1) If the net retail price (excluding the excise tax and the value-added tax) is below Five pesos (P5.00) per pack,
the tax shall be:
Effective on January 1, 2005, Two pesos (P2.00) per pack;
Effective on January 1, 2007, Two pesos and twenty-three centavos (P2.23) per pack;
Effective on January 1, 2009, Two pesos and forty-seven centavos (P2.47) per pack; and
Effective on January 1, 2011, Two pesos and seventy-two centavos (P2.72) per pack.
(2) If the net retail price (excluding the excise tax and the value-added tax) is Five pesos (P5.00) but does not
exceed Six pesos and fifty centavos (P6.50) per pack, the tax shall be:
Effective on January 1, 2005, Six pesos and thirty-five centavos (P6.35) per pack;
Effective on January 1, 2007, Six pesos and seventy-four centavos (P6.74) per pack;
Effective on January 1, 2009, Seven pesos and fourteen centavos (P7.14) per pack; and
Effective on January 1, 2011, Seven pesos and fifty-six centavos (P7.56) per pack.
(3) If the net retail price (excluding the excise tax and the value-added tax) exceeds Six pesos and fifty centavos
(P6.50) but does not exceed Ten pesos (P10.00) per pack, the tax shall be:
Effective on January 1, 2005, Ten pesos and thirty-five centavos (10.35) per pack;
Effective on January 1, 2007, Ten pesos and eighty-eight centavos (P10.88) per pack;
Effective on January 1, 2009, Eleven pesos and forty-three centavos (P11.43) per pack; and
Effective on January 1, 2011, Twelve pesos (P12.00) per pack.
(4) If the net retail price (excluding the excise tax and the value-added tax) is above Ten pesos (P10.00) per pack,
the tax shall be:
Effective on January 1, 2005, Twenty-five pesos (P25.00) per pack;
Effective on January 1, 2007, Twenty-six pesos and six centavos (P26.06) per pack;
Effective on January 1, 2009, Twenty-seven pesos and sixteen centavos (P27.16) per pack; and
Effective on January 1, 2011, Twenty-eight pesos and thirty centavos (P28.30) per pack.
xxxx
New brands, as defined in the immediately following paragraph, shall initially be classified according to their
suggested net retail price.
New brands shall mean a brand registered after the date of effectivity of R.A. No. 8240.
Suggested net retail price shall mean the net retail price at which new brands, as defined above, of locally
manufactured or imported cigarettes are intended by the manufacturer or importer to be sold on retail in major
supermarkets or retail outlets in Metro Manila for those marketed nationwide, and in other regions, for those with
regional markets. At the end of three (3) months from the product launch, the Bureau of Internal Revenue shall
validate the suggested net retail price of the new brand against the net retail price as defined herein and
determine the correct tax bracket under which a particular new brand of cigarette, as defined above, shall be
classified. After the end of eighteen (18) months from such validation, the Bureau of Internal Revenue shall
revalidate the initially validated net retail price against the net retail price as of the time of revalidation in order to
finally determine the correct tax bracket under which a particular new brand of cigarettes shall be
classified; Provided however, That brands of cigarettes introduced in the domestic market between
January 1, 1997 [should be January 2, 1997] and December 31, 2003 shall remain in the classification under
which the Bureau of Internal Revenue has determined them to belong as of December 31, 2003. Such
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classification of new brands and brands introduced between January 1, 1997 and December 31, 2003
shall not be revised except by an act of Congress.
Net retail price, as determined by the Bureau of Internal Revenue through a price survey to be conducted by the
Bureau of Internal Revenue itself, or the National Statistics Office when deputized for the purpose by the Bureau
of Internal Revenue, shall mean the price at which the cigarette is sold in retail in at least twenty (20) major
supermarkets in Metro Manila (for brands of cigarettes marketed nationally), excluding the amount intended to
cover the applicable excise tax and the value-added tax. For brands which are marketed only outside Metro
Manila, the "net retail price" shall mean the price at which the cigarette is sold in at least five (5) major
supermarkets in the region excluding the amount intended to cover the applicable excise tax and value-added
tax.
The classification of each brand of cigarettes based on its average net retail price as of October 1, 1996,
as set forth in Annex "D", including the classification of brands for the same products which, although
not set forth in said Annex "D", were registered and were being commercially produced and marketed on
or after October 1, 1996, and which continue to be commercially produced and marketed after the
effectivity of this Act, shall remain in force until revised by Congress. (Emphasis added)
Under RA 9334, the excise tax due on petitioners products was increased to P25.00 per pack. In the implementation
thereof, respondent Commissioner assessed petitioners importation of 911,000 packs of Lucky Strike cigarettes at the
increased tax rate of P25.00 per pack, rendering it liable for taxes in the total sum of P22,775,000.00.18
Hence, petitioner filed a Motion to Admit Attached Supplement19 and a Supplement20 to the petition for review, assailing the
constitutionality of RA 9334 insofar as it retained Annex "D" and praying for a downward classification of Lucky Strike
products at the bracket taxable at P8.96 per pack. Petitioner contended that the continued use of Annex "D" as the tax
base of existing brands of cigarettes gives undue protection to said brands which are still taxed based on their price as of
October 1996 notwithstanding that they are now sold at the same or even at a higher price than new brands like Lucky
Strike. Thus, old brands of cigarettes such as Marlboro and Philip Morris which, like Lucky Strike, are sold at or more than
P22.00 per pack, are taxed at the rate of P10.88 per pack, while Lucky Strike products are taxed at P26.06 per pack.
In its Comment to the supplemental petition, respondents, through the Office of the Solicitor General (OSG), argued that
the passage of RA 9334, specifically the provision imposing a legislative freeze on the classification of cigarettes
introduced into the market between January 2, 1997 and December 31, 2003, rendered the instant petition academic. The
OSG claims that the provision in Section 145, as amended by RA 9334, prohibiting the reclassification of cigarettes
introduced during said period, "cured the perceived defect of Section 145 considering that, like the cigarettes under Annex
"D," petitioners brands and other brands introduced between January 2, 1997 and December 31, 2003, shall remain in the
classification under which the BIR has placed them and only Congress has the power to reclassify them.
On March 20, 2006, Philip Morris Philippines Manufacturing Incorporated filed a Motion for Leave to Intervene with
attached Comment-in-Intervention.21 This was followed by the Motions for Leave to Intervene of Fortune Tobacco
Corporation,22 Mighty Corporation, 23 and JT International, S.A., with their respective Comments-in-Intervention. The
Intervenors claim that they are parties-in-interest who stand to be affected by the ruling of the Court on the constitutionality
of Section 145 of the NIRC and its Annex "D" because they are manufacturers of cigarette brands which are included in
the said Annex. Hence, their intervention is proper since the protection of their interest cannot be addressed in a separate
proceeding.
According to the Intervenors, no inequality exists because cigarettes classified by the BIR based on their net retail price as
of December 31, 2003 now enjoy the same status quo provision that prevents the BIR from reclassifying cigarettes
included in Annex "D." It added that the Court has no power to pass upon the wisdom of the legislature in retaining Annex
"D" in RA 9334; and that the nullification of said Annex would bring about tremendous loss of revenue to the government,
chaos in the collection of taxes, illicit trade of cigarettes, and cause decline in cigarette demand to the detriment of the
farmers who depend on the tobacco industry.
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Intervenor Fortune Tobacco further contends that petitioner is estopped from questioning the constitutionality of Section
145 and its implementing rules and regulations because it entered into the cigarette industry fully aware of the existing tax
system and its consequences. Petitioner imported cigarettes into the country knowing that its suggested retail price, which
will be the initial basis of its tax classification, will be confirmed and validated through a survey by the BIR to determine the
correct tax that would be levied on its cigarettes.
Moreover, Fortune Tobacco claims that the challenge to the validity of the BIR issuances should have been brought by
petitioner before the Court of Tax Appeals (CTA) and not the RTC because it is the CTA which has exclusive appellate
jurisdiction over decisions of the BIR in tax disputes.
On August 7, 2006, the OSG manifested that it interposes no objection to the motions for intervention. 24 Therefore,
considering the substantial interest of the intervenors, and in the higher interest of justice, the Court admits their
intervention.
Before going into the substantive issues of this case, we must first address the matter of jurisdiction, in light of Fortune
Tobaccos contention that petitioner should have brought its petition before the Court of Tax Appeals rather than the
regional trial court.
The jurisdiction of the Court of Tax Appeals is defined in Republic Act No. 1125, as amended by Republic Act No. 9282.
Section 7 thereof states, in pertinent part:
Sec. 7. Jurisdiction. The CTA shall exercise:
a. Exclusive appellate jurisdiction to review by appeal, as herein provided:
1. Decisions of the Commissioner of Internal Revenue in cases involving disputed assessments, refunds of
internal revenue taxes, fees or other charges, penalties in relation thereto, or other matters arising under the
National Internal Revenue or other laws administered by the Bureau of Internal Revenue;
2. Inaction by the Commissioner of Internal Revenue in cases involving disputed assessments, refunds of internal
revenue taxes, fees or other charges, penalties in relations thereto, or other matters arising under the National
Internal Revenue Code or other laws administered by the Bureau of Internal Revenue, where the National
Internal Revenue Code provides a specific period of action, in which case the inaction shall be deemed a denial;
xxx.25
While the above statute confers on the CTA jurisdiction to resolve tax disputes in general, this does not include cases
where the constitutionality of a law or rule is challenged. Where what is assailed is the validity or constitutionality of a law,
or a rule or regulation issued by the administrative agency in the performance of its quasi-legislative function, the regular
courts have jurisdiction to pass upon the same. The determination of whether a specific rule or set of rules issued by an
administrative agency contravenes the law or the constitution is within the jurisdiction of the regular courts. Indeed, the
Constitution vests the power of judicial review or the power to declare a law, treaty, international or executive agreement,
presidential decree, order, instruction, ordinance, or regulation in the courts, including the regional trial courts. This is
within the scope of judicial power, which includes the authority of the courts to determine in an appropriate action the
validity of the acts of the political departments. Judicial power includes the duty of the courts of justice to settle actual
controversies involving rights which are legally demandable and enforceable, and to determine whether or not there has
been a grave abuse of discretion amounting to lack or excess of jurisdiction on the part of any branch or instrumentality of
the Government.26
In Drilon v. Lim,27 it was held:
We stress at the outset that the lower court had jurisdiction to consider the constitutionality of Section 187, this
authority being embraced in the general definition of the judicial power to determine what are the valid and
binding laws by the criterion of their conformity to the fundamental law. Specifically, B.P. 129 vests in the regional
trial courts jurisdiction over all civil cases in which the subject of the litigation is incapable of pecuniary estimation,
130

even as the accused in a criminal action has the right to question in his defense the constitutionality of a law he is
charged with violating and of the proceedings taken against him, particularly as they contravene the Bill of Rights.
Moreover, Article X, Section 5(2), of the Constitution vests in the Supreme Court appellate jurisdiction over final
judgments and orders of lower courts in all cases in which the constitutionality or validity of any treaty,
international or executive agreement, law, presidential decree, proclamation, order, instruction, ordinance, or
regulation is in question.
The petition for injunction filed by petitioner before the RTC is a direct attack on the constitutionality of Section 145(C) of
the NIRC, as amended, and the validity of its implementing rules and regulations. In fact, the RTC limited the resolution of
the subject case to the issue of the constitutionality of the assailed provisions. The determination of whether the assailed
law and its implementing rules and regulations contravene the Constitution is within the jurisdiction of regular courts. The
Constitution vests the power of judicial review or the power to declare a law, treaty, international or executive agreement,
presidential decree, order, instruction, ordinance, or regulation in the courts, including the regional trial courts. 28 Petitioner,
therefore, properly filed the subject case before the RTC.
We come now to the issue of whether petitioner is estopped from assailing the authority of the Commissioner of Internal
Revenue. Fortune Tobacco raises this objection by pointing out that when petitioner requested the Commissioner for a
ruling that its Lucky Strike Soft Pack cigarettes was a "new brand" rather than a variant of an existing brand, and thus
subject to a lower specific tax rate, petitioner executed an undertaking to comply with the procedures under existing
regulations for the assessment of deficiency internal revenue taxes.
Fortune Tobacco argues that petitioner, after invoking the authority of the Commissioner of Internal Revenue, cannot later
on turn around when the ruling is adverse to it.
Estoppel, an equitable principle rooted in natural justice, prevents persons from going back on their own acts and
representations, to the prejudice of others who have relied on them.29 The principle is codified in Article 1431 of the Civil
Code, which provides:
Through estoppel, an admission or representation is rendered conclusive upon the person making it and cannot be denied
or disproved as against the person relying thereon.
Estoppel can also be found in Rule 131, Section 2 (a) of the Rules of Court, viz:
Sec. 2. Conclusive presumptions. The following are instances of conclusive presumptions:
(a) Whenever a party has by his own declaration, act or omission, intentionally and deliberately led another to
believe a particular thing true, and to act upon such belief, he cannot, in any litigation arising out of such
declaration, act or omission be permitted to falsify it.
The elements of estoppel are: first, the actor who usually must have knowledge, notice or suspicion of the true facts,
communicates something to another in a misleading way, either by words, conduct or silence; second, the other in fact
relies, and relies reasonably or justifiably, upon that communication;third, the other would be harmed materially if the actor
is later permitted to assert any claim inconsistent with his earlier conduct; and fourth, the actor knows, expects or foresees
that the other would act upon the information given or that a reasonable person in the actor's position would expect or
foresee such action.30
In the early case of Kalalo v. Luz,31 the elements of estoppel, as related to the party to be estopped, are: (1) conduct
amounting to false representation or concealment of material facts; or at least calculated to convey the impression that the
facts are other than, and inconsistent with, those which the party subsequently attempts to assert; (2) intent, or at least
expectation that this conduct shall be acted upon by, or at least influence, the other party; and (3) knowledge, actual or
constructive, of the real facts.
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We find that petitioner was not guilty of estoppel. When it made the undertaking to comply with all issuances of the BIR,
which at that time it considered as valid, petitioner did not commit any false misrepresentation or misleading act. Indeed,
petitioner cannot be faulted for initially undertaking to comply with, and subjecting itself to the operation of Section 145(C),
and only later on filing the subject case praying for the declaration of its unconstitutionality when the circumstances change
and the law results in what it perceives to be unlawful discrimination. The mere fact that a law has been relied upon in the
past and all that time has not been attacked as unconstitutional is not a ground for considering petitioner estopped from
assailing its validity. For courts will pass upon a constitutional question only when presented before it in bona fide cases for
determination, and the fact that the question has not been raised before is not a valid reason for refusing to allow it to be
raised later.32
Now to the substantive issues.
To place this case in its proper context, we deem it necessary to first discuss how the assailed law operates in order to
identify, with precision, the specific provisions which, according to petitioner, have created a grossly discriminatory
classification scheme between old and new brands. The pertinent portions of RA 8240, as amended by RA 9334, are
reproduced below for ready reference:
SEC. 145. Cigars and Cigarettes.
xxxx
(C) Cigarettes Packed by Machine. There shall be levied, assessed and collected on cigarettes packed by
machine a tax at the rates prescribed below:
(1) If the net retail price (excluding the excise tax and the value-added tax) is below Five pesos (P5.00) per pack,
the tax shall be:
Effective on January 1, 2005, Two pesos (P2.00) per pack;
Effective on January 1, 2007, Two pesos and twenty-three centavos (P2.23) per pack;
Effective on January 1, 2009, Two pesos and forty-seven centavos (P2.47) per pack; and
Effective on January 1, 2011, Two pesos and seventy-two centavos (P2.72) per pack.
(2) If the net retail price (excluding the excise tax and the value-added tax) is Five pesos (P5.00) but does not
exceed Six pesos and fifty centavos (P6.50) per pack, the tax shall be:
Effective on January 1, 2005, Six pesos and thirty-five centavos (P6.35) per pack;
Effective on January 1, 2007, Six pesos and seventy-four centavos (P6.74) per pack;
Effective on January 1, 2009, Seven pesos and fourteen centavos (P7.14) per pack; and
Effective on January 1, 2011, Seven pesos and fifty-six centavos (P7.56) per pack.
(3) If the net retail price (excluding the excise tax and the value-added tax) exceeds Six pesos and fifty centavos
(P6.50) but does not exceed Ten pesos (P10.00) per pack, the tax shall be:
Effective on January 1, 2005, Ten pesos and thirty-five centavos (10.35) per pack;
Effective on January 1, 2007, Ten pesos and eighty-eight centavos (P10.88) per pack;
Effective on January 1, 2009, Eleven pesos and forty-three centavos (P11.43) per pack; and
Effective on January 1, 2011, Twelve pesos (P12.00) per pack.
(4) If the net retail price (excluding the excise tax and the value-added tax) is above Ten pesos (P10.00) per pack,
the tax shall be:
Effective on January 1, 2005, Twenty-five pesos (P25.00) per pack;
Effective on January 1, 2007, Twenty-six pesos and six centavos (P26.06) per pack;
Effective on January 1, 2009, Twenty-seven pesos and sixteen centavos (P27.16) per pack; and
Effective on January 1, 2011, Twenty-eight pesos and thirty centavos (P28.30) per pack.
xxxx
New brands, as defined in the immediately following paragraph, shall initially be classified according to their
suggested net retail price.
New brands shall mean a brand registered after the date of effectivity of R.A. No. 8240.

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Suggested net retail price shall mean the net retail price at which new brands, as defined above, of locally
manufactured or imported cigarettes are intended by the manufacturer or importer to be sold on retail in major
supermarkets or retail outlets in Metro Manila for those marketed nationwide, and in other regions, for those with
regional markets. At the end of three (3) months from the product launch, the Bureau of Internal Revenue shall
validate the suggested net retail price of the new brand against the net retail price as defined herein and
determine the correct tax bracket under which a particular new brand of cigarette, as defined above, shall be
classified. After the end of eighteen (18) months from such validation, the Bureau of Internal Revenue shall
revalidate the initially validated net retail price against the net retail price as of the time of revalidation in order to
finally determine the correct tax bracket under which a particular new brand of cigarettes shall be classified;
Provided however, That brands of cigarettes introduced in the domestic market between January 1, 1997 [should
be January 2, 1997] and December 31, 2003 shall remain in the classification under which the Bureau of Internal
Revenue has determined them to belong as of December 31, 2003. Such classification of new brands and brands
introduced between January 1, 1997 and December 31, 2003 shall not be revised except by an act of Congress.
Net retail price, as determined by the Bureau of Internal Revenue through a price survey to be conducted by the
Bureau of Internal Revenue itself, or the National Statistics Office when deputized for the purpose by the Bureau
of Internal Revenue, shall mean the price at which the cigarette is sold in retail in at least twenty (20) major
supermarkets in Metro Manila (for brands of cigarettes marketed nationally), excluding the amount intended to
cover the applicable excise tax and the value-added tax. For brands which are marketed only outside Metro
Manila, the "net retail price" shall mean the price at which the cigarette is sold in at least five (5) major
supermarkets in the region excluding the amount intended to cover the applicable excise tax and value-added
tax.
The classification of each brand of cigarettes based on its average net retail price as of October 1, 1996, as set
forth in Annex "D", including the classification of brands for the same products which, although not set forth in
said Annex "D", were registered and were being commercially produced and marketed on or after October 1,
1996, and which continue to be commercially produced and marketed after the effectivity of this Act, shall remain
in force until revised by Congress.
As can be seen, the law creates a four-tiered system which we may refer to as the low-priced, 33medium-priced,34 highpriced,35 and premium-priced36 tax brackets. When a brand is introduced in the market, the current net retail price is
determined through the aforequoted specified procedure. The current net retail price is then used to classify under which
tax bracket the brand belongs in order to finally determine the corresponding excise tax rate on a per pack basis. The
assailed feature of this law pertains to the mechanism where, after a brand is classified based on its current net retail
price, the classification is frozen and only Congress can thereafter reclassify the same. From a practical point of view,
Annex "D" is merely a by-product of the whole mechanism and philosophy of the assailed law. That is, the brands under
Annex "D" were also classified based on their current net retail price, the only difference being that they were the first ones
so classified since they were the only brands surveyed as of October 1, 1996, or prior to the effectivity of RA 8240 on
January 1, 1997.37
Due to this legislative classification scheme, it is possible that over time the net retail price of a previously classified brand,
whether it be a brand under Annex "D" or a new brand classified after the effectivity of RA 8240 on January 1, 1997, would
increase (due to inflation, increase of production costs, manufacturers decision to increase its prices, etc.) to a point that
its net retail price pierces the tax bracket to which it was previously classified.38 Consequently, even if its present day net
retail price would make it fall under a higher tax bracket, the previously classified brand would continue to be subject to the
excise tax rate under the lower tax bracket by virtue of the legislative classification freeze.
Petitioner claims that this is what happened in 2004 to the Marlboro and Philip Morris brands, which were permanently
classified under Annex "D." As of October 1, 1996, Marlboro had net retail prices ranging from P6.78 to P6.84 while Philip
Morris had net retail prices ranging from P7.39 to P7.48. Thus, pursuant to RA 8240, 39 Marlboro and Philip Morris were
classified under the high-priced tax bracket and subjected to an excise tax rate of P8.96 per pack. Petitioner then
presented evidence showing that after the lapse of about seven years or sometime in 2004, Marlboros and Philip Morris
net retail prices per pack both increased to about P15.59. 40 This meant that they would fall under the premium-priced tax
133

bracket, with a higher excise tax rate of P13.44 per pack,41 had they been classified based on their 2004 net retail prices.
However, due to the legislative classification freeze, they continued to be classified under the high-priced tax bracket with
a lower excise tax rate. Petitioner thereafter deplores the fact that its Lucky Strike Filter, Lucky Strike Lights, and Lucky
Strike Menthol Lights cigarettes, introduced in the market sometime in 2001 and validated by a BIR survey in 2003, were
found to have net retail prices of P11.53, P11.59 and P10.34,42 respectively, which are lower than those of Marlboro and
Philip Morris. However, since petitioners cigarettes were newly introduced brands in the market, they were taxed based on
their current net retail prices and, thus, fall under the premium-priced tax bracket with a higher excise tax rate of P13.44
per pack. This unequal tax treatment between Marlboro and Philip Morris, on the one hand, and Lucky Strike, on the other,
is the crux of petitioners contention that the legislative classification freeze violates the equal protection and uniformity of
taxation clauses of the Constitution.
It is apparent that, contrary to its assertions, petitioner is not only questioning the undue favoritism accorded to brands
under Annex "D," but the entire mechanism and philosophy of the law which freezes the tax classification of a cigarette
brand based on its current net retail price. Stated differently, the alleged discrimination arising from the legislative
classification freeze between the brands under Annex "D" and petitioners newly introduced brands arose only because the
former were classified based on their "current" net retail price as of October 1, 1996 and petitioners newly introduced
brands were classified based on their "current" net retail price as of 2003. Without this corresponding freezing of the
classification of petitioners newly introduced brands based on their current net retail price, it would be impossible to
establish that a disparate tax treatment occurred between the Annex "D" brands and petitioners newly introduced brands.
This clarification is significant because, under these circumstances, a declaration of unconstitutionality would necessarily
entail nullifying the whole mechanism of the law and not just Annex "D." Consequently, if the assailed law is declared
unconstitutional on equal protection grounds, the entire method by which a brand of cigarette is classified would have to be
invalidated. As a result, no method to classify brands under Annex "D" as well as new brands would be left behind and the
whole Section 145 of the NIRC, as amended, would become inoperative.43
To simplify the succeeding discussions, we shall refer to the whole mechanism and philosophy of the assailed law which
freezes the tax classification of a cigarette brand based on its current net retail price and which, thus, produced different
classes of brands based on the time of their introduction in the market (starting with the brands in Annex "D" since they
were the first brands so classified as of October 1, 1996) as the classification freeze provision.44
As thus formulated, the central issue is whether or not the classification freeze provision violates the equal protection and
uniformity of taxation clauses of the Constitution.
In Sison, Jr. v. Ancheta,45 this Court, through Chief Justice Fernando, explained the applicable standard in deciding equal
protection and uniformity of taxation challenges:
Now for equal protection. The applicable standard to avoid the charge that there is a denial of this constitutional
mandate whether the assailed act is in the exercise of the police power or the power of eminent domain is to
demonstrate "that the governmental act assailed, far from being inspired by the attainment of the common weal
was prompted by the spirit of hostility, or at the very least, discrimination that finds no support in reason. It suffices
then that the laws operate equally and uniformly on all persons under similar circumstances or that all persons
must be treated in the same manner, the conditions not being different, both in the privileges conferred and the
liabilities imposed. Favoritism and undue preference cannot be allowed. For the principle is that equal protection
and security shall be given to every person under circumstances, which if not identical are analogous. If law be
looks upon in terms of burden or charges, those that fall within a class should be treated in the same fashion,
whatever restrictions cast on some in the group equally binding on the rest." That same formulation applies as
well to taxation measures. The equal protection clause is, of course, inspired by the noble concept of
approximating the ideal of the laws's benefits being available to all and the affairs of men being governed by that
serene and impartial uniformity, which is of the very essence of the idea of law. There is, however, wisdom, as
well as realism, in these words of Justice Frankfurter: "The equality at which the 'equal protection' clause aims is
not a disembodied equality. The Fourteenth Amendment enjoins 'the equal protection of the laws,' and laws are
not abstract propositions. They do not relate to abstract units A, B and C, but are expressions of policy arising out
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of specific difficulties, addressed to the attainment of specific ends by the use of specific remedies. The
Constitution does not require things which are different in fact or opinion to be treated in law as though they were
the same." Hence the constant reiteration of the view that classification if rational in character is
allowable. As a matter of fact, in a leading case of Lutz v. Araneta, this Court, through Justice J.B.L. Reyes, went
so far as to hold "at any rate, it is inherent in the power to tax that a state be free to select the subjects of taxation,
and it has been repeatedly held that 'inequalities which result from a singling out of one particular class for
taxation, or exemption infringe no constitutional limitation.'"
Petitioner likewise invoked the kindred concept of uniformity. According to the Constitution: "The rule of taxation
shall be uniform and equitable." This requirement is met according to Justice Laurel in Philippine Trust Company
v. Yatco, decided in 1940, when the tax "operates with the same force and effect in every place where the subject
may be found." He likewise added: "The rule of uniformity does not call for perfect uniformity or perfect equality,
because this is hardly attainable." The problem of classification did not present itself in that case. It did not arise
until nine years later, when the Supreme Court held: "Equality and uniformity in taxation means that all taxable
articles or kinds of property of the same class shall be taxed at the same rate. The taxing power has the
authority to make reasonable and natural classifications for purposes of taxation, . . . As clarified by Justice
Tuason, where "the differentiation" complained of "conforms to the practical dictates of justice and equity" it "is not
discriminatory within the meaning of this clause and is therefore uniform." There is quite a similarity then to the
standard of equal protection for all that is required is that the tax "applies equally to all persons, firms and
corporations placed in similar situation."46 (Emphasis supplied)
In consonance thereto, we have held that "in our jurisdiction, the standard and analysis of equal protection challenges in
the main have followed the rational basis test, coupled with a deferential attitude to legislative classifications and a
reluctance to invalidate a law unless there is a showing of a clear and unequivocal breach of the Constitution."47 Within the
present context of tax legislation on sin products which neither contains a suspect classification nor impinges on a
fundamental right, the rational-basis test thus finds application. Under this test, a legislative classification, to survive an
equal protection challenge, must be shown to rationally further a legitimate state interest.48 The classifications must be
reasonable and rest upon some ground of difference having a fair and substantial relation to the object of the
legislation.49 Since every law has in its favor the presumption of constitutionality, the burden of proof is on the one attacking
the constitutionality of the law to prove beyond reasonable doubt that the legislative classification is without rational
basis.50 The presumption of constitutionality can be overcome only by the most explicit demonstration that a classification
is a hostile and oppressive discrimination against particular persons and classes, and that there is no conceivable basis
which might support it.51
A legislative classification that is reasonable does not offend the constitutional guaranty of the equal protection of the laws.
The classification is considered valid and reasonable provided that: (1) it rests on substantial distinctions; (2) it is germane
to the purpose of the law; (3) it applies, all things being equal, to both present and future conditions; and (4) it applies
equally to all those belonging to the same class.52
The first, third and fourth requisites are satisfied. The classification freeze provision was inserted in the law for reasons of
practicality and expediency. That is, since a new brand was not yet in existence at the time of the passage of RA 8240,
then Congress needed a uniform mechanism to fix the tax bracket of a new brand. The current net retail price, similar to
what was used to classify the brands under Annex "D" as of October 1, 1996, was thus the logical and practical choice.
Further, with the amendments introduced by RA 9334, the freezing of the tax classifications now expressly applies not just
to Annex "D" brands but to newer brands introduced after the effectivity of RA 8240 on January 1, 1997 and any new brand
that will be introduced in the future.53 (However, as will be discussed later, the intent to apply the freezing mechanism to
newer brands was already in place even prior to the amendments introduced by RA 9334 to RA 8240.) This does not
explain, however, why the classification is "frozen" after its determination based on current net retail price and how this is
germane to the purpose of the assailed law. An examination of the legislative history of RA 8240 provides interesting
answers to this question.

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RA 8240 was the first of three parts in the Comprehensive Tax Reform Package then being pushed by the Ramos
Administration. It was enacted with the following objectives stated in the Sponsorship Speech of Senator Juan Ponce
Enrile (Senator Enrile), viz:
First, to evolve a tax structure which will promote fair competition among the players in the industries concerned
and generate buoyant and stable revenue for the government.
Second, to ensure that the tax burden is equitably distributed not only amongst the industries affected but equally
amongst the various levels of our society that are involved in various markets that are going to be affected by the
excise tax on distilled spirits, fermented liquor, cigars and cigarettes.
In the case of firms engaged in the industries producing the products that we are about to tax, this means relating
the tax burden to their market share, not only in terms of quantity, Mr. President, but in terms of value.
In case of consumers, this will mean evolving a multi-tiered rate structure so that low-priced products are subject
to lower tax rates and higher-priced products are subject to higher tax rates.
Third, to simplify the tax administration and compliance with the tax laws that are about to unfold in order to
minimize losses arising from inefficiencies and tax avoidance scheme, if not outright tax evasion.54
In the initial stages of the crafting of the assailed law, the Department of Finance (DOF) recommended to Congress a shift
from the then existing ad valorem taxation system to a specific taxation system with respect to sin products, including
cigarettes. The DOF noted that the ad valoremtaxation system was a source of massive tax leakages because the
taxpayer was able to evade paying the correct amount of taxes through the undervaluation of the price of cigarettes using
various marketing arms and dummy corporations. In order to address this problem, the DOF proposed a specific taxation
system where the cigarettes would be taxed based on volume or on a per pack basis which was believed to be less
susceptible to price manipulation. The reason was that the BIR would only need to monitor the sales volume of cigarettes,
from which it could easily compute the corresponding tax liability of cigarette manufacturers. Thus, the DOF suggested the
use of a three-tiered system which operates in substantially the same manner as the four-tiered system under RA 8240 as
earlier discussed. The proposal of the DOF was embodied in House Bill (H.B.) No. 6060, the pertinent portions of which
states
SEC. 142. Cigars and cigarettes.
(c) Cigarettes packed by machine. There shall be levied, assessed and collected on cigarettes packed by
machine a tax at the rates prescribed below:
(1) If the manufacturers or importers wholesale price (net of excise tax and value-added tax) per pack exceeds
four pesos and twenty centavos (P4.20), the tax shall be seven pesos and fifty centavos (P7.50);
(2) If the manufacturers or importers wholesale price (net of excise tax and value-added tax) per pack exceeds
three pesos and ninety centavos (P3.90) but does not exceed four pesos and twenty centavos (P4.20), the tax
shall be five pesos and fifty centavos (P5.50): provided, that after two (2) years from the effectivity of this Act,
cigarettes otherwise subject to tax under this subparagraph shall be taxed under subparagraph (1) above.
(3) If the manufacturers or importers wholesale price (net of excise tax and value-added tax) per pack does not
exceeds three pesos and ninety centavos (P3.90), the tax rate shall be one peso (P1.00).
Variants of existing brands and new brands of cigarettes packed by machine to be introduced in the domestic
market after the effectivity of this Act, shall be taxed under paragraph (c)(1) hereof.

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The rates of specific tax on cigars and cigarettes under paragraphs (a), (b), and (c) hereof, including the
price levels for purposes of classifying cigarettes packed by machine, shall be revised upward two (2)
years after the effectivity of this Act and every two years thereafter by the Commissioner of Internal
Revenue, subject to the approval of the Secretary of Finance, taking into account the movement of the
consumer price index for cigars and cigarettes as established by the National Statistics Office: provided,
that the increase in taxes and/or price levels shall be equal to the present change in such consumer price
index for the two-year period: provided, further, that the President, upon the recommendation of the
Secretary of Finance, may suspend or defer the adjustment in price levels and tax rates when the interest
of the national economy and general welfare so require, such as the need to obviate unemployment, and
economic and social dislocation: provided, finally, that the revised price levels and tax rates authorized
herein shall in all cases be rounded off to the nearest centavo and shall be in force and effect on the date
of publication thereof in a newspaper of general circulation. x x x (Emphasis supplied)
What is of particular interest with respect to the proposal of the DOF is that it contained a provision for the periodic
adjustment of the excise tax rates and tax brackets, and a corresponding periodic resurvey and reclassification of cigarette
brands based on the increase in the consumer price index as determined by the Commissioner of Internal Revenue
subject to certain guidelines. The evident intent was to prevent inflation from eroding the value of the excise taxes that
would be collected from cigarettes over time by adjusting the tax rate and tax brackets based on the increase in the
consumer price index. Further, under this proposal, old brands as well as new brands introduced thereafter would be
subjected to a resurvey and reclassification based on their respective values at the end of every two years in order to align
them with the adjustment of the excise tax rate and tax brackets due to the movement in the consumer price index.55
Of course, we now know that the DOF proposal, insofar as the periodic adjustment of tax rates and tax brackets, and the
periodic resurvey and reclassification of cigarette brands are concerned, did not gain approval from Congress. The House
and Senate pushed through with their own versions of the excise tax system on beers and cigarettes both denominated as
H.B. No. 7198. For convenience, we shall refer to the bill deliberated upon by the House as the House Version and that of
the Senate as the Senate Version.
The Houses Committee on Ways and Means, then chaired by Congressman Exequiel B. Javier (Congressman Javier),
roundly rejected the DOF proposal. Instead, in its Committee Report submitted to the plenary, it proposed a different
excise tax system which used a specific tax as a basic tax with an ad valorem comparator. Further, it deleted the proposal
to have a periodic adjustment of tax rates and the tax brackets as well as periodic resurvey and reclassification of cigarette
brands, to wit:
The rigidity of the specific tax system calls for the need for frequent congressional intervention to adjust the tax
rates to inflation and to keep pace with the expanding needs of government for more revenues. The DOF admits
this flaw inherent in the tax system it proposed. Hence, to obviate the need for remedial legislation, the DOF is
asking Congress to grant to the Commissioner the power to revise, one, the specific tax rates: and two, the price
levels of beer and cigarettes. What the DOF is asking, Mr. Speaker, is for Congress to delegate to the
Commissioner of Internal Revenue the power to fix the tax rates and classify the subjects of taxation based on
their price levels for purposes of fixing the tax rates. While we sympathize with the predicament of the DOF, it is
not for Congress to abdicate such power. The power sought to be delegated to be exercised by the
Commissioner of Internal Revenue is a legislative power vested by the Constitution in Congress pursuant to
Section 1, Article VI of the Constitution. Where the power is vested, there it must remain in Congress, a body of
representatives elected by the people. Congress may not delegate such power, much less abdicate it.
xxxx
Moreover, the grant of such power, if at all constitutionally permissible, to the Commissioner of Internal Revenue
is fraught with ethical implications. The debates on how much revenue will be raised, how much money will be
taken from the pockets of taxpayers, will inexorably shift from the democratic Halls of Congress to the secret and
non-transparent corridors of unelected agencies of government, the Department of Finance and the Bureau of
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Internal Revenue, which are not accountable to our people. We cannot countenance the shift for ethical reasons,
lest we be accused of betraying the trust reposed on this Chamber by the people. x x x
A final point on this proposal, Mr. Speaker, is the exercise of the taxing power of the Commissioner of Internal
Revenue which will be triggered by inflation rates based on the consumer price index. Simply stated, Mr. Speaker,
the specific tax rates will be fixed by the Commissioner depending on the price levels of beers and cigarettes as
determined by the consumers price index. This is a novel idea, if not necessarily weird in the field of taxation.
What if the brewer or the cigarette manufacturer sells at a price below the consumers price index? Will it be taxed
on the basis of the consumers price index which is over and above its wholesale or retail price as the case may
be? This is a weird form of exaction where the tax is based not on what the brewer or manufacturer actually
realized but on an imaginary wholesale or retail price. This amounts to a taxation based on presumptive price
levels and renders the specific tax a presumptive tax. We hope, the DOF and the BIR will also honor a
presumptive tax payment.
Moreover, specific tax rates based on price levels tied to consumers price index as proposed by the DOF
engenders anti-trust concerns. The proposal if enacted into law will serve as a barrier to the entry of new players
in the beer and cigarette industries which are presently dominated by shared monopolies. A new player in these
industries will be denied business flexibility to fix its price levels to promote its product and penetrate the market
as the price levels are dictated by the consumer price index. The proposed tax regime, Mr. Speaker, will merely
enhance the stranglehold of the oligopolies in the beer and cigarette industries, thus, reversing the governments
policy of dismantling monopolies and combinations in restraint of trade.56
For its part, the Senates Committee on Ways and Means, then chaired by Senator Juan Ponce Enrile (Senator Enrile),
developed its own version of the excise tax system on cigarettes. The Senate Version consisted of a four-tiered system
and, interestingly enough, contained a periodic excise tax rate and tax bracket adjustment as well as a periodic resurvey
and reclassification of brands provision ("periodic adjustment and reclassification provision," for brevity) to be conducted
by the DOF in coordination with the BIR and the National Statistics Office based on the increase in the consumer price
index similar to the one proposed by the DOF, viz:
SEC. 4 Section 142 of the National Internal Revenue Code, as amended, is hereby further amended to read as
follows:
"SEC. 142. Cigars and cigarettes.
xxxx
(c) Cigarettes packed by machine. There shall be levied, assessed and collected on cigarettes packed by
machine a tax at the rates prescribed below:
(1) If the net retail price (excluding the excise tax and the value-added tax) is above Ten pesos (P10.00) per pack,
the tax shall be Twelve pesos (P12.00) per pack;
(2) If the net retail price (excluding the excise tax and the value-added tax) exceeds Six pesos and fifty centavos
(P6.50) per pack, the tax shall be Eight pesos (P8.00) per pack;
(3) If the net retail price (excluding the excise tax and the value-added tax) is Five pesos (P5.00) up to Six pesos
and fifty centavos (P6.50) per pack, the tax shall be Five pesos (P5.00) per pack;
(4) If the net retail price (excluding the excise tax and the value-added tax) is below Five pesos (P5.00) per pack,
the tax shall be One peso (P1.00) per pack.
Variants of existing brands of cigarettes which are introduced in the domestic market after the effectivity of this Act
shall be taxed under the highest classification of any variant of that brand.
xxx
The rates of specific tax on cigars and cigarettes under subparagraph (a), (b) and (c) hereof, including the
net retail prices for purposes of classification, shall be adjusted on the sixth of January three years after
the effectivity of this Act and every three years thereafter. The adjustment shall be in accordance with the
inflation rate measured by the average increase in the consumer price index over the three-year period.
The adjusted tax rates and net price levels shall be in force on the eighth of January.

