MEANING OF TAXATION

G.R. No. 119286 October 13, 2004

PASEO REALTY & DEVELOPMENT CORPORATION, petitioner,

vs.
C O U R T O F A P P E A L S , C O U R T O F TA X A P P E A L S a n d
COMMISSIONER OF INTERNAL REVENUE, respondents.

DECISION

TINGA, J.:

The changes in the reportorial requirements and payment schedules

of corporate income taxes from annual to quarterly have created
problems, especially on the matter of tax refunds.1 In this case, the
Court is called to resolve the question of whether alleged excess
taxes paid by a corporation during a taxable year should be refunded
or credited against its tax liabilities for the succeeding year.

Paseo Realty and Development Corporation, a domestic corporation

engaged in the lease of two (2) parcels of land at Paseo de Roxas in
Makati City, seeks a review of the Decision2 of the Court of Appeals
dismissing its petition for review of the resolution3 of the Court of Tax
Appeals (CTA) which, in turn, denied its claim for refund.

The factual antecedents4 are as follows:

On April 16, 1990, petitioner filed its Income Tax Return for the
calendar year 1989 declaring a gross income of ₱1,855,000.00,
deductions of ₱1,775,991.00, net income of ₱79,009.00, an income
tax due thereon in the amount of ₱27,653.00, prior year’s excess
credit of ₱146,026.00, and creditable taxes withheld in 1989 of
₱54,104.00 or a total tax credit of ₱200,130.00 and credit balance of
₱172,477.00.

On November 14, 1991, petitioner filed with respondent a claim for

"the refund of excess creditable withholding and income taxes for the
years 1989 and 1990 in the aggregate amount of ₱147,036.15."
On December 27, 1991 alleging that the prescriptive period for
refunds for 1989 would expire on December 30, 1991 and that it was
necessary to interrupt the prescriptive period, petitioner filed with the
respondent Court of Tax Appeals a petition for review praying for the
refund of "₱54,104.00 representing creditable taxes withheld from
income payments of petitioner for the calendar year ending
December 31, 1989."

On February 25, 1992, respondent Commissioner filed an Answer and

by way of special and/or affirmative defenses averred the following: a)
the petition states no cause of action for failure to allege the dates
when the taxes sought to be refunded were paid; b) petitioner’s claim
for refund is still under investigation by respondent Commissioner; c)
the taxes claimed are deemed to have been paid and collected in
accordance with law and existing pertinent rules and regulations; d)
petitioner failed to allege that it is entitled to the refund or
deductions claimed; e) petitioner’s contention that it has available tax
credit for the current and prior year is gratuitous and does not ipso
facto warrant the refund; f) petitioner failed to show that it has
complied with the provision of Section 230 in relation to Section 204
of the Tax Code.

After trial, the respondent Court rendered a decision ordering

respondent Commissioner "to refund in favor of petitioner the
amount of ₱54,104.00, representing excess creditable withholding
taxes paid for January to July1989."

Respondent Commissioner moved for reconsideration of the decision,

alleging that the ₱54,104.00 ordered to be refunded "has already
been included and is part and parcel of the ₱172,477.00 which
petitioner automatically applied as tax credit for the succeeding
taxable year 1990."

In a resolution dated October 21, 1993 Respondent Court

reconsidered its decision of July 29, 1993 and dismissed the petition
for review, stating that it has "overlooked the fact that the petitioner’s
1989 Corporate Income Tax Return (Exh. "A") indicated that the
amount of ₱54,104.00 subject of petitioner’s claim for refund has
already been included as part and parcel of the ₱172,477.00 which
the petitioner automatically applied as tax credit for the succeeding
taxable year 1990."

Petitioner filed a Motion for Reconsideration which was denied by

respondent Court on March 10, 1994.5

Petitioner filed a Petition for Review6 dated April 3, 1994 with the
Court of Appeals. Resolving the twin issues of whether petitioner is
entitled to a refund of ₱54,104.00 representing creditable taxes
withheld in 1989 and whether petitioner applied such creditable taxes
withheld to its 1990 income tax liability, the appellate court held that
petitioner is not entitled to a refund because it had already elected to
apply the total amount of ₱172,447.00, which includes the
₱54,104.00 refund claimed, against its income tax liability for 1990.
The appellate court elucidated on the reason for its dismissal of
petitioner’s claim for refund, thus:

In the instant case, it appears that when petitioner filed its income tax
return for the year 1989, it filled up the box stating that the total
amount of ₱172,477.00 shall be applied against its income tax
liabilities for the succeeding taxable year.

Petitioner did not specify in its return the amount to be refunded and
the amount to be applied as tax credit to the succeeding taxable year,
but merely marked an "x" to the box indicating "to be applied as tax
credit to the succeeding taxable year." Unlike what petitioner had
done when it filed its income tax return for the year 1988, it
specifically stated that out of the ₱146,026.00 the entire refundable
amount, only ₱64,623.00 will be made available as tax credit, while
the amount of ₱81,403.00 will be refunded.

In its 1989 income tax return, petitioner filled up the box "to be
applied as tax credit to succeeding taxable year," which signified that
instead of refund, petitioner will apply the total amount of
₱172,447.00, which includes the amount of ₱54,104.00 sought to be
refunded, as tax credit for its tax liabilities in 1990. Thus, there is really
nothing left to be refunded to petitioner for the year 1989. To grant
petitioner’s claim for refund is tantamount to granting twice the
refund herein sought to be refunded, to the prejudice of the
Government.

The Court of Appeals denied petitioner’s Motion for Reconsideration7

dated November 8, 1994 in its Resolution8 dated February 21, 1995
because the motion merely restated the grounds which have already
been considered and passed upon in its Decision.9

Petitioner thus filed the instant Petition for Review10 dated April 14,
1995 arguing that the evidence presented before the lower courts
conclusively shows that it did not apply the ₱54,104.00 to its 1990
income tax liability; that the Decision subject of the instant petition is
inconsistent with a final decision11 of the Sixteenth Division of the
appellate court in C.A.-G.R. Sp. No. 32890 involving the same parties
and subject matter; and that the affirmation of the questioned
Decision would lead to absurd results in the manner of claiming
refunds or in the application of prior years’ excess tax credits.

The Office of the Solicitor General (OSG) filed a Comment12 dated

May 16, 1996 on behalf of respondents asserting that the claimed
refund of ₱54,104.00 was, by petitioner’s election in its Corporate
Annual Income Tax Return for 1989, to be applied against its tax
liability for 1990. Not having submitted its tax return for 1990 to show
whether the said amount was indeed applied against its tax liability
for 1990, petitioner’s election in its tax return stands. The OSG also
contends that petitioner’s election to apply its overpaid income tax as
tax credit against its tax liabilities for the succeeding taxable year is
mandatory and irrevocable.

On September 2, 1997, petitioner filed a Reply13 dated August 31,

1996 insisting that the issue in this case is not whether the amount of
₱54,104.00 was included as tax credit to be applied against its 1990
income tax liability but whether the same amount was actually applied
as tax credit for 1990. Petitioner claims that there is no need to show
that the amount of ₱54,104.00 had not been automatically applied
against its 1990 income tax liability because the appellate court’s
decision in C.A.-G.R. Sp. No. 32890 clearly held that petitioner
charged its 1990 income tax liability against its tax credit for 1988 and
not 1989. Petitioner also disputes the OSG’s assertion that the
taxpayer’s election as to the application of excess taxes is irrevocable
averring that there is nothing in the law that prohibits a taxpayer from
changing its mind especially if subsequent events leave the latter no
choice but to change its election.

The OSG filed a Rejoinder14 dated March 5, 1997 stating that

petitioner’s 1988 tax return shows a prior year’s excess credit of
₱81,403.00, creditable tax withheld of ₱92,750.00 and tax due of
₱27,127.00. Petitioner indicated that the prior year’s excess credit of
₱81,403.00 was to be refunded, while the remaining amount of
₱64,623.00 (₱92,750.00 - ₱27,127.00) shall be considered as tax
credit for 1989. However, in its 1989 tax return, petitioner included
the ₱81,403.00 which had already been segregated for refund in the
computation of its excess credit, and specified that the full amount of
₱172,479.00* (₱81,403.00 + ₱64,623.00 + ₱54,104.00** -
₱27,653.00***) be considered as its tax credit for 1990. Considering
that it had obtained a favorable ruling for the refund of its excess
credit for 1988 in CA-G.R. SP. No. 32890, its remaining tax credit for
1989 should be the excess credit to be applied against its 1990 tax
liability. In fine, the OSG argues that by its own election, petitioner
can no longer ask for a refund of its creditable taxes withheld in 1989
as the same had been applied against its 1990 tax due.

In its Resolution15 dated July 16, 1997, the Court gave due course to
the petition and required the parties to simultaneously file their
respective memoranda within 30 days from notice. In compliance with
this directive, petitioner submitted its Memorandum16 dated
September 18, 1997 in due time, while the OSG filed its
Memorandum17 dated April 27, 1998 only on April 29, 1998 after
several extensions.

The petition must be denied.

As a matter of principle, it is not advisable for this Court to set aside

the conclusion reached by an agency such as the CTA which is, by the
very nature of its functions, dedicated exclusively to the study and
consideration of tax problems and has necessarily developed an
expertise on the subject, unless there has been an abuse or
improvident exercise of its authority.18
This interdiction finds particular application in this case since the CTA,
after careful consideration of the merits of the Commissioner of
Internal Revenue’s motion for reconsideration, reconsidered its earlier
decision which ordered the latter to refund the amount of ₱54,104.00
to petitioner. Its resolution cannot be successfully assailed based, as it
is, on the pertinent laws as applied to the facts.

Petitioner’s 1989 tax return indicates an aggregate creditable tax of

₱172,477.00, representing its 1988 excess credit of ₱146,026.00 and
1989 creditable tax of ₱54,104.00 less tax due for 1989, which it
elected to apply as tax credit for the succeeding taxable year.19
According to petitioner, it successively utilized this amount when it
obtained refunds in CTA Case No. 4439 (C.A.-G.R. Sp. No. 32300)
and CTA Case No. 4528 (C.A.-G.R. Sp. No. 32890), and applied its
1990 tax liability, leaving a balance of ₱54,104.00, the amount subject
of the instant claim for refund.20 Represented mathematically,
petitioner accounts for its claim in this wise:

₱172,477.00
Amount indicated in petitioner’s 1989 tax return to be applied as tax
credit for the succeeding taxable year

- 25,623.00
Claim for refund in CTA Case No. 4439 (C.A.-G.R. Sp. No. 32300)

₱146,854.00
Balance as of April 16, 1990

- 59,510.00
Claim for refund in CTA Case No. 4528 (C.A.-G.R. Sp. No. 32890)

₱87,344.00
Balance as of January 2, 1991

- 33,240.00
Income tax liability for calendar year 1990 applied as of April 15, 1991

₱54,104.00
Balance as of April 15, 1991 now subject of the instant claim for
refund21

Other than its own bare allegations, however, petitioner offers no

proof to the effect that its creditable tax of ₱172,477.00 was applied
as claimed above. Instead, it anchors its assertion of entitlement to
refund on an alleged finding in C.A.-G.R. Sp. No. 3289022 involving
the same parties to the effect that petitioner charged its 1990 income
tax liability to its tax credit for 1988 and not its 1989 tax credit.
Hence, its excess creditable taxes withheld of ₱54,104.00 for 1989
was left untouched and may be refunded.

Note should be taken, however, that nowhere in the case referred to

by petitioner did the Court of Appeals make a categorical
determination that petitioner’s tax liability for 1990 was applied
against its 1988 tax credit. The statement adverted to by petitioner
was actually presented in the appellate court’s decision in CA-G.R. Sp
No. 32890 as part of petitioner’s own narration of facts. The pertinent
portion of the decision reads:

It would appear from petitioner’s submission as follows:

x x x since it has already applied to its prior year’s excess credit of

₱81,403.00 (which petitioner wanted refunded when it filed its 1988
Income Tax Return on April 14, 1989) the income tax liability for 1988
of ₱28,127.00 and the income tax liability for 1989 of ₱27,653.00,
leaving a balance refundable of ₱25,623.00 subject of C.T.A. Case
No. 4439, the ₱92,750.00 (₱64,623.00 plus ₱28,127.00, since this
second amount was already applied to the amount refundable of
₱81,403.00) should be the refundable amount. But since the taxpayer
again used part of it to satisfy its income tax liability of ₱33,240.00 for
1990, the amount refundable was ₱59,510.00, which is the amount
prayed for in the claim for refund and also in the petitioner (sic) for
review.

That the present claim for refund already consolidates its claims for
refund for 1988, 1989, and 1990, when it filed a claim for refund of
₱59,510.00 in this case (CTA Case No. 4528). Hence, the present
claim should be resolved together with the previous claims.23
The confusion as to petitioner’s entitlement to a refund could
altogether have been avoided had it presented its tax return for 1990.
Such return would have shown whether petitioner actually applied its
1989 tax credit of ₱172,477.00, which includes the ₱54,104.00
creditable taxes withheld for 1989 subject of the instant claim for
refund, against its 1990 tax liability as it had elected in its 1989 return,
or at least, whether petitioner’s tax credit of ₱172,477.00 was applied
to its approved refunds as it claims.

The return would also have shown whether there remained an excess
credit refundable to petitioner after deducting its tax liability for 1990.
As it is, we only have petitioner’s allegation that its tax due for 1990
was ₱33,240.00 and that this was applied against its remaining tax
credits using its own "first in, first out" method of computation.

It would have been different had petitioner not included the

₱54,104.00 creditable taxes for 1989 in the total amount it elected to
apply against its 1990 tax liabilities. Then, all that would have been
required of petitioner are: proof that it filed a claim for refund within
the two (2)-year prescriptive period provided under Section 230 of the
NIRC; evidence that the income upon which the taxes were withheld
was included in its return; and to establish the fact of withholding by a
copy of the statement (BIR Form No. 1743.1) issued by the payor24
to the payee showing the amount paid and the amount of tax
withheld therefrom. However, since petitioner opted to apply its
aggregate excess credits as tax credit for 1990, it was incumbent
upon it to present its tax return for 1990 to show that the claimed
refund had not been automatically credited and applied to its 1990
tax liabilities.

The grant of a refund is founded on the assumption that the tax return
is valid, i.e., that the facts stated therein are true and correct.25
Without the tax return, it is error to grant a refund since it would be
virtually impossible to determine whether the proper taxes have been
assessed and paid.

Why petitioner failed to present such a vital piece of evidence

confounds the Court. Petitioner could very well have attached a copy
of its final adjustment return for 1990 when it filed its claim for refund
on November 13, 1991. Annex "B" of its Petition for Review26 dated
December 26, 1991 filed with the CTA, in fact, states that its annual
tax return for 1990 was submitted in support of its claim. Yet,
petitioner’s tax return for 1990 is nowhere to be found in the records
of this case.

Had petitioner presented its 1990 tax return in refutation of

respondent Commissioner’s allegation that it did not present
evidence to prove that its claimed refund had already been
automatically credited against its 1990 tax liability, the CTA would not
have reconsidered its earlier Decision. As it is, the absence of
petitioner’s 1990 tax return was the principal basis of the CTA’s
Resolution reconsidering its earlier Decision to grant petitioner’s claim
for refund.

Petitioner could even still have attached a copy of its 1990 tax return
to its petition for review before the Court of Appeals. The appellate
court, being a trier of facts, is authorized to receive it in evidence and
would likely have taken it into account in its disposition of the
petition.

In BPI-Family Savings Bank v. Court of Appeals,27 although petitioner

failed to present its 1990 tax return, it presented other evidence to
prove its claim that it did not apply and could not have applied the
amount in dispute as tax credit. Importantly, petitioner therein
attached a copy of its final adjustment return for 1990 to its motion
for reconsideration before the CTA buttressing its claim that it
incurred a net loss and is thus entitled to refund. Considering this fact,
the Court held that there is no reason for the BIR to withhold the tax
refund.

In this case, petitioner’s failure to present sufficient evidence to prove

its claim for refund is fatal to its cause. After all, it is axiomatic that a
claimant has the burden of proof to establish the factual basis of his or
her claim for tax credit or refund. Tax refunds, like tax exemptions, are
construed strictly against the taxpayer.28
Section 69, Chapter IX, Title II of the National Internal Revenue Code
of the Philippines (NIRC) provides:

Sec. 69. Final Adjustment Return.—Every corporation liable to tax

under Section 24 shall file a final adjustment return covering the total
net income for the preceding calendar or fiscal year. If the sum of the
quarterly tax payments made during the said taxable year is not equal
to the total tax due on the entire taxable net income of that year the
corporation shall either:

(a) Pay the excess tax still due; or

(b) Be refunded the excess amount paid, as the case may be.

In case the corporation is entitled to a refund of the excess estimated

quarterly income taxes paid, the refundable amount shown on its final
adjustment return may be credited against the estimated quarterly
income tax liabilities for the taxable quarters of the succeeding
taxable year. [Emphasis supplied]

Revenue Regulation No. 10-77 of the Bureau of Internal Revenue

clarifies:

SEC. 7. Filing of final or adjustment return and final payment of

income tax. – A final or an adjustment return on B.I.R. Form No. 1702
covering the total taxable income of the corporation for the
preceding calendar or fiscal year shall be filed on or before the 15th
day of the fourth month following the close of the calendar or fiscal
year. The return shall include all the items of gross income and
deductions for the taxable year. The amount of income tax to be paid
shall be the balance of the total income tax shown on the final or
adjustment return after deducting therefrom the total quarterly
income taxes paid during the preceding first three quarters of the
same calendar or fiscal year.

Any excess of the total quarterly payments over the actual income tax
computed and shown in the adjustment or final corporate income tax
return shall either (a) be refunded to the corporation, or (b) may be
credited against the estimated quarterly income tax liabilities for the
quarters of the succeeding taxable year. The corporation must signify
in its annual corporate adjustment return its intention whether to
request for refund of the overpaid income tax or claim for automatic
credit to be applied against its income tax liabilities for the quarters of
the succeeding taxable year by filling up the appropriate box on the
corporate tax return (B.I.R. Form No. 1702). [Emphasis supplied]

As clearly shown from the above-quoted provisions, in case the

corporation is entitled to a refund of the excess estimated quarterly
income taxes paid, the refundable amount shown on its final
adjustment return may be credited against the estimated quarterly
income tax liabilities for the taxable quarters of the succeeding year.
The carrying forward of any excess or overpaid income tax for a given
taxable year is limited to the succeeding taxable year only.

In the recent case of AB Leasing and Finance Corporation v.

Commissioner of Internal Revenue,29 where the Court declared that
"[T]he carrying forward of any excess or overpaid income tax for a
given taxable year then is limited to the succeeding taxable year
only," we ruled that since the case involved a claim for refund of
overpaid taxes for 1993, petitioner could only have applied the 1993
excess tax credits to its 1994 income tax liabilities. To further carry-
over to 1995 the 1993 excess tax credits is violative of Section 69 of
the NIRC.

In this case, petitioner included its 1988 excess credit of ₱146,026.00

in the computation of its total excess credit for 1989. It indicated this
amount, plus the 1989 creditable taxes withheld of ₱54,104.00 or a
total of ₱172,477.00, as its total excess credit to be applied as tax
credit for 1990. By its own disclosure, petitioner effectively combined
its 1988 and 1989 tax credits and applied its 1990 tax due of
₱33,240.00 against the total, and not against its creditable taxes for
1989 only as allowed by Section 69. This is a clear admission that
petitioner’s 1988 tax credit was incorrectly and illegally applied
against its 1990 tax liabilities.

Parenthetically, while a taxpayer is given the choice whether to claim

for refund or have its excess taxes applied as tax credit for the
succeeding taxable year, such election is not final. Prior verification
and approval by the Commissioner of Internal Revenue is required.
The availment of the remedy of tax credit is not absolute and
mandatory. It does not confer an absolute right on the taxpayer to
avail of the tax credit scheme if it so chooses. Neither does it impose
a duty on the part of the government to sit back and allow an
important facet of tax collection to be at the sole control and
discretion of the taxpayer.30

Contrary to petitioner’s assertion however, the taxpayer’s election,

signified by the ticking of boxes in Item 10 of BIR Form No. 1702, is
not a mere technical exercise. It aids in the proper management of
claims for refund or tax credit by leading tax authorities to the
direction they should take in addressing the claim.

The amendment of Section 69 by what is now Section 76 of Republic

Act No. 842431 emphasizes that it is imperative to indicate in the tax
return or the final adjustment return whether a tax credit or refund is
sought by making the taxpayer’s choice irrevocable. Section 76
provides:

SEC. 76. Final Adjustment Return.—Every corporation liable to tax

under Section 27 shall file a final adjustment return covering the total
taxable income for the preceding calendar or fiscal year. If the sum of
the quarterly tax payments made during the said taxable year is not
equal to the total tax due on the entire taxable income of that year,
the corporation shall either:

(A) Pay the balance of the tax still due; or

(B) Carry-over the excess credit; or

(C) Be credited or refunded with the excess amount paid, as the case
may be.

In case the corporation is entitled to a tax credit or refund of the

excess estimated quarterly income taxes paid, the excess amount
shown on its final adjustment return may be carried over and credited
against the estimated quarterly income tax liabilities for the taxable
quarters of the succeeding taxable years. Once the option to carry-
over and apply the excess quarterly income tax against income tax
due for the taxable quarters of the succeeding taxable years has been
made, such option shall be considered irrevocable for that taxable
period and no application for cash refund or issuance of a tax credit
certificate shall be allowed therefore. [Emphasis supplied]

As clearly seen from this provision, the taxpayer is allowed three (3)
options if the sum of its quarterly tax payments made during the
taxable year is not equal to the total tax due for that year: (a) pay the
balance of the tax still due; (b) carry-over the excess credit; or (c) be
credited or refunded the amount paid. If the taxpayer has paid excess
quarterly income taxes, it may be entitled to a tax credit or refund as
shown in its final adjustment return which may be carried over and
applied against the estimated quarterly income tax liabilities for the
taxable quarters of the succeeding taxable years. However, once the
taxpayer has exercised the option to carry-over and to apply the
excess quarterly income tax against income tax due for the taxable
quarters of the succeeding taxable years, such option is irrevocable
for that taxable period and no application for cash refund or issuance
of a tax credit certificate shall be allowed.

Had this provision been in effect when the present claim for refund
was filed, petitioner’s excess credits for 1988 could have been
properly applied to its 1990 tax liabilities. Unfortunately for petitioner,
this is not the case.

