Republic of the Philippines

SUPREME COURT
Manila

THIRD DIVISION

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.

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 of P110,677,668.52 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.

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 Philex's position. Since
these pending claims have not yet been established or determined with certainty, it follows that no
legal compensation can take place. Hence, the BIR reiterated its demand that Philex settle the
amount plus interest within 30 days from the receipt of the letter.

In view of the BIR's denial of the offsetting of Philex's claim for VAT input credit/refund against its
excise 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 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 latter's tax obligation to 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:

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-
GR. CV No. 36975. 11 Nonetheless, on April 8, 1996, the Court of Appeals a 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 Tax Credit Date

By Claims For Certificate of

VAT refund/credit Number Issue Amount

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.

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 a tax cannot await the results
of a lawsuit against the government.
The ruling in Francia has been applied to the subsequent case of Caltex Philippines, Inc. v.
Commission on Audit, 20which reiterated that:

. . . 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, Philex's 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-Suyoc pronouncement was
based was omitted. 22 Accordingly, the doctrine enunciated in Itogon-Suyoc cannot be invoked by
Philex.

Despite the foregoing rulings clearly adverse to Philex's 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 tax 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 Philex's 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 Philex's 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 taxpayer 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 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 honestly 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 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.

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 a valid reason for the non-
payment of its tax liabilities.

To be sure, this is not to 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 claim 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.

Art. 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.

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 enjoyed 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., Kapunan and Purisima, JJ., concur.

Republic of the Philippines

SUPREME COURT
Manila

EN BANC

G.R. No. L-18994 June 29, 1963

MELECIO R. DOMINGO, as Commissioner of Internal Revenue, petitioner,

vs.
HON. LORENZO C. GARLITOS, in his capacity as Judge of the Court of First Instance of
Leyte,
and SIMEONA K. PRICE, as Administratrix of the Intestate Estate of the late Walter Scott
Price, respondents.

Office of the Solicitor General and Atty. G. H. Mantolino for petitioner.

Benedicto and Martinez for respondents.

LABRADOR, J.:

This is a petition for certiorari and mandamus against the Judge of the Court of First Instance of
Leyte, Ron. Lorenzo C. Garlitos, presiding, seeking to annul certain orders of the court and for an
order in this Court directing the respondent court below to execute the judgment in favor of the
Government against the estate of Walter Scott Price for internal revenue taxes.

It appears that in Melecio R. Domingo vs. Hon. Judge S. C. Moscoso, G.R. No. L-14674, January
30, 1960, this Court declared as final and executory the order for the payment by the estate of the
estate and inheritance taxes, charges and penalties, amounting to P40,058.55, issued by the Court
of First Instance of Leyte in, special proceedings No. 14 entitled "In the matter of the Intestate Estate
of the Late Walter Scott Price." In order to enforce the claims against the estate the fiscal presented
a petition dated June 21, 1961, to the court below for the execution of the judgment. The petition
was, however, denied by the court which held that the execution is not justifiable as the Government
is indebted to the estate under administration in the amount of P262,200. The orders of the court
below dated August 20, 1960 and September 28, 1960, respectively, are as follows:

Atty. Benedicto submitted a copy of the contract between Mrs. Simeona K. Price,
Administratrix of the estate of her late husband Walter Scott Price and Director Zoilo Castrillo
of the Bureau of Lands dated September 19, 1956 and acknowledged before Notary Public
Salvador V. Esguerra, legal adviser in Malacaang to Executive Secretary De Leon dated
December 14, 1956, the note of His Excellency, Pres. Carlos P. Garcia, to Director Castrillo
dated August 2, 1958, directing the latter to pay to Mrs. Price the sum ofP368,140.00, and an
extract of page 765 of Republic Act No. 2700 appropriating the sum of P262.200.00 for the
payment to the Leyte Cadastral Survey, Inc., represented by the administratrix Simeona K.
Price, as directed in the above note of the President. Considering these facts, the Court
orders that the payment of inheritance taxes in the sum of P40,058.55 due the Collector of
Internal Revenue as ordered paid by this Court on July 5, 1960 in accordance with the order
of the Supreme Court promulgated July 30, 1960 in G.R. No. L-14674, be deducted from the
amount of P262,200.00 due and payable to the Administratrix Simeona K. Price, in this
estate, the balance to be paid by the Government to her without further delay. (Order of
August 20, 1960)

The Court has nothing further to add to its order dated August 20, 1960 and it orders that the
payment of the claim of the Collector of Internal Revenue be deferred until the Government
shall have paid its accounts to the administratrix herein amounting to P262,200.00. It may
not be amiss to repeat that it is only fair for the Government, as a debtor, to its accounts to
its citizens-creditors before it can insist in the prompt payment of the latter's account to it,
specially taking into consideration that the amount due to the Government draws interests
while the credit due to the present state does not accrue any interest. (Order of September
28, 1960)

The petition to set aside the above orders of the court below and for the execution of the claim of the
Government against the estate must be denied for lack of merit. The ordinary procedure by which to
settle claims of indebtedness against the estate of a deceased person, as an inheritance tax, is for
the claimant to present a claim before the probate court so that said court may order the
administrator to pay the amount thereof. To such effect is the decision of this Court in Aldamiz vs.
Judge of the Court of First Instance of Mindoro, G.R. No. L-2360, Dec. 29, 1949, thus:

. . . a writ of execution is not the proper procedure allowed by the Rules of Court for the
payment of debts and expenses of administration. The proper procedure is for the court to
order the sale of personal estate or the sale or mortgage of real property of the deceased
and all debts or expenses of administrator and with the written notice to all the heirs legatees
and devisees residing in the Philippines, according to Rule 89, section 3, and Rule 90,
section 2. And when sale or mortgage of real estate is to be made, the regulations contained
in Rule 90, section 7, should be complied with. 1wph1.t

Execution may issue only where the devisees, legatees or heirs have entered into
possession of their respective portions in the estate prior to settlement and payment of the
debts and expenses of administration and it is later ascertained that there are such debts
and expenses to be paid, in which case "the court having jurisdiction of the estate may, by
order for that purpose, after hearing, settle the amount of their several liabilities, and order
how much and in what manner each person shall contribute, and may issue execution if
circumstances require" (Rule 89, section 6; see also Rule 74, Section 4; Emphasis supplied.)
And this is not the instant case.
The legal basis for such a procedure is the fact that in the testate or intestate proceedings to settle
the estate of a deceased person, the properties belonging to the estate are under the jurisdiction of
the court and such jurisdiction continues until said properties have been distributed among the heirs
entitled thereto. During the pendency of the proceedings all the estate is in custodia legis and the
proper procedure is not to allow the sheriff, in case of the court judgment, to seize the properties but
to ask the court for an order to require the administrator to pay the amount due from the estate and
required to be paid.

Another ground for denying the petition of the provincial fiscal is the fact that the court having
jurisdiction of the estate had found that the claim of the estate against the Government has been
recognized and an amount of P262,200 has already been appropriated for the purpose by a
corresponding law (Rep. Act No. 2700). Under the above circumstances, both the claim of the
Government for inheritance taxes and the claim of the intestate for services rendered have already
become overdue and demandable is well as fully liquidated. Compensation, therefore, takes place
by operation of law, in accordance with the provisions of Articles 1279 and 1290 of the Civil Code,
and both debts are extinguished to the concurrent amount, thus:

ART. 1200. When all the requisites mentioned in article 1279 are present, compensation
takes effect by operation of law, and extinguished both debts to the concurrent amount,
eventhough the creditors and debtors are not aware of the compensation.

It is clear, therefore, that the petitioner has no clear right to execute the judgment for taxes against
the estate of the deceased Walter Scott Price. Furthermore, the petition
for certiorari and mandamus is not the proper remedy for the petitioner. Appeal is the remedy.

The petition is, therefore, dismissed, without costs.

Padilla, Bautista Angelo, Concepcion, Barrera, Paredes, Dizon, Regala and Makalintal, JJ., concur.
Bengzon, C.J., took no part.

Republic of the Philippines

SUPREME COURT
Manila

FIRST DIVISION

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 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:

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.

THIRD DIVISION

G.R. No. 149110 April 9, 2003

NATIONAL POWER CORPORATION, petitioner,

vs.
CITY OF CABANATUAN, respondent.

PUNO, J.:

This is a petition for review1 of the Decision2 and the Resolution3 of the Court of Appeals dated
March 12, 2001 and July 10, 2001, respectively, finding petitioner National Power Corporation (NPC)
liable to pay franchise tax to respondent City of Cabanatuan.

Petitioner is a government-owned and controlled corporation created under Commonwealth Act No.
120, as amended.4 It is tasked to undertake the "development of hydroelectric generations of power
and the production of electricity from nuclear, geothermal and other sources, as well as, the
transmission of electric power on a nationwide basis."5 Concomitant to its mandated duty, petitioner
has, among others, the power to construct, operate and maintain power plants, auxiliary plants,
power stations and substations for the purpose of developing hydraulic power and supplying such
power to the inhabitants.6

For many years now, petitioner sells electric power to the residents of Cabanatuan City, posting a
gross income of P107,814,187.96 in 1992.7 Pursuant to section 37 of Ordinance No. 165-92,8 the
respondent assessed the petitioner a franchise tax amounting to P808,606.41, representing 75% of
1% of the latter's gross receipts for the preceding year.9

Petitioner, whose capital stock was subscribed and paid wholly by the Philippine
Government,10 refused to pay the tax assessment. It argued that the respondent has no authority to
impose tax on government entities. Petitioner also contended that as a non-profit organization, it is
exempted from the payment of all forms of taxes, charges, duties or fees11 in accordance with sec.
13 of Rep. Act No. 6395, as amended, viz:

"Sec.13. Non-profit Character of the Corporation; Exemption from all Taxes, Duties, Fees,
Imposts and Other Charges by Government and Governmental Instrumentalities.- The
Corporation shall be non-profit and shall devote all its return from its capital investment, as
well as excess revenues from its operation, for expansion. To enable the Corporation to pay
its indebtedness and obligations and in furtherance and effective implementation of the
policy enunciated in Section one of this Act, the Corporation is hereby exempt:

(a) From the payment of all taxes, duties, fees, imposts, charges, costs and service fees in
any court or administrative proceedings in which it may be a party, restrictions and duties to
the Republic of the Philippines, its provinces, cities, municipalities and other government
agencies and instrumentalities;

(b) From all income taxes, franchise taxes and realty taxes to be paid to the National
Government, its provinces, cities, municipalities and other government agencies and
instrumentalities;

(c) From all import duties, compensating taxes and advanced sales tax, and wharfage fees
on import of foreign goods required for its operations and projects; and

(d) From all taxes, duties, fees, imposts, and all other charges imposed by the Republic of
the Philippines, its provinces, cities, municipalities and other government agencies and
instrumentalities, on all petroleum products used by the Corporation in the generation,
transmission, utilization, and sale of electric power."12

The respondent filed a collection suit in the Regional Trial Court of Cabanatuan City, demanding that
petitioner pay the assessed tax due, plus a surcharge equivalent to 25% of the amount of tax, and
2% monthly interest.13Respondent alleged that petitioner's exemption from local taxes has been
repealed by section 193 of Rep. Act No. 7160,14 which reads as follows:

"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 government owned or controlled corporations, except local water
districts, cooperatives duly registered under R.A. No. 6938, non-stock and non-profit
hospitals and educational institutions, are hereby withdrawn upon the effectivity of this
Code."

On January 25, 1996, the trial court issued an Order15 dismissing the case. It ruled that the tax
exemption privileges granted to petitioner subsist despite the passage of Rep. Act No. 7160 for the
following reasons: (1) Rep. Act No. 6395 is a particular law and it may not be repealed by Rep. Act
No. 7160 which is a general law; (2) section 193 of Rep. Act No. 7160 is in the nature of an implied
repeal which is not favored; and (3) local governments have no power to tax instrumentalities of the
national government. Pertinent portion of the Order reads:

"The question of whether a particular law has been repealed or not by a subsequent law is a
matter of legislative intent. The lawmakers may expressly repeal a law by incorporating
therein repealing provisions which expressly and specifically cite(s) the particular law or
laws, and portions thereof, that are intended to be repealed. A declaration in a statute,
usually in its repealing clause, that a particular and specific law, identified by its number or
title is repealed is an express repeal; all others are implied repeal. Sec. 193 of R.A. No. 7160
 is an implied repealing clause because it fails to identify the act or acts that are intended to
be repealed. It is a well-settled rule of statutory construction that repeals of statutes by
implication are not favored. The presumption is against inconsistency and repugnancy for the
legislative is presumed to know the existing laws on the subject and not to have enacted
inconsistent or conflicting statutes. It is also a well-settled rule that, generally, general law
does not repeal a special law unless it clearly appears that the legislative has intended by
the latter general act to modify or repeal the earlier special law. Thus, despite the passage of
R.A. No. 7160 from which the questioned Ordinance No. 165-92 was based, the tax
exemption privileges of defendant NPC remain.

Another point going against plaintiff in this case is the ruling of the Supreme Court in the
case of Basco vs. Philippine Amusement and Gaming Corporation, 197 SCRA 52, where it
was held that:

'Local governments have no power to tax instrumentalities of the National

Government. PAGCOR is a government owned or controlled corporation with an
original charter, PD 1869. All of its shares of stocks are owned by the National
Government. xxx 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 mere local government.'

Like PAGCOR, NPC, being a government owned and controlled corporation with an original
charter and its shares of stocks owned by the National Government, is beyond the taxing
power of the Local Government. Corollary to this, it should be noted here that in the NPC
Charter's declaration of Policy, Congress declared that: 'xxx (2) the total electrification of the
Philippines through the development of power from all services to meet the needs of
industrial development and dispersal and needs of rural electrification are primary objectives
of the nations which shall be pursued coordinately and supported by all instrumentalities and
agencies of the government, including its financial institutions.' (underscoring supplied). To
allow plaintiff to subject defendant to its tax-ordinance would be to impede the avowed goal
of this government instrumentality.

Unlike the State, a city or municipality has no inherent power of taxation. Its taxing power is
limited to that which is provided for in its charter or other statute. Any grant of taxing power is
to be construed strictly, with doubts resolved against its existence.

From the existing law and the rulings of the Supreme Court itself, it is very clear that the
plaintiff could not impose the subject tax on the defendant."16

On appeal, the Court of Appeals reversed the trial court's Order17 on the ground that section 193, in
relation to sections 137 and 151 of the LGC, expressly withdrew the exemptions granted to the
petitioner.18 It ordered the petitioner to pay the respondent city government the following: (a) the sum
of P808,606.41 representing the franchise tax due based on gross receipts for the year 1992, (b) the
tax due every year thereafter based in the gross receipts earned by NPC, (c) in all cases, to pay a
surcharge of 25% of the tax due and unpaid, and (d) the sum of P 10,000.00 as litigation expense.19

On April 4, 2001, the petitioner filed a Motion for Reconsideration on the Court of Appeal's Decision.
This was denied by the appellate court, viz:

"The Court finds no merit in NPC's motion for reconsideration. Its arguments reiterated
therein that the taxing power of the province under Art. 137 (sic) of the Local Government
Code refers merely to private persons or corporations in which category it (NPC) does not
 belong, and that the LGC (RA 7160) which is a general law may not impliedly repeal the
NPC Charter which is a special lawfinds the answer in Section 193 of the LGC to the effect
that '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 xxx are hereby withdrawn.' The repeal is direct and unequivocal, not implied.

IN VIEW WHEREOF, the motion for reconsideration is hereby DENIED.

SO ORDERED."20

In this petition for review, petitioner raises the following issues:

"A. THE COURT OF APPEALS GRAVELY ERRED IN HOLDING THAT NPC, A PUBLIC
NON-PROFIT CORPORATION, IS LIABLE TO PAY A FRANCHISE TAX AS IT FAILED TO
CONSIDER THAT SECTION 137 OF THE LOCAL GOVERNMENT CODE IN RELATION
TO SECTION 131 APPLIES ONLY TO PRIVATE PERSONS OR CORPORATIONS
ENJOYING A FRANCHISE.

B. THE COURT OF APPEALS GRAVELY ERRED IN HOLDING THAT NPC'S EXEMPTION

FROM ALL FORMS OF TAXES HAS BEEN REPEALED BY THE PROVISION OF THE
LOCAL GOVERNMENT CODE AS THE ENACTMENT OF A LATER LEGISLATION,
WHICH IS A GENERAL LAW, CANNOT BE CONSTRUED TO HAVE REPEALED A
SPECIAL LAW.

C. THE COURT OF APPEALS GRAVELY ERRED IN NOT CONSIDERING THAT AN

EXERCISE OF POLICE POWER THROUGH TAX EXEMPTION SHOULD PREVAIL OVER
THE LOCAL GOVERNMENT CODE."21

It is beyond dispute that the respondent city government has the authority to issue Ordinance No.
165-92 and impose an annual tax on "businesses enjoying a franchise," pursuant to section 151 in
relation to section 137 of the LGC, viz:

"Sec. 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 a 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 thereof, as provided herein." (emphasis supplied)

x x x

Sec. 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."

Petitioner, however, submits that it is not liable to pay an annual franchise tax to the respondent city
government. It contends that sections 137 and 151 of the LGC in relation to section 131, limit the
taxing power of the respondent city government to private entities that are engaged in trade or
occupation for profit.22

Section 131 (m) of the LGC defines a "franchise" as "a right or privilege, affected with public interest
which is conferred upon private persons or corporations, under such terms and conditions as the
government and its political subdivisions may impose in the interest of the public welfare, security
and safety." From the phraseology of this provision, the petitioner claims that the word "private"
modifies the terms "persons" and "corporations." Hence, when the LGC uses the term "franchise,"
petitioner submits that it should refer specifically to franchises granted to private natural persons and
to private corporations.23 Ergo, its charter should not be considered a "franchise" for the purpose of
imposing the franchise tax in question.

On the other hand, section 131 (d) of the LGC defines "business" as "trade or commercial activity
regularly engaged in as means of livelihood or with a view to profit." Petitioner claims that it is not
engaged in an activity for profit, in as much as its charter specifically provides that it is a "non-profit
organization." In any case, petitioner argues that the accumulation of profit is merely incidental to its
operation; all these profits are required by law to be channeled for expansion and improvement of its
facilities and services.24

Petitioner also alleges that it is an instrumentality of the National Government,25 and as such, may
not be taxed by the respondent city government. It cites the doctrine in Basco vs. Philippine
Amusement and Gaming Corporation26where this Court held that local governments have no power
to tax instrumentalities of the National Government, viz:

"Local governments have no power to tax instrumentalities of the National Government.

PAGCOR has a dual role, to operate and regulate gambling casinos. The latter role 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. (MC Culloch v.
Maryland, 4 Wheat 316, 4 L Ed. 579)'

This doctrine emanates from the 'supremacy' of the National Government over local
governments.

'Justice Holmes, speaking for the Supreme Court, made reference 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 seriously burden it from accomplishment of them.'
(Antieau, Modern Constitutional Law, Vol. 2, p. 140, italics supplied)

Otherwise, mere creatures 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 tool regulation' (U.S. v. Sanchez, 340 US 42).

The power to tax which was called by Justice Marshall as the 'power to destroy' (Mc Culloch
v. Maryland, supra) cannot be allowed to defeat an instrumentality or creation of the very
entity which has the inherent power to wield it."27

Petitioner contends that section 193 of Rep. Act No. 7160, withdrawing the tax privileges of
government-owned or controlled corporations, is in the nature of an implied repeal. A special law, its
charter cannot be amended or modified impliedly by the local government code which is a general
law. Consequently, petitioner claims that its exemption from all taxes, fees or charges under its
charter subsists despite the passage of the LGC, viz:

"It is a well-settled rule of statutory construction that repeals of statutes by implication are not
favored and as much as possible, effect must be given to all enactments of the legislature.
Moreover, it has to be conceded that the charter of the NPC constitutes a special law.
Republic Act No. 7160, is a general law. It is a basic rule in statutory construction that the
enactment of a later legislation which is a general law cannot be construed to have repealed
a special law. Where there is a conflict between a general law and a special statute, the
special statute should prevail since it evinces the legislative intent more clearly than the
general statute."28

Finally, petitioner submits that the charter of the NPC, being a valid exercise of police power, should
prevail over the LGC. It alleges that the power of the local government to impose franchise tax is
subordinate to petitioner's exemption from taxation; "police power being the most pervasive, the
least limitable and most demanding of all powers, including the power of taxation."29

The petition is without merit.

Taxes are the lifeblood of the government,30 for without taxes, the government can neither exist nor
endure. A principal attribute of sovereignty,31 the exercise of taxing power derives its source from the
very existence of the state whose social contract with its citizens obliges it to promote public interest
and common good. The theory behind the exercise of the power to tax emanates from
necessity;32 without taxes, government cannot fulfill its mandate of promoting the general welfare
and well-being of the people.

In recent years, the increasing social challenges of the times expanded the scope of state activity,
and taxation has become a tool to realize social justice and the equitable distribution of wealth,
economic progress and the protection of local industries as well as public welfare and similar
objectives.33 Taxation assumes even greater significance with the ratification of the 1987
Constitution. Thenceforth, the power to tax is no longer vested exclusively on Congress; local
legislative bodies are now given direct authority to levy taxes, fees and other charges34 pursuant to
Article X, section 5 of the 1987 Constitution, viz:

"Section 5.- Each Local Government unit shall have the power to create its own sources of
revenue, to levy taxes, fees and charges subject to such guidelines and limitations as the
Congress may provide, consistent with the basic policy of local autonomy. Such taxes, fees
and charges shall accrue exclusively to the Local Governments."
This paradigm shift results from the realization that genuine development can be achieved only by
strengthening local autonomy and promoting decentralization of governance. For a long time, the
country's highly centralized government structure has bred a culture of dependence among local
government leaders upon the national leadership. It has also "dampened the spirit of initiative,
innovation and imaginative resilience in matters of local development on the part of local government
leaders."35 The only way to shatter this culture of dependence is to give the LGUs a wider role in the
delivery of basic services, and confer them sufficient powers to generate their own sources for the
purpose. To achieve this goal, section 3 of Article X of the 1987 Constitution mandates Congress to
enact a local government code that will, consistent with the basic policy of local autonomy, set the
guidelines and limitations to this grant of taxing powers, viz:

"Section 3. The Congress shall enact a local government code which shall provide for a
more responsive and accountable local government structure instituted through a system of
decentralization with effective mechanisms of recall, initiative, and referendum, allocate
among the different local government units their powers, responsibilities, and resources, and
provide for the qualifications, election, appointment and removal, term, salaries, powers and
functions and duties of local officials, and all other matters relating to the organization and
operation of the local units."

To recall, prior to the enactment of the Rep. Act No. 7160,36 also known as the Local Government
Code of 1991 (LGC), various measures have been enacted to promote local autonomy. These
include the Barrio Charter of 1959,37 the Local Autonomy Act of 1959,38 the Decentralization Act of
196739 and the Local Government Code of 1983.40 Despite these initiatives, however, the shackles of
dependence on the national government remained. Local government units were faced with the
same problems that hamper their capabilities to participate effectively in the national development
efforts, among which are: (a) inadequate tax base, (b) lack of fiscal control over external sources of
income, (c) limited authority to prioritize and approve development projects, (d) heavy dependence
on external sources of income, and (e) limited supervisory control over personnel of national line
agencies.41

Considered as the most revolutionary piece of legislation on local autonomy,42 the LGC effectively
deals with the fiscal constraints faced by LGUs. It widens the tax base of LGUs to include taxes
which were prohibited by previous laws such as the imposition of taxes on forest products, forest
concessionaires, mineral products, mining operations, and the like. The LGC likewise provides
enough flexibility to impose tax rates in accordance with their needs and capabilities. It does not
prescribe graduated fixed rates but merely specifies the minimum and maximum tax rates and
leaves the determination of the actual rates to the respective sanggunian.43

One of the most significant provisions of the LGC is the removal of the blanket exclusion of
instrumentalities and agencies of the national government from the coverage of local taxation.
Although as a general rule, LGUs cannot impose taxes, fees or charges of any kind on the National
Government, its agencies and instrumentalities, this rule now admits an exception, i.e., when
specific provisions of the LGC authorize the LGUs to impose taxes, fees or charges on the
aforementioned entities, viz:

"Section 133. Common Limitations on the Taxing Powers of the 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:

x x x
 (o) Taxes, fees, or charges of any kind on the National Government, its agencies and
instrumentalities, and local government units." (emphasis supplied)

In view of the afore-quoted provision of the LGC, the doctrine in Basco vs. Philippine Amusement
and Gaming Corporation44 relied upon by the petitioner to support its claim no longer applies. To
emphasize, the Basco case was decided prior to the effectivity of the LGC, when no law empowering
the local government units to tax instrumentalities of the National Government was in effect.
However, as this Court ruled in the case of Mactan Cebu International Airport Authority (MCIAA) vs.
Marcos,45 nothing prevents Congress from decreeing that even instrumentalities or agencies of the
government performing governmental functions may be subject to tax.46 In enacting the LGC,
Congress exercised its prerogative to tax instrumentalities and agencies of government as it sees fit.
Thus, after reviewing the specific provisions of the LGC, this Court held that MCIAA, although an
instrumentality of the national government, was subject to real property tax, viz:

"Thus, reading together sections 133, 232, and 234 of the LGC, we conclude that as a
general rule, as laid down in section 133, the taxing power of local governments cannot
extend to the levy of inter alia, 'taxes, fees and charges of any kind on the national
government, its agencies and instrumentalities, and local government units'; however,
pursuant to section 232, provinces, cities and 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 use thereof
has been granted for consideration or otherwise, to a taxable person as provided in the item
(a) of the first paragraph of section 12.'"47

In the case at bar, section 151 in relation to section 137 of the LGC clearly authorizes the
respondent city government to impose on the petitioner the franchise tax in question.