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Within the period hereinabove mentioned, the Secretary of Finance shall direct the conduct of a survey of
retail prices of each brand of cigarettes in coordination with the Bureau of Internal Revenue and the
National Statistics Office.
For purposes of this Section, net retail price shall mean the price at which the cigarette is sold on retail in 20
major supermarkets in Metro Manila (for brands of cigarettes marketed nationally), excluding the amount intended
to cover the applicable excise tax and the value-added tax. For brands which are marketed only outside Metro
Manila, the net retail price shall mean the price at which the cigarette is sold in five major supermarkets in the
region excluding the amount intended to cover the applicable excise tax and the value-added tax.
The classification of each brand of cigarettes in the initial year of implementation of this Act shall be
based on its average net retail price as of October 1, 1996. The said classification by brand shall remain
in force until January 7, 2000.
New brands shall be classified according to their current net retail price.57 (Emphasis supplied)
During the period of interpellations, the late Senator Raul S. Roco (Senator Roco) expressed doubts as to the legality and
wisdom of putting a periodic adjustment and reclassification provision:
Senator Enrile: This will be the first time that a tax burden will be allowed to be automatically adjusted upwards
based on a system of indexing tied up with the Consumers Price Index (CPI). Although I must add that we have
adopted a similar system in adjusting the personal tax exemption from income tax of our individual taxpayers.
Senator Roco: They are not exactly the same, Mr. President. But even then, we do note that this the first time we
are trying to put an automatic adjustment. My concern is, why do we propose now this automatic adjustment?
What is the reason that impels the committee? Maybe we can be enlightened and maybe we shall embrace it
forthwith. But what is the reason?
Senator Enrile: Mr. President, we will recall that in the House of Representatives, it has adopted a tax proposal on
these products based on a specific tax as a basic tax with an ad valoremcomparator. The Committee on Ways
and Means of the Senate has not seen it fit to adopt this system, but it recognized the possibility that there may
be an occasion where the price movement in the country might unwarrantedly move upwards, in which case, if
we peg the government to a specific tax rate of P6.30, P9.30 and P12.30 for beer, since we are talking of
beer, 58 the government might lose in the process.
In order to consider the interest of the government in this, Mr. President, and in order to obviate the possibility that
some of these products categorized under the different tiers with different specific tax rates from moving upwards
and piercing their own tiers and thereby expose themselves to an incremental tax of higher magnitude, it was felt
that we should adopt a system where, in spite of any escalation in the price of these products in the future, the tax
rates could be adjusted upwards so that none of these products would leave their own tier. That was the basic
principle under which we crafted this portion of the tax proposal.
Senator Roco: Mr. President, we certainly share the judgment of the distinguished gentleman as regards the
comparator provision in the House of Representatives and we appreciate the reasons given. But we are under
the impression that the House also, aside from the comparator, has an adjustment clause that is fixed. It has fixed
rates for the adjustment. So that one of the basic differences between the Senate proposed version now and the
House version is that, the House of Representatives has manifested its will and judgment as regards the tax to
which we will adjust, whereas the Senate version relegates fundamentally that judgment to the Department of
Finance.
Senator Enrile: That is correct, Mr. President, because we felt that in imposing a fixed adjustment, we might be
fixing an amount that is either too high or too low. We cannot foresee the economic trends in this country over a
period of two years, three years, let alone ten years. So we felt that a mechanism ought to be adopted in order to
serve the interest of the government, the interest of the producers, and the interest of the consuming public.
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Senator Roco: This is where, Mr. President, my policy difficulties start. Under the Constitution I think it is Article
VI, Section 24, and it was the distinguished chairman of the Committee on Ways and Means who made this
Chamber very conscious of this provision revenue measures and tariff measures shall originate exclusively
from the House of Representatives.
The reason for this, Mr. President, is, there is a long history why the House of Representatives must originate
judgments on tax. The House members represent specific districts. They represent specific constituencies, and
the whole history of parliamentarism, the whole history of Congress as an institution is founded on the proposition
that the direct representatives of the people must speak about taxes.
Mr. President, while the Senate can concur and can introduce amendments, the proposed change here is radical.
This is the policy difficulty that I wish to clarify with the gentleman because the judgment call now on the amount
of tax to be imposed is not coming from Congress. It is shifted to the Department of Finance. True, the Secretary
of Finance may have been the best finance officer two years ago and now the best finance officer in Asia, but that
does not make him qualified to replace the judgment call of the House of Representatives. That is my first
difficulty.
Senator Enrile: Mr. President, precisely the law, in effect, authorizes this rate beforehand. The computation of the
rate is the only thing that was left to the Department of Finance as a tax implementor of Congress. This is not
unusual because we have already, as I said, adopted a system similar to this. If we adjust the personal exemption
of an individual taxpayer, we are in effect adjusting the applicable tax rate to him.
Senator Roco: But the point I was trying to demonstrate, Mr. President, is that we depart precisely from the
mandate of the Constitution that judgment on revenue must emanate from Congress. Here, it is shifted to the
Department of Finance for no visible or patent reason insofar as I could understand. The only difference is, who
will make the judgment? Should it be Congress?
Senator Enrile: Mr. President, forgive me for answering sooner than I should. My understanding of the
Constitution is that all revenue measures must emanate from the House. That is all the Constitution says.
Now, it does not say that the judgment call must belong to the House. The judgment call can belong both to the
House and to the Senate. We can change whatever proposal the House did. Precisely, we are now crafting a
measure, and we are saying that this is the rate subject to an adjustment which we also provide. We are not
giving any unusual power to the Secretary of Finance because we tell him, "This is the formula that you must
adopt in arriving at the adjustment so that you do not have to come back to us."59
Apart from his doubts as to the legality of the delegation of taxing power to the DOF and BIR, Senator Roco also voiced
out his concern about the possible abuse and corruption that will arise from the periodic adjustment and reclassification
provision. Continuing
Senator Roco: Mr. President, if that is the argument, that the distinguished gentleman has a different legal
interpretation, we will then now examine the choice. Because his legal interpretation is different from mine, then
the issues becomes: Is it more advantageous that this judgment be exercised by the House? Should we
not concur or modify in terms of the exercise by the House of its power or are we better off giving this
judgment call to the Department of Finance?
Let me now submit, Mr. President, that in so doing, it is more advantageous to fix the rate so that even if
we modify the rates identified by Congress, it is better and less susceptible to abuse.
For instance, Mr. President, would the gentlemen wish to demonstrate to us how this will be done? On page 8,
lines 5 to 9, there is a provision here as to when the Secretary of Finance shall direct the conduct of survey of
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retail prices of each brand of fermented liquor in coordination with the Bureau of Internal Revenue and the
National Statistics Office.
These offices are not exactly noted, Mr. President, for having been sanctified by the Holy Spirit in their noble
intentions. x x x60 (Emphasis supplied)
Pressing this point, Senator Roco continued his query:
Senator Roco: x x x [On page 8, lines 5 to 9] it says that during the two-year period, the Secretary of Finance
shall direct the conduct of the survey. How? When? Which retail prices and what brand shall he consider? When
he coordinates with the Bureau of Internal Revenue, what is the Bureau of Internal Revenue supposed to be
doing? What is the National Statistics Office supposed to be doing, and under what guides and standards?
May the gentleman wish to demonstrate how this will be done? My point, Mr. President, is, by giving the
Secretary of Finance, the BIR and the National Statistics Office discretion over a two-year period will
invite corruption and arbitrariness, which is more dangerous than letting the House of Representatives
and this Chamber set the adjustment rate. Why not set the adjustment rate? Why should Congress not
exercise that judgment now? x x x
Senator Enrile: x x x
Senator Roco: x x x We respectfully submit that the Chairman consider choosing the judgment of this Chamber
and the House of Representatives over a delegated judgment of the Department of Finance.
Again, it is not to say that I do not trust the Department of Finance. It has won awards, and I also trust the
undersecretary. But that is beside the point. Tomorrow, they may not be there.61(Emphasis supplied)
This point was further dissected by the two senators. There was a genuine difference of opinion as to which system one
with a fixed excise tax rate and classification or the other with a periodic adjustment of excise tax rate and reclassification
was less susceptible to abuse, as the following exchanges show:
Senator Enrile: Mr. President, considering the sensitivity of these products from the viewpoint of exerted
pressures because of the understandable impact of this measure on the pockets of the major players producing
these products, the committee felt that perhaps to lessen such pressures, it is best that we now establish a norm
where the tax will be adjusted without incurring too much political controversy as has happened in the case of this
proposal.
Senator Roco: But that is exactly the same reason we say we must rely upon Congress because Congress, if it is
subjected to pressure, at least balances off because of political factors.
When the Secretary of Finance is now subjected to pressure, are we saying that the Secretary of Finance and the
Department of Finance is better-suited to withstand the pressure? Or are we saying "Let the Finance Secretary
decide whom to yield"?
I am saying that the temptation and the pressure on the Secretary of Finance is more dangerous and more
corruption-friendly than ascertaining for ourselves now a fixed rate of increase for a fixed period.
Senator Enrile: Mr. President, perhaps the gentleman may not agree with this representation, but in my humble
opinion, this formulation is less susceptible to pressure because there is a definite point of reference which is the
consumer price index, and that consumer price index is not going to be used only for this purpose. The CPI is
used for a national purpose, and there is less possibility of tinkering with it.62
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Further, Senator Roco, like Congressman Javier, expressed the view that the periodic adjustment and reclassification
provision would create an anti-competitive atmosphere. Again, Senators Roco and Enrile had genuine divergence of
opinions on this matter, to wit:
Senator Roco: x x x On the marketing level, an adjustment clause may, in fact, be disadvantageous to both
companies, whether it is the Lucio Tan companies or the San Miguel companies. If we have to adjust our
marketing position every two years based on the adjustment clause, the established company may survive, but
the new ones will have tremendous difficulty. Therefore, this provision tends to indicate an anticompetitive bias.
It is good for San Miguel and the Lucio Tan companies, but the new companies assuming there may be new
companies and we want to encourage them because of the old point of liberalization will be at a disadvantage
under this situation. If this observation will find receptivity in the policy consideration of the distinguished
Gentleman, maybe we can also further, later on, seek amendments to this automatic adjustment clause in some
manner.
Senator Enrile: Mr. President, I cannot foresee any anti-competitiveness of this provision with respect to a new
entrant, because a new entrant will not just come in without studying the market. He is a lousy businessman if he
will just come in without studying the market. If he comes in, he will determine at what retail price level he will
market his product, and he will be coming under any of the tiers depending upon his net retail price. Therefore, I
do not see how this particular provision will affect a new entrant.
Senator Roco: Be that as it may, Mr. President, we obviously will not resort to debate until this evening, and we
will have to look for other ways of resolving the policy options.
Let me just close that particular area of my interpellation, by summarizing the points we were hoping could be
clarified.
1. That the automatic adjustment clause is at best questionable in law.
2. It is corruption-friendly in the sense that it shifts the discretion from the House of Representatives and
this Chamber to the Secretary of Finance, no matter how saintly he may be.
3. There is, although the judgment call of the gentleman disagrees to our view, an anticompetitive
situation that is geared at63
After these lengthy exchanges, it appears that the views of Senator Enrile were sustained by the Senate Body because the
Senate Version was passed on Third Reading without substantially altering the periodic adjustment and reclassification
provision.
It was actually at the Bicameral Conference Committee level where the Senate Version underwent major changes. The
Senate Panel prevailed upon the House Panel to abandon the basic excise tax rate and ad valorem comparator as the
means to determine the applicable excise tax rate. Thus, the Senates four-tiered system was retained with minor
adjustments as to the excise tax rate per tier. However, the House Panel prevailed upon the Senate Panel to delete the
power of the DOF and BIR to periodically adjust the excise tax rate and tax brackets, and periodically resurvey and
reclassify the cigarette brands based on the increase in the consumer price index.
In lieu thereof, the classification of existing brands based on their average net retail price as of October 1, 1996 was
"frozen" and a fixed across-the-board 12% increase in the excise tax rate of each tier after three years from the effectivity
of the Act was put in place. There is a dearth of discussion in the deliberations as to the applicability of the freezing
mechanism to new brands after their classification is determined based on their current net retail price. But a plain reading
of the text of RA 8240, even before its amendment by RA 9334, as well as the previously discussed deliberations would
readily lead to the conclusion that the intent of Congress was to likewise apply the freezing mechanism to new brands.
Precisely, Congress rejected the proposal to allow the DOF and BIR to periodically adjust the excise tax rate and tax
brackets as well as to periodically resurvey and reclassify cigarettes brands which would have encompassed old and new
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brands alike. Thus, it would be absurd for us to conclude that Congress intended to allow the periodic reclassification of
new brands by the BIR after their classification is determined based on their current net retail price. We shall return to this
point when we tackle the second issue.
In explaining the changes made at the Bicameral Conference Committee level, Senator Enrile, in his report to the Senate
plenary, noted that the fixing of the excise tax rates was done to avoid confusion. 64 Congressman Javier, for his part,
reported to the House plenary the reasons for fixing the excise tax rate and freezing the classification, thus:
Finally, this twin feature, Mr. Speaker, fixed specific tax rates and frozen classification, rejects the Senate version
which seeks to abdicate the power of Congress to tax by pegging the rates as well as the classification of sin
products to consumer price index which practically vests in the Secretary of Finance the power to fix the
rates and to classify the products for tax purposes.65 (Emphasis supplied)
Congressman Javier later added that the frozen classification was intended to give stability to the industry as the BIR
would be prevented from tinkering with the classification since it would remain unchanged despite the increase in the net
retail prices of the previously classified brands. 66 This would also assure the industry players that there would be no new
impositions as long as the law is unchanged.67
From the foregoing, it is quite evident that the classification freeze provision could hardly be considered arbitrary, or
motivated by a hostile or oppressive attitude to unduly favor older brands over newer brands. Congress was unequivocal
in its unwillingness to delegate the power to periodically adjust the excise tax rate and tax brackets as well as to
periodically resurvey and reclassify the cigarette brands based on the increase in the consumer price index to the DOF
and the BIR. Congress doubted the constitutionality of such delegation of power, and likewise, considered the ethical
implications thereof. Curiously, the classification freeze provision was put in place of the periodic adjustment and
reclassification provision because of the belief that the latter would foster an anti-competitive atmosphere in the market.
Yet, as it is, this same criticism is being foisted by petitioner upon the classification freeze provision.
To our mind, the classification freeze provision was in the main the result of Congresss earnest efforts to improve the
efficiency and effectivity of the tax administration over sin products while trying to balance the same with other state
interests. In particular, the questioned provision addressed Congresss administrative concerns regarding delegating too
much authority to the DOF and BIR as this will open the tax system to potential areas for abuse and corruption. Congress
may have reasonably conceived that a tax system which would give the least amount of discretion to the tax implementers
would address the problems of tax avoidance and tax evasion.
To elaborate a little, Congress could have reasonably foreseen that, under the DOF proposal and the Senate Version, the
periodic reclassification of brands would tempt the cigarette manufacturers to manipulate their price levels or bribe the tax
implementers in order to allow their brands to be classified at a lower tax bracket even if their net retail prices have already
migrated to a higher tax bracket after the adjustment of the tax brackets to the increase in the consumer price index.
Presumably, this could be done when a resurvey and reclassification is forthcoming. As briefly touched upon in the
Congressional deliberations, the difference of the excise tax rate between the medium-priced and the high-priced tax
brackets under RA 8240, prior to its amendment, was P3.36. For a moderately popular brand which sells around 100
million packs per year, this easily translates to P336,000,000.68 The incentive for tax avoidance, if not outright tax evasion,
would clearly be present. Then again, the tax implementers may use the power to periodically adjust the tax rate and
reclassify the brands as a tool to unduly oppress the taxpayer in order for the government to achieve its revenue targets
for a given year.
Thus, Congress sought to, among others, simplify the whole tax system for sin products to remove these potential areas of
abuse and corruption from both the side of the taxpayer and the government. Without doubt, the classification freeze
provision was an integral part of this overall plan. This is in line with one of the avowed objectives of the assailed law "to
simplify the tax administration and compliance with the tax laws that are about to unfold in order to minimize losses arising
from inefficiencies and tax avoidance scheme, if not outright tax evasion." 69 RA 9334 did not alter thisclassification freeze
provision of RA 8240. On the contrary, Congress affirmed this freezing mechanism by clarifying the wording of the law. We
can thus reasonably conclude, as the deliberations on RA 9334 readily show, that the administrative concerns in tax
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administration, which moved Congress to enact the classification freeze provision in RA 8240, were merely continued by
RA 9334. Indeed, administrative concerns may provide a legitimate, rational basis for legislative classification. 70 In the case
at bar, these administrative concerns in the measurement and collection of excise taxes on sin products are readily
apparent as afore-discussed.
Aside from the major concern regarding the elimination of potential areas for abuse and corruption from the tax
administration of sin products, the legislative deliberations also show that theclassification freeze provision was intended to
generate buoyant and stable revenues for government. With the frozen tax classifications, the revenue inflow would
remain stable and the government would be able to predict with a greater degree of certainty the amount of taxes that a
cigarette manufacturer would pay given the trend in its sales volume over time. The reason for this is that the previously
classified cigarette brands would be prevented from moving either upward or downward their tax brackets despite the
changes in their net retail prices in the future and, as a result, the amount of taxes due from them would remain
predictable. The classification freeze provision would, thus, aid in the revenue planning of the government.71
All in all, the classification freeze provision addressed Congresss administrative concerns in the simplification of tax
administration of sin products, elimination of potential areas for abuse and corruption in tax collection, buoyant and stable
revenue generation, and ease of projection of revenues. Consequently, there can be no denial of the equal protection of
the laws since the rational-basis test is amply satisfied.
Going now to the contention of petitioner that the classification freeze provision unduly favors older brands over newer
brands, we must first contextualize the basis of this claim. As previously discussed, the evidence presented by the
petitioner merely showed that in 2004, Marlboro and Philip Morris, on the one hand, and Lucky Strike, on the other, would
have been taxed at the same rate had the classification freeze provision been not in place. But due to the operation of
the classification freeze provision, Lucky Strike was taxed higher. From here, petitioner generalizes that this differential tax
treatment arising from the classification freeze provision adversely impacts the fairness of the playing field in the industry,
particularly, between older and newer brands. Thus, it is virtually impossible for new brands to enter the market.
Petitioner did not, however, clearly demonstrate the exact extent of such impact. It has not been shown that the net retail
prices of other older brands previously classified under this classification system have already pierced their tax brackets,
and, if so, how this has affected the overall competition in the market. Further, it does not necessarily follow that newer
brands cannot compete against older brands because price is not the only factor in the market as there are other factors
like consumer preference, brand loyalty, etc. In other words, even if the newer brands are priced higher due to the
differential tax treatment, it does not mean that they cannot compete in the market especially since cigarettes contain
addictive ingredients so that a consumer may be willing to pay a higher price for a particular brand solely due to its unique
formulation. It may also be noted that in 2003, the BIR surveyed 29 new brands72 that were introduced in the market after
the effectivity of RA 8240 on January 1, 1997, thus negating the sweeping generalization of petitioner that theclassification
freeze provision has become an insurmountable barrier to the entry of new brands. Verily, where there is a claim of breach
of the due process and equal protection clauses, considering that they are not fixed rules but rather broad standards, there
is a need for proof of such persuasive character as would lead to such a conclusion. Absent such a showing, the
presumption of validity must prevail.73
Be that as it may, petitioners evidence does suggest that, at least in 2004, Philip Morris and Marlboro, older brands, would
have been taxed at the same rate as Lucky Strike, a newer brand, due to certain conditions (i.e., the increase of the older
brands net retail prices beyond the tax bracket to which they were previously classified after the lapse of some time) were
it not for the classification freeze provision. It may be conceded that this has adversely affected, to a certain extent, the
ability of petitioner to competitively price its newer brands vis--vis the subject older brands. Thus, to a limited extent, the
assailed law seems to derogate one of its avowed objectives, i.e. promoting fair competition among the players in the
industry. Yet, will this occurrence, by itself, render the assailed law unconstitutional on equal protection grounds?
We answer in the negative.
Whether Congress acted improvidently in derogating, to a limited extent, the states interest in promoting fair competition
among the players in the industry, while pursuing other state interests regarding the simplification of tax administration of
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sin products, elimination of potential areas for abuse and corruption in tax collection, buoyant and stable revenue
generation, and ease of projection of revenues through the classification freeze provision, and whether the questioned
provision is the best means to achieve these state interests, necessarily go into the wisdom of the assailed law which we
cannot inquire into, much less overrule. The classification freeze provision has not been shown to be precipitated by a
veiled attempt, or hostile attitude on the part of Congress to unduly favor older brands over newer brands. On the contrary,
we must reasonably assume, owing to the respect due a co-equal branch of government and as revealed by the
Congressional deliberations, that the enactment of the questioned provision was impelled by an earnest desire to improve
the efficiency and effectivity of the tax administration of sin products. For as long as the legislative classification is
rationally related to furthering some legitimate state interest, as here, the rational-basis test is satisfied and the
constitutional challenge is perfunctorily defeated.
We do not sit in judgment as a supra-legislature to decide, after a law is passed by Congress, which state interest is
superior over another, or which method is better suited to achieve one, some or all of the states interests, or what these
interests should be in the first place. This policy-determining power, by constitutional fiat, belongs to Congress as it is its
function to determine and balance these interests or choose which ones to pursue. Time and again we have ruled that the
judiciary does not settle policy issues. The Court can only declare what the law is and not what the law should be. Under
our system of government, policy issues are within the domain of the political branches of government and of the people
themselves as the repository of all state power. 74 Thus, the legislative classification under the classification freeze
provision, after having been shown to be rationally related to achieve certain legitimate state interests and done in good
faith, must, perforce, end our inquiry.
Concededly, the finding that the assailed law seems to derogate, to a limited extent, one of its avowed objectives (i.e.
promoting fair competition among the players in the industry) would suggest that, by Congresss own standards, the
current excise tax system on sin products is imperfect. But, certainly, we cannot declare a statute unconstitutional merely
because it can be improved or that it does not tend to achieve all of its stated objectives. 75 This is especially true for tax
legislation which simultaneously addresses and impacts multiple state interests. 76 Absent a clear showing of breach of
constitutional limitations, Congress, owing to its vast experience and expertise in the field of taxation, must be given
sufficient leeway to formulate and experiment with different tax systems to address the complex issues and problems
related to tax administration. Whatever imperfections that may occur, the same should be addressed to the democratic
process to refine and evolve a taxation system which ideally will achieve most, if not all, of the states objectives.
In fine, petitioner may have valid reasons to disagree with the policy decision of Congress and the method by which the
latter sought to achieve the same. But its remedy is with Congress and not this Court. As succinctly articulated in Vance v.
Bradley:77
The Constitution presumes that, absent some reason to infer antipathy, even improvident decisions will eventually
be rectified by the democratic process, and that judicial intervention is generally unwarranted no matter how
unwisely we may think a political branch has acted. Thus, we will not overturn such a statute unless the varying
treatment of different groups or persons is so unrelated to the achievement of any combination of legitimate
purposes that we can only conclude that the legislature's actions were irrational.78
We now tackle the second issue.
Petitioner asserts that Revenue Regulations No. 1-97, as amended by Revenue Regulations No. 9-2003, Revenue
Regulations No. 22-2003 and Revenue Memorandum Order No. 6-2003, are invalid insofar as they empower the BIR to
reclassify or update the classification of new brands of cigarettes based on their current net retail prices every two years or
earlier. It claims that RA 8240, even prior to its amendment by RA 9334, did not authorize the BIR to conduct said periodic
resurvey and reclassification.
The questioned provisions are found in the following sections of the assailed issuances:

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(1) Section 4(B)(e)(c), 2nd paragraph of Revenue Regulations No. 1-97, as amended by Section 2 of Revenue Regulations
9-2003, viz:
For the purpose of establishing or updating the tax classification of new brands and variant(s) thereof, their
current net retail price shall be reviewed periodically through the conduct of survey or any other appropriate
activity, as mentioned above, every two (2) years unless earlier ordered by the Commissioner. However,
notwithstanding any increase in the current net retail price, the tax classification of such new brands shall remain
in force until the same is altered or changed through the issuance of an appropriate Revenue Regulations.
(2) Sections II(1)(b), II(4)(b), II(6), II(7), III (Large Tax Payers Assistance Division II) II(b) of Revenue Memorandum Order
No. 6-2003, insofar as pertinent to cigarettes packed by machine, viz:
II. POLICIES AND GUIDELINES
1. The conduct of survey covered by this Order, for purposes of determining the current retail prices of new
brands of cigarettes and alcohol products introduced in the market on or after January 1, 1997, shall be
undertaken in the following instances:
xxxx
b. For reclassification of new brands of said excisable products that were introduced in the market after January
1, 1997.
xxxx
4. The determination of the current retail prices of new brands of the aforesaid excisable products shall be
initiated as follows:
xxxx
b. After the lapse of the prescribed two-year period or as the Commissioner may otherwise direct, the appropriate
tax reclassification of these brands based on the current net retail prices thereof shall be determined by a survey
to be conducted upon a written directive by the Commissioner.
For this purpose, a memorandum order to the Assistant Commissioner, Large Taxpayers Service, Heads, Excise
Tax Areas, and Regional Directors of all Revenue Regions, except Revenue Region Nos. 4, 5, 6, 7, 8 and 9, shall
be issued by the Commissioner for the submission of the list of major supermarkets/retail outlets where the above
excisable products are being sold, as well as the list of selected revenue officers who shall be designated to
conduct the said activity(ies).
xxxx
6. The results of the survey conducted in Revenue Region Nos. 4 to 9 shall be submitted directly to the Chief, LT
Assistance Division II (LTAD II), National Office for consolidation. On the other hand, the results of the survey
conducted in Revenue Regions other than Revenue Region Nos. 4 to 9, shall be submitted to the Office of the
Regional Director for regional consolidation. The consolidated regional survey, together with the accomplished
survey forms shall be transmitted to the Chief, LTAD II for national consolidation within three (3) days from date of
actual receipt from the survey teams. The LTAD II shall be responsible for the evaluation and analysis of the
submitted survey forms and the preparation of the recommendation for the updating/revision of the tax
classification of each brand of cigarettes and alcohol products. The said recommendation, duly validated by the
ACIR, LTS, shall be submitted to the Commissioner for final review within ten (10) days from the date of actual
receipt of complete reports from all the surveying Offices.
7. Upon final review by the Commissioner of the revised tax classification of the different new brands of cigarettes
and alcohol products, the appropriate revenue regulations shall be prepared and submitted for approval by the
Secretary of Finance.
xxxx
III. PROCEDURES
xxxx
Large Taxpayers Assistance Division II
xxxx
1. Perform the following preparatory procedures on the identification of brands to be surveyed,
supermarkets/retail outlets where the survey shall be conducted, and the personnel selected to conduct the
survey.
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xxxx
b. On the tax reclassification of new brands
i. Submit a master list of registered brands covered by the survey pursuant to the provisions of Item II.2 of this
Order containing the complete description of each brand, existing net retail price and the corresponding tax rate
thereof.
ii. Submit to the ACIR, LTS, a list of major supermarkets/retail outlets within the territorial jurisdiction of the
concerned revenue regions where the survey will be conducted to be used as basis in the issuance of Mission
Orders. Ensure that the minimum number of establishments to be surveyed, as prescribed under existing revenue
laws and regulations, is complied with. In addition, the names and designations of revenue officers selected to
conduct the survey shall be clearly indicated opposite the names of the establishments to be surveyed.
There is merit to the contention.
In order to implement RA 8240 following its effectivity on January 1, 1997, the BIR issued Revenue Regulations No. 1-97,
dated December 13, 1996, which mandates a one-time classification only.79Upon their launch, new brands shall be initially
taxed based on their suggested net retail price. Thereafter, a survey shall be conducted within three (3) months to
determine their current net retail prices and, thus, fix their official tax classifications. However, the BIR made a turnaround
by issuing Revenue Regulations No. 9-2003, dated February 17, 2003, which partly amended Revenue Regulations No. 197, by authorizing the BIR to periodically reclassify new brands (i.e., every two years or earlier) based on their current net
retail prices. Thereafter, the BIR issued Revenue Memorandum Order No. 6-2003, dated March 11, 2003, prescribing the
guidelines on the implementation of Revenue Regulations No. 9-2003. This was patent error on the part of the BIR for
being contrary to the plain text and legislative intent of RA 8240.
It is clear that the afore-quoted portions of Revenue Regulations No. 1-97, as amended by Section 2 of Revenue
Regulations 9-2003, and Revenue Memorandum Order No. 6-2003 unjustifiably emasculate the operation of Section 145
of the NIRC because they authorize the Commissioner of Internal Revenue to update the tax classification of new brands
every two years or earlier subject only to its issuance of the appropriate Revenue Regulations, when nowhere in Section
145 is such authority granted to the Bureau. Unless expressly granted to the BIR, the power to reclassify cigarette brands
remains a prerogative of the legislature which cannot be usurped by the former.
More importantly, as previously discussed, the clear legislative intent was for new brands to benefit from the same freezing
mechanism accorded to Annex "D" brands. To reiterate, in enacting RA 8240, Congress categorically rejected the DOF
proposal and Senate Version which would have empowered the DOF and BIR to periodically adjust the excise tax rate and
tax brackets, and to periodically resurvey and reclassify cigarette brands. (This resurvey and reclassification would have
naturally encompassed both old and new brands.) It would thus, be absurd for us to conclude that Congress intended to
allow the periodic reclassification of new brands by the BIR after their classification is determined based on their current
net retail price while limiting the freezing of the classification to Annex "D" brands. Incidentally, Senator Ralph G. Recto
expressed the following views during the deliberations on RA 9334, which later amended RA 8240:
Senator Recto: Because, like I said, when Congress agreed to adopt a specific tax system [under R.A. 8240],
when Congress did not index the brackets, and Congress did not index the rates but only provided for a one rate
increase in the year 2000, we shifted from ad valoremwhich was based on value to a system of specific which is
based on volume. Congress then, in effect, determined the classification based on the prices at that particular
period of time and classified these products accordingly.
Of course, Congress then decided on what will happen to the new brands or variants of existing brands. To favor
government, a variant would be classified as the highest rate of tax for that particular brand. In case of a new
brand, Mr. President, then the BIR should classify them. But I do not think it was the intention of Congress then to
give the BIR the authority to reclassify them every so often. I do not think it was the intention of Congress to allow
the BIR to classify a new brand every two years, for example, because it will be arbitrary for the BIR to do so. x x
x80(Emphasis supplied)

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For these reasons, the amendments introduced by RA 9334 to RA 8240, insofar as the freezing mechanism is concerned,
must be seen merely as underscoring the legislative intent already in place then, i.e. new brands as being covered by the
freezing mechanism after their classification based on their current net retail prices.
Unfortunately for petitioner, this result will not cause a downward reclassification of Lucky Strike. It will be recalled that
petitioner introduced Lucky Strike in June 2001. However, as admitted by petitioner itself, the BIR did not conduct the
required market survey within three months from product launch. As a result, Lucky Strike was never classified based on
its actual current net retail price. Petitioner failed to timely seek redress to compel the BIR to conduct the requisite market
survey in order to fix the tax classification of Lucky Strike. In the meantime, Lucky Strike was taxed based on
itssuggested net retail price of P9.90 per pack, which is within the high-priced tax bracket. It was only after the lapse of two
years or in 2003 that the BIR conducted a market survey which was the first time that Lucky Strikes actual current net
retail price was surveyed and found to be from P10.34 toP11.53 per pack, which is within the premium-priced tax bracket.
The case of petitioner falls under a situation where there was no reclassification based on its current net retail price which
would have been invalid as previously explained. Thus, we cannot grant petitioners prayer for a downward reclassification
of Lucky Strike because it was never reclassified by the BIR based on its actual current net retail price.
It should be noted though that on August 8, 2003, the BIR issued Revenue Regulations No. 22-2003 which implemented
the revised tax classifications of new brands based on their current net retail prices through the market survey conducted
pursuant to Revenue Regulations No. 9-2003. Annex "A" of Revenue Regulations No. 22-2003 lists the result of the
market survey and the corresponding recommended tax classification of the new brands therein aside from Lucky Strike.
However, whether these other brands were illegally reclassified based on their actual current net retail prices by the BIR
must be determined on a case-to-case basis because it is possible that these brands were classified based on their actual
current net retail price for the first time in the year 2003 just like Lucky Strike. Thus, we shall not make any pronouncement
as to the validity of the tax classifications of the other brands listed therein.
Finally, it must be noted that RA 9334 introduced changes in the manner by which the current net retail price of a new
brand is determined and how its classification is permanently fixed, to wit:
New brands, as defined in the immediately following paragraph, shall initially be classified according to their
suggested net retail price.
New brands shall mean a brand registered after the date of effectivity of R.A. No. 8240 [on January 1, 1997].
Suggested net retail price shall mean the net retail price at which new brands, as defined above, of locally
manufactured or imported cigarettes are intended by the manufacture or importer to be sold on retail in major
supermarkets or retail outlets in Metro Manila for those marketed nationwide, and in other regions, for those with
regional markets. At the end of three (3) months from the product launch, the Bureau of Internal Revenue
shall validate the suggested net retail price of the new brand against the net retail price as defined herein
and determine the correct tax bracket under which a particular new brand of cigarette, as defined above,
shall be classified. After the end of eighteen (18) months from such validation, the Bureau of Internal
Revenue shall revalidate the initially validated net retail price against the net retail price as of the time of
revalidation in order to finally determine the correct tax bracket under which a particular new brand of
cigarettes shall be classified; Provided however, That brands of cigarettes introduced in the domestic market
between January 1, 1997 and December 31, 2003 shall remain in the classification under which the Bureau of
Internal Revenue has determined them to belong as of December 31, 2003. Such classification of new brands
and brands introduced between January 1, 1997 and December 31, 2003 shall not be revised except by an
act of Congress. (Emphasis supplied)
Thus, Revenue Regulations No. 9-2003 and Revenue Memorandum Order No. 6-2003 should be deemed modified by the
above provisions from the date of effectivity of RA 9334 on January 1, 2005.

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In sum, Section 4(B)(e)(c), 2nd paragraph of Revenue Regulations No. 1-97, as amended by Section 2 of Revenue
Regulations 9-2003, and Sections II(1)(b), II(4)(b), II(6), II(7), III (Large Tax Payers Assistance Division II) II(b) of Revenue
Memorandum Order No. 6-2003, as pertinent to cigarettes packed by machine, are invalid insofar as they grant the BIR
the power to reclassify or update the classification of new brands every two years or earlier. Further, these provisions are
deemed modified upon the effectivity of RA 9334 on January 1, 2005 insofar as the manner of determining the permanent
classification of new brands is concerned.
We now tackle the last issue.
Petitioner contends that RA 8240, as amended by RA 9334, and its implementing rules and regulations violate the General
Agreement on Tariffs and Trade (GATT) of 1947, as amended, specifically, Paragraph 2, Article III, Part II:
2. The products of the territory of any contracting party imported into the territory of any other contracting party
shall not be subject, directly or indirectly, to internal taxes or other internal charges of any kind in excess of those
applied, directly or indirectly, to like domestic products. Moreover, no contracting party shall otherwise apply
internal taxes or other internal charges to imported or domestic products in a manner contrary to the principles set
forth in paragraph 1.
It claims that it is the duty of this Court to correct, in favor of the GATT, whatever inconsistency exists between the assailed
law and the GATT in order to prevent triggering the international dispute settlement mechanism under the GATT-WTO
Agreement.
We disagree.
The classification freeze provision uniformly applies to all newly introduced brands in the market, whether imported or
locally manufactured. It does not purport to single out imported cigarettes in order to unduly favor locally produced ones.
Further, petitioners evidence was anchored on the alleged unequal tax treatment between old and new brands which
involves a different frame of reference vis--vis local and imported products. Petitioner has, therefore, failed to clearly
prove its case, both factually and legally, within the parameters of the GATT.
At any rate, even assuming arguendo that petitioner was able to prove that the classification freeze provision violates the
GATT, the outcome would still be the same. The GATT is a treaty duly ratified by the Philippine Senate and under Article
VII, Section 2181 of the Constitution, it merely acquired the status of a statute. 82 Applying the basic principles of statutory
construction in case of irreconcilable conflict between statutes, RA 8240, as amended by RA 9334, would prevail over the
GATT either as a later enactment by Congress or as a special law dealing with the taxation of sin products. Thus, inAbbas
v. Commission on Elections,83 we had occasion to explain:
Petitioners premise their arguments on the assumption that the Tripoli Agreement is part of the law of the land,
being a binding international agreement. The Solicitor General asserts that the Tripoli Agreement is neither a
binding treaty, not having been entered into by the Republic of the Philippines with a sovereign state and ratified
according to the provisions of the 1973 or 1987 Constitutions, nor a binding international agreement.
We find it neither necessary nor determinative of the case to rule on the nature of the Tripoli Agreement and its
binding effect on the Philippine Government whether under public international or internal Philippine law. In the
first place, it is now the Constitution itself that provides for the creation of an autonomous region in Muslim
Mindanao. The standard for any inquiry into the validity of R.A. No. 6734 would therefore be what is so provided
in the Constitution. Thus, any conflict between the provisions of R.A. No. 6734 and the provisions of the Tripoli
Agreement will not have the effect of enjoining the implementation of the Organic Act. Assuming for the sake of
argument that the Tripoli Agreement is a binding treaty or international agreement, it would then constitute part of
the law of the land. But as internal law it would not be superior to R.A. No. 6734, an enactment of the Congress of
the Philippines, rather it would be in the same class as the latter [SALONGA, PUBLIC INTERNATIONAL LAW
320 (4th ed., 1974), citing Head Money Cases, 112 U.S. 580 (1884) and Foster v. Nelson, 2 Pet. 253 (1829)].
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Thus, if at all, R.A. No. 6734 would be amendatory of the Tripoli Agreement, being a subsequent law. Only a
determination by this Court that R.A. No. 6734 contravenes the Constitution would result in the granting of the
reliefs sought. (Emphasis supplied)
WHEREFORE, the petition is PARTIALLY GRANTED and the decision of the Regional Trial Court of Makati, Branch 61, in
Civil Case No. 03-1032, is AFFIRMED with MODIFICATION. As modified, this Court declares that:
(1) Section 145 of the NIRC, as amended by Republic Act No. 9334, is CONSTITUTIONAL; and that
(2) Section 4(B)(e)(c), 2nd paragraph of Revenue Regulations No. 1-97, as amended by Section 2 of Revenue Regulations
9-2003, and Sections II(1)(b), II(4)(b), II(6), II(7), III (Large Tax Payers Assistance Division II) II(b) of Revenue
Memorandum Order No. 6-2003, insofar as pertinent to cigarettes packed by machine, are INVALID insofar as they grant
the BIR the power to reclassify or update the classification of new brands every two years or earlier. SO ORDERED.

G.R. No. 168056 September 1, 2005

ABAKADA GURO PARTY LIST (Formerly AASJAS) OFFICERS SAMSON S. ALCANTARA and ED VINCENT S.
ALBANO, Petitioners,
vs.
THE HONORABLE EXECUTIVE SECRETARY EDUARDO ERMITA; HONORABLE SECRETARY OF THE
DEPARTMENT OF FINANCE CESAR PURISIMA; and HONORABLE COMMISSIONER OF INTERNAL REVENUE
GUILLERMO PARAYNO, JR., Respondent.
DECISION
AUSTRIA-MARTINEZ, J.:
The expenses of government, having for their object the interest of all, should be borne by everyone, and the more man
enjoys the advantages of society, the more he ought to hold himself honored in contributing to those expenses.
-Anne Robert Jacques Turgot (1727-1781)
French statesman and economist
Mounting budget deficit, revenue generation, inadequate fiscal allocation for education, increased emoluments for health
workers, and wider coverage for full value-added tax benefits these are the reasons why Republic Act No. 9337 (R.A.
No. 9337)1 was enacted. Reasons, the wisdom of which, the Court even with its extensive constitutional power of review,
cannot probe. The petitioners in these cases, however, question not only the wisdom of the law, but also perceived
constitutional infirmities in its passage.
Every law enjoys in its favor the presumption of constitutionality. Their arguments notwithstanding, petitioners failed to
justify their call for the invalidity of the law. Hence, R.A. No. 9337 is not unconstitutional.
LEGISLATIVE HISTORY
R.A. No. 9337 is a consolidation of three legislative bills namely, House Bill Nos. 3555 and 3705, and Senate Bill No. 1950.
House Bill No. 35552 was introduced on first reading on January 7, 2005. The House Committee on Ways and Means
approved the bill, in substitution of House Bill No. 1468, which Representative (Rep.) Eric D. Singson introduced on August
8, 2004. The President certified the bill on January 7, 2005 for immediate enactment. On January 27, 2005, the House of
Representatives approved the bill on second and third reading.
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House Bill No. 37053 on the other hand, substituted House Bill No. 3105 introduced by Rep. Salacnib F. Baterina, and
House Bill No. 3381 introduced by Rep. Jacinto V. Paras. Its "mother bill" is House Bill No. 3555. The House Committee on
Ways and Means approved the bill on February 2, 2005. The President also certified it as urgent on February 8, 2005. The
House of Representatives approved the bill on second and third reading on February 28, 2005.
Meanwhile, the Senate Committee on Ways and Means approved Senate Bill No. 19504 on March 7, 2005, "in
substitution of Senate Bill Nos. 1337, 1838 and 1873, taking into consideration House Bill Nos. 3555 and 3705." Senator
Ralph G. Recto sponsored Senate Bill No. 1337, while Senate Bill Nos. 1838 and 1873 were both sponsored by Sens.
Franklin M. Drilon, Juan M. Flavier and Francis N. Pangilinan. The President certified the bill on March 11, 2005, and was
approved by the Senate on second and third reading on April 13, 2005.
On the same date, April 13, 2005, the Senate agreed to the request of the House of Representatives for a committee
conference on the disagreeing provisions of the proposed bills.
Before long, the Conference Committee on the Disagreeing Provisions of House Bill No. 3555, House Bill No. 3705, and
Senate Bill No. 1950, "after having met and discussed in full free and conference," recommended the approval of its
report, which the Senate did on May 10, 2005, and with the House of Representatives agreeing thereto the next day, May
11, 2005.
On May 23, 2005, the enrolled copy of the consolidated House and Senate version was transmitted to the President, who
signed the same into law on May 24, 2005. Thus, came R.A. No. 9337.
July 1, 2005 is the effectivity date of R.A. No. 9337.5 When said date came, the Court issued a temporary restraining order,
effective immediately and continuing until further orders, enjoining respondents from enforcing and implementing the law.
Oral arguments were held on July 14, 2005. Significantly, during the hearing, the Court speaking through Mr. Justice
Artemio V. Panganiban, voiced the rationale for its issuance of the temporary restraining order on July 1, 2005, to wit:
J. PANGANIBAN : . . . But before I go into the details of your presentation, let me just tell you a little background. You know
when the law took effect on July 1, 2005, the Court issued a TRO at about 5 oclock in the afternoon. But before that, there
was a lot of complaints aired on television and on radio. Some people in a gas station were complaining that the gas prices
went up by 10%. Some people were complaining that their electric bill will go up by 10%. Other times people riding in
domestic air carrier were complaining that the prices that theyll have to pay would have to go up by 10%. While all that
was being aired, per your presentation and per our own understanding of the law, thats not true. Its not true that the e-vat
law necessarily increased prices by 10% uniformly isnt it?
ATTY. BANIQUED : No, Your Honor.
J. PANGANIBAN : It is not?
ATTY. BANIQUED : Its not, because, Your Honor, there is an Executive Order that granted the Petroleum companies
some subsidy . . . interrupted
J. PANGANIBAN : Thats correct . . .
ATTY. BANIQUED : . . . and therefore that was meant to temper the impact . . . interrupted
J. PANGANIBAN : . . . mitigating measures . . .
ATTY. BANIQUED : Yes, Your Honor.
J. PANGANIBAN : As a matter of fact a part of the mitigating measures would be the elimination of the Excise Tax and the
import duties. That is why, it is not correct to say that the VAT as to petroleum dealers increased prices by 10%.
ATTY. BANIQUED : Yes, Your Honor.
J. PANGANIBAN : And therefore, there is no justification for increasing the retail price by 10% to cover the E-Vat tax. If you
consider the excise tax and the import duties, the Net Tax would probably be in the neighborhood of 7%? We are not going
into exact figures I am just trying to deliver a point that different industries, different products, different services are hit
differently. So its not correct to say that all prices must go up by 10%.
ATTY. BANIQUED : Youre right, Your Honor.
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J. PANGANIBAN : Now. For instance, Domestic Airline companies, Mr. Counsel, are at present imposed a Sales Tax of
3%. When this E-Vat law took effect the Sales Tax was also removed as a mitigating measure. So, therefore, there is no
justification to increase the fares by 10% at best 7%, correct?
ATTY. BANIQUED : I guess so, Your Honor, yes.
J. PANGANIBAN : There are other products that the people were complaining on that first day, were being increased
arbitrarily by 10%. And thats one reason among many others this Court had to issue TRO because of the confusion in the
implementation. Thats why we added as an issue in this case, even if its tangentially taken up by the pleadings of the
parties, the confusion in the implementation of the E-vat. Our people were subjected to the mercy of that confusion of an
across the board increase of 10%, which you yourself now admit and I think even the Government will admit is incorrect. In
some cases, it should be 3% only, in some cases it should be 6% depending on these mitigating measures and the
location and situation of each product, of each service, of each company, isnt it?
ATTY. BANIQUED : Yes, Your Honor.
J. PANGANIBAN : Alright. So thats one reason why we had to issue a TRO pending the clarification of all these and we
wish the government will take time to clarify all these by means of a more detailed implementing rules, in case the law is
upheld by this Court. . . .6
The Court also directed the parties to file their respective Memoranda.
G.R. No. 168056
Before R.A. No. 9337 took effect, petitioners ABAKADA GURO Party List, et al., filed a petition for prohibition on May 27,
2005. They question the constitutionality of Sections 4, 5 and 6 of R.A. No. 9337, amending Sections 106, 107 and 108,
respectively, of the National Internal Revenue Code (NIRC). Section 4 imposes a 10% VAT on sale of goods and
properties, Section 5 imposes a 10% VAT on importation of goods, and Section 6 imposes a 10% VAT on sale of services
and use or lease of properties. These questioned provisions contain a uniform provisoauthorizing the President, upon
recommendation of the Secretary of Finance, to raise the VAT rate to 12%, effective January 1, 2006, after any of the
following conditions have been satisfied, to wit:
. . . That the President, upon the recommendation of the Secretary of Finance, shall, effective January 1, 2006, raise the
rate of value-added tax to twelve percent (12%), after any of the following conditions has been satisfied:
(i) Value-added tax collection as a percentage of Gross Domestic Product (GDP) of the previous year exceeds two and
four-fifth percent (2 4/5%); or
(ii) National government deficit as a percentage of GDP of the previous year exceeds one and one-half percent (1 %).
Petitioners argue that the law is unconstitutional, as it constitutes abandonment by Congress of its exclusive authority to fix
the rate of taxes under Article VI, Section 28(2) of the 1987 Philippine Constitution.
G.R. No. 168207
On June 9, 2005, Sen. Aquilino Q. Pimentel, Jr., et al., filed a petition for certiorari likewise assailing the constitutionality of
Sections 4, 5 and 6 of R.A. No. 9337.
Aside from questioning the so-called stand-by authority of the President to increase the VAT rate to 12%, on the ground
that it amounts to an undue delegation of legislative power, petitioners also contend that the increase in the VAT rate to
12% contingent on any of the two conditions being satisfied violates the due process clause embodied in Article III, Section
1 of the Constitution, as it imposes an unfair and additional tax burden on the people, in that: (1) the 12% increase is
ambiguous because it does not state if the rate would be returned to the original 10% if the conditions are no longer
satisfied; (2) the rate is unfair and unreasonable, as the people are unsure of the applicable VAT rate from year to year;
and (3) the increase in the VAT rate, which is supposed to be an incentive to the President to raise the VAT collection to at
least 2 4/5 of the GDP of the previous year, should only be based on fiscal adequacy.
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Petitioners further claim that the inclusion of a stand-by authority granted to the President by the Bicameral Conference
Committee is a violation of the "no-amendment rule" upon last reading of a bill laid down in Article VI, Section 26(2) of the
Constitution.
G.R. No. 168461
Thereafter, a petition for prohibition was filed on June 29, 2005, by the Association of Pilipinas Shell Dealers, Inc., et al.,
assailing the following provisions of R.A. No. 9337:
1) Section 8, amending Section 110 (A)(2) of the NIRC, requiring that the input tax on depreciable goods shall be
amortized over a 60-month period, if the acquisition, excluding the VAT components, exceeds One Million Pesos (P1,
000,000.00);
2) Section 8, amending Section 110 (B) of the NIRC, imposing a 70% limit on the amount of input tax to be credited
against the output tax; and
3) Section 12, amending Section 114 (c) of the NIRC, authorizing the Government or any of its political subdivisions,
instrumentalities or agencies, including GOCCs, to deduct a 5% final withholding tax on gross payments of goods and
services, which are subject to 10% VAT under Sections 106 (sale of goods and properties) and 108 (sale of services and
use or lease of properties) of the NIRC.
Petitioners contend that these provisions are unconstitutional for being arbitrary, oppressive, excessive, and confiscatory.
Petitioners argument is premised on the constitutional right of non-deprivation of life, liberty or property without due
process of law under Article III, Section 1 of the Constitution. According to petitioners, the contested sections impose
limitations on the amount of input tax that may be claimed. Petitioners also argue that the input tax partakes the nature of a
property that may not be confiscated, appropriated, or limited without due process of law. Petitioners further contend that
like any other property or property right, the input tax credit may be transferred or disposed of, and that by limiting the
same, the government gets to tax a profit or value-added even if there is no profit or value-added.
Petitioners also believe that these provisions violate the constitutional guarantee of equal protection of the law under
Article III, Section 1 of the Constitution, as the limitation on the creditable input tax if: (1) the entity has a high ratio of input
tax; or (2) invests in capital equipment; or (3) has several transactions with the government, is not based on real and
substantial differences to meet a valid classification.
Lastly, petitioners contend that the 70% limit is anything but progressive, violative of Article VI, Section 28(1) of the
Constitution, and that it is the smaller businesses with higher input tax to output tax ratio that will suffer the consequences
thereof for it wipes out whatever meager margins the petitioners make.
G.R. No. 168463
Several members of the House of Representatives led by Rep. Francis Joseph G. Escudero filed this petition
forcertiorari on June 30, 2005. They question the constitutionality of R.A. No. 9337 on the following grounds:
1) Sections 4, 5, and 6 of R.A. No. 9337 constitute an undue delegation of legislative power, in violation of Article VI,
Section 28(2) of the Constitution;
2) The Bicameral Conference Committee acted without jurisdiction in deleting the no pass on provisions present in Senate
Bill No. 1950 and House Bill No. 3705; and