Taxation is a destructive power which interferes with the personal and

property rights of the people and takes from them a portion of their
property for the support of the government. And since taxes are what
we pay for civilized society, or are the lifeblood of the nation, the law
frowns against exemptions from taxation and statutes granting tax
exemptions are thus construed strictissimi juris against the taxpayer
and liberally in favor of the taxing authority. A claim of refund or
exemption from tax payments must be clearly shown and be based
on language in the law too plain to be mistaken. Elsewise stated,
taxation is the rule, exemption therefrom is the exception.32
WHEREFORE, the instant petition is DENIED. The challenged
decision of the Court of Appeals is hereby AFFIRMED. No
pronouncement as to costs.

SO ORDERED.

G.R. Nos. 167274-75 July 21, 2008

COMMISSIONER OF INTERNAL REVENUE, Petitioner,

vs.
FORTUNE TOBACCO CORPORATION, Respondent.

DECISION

TINGA, J.:

Simple and uncomplicated is the central issue involved, yet whopping

is the amount at stake in this case.

After much wrangling in the Court of Tax Appeals (CTA) and the Court
of Appeals, Fortune Tobacco Corporation (Fortune Tobacco) was
granted a tax refund or tax credit representing specific taxes
erroneously collected from its tobacco products. The tax refund is
being re-claimed by the Commissioner of Internal Revenue
(Commissioner) in this petition.

The following undisputed facts, summarized by the Court of Appeals,

are quoted in the assailed Decision1 dated 28 September 2004:

CAG.R. SP No. 80675

xxxx

Petitioner2 is a domestic corporation duly organized and existing

under and by virtue of the laws of the Republic of the Philippines, with
principal address at Fortune Avenue, Parang, Marikina City.
Petitioner is the manufacturer/producer of, among others, the
following cigarette brands, with tax rate classification based on net
retail price prescribed by Annex "D" to R.A. No. 4280, to wit:

Brand Tax Rate

Champion M 100 ₱1.00
Salem M 100 ₱1.00
Salem M King ₱1.00
Camel F King ₱1.00
Camel Lights Box 20’s ₱1.00
Camel Filters Box 20’s ₱1.00
Winston F Kings ₱5.00
Winston Lights ₱5.00
Immediately prior to January 1, 1997, the above-mentioned cigarette
brands were subject to ad valorem tax pursuant to then Section 142
of the Tax Code of 1977, as amended. However, on January 1, 1997,

⇐
R.A. No. 8240 took effect whereby a shift from the ad valorem tax
(AVT) system to the specific tax system was made and subjecting the
aforesaid cigarette brands to specific tax under [S]ection 142 thereof,
now renumbered as Sec. 145 of the Tax Code of 1997, pertinent
provisions of which are quoted thus:

Section 145. Cigars and Cigarettes-

(A) Cigars. – There shall be levied, assessed and collected on cigars a

tax of One peso (₱1.00) per cigar.

"(B) Cigarettes packed by hand. – There shall be levied, assessesed

and collected on cigarettes packed by hand a tax of Forty centavos
(P0.40) per pack.

(C) Cigarettes packed by machine. – There shall be levied, assessed

and collected on cigarettes packed by machine a tax at the rates
prescribed below:

(1) If the net retail price (excluding the excise tax and the value-added
tax) is above Ten pesos (₱10.00) per pack, the tax shall be Twelve
(₱12.00) per pack;
(2) If the net retail price (excluding the excise tax and the value added
tax) exceeds Six pesos and Fifty centavos (₱6.50) but does not
exceed Ten pesos (₱10.00) per pack, the tax shall be Eight Pesos
(₱8.00) per pack.

(3) If the net retail price (excluding the excise tax and the value-added
tax) is Five pesos (₱5.00) but does not exceed Six Pesos and fifty
centavos (₱6.50) per pack, the tax shall be Five pesos (₱5.00) per
pack;

(4) If the net retail price (excluding the excise tax and the value-added
tax) is below Five pesos (₱5.00) per pack, the tax shall be One peso
(₱1.00) per pack;

"Variants of existing brands of cigarettes which are introduced in the

domestic market after the effectivity of R.A. No. 8240 shall be taxed
under the highest classification of any variant of that brand.

The excise tax from any brand of cigarettes within the next three (3)
years from the effectivity of R.A. No. 8240 shall not be lower than the
tax, which is due from each brand on October 1, 1996. Provided,
however, that in cases were (sic) the excise tax rate imposed in
paragraphs (1), (2), (3) and (4) hereinabove will result in an increase in
excise tax of more than seventy percent (70%), for a brand of
cigarette, the increase shall take effect in two tranches: fifty percent
(50%) of the increase shall be effective in 1997 and one hundred
percent (100%) of the increase shall be effective in 1998.

Duly registered or existing brands of cigarettes or new brands thereof

packed by machine shall only be packed in twenties.

The rates of excise tax on cigars and cigarettes under paragraphs (1),
(2) (3) and (4) hereof, shall be increased by twelve percent (12%) on
January 1, 2000. (Emphasis supplied)

New brands shall be classified according to their current net retail

price.
For the above purpose, ‘net retail price’ shall mean the price at which
the cigarette is sold on retail in twenty (20) major supermarkets in
Metro Manila (for brands of cigarettes marketed nationally), excluding
the amount intended to cover the applicable excise tax and value-
added tax. For brands which are marketed only outside Metro
[M]anila, the ‘net retail price’ shall mean the price at which the
cigarette is sold in five (5) major supermarkets in the region excluding
the amount intended to cover the applicable excise tax and the value-
added tax.

The classification of each brand of cigarettes based on its average

retail price as of October 1, 1996, as set forth in Annex "D," shall
remain in force until revised by Congress.

Variant of a brand shall refer to a brand on which a modifier is

prefixed and/or suffixed to the root name of the brand and/or a
different brand which carries the same logo or design of the existing
brand.

To implement the provisions for a twelve percent (12%) increase of

excise tax on, among others, cigars and cigarettes packed by
machines by January 1, 2000, the Secretary of Finance, upon
recommendation of the respondent Commissioner of Internal
Revenue, issued Revenue Regulations No. 17-99, dated December
16, 1999, which provides the increase on the applicable tax rates on
cigar and cigarettes as follows:

SECTION ARTICLES PRESENT SPECIFIC TAX RATE PRIOR TO JAN.

1, 2000 NEW SPECIFIC TAX RATE EFFECTIVE JAN. 1, 2000
145 (A) P1.00/cigar ₱1.12/cigar
(B)Cigarettes packed by machine

(1) Net retail price (excluding VAT and excise) exceeds ₱10.00 per
pack ₱12.00/pack ₱13.44/ pack
(2) Exceeds ₱10.00 per pack ₱8.00/pack ₱8.96/pack
(3) Net retail price (excluding VAT and excise) is ₱5.00 to ₱6.50 per
pack ₱5.00/pack ₱5.60/pack
(4) Net Retail Price (excluding VAT and excise) is below ₱5.00 per
pack ₱1.00/pack ₱1.12/pack
Revenue Regulations No. 17-99 likewise provides in the last
paragraph of Section 1 thereof, "(t)hat the new specific tax rate for
any existing brand of cigars, cigarettes packed by machine, distilled
spirits, wines and fermented liquor shall not be lower than the excise
tax that is actually being paid prior to January 1, 2000."

For the period covering January 1-31, 2000, petitioner allegedly paid
specific taxes on all brands manufactured and removed in the total
amounts of ₱585,705,250.00.

On February 7, 2000, petitioner filed with respondent’s Appellate

Division a claim for refund or tax credit of its purportedly overpaid
excise tax for the month of January 2000 in the amount of
₱35,651,410.00

On June 21, 2001, petitioner filed with respondent’s Legal Service a

letter dated June 20, 2001 reiterating all the claims for refund/tax
credit of its overpaid excise taxes filed on various dates, including the
present claim for the month of January 2000 in the amount of
₱35,651,410.00.

As there was no action on the part of the respondent, petitioner filed

the instant petition for review with this Court on December 11, 2001,
in order to comply with the two-year period for filing a claim for
refund.

In his answer filed on January 16, 2002, respondent raised the

following Special and Affirmative Defenses;

4. Petitioner’s alleged claim for refund is subject to administrative

routinary investigation/examination by the Bureau;

5. The amount of ₱35,651,410 being claimed by petitioner as alleged

overpaid excise tax for the month of January 2000 was not properly
documented.

6. In an action for tax refund, the burden of proof is on the taxpayer

to establish its right to refund, and failure to sustain the burden is fatal
to its claim for refund/credit.
7. Petitioner must show that it has complied with the provisions of
Section 204(C) in relation [to] Section 229 of the Tax Code on the
prescriptive period for claiming tax refund/credit;

8. Claims for refund are construed strictly against the claimant for the
same partake of tax exemption from taxation; and

9. The last paragraph of Section 1 of Revenue Regulation[s]

[No.]17-99 is a valid implementing regulation which has the force and
effect of law."

CA G.R. SP No. 83165

The petition contains essentially similar facts, except that the said
case questions the CTA’s December 4, 2003 decision in CTA Case No.
6612 granting respondent’s3 claim for refund of the amount of
₱355,385,920.00 representing erroneously or illegally collected
specific taxes covering the period January 1, 2002 to December 31,
2002, as well as its March 17, 2004 Resolution denying a
reconsideration thereof.

xxxx

In both CTA Case Nos. 6365 & 6383 and CTA No. 6612, the Court of
Tax Appeals reduced the issues to be resolved into two as stipulated
by the parties, to wit: (1) Whether or not the last paragraph of Section
1 of Revenue Regulation[s] [No.] 17-99 is in accordance with the
pertinent provisions of Republic Act [No.] 8240, now incorporated in
Section 145 of the Tax Code of 1997; and (2) Whether or not
petitioner is entitled to a refund of ₱35,651,410.00 as alleged
overpaid excise tax for the month of January 2000.

xxxx

Hence, the respondent CTA in its assailed October 21, 2002 [twin]
Decisions[s] disposed in CTA Case Nos. 6365 & 6383:
WHEREFORE, in view of the foregoing, the court finds the instant
petition meritorious and in accordance with law. Accordingly,
respondent is hereby ORDERED to REFUND to petitioner the amount
of ₱35,651.410.00 representing erroneously paid excise taxes for the
period January 1 to January 31, 2000.

SO ORDERED.

Herein petitioner sought reconsideration of the above-quoted

decision. In [twin] resolution[s] [both] dated July 15, 2003, the Tax
Court, in an apparent change of heart, granted the petitioner’s
consolidated motions for reconsideration, thereby denying the
respondent’s claim for refund.

However, on consolidated motions for reconsideration filed by the

respondent in CTA Case Nos. 6363 and 6383, the July 15, 2002
resolution was set aside, and the Tax Court ruled, this time with a
semblance of finality, that the respondent is entitled to the refund
claimed. Hence, in a resolution dated November 4, 2003, the tax
court reinstated its December 21, 2002 Decision and disposed as
follows:

WHEREFORE, our Decisions in CTA Case Nos. 6365 and 6383 are
hereby REINSTATED. Accordingly, respondent is hereby ORDERED to
REFUND petitioner the total amount of ₱680,387,025.00 representing
erroneously paid excise taxes for the period January 1, 2000 to
January 31, 2000 and February 1, 2000 to December 31, 2001.

SO ORDERED.

Meanwhile, on December 4, 2003, the Court of Tax Appeals rendered

decision in CTA Case No. 6612 granting the prayer for the refund of
the amount of ₱355,385,920.00 representing overpaid excise tax for
the period covering January 1, 2002 to December 31, 2002. The tax
court disposed of the case as follows:

IN VIEW OF THE FOREGOING, the Petition for Review is GRANTED.

Accordingly, respondent is hereby ORDERED to REFUND to
petitioner the amount of ₱355,385,920.00 representing overpaid
excise tax for the period covering January 1, 2002 to December 31,
2002.

SO ORDERED.

Petitioner sought reconsideration of the decision, but the same was

denied in a Resolution dated March 17, 2004.4 (Emphasis supplied)
(Citations omitted)

The Commissioner appealed the aforesaid decisions of the CTA. The

petition questioning the grant of refund in the amount of
₱680,387,025.00 was docketed as CA-G.R. SP No. 80675, whereas
that assailing the grant of refund in the amount of ₱355,385,920.00
was docketed as CA-G.R. SP No. 83165. The petitions were
consolidated and eventually denied by the Court of Appeals. The
appellate court also denied reconsideration in its Resolution5 dated 1
March 2005.

In its Memorandum6 22 dated November 2006, filed on behalf of the

Commissioner, the Office of the Solicitor General (OSG) seeks to
convince the Court that the literal interpretation given by the CTA and
the Court of Appeals of Section 145 of the Tax Code of 1997 (Tax
Code) would lead to a lower tax imposable on 1 January 2000 than
that imposable during the transition period. Instead of an increase of
12% in the tax rate effective on 1 January 2000 as allegedly
mandated by the Tax Code, the appellate court’s ruling would result
in a significant decrease in the tax rate by as much as 66%.

The OSG argues that Section 145 of the Tax Code admits of several
interpretations, such as:

1. That by January 1, 2000, the excise tax on cigarettes should be the

higher tax imposed under the specific tax system and the tax imposed
under the ad valorem tax system plus the 12% increase imposed by
par. 5, Sec. 145 of the Tax Code;

2. The increase of 12% starting on January 1, 2000 does not apply to

the brands of cigarettes listed under Annex "D" referred to in par. 8,
Sec. 145 of the Tax Code;
3. The 12% increment shall be computed based on the net retail price
as indicated in par. C, sub-par. (1)-(4), Sec. 145 of the Tax Code even if
the resulting figure will be lower than the amount already being paid
at the end of the transition period. This is the interpretation followed
by both the CTA and the Court of Appeals.7

This being so, the interpretation which will give life to the legislative
intent to raise revenue should govern, the OSG stresses.

Finally, the OSG asserts that a tax refund is in the nature of a tax
exemption and must, therefore, be construed strictly against the
taxpayer, such as Fortune Tobacco.

In its Memorandum8 dated 10 November 2006, Fortune Tobacco

argues that the CTA and the Court of Appeals merely followed the
letter of the law when they ruled that the basis for the 12% increase in
the tax rate should be the net retail price of the cigarettes in the
market as outlined in paragraph C, sub paragraphs (1)-(4), Section 145
of the Tax Code. The Commissioner allegedly has gone beyond his
delegated rule-making power when he promulgated, enforced and
implemented Revenue Regulation No. 17-99, which effectively
created a separate classification for cigarettes based on the excise tax
"actually being paid prior to January 1, 2000."9

It should be mentioned at the outset that there is no dispute between

the fact of payment of the taxes sought to be refunded and the
receipt thereof by the Bureau of Internal Revenue (BIR). There is also
no question about the mathematical accuracy of Fortune Tobacco’s
claim since the documentary evidence in support of the refund has
not been controverted by the revenue agency. Likewise, the claims
have been made and the actions have been filed within the two (2)-
year prescriptive period provided under Section 229 of the Tax Code.

The power to tax is inherent in the State, such power being inherently
legislative, based on the principle that taxes are a grant of the people
who are taxed, and the grant must be made by the immediate
representatives of the people; and where the people have laid the
power, there it must remain and be exercised.10
This entire controversy revolves around the interplay between Section
145 of the Tax Code and Revenue Regulation 17-99. The main issue is
an inquiry into whether the revenue regulation has exceeded the
allowable limits of legislative delegation.

For ease of reference, Section 145 of the Tax Code is again

reproduced in full as follows:

Section 145. Cigars and Cigarettes-

(A) Cigars.—There shall be levied, assessed and collected on cigars a

tax of One peso (₱1.00) per cigar.

(B). Cigarettes packed by hand.—There shall be levied, assessed and

collected on cigarettes packed by hand a tax of Forty centavos
(₱0.40) per pack.

(C) Cigarettes packed by machine.—There shall be levied, assessed

and collected on cigarettes packed by machine a tax at the rates
prescribed below:

(1) If the net retail price (excluding the excise tax and the value-added
tax) is above Ten pesos (₱10.00) per pack, the tax shall be Twelve
pesos (₱12.00) per pack;

(2) If the net retail price (excluding the excise tax and the value added
tax) exceeds Six pesos and Fifty centavos (₱6.50) but does not
exceed Ten pesos (₱10.00) per pack, the tax shall be Eight Pesos
(₱8.00) per pack.

(3) If the net retail price (excluding the excise tax and the value-added
tax) is Five pesos (₱5.00) but does not exceed Six Pesos and fifty
centavos (₱6.50) per pack, the tax shall be Five pesos (₱5.00) per
pack;

(4) If the net retail price (excluding the excise tax and the value-added
tax) is below Five pesos (₱5.00) per pack, the tax shall be One peso
(₱1.00) per pack;
Variants of existing brands of cigarettes which are introduced in the
domestic market after the effectivity of R.A. No. 8240 shall be taxed
under the highest classification of any variant of that brand.

The excise tax from any brand of cigarettes within the next three (3)
years from the effectivity of R.A. No. 8240 shall not be lower than the
tax, which is due from each brand on October 1, 1996. Provided,
however, That in cases where the excise tax rates imposed in
paragraphs (1), (2), (3) and (4) hereinabove will result in an increase in
excise tax of more than seventy percent (70%), for a brand of
cigarette, the increase shall take effect in two tranches: fifty percent
(50%) of the increase shall be effective in 1997 and one hundred
percent (100%) of the increase shall be effective in 1998.

Duly registered or existing brands of cigarettes or new brands thereof

packed by machine shall only be packed in twenties.

The rates of excise tax on cigars and cigarettes under paragraphs (1),
(2) (3) and (4) hereof, shall be increased by twelve percent (12%) on
January 1, 2000.

New brands shall be classified according to their current net retail

price.

For the above purpose, ‘net retail price’ shall mean the price at which
the cigarette is sold on retail in twenty (20) major supermarkets in
Metro Manila (for brands of cigarettes marketed nationally), excluding
the amount intended to cover the applicable excise tax and value-
added tax. For brands which are marketed only outside Metro Manila,
the ‘net retail price’ shall mean the price at which the cigarette is sold
in five (5) major intended to cover the applicable excise tax and the
value-added tax.

The classification of each brand of cigarettes based on its average

retail price as of October 1, 1996, as set forth in Annex "D," shall
remain in force until revised by Congress.
Variant of a brand’ shall refer to a brand on which a modifier is
prefixed and/or suffixed to the root name of the brand and/or a
different brand which carries the same logo or design of the existing
brand.11 (Emphasis supplied)

Revenue Regulation 17-99, which was issued pursuant to the

unquestioned authority of the Secretary of Finance to promulgate
rules and regulations for the effective implementation of the Tax
Code,12 interprets the above-quoted provision and reflects the 12%
increase in excise taxes in the following manner:

SECTION DESCRIPTION OF ARTICLES PRESENT SPECIFIC TAX

RATES PRIOR TO JAN. 1, 2000 NEW SPECIFIC TAX RATE Effective
Jan.. 1, 2000
145 (A) P1.00/cigar ₱1.12/cigar

(B)Cigarettes packed by Machine

(1) Net Retail Price (excluding VAT and Excise) exceeds ₱10.00 per
pack ₱12.00/pack ₱13.44/pack
(2) Net Retail Price (excluding VAT and Excise) is ₱6.51 up to ₱10.00
per pack ₱8.00/pack ₱8.96/pack
(3) Net Retail Price (excluding VAT and excise) is ₱5.00 to ₱6.50 per
pack ₱5.00/pack ₱5.60/pack
(4) Net Retail Price (excluding VAT and excise) is below ₱5.00 per
pack) ₱1.00/pack ₱1.12/pack
This table reflects Section 145 of the Tax Code insofar as it mandates
a 12% increase effective on 1 January 2000 based on the taxes
indicated under paragraph C, sub-paragraph (1)-(4). However,
Revenue Regulation No. 17-99 went further and added that "[T]he
new specific tax rate for any existing brand of cigars, cigarettes
packed by machine, distilled spirits, wines and fermented liquor shall
not be lower than the excise tax that is actually being paid prior to
January 1, 2000."13

Parenthetically, Section 145 states that during the transition period,

i.e., within the next three (3) years from the effectivity of the Tax Code,
the excise tax from any brand of cigarettes shall not be lower than the
tax due from each brand on 1 October 1996. This qualification,
however, is conspicuously absent as regards the 12% increase which is
to be applied on cigars and cigarettes packed by machine, among
others, effective on 1 January 2000. Clearly and unmistakably, Section
145 mandates a new rate of excise tax for cigarettes packed by
machine due to the 12% increase effective on 1 January 2000 without
regard to whether the revenue collection starting from this period
may turn out to be lower than that collected prior to this date.

By adding the qualification that the tax due after the 12% increase
becomes effective shall not be lower than the tax actually paid prior
to 1 January 2000, Revenue Regulation No. 17-99 effectively imposes
a tax which is the higher amount between the ad valorem tax being
paid at the end of the three (3)-year transition period and the specific
tax under paragraph C, sub-paragraph (1)-(4), as increased by 12%—a
situation not supported by the plain wording of Section 145 of the Tax
Code.

This is not the first time that national revenue officials had ventured in
the area of unauthorized administrative legislation.

In Commissioner of Internal Revenue v. Reyes,14 respondent was not

informed in writing of the law and the facts on which the assessment
of estate taxes was made pursuant to Section 228 of the 1997 Tax
Code, as amended by Republic Act (R.A.) No. 8424. She was merely
notified of the findings by the Commissioner, who had simply relied
upon the old provisions of the law and Revenue Regulation No. 12-85
which was based on the old provision of the law. The Court held that
in case of discrepancy between the law as amended and the
implementing regulation based on the old law, the former necessarily
prevails. The law must still be followed, even though the existing tax
regulation at that time provided for a different procedure.15

In Commissioner of Internal Revenue v. Central Luzon Drug

Corporation,16 the tax authorities gave the term "tax credit" in
Sections 2(i) and 4 of Revenue Regulation 2-94 a meaning utterly
disparate from what R.A. No. 7432 provides. Their interpretation
muddled up the intent of Congress to grant a mere discount privilege
and not a sales discount. The Court, striking down the revenue
regulation, held that an administrative agency issuing regulations may
not enlarge, alter or restrict the provisions of the law it administers,
and it cannot engraft additional requirements not contemplated by
the legislature. The Court emphasized that tax administrators are not
allowed to expand or contract the legislative mandate and that the
"plain meaning rule" or verba legis in statutory construction should
be applied such that where the words of a statute are clear, plain and
free from ambiguity, it must be given its literal meaning and applied
without attempted interpretation.

