Republic of the Philippines

SUPREME COURT
Manila

EN BANC

G.R. No. 99886 March 31, 1993

JOHN H. OSMEÑA, petitioner,

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

Nachura & Sarmiento for petitioner.

The Solicitor General for public respondents.

NARVASA, C.J.:

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

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

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

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

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

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

Subsequently, the OPSF was reclassified into a "trust liability account," in virtue of E.O. 1024,7 and
ordered released from the National Treasury to the Ministry of Energy. The same Executive Order
also authorized the investment of the fund in government securities, with the earnings from such
placements accruing to the fund.
President Corazon C. Aquino, amended P.D. 1956. She promulgated Executive Order No. 137 on
February 27, 1987, expanding the grounds for reimbursement to oil companies for possible cost
underrecovery incurred as a result of the reduction of domestic prices of petroleum products, the
amount of the underrecovery being left for determination by the Ministry of Finance.

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

The petition further avers that the creation of the trust fund violates §
29(3), Article VI of the Constitution, reading as follows:

(3) All money collected on any tax levied for a special purpose shall be treated as a
special fund and paid out for such purposes only. If the purpose for which a special
fund was created has been fulfilled or abandoned, the balance, if any, shall be
transferred to the general funds of the Government.

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

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

(2) The Congress may, by law, authorize the President to fix, within specified limits,
and subject to such limitations and restrictions as it may impose, tariff rates, import
and export quotas, tonnage and wharfage dues, and other duties or imposts within
the framework of the national development program of the Government;

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

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

It thus appears that the challenge posed by the petitioner is premised primarily on the view that the
powers granted to the ERB under P.D. 1956, as amended, partake of the nature of the taxation
power of the State. The Solicitor General observes that the "argument rests on the assumption that
the OPSF is a form of revenue measure drawing from a special tax to be expended for a special
purpose." 13 The petitioner's perceptions are, in the Court's view, not quite correct.
To address this critical misgiving in the position of the petitioner on these issues, the Court recalls its
holding in Valmonte v. Energy Regulatory Board, et al. 14 —

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

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

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

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

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

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

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

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

xxx xxx xxx

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

Also of relevance is this Court's ruling in relation to the sugar stabilization fund the nature of which is
not far different from the OPSF. In Gaston v. Republic Planters Bank, 16 this Court upheld the legality
of the sugar stabilization fees and explained their nature and character, viz.:

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

xxx xxx xxx

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

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

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

Hence, it seems clear that while the funds collected may be referred to as taxes, they are exacted in
the exercise of the police power of the State. Moreover, that the OPSF is a special fund is plain from
the special treatment given it by E.O. 137. It is segregated from the general fund; and while it is
placed in what the law refers to as a "trust liability account," the fund nonetheless remains subject to
the scrutiny and review of the COA. The Court is satisfied that these measures comply with the
constitutional description of a "special fund." Indeed, the practice is not without precedent.
With regard to the alleged undue delegation of legislative power, the Court finds that the provision
conferring the authority upon the ERB to impose additional amounts on petroleum products provides
a sufficient standard by which the authority must be exercised. In addition to the general policy of the
law to protect the local consumer by stabilizing and subsidizing domestic pump rates, § 8(c) of P.D.
1956 18 expressly authorizes the ERB to impose additional amounts to augment the resources of the
Fund.

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

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

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

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

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

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

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

In relation to the third question — respecting the illegality of the reimbursements to oil companies,
paid out of the Oil Price Stabilization Fund, because allegedly in contravention of § 8, paragraph 2
(2) of P.D. 1956, amended 23 — the Court finds for the petitioner.

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

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

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

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

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

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

Anent the overpayment refunds mentioned by the petitioner, no substantive discussion has been
presented to show how this is prohibited by P.D. 1956. Nor has the Solicitor General taken any effort
to defend the propriety of this refund. In fine, neither of the parties, beyond the mere mention of
overpayment refunds, has at all bothered to discuss the arguments for or against the legality of the
so-called overpayment refunds. To be sure, the absence of any argument for or against the validity
of the refund cannot result in its disallowance by the Court. Unless the impropriety or illegality of the
overpayment refund has been clearly and specifically shown, there can be no basis upon which to
nullify the same.

Finally, the Court finds no necessity to rule on the remaining issue, the same having been rendered
moot and academic. As of date hereof, the pump rates of gasoline have been reduced to levels
below even those prayed for in the petition.

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

SO ORDERED.

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

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

# Footnotes

1 The writ of certiorari is, of course, available only as against tribunals, boards or
officers exercising judicial or quasi-judicial functions.

2 The petition alleges separate causes or grounds for each extraordinary writ sought.

3 Rollo, pp. 1 to 4.

4 Rollo, p. 2.

5 Id.

6 When this petition was filed, the amount involved was P5,277.4 million.

7 Issued on 9 May 1985.

8 Rollo, pp. 8-9.

9 Rollo, p. 11; emphasis supplied.

10 Id., pp. 13-4.

11 Id., p. 15.

12 Rollo, p. 17.

13 Comment of the Respondents; Rollo, p. 63.

14 G.R. Nos. L-79501-03 [23 June 1988] 162 SCRA 521; Decided jointly with
Citizen's Alliance for Consumer Protection v. Energy Regulatory Board et al., G.R.
Nos. L-78888-90, and Kilusang Mayo Uno Labor Center v. Energy Regulatory Board,
et al., G.R. Nos. L-79590-92; emphasis supplied.

15 Citing E.O. No. 137, Sec. 1 (amending § 8 of P.D. 1956).

16 158 SCRA 626, emphasis supplied.

17 "(3) All money collected on any tax levied for a special purpose shall be treated as
a special fund and paid out for such purpose only. If the purpose for which a special
fund was created has been fulfilled or abandoned, the balance, if any, shall be
transferred to the general funds of the government." (1987 Constitution, Art. VI, Sec.
28[3]).

18 Supra; see footnote 14 and related text.

19 Rollo, p. 17.

20 SEE Vigan Electric Light Co., Inc. v. Public Service Commission, G.R. No.
L-19850, 30 January 1964 and Pelaez v. Auditor General, G.R. No. L-23825, 24
December 1965; see also Gonzales, N. Administrative Law — A Text, (1979) at 29.

21 De La Llana v. Alba, 112 SCRA 294, citing Edu v. Ericta, 35 SCRA

481: Cf. Agustin v. Edu, 88 SCRA 195.

22 Hirabayashi v. U.S., 390 U.S. 99.

23 When this petition was filed, the amount involved was P5,277.4 million.

24 Rollo, p. 20.

25 Id., p. 21.

26 Id., p. 20.

27 Caltex Philippines, Inc. v. The Honorable Commissioner on Audit, et al., G.R. No.
92585, 8 May 1992, En Banc. N.B. — The Solicitor General seems to have taken a
different position in this case, with respect to the application of ejusdem generis.
28 Smith Bell and Co., Ltd. v. Register of Deeds of Davao, 96 Phil. 53
[1954], citing BLACK on Interpretation of Law, 2nd ed. at 203: see also Republic v.
Migriño 189 SCRA 289 [1990].

29 Supra at note 25; SEE also Maceda v. Hon. Catalino Macaraig, Jr., et al., G.R.
No. 88291, 197 SCRA 771 (1991).
 Republic of the Philippines
SUPREME COURT
Manila

FIRST DIVISION

G.R. No. 51593 November 5, 1992

NATIONAL DEVELOPMENT COMPANY, plaintiff-appellee,

vs.
CEBU CITY and AUGUSTO PACIS as Treasurer of Cebu City, defendant-appellants.

BELLOSILLO, J.:

Is a public land reserved by the President for warehousing purposes in favor of a government-owned
or controlled corporation, 1 as well as the warehouse subsequently erected thereon, exempt from
real property tax?