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3) Insertion by the Bicameral Conference Committee of Sections 27, 28, 34, 116, 117, 119, 121, 125, 7 148, 151, 236, 237
and 288, which were present in Senate Bill No. 1950, violates Article VI, Section 24(1) of the Constitution, which provides
that all appropriation, revenue or tariff bills shall originate exclusively in the House of Representatives
G.R. No. 168730
On the eleventh hour, Governor Enrique T. Garcia filed a petition for certiorari and prohibition on July 20, 2005, alleging
unconstitutionality of the law on the ground that the limitation on the creditable input tax in effect allows VAT-registered
establishments to retain a portion of the taxes they collect, thus violating the principle that tax collection and revenue
should be solely allocated for public purposes and expenditures. Petitioner Garcia further claims that allowing these
establishments to pass on the tax to the consumers is inequitable, in violation of Article VI, Section 28(1) of the
Constitution.
RESPONDENTS COMMENT
The Office of the Solicitor General (OSG) filed a Comment in behalf of respondents. Preliminarily, respondents contend
that R.A. No. 9337 enjoys the presumption of constitutionality and petitioners failed to cast doubt on its validity.
Relying on the case of Tolentino vs. Secretary of Finance, 235 SCRA
630 (1994), respondents argue that the procedural issues raised by petitioners, i.e., legality of the bicameral proceedings,
exclusive origination of revenue measures and the power of the Senate concomitant thereto, have already been settled.
With regard to the issue of undue delegation of legislative power to the President, respondents contend that the law is
complete and leaves no discretion to the President but to increase the rate to 12% once any of the two conditions provided
therein arise.
Respondents also refute petitioners argument that the increase to 12%, as well as the 70% limitation on the creditable
input tax, the 60-month amortization on the purchase or importation of capital goods exceedingP1,000,000.00, and the 5%
final withholding tax by government agencies, is arbitrary, oppressive, and confiscatory, and that it violates the
constitutional principle on progressive taxation, among others.
Finally, respondents manifest that R.A. No. 9337 is the anchor of the governments fiscal reform agenda. A reform in the
value-added system of taxation is the core revenue measure that will tilt the balance towards a sustainable
macroeconomic environment necessary for economic growth.
ISSUES
The Court defined the issues, as follows:
PROCEDURAL ISSUE
Whether R.A. No. 9337 violates the following provisions of the Constitution:
a. Article VI, Section 24, and
b. Article VI, Section 26(2)
SUBSTANTIVE ISSUES
1. Whether Sections 4, 5 and 6 of R.A. No. 9337, amending Sections 106, 107 and 108 of the NIRC, violate the following
provisions of the Constitution:
a. Article VI, Section 28(1), and
b. Article VI, Section 28(2)
2. Whether Section 8 of R.A. No. 9337, amending Sections 110(A)(2) and 110(B) of the NIRC; and Section 12 of R.A. No.
9337, amending Section 114(C) of the NIRC, violate the following provisions of the Constitution:
a. Article VI, Section 28(1), and
b. Article III, Section 1
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RULING OF THE COURT

As a prelude, the Court deems it apt to restate the general principles and concepts of value-added tax (VAT), as the
confusion and inevitably, litigation, breeds from a fallacious notion of its nature.
The VAT is a tax on spending or consumption. It is levied on the sale, barter, exchange or lease of goods or properties and
services.8 Being an indirect tax on expenditure, the seller of goods or services may pass on the amount of tax paid to the
buyer,9 with the seller acting merely as a tax collector.10 The burden of VAT is intended to fall on the immediate buyers and
ultimately, the end-consumers.
In contrast, a direct tax is a tax for which a taxpayer is directly liable on the transaction or business it engages in, without
transferring the burden to someone else.11 Examples are individual and corporate income taxes, transfer taxes, and
residence taxes.12
In the Philippines, the value-added system of sales taxation has long been in existence, albeit in a different mode. Prior to
1978, the system was a single-stage tax computed under the "cost deduction method" and was payable only by the
original sellers. The single-stage system was subsequently modified, and a mixture of the "cost deduction method" and
"tax credit method" was used to determine the value-added tax payable. 13 Under the "tax credit method," an entity can
credit against or subtract from the VAT charged on its sales or outputs the VAT paid on its purchases, inputs and imports.14
It was only in 1987, when President Corazon C. Aquino issued Executive Order No. 273, that the VAT system was
rationalized by imposing a multi-stage tax rate of 0% or 10% on all sales using the "tax credit method."15
E.O. No. 273 was followed by R.A. No. 7716 or the Expanded VAT Law, 16 R.A. No. 8241 or the Improved VAT Law, 17 R.A.
No. 8424 or the Tax Reform Act of 1997,18 and finally, the presently beleaguered R.A. No. 9337, also referred to by
respondents as the VAT Reform Act.
The Court will now discuss the issues in logical sequence.
PROCEDURAL ISSUE
I.
Whether R.A. No. 9337 violates the following provisions of the Constitution:
a. Article VI, Section 24, and
b. Article VI, Section 26(2)
A. The Bicameral Conference Committee
Petitioners Escudero, et al., and Pimentel, et al., allege that the Bicameral Conference Committee exceeded its authority
by:
1) Inserting the stand-by authority in favor of the President in Sections 4, 5, and 6 of R.A. No. 9337;
2) Deleting entirely the no pass-on provisions found in both the House and Senate bills;
3) Inserting the provision imposing a 70% limit on the amount of input tax to be credited against the output tax; and
4) Including the amendments introduced only by Senate Bill No. 1950 regarding other kinds of taxes in addition to the
value-added tax.
Petitioners now beseech the Court to define the powers of the Bicameral Conference Committee.
It should be borne in mind that the power of internal regulation and discipline are intrinsic in any legislative body for, as
unerringly elucidated by Justice Story, "[i]f the power did not exist, it would be utterly impracticable to transact the
business of the nation, either at all, or at least with decency, deliberation, and order."19 Thus, Article VI, Section 16
(3) of the Constitution provides that "each House may determine the rules of its proceedings." Pursuant to this inherent
constitutional power to promulgate and implement its own rules of procedure, the respective rules of each house of
Congress provided for the creation of a Bicameral Conference Committee.
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Thus, Rule XIV, Sections 88 and 89 of the Rules of House of Representatives provides as follows:
Sec. 88. Conference Committee. In the event that the House does not agree with the Senate on the amendment to any
bill or joint resolution, the differences may be settled by the conference committees of both chambers.
In resolving the differences with the Senate, the House panel shall, as much as possible, adhere to and support the House
Bill. If the differences with the Senate are so substantial that they materially impair the House Bill, the panel shall report
such fact to the House for the latters appropriate action.
Sec. 89. Conference Committee Reports. . . . Each report shall contain a detailed, sufficiently explicit statement of the
changes in or amendments to the subject measure.
...
The Chairman of the House panel may be interpellated on the Conference Committee Report prior to the voting thereon.
The House shall vote on the Conference Committee Report in the same manner and procedure as it votes on a bill on third
and final reading.
Rule XII, Section 35 of the Rules of the Senate states:
Sec. 35. In the event that the Senate does not agree with the House of Representatives on the provision of any bill or joint
resolution, the differences shall be settled by a conference committee of both Houses which shall meet within ten (10)
days after their composition. The President shall designate the members of the Senate Panel in the conference committee
with the approval of the Senate.
Each Conference Committee Report shall contain a detailed and sufficiently explicit statement of the changes in, or
amendments to the subject measure, and shall be signed by a majority of the members of each House panel, voting
separately.
A comparative presentation of the conflicting House and Senate provisions and a reconciled version thereof with the
explanatory statement of the conference committee shall be attached to the report.
...
The creation of such conference committee was apparently in response to a problem, not addressed by any constitutional
provision, where the two houses of Congress find themselves in disagreement over changes or amendments introduced
by the other house in a legislative bill. Given that one of the most basic powers of the legislative branch is to formulate and
implement its own rules of proceedings and to discipline its members, may the Court then delve into the details of how
Congress complies with its internal rules or how it conducts its business of passing legislation? Note that in the present
petitions, the issue is not whether provisions of the rules of both houses creating the bicameral conference committee are
unconstitutional, but whether the bicameral conference committee has strictly complied with the rules of both
houses, thereby remaining within the jurisdiction conferred upon it by Congress.
In the recent case of Farias vs. The Executive Secretary,20 the Court En Banc, unanimously reiterated and emphasized
its adherence to the "enrolled bill doctrine," thus, declining therein petitioners plea for the Court to go behind the enrolled
copy of the bill. Assailed in said case was Congresss creation of two sets of bicameral conference committees, the lack of
records of said committees proceedings, the alleged violation of said committees of the rules of both houses, and the
disappearance or deletion of one of the provisions in the compromise bill submitted by the bicameral conference
committee. It was argued that such irregularities in the passage of the law nullified R.A. No. 9006, or the Fair Election Act.
Striking down such argument, the Court held thus:
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Under the "enrolled bill doctrine," the signing of a bill by the Speaker of the House and the Senate President and the
certification of the Secretaries of both Houses of Congress that it was passed are conclusive of its due enactment. A
review of cases reveals the Courts consistent adherence to the rule. The Court finds no reason to deviate from the
salutary rule in this case where the irregularities alleged by the petitioners mostly involved the internal rules of
Congress, e.g., creation of the 2nd or 3rd Bicameral Conference Committee by the House. This Court is not the
proper forum for the enforcement of these internal rules of Congress, whether House or Senate. Parliamentary
rules are merely procedural and with their observance the courts have no concern. Whatever doubts there may be
as to the formal validity of Rep. Act No. 9006 must be resolved in its favor.The Court reiterates its ruling in Arroyo vs.
De Venecia, viz.:
But the cases, both here and abroad, in varying forms of expression, all deny to the courts the power to inquire
into allegations that, in enacting a law, a House of Congress failed to comply with its own rules, in the absence of
showing that there was a violation of a constitutional provision or the rights of private individuals. In Osmea v.
Pendatun, it was held: "At any rate, courts have declared that the rules adopted by deliberative bodies are subject to
revocation, modification or waiver at the pleasure of the body adopting them. And it has been said that "Parliamentary
rules are merely procedural, and with their observance, the courts have no concern. They may be waived or
disregarded by the legislative body." Consequently, "mere failure to conform to parliamentary usage will not
invalidate the action (taken by a deliberative body) when the requisite number of members have agreed to a
particular measure."21 (Emphasis supplied)
The foregoing declaration is exactly in point with the present cases, where petitioners allege irregularities committed by the
conference committee in introducing changes or deleting provisions in the House and Senate bills. Akin to
theFarias case,22 the present petitions also raise an issue regarding the actions taken by the conference committee on
matters regarding Congress compliance with its own internal rules. As stated earlier, one of the most basic and inherent
power of the legislature is the power to formulate rules for its proceedings and the discipline of its members. Congress is
the best judge of how it should conduct its own business expeditiously and in the most orderly manner. It is also the sole
concern of Congress to instill discipline among the members of its conference committee if it believes that said members
violated any of its rules of proceedings. Even the expanded jurisdiction of this Court cannot apply to questions regarding
only the internal operation of Congress, thus, the Court is wont to deny a review of the internal proceedings of a co-equal
branch of government.
Moreover, as far back as 1994 or more than ten years ago, in the case of Tolentino vs. Secretary of Finance,23 the Court
already made the pronouncement that "[i]f a change is desired in the practice [of the Bicameral Conference
Committee] it must be sought in Congress since this question is not covered by any constitutional provision but
is only an internal rule of each house." 24 To date, Congress has not seen it fit to make such changes adverted to by the
Court. It seems, therefore, that Congress finds the practices of the bicameral conference committee to be very useful for
purposes of prompt and efficient legislative action.
Nevertheless, just to put minds at ease that no blatant irregularities tainted the proceedings of the bicameral conference
committees, the Court deems it necessary to dwell on the issue. The Court observes that there was a necessity for a
conference committee because a comparison of the provisions of House Bill Nos. 3555 and 3705 on one hand, and
Senate Bill No. 1950 on the other, reveals that there were indeed disagreements. As pointed out in the petitions, said
disagreements were as follows:

House Bill No. 3555

With regard to "Stand-By Authority" in favor of President

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Provides for 12% VAT on every sale of goods or properties (amending Sec. 106 of NIRC); 12% VAT on importation of goods (amending S
108 of NIRC)

With regard to the "no pass-on" provision

No similar provision

With regard to 70% limit on input tax credit

Provides that the input tax credit for capital goods on which a VAT has been paid shall be equally distributed over 5 years or the deprec
shall not exceed 5% of the total amount of such goods and services; and for persons engaged in retail trading of goods, the allowable inpu

With regard to amendments to be made to NIRC provisions regarding income and excise taxes

No similar provision

No similar provision

Provided for amendments to

several NIRC provisions regarding
corporate income, percentage,
franchise and excise taxes

The disagreements between the provisions in the House bills and the Senate bill were with regard to (1) what rate of VAT
is to be imposed; (2) whether only the VAT imposed on electricity generation, transmission and distribution companies
should not be passed on to consumers, as proposed in the Senate bill, or both the VAT imposed on electricity generation,
transmission and distribution companies and the VAT imposed on sale of petroleum products should not be passed on to
consumers, as proposed in the House bill; (3) in what manner input tax credits should be limited; (4) and whether the NIRC
provisions on corporate income taxes, percentage, franchise and excise taxes should be amended.
There being differences and/or disagreements on the foregoing provisions of the House and Senate bills, the Bicameral
Conference Committee was mandated by the rules of both houses of Congress to act on the same by settling said
differences and/or disagreements. The Bicameral Conference Committee acted on the disagreeing provisions by making
the following changes:
1. With regard to the disagreement on the rate of VAT to be imposed, it would appear from the Conference Committee
Report that the Bicameral Conference Committee tried to bridge the gap in the difference between the 10% VAT rate
proposed by the Senate, and the various rates with 12% as the highest VAT rate proposed by the House, by striking a
compromise whereby the present 10% VAT rate would be retained until certain conditions arise,i.e., the value-added tax
collection as a percentage of gross domestic product (GDP) of the previous year exceeds 2 4/5%, or National Government
deficit as a percentage of GDP of the previous year exceeds 1%, when the President, upon recommendation of the
Secretary of Finance shall raise the rate of VAT to 12% effective January 1, 2006.
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2. With regard to the disagreement on whether only the VAT imposed on electricity generation, transmission and
distribution companies should not be passed on to consumers or whether both the VAT imposed on electricity generation,
transmission and distribution companies and the VAT imposed on sale of petroleum products may be passed on to
consumers, the Bicameral Conference Committee chose to settle such disagreement by altogether deleting from its Report
any no pass-on provision.
3. With regard to the disagreement on whether input tax credits should be limited or not, the Bicameral Conference
Committee decided to adopt the position of the House by putting a limitation on the amount of input tax that may be
credited against the output tax, although it crafted its own language as to the amount of the limitation on input tax credits
and the manner of computing the same by providing thus:
(A) Creditable Input Tax. . . .
...
Provided, The input tax on goods purchased or imported in a calendar month for use in trade or business for which
deduction for depreciation is allowed under this Code, shall be spread evenly over the month of acquisition and the fiftynine (59) succeeding months if the aggregate acquisition cost for such goods, excluding the VAT component thereof,
exceeds one million Pesos (P1,000,000.00): PROVIDED, however, that if the estimated useful life of the capital good is
less than five (5) years, as used for depreciation purposes, then the input VAT shall be spread over such shorter
period: . . .
(B) Excess Output or Input Tax. If at the end of any taxable quarter the output tax exceeds the input tax, the excess shall
be paid by the VAT-registered person. If the input tax exceeds the output tax, the excess shall be carried over to the
succeeding quarter or quarters: PROVIDED that the input tax inclusive of input VAT carried over from the previous quarter
that may be credited in every quarter shall not exceed seventy percent (70%) of the output VAT: PROVIDED, HOWEVER,
THAT any input tax attributable to zero-rated sales by a VAT-registered person may at his option be refunded or credited
against other internal revenue taxes, . . .
4. With regard to the amendments to other provisions of the NIRC on corporate income tax, franchise, percentage and
excise taxes, the conference committee decided to include such amendments and basically adopted the provisions found
in Senate Bill No. 1950, with some changes as to the rate of the tax to be imposed.
Under the provisions of both the Rules of the House of Representatives and Senate Rules, the Bicameral Conference
Committee is mandated to settle the differences between the disagreeing provisions in the House bill and the Senate bill.
The term "settle" is synonymous to "reconcile" and "harmonize."25 To reconcile or harmonize disagreeing provisions, the
Bicameral Conference Committee may then (a) adopt the specific provisions of either the House bill or Senate bill, (b)
decide that neither provisions in the House bill or the provisions in the Senate bill would
be carried into the final form of the bill, and/or (c) try to arrive at a compromise between the disagreeing provisions.
In the present case, the changes introduced by the Bicameral Conference Committee on disagreeing provisions were
meant only to reconcile and harmonize the disagreeing provisions for it did not inject any idea or intent that is wholly
foreign to the subject embraced by the original provisions.
The so-called stand-by authority in favor of the President, whereby the rate of 10% VAT wanted by the Senate is retained
until such time that certain conditions arise when the 12% VAT wanted by the House shall be imposed, appears to be a
compromise to try to bridge the difference in the rate of VAT proposed by the two houses of Congress. Nevertheless, such
compromise is still totally within the subject of what rate of VAT should be imposed on taxpayers.
The no pass-on provision was deleted altogether. In the transcripts of the proceedings of the Bicameral Conference
Committee held on May 10, 2005, Sen. Ralph Recto, Chairman of the Senate Panel, explained the reason for deleting
the no pass-on provision in this wise:
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. . . the thinking was just to keep the VAT law or the VAT bill simple. And we were thinking that no sector should be a
beneficiary of legislative grace, neither should any sector be discriminated on. The VAT is an indirect tax. It is a pass ontax. And lets keep it plain and simple. Lets not confuse the bill and put a no pass-on provision. Two-thirds of the world
have a VAT system and in this two-thirds of the globe, I have yet to see a VAT with a no pass-though provision. So, the
thinking of the Senate is basically simple, lets keep the VAT simple.26 (Emphasis supplied)
Rep. Teodoro Locsin further made the manifestation that the no pass-on provision "never really enjoyed the support of
either House."27
With regard to the amount of input tax to be credited against output tax, the Bicameral Conference Committee came to a
compromise on the percentage rate of the limitation or cap on such input tax credit, but again, the change introduced by
the Bicameral Conference Committee was totally within the intent of both houses to put a cap on input tax that may be
credited against the output tax. From the inception of the subject revenue bill in the House of Representatives, one of the
major objectives was to "plug a glaring loophole in the tax policy and administration by creating vital restrictions on the
claiming of input VAT tax credits . . ." and "[b]y introducing limitations on the claiming of tax credit, we are capping a major
leakage that has placed our collection efforts at an apparent disadvantage."28
As to the amendments to NIRC provisions on taxes other than the value-added tax proposed in Senate Bill No. 1950,
since said provisions were among those referred to it, the conference committee had to act on the same and it basically
adopted the version of the Senate.
Thus, all the changes or modifications made by the Bicameral Conference Committee were germane to subjects of the
provisions referred
to it for reconciliation. Such being the case, the Court does not see any grave abuse of discretion amounting to lack or
excess of jurisdiction committed by the Bicameral Conference Committee. In the earlier cases of Philippine Judges
Association vs. Prado29 and Tolentino vs. Secretary of Finance,30 the Court recognized the long-standing legislative
practice of giving said conference committee ample latitude for compromising differences between the Senate and the
House. Thus, in the Tolentino case, it was held that:
. . . it is within the power of a conference committee to include in its report an entirely new provision that is not found either
in the House bill or in the Senate bill. If the committee can propose an amendment consisting of one or two provisions,
there is no reason why it cannot propose several provisions, collectively considered as an "amendment in the nature of a
substitute," so long as such amendment is germane to the subject of the bills before the committee. After all, its report was
not final but needed the approval of both houses of Congress to become valid as an act of the legislative department. The
charge that in this case the Conference Committee acted as a third legislative chamber is thus without any
basis.31 (Emphasis supplied)
B. R.A. No. 9337 Does Not Violate Article VI, Section 26(2) of the Constitution on the "No-Amendment Rule"
Article VI, Sec. 26 (2) of the Constitution, states:
No bill passed by either House shall become a law unless it has passed three readings on separate days, and printed
copies thereof in its final form have been distributed to its Members three days before its passage, except when the
President certifies to the necessity of its immediate enactment to meet a public calamity or emergency. Upon the last
reading of a bill, no amendment thereto shall be allowed, and the vote thereon shall be taken immediately thereafter, and
the yeas and nays entered in the Journal.
Petitioners argument that the practice where a bicameral conference committee is allowed to add or delete provisions in
the House bill and the Senate bill after these had passed three readings is in effect a circumvention of the "no amendment
160

rule" (Sec. 26 (2), Art. VI of the 1987 Constitution), fails to convince the Court to deviate from its ruling in
the Tolentino case that:
Nor is there any reason for requiring that the Committees Report in these cases must have undergone three readings in
each of the two houses. If that be the case, there would be no end to negotiation since each house may seek modification
of the compromise bill. . . .
Art. VI. 26 (2) must, therefore, be construed as referring only to bills introduced for the first time in either house
of Congress, not to the conference committee report.32 (Emphasis supplied)
The Court reiterates here that the "no-amendment rule" refers only to the procedure to be followed by each house
of Congress with regard to bills initiated in each of said respective houses, before said bill is transmitted to the
other house for its concurrence or amendment. Verily, to construe said provision in a way as to proscribe any further
changes to a bill after one house has voted on it would lead to absurdity as this would mean that the other house of
Congress would be deprived of its constitutional power to amend or introduce changes to said bill. Thus, Art. VI, Sec. 26
(2) of the Constitution cannot be taken to mean that the introduction by the Bicameral Conference Committee of
amendments and modifications to disagreeing provisions in bills that have been acted upon by both houses of Congress is
prohibited.
C. R.A. No. 9337 Does Not Violate Article VI, Section 24 of the Constitution on Exclusive Origination of Revenue Bills
Coming to the issue of the validity of the amendments made regarding the NIRC provisions on corporate income taxes and
percentage, excise taxes. Petitioners refer to the following provisions, to wit:

Section 27

Rates of Income Tax on Domestic Corporation

28(A)(1)

Tax on Resident Foreign Corporation

28(B)(1)

Inter-corporate Dividends

34(B)(1)

Inter-corporate Dividends

116

Tax on Persons Exempt from VAT

117

Percentage Tax on domestic carriers and keepers of Garage

119

Tax on franchises

121

Tax on banks and Non-Bank Financial Intermediaries

148

Excise Tax on manufactured oils and other fuels

161

151

Excise Tax on mineral products

236

Registration requirements

237

Issuance of receipts or sales or commercial invoices

288

Disposition of Incremental Revenue

Petitioners claim that the amendments to these provisions of the NIRC did not at all originate from the House. They aver
that House Bill No. 3555 proposed amendments only regarding Sections 106, 107, 108, 110 and 114 of the NIRC, while
House Bill No. 3705 proposed amendments only to Sections 106, 107,108, 109, 110 and 111 of the NIRC; thus, the other
sections of the NIRC which the Senate amended but which amendments were not found in the House bills are not
intended to be amended by the House of Representatives. Hence, they argue that since the proposed amendments did
not originate from the House, such amendments are a violation of Article VI, Section 24 of the Constitution.
The argument does not hold water.
Article VI, Section 24 of the Constitution reads:
Sec. 24. All appropriation, revenue or tariff bills, bills authorizing increase of the public debt, bills of local application, and
private bills shall originate exclusively in the House of Representatives but the Senate may propose or concur with
amendments.
In the present cases, petitioners admit that it was indeed House Bill Nos. 3555 and 3705 that initiated the move for
amending provisions of the NIRC dealing mainly with the value-added tax. Upon transmittal of said House bills to the
Senate, the Senate came out with Senate Bill No. 1950 proposing amendments not only to NIRC provisions on the valueadded tax but also amendments to NIRC provisions on other kinds of taxes. Is the introduction by the Senate of provisions
not dealing directly with the value- added tax, which is the only kind of tax being amended in the House bills, still within the
purview of the constitutional provision authorizing the Senate to propose or concur with amendments to a revenue bill that
originated from the House?
The foregoing question had been squarely answered in the Tolentino case, wherein the Court held, thus:
. . . To begin with, it is not the law but the revenue bill which is required by the Constitution to "originate exclusively" in
the House of Representatives. It is important to emphasize this, because a bill originating in the House may undergo such
extensive changes in the Senate that the result may be a rewriting of the whole. . . . At this point, what is important to note
is that, as a result of the Senate action, a distinct bill may be produced. To insist that a revenue statute and not only
the bill which initiated the legislative process culminating in the enactment of the law must substantially be the
same as the House bill would be to deny the Senates power not only to "concur with amendments" but also to
"propose amendments." It would be to violate the coequality of legislative power of the two houses of Congress and in
fact make the House superior to the Senate.

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Given, then, the power of the Senate to propose amendments, the Senate can propose its own version even
with respect to bills which are required by the Constitution to originate in the House.
...
Indeed, what the Constitution simply means is that the initiative for filing revenue, tariff or tax bills, bills authorizing an
increase of the public debt, private bills and bills of local application must come from the House of Representatives on the
theory that, elected as they are from the districts, the members of the House can be expected to be more sensitive to
the local needs and problems. On the other hand, the senators, who are elected at large, are expected to
approach the same problems from the national perspective. Both views are thereby made to bear on the
enactment of such laws.33 (Emphasis supplied)
Since there is no question that the revenue bill exclusively originated in the House of Representatives, the Senate was
acting within its constitutional power to introduce amendments to the House bill when it included provisions in Senate Bill
No. 1950 amending corporate income taxes, percentage, excise and franchise taxes. Verily, Article VI, Section 24 of the
Constitution does not contain any prohibition or limitation on the extent of the amendments that may be introduced by the
Senate to the House revenue bill.
Furthermore, the amendments introduced by the Senate to the NIRC provisions that had not been touched in the House
bills are still in furtherance of the intent of the House in initiating the subject revenue bills. The Explanatory Note of House
Bill No. 1468, the very first House bill introduced on the floor, which was later substituted by House Bill No. 3555, stated:
One of the challenges faced by the present administration is the urgent and daunting task of solving the countrys serious
financial problems. To do this, government expenditures must be strictly monitored and controlled and revenues must be
significantly increased. This may be easier said than done, but our fiscal authorities are still optimistic the government will
be operating on a balanced budget by the year 2009. In fact, several measures that will result to significant expenditure
savings have been identified by the administration. It is supported with a credible package of revenue measures that
include measures to improve tax administration and control the leakages in revenues from income taxes and the
value-added tax (VAT). (Emphasis supplied)
Rep. Eric D. Singson, in his sponsorship speech for House Bill No. 3555, declared that:
In the budget message of our President in the year 2005, she reiterated that we all acknowledged that on top of our
agenda must be the restoration of the health of our fiscal system.
In order to considerably lower the consolidated public sector deficit and eventually achieve a balanced budget by the year
2009, we need to seize windows of opportunities which might seem poignant in the beginning, but in the long run
prove effective and beneficial to the overall status of our economy. One such opportunity is a review of existing
tax rates, evaluating the relevance given our present conditions.34 (Emphasis supplied)
Notably therefore, the main purpose of the bills emanating from the House of Representatives is to bring in sizeable
revenues for the government
to supplement our countrys serious financial problems, and improve tax administration and control of the leakages in
revenues from income taxes and value-added taxes. As these house bills were transmitted to the Senate, the latter,
approaching the measures from the point of national perspective, can introduce amendments within the purposes of those
bills. It can provide for ways that would soften the impact of the VAT measure on the consumer,i.e., by distributing the
burden across all sectors instead of putting it entirely on the shoulders of the consumers. The sponsorship speech of Sen.
Ralph Recto on why the provisions on income tax on corporation were included is worth quoting:
All in all, the proposal of the Senate Committee on Ways and Means will raise P64.3 billion in additional revenues annually
even while by mitigating prices of power, services and petroleum products.

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However, not all of this will be wrung out of VAT. In fact, only P48.7 billion amount is from the VAT on twelve goods and
services. The rest of the tab P10.5 billion- will be picked by corporations.
What we therefore prescribe is a burden sharing between corporate Philippines and the consumer. Why should the latter
bear all the pain? Why should the fiscal salvation be only on the burden of the consumer?
The corporate worlds equity is in form of the increase in the corporate income tax from 32 to 35 percent, but up to 2008
only. This will raise P10.5 billion a year. After that, the rate will slide back, not to its old rate of 32 percent, but two notches
lower, to 30 percent.
Clearly, we are telling those with the capacity to pay, corporations, to bear with this emergency provision that will be in
effect for 1,200 days, while we put our fiscal house in order. This fiscal medicine will have an expiry date.
For their assistance, a reward of tax reduction awaits them. We intend to keep the length of their sacrifice brief. We would
like to assure them that not because there is a light at the end of the tunnel, this government will keep on making the
tunnel long.
The responsibility will not rest solely on the weary shoulders of the small man. Big business will be there to share the
burden.35
As the Court has said, the Senate can propose amendments and in fact, the amendments made on provisions in the tax
on income of corporations are germane to the purpose of the house bills which is to raise revenues for the government.
Likewise, the Court finds the sections referring to other percentage and excise taxes germane to the reforms to the VAT
system, as these sections would cushion the effects of VAT on consumers. Considering that certain goods and services
which were subject to percentage tax and excise tax would no longer be VAT-exempt, the consumer would be burdened
more as they would be paying the VAT in addition to these taxes. Thus, there is a need to amend these sections to soften
the impact of VAT. Again, in his sponsorship speech, Sen. Recto said:
However, for power plants that run on oil, we will reduce to zero the present excise tax on bunker fuel, to lessen the effect
of a VAT on this product.
For electric utilities like Meralco, we will wipe out the franchise tax in exchange for a VAT.
And in the case of petroleum, while we will levy the VAT on oil products, so as not to destroy the VAT chain, we will
however bring down the excise tax on socially sensitive products such as diesel, bunker, fuel and kerosene.
...
What do all these exercises point to? These are not contortions of giving to the left hand what was taken from the right.
Rather, these sprang from our concern of softening the impact of VAT, so that the people can cushion the blow of higher
prices they will have to pay as a result of VAT.36
The other sections amended by the Senate pertained to matters of tax administration which are necessary for the
implementation of the changes in the VAT system.
To reiterate, the sections introduced by the Senate are germane to the subject matter and purposes of the house bills,
which is to supplement our countrys fiscal deficit, among others. Thus, the Senate acted within its power to propose those
amendments.
SUBSTANTIVE ISSUES
I. Whether Sections 4, 5 and 6 of R.A. No. 9337, amending Sections 106, 107 and 108 of the NIRC, violate the following
provisions of the Constitution:
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a. Article VI, Section 28(1), and