As we have previously declared, rule-making power must be confined

to details for regulating the mode or proceedings in order to carry
into effect the law as it has been enacted, and it cannot be extended
to amend or expand the statutory requirements or to embrace
matters not covered by the statute. Administrative regulations must
always be in harmony with the provisions of the law because any
resulting discrepancy between the two will always be resolved in favor
of the basic law.17

In Commissioner of Internal Revenue v. Michel J. Lhuillier Pawnshop,

Inc.,18 Commissioner Jose Ong issued Revenue Memorandum Order
(RMO) No. 15-91, as well as the clarificatory Revenue Memorandum
Circular (RMC) 43-91, imposing a 5% lending investor’s tax under the
1977 Tax Code, as amended by Executive Order (E.O.) No. 273, on
pawnshops. The Commissioner anchored the imposition on the
definition of lending investors provided in the 1977 Tax Code which,
according to him, was broad enough to include pawnshop operators.
However, the Court noted that pawnshops and lending investors were
subjected to different tax treatments under the Tax Code prior to its
amendment by the executive order; that Congress never intended to
treat pawnshops in the same way as lending investors; and that the
particularly involved section of the Tax Code explicitly subjected
lending investors and dealers in securities only to percentage tax.
And so the Court affirmed the invalidity of the challenged circulars,
stressing that "administrative issuances must not override, supplant or
modify the law, but must remain consistent with the law they intend to
carry out."19

In Philippine Bank of Communications v. Commissioner of Internal

Revenue,20 the then acting Commissioner issued RMC 7-85,
changing the prescriptive period of two years to ten years for claims
of excess quarterly income tax payments, thereby creating a clear
inconsistency with the provision of Section 230 of the 1977 Tax Code.
The Court nullified the circular, ruling that the BIR did not simply
interpret the law; rather it legislated guidelines contrary to the statute
passed by Congress. The Court held:

It bears repeating that Revenue memorandum-circulars are

considered administrative rulings (in the sense of more specific and
less general interpretations of tax laws) which are issued from time to
time by the Commissioner of Internal Revenue. It is widely accepted
that the interpretation placed upon a statute by the executive officers,
whose duty is to enforce it, is entitled to great respect by the courts.
Nevertheless, such interpretation is not conclusive and will be ignored
if judicially found to be erroneous. Thus, courts will not countenance
administrative issuances that override, instead of remaining consistent
and in harmony with, the law they seek to apply and implement.21

In Commissioner of Internal Revenue v. CA, et al.,22 the central issue

was the validity of RMO 4-87 which had construed the amnesty
coverage under E.O. No. 41 (1986) to include only assessments
issued by the BIR after the promulgation of the executive order on 22
August 1986 and not assessments made to that date. Resolving the
issue in the negative, the Court held:

x x x all such issuances must not override, but must remain consistent
and in harmony with, the law they seek to apply and implement.
Administrative rules and regulations are intended to carry out, neither
to supplant nor to modify, the law.23

xxx

If, as the Commissioner argues, Executive Order No. 41 had not been
intended to include 1981-1985 tax liabilities already assessed
(administratively) prior to 22 August 1986, the law could have simply
so provided in its exclusionary clauses. It did not. The conclusion is
unavoidable, and it is that the executive order has been designed to
be in the nature of a general grant of tax amnesty subject only to the
cases specifically excepted by it.24
In the case at bar, the OSG’s argument that by 1 January 2000, the
excise tax on cigarettes should be the higher tax imposed under the
specific tax system and the tax imposed under the ad valorem tax
system plus the 12% increase imposed by paragraph 5, Section 145
of the Tax Code, is an unsuccessful attempt to justify what is clearly an
impermissible incursion into the limits of administrative legislation.
Such an interpretation is not supported by the clear language of the
law and is obviously only meant to validate the OSG’s thesis that
Section 145 of the Tax Code is ambiguous and admits of several
interpretations.

The contention that the increase of 12% starting on 1 January 2000

does not apply to the brands of cigarettes listed under Annex "D" is
likewise unmeritorious, absurd even. Paragraph 8, Section 145 of the
Tax Code simply states that, "[T]he classification of each brand of
cigarettes based on its average net retail price as of October 1, 1996,
as set forth in Annex ‘D’, shall remain in force until revised by
Congress." This declaration certainly does not lend itself to the
interpretation given to it by the OSG. As plainly worded, the average
net retail prices of the listed brands under Annex "D," which classify
cigarettes according to their net retail price into low, medium or high,
obviously remain the bases for the application of the increase in
excise tax rates effective on 1 January 2000.

The foregoing leads us to conclude that Revenue Regulation No.

17-99 is indeed indefensibly flawed. The Commissioner cannot seek
refuge in his claim that the purpose behind the passage of the Tax
Code is to generate additional revenues for the government. Revenue
generation has undoubtedly been a major consideration in the
passage of the Tax Code. However, as borne by the legislative record,
25 the shift from the ad valorem system to the specific tax system is
likewise meant to promote fair competition among the players in the
industries concerned, to ensure an equitable distribution of the tax
burden and to simplify tax administration by classifying cigarettes,
among others, into high, medium and low-priced based on their net
retail price and accordingly graduating tax rates.
At any rate, this advertence to the legislative record is merely
gratuitous because, as we have held, the meaning of the law is clear
on its face and free from the ambiguities that the Commissioner
imputes. We simply cannot disregard the letter of the law on the
pretext of pursuing its spirit.26

Finally, the Commissioner’s contention that a tax refund partakes the

nature of a tax exemption does not apply to the tax refund to which
Fortune Tobacco is entitled. There is parity between tax refund and
tax exemption only when the former is based either on a tax
exemption statute or a tax refund statute. Obviously, that is not the
situation here. Quite the contrary, Fortune Tobaccos claim for refund
is premised on its erroneous payment of the tax, or better still the
government’s exaction in the absence of a law.

Tax exemption is a result of legislative grace. And he who claims an

exemption from the burden of taxation must justify his claim by
showing that the legislature intended to exempt him by words too
plain to be mistaken.27 The rule is that tax exemptions must be
strictly construed such that the exemption will not be held to be
conferred unless the terms under which it is granted clearly and
distinctly show that such was the intention.28

A claim for tax refund may be based on statutes granting tax

exemption or tax refund. In such case, the rule of strict interpretation
against the taxpayer is applicable as the claim for refund partakes of
the nature of an exemption, a legislative grace, which cannot be
allowed unless granted in the most explicit and categorical language.
The taxpayer must show that the legislature intended to exempt him
from the tax by words too plain to be mistaken.29

Tax refunds (or tax credits), on the other hand, are not founded
principally on legislative grace but on the legal principle which
underlies all quasi-contracts abhorring a person’s unjust enrichment at
the expense of another.30 The dynamic of erroneous payment of tax
fits to a tee the prototypic quasi-contract, solutio indebiti, which
covers not only mistake in fact but also mistake in law.31
The Government is not exempt from the application of solutio
indebiti.32 Indeed, the taxpayer expects fair dealing from the
Government, and the latter has the duty to refund without any
unreasonable delay what it has erroneously collected.33 If the State
expects its taxpayers to observe fairness and honesty in paying their
taxes, it must hold itself against the same standard in refunding
excess (or erroneous) payments of such taxes. It should not unjustly
enrich itself at the expense of taxpayers.34 And so, given its essence,
a claim for tax refund necessitates only preponderance of evidence
for its approbation like in any other ordinary civil case.

Under the Tax Code itself, apparently in recognition of the pervasive

quasi-contract principle, a claim for tax refund may be based on the
following: (a) erroneously or illegally assessed or collected internal
revenue taxes; (b) penalties imposed without authority; and (c) any
sum alleged to have been excessive or in any manner wrongfully
collected.35

What is controlling in this case is the well-settled doctrine of strict

interpretation in the imposition of taxes, not the similar doctrine as
applied to tax exemptions. The rule in the interpretation of tax laws is
that a statute will not be construed as imposing a tax unless it does so
clearly, expressly, and unambiguously. A tax cannot be imposed
without clear and express words for that purpose. Accordingly, the
general rule of requiring adherence to the letter in construing statutes
applies with peculiar strictness to tax laws and the provisions of a
taxing act are not to be extended by implication. In answering the
question of who is subject to tax statutes, it is basic that in case of
doubt, such statutes are to be construed most strongly against the
government and in favor of the subjects or citizens because burdens
are not to be imposed nor presumed to be imposed beyond what
statutes expressly and clearly import.36 As burdens, taxes should not
be unduly exacted nor assumed beyond the plain meaning of the tax
laws.37

WHEREFORE, the petition is DENIED. The Decision of the Court of

Appeals in CA G.R. SP No. 80675, dated 28 September 2004, and its
Resolution, dated 1 March 2005, are AFFIRMED. No pronouncement
as to costs.
SO ORDERED.

DANTE O. TINGA
Associate Justice

WE CONCUR:

POLICE OWER AS AN IMPLEMENT OF POWER OF TAXATION

G.R. No. L-7859 December 22, 1955

WALTER LUTZ, as Judicial Administrator of the Intestate Estate of the

deceased Antonio Jayme Ledesma, plaintiff-appellant,
vs.
J. ANTONIO ARANETA, as the Collector of Internal Revenue,
defendant-appellee.

Ernesto J. Gonzaga for appellant.

Office of the Solicitor General Ambrosio Padilla, First Assistant
Solicitor General Guillermo E. Torres and Solicitor Felicisimo R. Rosete
for appellee.

REYES, J.B L., J.:

This case was initiated in the Court of First Instance of Negros

Occidental to test the legality of the taxes imposed by
Commonwealth Act No. 567, otherwise known as the Sugar
Adjustment Act.

Promulgated in 1940, the law in question opens (section 1) with a

declaration of emergency, due to the threat to our industry by the
imminent imposition of export taxes upon sugar as provided in the
Tydings-McDuffe Act, and the "eventual loss of its preferential
position in the United States market"; wherefore, the national policy
was expressed "to obtain a readjustment of the benefits derived from
the sugar industry by the component elements thereof" and "to
stabilize the sugar industry so as to prepare it for the eventuality of
the loss of its preferential position in the United States market and the
imposition of the export taxes."

In section 2, Commonwealth Act 567 provides for an increase of the

existing tax on the manufacture of sugar, on a graduated basis, on
each picul of sugar manufactured; while section 3 levies on owners or
persons in control of lands devoted to the cultivation of sugar cane
and ceded to others for a consideration, on lease or otherwise —

a tax equivalent to the difference between the money value of the

rental or consideration collected and the amount representing 12 per
centum of the assessed value of such land.

According to section 6 of the law —

SEC. 6. All collections made under this Act shall accrue to a special
fund in the Philippine Treasury, to be known as the 'Sugar Adjustment
and Stabilization Fund,' and shall be paid out only for any or all of the
following purposes or to attain any or all of the following objectives,
as may be provided by law.

First, to place the sugar industry in a position to maintain itself,

despite the gradual loss of the preferntial position of the Philippine
sugar in the United States market, and ultimately to insure its
continued existence notwithstanding the loss of that market and the
consequent necessity of meeting competition in the free markets of
the world;

Second, to readjust the benefits derived from the sugar industry by all
of the component elements thereof — the mill, the landowner, the
planter of the sugar cane, and the laborers in the factory and in the
field — so that all might continue profitably to engage
therein;lawphi1.net

Third, to limit the production of sugar to areas more economically

suited to the production thereof; and

Fourth, to afford labor employed in the industry a living wage and to

improve their living and working conditions: Provided, That the
President of the Philippines may, until the adjourment of the next
regular session of the National Assembly, make the necessary
disbursements from the fund herein created (1) for the establishment
and operation of sugar experiment station or stations and the
undertaking of researchers (a) to increase the recoveries of the
centrifugal sugar factories with the view of reducing manufacturing
costs, (b) to produce and propagate higher yielding varieties of sugar
cane more adaptable to different district conditions in the Philippines,
(c) to lower the costs of raising sugar cane, (d) to improve the buying
quality of denatured alcohol from molasses for motor fuel, (e) to
determine the possibility of utilizing the other by-products of the
industry, (f) to determine what crop or crops are suitable for rotation
and for the utilization of excess cane lands, and (g) on other problems
the solution of which would help rehabilitate and stabilize the
industry, and (2) for the improvement of living and working conditions
in sugar mills and sugar plantations, authorizing him to organize the
necessary agency or agencies to take charge of the expenditure and
allocation of said funds to carry out the purpose hereinbefore
enumerated, and, likewise, authorizing the disbursement from the
fund herein created of the necessary amount or amounts needed for
salaries, wages, travelling expenses, equipment, and other sundry
expenses of said agency or agencies.

Plaintiff, Walter Lutz, in his capacity as Judicial Administrator of the

Intestate Estate of Antonio Jayme Ledesma, seeks to recover from the
Collector of Internal Revenue the sum of P14,666.40 paid by the
estate as taxes, under section 3 of the Act, for the crop years
1948-1949 and 1949-1950; alleging that such tax is unconstitutional
and void, being levied for the aid and support of the sugar industry
exclusively, which in plaintiff's opinion is not a public purpose for
which a tax may be constitutioally levied. The action having been
dismissed by the Court of First Instance, the plaintifs appealed the
case directly to this Court (Judiciary Act, section 17).

The basic defect in the plaintiff's position is his assumption that the
tax provided for in Commonwealth Act No. 567 is a pure exercise of
the taxing power. Analysis of the Act, and particularly of section 6
(heretofore quoted in full), will show that the tax is levied with a
regulatory purpose, to provide means for the rehabilitation and
stabilization of the threatened sugar industry. In other words, the act
is primarily an exercise of the police power.

This Court can take judicial notice of the fact that sugar production is
one of the great industries of our nation, sugar occupying a leading
position among its export products; that it gives employment to
thousands of laborers in fields and factories; that it is a great source of
the state's wealth, is one of the important sources of foreign
exchange needed by our government, and is thus pivotal in the plans
of a regime committed to a policy of currency stability. Its promotion,
protection and advancement, therefore redounds greatly to the
general welfare. Hence it was competent for the legislature to find
that the general welfare demanded that the sugar industry should be
stabilized in turn; and in the wide field of its police power, the
lawmaking body could provide that the distribution of benefits
therefrom be readjusted among its components to enable it to resist
the added strain of the increase in taxes that it had to sustain (Sligh
vs. Kirkwood, 237 U. S. 52, 59 L. Ed. 835; Johnson vs. State ex rel.
Marey, 99 Fla. 1311, 128 So. 853; Maxcy Inc. vs. Mayo, 103 Fla. 552,
139 So. 121).

As stated in Johnson vs. State ex rel. Marey, with reference to the

citrus industry in Florida —

The protection of a large industry constituting one of the great

sources of the state's wealth and therefore directly or indirectly
affecting the welfare of so great a portion of the population of the
State is affected to such an extent by public interests as to be within
the police power of the sovereign. (128 Sp. 857).

Once it is conceded, as it must, that the protection and promotion of

the sugar industry is a matter of public concern, it follows that the
Legislature may determine within reasonable bounds what is
necessary for its protection and expedient for its promotion. Here, the
legislative discretion must be allowed fully play, subject only to the
test of reasonableness; and it is not contended that the means
provided in section 6 of the law (above quoted) bear no relation to
the objective pursued or are oppressive in character. If objective and
methods are alike constitutionally valid, no reason is seen why the
state may not levy taxes to raise funds for their prosecution and
attainment. Taxation may be made the implement of the state's police
power (Great Atl. & Pac. Tea Co. vs. Grosjean, 301 U. S. 412, 81 L. Ed.
1193; U. S. vs. Butler, 297 U. S. 1, 80 L. Ed. 477; M'Culloch vs.
Maryland, 4 Wheat. 316, 4 L. Ed. 579).

That the tax to be levied should burden the sugar producers

themselves can hardly be a ground of complaint; indeed, it appears
rational that the tax be obtained precisely from those who are to be
benefited from the expenditure of the funds derived from it. At any
rate, it is inherent in the power to tax that a state be free to select the
subjects of taxation, and it has been repeatedly held that "inequalities
which result from a singling out of one particular class for taxation, or
exemption infringe no constitutional limitation" (Carmichael vs.
Southern Coal & Coke Co., 301 U. S. 495, 81 L. Ed. 1245, citing
numerous authorities, at p. 1251).

From the point of view we have taken it appears of no moment that

the funds raised under the Sugar Stabilization Act, now in question,
should be exclusively spent in aid of the sugar industry, since it is that
very enterprise that is being protected. It may be that other industries
are also in need of similar protection; that the legislature is not
required by the Constitution to adhere to a policy of "all or none." As
ruled in Minnesota ex rel. Pearson vs. Probate Court, 309 U. S. 270,
84 L. Ed. 744, "if the law presumably hits the evil where it is most felt,
it is not to be overthrown because there are other instances to which
it might have been applied;" and that "the legislative authority,
exerted within its proper field, need not embrace all the evils within
its reach" (N. L. R. B. vs. Jones & Laughlin Steel Corp. 301 U. S. 1, 81
L. Ed. 893).

Even from the standpoint that the Act is a pure tax measure, it cannot
be said that the devotion of tax money to experimental stations to
seek increase of efficiency in sugar production, utilization of by-
products and solution of allied problems, as well as to the
improvements of living and working conditions in sugar mills or
plantations, without any part of such money being channeled directly
to private persons, constitutes expenditure of tax money for private
purposes, (compare Everson vs. Board of Education, 91 L. Ed. 472,
168 ALR 1392, 1400).

The decision appealed from is affirmed, with costs against appellant.

So ordered.

Paras, C. J., Bengzon, Padilla, Reyes, A., Jugo, Bautista Angelo,

Labrador, and Concepcion, JJ., concur.

POWER OF TAXATION AS AN IMPLEMENT OF THE POWER OF

EMINENT DOMAIN\
G.R. No. 159647 April 15, 2005

COMMISSIONER OF INTERNAL REVENUE, Petitioners,

vs.
CENTRAL LUZON DRUG CORPORATION, Respondent.

DECISION

PANGANIBAN, J.:

The 20 percent discount required by the law to be given to senior

citizens is a tax credit, not merely a tax deduction from the gross
income or gross sale of the establishment concerned. A tax credit is
used by a private establishment only after the tax has been
computed; a tax deduction, before the tax is computed. RA 7432
unconditionally grants a tax credit to all covered entities. Thus, the
provisions of the revenue regulation that withdraw or modify such
grant are void. Basic is the rule that administrative regulations cannot
amend or revoke the law.

The Case

Before us is a Petition for Review1 under Rule 45 of the Rules of

Court, seeking to set aside the August 29, 2002 Decision2 and the
August 11, 2003 Resolution3 of the Court of Appeals (CA) in CA-GR
SP No. 67439. The assailed Decision reads as follows:
"WHEREFORE, premises considered, the Resolution appealed from is
AFFIRMED in toto. No costs."4

The assailed Resolution denied petitioner’s Motion for

Reconsideration.

The Facts

The CA narrated the antecedent facts as follows:

"Respondent is a domestic corporation primarily engaged in retailing

of medicines and other pharmaceutical products. In 1996, it operated
six (6) drugstores under the business name and style ‘Mercury Drug.’

"From January to December 1996, respondent granted twenty (20%)

percent sales discount to qualified senior citizens on their purchases
of medicines pursuant to Republic Act No. [R.A.] 7432 and its
Implementing Rules and Regulations. For the said period, the amount
allegedly representing the 20% sales discount granted by respondent
to qualified senior citizens totaled ₱904,769.00.

"On April 15, 1997, respondent filed its Annual Income Tax Return for
taxable year 1996 declaring therein that it incurred net losses from its
operations.

"On January 16, 1998, respondent filed with petitioner a claim for tax
refund/credit in the amount of ₱904,769.00 allegedly arising from the
20% sales discount granted by respondent to qualified senior citizens
in compliance with [R.A.] 7432. Unable to obtain affirmative response
from petitioner, respondent elevated its claim to the Court of Tax
Appeals [(CTA or Tax Court)] via a Petition for Review.

"On February 12, 2001, the Tax Court rendered a Decision5

dismissing respondent’s Petition for lack of merit. In said decision, the
[CTA] justified its ruling with the following ratiocination:

‘x x x, if no tax has been paid to the government, erroneously or

illegally, or if no amount is due and collectible from the taxpayer, tax
refund or tax credit is unavailing. Moreover, whether the recovery of
the tax is made by means of a claim for refund or tax credit, before
recovery is allowed[,] it must be first established that there was an
actual collection and receipt by the government of the tax sought to
be recovered. x x x.

‘x x x x x x x x x

‘Prescinding from the above, it could logically be deduced that tax

credit is premised on the existence of tax liability on the part of
taxpayer. In other words, if there is no tax liability, tax credit is not
available.’

"Respondent lodged a Motion for Reconsideration. The [CTA], in its

assailed resolution,6 granted respondent’s motion for reconsideration
and ordered herein petitioner to issue a Tax Credit Certificate in favor
of respondent citing the decision of the then Special Fourth Division
of [the CA] in CA G.R. SP No. 60057 entitled ‘Central [Luzon] Drug
Corporation vs. Commissioner of Internal Revenue’ promulgated on
May 31, 2001, to wit:

‘However, Sec. 229 clearly does not apply in the instant case because
the tax sought to be refunded or credited by petitioner was not
erroneously paid or illegally collected. We take exception to the CTA’s
sweeping but unfounded statement that ‘both tax refund and tax
credit are modes of recovering taxes which are either erroneously or
illegally paid to the government.’ Tax refunds or credits do not
exclusively pertain to illegally collected or erroneously paid taxes as
they may be other circumstances where a refund is warranted. The tax
refund provided under Section 229 deals exclusively with illegally
collected or erroneously paid taxes but there are other possible
situations, such as the refund of excess estimated corporate quarterly
income tax paid, or that of excess input tax paid by a VAT-registered
person, or that of excise tax paid on goods locally produced or
manufactured but actually exported. The standards and mechanics for
the grant of a refund or credit under these situations are different
from that under Sec. 229. Sec. 4[.a)] of R.A. 7432, is yet another
instance of a tax credit and it does not in any way refer to illegally
collected or erroneously paid taxes, x x x.’"7
Ruling of the Court of Appeals

The CA affirmed in toto the Resolution of the Court of Tax Appeals

(CTA) ordering petitioner to issue a tax credit certificate in favor of
respondent in the reduced amount of ₱903,038.39. It reasoned that
Republic Act No. (RA) 7432 required neither a tax liability nor a
payment of taxes by private establishments prior to the availment of a
tax credit. Moreover, such credit is not tantamount to an unintended
benefit from the law, but rather a just compensation for the taking of
private property for public use.