In its general signification, a franchise is a privilege conferred by government authority, which does
not belong to citizens of the country generally as a matter of common right.48 In its specific sense, a
franchise may refer to a general or primary franchise, or to a special or secondary franchise. The
former relates to the right to exist as a corporation, by virtue of duly approved articles of
incorporation, or a charter pursuant to a special law creating the corporation.49 The right under a
primary or general franchise is vested in the individuals who compose the corporation and not in the
corporation itself.50 On the other hand, the latter refers to the right or privileges conferred upon an
existing corporation such as the right to use the streets of a municipality to lay pipes of tracks, erect
poles or string wires.51 The rights under a secondary or special franchise are vested in the
corporation and may ordinarily be conveyed or mortgaged under a general power granted to a
corporation to dispose of its property, except such special or secondary franchises as are charged
with a public use.52

In section 131 (m) of the LGC, Congress unmistakably defined a franchise in the sense of a
secondary or special franchise. This is to avoid any confusion when the word franchise is used in the
context of taxation. As commonly used, a franchise tax is "a tax on the privilege of transacting
business in the state and exercising corporate franchises granted by the state."53 It is not levied on
the corporation simply for existing as a corporation, upon its property54 or its income,55 but on its
exercise of the rights or privileges granted to it by the government. Hence, a corporation need not
pay franchise tax from the time it ceased to do business and exercise its franchise.56 It is within this
context that the phrase "tax on businesses enjoying a franchise" in section 137 of the LGC should be
interpreted and understood. Verily, to determine whether the petitioner is covered by the franchise
tax in question, the following requisites should concur: (1) that petitioner has a "franchise" in the
sense of a secondary or special franchise; and (2) that it is exercising its rights or privileges under
this franchise within the territory of the respondent city government.
Petitioner fulfills the first requisite. Commonwealth Act No. 120, as amended by Rep. Act No. 7395,
constitutes petitioner's primary and secondary franchises. It serves as the petitioner's charter,
defining its composition, capitalization, the appointment and the specific duties of its corporate
officers, and its corporate life span.57 As its secondary franchise, Commonwealth Act No. 120, as
amended, vests the petitioner the following powers which are not available to ordinary
corporations, viz:

"x x x

(e) To conduct investigations and surveys for the development of water power in any part of
the Philippines;

(f) To take water from any public stream, river, creek, lake, spring or waterfall in the
Philippines, for the purposes specified in this Act; to intercept and divert the flow of waters
from lands of riparian owners and from persons owning or interested in waters which are or
may be necessary for said purposes, upon payment of just compensation therefor; to alter,
straighten, obstruct or increase the flow of water in streams or water channels intersecting or
connecting therewith or contiguous to its works or any part thereof: Provided, That just
compensation shall be paid to any person or persons whose property is, directly or indirectly,
adversely affected or damaged thereby;

(g) To construct, operate and maintain power plants, auxiliary plants, dams, reservoirs,
pipes, mains, transmission lines, power stations and substations, and other works for the
purpose of developing hydraulic power from any river, creek, lake, spring and waterfall in the
Philippines and supplying such power to the inhabitants thereof; to acquire, construct, install,
maintain, operate, and improve gas, oil, or steam engines, and/or other prime movers,
generators and machinery in plants and/or auxiliary plants for the production of electric
power; to establish, develop, operate, maintain and administer power and lighting systems
for the transmission and utilization of its power generation; to sell electric power in bulk to (1)
industrial enterprises, (2) city, municipal or provincial systems and other government
institutions, (3) electric cooperatives, (4) franchise holders, and (5) real estate subdivisions x
x x;

(h) To acquire, promote, hold, transfer, sell, lease, rent, mortgage, encumber and otherwise
dispose of property incident to, or necessary, convenient or proper to carry out the purposes
for which the Corporation was created: Provided, That in case a right of way is necessary for
its transmission lines, easement of right of way shall only be sought: Provided, however,
That in case the property itself shall be acquired by purchase, the cost thereof shall be the
fair market value at the time of the taking of such property;

(i) To construct works across, or otherwise, any stream, watercourse, canal, ditch, flume,
street, avenue, highway or railway of private and public ownership, as the location of said
works may require xxx;

(j) To exercise the right of eminent domain for the purpose of this Act in the manner provided
by law for instituting condemnation proceedings by the national, provincial and municipal
governments;

x x x

(m) To cooperate with, and to coordinate its operations with those of the National
Electrification Administration and public service entities;
 (n) To exercise complete jurisdiction and control over watersheds surrounding the reservoirs
of plants and/or projects constructed or proposed to be constructed by the Corporation. Upon
determination by the Corporation of the areas required for watersheds for a specific project,
the Bureau of Forestry, the Reforestation Administration and the Bureau of Lands shall, upon
written advice by the Corporation, forthwith surrender jurisdiction to the Corporation of all
areas embraced within the watersheds, subject to existing private rights, the needs of
waterworks systems, and the requirements of domestic water supply;

(o) In the prosecution and maintenance of its projects, the Corporation shall adopt measures
to prevent environmental pollution and promote the conservation, development and
maximum utilization of natural resources xxx "58

With these powers, petitioner eventually had the monopoly in the generation and distribution of
electricity. This monopoly was strengthened with the issuance of Pres. Decree No. 40,59 nationalizing
the electric power industry. Although Exec. Order No. 21560 thereafter allowed private sector
participation in the generation of electricity, the transmission of electricity remains the monopoly of
the petitioner.

Petitioner also fulfills the second requisite. It is operating within the respondent city government's
territorial jurisdiction pursuant to the powers granted to it by Commonwealth Act No. 120, as
amended. From its operations in the City of Cabanatuan, petitioner realized a gross income of
P107,814,187.96 in 1992. Fulfilling both requisites, petitioner is, and ought to be, subject of the
franchise tax in question.

Petitioner, however, insists that it is excluded from the coverage of the franchise tax simply because
its stocks are wholly owned by the National Government, and its charter characterized it as a "non-
profit" organization.

These contentions must necessarily fail.

To stress, a franchise tax is imposed based not on the ownership but on the exercise by the
corporation of a privilege to do business. The taxable entity is the corporation which exercises the
franchise, and not the individual stockholders. By virtue of its charter, petitioner was created as a
separate and distinct entity from the National Government. It can sue and be sued under its own
name,61 and can exercise all the powers of a corporation under the Corporation Code.62

To be sure, the ownership by the National Government of its entire capital stock does not
necessarily imply that petitioner is not engaged in business. Section 2 of Pres. Decree No.
202963 classifies government-owned or controlled corporations (GOCCs) into those performing
governmental functions and those performing proprietary functions, viz:

"A government-owned or controlled corporation is a stock or a non-stock

corporation, whether performing governmental or proprietary functions, which is directly
chartered by special law or if organized under the general corporation law is owned or
controlled by the government directly, or indirectly through a parent corporation or subsidiary
corporation, to the extent of at least a majority of its outstanding voting capital stock x x x."
(emphases supplied)

Governmental functions are those pertaining to the administration of government, and as such, are
treated as absolute obligation on the part of the state to perform while proprietary functions are those
that are undertaken only by way of advancing the general interest of society, and are merely optional
on the government.64 Included in the class of GOCCs performing proprietary functions are "business-
like" entities such as the National Steel Corporation (NSC), the National Development Corporation
(NDC), the Social Security System (SSS), the Government Service Insurance System (GSIS), and
the National Water Sewerage Authority (NAWASA),65 among others.

Petitioner was created to "undertake the development of hydroelectric generation of power and the
production of electricity from nuclear, geothermal and other sources, as well as the transmission of
electric power on a nationwide basis."66 Pursuant to this mandate, petitioner generates power and
sells electricity in bulk. Certainly, these activities do not partake of the sovereign functions of the
government. They are purely private and commercial undertakings, albeit imbued with public
interest. The public interest involved in its activities, however, does not distract from the true nature
of the petitioner as a commercial enterprise, in the same league with similar public utilities like
telephone and telegraph companies, railroad companies, water supply and irrigation companies,
gas, coal or light companies, power plants, ice plant among others; all of which are declared by this
Court as ministrant or proprietary functions of government aimed at advancing the general interest of
society.67

A closer reading of its charter reveals that even the legislature treats the character of the petitioner's
enterprise as a "business," although it limits petitioner's profits to twelve percent (12%), viz:68

"(n) When essential to the proper administration of its corporate affairs or necessary for the
proper transaction of its business or to carry out the purposes for which it was organized, to
contract indebtedness and issue bonds subject to approval of the President upon
recommendation of the Secretary of Finance;

(o) To exercise such powers and do such things as may be reasonably necessary to carry
out the business and purposes for which it was organized, or which, from time to time, may
be declared by the Board to be necessary, useful, incidental or auxiliary to accomplish the
said purpose xxx."(emphases supplied)

It is worthy to note that all other private franchise holders receiving at least sixty percent (60%) of its
electricity requirement from the petitioner are likewise imposed the cap of twelve percent (12%) on
profits.69 The main difference is that the petitioner is mandated to devote "all its returns from its
capital investment, as well as excess revenues from its operation, for expansion"70 while other
franchise holders have the option to distribute their profits to its stockholders by declaring dividends.
We do not see why this fact can be a source of difference in tax treatment. In both instances, the
taxable entity is the corporation, which exercises the franchise, and not the individual stockholders.

We also do not find merit in the petitioner's contention that its tax exemptions under its charter
subsist despite the passage of the LGC.

As a rule, tax exemptions are construed strongly against the claimant. Exemptions must be shown to
exist clearly and categorically, and supported by clear legal provisions.71 In the case at bar, the
petitioner's sole refuge is section 13 of Rep. Act No. 6395 exempting from, among others, "all
income taxes, franchise taxes and realty taxes to be paid to the National Government, its provinces,
cities, municipalities and other government agencies and instrumentalities." However, section 193 of
the LGC withdrew, subject to limited exceptions, the sweeping tax privileges previously enjoyed by
private and public corporations. Contrary to the contention of petitioner, section 193 of the LGC is an
express, albeit general, repeal of all statutes granting tax exemptions from local taxes.72 It reads:

"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 government-owned or controlled corporations, except local water
 districts, cooperatives duly registered under R.A. No. 6938, non-stock and non-profit
hospitals and educational institutions, are hereby withdrawn upon the effectivity of this
Code." (emphases supplied)

It is a basic precept of statutory construction that the express mention of one person, thing, act, or
consequence excludes all others as expressed in the familiar maxim expressio unius est exclusio
alterius.73 Not being a local water district, a cooperative registered under R.A. No. 6938, or a non-
stock and non-profit hospital or educational institution, petitioner clearly does not belong to the
exception. It is therefore incumbent upon the petitioner to point to some provisions of the LGC that
expressly grant it exemption from local taxes.

But this would be an exercise in futility. Section 137 of the LGC clearly states that the LGUs can
impose franchise tax "notwithstanding any exemption granted by any law or other special law." This
particular provision of the LGC does not admit any exception. In City Government of San Pablo,
Laguna v. Reyes,74 MERALCO's exemption from the payment of franchise taxes was brought as an
issue before this Court. The same issue was involved in the subsequent case of Manila Electric
Company v. Province of Laguna.75 Ruling in favor of the local government in both instances, we
ruled that the franchise tax in question is imposable despite any exemption enjoyed by MERALCO
under special laws, viz:

"It is our view that petitioners correctly rely on provisions of Sections 137 and 193 of the LGC
to support their position that MERALCO's tax exemption has been withdrawn. The explicit
language of section 137 which authorizes the province to impose franchise tax
'notwithstanding any exemption granted by any law or other special law' is all-encompassing
and clear. The franchise tax is imposable despite any exemption enjoyed under special laws.

Section 193 buttresses the withdrawal of extant tax exemption privileges. By stating that
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 (1) local water districts, (2) cooperatives duly registered under
R.A. 6938, (3) non-stock and non-profit hospitals and educational institutions, are withdrawn
upon the effectivity of this code, the obvious import is to limit the exemptions to the three
enumerated entities. It is a basic precept of statutory construction that the express mention
of one person, thing, act, or consequence excludes all others as expressed in the familiar
maxim expressio unius est exclusio alterius. In the absence of any provision of the Code to
the contrary, and we find no other provision in point, any existing tax exemption or incentive
enjoyed by MERALCO under existing law was clearly intended to be withdrawn.

Reading together sections 137 and 193 of the LGC, we conclude that under the LGC the
local government unit may now impose a local tax at a rate not exceeding 50% of 1% of the
gross annual receipts for the preceding calendar based on the incoming receipts realized
within its territorial jurisdiction. The legislative purpose to withdraw tax privileges enjoyed
under existing law or charter is clearly manifested by the language used on (sic) Sections
137 and 193 categorically withdrawing such exemption subject only to the exceptions
enumerated. Since it would be not only tedious and impractical to attempt to enumerate all
the existing statutes providing for special tax exemptions or privileges, the LGC provided for
an express, albeit general, withdrawal of such exemptions or privileges. No more
unequivocal language could have been used."76(emphases supplied).

It is worth mentioning that section 192 of the LGC empowers the LGUs, through ordinances duly
approved, to grant tax exemptions, initiatives or reliefs.77 But in enacting section 37 of Ordinance No.
165-92 which imposes an annual franchise tax "notwithstanding any exemption granted by law or
other special law," the respondent city government clearly did not intend to exempt the petitioner
from the coverage thereof.

Doubtless, the power to tax is the most effective instrument to raise needed revenues to finance and
support myriad activities of the 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. As this Court observed in the Mactan case, "the original reasons for the withdrawal of tax
exemption privileges granted to government-owned or 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."78 With the added burden of devolution, it is even more
imperative for government entities to share in the requirements of development, fiscal or otherwise,
by paying taxes or other charges due from them.

IN VIEW WHEREOF, the instant petition is DENIED and the assailed Decision and Resolution of the
Court of Appeals dated March 12, 2001 and July 10, 2001, respectively, are hereby AFFIRMED.

SO ORDERED.

Panganiban, Sandoval-Gutierrez, Corona, and Carpio-Morales, JJ., concur.

Republic of the Philippines

SUPREME COURT
Manila

EN BANC

G.R. No. L-43082 June 18, 1937

PABLO LORENZO, as trustee of the estate of Thomas Hanley, deceased, plaintiff-appellant,

vs.
JUAN POSADAS, JR., Collector of Internal Revenue, defendant-appellant.

Pablo Lorenzo and Delfin Joven for plaintiff-appellant.

Office of the Solicitor-General Hilado for defendant-appellant.

LAUREL, J.:

On October 4, 1932, the plaintiff Pablo Lorenzo, in his capacity as trustee of the estate of Thomas
Hanley, deceased, brought this action in the Court of First Instance of Zamboanga against the
defendant, Juan Posadas, Jr., then the Collector of Internal Revenue, for the refund of the amount of
P2,052.74, paid by the plaintiff as inheritance tax on the estate of the deceased, and for the
collection of interst thereon at the rate of 6 per cent per annum, computed from September 15, 1932,
the date when the aforesaid tax was [paid under protest. The defendant set up a counterclaim for
P1,191.27 alleged to be interest due on the tax in question and which was not included in the
original assessment. From the decision of the Court of First Instance of Zamboanga dismissing both
the plaintiff's complaint and the defendant's counterclaim, both parties appealed to this court.

It appears that on May 27, 1922, one Thomas Hanley died in Zamboanga, Zamboanga, leaving a
will (Exhibit 5) and considerable amount of real and personal properties. On june 14, 1922,
proceedings for the probate of his will and the settlement and distribution of his estate were begun in
the Court of First Instance of Zamboanga. The will was admitted to probate. Said will provides,
among other things, as follows:

4. I direct that any money left by me be given to my nephew Matthew Hanley.

5. I direct that all real estate owned by me at the time of my death be not sold or otherwise
disposed of for a period of ten (10) years after my death, and that the same be handled and
managed by the executors, and proceeds thereof to be given to my nephew, Matthew
Hanley, at Castlemore, Ballaghaderine, County of Rosecommon, Ireland, and that he be
directed that the same be used only for the education of my brother's children and their
descendants.

6. I direct that ten (10) years after my death my property be given to the above mentioned
Matthew Hanley to be disposed of in the way he thinks most advantageous.

xxx xxx xxx

8. I state at this time I have one brother living, named Malachi Hanley, and that my nephew,
Matthew Hanley, is a son of my said brother, Malachi Hanley.

The Court of First Instance of Zamboanga considered it proper for the best interests of ther estate to
appoint a trustee to administer the real properties which, under the will, were to pass to Matthew
Hanley ten years after the two executors named in the will, was, on March 8, 1924, appointed
trustee. Moore took his oath of office and gave bond on March 10, 1924. He acted as trustee until
February 29, 1932, when he resigned and the plaintiff herein was appointed in his stead.

During the incumbency of the plaintiff as trustee, the defendant Collector of Internal Revenue,
alleging that the estate left by the deceased at the time of his death consisted of realty valued at
P27,920 and personalty valued at P1,465, and allowing a deduction of P480.81, assessed against
the estate an inheritance tax in the amount of P1,434.24 which, together with the penalties for
deliquency in payment consisting of a 1 per cent monthly interest from July 1, 1931 to the date of
payment and a surcharge of 25 per cent on the tax, amounted to P2,052.74. On March 15, 1932, the
defendant filed a motion in the testamentary proceedings pending before the Court of First Instance
of Zamboanga (Special proceedings No. 302) praying that the trustee, plaintiff herein, be ordered to
pay to the Government the said sum of P2,052.74. The motion was granted. On September 15,
1932, the plaintiff paid said amount under protest, notifying the defendant at the same time that
unless the amount was promptly refunded suit would be brought for its recovery. The defendant
overruled the plaintiff's protest and refused to refund the said amount hausted, plaintiff went to court
with the result herein above indicated.

In his appeal, plaintiff contends that the lower court erred:

I. In holding that the real property of Thomas Hanley, deceased, passed to his instituted heir,
Matthew Hanley, from the moment of the death of the former, and that from the time, the
latter became the owner thereof.

II. In holding, in effect, that there was deliquency in the payment of inheritance tax due on the
estate of said deceased.
 III. In holding that the inheritance tax in question be based upon the value of the estate upon
the death of the testator, and not, as it should have been held, upon the value thereof at the
expiration of the period of ten years after which, according to the testator's will, the property
could be and was to be delivered to the instituted heir.

IV. In not allowing as lawful deductions, in the determination of the net amount of the estate
subject to said tax, the amounts allowed by the court as compensation to the "trustees" and
paid to them from the decedent's estate.

V. In not rendering judgment in favor of the plaintiff and in denying his motion for new trial.

The defendant-appellant contradicts the theories of the plaintiff and assigns the following error
besides:

The lower court erred in not ordering the plaintiff to pay to the defendant the sum of
P1,191.27, representing part of the interest at the rate of 1 per cent per month from April 10,
1924, to June 30, 1931, which the plaintiff had failed to pay on the inheritance tax assessed
by the defendant against the estate of Thomas Hanley.

The following are the principal questions to be decided by this court in this appeal: (a) When does
the inheritance tax accrue and when must it be satisfied? (b) Should the inheritance tax be
computed on the basis of the value of the estate at the time of the testator's death, or on its value ten
years later? (c) In determining the net value of the estate subject to tax, is it proper to deduct the
compensation due to trustees? (d) What law governs the case at bar? Should the provisions of Act
No. 3606 favorable to the tax-payer be given retroactive effect? (e) Has there been deliquency in the
payment of the inheritance tax? If so, should the additional interest claimed by the defendant in his
appeal be paid by the estate? Other points of incidental importance, raised by the parties in their
briefs, will be touched upon in the course of this opinion.

(a) The accrual of the inheritance tax is distinct from the obligation to pay the same. Section 1536 as
amended, of the Administrative Code, imposes the tax upon "every transmission by virtue of
inheritance, devise, bequest, gift mortis causa, or advance in anticipation of inheritance,devise, or
bequest." The tax therefore is upon transmission or the transfer or devolution of property of a
decedent, made effective by his death. (61 C. J., p. 1592.) It is in reality an excise or privilege tax
imposed on the right to succeed to, receive, or take property by or under a will or the intestacy law,
or deed, grant, or gift to become operative at or after death. Acording to article 657 of the Civil Code,
"the rights to the succession of a person are transmitted from the moment of his death." "In other
words", said Arellano, C. J., ". . . the heirs succeed immediately to all of the property of the deceased
ancestor. The property belongs to the heirs at the moment of the death of the ancestor as
completely as if the ancestor had executed and delivered to them a deed for the same before his
death." (Bondad vs. Bondad, 34 Phil., 232. See also, Mijares vs. Nery, 3 Phil., 195; Suilong & Co.,
vs. Chio-Taysan, 12 Phil., 13; Lubrico vs. Arbado, 12 Phil., 391; Innocencio vs. Gat-Pandan, 14
Phil., 491; Aliasas vs.Alcantara, 16 Phil., 489; Ilustre vs. Alaras Frondosa, 17 Phil., 321; Malahacan
vs. Ignacio, 19 Phil., 434; Bowa vs. Briones, 38 Phil., 27; Osario vs. Osario & Yuchausti Steamship
Co., 41 Phil., 531; Fule vs. Fule, 46 Phil., 317; Dais vs. Court of First Instance of Capiz, 51 Phil.,
396; Baun vs. Heirs of Baun, 53 Phil., 654.) Plaintiff, however, asserts that while article 657 of the
Civil Code is applicable to testate as well as intestate succession, it operates only in so far as forced
heirs are concerned. But the language of article 657 of the Civil Code is broad and makes no
distinction between different classes of heirs. That article does not speak of forced heirs; it does not
even use the word "heir". It speaks of the rights of succession and the transmission thereof from the
moment of death. The provision of section 625 of the Code of Civil Procedure regarding the
authentication and probate of a will as a necessary condition to effect transmission of property does
not affect the general rule laid down in article 657 of the Civil Code. The authentication of a will
implies its due execution but once probated and allowed the transmission is effective as of the death
of the testator in accordance with article 657 of the Civil Code. Whatever may be the time when
actual transmission of the inheritance takes place, succession takes place in any event at the
moment of the decedent's death. The time when the heirs legally succeed to the inheritance may
differ from the time when the heirs actually receive such inheritance. "Poco importa", says Manresa
commenting on article 657 of the Civil Code, "que desde el falleimiento del causante, hasta que el
heredero o legatario entre en posesion de los bienes de la herencia o del legado, transcurra mucho
o poco tiempo, pues la adquisicion ha de retrotraerse al momento de la muerte, y asi lo ordena el
articulo 989, que debe considerarse como complemento del presente." (5 Manresa, 305; see also,
art. 440, par. 1, Civil Code.) Thomas Hanley having died on May 27, 1922, the inheritance tax
accrued as of the date.

From the fact, however, that Thomas Hanley died on May 27, 1922, it does not follow that the
obligation to pay the tax arose as of the date. The time for the payment on inheritance tax is clearly
fixed by section 1544 of the Revised Administrative Code as amended by Act No. 3031, in relation to
section 1543 of the same Code. The two sections follow:

SEC. 1543. Exemption of certain acquisitions and transmissions. The following shall not
be taxed:

(a) The merger of the usufruct in the owner of the naked title.

(b) The transmission or delivery of the inheritance or legacy by the fiduciary heir or
legatee to the trustees.

(c) The transmission from the first heir, legatee, or donee in favor of another
beneficiary, in accordance with the desire of the predecessor.

In the last two cases, if the scale of taxation appropriate to the new beneficiary is greater
than that paid by the first, the former must pay the difference.

SEC. 1544. When tax to be paid. The tax fixed in this article shall be paid:

(a) In the second and third cases of the next preceding section, before entrance into
possession of the property.

(b) In other cases, within the six months subsequent to the death of the predecessor;
but if judicial testamentary or intestate proceedings shall be instituted prior to the
expiration of said period, the payment shall be made by the executor or administrator
before delivering to each beneficiary his share.

If the tax is not paid within the time hereinbefore prescribed, interest at the rate of twelve per
centum per annum shall be added as part of the tax; and to the tax and interest due and
unpaid within ten days after the date of notice and demand thereof by the collector, there
shall be further added a surcharge of twenty-five per centum.

A certified of all letters testamentary or of admisitration shall be furnished the Collector of

Internal Revenue by the Clerk of Court within thirty days after their issuance.
It should be observed in passing that the word "trustee", appearing in subsection (b) of section 1543,
should read "fideicommissary" or "cestui que trust". There was an obvious mistake in translation
from the Spanish to the English version.

The instant case does fall under subsection (a), but under subsection (b), of section 1544 above-
quoted, as there is here no fiduciary heirs, first heirs, legatee or donee. Under the subsection, the
tax should have been paid before the delivery of the properties in question to P. J. M. Moore as
trustee on March 10, 1924.

(b) The plaintiff contends that the estate of Thomas Hanley, in so far as the real properties are
concerned, did not and could not legally pass to the instituted heir, Matthew Hanley, until after the
expiration of ten years from the death of the testator on May 27, 1922 and, that the inheritance tax
should be based on the value of the estate in 1932, or ten years after the testator's death. The
plaintiff introduced evidence tending to show that in 1932 the real properties in question had a
reasonable value of only P5,787. This amount added to the value of the personal property left by the
deceased, which the plaintiff admits is P1,465, would generate an inheritance tax which, excluding
deductions, interest and surcharge, would amount only to about P169.52.