b. Article VI, Section 28(2)
A. No Undue Delegation of Legislative Power
Petitioners ABAKADA GURO Party List, et al., Pimentel, Jr., et al., and Escudero, et al. contend in common that Sections
4, 5 and 6 of R.A. No. 9337, amending Sections 106, 107 and 108, respectively, of the NIRC giving the President
the stand-by authority to raise the VAT rate from 10% to 12% when a certain condition is met, constitutes undue delegation
of the legislative power to tax.
The assailed provisions read as follows:
SEC. 4. Sec. 106 of the same Code, as amended, is hereby further amended to read as follows:
SEC. 106. Value-Added Tax on Sale of Goods or Properties.
(A) Rate and Base of Tax. There shall be levied, assessed and collected on every sale, barter or exchange of goods or
properties, a value-added tax equivalent to ten percent (10%) of the gross selling price or gross value in money of the
goods or properties sold, bartered or exchanged, such tax to be paid by the seller or transferor:provided, that the
President, upon the recommendation of the Secretary of Finance, shall, effective January 1, 2006, raise the rate of
value-added tax to twelve percent (12%), after any of the following conditions has been satisfied.
(i) value-added tax collection as a percentage of Gross Domestic Product (GDP) of the previous year exceeds two
and four-fifth percent (2 4/5%) or
(ii) national government deficit as a percentage of GDP of the previous year exceeds one and one-half percent (1
%).
SEC. 5. Section 107 of the same Code, as amended, is hereby further amended to read as follows:
SEC. 107. Value-Added Tax on Importation of Goods.
(A) In General. There shall be levied, assessed and collected on every importation of goods a value-added tax
equivalent to ten percent (10%) based on the total value used by the Bureau of Customs in determining tariff and customs
duties, plus customs duties, excise taxes, if any, and other charges, such tax to be paid by the importer prior to the release
of such goods from customs custody: Provided, That where the customs duties are determined on the basis of the quantity
or volume of the goods, the value-added tax shall be based on the landed cost plus excise taxes, if any: provided,
further, that the President, upon the recommendation of the Secretary of Finance, shall, effective January 1, 2006,
raise the rate of value-added tax to twelve percent (12%) after any of the following conditions has been satisfied.
(i) value-added tax collection as a percentage of Gross Domestic Product (GDP) of the previous year exceeds two
and four-fifth percent (2 4/5%) or
(ii) national government deficit as a percentage of GDP of the previous year exceeds one and one-half percent (1
%).
SEC. 6. Section 108 of the same Code, as amended, is hereby further amended to read as follows:
SEC. 108. Value-added Tax on Sale of Services and Use or Lease of Properties
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(A) Rate and Base of Tax. There shall be levied, assessed and collected, a value-added tax equivalent to ten percent
(10%) of gross receipts derived from the sale or exchange of services: provided, that the President, upon the
recommendation of the Secretary of Finance, shall, effective January 1, 2006, raise the rate of value-added tax to
twelve percent (12%), after any of the following conditions has been satisfied.
(i) value-added tax collection as a percentage of Gross Domestic Product (GDP) of the previous year exceeds two
and four-fifth percent (2 4/5%) or
(ii) national government deficit as a percentage of GDP of the previous year exceeds one and one-half percent (1
%). (Emphasis supplied)
Petitioners allege that the grant of the stand-by authority to the President to increase the VAT rate is a virtual abdication by
Congress of its exclusive power to tax because such delegation is not within the purview of Section 28 (2), Article VI of the
Constitution, which provides:
The Congress may, by law, authorize the President to fix within specified limits, and may impose, tariff rates, import and
export quotas, tonnage and wharfage dues, and other duties or imposts within the framework of the national development
program of the government.
They argue that the VAT is a tax levied on the sale, barter or exchange of goods and properties as well as on the sale or
exchange of services, which cannot be included within the purview of tariffs under the exempted delegation as the latter
refers to customs duties, tolls or tribute payable upon merchandise to the government and usually imposed on goods or
merchandise imported or exported.
Petitioners ABAKADA GURO Party List, et al., further contend that delegating to the President the legislative power to tax
is contrary to republicanism. They insist that accountability, responsibility and transparency should dictate the actions of
Congress and they should not pass to the President the decision to impose taxes. They also argue that the law also
effectively nullified the Presidents power of control, which includes the authority to set aside and nullify the acts of her
subordinates like the Secretary of Finance, by mandating the fixing of the tax rate by the President upon the
recommendation of the Secretary of Finance.
Petitioners Pimentel, et al. aver that the President has ample powers to cause, influence or create the conditions provided
by the law to bring about either or both the conditions precedent.
On the other hand, petitioners Escudero, et al. find bizarre and revolting the situation that the imposition of the 12% rate
would be subject to the whim of the Secretary of Finance, an unelected bureaucrat, contrary to the principle of no taxation
without representation. They submit that the Secretary of Finance is not mandated to give a favorable recommendation
and he may not even give his recommendation. Moreover, they allege that no guiding standards are provided in the law on
what basis and as to how he will make his recommendation. They claim, nonetheless, that any recommendation of the
Secretary of Finance can easily be brushed aside by the President since the former is a mere alter ego of the latter, such
that, ultimately, it is the President who decides whether to impose the increased tax rate or not.
A brief discourse on the principle of non-delegation of powers is instructive.
The principle of separation of powers ordains that each of the three great branches of government has exclusive
cognizance of and is supreme in matters falling within its own constitutionally allocated sphere.37 A logical
corollary to the doctrine of separation of powers is the principle of non-delegation of powers, as expressed in the Latin
maxim: potestas delegata non delegari potest which means "what has been delegated, cannot be delegated."38 This
doctrine is based on the ethical principle that such as delegated power constitutes not only a right but a duty to be
performed by the delegate through the instrumentality of his own judgment and not through the intervening mind of
another.39
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With respect to the Legislature, Section 1 of Article VI of the Constitution provides that "the Legislative power shall be
vested in the Congress of the Philippines which shall consist of a Senate and a House of Representatives." The powers
which Congress is prohibited from delegating are those which are strictly, or inherently and exclusively, legislative. Purely
legislative power, which can never be delegated, has been described as the authority to make a complete law
complete as to the time when it shall take effect and as to whom it shall be applicable and to determine the
expediency of its enactment.40 Thus, the rule is that in order that a court may be justified in holding a statute
unconstitutional as a delegation of legislative power, it must appear that the power involved is purely legislative in nature
that is, one appertaining exclusively to the legislative department. It is the nature of the power, and not the liability of its
use or the manner of its exercise, which determines the validity of its delegation.
Nonetheless, the general rule barring delegation of legislative powers is subject to the following recognized limitations or
exceptions:
(1) Delegation of tariff powers to the President under Section 28 (2) of Article VI of the Constitution;
(2) Delegation of emergency powers to the President under Section 23 (2) of Article VI of the Constitution;
(3) Delegation to the people at large;
(4) Delegation to local governments; and
(5) Delegation to administrative bodies.
In every case of permissible delegation, there must be a showing that the delegation itself is valid. It is valid only if the law
(a) is complete in itself, setting forth therein the policy to be executed, carried out, or implemented by the delegate;41 and
(b) fixes a standard the limits of which are sufficiently determinate and determinable to which the delegate must
conform in the performance of his functions.42 A sufficient standard is one which defines legislative policy, marks its limits,
maps out its boundaries and specifies the public agency to apply it. It indicates the circumstances under which the
legislative command is to be effected.43 Both tests are intended to prevent a total transference of legislative authority to the
delegate, who is not allowed to step into the shoes of the legislature and exercise a power essentially legislative.44
In People vs. Vera,45 the Court, through eminent Justice Jose P. Laurel, expounded on the concept and extent of
delegation of power in this wise:
In testing whether a statute constitutes an undue delegation of legislative power or not, it is usual to inquire whether the
statute was complete in all its terms and provisions when it left the hands of the legislature so that nothing was left to the
judgment of any other appointee or delegate of the legislature.
...
The true distinction, says Judge Ranney, is between the delegation of power to make the law, which necessarily
involves a discretion as to what it shall be, and conferring an authority or discretion as to its execution, to be
exercised under and in pursuance of the law. The first cannot be done; to the latter no valid objection can be
made.
...
It is contended, however, that a legislative act may be made to the effect as law after it leaves the hands of the legislature.
It is true that laws may be made effective on certain contingencies, as by proclamation of the executive or the adoption by
the people of a particular community. In Wayman vs. Southard, the Supreme Court of the United States ruled that the
legislature may delegate a power not legislative which it may itself rightfully exercise. The power to ascertain facts is
such a power which may be delegated. There is nothing essentially legislative in ascertaining the existence of
facts or conditions as the basis of the taking into effect of a law. That is a mental process common to all branches
of the government. Notwithstanding the apparent tendency, however, to relax the rule prohibiting delegation of legislative
authority on account of the complexity arising from social and economic forces at work in this modern industrial age, the
orthodox pronouncement of Judge Cooley in his work on Constitutional Limitations finds restatement in Prof. Willoughby's
treatise on the Constitution of the United States in the following language speaking of declaration of legislative power to
administrative agencies: The principle which permits the legislature to provide that the administrative agent may
determine when the circumstances are such as require the application of a law is defended upon the ground that
at the time this authority is granted, the rule of public policy, which is the essence of the legislative act, is
determined by the legislature. In other words, the legislature, as it is its duty to do, determines that, under given
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circumstances, certain executive or administrative action is to be taken, and that, under other circumstances,
different or no action at all is to be taken. What is thus left to the administrative official is not the legislative
determination of what public policy demands, but simply the ascertainment of what the facts of the case require
to be done according to the terms of the law by which he is governed. The efficiency of an Act as a declaration of
legislative will must, of course, come from Congress, but the ascertainment of the contingency upon which the
Act shall take effect may be left to such agencies as it may designate. The legislature, then, may provide that a
law shall take effect upon the happening of future specified contingencies leaving to some other person or body
the power to determine when the specified contingency has arisen. (Emphasis supplied).46
In Edu vs. Ericta,47 the Court reiterated:
What cannot be delegated is the authority under the Constitution to make laws and to alter and repeal them; the test is the
completeness of the statute in all its terms and provisions when it leaves the hands of the legislature. To determine
whether or not there is an undue delegation of legislative power, the inquiry must be directed to the scope and definiteness
of the measure enacted. The legislative does not abdicate its functions when it describes what job must be done,
who is to do it, and what is the scope of his authority. For a complex economy, that may be the only way in which the
legislative process can go forward. A distinction has rightfully been made between delegation of power to make the
laws which necessarily involves a discretion as to what it shall be, which constitutionally may not be done, and
delegation of authority or discretion as to its execution to be exercised under and in pursuance of the law, to
which no valid objection can be made. The Constitution is thus not to be regarded as denying the legislature the
necessary resources of flexibility and practicability. (Emphasis supplied).48
Clearly, the legislature may delegate to executive officers or bodies the power to determine certain facts or conditions, or
the happening of contingencies, on which the operation of a statute is, by its terms, made to depend, but the legislature
must prescribe sufficient standards, policies or limitations on their authority.49 While the power to tax cannot be delegated
to executive agencies, details as to the enforcement and administration of an exercise of such power may be left to them,
including the power to determine the existence of facts on which its operation depends.50
The rationale for this is that the preliminary ascertainment of facts as basis for the enactment of legislation is not of itself a
legislative function, but is simply ancillary to legislation. Thus, the duty of correlating information and making
recommendations is the kind of subsidiary activity which the legislature may perform through its members, or which it may
delegate to others to perform. Intelligent legislation on the complicated problems of modern society is impossible in the
absence of accurate information on the part of the legislators, and any reasonable method of securing such information is
proper.51 The Constitution as a continuously operative charter of government does not require that Congress find for itself
every fact upon which it desires to base legislative action or that it make for itself detailed determinations which it has
declared to be prerequisite to application of legislative policy to particular facts and circumstances impossible for Congress
itself properly to investigate.52
In the present case, the challenged section of R.A. No. 9337 is the common proviso in Sections 4, 5 and 6 which reads as
follows:
That the President, upon the recommendation of the Secretary of Finance, shall, effective January 1, 2006, raise the rate
of value-added tax to twelve percent (12%), after any of the following conditions has been satisfied:
(i) Value-added tax collection as a percentage of Gross Domestic Product (GDP) of the previous year exceeds two and
four-fifth percent (2 4/5%); or
(ii) National government deficit as a percentage of GDP of the previous year exceeds one and one-half percent (1 %).
The case before the Court is not a delegation of legislative power. It is simply a delegation of ascertainment of facts upon
which enforcement and administration of the increase rate under the law is contingent. The legislature has made the
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operation of the 12% rate effective January 1, 2006, contingent upon a specified fact or condition. It leaves the entire
operation or non-operation of the 12% rate upon factual matters outside of the control of the executive.
No discretion would be exercised by the President. Highlighting the absence of discretion is the fact that the wordshall is
used in the common proviso. The use of the word shall connotes a mandatory order. Its use in a statute denotes an
imperative obligation and is inconsistent with the idea of discretion.53 Where the law is clear and unambiguous, it must be
taken to mean exactly what it says, and courts have no choice but to see to it that the mandate is obeyed.54
Thus, it is the ministerial duty of the President to immediately impose the 12% rate upon the existence of any of the
conditions specified by Congress. This is a duty which cannot be evaded by the President. Inasmuch as the law
specifically uses the word shall, the exercise of discretion by the President does not come into play. It is a clear directive to
impose the 12% VAT rate when the specified conditions are present. The time of taking into effect of the 12% VAT rate is
based on the happening of a certain specified contingency, or upon the ascertainment of certain facts or conditions by a
person or body other than the legislature itself.
The Court finds no merit to the contention of petitioners ABAKADA GURO Party List, et al. that the law effectively nullified
the Presidents power of control over the Secretary of Finance by mandating the fixing of the tax rate by the President
upon the recommendation of the Secretary of Finance. The Court cannot also subscribe to the position of petitioners
Pimentel, et al. that the word shall should be interpreted to mean may in view of the phrase "upon the recommendation of
the Secretary of Finance." Neither does the Court find persuasive the submission of petitioners Escudero, et al. that any
recommendation by the Secretary of Finance can easily be brushed aside by the President since the former is a mere alter
ego of the latter.
When one speaks of the Secretary of Finance as the alter ego of the President, it simply means that as head of the
Department of Finance he is the assistant and agent of the Chief Executive. The multifarious executive and administrative
functions of the Chief Executive are performed by and through the executive departments, and the acts of the secretaries
of such departments, such as the Department of Finance, performed and promulgated in the regular course of business,
are, unless disapproved or reprobated by the Chief Executive, presumptively the acts of the Chief Executive. The
Secretary of Finance, as such, occupies a political position and holds office in an advisory capacity, and, in the language of
Thomas Jefferson, "should be of the President's bosom confidence" and, in the language of Attorney-General Cushing, is
"subject to the direction of the President."55
In the present case, in making his recommendation to the President on the existence of either of the two conditions, the
Secretary of Finance is not acting as the alter ego of the President or even her subordinate. In such instance, he is not
subject to the power of control and direction of the President. He is acting as the agent of the legislative department, to
determine and declare the event upon which its expressed will is to take effect. 56 The Secretary of Finance becomes the
means or tool by which legislative policy is determined and implemented, considering that he possesses all the facilities to
gather data and information and has a much broader perspective to properly evaluate them. His function is to gather and
collate statistical data and other pertinent information and verify if any of the two conditions laid out by Congress is
present. His personality in such instance is in reality but a projection of that of Congress. Thus, being the agent of
Congress and not of the President, the President cannot alter or modify or nullify, or set aside the findings of the Secretary
of Finance and to substitute the judgment of the former for that of the latter.
Congress simply granted the Secretary of Finance the authority to ascertain the existence of a fact, namely, whether by
December 31, 2005, the value-added tax collection as a percentage of Gross Domestic Product (GDP) of the previous
year exceeds two and four-fifth percent (24/5%) or the national government deficit as a percentage of GDP of the previous
year exceeds one and one-half percent (1%). If either of these two instances has occurred, the Secretary of Finance, by
legislative mandate, must submit such information to the President. Then the 12% VAT rate must be imposed by the
President effective January 1, 2006. There is no undue delegation of legislative power but only of the discretion as
to the execution of a law. This is constitutionally permissible.57Congress does not abdicate its functions or unduly
delegate power when it describes what job must be done, who must do it, and what is the scope of his authority; in our
complex economy that is frequently the only way in which the legislative process can go forward.58
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As to the argument of petitioners ABAKADA GURO Party List, et al. that delegating to the President the legislative power
to tax is contrary to the principle of republicanism, the same deserves scant consideration. Congress did not delegate the
power to tax but the mere implementation of the law. The intent and will to increase the VAT rate to 12% came from
Congress and the task of the President is to simply execute the legislative policy. That Congress chose to do so in such a
manner is not within the province of the Court to inquire into, its task being to interpret the law.59
The insinuation by petitioners Pimentel, et al. that the President has ample powers to cause, influence or create the
conditions to bring about either or both the conditions precedent does not deserve any merit as this argument is highly
speculative. The Court does not rule on allegations which are manifestly conjectural, as these may not exist at all. The
Court deals with facts, not fancies; on realities, not appearances. When the Court acts on appearances instead of realities,
justice and law will be short-lived.
B. The 12% Increase VAT Rate Does Not Impose an Unfair and Unnecessary Additional Tax Burden
Petitioners Pimentel, et al. argue that the 12% increase in the VAT rate imposes an unfair and additional tax burden on the
people. Petitioners also argue that the 12% increase, dependent on any of the 2 conditions set forth in the contested
provisions, is ambiguous because it does not state if the VAT rate would be returned to the original 10% if the rates are no
longer satisfied. Petitioners also argue that such rate is unfair and unreasonable, as the people are unsure of the
applicable VAT rate from year to year.
Under the common provisos of Sections 4, 5 and 6 of R.A. No. 9337, if any of the two conditions set forth therein are
satisfied, the President shall increase the VAT rate to 12%. The provisions of the law are clear. It does not provide for a
return to the 10% rate nor does it empower the President to so revert if, after the rate is increased to 12%, the VAT
collection goes below the 24/5 of the GDP of the previous year or that the national government deficit as a percentage of
GDP of the previous year does not exceed 1%.
Therefore, no statutory construction or interpretation is needed. Neither can conditions or limitations be introduced where
none is provided for. Rewriting the law is a forbidden ground that only Congress may tread upon.60
Thus, in the absence of any provision providing for a return to the 10% rate, which in this case the Court finds none,
petitioners argument is, at best, purely speculative. There is no basis for petitioners fear of a fluctuating VAT rate because
the law itself does not provide that the rate should go back to 10% if the conditions provided in Sections 4, 5 and 6 are no
longer present. The rule is that where the provision of the law is clear and unambiguous, so that there is no occasion for
the court's seeking the legislative intent, the law must be taken as it is, devoid of judicial addition or subtraction.61
Petitioners also contend that the increase in the VAT rate, which was allegedly an incentive to the President to raise the
VAT collection to at least 2 4/5 of the GDP of the previous year, should be based on fiscal adequacy.
Petitioners obviously overlooked that increase in VAT collection is not the only condition. There is another condition,i.e.,
the national government deficit as a percentage of GDP of the previous year exceeds one and one-half percent (1 %).
Respondents explained the philosophy behind these alternative conditions:
1. VAT/GDP Ratio > 2.8%
The condition set for increasing VAT rate to 12% have economic or fiscal meaning. If VAT/GDP is less than 2.8%, it means
that government has weak or no capability of implementing the VAT or that VAT is not effective in the function of the tax
collection. Therefore, there is no value to increase it to 12% because such action will also be ineffectual.
2. Natl Govt Deficit/GDP >1.5%

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The condition set for increasing VAT when deficit/GDP is 1.5% or less means the fiscal condition of government has
reached a relatively sound position or is towards the direction of a balanced budget position. Therefore, there is no need to
increase the VAT rate since the fiscal house is in a relatively healthy position. Otherwise stated, if the ratio is more than
1.5%, there is indeed a need to increase the VAT rate.62
That the first condition amounts to an incentive to the President to increase the VAT collection does not render it
unconstitutional so long as there is a public purpose for which the law was passed, which in this case, is mainly to raise
revenue. In fact, fiscal adequacy dictated the need for a raise in revenue.
The principle of fiscal adequacy as a characteristic of a sound tax system was originally stated by Adam Smith in
hisCanons of Taxation (1776), as:
IV. Every tax ought to be so contrived as both to take out and to keep out of the pockets of the people as little as possible
over and above what it brings into the public treasury of the state.63
It simply means that sources of revenues must be adequate to meet government expenditures and their variations.64
The dire need for revenue cannot be ignored. Our country is in a quagmire of financial woe. During the Bicameral
Conference Committee hearing, then Finance Secretary Purisima bluntly depicted the countrys gloomy state of economic
affairs, thus:
First, let me explain the position that the Philippines finds itself in right now. We are in a position where 90 percent of our
revenue is used for debt service. So, for every peso of revenue that we currently raise, 90 goes to debt service. Thats
interest plus amortization of our debt. So clearly, this is not a sustainable situation. Thats the first fact.
The second fact is that our debt to GDP level is way out of line compared to other peer countries that borrow money from
that international financial markets. Our debt to GDP is approximately equal to our GDP. Again, that shows you that this is
not a sustainable situation.
The third thing that Id like to point out is the environment that we are presently operating in is not as benign as what it
used to be the past five years.
What do I mean by that?
In the past five years, weve been lucky because we were operating in a period of basically global growth and low interest
rates. The past few months, we have seen an inching up, in fact, a rapid increase in the interest rates in the leading
economies of the world. And, therefore, our ability to borrow at reasonable prices is going to be challenged. In fact,
ultimately, the question is our ability to access the financial markets.
When the President made her speech in July last year, the environment was not as bad as it is now, at least based on the
forecast of most financial institutions. So, we were assuming that raising 80 billion would put us in a position where we can
then convince them to improve our ability to borrow at lower rates. But conditions have changed on us because the
interest rates have gone up. In fact, just within this room, we tried to access the market for a billion dollars because for this
year alone, the Philippines will have to borrow 4 billion dollars. Of that amount, we have borrowed 1.5 billion. We issued
last January a 25-year bond at 9.7 percent cost. We were trying to access last week and the market was not as favorable
and up to now we have not accessed and we might pull back because the conditions are not very good.
So given this situation, we at the Department of Finance believe that we really need to front-end our deficit reduction.
Because it is deficit that is causing the increase of the debt and we are in what we call a debt spiral. The more debt you
have, the more deficit you have because interest and debt service eats and eats more of your revenue. We need to get out
of this debt spiral. And the only way, I think, we can get out of this debt spiral is really have a front-end adjustment in our
revenue base.65
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The image portrayed is chilling. Congress passed the law hoping for rescue from an inevitable catastrophe. Whether the
law is indeed sufficient to answer the states economic dilemma is not for the Court to judge. In the Farias case, the Court
refused to consider the various arguments raised therein that dwelt on the wisdom of Section 14 of R.A. No. 9006 (The
Fair Election Act), pronouncing that:
. . . policy matters are not the concern of the Court. Government policy is within the exclusive dominion of the political
branches of the government. It is not for this Court to look into the wisdom or propriety of legislative determination. Indeed,
whether an enactment is wise or unwise, whether it is based on sound economic theory, whether it is the best means to
achieve the desired results, whether, in short, the legislative discretion within its prescribed limits should be exercised in a
particular manner are matters for the judgment of the legislature, and the serious conflict of opinions does not suffice to
bring them within the range of judicial cognizance.66
In the same vein, the Court in this case will not dawdle on the purpose of Congress or the executive policy, given that it is
not for the judiciary to "pass upon questions of wisdom, justice or expediency of legislation."67
II. Whether Section 8 of R.A. No. 9337, amending Sections 110(A)(2) and 110(B) of the NIRC; and Section 12 of R.A. No.
9337, amending Section 114(C) of the NIRC, violate the following provisions of the Constitution:
a. Article VI, Section 28(1), and
b. Article III, Section 1
A. Due Process and Equal Protection Clauses
Petitioners Association of Pilipinas Shell Dealers, Inc., et al. argue that Section 8 of R.A. No. 9337, amending Sections 110
(A)(2), 110 (B), and Section 12 of R.A. No. 9337, amending Section 114 (C) of the NIRC are arbitrary, oppressive,
excessive and confiscatory. Their argument is premised on the constitutional right against deprivation of life, liberty of
property without due process of law, as embodied in Article III, Section 1 of the Constitution.
Petitioners also contend that these provisions violate the constitutional guarantee of equal protection of the law.
The doctrine is that where the due process and equal protection clauses are invoked, considering that they are not fixed
rules but rather broad standards, there is a need for proof of such persuasive character as would lead to such a
conclusion. Absent such a showing, the presumption of validity must prevail.68
Section 8 of R.A. No. 9337, amending Section 110(B) of the NIRC imposes a limitation on the amount of input tax that may
be credited against the output tax. It states, in part: "[P]rovided, that the input tax inclusive of the input VAT carried over
from the previous quarter that may be credited in every quarter shall not exceed seventy percent (70%) of the output VAT:
"
Input Tax is defined under Section 110(A) of the NIRC, as amended, as the value-added tax due from or paid by a VATregistered person on the importation of goods or local purchase of good and services, including lease or use of property, in
the course of trade or business, from a VAT-registered person, and Output Tax is the value-added taxdue on the sale or
lease of taxable goods or properties or services by any person registered or required to register under the law.
Petitioners claim that the contested sections impose limitations on the amount of input tax that may be claimed. In effect, a
portion of the input tax that has already been paid cannot now be credited against the output tax.
Petitioners argument is not absolute. It assumes that the input tax exceeds 70% of the output tax, and therefore, the input
tax in excess of 70% remains uncredited. However, to the extent that the input tax is less than 70% of the output tax, then
100% of such input tax is still creditable.
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More importantly, the excess input tax, if any, is retained in a businesss books of accounts and remains creditable in the
succeeding quarter/s. This is explicitly allowed by Section 110(B), which provides that "if the input tax exceeds the output
tax, the excess shall be carried over to the succeeding quarter or quarters." In addition, Section 112(B) allows a VATregistered person to apply for the issuance of a tax credit certificate or refund for any unused input taxes, to the extent that
such input taxes have not been applied against the output taxes. Such unused input tax may be used in payment of his
other internal revenue taxes.
The non-application of the unutilized input tax in a given quarter is not ad infinitum, as petitioners exaggeratedly contend.
Their analysis of the effect of the 70% limitation is incomplete and one-sided. It ends at the net effect that there will be
unapplied/unutilized inputs VAT for a given quarter. It does not proceed further to the fact that such unapplied/unutilized
input tax may be credited in the subsequent periods as allowed by the carry-over provision of Section 110(B) or that it may
later on be refunded through a tax credit certificate under Section 112(B).
Therefore, petitioners argument must be rejected.
On the other hand, it appears that petitioner Garcia failed to comprehend the operation of the 70% limitation on the input
tax. According to petitioner, the limitation on the creditable input tax in effect allows VAT-registered establishments to retain
a portion of the taxes they collect, which violates the principle that tax collection and revenue should be for public purposes
and expenditures
As earlier stated, the input tax is the tax paid by a person, passed on to him by the seller, when he buys goods. Output tax
meanwhile is the tax due to the person when he sells goods. In computing the VAT payable, three possible scenarios may
arise:
First, if at the end of a taxable quarter the output taxes charged by the seller are equal to the input taxes that he paid and
passed on by the suppliers, then no payment is required;
Second, when the output taxes exceed the input taxes, the person shall be liable for the excess, which has to be paid to
the Bureau of Internal Revenue (BIR);69 and
Third, if the input taxes exceed the output taxes, the excess shall be carried over to the succeeding quarter or quarters.
Should the input taxes result from zero-rated or effectively zero-rated transactions, any excess over the output taxes shall
instead be refunded to the taxpayer or credited against other internal revenue taxes, at the taxpayers option.70
Section 8 of R.A. No. 9337 however, imposed a 70% limitation on the input tax. Thus, a person can credit his input tax only
up to the extent of 70% of the output tax. In laymans term, the value-added taxes that a person/taxpayer paid and passed
on to him by a seller can only be credited up to 70% of the value-added taxes that is due to him on a taxable transaction.
There is no retention of any tax collection because the person/taxpayer has already previously paid the input tax to a
seller, and the seller will subsequently remit such input tax to the BIR. The party directly liable for the payment of the tax is
the seller.71 What only needs to be done is for the person/taxpayer to apply or credit these input taxes, as evidenced by
receipts, against his output taxes.
Petitioners Association of Pilipinas Shell Dealers, Inc., et al. also argue that the input tax partakes the nature of a property
that may not be confiscated, appropriated, or limited without due process of law.
The input tax is not a property or a property right within the constitutional purview of the due process clause. A VATregistered persons entitlement to the creditable input tax is a mere statutory privilege.
The distinction between statutory privileges and vested rights must be borne in mind for persons have no vested rights in
statutory privileges. The state may change or take away rights, which were created by the law of the state, although it may
not take away property, which was vested by virtue of such rights.72
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Under the previous system of single-stage taxation, taxes paid at every level of distribution are not recoverable from the
taxes payable, although it becomes part of the cost, which is deductible from the gross revenue. When Pres. Aquino
issued E.O. No. 273 imposing a 10% multi-stage tax on all sales, it was then that the crediting of the input tax paid on
purchase or importation of goods and services by VAT-registered persons against the output tax was introduced. 73 This
was adopted by the Expanded VAT Law (R.A. No. 7716),74 and The Tax Reform Act of 1997 (R.A. No. 8424).75 The right to
credit input tax as against the output tax is clearly a privilege created by law, a privilege that also the law can remove, or in
this case, limit.
Petitioners also contest as arbitrary, oppressive, excessive and confiscatory, Section 8 of R.A. No. 9337, amending
Section 110(A) of the NIRC, which provides:
SEC. 110. Tax Credits.
(A) Creditable Input Tax.
Provided, That the input tax on goods purchased or imported in a calendar month for use in trade or business for which
deduction for depreciation is allowed under this Code, shall be spread evenly over the month of acquisition and the fiftynine (59) succeeding months if the aggregate acquisition cost for such goods, excluding the VAT component thereof,
exceeds One million pesos (P1,000,000.00): Provided, however, That if the estimated useful life of the capital goods is
less than five (5) years, as used for depreciation purposes, then the input VAT shall be spread over such a shorter
period: Provided, finally, That in the case of purchase of services, lease or use of properties, the input tax shall be
creditable to the purchaser, lessee or license upon payment of the compensation, rental, royalty or fee.
The foregoing section imposes a 60-month period within which to amortize the creditable input tax on purchase or
importation of capital goods with acquisition cost of P1 Million pesos, exclusive of the VAT component. Such spread out
only poses a delay in the crediting of the input tax. Petitioners argument is without basis because the taxpayer is not
permanently deprived of his privilege to credit the input tax.
It is worth mentioning that Congress admitted that the spread-out of the creditable input tax in this case amounts to a 4year interest-free loan to the government.76 In the same breath, Congress also justified its move by saying that the
provision was designed to raise an annual revenue of 22.6 billion. 77 The legislature also dispelled the fear that the
provision will fend off foreign investments, saying that foreign investors have other tax incentives provided by law, and
citing the case of China, where despite a 17.5% non-creditable VAT, foreign investments were not deterred. 78 Again, for
whatever is the purpose of the 60-month amortization, this involves executive economic policy and legislative wisdom in
which the Court cannot intervene.
With regard to the 5% creditable withholding tax imposed on payments made by the government for taxable transactions,
Section 12 of R.A. No. 9337, which amended Section 114 of the NIRC, reads:
SEC. 114. Return and Payment of Value-added Tax.
(C) Withholding of Value-added Tax. The Government or any of its political subdivisions, instrumentalities or agencies,
including government-owned or controlled corporations (GOCCs) shall, before making payment on account of each
purchase of goods and services which are subject to the value-added tax imposed in Sections 106 and 108 of this Code,
deduct and withhold a final value-added tax at the rate of five percent (5%) of the gross payment thereof: Provided, That
the payment for lease or use of properties or property rights to nonresident owners shall be subject to ten percent (10%)
withholding tax at the time of payment. For purposes of this Section, the payor or person in control of the payment shall be
considered as the withholding agent.
The value-added tax withheld under this Section shall be remitted within ten (10) days following the end of the month the
withholding was made.

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Section 114(C) merely provides a method of collection, or as stated by respondents, a more simplified VAT withholding
system. The government in this case is constituted as a withholding agent with respect to their payments for goods and
services.
Prior to its amendment, Section 114(C) provided for different rates of value-added taxes to be withheld -- 3% on gross
payments for purchases of goods; 6% on gross payments for services supplied by contractors other than by public works
contractors; 8.5% on gross payments for services supplied by public work contractors; or 10% on payment for the lease or
use of properties or property rights to nonresident owners. Under the present Section 114(C), these different rates, except
for the 10% on lease or property rights payment to nonresidents, were deleted, and a uniform rate of 5% is applied.
The Court observes, however, that the law the used the word final. In tax usage, final, as opposed to creditable, means
full. Thus, it is provided in Section 114(C): "final value-added tax at the rate of five percent (5%)."
In Revenue Regulations No. 02-98, implementing R.A. No. 8424 (The Tax Reform Act of 1997), the concept of final
withholding tax on income was explained, to wit:
SECTION 2.57. Withholding of Tax at Source
(A) Final Withholding Tax. Under the final withholding tax system the amount of income tax withheld by the withholding
agent is constituted as full and final payment of the income tax due from the payee on the said income. The liability for
payment of the tax rests primarily on the payor as a withholding agent. Thus, in case of his failure to withhold the tax or in
case of underwithholding, the deficiency tax shall be collected from the payor/withholding agent.
(B) Creditable Withholding Tax. Under the creditable withholding tax system, taxes withheld on certain income payments
are intended to equal or at least approximate the tax due of the payee on said income. Taxes withheld on income
payments covered by the expanded withholding tax (referred to in Sec. 2.57.2 of these regulations) and compensation
income (referred to in Sec. 2.78 also of these regulations) are creditable in nature.
As applied to value-added tax, this means that taxable transactions with the government are subject to a 5% rate, which
constitutes as full payment of the tax payable on the transaction. This represents the net VAT payable of the seller. The
other 5% effectively accounts for the standard input VAT (deemed input VAT), in lieu of the actual input VAT directly or
attributable to the taxable transaction.79
The Court need not explore the rationale behind the provision. It is clear that Congress intended to treat differently taxable
transactions with the government.80 This is supported by the fact that under the old provision, the 5% tax withheld by the
government remains creditable against the tax liability of the seller or contractor, to wit:
SEC. 114. Return and Payment of Value-added Tax.
(C) Withholding of Creditable Value-added Tax. The Government or any of its political subdivisions, instrumentalities
or agencies, including government-owned or controlled corporations (GOCCs) shall, before making payment on account of
each purchase of goods from sellers and services rendered by contractors which are subject to the value-added tax
imposed in Sections 106 and 108 of this Code, deduct and withhold the value-added tax due at the rate of three percent
(3%) of the gross payment for the purchase of goods and six percent (6%) on gross receipts for services rendered by
contractors on every sale or installment payment which shall be creditable against the value-added tax liability of the
seller or contractor: Provided, however, That in the case of government public works contractors, the withholding rate
shall be eight and one-half percent (8.5%): Provided, further, That the payment for lease or use of properties or property
rights to nonresident owners shall be subject to ten percent (10%) withholding tax at the time of payment. For this purpose,
the payor or person in control of the payment shall be considered as the withholding agent.
The valued-added tax withheld under this Section shall be remitted within ten (10) days following the end of the month the
withholding was made. (Emphasis supplied)
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As amended, the use of the word final and the deletion of the word creditable exhibits Congresss intention to treat
transactions with the government differently. Since it has not been shown that the class subject to the 5% final withholding
tax has been unreasonably narrowed, there is no reason to invalidate the provision. Petitioners, as petroleum dealers, are
not the only ones subjected to the 5% final withholding tax. It applies to all those who deal with the government.
Moreover, the actual input tax is not totally lost or uncreditable, as petitioners believe. Revenue Regulations No. 14-2005
or the Consolidated Value-Added Tax Regulations 2005 issued by the BIR, provides that should the actual input tax
exceed 5% of gross payments, the excess may form part of the cost. Equally, should the actual input tax be less than 5%,
the difference is treated as income.81
Petitioners also argue that by imposing a limitation on the creditable input tax, the government gets to tax a profit or valueadded even if there is no profit or value-added.
Petitioners stance is purely hypothetical, argumentative, and again, one-sided. The Court will not engage in a legal joust
where premises are what ifs, arguments, theoretical and facts, uncertain. Any disquisition by the Court on this point will
only be, as Shakespeare describes life in Macbeth,82 "full of sound and fury, signifying nothing."
Whats more, petitioners contention assumes the proposition that there is no profit or value-added. It need not take an
astute businessman to know that it is a matter of exception that a business will sell goods or services without profit or
value-added. It cannot be overstressed that a business is created precisely for profit.
The equal protection clause under the Constitution means that "no person or class of persons shall be deprived of the
same protection of laws which is enjoyed by other persons or other classes in the same place and in like circumstances."83
The power of the State to make reasonable and natural classifications for the purposes of taxation has long been
established. Whether it relates to the subject of taxation, the kind of property, the rates to be levied, or the amounts to be
raised, the methods of assessment, valuation and collection, the States power is entitled to presumption of validity. As a
rule, the judiciary will not interfere with such power absent a clear showing of unreasonableness, discrimination, or
arbitrariness.84
Petitioners point out that the limitation on the creditable input tax if the entity has a high ratio of input tax, or invests in
capital equipment, or has several transactions with the government, is not based on real and substantial differences to
meet a valid classification.
The argument is pedantic, if not outright baseless. The law does not make any classification in the subject of taxation, the
kind of property, the rates to be levied or the amounts to be raised, the methods of assessment, valuation and collection.
Petitioners alleged distinctions are based on variables that bear different consequences. While the implementation of the
law may yield varying end results depending on ones profit margin and value-added, the Court cannot go beyond what the
legislature has laid down and interfere with the affairs of business.
The equal protection clause does not require the universal application of the laws on all persons or things without
distinction. This might in fact sometimes result in unequal protection. What the clause requires is equality among equals as
determined according to a valid classification. By classification is meant the grouping of persons or things similar to each
other in certain particulars and different from all others in these same particulars.85
Petitioners brought to the Courts attention the introduction of Senate Bill No. 2038 by Sens. S.R. Osmea III and Ma. Ana
Consuelo A.S. Madrigal on June 6, 2005, and House Bill No. 4493 by Rep. Eric D. Singson. The proposed legislation
seeks to amend the 70% limitation by increasing the same to 90%. This, according to petitioners, supports their stance
that the 70% limitation is arbitrary and confiscatory. On this score, suffice it to say that these are still proposed legislations.
Until Congress amends the law, and absent any unequivocal basis for its unconstitutionality, the 70% limitation stays.
B. Uniformity and Equitability of Taxation
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Article VI, Section 28(1) of the Constitution reads:

The rule of taxation shall be uniform and equitable. The Congress shall evolve a progressive system of taxation.
Uniformity in taxation means that all taxable articles or kinds of property of the same class shall be taxed at the same rate.
Different articles may be taxed at different amounts provided that the rate is uniform on the same class everywhere with all
people at all times.86
In this case, the tax law is uniform as it provides a standard rate of 0% or 10% (or 12%) on all goods and services.
Sections 4, 5 and 6 of R.A. No. 9337, amending Sections 106, 107 and 108, respectively, of the NIRC, provide for a rate of
10% (or 12%) on sale of goods and properties, importation of goods, and sale of services and use or lease of properties.
These same sections also provide for a 0% rate on certain sales and transaction.
Neither does the law make any distinction as to the type of industry or trade that will bear the 70% limitation on the
creditable input tax, 5-year amortization of input tax paid on purchase of capital goods or the 5% final withholding tax by
the government. It must be stressed that the rule of uniform taxation does not deprive Congress of the power to classify
subjects of taxation, and only demands uniformity within the particular class.87
R.A. No. 9337 is also equitable. The law is equipped with a threshold margin. The VAT rate of 0% or 10% (or 12%) does
not apply to sales of goods or services with gross annual sales or receipts not exceeding P1,500,000.00.88Also, basic
marine and agricultural food products in their original state are still not subject to the tax, 89 thus ensuring that prices at the
grassroots level will remain accessible. As was stated in Kapatiran ng mga Naglilingkod sa Pamahalaan ng Pilipinas, Inc.
vs. Tan:90
The disputed sales tax is also equitable. It is imposed only on sales of goods or services by persons engaged in business
with an aggregate gross annual sales exceeding P200,000.00. Small corner sari-sari stores are consequently exempt from
its application. Likewise exempt from the tax are sales of farm and marine products, so that the costs of basic food and
other necessities, spared as they are from the incidence of the VAT, are expected to be relatively lower and within the
reach of the general public.
It is admitted that R.A. No. 9337 puts a premium on businesses with low profit margins, and unduly favors those with high
profit margins. Congress was not oblivious to this. Thus, to equalize the weighty burden the law entails, the law, under
Section 116, imposed a 3% percentage tax on VAT-exempt persons under Section 109(v), i.e., transactions with gross
annual sales and/or receipts not exceeding P1.5 Million. This acts as a equalizer because in effect, bigger businesses that
qualify for VAT coverage and VAT-exempt taxpayers stand on equal-footing.
Moreover, Congress provided mitigating measures to cushion the impact of the imposition of the tax on those previously
exempt. Excise taxes on petroleum products91 and natural gas92 were reduced. Percentage tax on domestic carriers was
removed.93 Power producers are now exempt from paying franchise tax.94
Aside from these, Congress also increased the income tax rates of corporations, in order to distribute the burden of
taxation. Domestic, foreign, and non-resident corporations are now subject to a 35% income tax rate, from a previous
32%.95 Intercorporate dividends of non-resident foreign corporations are still subject to 15% final withholding tax but the tax
credit allowed on the corporations domicile was increased to 20%.96 The Philippine Amusement and Gaming Corporation
(PAGCOR) is not exempt from income taxes anymore. 97 Even the sale by an artist of his works or services performed for
the production of such works was not spared.
All these were designed to ease, as well as spread out, the burden of taxation, which would otherwise rest largely on the
consumers. It cannot therefore be gainsaid that R.A. No. 9337 is equitable.
C. Progressivity of Taxation
Lastly, petitioners contend that the limitation on the creditable input tax is anything but regressive. It is the smaller business
with higher input tax-output tax ratio that will suffer the consequences.
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Progressive taxation is built on the principle of the taxpayers ability to pay. This principle was also lifted from Adam
Smiths Canons of Taxation, and it states:
I. The subjects of every state ought to contribute towards the support of the government, as nearly as possible, in
proportion to their respective abilities; that is, in proportion to the revenue which they respectively enjoy under the
protection of the state.
Taxation is progressive when its rate goes up depending on the resources of the person affected.98
The VAT is an antithesis of progressive taxation. By its very nature, it is regressive. The principle of progressive taxation
has no relation with the VAT system inasmuch as the VAT paid by the consumer or business for every goods bought or
services enjoyed is the same regardless of income. In
other words, the VAT paid eats the same portion of an income, whether big or small. The disparity lies in the income
earned by a person or profit margin marked by a business, such that the higher the income or profit margin, the smaller the
portion of the income or profit that is eaten by VAT. A converso, the lower the income or profit margin, the bigger the part
that the VAT eats away. At the end of the day, it is really the lower income group or businesses with low-profit margins that
is always hardest hit.
Nevertheless, the Constitution does not really prohibit the imposition of indirect taxes, like the VAT. What it simply provides
is that Congress shall "evolve a progressive system of taxation." The Court stated in the Tolentino case, thus:
The Constitution does not really prohibit the imposition of indirect taxes which, like the VAT, are regressive. What it simply
provides is that Congress shall evolve a progressive system of taxation. The constitutional provision has been interpreted
to mean simply that direct taxes are . . . to be preferred [and] as much as possible, indirect taxes should be minimized. (E.
FERNANDO, THE CONSTITUTION OF THE PHILIPPINES 221 (Second ed. 1977)) Indeed, the mandate to Congress is
not to prescribe, but to evolve, a progressive tax system. Otherwise, sales taxes, which perhaps are the oldest form of
indirect taxes, would have been prohibited with the proclamation of Art. VIII, 17 (1) of the 1973 Constitution from which
the present Art. VI, 28 (1) was taken. Sales taxes are also regressive.
Resort to indirect taxes should be minimized but not avoided entirely because it is difficult, if not impossible, to avoid them
by imposing such taxes according to the taxpayers' ability to pay. In the case of the VAT, the law minimizes the regressive
effects of this imposition by providing for zero rating of certain transactions (R.A. No. 7716, 3, amending 102 (b) of the
NIRC), while granting exemptions to other transactions. (R.A. No. 7716, 4 amending 103 of the NIRC)99
CONCLUSION
It has been said that taxes are the lifeblood of the government. In this case, it is just an enema, a first-aid measure to
resuscitate an economy in distress. The Court is neither blind nor is it turning a deaf ear on the plight of the masses. But it
does not have the panacea for the malady that the law seeks to remedy. As in other cases, the Court cannot strike down a
law as unconstitutional simply because of its yokes.
Let us not be overly influenced by the plea that for every wrong there is a remedy, and that the judiciary should stand
ready to afford relief. There are undoubtedly many wrongs the judicature may not correct, for instance, those involving
political questions. . . .
Let us likewise disabuse our minds from the notion that the judiciary is the repository of remedies for all political or social
ills; We should not forget that the Constitution has judiciously allocated the powers of government to three distinct and
separate compartments; and that judicial interpretation has tended to the preservation of the independence of the three,
and a zealous regard of the prerogatives of each, knowing full well that one is not the guardian of the others and that, for
official wrong-doing, each may be brought to account, either by impeachment, trial or by the ballot box.100
The words of the Court in Vera vs. Avelino101 holds true then, as it still holds true now. All things considered, there is
no raison d'tre for the unconstitutionality of R.A. No. 9337.

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WHEREFORE, Republic Act No. 9337 not being unconstitutional, the petitions in G.R. Nos. 168056, 168207, 168461,
168463, and 168730, are hereby DISMISSED. There being no constitutional impediment to the full enforcement and
implementation of R.A. No. 9337, the temporary restraining order issued by the Court on July 1, 2005 is LIFTED upon
finality of herein decision. SO ORDERED.
G.R. No. L-29646 November 10, 1978
MAYOR ANTONIO J. VILLEGAS, petitioner,
vs.
HIU CHIONG TSAI PAO HO and JUDGE FRANCISCO ARCA, respondents.
Angel C. Cruz, Gregorio A. Ejercito, Felix C. Chaves & Jose Laureta for petitioner. Sotero H. Laurel for respondents.
FERNANDEZ, J.:
This is a petition for certiorari to review tile decision dated September 17, 1968 of respondent Judge Francisco Arca of the
Court of First Instance of Manila, Branch I, in Civil Case No. 72797, the dispositive portion of winch reads.
Wherefore, judgment is hereby rendered in favor of the petitioner and against the respondents, declaring
Ordinance No. 6 37 of the City of Manila null and void. The preliminary injunction is made permanent. No
pronouncement as to cost.
SO ORDERED.
Manila, Philippines, September 17, 1968.
(SGD.) FRANCISCO ARCA
Judge 1
The controverted Ordinance No. 6537 was passed by the Municipal Board of Manila on February 22, 1968 and signed by
the herein petitioner Mayor Antonio J. Villegas of Manila on March 27, 1968. 2
City Ordinance No. 6537 is entitled:
AN ORDINANCE MAKING IT UNLAWFUL FOR ANY PERSON NOT A CITIZEN OF THE PHILIPPINES
TO BE EMPLOYED IN ANY PLACE OF EMPLOYMENT OR TO BE ENGAGED IN ANY KIND OF
TRADE, BUSINESS OR OCCUPATION WITHIN THE CITY OF MANILA WITHOUT FIRST SECURING
AN EMPLOYMENT PERMIT FROM THE MAYOR OF MANILA; AND FOR OTHER PURPOSES. 3
Section 1 of said Ordinance No. 6537 4 prohibits aliens from being employed or to engage or participate in any position or
occupation or business enumerated therein, whether permanent, temporary or casual, without first securing an
employment permit from the Mayor of Manila and paying the permit fee of P50.00 except persons employed in the
diplomatic or consular missions of foreign countries, or in the technical assistance programs of both the Philippine
Government and any foreign government, and those working in their respective households, and members of religious
orders or congregations, sect or denomination, who are not paid monetarily or in kind.
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Violations of this ordinance is punishable by an imprisonment of not less than three (3) months to six (6) months or fine of
not less than P100.00 but not more than P200.00 or both such fine and imprisonment, upon conviction. 5
On May 4, 1968, private respondent Hiu Chiong Tsai Pao Ho who was employed in Manila, filed a petition with the Court of
First Instance of Manila, Branch I, denominated as Civil Case No. 72797, praying for the issuance of the writ of preliminary
injunction and restraining order to stop the enforcement of Ordinance No. 6537 as well as for a judgment declaring said
Ordinance No. 6537 null and void. 6
In this petition, Hiu Chiong Tsai Pao Ho assigned the following as his grounds for wanting the ordinance declared null and
void:
1) As a revenue measure imposed on aliens employed in the City of Manila, Ordinance No. 6537 is
discriminatory and violative of the rule of the uniformity in taxation;
2) As a police power measure, it makes no distinction between useful and non-useful occupations,
imposing a fixed P50.00 employment permit, which is out of proportion to the cost of registration and that
it fails to prescribe any standard to guide and/or limit the action of the Mayor, thus, violating the
fundamental principle on illegal delegation of legislative powers:
3) It is arbitrary, oppressive and unreasonable, being applied only to aliens who are thus, deprived of
their rights to life, liberty and property and therefore, violates the due process and equal protection
clauses of the Constitution. 7
On May 24, 1968, respondent Judge issued the writ of preliminary injunction and on September 17, 1968 rendered
judgment declaring Ordinance No. 6537 null and void and making permanent the writ of preliminary injunction. 8
Contesting the aforecited decision of respondent Judge, then Mayor Antonio J. Villegas filed the present petition on March
27, 1969. Petitioner assigned the following as errors allegedly committed by respondent Judge in the latter's decision of
September 17,1968: 9
I
THE RESPONDENT JUDGE COMMITTED A SERIOUS AND PATENT ERROR OF LAW IN RULING
THAT ORDINANCE NO. 6537 VIOLATED THE CARDINAL RULE OF UNIFORMITY OF TAXATION.
II
RESPONDENT JUDGE LIKEWISE COMMITTED A GRAVE AND PATENT ERROR OF LAW IN RULING
THAT ORDINANCE NO. 6537 VIOLATED THE PRINCIPLE AGAINST UNDUE DESIGNATION OF
LEGISLATIVE POWER.
III
RESPONDENT JUDGE FURTHER COMMITTED A SERIOUS AND PATENT ERROR OF LAW IN
RULING THAT ORDINANCE NO. 6537 VIOLATED THE DUE PROCESS AND EQUAL PROTECTION
CLAUSES OF THE CONSTITUTION.
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Petitioner Mayor Villegas argues that Ordinance No. 6537 cannot be declared null and void on the ground that it violated
the rule on uniformity of taxation because the rule on uniformity of taxation applies only to purely tax or revenue measures
and that Ordinance No. 6537 is not a tax or revenue measure but is an exercise of the police power of the state, it being
principally a regulatory measure in nature.
The contention that Ordinance No. 6537 is not a purely tax or revenue measure because its principal purpose is regulatory
in nature has no merit. While it is true that the first part which requires that the alien shall secure an employment permit
from the Mayor involves the exercise of discretion and judgment in the processing and approval or disapproval of
applications for employment permits and therefore is regulatory in character the second part which requires the payment of
P50.00 as employee's fee is not regulatory but a revenue measure. There is no logic or justification in exacting P50.00
from aliens who have been cleared for employment. It is obvious that the purpose of the ordinance is to raise money under
the guise of regulation.
The P50.00 fee is unreasonable not only because it is excessive but because it fails to consider valid substantial
differences in situation among individual aliens who are required to pay it. Although the equal protection clause of the
Constitution does not forbid classification, it is imperative that the classification should be based on real and substantial
differences having a reasonable relation to the subject of the particular legislation. The same amount of P50.00 is being
collected from every employed alien whether he is casual or permanent, part time or full time or whether he is a lowly
employee or a highly paid executive
Ordinance No. 6537 does not lay down any criterion or standard to guide the Mayor in the exercise of his discretion. It has
been held that where an ordinance of a municipality fails to state any policy or to set up any standard to guide or limit the
mayor's action, expresses no purpose to be attained by requiring a permit, enumerates no conditions for its grant or
refusal, and entirely lacks standard, thus conferring upon the Mayor arbitrary and unrestricted power to grant or deny the
issuance of building permits, such ordinance is invalid, being an undefined and unlimited delegation of power to allow or
prevent an activity per se lawful. 10
In Chinese Flour Importers Association vs. Price Stabilization Board, 11 where a law granted a government agency power
to determine the allocation of wheat flour among importers, the Supreme Court ruled against the interpretation of
uncontrolled power as it vested in the administrative officer an arbitrary discretion to be exercised without a policy, rule, or
standard from which it can be measured or controlled.
It was also held in Primicias vs. Fugoso 12 that the authority and discretion to grant and refuse permits of all classes
conferred upon the Mayor of Manila by the Revised Charter of Manila is not uncontrolled discretion but legal discretion to
be exercised within the limits of the law.
Ordinance No. 6537 is void because it does not contain or suggest any standard or criterion to guide the mayor in the
exercise of the power which has been granted to him by the ordinance.
The ordinance in question violates the due process of law and equal protection rule of the Constitution.
Requiring a person before he can be employed to get a permit from the City Mayor of Manila who may withhold or refuse it
at will is tantamount to denying him the basic right of the people in the Philippines to engage in a means of livelihood.
While it is true that the Philippines as a State is not obliged to admit aliens within its territory, once an alien is admitted, he
cannot be deprived of life without due process of law. This guarantee includes the means of livelihood. The shelter of
protection under the due process and equal protection clause is given to all persons, both aliens and citizens. 13
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The trial court did not commit the errors assigned.