Hence this Petition.8

The Issues

Petitioner raises the following issues for our consideration:

"Whether the Court of Appeals erred in holding that respondent may

claim the 20% sales discount as a tax credit instead of as a deduction
from gross income or gross sales.

"Whether the Court of Appeals erred in holding that respondent is

entitled to a refund."9

These two issues may be summed up in only one: whether

respondent, despite incurring a net loss, may still claim the 20 percent
sales discount as a tax credit.

The Court’s Ruling

The Petition is not meritorious.

Sole Issue:
Claim of 20 Percent Sales Discount

as Tax Credit Despite Net Loss

Section 4a) of RA 743210 grants to senior citizens the privilege of
obtaining a 20 percent discount on their purchase of medicine from
any private establishment in the country.11 The latter may then claim
the cost of the discount as a tax credit.12 But can such credit be
claimed, even though an establishment operates at a loss?

We answer in the affirmative. MAY UAIM TAY cntn IT

Tax Credit versus Ertnl w/ wss -

Tax Deduction

Although the term is not specifically defined in our Tax Code,13 tax
credit generally refers to an amount that is "subtracted directly from
one’s total tax liability."14 It is an "allowance against the tax itself"15
or "a deduction from what is owed"16 by a taxpayer to the
government. Examples of tax credits are withheld taxes, payments of
estimated tax, and investment tax credits.17

Tax credit should be understood in relation to other tax concepts.

One of these is tax deduction -- defined as a subtraction "from
income for tax purposes,"18 or an amount that is "allowed by law to
reduce income prior to [the] application of the tax rate to compute
the amount of tax which is due."19 An example of a tax deduction is
any of the allowable deductions enumerated in Section 3420 of the
Tax Code.

A tax credit differs from a tax deduction. On the one hand, a tax
credit reduces the tax due, including -- whenever applicable -- the
income tax that is determined after applying the corresponding tax
rates to taxable income.21 A tax deduction, on the other, reduces the
income that is subject to tax22 in order to arrive at taxable income.23
To think of the former as the latter is to avoid, if not entirely confuse,
the issue. A tax credit is used only after the tax has been computed; a
tax deduction, before.

Tax Liability Required

for Tax Credit

Since a tax credit is used to reduce directly the tax that is due, there
ought to be a tax liability before the tax credit can be applied.
Without that liability, any tax credit application will be useless. There
will be no reason for deducting the latter when there is, to begin with,
no existing obligation to the government. However, as will be
presented shortly, the existence of a tax credit or its grant by law is
not the same as the availment or use of such credit. While the grant is
mandatory, the availment or use is not.

If a net loss is reported by, and no other taxes are currently due from,
a business establishment, there will obviously be no tax liability
against which any tax credit can be applied.24 For the establishment
to choose the immediate availment of a tax credit will be premature
and impracticable. Nevertheless, the irrefutable fact remains that,
under RA 7432, Congress has granted without conditions a tax credit
benefit to all covered establishments.

Although this tax credit benefit is available, it need not be used by

losing ventures, since there is no tax liability that calls for its
application. Neither can it be reduced to nil by the quick yet callow
stroke of an administrative pen, simply because no reduction of taxes
can instantly be effected. By its nature, the tax credit may still be
deducted from a future, not a present, tax liability, without which it
does not have any use. In the meantime, it need not move. But it
breathes.

Prior Tax Payments Not

Required for Tax Credit

While a tax liability is essential to the availment or use of any tax

credit, prior tax payments are not. On the contrary, for the existence
or grant solely of such credit, neither a tax liability nor a prior tax
payment is needed. The Tax Code is in fact replete with provisions
granting or allowing tax credits, even though no taxes have been
previously paid.
For example, in computing the estate tax due, Section 86(E) allows a
tax credit -- subject to certain limitations -- for estate taxes paid to a
foreign country. Also found in Section 101(C) is a similar provision for
donor’s taxes -- again when paid to a foreign country -- in computing
for the donor’s tax due. The tax credits in both instances allude to the
prior payment of taxes, even if not made to our government.

Under Section 110, a VAT (Value-Added Tax)- registered person

engaging in transactions -- whether or not subject to the VAT -- is also
allowed a tax credit that includes a ratable portion of any input tax
not directly attributable to either activity. This input tax may either be
the VAT on the purchase or importation of goods or services that is
merely due from -- not necessarily paid by -- such VAT-registered
person in the course of trade or business; or the transitional input tax
determined in accordance with Section 111(A). The latter type may in
fact be an amount equivalent to only eight percent of the value of a
VAT-registered person’s beginning inventory of goods, materials and
supplies, when such amount -- as computed -- is higher than the
actual VAT paid on the said items.25 Clearly from this provision, the
tax credit refers to an input tax that is either due only or given a value
by mere comparison with the VAT actually paid -- then later prorated.
No tax is actually paid prior to the availment of such credit.

In Section 111(B), a one and a half percent input tax credit that is
merely presumptive is allowed. For the purchase of primary
agricultural products used as inputs -- either in the processing of
sardines, mackerel and milk, or in the manufacture of refined sugar
and cooking oil -- and for the contract price of public work contracts
entered into with the government, again, no prior tax payments are
needed for the use of the tax credit.

More important, a VAT-registered person whose sales are zero-rated

or effectively zero-rated may, under Section 112(A), apply for the
issuance of a tax credit certificate for the amount of creditable input
taxes merely due -- again not necessarily paid to -- the government
and attributable to such sales, to the extent that the input taxes have
not been applied against output taxes.26 Where a taxpayer
is engaged in zero-rated or effectively zero-rated sales and also in
taxable or exempt sales, the amount of creditable input taxes due
that are not directly and entirely attributable to any one of these
transactions shall be proportionately allocated on the basis of the
volume of sales. Indeed, in availing of such tax credit for VAT
purposes, this provision -- as well as the one earlier mentioned --
shows that the prior payment of taxes is not a requisite.

It may be argued that Section 28(B)(5)(b) of the Tax Code is another

illustration of a tax credit allowed, even though no prior tax payments
are not required. Specifically, in this provision, the imposition of a final
withholding tax rate on cash and/or property dividends received by a
nonresident foreign corporation from a domestic corporation is
subjected to the condition that a foreign tax credit will be given by
the domiciliary country in an amount equivalent to taxes that are
merely deemed paid.27 Although true, this provision actually refers to
the tax credit as a condition only for the imposition of a lower tax
rate, not as a deduction from the corresponding tax liability. Besides,
it is not our government but the domiciliary country that credits
against the income tax payable to the latter by the foreign
corporation, the tax to be foregone or spared.28

In contrast, Section 34(C)(3), in relation to Section 34(C)(7)(b),

categorically allows as credits, against the income tax imposable
under Title II, the amount of income taxes merely incurred -- not
necessarily paid -- by a domestic corporation during a taxable year in
any foreign country. Moreover, Section 34(C)(5) provides that for such
taxes incurred but not paid, a tax credit may be allowed, subject to
the condition precedent that the taxpayer shall simply give a bond
with sureties satisfactory to and approved by petitioner, in such sum
as may be required; and further conditioned upon payment by the
taxpayer of any tax found due, upon petitioner’s redetermination of it.

In addition to the above-cited provisions in the Tax Code, there are

also tax treaties and special laws that grant or allow tax credits, even
though no prior tax payments have been made.

Under the treaties in which the tax credit method is used as a relief to
avoid double taxation, income that is taxed in the state of source is
also taxable in the state of residence, but the tax paid in the former is
merely allowed as a credit against the tax levied in the latter.29
Apparently, payment is made to the state of source, not the state of
residence. No tax, therefore, has been previously paid to the latter.

Under special laws that particularly affect businesses, there can also
be tax credit incentives. To illustrate, the incentives provided for in
Article 48 of Presidential Decree No. (PD) 1789, as amended by Batas
Pambansa Blg. (BP) 391, include tax credits equivalent to either five
percent of the net value earned, or five or ten percent of the net local
content of exports.30 In order to avail of such credits under the said
law and still achieve its objectives, no prior tax payments are
necessary.

From all the foregoing instances, it is evident that prior tax payments
are not indispensable to the availment of a tax credit. Thus, the CA
correctly held that the availment under RA 7432 did not require prior
tax payments by private establishments concerned.31 However, we
do not agree with its finding32 that the carry-over of tax credits under
the said special law to succeeding taxable periods, and even their
application against internal revenue taxes, did not necessitate the
existence of a tax liability.

The examples above show that a tax liability is certainly important in

the availment or use, not the existence or grant, of a tax credit.
Regarding this matter, a private establishment reporting a net loss in
its financial statements is no different from another that presents a net
income. Both are entitled to the tax credit provided for under RA
7432, since the law itself accords that unconditional benefit. However,
for the losing establishment to immediately apply such credit, where
no tax is due, will be an improvident usance.

Sections 2.i and 4 of Revenue

Regulations No. 2-94 Erroneous

RA 7432 specifically allows private establishments to claim as tax

credit the amount of discounts they grant.33 In turn, the
Implementing Rules and Regulations, issued pursuant thereto,
provide the procedures for its availment.34 To deny such credit,
despite the plain mandate of the law and the regulations carrying out
that mandate, is indefensible.

First, the definition given by petitioner is erroneous. It refers to tax

credit as the amount representing the 20 percent discount that "shall
be deducted by the said establishments from their gross income for
income tax purposes and from their gross sales for value-added tax or
other percentage tax purposes."35 In ordinary business language, the
tax credit represents the amount of such discount. However, the
manner by which the discount shall be credited against taxes has not
been clarified by the revenue regulations.

By ordinary acceptation, a discount is an "abatement or reduction

made from the gross amount or value of anything."36 To be more
precise, it is in business parlance "a deduction or lowering of an
amount of money;"37 or "a reduction from the full amount or value of
something, especially a price."38 In business there are many kinds of
discount, the most common of which is that affecting the income
statement39 or financial report upon which the income tax is based.

Business Discounts

Deducted from Gross Sales

A cash discount, for example, is one granted by business

establishments to credit customers for their prompt payment.40 It is a
"reduction in price offered to the purchaser if payment is made within
a shorter period of time than the maximum time specified."41 Also
referred to as a sales discount on the part of the seller and a purchase
discount on the part of the buyer, it may be expressed in such
terms as "5/10, n/30."42

A quantity discount, however, is a "reduction in price allowed for

purchases made in large quantities, justified by savings in packaging,
shipping, and handling."43 It is also called a volume or bulk discount.
44

A "percentage reduction from the list price x x x allowed by

manufacturers to wholesalers and by wholesalers to retailers"45 is
known as a trade discount. No entry for it need be made in the
manual or computerized books of accounts, since the purchase or
sale is already valued at the net price actually charged the buyer.46
The purpose for the discount is to encourage trading or increase
sales, and the prices at which the purchased goods may be resold are
also suggested.47 Even a chain discount -- a series of discounts from
one list price -- is recorded at net.48

Finally, akin to a trade discount is a functional discount. It is "a

supplier’s price discount given to a purchaser based on the [latter’s]
role in the [former’s] distribution system."49 This role usually involves
warehousing or advertising.

Based on this discussion, we find that the nature of a sales discount is

peculiar. Applying generally accepted accounting principles (GAAP) in
the country, this type of discount is reflected in the income
statement50 as a line item deducted -- along with returns, allowances,
rebates and other similar expenses -- from gross sales to arrive at net
sales.51 This type of presentation is resorted to, because the accounts
receivable and sales figures that arise from sales discounts, -- as well
as from quantity, volume or bulk discounts -- are recorded in the
manual and computerized books of accounts and reflected in the
financial statements at the gross amounts of the invoices.52 This
manner of recording credit sales -- known as the gross method -- is
most widely used, because it is simple, more convenient to apply than
the net method, and produces no material errors over time.53

However, under the net method used in recording trade, chain or

functional discounts, only the net amounts of the invoices -- after the
discounts have been deducted -- are recorded in the books of
accounts54 and reflected in the financial statements. A separate line
item cannot be shown,55 because the transactions themselves
involving both accounts receivable and sales have already been
entered into, net of the said discounts.

The term sales discounts is not expressly defined in the Tax Code, but
one provision adverts to amounts whose sum -- along with sales
returns, allowances and cost of goods sold56 -- is deducted from
gross sales to come up with the gross income, profit or margin57
derived from business.58 In another provision therein, sales discounts
that are granted and indicated in the invoices at the time of sale --
and that do not depend upon the happening of any future event --
may be excluded from the gross sales within the same quarter they
were given.59 While determinative only of the VAT, the latter
provision also appears as a suitable reference point for income tax
purposes already embraced in the former. After all, these two
provisions affirm that sales discounts are amounts that are always
deductible from gross sales.

Reason for the Senior Citizen Discount:

The Law, Not Prompt Payment

A distinguishing feature of the implementing rules of RA 7432 is the

private establishment’s outright deduction of the discount from the
invoice price of the medicine sold to the senior citizen.60 It is,
therefore, expected that for each retail sale made under this law, the
discount period lasts no more than a day, because such discount is
given -- and the net amount thereof collected -- immediately upon
perfection of the sale.61 Although prompt payment is made for an
arm’s-length transaction by the senior citizen, the real and compelling
reason for the private establishment giving the discount is that the law
itself makes it mandatory.

What RA 7432 grants the senior citizen is a mere discount privilege,

not a sales discount or any of the above discounts in particular.
Prompt payment is not the reason for (although a necessary
consequence of) such grant. To be sure, the privilege enjoyed by the
senior citizen must be equivalent to the tax credit benefit enjoyed by
the private establishment granting the discount. Yet, under the
revenue regulations promulgated by our tax authorities, this benefit
has been erroneously likened and confined to a sales discount.

To a senior citizen, the monetary effect of the privilege may be the

same as that resulting from a sales discount. However, to a private
establishment, the effect is different from a simple reduction in price
that results from such discount. In other words, the tax credit benefit
is not the same as a sales discount. To repeat from our earlier
discourse, this benefit cannot and should not be treated as a tax
deduction.

To stress, the effect of a sales discount on the income statement and

income tax return of an establishment covered by RA 7432 is different
from that resulting from the availment or use of its tax credit benefit.
While the former is a deduction before, the latter is a deduction after,
the income tax is computed. As mentioned earlier, a discount is not
necessarily a sales discount, and a tax credit for a simple discount
privilege should not be automatically treated like a sales discount. Ubi
lex non distinguit, nec nos distinguere debemus. Where the law does
not distinguish, we ought not to distinguish.

Sections 2.i and 4 of Revenue Regulations No. (RR) 2-94 define tax
credit as the 20 percent discount deductible from gross income for
income tax purposes, or from gross sales for VAT or other percentage
tax purposes. In effect, the tax credit benefit under RA 7432 is related
to a sales discount. This contrived definition is improper, considering
that the latter has to be deducted from gross sales in order to
compute the gross income in the income statement and cannot be
deducted again, even for purposes of computing the income tax.

When the law says that the cost of the discount may be claimed as a
tax credit, it means that the amount -- when claimed -- shall be
treated as a reduction from any tax liability, plain and simple. The
option to avail of the tax credit benefit depends upon the existence
of a tax liability, but to limit the benefit to a sales discount -- which is
not even identical to the discount privilege that is granted by law --
does not define it at all and serves no useful purpose. The definition
must, therefore, be stricken down.

Laws Not Amended

by Regulations

Second, the law cannot be amended by a mere regulation. In fact, a

regulation that "operates to create a rule out of harmony with
the statute is a mere nullity";62 it cannot prevail.
It is a cardinal rule that courts "will and should respect the
contemporaneous construction placed upon a statute by the
executive officers whose duty it is to enforce it x x x."63 In the
scheme of judicial tax administration, the need for certainty and
predictability in the implementation of tax laws is crucial.64 Our tax
authorities fill in the details that "Congress may not have the
opportunity or competence to provide."65 The regulations these
authorities issue are relied upon by taxpayers, who are certain that
these will be followed by the courts.66 Courts, however, will not
uphold these authorities’ interpretations when clearly absurd,
erroneous or improper.

In the present case, the tax authorities have given the term tax credit
in Sections 2.i and 4 of RR 2-94 a meaning utterly in contrast to what
RA 7432 provides. Their interpretation has muddled up the intent of
Congress in granting a mere discount privilege, not a sales discount.
The administrative agency issuing these regulations may not enlarge,
alter or restrict the provisions of the law it administers; it cannot
engraft additional requirements not contemplated by the legislature.
67

In case of conflict, the law must prevail.68 A "regulation adopted

pursuant to law is law."69 Conversely, a regulation or any portion
thereof not adopted pursuant to law is no law and has neither the
force nor the effect of law.70

Availment of Tax

Credit Voluntary

Third, the word may in the text of the statute71 implies that the
availability of the tax credit benefit is neither unrestricted nor
mandatory.72 There is no absolute right conferred upon respondent,
or any similar taxpayer, to avail itself of the tax credit remedy
whenever it chooses; "neither does it impose a duty on the part of
the government to sit back and allow an important facet of tax
collection to be at the sole control and discretion of the taxpayer."73
For the tax authorities to compel respondent to deduct the 20
percent discount from either its gross income or its gross sales74 is,
therefore, not only to make an imposition without basis in law, but
also to blatantly contravene the law itself.

What Section 4.a of RA 7432 means is that the tax credit benefit is
merely permissive, not imperative. Respondent is given two options --
either to claim or not to claim the cost of the discounts as a tax credit.
In fact, it may even ignore the credit and simply consider the gesture
as an act of beneficence, an expression of its social conscience.

Granting that there is a tax liability and respondent claims such cost
as a tax credit, then the tax credit can easily be applied. If there is
none, the credit cannot be used and will just have to be carried over
and revalidated75 accordingly. If, however, the business continues to
operate at a loss and no other taxes are due, thus compelling it to
close shop, the credit can never be applied and will be lost
altogether.

In other words, it is the existence or the lack of a tax liability that

determines whether the cost of the discounts can be used as a tax
credit. RA 7432 does not give respondent the unfettered right to avail
itself of the credit whenever it pleases. Neither does it allow our tax
administrators to expand or contract the legislative mandate. "The
‘plain meaning rule’ or verba legis in statutory construction is thus
applicable x x x. Where the words of a statute are clear, plain and free
from ambiguity, it must be given its literal meaning and applied
without attempted interpretation."76

Tax Credit Benefit

Deemed Just Compensation

Fourth, Sections 2.i and 4 of RR 2-94 deny the exercise by the State of
its power of eminent domain. Be it stressed that the privilege enjoyed
by senior citizens does not come directly from the State, but rather
from the private establishments concerned. Accordingly, the tax credit
benefit granted to these establishments can be deemed as their just
compensation for private property taken by the State for public use.
77
The concept of public use is no longer confined to the traditional
notion of use by the public, but held synonymous with public interest,
public benefit, public welfare, and public convenience.78 The
discount privilege to which our senior citizens are entitled is actually a
benefit enjoyed by the general public to which these citizens belong.
The discounts given would have entered the coffers and formed part
of the gross sales of the private establishments concerned, were it not
for RA 7432. The permanent reduction in their total revenues is a
forced subsidy corresponding to the taking of private property for
public use or benefit.

As a result of the 20 percent discount imposed by RA 7432,

respondent becomes entitled to a just compensation. This term refers
not only to the issuance of a tax credit certificate indicating the
correct amount of the discounts given, but also to the promptness in
its release. Equivalent to the payment of property taken by the State,
such issuance -- when not done within a reasonable time from the
grant of the discounts -- cannot be considered as just compensation.
In effect, respondent is made to suffer the consequences of being
immediately deprived of its revenues while awaiting actual receipt,
through the certificate, of the equivalent amount it needs to cope
with the reduction in its revenues.79

Besides, the taxation power can also be used as an implement for the
exercise of the power of eminent domain.80 Tax measures are but
"enforced contributions exacted on pain of penal sanctions"81 and
"clearly imposed for a public purpose."82 In recent years, the power
to tax has indeed become a most effective tool to realize social
justice, public welfare, and the equitable distribution of wealth.83

While it is a declared commitment under Section 1 of RA 7432, social

justice "cannot be invoked to trample on the rights of property
owners who under our Constitution and laws are also entitled to
protection. The social justice consecrated in our [C]onstitution [is] not
intended to take away rights from a person and give them to another
who is not entitled thereto."84 For this reason, a just compensation
for income that is taken away from respondent becomes necessary. It
is in the tax credit that our legislators find support to realize social
justice, and no administrative body can alter that fact.

To put it differently, a private establishment that merely breaks even85

-- without the discounts yet -- will surely start to incur losses because
of such discounts. The same effect is expected if its mark-up is less
than 20 percent, and if all its sales come from retail purchases by
senior citizens. Aside from the observation we have already raised
earlier, it will also be grossly unfair to an establishment if the discounts
will be treated merely as deductions from either its gross income or its
gross sales. Operating at a loss through no fault of its own, it will
realize that the tax credit limitation under RR 2-94 is inutile, if not
improper. Worse, profit-generating businesses will be put in a better
position if they avail themselves of tax credits denied those that are
losing, because no taxes are due from the latter.

Grant of Tax Credit

Intended by the Legislature

Fifth, RA 7432 itself seeks to adopt measures whereby senior citizens

are assisted by the community as a whole and to establish a program
beneficial to them.86 These objectives are consonant with the
constitutional policy of making "health x x x services available to all
the people at affordable cost"87 and of giving "priority for the needs
of the x x x elderly."88 Sections 2.i and 4 of RR 2-94, however,
contradict these constitutional policies and statutory objectives.

Furthermore, Congress has allowed all private establishments a

simple tax credit, not a deduction. In fact, no cash outlay is required
from the government for the availment or use of such credit. The
deliberations on February 5, 1992 of the Bicameral Conference
Committee Meeting on Social Justice, which finalized RA 7432,
disclose the true intent of our legislators to treat the sales discounts
as a tax credit, rather than as a deduction from gross income. We
quote from those deliberations as follows:

"THE CHAIRMAN (Rep. Unico). By the way, before that ano, about
deductions from taxable income. I think we incorporated there a
provision na - on the responsibility of the private hospitals and
drugstores, hindi ba?

SEN. ANGARA. Oo.

THE CHAIRMAN. (Rep. Unico), So, I think we have to put in also a

provision here about the deductions from taxable income of that
private hospitals, di ba ganon 'yan?

MS. ADVENTO. Kaya lang po sir, and mga discounts po nila affecting
government and public institutions, so, puwede na po nating hindi
isama yung mga less deductions ng taxable income.

THE CHAIRMAN. (Rep. Unico). Puwede na. Yung about the private
hospitals. Yung isiningit natin?

MS. ADVENTO. Singit na po ba yung 15% on credit. (inaudible/did

not use the microphone).