If death is the generating source from which the power of the estate to impose inheritance taxes
takes its being and if, upon the death of the decedent, succession takes place and the right of the
estate to tax vests instantly, the tax should be measured by the vlaue of the estate as it stood at the
time of the decedent's death, regardless of any subsequent contingency value of any subsequent
increase or decrease in value. (61 C. J., pp. 1692, 1693; 26 R. C. L., p. 232; Blakemore and
Bancroft, Inheritance Taxes, p. 137. See also Knowlton vs. Moore, 178 U.S., 41; 20 Sup. Ct. Rep.,
747; 44 Law. ed., 969.) "The right of the state to an inheritance tax accrues at the moment of death,
and hence is ordinarily measured as to any beneficiary by the value at that time of such property as
passes to him. Subsequent appreciation or depriciation is immaterial." (Ross, Inheritance Taxation,
p. 72.)

Our attention is directed to the statement of the rule in Cyclopedia of Law of and Procedure (vol. 37,
pp. 1574, 1575) that, in the case of contingent remainders, taxation is postponed until the estate
vests in possession or the contingency is settled. This rule was formerly followed in New York and
has been adopted in Illinois, Minnesota, Massachusetts, Ohio, Pennsylvania and Wisconsin. This
rule, horever, is by no means entirely satisfactory either to the estate or to those interested in the
property (26 R. C. L., p. 231.). Realizing, perhaps, the defects of its anterior system, we find upon
examination of cases and authorities that New York has varied and now requires the immediate
appraisal of the postponed estate at its clear market value and the payment forthwith of the tax on its
out of the corpus of the estate transferred. (In re Vanderbilt, 172 N. Y., 69; 69 N. E., 782; In
re Huber, 86 N. Y. App. Div., 458; 83 N. Y. Supp., 769; Estate of Tracy, 179 N. Y., 501; 72 N. Y.,
519; Estate of Brez, 172 N. Y., 609; 64 N. E., 958; Estate of Post, 85 App. Div., 611; 82 N. Y. Supp.,
1079. Vide also, Saltoun vs. Lord Advocate, 1 Peter. Sc. App., 970; 3 Macq. H. L., 659; 23 Eng. Rul.
Cas., 888.) California adheres to this new rule (Stats. 1905, sec. 5, p. 343).

But whatever may be the rule in other jurisdictions, we hold that a transmission by inheritance is
taxable at the time of the predecessor's death, notwithstanding the postponement of the actual
possession or enjoyment of the estate by the beneficiary, and the tax measured by the value of the
property transmitted at that time regardless of its appreciation or depreciation.

(c) Certain items are required by law to be deducted from the appraised gross in arriving at the net
value of the estate on which the inheritance tax is to be computed (sec. 1539, Revised
Administrative Code). In the case at bar, the defendant and the trial court allowed a deduction of
only P480.81. This sum represents the expenses and disbursements of the executors until March
10, 1924, among which were their fees and the proven debts of the deceased. The plaintiff contends
that the compensation and fees of the trustees, which aggregate P1,187.28 (Exhibits C, AA, EE, PP,
HH, JJ, LL, NN, OO), should also be deducted under section 1539 of the Revised Administrative
Code which provides, in part, as follows: "In order to determine the net sum which must bear the tax,
when an inheritance is concerned, there shall be deducted, in case of a resident, . . . the judicial
expenses of the testamentary or intestate proceedings, . . . ."

A trustee, no doubt, is entitled to receive a fair compensation for his services (Barney vs. Saunders,
16 How., 535; 14 Law. ed., 1047). But from this it does not follow that the compensation due him
may lawfully be deducted in arriving at the net value of the estate subject to tax. There is no statute
in the Philippines which requires trustees' commissions to be deducted in determining the net value
of the estate subject to inheritance tax (61 C. J., p. 1705). Furthermore, though a testamentary trust
has been created, it does not appear that the testator intended that the duties of his executors and
trustees should be separated. (Ibid.; In re Vanneck's Estate, 161 N. Y. Supp., 893; 175 App. Div.,
363; In re Collard's Estate, 161 N. Y. Supp., 455.) On the contrary, in paragraph 5 of his will, the
testator expressed the desire that his real estate be handled and managed by his executors until the
expiration of the period of ten years therein provided. Judicial expenses are expenses of
administration (61 C. J., p. 1705) but, in State vs. Hennepin County Probate Court (112 N. W., 878;
101 Minn., 485), it was said: ". . . The compensation of a trustee, earned, not in the administration of
the estate, but in the management thereof for the benefit of the legatees or devises, does not come
properly within the class or reason for exempting administration expenses. . . . Service rendered in
that behalf have no reference to closing the estate for the purpose of a distribution thereof to those
entitled to it, and are not required or essential to the perfection of the rights of the heirs or legatees. .
. . Trusts . . . of the character of that here before the court, are created for the the benefit of those to
whom the property ultimately passes, are of voluntary creation, and intended for the preservation of
the estate. No sound reason is given to support the contention that such expenses should be taken
into consideration in fixing the value of the estate for the purpose of this tax."

(d) The defendant levied and assessed the inheritance tax due from the estate of Thomas Hanley
under the provisions of section 1544 of the Revised Administrative Code, as amended by section 3
of Act No. 3606. But Act No. 3606 went into effect on January 1, 1930. It, therefore, was not the law
in force when the testator died on May 27, 1922. The law at the time was section 1544 above-
mentioned, as amended by Act No. 3031, which took effect on March 9, 1922.

It is well-settled that inheritance taxation is governed by the statute in force at the time of the death
of the decedent (26 R. C. L., p. 206; 4 Cooley on Taxation, 4th ed., p. 3461). The taxpayer can not
foresee and ought not to be required to guess the outcome of pending measures. Of course, a tax
statute may be made retroactive in its operation. Liability for taxes under retroactive legislation has
been "one of the incidents of social life." (Seattle vs. Kelleher, 195 U. S., 360; 49 Law. ed., 232 Sup.
Ct. Rep., 44.) But legislative intent that a tax statute should operate retroactively should be perfectly
clear. (Scwab vs. Doyle, 42 Sup. Ct. Rep., 491; Smietanka vs. First Trust & Savings Bank, 257 U.
S., 602; Stockdale vs. Insurance Co., 20 Wall., 323; Lunch vs. Turrish, 247 U. S., 221.) "A statute
should be considered as prospective in its operation, whether it enacts, amends, or repeals an
inheritance tax, unless the language of the statute clearly demands or expresses that it shall have a
retroactive effect, . . . ." (61 C. J., P. 1602.) Though the last paragraph of section 5 of Regulations
No. 65 of the Department of Finance makes section 3 of Act No. 3606, amending section 1544 of the
Revised Administrative Code, applicable to all estates the inheritance taxes due from which have not
been paid, Act No. 3606 itself contains no provisions indicating legislative intent to give it retroactive
effect. No such effect can begiven the statute by this court.

The defendant Collector of Internal Revenue maintains, however, that certain provisions of Act No.
3606 are more favorable to the taxpayer than those of Act No. 3031, that said provisions are penal in
nature and, therefore, should operate retroactively in conformity with the provisions of article 22 of
the Revised Penal Code. This is the reason why he applied Act No. 3606 instead of Act No. 3031.
Indeed, under Act No. 3606, (1) the surcharge of 25 per cent is based on the tax only, instead of on
both the tax and the interest, as provided for in Act No. 3031, and (2) the taxpayer is allowed twenty
days from notice and demand by rthe Collector of Internal Revenue within which to pay the tax,
instead of ten days only as required by the old law.

Properly speaking, a statute is penal when it imposes punishment for an offense committed against
the state which, under the Constitution, the Executive has the power to pardon. In common use,
however, this sense has been enlarged to include within the term "penal statutes" all status which
command or prohibit certain acts, and establish penalties for their violation, and even those which,
without expressly prohibiting certain acts, impose a penalty upon their commission (59 C. J., p.
1110). Revenue laws, generally, which impose taxes collected by the means ordinarily resorted to
for the collection of taxes are not classed as penal laws, although there are authorities to the
contrary. (See Sutherland, Statutory Construction, 361; Twine Co. vs. Worthington, 141 U. S., 468;
12 Sup. Ct., 55; Rice vs. U. S., 4 C. C. A., 104; 53 Fed., 910; Com. vs. Standard Oil Co., 101 Pa. St.,
150; State vs. Wheeler, 44 P., 430; 25 Nev. 143.) Article 22 of the Revised Penal Code is not
applicable to the case at bar, and in the absence of clear legislative intent, we cannot give Act No.
3606 a retroactive effect.

(e) The plaintiff correctly states that the liability to pay a tax may arise at a certain time and the tax
may be paid within another given time. As stated by this court, "the mere failure to pay one's tax
does not render one delinqent until and unless the entire period has eplased within which the
taxpayer is authorized by law to make such payment without being subjected to the payment of
penalties for fasilure to pay his taxes within the prescribed period." (U. S. vs. Labadan, 26 Phil.,
239.)

The defendant maintains that it was the duty of the executor to pay the inheritance tax before the
delivery of the decedent's property to the trustee. Stated otherwise, the defendant contends that
delivery to the trustee was delivery to the cestui que trust, the beneficiery in this case, within the
meaning of the first paragraph of subsection (b) of section 1544 of the Revised Administrative Code.
This contention is well taken and is sustained. The appointment of P. J. M. Moore as trustee was
made by the trial court in conformity with the wishes of the testator as expressed in his will. It is true
that the word "trust" is not mentioned or used in the will but the intention to create one is clear. No
particular or technical words are required to create a testamentary trust (69 C. J., p. 711). The words
"trust" and "trustee", though apt for the purpose, are not necessary. In fact, the use of these two
words is not conclusive on the question that a trust is created (69 C. J., p. 714). "To create a trust by
will the testator must indicate in the will his intention so to do by using language sufficient to
separate the legal from the equitable estate, and with sufficient certainty designate the beneficiaries,
their interest in the ttrust, the purpose or object of the trust, and the property or subject matter
thereof. Stated otherwise, to constitute a valid testamentary trust there must be a concurrence of
three circumstances: (1) Sufficient words to raise a trust; (2) a definite subject; (3) a certain or
ascertain object; statutes in some jurisdictions expressly or in effect so providing." (69 C. J., pp.
705,706.) There is no doubt that the testator intended to create a trust. He ordered in his will that
certain of his properties be kept together undisposed during a fixed period, for a stated purpose. The
probate court certainly exercised sound judgment in appointment a trustee to carry into effect the
provisions of the will (see sec. 582, Code of Civil Procedure).

P. J. M. Moore became trustee on March 10, 1924. On that date trust estate vested in him (sec. 582
in relation to sec. 590, Code of Civil Procedure). The mere fact that the estate of the deceased was
placed in trust did not remove it from the operation of our inheritance tax laws or exempt it from the
payment of the inheritance tax. The corresponding inheritance tax should have been paid on or
before March 10, 1924, to escape the penalties of the laws. This is so for the reason already stated
that the delivery of the estate to the trustee was in esse delivery of the same estate to the cestui que
trust, the beneficiary in this case. A trustee is but an instrument or agent for the cestui que
trust (Shelton vs. King, 299 U. S., 90; 33 Sup. Ct. Rep., 689; 57 Law. ed., 1086). When Moore
accepted the trust and took possesson of the trust estate he thereby admitted that the estate
belonged not to him but to his cestui que trust (Tolentino vs. Vitug, 39 Phil.,126, cited in 65 C. J., p.
692, n. 63). He did not acquire any beneficial interest in the estate. He took such legal estate only as
the proper execution of the trust required (65 C. J., p. 528) and, his estate ceased upon the
fulfillment of the testator's wishes. The estate then vested absolutely in the beneficiary (65 C. J., p.
542).

The highest considerations of public policy also justify the conclusion we have reached. Were we to
hold that the payment of the tax could be postponed or delayed by the creation of a trust of the type
at hand, the result would be plainly disastrous. Testators may provide, as Thomas Hanley has
provided, that their estates be not delivered to their beneficiaries until after the lapse of a certain
period of time. In the case at bar, the period is ten years. In other cases, the trust may last for fifty
years, or for a longer period which does not offend the rule against petuities. The collection of the tax
would then be left to the will of a private individual. The mere suggestion of this result is a sufficient
warning against the accpetance of the essential to the very exeistence of government. (Dobbins vs.
Erie Country, 16 Pet., 435; 10 Law. ed., 1022; Kirkland vs. Hotchkiss, 100 U. S., 491; 25 Law. ed.,
558; Lane County vs. Oregon, 7 Wall., 71; 19 Law. ed., 101; Union Refrigerator Transit Co. vs.
Kentucky, 199 U. S., 194; 26 Sup. Ct. Rep., 36; 50 Law. ed., 150; Charles River Bridge vs. Warren
Bridge, 11 Pet., 420; 9 Law. ed., 773.) The obligation to pay taxes rests not upon the privileges
enjoyed by, or the protection afforded to, a citizen by the government but upon the necessity of
money for the support of the state (Dobbins vs. Erie Country, supra). For this reason, no one is
allowed to object to or resist the payment of taxes solely because no personal benefit to him can be
pointed out. (Thomas vs. Gay, 169 U. S., 264; 18 Sup. Ct. Rep., 340; 43 Law. ed., 740.) While
courts will not enlarge, by construction, the government's power of taxation (Bromley vs. McCaughn,
280 U. S., 124; 74 Law. ed., 226; 50 Sup. Ct. Rep., 46) they also will not place upon tax laws so
loose a construction as to permit evasions on merely fanciful and insubstantial distictions. (U. S. vs.
Watts, 1 Bond., 580; Fed. Cas. No. 16,653; U. S. vs. Wigglesirth, 2 Story, 369; Fed. Cas. No.
16,690, followed in Froelich & Kuttner vs. Collector of Customs, 18 Phil., 461, 481; Castle Bros.,
Wolf & Sons vs. McCoy, 21 Phil., 300; Muoz & Co. vs. Hord, 12 Phil., 624; Hongkong & Shanghai
Banking Corporation vs. Rafferty, 39 Phil., 145; Luzon Stevedoring Co. vs. Trinidad, 43 Phil., 803.)
When proper, a tax statute should be construed to avoid the possibilities of tax evasion. Construed
this way, the statute, without resulting in injustice to the taxpayer, becomes fair to the government.

That taxes must be collected promptly is a policy deeply intrenched in our tax system. Thus, no court
is allowed to grant injunction to restrain the collection of any internal revenue tax ( sec. 1578,
Revised Administrative Code; Sarasola vs. Trinidad, 40 Phil., 252). In the case of Lim Co Chui vs.
Posadas (47 Phil., 461), this court had occassion to demonstrate trenchment adherence to this
policy of the law. It held that "the fact that on account of riots directed against the Chinese on
October 18, 19, and 20, 1924, they were prevented from praying their internal revenue taxes on time
and by mutual agreement closed their homes and stores and remained therein, does not authorize
the Collector of Internal Revenue to extend the time prescribed for the payment of the taxes or to
accept them without the additional penalty of twenty five per cent." (Syllabus, No. 3.)

". . . It is of the utmost importance," said the Supreme Court of the United States, ". . . that the
modes adopted to enforce the taxes levied should be interfered with as little as possible. Any delay
in the proceedings of the officers, upon whom the duty is developed of collecting the taxes, may
derange the operations of government, and thereby, cause serious detriment to the public." (Dows
vs. Chicago, 11 Wall., 108; 20 Law. ed., 65, 66; Churchill and Tait vs. Rafferty, 32 Phil., 580.)

It results that the estate which plaintiff represents has been delinquent in the payment of inheritance
tax and, therefore, liable for the payment of interest and surcharge provided by law in such cases.
The delinquency in payment occurred on March 10, 1924, the date when Moore became trustee.
The interest due should be computed from that date and it is error on the part of the defendant to
compute it one month later. The provisions cases is mandatory (see and cf. Lim Co Chui vs.
Posadas, supra), and neither the Collector of Internal Revenuen or this court may remit or decrease
such interest, no matter how heavily it may burden the taxpayer.

To the tax and interest due and unpaid within ten days after the date of notice and demand thereof
by the Collector of Internal Revenue, a surcharge of twenty-five per centum should be added (sec.
1544, subsec. (b), par. 2, Revised Administrative Code). Demand was made by the Deputy Collector
of Internal Revenue upon Moore in a communiction dated October 16, 1931 (Exhibit 29). The date
fixed for the payment of the tax and interest was November 30, 1931. November 30 being an official
holiday, the tenth day fell on December 1, 1931. As the tax and interest due were not paid on that
date, the estate became liable for the payment of the surcharge.

In view of the foregoing, it becomes unnecessary for us to discuss the fifth error assigned by the
plaintiff in his brief.

We shall now compute the tax, together with the interest and surcharge due from the estate of
Thomas Hanley inaccordance with the conclusions we have reached.

At the time of his death, the deceased left real properties valued at P27,920 and personal properties
worth P1,465, or a total of P29,385. Deducting from this amount the sum of P480.81, representing
allowable deductions under secftion 1539 of the Revised Administrative Code, we have P28,904.19
as the net value of the estate subject to inheritance tax.

The primary tax, according to section 1536, subsection (c), of the Revised Administrative Code,
should be imposed at the rate of one per centum upon the first ten thousand pesos and two per
centum upon the amount by which the share exceed thirty thousand pesos, plus an additional two
hundred per centum. One per centum of ten thousand pesos is P100. Two per centum of
P18,904.19 is P378.08. Adding to these two sums an additional two hundred per centum, or
P965.16, we have as primary tax, correctly computed by the defendant, the sum of P1,434.24.

To the primary tax thus computed should be added the sums collectible under section 1544 of the
Revised Administrative Code. First should be added P1,465.31 which stands for interest at the rate
of twelve per centum per annum from March 10, 1924, the date of delinquency, to September 15,
1932, the date of payment under protest, a period covering 8 years, 6 months and 5 days. To the tax
and interest thus computed should be added the sum of P724.88, representing a surhcarge of 25
per cent on both the tax and interest, and also P10, the compromise sum fixed by the defendant
(Exh. 29), giving a grand total of P3,634.43.

As the plaintiff has already paid the sum of P2,052.74, only the sums of P1,581.69 is legally due
from the estate. This last sum is P390.42 more than the amount demanded by the defendant in his
counterclaim. But, as we cannot give the defendant more than what he claims, we must hold that the
plaintiff is liable only in the sum of P1,191.27 the amount stated in the counterclaim.

The judgment of the lower court is accordingly modified, with costs against the plaintiff in both
instances. So ordered.

Avancea, C.J., Abad Santos, Imperial, Diaz and Concepcion, JJ., concur.
Villa-Real, J., concurs.
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 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:

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.

Republic of the Philippines

SUPREME COURT
Manila

EN BANC

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

PHILIPPINE AIRLINES, INC., plaintiff-appellant,

vs.
ROMEO F. EDU in his capacity as Land Transportation Commissioner, and UBALDO
CARBONELL, in his capacity as National Treasurer, defendants-appellants.

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

GUTIERREZ, JR., J.:

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

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

This appeal was certified to us as one involving a pure question of law by the Court of Appeals in a
case where the then Court of First Instance of Rizal dismissed the portion-about complaint for refund
of registration fees paid under protest.
The disputed registration fees were imposed by the appellee, Commissioner Romeo F. Elevate
pursuant to Section 8, Republic Act No. 4136, otherwise known as the Land Transportation and
Traffic Code.

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

Section 13. In consideration of the franchise and rights hereby granted, the grantee
shall pay to the National Government during the life of this franchise a tax of two per
cent of the gross revenue or gross earning derived by the grantee from its operations
under this franchise. Such tax shall be due and payable quarterly and shall be in lieu
of all taxes of any kind, nature or description, levied, established or collected by any
municipal, provincial or national automobiles, Provided, that if, after the audit of the
accounts of the grantee by the Commissioner of Internal Revenue, a deficiency tax is
shown to be due, the deficiency tax shall be payable within the ten days from the
receipt of the assessment. The grantee shall pay the tax on its real property in
conformity with existing law.

On the strength of an opinion of the Secretary of Justice (Op. No. 307, series of 1956) PAL has,
since 1956, not been paying motor vehicle registration fees.

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

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

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

Appellee Edu denied the request for refund basing his action on the decision in Republic v.
Philippine Rabbit Bus Lines, Inc., (32 SCRA 211, March 30, 1970) to the effect that motor vehicle
registration fees are regulatory exceptional. and not revenue measures and, therefore, do not come
within the exemption granted to PAL? under its franchise. Hence, PAL filed the complaint against
Land Transportation Commissioner Romeo F. Edu and National Treasurer Ubaldo Carbonell with
the Court of First Instance of Rizal, Branch 18 where it was docketed as Civil Case No. Q-15862.

Appellee Romeo F. Elevate in his capacity as LTC Commissioner, and LOI Carbonell in his capacity
as National Treasurer, filed a motion to dismiss alleging that the complaint states no cause of action.
In support of the motion to dismiss, defendants repatriation the ruling in Republic v. Philippine Rabbit
Bus Lines, Inc., (supra) that registration fees of motor vehicles are not taxes, but regulatory fees
imposed as an incident of the exercise of the police power of the state. They contended that while
Act 4271 exempts PAL from the payment of any tax except two per cent on its gross revenue or
earnings, it does not exempt the plaintiff from paying regulatory fees, such as motor vehicle
registration fees. The resolution of the motion to dismiss was deferred by the Court until after trial on
the merits.
On April 24, 1973, the trial court rendered a decision dismissing the appellant's complaint "moved by
the later ruling laid down by the Supreme Court in the case or Republic v. Philippine Rabbit Bus
Lines, Inc., (supra)." From this judgment, PAL appealed to the Court of Appeals which certified the
case to us.

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

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

"The registration fee which defendant-appellee had to pay was imposed by Section 8
of the Revised Motor Vehicle Law (Republic Act No. 587 [1950]). Its heading speaks
of "registration fees." The term is repeated four times in the body thereof. Equally so,
mention is made of the "fee for registration." (Ibid., Subsection G) A subsection starts
with a categorical statement "No fees shall be charged." (lbid.,Subsection H) The
conclusion is difficult to resist therefore that the Motor Vehicle Act requires the
payment not of a tax but of a registration fee under the police power. Hence the
incipient, of the section relied upon by defendant-appellee under the Back Pay Law,
It is not held liable for a tax but for a registration fee. It therefore cannot make use of
a backpay certificate to meet such an obligation.

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

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

The charges prescribed by the Revised Motor Vehicle Law for the registration of
motor vehicles are in section 8 of that law called "fees". But the appellation is no
impediment to their being considered taxes if taxes they really are. For not the name
but the object of the charge determines whether it is a tax or a fee. Geveia speaking,
taxes are for revenue, whereas fees are exceptional. for purposes of regulation and
inspection and are for that reason limited in amount to what is necessary to cover the
cost of the services rendered in that connection. Hence, a charge fixed by statute for
the service to be person,-When by an officer, where the charge has no relation to the
value of the services performed and where the amount collected eventually finds its
way into the treasury of the branch of the government whose officer or officers
collected the chauffeur, is not a fee but a tax."(Cooley on Taxation, Vol. 1, 4th ed., p.
110.)
 From the data submitted in the court below, it appears that the expenditures of the
Motor Vehicle Office are but a small portionabout 5 per centumof the total
collections from motor vehicle registration fees. And as proof that the money
collected is not intended for the expenditures of that office, the law itself provides that
all such money shall accrue to the funds for the construction and maintenance of
public roads, streets and bridges. It is thus obvious that the fees are not collected for
regulatory purposes, that is to say, as an incident to the enforcement of regulations
governing the operation of motor vehicles on public highways, for their express
object is to provide revenue with which the Government is to discharge one of its
principal functionsthe construction and maintenance of public highways for
everybody's use. They are veritable taxes, not merely fees.

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

Sec. 70(b) No other taxes or fees than those prescribed in this Act
shall be imposed for the registration or operation or on the ownership
of any motor vehicle, or for the exercise of the profession of
chauffeur, by any municipal corporation, the provisions of any city
charter to the contrary notwithstanding: Provided, however, That any
provincial board, city or municipal council or board, or other
competent authority may exact and collect such reasonable and
equitable toll fees for the use of such bridges and ferries, within their
respective jurisdiction, as may be authorized and approved by the
Secretary of Public Works and Communications, and also for the use
of such public roads, as may be authorized by the President of the
Philippines upon the recommendation of the Secretary of Public
Works and Communications, but in none of these cases, shall any toll
fee." be charged or collected until and unless the approved schedule
of tolls shall have been posted levied, in a conspicuous place at such
toll station. (at pp. 213-214)

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

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

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

Section 73. Disposal of moneys collected.Twenty per centum of the money

collected under the provisions of this Act shall accrue to the road and bridge funds of
the different provinces and chartered cities in proportion to the centum shall during
the next previous year and the remaining eighty per centum shall be deposited in the
Philippine Treasury to create a special fund for the construction and maintenance of
national and provincial roads and bridges. as well as the streets and bridges in the
 chartered cities to be alloted by the Secretary of Public Works and Communications
for projects recommended by the Director of Public Works in the different provinces
and chartered cities. ....