Petitioner National Development Company (NDC), a government-owned or controlled corporation

(GOCC) existing by virtue of C.A. 182 2 and E.O. 399, 3 is authorized to engage in commercial,
industrial, mining, agricultural and other enterprises necessary or contributory to economic
development or important to public interest. It also operates, in furtherance of its objectives,
subsidiary corporations one of which is the now defucnt National Warehousing Corporation (NWC). 4

On August 10, 1939, the President issued Proclamation No. 4305 reserving Block no. 4, Reclamation
Area No. 4, of Cebu City, consisting of 4,599 square meters, for warehousing purposes under the
administration of NWC. 6Subsequently, in 1940, a warehouse with a floor area of 1,940 square
meters more or less, was constructed thereon. 7

On October 4, 1947, E.O. 93 dissolved NWC 8 with NDC taking over its assets and functions. 9

Commencing 1948, Cebu City (CEBU) assessed and collected from NDC real estate taxes on the
land and the warehouse thereon. 10 By the first quarter of 1970, a total of P100,316.31 was paid by
NDC 11 of which only P3,895.06 was under protest. 12

On 20 March 1970, NDC wrote the City Assessor demanding full refund of the real estate taxes paid
to CEBU claiming that the land and the warehouse standing thereon belonged to the Republic and
therefore exempt from taxation. 13 CEBU did not acquiesce in the demand, hence, the present suit
filed 25 October 1972 in the Court of First Instance of Manila.

On 29 May 1973, the Court of First Instance of Manila, Branch XXII, promulgated a decision 14 the
dispositive portion of which reads —

WHEREFORE, judgment is hereby rendered sentencing the City of Cebu, thru the
Treasurer of said City, to refund to the plaintiff, National Development Company, the
real estate taxes paid by it for the parcel of land covered by Presidential
Proclamation No. 430 of August 10, 1939, and the warehouse erected thereon from
 and after October 25, 1966, with interests thereon at the legal rate from the date of
the filing of the complaint and the costs of the suit.

The defendants appealed to the Court of Appeals which however certified the case to Us as one
involving pure questions of law, pursuant to Sec. 17, R.A. 296.

In this appeal, CEBU assigns five (5) errors 15 imputed to the trial court which may be synopsized into
whether NDC is exempted from payment of the real estate taxes on the land reserved by the
President for warehousing purposes as well as the warehouse constructed thereon, and in the
affirmative, whether NDC may recover in refund unprotested real estate taxes it paid from 1948 to
1970.

On the first question, CEBU insists on taxability of the subject properties, claiming that no law grants
NDC exemption from real estate taxes, and that NDC, as recipient of the land reserved by the
President pursuant to Sec. 83 of the Public Land Act, 16 is liable for payment or ordinary (real estate)
taxes under Sec. 115 therefore. CEBU contends that the properties have ceased to be tax exempt
under the Assessment Law. 17 when the government disposed of them in favor of NDC, and even
assuming that title to the land remains with the government (ownership being the basis for real
estate taxability under the Assessment Law), the Supreme Court rulings establish increasing rather
than "ownership" as basis for real estate tax liability.

On the other hand, NDC maintains the Sec. 3 of the Assessment Law, which exempts properties
owned by the Republic from real estate tax, includes subject properties in the exemption. It invokes
the ruling in Board of Assessment Appeals vs. CTA & NWSA 18 which held that properties of NWSA,
a GOCC, were exempt from real estate tax because Sec. 3 of the Assessment Law applied to all
government properties whether held in governmental or proprietary capacity. NDC rejects the
applicability of Sec. 115 of the Public Land Act to the subject land, claiming that provision
contemplates dispositions of public land with eventual transfer of title. In addition, NDC believes that
it is neither a grantee of a public land nor an applicant within the purview of the same provision.

As already adverted to, one of the principal issues before Us is the interpretation of a provision of the
Assessment Law, the precursor of the then Real Property Tax Code and the Local Government
Code, where "ownership" of the property and not "use" is the test of tax liability. 19

Section, 3 par. (a), of the Assessment Law, on which NDC claims real estate tax exemption,
provides —

Section 3. Property exempt from tax. — The exemptions shall be as follows: (a)
Property owned by the United States of America, the Commonwealth of the
Philippines, any province, city, municipality at municipal district . . .

The same opinion of NDC was passed upon in National Development Co. v. Province of Nueva
Ecija 20 where We held that its properties were not comprehended in Sec. 3, par (a), of the
Assessment Law. In part, We stated:

1. Commonwealth Act No. 182 which created NDC contains no provision exempting
it from the payment of real estate tax on properties it may acquire . . . There is
justification in the contention of plaintiff-appellee that . . . [I]t is undeniable that to any
municipality the principal source of revenue with which it would defray its operation
will came from real property taxes. If the National Development Company would be
exempt from paying real property taxes over these properties, the town of Gabaldon
 will bee deprived of much needed revenues with which it will maintain itself and
finance the compelling needs of its inhabitants (p. 6, Brief of Plaintiff-Appellee).

2. Defendant-appellant NDC does not come under classification of municipal or

public corporation in the sense that it may sue and be sued in the same manner as
any other private corporations, and in this sense, it is an entity different from the
government, defendant corporation may be sued without its consent, and is subject
to taxation. In the case NDC vs. Jose Yulo Tobias, 7 SCRA 692, it was held that . . .
plaintiff is neither the Government of the Republic nor a branch or subdivision
thereof, but a government owned and controlled corporation which cannot be said to
exercise a sovereign function (Association Cooperativa de Credito Agricola de
Miagao vs. Monteclaro, 74 Phil. 281). it is a business corporation, and as such, its
causes of action are subject to the statute of limitations. . . . That plaintiff herein does
not exercise sovereign powers — and, hence, cannot invoke the exemptions thereof
–– but is an agency for the performance of purely corporate, proprietary or business
functions, is apparent from its Organic Act (Commonwealth Act 182, as amended by
Commonwealth Act 311) pursuant to Section 3 of which it "shall be subject to the
provisions of the Corporation Law insofar as they are not inconsistent" with the
provisions of said Commonwealth Act, "and shall have the general powers
mentioned in said" Corporation Law, and, hence, "may engage in commercial,
industrial, mining, agricultural, and other enterprises which may be necessary or
contributory to the economic development of the country, or important in the public
interest," as well as "acquire, hold, mortgage and alienate personal and real property
in the Philippines or elsewhere; . . . make contracts of any kind and description", and
"perform any and all acts which a corporation or natural persons is authorized to
perform under the laws now existing or which may be enacted hereafter."

We find no compelling reason why the foregoing ruling, although referring to lands which would
eventually be transferred to private individuals, should not apply equally to this case.

NDC cites Board of Assessment Appeals, Province of Laguna v. Court of Tax Appeal and National
Waterworks and Sewerage Authority (NWSA). In that case, We held that properties of NWSA, a
GOCC, were exempt from real estate tax because Sec. 3, par (c), of R.A. 470 did not distinguish
between those possessed by the government in sovereign/governmental/political capacity and those
in private/proprietary/patrimonial character.

The conflict between NDC v. Nueva Ecija, supra, and BAA v. CTA and NWSA, supra, is more
superficial than real. The NDC decision speaks of properties owned by NDC, while the BAA ruling
concerns properties belonging to the Republic. The latter case appears to be exceptional because
the parties therein stipulated —

1. That the petitioner National Waterworks and Sewerage Authority (NAWASA) is a

public corporation created by virtue of Republic Act. No. 1383, and that it is owned by
the Government of the Philippines as well as all property comprising waterworks and
sewerage systems placed under it (Emphasis supplied).

There, the Court observed: "It is conceded, in the stipulation of facts, that the property involved in
this case "is owned by the Government of the Philippines." Hence, it belongs to the Republic of the
Philippines and falls squarely within letter of the above provision."

In the case at bar, no similar statement appears in the stipulation of facts, hence, ownership of
subject properties should first be established. For, while it may be stated that the Republic owns
NDC, it does not necessary follow that properties owned by NDC, are also owned by Republic — in
the same way that stockholders are not ipso facto owners of the properties of their corporation.

The Republic, like any individual, may form a corporation with personality and existence distinct from
its own. The separate personality allows a GOCC to hold and possess properties in its own name
and, thus, permit greater independence and flexibility in its operations. It may, therefore, be stated
that tax exemption of property owned by the Republic of the Philippines "refers to properties owned
by the Government and by its agencies which do not have separate and distinct personalities
(unincorporated entities). We find the separate opinion of Justice Bautista-Angelo in Gonzales
v. Hechanova, et al., 21 appropriate and enlightening —

. . . The Government of the Republic of the Philippines under the Revised

Administrative Code refers to that entity through which the functions of government
are exercised, including the various arms through which political authority is made
effective whether they be provincial, municipal or other form of local government,
whereas a government instrumentality refers to corporations owned or controlled by
the government to promote certain aspects of the economic life of our people. A
government agency therefore, must necessarily after refer to the government itself to
the Republic, as distinguished from any government instrumentality which has a
personality distinct and separate from it (Section 2).