SEN. ANGARA. Hindi pa, hindi pa.

THE CHAIRMAN. (Rep. Unico) Ah, 'di pa ba naisama natin?

SEN. ANGARA. Oo. You want to insert that?

THE CHAIRMAN (Rep. Unico). Yung ang proposal ni Senator Shahani,

e.

SEN. ANGARA. In the case of private hospitals they got the grant of
15% discount, provided that, the private hospitals can claim the
expense as a tax credit.

REP. AQUINO. Yah could be allowed as deductions in the

perpetrations of (inaudible) income.

SEN. ANGARA. I-tax credit na lang natin para walang cash-out ano?

REP. AQUINO. Oo, tax credit. Tama, Okay. Hospitals ba o lahat ng

establishments na covered.
THE CHAIRMAN. (Rep. Unico). Sa kuwan lang yon, as private
hospitals lang.

REP. AQUINO. Ano ba yung establishments na covered?

SEN. ANGARA. Restaurant lodging houses, recreation centers.

REP. AQUINO. All establishments covered siguro?

SEN. ANGARA. From all establishments. Alisin na natin 'Yung kuwan

kung ganon. Can we go back to Section 4 ha?

REP. AQUINO. Oho.

SEN. ANGARA. Letter A. To capture that thought, we'll say the grant
of 20% discount from all establishments et cetera, et cetera, provided
that said establishments - provided that private establishments may
claim the cost as a tax credit. Ganon ba 'yon?

REP. AQUINO. Yah.

SEN. ANGARA. Dahil kung government, they don't need to claim it.

THE CHAIRMAN. (Rep. Unico). Tax credit.

SEN. ANGARA. As a tax credit [rather] than a kuwan - deduction,

Okay.

REP. AQUINO Okay.

SEN. ANGARA. Sige Okay. Di subject to style na lang sa Letter A".89

Special Law

Over General Law

Sixth and last, RA 7432 is a special law that should prevail over the
Tax Code -- a general law. "x x x [T]he rule is that on a specific matter
the special law shall prevail over the general law, which shall
be resorted to only to supply deficiencies in the former."90 In
addition, "[w]here there are two statutes, the earlier special and the
later general -- the terms of the general broad enough to include the
matter provided for in the special -- the fact that one is special and
the other is general creates a presumption that the special is to be
considered as remaining an exception to the general,91 one as a
general law of the land, the other as the law of a particular case."92
"It is a canon of statutory construction that a later statute, general in
its terms and not expressly repealing a prior special statute, will
ordinarily not affect the special provisions of such earlier statute."93

RA 7432 is an earlier law not expressly repealed by, and therefore

remains an exception to, the Tax Code -- a later law. When the former
states that a tax credit may be claimed, then the requirement of prior
tax payments under certain provisions of the latter, as discussed
above, cannot be made to apply. Neither can the instances of or
references to a tax deduction under the Tax Code94 be made to
restrict RA 7432. No provision of any revenue regulation can supplant
or modify the acts of Congress.

WHEREFORE, the Petition is hereby DENIED. The assailed Decision

and Resolution of the Court of Appeals AFFIRMED. No
pronouncement as to costs.

SO ORDERED.

ARTEMIO V. PANGANIBAN

Associate Justice

Chairman, Third Division

W E C O N C U R:

ANGELINA SANDOVAL-GUTIERREZ
RENATO C. CORONA

Associate Justice

Associate Justice

CONCHITA CARPIO MORALES

CANCIO C. GARCIA

Associate Justice

Associate Justice

G.R. No. 166494 June 29, 2007

CARLOS SUPERDRUG CORP., doing business under the name and

style "Carlos Superdrug," ELSIE M. CANO, doing business under the
name and style "Advance Drug," Dr. SIMPLICIO L. YAP, JR., doing
business under the name and style "City Pharmacy," MELVIN S. DELA
SERNA, doing business under the name and style "Botica dela
Serna," and LEYTE SERV-WELL CORP., doing business under the
name and style "Leyte Serv-Well Drugstore," petitioners,
vs.
DEPARTMENT OF SOCIAL WELFARE and DEVELOPMENT (DSWD),
DEPARTMENT OF HEALTH (DOH), DEPARTMENT OF FINANCE
(DOF), DEPARTMENT OF JUSTICE (DOJ), and DEPARTMENT OF
INTERIOR and LOCAL GOVERNMENT (DILG), respondents.

DECISION

AZCUNA, J.:

This is a petition1 for Prohibition with Prayer for Preliminary Injunction

assailing the constitutionality of Section 4(a) of Republic Act (R.A.) No.
9257,2 otherwise known as the "Expanded Senior Citizens Act of
2003."

Petitioners are domestic corporations and proprietors operating

drugstores in the Philippines.

Public respondents, on the other hand, include the Department of

Social Welfare and Development (DSWD), the Department of Health
(DOH), the Department of Finance (DOF), the Department of Justice
(DOJ), and the Department of Interior and Local Government (DILG)
which have been specifically tasked to monitor the drugstores’
compliance with the law; promulgate the implementing rules and
regulations for the effective implementation of the law; and prosecute
and revoke the licenses of erring drugstore establishments.

The antecedents are as follows:

On February 26, 2004, R.A. No. 9257, amending R.A. No. 7432,3 was
signed into law by President Gloria Macapagal-Arroyo and it became
effective on March 21, 2004. Section 4(a) of the Act states:

SEC. 4. Privileges for the Senior Citizens. – The senior citizens shall be
entitled to the following:

(a) the grant of twenty percent (20%) discount from all establishments
relative to the utilization of services in hotels and similar lodging
establishments, restaurants and recreation centers, and purchase of
medicines in all establishments for the exclusive use or enjoyment of
senior citizens, including funeral and burial services for the death of
senior citizens;

...

The establishment may claim the discounts granted under (a), (f), (g)
and (h) as tax deduction based on the net cost of the goods sold or
services rendered: Provided, That the cost of the discount shall be
allowed as deduction from gross income for the same taxable year
that the discount is granted. Provided, further, That the total amount
of the claimed tax deduction net of value added tax if applicable,
shall be included in their gross sales receipts for tax purposes and
shall be subject to proper documentation and to the provisions of the
National Internal Revenue Code, as amended.4

On May 28, 2004, the DSWD approved and adopted the

Implementing Rules and Regulations of R.A. No. 9257, Rule VI, Article
8 of which states:

Article 8. Tax Deduction of Establishments. – The establishment may

claim the discounts granted under Rule V, Section 4 – Discounts for
Establishments;5 Section 9, Medical and Dental Services in Private
Facilities[,]6 and Sections 107 and 118 – Air, Sea and Land
Transportation as tax deduction based on the net cost of the goods
sold or services rendered. Provided, That the cost of the discount
shall be allowed as deduction from gross income for the same taxable
year that the discount is granted; Provided, further, That the total
amount of the claimed tax deduction net of value added tax if
applicable, shall be included in their gross sales receipts for tax
purposes and shall be subject to proper documentation and to the
provisions of the National Internal Revenue Code, as amended;
Provided, finally, that the implementation of the tax deduction shall
be subject to the Revenue Regulations to be issued by the Bureau of
Internal Revenue (BIR) and approved by the Department of Finance
(DOF).9

On July 10, 2004, in reference to the query of the Drug Stores

Association of the Philippines (DSAP) concerning the meaning of a tax
deduction under the Expanded Senior Citizens Act, the DOF, through
Director IV Ma. Lourdes B. Recente, clarified as follows:

1) The difference between the Tax Credit (under the Old Senior
Citizens Act) and Tax Deduction (under the Expanded Senior Citizens
Act).

1.1. The provision of Section 4 of R.A. No. 7432 (the old Senior
Citizens Act) grants twenty percent (20%) discount from all
establishments relative to the utilization of transportation services,
hotels and similar lodging establishment, restaurants and recreation
centers and purchase of medicines anywhere in the country, the costs
of which may be claimed by the private establishments concerned as
tax credit.

Effectively, a tax credit is a peso-for-peso deduction from a taxpayer’s

tax liability due to the government of the amount of discounts such
establishment has granted to a senior citizen. The establishment
recovers the full amount of discount given to a senior citizen and
hence, the government shoulders 100% of the discounts granted.

It must be noted, however, that conceptually, a tax credit scheme

under the Philippine tax system, necessitates that prior payments of
taxes have been made and the taxpayer is attempting to recover this
tax payment from his/her income tax due. The tax credit scheme
under R.A. No. 7432 is, therefore, inapplicable since no tax payments
have previously occurred.

1.2. The provision under R.A. No. 9257, on the other hand, provides
that the establishment concerned may claim the discounts under
Section 4(a), (f), (g) and (h) as tax deduction from gross income, based
on the net cost of goods sold or services rendered.

Under this scheme, the establishment concerned is allowed to deduct

from gross income, in computing for its tax liability, the amount of
discounts granted to senior citizens. Effectively, the government loses
in terms of foregone revenues an amount equivalent to the marginal
tax rate the said establishment is liable to pay the government. This
will be an amount equivalent to 32% of the twenty percent (20%)
discounts so granted. The establishment shoulders the remaining
portion of the granted discounts.

It may be necessary to note that while the burden on [the]

government is slightly diminished in terms of its percentage share on
the discounts granted to senior citizens, the number of potential
establishments that may claim tax deductions, have however, been
broadened. Aside from the establishments that may claim tax credits
under the old law, more establishments were added under the new
law such as: establishments providing medical and dental services,
diagnostic and laboratory services, including professional fees of
attending doctors in all private hospitals and medical facilities,
operators of domestic air and sea transport services, public railways
and skyways and bus transport services.

A simple illustration might help amplify the points discussed above,

as follows:

Tax Deduction Tax Credit

Gross Sales x x x x x x x x x x x x

Less : Cost of goods sold x x x x x x x x x x

Net Sales x x x x x x x x x x x x

Less: Operating Expenses:

Tax Deduction on Discounts x x x x --

Other deductions: x x x x x x x x

Net Taxable Income x x x x x x x x x x

Tax Due x x x x x x

Less: Tax Credit -- ______x x

Net Tax Due -- x x

As shown above, under a tax deduction scheme, the tax deduction on

discounts was subtracted from Net Sales together with other
deductions which are considered as operating expenses before the
Tax Due was computed based on the Net Taxable Income. On the
other hand, under a tax credit scheme, the amount of discounts which
is the tax credit item, was deducted directly from the tax due amount.
10

Meanwhile, on October 1, 2004, Administrative Order (A.O.) No. 171

or the Policies and Guidelines to Implement the Relevant Provisions
of Republic Act 9257, otherwise known as the "Expanded Senior
Citizens Act of 2003"11 was issued by the DOH, providing the grant
of twenty percent (20%) discount in the purchase of unbranded
generic medicines from all establishments dispensing medicines for
the exclusive use of the senior citizens.

On November 12, 2004, the DOH issued Administrative Order No

17712 amending A.O. No. 171. Under A.O. No. 177, the twenty
percent discount shall not be limited to the purchase of unbranded
generic medicines only, but shall extend to both prescription and
non-prescription medicines whether branded or generic. Thus, it
stated that "[t]he grant of twenty percent (20%) discount shall be
provided in the purchase of medicines from all establishments
dispensing medicines for the exclusive use of the senior citizens."

Petitioners assail the constitutionality of Section 4(a) of the Expanded

Senior Citizens Act based on the following grounds:13

1) The law is confiscatory because it infringes Art. III, Sec. 9 of the

Constitution which provides that private property shall not be taken
for public use without just compensation;

2) It violates the equal protection clause (Art. III, Sec. 1) enshrined in

our Constitution which states that "no person shall be deprived of life,
liberty or property without due process of law, nor shall any person be
denied of the equal protection of the laws;" and

3) The 20% discount on medicines violates the constitutional

guarantee in Article XIII, Section 11 that makes "essential goods,
health and other social services available to all people at affordable
cost."14

Petitioners assert that Section 4(a) of the law is unconstitutional

because it constitutes deprivation of private property. Compelling
drugstore owners and establishments to grant the discount will result
in a loss of profit

and capital because 1) drugstores impose a mark-up of only 5% to

10% on branded medicines; and 2) the law failed to provide a scheme
whereby drugstores will be justly compensated for the discount.
Examining petitioners’ arguments, it is apparent that what petitioners
are ultimately questioning is the validity of the tax deduction scheme
as a reimbursement mechanism for the twenty percent (20%) discount
that they extend to senior citizens.

Based on the afore-stated DOF Opinion, the tax deduction scheme

does not fully reimburse petitioners for the discount privilege
accorded to senior citizens. This is because the discount is treated as
a deduction, a tax-deductible expense that is subtracted from the
gross income and results in a lower taxable income. Stated otherwise,
it is an amount that is allowed by law15 to reduce the income prior to
the application of the tax rate to compute the amount of tax which is
due.16 Being a tax deduction, the discount does not reduce taxes
owed on a peso for peso basis but merely offers a fractional reduction
in taxes owed.

Theoretically, the treatment of the discount as a deduction reduces

the net income of the private establishments concerned. The
discounts given would have entered the coffers and formed part of
the gross sales of the private establishments, were it not for R.A. No.
9257.

The permanent reduction in their total revenues is a forced subsidy

corresponding to the taking of private property for public use or
benefit.17 This constitutes compensable taking for which petitioners
would ordinarily become entitled to a just compensation.

Just compensation is defined as the full and fair equivalent of the

property taken from its owner by the expropriator. The measure is not
the taker’s gain but the owner’s loss. The word just is used to intensify
the meaning of the word compensation, and to convey the idea that
the equivalent to be rendered for the property to be taken shall be
real, substantial, full and ample.18

A tax deduction does not offer full reimbursement of the senior citizen
discount. As such, it would not meet the definition of just
compensation.19
Having said that, this raises the question of whether the State, in
promoting the health and welfare of a special group of citizens, can
impose upon private establishments the burden of partly subsidizing
a government program.

The Court believes so.

The Senior Citizens Act was enacted primarily to maximize the

contribution of senior citizens to nation-building, and to grant
benefits and privileges to them for their improvement and well-being
as the State considers them an integral part of our society.20

The priority given to senior citizens finds its basis in the Constitution
as set forth in the law itself. Thus, the Act provides:

SEC. 2. Republic Act No. 7432 is hereby amended to read as follows:

SECTION 1. Declaration of Policies and Objectives. – Pursuant to

Article XV, Section 4 of the Constitution, it is the duty of the family to
take care of its elderly members while the State may design programs
of social security for them. In addition to this, Section 10 in the
Declaration of Principles and State Policies provides: "The State shall
provide social justice in all phases of national development." Further,
Article XIII, Section 11, provides: "The State shall adopt an integrated
and comprehensive approach to health development which shall
endeavor to make essential goods, health and other social services
available to all the people at affordable cost. There shall be priority
for the needs of the underprivileged sick, elderly, disabled, women
and children." Consonant with these constitutional principles the
following are the declared policies of this Act:

...

(f) To recognize the important role of the private sector in the

improvement of the welfare of senior citizens and to actively seek
their partnership.21

To implement the above policy, the law grants a twenty percent

discount to senior citizens for medical and dental services, and
diagnostic and laboratory fees; admission fees charged by theaters,
concert halls, circuses, carnivals, and other similar places of culture,
leisure and amusement; fares for domestic land, air and sea travel;
utilization of services in hotels and similar lodging establishments,
restaurants and recreation centers; and purchases of medicines for the
exclusive use or enjoyment of senior citizens. As a form of
reimbursement, the law provides that business establishments
extending the twenty percent discount to senior citizens may claim
the discount as a tax deduction.

The law is a legitimate exercise of police power which, similar to the

power of eminent domain, has general welfare for its object. Police
power is not capable of an exact definition, but has been purposely
veiled in general terms to underscore its comprehensiveness to meet
all exigencies and provide enough room for an efficient and flexible
response to conditions and circumstances, thus assuring the greatest
benefits. 22 Accordingly, it has been described as "the most essential,
insistent and the least limitable of powers, extending as it does to all
the great public needs."23 It is "[t]he power vested in the legislature
by the constitution to make, ordain, and establish all manner of
wholesome and reasonable laws, statutes, and ordinances, either with
penalties or without, not repugnant to the constitution, as they shall
judge to be for the good and welfare of the commonwealth, and of
the subjects of the same."24

For this reason, when the conditions so demand as determined by the

legislature, property rights must bow to the primacy of police power
because property rights, though sheltered by due process, must yield
to general welfare.25

Police power as an attribute to promote the common good would be

diluted considerably if on the mere plea of petitioners that they will
suffer loss of earnings and capital, the questioned provision is
invalidated. Moreover, in the absence of evidence demonstrating the
alleged confiscatory effect of the provision in question, there is no
basis for its nullification in view of the presumption of validity which
every law has in its favor.26
Given these, it is incorrect for petitioners to insist that the grant of the
senior citizen discount is unduly oppressive to their business, because
petitioners have not taken time to calculate correctly and come up
with a financial report, so that they have not been able to show
properly whether or not the tax deduction scheme really works greatly
to their disadvantage.27

In treating the discount as a tax deduction, petitioners insist that they

will incur losses because, referring to the DOF Opinion, for every
₱1.00 senior citizen discount that petitioners would give, ₱0.68 will
be shouldered by them as only ₱0.32 will be refunded by the
government by way of a tax deduction.

To illustrate this point, petitioner Carlos Super Drug cited the anti-
hypertensive maintenance drug Norvasc as an example. According to
the latter, it acquires Norvasc from the distributors at ₱37.57 per
tablet, and retails it at ₱39.60 (or at a margin of 5%). If it grants a 20%
discount to senior citizens or an amount equivalent to ₱7.92, then it
would have to sell Norvasc at ₱31.68 which translates to a loss from
capital of ₱5.89 per tablet. Even if the government will allow a tax
deduction, only ₱2.53 per tablet will be refunded and not the full
amount of the discount which is ₱7.92. In short, only 32% of the 20%
discount will be reimbursed to the drugstores.28

Petitioners’ computation is flawed. For purposes of reimbursement,

the law states that the cost of the discount shall be deducted from
gross income,29 the amount of income derived from all sources
before deducting allowable expenses, which will result in net income.
Here, petitioners tried to show a loss on a per transaction basis, which
should not be the case. An income statement, showing an accounting
of petitioners’ sales, expenses, and net profit (or loss) for a given
period could have accurately reflected the effect of the discount on
their income. Absent any financial statement, petitioners cannot
substantiate their claim that they will be operating at a loss should
they give the discount. In addition, the computation was erroneously
based on the assumption that their customers consisted wholly of
senior citizens. Lastly, the 32% tax rate is to be imposed on income,
not on the amount of the discount.
Furthermore, it is unfair for petitioners to criticize the law because
they cannot raise the prices of their medicines given the cutthroat
nature of the players in the industry. It is a business decision on the
part of petitioners to peg the mark-up at 5%. Selling the medicines
below acquisition cost, as alleged by petitioners, is merely a result of
this decision. Inasmuch as pricing is a property right, petitioners
cannot reproach the law for being oppressive, simply because they
cannot afford to raise their prices for fear of losing their customers to
competition.

The Court is not oblivious of the retail side of the pharmaceutical

industry and the competitive pricing component of the business.
While the Constitution protects property rights, petitioners must
accept the realities of business and the State, in the exercise of police
power, can intervene in the operations of a business which may result
in an impairment of property rights in the process.

Moreover, the right to property has a social dimension. While Article

XIII of the Constitution provides the precept for the protection of
property, various laws and jurisprudence, particularly on agrarian
reform and the regulation of contracts and public utilities,
continuously serve as a reminder that the right to property can be
relinquished upon the command of the State for the promotion of
public good.30

Undeniably, the success of the senior citizens program rests largely on

the support imparted by petitioners and the other private
establishments concerned. This being the case, the means employed
in invoking the active participation of the private sector, in order to
achieve the purpose or objective of the law, is reasonably and directly
related. Without sufficient proof that Section 4(a) of R.A. No. 9257 is
arbitrary, and that the continued implementation of the same would
be unconscionably detrimental to petitioners, the Court will refrain
from quashing a legislative act.31

WHEREFORE, the petition is DISMISSED for lack of merit.

No costs.
SO ORDERED.

ADOLFO S. AZCUNA
Associate Justice

WE CONCUR:

REYNATO S. PUNO
Chief Justice

G.R. No. 175356 December 3, 2013

MANILA MEMORIAL PARK, INC. AND LA FUNERARIA PAZ-SUCAT,

INC., Petitioners,
vs.
SECRETARY OF THE DEPARTMENT OF SOCIAL WELFARE AND
DEVELOPMENT and THE SECRETARY OF THE DEPARTMENT OF
FINANCE, Respondents.

DECISION

DEL CASTILLO, J.:

When a party challeges the constitutionality of a law, the burden of

proof rests upon him.

Before us is a Petition for Prohibition2 under Rule 65 of the Rules of

Court filed by petitioners Manila Memorial Park, Inc. and La Funeraria
Paz-Sucat, Inc., domestic corporations engaged in the business of
providing funeral and burial services, against public respondents
Secretaries of the Department of Social Welfare and Development
(DSWD) and the Department of Finance (DOF).

Petitioners assail the constitutionality of Section 4 of Republic Act (RA)

No. 7432,3 as amended by RA 9257,4 and the implementing rules
and regulations issued by the DSWD and DOF insofar as these allow
business establishments to claim the 20% discount given to senior
citizens as a tax deduction.
Factual Antecedents

On April 23, 1992, RA 7432 was passed into law, granting senior
citizens the following privileges:

SECTION 4. Privileges for the Senior Citizens. – The senior citizens

shall be entitled to the following:

a) the grant of twenty percent (20%) discount from all establishments

relative to utilization of transportation services, hotels and similar
lodging establishment[s], restaurants and recreation centers and
purchase of medicine anywhere in the country: Provided, That private
establishments may claim the cost as tax credit;

b) a minimum of twenty percent (20%) discount on admission fees

charged by theaters, cinema houses and concert halls, circuses,
carnivals and other similar places of culture, leisure, and amusement;

c) exemption from the payment of individual income taxes: Provided,

That their annual taxable income does not exceed the property level
as determined by the National Economic and Development Authority
(NEDA) for that year;

d) exemption from training fees for socioeconomic programs

undertaken by the OSCA as part of its work;

e) free medical and dental services in government establishment[s]

anywhere in the country, subject to guidelines to be issued by the
Department of Health, the Government Service Insurance System and
the Social Security System;

f) to the extent practicable and feasible, the continuance of the same

benefits and privileges given by the Government Service Insurance
System (GSIS), Social Security System (SSS) and PAG-IBIG, as the case
may be, as are enjoyed by those in actual service.