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

Sec. 61. Disposal of Mortgage. CollectedMonies collected under the provisions of

this Act shall be deposited in a special trust account in the National Treasury to
constitute the Highway Special Fund, which shall be apportioned and expended in
accordance with the provisions of the" Philippine Highway Act of 1935. "Provided,
however, That the amount necessary to maintain and equip the Land Transportation
Commission but not to exceed twenty per cent of the total collection during one year,
shall be set aside for the purpose. (As amended by RA 64-67, approved August 6,
1971).

It appears clear from the above provisions that the legislative intent and purpose behind the law
requiring 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. On the other hand, the Philippine Rabbit case mentions a presumption arising
from the use of the term "fees," which appears to have been favored by the legislature to distinguish
fees from other taxes such as those mentioned in Section 13 of Rep. Act 4136 which reads:

Sec. 13. Payment of taxes upon registration.No original registration of motor

vehicles subject to payment of taxes, customs s duties or other charges shall be
accepted unless proof of payment of the taxes due thereon has been presented to
the Commission.

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

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

It is possible for an exaction to be both tax arose. regulation. License fees are
changes. looked to as a source of revenue as well as a means of regulation
(Sonzinky v. U.S., 300 U.S. 506) This is true, for example, of automobile license
fees. Isabela such case, the fees may properly be regarded as taxes even though
they also serve as an instrument of regulation. 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. (1955 CCH Fed. tax Course, Par. 3101, citing Cooley on
Taxation (2nd Ed.) 592, 593; Calalang v. Lorenzo. 97 Phil. 213-214) Lutz v. Araneta
98 Phil. 198.) These exactions are sometimes called regulatory taxes. (See Secs.
4701, 4711, 4741, 4801, 4811, 4851, and 4881, U.S. Internal Revenue Code of
1954, which classify taxes on tobacco and alcohol as regulatory taxes.) (Umali,
Reviewer in Taxation, 1980, pp. 12-13, citing Cooley on Taxation, 2nd Edition, 591-
593).

Indeed, taxation may be made the implement of the state's police power (Lutz v. Araneta, 98 Phil.
148).
If the purpose is primarily revenue, or if revenue is, at least, one of the real and substantial
purposes, then the exaction is properly called a tax (Umali, Id.) Such is the case of motor vehicle
registration fees. The conclusions become inescapable in view of Section 70(b) of Rep. Act 587
quoted in the Calalang case. The same provision appears as Section 591-593). 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." Though nowhere in Rep. Act 4136 does the law specifically state that the imposition is a tax,
Section 591-593). speaks of "taxes." or fees ... for the registration or operation or on the ownership
of any motor vehicle, or for the exercise of the profession of chauffeur ..." making the intent to
impose a tax more apparent. Thus, even Rep. Act 5448 cited by the respondents, speak of an
"additional" tax," where the law could have referred to an original tax and not one in addition to the
tax already imposed on the registration, operation, or ownership of a motor vehicle under Rep. Act
41383. Simply put, if the exaction under Rep. Act 4136 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. 591-593). of the Code as taxes like the
motor vehicle registration fee and chauffers' license fee. Such fees are to go into the expenditures of
the Land Transportation Commission as provided for in the last proviso of see. 61, aforequoted.

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

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

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

The answer is NO.

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

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

Under its original franchise, Republic Act No. 21); enacted in 1957, petitioner Radio
Communications of the Philippines, Inc., was subject to both the franchise tax and
income tax. In 1964, however, petitioner's franchise was amended by Republic Act
No. 41-42). to the effect that its franchise tax of one and one-half percentum (1-1/2%)
of all gross receipts was provided as "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 taxes the grantee is hereby expressly
 exempted." The issue raised to this Court now is the validity of the respondent court's
decision which ruled that the exemption under Republic Act No. 41-42). was
repealed by Section 24 of Republic Act No. 5448 dated June 27, 1968 which reads:

"(d) The provisions of existing special or general laws to the contrary

notwithstanding, all corporate taxpayers not specifically exempt under
Sections 24 (c) (1) of this Code shall pay the rates provided in this
section. All corporations, agencies, or instrumentalities owned or
controlled by the government, including the Government Service
Insurance System and the Social Security System but excluding
educational institutions, shall pay such rate of tax upon their taxable
net income as are imposed by this section upon associations or
corporations engaged in a similar business or industry. "

An examination of Section 24 of the Tax Code as amended shows clearly that the
law intended all corporate taxpayers to pay income tax as provided by the statute.
There can be no doubt as to the power of Congress to repeal the earlier exemption it
granted. Article XIV, Section 8 of the 1935 Constitution and Article XIV, Section 5 of
the Constitution as amended in 1973 expressly provide that no franchise shall be
granted to any individual, firm, or corporation except under the condition that it shall
be subject to amendment, alteration, or repeal by the legislature when the public
interest so requires. There is no question as to the public interest involved. The
country needs increased revenues. The repealing clause is clear and unambiguous.
There is a listing of entities entitled to tax exemption. The petitioner is not covered by
the provision. Considering the foregoing, the Court Resolved to DENY the petition for
lack of merit. The decision of the respondent court is affirmed.

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

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

(a) The basic corporate income tax based on the grantee's annual net
taxable income computed in accordance with the provisions of the
Internal Revenue Code; or

(b) A franchise tax of two per cent (2%) of the gross revenues.
derived by the grantees from all specific. without distinction as to
transport or nontransport corporations; provided that with respect to
international airtransport service, only the gross passengers, mail,
and freight revenues. from its outgoing flights shall be subject to this
law.

The tax paid by the grantee under either of the above alternatives shall be in lieu of
all other taxes, duties, royalties, registration, license and other fees and charges of
any kind, nature or description imposed, levied, established, assessed, or collected
by any municipal, city, provincial, or national authority or government, agency, now or
in the future, including but not limited to the following:
 xxx xxx xxx

(5) All taxes, fees and other charges on the registration, license, acquisition, and
transfer of airtransport equipment, motor vehicles, and all other personal or real
property of the gravitates (Pres. Decree 1590, 75 OG No. 15, 3259, April 9, 1979).

PAL's current franchise is clear and specific. It has removed the ambiguity found in the earlier law.
PAL is now exempt from the payment of any tax, fee, or other charge on the registration and
licensing of motor vehicles. Such payments are already included in the basic tax or franchise tax
provided in Subsections (a) and (b) of Section 13, P.D. 1590, and may no longer be exacted.

WHEREFORE, the petition is hereby partially GRANTED. The prayed for refund of registration fees
paid in 1971 is DENIED. The Land Transportation Franchising and Regulatory Board (LTFRB) is
enjoined functions-the collecting any tax, fee, or other charge on the registration and licensing of the
petitioner's motor vehicles from April 9, 1979 as provided in Presidential Decree No. 1590.

SO ORDERED.

Fernan, C.J., Narvasa, Melencio-Herrera, Cruz, Paras, Feliciano, Gancayco, Padilla, Bidin,
Sarmiento, Cortes, Grio Aquino and Medialdea, JJ., concur.

Republic of the Philippines

SUPREME COURT
Manila

EN BANC

G.R. No. 115455 October 30, 1995

ARTURO M. TOLENTINO, petitioner,

vs.
THE SECRETARY OF FINANCE and THE COMMISSIONER OF INTERNAL
REVENUE, respondents.

G.R. No. 115525 October 30, 1995

JUAN T. DAVID, petitioner,

vs.
TEOFISTO 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.

G.R. No. 115543 October 30, 1995

RAUL S. ROCO and the INTEGRATED BAR OF THE PHILIPPINES, petitioners,

vs.
THE SECRETARY OF THE DEPARTMENT OF FINANCE; THE COMMISSIONERS OF THE
BUREAU OF INTERNAL REVENUE AND BUREAU OF CUSTOMS, respondents.
G.R. No. 115544 October 30, 1995

PHILIPPINE PRESS INSTITUTE, INC.; EGP PUBLISHING CO., INC.; KAMAHALAN PUBLISHING
CORPORATION; PHILIPPINE JOURNALISTS, INC.; JOSE L. PAVIA; and OFELIA L.
DIMALANTA, petitioners,
vs.
HON. 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.

G.R. No. 115754 October 30, 1995

CHAMBER OF REAL ESTATE AND BUILDERS ASSOCIATIONS, INC., (CREBA), petitioner,

vs.
THE COMMISSIONER OF INTERNAL REVENUE, respondent.

G.R. No. 115781 October 30, 1995

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., and PHILIPPINE BIBLE SOCIETY, INC. and WIGBERTO
TAADA, petitioners,
vs.
THE EXECUTIVE SECRETARY, THE SECRETARY OF FINANCE, THE COMMISSIONER OF
INTERNAL REVENUE and THE COMMISSIONER OF CUSTOMS, respondents.

G.R. No. 115852 October 30, 1995

PHILIPPINE AIRLINES, INC., petitioner,

vs.
THE SECRETARY OF FINANCE and COMMISSIONER OF INTERNAL REVENUE, respondents.

G.R. No. 115873 October 30, 1995

COOPERATIVE UNION OF THE PHILIPPINES, petitioner,

vs.
HON. 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.

G.R. No. 115931 October 30, 1995

PHILIPPINE EDUCATIONAL PUBLISHERS ASSOCIATION, INC. and ASSOCIATION OF

PHILIPPINE BOOK SELLERS, petitioners,
vs.
HON. 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 Commissioner of Customs, respondents.
 RESOLUTION

MENDOZA, J.:

These are motions seeking reconsideration of our decision dismissing the petitions filed in these
cases for the declaration of unconstitutionality of R.A. No. 7716, otherwise known as the Expanded
Value-Added Tax Law. The motions, of which there are 10 in all, have been filed by the several
petitioners in these cases, with the exception of the Philippine Educational Publishers Association,
Inc. and the Association of Philippine Booksellers, petitioners in G.R. No. 115931.

The Solicitor General, representing the respondents, filed a consolidated comment, to which the
Philippine Airlines, Inc., petitioner in G.R. No. 115852, and the Philippine Press Institute, Inc.,
petitioner in G.R. No. 115544, and Juan T. David, petitioner in G.R. No. 115525, each filed a reply.
In turn the Solicitor General filed on June 1, 1995 a rejoinder to the PPI's reply.

On June 27, 1995 the matter was submitted for resolution.

I. Power of the Senate to propose amendments to revenue bills. Some of the petitioners (Tolentino,
Kilosbayan, Inc., Philippine Airlines (PAL), Roco, and Chamber of Real Estate and Builders
Association (CREBA)) reiterate previous claims made by them that R.A. No. 7716 did not "originate
exclusively" in the House of Representatives as required by Art. VI, 24 of the Constitution. Although
they admit that H. No. 11197 was filed in the House of Representatives where it passed three
readings and that afterward it was sent to the Senate where after first reading it was referred to the
Senate Ways and Means Committee, they complain that the Senate did not pass it on second and
third readings. Instead what the Senate did was to pass its own version (S. No. 1630) which it
approved on May 24, 1994. Petitioner Tolentino adds that what the Senate committee should have
done was to amend H. No. 11197 by striking out the text of the bill and substituting it with the text of
S. No. 1630. That way, it is said, "the bill remains a House bill and the Senate version just becomes
the text (only the text) of the House bill."

The contention has no merit.

The enactment of S. No. 1630 is not the only instance in which the Senate proposed an amendment
to a House revenue bill by enacting its own version of a revenue bill. On at least two occasions
during the Eighth Congress, the Senate passed its own version of revenue bills, which, in
consolidation with House bills earlier passed, became the enrolled bills. These were:

R.A. No. 7369 (AN ACT TO AMEND THE OMNIBUS INVESTMENTS CODE OF 1987 BY
EXTENDING FROM FIVE (5) YEARS TO TEN YEARS THE PERIOD FOR TAX AND DUTY
EXEMPTION AND TAX CREDIT ON CAPITAL EQUIPMENT) which was approved by the President
on April 10, 1992. This Act is actually a consolidation of H. No. 34254, which was approved by the
House on January 29, 1992, and S. No. 1920, which was approved by the Senate on February 3,
1992.

R.A. No. 7549 (AN ACT GRANTING TAX EXEMPTIONS TO WHOEVER SHALL GIVE REWARD
TO ANY FILIPINO ATHLETE WINNING A MEDAL IN OLYMPIC GAMES) which was approved by
the President on May 22, 1992. This Act is a consolidation of H. No. 22232, which was approved by
the House of Representatives on August 2, 1989, and S. No. 807, which was approved by the
Senate on October 21, 1991.
On the other hand, the Ninth Congress passed revenue laws which were also the result of the
consolidation of House and Senate bills. These are the following, with indications of the dates on
which the laws were approved by the President and dates the separate bills of the two chambers of
Congress were respectively passed:

1. R.A. NO. 7642

AN ACT INCREASING THE PENALTIES FOR TAX EVASION, AMENDING FOR

THIS PURPOSE THE PERTINENT SECTIONS OF THE NATIONAL INTERNAL
REVENUE CODE (December 28, 1992).

House Bill No. 2165, October 5, 1992

Senate Bill No. 32, December 7, 1992

2. R.A. NO. 7643

AN ACT TO EMPOWER THE COMMISSIONER OF INTERNAL REVENUE TO

REQUIRE THE PAYMENT OF THE VALUE-ADDED TAX EVERY MONTH AND TO
ALLOW LOCAL GOVERNMENT UNITS TO SHARE IN VAT REVENUE,
AMENDING FOR THIS PURPOSE CERTAIN SECTIONS OF THE NATIONAL
INTERNAL REVENUE CODE (December 28, 1992)

House Bill No. 1503, September 3, 1992

Senate Bill No. 968, December 7, 1992

3. R.A. NO. 7646

AN ACT AUTHORIZING THE COMMISSIONER OF INTERNAL REVENUE TO

PRESCRIBE THE PLACE FOR PAYMENT OF INTERNAL REVENUE TAXES BY
LARGE TAXPAYERS, AMENDING FOR THIS PURPOSE CERTAIN PROVISIONS
OF THE NATIONAL INTERNAL REVENUE CODE, AS AMENDED (February 24,
1993)

House Bill No. 1470, October 20, 1992

Senate Bill No. 35, November 19, 1992

4. R.A. NO. 7649

AN ACT REQUIRING THE GOVERNMENT OR ANY OF ITS POLITICAL

SUBDIVISIONS, INSTRUMENTALITIES OR AGENCIES INCLUDING
GOVERNMENT-OWNED OR CONTROLLED CORPORATIONS (GOCCS) TO
DEDUCT AND WITHHOLD THE VALUE-ADDED TAX DUE AT THE RATE OF
THREE PERCENT (3%) ON GROSS PAYMENT FOR THE PURCHASE OF
GOODS AND SIX PERCENT (6%) ON GROSS RECEIPTS FOR SERVICES
RENDERED BY CONTRACTORS (April 6, 1993)

House Bill No. 5260, January 26, 1993

 Senate Bill No. 1141, March 30, 1993

5. R.A. NO. 7656

AN ACT REQUIRING GOVERNMENT-OWNED OR CONTROLLED

CORPORATIONS TO DECLARE DIVIDENDS UNDER CERTAIN CONDITIONS TO
THE NATIONAL GOVERNMENT, AND FOR OTHER PURPOSES (November 9,
1993)

House Bill No. 11024, November 3, 1993

Senate Bill No. 1168, November 3, 1993

6. R.A. NO. 7660

AN ACT RATIONALIZING FURTHER THE STRUCTURE AND ADMINISTRATION

OF THE DOCUMENTARY STAMP TAX, AMENDING FOR THE PURPOSE
CERTAIN PROVISIONS OF THE NATIONAL INTERNAL REVENUE CODE, AS
AMENDED, ALLOCATING FUNDS FOR SPECIFIC PROGRAMS, AND FOR
OTHER PURPOSES (December 23, 1993)

House Bill No. 7789, May 31, 1993

Senate Bill No. 1330, November 18, 1993

7. R.A. NO. 7717

AN ACT IMPOSING A TAX ON THE SALE, BARTER OR EXCHANGE OF SHARES

OF STOCK LISTED AND TRADED THROUGH THE LOCAL STOCK EXCHANGE
OR THROUGH INITIAL PUBLIC OFFERING, AMENDING FOR THE PURPOSE
THE NATIONAL INTERNAL REVENUE CODE, AS AMENDED, BY INSERTING A
NEW SECTION AND REPEALING CERTAIN SUBSECTIONS THEREOF (May 5,
1994)

House Bill No. 9187, November 3, 1993

Senate Bill No. 1127, March 23, 1994

Thus, the enactment of S. No. 1630 is not the only instance in which the Senate, in the exercise of
its power to propose amendments to bills required to originate in the House, passed its own version
of a House revenue measure. It is noteworthy that, in the particular case of S. No. 1630, petitioners
Tolentino and Roco, as members of the Senate, voted to approve it on second and third readings.

On the other hand, amendment by substitution, in the manner urged by petitioner Tolentino,
concerns a mere matter of form. Petitioner has not shown what substantial difference it would make
if, as the Senate actually did in this case, a separate bill like S. No. 1630 is instead enacted as a
substitute measure, "taking into Consideration . . . H.B. 11197."

Indeed, so far as pertinent, the Rules of the Senate only provide:

RULE XXIX
 AMENDMENTS

xxx xxx xxx

68. Not more than one amendment to the original amendment shall be considered.

No amendment by substitution shall be entertained unless the text thereof is

submitted in writing.

Any of said amendments may be withdrawn before a vote is taken thereon.

69. No amendment which seeks the inclusion of a legislative provision foreign to the
subject matter of a bill (rider) shall be entertained.

xxx xxx xxx

70-A. A bill or resolution shall not be amended by substituting it with another which
covers a subject distinct from that proposed in the original bill or resolution.
(emphasis added).

Nor is there merit in petitioners' contention that, with regard to revenue bills, the Philippine Senate
possesses less power than the U.S. Senate because of textual differences between constitutional
provisions giving them the power to propose or concur with amendments.

Art. I, 7, cl. 1 of the U.S. Constitution reads:

All Bills for raising Revenue shall originate in the House of Representatives; but the
Senate may propose or concur with amendments as on other Bills.

Art. VI, 24 of our Constitution reads:

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.

The addition of the word "exclusively" in the Philippine Constitution and the decision to drop the
phrase "as on other Bills" in the American version, according to petitioners, shows the intention of
the framers of our Constitution to restrict the Senate's power to propose amendments to revenue
bills. Petitioner Tolentino contends that the word "exclusively" was inserted to modify "originate" and
"the words 'as in any other bills' (sic) were eliminated so as to show that these bills were not to be
like other bills but must be treated as a special kind."

The history of this provision does not support this contention. The supposed indicia of constitutional
intent are nothing but the relics of an unsuccessful attempt to limit the power of the Senate. It will be
recalled that the 1935 Constitution originally provided for a unicameral National Assembly. When it
was decided in 1939 to change to a bicameral legislature, it became necessary to provide for the
procedure for lawmaking by the Senate and the House of Representatives. The work of proposing
amendments to the Constitution was done by the National Assembly, acting as a constituent
assembly, some of whose members, jealous of preserving the Assembly's lawmaking powers,
sought to curtail the powers of the proposed Senate. Accordingly they proposed the following
provision:
 All bills appropriating public funds, revenue or tariff bills, bills of local application, and
private bills shall originate exclusively in the Assembly, but the Senate may propose
or concur with amendments. In case of disapproval by the Senate of any such bills,
the Assembly may repass the same by a two-thirds vote of all its members, and
thereupon, the bill so repassed shall be deemed enacted and may be submitted to
the President for corresponding action. In the event that the Senate should fail to
finally act on any such bills, the Assembly may, after thirty days from the opening of
the next regular session of the same legislative term, reapprove the same with a vote
of two-thirds of all the members of the Assembly. And upon such reapproval, the bill
shall be deemed enacted and may be submitted to the President for corresponding
action.

The special committee on the revision of laws of the Second National Assembly vetoed the proposal.
It deleted everything after the first sentence. As rewritten, the proposal was approved by the National
Assembly and embodied in Resolution No. 38, as amended by Resolution No. 73. (J. ARUEGO,
KNOW YOUR CONSTITUTION 65-66 (1950)). The proposed amendment was submitted to the
people and ratified by them in the elections held on June 18, 1940.

This is the history of Art. VI, 18 (2) of the 1935 Constitution, from which Art. VI, 24 of the present
Constitution was derived. It explains why the word "exclusively" was added to the American text from
which the framers of the Philippine Constitution borrowed and why the phrase "as on other Bills" was
not copied. Considering the defeat of the proposal, the power of the Senate to propose amendments
must be understood to be full, plenary and complete "as on other Bills." Thus, because revenue bills
are required to originate exclusively in the House of Representatives, the Senate cannot enact
revenue measures of its own without such bills. After a revenue bill is passed and sent over to it by
the House, however, the Senate certainly can pass its own version on the same subject matter. This
follows from the coequality of the two chambers of Congress.

That this is also the understanding of book authors of the scope of the Senate's power to concur is
clear from the following commentaries:

The power of the Senate to propose or concur with amendments is apparently

without restriction. It would seem that by virtue of this power, the Senate can
practically re-write a bill required to come from the House and leave only a trace of
the original bill. For example, a general revenue bill passed by the lower house of the
United States Congress contained provisions for the imposition of an inheritance tax .
This was changed by the Senate into a corporation tax. The amending authority of
the Senate was declared by the United States Supreme Court to be sufficiently broad
to enable it to make the alteration. [Flint v. Stone Tracy Company, 220 U.S. 107, 55
L. ed. 389].

(L. TAADA AND F. CARREON, POLITICAL LAW OF THE PHILIPPINES 247

(1961))

The above-mentioned bills are supposed to be initiated by the House of

Representatives because it is more numerous in membership and therefore also
more representative of the people. Moreover, its members are presumed to be more
familiar with the needs of the country in regard to the enactment of the legislation
involved.

The Senate is, however, allowed much leeway in the exercise of its power to propose
or concur with amendments to the bills initiated by the House of Representatives.
 Thus, in one case, a bill introduced in the U.S. House of Representatives was
changed by the Senate to make a proposed inheritance tax a corporation tax. It is
also accepted practice for the Senate to introduce what is known as an amendment
by substitution, which may entirely replace the bill initiated in the House of
Representatives.

(I. CRUZ, PHILIPPINE POLITICAL LAW 144-145 (1993)).

In sum, while Art. VI, 24 provides that all appropriation, revenue or tariff bills, bills authorizing
increase of the public debt, bills of local application, and private bills must "originate exclusively in
the House of Representatives," it also adds, "but the Senate may propose or concur with
amendments." In the exercise of this power, the Senate may propose an entirely new bill as a
substitute measure. As petitioner Tolentino states in a high school text, a committee to which a bill is
referred may do any of the following:

(1) to endorse the bill without changes; (2) to make changes in the bill omitting or
adding sections or altering its language; (3) to make and endorse an entirely new bill
as a substitute, in which case it will be known as a committee bill; or (4) to make no
report at all.

(A. TOLENTINO, THE GOVERNMENT OF THE PHILIPPINES 258 (1950))

To except from this procedure the amendment of bills which are required to originate in the House
by prescribing that the number of the House bill and its other parts up to the enacting clause must be
preserved although the text of the Senate amendment may be incorporated in place of the original
body of the bill is to insist on a mere technicality. At any rate there is no rule prescribing this form. S.
No. 1630, as a substitute measure, is therefore as much an amendment of H. No. 11197 as any
which the Senate could have made.

II. S. No. 1630 a mere amendment of H. No. 11197. Petitioners' basic error is that they assume that
S. No. 1630 is an independent and distinct bill. Hence their repeated references to its certification
that it was passed by the Senate "in substitution of S.B. No. 1129, taking into consideration P.S.
Res. No. 734 and H.B. No. 11197," implying that there is something substantially different between
the reference to S. No. 1129 and the reference to H. No. 11197. From this premise, they conclude
that R.A. No. 7716 originated both in the House and in the Senate and that it is the product of two
"half-baked bills because neither H. No. 11197 nor S. No. 1630 was passed by both houses of
Congress."

In point of fact, in several instances the provisions of S. No. 1630, clearly appear to be mere
amendments of the corresponding provisions of H. No. 11197. The very tabular comparison of the
provisions of H. No. 11197 and S. No. 1630 attached as Supplement A to the basic petition of
petitioner Tolentino, while showing differences between the two bills, at the same time indicates that
the provisions of the Senate bill were precisely intended to be amendments to the House bill.

Without H. No. 11197, the Senate could not have enacted S. No. 1630. Because the Senate bill was
a mere amendment of the House bill, H. No. 11197 in its original form did not have to pass the
Senate on second and three readings. It was enough that after it was passed on first reading it was
referred to the Senate Committee on Ways and Means. Neither was it required that S. No. 1630 be
passed by the House of Representatives before the two bills could be referred to the Conference
Committee.
There is legislative precedent for what was done in the case of H. No. 11197 and S. No. 1630. When
the House bill and Senate bill, which became R.A. No. 1405 (Act prohibiting the disclosure of bank
deposits), were referred to a conference committee, the question was raised whether the two bills
could be the subject of such conference, considering that the bill from one house had not been
passed by the other and vice versa. As Congressman Duran put the question:

MR. DURAN. Therefore, I raise this question of order as to procedure: If a House bill
is passed by the House but not passed by the Senate, and a Senate bill of a similar
nature is passed in the Senate but never passed in the House, can the two bills be
the subject of a conference, and can a law be enacted from these two bills? I
understand that the Senate bill in this particular instance does not refer to
investments in government securities, whereas the bill in the House, which was
introduced by the Speaker, covers two subject matters: not only investigation of
deposits in banks but also investigation of investments in government securities.
Now, since the two bills differ in their subject matter, I believe that no law can be
enacted.