The foregoing discussion does not mean that because NDC, like most GOCC's engages in
commercial enterprises all properties of the government and its unincorporated agencies possessed
in propriety character are taxable. Similarly, in the case at bar, NDC proceeded on the premise that
the BAA ruling declared all properties owed by GOCC's as properties in the name of the Republic,
hence, exempt under Sec. 3 of the Assessment Law. 22

To come within the ambit of the exemption provided in Art. 3, par. (a), of the Assessment Law, it is
important to establish that the property is owned by the government or its unincorporated agency,
and once government ownership is determined, the nature of the use of the property, whether for
proprietary or sovereign purposes, becomes immaterial. What appears to have been ceded to NWC
(later transferred to NDC), in the case before Us, is merely the administration of the property while
the government retains ownership of what has been declared reserved for warehousing purposes
under Proclamation No. 430.

Incidentally, the parties never raised the issued the issue of ownership from the court a quo to this
Court.

A reserved land is defined as a "[p]ublic land that has been withheld or kept back from sale or
disposition." 23 The land remains "absolute property of the government." 24 The government "does not
part with its title by reserving them (lands), but simply gives notice to all the world that it desires them
for a certain purpose." 25 Absolute disposition of land is not implied from reservation; 26 it merely
means "a withdrawal of a specified portion of the public domain from disposal under the land laws
and the appropriation thereof, for the time being, to some particular use or purpose of the general
government." 27 As its title remains with the Republic, the reserved land is clearly recovered by the
tax exemption provision.

CEBU nevertheless contends that the reservation of the property in favor of NWC or NDC is a form
of disposition of public land which, subjects the recipient (NDC ) to real estate taxation under Sec.
115 of the Public Land Act. as amended by R.A. 436, 28 which estate:
 Sec 115. All lands granted by virtue of this Act, including homesteads upon which
final proof has not been made or approved shall, even though and while the title
remains in the State, be subject to the ordinary taxes, which shall be paid by the
grantee or the applicant, beginning with the year next following the one in which the
homestead application has been filed, or the concession has been approved, or the
contract has been signed, as the case may be, on the basis of the value fixed in such
filing, approval or signing of the application, concession or contract.

The essential question then is whether lands reserved pursuant to Sec. 83 are comprehended in
Sec. 115 and, therefore, taxable.

Section 115 of the Public Land Act should be treated as an exception to Art. 3, par. (a), of the
Assessment Law. While ordinary public lands are tax exempt because title thereto belongs to the
Republic, Sec. 115 subjects them to real estate tax even before ownership thereto is transferred in
the name of the beneficiaries. Sec. 115 comprehends three (3) modes of disposition of Lands under
the Public Land Act, to wit: homestead, concession, and contract.

Liability to real property taxes under Sec. 115 is predicated on (a) filing of homestead application,
(b) approval of concession and, (c) signing of contract. Significantly, without these words, the date of
the accrual of the real estate tax would be indeterminate. Since NDC is not a homesteader and no
"contract" (bilateral agreement) was signed, it would appear, then, that reservation under Sec. 83,
being a unilateral act of the President, falls under "concession".

"Concession" as a technical term under the Public Land Act is synonymous with "alienation" and
"disposition", and is defined in Sec. 10 as "any of the methods authorized by this Act for the
acquisition, lease, use, or benefit of the lands of the public domain other than timber or mineral
lands." Logically, where Sec. 115 contemplates authorized methods for acquisition, lease, use, or
benefit under the Act, the taxability of the land would depend on whether reservation under Sec. 83
is one such method of acquisition, etc. Tersely put, is reservation synonymous with alienation? Or,
are the two terms antithetical and mutually exclusive? Indeed, reservation connotes retention, while
concession (alienation) signifies cession.

Section 8 and 88 of the Public Land Act provide that reserved lands are excluded from that may be
subject of disposition, to wit –—

Sec. 8. Only those lands shall be declared open to disposition or concession which
have been officially delimited and classified and, when practicable, surveyed,
and which have not been reserved for public or quasi-public uses, nor appropriated
by the Government, nor in any manner become private property , nor those on which
a private right authorized and recognized by this Act or any valid law may be
claimed, or which, having been reserved or appropriated, have ceased to be so.

Sec. 88. The tract or tracts of land reserved under the provisions of section eighty-
three shall be non-alienable and shall not be subject to occupation, entry, sale, lease,
or other disposition until again declared alienable under the provisions of this Act or
by proclamation of the President (Emphasis supplied)

As We view it, the effect of reservation under Sec. 83 is to segregate a piece of public land and
transform it into non-alienable or non-disposable under the Public Land Act. Section 115, on the
other hand, applies to disposable public lands. Clearly, therefore, Sec. 115 does not apply to lands
reserved under Sec. 83. Consequently, the subject reserved public land remains tax exempt.
However, as regards the warehouse constructed on a public reservation, a different rule should
apply because "[t]he exemption of public property from taxation does not extend to improvements on
the public lands made by pre-emptioners, homesteaders and other claimants, or occupants, at their
own expense, and these are taxable by the state . . ." 29 Consequently, the warehouse constructed
on the reserved land by NWC (now under administration by NDC), indeed, should properly be
assessed real estate tax as such improvement does not appear to belong to the Republic.

Since the reservation is exempt from realty tax, the erroneous tax payments collected by CEBU
should be refunded to NDC. This is in consonance with Sec. 40, par. (a) of the former Real Property
Tax Code which exempted from taxation real property owned by the Republic of the Philippines or
any of its political subdivisions, as well as any GOCC so exempt by its charter. 30

As regards the requirement of paying under protest before judicial recourse, CEBU argues that in
any case NDC is not entitled to refund because Sec. 75 of R.A. 3857, the Revised Charter of the
City of Cebu, 31 requires payment under protest before resorting to judicial action for tax refund; that it
could not have acted on the first demand letter of NDC of 20 May 1970 because it was sent to the
City Assessor and not to the City Treasurer; that, consequently, there having been no appropriate
prior demand, resort to judicial remedy is premature; and, that even on the premise that there was
proper demand, NDC has yet to exhaust administrative remedies by way of appeal to the
Department of Finance and/or Auditor General before taking judicial action.

NDC does not agree. It disputes the applicability of the payment-under-protest requirement is Sec.
75 of the Revised Cebu City Charter because the issue is not the validity of tax assessment but
recovery of erroneous payments under Arts. 2154 and 2155 of the Civil Code. 32 It cites the case
of East Asiatic Co., Ltd. v. City of Davao 33 which held that where the tax is unauthorized, "it is not a
tax assessed under the charter of the appellant City of Davao and for that reason no protest is
necessary for a claim or demand for its refund." In Ramie Textiles, Inc. vs.Mathay, Sr., 34 We held —

. . . Protest is not a requirement in order that a taxpayer who paid under a mistaken
belief that it is required by law, may claim for a refund. Section 54 35 of
Commonwealth Act No. 470 does not apply to petitioner which could conceivably not
have been expected to protest a payment it honestly believed to be due. The same
refers only to the case where the taxpayer, despite his knowledge of the erroneous
or illegal assessment, still pays and fails to make the proper protest, for in such case,
he should manifest an unwillingness to pay, and failing so, the taxpayer is deemed to
have waved his right to claim a refund.

In the case at bar, petitioner, therefore, cannot be said to have waived his right. He
had no knowledge of the fact that it was exempted from payment of the realty tax
under Commonwealth Act No. 470. Payment was made through error or mistake, in
the honest belief that petitioner was liable, and therefore could not have been made
under protest, but with complete voluntariness. In any case, a taxpayer should not be
held to suffer loss by his good intention to comply with what he believes is his legal
obligation, where such obligation does not really exist . . . The fact that petitioner paid
thru error or mistake, and the government accepted the payment, gave rise to the
application of the principle of solutio indebiti under Article 2154 of the New Civil
Code, which provides that "if something is received when there is no right to demand
it, and it was unduly delivered through mistake, the obligation to return it arises."
There is, therefore, created a tie or juridical relation in the nature of solutio
indebiti, expressly classified as quasi-contract under Section 2, Chapter I of Title XVII
of the New Civil code.
 The quasi-contract of solutio indebiti is one of the concrete manifestations of the
ancient principle that no one shall enrich himself unjustly at the expense of another . .
. Hence, it would seem unedifying for the government, that knowing it has no right at
all to collect or to receive money for alleged taxes paid by mistake, it would be
reluctant to return the same . . . Petitioner is not unsatisfied in the assessment of its
property. Assessment having been made, it paid the real estate taxes without
knowing that it is exempt.