On August 23, 1993, Revenue Regulations (RR) No. 02-94 was issued
to implement RA 7432. Sections 2(i) and 4 of RR No. 02-94 provide:
Sec. 2. DEFINITIONS. – For purposes of these regulations: i. Tax
Credit – refers to the amount representing the 20% discount granted
to a qualified senior citizen by all establishments relative to their
utilization of transportation services, hotels and similar lodging
establishments, restaurants, drugstores, recreation centers, theaters,
cinema houses, concert halls, circuses, carnivals and other similar
places of culture, leisure and amusement, which discount shall be
deducted by the said establishments from their gross income for
income tax purposes and from their gross sales for value-added tax or
other percentage tax purposes. x x x x Sec. 4. RECORDING/
BOOKKEEPING REQUIREMENTS FOR PRIVATE ESTABLISHMENTS. –
Private establishments, i.e., transport services, hotels and similar
lodging establishments, restaurants, recreation centers, drugstores,
theaters, cinema houses, concert halls, circuses, carnivals and other
similar places of culture[,] leisure and amusement, giving 20%
discounts to qualified senior citizens are required to keep separate
and accurate record[s] of sales made to senior citizens, which shall
include the name, identification number, gross sales/receipts,
discounts, dates of transactions and invoice number for every
transaction. The amount of 20% discount shall be deducted from the
gross income for income tax purposes and from gross sales of the
business enterprise concerned for purposes of the VAT and other
percentage taxes.

In Commissioner of Internal Revenue v. Central Luzon Drug

Corporation,5 the Court declared Sections 2(i) and 4 of RR No. 02-94
as erroneous because these contravene RA 7432,6 thus:

RA 7432 specifically allows private establishments to claim as tax

credit the amount of discounts they grant. In turn, the Implementing
Rules and Regulations, issued pursuant thereto, provide the
procedures for its availment. To deny such credit, despite the plain
mandate of the law and the regulations carrying out that mandate, is
indefensible. First, the definition given by petitioner is erroneous. It
refers to tax credit as the amount representing the 20 percent
discount that "shall be deducted by the said establishments from
their gross income for income tax purposes and from their gross sales
for value-added tax or other percentage tax purposes." In ordinary
business language, the tax credit represents the amount of such
discount. However, the manner by which the discount shall be
credited against taxes has not been clarified by the revenue
regulations. By ordinary acceptation, a discount is an "abatement or
reduction made from the gross amount or value of anything." To be
more precise, it is in business parlance "a deduction or lowering of an
amount of money;" or "a reduction from the full amount or value of
something, especially a price." In business there are many kinds of
discount, the most common of which is that affecting the income
statement or financial report upon which the income tax is based.

xxxx

Sections 2.i and 4 of Revenue Regulations No. (RR) 2-94 define tax
credit as the 20 percent discount deductible from gross income for
income tax purposes, or from gross sales for VAT or other percentage
tax purposes. In effect, the tax credit benefit under RA 7432 is related
to a sales discount. This contrived definition is improper, considering
that the latter has to be deducted from gross sales in order to
compute the gross income in the income statement and cannot be
deducted again, even for purposes of computing the income tax.
When the law says that the cost of the discount may be claimed as a
tax credit, it means that the amount — when claimed — shall be
treated as a reduction from any tax liability, plain and simple. The
option to avail of the tax credit benefit depends upon the existence
of a tax liability, but to limit the benefit to a sales discount — which is
not even identical to the discount privilege that is granted by law —
does not define it at all and serves no useful purpose. The definition
must, therefore, be stricken down.

Laws Not Amended by Regulations

Second, the law cannot be amended by a mere regulation. In fact, a

regulation that "operates to create a rule out of harmony with the
statute is a mere nullity;" it cannot prevail. It is a cardinal rule that
courts "will and should respect the contemporaneous construction
placed upon a statute by the executive officers whose duty it is to
enforce it x x x." In the scheme of judicial tax administration, the need
for certainty and predictability in the implementation of tax laws is
crucial. Our tax authorities fill in the details that "Congress may not
have the opportunity or competence to provide." The regulations
these authorities issue are relied upon by taxpayers, who are certain
that these will be followed by the courts. Courts, however, will not
uphold these authorities’ interpretations when clearly absurd,
erroneous or improper. In the present case, the tax authorities have
given the term tax credit in Sections 2.i and 4 of RR 2-94 a meaning
utterly in contrast to what RA 7432 provides. Their interpretation has
muddled x x x the intent of Congress in granting a mere discount
privilege, not a sales discount. The administrative agency issuing
these regulations may not enlarge, alter or restrict the provisions of
the law it administers; it cannot engraft additional requirements not
contemplated by the legislature.

In case of conflict, the law must prevail. A "regulation adopted

pursuant to law is law." Conversely, a regulation or any portion
thereof not adopted pursuant to law is no law and has neither the
force nor the effect of law.7

On February 26, 2004, RA 92578 amended certain provisions of RA

7432, to wit:

SECTION 4. Privileges for the Senior Citizens. – The senior citizens

shall be entitled to the following:

(a) the grant of twenty percent (20%) discount from all establishments
relative to the utilization of services in hotels and similar lodging
establishments, restaurants and recreation centers, and purchase of
medicines in all establishments for the exclusive use or enjoyment of
senior citizens, including funeral and burial services for the death of
senior citizens;

xxxx

The establishment may claim the discounts granted under (a), (f), (g)
and (h) as tax deduction based on the net cost of the goods sold or
services rendered: Provided, That the cost of the discount shall be
allowed as deduction from gross income for the same taxable year
that the discount is granted. Provided, further, That the total amount
of the claimed tax deduction net of value added tax if applicable,
shall be included in their gross sales receipts for tax purposes and
shall be subject to proper documentation and to the provisions of the
National Internal Revenue Code, as amended.

To implement the tax provisions of RA 9257, the Secretary of Finance

issued RR No. 4-2006, the pertinent provision of which provides:

SEC. 8. AVAILMENT BY ESTABLISHMENTS OF SALES DISCOUNTS

AS DEDUCTION FROM GROSS INCOME. – Establishments
enumerated in subparagraph (6) hereunder granting sales discounts
to senior citizens on the sale of goods and/or services specified
thereunder are entitled to deduct the said discount from gross
income subject to the following conditions:

(1) Only that portion of the gross sales EXCLUSIVELY USED,

CONSUMED OR ENJOYED BY THE SENIOR CITIZEN shall be eligible
for the deductible sales discount.

(2) The gross selling price and the sales discount MUST BE
SEPARATELY INDICATED IN THE OFFICIAL RECEIPT OR SALES
INVOICE issued by the establishment for the sale of goods or services
to the senior citizen.

(3) Only the actual amount of the discount granted or a sales discount
not exceeding 20% of the gross selling price can be deducted from
the gross income, net of value added tax, if applicable, for income tax
purposes, and from gross sales or gross receipts of the business
enterprise concerned, for VAT or other percentage tax purposes.

(4) The discount can only be allowed as deduction from gross income
for the same taxable year that the discount is granted.

(5) The business establishment giving sales discounts to qualified

senior citizens is required to keep separate and accurate record[s] of
sales, which shall include the name of the senior citizen, TIN, OSCA
ID, gross sales/receipts, sales discount granted, [date] of [transaction]
and invoice number for every sale transaction to senior citizen.
(6) Only the following business establishments which granted sales
discount to senior citizens on their sale of goods and/or services may
claim the said discount granted as deduction from gross income,
namely:

xxxx

(i) Funeral parlors and similar establishments – The beneficiary or any

person who shall shoulder the funeral and burial expenses of the
deceased senior citizen shall claim the discount, such as casket,
embalmment, cremation cost and other related services for the senior
citizen upon payment and presentation of [his] death certificate.

The DSWD likewise issued its own Rules and Regulations

Implementing RA 9257, to wit:

RULE VI DISCOUNTS AS TAX DEDUCTION OF ESTABLISHMENTS

Article 8. Tax Deduction of Establishments. – The establishment may

claim the discounts granted under Rule V, Section 4 – Discounts for
Establishments, Section 9, Medical and Dental Services in Private
Facilities and Sections 10 and 11 – Air, Sea and Land Transportation
as tax deduction based on the net cost of the goods sold or services
rendered.

Provided, That the cost of the discount shall be allowed as deduction

from gross income for the same taxable year that the discount is
granted; Provided, further, That the total amount of the claimed tax
deduction net of value added tax if applicable, shall be included in
their gross sales receipts for tax purposes and shall be subject to
proper documentation and to the provisions of the National Internal
Revenue Code, as amended; Provided, finally, that the
implementation of the tax deduction shall be subject to the Revenue
Regulations to be issued by the Bureau of Internal Revenue (BIR) and
approved by the Department of Finance (DOF).

Feeling aggrieved by the tax deduction scheme, petitioners filed the

present recourse, praying that Section 4 of RA 7432, as amended by
RA 9257, and the implementing rules and regulations issued by the
DSWD and the DOF be declared unconstitutional insofar as these
allow business establishments to claim the 20% discount given to
senior citizens as a tax deduction; that the DSWD and the DOF be
prohibited from enforcing the same; and that the tax credit treatment
of the 20% discount under the former Section 4 (a) of RA 7432 be
reinstated.

Issues

Petitioners raise the following issues:

A.

WHETHER THE PETITION PRESENTS AN ACTUAL CASE OR

CONTROVERSY.

B.

WHETHER SECTION 4 OF REPUBLIC ACT NO. 9257 AND X X X ITS

IMPLEMENTING RULES AND REGULATIONS, INSOFAR AS THEY
PROVIDE THAT THE TWENTY PERCENT (20%) DISCOUNT TO
SENIOR CITIZENS MAY BE CLAIMED AS A TAX DEDUCTION BY THE
P R I VAT E E S TA B L I S H M E N T S , A R E I N VA L I D A N D
UNCONSTITUTIONAL.9

Petitioners’ Arguments

Petitioners emphasize that they are not questioning the 20% discount
granted to senior citizens but are only assailing the constitutionality of
the tax deduction scheme prescribed under RA 9257 and the
implementing rules and regulations issued by the DSWD and the
DOF.10

Petitioners posit that the tax deduction scheme contravenes Article III,
Section 9 of the Constitution, which provides that: "[p]rivate property
shall not be taken for public use without just compensation."11

In support of their position, petitioners cite Central Luzon Drug

Corporation,12 where it was ruled that the 20% discount privilege
constitutes taking of private property for public use which requires the
payment of just compensation,13 and Carlos Superdrug Corporation
v. Department of Social Welfare and Development,14 where it was
acknowledged that the tax deduction scheme does not meet the
definition of just compensation.15

Petitioners likewise seek a reversal of the ruling in Carlos Superdrug

Corporation16 that the tax deduction scheme adopted by the
government is justified by police power.17

They assert that "[a]lthough both police power and the power of
eminent domain have the general welfare for their object, there are
still traditional distinctions between the two"18 and that "eminent
domain cannot be made less supreme than police power."19

Petitioners further claim that the legislature, in amending RA 7432,

relied on an erroneous contemporaneous construction that prior
payment of taxes is required for tax credit.20

Petitioners also contend that the tax deduction scheme violates

Article XV, Section 421 and Article XIII, Section 1122 of the
Constitution because it shifts the State’s constitutional mandate or
duty of improving the welfare of the elderly to the private sector.23

Under the tax deduction scheme, the private sector shoulders 65% of
the discount because only 35%24 of it is actually returned by the
government.25

Consequently, the implementation of the tax deduction scheme

prescribed under Section 4 of RA 9257 affects the businesses of
petitioners.26

Thus, there exists an actual case or controversy of transcendental

importance which deserves judicious disposition on the merits by the
highest court of the land.27

Respondents’ Arguments
Respondents, on the other hand, question the filing of the instant
Petition directly with the Supreme Court as this disregards the
hierarchy of courts.28

They likewise assert that there is no justiciable controversy as

petitioners failed to prove that the tax deduction treatment is not a
"fair and full equivalent of the loss sustained" by them.29

As to the constitutionality of RA 9257 and its implementing rules and

regulations, respondents contend that petitioners failed to overturn
its presumption of constitutionality.30

More important, respondents maintain that the tax deduction scheme

is a legitimate exercise of the State’s police power.31

Our Ruling

The Petition lacks merit.

There exists an actual case or controversy.

We shall first resolve the procedural issue. When the constitutionality

of a law is put in issue, judicial review may be availed of only if the
following requisites concur: "(1) the existence of an actual and
appropriate case; (2) the existence of personal and substantial interest
on the part of the party raising the [question of constitutionality]; (3)
recourse to judicial review is made at the earliest opportunity; and (4)
the [question of constitutionality] is the lis mota of the case."32

In this case, petitioners are challenging the constitutionality of the tax

deduction scheme provided in RA 9257 and the implementing rules
and regulations issued by the DSWD and the DOF. Respondents,
however, oppose the Petition on the ground that there is no actual
case or controversy. We do not agree with respondents. An actual
case or controversy exists when there is "a conflict of legal rights" or
"an assertion of opposite legal claims susceptible of judicial
resolution."33
The Petition must therefore show that "the governmental act being
challenged has a direct adverse effect on the individual challenging
it."34

In this case, the tax deduction scheme challenged by petitioners has a

direct adverse effect on them. Thus, it cannot be denied that there
exists an actual case or controversy.

The validity of the 20% senior citizen discount and tax deduction
scheme under RA 9257, as an exercise of police power of the State,
has already been settled in Carlos Superdrug Corporation.

Petitioners posit that the resolution of this case lies in the

determination of whether the legally mandated 20% senior citizen
discount is an exercise of police power or eminent domain. If it is
police power, no just compensation is warranted. But if it is eminent
domain, the tax deduction scheme is unconstitutional because it is
not a peso for peso reimbursement of the 20% discount given to
senior citizens. Thus, it constitutes taking of private property without
payment of just compensation. At the outset, we note that this
question has been settled in Carlos Superdrug Corporation.35

In that case, we ruled:

Petitioners assert that Section 4(a) of the law is unconstitutional

because it constitutes deprivation of private property. Compelling
drugstore owners and establishments to grant the discount will result
in a loss of profit and capital because 1) drugstores impose a mark-up
of only 5% to 10% on branded medicines; and 2) the law failed to
provide a scheme whereby drugstores will be justly compensated for
the discount. Examining petitioners’ arguments, it is apparent that
what petitioners are ultimately questioning is the validity of the tax
deduction scheme as a reimbursement mechanism for the twenty
percent (20%) discount that they extend to senior citizens. Based on
the afore-stated DOF Opinion, the tax deduction scheme does not
fully reimburse petitioners for the discount privilege accorded to
senior citizens. This is because the discount is treated as a deduction,
a tax-deductible expense that is subtracted from the gross income
and results in a lower taxable income. Stated otherwise, it is an
amount that is allowed by law to reduce the income prior to the
application of the tax rate to compute the amount of tax which is due.
Being a tax deduction, the discount does not reduce taxes owed on a
peso for peso basis but merely offers a fractional reduction in taxes
owed. Theoretically, the treatment of the discount as a deduction
reduces the net income of the private establishments concerned. The
discounts given would have entered the coffers and formed part of
the gross sales of the private establishments, were it not for R.A. No.
9257. The permanent reduction in their total revenues is a forced
subsidy corresponding to the taking of private property for public use
or benefit. This constitutes compensable taking for which petitioners
would ordinarily become entitled to a just compensation. Just
compensation is defined as the full and fair equivalent of the property
taken from its owner by the expropriator. The measure is not the
taker’s gain but the owner’s loss. The word just is used to intensify the
meaning of the word compensation, and to convey the idea that the
equivalent to be rendered for the property to be taken shall be real,
substantial, full and ample. A tax deduction does not offer full
reimbursement of the senior citizen discount. As such, it would not
meet the definition of just compensation. Having said that, this raises
the question of whether the State, in promoting the health and
welfare of a special group of citizens, can impose upon private
establishments the burden of partly subsidizing a government
program. The Court believes so. The Senior Citizens Act was enacted
primarily to maximize the contribution of senior citizens to nation-
building, and to grant benefits and privileges to them for their
improvement and well-being as the State considers them an integral
part of our society. The priority given to senior citizens finds its basis
in the Constitution as set forth in the law itself.1âwphi1 Thus, the Act
provides: SEC. 2. Republic Act No. 7432 is hereby amended to read
as follows:

SECTION 1. Declaration of Policies and Objectives. — Pursuant to

Article XV, Section 4 of the Constitution, it is the duty of the family to
take care of its elderly members while the State may design programs
of social security for them. In addition to this, Section 10 in the
Declaration of Principles and State Policies provides: "The State shall
provide social justice in all phases of national development." Further,
Article XIII, Section 11, provides: "The State shall adopt an integrated
and comprehensive approach to health development which shall
endeavor to make essential goods, health and other social services
available to all the people at affordable cost. There shall be priority
for the needs of the underprivileged sick, elderly, disabled, women
and children." Consonant with these constitutional principles the
following are the declared policies of this Act:

xxx xxx xxx

(f) To recognize the important role of the private sector in the

improvement of the welfare of senior citizens and to actively seek
their partnership.

To implement the above policy, the law grants a twenty percent

discount to senior citizens for medical and dental services, and
diagnostic and laboratory fees; admission fees charged by theaters,
concert halls, circuses, carnivals, and other similar places of culture,
leisure and amusement; fares for domestic land, air and sea travel;
utilization of services in hotels and similar lodging establishments,
restaurants and recreation centers; and purchases of medicines for the
exclusive use or enjoyment of senior citizens. As a form of
reimbursement, the law provides that business establishments
extending the twenty percent discount to senior citizens may claim
the discount as a tax deduction. The law is a legitimate exercise of
police power which, similar to the power of eminent domain, has
general welfare for its object. Police power is not capable of an exact
definition, but has been purposely veiled in general terms to
underscore its comprehensiveness to meet all exigencies and provide
enough room for an efficient and flexible response to conditions and
circumstances, thus assuring the greatest benefits. Accordingly, it has
been described as "the most essential, insistent and the least
limitable of powers, extending as it does to all the great public
needs." It is "[t]he power vested in the legislature by the constitution
to make, ordain, and establish all manner of wholesome and
reasonable laws, statutes, and ordinances, either with penalties or
without, not repugnant to the constitution, as they shall judge to be
for the good and welfare of the commonwealth, and of the subjects
of the same." For this reason, when the conditions so demand as
determined by the legislature, property rights must bow to the
primacy of police power because property rights, though sheltered by
due process, must yield to general welfare. Police power as an
attribute to promote the common good would be diluted
considerably if on the mere plea of petitioners that they will suffer loss
of earnings and capital, the questioned provision is invalidated.
Moreover, in the absence of evidence demonstrating the alleged
confiscatory effect of the provision in question, there is no basis for its
nullification in view of the presumption of validity which every law has
in its favor. Given these, it is incorrect for petitioners to insist that the
grant of the senior citizen discount is unduly oppressive to their
business, because petitioners have not taken time to calculate
correctly and come up with a financial report, so that they have not
been able to show properly whether or not the tax deduction scheme
really works greatly to their disadvantage. In treating the discount as a
tax deduction, petitioners insist that they will incur losses because,
referring to the DOF Opinion, for every ₱1.00 senior citizen discount
that petitioners would give, P0.68 will be shouldered by them as only
P0.32 will be refunded by the government by way of a tax deduction.
To illustrate this point, petitioner Carlos Super Drug cited the anti-
hypertensive maintenance drug Norvasc as an example. According to
the latter, it acquires Norvasc from the distributors at ₱37.57 per
tablet, and retails it at ₱39.60 (or at a margin of 5%). If it grants a 20%
discount to senior citizens or an amount equivalent to ₱7.92, then it
would have to sell Norvasc at ₱31.68 which translates to a loss from
capital of ₱5.89 per tablet. Even if the government will allow a tax
deduction, only ₱2.53 per tablet will be refunded and not the full
amount of the discount which is ₱7.92. In short, only 32% of the 20%
discount will be reimbursed to the drugstores. Petitioners’
computation is flawed. For purposes of reimbursement, the law states
that the cost of the discount shall be deducted from gross income,
the amount of income derived from all sources before deducting
allowable expenses, which will result in net income. Here, petitioners
tried to show a loss on a per transaction basis, which should not be
the case. An income statement, showing an accounting of petitioners'
sales, expenses, and net profit (or loss) for a given period could have
accurately reflected the effect of the discount on their income. Absent
any financial statement, petitioners cannot substantiate their claim
that they will be operating at a loss should they give the discount. In
addition, the computation was erroneously based on the assumption
that their customers consisted wholly of senior citizens. Lastly, the
32% tax rate is to be imposed on income, not on the amount of the
discount.

Furthermore, it is unfair for petitioners to criticize the law because

they cannot raise the prices of their medicines given the cutthroat
nature of the players in the industry. It is a business decision on the
part of petitioners to peg the mark-up at 5%. Selling the medicines
below acquisition cost, as alleged by petitioners, is merely a result of
this decision. Inasmuch as pricing is a property right, petitioners
cannot reproach the law for being oppressive, simply because they
cannot afford to raise their prices for fear of losing their customers to
competition. The Court is not oblivious of the retail side of the
pharmaceutical industry and the competitive pricing component of
the business. While the Constitution protects property rights,
petitioners must accept the realities of business and the State, in the
exercise of police power, can intervene in the operations of a business
which may result in an impairment of property rights in the process.

Moreover, the right to property has a social dimension. While Article

XIII of the Constitution provides the precept for the protection of
property, various laws and jurisprudence, particularly on agrarian
reform and the regulation of contracts and public utilities,
continuously serve as x x x reminder[s] that the right to property can
be relinquished upon the command of the State for the promotion of
public good. Undeniably, the success of the senior citizens program
rests largely on the support imparted by petitioners and the other
private establishments concerned. This being the case, the means
employed in invoking the active participation of the private sector, in
order to achieve the purpose or objective of the law, is reasonably
and directly related. Without sufficient proof that Section 4 (a) of R.A.
No. 9257 is arbitrary, and that the continued implementation of the
same would be unconscionably detrimental to petitioners, the Court
will refrain from quashing a legislative act.36 (Bold in the original;
underline supplied)

We, thus, found that the 20% discount as well as the tax deduction
scheme is a valid exercise of the police power of the State.
No compelling reason has been proffered to overturn, modify or
abandon the ruling in Carlos Superdrug Corporation.