Ruling on the point of order raised, the chair (Speaker Jose B. Laurel, Jr.) said:

THE SPEAKER. The report of the conference committee is in order. It is precisely in

cases like this where a conference should be had. If the House bill had been
approved by the Senate, there would have been no need of a conference; but
precisely because the Senate passed another bill on the same subject matter, the
conference committee had to be created, and we are now considering the report of
that committee.

(2 CONG. REC. NO. 13, July 27, 1955, pp. 3841-42 (emphasis added))

III. The President's certification. The fallacy in thinking that H. No. 11197 and S. No. 1630 are distinct
and unrelated measures also accounts for the petitioners' (Kilosbayan's and PAL's) contention that
because the President separately certified to the need for the immediate enactment of these
measures, his certification was ineffectual and void. The certification had to be made of the version
of the same revenue bill which at the moment was being considered. Otherwise, to follow petitioners'
theory, it would be necessary for the President to certify as many bills as are presented in a house of
Congress even though the bills are merely versions of the bill he has already certified. It is enough
that he certifies the bill which, at the time he makes the certification, is under consideration. Since on
March 22, 1994 the Senate was considering S. No. 1630, it was that bill which had to be certified.
For that matter on June 1, 1993 the President had earlier certified H. No. 9210 for immediate
enactment because it was the one which at that time was being considered by the House. This bill
was later substituted, together with other bills, by H. No. 11197.

As to what Presidential certification can accomplish, we have already explained in the main decision
that the phrase "except when the President certifies to the necessity of its immediate enactment,
etc." in Art. VI, 26 (2) qualifies not only the requirement that "printed copies [of a bill] in its final form
[must be] distributed to the members three days before its passage" but also the requirement that
before a bill can become a law it must have passed "three readings on separate days." There is not
only textual support for such construction but historical basis as well.

Art. VI, 21 (2) of the 1935 Constitution originally provided:

(2) No bill shall be passed by either House unless it shall have been printed and
copies thereof in its final form furnished its Members at least three calendar days
 prior to its passage, except when the President shall have certified to the necessity of
its immediate enactment. Upon the last reading of a bill, no amendment thereof shall
be allowed and the question upon its passage shall be taken immediately thereafter,
and the yeas and nays entered on the Journal.

When the 1973 Constitution was adopted, it was provided in Art. VIII, 19 (2):

(2) No bill 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 the Members
three days before its passage, except when the Prime Minister 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.

This provision of the 1973 document, with slight modification, was adopted in Art. VI, 26 (2) of the
present Constitution, thus:

(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. 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.

The exception is based on the prudential consideration that if in all cases three readings on separate
days are required and a bill has to be printed in final form before it can be passed, the need for a law
may be rendered academic by the occurrence of the very emergency or public calamity which it is
meant to address.

Petitioners further contend that a "growing budget deficit" is not an emergency, especially in a
country like the Philippines where budget deficit is a chronic condition. Even if this were the case, an
enormous budget deficit does not make the need for R.A. No. 7716 any less urgent or the situation
calling for its enactment any less an emergency.

Apparently, the members of the Senate (including some of the petitioners in these cases) believed
that there was an urgent need for consideration of S. No. 1630, because they responded to the call
of the President by voting on the bill on second and third readings on the same day. While the
judicial department is not bound by the Senate's acceptance of the President's certification, the
respect due coequal departments of the government in matters committed to them by the
Constitution and the absence of a clear showing of grave abuse of discretion caution a stay of the
judicial hand.

At any rate, we are satisfied that S. No. 1630 received thorough consideration in the Senate where it
was discussed for six days. Only its distribution in advance in its final printed form was actually
dispensed with by holding the voting on second and third readings on the same day (March 24,
1994). Otherwise, sufficient time between the submission of the bill on February 8, 1994 on second
reading and its approval on March 24, 1994 elapsed before it was finally voted on by the Senate on
third reading.
The purpose for which three readings on separate days is required is said to be two-fold: (1) to
inform the members of Congress of what they must vote on and (2) to give them notice that a
measure is progressing through the enacting process, thus enabling them and others interested in
the measure to prepare their positions with reference to it. (1 J. G. SUTHERLAND, STATUTES AND
STATUTORY CONSTRUCTION 10.04, p. 282 (1972)). These purposes were substantially
achieved in the case of R.A. No. 7716.

IV. Power of Conference Committee. It is contended (principally by Kilosbayan, Inc. and the
Movement of Attorneys for Brotherhood, Integrity and Nationalism, Inc. (MABINI)) that in violation of
the constitutional policy of full public disclosure and the people's right to know (Art. II, 28 and Art.
III, 7) the Conference Committee met for two days in executive session with only the conferees
present.

As pointed out in our main decision, even in the United States it was customary to hold such
sessions with only the conferees and their staffs in attendance and it was only in 1975 when a new
rule was adopted requiring open sessions. Unlike its American counterpart, the Philippine Congress
has not adopted a rule prescribing open hearings for conference committees.

It is nevertheless claimed that in the United States, before the adoption of the rule in 1975, at least
staff members were present. These were staff members of the Senators and Congressmen,
however, who may be presumed to be their confidential men, not stenographers as in this case who
on the last two days of the conference were excluded. There is no showing that the conferees
themselves did not take notes of their proceedings so as to give petitioner Kilosbayan basis for
claiming that even in secret diplomatic negotiations involving state interests, conferees keep notes of
their meetings. Above all, the public's right to know was fully served because the Conference
Committee in this case submitted a report showing the changes made on the differing versions of
the House and the Senate.

Petitioners cite the rules of both houses which provide that conference committee reports must
contain "a detailed, sufficiently explicit statement of the changes in or other amendments." These
changes are shown in the bill attached to the Conference Committee Report. The members of both
houses could thus ascertain what changes had been made in the original bills without the need of a
statement detailing the changes.

The same question now presented was raised when the bill which became R.A. No. 1400 (Land
Reform Act of 1955) was reported by the Conference Committee. Congressman Bengzon raised a
point of order. He said:

MR. BENGZON. My point of order is that it is out of order to consider the report of
the conference committee regarding House Bill No. 2557 by reason of the provision
of Section 11, Article XII, of the Rules of this House which provides specifically that
the conference report must be accompanied by a detailed statement of the effects of
the amendment on the bill of the House. This conference committee report is not
accompanied by that detailed statement, Mr. Speaker. Therefore it is out of order to
consider it.

Petitioner Tolentino, then the Majority Floor Leader, answered:

MR. TOLENTINO. Mr. Speaker, I should just like to say a few words in connection
with the point of order raised by the gentleman from Pangasinan.
 There is no question about the provision of the Rule cited by the gentleman from
Pangasinan, but this provision applies to those cases where only portions of the bill
have been amended. In this case before us an entire bill is presented; therefore, it
can be easily seen from the reading of the bill what the provisions are. Besides, this
procedure has been an established practice.

After some interruption, he continued:

MR. TOLENTINO. As I was saying, Mr. Speaker, we have to look into the reason for
the provisions of the Rules, and the reason for the requirement in the provision cited
by the gentleman from Pangasinan is when there are only certain words or phrases
inserted in or deleted from the provisions of the bill included in the conference report,
and we cannot understand what those words and phrases mean and their relation to
the bill. In that case, it is necessary to make a detailed statement on how those
words and phrases will affect the bill as a whole; but when the entire bill itself is
copied verbatim in the conference report, that is not necessary. So when the reason
for the Rule does not exist, the Rule does not exist.

(2 CONG. REC. NO. 2, p. 4056. (emphasis added))

Congressman Tolentino was sustained by the chair. The record shows that when the ruling was
appealed, it was upheld by viva voce and when a division of the House was called, it was sustained
by a vote of 48 to 5. (Id.,
p. 4058)

Nor is there any doubt about the power of a conference committee to insert new provisions as long
as these are germane to the subject of the conference. As this Court held in Philippine Judges
Association v. Prado, 227 SCRA 703 (1993), in an opinion written by then Justice Cruz, the
jurisdiction of the conference committee is not limited to resolving differences between the Senate
and the House. It may propose an entirely new provision. What is important is that its report is
subsequently approved by the respective houses of Congress. This Court ruled that it would not
entertain allegations that, because new provisions had been added by the conference committee,
there was thereby a violation of the constitutional injunction that "upon the last reading of a bill, no
amendment thereto shall be allowed."

Applying these principles, we shall decline to look into the petitioners' charges that an
amendment was made upon the last reading of the bill that eventually became R.A.
No. 7354 and that copies thereof in its final form were not distributed among the
members of each House. Both the enrolled bill and the legislative journals certify that
the measure was duly enacted i.e., in accordance with Article VI, Sec. 26 (2) of the
Constitution. We are bound by such official assurances from a coordinate
department of the government, to which we owe, at the very least, a becoming
courtesy.

(Id. at 710. (emphasis added))

It is interesting to note the following description of conference committees in the Philippines in a

1979 study:

Conference committees may be of two types: free or instructed. These committees

may be given instructions by their parent bodies or they may be left without
instructions. Normally the conference committees are without instructions, and this is
 why they are often critically referred to as "the little legislatures." Once bills have
been sent to them, the conferees have almost unlimited authority to change the
clauses of the bills and in fact sometimes introduce new measures that were not in
the original legislation. No minutes are kept, and members' activities on conference
committees are difficult to determine. One congressman known for his idealism put it
this way: "I killed a bill on export incentives for my interest group [copra] in the
conference committee but I could not have done so anywhere else." The conference
committee submits a report to both houses, and usually it is accepted. If the report is
not accepted, then the committee is discharged and new members are appointed.

(R. Jackson, Committees in the Philippine Congress, in COMMITTEES AND

LEGISLATURES: A COMPARATIVE ANALYSIS 163 (J. D. LEES AND M. SHAW,
eds.)).

In citing this study, we pass no judgment on the methods of conference committees. We cite it only
to say that conference committees here are no different from their counterparts in the United States
whose vast powers we noted in Philippine Judges Association v. Prado, supra. At all events, under
Art. VI, 16(3) each house has the power "to determine the rules of its proceedings," including those
of its committees. Any meaningful change in the method and procedures of Congress or its
committees must therefore be sought in that body itself.

V. The titles of S. No. 1630 and H. No. 11197. PAL maintains that R.A. No. 7716 violates Art. VI, 26
(1) of the Constitution which provides that "Every bill passed by Congress shall embrace only one
subject which shall be expressed in the title thereof." PAL contends that the amendment of its
franchise by the withdrawal of its exemption from the VAT is not expressed in the title of the law.

Pursuant to 13 of P.D. No. 1590, PAL pays a franchise tax of 2% on its gross revenue "in lieu of all
other taxes, duties, royalties, registration, license and other fees and charges of any kind, nature, or
description, imposed, levied, established, assessed or collected by any municipal, city, provincial or
national authority or government agency, now or in the future."

PAL was exempted from the payment of the VAT along with other entities by 103 of the National
Internal Revenue Code, which provides as follows:

103. Exempt transactions. The following shall be exempt from the value-added
tax:

xxx xxx xxx

(q) Transactions which are exempt under special laws or international agreements to
which the Philippines is a signatory.

R.A. No. 7716 seeks to withdraw certain exemptions, including that granted to PAL, by amending
103, as follows:

103. Exempt transactions. The following shall be exempt from the value-added
tax:

xxx xxx xxx

 (q) Transactions which are exempt under special laws, except those granted under
Presidential Decree Nos. 66, 529, 972, 1491, 1590. . . .

The amendment of 103 is expressed in the title of R.A. No. 7716 which reads:

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.

By stating that R.A. No. 7716 seeks to "[RESTRUCTURE] THE VALUE-ADDED TAX (VAT)
SYSTEM [BY] 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,"
Congress thereby clearly expresses its intention to amend any provision of the NIRC which stands in
the way of accomplishing the purpose of the law.

PAL asserts that the amendment of its franchise must be reflected in the title of the law by specific
reference to P.D. No. 1590. It is unnecessary to do this in order to comply with the constitutional
requirement, since it is already stated in the title that the law seeks to amend the pertinent provisions
of the NIRC, among which is 103(q), in order to widen the base of the VAT. Actually, it is the bill
which becomes a law that is required to express in its title the subject of legislation. The titles of H.
No. 11197 and S. No. 1630 in fact specifically referred to 103 of the NIRC as among the provisions
sought to be amended. We are satisfied that sufficient notice had been given of the pendency of
these bills in Congress before they were enacted into what is now R.A.
No. 7716.

In Philippine Judges Association v. Prado, supra, a similar argument as that now made by PAL was
rejected. R.A. No. 7354 is entitled AN ACT CREATING THE PHILIPPINE POSTAL CORPORATION,
DEFINING ITS POWERS, FUNCTIONS AND RESPONSIBILITIES, PROVIDING FOR
REGULATION OF THE INDUSTRY AND FOR OTHER PURPOSES CONNECTED THEREWITH. It
contained a provision repealing all franking privileges. It was contended that the withdrawal of
franking privileges was not expressed in the title of the law. In holding that there was sufficient
description of the subject of the law in its title, including the repeal of franking privileges, this Court
held:

To require every end and means necessary for the accomplishment of the general
objectives of the statute to be expressed in its title would not only be unreasonable
but would actually render legislation impossible. [Cooley, Constitutional Limitations,
8th Ed., p. 297] As has been correctly explained:

The details of a legislative act need not be specifically stated in its

title, but matter germane to the subject as expressed in the title, and
adopted to the accomplishment of the object in view, may properly be
included in the act. Thus, it is proper to create in the same act the
machinery by which the act is to be enforced, to prescribe the
penalties for its infraction, and to remove obstacles in the way of its
execution. If such matters are properly connected with the subject as
expressed in the title, it is unnecessary that they should also have
special mention in the title. (Southern Pac. Co. v. Bartine, 170 Fed.
725)
 (227 SCRA at 707-708)

VI. Claims of press freedom and religious liberty. We have held that, as a general proposition, the
press is not exempt from the taxing power of the State and that what the constitutional guarantee of
free press prohibits are laws which single out the press or target a group belonging to the press for
special treatment or which in any way discriminate against the press on the basis of the content of
the publication, and R.A. No. 7716 is none of these.

Now it is contended by the PPI that by removing the exemption of the press from the VAT while
maintaining those granted to others, the law discriminates against the press. At any rate, it is
averred, "even nondiscriminatory taxation of constitutionally guaranteed freedom is unconstitutional."

With respect to the first contention, it would suffice to say that since the law granted the press a
privilege, the law could take back the privilege anytime without offense to the Constitution. The
reason is simple: by granting exemptions, the State does not forever waive the exercise of its
sovereign prerogative.

Indeed, in withdrawing the exemption, the law merely subjects the press to the same tax burden to
which other businesses have long ago been subject. It is thus different from the tax involved in the
cases invoked by the PPI. The license tax in Grosjean v. American Press Co., 297 U.S. 233, 80 L.
Ed. 660 (1936) was found to be discriminatory because it was laid on the gross advertising receipts
only of newspapers whose weekly circulation was over 20,000, with the result that the tax applied
only to 13 out of 124 publishers in Louisiana. These large papers were critical of Senator Huey Long
who controlled the state legislature which enacted the license tax. The censorial motivation for the
law was thus evident.

On the other hand, in Minneapolis Star & Tribune Co. v. Minnesota Comm'r of Revenue, 460 U.S.
575, 75 L. Ed. 2d 295 (1983), the tax was found to be discriminatory because although it could have
been made liable for the sales tax or, in lieu thereof, for the use tax on the privilege of using, storing
or consuming tangible goods, the press was not. Instead, the press was exempted from both taxes.
It was, however, later made to pay a special use tax on the cost of paper and ink which made these
items "the only items subject to the use tax that were component of goods to be sold at retail." The
U.S. Supreme Court held that the differential treatment of the press "suggests that the goal of
regulation is not related to suppression of expression, and such goal is presumptively
unconstitutional." It would therefore appear that even a law that favors the press is constitutionally
suspect. (See the dissent of Rehnquist, J. in that case)

Nor is it true that only two exemptions previously granted by E.O. No. 273 are withdrawn "absolutely
and unqualifiedly" by R.A. No. 7716. Other exemptions from the VAT, such as those previously
granted to PAL, petroleum concessionaires, enterprises registered with the Export Processing Zone
Authority, and many more are likewise totally withdrawn, in addition to exemptions which are partially
withdrawn, in an effort to broaden the base of the tax.

The PPI says that the discriminatory treatment of the press is highlighted by the fact that
transactions, which are profit oriented, continue to enjoy exemption under R.A. No. 7716. An
enumeration of some of these transactions will suffice to show that by and large this is not so and
that the exemptions are granted for a purpose. As the Solicitor General says, such exemptions are
granted, in some cases, to encourage agricultural production and, in other cases, for the personal
benefit of the end-user rather than for profit. The exempt transactions are:

(a) Goods for consumption or use which are in their original state (agricultural,
marine and forest products, cotton seeds in their original state, fertilizers, seeds,
 seedlings, fingerlings, fish, prawn livestock and poultry feeds) and goods or services
to enhance agriculture (milling of palay, corn, sugar cane and raw sugar, livestock,
poultry feeds, fertilizer, ingredients used for the manufacture of feeds).

(b) Goods used for personal consumption or use (household and personal effects of
citizens returning to the Philippines) or for professional use, like professional
instruments and implements, by persons coming to the Philippines to settle here.

(c) Goods subject to excise tax such as petroleum products or to be used for
manufacture of petroleum products subject to excise tax and services subject to
percentage tax.

(d) Educational services, medical, dental, hospital and veterinary services, and
services rendered under employer-employee relationship.

(e) Works of art and similar creations sold by the artist himself.

(f) Transactions exempted under special laws, or international agreements.

(g) Export-sales by persons not VAT-registered.

(h) Goods or services with gross annual sale or receipt not exceeding P500,000.00.

(Respondents' Consolidated Comment on the Motions for Reconsideration, pp. 58-

60)

The PPI asserts that it does not really matter that the law does not discriminate against the press
because "even nondiscriminatory taxation on constitutionally guaranteed freedom is
unconstitutional." PPI cites in support of this assertion the following statement in Murdock
v. Pennsylvania, 319 U.S. 105, 87 L. Ed. 1292 (1943):

The fact that the ordinance is "nondiscriminatory" is immaterial. The protection

afforded by the First Amendment is not so restricted. A license tax certainly does not
acquire constitutional validity because it classifies the privileges protected by the
First Amendment along with the wares and merchandise of hucksters and peddlers
and treats them all alike. Such equality in treatment does not save the ordinance.
Freedom of press, freedom of speech, freedom of religion are in preferred position.

The Court was speaking in that case of a license tax, which, unlike an ordinary tax, is mainly for
regulation. Its imposition on the press is unconstitutional because it lays a prior restraint on the
exercise of its right. Hence, although its application to others, such those selling goods, is valid, its
application to the press or to religious groups, such as the Jehovah's Witnesses, in connection with
the latter's sale of religious books and pamphlets, is unconstitutional. As the U.S. Supreme Court put
it, "it is one thing to impose a tax on income or property of a preacher. It is quite another thing to
exact a tax on him for delivering a sermon."

A similar ruling was made by this Court in American Bible Society v. City of Manila, 101 Phil. 386
(1957) which invalidated a city ordinance requiring a business license fee on those engaged in the
sale of general merchandise. It was held that the tax could not be imposed on the sale of bibles by
the American Bible Society without restraining the free exercise of its right to propagate.
The VAT is, however, different. It is not a license tax. It is not a tax on the exercise of a privilege,
much less a constitutional right. It is imposed on the sale, barter, lease or exchange of goods or
properties or the sale or exchange of services and the lease of properties purely for revenue
purposes. To subject the press to its payment is not to burden the exercise of its right any more than
to make the press pay income tax or subject it to general regulation is not to violate its freedom
under the Constitution.

Additionally, the Philippine Bible Society, Inc. claims that although it sells bibles, the proceeds
derived from the sales are used to subsidize the cost of printing copies which are given free to those
who cannot afford to pay so that to tax the sales would be to increase the price, while reducing the
volume of sale. Granting that to be the case, the resulting burden on the exercise of religious
freedom is so incidental as to make it difficult to differentiate it from any other economic imposition
that might make the right to disseminate religious doctrines costly. Otherwise, to follow the
petitioner's argument, to increase the tax on the sale of vestments would be to lay an impermissible
burden on the right of the preacher to make a sermon.

On the other hand the registration fee of P1,000.00 imposed by 107 of the NIRC, as amended by
7 of R.A. No. 7716, although fixed in amount, is really just to pay for the expenses of registration
and enforcement of provisions such as those relating to accounting in 108 of the NIRC. That the
PBS distributes free bibles and therefore is not liable to pay the VAT does not excuse it from the
payment of this fee because it also sells some copies. At any rate whether the PBS is liable for the
VAT must be decided in concrete cases, in the event it is assessed this tax by the Commissioner of
Internal Revenue.

VII. Alleged violations of the due process, equal protection and contract clauses and the rule on
taxation. CREBA asserts that R.A. No. 7716 (1) impairs the obligations of contracts, (2) classifies
transactions as covered or exempt without reasonable basis and (3) violates the rule that taxes
should be uniform and equitable and that Congress shall "evolve a progressive system of taxation."

With respect to the first contention, it is claimed that the application of the tax to existing contracts of
the sale of real property by installment or on deferred payment basis would result in substantial
increases in the monthly amortizations to be paid because of the 10% VAT. The additional amount, it
is pointed out, is something that the buyer did not anticipate at the time he entered into the contract.

The short answer to this is the one given by this Court in an early case: "Authorities from numerous
sources are cited by the plaintiffs, but none of them show that a lawful tax on a new subject, or an
increased tax on an old one, interferes with a contract or impairs its obligation, within the meaning of
the Constitution. Even though such taxation may affect particular contracts, as it may increase the
debt of one person and lessen the security of another, or may impose additional burdens upon one
class and release the burdens of another, still the tax must be paid unless prohibited by the
Constitution, nor can it be said that it impairs the obligation of any existing contract in its true legal
sense." (La Insular v. Machuca Go-Tauco and Nubla Co-Siong, 39 Phil. 567, 574 (1919)). Indeed not
only existing laws but also "the reservation of the essential attributes of sovereignty, is . . . read into
contracts as a postulate of the legal order." (Philippine-American Life Ins. Co. v. Auditor General, 22
SCRA 135, 147 (1968)) Contracts must be understood as having been made in reference to the
possible exercise of the rightful authority of the government and no obligation of contract can extend
to the defeat of that authority. (Norman v. Baltimore and Ohio R.R., 79 L. Ed. 885 (1935)).

It is next pointed out that while 4 of R.A. No. 7716 exempts such transactions as the sale of
agricultural products, food items, petroleum, and medical and veterinary services, it grants no
exemption on the sale of real property which is equally essential. The sale of real property for
socialized and low-cost housing is exempted from the tax, but CREBA claims that real estate
transactions of "the less poor," i.e., the middle class, who are equally homeless, should likewise be
exempted.

The sale of food items, petroleum, medical and veterinary services, etc., which are essential goods
and services was already exempt under 103, pars. (b) (d) (1) of the NIRC before the enactment of
R.A. No. 7716. Petitioner is in error in claiming that R.A. No. 7716 granted exemption to these
transactions, while subjecting those of petitioner to the payment of the VAT. Moreover, there is a
difference between the "homeless poor" and the "homeless less poor" in the example given by
petitioner, because the second group or middle class can afford to rent houses in the meantime that
they cannot yet buy their own homes. The two social classes are thus differently situated in life. "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 of one particular class for taxation,
or exemption infringe no constitutional limitation.'" (Lutz v. Araneta, 98 Phil. 148, 153 (1955). Accord,
City of Baguio v. De Leon, 134 Phil. 912 (1968); Sison, Jr. v. Ancheta, 130 SCRA 654, 663 (1984);
Kapatiran ng mga Naglilingkod sa Pamahalaan ng Pilipinas, Inc. v. Tan, 163 SCRA 371 (1988)).

Finally, it is contended, for the reasons already noted, that R.A. No. 7716 also violates Art. VI, 28(1)
which provides that "The rule of taxation shall be uniform and equitable. The Congress shall evolve a
progressive system of taxation."

Equality and uniformity of taxation means that all taxable articles or kinds of property of the same
class be taxed at the same rate. The taxing power has the authority to make reasonable and natural
classifications for purposes of taxation. To satisfy this requirement it is enough that the statute or
ordinance applies equally to all persons, forms and corporations placed in similar situation. (City of
Baguio v. De Leon, supra; Sison, Jr. v. Ancheta, supra)

Indeed, the VAT was already provided in E.O. No. 273 long before R.A. No. 7716 was enacted. R.A.
No. 7716 merely expands the base of the tax. The validity of the original VAT Law was questioned
in Kapatiran ng Naglilingkod sa Pamahalaan ng Pilipinas, Inc. v. Tan, 163 SCRA 383 (1988) on
grounds similar to those made in these cases, namely, that the law was "oppressive, discriminatory,
unjust and regressive in violation of Art. VI, 28(1) of the Constitution." (At 382) Rejecting the
challenge to the law, this Court held:

As the Court sees it, EO 273 satisfies all the requirements of a valid tax. It is uniform.
...