WHEREFORE, the decision appealed from is hereby affirmed, without pronouncement as to costs.
SO ORDERED. Barredo, Makasiar, Muoz Palma, Santos and Guerrero, JJ., concur.Castro, C.J., Antonio and Aquino,
Fernando, JJ., concur in the result. Concepcion, Jr., J., took no part.

G.R. No. L-49336 August 31, 1981 .THE PROVINCE OF ABRA, represented by LADISLAO ANCHETA, Provincial
Assessor, petitioner, vs.
HONORABLE HAROLD M. HERNANDO, in his capacity as Presiding Judge of Branch I, Court of First Instance
Abra; THE ROMAN CATHOLIC BISHOP OF BANGUED, INC., represented by Bishop Odilo etspueler and Reverend
Felipe Flores, respondents.

FERNANDO, C.J.:

On the face of this certiorari and mandamus petition filed by the Province of Abra, 1 it clearly appears that the actuation of
respondent Judge Harold M. Hernando of the Court of First Instance of Abra left much to be desired. First, there was a
denial of a motion to dismiss 2 an action for declaratory relief by private respondent Roman Catholic Bishop of Bangued
desirous of being exempted from a real estate tax followed by a summary judgment 3 granting such exemption, without
even hearing the side of petitioner. In the rather vigorous language of the Acting Provincial Fiscal, as counsel for petitioner,
respondent Judge "virtually ignored the pertinent provisions of the Rules of Court; ... wantonly violated the rights of
petitioner to due process, by giving due course to the petition of private respondent for declaratory relief, and thereafter
without allowing petitioner to answer and without any hearing, adjudged the case; all in total disregard of basic laws of
procedure and basic provisions of due process in the constitution, thereby indicating a failure to grasp and understand the
law, which goes into the competence of the Honorable Presiding Judge." 4
It was the submission of counsel that an action for declaratory relief would be proper only before a breach or violation of
any statute, executive order or regulation. 5 Moreover, there being a tax assessment made by the Provincial Assessor on
the properties of respondent Roman Catholic Bishop, petitioner failed to exhaust the administrative remedies available
under Presidential Decree No. 464 before filing such court action. Further, it was pointed out to respondent Judge that he
failed to abide by the pertinent provision of such Presidential Decree which provides as follows: "No court shall entertain
any suit assailing the validity of a tax assessed under this Code until the taxpayer, shall have paid, under protest, the tax
assessed against him nor shall any court declare any tax invalid by reason of irregularities or informalities in the
proceedings of the officers charged with the assessment or collection of taxes, or of failure to perform their duties within
this time herein specified for their performance unless such irregularities, informalities or failure shall have impaired the
substantial rights of the taxpayer; nor shall any court declare any portion of the tax assessed under the provisions of this
Code invalid except upon condition that the taxpayer shall pay the just amount of the tax, as determined by the court in the
pending proceeding." 6
When asked to comment, respondent Judge began with the allegation that there "is no question that the real properties
sought to be taxed by the Province of Abra are properties of the respondent Roman Catholic Bishop of Bangued,
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Inc." 7 The very next sentence assumed the very point it asked when he categorically stated: "Likewise, there is no dispute
that the properties including their procedure are actually, directly and exclusively used by the Roman Catholic Bishop of
Bangued, Inc. for religious or charitable purposes." 8 For him then: "The proper remedy of the petitioner is appeal and not
this special civil action." 9 A more exhaustive comment was submitted by private respondent Roman Catholic Bishop of
Bangued, Inc. It was, however, unable to lessen the force of the objection raised by petitioner Province of Abra, especially
the due process aspect. it is to be admitted that his opposition to the petition, pressed with vigor, ostensibly finds a
semblance of support from the authorities cited. It is thus impressed with a scholarly aspect. It suffers, however, from the
grave infirmity of stating that only a pure question of law is presented when a claim for exemption is made.
The petition must be granted.
1. Respondent Judge would not have erred so grievously had he merely compared the provisions of the present
Constitution with that appearing in the 1935 Charter on the tax exemption of "lands, buildings, and improvements." There
is a marked difference. Under the 1935 Constitution: "Cemeteries, churches, and parsonages or convents appurtenant
thereto, and all lands, buildings, and improvements used exclusively for religious, charitable, or educational purposes shall
be exempt from taxation." 10 The present Constitution added "charitable institutions, mosques, and non-profit cemeteries"
and required that for the exemption of ":lands, buildings, and improvements," they should not only be "exclusively" but also
"actually and "directly" used for religious or charitable purposes. 11 The Constitution is worded differently. The change
should not be ignored. It must be duly taken into consideration. Reliance on past decisions would have sufficed were the
words "actually" as well as "directly" not added. There must be proof therefore of the actual anddirect use of the lands,
buildings, and improvements for religious or charitable purposes to be exempt from taxation. According to Commissioner
of Internal Revenue v. Guerrero: 12 "From 1906, in Catholic Church v. Hastings to 1966, in Esso Standard Eastern, Inc. v.
Acting Commissioner of Customs, it has been the constant and uniform holding that exemption from taxation is not favored
and is never presumed, so that if granted it must be strictly construed against the taxpayer. Affirmatively put, the law
frowns on exemption from taxation, hence, an exempting provision should be construed strictissimi juris." 13 In Manila
Electric Company v. Vera, 14 a 1975 decision, such principle was reiterated, reference being made toRepublic Flour Mills,
Inc. v. Commissioner of Internal Revenue; 15 Commissioner of Customs v. Philippine Acetylene Co. & CTA; 16 and Davao
Light and Power Co., Inc. v. Commissioner of Customs. 17
2. Petitioner Province of Abra is therefore fully justified in invoking the protection of procedural due process. If there is any
case where proof is necessary to demonstrate that there is compliance with the constitutional provision that allows an
exemption, this is it. Instead, respondent Judge accepted at its face the allegation of private respondent. All that was
alleged in the petition for declaratory relief filed by private respondents, after mentioning certain parcels of land owned by
it, are that they are used "actually, directly and exclusively" as sources of support of the parish priest and his helpers and
also of private respondent Bishop. 18 In the motion to dismiss filed on behalf of petitioner Province of Abra, the objection
was based primarily on the lack of jurisdiction, as the validity of a tax assessment may be questioned before the Local
Board of Assessment Appeals and not with a court. There was also mention of a lack of a cause of action, but only
because, in its view, declaratory relief is not proper, as there had been breach or violation of the right of government to
assess and collect taxes on such property. It clearly appears, therefore, that in failing to accord a hearing to petitioner
Province of Abra and deciding the case immediately in favor of private respondent, respondent Judge failed to abide by the
constitutional command of procedural due process.
WHEREFORE, the petition is granted and the resolution of June 19, 1978 is set aside. Respondent Judge, or who ever is
acting on his behalf, is ordered to hear the case on the merit. No costs. Barredo, Concepcion, Jr., and De Castro, JJ.,
concur.Aquino, J., concur in the result.Abad Santos, J., is on leave.

183

G.R. No. L-23771 August 4, 1988 : THE COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. LINGAYEN GULF
ELECTRIC POWER CO., INC. and THE COURT OF TAX APPEALS, respondents. Angel Sanchez for Lingayen Electric
Power Co., Inc.
SARMIENTO, J.:

This is an appeal from the decision * of the Court of Tax Appeals (C.T.A., for brevity) dated September 15, 1964 in C.T.A.
Cases Nos. 581 and 1302, which were jointly heard upon agreement of the parties, absolving the respondent taxpayer
from liability for the deficiency percentage, franchise, and fixed taxes and surcharge assessed against it in the sums of
P19,293.41 and P3,616.86 for the years 1946 to 1954 and 1959 to 1961, respectively.
The respondent taxpayer, Lingayen Gulf Electric Power Co., Inc., operates an electric power plant serving the adjoining
municipalities of Lingayen and Binmaley, both in the province of Pangasinan, pursuant to the municipal franchise granted it
by their respective municipal councils, under Resolution Nos. 14 and 25 of June 29 and July 2, 1946, respectively. Section
10 of these franchises provide that: ...The said grantee in consideration of the franchise hereby granted, shall pay quarterly
into the Provincial Treasury of Pangasinan, one per centum of the gross earnings obtained thru this privilege during the
first twenty years and two per centum during the remaining fifteen years of the life of said franchise.
On February 24, 1948, the President of the Philippines approved the franchises granted to the private respondent. On
November 21, 1955, the Bureau of Internal Revenue (BIR) assessed against and demanded from the private respondent
the total amount of P19,293.41 representing deficiency franchise taxes and surcharges for the years 1946 to 1954
applying the franchise tax rate of 5% on gross receipts from March 1, 1948 to December 31, 1954 as prescribed in Section
259 of the National Internal Revenue Code, instead of the lower rates as provided in the municipal franchises. On
September 29, 1956, the private respondent requested for a reinvestigation of the case on the ground that instead of
incurring a deficiency liability, it made an overpayment of the franchise tax. On April 30, 1957, the BIR through its regional
director, denied the private respondent's request for reinvestigation and reiterated the demand for payment of the same. In
its letters dated July 2, and August 9, 1958 to the petitioner Commissioner, the private respondent protested the said
assessment and requested for a conference with a view to settling the liability amicably. In his letters dated July 25 and
August 28, 1958, the Commissioner denied the request of the private respondent. Thus, the appeal to the respondent
Court of Tax Appeals on September 19, 1958, docketed as C.T.A. Case No. 581.
In a letter dated August 21, 1962, the Commissioner demanded from the private respondent the payment of P3,616.86
representing deficiency franchise tax and surcharges for the years 1959 to 1961 again applying the franchise tax rate of
5% on gross receipts as prescribed in Section 259 of the National Internal Revenue Code. In a letter dated October 5,
1962, the private respondent protested the assessment and requested reconsideration thereof The same was denied on
November 9, 1962. Thus, the appeal to the respondent Court of Appeals on November 29, 1962, docketed as C.T.A. No.
1302.
Pending the hearing of the said cases, Republic Act (R.A.) No. 3843 was passed on June 22, 1 963, granting to the private
respondent a legislative franchise for the operation of the electric light, heat, and power system in the same municipalities
of Pangasinan. Section 4 thereof provides that:
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In consideration of the franchise and rights hereby granted, the grantee shall pay into the Internal Revenue office of each
Municipality in which it is supplying electric current to the public under this franchise, a tax equal to two per centum of the
gross receipts from electric current sold or supplied under this franchise. Said tax shall be due and payable quarterly and
shall be in lieu of any and all taxes and/or licenses of any kind, nature or description levied, established, or collected by
any authority whatsoever, municipal, provincial or national, now or in the future, on its poles, wires, insulator ... and on its
franchise, rights, privileges, receipts, revenues and profits, from which taxes and/or licenses, the grantee is hereby
expressly exempted and effective further upon the date the original franchise was granted, no other tax and/or licenses
other than the franchise tax of two per centum on the gross receipts as provided for in the original franchise shall be
collected, any provision of law to the contrary notwithstanding.
On September 15, 1964, the respondent court ruled that the provisions of R.A. No. 3843 should apply and accordingly
dismissed the claim of the Commissioner of Internal Revenue. The said ruling is now the subject of the petition at bar.
The issues raised for resolution are:
1. Whether or not the 5% franchise tax prescribed in Section 259 of the National Internal Revenue Code assessed against
the private respondent on its gross receipts realized before the effectivity of R.A- No. 3843 is collectible.
2. Whether or not Section 4 of R.A. No. 3843 is unconstitutional for being violative of the "uniformity and equality of
taxation" clause of the Constitution.
3. If the abovementioned Section 4 of R.A. No. 3843 is valid, whether or not it could be given retroactive effect so as to
render uncollectible the taxes in question which were assessed before its enactment.
4. Whether or not the respondent taxpayer is liable for the fixed and deficiency percentage taxes in the amount of
P3,025.96 for the period from January 1, 1946 to February 29, 1948, the period before the approval of its municipal
franchises.
The first issue raised by the petitioner before us is whether or not the five percent (5%) franchise tax prescribed in Section
259 of the National Internal Revenue Code (Commonwealth Act No. 466 as amended by R.A. No. 39) assessed against
the private respondent on its gross receipts realized before the effectivity of R.A- No. 3843 is collectible. It is the contention
of the petitioner Commissioner of Internal Revenue that the private respondent should have been held liable for the 5%
franchise tax on gross receipts prescribed in Section 259 of the Tax Code, instead of the lower franchise tax rates provided
in the municipal franchises (1% of gross earnings for the first twenty years and 2% for the remaining fifteen years of the life
of the franchises) because Section 259 of the Tax Code, as amended by RA No. 39 of October 1, 1946, applied to existing
and future franchises. The franchises of the private respondent were already in existence at the time of the adoption of the
said amendment, since the franchises were accepted on March 1, 1948 after approval by the President of the Philippines
on February 24, 1948. The private respondent's original franchises did not contain the proviso that the tax provided therein
"shall be in lieu of all taxes;" moreover, the franchises contained a reservation clause that they shag be subject to
amendment, alteration, or repeal, but even in the absence of such cause, the power of the Legislature to alter, amend, or
repeal any franchise is always deemed reserved. The franchise of the private respondent have been modified or amended
by Section 259 of the Tax Code, the petitioner submits.
We find no merit in petitioner's contention. R.A. No. 3843 granted the private respondent a legislative franchise in June,
1963, amending, altering, or even repealing the original municipal franchises, and providing that the private respondent
should pay only a 2% franchise tax on its gross receipts, "in lieu of any and all taxes and/or licenses of any kind, nature or
description levied, established, or collected by any authority whatsoever, municipal, provincial, or national, now or in the
185

future ... and effective further upon the date the original franchise was granted, no other tax and/or licenses other than the
franchise tax of two per centum on the gross receipts ... shall be collected, any provision of law to the contrary
notwithstanding." Thus, by virtue of R.A- No. 3843, the private respondent was liable to pay only the 2% franchise tax,
effective from the date the original municipal franchise was granted.
On the question as to whether or not Section 4 of R.A. No. 3843 is unconstitutional for being violative of the "uniformity and
equality of taxation" clause of the Constitution, and, if adjudged valid, whether or not it should be given retroactive effect,
the petitioner submits that the said law is unconstitutional insofar as it provides for the payment by the private respondent
of a franchise tax of 2% of its gross receipts, while other taxpayers similarly situated were subject to the 5% franchise tax
imposed in Section 259 of the Tax Code, thereby discriminatory and violative of the rule on uniformity and equality of
taxation.
A tax is uniform when it operates with the same force and effect in every place where the subject of it is found. Uniformity
means that all property belonging to the same class shall be taxed alike The Legislature has the inherent power not only to
select the subjects of taxation but to grant exemptions. Tax exemptions have never been deemed violative of the equal
protection clause. 1 It is true that the private respondents municipal franchises were obtained under Act No. 667 2 of the
Philippine Commission, but these original franchises have been replaced by a new legislative franchise, i.e. R.A. No. 3843.
As correctly held by the respondent court, the latter was granted subject to the terms and conditions established in Act No.
3636, 3 as amended by C.A. No. 132. These conditions Identify the private respondent's power plant as falling within that
class of power plants created by Act No. 3636, as amended. The benefits of the tax reduction provided by law (Act No.
3636 as amended by C.A. No. 132 and R.A. No. 3843) apply to the respondent's power plant and others circumscribed
within this class. R.A-No. 3843 merely transferred the petitioner's power plant from that class provided for in Act No. 667,
as amended, to which it belonged until the approval of R.A- No. 3843, and placed it within the class falling under Act No.
3636, as amended. Thus, it only effected the transfer of a taxable property from one class to another.
We do not have the authority to inquire into the wisdom of such act. Furthermore, the 5% franchise tax rate provided in
Section 259 of the Tax Code was never intended to have a universal application. 4 We note that the said Section 259 of the
Tax Code expressly allows the payment of taxes at rates lower than 5% when the charter granting the franchise of a
grantee, like the one granted to the private respondent under Section 4 of R.A. No. 3843, precludes the imposition of a
higher tax. R.A. No. 3843 did not only fix and specify a franchise tax of 2% on its gross receipts, but made it "in lieu of any
and all taxes, all laws to the contrary notwithstanding," thus, leaving no room for doubt regarding the legislative intent.
"Charters or special laws granted and enacted by the Legislature are in the nature of private contracts. They do not
constitute a part of the machinery of the general government. They are usually adopted after careful consideration of the
private rights in relation with resultant benefits to the State ... in passing a special charter the attention of the Legislature is
directed to the facts and circumstances which the act or charter is intended to meet. The Legislature consider (sic) and
make (sic) provision for all the circumstances of a particular case." 5 In view of the foregoing, we find no reason to disturb
the respondent court's ruling upholding the constitutionality of the law in question.
Given its validity, should the said law be applied retroactively so as to render uncollectible the taxes in question which were
assessed before its enactment? The question of whether a statute operates retrospectively or only prospectively depends
on the legislative intent. In the instant case, Act No. 3843 provides that "effective ... upon the date the original franchise
was granted, no other tax and/or licenses other than the franchise tax of two per centum on the gross receipts ... shall be
collected, any provision to the contrary notwithstanding." Republic Act No. 3843 therefore specifically provided for the
retroactive effect of the law.
The last issue to be resolved is whether or not the private respondent is liable for the fixed and deficiency percentage
taxes in the amount of P3,025.96 (i.e. for the period from January 1, 1946 to February 29, 1948) before the approval of its
186

municipal franchises. As aforestated, the franchises were approved by the President only on February 24, 1948.
Therefore, before the said date, the private respondent was liable for the payment of percentage and fixed taxes as seller
of light, heat, and power which as the petitioner claims, amounted to P3,025.96. The legislative franchise (R.A. No.
3843) exempted the grantee from all kinds of taxes other than the 2% tax from the date the original franchise was granted.
The exemption, therefore, did not cover the period before the franchise was granted, i.e. before February 24, 1948.
However, as pointed out by the respondent court in its findings, during the period covered by the instant case, that is from
January 1, 1946 to December 31, 1961, the private respondent paid the amount of P34,184.36, which was very much
more than the amount rightfully due from it. Hence, the private respondent should no longer be made to pay for the
deficiency tax in the amount of P3,025.98 for the period from January 1, 1946 to February 29, 1948. WHEREFORE, the
appealed decision of the respondent Court of Tax Appeals is hereby AFFIRMED. No pronouncement as to costs. SO
ORDERED. Fernan, C.J., Narvasa, Melencio-Herrera, Gutierrez, Jr., Cruz, Paras, Feliciano, Gancayco, Padilla, Bidin,
Cortes, Grio-Aquino and Medialdea, JJ., concur.

G.R. No. L-4817

May 26, 1954

SILVESTER M. PUNSALAN, ET AL., plaintiffs-appellants, vs. THE MUNICIPAL BOARD OF THE CITY OF MANILA, ET
AL., defendants-appellants. Calanog and Alafriz for plaintiffs-appellants. City Fiscal Eugenio Angeles and Assistant Fiscal
Eulogio S. Serreno for defendants-appellants.
REYES, J.:
This suit was commenced in the Court of First Instance of Manila by two lawyers, a medical practitioner, a public
accountant, a dental surgeon and a pharmacist, purportedly "in their own behalf and in behalf of other professionals
practising in the City of Manila who may desire to join it." Object of the suit is the annulment of Ordinance No. 3398 of the
City of Manila together with the provision of the Manila charter authorizing it and the refund of taxes collected under the
ordinance but paid under protest.
The ordinance in question, which was approved by the municipal board of the City of Manila on July 25, 1950, imposes a
municipal occupation tax on persons exercising various professions in the city and penalizes non-payment of the tax "by a
fine of not more than two hundred pesos or by imprisonment of not more than six months, or by both such fine and
imprisonment in the discretion of the court." Among the professions taxed were those to which plaintiffs belong. The
ordinance was enacted pursuant to paragraph (1) of section 18 of the Revised Charter of the City of Manila (as amended
by Republic Act No. 409), which empowers the Municipal Board of said city to impose a municipal occupation tax, not to
exceed P50 per annum, on persons engaged in the various professions above referred to.
Having already paid their occupation tax under section 201 of the National Internal Revenue Code, plaintiffs, upon being
required to pay the additional tax prescribed in the ordinance, paid the same under protest and then brought the present
suit for the purpose already stated. The lower court upheld the validity of the provision of law authorizing the enactment of
the ordinance but declared the ordinance itself illegal and void on the ground that the penalty there in provided for nonpayment of the tax was not legally authorized. From this decision both parties appealed to this Court, and the only
question they have presented for our determination is whether this ruling is correct or not, for though the decision is silent
on the refund of taxes paid plaintiffs make no assignment of error on this point.
To begin with defendants' appeal, we find that the lower court was in error in saying that the imposition of the penalty
provided for in the ordinance was without the authority of law. The last paragraph (kk) of the very section that authorizes
the enactment of this tax ordinance (section 18 of the Manila Charter) in express terms also empowers the Municipal
Board "to fix penalties for the violation of ordinances which shall not exceed to(sic) two hundred pesos fine or six months"
imprisonment, or both such fine and imprisonment, for a single offense." Hence, the pronouncement below that the
ordinance in question is illegal and void because it imposes a penalty not authorized by law is clearly without basis.
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As to plaintiffs' appeal, the contention in substance is that this ordinance and the law authorizing it constitute class
legislation, are unjust and oppressive, and authorize what amounts to double taxation.
In raising the hue and cry of "class legislation", the burden of plaintiffs' complaint is not that the professions to which they
respectively belong have been singled out for the imposition of this municipal occupation tax; and in any event, the
Legislature may, in its discretion, select what occupations shall be taxed, and in the exercise of that discretion it may tax
all, or it may select for taxation certain classes and leave the others untaxed. (Cooley on Taxation, Vol. 4, 4th ed., pp.
3393-3395.) Plaintiffs' complaint is that while the law has authorized the City of Manila to impose the said tax, it has
withheld that authority from other chartered cities, not to mention municipalities. We do not think it is for the courts to judge
what particular cities or municipalities should be empowered to impose occupation taxes in addition to those imposed by
the National Government. That matter is peculiarly within the domain of the political departments and the courts would do
well not to encroach upon it. Moreover, as the seat of the National Government and with a population and volume of trade
many times that of any other Philippine city or municipality, Manila, no doubt, offers a more lucrative field for the practice of
the professions, so that it is but fair that the professionals in Manila be made to pay a higher occupation tax than their
brethren in the provinces.
Plaintiffs brand the ordinance unjust and oppressive because they say that it creates discrimination within a class in that
while professionals with offices in Manila have to pay the tax, outsiders who have no offices in the city but practice their
profession therein are not subject to the tax. Plaintiffs make a distinction that is not found in the ordinance. The ordinance
imposes the tax upon every person "exercising" or "pursuing" in the City of Manila naturally any one of the
occupations named, but does not say that such person must have his office in Manila. What constitutes exercise or pursuit
of a profession in the city is a matter of judicial determination. The argument against double taxation may not be invoked
where one tax is imposed by the state and the other is imposed by the city (1 Cooley on Taxation, 4th ed., p. 492), it being
widely recognized that there is nothing inherently obnoxious in the requirement that license fees or taxes be exacted with
respect to the same occupation, calling or activity by both the state and the political subdivisions thereof. (51 Am. Jur.,
341.)
In view of the foregoing, the judgment appealed from is reversed in so far as it declares Ordinance No. 3398 of the City of
Manila illegal and void and affirmed in so far as it holds the validity of the provision of the Manila charter authorizing it. With
costs against plaintiffs-appellants.
Pablo, Bengzon, Montemayor, Jugo, Bautista Angelo, Labrador, and Concepcion, JJ., concur.

[G.R. No. 132527. July 29, 2005] COCONUT OIL REFINERS ASSOCIATION, INC. represented by its President,
JESUS L. ARRANZA, PHILIPPINE ASSOCIATION OF MEAT PROCESSORS, INC. (PAMPI), represented by its
Secretary, ROMEO G. HIDALGO, FEDERATION OF FREE FARMERS (FFF), represented by its President, JEREMIAS
U. MONTEMAYOR, and BUKLURAN NG MANGGAGAWANG PILIPINO (BMP), represented by its Chairperson,
FELIMON C. LAGMAN, petitioners, vs. HON. RUBEN TORRES, in his capacity as Executive Secretary; BASES
CONVERSION AND DEVELOPMENT AUTHORITY, CLARK DEVELOPMENT CORPORATION, SUBIC BAY
METROPOLITAN AUTHORITY, 88 MART DUTY FREE, FREEPORT TRADERS, PX CLUB, AMERICAN HARDWARE,
ROYAL DUTY FREE SHOPS, INC., DFS SPORTS, ASIA PACIFIC, MCI DUTY FREE DISTRIBUTOR CORP. (formerly
MCI RESOURCES, CORP.), PARK & SHOP, DUTY FREE COMMODITIES, L. FURNISHING, SHAMBURGH, SUBIC
DFS, ARGAN TRADING CORP., ASIPINE CORP., BEST BUY, INC., PX CLUB, CLARK TRADING, DEMAGUS
TRADING CORP., D.F.S. SPORTS UNLIMITED, INC., DUTY FREE FIRST SUPERSTORE, INC., FREEPORT, JC MALL
DUTY FREE INC. (formerly 88 Mart [Clark] Duty Free Corp.), LILLY HILL CORP., MARSHALL, PUREGOLD DUTY
FREE, INC., ROYAL DFS and ZAXXON PHILIPPINES, INC., respondents.
DECISION
188

AZCUNA, J.:
This is a Petition for Prohibition and Injunction seeking to enjoin and prohibit the Executive Branch, through the public
respondents Ruben Torres in his capacity as Executive Secretary, the Bases Conversion Development Authority (BCDA),
the Clark Development Corporation (CDC) and the Subic Bay Metropolitan Authority (SBMA), from allowing, and the
private respondents from continuing with, the operation of tax and duty-free shops located at the Subic Special Economic
Zone (SSEZ) and the Clark Special Economic Zone (CSEZ), and to declare the following issuances as unconstitutional,
illegal, and void:
1. Section 5 of Executive Order No. 80,[1] dated April 3, 1993, regarding the CSEZ.
2. Executive Order No. 97-A, dated June 19, 1993, pertaining to the SSEZ.
3. Section 4 of BCDA Board Resolution No. 93-05-034,[2] dated May 18, 1993, pertaining to the CSEZ.
Petitioners contend that the aforecited issuances are unconstitutional and void as they constitute executive
lawmaking, and that they are contrary to Republic Act No. 7227 [3] and in violation of the Constitution, particularly Section 1,
Article III (equal protection clause), Section 19, Article XII (prohibition of unfair competition and combinations in restraint of
trade), and Section 12, Article XII (preferential use of Filipino labor, domestic materials and locally produced goods).
The facts are as follows:
On March 13, 1992, Republic Act No. 7227 was enacted, providing for, among other things, the sound and balanced
conversion of the Clark and Subic military reservations and their extensions into alternative productive uses in the form of
special economic zones in order to promote the economic and social development of Central Luzon in particular and the
country in general. Among the salient provisions are as follows:
SECTION 12. Subic Special Economic Zone.
...
The abovementioned zone shall be subject to the following policies:
(a) Within the framework and subject to the mandate and limitations of the Constitution and the pertinent provisions of the
Local Government Code, the Subic Special Economic Zone shall be developed into a self-sustaining, industrial,
commercial, financial and investment center to generate employment opportunities in and around the zone and to attract
and promote productive foreign investments;
(b) The Subic Special Economic Zone shall be operated and managed as a separate customs territory ensuring free flow
or movement of goods and capital within, into and exported out of the Subic Special Economic Zone, as well as provide
incentives such as tax and duty-free importations of raw materials, capital and equipment. However, exportation or
removal of goods from the territory of the Subic Special Economic Zone to the other parts of the Philippine territory shall be
subject to customs duties and taxes under the Customs and Tariff Code and other relevant tax laws of the Philippines;[4]
(c) The provision of existing laws, rules and regulations to the contrary notwithstanding, no taxes, local and national, shall
be imposed within the Subic Special Economic Zone. In lieu of paying taxes, three percent (3%) of the gross income
earned by all businesses and enterprises within the Subic Special Ecoomic Zone shall be remitted to the National
189

Government, one percent (1%) each to the local government units affected by the declaration of the zone in proportion to
their population area, and other factors. In addition, there is hereby established a development fund of one percent (1%) of
the gross income earned by all businesses and enterprises within the Subic Special Economic Zone to be utilized for the
development of municipalities outside the City of Olangapo and the Municipality of Subic, and other municipalities
contiguous to the base areas.
...
SECTION 15. Clark and Other Special Economic Zones. Subject to the concurrence by resolution of the local government
units directly affected, the President is hereby authorized to create by executive proclamation a Special Economic Zone
covering the lands occupied by the Clark military reservations and its contiguous extensions as embraced, covered and
defined by the 1947 Military Bases Agreement between the Philippines and the United States of America, as amended,
located within the territorial jurisdiction of Angeles City, Municipalities of Mabalacat and Porac, Province of Pampanga and
the Municipality of Capas, Province of Tarlac, in accordance with the policies as herein provided insofar as applicable to
the Clark military reservations.
The governing body of the Clark Special Economic Zone shall likewise be established by executive proclamation with such
powers and functions exercised by the Export Processing Zone Authority pursuant to Presidential Decree No. 66 as
amended.
The policies to govern and regulate the Clark Special Economic Zone shall be determined upon consultation with the
inhabitants of the local government units directly affected which shall be conducted within six (6) months upon approval of
this Act.
Similarly, subject to the concurrence by resolution of the local government units directly affected, the President shall create
other Special Economic Zones, in the base areas of Wallace Air Station in San Fernando, La Union (excluding areas
designated for communications, advance warning and radar requirements of the Philippine Air Force to be determined by
the Conversion Authority) and Camp John Hay in the City of Baguio.
Upon recommendation of the Conversion Authority, the President is likewise authorized to create Special Economic Zones
covering the Municipalities of Morong, Hermosa, Dinalupihan, Castillejos and San Marcelino.
On April 3, 1993, President Fidel V. Ramos issued Executive Order No. 80, which declared, among others, that Clark
shall have all the applicable incentives granted to the Subic Special Economic and Free Port Zone under Republic Act No.
7227. The pertinent provision assailed therein is as follows:
SECTION 5. Investments Climate in the CSEZ. Pursuant to Section 5(m) and Section 15 of RA 7227, the BCDA shall
promulgate all necessary policies, rules and regulations governing the CSEZ, including investment incentives, in
consultation with the local government units and pertinent government departments for implementation by the CDC.
Among others, the CSEZ shall have all the applicable incentives in the Subic Special Economic and Free Port Zone under
RA 7227 and those applicable incentives granted in the Export Processing Zones, the Omnibus Investments Code of
1987, the Foreign Investments Act of 1991 and new investments laws which may hereinafter be enacted.
The CSEZ Main Zone covering the Clark Air Base proper shall have all the aforecited investment incentives, while the
CSEZ Sub-Zone covering the rest of the CSEZ shall have limited incentives. The full incentives in the Clark SEZ Main
Zone and the limited incentives in the Clark SEZ Sub-Zone shall be determined by the BCDA.
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Pursuant to the directive under Executive Order No. 80, the BCDA passed Board Resolution No. 93-05-034 on May
18, 1993, allowing the tax and duty-free sale at retail of consumer goods imported via Clark for consumption outside the
CSEZ. The assailed provisions of said resolution read, as follows:
Section 4. SPECIFIC INCENTIVES IN THE CSEZ MAIN ZONE. The CSEZ-registered enterprises/businesses shall be
entitled to all the incentives available under R.A. No. 7227, E.O. No. 226 and R.A. No. 7042 which shall include, but not
limited to, the following:
I. As in Subic Economic and Free Port Zone:
A. Customs:
...
4. Tax and duty-free purchase and consumption of goods/articles (duty free shopping) within the CSEZ
Main Zone.
5. For individuals, duty-free consumer goods may be brought out of the CSEZ Main Zone into the
Philippine Customs territory but not to exceed US$200.00 per month per CDC-registered person,
similar to the limits imposed in the Subic SEZ. This privilege shall be enjoyed only once a month. Any
excess shall be levied taxes and duties by the Bureau of Customs.
On June 10, 1993, the President issued Executive Order No. 97, Clarifying the Tax and Duty Free Incentive Within
the Subic Special Economic Zone Pursuant to R.A. No. 7227. Said issuance in part states, thus:
SECTION 1. On Import Taxes and Duties Tax and duty-free importations shall apply only to raw materials, capital goods
and equipment brought in by business enterprises into the SSEZ. Except for these items, importations of other goods into
the SSEZ, whether by business enterprises or resident individuals, are subject to taxes and duties under relevant
Philippine laws.
The exportation or removal of tax and duty-free goods from the territory of the SSEZ to other parts of the Philippine
territory shall be subject to duties and taxes under relevant Philippine laws.
Nine days after, on June 19, 1993, Executive Order No. 97-A was issued, Further Clarifying the Tax and Duty-Free
Privilege Within the Subic Special Economic and Free Port Zone. The relevant provisions read, as follows:
SECTION 1. The following guidelines shall govern the tax and duty-free privilege within the Secured Area of the Subic
Special Economic and Free Port Zone:
1.1 The Secured Area consisting of the presently fenced-in former Subic Naval Base shall be the only completely tax and
duty-free area in the SSEFPZ. Business enterprises and individuals (Filipinos and foreigners) residing within the Secured
Area are free to import raw materials, capital goods, equipment, and consumer items tax and duty-free. Consumption
items, however, must be consumed within the Secured Area. Removal of raw materials, capital goods, equipment and
consumer items out of the Secured Area for sale to non-SSEFPZ registered enterprises shall be subject to the usual taxes
and duties, except as may be provided herein.

191

1.2. Residents of the SSEFPZ living outside the Secured Area can enter the Secured Area and consume any quantity of
consumption items in hotels and restaurants within the Secured Area. However, these residents can purchase and bring
out of the Secured Area to other parts of the Philippine territory consumer items worth not exceeding US$100 per month
per person. Only residents age 15 and over are entitled to this privilege.
1.3. Filipinos not residing within the SSEFPZ can enter the Secured Area and consume any quantity of consumption items
in hotels and restaurants within the Secured Area. However, they can purchase and bring out [of] the Secured Area to
other parts of the Philippine territory consumer items worth not exceeding US$200 per year per person. Only Filipinos age
15 and over are entitled to this privilege.
Petitioners assail the $100 monthly and $200 yearly tax-free shopping privileges granted by the aforecited provisions
respectively to SSEZ residents living outside the Secured Area of the SSEZ and to Filipinos aged 15 and over residing
outside the SSEZ.
On February 23, 1998, petitioners thus filed the instant petition, seeking the declaration of nullity of the assailed
issuances on the following grounds:
I. EXECUTIVE ORDER NO. 97-A, SECTION 5 OF EXECUTIVE ORDER NO. 80, AND SECTION 4 OF BCDA BOARD
RESOLUTION NO. 93-05-034 ARE NULL AND VOID [FOR] BEING AN EXERCISE OF EXECUTIVE LAWMAKING.
II.EXECUTIVE ORDER NO. 97-A, SECTION 5 OF EXECUTIVE ORDER NO. 80, AND SECTION 4 OF BCDA BOARD
RESOLUTION NO. 93-05-034 ARE UNCONSTITUTIONAL FOR BEING VIOLATIVE OF THE EQUAL PROTECTION
CLAUSE AND THE PROHIBITION AGAINST UNFAIR COMPETITION AND PRACTICES IN RESTRAINT OF TRADE.
III.EXECUTIVE ORDER NO. 97-A, SECTION 5 OF EXECUTIVE ORDER NO. 80, AND SECTION 4 OF BCDA BOARD
RESOLUTION NO. 93-05-034 ARE NULL AND VOID [FOR] BEING VIOLATIVE OF REPUBLIC ACT NO. 7227.
IV.THE CONTINUED IMPLEMENTATION OF THE CHALLENGED ISSUANCES IF NOT RESTRAINED WILL CONTINUE
TO CAUSE PETITIONERS TO SUFFER GRAVE AND IRREPARABLE INJURY.[5]
In their Comments, respondents point out procedural issues, alleging lack of petitioners legal standing, the
unreasonable delay in the filing of the petition, laches, and the propriety of the remedy of prohibition.
Anent the claim on lack of legal standing, respondents argue that petitioners, being mere suppliers of the local
retailers operating outside the special economic zones, do not stand to suffer direct injury in the enforcement of the
issuances being assailed herein. Assuming this is true, this Court has nevertheless held that in cases of paramount
importance where serious constitutional questions are involved, the standing requirements may be relaxed and a suit may
be allowed to prosper even where there is no direct injury to the party claiming the right of judicial review.[6]
In the same vein, with respect to the other alleged procedural flaws, even assuming the existence of such defects,
this Court, in the exercise of its discretion, brushes aside these technicalities and takes cognizance of the petition
considering the importance to the public of the present case and in keeping with the duty to determine whether the other
branches of the government have kept themselves within the limits of the Constitution.[7]
Now, on the constitutional arguments raised:

192

As this Court enters upon the task of passing on the validity of an act of a co-equal and coordinate branch of the
Government, it bears emphasis that deeply ingrained in our jurisprudence is the time-honored principle that a statute is
presumed to be valid.[8] This presumption is rooted in the doctrine of separation of powers which enjoins upon the three
coordinate departments of the Government a becoming courtesy for each others acts.[9] Hence, to doubt is to sustain. The
theory is that before the act was done or the law was enacted, earnest studies were made by Congress, or the President,
or both, to insure that the Constitution would not be breached. [10] This Court, however, may declare a law, or portions
thereof, unconstitutional where a petitioner has shown a clear and unequivocal breach of the Constitution, not merely a
doubtful or argumentative one.[11] In other words, before a statute or a portion thereof may be declared unconstitutional, it
must be shown that the statute or issuance violates the Constitution clearly, palpably and plainly, and in such a manner as
to leave no doubt or hesitation in the mind of the Court.[12]

The Issue on Executive Legislation

Petitioners claim that the assailed issuances (Executive Order No. 97-A; Section 5 of Executive Order No. 80; and
Section 4 of BCDA Board Resolution No. 93-05-034) constitute executive legislation, in violation of the rule on separation
of powers. Petitioners argue that the Executive Department, by allowing through the questioned issuances the setting up
of tax and duty-free shops and the removal of consumer goods and items from the zones without payment of
corresponding duties and taxes, arbitrarily provided additional exemptions to the limitations imposed by Republic Act No.
7227, which limitations petitioners identify as follows:
(1) [Republic Act No. 7227] allowed only tax and duty-free importation of raw materials, capital and equipment.
(2) It provides that any exportation or removal of goods from the territory of the Subic Special Economic Zone to
other parts of the Philippine territory shall be subject to customs duties and taxes under the Customs and
Tariff Code and other relevant tax laws of the Philippines.
Anent the first alleged limitation, petitioners contend that the wording of Republic Act No. 7227 clearly limits the grant
of tax incentives to the importation of raw materials, capital and equipment only. Hence, they claim that the assailed
issuances constitute executive legislation for invalidly granting tax incentives in the importation of consumer goods such as
those being sold in the duty-free shops, in violation of the letter and intent of Republic Act No. 7227.
A careful reading of Section 12 of Republic Act No. 7227, which pertains to the SSEZ, would show that it does not
restrict the duty-free importation only to raw materials, capital and equipment. Section 12 of the cited law is partly
reproduced, as follows:
SECTION 12. Subic Special Economic Zone.
...
The abovementioned zone shall be subject to the following policies:
193

...
(b) The Subic Special Economic Zone shall be operated and managed as a separate customs territory ensuring
free flow or movement of goods and capital within, into and exported out of the Subic Special Economic
Zone, as well as provide incentives such as tax and duty-free importations of raw materials, capital and
equipment. However, exportation or removal of goods from the territory of the Subic Special Economic
Zone to the other parts of the Philippine territory shall be subject to customs duties and taxes under the
Customs and Tariff Code and other relevant tax laws of the Philippines.[13]
While it is true that Section 12 (b) of Republic Act No. 7227 mentions only raw materials, capital and equipment, this
does not necessarily mean that the tax and duty-free buying privilege is limited to these types of articles to the exclusion of
consumer goods. It must be remembered that in construing statutes, the proper course is to start out and follow the true
intent of the Legislature and to adopt that sense which harmonizes best with the context and promotes in the fullest
manner the policy and objects of the Legislature.[14]
In the present case, there appears to be no logic in following the narrow interpretation petitioners urge. To limit the
tax-free importation privilege of enterprises located inside the special economic zone only to raw materials, capital and
equipment clearly runs counter to the intention of the Legislature to create a free port where the free flow of goods or
capital within, into, and out of the zones is insured.
The phrase tax and duty-free importations of raw materials, capital and equipment was merely cited as an example of
incentives that may be given to entities operating within the zone. Public respondent SBMA correctly argued that the
maxim expressio unius est exclusio alterius, on which petitioners impliedly rely to support their restrictive interpretation,
does not apply when words are mentioned by way of example. [15] It is obvious from the wording of Republic Act No. 7227,
particularly the use of the phrase such as, that the enumeration only meant to illustrate incentives that the SSEZ is
authorized to grant, in line with its being a free port zone.
Furthermore, said legal maxim should be applied only as a means of discovering legislative intent which is not
otherwise manifest, and should not be permitted to defeat the plainly indicated purpose of the Legislature.[16]
The records of the Senate containing the discussion of the concept of special economic zone in Section 12 (a) of
Republic Act No. 7227 show the legislative intent that consumer goods entering the SSEZ which satisfy the needs of the
zone and are consumed there are not subject to duties and taxes in accordance with Philippine laws, thus:
Senator Guingona. . . . The concept of Special Economic Zone is one that really includes the concept of a free port, but it
is broader. While a free port is necessarily included in the Special Economic Zone, the reverse is not true that a free port
would include a special economic zone.
Special Economic Zone, Mr. President, would include not only the incoming and outgoing of vessels, duty-free and taxfree, but it would involve also tourism, servicing, financing and all the appurtenances of an investment center. So, that is
the concept, Mr. President. It is broader. It includes the free port concept and would cater to the greater needs of Olangapo
City, Subic Bay and the surrounding municipalities.
Senator Enrile. May I know then if a factory located within the jurisdiction of Morong, Bataan that was originally a part of
the Subic Naval reservation, be entitled to a free port treatment or just a special economic zone treatment?