Petitioners argue that we have previously ruled in Central Luzon Drug

Corporation37 that the 20% discount is an exercise of the power of
eminent domain, thus, requiring the payment of just compensation.
They urge us to re-examine our ruling in Carlos Superdrug
Corporation38 which allegedly reversed the ruling in Central Luzon
Drug Corporation.39

They also point out that Carlos Superdrug Corporation40 recognized

that the tax deduction scheme under the assailed law does not
provide for sufficient just compensation. We agree with petitioners’
observation that there are statements in Central Luzon Drug
Corporation41 describing the 20% discount as an exercise of the
power of eminent domain, viz.:

[T]he privilege enjoyed by senior citizens does not come directly from
the State, but rather from the private establishments concerned.
Accordingly, the tax credit benefit granted to these establishments
can be deemed as their just compensation for private property taken
by the State for public use. The concept of public use is no longer
confined to the traditional notion of use by the public, but held
synonymous with public interest, public benefit, public welfare, and
public convenience. The discount privilege to which our senior
citizens are entitled is actually a benefit enjoyed by the general public
to which these citizens belong. The discounts given would have
entered the coffers and formed part of the gross sales of the private
establishments concerned, were it not for RA 7432. The permanent
reduction in their total revenues is a forced subsidy corresponding to
the taking of private property for public use or benefit. As a result of
the 20 percent discount imposed by RA 7432, respondent becomes
entitled to a just compensation. This term refers not only to the
issuance of a tax credit certificate indicating the correct amount of the
discounts given, but also to the promptness in its release. Equivalent
to the payment of property taken by the State, such issuance — when
not done within a reasonable time from the grant of the discounts —
cannot be considered as just compensation. In effect, respondent is
made to suffer the consequences of being immediately deprived of
its revenues while awaiting actual receipt, through the certificate, of
the equivalent amount it needs to cope with the reduction in its
revenues. Besides, the taxation power can also be used as an
implement for the exercise of the power of eminent domain. Tax
measures are but "enforced contributions exacted on pain of penal
sanctions" and "clearly imposed for a public purpose." In recent
years, the power to tax has indeed become a most effective tool to
realize social justice, public welfare, and the equitable distribution of
wealth. While it is a declared commitment under Section 1 of RA
7432, social justice "cannot be invoked to trample on the rights of
property owners who under our Constitution and laws are also
entitled to protection. The social justice consecrated in our
[C]onstitution [is] not intended to take away rights from a person and
give them to another who is not entitled thereto." For this reason, a
just compensation for income that is taken away from respondent
becomes necessary. It is in the tax credit that our legislators find
support to realize social justice, and no administrative body can alter
that fact. To put it differently, a private establishment that merely
breaks even — without the discounts yet — will surely start to incur
losses because of such discounts. The same effect is expected if its
mark-up is less than 20 percent, and if all its sales come from retail
purchases by senior citizens. Aside from the observation we have
already raised earlier, it will also be grossly unfair to an establishment
if the discounts will be treated merely as deductions from either its
gross income or its gross sales.1âwphi1 Operating at a loss through
no fault of its own, it will realize that the tax credit limitation under RR
2-94 is inutile, if not improper. Worse, profit-generating businesses
will be put in a better position if they avail themselves of tax credits
denied those that are losing, because no taxes are due from the latter.
42 (Italics in the original; emphasis supplied)

The above was partly incorporated in our ruling in Carlos Superdrug

Corporation43 when we stated preliminarily that—

Petitioners assert that Section 4(a) of the law is unconstitutional

because it constitutes deprivation of private property. Compelling
drugstore owners and establishments to grant the discount will result
in a loss of profit and capital because 1) drugstores impose a mark-up
of only 5% to 10% on branded medicines; and 2) the law failed to
provide a scheme whereby drugstores will be justly compensated for
the discount. Examining petitioners’ arguments, it is apparent that
what petitioners are ultimately questioning is the validity of the tax
deduction scheme as a reimbursement mechanism for the twenty
percent (20%) discount that they extend to senior citizens. Based on
the afore-stated DOF Opinion, the tax deduction scheme does not
fully reimburse petitioners for the discount privilege accorded to
senior citizens. This is because the discount is treated as a deduction,
a tax-deductible expense that is subtracted from the gross income
and results in a lower taxable income. Stated otherwise, it is an
amount that is allowed by law to reduce the income prior to the
application of the tax rate to compute the amount of tax which is due.
Being a tax deduction, the discount does not reduce taxes owed on a
peso for peso basis but merely offers a fractional reduction in taxes
owed. Theoretically, the treatment of the discount as a deduction
reduces the net income of the private establishments concerned. The
discounts given would have entered the coffers and formed part of
the gross sales of the private establishments, were it not for R.A. No.
9257. The permanent reduction in their total revenues is a forced
subsidy corresponding to the taking of private property for public use
or benefit. This constitutes compensable taking for which petitioners
would ordinarily become entitled to a just compensation. Just
compensation is defined as the full and fair equivalent of the property
taken from its owner by the expropriator. The measure is not the
taker’s gain but the owner’s loss. The word just is used to intensify the
meaning of the word compensation, and to convey the idea that the
equivalent to be rendered for the property to be taken shall be real,
substantial, full and ample. A tax deduction does not offer full
reimbursement of the senior citizen discount. As such, it would not
meet the definition of just compensation. Having said that, this raises
the question of whether the State, in promoting the health and
welfare of a special group of citizens, can impose upon private
establishments the burden of partly subsidizing a government
program. The Court believes so.44

This, notwithstanding, we went on to rule in Carlos Superdrug

Corporation45 that the 20% discount and tax deduction scheme is a
valid exercise of the police power of the State. The present case, thus,
affords an opportunity for us to clarify the above-quoted statements
in Central Luzon Drug Corporation46 and Carlos Superdrug
Corporation.47

First, we note that the above-quoted disquisition on eminent domain

in Central Luzon Drug Corporation48 is obiter dicta and, thus, not
binding precedent. As stated earlier, in Central Luzon Drug
Corporation,49 we ruled that the BIR acted ultra vires when it
effectively treated the 20% discount as a tax deduction, under
Sections 2.i and 4 of RR No. 2-94, despite the clear wording of the
previous law that the same should be treated as a tax credit. We
were, therefore, not confronted in that case with the issue as to
whether the 20% discount is an exercise of police power or eminent
domain. Second, although we adverted to Central Luzon Drug
Corporation50 in our ruling in Carlos Superdrug Corporation,51 this
referred only to preliminary matters. A fair reading of Carlos
Superdrug Corporation52 would show that we categorically ruled
therein that the 20% discount is a valid exercise of police power. Thus,
even if the current law, through its tax deduction scheme (which
abandoned the tax credit scheme under the previous law), does not
provide for a peso for peso reimbursement of the 20% discount given
by private establishments, no constitutional infirmity obtains because,
being a valid exercise of police power, payment of just compensation
is not warranted. We have carefully reviewed the basis of our ruling in
Carlos Superdrug Corporation53 and we find no cogent reason to
overturn, modify or abandon it. We also note that petitioners’
arguments are a mere reiteration of those raised and resolved in
Carlos Superdrug Corporation.54 Thus, we sustain Carlos Superdrug
Corporation.55

Nonetheless, we deem it proper, in what follows, to amplify our

explanation in Carlos Superdrug Corporation56 as to why the 20%
discount is a valid exercise of police power and why it may not, under
the specific circumstances of this case, be considered as an exercise
of the power of eminent domain contrary to the obiter in Central
Luzon Drug Corporation.57

Police power versus eminent domain.

Police power is the inherent power of the State to regulate or to
restrain the use of liberty and property for public welfare.58

The only limitation is that the restriction imposed should be

reasonable, not oppressive.59

In other words, to be a valid exercise of police power, it must have a

lawful subject or objective and a lawful method of accomplishing the
goal.60

Under the police power of the State, "property rights of individuals

may be subjected to restraints and burdens in order to fulfill the
objectives of the government."61

The State "may interfere with personal liberty, property, lawful

businesses and occupations to promote the general welfare [as long
as] the interference [is] reasonable and not arbitrary."62

Eminent domain, on the other hand, is the inherent power of the

State to take or appropriate private property for public use.63

The Constitution, however, requires that private property shall not be

taken without due process of law and the payment of just
compensation.64

Traditional distinctions exist between police power and eminent

domain. In the exercise of police power, a property right is impaired
by regulation,65 or the use of property is merely prohibited,
regulated or restricted66 to promote public welfare. In such cases,
there is no compensable taking, hence, payment of just
compensation is not required. Examples of these regulations are
property condemned for being noxious or intended for noxious
purposes (e.g., a building on the verge of collapse to be demolished
for public safety, or obscene materials to be destroyed in the interest
of public morals)67 as well as zoning ordinances prohibiting the use of
property for purposes injurious to the health, morals or safety of the
community (e.g., dividing a city’s territory into residential and
industrial areas).68
It has, thus, been observed that, in the exercise of police power (as
distinguished from eminent domain), although the regulation affects
the right of ownership, none of the bundle of rights which constitute
ownership is appropriated for use by or for the benefit of the public.
69

On the other hand, in the exercise of the power of eminent domain,

property interests are appropriated and applied to some public
purpose which necessitates the payment of just compensation
therefor. Normally, the title to and possession of the property are
transferred to the expropriating authority. Examples include the
acquisition of lands for the construction of public highways as well as
agricultural lands acquired by the government under the agrarian
reform law for redistribution to qualified farmer beneficiaries.
However, it is a settled rule that the acquisition of title or total
destruction of the property is not essential for "taking" under the
power of eminent domain to be present.70

Examples of these include establishment of easements such as where

the land owner is perpetually deprived of his proprietary rights
because of the hazards posed by electric transmission lines
constructed above his property71 or the compelled interconnection
of the telephone system between the government and a private
company.72

In these cases, although the private property owner is not divested of

ownership or possession, payment of just compensation is warranted
because of the burden placed on the property for the use or benefit
of the public.

The 20% senior citizen discount is an exercise of police power.

It may not always be easy to determine whether a challenged

governmental act is an exercise of police power or eminent domain.
The very nature of police power as elastic and responsive to various
social conditions73 as well as the evolving meaning and scope of
public use74 and just compensation75 in eminent domain evinces
that these are not static concepts. Because of the exigencies of
rapidly changing times, Congress may be compelled to adopt or
experiment with different measures to promote the general welfare
which may not fall squarely within the traditionally recognized
categories of police power and eminent domain. The judicious
approach, therefore, is to look at the nature and effects of the
challenged governmental act and decide, on the basis thereof,
whether the act is the exercise of police power or eminent domain.
Thus, we now look at the nature and effects of the 20% discount to
determine if it constitutes an exercise of police power or eminent
domain. The 20% discount is intended to improve the welfare of
senior citizens who, at their age, are less likely to be gainfully
employed, more prone to illnesses and other disabilities, and, thus, in
need of subsidy in purchasing basic commodities. It may not be amiss
to mention also that the discount serves to honor senior citizens who
presumably spent the productive years of their lives on contributing
to the development and progress of the nation. This distinct cultural
Filipino practice of honoring the elderly is an integral part of this law.
As to its nature and effects, the 20% discount is a regulation affecting
the ability of private establishments to price their products and
services relative to a special class of individuals, senior citizens, for
which the Constitution affords preferential concern.76

In turn, this affects the amount of profits or income/gross sales that a

private establishment can derive from senior citizens. In other words,
the subject regulation affects the pricing, and, hence, the profitability
of a private establishment. However, it does not purport to
appropriate or burden specific properties, used in the operation or
conduct of the business of private establishments, for the use or
benefit of the public, or senior citizens for that matter, but merely
regulates the pricing of goods and services relative to, and the
amount of profits or income/gross sales that such private
establishments may derive from, senior citizens. The subject
regulation may be said to be similar to, but with substantial
distinctions from, price control or rate of return on investment control
laws which are traditionally regarded as police power measures.77

These laws generally regulate public utilities or industries/enterprises

imbued with public interest in order to protect consumers from
exorbitant or unreasonable pricing as well as temper corporate greed
by controlling the rate of return on investment of these corporations
considering that they have a monopoly over the goods or services
that they provide to the general public. The subject regulation differs
therefrom in that (1) the discount does not prevent the establishments
from adjusting the level of prices of their goods and services, and (2)
the discount does not apply to all customers of a given establishment
but only to the class of senior citizens. Nonetheless, to the degree
material to the resolution of this case, the 20% discount may be
properly viewed as belonging to the category of price regulatory
measures which affect the profitability of establishments subjected
thereto. On its face, therefore, the subject regulation is a police
power measure. The obiter in Central Luzon Drug Corporation,78
however, describes the 20% discount as an exercise of the power of
eminent domain and the tax credit, under the previous law, equivalent
to the amount of discount given as the just compensation therefor.
The reason is that (1) the discount would have formed part of the
gross sales of the establishment were it not for the law prescribing the
20% discount, and (2) the permanent reduction in total revenues is a
forced subsidy corresponding to the taking of private property for
public use or benefit. The flaw in this reasoning is in its premise. It
presupposes that the subject regulation, which impacts the pricing
and, hence, the profitability of a private establishment, automatically
amounts to a deprivation of property without due process of law. If
this were so, then all price and rate of return on investment control
laws would have to be invalidated because they impact, at some
level, the regulated establishment’s profits or income/gross sales, yet
there is no provision for payment of just compensation. It would also
mean that overnment cannot set price or rate of return on investment
limits, which reduce the profits or income/gross sales of private
establishments, if no just compensation is paid even if the measure is
not confiscatory. The obiter is, thus, at odds with the settled octrine
that the State can employ police power measures to regulate the
pricing of goods and services, and, hence, the profitability of business
establishments in order to pursue legitimate State objectives for the
common good, provided that the regulation does not go too far as to
amount to "taking."79

In City of Manila v. Laguio, Jr.,80 we recognized that— x x x a taking

also could be found if government regulation of the use of property
went "too far." When regulation reaches a certain magnitude, in most
if not in all cases there must be an exercise of eminent domain and
compensation to support the act. While property may be regulated to
a certain extent, if regulation goes too far it will be recognized as a
taking. No formula or rule can be devised to answer the questions of
what is too far and when regulation becomes a taking. In Mahon,
Justice Holmes recognized that it was "a question of degree and
therefore cannot be disposed of by general propositions." On many
other occasions as well, the U.S. Supreme Court has said that the
issue of when regulation constitutes a taking is a matter of
considering the facts in each case. The Court asks whether justice and
fairness require that the economic loss caused by public action must
be compensated by the government and thus borne by the public as
a whole, or whether the loss should remain concentrated on those
few persons subject to the public action.81

The impact or effect of a regulation, such as the one under

consideration, must, thus, be determined on a case-to-case basis.
Whether that line between permissible regulation under police power
and "taking" under eminent domain has been crossed must, under
the specific circumstances of this case, be subject to proof and the
one assailing the constitutionality of the regulation carries the heavy
burden of proving that the measure is unreasonable, oppressive or
confiscatory. The time-honored rule is that the burden of proving the
unconstitutionality of a law rests upon the one assailing it and "the
burden becomes heavier when police power is at issue."82

The 20% senior citizen discount has not been shown to be

unreasonable, oppressive or confiscatory.

In Alalayan v. National Power Corporation,83 petitioners, who were

franchise holders of electric plants, challenged the validity of a law
limiting their allowable net profits to no more than 12% per annum of
their investments plus two-month operating expenses. In rejecting
their plea, we ruled that, in an earlier case, it was found that 12% is a
reasonable rate of return and that petitioners failed to prove that the
aforesaid rate is confiscatory in view of the presumption of
constitutionality.84
We adopted a similar line of reasoning in Carlos Superdrug
Corporation85 when we ruled that petitioners therein failed to prove
that the 20% discount is arbitrary, oppressive or confiscatory. We
noted that no evidence, such as a financial report, to establish the
impact of the 20% discount on the overall profitability of petitioners
was presented in order to show that they would be operating at a loss
due to the subject regulation or that the continued implementation of
the law would be unconscionably detrimental to the business
operations of petitioners. In the case at bar, petitioners proceeded
with a hypothetical computation of the alleged loss that they will
suffer similar to what the petitioners in Carlos Superdrug
Corporation86 did. Petitioners went directly to this Court without first
establishing the factual bases of their claims. Hence, the present
recourse must, likewise, fail. Because all laws enjoy the presumption
of constitutionality, courts will uphold a law’s validity if any set of facts
may be conceived to sustain it.87

On its face, we find that there are at least two conceivable bases to
sustain the subject regulation’s validity absent clear and convincing
proof that it is unreasonable, oppressive or confiscatory. Congress
may have legitimately concluded that business establishments have
the capacity to absorb a decrease in profits or income/gross sales due
to the 20% discount without substantially affecting the reasonable
rate of return on their investments considering (1) not all customers of
a business establishment are senior citizens and (2) the level of its
profit margins on goods and services offered to the general public.
Concurrently, Congress may have, likewise, legitimately concluded
that the establishments, which will be required to extend the 20%
discount, have the capacity to revise their pricing strategy so that
whatever reduction in profits or income/gross sales that they may
sustain because of sales to senior citizens, can be recouped through
higher mark-ups or from other products not subject of discounts. As a
result, the discounts resulting from sales to senior citizens will not be
confiscatory or unduly oppressive. In sum, we sustain our ruling in
Carlos Superdrug Corporation88 that the 20% senior citizen discount
and tax deduction scheme are valid exercises of police power of the
State absent a clear showing that it is arbitrary, oppressive or
confiscatory.
Conclusion

In closing, we note that petitioners hypothesize, consistent with our

previous ratiocinations, that the discount will force establishments to
raise their prices in order to compensate for its impact on overall
profits or income/gross sales. The general public, or those not
belonging to the senior citizen class, are, thus, made to effectively
shoulder the subsidy for senior citizens. This, in petitioners’ view, is
unfair.

As already mentioned, Congress may be reasonably assumed to have

foreseen this eventuality. But, more importantly, this goes into the
wisdom, efficacy and expediency of the subject law which is not
proper for judicial review. In a way, this law pursues its social equity
objective in a non-traditional manner unlike past and existing direct
subsidy programs of the government for the poor and marginalized
sectors of our society. Verily, Congress must be given sufficient leeway
in formulating welfare legislations given the enormous challenges that
the government faces relative to, among others, resource adequacy
and administrative capability in implementing social reform measures
which aim to protect and uphold the interests of those most
vulnerable in our society. In the process, the individual, who enjoys
the rights, benefits and privileges of living in a democratic polity, must
bear his share in supporting measures intended for the common
good. This is only fair. In fine, without the requisite showing of a clear
and unequivocal breach of the Constitution, the validity of the
assailed law must be sustained.

Refutation of the Dissent

The main points of Justice Carpio’s Dissent may be summarized as

follows: (1) the discussion on eminent domain in Central Luzon Drug
Corporation89 is not obiter dicta ; (2) allowable taking, in police
power, is limited to property that is destroyed or placed outside the
commerce of man for public welfare; (3) the amount of mandatory
discount is private property within the ambit of Article III, Section 990
of the Constitution; and (4) the permanent reduction in a private
establishment’s total revenue, arising from the mandatory discount, is
a taking of private property for public use or benefit, hence, an
exercise of the power of eminent domain requiring the payment of
just compensation. I We maintain that the discussion on eminent
domain in Central Luzon Drug Corporation91 is obiter dicta. As
previously discussed, in Central Luzon Drug Corporation,92 the BIR,
pursuant to Sections 2.i and 4 of RR No. 2-94, treated the senior
citizen discount in the previous law, RA 7432, as a tax deduction
instead of a tax credit despite the clear provision in that law which
stated –

SECTION 4. Privileges for the Senior Citizens. – The senior citizens

shall be entitled to the following:

a) The grant of twenty percent (20%) discount from all establishments

relative to utilization of transportation services, hotels and similar
lodging establishment, restaurants and recreation centers and
purchase of medicines anywhere in the country: Provided, That
private establishments may claim the cost as tax credit; (Emphasis
supplied)

Thus, the Court ruled that the subject revenue regulation violated the
law, viz:

The 20 percent discount required by the law to be given to senior

citizens is a tax credit, not merely a tax deduction from the gross
income or gross sale of the establishment concerned. A tax credit is
used by a private establishment only after the tax has been
computed; a tax deduction, before the tax is computed. RA 7432
unconditionally grants a tax credit to all covered entities. Thus, the
provisions of the revenue regulation that withdraw or modify such
grant are void. Basic is the rule that administrative regulations cannot
amend or revoke the law.93

As can be readily seen, the discussion on eminent domain was not

necessary in order to arrive at this conclusion. All that was needed
was to point out that the revenue regulation contravened the law
which it sought to implement. And, precisely, this was done in Central
Luzon Drug Corporation94 by comparing the wording of the previous
law vis-à-vis the revenue regulation; employing the rules of statutory
construction; and applying the settled principle that a regulation
cannot amend the law it seeks to implement. A close reading of
Central Luzon Drug Corporation95 would show that the Court went
on to state that the tax credit "can be deemed" as just compensation
only to explain why the previous law provides for a tax credit instead
of a tax deduction. The Court surmised that the tax credit was a form
of just compensation given to the establishments covered by the 20%
discount. However, the reason why the previous law provided for a tax
credit and not a tax deduction was not necessary to resolve the issue
as to whether the revenue regulation contravenes the law. Hence, the
discussion on eminent domain is obiter dicta.

A court, in resolving cases before it, may look into the possible
purposes or reasons that impelled the enactment of a particular
statute or legal provision. However, statements made relative thereto
are not always necessary in resolving the actual controversies
presented before it. This was the case in Central Luzon Drug
Corporation96 resulting in that unfortunate statement that the tax
credit "can be deemed" as just compensation. This, in turn, led to the
erroneous conclusion, by deductive reasoning, that the 20% discount
is an exercise of the power of eminent domain. The Dissent essentially
adopts this theory and reasoning which, as will be shown below, is
contrary to settled principles in police power and eminent domain
analysis. II The Dissent discusses at length the doctrine on "taking" in
police power which occurs when private property is destroyed or
placed outside the commerce of man. Indeed, there is a whole class
of police power measures which justify the destruction of private
property in order to preserve public health, morals, safety or welfare.
As earlier mentioned, these would include a building on the verge of
collapse or confiscated obscene materials as well as those mentioned
by the Dissent with regard to property used in violating a criminal
statute or one which constitutes a nuisance. In such cases, no
compensation is required. However, it is equally true that there is
another class of police power measures which do not involve the
destruction of private property but merely regulate its use. The
minimum wage law, zoning ordinances, price control laws, laws
regulating the operation of motels and hotels, laws limiting the
working hours to eight, and the like would fall under this category.
The examples cited by the Dissent, likewise, fall under this category:
Article 157 of the Labor Code, Sections 19 and 18 of the Social
Security Law, and Section 7 of the Pag-IBIG Fund Law. These laws
merely regulate or, to use the term of the Dissent, burden the conduct
of the affairs of business establishments. In such cases, payment of
just compensation is not required because they fall within the sphere
of permissible police power measures. The senior citizen discount law
falls under this latter category. III The Dissent proceeds from the
theory that the permanent reduction of profits or income/gross sales,
due to the 20% discount, is a "taking" of private property for public
purpose without payment of just compensation. At the outset, it must
be emphasized that petitioners never presented any evidence to
establish that they were forced to suffer enormous losses or operate
at a loss due to the effects of the assailed law. They came directly to
this Court and provided a hypothetical computation of the loss they
would allegedly suffer due to the operation of the assailed law. The
central premise of the Dissent’s argument that the 20% discount
results in a permanent reduction in profits or income/gross sales, or
forces a business establishment to operate at a loss is, thus, wholly
unsupported by competent evidence. To be sure, the Court can
invalidate a law which, on its face, is arbitrary, oppressive or
confiscatory.97

But this is not the case here.