The sales tax adopted in EO 273 is applied similarly on all goods and services sold
to the public, which are not exempt, at the constant rate of 0% or 10%.

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.

(At 382-383)

The CREBA claims that the VAT is regressive. A similar claim is made by the Cooperative Union of
the Philippines, Inc. (CUP), while petitioner Juan T. David argues that the law contravenes the
mandate of Congress to provide for a progressive system of taxation because the law imposes a flat
rate of 10% and thus places the tax burden on all taxpayers without regard to their ability to pay.

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).

Thus, the following transactions involving basic and essential goods and services are exempted from
the VAT:

(a) Goods for consumption or use which are in their original state (agricultural,
marine and forest products, cotton seeds in their original state, fertilizers, seeds,
seedlings, fingerlings, fish, prawn livestock and poultry feeds) and goods or services
to enhance agriculture (milling of palay, corn sugar cane and raw sugar, livestock,
poultry feeds, fertilizer, ingredients used for the manufacture of feeds).

(b) Goods used for personal consumption or use (household and personal effects of
citizens returning to the Philippines) and or professional use, like professional
instruments and implements, by persons coming to the Philippines to settle here.

(c) Goods subject to excise tax such as petroleum products or to be used for
manufacture of petroleum products subject to excise tax and services subject to
percentage tax.

(d) Educational services, medical, dental, hospital and veterinary services, and
services rendered under employer-employee relationship.

(e) Works of art and similar creations sold by the artist himself.

(f) Transactions exempted under special laws, or international agreements.

(g) Export-sales by persons not VAT-registered.

(h) Goods or services with gross annual sale or receipt not exceeding P500,000.00.

(Respondents' Consolidated Comment on the Motions for Reconsideration, pp. 58-

60)
On the other hand, the transactions which are subject to the VAT are those which involve goods and
services which are used or availed of mainly by higher income groups. These include real properties
held primarily for sale to customers or for lease in the ordinary course of trade or business, the right
or privilege to use patent, copyright, and other similar property or right, the right or privilege to use
industrial, commercial or scientific equipment, motion picture films, tapes and discs, radio, television,
satellite transmission and cable television time, hotels, restaurants and similar places, securities,
lending investments, taxicabs, utility cars for rent, tourist buses, and other common carriers, services
of franchise grantees of telephone and telegraph.

The problem with CREBA's petition is that it presents broad claims of constitutional violations by
tendering issues not at retail but at wholesale and in the abstract. There is no fully developed record
which can impart to adjudication the impact of actuality. There is no factual foundation to show in
the concrete the application of the law to actual contracts and exemplify its effect on property rights.
For the fact is that petitioner's members have not even been assessed the VAT. Petitioner's case is
not made concrete by a series of hypothetical questions asked which are no different from those
dealt with in advisory opinions.

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 on its face, he has not made out a case. This is merely to adhere to
the authoritative doctrine 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.

(Sison, Jr. v. Ancheta, 130 SCRA at 661)

Adjudication of these broad claims must await the development of a concrete case. It may be that
postponement of adjudication would result in a multiplicity of suits. This need not be the case,
however. Enforcement of the law may give rise to such a case. A test case, provided it is an actual
case and not an abstract or hypothetical one, may thus be presented.

Nor is hardship to taxpayers alone an adequate justification for adjudicating abstract issues.
Otherwise, adjudication would be no different from the giving of advisory opinion that does not really
settle legal issues.

We are told that it is our duty under Art. VIII, 1, 2 to decide whenever a claim is made that "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." This duty can only arise if an actual case or
controversy is before us. Under Art . VIII, 5 our jurisdiction is defined in terms of "cases" and all that
Art. VIII, 1, 2 can plausibly mean is that in the exercise of that jurisdiction we have the judicial
power to determine questions of grave abuse of discretion by any branch or instrumentality of the
government.

Put in another way, what is granted in Art. VIII, 1, 2 is "judicial power," which is "the power of a
court to hear and decide cases pending between parties who have the right to sue and be sued in
the courts of law and equity" (Lamb v. Phipps, 22 Phil. 456, 559 (1912)), as distinguished from
legislative and executive power. This power cannot be directly appropriated until it is apportioned
among several courts either by the Constitution, as in the case of Art. VIII, 5, or by statute, as in the
case of the Judiciary Act of 1948 (R.A. No. 296) and the Judiciary Reorganization Act of 1980 (B.P.
Blg. 129). The power thus apportioned constitutes the court's "jurisdiction," defined as "the power
conferred by law upon a court or judge to take cognizance of a case, to the exclusion of all others."
(United States v. Arceo, 6 Phil. 29 (1906)) Without an actual case coming within its jurisdiction, this
Court cannot inquire into any allegation of grave abuse of discretion by the other departments of the
government.

VIII. Alleged violation of policy towards cooperatives. On the other hand, the Cooperative Union of
the Philippines (CUP), after briefly surveying the course of legislation, argues that it was to adopt a
definite policy of granting tax exemption to cooperatives that the present Constitution embodies
provisions on cooperatives. To subject cooperatives to the VAT would therefore be to infringe a
constitutional policy. Petitioner claims that in 1973, P.D. No. 175 was promulgated exempting
cooperatives from the payment of income taxes and sales taxes but in 1984, because of the crisis
which menaced the national economy, this exemption was withdrawn by P.D. No. 1955; that in 1986,
P.D. No. 2008 again granted cooperatives exemption from income and sales taxes until December
31, 1991, but, in the same year, E.O. No. 93 revoked the exemption; and that finally in 1987 the
framers of the Constitution "repudiated the previous actions of the government adverse to the
interests of the cooperatives, that is, the repeated revocation of the tax exemption to
cooperatives and instead upheld the policy of strengthening the cooperatives by way of the grant of
tax exemptions," by providing the following in Art. XII:

1. The goals of the national economy are a more equitable distribution of

opportunities, income, and wealth; a sustained increase in the amount of goods and
services produced by the nation for the benefit of the people; and an expanding
productivity as the key to raising the quality of life for all, especially the
underprivileged.

The State shall promote industrialization and full employment based on sound
agricultural development and agrarian reform, through industries that make full and
efficient use of human and natural resources, and which are competitive in both
domestic and foreign markets. However, the State shall protect Filipino enterprises
against unfair foreign competition and trade practices.

In the pursuit of these goals, all sectors of the economy and all regions of the country
shall be given optimum opportunity to develop. Private enterprises, including
corporations, cooperatives, and similar collective organizations, shall be encouraged
to broaden the base of their ownership.

15. The Congress shall create an agency to promote the viability and growth of
cooperatives as instruments for social justice and economic development.

Petitioner's contention has no merit. In the first place, it is not true that P.D. No. 1955 singled out
cooperatives by withdrawing their exemption from income and sales taxes under P.D. No. 175, 5.
What P.D. No. 1955, 1 did was to withdraw the exemptions and preferential treatments theretofore
granted to private business enterprises in general, in view of the economic crisis which then beset
the nation. It is true that after P.D. No. 2008, 2 had restored the tax exemptions of cooperatives in
1986, the exemption was again repealed by E.O. No. 93, 1, but then again cooperatives were not
the only ones whose exemptions were withdrawn. The withdrawal of tax incentives applied to all,
including government and private entities. In the second place, the Constitution does not really
require that cooperatives be granted tax exemptions in order to promote their growth and viability.
Hence, there is no basis for petitioner's assertion that the government's policy toward cooperatives
had been one of vacillation, as far as the grant of tax privileges was concerned, and that it was to put
an end to this indecision that the constitutional provisions cited were adopted. Perhaps as a matter
of policy cooperatives should be granted tax exemptions, but that is left to the discretion of
Congress. If Congress does not grant exemption and there is no discrimination to cooperatives, no
violation of any constitutional policy can be charged.

Indeed, petitioner's theory amounts to saying that under the Constitution cooperatives are exempt
from taxation. Such theory is contrary to the Constitution under which only the following are exempt
from taxation: charitable institutions, churches and parsonages, by reason of Art. VI, 28 (3), and
non-stock, non-profit educational institutions by reason of Art. XIV, 4 (3).

CUP's further ground for seeking the invalidation of R.A. No. 7716 is that it denies cooperatives the
equal protection of the law because electric cooperatives are exempted from the VAT. The
classification between electric and other cooperatives (farmers cooperatives, producers
cooperatives, marketing cooperatives, etc.) apparently rests on a congressional determination that
there is greater need to provide cheaper electric power to as many people as possible, especially
those living in the rural areas, than there is to provide them with other necessities in life. We cannot
say that such classification is unreasonable.

We have carefully read the various arguments raised against the constitutional validity of R.A. No.
7716. We have in fact taken the extraordinary step of enjoining its enforcement pending resolution of
these cases. We have now come to the conclusion that the law suffers from none of the infirmities
attributed to it by petitioners and that its enactment by the other branches of the government does
not constitute a grave abuse of discretion. Any question as to its necessity, desirability or expediency
must be addressed to Congress as the body which is electorally responsible, remembering that, as
Justice Holmes has said, "legislators are the ultimate guardians of the liberties and welfare of the
people in quite as great a degree as are the courts." (Missouri, Kansas & Texas Ry. Co. v. May, 194
U.S. 267, 270, 48 L. Ed. 971, 973 (1904)). It is not right, as petitioner in G.R. No. 115543 does in
arguing that we should enforce the public accountability of legislators, that those who took part in
passing the law in question by voting for it in Congress should later thrust to the courts the burden of
reviewing measures in the flush of enactment. This Court does not sit as a third branch of the
legislature, much less exercise a veto power over legislation.

WHEREFORE, the motions for reconsideration are denied with finality and the temporary restraining
order previously issued is hereby lifted.

Republic of the Philippines

SUPREME COURT
Manila

EN BANC

G.R. No. 99886 March 31, 1993

JOHN H. OSMEA, petitioner,

vs.
OSCAR ORBOS, in his capacity as Executive Secretary; JESUS ESTANISLAO, in his capacity
as Secretary of Finance; WENCESLAO DELA PAZ, in his capacity as Head of the Office of
Energy Affairs; REX V. TANTIONGCO, and the ENERGY REGULATORY BOARD, respondents.
Nachura & Sarmiento for petitioner.

The Solicitor General for public respondents.

NARVASA, C.J.:

The petitioner seeks the corrective,1 prohibitive and coercive remedies provided by Rule 65 of the
Rules of Court,2upon the following posited grounds, viz.:3

1) the invalidity of the "TRUST ACCOUNT" in the books of account of the Ministry of Energy (now,
the Office of Energy Affairs), created pursuant to 8, paragraph 1, of P.D. No. 1956, as amended,
"said creation of a trust fund being contrary to Section 29 (3), Article VI of the . . Constitution;4

2) the unconstitutionality of 8, paragraph 1 (c) of P.D. No. 1956, as amended by Executive Order
No. 137, for "being an undue and invalid delegation of legislative power . . to the Energy Regulatory Board;"5

3) the illegality of the reimbursements to oil companies, paid out of the Oil Price Stabilization
Fund,6 because it contravenes 8, paragraph 2 (2) of
P. D. 1956, as amended; and

4) the consequent nullity of the Order dated December 10, 1990 and the necessity of a rollback of
the pump prices and petroleum products to the levels prevailing prior to the said Order.

It will be recalled that on October 10, 1984, President Ferdinand Marcos issued P.D. 1956 creating a
Special Account in the General Fund, designated as the Oil Price Stabilization Fund (OPSF). The
OPSF was designed to reimburse oil companies for cost increases in crude oil and imported
petroleum products resulting from exchange rate adjustments and from increases in the world
market prices of crude oil.

Subsequently, the OPSF was reclassified into a "trust liability account," in virtue of E.O. 1024,7 and
ordered released from the National Treasury to the Ministry of Energy. The same Executive Order
also authorized the investment of the fund in government securities, with the earnings from such
placements accruing to the fund.

President Corazon C. Aquino, amended P.D. 1956. She promulgated Executive Order No. 137 on
February 27, 1987, expanding the grounds for reimbursement to oil companies for possible cost
underrecovery incurred as a result of the reduction of domestic prices of petroleum products, the
amount of the underrecovery being left for determination by the Ministry of Finance.

Now, the petition alleges that the status of the OPSF as of March 31, 1991 showed a "Terminal Fund
Balance deficit" of some P12.877 billion;8 that to abate the worsening deficit, "the Energy Regulatory
Board . . issued an Order on December 10, 1990, approving the increase in pump prices of petroleum products," and at the rate of
recoupment, the OPSF deficit should have been fully covered in a span of six (6) months, but this notwithstanding, the respondents Oscar
Orbos, in his capacity as Executive Secretary; Jesus Estanislao, in his capacity as Secretary of Finance; Wenceslao de la Paz, in his
capacity as Head of the Office of Energy Affairs; Chairman Rex V. Tantiongco and the Energy Regulatory Board "are poised to accept,
process and pay claims not authorized under P.D. 1956."9

The petition further avers that the creation of the trust fund violates
29(3), Article VI of the Constitution, reading as follows:
 (3) All money collected on any tax levied for a special purpose shall be treated as a
special fund and paid out for such purposes only. If the purpose for which a special
fund was created has been fulfilled or abandoned, the balance, if any, shall be
transferred to the general funds of the Government.

The petitioner argues that "the monies collected pursuant to . . P.D. 1956, as amended, must be
treated as a 'SPECIAL FUND,' not as a 'trust account' or a 'trust fund,' and that "if a special tax is
collected for a specific purpose, the revenue generated therefrom shall 'be treated as a special fund'
to be used only for the purpose indicated, and not channeled to another government
objective." 10 Petitioner further points out that since "a 'special fund' consists of monies collected
through the taxing power of a State, such amounts belong to the State, although the use thereof is
limited to the special purpose/objective for which it was created." 11

He also contends that the "delegation of legislative authority" to the ERB violates 28 (2). Article VI
of the Constitution, viz.:

(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, tonnage and wharfage dues, and other duties or imposts within
the framework of the national development program of the Government;

and, inasmuch as the delegation relates to the exercise of the power of taxation, "the limits,
limitations and restrictions must be quantitative, that is, the law must not only specify how to
tax, who (shall) be taxed (and) what the tax is for, but also impose a specific limit on how
much to tax." 12

The petitioner does not suggest that a "trust account" is illegal per se, but maintains that the monies
collected, which form part of the OPSF, should be maintained in a special account of the general
fund for the reason that the Constitution so provides, and because they are, supposedly, taxes
levied for a special purpose. He assumes that the Fund is formed from a tax undoubtedly because a
portion thereof is taken from collections of ad valorem taxes and the increases thereon.

It thus appears that the challenge posed by the petitioner is premised primarily on the view that the
powers granted to the ERB under P.D. 1956, as amended, partake of the nature of the taxation
power of the State. The Solicitor General observes that the "argument rests on the assumption that
the OPSF is a form of revenue measure drawing from a special tax to be expended for a special
purpose." 13 The petitioner's perceptions are, in the Court's view, not quite correct.

To address this critical misgiving in the position of the petitioner on these issues, the Court recalls its
holding in Valmonte v. Energy Regulatory Board, et al. 14

The foregoing arguments suggest the presence of misconceptions about the nature
and functions of the OPSF. The OPSF is a "Trust Account" which was established
"for the purpose of minimizing the frequent price changes brought about by exchange
rate adjustment and/or changes in world market prices of crude oil and imported
petroleum products." 15 Under P.D. No. 1956, as amended by Executive Order No.
137 dated 27 February 1987, this Trust Account may be funded from any of the
following sources:

a) Any increase in the tax collection from ad valorem tax or customs

duty imposed on petroleum products subject to tax under this
Decree arising from exchange rate adjustment, as may be
 determined by the Minister of Finance in consultation with the Board
of Energy;

b) Any increase in the tax collection as a result of the lifting of tax

exemptions of government corporations, as may be determined by
the Minister of Finance in consultation with the Board of Energy:

c) Any additional amount to be imposed on petroleum products to

augment the resources of the Fund through an appropriate Order that
may be issued by the Board of Energy requiring payment of persons
or companies engaged in the business of importing, manufacturing
and/or marketing petroleum products;

d) Any resulting peso cost differentials in case the actual peso costs
paid by oil companies in the importation of crude oil and petroleum
products is less than the peso costs computed using the reference
foreign exchange rate as fixed by the Board of Energy.

xxx xxx xxx

The fact that the world market prices of oil, measured by the spot market in
Rotterdam, vary from day to day is of judicial notice. Freight rates for hauling crude
oil and petroleum products from sources of supply to the Philippines may also vary
from time to time. The exchange rate of the peso vis-a-vis the U.S. dollar and other
convertible foreign currencies also changes from day to day. These fluctuations in
world market prices and in tanker rates and foreign exchange rates would in a
completely free market translate into corresponding adjustments in domestic prices
of oil and petroleum products with sympathetic frequency. But domestic prices which
vary from day to day or even only from week to week would result in a chaotic market
with unpredictable effects upon the country's economy in general. The OPSF was
established precisely to protect local consumers from the adverse consequences that
such frequent oil price adjustments may have upon the economy. Thus, the OPSF
serves as a pocket, as it were, into which a portion of the purchase price of oil and
petroleum products paid by consumers as well as some tax revenues are inputted
and from which amounts are drawn from time to time to reimburse oil companies,
when appropriate situations arise, for increases in, as well as underrecovery of, costs
of crude importation. The OPSF is thus a buffer mechanism through which the
domestic consumer prices of oil and petroleum products are stabilized, instead of
fluctuating every so often, and oil companies are allowed to recover those portions of
their costs which they would not otherwise recover given the level of domestic prices
existing at any given time. To the extent that some tax revenues are also put into it,
the OPSF is in effect a device through which the domestic prices of petroleum
products are subsidized in part. It appears to the Court that the establishment and
maintenance of the OPSF is well within that pervasive and non-waivable power and
responsibility of the 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. The stabilization, and subsidy of domestic prices of
petroleum products and fuel oil clearly critical in importance considering, among
other things, the continuing high level of dependence of the country on imported
crude oil are appropriately regarded as public purposes.
Also of relevance is this Court's ruling in relation to the sugar stabilization fund the nature of which is
not far different from the OPSF. In Gaston v. Republic Planters Bank, 16 this Court upheld the legality
of the sugar stabilization fees and explained their nature and character, viz.:

The stabilization fees collected are in the nature of a tax, which is within the power of
the State to impose for the promotion of the sugar industry (Lutz v. Araneta, 98 Phil.
148). . . . The tax collected is not in a pure exercise of the taxing power. It is levied
with a regulatory purpose, to provide a means for the stabilization of the sugar
industry. The levy is primarily in the exercise of the police power of the State (Lutz v.
Araneta, supra).

xxx xxx xxx

The stabilization fees in question are levied by the State upon sugar millers, planters
and producers for a special purpose that of "financing the growth and
development of the sugar industry and all its components, stabilization of the
domestic market including the foreign market." The fact that the State has taken
possession of moneys pursuant to law is sufficient to constitute them state funds,
even though they are held for a special purpose (Lawrence v. American Surety Co.
263 Mich. 586, 249 ALR 535, cited in 42 Am Jur Sec. 2, p. 718). Having been levied
for a special purpose, the revenues collected are to be treated as a special fund, to
be, in the language of the statute, "administered in trust" for the purpose intended.
Once the purpose has been fulfilled or abandoned, the balance if any, is to be
transferred to the general funds of the Government. That is the essence of the trust
intended (SEE 1987 Constitution, Article VI, Sec. 29(3), lifted from the 1935
Constitution, Article VI, Sec. 23(1). 17

The character of the Stabilization Fund as a special kind of fund is emphasized by

the fact that the funds are deposited in the Philippine National Bank and not in the
Philippine Treasury, moneys from which may be paid out only in pursuance of an
appropriation made by law (1987) Constitution, Article VI, Sec. 29 (3), lifted from the
1935 Constitution, Article VI, Sec. 23(1). (Emphasis supplied).

Hence, it seems clear that while the funds collected may be referred to as taxes, they are exacted in
the exercise of the police power of the State. Moreover, that the OPSF is a special fund is plain from
the special treatment given it by E.O. 137. It is segregated from the general fund; and while it is
placed in what the law refers to as a "trust liability account," the fund nonetheless remains subject to
the scrutiny and review of the COA. The Court is satisfied that these measures comply with the
constitutional description of a "special fund." Indeed, the practice is not without precedent.

With regard to the alleged undue delegation of legislative power, the Court finds that the provision
conferring the authority upon the ERB to impose additional amounts on petroleum products provides
a sufficient standard by which the authority must be exercised. In addition to the general policy of the
law to protect the local consumer by stabilizing and subsidizing domestic pump rates, 8(c) of P.D.
1956 18 expressly authorizes the ERB to impose additional amounts to augment the resources of the
Fund.

What petitioner would wish is the fixing of some definite, quantitative restriction, or "a specific limit on
how much to tax." 19 The Court is cited to this requirement by the petitioner on the premise that what
is involved here is the power of taxation; but as already discussed, this is not the case. What is here
involved is not so much the power of taxation as police power. Although the provision authorizing the
ERB to impose additional amounts could be construed to refer to the power of taxation, it cannot be
overlooked that the overriding consideration is to enable the delegate to act with expediency in
carrying out the objectives of the law which are embraced by the police power of the State.

The interplay and constant fluctuation of the various factors involved in the determination of the price
of oil and petroleum products, and the frequently shifting need to either augment or exhaust the
Fund, do not conveniently permit the setting of fixed or rigid parameters in the law as proposed by
the petitioner. To do so would render the ERB unable to respond effectively so as to mitigate or
avoid the undesirable consequences of such fluidity. As such, the standard as it is expressed,
suffices to guide the delegate in the exercise of the delegated power, taking account of the
circumstances under which it is to be exercised.

For a valid delegation of power, it is essential that the law delegating the power must be (1)
complete in itself, that is it must set forth the policy to be executed by the delegate and (2) it must fix
a standard limits of which
are sufficiently determinate or determinable to which the delegate must conform. 20

. . . As pointed out in Edu v. Ericta: "To avoid the taint of unlawful delegation, there
must be a standard, which implies at the very least that the legislature itself
determines matters of principle and lays down fundamental policy. Otherwise, the
charge of complete abdication may be hard to repel. A standard thus 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. It is the criterion by which the legislative purpose may be
carried out. Thereafter, the executive or administrative office designated may in
pursuance of the above guidelines promulgate supplemental rules and regulations.
The standard may either be express or implied. If the former, the non-delegation
objection is easily met. The standard though does not have to be spelled out
specifically. It could be implied from the policy and purpose of the act considered as
a whole. 21

It would seem that from the above-quoted ruling, the petition for prohibition should fail.

The standard, as the Court has already stated, may even be implied. In that light, there can be no
ground upon which to sustain the petition, inasmuch as the challenged law sets forth a determinable
standard which guides the exercise of the power granted to the ERB. By the same token, the proper
exercise of the delegated power may be tested with ease. It seems obvious that what the law
intended was to permit the additional imposts for as long as there exists a need to protect the
general public and the petroleum industry from the adverse consequences of pump rate fluctuations.
"Where the standards set up for the guidance of an administrative officer and the action taken are in
fact recorded in the orders of such officer, so that Congress, the courts and the public are assured
that the orders in the judgment of such officer conform to the legislative standard, there is no failure
in the performance of the legislative functions." 22

This Court thus finds no serious impediment to sustaining the validity of the legislation; the express
purpose for which the imposts are permitted and the general objectives and purposes of the fund are
readily discernible, and they constitute a sufficient standard upon which the delegation of power may
be justified.

In relation to the third question respecting the illegality of the reimbursements to oil companies,
paid out of the Oil Price Stabilization Fund, because allegedly in contravention of 8, paragraph 2
(2) of P.D. 1956, amended 23 the Court finds for the petitioner.
The petition assails the payment of certain items or accounts in favor of the petroleum companies
(i.e., inventory losses, financing charges, fuel oil sales to the National Power Corporation, etc.)
because not authorized by law. Petitioner contends that "these claims are not embraced in the
enumeration in 8 of P.D. 1956 . . since none of them was incurred 'as a result of the reduction of
domestic prices of petroleum products,'" 24 and since these items are reimbursements for which the
OPSF should not have responded, the amount of the P12.877 billion deficit "should be reduced by
P5,277.2 million." 25 It is argued "that under the principle of ejusdem generis . . . the term 'other
factors' (as used in 8 of P.D. 1956) . . can only include such 'other factors' which necessarily result
in the reduction of domestic prices of petroleum products." 26

The Solicitor General, for his part, contends that "(t)o place said (term) within the restrictive confines
of the rule of ejusdem generis would reduce (E.O. 137) to a meaningless provision."

This Court, in Caltex Philippines, Inc. v. The Honorable Commissioner on Audit, et al., 27 passed
upon the application of ejusdem generis to paragraph 2 of 8 of P.D. 1956, viz.:

The rule of ejusdem generis states that "[w]here words follow an enumeration of
persons or things, by words of a particular and specific meaning, such general words
are not to be construed in their widest extent, but are held to be as applying only to
persons or things of the same kind or class as those specifically mentioned." 28 A
reading of subparagraphs (i) and (ii) easily discloses that they do not have a common
characteristic. The first relates to price reduction as directed by the Board of Energy
while the second refers to reduction in internal ad valorem taxes. Therefore,
subparagraph (iii) cannot be limited by the enumeration in these subparagraphs.
What should be considered for purposes of determining the "other factors" in
subparagraph (iii) is the first sentence of paragraph (2) of the Section which explicitly
allows the cost underrecovery only if such were incurred as a result of the reduction
of domestic prices of petroleum products.