194

Senator Guingona. As far as the goods required for manufacture is concerned, Mr. President, it would have privileges of
duty-free and tax-free. But in addition, the Special Economic Zone could embrace the needs of tourism, could embrace the
needs of servicing, could embrace the needs of financing and other investment aspects.
Senator Enrile. When a hotel is constructed, Mr. President, in this geographical unit which we call a special economic
zone, will the goods entering to be consumed by the customers or guests of the hotel be subject to duties?
Senator Guingona. That is the concept that we are crafting, Mr. President.
Senator Enrile. No. I am asking whether those goods will be duty-free, because it is constructed within a free port.
Senator Guingona. For as long as it services the needs of the Special Economic Zone, yes.
Senator Enrile. For as long as the goods remain within the zone, whether we call it an economic zone or a free port, for
as long as we say in this law that all goods entering this particular territory will be duty-free and tax-free, for as long as
they remain there, consumed there or reexported or destroyed in that place, then they are not subject to the duties and
taxes in accordance with the laws of the Philippines?
Senator Guingona. Yes.[17]
Petitioners rely on Committee Report No. 1206 submitted by the Ad Hoc Oversight Committee on Bases Conversion
on June 26, 1995. Petitioners put emphasis on the reports finding that the setting up of duty-free stores never figured in
the minds of the authors of Republic Act No. 7227 in attracting foreign investors to the former military baselands. They
maintain that said law aimed to attract manufacturing and service enterprises that will employ the dislocated former military
base workers, but not investors who would buy consumer goods from duty-free stores.
The Court is not persuaded. Indeed, it is well-established that opinions expressed in the debates and proceedings of
the Legislature, steps taken in the enactment of a law, or the history of the passage of the law through the Legislature, may
be resorted to as aids in the interpretation of a statute with a doubtful meaning. [18] Petitioners posture, however, overlooks
the fact that the 1995 Committee Report they are referring to came into being well after the enactment of Republic Act No.
7227 in 1993. Hence, as pointed out by respondent Executive Secretary Torres, the aforementioned report cannot be said
to form part of Republic Act No. 7227s legislative history.
Section 12 of Republic Act No. 7227, provides in part, thus:
SEC. 12. Subic Special Economic Zone. -- . . .
The abovementioned zone shall be subject to the following policies:
(a) Within the framework and subject to the mandate and limitations of the Constitution and the pertinent provisions of the
Local Government Code, the Subic Special Economic Zone shall be developed into a self-sustaining,
industrial, commercial, financial and investment center to generate employment opportunities in and around the zone and
to attract and promote productive foreign investments. [19]
The aforecited policy was mentioned as a basis for the issuance of Executive Order No. 97-A, thus:

195

WHEREAS, Republic Act No. 7227 provides that within the framework and subject to the mandate and limitations of the
Constitution and the pertinent provisions of the Local Government Code, the Subic Special Economic and Free Port Zone
(SSEFPZ) shall be developed into a self-sustaining industrial, commercial, financial and investment center to generate
employment opportunities in and around the zone and to attract and promote productive foreign investments; and
WHEREAS, a special tax and duty-free privilege within a Secured Area in the SSEFPZ subject, to existing laws has been
determined necessary to attract local and foreign visitors to the zone.
Executive Order No. 97-A provides guidelines to govern the tax and duty-free privileges within the Secured Area of
the Subic Special Economic and Free Port Zone. Paragraph 1.6 thereof states that (t)he sale of tax and duty-free
consumer items in the Secured Area shall only be allowed in duly authorized duty-free shops.
The Court finds that the setting up of such commercial establishments which are the only ones duly authorized to sell
consumer items tax and duty-free is still well within the policy enunciated in Section 12 of Republic Act No. 7227
that . . .the Subic Special Economic Zone shall be developed into a self-sustaining, industrial,
commercial, financial and investment center to generate employment opportunities in and around the zone and to
attract and promote productive foreign investments. (Emphasis supplied.)
However, the Court reiterates that the second sentences of paragraphs 1.2 and 1.3 of Executive Order No. 97-A,
allowing tax and duty-free removal of goods to certain individuals, even in a limited amount, from the Secured Area of the
SSEZ, are null and void for being contrary to Section 12 of Republic Act No. 7227. Said Section clearly provides that
exportation or removal of goods from the territory of the Subic Special Economic Zone to the other parts of the Philippine
territory shall be subject to customs duties and taxes under the Customs and Tariff Code and other relevant tax laws of the
Philippines.
On the other hand, insofar as the CSEZ is concerned, the case for an invalid exercise of executive legislation is
tenable.
In John Hay Peoples Alternative Coalition,
the one herein, concerning the legality of the
Presidential Proclamation No. 420, Series of
COVERED BY THE FORMER CAMP JOHN
REPUBLIC ACT NO. 7227.

et al. v. Victor Lim, et al.,[20] this Court resolved an issue, very much like
tax exemption benefits given to the John Hay Economic Zone under
1994, CREATING AND DESIGNATING A PORTION OF THE AREA
AS THE JOHN HAY SPECIAL ECONOMIC ZONE PURSUANT TO

In that case, among the arguments raised was that the granting of tax exemptions to John Hay was an invalid and
illegal exercise by the President of the powers granted only to the Legislature. Petitioners therein argued that Republic Act
No. 7227 expressly granted tax exemption only to Subic and not to the other economic zones yet to be established. Thus,
the grant of tax exemption to John Hay by Presidential Proclamation contravenes the constitutional mandate that [n]o law
granting any tax exemption shall be passed without the concurrence of a majority of all the members of Congress.[21]
This Court sustained the argument and ruled that the incentives under Republic Act No. 7227 are exclusive only to
the SSEZ. The President, therefore, had no authority to extend their application to John Hay. To quote from the Decision:
More importantly, the nature of most of the assailed privileges is one of tax exemption. It is the legislature, unless limited
by a provision of a state constitution, that has full power to exempt any person or corporation or class of property from
taxation, its power to exempt being as broad as its power to tax. Other than Congress, the Constitution may itself provide
for specific tax exemptions, or local governments may pass ordinances on exemption only from local taxes.
196

The challenged grant of tax exemption would circumvent the Constitutions imposition that a law granting any tax
exemption must have the concurrence of a majority of all the members of Congress. In the same vein, the other kinds of
privileges extended to the John Hay SEZ are by tradition and usage for Congress to legislate upon.
Contrary to public respondents suggestions, the claimed statutory exemption of the John Hay SEZ from taxation should be
manifest and unmistakable from the language of the law on which it is based; it must be expressly granted in a statute
stated in a language too clear to be mistaken. Tax exemption cannot be implied as it must be categorically and
unmistakably expressed.
If it were the intent of the legislature to grant to John Hay SEZ the same tax exemption and incentives given to the Subic
SEZ, it would have so expressly provided in R.A. No. 7227.[22]
In the present case, while Section 12 of Republic Act No. 7227 expressly provides for the grant of incentives to the
SSEZ, it fails to make any similar grant in favor of other economic zones, including the CSEZ. Tax and duty-free incentives
being in the nature of tax exemptions, the basis thereof should be categorically and unmistakably expressed from the
language of the statute. Consequently, in the absence of any express grant of tax and duty-free privileges to the CSEZ in
Republic Act No. 7227, there would be no legal basis to uphold the questioned portions of two issuances: Section 5 of
Executive Order No. 80 and Section 4 of BCDA Board Resolution No. 93-05-034, which both pertain to the CSEZ.
Petitioners also contend that the questioned issuances constitute executive legislation for allowing the removal of
consumer goods and items from the zones without payment of corresponding duties and taxes in violation of Republic Act
No. 7227 as Section 12 thereof provides for the taxation of goods that are exported or removed from the SSEZ to other
parts of the Philippine territory.
On September 26, 1997, Executive Order No. 444 was issued, curtailing the duty-free shopping privileges in the
SSEZ and the CSEZ to prevent abuse of duty-free privilege and to protect local industries from unfair competition. The
pertinent provisions of said issuance state, as follows:
SECTION 3. Special Shopping Privileges Granted During the Year-round Centennial Anniversary Celebration in 1998.
Upon effectivity of this Order and up to the Centennial Year 1998, in addition to the permanent residents, locators and
employees of the fenced-in areas of the Subic Special Economic and Freeport Zone and the Clark Special Economic Zone
who are allowed unlimited duty free purchases, provided these are consumed within said fenced-in areas of the Zones, the
residents of the municipalities adjacent to Subic and Clark as respectively provided in R.A. 7227 (1992) and E.O. 97-A s.
1993 shall continue to be allowed One Hundred US Dollars (US$100) monthly shopping privilege until 31 December
1998. Domestic tourists visiting Subic and Clark shall be allowed a shopping privilege of US$25 for consumable
goods which shall be consumed only in the fenced-in area during their visittherein.
SECTION 4. Grant of Duty Free Shopping Privileges Limited Only To Individuals Allowed by Law. Starting 1 January 1999,
only the following persons shall continue to be eligible to shop in duty free shops/outlets with their corresponding purchase
limits:
a. Tourists and Filipinos traveling to or returning from foreign destinations under E.O. 97-A s. 1993 One Thousand US Dollars
(US$1,000) but not to exceed Ten Thousand US Dollars (US$10,000) in any given year;
b. Overseas Filipino Workers (OFWs) and Balikbayans defined under R.A. 6768 dated 3 November 1989 Two Thousand US
Dollars (US$2,000);
197

c. Residents, eighteen (18) years old and above, of the fenced-in areas of the freeports under R.A. 7227 (1992) and E.O. 97-A
s. 1993 Unlimited purchase as long as these are for consumption within these freeports.

The term "Residents" mentioned in item c above shall refer to individuals who, by virtue of domicile or employment, reside
on permanent basis within the freeport area. The term excludes (1) non-residents who have entered into short- or longterm property lease inside the freeport, (2) outsiders engaged in doing business within the freeport, and (3) members of
private clubs (e.g., yacht and golf clubs) based or located within the freeport. In this regard, duty free privileges granted to
any of the above individuals (e.g., unlimited shopping privilege, tax-free importation of cars, etc.) are hereby revoked.[23]
A perusal of the above provisions indicates that effective January 1, 1999, the grant of duty-free shopping privileges
to domestic tourists and to residents living adjacent to SSEZ and the CSEZ had been revoked. Residents of the fenced-in
area of the free port are still allowed unlimited purchase of consumer goods, as long as these are for consumption within
these freeports. Hence, the only individuals allowed by law to shop in the duty-free outlets and remove consumer goods
out of the free ports tax-free are tourists and Filipinos traveling to or returning from foreign destinations, and Overseas
Filipino Workers and Balikbayans as defined under Republic Act No. 6768.[24]
Subsequently, on October 20, 2000, Executive Order No. 303 was issued, amending Executive Order No. 444.
Pursuant to the limited duration of the privileges granted under the preceding issuance, Section 2 of Executive Order No.
303 declared that [a]ll special shopping privileges as granted under Section 3 of Executive Order 444, s. 1997, are hereby
deemed terminated. The grant of duty free shopping privileges shall be restricted to qualified individuals as provided by
law.
It bears noting at this point that the shopping privileges currently being enjoyed by Overseas Filipino Workers,
Balikbayans, and tourists traveling to and from foreign destinations, draw authority not from the issuances being assailed
herein, but from Executive Order No. 46[25]and Republic Act No. 6768, both enacted prior to the promulgation of Republic
Act No. 7227.
From the foregoing, it appears that petitioners objection to the allowance of tax-free removal of goods from the
special economic zones as previously authorized by the questioned issuances has become moot and academic.
In any event, Republic Act No. 7227, specifically Section 12 (b) thereof, clearly provides that exportation or removal
of goods from the territory of the Subic Special Economic Zone to the other parts of the Philippine territory shall be subject
to customs duties and taxes under the Customs and Tariff Code and other relevant tax laws of the Philippines.
Thus, the removal of goods from the SSEZ to other parts of the Philippine territory without payment of said customs
duties and taxes is not authorized by the Act. Consequently, the following italicized provisions found in the second
sentences of paragraphs 1.2 and 1.3, Section 1 of Executive Order No. 97-A are null and void:
1.2 Residents of the SSEFPZ living outside the Secured Area can enter and consume any quantity of consumption
items in hotels and restaurants within the Secured Area. However, these residents can purchase and bring out
of the Secured Area to other parts of the Philippine territory consumer items worth not exceeding US $100 per
month per person. Only residents age 15 and over are entitled to this privilege.
1.3 Filipinos not residing within the SSEFPZ can enter the Secured Area and consume any quantity of consumption
items in hotels and restaurants within the Secured Area. However, they can purchase and bring out of the
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Secured Area to other parts of the Philippine territory consumer items worth not exceeding US $200 per year
per person. Only Filipinos age 15 and over are entitled to this privilege.[26]
A similar provision found in paragraph 5, Section 4(A) of BCDA Board Resolution No. 93-05-034 is also null and void.
Said Resolution applied the incentives given to the SSEZ under Republic Act No. 7227 to the CSEZ, which, as aforestated,
is without legal basis.
Having concluded earlier that the CSEZ is excluded from the tax and duty-free incentives provided under Republic
Act No. 7227, this Court will resolve the remaining arguments only with regard to the operations of the SSEZ. Thus, the
assailed issuance that will be discussed is solely Executive Order No. 97-A, since it is the only one among the three
questioned issuances which pertains to the SSEZ.

Equal Protection of the Laws

Petitioners argue that the assailed issuance (Executive Order No. 97-A) is violative of their right to equal protection of
the laws, as enshrined in Section 1, Article III of the Constitution. To support this argument, they assert that private
respondents operating inside the SSEZ are not different from the retail establishments located outside, the products sold
being essentially the same. The only distinction, they claim, lies in the products variety and source, and the fact that
private respondents import their items tax-free, to the prejudice of the retailers and manufacturers located outside the
zone.
Petitioners contention cannot be sustained. It is an established principle of constitutional law that the guaranty of the
equal protection of the laws is not violated by a legislation based on a reasonable classification. [27] Classification, to be
valid, must (1) rest on substantial distinction, (2) be germane to the purpose of the law, (3) not be limited to existing
conditions only, and (4) apply equally to all members of the same class.[28]
Applying the foregoing test to the present case, this Court finds no violation of the right to equal protection of the
laws. First, contrary to petitioners claim, substantial distinctions lie between the establishments inside and outside the
zone, justifying the difference in their treatment. In Tiu v. Court of Appeals,[29] the constitutionality of Executive Order No.
97-A was challenged for being violative of the equal protection clause. In that case, petitioners claimed that Executive
Order No. 97-A was discriminatory in confining the application of Republic Act No. 7227 within a secured area of the
SSEZ, to the exclusion of those outside but are, nevertheless, still within the economic zone.
Upholding the constitutionality of Executive Order No. 97-A, this Court therein found substantial differences between
the retailers inside and outside the secured area, thereby justifying a valid and reasonable classification:
Certainly, there are substantial differences between the big investors who are being lured to establish and operate their
industries in the so-called secured area and the present business operators outside the area. On the one hand, we are
talking of billion-peso investments and thousands of new jobs. On the other hand, definitely none of such magnitude. In the
first, the economic impact will be national; in the second, only local. Even more important, at this time the business
activities outside the secured area are not likely to have any impact in achieving the purpose of the law, which is to turn the
former military base to productive use for the benefit of the Philippine economy. There is, then, hardly any reasonable
basis to extend to them the benefits and incentives accorded in R.A. 7227. Additionally, as the Court of Appeals pointed
out, it will be easier to manage and monitor the activities within the secured area, which is already fenced off, to prevent
fraudulent importation of merchandise or smuggling.
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It is well-settled that the equal-protection guarantee does not require territorial uniformity of laws. As long as there are
actual and material differences between territories, there is no violation of the constitutional clause. And of course, anyone,
including the petitioners, possessing the requisite investment capital can always avail of the same benefits by channeling
his or her resources or business operations into the fenced-off free port zone.[30]
The Court in Tiu found real and substantial distinctions between residents within the secured area and those living
within the economic zone but outside the fenced-off area. Similarly, real and substantial differences exist between the
establishments herein involved. A significant distinction between the two groups is that enterprises outside the zones
maintain their businesses within Philippine customs territory, while private respondents and the other duly-registered zone
enterprises operate within the so-called separate customs territory. To grant the same tax incentives given to enterprises
within the zones to businesses operating outside the zones, as petitioners insist, would clearly defeat the statutes intent to
carve a territory out of the military reservations in Subic Bay where free flow of goods and capital is maintained.
The classification is germane to the purpose of Republic Act No. 7227. As held in Tiu, the real concern of Republic
Act No. 7227 is to convert the lands formerly occupied by the US military bases into economic or industrial areas. In
furtherance of such objective, Congress deemed it necessary to extend economic incentives to the establishments within
the zone to attract and encourage foreign and local investors. This is the very rationale behind Republic Act No. 7227 and
other similar special economic zone laws which grant a complete package of tax incentives and other benefits.
The classification, moreover, is not limited to the existing conditions when the law was promulgated, but to future
conditions as well, inasmuch as the law envisioned the former military reservation to ultimately develop into a selfsustaining investment center.
And, lastly, the classification applies equally to all retailers found within the secured area. As ruled in Tiu, the
individuals and businesses within the secured area, being in like circumstances or contributing directly to the achievement
of the end purpose of the law, are not categorized further. They are all similarly treated, both in privileges granted and in
obligations required.
With all the four requisites for a reasonable classification present, there is no ground to invalidate Executive Order
No. 97-A for being violative of the equal protection clause.

Prohibition against Unfair Competition and Practices in Restraint of Trade

Petitioners next argue that the grant of special tax exemptions and privileges gave the private respondents undue
advantage over local enterprises which do not operate inside the SSEZ, thereby creating unfair competition in violation of
the constitutional prohibition against unfair competition and practices in restraint of trade.
The argument is without merit. Just how the assailed issuance is violative of the prohibition against unfair competition
and practices in restraint of trade is not clearly explained in the petition. Republic Act No. 7227, and consequently
Executive Order No. 97-A, cannot be said to be distinctively arbitrary against the welfare of businesses outside the zones.
The mere fact that incentives and privileges are granted to certain enterprises to the exclusion of others does not render
the issuance unconstitutional for espousing unfair competition. Said constitutional prohibition cannot hinder the Legislature
from using tax incentives as a tool to pursue its policies.

200

Suffice it to say that Congress had justifiable reasons in granting incentives to the private respondents, in accordance
with Republic Act No. 7227s policy of developing the SSEZ into a self-sustaining entity that will generate employment and
attract foreign and local investment. If petitioners had wanted to avoid any alleged unfavorable consequences on their
profits, they should upgrade their standards of quality so as to effectively compete in the market. In the alternative, if
petitioners really wanted the preferential treatment accorded to the private respondents, they could have opted to register
with SSEZ in order to operate within the special economic zone.
Preferential Use of Filipino Labor, Domestic Materials
and Locally Produced Goods
Lastly, petitioners claim that the questioned issuance (Executive Order No. 97-A) openly violated the State policy of
promoting the preferential use of Filipino labor, domestic materials and locally produced goods and adopting measures to
help make them competitive.
Again, the argument lacks merit. This Court notes that petitioners failed to substantiate their sweeping conclusion
that the issuance has violated the State policy of giving preference to Filipino goods and labor. The mere fact that said
issuance authorizes the importation and trade of foreign goods does not suffice to declare it unconstitutional on this
ground.
Petitioners cite Manila Prince Hotel v. GSIS[31] which, however, does not apply. That case dealt with the policy
enunciated under the second paragraph of Section 10, Article XII of the Constitution, [32] applicable to the grant of rights,
privileges, and concessions covering the national economy and patrimony, which is different from the policy invoked in this
petition, specifically that of giving preference to Filipino materials and labor found under Section 12 of the same Article of
the Constitution. (Emphasis supplied).
In Taada v. Angara,[33] this Court elaborated on the meaning of Section 12, Article XII of the Constitution in this wise:
[W]hile the Constitution indeed mandates a bias in favor of Filipino goods, services, labor and enterprises, at the same
time, it recognizes the need for business exchange with the rest of the world on the bases of equality and reciprocity and
limits protection of Filipino enterprises only against foreign competition and trade practices that are unfair. In other words,
the Constitution did not intend to pursue an isolationist policy. It did not shut out foreign investments, goods and services in
the development of the Philippine economy. While the Constitution does not encourage the unlimited entry of foreign
goods, services and investments into the country, it does not prohibit them either. In fact, it allows an exchange on the
basis of equality and reciprocity, frowning only on foreign competition that is unfair.[34]
This Court notes that the Executive Department, with its subsequent issuance of Executive Order Nos. 444 and 303,
has provided certain measures to prevent unfair competition. In particular, Executive Order Nos. 444 and 303 have
restricted the special shopping privileges to certain individuals. [35] Executive Order No. 303 has limited the range of items
that may be sold in the duty-free outlets, [36] and imposed sanctions to curb abuses of duty-free privileges. [37] With these
measures, this Court finds no reason to strike down Executive Order No. 97-A for allegedly being prejudicial to Filipino
labor, domestic materials and locally produced goods.
WHEREFORE, the petition is PARTLY GRANTED. Section 5 of Executive Order No. 80 and Section 4 of BCDA
Board Resolution No. 93-05-034 are hereby declared NULL and VOID and are accordingly declared of no legal force and
effect. Respondents are hereby enjoined from implementing the aforesaid void provisions. All portions of Executive Order
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No. 97-A are valid and effective, except the second sentences in paragraphs 1.2 and 1.3 of said Executive Order, which
are hereby declared INVALID.
No costs. SO ORDERED.

G.R. No. L-23794

February 17, 1968:

ORMOC SUGAR COMPANY, INC., plaintiff-appellant, vs.THE TREASURER OF ORMOC CITY, THE MUNICIPAL
BOARD OF ORMOC CITY, HON. ESTEBAN C. CONEJOS as Mayor of Ormoc City and ORMOC CITY, defendantsappellees.
BENGZON, J.P., J.:
On January 29, 1964, the Municipal Board of Ormoc City passed 1 Ordinance No. 4, Series of 1964, imposing "on
any and all productions of centrifugal sugar milled at the Ormoc Sugar Company, Inc., in Ormoc City a municipal tax
equivalent to one per centum (1%) per export sale to the United States of America and other foreign countries."2
Payments for said tax were made, under protest, by Ormoc Sugar Company, Inc. on March 20, 1964 for P7,087.50
and on April 20, 1964 for P5,000, or a total of P12,087.50.
On June 1, 1964, Ormoc Sugar Company, Inc. filed before the Court of First Instance of Leyte, with service of a
copy upon the Solicitor General, a complaint 3 against the City of Ormoc as well as its Treasurer, Municipal Board and
Mayor, alleging that the afore-stated ordinance is unconstitutional for being violative of the equal protection clause (Sec.
1[1], Art. III, Constitution) and the rule of uniformity of taxation (Sec. 22[1]), Art. VI, Constitution), aside from being an
export tax forbidden under Section 2287 of the Revised Administrative Code. It further alleged that the tax is neither a
production nor a license tax which Ormoc City under Section 15-kk of its charter and under Section 2 of Republic Act 2264,
otherwise known as the Local Autonomy Act, is authorized to impose; and that the tax amounts to a customs duty, fee or
charge in violation of paragraph 1 of Section 2 of Republic Act 2264 because the tax is on both the sale and export of
sugar.
Answering, the defendants asserted that the tax ordinance was within defendant city's power to enact under the
Local Autonomy Act and that the same did not violate the afore-cited constitutional limitations. After pre-trial and
submission of the case on memoranda, the Court of First Instance, on August 6, 1964, rendered a decision that upheld the
constitutionality of the ordinance and declared the taxing power of defendant chartered city broadened by the Local
Autonomy Act to include all other forms of taxes, licenses or fees not excluded in its charter.
Appeal therefrom was directly taken to Us by plaintiff Ormoc Sugar Company, Inc. Appellant alleges the same
statutory and constitutional violations in the aforesaid taxing ordinance mentioned earlier.
Section 1 of the ordinance states: "There shall be paid to the City Treasurer on any and all productions of centrifugal
sugar milled at the Ormoc Sugar Company, Incorporated, in Ormoc City, a municipal tax equivalent to one per centum
(1%) per export sale to the United States of America and other foreign countries." Though referred to as a tax on the
export of centrifugal sugar produced at Ormoc Sugar Company, Inc. For production of sugar alone is not taxable; the only
time the tax applies is when the sugar produced is exported.
Appellant questions the authority of the defendant Municipal Board to levy such an export tax, in view of Section
2287 of the Revised Administrative Code which denies from municipal councils the power to impose an export tax. Section
2287 in part states: "It shall not be in the power of the municipal council to impose a tax in any form whatever, upon goods
202

and merchandise carried into the municipality, or out of the same, and any attempt to impose an import or export tax upon
such goods in the guise of an unreasonable charge for wharfage use of bridges or otherwise, shall be void."
Subsequently, however, Section 2 of Republic Act 2264 effective June 19, 1959, gave chartered cities, municipalities
and municipal districts authority to levy for public purposes just and uniform taxes, licenses or fees. Anent the
inconsistency between Section 2287 of the Revised Administrative Code and Section 2 of Republic Act 2264, this Court,
in Nin Bay Mining Co. v. Municipality of Roxas 4 held the former to have been repealed by the latter. And expressing Our
awareness of the transcendental effects that municipal export or import taxes or licenses will have on the national
economy, due to Section 2 of Republic Act 2264, We stated that there was no other alternative until Congress acts to
provide remedial measures to forestall any unfavorable results.
The point remains to be determined, however, whether constitutional limits on the power of taxation, specifically the
equal protection clause and rule of uniformity of taxation, were infringed.
The Constitution in the bill of rights provides: ". . . nor shall any person be denied the equal protection of the laws."
(Sec. 1 [1], Art. III) In Felwa vs. Salas, 5 We ruled that the equal protection clause applies only to persons or things
identically situated and does not bar a reasonable classification of the subject of legislation, and a classification is
reasonable where (1) it is based on substantial distinctions which make real differences; (2) these are germane to the
purpose of the law; (3) the classification applies not only to present conditions but also to future conditions which are
substantially identical to those of the present; (4) the classification applies only to those who belong to the same class.
A perusal of the requisites instantly shows that the questioned ordinance does not meet them, for it taxes only
centrifugal sugar produced and exported by the Ormoc Sugar Company, Inc. and none other. At the time of the taxing
ordinance's enactment, Ormoc Sugar Company, Inc., it is true, was the only sugar central in the city of Ormoc. Still, the
classification, to be reasonable, should be in terms applicable to future conditions as well. The taxing ordinance should not
be singular and exclusive as to exclude any subsequently established sugar central, of the same class as plaintiff, for the
coverage of the tax. As it is now, even if later a similar company is set up, it cannot be subject to the tax because the
ordinance expressly points only to Ormoc City Sugar Company, Inc. as the entity to be levied upon.
Appellant, however, is not entitled to interest; on the refund because the taxes were not arbitrarily collected
(Collector of Internal Revenue v. Binalbagan). 6 At the time of collection, the ordinance provided a sufficient basis to
preclude arbitrariness, the same being then presumed constitutional until declared otherwise.
WHEREFORE, the decision appealed from is hereby reversed, the challenged ordinance is declared
unconstitutional and the defendants-appellees are hereby ordered to refund the P12,087.50 plaintiff-appellant paid under
protest. No costs.
So ordered.
Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal, Zaldivar, Sanchez, Castro, Angeles and Fernando, JJ.,
concur.1wph1.t
April 30, 1957 G.R. No. L-9637
AMERICAN BIBLE SOCIETY, plaintiff-appellant, vs. CITY OF MANILA, defendant-appellee.
City Fiscal Eugenio Angeles and Juan Nabong for appellant.Assistant City Fiscal Arsenio Naawa for appellee.
FELIX, J.:
Plaintiff-appellant is a foreign, non-stock, non-profit, religious, missionary corporation duly registered and doing
business in the Philippines through its Philippine agency established in Manila in November, 1898, with its principal office
at 636 Isaac Peral in said City. The defendant appellee is a municipal corporation with powers that are to be exercised in
conformity with the provisions of Republic Act No. 409, known as the Revised Charter of the City of Manila.
In the course of its ministry, plaintiff's Philippine agency has been distributing and selling bibles and/or gospel
portions thereof (except during the Japanese occupation) throughout the Philippines and translating the same into several
Philippine dialects. On May 29 1953, the acting City Treasurer of the City of Manila informed plaintiff that it was conducting
the business of general merchandise since November, 1945, without providing itself with the necessary Mayor's permit and
municipal license, in violation of Ordinance No. 3000, as amended, and Ordinances Nos. 2529, 3028 and 3364, and
required plaintiff to secure, within three days, the corresponding permit and license fees, together with compromise
covering the period from the 4th quarter of 1945 to the 2nd quarter of 1953, in the total sum of P5,821.45 (Annex A).
Plaintiff protested against this requirement, but the City Treasurer demanded that plaintiff deposit and pay under
protest the sum of P5,891.45, if suit was to be taken in court regarding the same (Annex B). To avoid the closing of its
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business as well as further fines and penalties in the premises on October 24, 1953, plaintiff paid to the defendant under
protest the said permit and license fees in the aforementioned amount, giving at the same time notice to the City Treasurer
that suit would be taken in court to question the legality of the ordinances under which, the said fees were being collected
(Annex C), which was done on the same date by filing the complaint that gave rise to this action. In its complaint plaintiff
prays that judgment be rendered declaring the said Municipal Ordinance No. 3000, as amended, and Ordinances Nos.
2529, 3028 and 3364 illegal and unconstitutional, and that the defendant be ordered to refund to the plaintiff the sum of
P5,891.45 paid under protest, together with legal interest thereon, and the costs, plaintiff further praying for such other
relief and remedy as the court may deem just equitable.
Defendant answered the complaint, maintaining in turn that said ordinances were enacted by the Municipal Board
of the City of Manila by virtue of the power granted to it by section 2444, subsection (m-2) of the Revised Administrative
Code, superseded on June 18, 1949, by section 18, subsection (1) of Republic Act No. 409, known as the Revised Charter
of the City of Manila, and praying that the complaint be dismissed, with costs against plaintiff. This answer was replied by
the plaintiff reiterating the unconstitutionality of the often-repeated ordinances.
Before trial the parties submitted the following stipulation of facts:
COME NOW the parties in the above-entitled case, thru their undersigned attorneys and respectfully submit the
following stipulation of facts:
1. That the plaintiff sold for the use of the purchasers at its principal office at 636 Isaac Peral, Manila, Bibles, New
Testaments, bible portions and bible concordance in English and other foreign languages imported by it from the United
States as well as Bibles, New Testaments and bible portions in the local dialects imported and/or purchased locally; that
from the fourth quarter of 1945 to the first quarter of 1953 inclusive the sales made by the plaintiff were as follows:
Quarter
4th quarter 1945
1st quarter 1946
2nd quarter 1946
3rd quarter 1946
4th quarter 1946
1st quarter 1947
2nd quarter 1947
3rd quarter 1947

Amount of Sales
P1,244.21
2,206.85
1,950.38
2,235.99
3,256.04
13,241.07
15,774.55
14,654.13

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2. That the parties hereby reserve the right to present evidence of other facts not herein stipulated.
WHEREFORE, it is respectfully prayed that this case be set for hearing so that the parties may present further
evidence on their behalf. (Record on Appeal, pp. 15-16).
When the case was set for hearing, plaintiff proved, among other things, that it has been in existence in the
Philippines since 1899, and that its parent society is in New York, United States of America; that its, contiguous real
properties located at Isaac Peral are exempt from real estate taxes; and that it was never required to pay any municipal
license fee or tax before the war, nor does the American Bible Society in the United States pay any license fee or sales tax
for the sale of bible therein. Plaintiff further tried to establish that it never made any profit from the sale of its bibles, which
are disposed of for as low as one third of the cost, and that in order to maintain its operating cost it obtains substantial
remittances from its New York office and voluntary contributions and gifts from certain churches, both in the United States
and in the Philippines, which are interested in its missionary work. Regarding plaintiff's contention of lack of profit in the
sale of bibles, defendant retorts that the admissions of plaintiff-appellant's lone witness who testified on cross-examination
that bibles bearing the price of 70 cents each from plaintiff-appellant's New York office are sold here by plaintiff-appellant at
P1.30 each; those bearing the price of $4.50 each are sold here at P10 each; those bearing the price of $7 each are sold
here at P15 each; and those bearing the price of $11 each are sold here at P22 each, clearly show that plaintiff's
contention that it never makes any profit from the sale of its bible, is evidently untenable.
After hearing the Court rendered judgment, the last part of which is as follows:
As may be seen from the repealed section (m-2) of the Revised Administrative Code and the repealing portions
(o) of section 18 of Republic Act No. 409, although they seemingly differ in the way the legislative intent is expressed, yet
their meaning is practically the same for the purpose of taxing the merchandise mentioned in said legal provisions, and
that the taxes to be levied by said ordinances is in the nature of percentage graduated taxes (Sec. 3 of Ordinance No.
3000, as amended, and Sec. 1, Group 2, of Ordinance No. 2529, as amended by Ordinance No. 3364).
IN VIEW OF THE FOREGOING CONSIDERATIONS, this Court is of the opinion and so holds that this case
should be dismissed, as it is hereby dismissed, for lack of merits, with costs against the plaintiff.
Not satisfied with this verdict plaintiff took up the matter to the Court of Appeals which certified the case to Us for
the reason that the errors assigned to the lower Court involved only questions of law.
Appellant contends that the lower Court erred:
1. In holding that Ordinances Nos. 2529 and 3000, as respectively amended, are not unconstitutional;
2. In holding that subsection m-2 of Section 2444 of the Revised Administrative Code under which Ordinances Nos. 2592
and 3000 were promulgated, was not repealed by Section 18 of Republic Act No. 409;
3. In not holding that an ordinance providing for taxes based on gross sales or receipts, in order to be valid under the new
Charter of the City of Manila, must first be approved by the President of the Philippines; and
4. In holding that, as the sales made by the plaintiff-appellant have assumed commercial proportions, it cannot escape
from the operation of said municipal ordinances under the cloak of religious privilege.
The issues. As may be seen from the proceeding statement of the case, the issues involved in the present controversy
may be reduced to the following: (1) whether or not the ordinances of the City of Manila, Nos. 3000, as amended, and
2529, 3028 and 3364, are constitutional and valid; and (2) whether the provisions of said ordinances are applicable or not
to the case at bar.
Section 1, subsection (7) of Article III of the Constitution of the Republic of the Philippines, provides that:
(7) No law shall be made respecting an establishment of religion, or prohibiting the free exercise thereof, and the free
exercise and enjoyment of religious profession and worship, without discrimination or preference, shall forever be allowed.
No religion test shall be required for the exercise of civil or political rights.
Predicated on this constitutional mandate, plaintiff-appellant contends that Ordinances Nos. 2529 and 3000, as
respectively amended, are unconstitutional and illegal in so far as its society is concerned, because they provide for
religious censorship and restrain the free exercise and enjoyment of its religious profession, to wit: the distribution and sale
of bibles and other religious literature to the people of the Philippines.