As regards the claim for refund of tax payments spanning more than twenty (20) years, We also said
in Ramie Textiles that —

Solutio indebiti is a quasi-contract, and the instant case being in the nature of solutio
indebiti, the claim for refund must be commenced within six (6) years from date of
payment pursuant to Article 1145 (2) of the New Civil Code 36 . . .

We sustain the appellate court to the extent that its decision covers improperly collected taxes on the
reserved land under Proclamation No. 430, thus —

The defense of prescription invoked by the defendant which counsel for the plaintiff,
however, did not answer in its memorandum, is partly well-taken. Actions for refund
of taxes illegally collected must be commenced within six (6) years from the date of
collection. . . . .

The stipulation of facts and the pleadings filed by the parties do not contain data
specifying when and how much were paid by the year, of the taxes sought to be
refunded. Accordingly, the Court has no other alternative but to order the refund of
an undetermined amount based, however, on the date of payment counted six (6)
years backward from October 25, 1972, when the complaint in this case was filed. 37

As regards exhaustion of administrative remedies, We agree with the trial court that the case
constitutes an exception to the rule, as it involves purely question of law. 38 Specifically, on the
requirement of appeal to the Secretary of Finance, We further held in the same Ramie Textiles that
"[E]qually not applicable is Section 17 of Commonwealth Act No. 470 39 cited by respondent in
relation to the right of a, property owner to contest the validity of assessment . . ."

Respondent CEBU likewise invites Our attention to the availability of appeal to the Government
Auditing Office although no authority is cited to Us. We do not find any either to sustain the
procedure.

WHEREFORE, finding that National Development Company (NDC) is exempt from real estate tax on
the reserved land but liable for the warehouse erected thereon, the decision appealed from is
accordingly MODIFIED. Consequently, let this case be remanded to the court of origin, now the
Regional Trial Court of Manila, to determine the proper liability of NDC, particularly on its warehouse,
and effect the corresponding refund, payment or set-off, as the case may be, conformably with this
decision. No costs.

SO ORDERED.

Cruz, Padilla and Griño-Aquino, JJ., concur.

Medialdea, J., is on leave.

Footnotes

1 A government owned or controlled corporation is defined in Sec. 2 of P.D. 2029 as

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

2 C.A. 182, "An Act to create Public Corporation to be known as the 'National
Development Company', to Defined it Powers and Duties, to Appropriates the
Necessary Funds Therefor, Repealing Thereby Acts Numbered Twenty-Eight
Hundred and Forty-Nine and Twenty-Eight Hundred and Seventy-Three", which took
effect 1 January 1937.

3 E.O. 399, "Uniform Charter for Government Corporations", dated 5 January 1951.

4 Joint Stipulation of Facts, 1st and 2nd pars., Record on Appeal, p. 12.

5 Proclamation No. 430 provides: "Upon the recommendation of the Secretary of

Agriculture and Commerce and pursuant to the provision of Section Eighty-Three of
Commonwealth Act Numbered One Hundred and Forty-One, I hereby withdraw from
sale or settlement and reserve for warehouse purposes, under the administration of
the National Warehousing Corporation, subject to private rights, if any there be, block
numbered four of Reclamation Area Numbered Four of the City of Cebu.

6 Joint Stipulation of Facts, par. 3, Record on Appeal, pp. 12-13.

7 Ibid, par. 4.

8 E.O. 93, "Abolishing the National Enterprises Control Board, Creating the
Government Enterprises Council, Transferring the Metropolitan Transportation
Service to the Manila Railroad Company, Dissolving and Merging Certain
Corporations Owned or Controlled by the Government, and for Other Purposes",
effective 4 October 1947.

9 Joint Stipulation of Facts, par. 5, Record on Appeal, p. 13.

10 Ibid., par. 6.

11 Ibid.

12 P96,401.37 was paid without protest (see Joint Stipulation of Facts, par. 13,
Record on Appeal, pp. 14-15).

13 Joint Stipulation of Facts, par. 8, Record on Appeal, p. 14.

14 Penned by Judge Federico C. Alikpala, then Presiding Judge, CFI-Manila Br.

XXII, Record on Appeal, pp. 54-55.
15 The following are the five (5) errors assigned:

I The trial court erred in not finding that plaintiff National Development Company is
liable for real estate taxes when using the land building, subject of this case, for
business purposes.

II The trial court erred in not finding that plaintiff had not exhausted all administrative
remedies before filing the instant action.

III The trial court erred in not finding that reservations for public use by means of
presidential proclamation under Sections 83-85 of the Public Land Law are forms of
disposition or grants of public lands and, therefore, the lands so disposed of are
subject to real estate taxes.

IV The trial court erred in ordering defendant to refund plaintiff a portion of the taxes
paid when said payment was not made under protest as required by the City Charter
of the defendant City.

V The trial court erred in sentencing the City of Cebu to refund plaintiff the amounts
paid for real estate taxes for the land covered by Presidential Proclamation No. 438
and the warehouse erected thereon from and after 25 October 1966 with interest
thereon from date of filing of the complaint and cost of the suit (Brief for Defendant-
Appellants, pp. 1-3).

16 C.A. 141, approved 7 November 1936, Sec. 83 of which provides: "Upon the
recommendation of the Secretary of Agriculture and Commerce, the President may
designated by proclamation any tract or tracts of land of the public domain as
reservations for the use of the Commonwealth of the Philippines or of any of its
branches, or of the inhabitants thereof, in accordance with regulations prescribed for
this purpose, or for quasi-public uses or purposes, when the public interest requires
it, including reservations for highways, rights of way for railroads, hydraulic power
sites, irrigation systems, communal pastures or leguas comunales, public parks,
public quarries, public fishponds, workingmen's village and other improvements for
the public benefits.

17 C.A. 470, effective 1 January 1940.

18 118 Phil. 227. prom. 31 May 1963.

19 We held Province of Nueva Ecija v. Imperial Mining Company, Inc. G.R. No.
L-59463, prom. 19 November 1982, 118 SCRA 632; "When IMC in 1968 obtained
lease on the mineral land in question, the law governing real property taxation was
the former Assessment Law, Commonwealth Act 470, and the basis of realty taxation
thereunder was ownership or interest tantamount to ownership. A mere lessee of
mineral land was thereunder not liable for the payment of realty tax thereon . . . In
1974, a new Real Property Tax Code came into being when Presidential Decree 464
was issued. It changed the basis of real property taxation. It adopted the policy of
taxing real property on the basis of actual use, even if the user is not the owner.

20 G.R. No. 51223, 25 November 1983; 125 SCRA 752.

21 118 Phil. 1084, October 22, 1963.

22 Consequently, erroneous reliance by NWSA v. Quezon City, G.R. No. L-25310,

26 April 1968, 23 SCRA 286, and Social Security System v. City of Bacolod, G.R.
No. L-35726, 21 July 1982, 115 SCRA 412, on BAA v. CTA and NWSA, should be
reexamined. In NWSA v. Quezon City, We held: . . . The properties of NWSA are
exempt from realty tax as properties of the Republic of the Philippines under Sec. 47
(a) of Republic Act 537 (Revised Charter of Quezon City) . . .

In SSS v. City of Bacolod, We ruled: "What is decisive is that the properties

possessed by the SSS, albeit devoted to private or proprietary purpose, are in fact
owned by the government of the Philippines. As such they are exempt from realty
taxes . . .

The SSS case appears to have proceeded form the premise that properties of SSS
are ipso facto owned by the Republic. In fact, it views Sec. 16 of P.D. 24 exempting
SSS and its assets from taxation a confirmation of its ruling. We are not persuaded;
P.D. 24 speaks of properties owned by SSS, while the decision alludes to properties
owned by the Republic. That conclusion is a misapplication of the BAA ruling.

23 Black's Law Dictionary, 4th ed., p.1473, citing Donley v. Van Horn, 49 Cal. App.
383, 193 P. 514, 516.

24 73 CJS 720.

25 Footnote No. 85 in 73 CJS 717-717 citing US vs. Payne, D.C. Ark. 8 F 883, 2
McCrary 289.

26 Words and Phrases, Vol. 37, p. 167, citing Jackson v. Wilcox, 2 I11. (1 Scam)
344, 359.

27 73 CJS 717

28 R.A. 436, approved June 7, 1950.

29 84 CJS 383.