The Court thus holds, that the reimbursement of financing charges is not authorized by paragraph 2
of 8 of P.D. 1956, for the reason that they were not incurred as a result of the reduction of
domestic prices of petroleum products. Under the same provision, however, the payment of
inventory losses is upheld as valid, being clearly a result of domestic price reduction, when oil
companies incur a cost underrecovery for yet unsold stocks of oil in inventory acquired at a higher
price.

Reimbursement for cost underrecovery from the sales of oil to the National Power Corporation is
equally permissible, not as coming within the provisions of P.D. 1956, but in virtue of other laws and
regulations as held in Caltex 29 and which have been pointed to by the Solicitor General. At any rate,
doubts about the propriety of such reimbursements have been dispelled by the enactment of R.A.
6952, establishing the Petroleum Price Standby Fund, 2 of which specifically authorizes the
reimbursement of "cost underrecovery incurred as a result of fuel oil sales to the National Power
Corporation."

Anent the overpayment refunds mentioned by the petitioner, no substantive discussion has been
presented to show how this is prohibited by P.D. 1956. Nor has the Solicitor General taken any effort
to defend the propriety of this refund. In fine, neither of the parties, beyond the mere mention of
overpayment refunds, has at all bothered to discuss the arguments for or against the legality of the
so-called overpayment refunds. To be sure, the absence of any argument for or against the validity
of the refund cannot result in its disallowance by the Court. Unless the impropriety or illegality of the
overpayment refund has been clearly and specifically shown, there can be no basis upon which to
nullify the same.
Finally, the Court finds no necessity to rule on the remaining issue, the same having been rendered
moot and academic. As of date hereof, the pump rates of gasoline have been reduced to levels
below even those prayed for in the petition.

WHEREFORE, the petition is GRANTED insofar as it prays for the nullification of the reimbursement
of financing charges, paid pursuant to E.O. 137, and DISMISSED in all other respects.

SO ORDERED.

Cruz, Feliciano, Padilla, Bidin, Grio-Aquino, Regalado, Davide, Jr., Romero, Nocon, Bellosillo,
Melo, Campos, Jr., and Quiason, JJ., concur.

Gutierrez, Jr., J., is on leave.

Republic of the Philippines

SUPREME COURT
Manila

EN BANC

G.R. No. 92585 May 8, 1992

CALTEX PHILIPPINES, INC., petitioner,

vs.
THE HONORABLE COMMISSION ON AUDIT, HONORABLE COMMISSIONER BARTOLOME C.
FERNANDEZ and HONORABLE COMMISSIONER ALBERTO P. CRUZ, respondents.

DAVIDE, JR., J.:

This is a petition erroneously brought under Rule 44 of the Rules of Court 1 questioning the authority
of the Commission on Audit (COA) in disallowing petitioner's claims for reimbursement from the Oil
Price Stabilization Fund (OPSF) and seeking the reversal of said Commission's decision denying its
claims for recovery of financing charges from the Fund and reimbursement of underrecovery arising
from sales to the National Power Corporation, Atlas Consolidated Mining and Development
Corporation (ATLAS) and Marcopper Mining Corporation (MAR-COPPER), preventing it from
exercising the right to offset its remittances against its reimbursement vis-a-vis the OPSF and
disallowing its claims which are still pending resolution before the Office of Energy Affairs (OEA) and
the Department of Finance (DOF).

Pursuant to the 1987 Constitution, 2 any decision, order or ruling of the Constitutional
Commissions 3 may be brought to this Court on certiorari by the aggrieved party within thirty (30)
days from receipt of a copy thereof. The certiorari referred to is the special civil action
for certiorari under Rule 65 of the Rules of Court. 4

Considering, however, that the allegations that the COA acted with:
(a) total lack of jurisdiction in completely ignoring and showing absolutely no respect for the findings
and rulings of the administrator of the fund itself and in disallowing a claim which is still pending
resolution at the OEA level, and (b) "grave abuse of discretion and completely without
jurisdiction" 5 in declaring that petitioner cannot avail of the right to offset any amount that it may be
required under the law to remit to the OPSF against any amount that it may receive by way of
reimbursement therefrom are sufficient to bring this petition within Rule 65 of the Rules of Court,
and, considering further the importance of the issues raised, the error in the designation of the
remedy pursued will, in this instance, be excused.

The issues raised revolve around the OPSF created under Section 8 of Presidential Decree (P.D.)
No. 1956, as amended by Executive Order (E.O.) No. 137. As amended, said Section 8 reads as
follows:

Sec. 8 . There is hereby created a Trust Account in the books of accounts of the
Ministry of Energy to be designated as Oil Price Stabilization Fund (OPSF) for the
purpose of minimizing frequent price changes brought about by exchange rate
adjustments and/or changes in world market prices of crude oil and imported
petroleum products. The Oil Price Stabilization Fund may be sourced from any of the
following:

a) Any increase in the tax collection from ad valorem tax or customs

duty imposed on petroleum products subject to tax under this Decree
arising from exchange rate adjustment, as may be determined by the
Minister of Finance in consultation with the Board of Energy;

b) Any increase in the tax collection as a result of the lifting of tax

exemptions of government corporations, as may be determined by
the Minister of Finance in consultation with the Board of Energy;

c) Any additional amount to be imposed on petroleum products to

augment the resources of the Fund through an appropriate Order that
may be issued by the Board of Energy requiring payment by persons
or companies engaged in the business of importing, manufacturing
and/or marketing petroleum products;

d) Any resulting peso cost differentials in case the actual peso costs
paid by oil companies in the importation of crude oil and petroleum
products is less than the peso costs computed using the reference
foreign exchange rate as fixed by the Board of Energy.

The Fund herein created shall be used for the following:

1) To reimburse the oil companies for cost increases in crude oil and
imported petroleum products resulting from exchange rate adjustment
and/or increase in world market prices of crude oil;

2) To reimburse the oil companies for possible cost under-recovery

incurred as a result of the reduction of domestic prices of petroleum
products. The magnitude of the underrecovery, if any, shall be
determined by the Ministry of Finance. "Cost underrecovery" shall
include the following:

i. Reduction in oil company take as directed by the

Board of Energy without the corresponding reduction
 in the landed cost of oil inventories in the possession
of the oil companies at the time of the price change;

ii. Reduction in internal ad valorem taxes as a result

of foregoing government mandated price reductions;

iii. Other factors as may be determined by the Ministry

of Finance to result in cost underrecovery.

The Oil Price Stabilization Fund (OPSF) shall be administered by the Ministry of
Energy.

The material operative facts of this case, as gathered from the pleadings of the parties, are not
disputed.

On 2 February 1989, the COA sent a letter to Caltex Philippines, Inc. (CPI), hereinafter referred to as
Petitioner, directing the latter to remit to the OPSF its collection, excluding that unremitted for the
years 1986 and 1988, of the additional tax on petroleum products authorized under the aforesaid
Section 8 of P.D. No. 1956 which, as of 31 December 1987, amounted to P335,037,649.00 and
informing it that, pending such remittance, all of its claims for reimbursement from the OPSF shall be
held in abeyance. 6

On 9 March 1989, the COA sent another letter to petitioner informing it that partial verification with
the OEA showed that the grand total of its unremitted collections of the above tax is
P1,287,668,820.00, broken down as follows:

1986 P233,190,916.00
1987 335,065,650.00
1988 719,412,254.00;

directing it to remit the same, with interest and surcharges thereon, within sixty (60) days from
receipt of the letter; advising it that the COA will hold in abeyance the audit of all its claims for
reimbursement from the OPSF; and directing it to desist from further offsetting the taxes collected
against outstanding claims in 1989 and subsequent periods. 7

In its letter of 3 May 1989, petitioner requested the COA for an early release of its reimbursement
certificates from the OPSF covering claims with the Office of Energy Affairs since June 1987 up to
March 1989, invoking in support thereof COA Circular No. 89-299 on the lifting of pre-audit of
government transactions of national government agencies and government-owned or controlled
corporations. 8

In its Answer dated 8 May 1989, the COA denied petitioner's request for the early release of the reimbursement certificates from the OPSF
and repeated its earlier directive to petitioner to forward payment of the latter's unremitted collections to the OPSF to facilitate COA's audit
action on the reimbursement claims. 9

By way of a reply, petitioner, in a letter dated 31 May 1989, submitted to the COA a proposal for the
payment of the collections and the recovery of claims, since the outright payment of the sum of
P1.287 billion to the OEA as a prerequisite for the processing of said claims against the OPSF will
cause a very serious impairment of its cash position. 10 The proposal reads:

We, therefore, very respectfully propose the following:

 (1) Any procedural arrangement acceptable to COA to facilitate
monitoring of payments and reimbursements will be administered by
the ERB/Finance Dept./OEA, as agencies designated by law to
administer/regulate OPSF.

(2) For the retroactive period, Caltex will deliver to OEA, P1.287
billion as payment to OPSF, similarly OEA will deliver to Caltex the
same amount in cash reimbursement from OPSF.

(3) The COA audit will commence immediately and will be conducted
expeditiously.

(4) The review of current claims (1989) will be conducted

expeditiously to preclude further accumulation of reimbursement from
OPSF.

On 7 June 1989, the COA, with the Chairman taking no part, handed down Decision No. 921
accepting the above-stated proposal but prohibiting petitioner from further offsetting remittances and
reimbursements for the current and ensuing years. 11 Decision No. 921 reads:

This pertains to the within separate requests of Mr. Manuel A. Estrella, President,
Petron Corporation, and Mr. Francis Ablan, President and Managing Director, Caltex
(Philippines) Inc., for reconsideration of this Commission's adverse action embodied
in its letters dated February 2, 1989 and March 9, 1989, the former directing
immediate remittance to the Oil Price Stabilization Fund of collections made by the
firms pursuant to P.D. 1956, as amended by E.O. No. 137, S. 1987, and the latter
reiterating the same directive but further advising the firms to desist from offsetting
collections against their claims with the notice that "this Commission will hold in
abeyance the audit of all . . . claims for reimbursement from the OPSF."

It appears that under letters of authority issued by the Chairman, Energy Regulatory
Board, the aforenamed oil companies were allowed to offset the amounts due to the
Oil Price Stabilization Fund against their outstanding claims from the said Fund for
the calendar years 1987 and 1988, pending with the then Ministry of Energy, the
government entity charged with administering the OPSF. This Commission, however,
expressing serious doubts as to the propriety of the offsetting of all types of
reimbursements from the OPSF against all categories of remittances, advised these
oil companies that such offsetting was bereft of legal basis. Aggrieved thereby, these
companies now seek reconsideration and in support thereof clearly manifest their
intent to make arrangements for the remittance to the Office of Energy Affairs of the
amount of collections equivalent to what has been previously offset, provided that
this Commission authorizes the Office of Energy Affairs to prepare the corresponding
checks representing reimbursement from the OPSF. It is alleged that the
implementation of such an arrangement, whereby the remittance of collections due to
the OPSF and the reimbursement of claims from the Fund shall be made within a
period of not more than one week from each other, will benefit the Fund and not
unduly jeopardize the continuing daily cash requirements of these firms.

Upon a circumspect evaluation of the circumstances herein obtaining, this

Commission perceives no further objectionable feature in the proposed arrangement,
provided that 15% of whatever amount is due from the Fund is retained by the Office
of Energy Affairs, the same to be answerable for suspensions or disallowances,
 errors or discrepancies which may be noted in the course of audit and surcharges for
late remittances without prejudice to similar future retentions to answer for any
deficiency in such surcharges, and provided further that no offsetting of remittances
and reimbursements for the current and ensuing years shall be allowed.

Pursuant to this decision, the COA, on 18 August 1989, sent the following letter to Executive Director
Wenceslao R. De la Paz of the Office of Energy Affairs: 12

Dear Atty. dela Paz:

Pursuant to the Commission on Audit Decision No. 921 dated June 7, 1989, and
based on our initial verification of documents submitted to us by your Office in
support of Caltex (Philippines), Inc. offsets (sic) for the year 1986 to May 31, 1989,
as well as its outstanding claims against the Oil Price Stabilization Fund (OPSF) as
of May 31, 1989, we are pleased to inform your Office that Caltex (Philippines), Inc.
shall be required to remit to OPSF an amount of P1,505,668,906, representing
remittances to the OPSF which were offset against its claims reimbursements (net of
unsubmitted claims). In addition, the Commission hereby authorize (sic) the Office of
Energy Affairs (OEA) to cause payment of P1,959,182,612 to Caltex, representing
claims initially allowed in audit, the details of which are presented hereunder: . . .

As presented in the foregoing computation the disallowances totalled P387,683,535,

which included P130,420,235 representing those claims disallowed by OEA, details
of which is (sic) shown in Schedule 1 as summarized as follows:

Disallowance of COA
Particulars Amount

Recovery of financing charges P162,728,475 /a

Product sales 48,402,398 /b
Inventory losses
Borrow loan arrangement 14,034,786 /c
Sales to Atlas/Marcopper 32,097,083 /d
Sales to NPC 558

P257,263,300

Disallowances of OEA 130,420,235

Total P387,683,535

The reasons for the disallowances are discussed hereunder:

a. Recovery of Financing Charges

Review of the provisions of P.D. 1596 as amended by E.O. 137 seems to indicate
that recovery of financing charges by oil companies is not among the items for which
the OPSF may be utilized. Therefore, it is our view that recovery of financing charges
has no legal basis. The mechanism for such claims is provided in DOF Circular 1-87.

b. Product Sales Sales to International Vessels/Airlines

 BOE Resolution No. 87-01 dated February 7, 1987 as implemented by OEA Order
No. 87-03-095 indicating that (sic) February 7, 1987 as the effectivity date that (sic)
oil companies should pay OPSF impost on export sales of petroleum products.
Effective February 7, 1987 sales to international vessels/airlines should not be
included as part of its domestic sales. Changing the effectivity date of the resolution
from February 7, 1987 to October 20, 1987 as covered by subsequent ERB
Resolution No. 88-12 dated November 18, 1988 has allowed Caltex to include in
their domestic sales volumes to international vessels/airlines and claim the
corresponding reimbursements from OPSF during the period. It is our opinion that
the effectivity of the said resolution should be February 7, 1987.

c. Inventory losses Settlement of Ad Valorem

We reviewed the system of handling Borrow and Loan (BLA) transactions including
the related BLA agreement, as they affect the claims for reimbursements of ad
valorem taxes. We observed that oil companies immediately settle ad valorem taxes
for BLA transaction (sic). Loan balances therefore are not tax paid inventories of
Caltex subject to reimbursements but those of the borrower. Hence, we recommend
reduction of the claim for July, August, and November, 1987 amounting to
P14,034,786.

d. Sales to Atlas/Marcopper

LOI No. 1416 dated July 17, 1984 provides that "I hereby order and direct the
suspension of payment of all taxes, duties, fees, imposts and other charges whether
direct or indirect due and payable by the copper mining companies in distress to the
national and local governments." It is our opinion that LOI 1416 which implements
the exemption from payment of OPSF imposts as effected by OEA has no legal
basis.

Furthermore, we wish to emphasize that payment to Caltex (Phil.) Inc., of the amount
as herein authorized shall be subject to availability of funds of OPSF as of May 31,
1989 and applicable auditing rules and regulations. With regard to the disallowances,
it is further informed that the aggrieved party has 30 days within which to appeal the
decision of the Commission in accordance with law.

On 8 September 1989, petitioner filed an Omnibus Request for the Reconsideration of the decision
based on the following grounds: 13

A) COA-DISALLOWED CLAIMS ARE AUTHORIZED UNDER EXISTING RULES,

ORDERS, RESOLUTIONS, CIRCULARS ISSUED BY THE DEPARTMENT OF
FINANCE AND THE ENERGY REGULATORY BOARD PURSUANT TO
EXECUTIVE ORDER NO. 137.

xxx xxx xxx

B) ADMINISTRATIVE INTERPRETATIONS IN THE COURSE OF EXERCISE OF

EXECUTIVE POWER BY DEPARTMENT OF FINANCE AND ENERGY
REGULATORY BOARD ARE LEGAL AND SHOULD BE RESPECTED AND
APPLIED UNLESS DECLARED NULL AND VOID BY COURTS OR REPEALED BY
LEGISLATION.
 xxx xxx xxx

C) LEGAL BASIS FOR RETENTION OF OFFSET ARRANGEMENT, AS

AUTHORIZED BY THE EXECUTIVE BRANCH OF GOVERNMENT, REMAINS
VALID.

xxx xxx xxx

On 6 November 1989, petitioner filed with the COA a Supplemental Omnibus Request for
Reconsideration. 14

On 16 February 1990, the COA, with Chairman Domingo taking no part and with Commissioner
Fernandez dissenting in part, handed down Decision No. 1171 affirming the disallowance for
recovery of financing charges, inventory losses, and sales to MARCOPPER and ATLAS, while
allowing the recovery of product sales or those arising from export sales. 15 Decision No. 1171 reads
as follows:

Anent the recovery of financing charges you contend that Caltex Phil. Inc. has the
.authority to recover financing charges from the OPSF on the basis of Department of
Finance (DOF) Circular 1-87, dated February 18, 1987, which allowed oil companies
to "recover cost of financing working capital associated with crude oil shipments,"
and provided a schedule of reimbursement in terms of peso per barrel. It appears
that on November 6, 1989, the DOF issued a memorandum to the President of the
Philippines explaining the nature of these financing charges and justifying their
reimbursement as follows:

As part of your program to promote economic recovery, . . . oil

companies (were authorized) to refinance their imports of crude oil
and petroleum products from the normal trade credit of 30 days up to
360 days from date of loading . . . Conformably . . ., the oil companies
deferred their foreign exchange remittances for purchases by
refinancing their import bills from the normal 30-day payment term up
to the desired 360 days. This refinancing of importations carried
additional costs (financing charges) which then became, due to
government mandate, an inherent part of the cost of the purchases of
our country's oil requirement.

We beg to disagree with such contention. The justification that financing charges
increased oil costs and the schedule of reimbursement rate in peso per barrel
(Exhibit 1) used to support alleged increase (sic) were not validated in our
independent inquiry. As manifested in Exhibit 2, using the same formula which the
DOF used in arriving at the reimbursement rate but using comparable percentages
instead of pesos, the ineluctable conclusion is that the oil companies are actually
gaining rather than losing from the extension of credit because such extension
enables them to invest the collections in marketable securities which have much
higher rates than those they incur due to the extension. The Data we used were
obtained from CPI (CALTEX) Management and can easily be verified from our
records.

With respect to product sales or those arising from sales to international vessels or
airlines, . . ., it is believed that export sales (product sales) are entitled to claim
refund from the OPSF.
 As regard your claim for underrecovery arising from inventory losses, . . . It is the
considered view of this Commission that the OPSF is not liable to refund such surtax
on inventory losses because these are paid to BIR and not OPSF, in view of which
CPI (CALTEX) should seek refund from BIR. . . .

Finally, as regards the sales to Atlas and Marcopper, it is represented that you are
entitled to claim recovery from the OPSF pursuant to LOI 1416 issued on July 17,
1984, since these copper mining companies did not pay CPI (CALTEX) and OPSF
imposts which were added to the selling price.

Upon a circumspect evaluation, this Commission believes and so holds that the CPI
(CALTEX) has no authority to claim reimbursement for this uncollected OPSF impost
because LOI 1416 dated July 17, 1984, which exempts distressed mining companies
from "all taxes, duties, import fees and other charges" was issued when OPSF was
not yet in existence and could not have contemplated OPSF imposts at the time of its
formulation. Moreover, it is evident that OPSF was not created to aid distressed
mining companies but rather to help the domestic oil industry by stabilizing oil prices.

Unsatisfied with the decision, petitioner filed on 28 March 1990 the present petition wherein it
imputes to the COA the commission of the following errors: 16

RESPONDENT COMMISSION ERRED IN DISALLOWING RECOVERY OF

FINANCING CHARGES FROM THE OPSF.

II

RESPONDENT COMMISSION ERRED IN DISALLOWING

CPI's 17 CLAIM FOR REIMBURSEMENT OF UNDERRECOVERY ARISING FROM
SALES TO NPC.

III

RESPONDENT COMMISSION ERRED IN DENYING CPI's CLAIMS FOR

REIMBURSEMENT ON SALES TO ATLAS AND MARCOPPER.

IV

RESPONDENT COMMISSION ERRED IN PREVENTING CPI FROM EXERCISING

ITS LEGAL RIGHT TO OFFSET ITS REMITTANCES AGAINST ITS
REIMBURSEMENT VIS-A-VIS THE OPSF.

RESPONDENT COMMISSION ERRED IN DISALLOWING CPI's CLAIMS WHICH

ARE STILL PENDING RESOLUTION BY (SIC) THE OEA AND THE DOF.

In the Resolution of 5 April 1990, this Court required the respondents to comment on the petition
within ten (10) days from notice. 18
On 6 September 1990, respondents COA and Commissioners Fernandez and Cruz, assisted by the
Office of the Solicitor General, filed their Comment. 19

This Court resolved to give due course to this petition on 30 May 1991 and required the parties to file
their respective Memoranda within twenty (20) days from notice. 20

In a Manifestation dated 18 July 1991, the Office of the Solicitor General prays that the Comment
filed on 6 September 1990 be considered as the Memorandum for respondents. 21

Upon the other hand, petitioner filed its Memorandum on 14 August 1991.

I. Petitioner dwells lengthily on its first assigned error contending, in support thereof, that:

(1) In view of the expanded role of the OPSF pursuant to Executive Order No. 137, which added a
second purpose, to wit:

2) To reimburse the oil companies for possible cost underrecovery incurred as a

result of the reduction of domestic prices of petroleum products. The magnitude of
the underrecovery, if any, shall be determined by the Ministry of Finance. "Cost
underrecovery" shall include the following:

i. Reduction in oil company take as directed by the Board of Energy

without the corresponding reduction in the landed cost of oil
inventories in the possession of the oil companies at the time of the
price change;

ii. Reduction in internal ad valorem taxes as a result of foregoing

government mandated price reductions;

iii. Other factors as may be determined by the Ministry of Finance to

result in cost underrecovery.

the "other factors" mentioned therein that may be determined by the Ministry (now Department) of
Finance may include financing charges for "in essence, financing charges constitute unrecovered
cost of acquisition of crude oil incurred by the oil companies," as explained in the 6 November 1989
Memorandum to the President of the Department of Finance; they "directly translate to cost
underrecovery in cases where the money market placement rates decline and at the same time the
tax on interest income increases. The relationship is such that the presence of underrecovery or
overrecovery is directly dependent on the amount and extent of financing charges."

(2) The claim for recovery of financing charges has clear legal and factual basis; it was filed on the
basis of Department of Finance Circular No.
1-87, dated 18 February 1987, which provides:

To allow oil companies to recover the costs of financing working capital associated
with crude oil shipments, the following guidelines on the utilization of the Oil Price
Stabilization Fund pertaining to the payment of the foregoing (sic) exchange risk
premium and recovery of financing charges will be implemented:

1. The OPSF foreign exchange premium shall be reduced to a flat

rate of one (1) percent for the first (6) months and 1/32 of one percent
per month thereafter up to a maximum period of one year, to be
applied on crude oil' shipments from January 1, 1987. Shipments with
outstanding financing as of January 1, 1987 shall be charged on the
basis of the fee applicable to the remaining period of financing.

2. In addition, for shipments loaded after January 1987, oil companies

shall be allowed to recover financing charges directly from the OPSF
per barrel of crude oil based on the following schedule:

F
i
n
a
n
c
i
n
g
P
e
r
i
o
d
R
e
i
m
b
u
r
s
e
m
e
n
t
R
a
t
e
P
e
s
o
s
p
e
r
B
a
r
r
 e
l

Less than 180 days None

180 days to 239 days 1.90
241 (sic) days to 299 4.02
300 days to 369 (sic) days 6.16
360 days or more 8.28

The above rates shall be subject to review every sixty

days. 22

Pursuant to this circular, the Department of Finance, in its letter of 18 February 1987, advised the
Office of Energy Affairs as follows:

HON. VICENTE T. PATERNO

Deputy Executive Secretary
For Energy Affairs
Office of the President
Makati, Metro Manila

Dear Sir:

This refers to the letters of the Oil Industry dated December 4, 1986 and February 5,
1987 and subsequent discussions held by the Price Review committee on February
6, 1987.

On the basis of the representations made, the Department of Finance recognizes the
necessity to reduce the foreign exchange risk premium accruing to the Oil Price
Stabilization Fund (OPSF). Such a reduction would allow the industry to recover
partly associated financing charges on crude oil imports. Accordingly, the OPSF
foreign exchange risk fee shall be reduced to a flat charge of 1% for the first six (6)
months plus 1/32% of 1% per month thereafter up to a maximum period of one year,
effective January 1, 1987. In addition, since the prevailing company take would still
leave unrecovered financing charges, reimbursement may be secured from the
OPSF in accordance with the provisions of the attached Department of Finance
circular. 23

Acting on this letter, the OEA issued on 4 May 1987 Order No. 87-05-096 which contains the
guidelines for the computation of the foreign exchange risk fee and the recovery of financing charges
from the OPSF, to wit:

B. FINANCE CHARGES

1. Oil companies shall be allowed to recover financing charges

directly from the OPSF for both crude and product shipments loaded
after January 1, 1987 based on the following rates:

F
i
n
 a
n
c
i
n
g
P
e
r
i
o
d
R
e
i
m
b
u
r
s
e
m
e
n
t
R
a
t
e
(
P
B
b
l
.
)

Less than 180 days None

180 days to 239 days 1.90
240 days to 229 (sic) days 4.02
300 days to 359 days 6.16
360 days to more 8.28

2. The above rates shall be subject to review every sixty days. 24

Then on 22 November 1988, the Department of Finance issued Circular No. 4-88 imposing further
guidelines on the recoverability of financing charges, to wit:

Following are the supplemental rules to Department of Finance Circular No. 1-87
dated February 18, 1987 which allowed the recovery of financing charges directly
from the Oil Price Stabilization Fund. (OPSF):
 1. The Claim for reimbursement shall be on a per shipment basis.