205

Before entering into a discussion of the constitutional aspect of the case, We shall first consider the provisions of the
questioned ordinances in relation to their application to the sale of bibles, etc. by appellant. The records, show that by
letter of May 29, 1953 (Annex A), the City Treasurer required plaintiff to secure a Mayor's permit in connection with the
society's alleged business of distributing and selling bibles, etc. and to pay permit dues in the sum of P35 for the period
covered in this litigation, plus the sum of P35 for compromise on account of plaintiff's failure to secure the permit required
by Ordinance No. 3000 of the City of Manila, as amended. This Ordinance is of general application and not particularly
directed against institutions like the plaintiff, and it does not contain any provisions whatever prescribing religious
censorship nor restraining the free exercise and enjoyment of any religious profession. Section 1 of Ordinance No. 3000
reads as follows:
SEC. 1. PERMITS NECESSARY. It shall be unlawful for any person or entity to conduct or engage in any of the
businesses, trades, or occupations enumerated in Section 3 of this Ordinance or other businesses, trades, or occupations
for which a permit is required for the proper supervision and enforcement of existing laws and ordinances governing the
sanitation, security, and welfare of the public and the health of the employees engaged in the business specified in said
section 3 hereof, WITHOUT FIRST HAVING OBTAINED A PERMIT THEREFOR FROM THE MAYOR AND THE
NECESSARY LICENSE FROM THE CITY TREASURER.
The business, trade or occupation of the plaintiff involved in this case is not particularly mentioned in Section 3 of the
Ordinance, and the record does not show that a permit is required therefor under existing laws and ordinances for the
proper supervision and enforcement of their provisions governing the sanitation, security and welfare of the public and the
health of the employees engaged in the business of the plaintiff. However, sections 3 of Ordinance 3000 contains item No.
79, which reads as follows:
79. All other businesses, trades or occupations not mentioned in this Ordinance, except those upon which the
City is not empowered to license or to tax P5.00. Therefore, the necessity of the permit is made to depend upon the power
of the City to license or tax said business, trade or occupation.
As to the license fees that the Treasurer of the City of Manila required the society to pay from the 4th quarter of 1945 to the
1st quarter of 1953 in the sum of P5,821.45, including the sum of P50 as compromise, Ordinance No. 2529, as amended
by Ordinances Nos. 2779, 2821 and 3028 prescribes the following:
SEC. 1. FEES. Subject to the provisions of section 578 of the Revised Ordinances of the City of Manila, as amended,
there shall be paid to the City Treasurer for engaging in any of the businesses or occupations below enumerated,
quarterly, license fees based on gross sales or receipts realized during the preceding quarter in accordance with the rates
herein prescribed: PROVIDED, HOWEVER, That a person engaged in any businesses or occupation for the first time shall
pay the initial license fee based on the probable gross sales or receipts for the first quarter beginning from the date of the
opening of the business as indicated herein for the corresponding business or occupation.
xxxxxxxxx
GROUP 2. Retail dealers in new (not yet used) merchandise, which dealers are not yet subject to the payment of any
municipal tax, such as (1) retail dealers in general merchandise; (2) retail dealers exclusively engaged in the sale of . . .
books, including stationery.
xxxxxxxxx
As may be seen, the license fees required to be paid quarterly in Section 1 of said Ordinance No. 2529, as amended, are
not imposed directly upon any religious institution but upon those engaged in any of the business or occupations therein
enumerated, such as retail "dealers in general merchandise" which, it is alleged, cover the business or occupation of
selling bibles, books, etc.
Chapter 60 of the Revised Administrative Code which includes section 2444, subsection (m-2) of said legal body, as
amended by Act No. 3659, approved on December 8, 1929, empowers the Municipal Board of the City of Manila:
(M-2) To tax and fix the license fee on (a) dealers in new automobiles or accessories or both, and (b) retail dealers in new
(not yet used) merchandise, which dealers are not yet subject to the payment of any municipal tax.
For the purpose of taxation, these retail dealers shall be classified as (1) retail dealers in general merchandise, and (2)
retail dealers exclusively engaged in the sale of (a) textiles . . . (e) books, including stationery, paper and office supplies, . .
206

.: PROVIDED, HOWEVER, That the combined total tax of any debtor or manufacturer, or both, enumerated under these
subsections (m-1) and (m-2), whether dealing in one or all of the articles mentioned herein, SHALL NOT BE IN EXCESS
OF FIVE HUNDRED PESOS PER ANNUM.
and appellee's counsel maintains that City Ordinances Nos. 2529 and 3000, as amended, were enacted in virtue of the
power that said Act No. 3669 conferred upon the City of Manila. Appellant, however, contends that said ordinances are
longer in force and effect as the law under which they were promulgated has been expressly repealed by Section 102
of Republic Act No. 409 passed on June 18, 1949, known as the Revised Manila Charter.
Passing upon this point the lower Court categorically stated that Republic Act No. 409 expressly repealed the provisions of
Chapter 60 of the Revised Administrative Code but in the opinion of the trial Judge, although Section 2444 (m-2) of the
former Manila Charter and section 18 (o) of the new seemingly differ in the way the legislative intent was expressed, yet
their meaning is practically the same for the purpose of taxing the merchandise mentioned in both legal provisions and,
consequently, Ordinances Nos. 2529 and 3000, as amended, are to be considered as still in full force and effect
uninterruptedly up to the present.
Often the legislature, instead of simply amending the pre-existing statute, will repeal the old statute in its entirety and by
the same enactment re-enact all or certain portions of the preexisting law. Of course, the problem created by this sort of
legislative action involves mainly the effect of the repeal upon rights and liabilities which accrued under the original statute.
Are those rights and liabilities destroyed or preserved? The authorities are divided as to the effect of simultaneous repeals
and re-enactments. Some adhere to the view that the rights and liabilities accrued under the repealed act are destroyed,
since the statutes from which they sprang are actually terminated, even though for only a very short period of time. Others,
and they seem to be in the majority, refuse to accept this view of the situation, and consequently maintain that all rights an
liabilities which have accrued under the original statute are preserved and may be enforced, since the re-enactment
neutralizes the repeal, therefore, continuing the law in force without interruption. (Crawford-Statutory Construction, Sec.
322).
Appellant's counsel states that section 18 (o) of Republic Act No, 409 introduces a new and wider concept of taxation and
is different from the provisions of Section 2444(m-2) that the former cannot be considered as a substantial re-enactment of
the provisions of the latter. We have quoted above the provisions of section 2444(m-2) of the Revised Administrative Code
and We shall now copy hereunder the provisions of Section 18, subdivision (o) of Republic Act No. 409, which reads as
follows:
(o) To tax and fix the license fee on dealers in general merchandise, including importers and indentors, except those
dealers who may be expressly subject to the payment of some other municipal tax under the provisions of this section.
Dealers in general merchandise shall be classified as (a) wholesale dealers and (b) retail dealers. For purposes of the tax
on retail dealers, general merchandise shall be classified into four main classes: namely (1) luxury articles, (2) semi-luxury
articles, (3) essential commodities, and (4) miscellaneous articles. A separate license shall be prescribed for each class
but where commodities of different classes are sold in the same establishment, it shall not be compulsory for the owner to
secure more than one license if he pays the higher or highest rate of tax prescribed by ordinance. Wholesale dealers shall
pay the license tax as such, as may be provided by ordinance.
For purposes of this section, the term "General merchandise" shall include poultry and livestock, agricultural products, fish
and other allied products.
The only essential difference that We find between these two provisions that may have any bearing on the case at bar, is
that, while subsection (m-2) prescribes that the combined total tax of any dealer or manufacturer, or both, enumerated
under subsections (m-1) and (m-2), whether dealing in one or all of the articles mentioned therein, shall not be in excess
of P500 per annum, the corresponding section 18, subsection (o) of Republic Act No. 409, does not contain any limitation
as to the amount of tax or license fee that the retail dealer has to pay per annum. Hence, and in accordance with the
weight of the authorities above referred to that maintain that "all rights and liabilities which have accrued under the original
statute are preserved and may be enforced, since the reenactment neutralizes the repeal, therefore continuing the law in
force without interruption", We hold that the questioned ordinances of the City of Manila are still in force and effect.
Plaintiff, however, argues that the questioned ordinances, to be valid, must first be approved by the President of the
Philippines as per section 18, subsection (ii) ofRepublic Act No. 409, which reads as follows:
(ii) To tax, license and regulate any business, trade or occupation being conducted within the City of Manila, not otherwise
enumerated in the preceding subsections, including percentage taxes based on gross sales or receipts, subject to the
approval of the PRESIDENT, except amusement taxes.
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but this requirement of the President's approval was not contained in section 2444 of the former Charter of the City of
Manila under which Ordinance No. 2529 was promulgated. Anyway, as stated by appellee's counsel, the business of "retail
dealers in general merchandise" is expressly enumerated in subsection (o), section 18 of Republic Act No. 409; hence, an
ordinance prescribing a municipal tax on said business does not have to be approved by the President to be effective, as it
is not among those referred to in said subsection (ii). Moreover, the questioned ordinances are still in force, having been
promulgated by the Municipal Board of the City of Manila under the authority granted to it by law.
The question that now remains to be determined is whether said ordinances are inapplicable, invalid or unconstitutional if
applied to the alleged business of distribution and sale of bibles to the people of the Philippines by a religious corporation
like the American Bible Society, plaintiff herein.
With regard to Ordinance No. 2529, as amended by Ordinances Nos. 2779, 2821 and 3028, appellant contends that it is
unconstitutional and illegal because it restrains the free exercise and enjoyment of the religious profession and worship of
appellant.
Article III, section 1, clause (7) of the Constitution of the Philippines aforequoted, guarantees the freedom of religious
profession and worship. "Religion has been spoken of as a profession of faith to an active power that binds and elevates
man to its Creator" (Aglipay vs. Ruiz, 64 Phil., 201). It has reference to one's views of his relations to His Creator and to
the obligations they impose of reverence to His being and character, and obedience to His Will (Davis vs. Beason, 133
U.S., 342). The constitutional guaranty of the free exercise and enjoyment of religious profession and worship carries with
it the right to disseminate religious information. Any restraints of such right can only be justified like other restraints of
freedom of expression on the grounds that there is a clear and present danger of any substantive evil which the State has
the right to prevent". (Taada and Fernando on the Constitution of the Philippines, Vol. 1, 4th ed., p. 297). In the case at
bar the license fee herein involved is imposed upon appellant for its distribution and sale of bibles and other religious
literature:
In the case of Murdock vs. Pennsylvania, it was held that an ordinance requiring that a license be obtained before a
person could canvass or solicit orders for goods, paintings, pictures, wares or merchandise cannot be made to apply to
members of Jehovah's Witnesses who went about from door to door distributing literature and soliciting people to
"purchase" certain religious books and pamphlets, all published by the Watch Tower Bible & Tract Society. The "price" of
the books was twenty-five cents each, the "price" of the pamphlets five cents each. It was shown that in making the
solicitations there was a request for additional "contribution" of twenty-five cents each for the books and five cents each for
the pamphlets. Lesser sum were accepted, however, and books were even donated in case interested persons were
without funds.
On the above facts the Supreme Court held that it could not be said that petitioners were engaged in commercial rather
than a religious venture. Their activities could not be described as embraced in the occupation of selling books and
pamphlets. Then the Court continued:
"We do not mean to say that religious groups and the press are free from all financial burdens of government.
See Grosjean vs. American Press Co., 297 U.S., 233, 250, 80 L. ed. 660, 668, 56 S. Ct. 444. We have here something
quite different, for example, from a tax on the income of one who engages in religious activities or a tax on property used
or employed in connection with activities. It is one thing to impose a tax on the income or property of a preacher. It is quite
another to exact a tax from him for the privilege of delivering a sermon. The tax imposed by the City of Jeannette is a flat
license tax, payment of which is a condition of the exercise of these constitutional privileges. The power to tax the exercise
of a privilege is the power to control or suppress its enjoyment. . . . Those who can tax the exercise of this religious
practice can make its exercise so costly as to deprive it of the resources necessary for its maintenance. Those who can
tax the privilege of engaging in this form of missionary evangelism can close all its doors to all those who do not have a full
purse. Spreading religious beliefs in this ancient and honorable manner would thus be denied the needy. . .
It is contended however that the fact that the license tax can suppress or control this activity is unimportant if it does not do
so. But that is to disregard the nature of this tax. It is a license tax a flat tax imposed on the exercise of a privilege
granted by the Bill of Rights . . . The power to impose a license tax on the exercise of these freedom is indeed as potent as
the power of censorship which this Court has repeatedly struck down. . . . It is not a nominal fee imposed as a regulatory
measure to defray the expenses of policing the activities in question. It is in no way apportioned. It is flat license tax levied
and collected as a condition to the pursuit of activities whose enjoyment is guaranteed by the constitutional liberties of
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press and religion and inevitably tends to suppress their exercise. That is almost uniformly recognized as the inherent vice
and evil of this flat license tax."
Nor could dissemination of religious information be conditioned upon the approval of an official or manager even if the
town were owned by a corporation as held in the case of Marsh vs. State of Alabama (326 U.S. 501), or by the United
States itself as held in the case of Tucker vs. Texas (326 U.S. 517). In the former case the Supreme Court expressed the
opinion that the right to enjoy freedom of the press and religion occupies a preferred position as against the constitutional
right of property owners.
"When we balance the constitutional rights of owners of property against those of the people to enjoy freedom of press and
religion, as we must here, we remain mindful of the fact that the latter occupy a preferred position. . . . In our view the
circumstance that the property rights to the premises where the deprivation of property here involved, took place, were
held by others than the public, is not sufficient to justify the State's permitting a corporation to govern a community of
citizens so as to restrict their fundamental liberties and the enforcement of such restraint by the application of a State
statute." (Taada and Fernando on the Constitution of the Philippines, Vol. 1, 4th ed., p. 304-306).
Section 27 of Commonwealth Act No. 466, otherwise known as the National Internal Revenue Code, provides:
SEC. 27. EXEMPTIONS FROM TAX ON CORPORATIONS. The following organizations shall not be taxed under this
Title in respect to income received by them as such
(e) Corporations or associations organized and operated exclusively for religious, charitable, . . . or educational
purposes, . . .: Provided, however, That the income of whatever kind and character from any of its properties, real or
personal, or from any activity conducted for profit, regardless of the disposition made of such income, shall be liable to the
tax imposed under this Code;
Appellant's counsel claims that the Collector of Internal Revenue has exempted the plaintiff from this tax and says that
such exemption clearly indicates that the act of distributing and selling bibles, etc. is purely religious and does not fall
under the above legal provisions.
It may be true that in the case at bar the price asked for the bibles and other religious pamphlets was in some
instances a little bit higher than the actual cost of the same but this cannot mean that appellant was engaged in the
business or occupation of selling said "merchandise" for profit. For this reason We believe that the provisions of City of
Manila Ordinance No. 2529, as amended, cannot be applied to appellant, for in doing so it would impair its free exercise
and enjoyment of its religious profession and worship as well as its rights of dissemination of religious beliefs.
With respect to Ordinance No. 3000, as amended, which requires the obtention the Mayor's permit before any
person can engage in any of the businesses, trades or occupations enumerated therein, We do not find that it imposes any
charge upon the enjoyment of a right granted by the Constitution, nor tax the exercise of religious practices. In the case
of Coleman vs. City of Griffin, 189 S.E. 427, this point was elucidated as follows:
An ordinance by the City of Griffin, declaring that the practice of distributing either by hand or otherwise, circulars,
handbooks, advertising, or literature of any kind, whether said articles are being delivered free, or whether same are being
sold within the city limits of the City of Griffin, without first obtaining written permission from the city manager of the City of
Griffin, shall be deemed a nuisance and punishable as an offense against the City of Griffin, does not deprive defendant of
his constitutional right of the free exercise and enjoyment of religious profession and worship, even though it prohibits him
from introducing and carrying out a scheme or purpose which he sees fit to claim as a part of his religious system.
It seems clear, therefore, that Ordinance No. 3000 cannot be considered unconstitutional, even if applied to plaintiff
Society. But as Ordinance No. 2529 of the City of Manila, as amended, is not applicable to plaintiff-appellant and
defendant-appellee is powerless to license or tax the business of plaintiff Society involved herein for, as stated before, it
would impair plaintiff's right to the free exercise and enjoyment of its religious profession and worship, as well as its rights
of dissemination of religious beliefs, We find that Ordinance No. 3000, as amended is also inapplicable to said business,
trade or occupation of the plaintiff.
Wherefore, and on the strength of the foregoing considerations, We hereby reverse the decision appealed from,
sentencing defendant return to plaintiff the sum of P5,891.45 unduly collected from it. Without pronouncement as to costs.
It is so ordered.

209

G.R. No. L-60126 September 25, 1985

CAGAYAN ELECTRIC POWER & LIGHT CO., INC., petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE and COURT OF APPEALS, respondents.

Quasha, De Guzman Makalintal & Barot for petitioner.

AQUINO, J.:

This is about the liability of petitioner Cagayan Electric Power & Light Co., Inc. for income tax amounting to
P75,149.73 for the more than seven-month period of the year 1969 in addition to franchise tax.
The petitioner is the holder of a legislative franchise, Republic Act No. 3247, under which its payment of 3% tax
on its gross earnings from the sale of electric current is "in lieu of all taxes and assessments of whatever authority upon
privileges, earnings, income, franchise, and poles, wires, transformers, and insulators of the grantee, from which taxes and
assessments the grantee is hereby expressly exempted" (Sec. 3).
On June 27, 1968, Republic Act No. 5431 amended section 24 of the Tax Code by making liable for income
tax all corporate taxpayers not specifically exempt under paragraph (c) (1) of said section and section 27 of the Tax Code
notwithstanding the "provisions of existing special or general laws to the contrary". Thus, franchise companies were
subjected to income tax in addition to franchise tax.
However, in petitioner's case, its franchise was amended by Republic Act No. 6020, effective August 4, 1969, by
authorizing the petitioner to furnish electricity to the municipalities of Villanueva and Jasaan, Misamis Oriental in addition to
Cagayan de Oro City and the municipalities of Tagoloan and Opol. The amendment reenacted the tax exemption in its
original charter or neutralized the modification made by Republic Act No. 5431 more than a year before.
By reason of the amendment to section 24 of the Tax Code, the Commissioner of Internal Revenue in a demand
letter dated February 15, 1973 required the petitioner to pay deficiency income taxes for 1968-to 1971. The petitioner
contested the assessments. The Commissioner cancelled the assessments for 1970 and 1971 but insisted on those for
1968 and 1969.
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The petitioner filed a petition for review with the Tax Court, which on February 26, 1982 held the petitioner liable
only for the income tax for the period from January 1 to August 3, 1969 or before the passage of Republic Act No. 6020
which reiterated its tax exemption. The petitioner appealed to this Court.
It contends that the Tax Court erred (1) in not holding that the franchise tax paid by the petitioner is a
commutative tax which already includes the income tax; (2) in holding that Republic Act No. 5431 as amended, altered or
repealed petitioner's franchise; (3) in holding that petitioner's franchise is a contract which can be impaired by an implied
repeal and (4) in not holding that section 24(d) of the Tax Code should be construed strictly against the Government.
We hold that Congress could impair petitioner's legislative franchise by making it liable for income tax from which
heretofore it was exempted by virtue of the exemption provided for in section 3 of its franchise.
The Constitution provides that a franchise is subject to amendment, alteration or repeal by the Congress when
the public interest so requires (Sec. 8, Art. XIV, 1935 Constitution; Sec. 5, Art. XIV, 1973 Constitution),
Section 1 of petitioner's franchise, Republic Act No. 3247, provides that it is subject to the provisions of the
Constitution and to the terms and conditions established in Act No. 3636 whose section 12 provides that the franchise is
subject to amendment, alteration or repeal by Congress.
Republic Act No. 5431, in amending section 24 of the Tax Code by subjecting to income tax all corporate taxpayers not
expressly exempted therein and in section 27 of the Code, had the effect of withdrawing petitioner's exemption from
income tax.
The Tax Court acted correctly in holding that the exemption was restored by the subsequent enactment on August
4, 1969 of Republic Act No. 6020 which reenacted the said tax exemption. Hence, the petitioner is liable only for the
income tax for the period from January 1 to August 3, 1969 when its tax exemption was modified by Republic Act No.
5431.
It is relevant to note that franchise companies, like the Philippine Long Distance Telephone Company, have been
paying income tax in addition to the franchise tax.
However, it cannot be denied that the said 1969 assessment appears to be highly controversial. The
Commissioner at the outset was not certain as to petitioner's income tax liability. It had reason not to pay income tax
because of the tax exemption in its franchise.
For this reason, it should be liable only for tax proper and should not be held liable for the surcharge and interest.
(Advertising Associates, Inc. vs. Commissioner of Internal Revenue and Court of Tax Appeals, G. R. No. 59758, December
26, 1984,133 SCRA 765; Imus Electric Co., Inc. vs. Commissioner of Internal Revenue, 125 Phil. 1024; C.M. Hoskins &
Co., Inc. vs. Commissioner of Internal Revenue, L-28383, June 22, 1976, 71 SCRA 511.)
WHEREFORE, the judgment of the Tax Court is affirmed with the modification that the petitioner is liable only for
the tax proper and that it should not pay the delinquency penalties. No costs.
SO ORDERED.

211

G.R. No. L-39086 June 15, 1988

ABRA VALLEY COLLEGE, INC., represented by PEDRO V. BORGONIA, petitioner, vs. HON. JUAN P. AQUINO,
Judge, Court of First Instance, Abra; ARMIN M. CARIAGA, Provincial Treasurer, Abra; GASPAR V. BOSQUE,
Municipal Treasurer, Bangued, Abra; HEIRS OF PATERNO MILLARE, respondents.
PARAS, J.:
This is a petition for review on certiorari of the decision * of the defunct Court of First Instance of Abra, Branch I, dated
June 14, 1974, rendered in Civil Case No. 656, entitled "Abra Valley Junior College, Inc., represented by Pedro V.
Borgonia, plaintiff vs. Armin M. Cariaga as Provincial Treasurer of Abra, Gaspar V. Bosque as Municipal Treasurer of
Bangued, Abra and Paterno Millare, defendants," the decretal portion of which reads:
IN VIEW OF ALL THE FOREGOING, the Court hereby declares:
That the distraint seizure and sale by the Municipal Treasurer of Bangued, Abra, the Provincial Treasurer
of said province against the lot and building of the Abra Valley Junior College, Inc., represented by Director Pedro
Borgonia located at Bangued, Abra, is valid;
That since the school is not exempt from paying taxes, it should therefore pay all back taxes in the
amount of P5,140.31 and back taxes and penalties from the promulgation of this decision;
That the amount deposited by the plaintaff him the sum of P60,000.00 before the trial, be confiscated to
apply for the payment of the back taxes and for the redemption of the property in question, if the amount is less
than P6,000.00, the remainder must be returned to the Director of Pedro Borgonia, who represents the plaintiff
herein;
That the deposit of the Municipal Treasurer in the amount of P6,000.00 also before the trial must be
returned to said Municipal Treasurer of Bangued, Abra;
And finally the case is hereby ordered dismissed with costs against the plaintiff.
SO ORDERED. (Rollo, pp. 22-23)
Petitioner, an educational corporation and institution of higher learning duly incorporated with the Securities and Exchange
Commission in 1948, filed a complaint (Annex "1" of Answer by the respondents Heirs of Paterno Millare; Rollo, pp. 95-97)
on July 10, 1972 in the court a quo to annul and declare void the "Notice of Seizure' and the "Notice of Sale" of its lot and
building located at Bangued, Abra, for non-payment of real estate taxes and penalties amounting to P5,140.31. Said
"Notice of Seizure" of the college lot and building covered by Original Certificate of Title No. Q-83 duly registered in the
name of petitioner, plaintiff below, on July 6, 1972, by respondents Municipal Treasurer and Provincial Treasurer,
defendants below, was issued for the satisfaction of the said taxes thereon. The "Notice of Sale" was caused to be served
upon the petitioner by the respondent treasurers on July 8, 1972 for the sale at public auction of said college lot and
212

building, which sale was held on the same date. Dr. Paterno Millare, then Municipal Mayor of Bangued, Abra, offered the
highest bid of P6,000.00 which was duly accepted. The certificate of sale was correspondingly issued to him.
On August 10, 1972, the respondent Paterno Millare (now deceased) filed through counstel a motion to dismiss the
complaint.
On August 23, 1972, the respondent Provincial Treasurer and Municipal Treasurer, through then Provincial Fiscal Loreto C.
Roldan, filed their answer (Annex "2" of Answer by the respondents Heirs of Patemo Millare; Rollo, pp. 98-100) to the
complaint. This was followed by an amended answer (Annex "3," ibid, Rollo, pp. 101-103) on August 31, 1972.
On September 1, 1972 the respondent Paterno Millare filed his answer (Annex "5," ibid; Rollo, pp. 106-108).
On October 12, 1972, with the aforesaid sale of the school premises at public auction, the respondent Judge, Hon. Juan P.
Aquino of the Court of First Instance of Abra, Branch I, ordered (Annex "6," ibid; Rollo, pp. 109-110) the respondents
provincial and municipal treasurers to deliver to the Clerk of Court the proceeds of the auction sale. Hence, on December
14, 1972, petitioner, through Director Borgonia, deposited with the trial court the sum of P6,000.00 evidenced by PNB
Check No. 904369.
On April 12, 1973, the parties entered into a stipulation of facts adopted and embodied by the trial court in its questioned
decision. Said Stipulations reads:
STIPULATION OF FACTS
COME NOW the parties, assisted by counsels, and to this Honorable Court respectfully enter into the
following agreed stipulation of facts:
1. That the personal circumstances of the parties as stated in paragraph 1 of the complaint is admitted;
but the particular person of Mr. Armin M. Cariaga is to be substituted, however, by anyone who is
actually holding the position of Provincial Treasurer of the Province of Abra;
2. That the plaintiff Abra Valley Junior College, Inc. is the owner of the lot and buildings thereon located
in Bangued, Abra under Original Certificate of Title No. 0-83;
3. That the defendant Gaspar V. Bosque, as Municipal treasurer of Bangued, Abra caused to be served
upon the Abra Valley Junior College, Inc. a Notice of Seizure on the property of said school under
Original Certificate of Title No. 0-83 for the satisfaction of real property taxes thereon, amounting to
P5,140.31; the Notice of Seizure being the one attached to the complaint as Exhibit A;
4. That on June 8, 1972 the above properties of the Abra Valley Junior College, Inc. was sold at public
auction for the satisfaction of the unpaid real property taxes thereon and the same was sold to defendant
Paterno Millare who offered the highest bid of P6,000.00 and a Certificate of Sale in his favor was issued
by the defendant Municipal Treasurer.
5. That all other matters not particularly and specially covered by this stipulation of facts will be the
subject of evidence by the parties.

213

WHEREFORE, it is respectfully prayed of the Honorable Court to consider and admit this stipulation of
facts on the point agreed upon by the parties.
Bangued, Abra, April 12, 1973.
Sgd. Agripino Brillantes
Typ AGRIPINO BRILLANTES
Attorney for Plaintiff
Sgd. Loreto Roldan
Typ LORETO ROLDAN
Provincial Fiscal
Counsel for Defendants
Provincial Treasurer of
Abra and the Municipal
Treasurer of Bangued, Abra
Sgd. Demetrio V. Pre
Typ. DEMETRIO V. PRE
Attorney for Defendant
Paterno Millare (Rollo, pp. 17-18)
Aside from the Stipulation of Facts, the trial court among others, found the following: (a) that the school is recognized by
the government and is offering Primary, High School and College Courses, and has a school population of more than one
thousand students all in all; (b) that it is located right in the heart of the town of Bangued, a few meters from the plaza and
about 120 meters from the Court of First Instance building; (c) that the elementary pupils are housed in a two-storey
building across the street; (d) that the high school and college students are housed in the main building; (e) that the
Director with his family is in the second floor of the main building; and (f) that the annual gross income of the school
reaches more than one hundred thousand pesos.
From all the foregoing, the only issue left for the Court to determine and as agreed by the parties, is whether or not the lot
and building in question are used exclusively for educational purposes. (Rollo, p. 20)
The succeeding Provincial Fiscal, Hon. Jose A. Solomon and his Assistant, Hon. Eustaquio Z. Montero, filed a
Memorandum for the Government on March 25, 1974, and a Supplemental Memorandum on May 7, 1974, wherein they
opined "that based on the evidence, the laws applicable, court decisions and jurisprudence, the school building and school
lot used for educational purposes of the Abra Valley College, Inc., are exempted from the payment of taxes." (Annexes "B,"
"B-1" of Petition; Rollo, pp. 24-49; 44 and 49).
Nonetheless, the trial court disagreed because of the use of the second floor by the Director of petitioner school for
residential purposes. He thus ruled for the government and rendered the assailed decision.
After having been granted by the trial court ten (10) days from August 6, 1974 within which to perfect its appeal (Per Order
dated August 6, 1974; Annex "G" of Petition; Rollo, p. 57) petitioner instead availed of the instant petition for review
on certiorari with prayer for preliminary injunction before this Court, which petition was filed on August 17, 1974 (Rollo,
p.2).
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In the resolution dated August 16, 1974, this Court resolved to give DUE COURSE to the petition (Rollo, p. 58).
Respondents were required to answer said petition (Rollo, p. 74).
Petitioner raised the following assignments of error:
I
THE COURT A QUO ERRED IN SUSTAINING AS VALID THE SEIZURE AND SALE OF THE COLLEGE LOT AND
BUILDING USED FOR EDUCATIONAL PURPOSES OF THE PETITIONER.
II
THE COURT A QUO ERRED IN DECLARING THAT THE COLLEGE LOT AND BUILDING OF THE PETITIONER ARE
NOT USED EXCLUSIVELY FOR EDUCATIONAL PURPOSES MERELY BECAUSE THE COLLEGE PRESIDENT
RESIDES IN ONE ROOM OF THE COLLEGE BUILDING.
III
THE COURT A QUO ERRED IN DECLARING THAT THE COLLEGE LOT AND BUILDING OF THE PETITIONER ARE
NOT EXEMPT FROM PROPERTY TAXES AND IN ORDERING PETITIONER TO PAY P5,140.31 AS REALTY TAXES.
IV
THE COURT A QUO ERRED IN ORDERING THE CONFISCATION OF THE P6,000.00 DEPOSIT MADE IN THE COURT
BY PETITIONER AS PAYMENT OF THE P5,140.31 REALTY TAXES. (See Brief for the Petitioner, pp. 1-2)
The main issue in this case is the proper interpretation of the phrase "used exclusively for educational purposes."
Petitioner contends that the primary use of the lot and building for educational purposes, and not the incidental use
thereof, determines and exemption from property taxes under Section 22 (3), Article VI of the 1935 Constitution. Hence,
the seizure and sale of subject college lot and building, which are contrary thereto as well as to the provision of
Commonwealth Act No. 470, otherwise known as the Assessment Law, are without legal basis and therefore void.
On the other hand, private respondents maintain that the college lot and building in question which were subjected to
seizure and sale to answer for the unpaid tax are used: (1) for the educational purposes of the college; (2) as the
permanent residence of the President and Director thereof, Mr. Pedro V. Borgonia, and his family including the in-laws and
grandchildren; and (3) for commercial purposes because the ground floor of the college building is being used and rented
by a commercial establishment, the Northern Marketing Corporation (See photograph attached as Annex "8" (Comment;
Rollo, p. 90]).
Due to its time frame, the constitutional provision which finds application in the case at bar is Section 22, paragraph 3,
Article VI, of the then 1935 Philippine Constitution, which expressly grants exemption from realty taxes for "Cemeteries,
churches and parsonages or convents appurtenant thereto, and all lands, buildings, and improvements used
exclusively for religious, charitable or educational purposes ...
Relative thereto, Section 54, paragraph c, Commonwealth Act No. 470 as amended by Republic Act No. 409, otherwise
known as the Assessment Law, provides:
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The following are exempted from real property tax under the Assessment Law:
xxx xxx xxx
(c) churches and parsonages or convents appurtenant thereto, and all lands, buildings, and
improvements used exclusively for religious, charitable, scientific or educational purposes.
xxx xxx xxx
In this regard petitioner argues that the primary use of the school lot and building is the basic and controlling guide, norm
and standard to determine tax exemption, and not the mere incidental use thereof.
As early as 1916 in YMCA of Manila vs. Collector of lnternal Revenue, 33 Phil. 217 [1916], this Court ruled that while it
may be true that the YMCA keeps a lodging and a boarding house and maintains a restaurant for its members, still these
do not constitute business in the ordinary acceptance of the word, but an institution used exclusively for religious,
charitable and educational purposes, and as such, it is entitled to be exempted from taxation.
In the case of Bishop of Nueva Segovia v. Provincial Board of Ilocos Norte, 51 Phil. 352 [1972], this Court included in the
exemption a vegetable garden in an adjacent lot and another lot formerly used as a cemetery. It was clarified that the term
"used exclusively" considers incidental use also. Thus, the exemption from payment of land tax in favor of the convent
includes, not only the land actually occupied by the building but also the adjacent garden devoted to the incidental use of
the parish priest. The lot which is not used for commercial purposes but serves solely as a sort of lodging place, also
qualifies for exemption because this constitutes incidental use in religious functions.
The phrase "exclusively used for educational purposes" was further clarified by this Court in the cases of Herrera vs.
Quezon City Board of assessment Appeals, 3 SCRA 186 [1961] and Commissioner of Internal Revenue vs. Bishop of the
Missionary District, 14 SCRA 991 [1965], thus
Moreover, the exemption in favor of property used exclusively for charitable or educational purposes is
'not limited to property actually indispensable' therefor (Cooley on Taxation, Vol. 2, p. 1430), but extends
to facilities which are incidental to and reasonably necessary for the accomplishment of said purposes,
such as in the case of hospitals, "a school for training nurses, a nurses' home, property use to provide
housing facilities for interns, resident doctors, superintendents, and other members of the hospital staff,
and recreational facilities for student nurses, interns, and residents' (84 CJS 6621), such as "Athletic
fields" including "a firm used for the inmates of the institution. (Cooley on Taxation, Vol. 2, p. 1430).
The test of exemption from taxation is the use of the property for purposes mentioned in the Constitution (Apostolic Prefect
v. City Treasurer of Baguio, 71 Phil, 547 [1941]).
It must be stressed however, that while this Court allows a more liberal and non-restrictive interpretation of the phrase
"exclusively used for educational purposes" as provided for in Article VI, Section 22, paragraph 3 of the 1935 Philippine
Constitution, reasonable emphasis has always been made that exemption extends to facilities which are incidental to and
reasonably necessary for the accomplishment of the main purposes. Otherwise stated, the use of the school building or lot
for commercial purposes is neither contemplated by law, nor by jurisprudence. Thus, while the use of the second floor of
the main building in the case at bar for residential purposes of the Director and his family, may find justification under the
concept of incidental use, which is complimentary to the main or primary purposeeducational, the lease of the first floor
216

thereof to the Northern Marketing Corporation cannot by any stretch of the imagination be considered incidental to the
purpose of education.
It will be noted however that the aforementioned lease appears to have been raised for the first time in this Court. That the
matter was not taken up in the to court is really apparent in the decision of respondent Judge. No mention thereof was
made in the stipulation of facts, not even in the description of the school building by the trial judge, both embodied in the
decision nor as one of the issues to resolve in order to determine whether or not said properly may be exempted from
payment of real estate taxes (Rollo, pp. 17-23). On the other hand, it is noteworthy that such fact was not disputed even
after it was raised in this Court.
Indeed, it is axiomatic that facts not raised in the lower court cannot be taken up for the first time on appeal. Nonetheless,
as an exception to the rule, this Court has held that although a factual issue is not squarely raised below, still in the interest
of substantial justice, this Court is not prevented from considering a pivotal factual matter. "The Supreme Court is clothed
with ample authority to review palpable errors not assigned as such if it finds that their consideration is necessary in
arriving at a just decision." (Perez vs. Court of Appeals, 127 SCRA 645 [1984]).
Under the 1935 Constitution, the trial court correctly arrived at the conclusion that the school building as well as the lot
where it is built, should be taxed, not because the second floor of the same is being used by the Director and his family for
residential purposes, but because the first floor thereof is being used for commercial purposes. However, since only a
portion is used for purposes of commerce, it is only fair that half of the assessed tax be returned to the school involved.
PREMISES CONSIDERED, the decision of the Court of First Instance of Abra, Branch I, is hereby AFFIRMED subject to
the modification that half of the assessed tax be returned to the petitioner. SO ORDERED.

G.R. No. 27588, December 31, 1927

THE ROMAN CATHOLIC BISHOP OF NUEVA SEGOVIA, as representative of the Roman Catholic Apostolic
Church, plaintiff-appellant,
vs. THE PROVINCIAL BOARD OF ILOCOS NORTE, ET AL., defendants-appellants.
Vicente Llanes and Proceso Coloma for plaintiff-appellant.
Provincial Fiscal Santos for defendant-appellants.

AVANCEA, J.:
The plaintiff, the Roman Catholic Apostolic Church, represented by the Bishop of Nueva Segovia, possesses and is the
owner of a parcel of land in the municipality of San Nicolas, Ilocos Norte, all four sides of which face on public streets. On
the south side is a part of the churchyard, the convent and an adjacent lot used for a vegetable garden, containing an area
off 1,624 square meters, in which there is a stable and a well for the use of the convent. In the center is the remainder of
the churchyard and the church. On the north is an old cemetery with two of its walls still standing, and a portion where
formerly stood a tower, the base of which still be seen, containing a total area of 8,955 square meters.
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As required by the defendants, on July 3, 1925 the plaintiff paid, under protest, the land tax on the lot adjoining the convent
and the lot which formerly was the cemetery with the portion where the tower stood.
The plaintiff filed this action for the recovery of the sum paid by to the defendants by way of land tax, alleging that the
collection of this tax is illegal. The lower court absolved the defendants from the complaint in regard to the lot adjoining
convent and declared that the tax collected on the lot, which formerly was the cemetery and on the portion where the lower
stood, was illegal. Both parties appealed from this judgment.
The exemption in favor of the convent in the payment of the land tax (sec. 344 [c] Administrative Code) refers to the home
of the parties who presides over the church and who has to take care of himself in order to discharge his duties. In
therefore must, in the sense, include not only the land actually occupied by the church, but also the adjacent ground
destined to the ordinary incidental uses of man. Except in large cities where the density of the population and the
development of commerce require the use of larger tracts of land for buildings, a vegetable garden belongs to a house
and, in the case of a convent, it use is limited to the necessities of the priest, which comes under the exemption.
In regard to the lot which formerly was the cemetery, while it is no longer used as such, neither is it used for commercial
purposes and, according to the evidence, is now being used as a lodging house by the people who participate in religious
festivities, which constitutes an incidental use in religious functions, which also comes within the exemption.
The judgment appealed from is reversed in all it parts and it is held that both lots are exempt from land tax and the
defendants are ordered to refund to plaintiff whatever was paid as such tax, without any special pronouncement as to
costs. So ordered.

G.R. No. L-19445

August 31, 1965

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. BISHOP OF THE MISSIONARY DISTRICT OF THE
PHILIPPINE ISLANDS OF THE PROTESTANT EPISCOPAL CHURCH IN THE U.S.A. and THE COURT OF TAX
APPEALS, respondents.

Office of the Solicitor General for petitioner.

Ross, Selph and Carrascoso for respondents.
218

REGALA, J.:
This is an appeal taken from the Commissioner of Internal Revenue from a decision of the Court of Tax Appeals ordering
him to refund to the Bishop of the Missionary District of the Philippines Islands of the Protestant Episcopal in the U.S.A. the
sum of P118,847 which the latter had paid by way of compensating tax.
Respondent Bishop of the Missionary District of the Philippines Islands of the Protestant, Episcopal Church in the U.S.A. is
a corporation sole duly registered with the Securities and Exchange Commission. He is in charge of the administration of
the temporalities and the management of the estates and properties in the Philippines of the Domestic and Foreign
Missionary Society of the Protestant Episcopal Church in the United States (hereinafter referred to as Missionary Society).
On the other hand, the Missionary District of the Philippine Islands of the Protestant Episcopal Church the U.S.A.
(hereinafter referred to as Missionary District) is a duly incorporated and established religious society. It owns and operates
the St. Luke's Hospital in Quezon City, the Brent Hospital in Zamboanga City and the St. Stephen's High School in Manila.
On different dates in 1957, 1958 and 1959, the Missionary District in the Philippines received from the Missionary Society
in the United States various shipments of materials, supplies, equipment and other articles intended for use in the
construction and operation of the new St. Luke's Hospital in Quezon City and the Brent Hospital and St. Stephen's High
School. The Missionary District also received from a certain William Minnis of Canada a stove for the use of the Brent
Hospital.
On these shipments, the Commissioner of Internal Revenue levied and collected the total amount of P118,847 as
compensating tax.
The Bishop of the Missionary District filed claims for refund of the amount he had paid on the ground that under Republic
Act No. 1916, the materials and articles received by him were exempt from the payment of compensating tax. As the twoyear period for recovery of tax was about to expire, the Bishop of the Missionary District filed a petition for review in the
Court of Tax Appeals, without awaiting action on his claim for refund. Subsequently, he also filed two supplemental
petitions for review covering other shipments received by him and on which he had paid compensating taxes.
On August 21, 1959, the petitioner, the Commissioner of Internal Revenue denied respondent's claim for refund on the
ground that St. Luke's Hospital was not a charitable institution and, therefore, was not exempt under the law. This is also
the position he maintained in his answer to the first supplemental petition for review in the Tax Court.
After trial, the Tax Court rendered a decision holding the shipments exempt from taxation ordering the petitioner to refund
to the respondent the amount of P118,847. It denied a motion for reconsideration of its decision, prompting petitioner to
interpose this appeal.
Petitioner makes the following assignment of errors:
1. The shipments cannot be considered donations because the Missionary District is merely a branch of the Missionary
Society. The two hold identical interests.
2. The Tax Court's holding that the real donors are the people who contributed money to the Missionary Society in America
is based on the uncorroborated testimony of Robert Meyer, Treasurer of the Missionary District in the Philippines, who did
not have personal knowledge of the alleged contribution. The alleged contributors were not even identified.

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3. The St. Luke's Hospital is not a charitable institution and, therefore, is not exempt from taxation because its admits pay
patients. The Secretary of Finance states in his Dept. Order No. 18 that hospitals admitting pay patients and charity
patients are not charitable institutions.
This order was issued pursuant to the power given him by the last proviso of Republic Act No. 1916 which provides:
SECTION 1. The provisions of existing laws to the contrary notwithstanding, all donations in any form and all
articles imported into the Philippines, consigned to a duly incorporated or established international civic
organization, religious or charitable society or institution for civic, religious or charitable purposes shall be exempt
from the payment of all taxes and duties upon proof satisfactory to the Commissioner of Customs and/or Collector
of Internal Revenue that such donations in any form and articles so imported are donations for its use or for free
distribution and not for barter, sale or hire: Provided, however, That in case such are subsequently conveyed or
transferred to other parties for a consideration, taxes and duties shall be collected thereon at double the rate
provided under existing laws payable by the transferor: Provided, further, That rules and regulation, shall be
promulgated by the Department of Finance for the implementation of this Act.
This Court has already held that the following requisites must concur in order that a taxpayer may claim exemption under
the law (1) the imported articles must have been donated; (2) the donee must be a duly incorporated or established
international civic organization, religious or charitable society, or institution for civic religious or charitable purposes; and (3)
the articles so imported must have been donated for the use of the organization, society or institution or for free distribution
and not for barter, sale or hire. (Commissioner v. Church of Jesus Christ "New Jerusalem," G.R. No. L-15772, Oct. 31,
1961)
In this appeal, the petitioner contends that the importations in question cannot be considered "donations" because the
Missionary Society, which made the shipments, and the Missionary District in the Philippines are not different persons but
rather are one and the same, the latter being a mere branch of the former.
It should be enough to point out that by stipulation of the parties, the respondent Bishop is admitted to be a corporation
sole duly registered with the Securities and Exchange Commission and that the Missionary District is a "duly incorporated
and established religious society." They are, therefore, entities separate and distinct from the Missionary Society whose
address is at 281 Fourth South, New York 10, N.Y., U.S.A. The fact that the Missionary District, of which respondent is the
Bishop, is a branch of the Missionary Society is of no moment. For that matter, so is the Roman Catholic Church in the
Philippines a branch of the Universal Roman Catholic Apostolic Church, but it is a branch only in religious matters, in
matters of faith and dogma. In other respects, it is independent. (Roman Catholic Apostolic Administrator v. Land
Registration Commissioner, G.R. No. L-8451, December 20, 1957)
The Tax Court's finding that the materials and supplies were purchased by the Missionary Society with money obtained
from contributions from other people who should be considered the real donors is also assailed as being based on the
uncorroborated testimony of Robert Meyer, Treasurer of the Missionary District, who it is said, did not have personal
knowledge of the matter testified to by him. This is not so. As respondent points out, the various deeds of donation state in
paragraph 3 that the "Missionary Society is a non-profit organization and derives its support from voluntary contributions."
Petitioner's other point is that St. Luke's Hospital is not a charitable institution considering that it admits paying patients.
Indeed, it was on this ground that petitioner denied respondent's claim for refund. It is argued that pursuant to the last
proviso of Republic Act No. 1916, the Secretary of Finance issued Department Order No. 18 on October 20, 1958, stating
that
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Hospitals that admit pay patients and charity patients ... are not charitable institutions for purposes of Republic
Act No 1916.
Again, it should be enough to point out that the admission of pay patients does not detract from the charitable character of
a hospital, if, as in the case of St. Luke's Hospital, its funds are devoted exclusively to the Maintenance of the institution
(Cf., e.g., Herrera v. Quezon City Board of Assessment Appeals, G.R. No. 15270, September 30, 1961). The Secretary of
Finance cannot limit or otherwise qualify the enjoyment of this exemption granted under Republic Act No. 1916 in
implementing the law.
WHEREFORE, the decision appealed from is hereby affirmed with costs.

G.R. No. 124043 October 14, 1998

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. COURT OF APPEALS, COURT OF TAX APPEALS and
YOUNG MEN'S CHRISTIAN ASSOCIATION OF THE PHILIPPINES, INC., respondents.