30 Sec. 40, P.D. 464, effective 1 June 1974, provides: "Exemption from Real
Property Tax. –– The exemption shall be as follow: (a) Real property owned by the
Republic of the Philippines or any of its political subdivisions and any government-
owned corporation so exempt by its charter: Provided, however, That this exemption
shall not apply to real property of the above-named entities the beneficial use of
which has been granted, for consideration or otherwise, to a taxable person . . .

31 Sec. 75, R.A. 3857, approved 10 June 1964, provides: "No court shall entertain
any suit assailing the validity of a tax assessed under this article until the taxpayer
shall have paid, under protest, the taxes assessed against him . . ."

32 Art. 2154 provides: "If something is received when there is no right to demand it,
and it was unduly delivered through mistake, the obligation to return it arises."
Art. 2155 provides: "Payment by reason of a mistake in the construction or
application of a doubtful or difficult question of law may come within the scope of the
proceeding article."

33 G.R. No. L-16253, 21 August 1962; 5 SCRA 873.

34 G.R. No. L-32364, 30 April 1979; 89 SCRA 586.

35 Sec. 54. Restriction upon power of court to impeach tax. — No court shall
entertain any suit assailing the validity of a tax assessed under this Act until the
taxpayer shall have paid, under protest, the taxes assessed against his. . . .

36 Art. 1145, par. 2, provides: "The following actions must be commenced within six
years: . . . Upon a quasi-contract."

37 Record on Appeal, p.54.

38 Valmonte v. Belmonte, G.R. No. 74930, 13 February 1989; 170 SCRA 256.

39 Sec 17. Appeal by owner to the Board of Tax Appeals. –– Any owner who is not
satisfied with the action of a provincial assessor in the assessment of his property
may . . . appeal to the Board of Tax Appeals . . . Sec. 18 . . . If the taxpayer is not
satisfied with the decision of the Board of Tax Appeals, he may likewise appeal to the
Secretary of Finance. . .
 EN BANC

G.R. No. 155650 July 20, 2006

MANILA INTERNATIONAL AIRPORT AUTHORITY, petitioner,

vs.
COURT OF APPEALS, CITY OF PARAÑAQUE, CITY MAYOR OF PARAÑAQUE,
SANGGUNIANG PANGLUNGSOD NG PARAÑAQUE, CITY ASSESSOR OF PARAÑAQUE, and
CITY TREASURER OF PARAÑAQUE, respondents.

DECISION

CARPIO, J.:

The Antecedents

Petitioner Manila International Airport Authority (MIAA) operates the Ninoy Aquino International
Airport (NAIA) Complex in Parañaque City under Executive Order No. 903, otherwise known as
the Revised Charter of the Manila International Airport Authority ("MIAA Charter"). Executive Order
No. 903 was issued on 21 July 1983 by then President Ferdinand E. Marcos. Subsequently,
Executive Order Nos. 9091 and 2982 amended the MIAA Charter.

As operator of the international airport, MIAA administers the land, improvements and equipment
within the NAIA Complex. The MIAA Charter transferred to MIAA approximately 600 hectares of
land,3 including the runways and buildings ("Airport Lands and Buildings") then under the Bureau of
Air Transportation.4 The MIAA Charter further provides that no portion of the land transferred to
MIAA shall be disposed of through sale or any other mode unless specifically approved by the
President of the Philippines.5

On 21 March 1997, the Office of the Government Corporate Counsel (OGCC) issued Opinion No.
061. The OGCC opined that the Local Government Code of 1991 withdrew the exemption from real
estate tax granted to MIAA under Section 21 of the MIAA Charter. Thus, MIAA negotiated with
respondent City of Parañaque to pay the real estate tax imposed by the City. MIAA then paid some
of the real estate tax already due.

On 28 June 2001, MIAA received Final Notices of Real Estate Tax Delinquency from the City of
Parañaque for the taxable years 1992 to 2001. MIAA's real estate tax delinquency is broken down as
follows:

TAX
TAXABLE YEAR TAX DUE PENALTY TOTAL
DECLARATION
E-016-01370 1992-2001 19,558,160.00 11,201,083.20 30,789,243.20
E-016-01374 1992-2001 111,689,424.90 68,149,479.59 179,838,904.49
E-016-01375 1992-2001 20,276,058.00 12,371,832.00 32,647,890.00
E-016-01376 1992-2001 58,144,028.00 35,477,712.00 93,621,740.00
E-016-01377 1992-2001 18,134,614.65 11,065,188.59 29,199,803.24
E-016-01378 1992-2001 111,107,950.40 67,794,681.59 178,902,631.99
E-016-01379 1992-2001 4,322,340.00 2,637,360.00 6,959,700.00
 E-016-01380 1992-2001 7,776,436.00 4,744,944.00 12,521,380.00
*E-016-013-85 1998-2001 6,444,810.00 2,900,164.50 9,344,974.50
*E-016-01387 1998-2001 34,876,800.00 5,694,560.00 50,571,360.00
*E-016-01396 1998-2001 75,240.00 33,858.00 109,098.00
GRAND TOTAL P392,435,861.95 P232,070,863.47 P 624,506,725.42

1992-1997 RPT was paid on Dec. 24, 1997 as per O.R.#9476102 for P4,207,028.75

#9476101 for P28,676,480.00

#9476103 for P49,115.006

On 17 July 2001, the City of Parañaque, through its City Treasurer, issued notices of levy and
warrants of levy on the Airport Lands and Buildings. The Mayor of the City of Parañaque threatened
to sell at public auction the Airport Lands and Buildings should MIAA fail to pay the real estate tax
delinquency. MIAA thus sought a clarification of OGCC Opinion No. 061.

On 9 August 2001, the OGCC issued Opinion No. 147 clarifying OGCC Opinion No. 061. The OGCC
pointed out that Section 206 of the Local Government Code requires persons exempt from real
estate tax to show proof of exemption. The OGCC opined that Section 21 of the MIAA Charter is the
proof that MIAA is exempt from real estate tax.

On 1 October 2001, MIAA filed with the Court of Appeals an original petition for prohibition and
injunction, with prayer for preliminary injunction or temporary restraining order. The petition sought to
restrain the City of Parañaque from imposing real estate tax on, levying against, and auctioning for
public sale the Airport Lands and Buildings. The petition was docketed as CA-G.R. SP No. 66878.

On 5 October 2001, the Court of Appeals dismissed the petition because MIAA filed it beyond the
60-day reglementary period. The Court of Appeals also denied on 27 September 2002 MIAA's
motion for reconsideration and supplemental motion for reconsideration. Hence, MIAA filed on 5
December 2002 the present petition for review.7

Meanwhile, in January 2003, the City of Parañaque posted notices of auction sale at the Barangay
Halls of Barangays Vitalez, Sto. Niño, and Tambo, Parañaque City; in the public market of Barangay
La Huerta; and in the main lobby of the Parañaque City Hall. The City of Parañaque published the
notices in the 3 and 10 January 2003 issues of the Philippine Daily Inquirer, a newspaper of general
circulation in the Philippines. The notices announced the public auction sale of the Airport Lands and
Buildings to the highest bidder on 7 February 2003, 10:00 a.m., at the Legislative Session Hall
Building of Parañaque City.

A day before the public auction, or on 6 February 2003, at 5:10 p.m., MIAA filed before this Court an
Urgent Ex-Parte and Reiteratory Motion for the Issuance of a Temporary Restraining Order. The
motion sought to restrain respondents — the City of Parañaque, City Mayor of
Parañaque, Sangguniang Panglungsod ng Parañaque, City Treasurer of Parañaque, and the City
Assessor of Parañaque ("respondents") — from auctioning the Airport Lands and Buildings.

On 7 February 2003, this Court issued a temporary restraining order (TRO) effective immediately.
The Court ordered respondents to cease and desist from selling at public auction the Airport Lands
and Buildings. Respondents received the TRO on the same day that the Court issued it. However,
respondents received the TRO only at 1:25 p.m. or three hours after the conclusion of the public
auction.
On 10 February 2003, this Court issued a Resolution confirming nunc pro tunc the TRO.

On 29 March 2005, the Court heard the parties in oral arguments. In compliance with the directive
issued during the hearing, MIAA, respondent City of Parañaque, and the Solicitor General
subsequently submitted their respective Memoranda.

MIAA admits that the MIAA Charter has placed the title to the Airport Lands and Buildings in the
name of MIAA. However, MIAA points out that it cannot claim ownership over these properties since
the real owner of the Airport Lands and Buildings is the Republic of the Philippines. The MIAA
Charter mandates MIAA to devote the Airport Lands and Buildings for the benefit of the general
public. Since the Airport Lands and Buildings are devoted to public use and public service, the
ownership of these properties remains with the State. The Airport Lands and Buildings are thus
inalienable and are not subject to real estate tax by local governments.