2. The claim shall be filed with the Office of Energy Affairs together
with the claim on peso cost differential for a particular shipment and
duly certified supporting documents providedfor under Ministry of
Finance No. 11-85.

3. The reimbursement shall be on the form of reimbursement

certificate (Annex A) to be issued by the Office of Energy Affairs. The
said certificate may be used to offset against amounts payable to the
OPSF. The oil companies may also redeem said certificates in cash if
not utilized, subject to availability of funds. 25

The OEA disseminated this Circular to all oil companies in its Memorandum Circular No. 88-12-
017. 26

The COA can neither ignore these issuances nor formulate its own interpretation of the laws in the
light of the determination of executive agencies. The determination by the Department of Finance
and the OEA that financing charges are recoverable from the OPSF is entitled to great weight and
consideration. 27 The function of the COA, particularly in the matter of allowing or disallowing certain
expenditures, is limited to the promulgation of accounting and auditing rules for, among others, the
disallowance of irregular, unnecessary, excessive, extravagant, or unconscionable expenditures, or
uses of government funds and properties. 28

(3) Denial of petitioner's claim for reimbursement would be inequitable. Additionally, COA's claim that
petitioner is gaining, instead of losing, from the extension of credit, is belatedly raised and not
supported by expert analysis.

In impeaching the validity of petitioner's assertions, the respondents argue that:

1. The Constitution gives the COA discretionary power to disapprove irregular or

unnecessary government expenditures and as the monetary claims of petitioner are
not allowed by law, the COA acted within its jurisdiction in denying them;

2. P.D. No. 1956 and E.O. No. 137 do not allow reimbursement of financing charges
from the OPSF;

3. Under the principle of ejusdem generis, the "other factors" mentioned in the
second purpose of the OPSF pursuant to E.O. No. 137 can only include "factors
which are of the same nature or analogous to those enumerated;"

4. In allowing reimbursement of financing charges from OPSF, Circular No. 1-87 of

the Department of Finance violates P.D. No. 1956 and E.O. No. 137; and

5. Department of Finance rules and regulations implementing P.D. No. 1956 do not
likewise allow reimbursement of financing
charges. 29

We find no merit in the first assigned error.

As to the power of the COA, which must first be resolved in view of its primacy, We find the theory of
petitioner that such does not extend to the disallowance of irregular, unnecessary, excessive,
extravagant, or unconscionable expenditures, or use of government funds and properties, but only to
the promulgation of accounting and auditing rules for, among others, such disallowance to be
untenable in the light of the provisions of the 1987 Constitution and related laws.

Section 2, Subdivision D, Article IX of the 1987 Constitution expressly provides:

Sec. 2(l). The Commission on Audit shall have the power, authority, and duty to
examine, audit, and settle all accounts pertaining to the revenue and receipts of, and
expenditures or uses of funds and property, owned or held in trust by, or pertaining
to, the Government, or any of its subdivisions, agencies, or instrumentalities,
including government-owned and controlled corporations with original charters, and
on a post-audit basis: (a) constitutional bodies, commissions and offices that have
been granted fiscal autonomy under this Constitution; (b) autonomous state colleges
and universities; (c) other government-owned or controlled corporations and their
subsidiaries; and (d) such non-governmental entities receiving subsidy or equity,
directly or indirectly, from or through the government, which are required by law or
the granting institution to submit to such audit as a condition of subsidy or equity.
However, where the internal control system of the audited agencies is inadequate,
the Commission may adopt such measures, including temporary or special pre-audit,
as are necessary and appropriate to correct the deficiencies. It shall keep the general
accounts, of the Government and, for such period as may be provided by law,
preserve the vouchers and other supporting papers pertaining thereto.

(2) The Commission shall have exclusive authority, subject to the limitations in this
Article, to define the scope of its audit and examination, establish the techniques and
methods required therefor, and promulgate accounting and auditing rules and
regulations, including those for the prevention and disallowance of irregular,
unnecessary, excessive, extravagant, or, unconscionable expenditures, or uses of
government funds and properties.

These present powers, consistent with the declared independence of the Commission, 30 are broader
and more extensive than that conferred by the 1973 Constitution. Under the latter, the Commission
was empowered to:

Examine, audit, and settle, in accordance with law and regulations, all accounts
pertaining to the revenues, and receipts of, and expenditures or uses of funds and
property, owned or held in trust by, or pertaining to, the Government, or any of its
subdivisions, agencies, or instrumentalities including government-owned or
controlled corporations, keep the general accounts of the Government and, for such
period as may be provided by law, preserve the vouchers pertaining thereto; and
promulgate accounting and auditing rules and regulations including those for the
prevention of irregular, unnecessary, excessive, or extravagant expenditures or uses
of funds and property. 31

Upon the other hand, under the 1935 Constitution, the power and authority of the COA's precursor,
the General Auditing Office, were, unfortunately, limited; its very role was markedly passive. Section
2 of Article XI thereofprovided:

Sec. 2. The Auditor General shall examine, audit, and settle all accounts pertaining
to the revenues and receipts from whatever source, including trust funds derived
 from bond issues; and audit, in accordance with law and administrative regulations,
all expenditures of funds or property pertaining to or held in trust by the Government
or the provinces or municipalities thereof. He shall keep the general accounts of the
Government and the preserve the vouchers pertaining thereto. It shall be the duty of
the Auditor General to bring to the attention of the proper administrative officer
expenditures of funds or property which, in his opinion, are irregular, unnecessary,
excessive, or extravagant. He shall also perform such other functions as may be
prescribed by law.

As clearly shown above, in respect to irregular, unnecessary, excessive or extravagant expenditures

or uses of funds, the 1935 Constitution did not grant the Auditor General the power to issue rules
and regulations to prevent the same. His was merely to bring that matter to the attention of the
proper administrative officer.

The ruling on this particular point, quoted by petitioner from the cases of Guevarra
vs. Gimenez 32 and Ramos vs.Aquino, 33 are no longer controlling as the two (2) were decided in the
light of the 1935 Constitution.

There can be no doubt, however, that the audit power of the Auditor General under the 1935
Constitution and the Commission on Audit under the 1973 Constitution authorized them to
disallow illegal expenditures of funds or uses of funds and property. Our present Constitution retains
that same power and authority, further strengthened by the definition of the COA's general
jurisdiction in Section 26 of the Government Auditing Code of the Philippines 34 and Administrative
Code of 1987. 35 Pursuant to its power to promulgate accounting and auditing rules and regulations
for the prevention of irregular, unnecessary, excessive or extravagant expenditures or uses of
funds, 36 the COA promulgated on 29 March 1977 COA Circular No. 77-55. Since the COA is
responsible for the enforcement of the rules and regulations, it goes without saying that failure to
comply with them is a ground for disapproving the payment of the proposed expenditure. As
observed by one of the Commissioners of the 1986 Constitutional Commission, Fr. Joaquin G.
Bernas: 37

It should be noted, however, that whereas under Article XI, Section 2, of the 1935
Constitution the Auditor General could not correct "irregular, unnecessary, excessive
or extravagant" expenditures of public funds but could only "bring [the matter] to the
attention of the proper administrative officer," under the 1987 Constitution, as also
under the 1973 Constitution, the Commission on Audit can "promulgate accounting
and auditing rules and regulations including those for the prevention and
disallowance of irregular, unnecessary, excessive, extravagant, or unconscionable
expenditures or uses of government funds and properties." Hence, since the
Commission on Audit must ultimately be responsible for the enforcement of these
rules and regulations, the failure to comply with these regulations can be a ground for
disapproving the payment of a proposed expenditure.

Indeed, when the framers of the last two (2) Constitutions conferred upon the COA a more active
role and invested it with broader and more extensive powers, they did not intend merely to make the
COA a toothless tiger, but rather envisioned a dynamic, effective, efficient and independent
watchdog of the Government.

The issue of the financing charges boils down to the validity of Department of Finance Circular No.
1-87, Department of Finance Circular No. 4-88 and the implementing circulars of the OEA, issued
pursuant to Section 8, P.D. No. 1956, as amended by E.O. No. 137, authorizing it to determine
"other factors" which may result in cost underrecovery and a consequent reimbursement from the
OPSF.

The Solicitor General maintains that, following the doctrine of ejusdem generis, financing charges
are not included in "cost underrecovery" and, therefore, cannot be considered as one of the "other
factors." Section 8 of P.D. No. 1956, as amended by E.O. No. 137, does not explicitly define what
"cost underrecovery" is. It merely states what it includes. Thus:

. . . "Cost underrecovery" shall include the following:

i. Reduction in oil company takes as directed by the Board of Energy without the
corresponding reduction in the landed cost of oil inventories in the possession of the
oil companies at the time of the price change;

ii. Reduction in internal ad valorem taxes as a result of foregoing government

mandated price reductions;

iii. Other factors as may be determined by the Ministry of Finance to result in cost
underrecovery.

These "other factors" can include only those which are of the same class or nature as the two
specifically enumerated in subparagraphs (i) and (ii). A common characteristic of both is that they
are in the nature of government mandated price reductions. Hence, any other factor which seeks to
be a part of the enumeration, or which could qualify as a cost underrecovery, must be of the same
class or nature as those specifically enumerated.

Petitioner, however, suggests that E.O. No. 137 intended to grant the Department of Finance broad
and unrestricted authority to determine or define "other factors."

Both views are unacceptable to this Court.

The rule of ejusdem generis states that "[w]here general words follow an enumeration of persons or
things, by words of a particular and specific meaning, such general words are not to be construed in
their widest extent, but are held to be as applying only to persons or things of the same kind or class
as those specifically mentioned. 38 A reading of subparagraphs (i) and (ii) easily discloses that they
do not have a common characteristic. The first relates to price reduction as directed by the Board of
Energy while the second refers to reduction in internal ad valoremtaxes. Therefore, subparagraph
(iii) cannot be limited by the enumeration in these subparagraphs. What should be considered for
purposes of determining the "other factors" in subparagraph (iii) is the first sentence of paragraph (2)
of the Section which explicitly allows cost underrecovery only if such were incurred as a result of the
reduction of domestic prices of petroleum products.

Although petitioner's financing losses, if indeed incurred, may constitute cost underrecovery in the
sense that such were incurred as a result of the inability to fully offset financing expenses from yields
in money market placements, they do not, however, fall under the foregoing provision of P.D. No.
1956, as amended, because the same did not result from the reduction of the domestic price of
petroleum products. Until paragraph (2), Section 8 of the decree, as amended, is further amended
by Congress, this Court can do nothing. The duty of this Court is not to legislate, but to apply or
interpret the law. Be that as it may, this Court wishes to emphasize that as the facts in this case
have shown, it was at the behest of the Government that petitioner refinanced its oil import
payments from the normal 30-day trade credit to a maximum of 360 days. Petitioner could be correct
in its assertion that owing to the extended period for payment, the financial institution which
refinanced said payments charged a higher interest, thereby resulting in higher financing expenses
for the petitioner. It would appear then that equity considerations dictate that petitioner should
somehow be allowed to recover its financing losses, if any, which may have been sustained because
it accommodated the request of the Government. Although under Section 29 of the National Internal
Revenue Code such losses may be deducted from gross income, the effect of that loss would be
merely to reduce its taxable income, but not to actually wipe out such losses. The Government then
may consider some positive measures to help petitioner and others similarly situated to obtain
substantial relief. An amendment, as aforestated, may then be in order.

Upon the other hand, to accept petitioner's theory of "unrestricted authority" on the part of the
Department of Finance to determine or define "other factors" is to uphold an undue delegation of
legislative power, it clearly appearing that the subject provision does not provide any standard for the
exercise of the authority. It is a fundamental rule that delegation of legislative power may be
sustained only upon the ground that some standard for its exercise is provided and that the
legislature, in making the delegation, has prescribed the manner of the exercise of the delegated
authority. 39

Finally, whether petitioner gained or lost by reason of the extensive credit is rendered irrelevant by
reason of the foregoing disquisitions. It may nevertheless be stated that petitioner failed to disprove
COA's claim that it had in fact gained in the process. Otherwise stated, petitioner failed to sufficiently
show that it incurred a loss. Such being the case, how can petitioner claim for reimbursement? It
cannot have its cake and eat it too.

II. Anent the claims arising from sales to the National Power Corporation, We find for the petitioner.
The respondents themselves admit in their Comment that underrecovery arising from sales to NPC
are reimbursable because NPC was granted full exemption from the payment of taxes; to prove this,
respondents trace the laws providing for such exemption. 40 The last law cited is the Fiscal Incentives
Regulatory Board's Resolution No. 17-87 of 24 June 1987 which provides, in part, "that the tax and
duty exemption privileges of the National Power Corporation, including those pertaining to its
domestic purchases of petroleum and petroleum products . . . are restored effective March 10,
1987." In a Memorandum issued on 5 October 1987 by the Office of the President, NPC's tax
exemption was confirmed and approved.

Furthermore, as pointed out by respondents, the intention to exempt sales of petroleum products to
the NPC is evident in the recently passed Republic Act No. 6952 establishing the Petroleum Price
Standby Fund to support the OPSF. 41 The pertinent part of Section 2, Republic Act No. 6952
provides:

Sec. 2. Application of the Fund shall be subject to the following conditions:

(1) That the Fund shall be used to reimburse the oil companies for (a)
cost increases of imported crude oil and finished petroleum products
resulting from foreign exchange rate adjustments and/or increases in
world market prices of crude oil; (b) cost underrecovery incurred as a
result of fuel oil sales to the National Power Corporation (NPC); and
(c) other cost underrecoveries incurred as may be finally decided by
the Supreme
Court; . . .

Hence, petitioner can recover its claim arising from sales of petroleum products to the National
Power Corporation.
III. With respect to its claim for reimbursement on sales to ATLAS and MARCOPPER, petitioner
relies on Letter of Instruction (LOI) 1416, dated 17 July 1984, which ordered the suspension of
payments of all taxes, duties, fees and other charges, whether direct or indirect, due and payable by
the copper mining companies in distress to the national government. Pursuant to this LOI, then
Minister of Energy, Hon. Geronimo Velasco, issued Memorandum Circular No. 84-11-22 advising
the oil companies that Atlas Consolidated Mining Corporation and Marcopper Mining Corporation are
among those declared to be in distress.

In denying the claims arising from sales to ATLAS and MARCOPPER, the COA, in its 18 August
1989 letter to Executive Director Wenceslao R. de la Paz, states that "it is our opinion that LOI 1416
which implements the exemption from payment of OPSF imposts as effected by OEA has no legal
basis;" 42 in its Decision No. 1171, it ruled that "the CPI (CALTEX) (Caltex) has no authority to claim
reimbursement for this uncollected impost because LOI 1416 dated July 17, 1984, . . . was issued
when OPSF was not yet in existence and could not have contemplated OPSF imposts at the time of
its formulation." 43 It is further stated that: "Moreover, it is evident that OPSF was not created to aid
distressed mining companies but rather to help the domestic oil industry by stabilizing oil prices."

In sustaining COA's stand, respondents vigorously maintain that LOI 1416 could not have intended
to exempt said distressed mining companies from the payment of OPSF dues for the following
reasons:

a. LOI 1416 granting the alleged exemption was issued on July 17, 1984. P.D. 1956
creating the OPSF was promulgated on October 10, 1984, while E.O. 137, amending
P.D. 1956, was issued on February 25, 1987.

b. LOI 1416 was issued in 1984 to assist distressed copper mining companies in line
with the government's effort to prevent the collapse of the copper industry. P.D No.
1956, as amended, was issued for the purpose of minimizing frequent price changes
brought about by exchange rate adjustments and/or changes in world market prices
of crude oil and imported petroleum product's; and

c. LOI 1416 caused the "suspension of all taxes, duties, fees, imposts and other
charges, whether direct or indirect, due and payable by the copper mining companies
in distress to the Notional and Local Governments . . ." On the other hand, OPSF
dues are not payable by (sic) distressed copper companies but by oil companies. It is
to be noted that the copper mining companies do not pay OPSF dues. Rather, such
imposts are built in or already incorporated in the prices of oil products. 44

Lastly, respondents allege that while LOI 1416 suspends the payment of taxes by distressed mining
companies, it does not accord petitioner the same privilege with respect to its obligation to pay
OPSF dues.

We concur with the disquisitions of the respondents. Aside from such reasons, however, it is
apparent that LOI 1416 was never published in the Official Gazette 45 as required by Article 2 of the
Civil Code, which reads:

Laws shall take effect after fifteen days following the completion of their publication in
the Official Gazette, unless it is otherwise provided. . . .

In applying said provision, this Court ruled in the case of Taada vs. Tuvera: 46
 WHEREFORE, the Court hereby orders respondents to publish in the Official
Gazette all unpublished presidential issuances which are of general application, and
unless so published they shall have no binding force and effect.

Resolving the motion for reconsideration of said decision, this Court, in its Resolution promulgated
on 29 December 1986, 47 ruled:

We hold therefore that all statutes, including those of local application and private
laws, shall be published as a condition for their effectivity, which shall begin fifteen
days after publication unless a different effectivity date is fixed by the legislature.

Covered by this rule are presidential decrees and executive orders promulgated by
the President in the exercise of legislative powers whenever the same are validly
delegated by the legislature or, at present, directly conferred by the Constitution.
Administrative rules and regulations must also be published if their purpose is to
enforce or implement existing laws pursuant also to a valid delegation.

xxx xxx xxx

WHEREFORE, it is hereby declared that all laws as above defined shall immediately
upon their approval, or as soon thereafter as possible, be published in full in the
Official Gazette, to become effective only after fifteen days from their publication, or
on another date specified by the legislature, in accordance with Article 2 of the Civil
Code.

LOI 1416 has, therefore, no binding force or effect as it was never published in the Official Gazette
after its issuance or at any time after the decision in the abovementioned cases.

Article 2 of the Civil Code was, however, later amended by Executive Order No. 200, issued on 18
June 1987. As amended, the said provision now reads:

Laws shall take effect after fifteen days following the completion of their publication
either in the Official Gazette or in a newspaper of general circulation in the
Philippines, unless it is otherwise provided.

We are not aware of the publication of LOI 1416 in any newspaper of general circulation pursuant to
Executive Order No. 200.

Furthermore, even granting arguendo that LOI 1416 has force and effect, petitioner's claim must still
fail. Tax exemptions as a general rule are construed strictly against the grantee and liberally in favor
of the taxing authority. 48The burden of proof rests upon the party claiming exemption to prove that it
is in fact covered by the exemption so claimed. The party claiming exemption must therefore be
expressly mentioned in the exempting law or at least be within its purview by clear legislative intent.

In the case at bar, petitioner failed to prove that it is entitled, as a consequence of its sales to ATLAS
and MARCOPPER, to claim reimbursement from the OPSF under LOI 1416. Though LOI 1416 may
suspend the payment of taxes by copper mining companies, it does not give petitioner the same
privilege with respect to the payment of OPSF dues.

IV. As to COA's disallowance of the amount of P130,420,235.00, petitioner maintains that the
Department of Finance has still to issue a final and definitive ruling thereon; accordingly, it was
premature for COA to disallow it. By doing so, the latter acted beyond its jurisdiction. 49 Respondents,
on the other hand, contend that said amount was already disallowed by the OEA for failure to
substantiate it. 50 In fact, when OEA submitted the claims of petitioner for pre-audit, the
abovementioned amount was already excluded.

An examination of the records of this case shows that petitioner failed to prove or substantiate its
contention that the amount of P130,420,235.00 is still pending before the OEA and the DOF.
Additionally, We find no reason to doubt the submission of respondents that said amount has
already been passed upon by the OEA. Hence, the ruling of respondent COA disapproving said
claim must be upheld.

V. The last issue to be resolved in this case is whether or not the amounts due to the OPSF from
petitioner may be offset against petitioner's outstanding claims from said fund. Petitioner contends
that it should be allowed to offset its claims from the OPSF against its contributions to the fund as
this has been allowed in the past, particularly in the years 1987 and 1988. 51

Furthermore, petitioner cites, as bases for offsetting, the provisions of the New Civil Code on
compensation and Section 21, Book V, Title I-B of the Revised Administrative Code which provides
for "Retention of Money for Satisfaction of Indebtedness to Government." 52 Petitioner also mentions
communications from the Board of Energy and the Department of Finance that supposedly authorize
compensation.

Respondents, on the other hand, citing Francia vs. IAC and Fernandez, 53 contend that there can be
no offsetting of taxes against the claims that a taxpayer may have against the government, as taxes
do not arise from contracts or depend upon the will of the taxpayer, but are imposed by law.
Respondents also allege that petitioner's reliance on Section 21, Book V, Title I-B of the Revised
Administrative Code, is misplaced because "while this provision empowers the COA to withhold
payment of a government indebtedness to a person who is also indebted to the government and
apply the government indebtedness to the satisfaction of the obligation of the person to the
government, like authority or right to make compensation is not given to the private person." 54 The
reason for this, as stated in Commissioner of Internal Revenue vs. Algue, Inc., 55 is that money due
the government, either in the form of taxes or other dues, is its lifeblood and should be collected
without hindrance. Thus, instead of giving petitioner a reason for compensation or set-off, the
Revised Administrative Code makes it the respondents' duty to collect petitioner's indebtedness to
the OPSF.

Refuting respondents' contention, petitioner claims that the amounts due from it do not arise as a
result of taxation because "P.D. 1956, amended, did not create a source of taxation; it instead
established a special fund . . .," 56 and that the OPSF contributions do not go to the general fund of
the state and are not used for public purpose, i.e., not for the support of the government, the
administration of law, or the payment of public expenses. This alleged lack of a public purpose
behind OPSF exactions distinguishes such from a tax. Hence, the ruling in the Francia case is
inapplicable.

Lastly, petitioner cites R.A. No. 6952 creating the Petroleum Price Standby Fund to support the
OPSF; the said law provides in part that:

Sec. 2. Application of the fund shall be subject to the following conditions:

xxx xxx xxx

 (3) That no amount of the Petroleum Price Standby Fund shall be
used to pay any oil company which has an outstanding obligation to
the Government without said obligation being offset first, subject to
the requirements of compensation or offset under the Civil Code.

We find no merit in petitioner's contention that the OPSF contributions are not for a public purpose
because they go to a special fund of the government. Taxation is no longer envisioned as a measure
merely to raise revenue to support the existence of the government; taxes may be levied with a
regulatory purpose to provide means for the rehabilitation and stabilization of a threatened industry
which is affected with public interest as to be within the police power of the state. 57 There can be no
doubt that the oil industry is greatly imbued with public interest as it vitally affects the general
welfare. Any unregulated increase in oil prices could hurt the lives of a majority of the people and
cause economic crisis of untold proportions. It would have a chain reaction in terms of, among
others, demands for wage increases and upward spiralling of the cost of basic commodities. The
stabilization then of oil prices is of prime concern which the state, via its police power, may properly
address.

Also, P.D. No. 1956, as amended by E.O. No. 137, explicitly provides that the source of OPSF is
taxation. No amount of semantical juggleries could dim this fact.

It is settled that a taxpayer may not offset taxes due from the claims that he may have against the
government. 58Taxes 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. 59

We may even further state that technically, in respect to the taxes for the OPSF, the oil companies
merely act as agents for the Government in the latter's collection since the taxes are, in reality,
passed unto the end-users the consuming public. In that capacity, the petitioner, as one of such
companies, has the primary obligation to account for and remit the taxes collected to the
administrator of the OPSF. This duty stems from the fiduciary relationship between the two;
petitioner certainly cannot be considered merely as a debtor. In respect, therefore, to its collection
for the OPSF vis-a-vis its claims for reimbursement, no compensation is likewise legally feasible.
Firstly, the Government and the petitioner cannot be said to be mutually debtors and creditors of
each other. Secondly, there is no proof that petitioner's claim is already due and liquidated. Under
Article 1279 of the Civil Code, in order that compensation may be proper, it is necessary that:

(1) each one of the obligors be bound principally, and that he be at the same time a
principal creditor of the other;

(2) 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) the two (2) debts be due;

(4) they be liquidated and demandable;

(5) over neither of them there be any retention or controversy, commenced by third
persons and communicated in due time to the debtor.

That compensation had been the practice in the past can set no valid precedent. Such a practice
has no legal basis. Lastly, R.A. No. 6952 does not authorize oil companies to offset their claims
against their OPSF contributions. Instead, it prohibits the government from paying any amount from
the Petroleum Price Standby Fund to oil companies which have outstanding obligations with the
government, without said obligation being offset first subject to the rules on compensation in the Civil
Code.

WHEREFORE, in view of the foregoing, judgment is hereby rendered AFFIRMING the challenged
decision of the Commission on Audit, except that portion thereof disallowing petitioner's claim for
reimbursement of underrecovery arising from sales to the National Power Corporation, which is
hereby allowed.

With costs against petitioner.

SO ORDERED.