PANGANIBAN, J.:
Is the income derived from rentals of real property owned by the Young Men's Christian Association of the Philippines, Inc.
(YMCA) established as "a welfare, educational and charitable non-profit corporation" subject to income tax under the
National Internal Revenue Code (NIRC) and the Constitution?
The Case
This is the main question raised before us in this petition for review on certiorari challenging two Resolutions issued by the
Court of Appeals 1 on September 28, 1995 2 and February 29, 1996 3 in CA-GR SP No. 32007. Both Resolutions affirmed
the Decision of the Court of Tax Appeals (CTA) allowing the YMCA to claim tax exemption on the latter's income from the
lease of its real property.
The Facts
The facts are undisputed. 4 Private Respondent YMCA is a non-stock, non-profit institution, which conducts various
programs and activities that are beneficial to the public, especially the young people, pursuant to its religious, educational
and charitable objectives.
In 1980, private respondent earned, among others, an income of P676,829.80 from leasing out a portion of its premises to
small shop owners, like restaurants and canteen operators, and P44,259.00 from parking fees collected from nonmembers. On July 2, 1984, the commissioner of internal revenue (CIR) issued an assessment to private respondent, in the
total amount of P415,615.01 including surcharge and interest, for deficiency income tax, deficiency expanded withholding
taxes on rentals and professional fees and deficiency withholding tax on wages. Private respondent formally protested the
221

assessment and, as a supplement to its basic protest, filed a letter dated October 8, 1985. In reply, the CIR denied the
claims of YMCA.
Contesting the denial of its protest, the YMCA filed a petition for review at the Court of Tax Appeals (CTA) on March 14,
1989. In due course, the CTA issued this ruling in favor of the YMCA:
. . . [T]he leasing of [private respondent's] facilities to small shop owners, to restaurant and canteen operators and
the operation of the parking lot are reasonably incidental to and reasonably necessary for the accomplishment of
the objectives of the [private respondents]. It appears from the testimonies of the witnesses for the [private
respondent] particularly Mr. James C. Delote, former accountant of YMCA, that these facilities were leased to
members and that they have to service the needs of its members and their guests. The rentals were minimal as
for example, the barbershop was only charged P300 per month. He also testified that there was actually no lot
devoted for parking space but the parking was done at the sides of the building. The parking was primarily for
members with stickers on the windshields of their cars and they charged P.50 for non-members. The rentals and
parking fees were just enough to cover the costs of operation and maintenance only. The earning[s] from these
rentals and parking charges including those from lodging and other charges for the use of the recreational
facilities constitute [the] bulk of its income which [is] channeled to support its many activities and attainment of its
objectives. As pointed out earlier, the membership dues are very insufficient to support its program. We find it
reasonably necessary therefore for [private respondent] to make [the] most out [of] its existing facilities to earn
some income. It would have been different if under the circumstances, [private respondent] will purchase a lot and
convert it to a parking lot to cater to the needs of the general public for a fee, or construct a building and lease it
out to the highest bidder or at the market rate for commercial purposes, or should it invest its funds in the buy and
sell of properties, real or personal. Under these circumstances, we could conclude that the activities are already
profit oriented, not incidental and reasonably necessary to the pursuit of the objectives of the association and
therefore, will fall under the last paragraph of Section 27 of the Tax Code and any income derived therefrom shall
be taxable.
Considering our findings that [private respondent] was not engaged in the business of operating or contracting [a]
parking lot, we find no legal basis also for the imposition of [a] deficiency fixed tax and [a] contractor's tax in the
amount[s] of P353.15 and P3,129.73, respectively.
xxx xxx xxx
WHEREFORE, in view of all the foregoing, the following assessments are hereby dismissed for lack of merit:
1980 Deficiency Fixed Tax P353,15;
1980 Deficiency Contractor's Tax P3,129.23;
1980 Deficiency Income Tax P372,578.20.
While the following assessments are hereby sustained:
1980 Deficiency Expanded Withholding Tax P1,798.93;
1980 Deficiency Withholding Tax on Wages P33,058.82
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plus 10% surcharge and 20% interest per annum from July 2, 1984 until fully paid but not to exceed three (3)
years pursuant to Section 51(e)(2) & (3) of the National Internal Revenue Code effective as of 1984. 5
Dissatisfied with the CTA ruling, the CIR elevated the case to the Court of Appeals (CA). In its Decision of February 16,
1994, the CA 6 initially decided in favor of the CIR and disposed of the appeal in the following manner:
Following the ruling in the afore-cited cases of Province of Abra vs. Hernando and Abra Valley College Inc. vs.
Aquino, the ruling of the respondent Court of Tax Appeals that "the leasing of petitioner's (herein respondent's)
facilities to small shop owners, to restaurant and canteen operators and the operation of the parking lot are
reasonably incidental to and reasonably necessary for the accomplishment of the objectives of the petitioners,
and the income derived therefrom are tax exempt, must be reversed.
WHEREFORE, the appealed decision is hereby REVERSED in so far as it dismissed the assessment for:
1980 Deficiency Income Tax P 353.15
1980 Deficiency Contractor's Tax P 3,129.23, &
1980 Deficiency Income Tax P 372,578.20
but the same is AFFIRMED in all other respect. 7
Aggrieved, the YMCA asked for reconsideration based on the following grounds:
I
The findings of facts of the Public Respondent Court of Tax Appeals being supported by substantial evidence
[are] final and conclusive.
II
The conclusions of law of [p]ublic [r]espondent exempting [p]rivate [r]espondent from the income on rentals of
small shops and parking fees [are] in accord with the applicable law and jurisprudence. 8
Finding merit in the Motion for Reconsideration filed by the YMCA, the CA reversed itself and promulgated on September
28, 1995 its first assailed Resolution which, in part, reads:
The Court cannot depart from the CTA's findings of fact, as they are supported by evidence beyond what is
considered as substantial.
xxx xxx xxx
The second ground raised is that the respondent CTA did not err in saying that the rental from small shops and
parking fees do not result in the loss of the exemption. Not even the petitioner would hazard the suggestion that
YMCA is designed for profit. Consequently, the little income from small shops and parking fees help[s] to keep its
head above the water, so to speak, and allow it to continue with its laudable work.
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The Court, therefore, finds the second ground of the motion to be meritorious and in accord with law and
jurisprudence.
WHEREFORE, the motion for reconsideration is GRANTED; the respondent CTA's decision is AFFIRMED in
toto. 9
The internal revenue commissioner's own Motion for Reconsideration was denied by Respondent Court in its second
assailed Resolution of February 29, 1996. Hence, this petition for review under Rule 45 of the Rules of Court. 10
The Issues
Before us, petitioner imputes to the Court of Appeals the following errors:
I
In holding that it had departed from the findings of fact of Respondent Court of Tax Appeals when it rendered its
Decision dated February 16, 1994; and
II
In affirming the conclusion of Respondent Court of Tax Appeals that the income of private respondent from rentals
of small shops and parking fees [is] exempt from taxation. 11
This Court's Ruling
The petition is meritorious.
First Issue:
Factual Findings of the CTA
Private respondent contends that the February 16, 1994 CA Decision reversed the factual findings of the CTA. On the
other hand, petitioner argues that the CA merely reversed the "ruling of the CTA that the leasing of private respondent's
facilities to small shop owners, to restaurant and canteen operators and the operation of parking lots are reasonably
incidental to and reasonably necessary for the accomplishment of the objectives of the private respondent and that the
income derived therefrom are tax exempt." 12 Petitioner insists that what the appellate court reversed was the legal
conclusion, not the factual finding, of the CTA. 13 The commissioner has a point.
Indeed, it is a basic rule in taxation that the factual findings of the CTA, when supported by substantial evidence, will be
disturbed on appeal unless it is shown that the said court committed gross error in the appreciation of facts. 14 In the
present case, this Court finds that the February 16, 1994 Decision of the CA did not deviate from this rule. The latter
merely applied the law to the facts as found by the CTA and ruled on the issue raised by the CIR: "Whether or not the
collection or earnings of rental income from the lease of certain premises and income earned from parking fees shall fall
under the last paragraph of Section 27 of the National Internal Revenue Code of 1977, as amended." 15
Clearly, the CA did not alter any fact or evidence. It merely resolved the aforementioned issue, as indeed it was expected
to. That it did so in a manner different from that of the CTA did not necessarily imply a reversal of factual findings.
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The distinction between a question of law and a question of fact is clear-cut. It has been held that "[t]here is a question of
law in a given case when the doubt or difference arises as to what the law is on a certain state of facts; there is a question
of fact when the doubt or difference arises as to the truth or falsehood of alleged facts." 16 In the present case, the CA did
not doubt, much less change, the facts narrated by the CTA. It merely applied the law to the facts. That its interpretation or
conclusion is different from that of the CTA is not irregular or abnormal.
Second Issue:
Is the Rental Income of the YMCA Taxable?
We now come to the crucial issue: Is the rental income of the YMCA from its real estate subject to tax? At the outset, we
set forth the relevant provision of the NIRC:
Sec. 27. Exemptions from tax on corporations. The following organizations shall not be taxed under this Title in
respect to income received by them as such
xxx xxx xxx
(g) Civic league or organization not organized for profit but operated exclusively for the promotion of social
welfare;
(h) Club organized and operated exclusively for pleasure, recreation, and other non-profitable purposes, no part
of the net income of which inures to the benefit of any private stockholder or member;
xxx xxx xxx
Notwithstanding the provisions in the preceding paragraphs, the income of whatever kind and character of the
foregoing organizations from any of their properties, real or personal, or from any of their activities conducted for
profit, regardless of the disposition made of such income, shall be subject to the tax imposed under this Code. (as
amended by Pres. Decree No. 1457)
Petitioner argues that while the income received by the organizations enumerated in Section 27 (now Section 26) of the
NIRC is, as a rule, exempted from the payment of tax "in respect to income received by them as such," the exemption
does not apply to income derived ". . . from any of their properties, real or personal, or from any of their activities
conducted for profit, regardless of the disposition made of such income . . . ."
Petitioner adds that "rental income derived by a tax-exempt organization from the lease of its properties, real or personal,
[is] not, therefore, exempt from income taxation, even if such income [is] exclusively used for the accomplishment of its
objectives." 17 We agree with the commissioner.
Because taxes are the lifeblood of the nation, the Court has always applied the doctrine of strict in interpretation in
construing tax exemptions. 18 Furthermore, a claim of statutory exemption from taxation should be manifest. and
unmistakable from the language of the law on which it is based. Thus, the claimed exemption "must expressly be granted
in a statute stated in a language too clear to be mistaken." 19
In the instant case, the exemption claimed by the YMCA is expressly disallowed by the very wording of the last paragraph
of then Section 27 of the NIRC which mandates that the income of exempt organizations (such as the YMCA) from any of
their properties, real or personal, be subject to the tax imposed by the same Code. Because the last paragraph of said
225

section unequivocally subjects to tax the rent income of the YMCA from its real property, 20the Court is duty-bound to abide
strictly by its literal meaning and to refrain from resorting to any convoluted attempt at construction.
It is axiomatic that where the language of the law is clear and unambiguous, its express terms must be
applied. 21Parenthetically, a consideration of the question of construction must not even begin, particularly when such
question is on whether to apply a strict construction or a liberal one on statutes that grant tax exemptions to "religious,
charitable and educational propert[ies] or institutions." 22
The last paragraph of Section 27, the YMCA argues, should be "subject to the qualification that the income from the
properties must arise from activities 'conducted for profit' before it may be considered taxable." 23 This argument is
erroneous. As previously stated, a reading of said paragraph ineludibly shows that the income from any property of exempt
organizations, as well as that arising from any activity it conducts for profit, is taxable. The phrase "any of their activities
conducted for profit" does not qualify the word "properties." This makes from the property of the organization taxable,
regardless of how that income is used whether for profit or for lofty non-profit purposes.
Verba legis non est recedendum. Hence, Respondent Court of Appeals committed reversible error when it allowed, on
reconsideration, the tax exemption claimed by YMCA on income it derived from renting out its real property, on the solitary
but unconvincing ground that the said income is not collected for profit but is merely incidental to its operation. The law
does not make a distinction. The rental income is taxable regardless of whence such income is derived and how it is used
or disposed of. Where the law does not distinguish, neither should we.
Constitutional Provisions
On Taxation
Invoking not only the NIRC but also the fundamental law, private respondent submits that Article VI, Section 28 of par. 3 of
the 1987 Constitution, 24 exempts "charitable institutions" from the payment not only of property taxes but also of income
tax from any source. 25 In support of its novel theory, it compares the use of the words "charitable institutions," "actually"
and "directly" in the 1973 and the 1987 Constitutions, on the one hand; and in Article VI, Section 22, par. 3 of the 1935
Constitution, on the other hand. 26
Private respondent enunciates three points. First, the present provision is divisible into two categories: (1) "[c]haritable
institutions, churches and parsonages or convents appurtenant thereto, mosques and non-profit cemeteries," the incomes
of which are, from whatever source, all tax-exempt; 27 and (2) "[a]ll lands, buildings and improvements actually and directly
used for religious, charitable or educational purposes," which are exempt only from property taxes. 28 Second, Lladoc v.
Commissioner of Internal Revenue, 29 which limited the exemption only to the payment of property taxes, referred to the
provision of the 1935 Constitution and not to its counterparts in the 1973 and the 1987 Constitutions. 30 Third, the phrase
"actually, directly and exclusively used for religious, charitable or educational purposes" refers not only to "all lands,
buildings and improvements," but also to the above-quoted first category which includes charitable institutions like the
private respondent. 31
The Court is not persuaded. The debates, interpellations and expressions of opinion of the framers of the Constitution
reveal their intent which, in turn, may have guided the people in ratifying the Charter. 32 Such intent must be effectuated.
Accordingly, Justice Hilario G. Davide, Jr., a former constitutional commissioner, who is now a member of this Court,
stressed during the Concom debates that ". . . what is exempted is not the institution itself . . .; those exempted from real
estate taxes are lands, buildings and improvements actually, directly and exclusively used for religious, charitable or
226

educational
purposes." 33 Father Joaquin G. Bernas, an eminent authority on the Constitution and also a member of the Concom,
adhered to the same view that the exemption created by said provision pertained only to property taxes. 34
In his treatise on taxation, Mr. Justice Jose C. Vitug concurs, stating that "[t]he tax exemption covers property taxes
only." 35 Indeed, the income tax exemption claimed by private respondent finds no basis in Article VI, Section 26, par. 3 of
the Constitution.
Private respondent also invokes Article XIV, Section 4, par. 3 of the Character, 36 claiming that the YMCA "is a non-stock,
non-profit educational institution whose revenues and assets are used actually, directly and exclusively for educational
purposes so it is exempt from taxes on its properties and income." 37 We reiterate that private respondent is exempt from
the payment of property tax, but not income tax on the rentals from its property. The bare allegation alone that it is a nonstock, non-profit educational institution is insufficient to justify its exemption from the payment of income tax.
As previously discussed, laws allowing tax exemption are construed strictissimi juris. Hence, for the YMCA to be granted
the exemption it claims under the aforecited provision, it must prove with substantial evidence that (1) it falls under the
classification non-stock, non-profit educational institution; and (2) the income it seeks to be exempted from taxation is
used actually, directly, and exclusively for educational purposes. However, the Court notes that not a scintilla of evidence
was submitted by private respondent to prove that it met the said requisites.
Is the YMCA an educational institution within the purview of Article XIV, Section 4, par. 3 of the Constitution? We rule that it
is not. The term "educational institution" or "institution of learning" has acquired a well-known technical meaning, of which
the members of the Constitutional Commission are deemed cognizant. 38 Under the Education Act of 1982, such term
refers to schools. 39 The school system is synonymous with formal education, 40 which "refers to the hierarchically
structured and chronologically graded learnings organized and provided by the formal school system and for which
certification is required in order for the learner to progress through the grades or move to the higher levels." 41 The Court
has examined the "Amended Articles of Incorporation" and "By-Laws" 43 of the YMCA, but found nothing in them that even
hints that it is a school or an educational institution. 44
Furthermore, under the Education Act of 1982, even non-formal education is understood to be school-based and "private
auspices such as foundations and civic-spirited organizations" are ruled out. 45 It is settled that the term "educational
institution," when used in laws granting tax exemptions, refers to a ". . . school seminary, college or educational
establishment . . . ." 46 Therefore, the private respondent cannot be deemed one of the educational institutions covered by
the constitutional provision under consideration.
. . . Words used in the Constitution are to be taken in their ordinary acceptation. While in its broadest and
best sense education embraces all forms and phases of instruction, improvement and development of
mind and body, and as well of religious and moral sentiments, yet in the common understanding and
application it means a place where systematic instruction in any or all of the useful branches of learning
is given by methods common to schools and institutions of learning. That we conceive to be the true
intent and scope of the term [educational institutions,] as used in the
Constitution. 47
Moreover, without conceding that Private Respondent YMCA is an educational institution, the Court also notes that the
former did not submit proof of the proportionate amount of the subject income that was actually, directly and exclusively
used for educational purposes. Article XIII, Section 5 of the YMCA by-laws, which formed part of the evidence submitted, is
patently insufficient, since the same merely signified that "[t]he net income derived from the rentals of the commercial
227

buildings shall be apportioned to the Federation and Member Associations as the National Board may decide." 48 In sum,
we find no basis for granting the YMCA exemption from income tax under the constitutional provision invoked.
Cases Cited by Private
Respondent Inapplicable
The cases 49 relied on by private respondent do not support its cause. YMCA of Manila v. Collector of Internal
Revenue 50and Abra Valley College, Inc. v. Aquino 51 are not applicable, because the controversy in both cases involved
exemption from the payment of property tax, not income tax. Hospital de San Juan de Dios, Inc. v. Pasay City 52 is not in
point either, because it involves a claim for exemption from the payment of regulatory fees, specifically electrical inspection
fees, imposed by an ordinance of Pasay City an issue not at all related to that involved in a claimed exemption from the
payment of income taxes imposed on property leases. In Jesus Sacred Heart College v. Com. of Internal Revenue, 53 the
party therein, which claimed an exemption from the payment of income tax, was an educational institution which submitted
substantial evidence that the income subject of the controversy had been devoted or used solely for educational purposes.
On the other hand, the private respondent in the present case has not given any proof that it is an educational institution,
or that part of its rent income is actually, directly and exclusively used for educational purposes.
Epilogue
In deliberating on this petition, the Court expresses its sympathy with private respondent. It appreciates the nobility of its
cause. However, the Court's power and function are limited merely to applying the law fairly and objectively. It cannot
change the law or bend it to suit its sympathies and appreciations. Otherwise, it would be overspilling its role and invading
the realm of legislation.
We concede that private respondent deserves the help and the encouragement of the government. It needs laws that can
facilitate, and not frustrate, its humanitarian tasks. But the Court regrets that, given its limited constitutional authority, it
cannot rule on the wisdom or propriety of legislation. That prerogative belongs to the political departments of government.
Indeed, some of the members of the Court may even believe in the wisdom and prudence of granting more tax exemptions
to private respondent. But such belief, however well-meaning and sincere, cannot bestow upon the Court the power to
change or amend the law.
WHEREFORE, the petition is GRANTED. The Resolutions of the Court of Appeals dated September 28, 1995 and
February 29, 1996 are hereby REVERSED and SET ASIDE. The Decision of the Court of Appeals dated February 16,
1995 is REINSTATED, insofar as it ruled that the income derived by petitioner from rentals of its real property is subject to
income tax. No pronouncement as to costs.
SO ORDERED.

SMART COMMUNICATIONS, INC.,

Petitioner,
- versus -

G.R. No. 155491

Present:
YNARES-SANTIAGO, J.,
Chairperson,
AUSTRIA-MARTINEZ,
CHICO-NAZARIO,
228

NACHURA, and
THE CITY OF DAVAO, represented herein by its Mayor REYES, JJ.
HON. RODRIGO R. DUTERTE, and the SANGGUNIANG
PANLUNGSOD OFDAVAO CITY,
Promulgated:
Respondents.
September 16, 2008
x------------------------------------------------------------------------------------x
DECISION
NACHURA, J.:
This is a petition for review on certiorari under Rule 45 of the Rules of Court filed by Smart Communications, Inc.
(Smart) against the City of Davao, represented by its Mayor, Hon. Rodrigo R. Duterte, and the Sangguniang Panlungsod
of Davao City, to annul the Decision[1] dated July 19, 2002 of the Regional Trial Court (RTC) and its Order [2] dated
September 26, 2002 in Sp. Civil Case No. 28,976-2002.
The Facts
On February 18, 2002, Smart filed a special civil action for declaratory relief [3] under Rule 63 of the Rules of Court, for the
ascertainment of its rights and obligations under the Tax Code of the City of Davao,[4] particularly Section 1, Article 10
thereof, the pertinent portion of which reads:
Notwithstanding any exemption granted by any law or other special law, there is hereby imposed a tax
on businesses enjoying a franchise, at a rate of seventy-five percent (75%) of one percent (1%) of the
gross annual receipts for the preceding calendar year based on the income or receipts realized within
the territorial jurisdiction of Davao City.
Smart contends that its telecenter in Davao City is exempt from payment of franchise tax to the City, on the following
grounds: (a) the issuance of its franchise under Republic Act (R.A.) No. 7294 [5] subsequent to R.A. No. 7160 shows the
clear legislative intent to exempt it from the provisions of R.A. 7160;[6] (b) Section 137 of R.A. No. 7160 can only apply to
exemptions already existing at the time of its effectivity and not to future exemptions; (c) the power of the City of Davao to
impose a franchise tax is subject to statutory limitations such as the in lieu of all taxes clause found in Section 9 of R.A.
No. 7294; and (d) the imposition of franchise tax by the City of Davao would amount to a violation of the constitutional
provision against impairment of contracts.[7]
On March 2, 2002, respondents filed their Answer[8] in which they contested the tax exemption claimed by Smart. They
invoked the power granted by the Constitution to local government units to create their own sources of revenue.[9]
On May 17, 2002, a pre-trial conference was held. Inasmuch as only legal issues were involved in the case, the RTC
issued an order requiring the parties to submit their respective memoranda and, thereafter, the case would be deemed
submitted for resolution.[10]
On July 19, 2002, the RTC rendered its Decision[11] denying the petition. The trial court noted that the ambiguity of the in
lieu of all taxes provision in R.A. No. 7294, on whether it covers both national and local taxes, must be resolved against
the taxpayer.[12]The RTC ratiocinated that tax exemptions are construed in strictissimi juris against the taxpayer and
liberally in favor of the taxing authority and, thus, those who assert a tax exemption must justify it with words too plain to be
mistaken and too categorical not to be misinterpreted. [13] On the issue of violation of the non-impairment clause of the
Constitution, the trial court cited Mactan Cebu International Airport Authority v. Marcos, [14] and declared that the citys power
to tax is based not merely on a valid delegation of legislative power but on the direct authority granted to it by the
fundamental law. It added that while such power may be subject to restrictions or conditions imposed by Congress, any
such legislated limitation must be consistent with the basic policy of local autonomy.[15]
Smart filed a motion for reconsideration which was denied by the trial court in an Order[16] dated September 26, 2002.
229

Thus, the instant case.

Smart assigns the following errors:
[a.] THE LOWER COURT ERRED IN NOT HOLDING THAT UNDER PETITIONERS FRANCHISE
(REPUBLIC ACT NO. 7294), WHICH CONTAINS THE IN LIEU OF ALL TAXES CLAUSE, AND WHICH
IS A SPECIAL LAW ENACTED SUBSEQUENT TO THE LOCAL GOVERNMENT CODE, NO
FRANCHISE TAX MAY BE IMPOSED ON PETITIONER BY RESPONDENT CITY.
[b.] THE LOWER COURT ERRED IN HOLDING THAT PETITIONERS FRANCHISE IS A GENERAL
LAW AND DID NOT REPEAL RELEVANT PROVISIONS REGARDING FRANCHISE TAX OF THE
LOCAL GOVERNMENT CODE, WHICH ACCORDING TO THE COURT IS A SPECIAL LAW.
[c.] THE LOWER COURT ERRED IN NOT HOLDING THAT SECTION 137 OF THE LOCAL
GOVERNMENT CODE, WHICH, IN RELATION TO SECTION 151 THEREOF, ALLOWS RESPONDENT
CITY TO IMPOSE THE FRANCHISE TAX, AND SECTION 193 OF THE CODE, WHICH PROVIDES
FOR WITHDRAWAL OF TAX EXEMPTION PRIVILEGES, ARE NOT APPLICABLE TO THIS CASE.
[d.] THE LOWER COURT ERRED IN NOT HOLDING THAT SECTIONS 137 AND 193 OF THE LOCAL
GOVERNMENT CODE REFER ONLY TO EXEMPTIONS ALREADY EXISTING AT THE TIME OF ITS
ENACTMENT BUT NOT TO FUTURE EXEMPTIONS.
[e.] THE LOWER COURT ERRED IN APPLYING THE RULE OF STATUTORY CONSTRUCTION THAT
TAX EXEMPTIONS ARE CONSTRUED STRICTLY AGAINST THE TAXPAYER.
[f.] THE LOWER COURT ERRED IN NOT HOLDING THAT PETITIONERS FRANCHISE (REPUBLIC
ACT NO. 7294) HAS BEEN AMENDED AND EXPANDED BY SECTION 23 OF REPUBLIC ACT NO.
7925, THE PUBLIC TELECOMMUNICATIONS POLICY ACT, TAKING INTO ACCOUNT THE
FRANCHISE OF GLOBE TELECOM, INC. (GLOBE) (REPUBLIC ACT NO. 7229), WHICH ARE
SPECIAL PROVISIONS AND WERE ENACTED SUBSEQUENT TO THE LOCAL GOVERNMENT
CODE, THEREBY PROVIDING AN ADDITIONAL GROUND WHY NO FRANCHISE TAX MAY BE
IMPOSED ON PETITIONER BY RESPONDENT CITY.
[g.] THE LOWER COURT ERRED IN DISREGARDING THE RULING OF THE DEPARTMENT OF
FINANCE, THROUGH ITS BUREAU OF LOCAL GOVERNMENT FINANCE, THAT PETITIONER IS
EXEMPT FROM THE PAYMENT OF THE FRANCHISE TAX IMPOSABLE BY LOCAL GOVERNMENT
UNITS UNDER THE LOCAL GOVERNMENT CODE.
[h.] THE LOWER COURT ERRED IN NOT HOLDING THAT THE IMPOSITION OF THE LOCAL
FRANCHISE TAX ON PETITIONER WOULD VIOLATE THE CONSTITUTIONAL PROHIBITION
AGAINST IMPAIRMENT OF CONTRACTS.
[i.] THE LOWER COURT ERRED IN DENYING THE PETITION BELOW.[17]
The Issue
In sum, the pivotal issue in this case is whether Smart is liable to pay the franchise tax imposed by the City of Davao.
The Ruling of the Court
We rule in the affirmative.
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I. Prospective Effect of R.A. No. 7160

On March 27, 1992, Smarts legislative franchise (R.A. No. 7294) took effect. Section 9 thereof, quoted hereunder, is at the
heart of the present controversy:
Section 9. Tax provisions. The grantee, its successors or assigns shall be liable to pay the same taxes
on their real estate buildings and personal property, exclusive of' this franchise, as other persons or
corporations which are now or hereafter may be required by law to pay.In addition thereto, the
grantee, its successors or assigns shall pay a franchise tax equivalent to three percent (3%) of all
gross receipts of the business transacted under this franchise by the grantee, its successors or
assigns and the said percentage shall be in lieu of all taxes on this franchise or earnings
thereof: Provided, That the grantee, its successors or assigns shall continue to be liable for income
taxes payable under Title II of the National Internal Revenue Code pursuant to Section 2 of Executive
Order No. 72 unless the latter enactment is amended or repealed, in which case the amendment or
repeal shall be applicable thereto.
The grantee shall file the return with and pay the tax due thereon to the Commissioner of Internal
Revenue or his duly authorized representative in accordance with the National Internal Revenue Code
and the return shall be subject to audit by the Bureau of Internal Revenue. (Emphasis supplied.)
Smart alleges that the in lieu of all taxes clause in Section 9 of its franchise exempts it from all taxes, both local and
national, except the national franchise tax (now VAT), income tax, and real property tax.[18]
On January 1, 1992, two months ahead of Smarts franchise, the Local Government Code (R.A. No. 7160) took effect.
Section 137, in relation to Section 151 of R.A. No. 7160, allowed the imposition of franchise tax by the local government
units; while Section 193 thereof provided for the withdrawal of tax exemption privileges granted prior to the issuance of
R.A. No. 7160 except for those expressly mentioned therein, viz.:
Section 137. Franchise Tax. Notwithstanding any exemption granted by any law or other special
law, the province may impose a tax on businesses enjoying a franchise, at the rate not exceeding
fifty percent (50%) of one percent (1%) of the gross annual receipts for the preceding calendar
year based on the incoming receipt, or realized, within its territorial jurisdiction.
In the case of a newly started business, the tax shall not exceed one-twentieth (1/20) of one
percent (1%) of the capital investment. In the succeeding calendar year, regardless of when the
business started to operate, the tax shall be based on the gross receipts for the preceding calendar year,
or any fraction thereon, as provided herein.
Section 151. Scope of Taxing Powers. Except as otherwise provided in this Code, the city may levy the
taxes, fees, and charges which the province or municipality may impose: Provided, however, That the
taxes, fees and charges levied and collected by highly urbanized and independent component cities
shall accrue to them and distributed in accordance with the provisions of this Code.
The rates of taxes that the city may levy may exceed the maximum rates allowed for the
province or municipality by not more than fifty percent (50%) except the rates of professional and
amusement taxes.
Section 193. Withdrawal of Tax Exemption Privileges. Unless otherwise provided in this Code, tax
exemptions or incentives granted to, or presently enjoyed by all persons, whether natural or juridical,
including government-owned or controlled corporations, except local water districts, cooperatives duly
231

registered under RA No. 6938, non-stock and non-profit hospitals and educational institutions, are
hereby withdrawn upon the effectivity of this Code. (Emphasis supplied.)
Smart argues that it is not covered by Section 137, in relation to Section 151 of R.A. No. 7160, because its franchise was
granted after the effectivity of the said law. We agree with Smarts contention on this matter. The withdrawal of tax
exemptions or incentives provided in R.A. No. 7160 can only affect those franchises granted prior to the effectivity of the
law. The intention of the legislature to remove all tax exemptions or incentives granted prior to the said law is evident in the
language of Section 193 of R.A. No. 7160. No interpretation is necessary.
II. The in lieu of all taxes Clause in R.A. No. 7294
The in lieu of all taxes clause in Smarts franchise is put in issue before the Court. In order to ascertain its meaning,
consistent with fundamentals of statutory construction, all the words in the statute must be considered. The grant of tax
exemption by R.A. No. 7294 is not to be interpreted from a consideration of a single portion or of isolated words or
clauses, but from a general view of the act as a whole. Every part of the statute must be construed with reference to the
context.[19]
Smart is of the view that the only taxes it may be made to bear under its franchise are the national franchise tax (now
VAT), income tax, and real property tax.[20] It claims exemption from the local franchise tax because the in lieu of taxes
clause in its franchise does not distinguish between national and local taxes.[21]
We pay heed that R.A. No. 7294 is not definite in granting exemption to Smart from local taxation. Section 9 of R.A. No.
7294 imposes on Smart a franchise tax equivalent to three percent (3%) of all gross receipts of the business transacted
under the franchise and the said percentage shall be in lieu of all taxes on the franchise or earnings thereof. R.A. No 7294
does not expressly provide what kind of taxes Smart is exempted from. It is not clear whether the in lieu of all taxes
provision in the franchise of Smart would include exemption from local or national taxation. What is clear is that Smart shall
pay franchise tax equivalent to three percent (3%) of all gross receipts of the business transacted under its franchise. But
whether the franchise tax exemption would include exemption from exactions by both the local and the national
government is not unequivocal.
The uncertainty in the in lieu of all taxes clause in R.A. No. 7294 on whether Smart is exempted from both local and
national franchise tax must be construed strictly against Smart which claims the exemption. Smart has the burden of
proving that, aside from the imposed 3% franchise tax, Congress intended it to be exempt from all kinds of franchise taxes
whether local or national. However, Smart failed in this regard.
Tax exemptions are never presumed and are strictly construed against the taxpayer and liberally in favor of the taxing
authority.[22]They can only be given force when the grant is clear and categorical.[23] The surrender of the power to tax,
when claimed, must be clearly shown by a language that will admit of no reasonable construction consistent with the
reservation of the power. If the intention of the legislature is open to doubt, then the intention of the legislature must be
resolved in favor of the State.[24]
In this case, the doubt must be resolved in favor of the City of Davao. The in lieu of all taxes clause applies only to national
internal revenue taxes and not to local taxes. As appropriately pointed out in the separate opinion of Justice Antonio T.
Carpio in a similar case[25] involving a demand for exemption from local franchise taxes:
[T]he "in lieu of all taxes" clause in Smart's franchise refers only to taxes, other than income tax,
imposed under the National Internal Revenue Code. The "in lieu of all taxes" clause does not apply to
local taxes. The proviso in the first paragraph of Section 9 of Smart's franchise states that the grantee
shall "continue to be liable for income taxes payable under Title II of the National Internal Revenue
Code." Also, the second paragraph of Section 9 speaks of tax returns filed and taxes paid to the
"Commissioner of Internal Revenue or his duly authorized representative in accordance with the
National Internal Revenue Code." Moreover, the same paragraph declares that the tax returns "shall be
232

subject to audit by the Bureau of Internal Revenue." Nothing is mentioned in Section 9 about local taxes.
The clear intent is for the "in lieu of all taxes" clause to apply only to taxes under the National Internal
Revenue Code and not to local taxes. Even with respect to national internal revenue taxes, the "in lieu of
all taxes" clause does not apply to income tax.
If Congress intended the "in lieu of all taxes" clause in Smart's franchise to also apply to local taxes,
Congress would have expressly mentioned the exemption from municipal and provincial taxes.
Congress could have used the language in Section 9(b) of Clavecilla's old franchise, as follows:
x x x in lieu of any and all taxes of any kind, nature or description levied, established or
collected by any authority whatsoever, municipal, provincial or national, from which the
grantee is hereby expressly exempted, x x x. (Emphasis supplied).
However, Congress did not expressly exempt Smart from local taxes. Congress used the "in lieu of all
taxes" clause only in reference to national internal revenue taxes. The only interpretation, under the rule
on strict construction of tax exemptions, is that the "in lieu of all taxes" clause in Smart's franchise refers
only to national and not to local taxes.
It should be noted that the in lieu of all taxes clause in R.A. No. 7294 has become functus officio with the abolition of the
franchise tax on telecommunications companies.[26] As admitted by Smart in its pleadings, it is no longer paying the 3%
franchise tax mandated in its franchise. Currently, Smart along with other telecommunications companies pays the
uniform 10% value-added tax.[27]
The VAT on sale of services of telephone franchise grantees is equivalent to 10% of gross receipts derived from the sale or
exchange of services.[28] R.A. No. 7716, as amended by the Expanded Value Added Tax Law (R.A. No. 8241), the pertinent
portion of which is hereunder quoted, amended Section 9 of R.A. No. 7294:
SEC. 102. Value-added tax on sale of services and use or lease of properties. (a) Rate and base of
tax. There shall be levied assessed and collected, a value-added tax equivalent to ten percent
(10%) of gross receipts derived from the sale or exchange of services, including the use or lease
of properties.
The phrase sale or exchange of services means the performance of all kinds of services in the
Philippines for others for a fee, remuneration or consideration, including those performed or
rendered by construction and service contractors; stock, real estate, commercial, customs and
immigration brokers; lessors of property, whether personal or real; warehousing services; lessors or
distributors of cinematographic films; persons engaged in milling, processing, manufacturing or
repacking goods for others; proprietors, operators or keepers of hotels, motels, rest houses, pension
houses, inns, resorts; proprietors or operators of restaurants, refreshment parlors, cafes and other
eating places, including clubs and caterers; dealers in securities; lending investors; transportation
contractors on their transport of goods or cargoes, including persons who transport goods or cargoes for
hire and other domestic common carriers by land, air, and water relative to their transport of goods or
cargoes; services of franchise grantees of telephone and telegraph, radio and television
broadcasting and all other franchise grantees except those under Section 117 of this
Code; services of banks, non-bank financial intermediaries and finance companies; and non-life
insurance companies (except their crop insurances) including surety, fidelity, indemnity and bonding
companies; and similar services regardless of whether or not the performance thereof calls for the
exercise or use of the physical or mental faculties. x x x.[29]
R.A. No. 7716, specifically Section 20 thereof, expressly repealed the provisions of all special laws relative to
the rate of franchise taxes. It also repealed, amended, or modified all other laws, orders, issuances, rules and
233

regulations, or parts thereof which are inconsistent with it.[30] In effect, the in lieu of all taxes clause in R.A. No.
7294 was rendered ineffective by the advent of the VAT Law.[31]
However, the franchise tax that the City of Davao may impose must comply with Sections 137 and 151 of R.A. No.
7160. Thus, the local franchise tax that may be imposed by the City must not exceed 50% of 1% of the gross annual
receipts for the preceding calendar year based on the income on receipts realized within the territorial jurisdiction
of Davao.
III. Opinion of the Bureau of Local Government Finance (BLGF)
In support of its argument that the in lieu of all taxes clause is to be construed as an exemption from local franchise taxes,
Smart submits the opinion of the Department of Finance, through the BLGF, dated August 13, 1998 and February 24,
1998, regarding the franchises of Smart and Globe, respectively.[32] Smart presents the same arguments as the Philippine
Long Distance Telephone Company in the previous cases already decided by this Court.[33] As previously held by the
Court, the findings of the BLGF are not conclusive on the courts:
[T]he BLGF opined that 23 of R.A. No. 7925 amended the franchise of petitioner and in effect restored
its exemptions from local taxes. Petitioner contends that courts should not set aside conclusions
reached by the BLGF because its function is precisely the study of local tax problems and it has
necessarily developed an expertise on the subject.
To be sure, the BLGF is not an administrative agency whose findings on questions of fact are given
weight and deference in the courts. The authorities cited by petitioner pertain to the Court of Tax
Appeals, a highly specialized court which performs judicial functions as it was created for the review of
tax cases. In contrast, the BLGF was created merely to provide consultative services and technical
assistance to local governments and the general public on local taxation, real property assessment, and
other related matters, among others. The question raised by petitioner is a legal question, to wit, the
interpretation of 23 of R.A. No. 7925. There is, therefore, no basis for claiming expertise for the BLGF
that administrative agencies are said to possess in their respective fields.
Petitioner likewise argues that the BLGF enjoys the presumption of regularity in the performance of its
duty. It does enjoy this presumption, but this has nothing to do with the question in this case. This case
does not concern the regularity of performance of the BLGF in the exercise of its duties, but the
correctness of its interpretation of a provision of law.[34]
IV. Tax Exclusion/Tax Exemption
Smart gives another perspective of the in lieu of all taxes clause in Section 9 of R.A. No. 7294 in order to avoid the
payment of local franchise tax. It says that, viewed from another angle, the in lieu of all taxes clause partakes of the nature
of a tax exclusion and not a tax exemption. A tax exemption means that the taxpayer does not pay any tax at all. Smart
pays VAT, income tax, and real property tax. Thus, what it enjoys is more accurately a tax exclusion.[35]
However, as previously held by the Court, both in their nature and effect, there is no essential difference between a tax
exemption and a tax exclusion. An exemption is an immunity or a privilege; it is the freedom from a charge or burden to
which others are subjected. An exclusion, on the other hand, is the removal of otherwise taxable items from the reach of
taxation, e.g., exclusions from gross income and allowable deductions. An exclusion is, thus, also an immunity or privilege
which frees a taxpayer from a charge to which others are subjected. Consequently, the rule that a tax exemption should be
applied in strictissimi juris against the taxpayer and liberally in favor of the government applies equally to tax exclusions.[36]
V. Section 23 of R.A. No. 7925
To further its claim, Smart invokes Section 23 of the Public Telecommunications Policy Act (R.A. No. 7925):
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SECTION 23. Equality of Treatment in the Telecommunications Industry. Any advantage, favor,
privilege, exemption, or immunity granted under existing franchises, or may hereafter be
granted, shall ipso facto become part of previously granted telecommunications franchise and
shall be accorded immediately and unconditionally to the grantees of such franchises: Provided,
however, That the foregoing shall neither apply to nor affect provisions of telecommunications franchises
concerning territory covered by the franchise, the life span of the franchise, or the type of service
authorized by the franchise. (Emphasis supplied.)
In sum, Smart wants us to interpret anew Section 23 of R.A. No. 7925, in connection with the franchise of Globe (R.A. No.
7227),[37] which was enacted on March 19, 1992.
Allegedly, by virtue of Section 23 of R.A. No. 7925, otherwise known as the most favored treatment clause or the equality
clause, the provision in the franchise of Globe exempting it from local taxes is automatically incorporated in the franchise
of Smart.[38]Smart posits that, since the franchise of Globe contains a provision exempting it from municipal or local
franchise tax, this provision should also benefit Smart by virtue of Section 23 of R.A. No. 7925. The provision in Globes
franchise invoked by Smart reads:
(b) The grantee shall further pay to the Treasurer of the Philippines each year after the audit and
approval of the accounts as prescribed in this Act, one and one-half per centum of all gross receipts from
business transacted under this franchise by the said grantee in the Philippines, in lieu of any and all
taxes of any kind, nature or description levied, established or collected by any authority
whatsoever, municipal, provincial or national, from which the grantee is hereby expressly
exempted, effective from the date of the approval of Republic Act Numbered Sixteen hundred eighteen.
[39]

We find no reason to disturb the previous pronouncements of this Court regarding the interpretation of Section 23 of R.A.
No. 7925.As aptly explained in the en banc decision of this Court in Philippine Long Distance Telephone Company, Inc. v.
City of Davao,[40]and recently in Digital Telecommunications Philippines, Inc. (Digitel) v. Province of Pangasinan,
[41]
Congress, in approving Section 23 of R.A. No. 7925, did not intend it to operate as a blanket tax exemption to all
telecommunications entities.[42] The language of Section 23 of R.A. No. 7925 and the proceedings of both Houses of
Congress are bereft of anything that would signify the grant of tax exemptions to all telecommunications entities, including
those whose exemptions had been withdrawn by R.A. No. 7160. [43] The term exemption in Section 23 of R.A. No. 7925
does not mean tax exemption. The term refers to exemption from certain regulations and requirements imposed by the
National Telecommunications Commission.[44]
Furthermore, in the franchise of Globe (R.A. No. 7229), the legislature incontrovertibly stated that it will be liable for one
and one-half per centum of all gross receipts from business transacted under the franchise, in lieu of any and all taxes of
any kind, nature, or description levied, established, or collected by any authority whatsoever, municipal, provincial, or
national, from which the grantee is hereby expressly exempted. [45] The grant of exemption from municipal, provincial, or
national is clear and categorical that aside from the franchise tax collected by virtue of R.A. No. 7229, no other franchise
tax may be collected from Globe regardless of who the taxing power is. No such provision is found in the franchise of
Smart; the kind of tax from which it is exempted is not clearly specified.
As previously explained by the Court, the stance of Smart would lead to absurd consequences.
The acceptance of petitioner's theory would result in absurd consequences. To illustrate: In its franchise,
Globe is required to pay a franchise tax of only one and one-half percentum (1%) of all gross receipts
from its transactions while Smart is required to pay a tax of three percent (3%) on all gross receipts from
business transacted. Petitioner's theory would require that, to level the playing field, any "advantage,
favor, privilege, exemption, or immunity" granted to Globe must be extended to all telecommunications
companies, including Smart. If, later, Congress again grants a franchise to another telecommunications
company imposing, say, one percent (1%) franchise tax, then all other telecommunications franchises
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will have to be adjusted to "level the playing field" so to speak. This could not have been the intent of
Congress in enacting 23 of Rep. Act 7925. Petitioner's theory will leave the Government with the burden
of having to keep track of all granted telecommunications franchises, lest some companies be treated
unequally. It is different if Congress enacts a law specifically granting uniform advantages, favor,
privilege, exemption, or immunity to all telecommunications entities.[46]
VI. Non-impairment Clause of the Constitution
Another argument of Smart is that the imposition of the local franchise tax by the City of Davao would violate the
constitutional prohibition against impairment of contracts. The franchise, according to petitioner, is in the nature of a
contract between the government and Smart.[47]
However, we find that there is no violation of Article III, Section 10 of the 1987 Philippine Constitution. As previously
discussed, the franchise of Smart does not expressly provide for exemption from local taxes. Absent the express provision
on such exemption under the franchise, we are constrained to rule against it. The in lieu of all taxes clause in Section 9 of
R.A. No. 7294 leaves much room for interpretation. Due to this ambiguity in the law, the doubt must be resolved against
the grant of tax exemption.
Moreover, Smarts franchise was granted with the express condition that it is subject to amendment, alteration, or repeal.
[48]
As held in Tolentino v. Secretary of Finance: [49]
It is enough to say that the parties to a contract cannot, through the exercise of prophetic discernment,
fetter the exercise of the taxing power of the State. For not only are existing laws read into contracts in
order to fix obligations as between parties, but the reservation of essential attributes of sovereign power
is also read into contracts as a basic postulate of the legal order. The policy of protecting contracts
against impairment presupposes the maintenance of a government which retains adequate authority to
secure the peace and good order of society.
In truth, the Contract Clause has never been thought as a limitation on the exercise of the States power
of taxation save only where a tax exemption has been granted for a valid consideration. x x x.
WHEREFORE, the instant petition is DENIED for lack of merit. Costs against petitioner.
SO ORDERED.

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