MIAA also points out that Section 21 of the MIAA Charter specifically exempts MIAA from the
payment of real estate tax. MIAA insists that it is also exempt from real estate tax under Section 234
of the Local Government Code because the Airport Lands and Buildings are owned by the Republic.
To justify the exemption, MIAA invokes the principle that the government cannot tax itself. MIAA
points out that the reason for tax exemption of public property is that its taxation would not inure to
any public advantage, since in such a case the tax debtor is also the tax creditor.

Respondents invoke Section 193 of the Local Government Code, which expressly withdrew the tax
exemption privileges of "government-owned and-controlled corporations" upon the effectivity of
the Local Government Code. Respondents also argue that a basic rule of statutory construction is
that the express mention of one person, thing, or act excludes all others. An international airport is
not among the exceptions mentioned in Section 193 of the Local Government Code. Thus,
respondents assert that MIAA cannot claim that the Airport Lands and Buildings are exempt from
real estate tax.

Respondents also cite the ruling of this Court in Mactan International Airport v. Marcos8 where we
held that the Local Government Code has withdrawn the exemption from real estate tax granted to
international airports. Respondents further argue that since MIAA has already paid some of the real
estate tax assessments, it is now estopped from claiming that the Airport Lands and Buildings are
exempt from real estate tax.

The Issue

This petition raises the threshold issue of whether the Airport Lands and Buildings of MIAA are
exempt from real estate tax under existing laws. If so exempt, then the real estate tax assessments
issued by the City of Parañaque, and all proceedings taken pursuant to such assessments, are void.
In such event, the other issues raised in this petition become moot.

The Court's Ruling

We rule that MIAA's Airport Lands and Buildings are exempt from real estate tax imposed by local
governments.

First, MIAA is not a government-owned or controlled corporation but an instrumentality of the

National Government and thus exempt from local taxation. Second, the real properties of MIAA
are owned by the Republic of the Philippines and thus exempt from real estate tax.
1. MIAA is Not a Government-Owned or Controlled Corporation

Respondents argue that MIAA, being a government-owned or controlled corporation, is not exempt
from real estate tax. Respondents claim that the deletion of the phrase "any government-owned or
controlled so exempt by its charter" in Section 234(e) of the Local Government Code withdrew the
real estate tax exemption of government-owned or controlled corporations. The deleted phrase
appeared in Section 40(a) of the 1974 Real Property Tax Code enumerating the entities exempt
from real estate tax.

There is no dispute that a government-owned or controlled corporation is not exempt from real
estate tax. However, MIAA is not a government-owned or controlled corporation. Section 2(13) of the
Introductory Provisions of the Administrative Code of 1987 defines a government-owned or
controlled corporation as follows:

SEC. 2. General Terms Defined. – x x x x

(13) Government-owned or controlled corporation refers to any agency organized as a

stock or non-stock corporation, vested with functions relating to public needs whether
governmental or proprietary in nature, and owned by the Government directly or through its
instrumentalities either wholly, or, where applicable as in the case of stock corporations, to
the extent of at least fifty-one (51) percent of its capital stock: x x x. (Emphasis supplied)

A government-owned or controlled corporation must be "organized as a stock or non-stock

corporation." MIAA is not organized as a stock or non-stock corporation. MIAA is not a stock
corporation because it has no capital stock divided into shares. MIAA has no stockholders or
voting shares. Section 10 of the MIAA Charter9 provides:

SECTION 10. Capital. — The capital of the Authority to be contributed by the National
Government shall be increased from Two and One-half Billion (P2,500,000,000.00) Pesos to
Ten Billion (P10,000,000,000.00) Pesos to consist of:

(a) The value of fixed assets including airport facilities, runways and equipment and such
other properties, movable and immovable[,] which may be contributed by the National
Government or transferred by it from any of its agencies, the valuation of which shall be
determined jointly with the Department of Budget and Management and the Commission on
Audit on the date of such contribution or transfer after making due allowances for
depreciation and other deductions taking into account the loans and other liabilities of the
Authority at the time of the takeover of the assets and other properties;

(b) That the amount of P605 million as of December 31, 1986 representing about seventy
percentum (70%) of the unremitted share of the National Government from 1983 to 1986 to
be remitted to the National Treasury as provided for in Section 11 of E. O. No. 903 as
amended, shall be converted into the equity of the National Government in the Authority.
Thereafter, the Government contribution to the capital of the Authority shall be provided in
the General Appropriations Act.

Clearly, under its Charter, MIAA does not have capital stock that is divided into shares.

Section 3 of the Corporation Code10 defines a stock corporation as one whose "capital stock is
divided into shares and x x x authorized to distribute to the holders of such shares dividends
x x x." MIAA has capital but it is not divided into shares of stock. MIAA has no stockholders or voting
shares. Hence, MIAA is not a stock corporation.
MIAA is also not a non-stock corporation because it has no members. Section 87 of the Corporation
Code defines a non-stock corporation as "one where no part of its income is distributable as
dividends to its members, trustees or officers." A non-stock corporation must have members. Even if
we assume that the Government is considered as the sole member of MIAA, this will not make MIAA
a non-stock corporation. Non-stock corporations cannot distribute any part of their income to their
members. Section 11 of the MIAA Charter mandates MIAA to remit 20% of its annual gross
operating income to the National Treasury.11 This prevents MIAA from qualifying as a non-stock
corporation.

Section 88 of the Corporation Code provides that non-stock corporations are "organized for
charitable, religious, educational, professional, cultural, recreational, fraternal, literary, scientific,
social, civil service, or similar purposes, like trade, industry, agriculture and like chambers." MIAA is
not organized for any of these purposes. MIAA, a public utility, is organized to operate an
international and domestic airport for public use.

Since MIAA is neither a stock nor a non-stock corporation, MIAA does not qualify as a government-
owned or controlled corporation. What then is the legal status of MIAA within the National
Government?

MIAA is a government instrumentality vested with corporate powers to perform efficiently its
governmental functions. MIAA is like any other government instrumentality, the only difference is that
MIAA is vested with corporate powers. Section 2(10) of the Introductory Provisions of the
Administrative Code defines a government "instrumentality" as follows:

SEC. 2. General Terms Defined. –– x x x x

(10) Instrumentality refers to any agency of the National Government, not integrated within
the department framework, vested with special functions or jurisdiction by law, endowed
with some if not all corporate powers, administering special funds, and enjoying
operational autonomy, usually through a charter. x x x (Emphasis supplied)

When the law vests in a government instrumentality corporate powers, the instrumentality does not
become a corporation. Unless the government instrumentality is organized as a stock or non-stock
corporation, it remains a government instrumentality exercising not only governmental but also
corporate powers. Thus, MIAA exercises the governmental powers of eminent domain,12 police
authority13 and the levying of fees and charges.14 At the same time, MIAA exercises "all the powers
of a corporation under the Corporation Law, insofar as these powers are not inconsistent with the
provisions of this Executive Order."15

Likewise, when the law makes a government instrumentality operationally autonomous, the
instrumentality remains part of the National Government machinery although not integrated with the
department framework. The MIAA Charter expressly states that transforming MIAA into a "separate
and autonomous body"16 will make its operation more "financially viable."17

Many government instrumentalities are vested with corporate powers but they do not become stock
or non-stock corporations, which is a necessary condition before an agency or instrumentality is
deemed a government-owned or controlled corporation. Examples are the Mactan International
Airport Authority, the Philippine Ports Authority, the University of the Philippines and Bangko Sentral
ng Pilipinas. All these government instrumentalities exercise corporate powers but they are not
organized as stock or non-stock corporations as required by Section 2(13) of the Introductory
Provisions of the Administrative Code. These government instrumentalities are sometimes loosely
called government corporate entities. However, they are not government-owned or controlled
corporations in the strict sense as understood under the Administrative Code, which is the governing
law defining the legal relationship and status of government entities.