In the case at bar, evidence is indispensable before a determination of

a constitutional violation can be made because of the following
reasons. First, the assailed law, by imposing the senior citizen
discount, does not take any of the properties used by a business
establishment like, say, the land on which a manufacturing plant is
constructed or the equipment being used to produce goods or
services. Second, rather than taking specific properties of a business
establishment, the senior citizen discount law merely regulates the
prices of the goods or services being sold to senior citizens by
mandating a 20% discount. Thus, if a product is sold at ₱10.00 to the
general public, then it shall be sold at ₱8.00 ( i.e., ₱10.00 less 20%) to
senior citizens. Note that the law does not impose at what specific
price the product shall be sold, only that a 20% discount shall be
given to senior citizens based on the price set by the business
establishment. A business establishment is, thus, free to adjust the
prices of the goods or services it provides to the general public.
Accordingly, it can increase the price of the above product to ₱20.00
but is required to sell it at ₱16.00 (i.e. , ₱20.00 less 20%) to senior
citizens. Third, because the law impacts the prices of the goods or
services of a particular establishment relative to its sales to senior
citizens, its profits or income/gross sales are affected. The extent of
the impact would, however, depend on the profit margin of the
business establishment on a particular good or service. If a product
costs ₱5.00 to produce and is sold at ₱10.00, then the profit98 is
₱5.0099 or a profit margin100 of 50%.101

Under the assailed law, the aforesaid product would have to be sold
at ₱8.00 to senior citizens yet the business would still earn ₱3.00102
or a 30%103 profit margin. On the other hand, if the product costs
₱9.00 to produce and is required to be sold at ₱8.00 to senior
citizens, then the business would experience a loss of ₱1.00.104

But note that since not all customers of a business establishment are
senior citizens, the business establishment may continue to earn
₱1.00 from non-senior citizens which, in turn, can offset any loss
arising from sales to senior citizens.

Fourth, when the law imposes the 20% discount in favor of senior
citizens, it does not prevent the business establishment from revising
its pricing strategy.

By revising its pricing strategy, a business establishment can recoup

any reduction of profits or income/gross sales which would otherwise
arise from the giving of the 20% discount. To illustrate, suppose A has
two customers: X, a senior citizen, and Y, a non-senior citizen. Prior to
the law, A sells his products at ₱10.00 a piece to X and Y resulting in
income/gross sales of ₱20.00 (₱10.00 + ₱10.00). With the passage of
the law, A must now sell his product to X at ₱8.00 (i.e., ₱10.00 less
20%) so that his income/gross sales would be ₱18.00 (₱8.00 +
₱10.00) or lower by ₱2.00. To prevent this from happening, A decides
to increase the price of his products to ₱11.11 per piece. Thus, he
sells his product to X at ₱8.89 (i.e. , ₱11.11 less 20%) and to Y at
₱11.11. As a result, his income/gross sales would still be ₱20.00105
(₱8.89 + ₱11.11). The capacity, then, of business establishments to
revise their pricing strategy makes it possible for them not to suffer
any reduction in profits or income/gross sales, or, in the alternative,
mitigate the reduction of their profits or income/gross sales even after
the passage of the law. In other words, business establishments have
the capacity to adjust their prices so that they may remain profitable
even under the operation of the assailed law.

The Dissent, however, states that – The explanation by the majority

that private establishments can always increase their prices to recover
the mandatory discount will only encourage private establishments to
adjust their prices upwards to the prejudice of customers who do not
enjoy the 20% discount. It was likewise suggested that if a company
increases its prices, despite the application of the 20% discount, the
establishment becomes more profitable than it was before the
implementation of R.A. 7432. Such an economic justification is self-
defeating, for more consumers will suffer from the price increase than
will benefit from the 20% discount. Even then, such ability to increase
prices cannot legally validate a violation of the eminent domain
clause.106

But, if it is possible that the business establishment, by adjusting its

prices, will suffer no reduction in its profits or income/gross sales (or
suffer some reduction but continue to operate profitably) despite
giving the discount, what would be the basis to strike down the law?
If it is possible that the business establishment, by adjusting its prices,
will not be unduly burdened, how can there be a finding that the
assailed law is an unconstitutional exercise of police power or eminent
domain? That there may be a burden placed on business
establishments or the consuming public as a result of the operation of
the assailed law is not, by itself, a ground to declare it
unconstitutional for this goes into the wisdom and expediency of the
law.

The cost of most, if not all, regulatory measures of the government on

business establishments is ultimately passed on to the consumers but
that, by itself, does not justify the wholesale nullification of these
measures. It is a basic postulate of our democratic system of
government that the Constitution is a social contract whereby the
people have surrendered their sovereign powers to the State for the
common good.107
All persons may be burdened by regulatory measures intended for
the common good or to serve some important governmental interest,
such as protecting or improving the welfare of a special class of
people for which the Constitution affords preferential concern.
Indubitably, the one assailing the law has the heavy burden of proving
that the regulation is unreasonable, oppressive or confiscatory, or has
gone "too far" as to amount to a "taking." Yet, here, the Dissent
would have this Court nullify the law without any proof of such nature.

Further, this Court is not the proper forum to debate the economic
theories or realities that impelled Congress to shift from the tax credit
to the tax deduction scheme. It is not within our power or
competence to judge which scheme is more or less burdensome to
business establishments or the consuming public and, thereafter, to
choose which scheme the State should use or pursue. The shift from
the tax credit to tax deduction scheme is a policy determination by
Congress and the Court will respect it for as long as there is no
showing, as here, that the subject regulation has transgressed
constitutional limitations. Unavoidably, the lack of evidence constrains
the Dissent to rely on speculative and hypothetical argumentation
when it states that the 20% discount is a significant amount and not a
minimal loss (which erroneously assumes that the discount
automatically results in a loss when it is possible that the profit margin
is greater than 20% and/or the pricing strategy can be revised to
prevent or mitigate any reduction in profits or income/gross sales as
illustrated above),108 and not all private establishments make a 20%
profit margin (which conversely implies that there are those who make
more and, thus, would not be greatly affected by this regulation).109

In fine, because of the possible scenarios discussed above, we cannot

assume that the 20% discount results in a permanent reduction in
profits or income/gross sales, much less that business establishments
are forced to operate at a loss under the assailed law. And, even if we
gratuitously assume that the 20% discount results in some degree of
reduction in profits or income/gross sales, we cannot assume that
such reduction is arbitrary, oppressive or confiscatory. To repeat, there
is no actual proof to back up this claim, and it could be that the loss
suffered by a business establishment was occasioned through its fault
or negligence in not adapting to the effects of the assailed law. The
law uniformly applies to all business establishments covered
thereunder. There is, therefore, no unjust discrimination as the
aforesaid business establishments are faced with the same
constraints. The necessity of proof is all the more pertinent in this case
because, as similarly observed by Justice Velasco in his Concurring
Opinion, the law has been in operation for over nine years now.
However, the grim picture painted by petitioners on the
unconscionable losses to be indiscriminately suffered by business
establishments, which should have led to the closure of numerous
business establishments, has not come to pass. Verily, we cannot
invalidate the assailed law based on assumptions and conjectures.
Without adequate proof, the presumption of constitutionality must
prevail. IV At this juncture, we note that the Dissent modified its
original arguments by including a new paragraph, to wit:

Section 9, Article III of the 1987 Constitution speaks of private

property without any distinction. It does not state that there should
be profit before the taking of property is subject to just
compensation. The private property referred to for purposes of taking
could be inherited, donated, purchased, mortgaged, or as in this
case, part of the gross sales of private establishments. They are all
private property and any taking should be attended by corresponding
payment of just compensation. The 20% discount granted to senior
citizens belong to private establishments, whether these
establishments make a profit or suffer a loss. In fact, the 20% discount
applies to non-profit establishments like country, social, or golf clubs
which are open to the public and not only for exclusive membership.
The issue of profit or loss to the establishments is immaterial.110

Two things may be said of this argument. First, it contradicts the rest
of the arguments of the Dissent. After it states that the issue of profit
or loss is immaterial, the Dissent proceeds to argue that the 20%
discount is not a minimal loss111 and that the 20% discount forces
business establishments to operate at a loss.112

Even the obiter in Central Luzon Drug Corporation,113 which the

Dissent essentially adopts and relies on, is premised on the
permanent reduction of total revenues and the loss that business
establishments will be forced to suffer in arguing that the 20%
discount constitutes a "taking" under the power of eminent domain.
Thus, when the Dissent now argues that the issue of profit or loss is
immaterial, it contradicts itself because it later argues, in order to
justify that there is a "taking" under the power of eminent domain in
this case, that the 20% discount forces business establishments to
suffer a significant loss or to operate at a loss. Second, this argument
suffers from the same flaw as the Dissent's original arguments. It is an
erroneous characterization of the 20% discount. According to the
Dissent, the 20% discount is part of the gross sales and, hence,
private property belonging to business establishments. However, as
previously discussed, the 20% discount is not private property actually
owned and/or used by the business establishment. It should be
distinguished from properties like lands or buildings actually used in
the operation of a business establishment which, if appropriated for
public use, would amount to a "taking" under the power of eminent
domain. Instead, the 20% discount is a regulatory measure which
impacts the pricing and, hence, the profitability of business
establishments. At the time the discount is imposed, no particular
property of the business establishment can be said to be "taken."
That is, the State does not acquire or take anything from the business
establishment in the way that it takes a piece of private land to build a
public road. While the 20% discount may form part of the potential
profits or income/gross sales114 of the business establishment, as
similarly characterized by Justice Bersamin in his Concurring Opinion,
potential profits or income/gross sales are not private property,
specifically cash or money, already belonging to the business
establishment. They are a mere expectancy because they are
potential fruits of the successful conduct of the business. Prior to the
sale of goods or services, a business establishment may be subject to
State regulations, such as the 20% senior citizen discount, which may
impact the level or amount of profits or income/gross sales that can
be generated by such establishment. For this reason, the validity of
the discount is to be determined based on its overall effects on the
operations of the business establishment.

Again, as previously discussed, the 20% discount does not

automatically result in a 20% reduction in profits, or, to align it with
the term used by the Dissent, the 20% discount does not mean that a
20% reduction in gross sales necessarily results. Because (1) the profit
margin of a product is not necessarily less than 20%, (2) not all
customers of a business establishment are senior citizens, and (3) the
establishment may revise its pricing strategy, such reduction in profits
or income/gross sales may be prevented or, in the alternative,
mitigated so that the business establishment continues to operate
profitably. Thus, even if we gratuitously assume that some degree of
reduction in profits or income/gross sales occurs because of the 20%
discount, it does not follow that the regulation is unreasonable,
oppressive or confiscatory because the business establishment may
make the necessary adjustments to continue to operate profitably. No
evidence was presented by petitioners to show otherwise. In fact, no
evidence was presented by petitioners at all. Justice Leonen, in his
Concurring and Dissenting Opinion, characterizes "profits" (or
income/gross sales) as an inchoate right. Another way to view it, as
stated by Justice Velasco in his Concurring Opinion, is that the
business establishment merely has a right to profits. The Constitution
adverts to it as the right of an enterprise to a reasonable return on
investment.115

Undeniably, this right, like any other right, may be regulated under
the police power of the State to achieve important governmental
objectives like protecting the interests and improving the welfare of
senior citizens. It should be noted though that potential profits or
income/gross sales are relevant in police power and eminent domain
analyses because they may, in appropriate cases, serve as an indicia
when a regulation has gone "too far" as to amount to a "taking"
under the power of eminent domain. When the deprivation or
reduction of profits or income/gross sales is shown to be
unreasonable, oppressive or confiscatory, then the challenged
governmental regulation may be nullified for being a "taking" under
the power of eminent domain. In such a case, it is not profits or
income/gross sales which are actually taken and appropriated for
public use. Rather, when the regulation causes an establishment to
incur losses in an unreasonable, oppressive or confiscatory manner,
what is actually taken is capital and the right of the business
establishment to a reasonable return on investment. If the business
losses are not halted because of the continued operation of the
regulation, this eventually leads to the destruction of the business and
the total loss of the capital invested therein. But, again, petitioners in
this case failed to prove that the subject regulation is unreasonable,
oppressive or confiscatory.

V.

The Dissent further argues that we erroneously used price and rate of
return on investment control laws to justify the senior citizen discount
law. According to the Dissent, only profits from industries imbued with
public interest may be regulated because this is a condition of their
franchises. Profits of establishments without franchises cannot be
regulated permanently because there is no law regulating their
profits. The Dissent concludes that the permanent reduction of total
revenues or gross sales of business establishments without franchises
is a taking of private property under the power of eminent domain. In
making this argument, it is unfortunate that the Dissent quotes only a
portion of the ponencia – The subject regulation may be said to be
similar to, but with substantial distinctions from, price control or rate
of return on investment control laws which are traditionally regarded
as police power measures. These laws generally regulate public
utilities or industries/enterprises imbued with public interest in order
to protect consumers from exorbitant or unreasonable pricing as well
as temper corporate greed by controlling the rate of return on
investment of these corporations considering that they have a
monopoly over the goods or services that they provide to the general
public. The subject regulation differs therefrom in that (1) the discount
does not prevent the establishments from adjusting the level of prices
of their goods and services, and (2) the discount does not apply to all
customers of a given establishment but only to the class of senior
citizens. x x x116

The above paragraph, in full, states –

The subject regulation may be said to be similar to, but with

substantial distinctions from, price control or rate of return on
investment control laws which are traditionally regarded as police
power measures. These laws generally regulate public utilities or
industries/enterprises imbued with public interest in order to protect
consumers from exorbitant or unreasonable pricing as well as temper
corporate greed by controlling the rate of return on investment of
these corporations considering that they have a monopoly over the
goods or services that they provide to the general public. The subject
regulation differs therefrom in that (1) the discount does not prevent
the establishments from adjusting the level of prices of their goods
and services, and (2) the discount does not apply to all customers of a
given establishment but only to the class of senior citizens.

Nonetheless, to the degree material to the resolution of this case, the

20% discount may be properly viewed as belonging to the category
of price regulatory measures which affects the profitability of
establishments subjected thereto. (Emphasis supplied)

The point of this paragraph is to simply show that the State has, in the
past, regulated prices and profits of business establishments. In other
words, this type of regulatory measures is traditionally recognized as
police power measures so that the senior citizen discount may be
considered as a police power measure as well. What is more, the
substantial distinctions between price and rate of return on
investment control laws vis-à-vis the senior citizen discount law
provide greater reason to uphold the validity of the senior citizen
discount law. As previously discussed, the ability to adjust prices
allows the establishment subject to the senior citizen discount to
prevent or mitigate any reduction of profits or income/gross sales
arising from the giving of the discount. In contrast, establishments
subject to price and rate of return on investment control laws cannot
adjust prices accordingly. Certainly, there is no intention to say that
price and rate of return on investment control laws are the justification
for the senior citizen discount law. Not at all. The justification for the
senior citizen discount law is the plenary powers of Congress. The
legislative power to regulate business establishments is broad and
covers a wide array of areas and subjects. It is well within Congress’
legislative powers to regulate the profits or income/gross sales of
industries and enterprises, even those without franchises. For what are
franchises but mere legislative enactments? There is nothing in the
Constitution that prohibits Congress from regulating the profits or
income/gross sales of industries and enterprises without franchises.
On the contrary, the social justice provisions of the Constitution enjoin
the State to regulate the "acquisition, ownership, use, and
disposition" of property and its increments.117

This may cover the regulation of profits or income/gross sales of all

businesses, without qualification, to attain the objective of diffusing
wealth in order to protect and enhance the right of all the people to
human dignity.118

Thus, under the social justice policy of the Constitution, business

establishments may be compelled to contribute to uplifting the plight
of vulnerable or marginalized groups in our society provided that the
regulation is not arbitrary, oppressive or confiscatory, or is not in
breach of some specific constitutional limitation. When the Dissent,
therefore, states that the "profits of private establishments which are
non-franchisees cannot be regulated permanently, and there is no
such law regulating their profits permanently,"119 it is assuming what
it ought to prove. First, there are laws which, in effect, permanently
regulate profits or income/gross sales of establishments without
franchises, and RA 9257 is one such law. And, second, Congress can
regulate such profits or income/gross sales because, as previously
noted, there is nothing in the Constitution to prevent it from doing so.
Here, again, it must be emphasized that petitioners failed to present
any proof to show that the effects of the assailed law on their
operations has been unreasonable, oppressive or confiscatory. The
permanent regulation of profits or income/gross sales of business
establishments, even those without franchises, is not as uncommon as
the Dissent depicts it to be. For instance, the minimum wage law
allows the State to set the minimum wage of employees in a given
region or geographical area. Because of the added labor costs arising
from the minimum wage, a permanent reduction of profits or income/
gross sales would result, assuming that the employer does not
increase the prices of his goods or services. To illustrate, suppose it
costs a company ₱5.00 to produce a product and it sells the same at
₱10.00 with a 50% profit margin. Later, the State increases the
minimum wage. As a result, the company incurs greater labor costs so
that it now costs ₱7.00 to produce the same product. The profit per
product of the company would be reduced to ₱3.00 with a profit
margin of 30%. The net effect would be the same as in the earlier
example of granting a 20% senior citizen discount. As can be seen,
the minimum wage law could, likewise, lead to a permanent reduction
of profits. Does this mean that the minimum wage law should,
likewise, be declared unconstitutional on the mere plea that it results
in a permanent reduction of profits? Taking it a step further, suppose
the company decides to increase the price of its product in order to
offset the effects of the increase in labor cost; does this mean that the
minimum wage law, following the reasoning of the Dissent, is
unconstitutional because the consuming public is effectively made to
subsidize the wage of a group of laborers, i.e., minimum wage
earners? The same reasoning can be adopted relative to the
examples cited by the Dissent which, according to it, are valid police
power regulations. Article 157 of the Labor Code, Sections 19 and 18
of the Social Security Law, and Section 7 of the Pag-IBIG Fund Law
would effectively increase the labor cost of a business establishment.
1âwphi1 This would, in turn, be integrated as part of the cost of its
goods or services. Again, if the establishment does not increase its
prices, the net effect would be a permanent reduction in its profits or
income/gross sales. Following the reasoning of the Dissent that "any
form of permanent taking of private property (including profits or
income/gross sales)120 is an exercise of eminent domain that requires
the State to pay just compensation,"121 then these statutory
provisions would, likewise, have to be declared unconstitutional. It
does not matter that these benefits are deemed part of the
employees’ legislated wages because the net effect is the same, that
is, it leads to higher labor costs and a permanent reduction in the
profits or income/gross sales of the business establishments.122

The point then is this – most, if not all, regulatory measures imposed
by the State on business establishments impact, at some level, the
latter’s prices and/or profits or income/gross sales.123

If the Court were to sustain the Dissent’s theory, then a wholesale

nullification of such measures would inevitably result. The police
power of the State and the social justice provisions of the Constitution
would, thus, be rendered nugatory. There is nothing sacrosanct about
profits or income/gross sales. This, we made clear in Carlos
Superdrug Corporation:124
Police power as an attribute to promote the common good would be
diluted considerably if on the mere plea of petitioners that they will
suffer loss of earnings and capital, the questioned provision is
invalidated. Moreover, in the absence of evidence demonstrating the
alleged confiscatory effect of the provision in question, there is no
basis for its nullification in view of the presumption of validity which
every law has in its favor.

xxxx

The Court is not oblivious of the retail side of the pharmaceutical

industry and the competitive pricing component of the business.
While the Constitution protects property rights petitioners must the
realities of business and the State, in the exercise of police power, can
intervene in the operations of a business which may result in an
impairment of property rights in the process.

Moreover, the right to property has a social dimension. While Article

XIII of the Constitution provides the percept for the protection of
property, various laws and jurisprudence, particularly on agrarian
reform and the regulation of contracts and public utilities, continously
serve as a reminder for the promotion of public good.

Undeniably, the success of the senior citizens program rests largely on

the support imparted by petitioners and the other private
establishments concerned. This being the case, the means employed
in invoking the active participation of the private sector, in order to
achieve the purpose or objective of the law, is reasonably and directly
related. Without sufficient proof that Section 4(a) of R.A. No. 9257 is
arbitrary, and that the continued implementation of the same would
be unconscionably detrimental to petitioners, the Court will refrain
form quashing a legislative act.125

In conclusion, we maintain that the correct rule in determining

whether the subject regulatory measure has amounted to a "taking"
under the power of eminent domain is the one laid down in Alalayan
v. National Power Corporation126 and followed in Carlos Superdurg
Corporation127 consistent with long standing principles in police
power and eminent domain analysis. Thus, the deprivation or
reduction of profits or income. Gross sales must be clearly shown to
be unreasonable, oppressive or confiscatory. Under the specific
circumstances of this case, such determination can only be made
upon the presentation of competent proof which petitioners failed to
do. A law, which has been in operation for many years and promotes
the welfare of a group accorded special concern by the Constitution,
cannot and should not be summarily invalidated on a mere allegation
that it reduces the profits or income/gross sales of business
establishments.

WHEREFORE, the Petition is hereby DISMISSED for lack of merit.

SO ORDERED.

MARIANO C. DEL CASTILLO

Associate Justice

WE CONCUR:

MARIA LOURDES P.A. SERENO

Chief Justice

See Dissenting Opinion

ANTONIO T. CARPIO
Associate Justice Please See Concurring Opinion
PRESBITERO J. VELASCO, JR.
Associate Justice
I certify that J. De Castro Left her vote concurring my ponencia of J.
Del Castillo
TERESITA J. LEONARDO-DE CASTRO
Associate Justice No Part
ARTURO D. BRION
Associate Justice