A government instrumentality like MIAA falls under Section 133(o) of the Local Government Code,
which states:

SEC. 133. Common Limitations on the Taxing Powers of Local Government Units. – Unless
otherwise provided herein, the exercise of the taxing powers of provinces, cities,
municipalities, and barangays shall not extend to the levy of the following:

xxxx

(o) Taxes, fees or charges of any kind on the National Government, its agencies and
instrumentalitiesand local government units.(Emphasis and underscoring supplied)

Section 133(o) recognizes the basic principle that local governments cannot tax the national
government, which historically merely delegated to local governments the power to tax. While the
1987 Constitution now includes taxation as one of the powers of local governments, local
governments may only exercise such power "subject to such guidelines and limitations as the
Congress may provide."18

When local governments invoke the power to tax on national government instrumentalities, such
power is construed strictly against local governments. The rule is that a tax is never presumed and
there must be clear language in the law imposing the tax. Any doubt whether a person, article or
activity is taxable is resolved against taxation. This rule applies with greater force when local
governments seek to tax national government instrumentalities.

Another rule is that a tax exemption is strictly construed against the taxpayer claiming the
exemption. However, when Congress grants an exemption to a national government instrumentality
from local taxation, such exemption is construed liberally in favor of the national government
instrumentality. As this Court declared in Maceda v. Macaraig, Jr.:

The reason for the rule does not apply in the case of exemptions running to the benefit of the
government itself or its agencies. In such case the practical effect of an exemption is merely
to reduce the amount of money that has to be handled by government in the course of its
operations. For these reasons, provisions granting exemptions to government agencies may
be construed liberally, in favor of non tax-liability of such agencies.19

There is, moreover, no point in national and local governments taxing each other, unless a sound
and compelling policy requires such transfer of public funds from one government pocket to another.

There is also no reason for local governments to tax national government instrumentalities for
rendering essential public services to inhabitants of local governments. The only exception is
when the legislature clearly intended to tax government instrumentalities for the delivery of
essential public services for sound and compelling policy considerations. There must be
express language in the law empowering local governments to tax national government
instrumentalities. Any doubt whether such power exists is resolved against local governments.

Thus, Section 133 of the Local Government Code states that "unless otherwise provided" in the
Code, local governments cannot tax national government instrumentalities. As this Court held
in Basco v. Philippine Amusements and Gaming Corporation:
 The states have no power by taxation or otherwise, to retard, impede, burden or in
any manner control the operation of constitutional laws enacted by Congress to carry
into execution the powers vested in the federal government. (MC Culloch v.
Maryland, 4 Wheat 316, 4 L Ed. 579)

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

"Justice Holmes, speaking for the Supreme Court, made reference to the entire
absence of power on the part of the States to touch, in that way (taxation) at least,
the instrumentalities of the United States (Johnson v. Maryland, 254 US 51) and it
can be agreed that no state or political subdivision can regulate a federal
instrumentality in such a way as to prevent it from consummating its federal
responsibilities, or even to seriously burden it in the accomplishment of them."
(Antieau, Modern Constitutional Law, Vol. 2, p. 140, emphasis supplied)

Otherwise, mere creatures of the State can defeat National policies thru extermination of
what local authorities may perceive to be undesirable activities or enterprise using the power
to tax as "a tool for regulation" (U.S. v. Sanchez, 340 US 42).

The power to tax which was called by Justice Marshall as the "power to destroy" (Mc Culloch
v. Maryland, supra) cannot be allowed to defeat an instrumentality or creation of the very
entity which has the inherent power to wield it. 20

2. Airport Lands and Buildings of MIAA are Owned by the Republic

a. Airport Lands and Buildings are of Public Dominion

The Airport Lands and Buildings of MIAA are property of public dominion and therefore owned by
the State or the Republic of the Philippines. The Civil Code provides:

ARTICLE 419. Property is either of public dominion or of private ownership.

ARTICLE 420. The following things are property of public dominion:

(1) Those intended for public use, such as roads, canals, rivers, torrents, ports and
bridges constructed by the State, banks, shores, roadsteads, and others of similar
character;

(2) Those which belong to the State, without being for public use, and are intended for some
public service or for the development of the national wealth. (Emphasis supplied)

ARTICLE 421. All other property of the State, which is not of the character stated in the
preceding article, is patrimonial property.

ARTICLE 422. Property of public dominion, when no longer intended for public use or for
public service, shall form part of the patrimonial property of the State.

No one can dispute that properties of public dominion mentioned in Article 420 of the Civil Code, like
"roads, canals, rivers, torrents, ports and bridges constructed by the State," are owned by the
State. The term "ports" includes seaports and airports. The MIAA Airport Lands and Buildings
constitute a "port" constructed by the State. Under Article 420 of the Civil Code, the MIAA Airport
Lands and Buildings are properties of public dominion and thus owned by the State or the Republic
of the Philippines.

The Airport Lands and Buildings are devoted to public use because they are used by the public for
international and domestic travel and transportation. The fact that the MIAA collects terminal
fees and other charges from the public does not remove the character of the Airport Lands and
Buildings as properties for public use. The operation by the government of a tollway does not
change the character of the road as one for public use. Someone must pay for the maintenance of
the road, either the public indirectly through the taxes they pay the government, or only those among
the public who actually use the road through the toll fees they pay upon using the road. The tollway
system is even a more efficient and equitable manner of taxing the public for the maintenance of
public roads.

The charging of fees to the public does not determine the character of the property whether it is of
public dominion or not. Article 420 of the Civil Code defines property of public dominion as one
"intended for public use." Even if the government collects toll fees, the road is still "intended for
public use" if anyone can use the road under the same terms and conditions as the rest of the public.
The charging of fees, the limitation on the kind of vehicles that can use the road, the speed
restrictions and other conditions for the use of the road do not affect the public character of the road.

The terminal fees MIAA charges to passengers, as well as the landing fees MIAA charges to airlines,
constitute the bulk of the income that maintains the operations of MIAA. The collection of such fees
does not change the character of MIAA as an airport for public use. Such fees are often termed
user's tax. This means taxing those among the public who actually use a public facility instead of
taxing all the public including those who never use the particular public facility. A user's tax is more
equitable — a principle of taxation mandated in the 1987 Constitution.21

The Airport Lands and Buildings of MIAA, which its Charter calls the "principal airport of the
Philippines for both international and domestic air traffic,"22 are properties of public dominion
because they are intended for public use. As properties of public dominion, they indisputably
belong to the State or the Republic of the Philippines.

b. Airport Lands and Buildings are Outside the Commerce of Man

The Airport Lands and Buildings of MIAA are devoted to public use and thus are properties of public
dominion. As properties of public dominion, the Airport Lands and Buildings are outside the
commerce of man. The Court has ruled repeatedly that properties of public dominion are outside
the commerce of man. As early as 1915, this Court already ruled in Municipality of Cavite v.
Rojas that properties devoted to public use are outside the commerce of man, thus:

According to article 344 of the Civil Code: "Property for public use in provinces and in towns
comprises the provincial and town roads, the squares, streets, fountains, and public waters,
the promenades, and public works of general service supported by said towns or provinces."

The said Plaza Soledad being a promenade for public use, the municipal council of Cavite
could not in 1907 withdraw or exclude from public use a portion thereof in order to lease it for
the sole benefit of the defendant Hilaria Rojas. In leasing a portion of said plaza or public
place to the defendant for private use the plaintiff municipality exceeded its authority in the
exercise of its powers by executing a contract over a thing of which it could not dispose, nor
is it empowered so to do.
 The Civil Code, article 1271, prescribes that everything which is not outside the commerce of
man may be the object of a contract, and plazas and streets are outside of this commerce,
as was decided by the supreme court of Spain in its decision of February 12, 1895, which
says: "Communal things that cannot be sold because they are by their very nature
outside of commerce are those for public use, such as the plazas, streets, common
lands, rivers, fountains, etc." (Emphasis supplied) 23

Again in Espiritu v. Municipal Council, the Court declared that properties of public dominion are
outside the commerce of man:

xxx Town plazas are properties of public dominion, to be devoted to public use and to be
made available to the public in general. They are outside the commerce of man and
cannot be disposed of or even leased by the municipality to private parties. While in case of
war or during an emergency, town plazas may be occupied temporarily by private
individuals, as was done and as was tolerated by the Municipality of Pozorrubio, when the
emergency has ceased, said temporary occupation or use must also cease, and the town
officials should see to it that the town plazas should ever be kept open to the public and free
from encumbrances or illegal private constructions.24 (Emphasis supplied)

The Court has also ruled that property of public dominion, being outside the commerce of man,
cannot be the subject of an auction sale.25

Properties of public dominion, being for public use, are not subject to levy, encumbrance or
disposition through public or private sale. Any encumbrance, levy on execution or auction sale of any
property of public dominion is void for being contrary to public policy. Essential public services will
stop if properties of public dominion are subject to encumbrances, foreclosures and auction sale.
This will happen if the City of Parañaque can foreclose and compel the auction sale of the 600-
hectare runway of the MIAA for non-payment of real estate tax.

Before MIAA can encumber26 the Airport Lands and Buildings, the President must first withdraw
from public usethe Airport Lands and Buildings. Sections 83 and 88 of the Public Land Law or
Commonwealth Act No. 141, which "remains to this day the existing general law governing the
classification and disposition of lands of the public domain other than timber and mineral
lands,"27 provide:

SECTION 83. Upon the recommendation of the Secretary of Agriculture and Natural
Resources, the President may designate by proclamation any tract or tracts of land of the
public domain as reservations for the use of the Republic of the Philippines or of any of its
branches, or of the inhabitants thereof, in accordance with regulations prescribed for this
purposes, or for quasi-public uses or purposes when the public interest requires it, including
reservations for highways, rights of way for railroads, hydraulic power sites, irrigation
systems, communal pastures or lequas communales, public parks, public quarries, public
fishponds, working men's village and other improvements for the public benefit.

SECTION 88. The tract or tracts of land reserved under the provisions of Section
eighty-three shall be non-alienable and shall not be subject to occupation, entry, sale,
lease, or other disposition until again declared alienable under the provisions of this
Act or by proclamation of the President. (Emphasis and underscoring supplied)

Thus, unless the President issues a proclamation withdrawing the Airport Lands and Buildings from
public use, these properties remain properties of public dominion and are inalienable. Since the
Airport Lands and Buildings are inalienable in their present status as properties of public dominion,
they are not subject to levy on execution or foreclosure sale. As long as the Airport Lands and
Buildings are reserved for public use, their ownership remains with the State or the Republic of the
Philippines.

The authority of the President to reserve lands of the public domain for public use, and to withdraw
such public use, is reiterated in Section 14, Chapter 4, Title I, Book III of the Administrative Code of
1987, which states:

SEC. 14. Power to Reserve Lands of the Public and Private Domain of the Government. —
(1) The President shall have the power to reserve for settlement or public use, and for
specific public purposes, any of the lands of the public domain, the use of which is
not otherwise directed by law. The reserved land shall thereafter remain subject to the
specific public purpose indicated until otherwise provided by law or proclamation;

x x x x. (Emphasis supplied)

There is no question, therefore, that unless the Airport Lands and Buildings are withdrawn by law or
presidential proclamation from public use, they are properties of public dominion, owned by the
Republic and outside the commerce of man.

c. MIAA is a Mere Trustee of the Republic

MIAA is merely holding title to the Airport Lands and Buildings in trust for the Republic. Section 48,
Chapter 12, Book I of the Administrative Code allows instrumentalities like MIAA to hold title to
real properties owned by the Republic, thus:

SEC. 48. Official Authorized to Convey Real Property. — Whenever real property of the
Government is authorized by law to be conveyed, the deed of conveyance shall be executed
in behalf of the government by the following:

(1) For property belonging to and titled in the name of the Republic of the Philippines, by the
President, unless the authority therefor is expressly vested by law in another officer.

(2) For property belonging to the Republic of the Philippines but titled in the name of
any political subdivision or of any corporate agency or instrumentality, by the
executive head of the agency or instrumentality. (Emphasis supplied)

In MIAA's case, its status as a mere trustee of the Airport Lands and Buildings is clearer because
even its executive head cannot sign the deed of conveyance on behalf of the Republic. Only the
President of the Republic can sign such deed of conveyance.28

d. Transfer to MIAA was Meant to Implement a Reorganization

The MIAA Charter, which is a law, transferred to MIAA the title to the Airport Lands and Buildings
from the Bureau of Air Transportation of the Department of Transportation and Communications.
The MIAA Charter provides:

SECTION 3. Creation of the Manila International Airport Authority. — x x x x

The land where the Airport is presently located as well as the surrounding land area of
approximately six hundred hectares, are hereby transferred, conveyed and assigned
 to the ownership and administration of the Authority, subject to existing rights, if any.
The Bureau of Lands and other appropriate government agencies shall undertake an actual
survey of the area transferred within one year from the promulgation of this Executive Order
and the corresponding title to be issued in the name of the Authority. Any portion thereof
shall not be disposed through sale or through any other mode unless specifically
approved by the President of the Philippines. (Emphasis supplied)

SECTION 22. Transfer of Existing Facilities and Intangible Assets. — All existing public
airport facilities, runways, lands, buildings and other property, movable or immovable,
belonging to the Airport, and all assets, powers, rights, interests and privileges belonging to
the Bureau of Air Transportation relating to airport works or air operations, including all
equipment which are necessary for the operation of crash fire and rescue facilities, are
hereby transferred to the Authority. (Emphasis supplied)

SECTION 25. Abolition of the Manila International Airport as a Division in the Bureau of Air
Transportation and Transitory Provisions. — The Manila International Airport including the
Manila Domestic Airport as a division under the Bureau of Air Transportation is hereby
abolished.

x x x x.

The MIAA Charter transferred the Airport Lands and Buildings to MIAA without the Republic
receiving cash, promissory notes or even stock since MIAA is not a stock corporation.

The whereas clauses of the MIAA Charter explain the rationale for the transfer of the Airport Lands
and Buildings to MIAA, thus:

WHEREAS, the Manila International Airport as the principal airport of the Philippines for both
international and domestic air traffic, is required to provide standards of airport
accommodation and service comparable with the best airports in the world;

WHEREAS, domestic and other terminals, general aviation and other facilities, have to be
upgraded to meet the current and future air traffic and other demands of aviation in Metro
Manila;

WHEREAS, a management and organization study has indicated that the objectives of
providing high standards of accommodation and service within the context of a
financially viable operation, will best be achieved by a separate and autonomous
body; and

WHEREAS, under Presidential Decree No. 1416, as amended by Presidential Decree No.
1772, the President of the Philippines is given continuing authority to reorganize the
National Government, which authority includes the creation of new entities, agencies
and instrumentalities of the Government[.] (Emphasis supplied)

The transfer of the Airport Lands and Buildings from the Bureau of Air Transportation to MIAA was
not meant to transfer beneficial ownership of these assets from the Republic to MIAA. The purpose
was merely to reorganize a division in the Bureau of Air Transportation into a separate and
autonomous body. The Republic remains the beneficial owner of the Airport Lands and Buildings.
MIAA itself is owned solely by the Republic. No party claims any ownership rights over MIAA's
assets adverse to the Republic.
The MIAA Charter expressly provides that the Airport Lands and Buildings "shall not be disposed
through sale or through any other mode unless specifically approved by the President of the
Philippines." This only means that the Republic retained the beneficial ownership of the Airport
Lands and Buildings because under Article 428 of the Civil Code, only the "owner has the right to x x
x dispose of a thing." Since MIAA cannot dispose of the Airport Lands and Buildings, MIAA does not
own the Airport Lands and Buildings.

At any time, the President can transfer back to the Republic title to the Airport Lands and Buildings
without the Republic paying MIAA any consideration. Under Section 3 of the MIAA Charter, the
President is the only one who can authorize the sale or disposition of the Airport Lands and
Buildings. This only confirms that the Airport Lands and Buildings belong to the Republic.

e. Real Property Owned by the Republic is Not Taxable

Section 234(a) of the Local Government Code exempts from real estate tax any "[r]eal property
owned by the Republic of the Philippines." Section 234(a) provides:

SEC. 234. Exemptions from Real Property Tax. — The following are exempted from
payment of the real property tax:

(a) Real property owned by the Republic of the Philippines or any of its political
subdivisions except when the beneficial use thereof has been granted, for
consideration or otherwise, to a taxable person;

x x x. (Emphasis supplied)

This exemption should be read in relation with Section 133(o) of the same Code, which prohibits
local governments from imposing "[t]axes, fees or charges of any kind on the National Government,
its agencies and instrumentalitiesx x x." The real properties owned by the Republic are titled either
in the name of the Republic itself or in the name of agencies or instrumentalities of the National
Government. The Administrative Code allows real property owned by the Republic to be titled in the
name of agencies or instrumentalities of the national government. Such real properties remain
owned by the Republic and continue to be exempt from real estate tax.

The Republic may grant the beneficial use of its real property to an agency or instrumentality of the
national government. This happens when title of the real property is transferred to an agency or
instrumentality even as the Republic remains the owner of the real property. Such arrangement does
not result in the loss of the tax exemption. Section 234(a) of the Local Government Code states that
real property owned by the Republic loses its tax exemption only if the "beneficial use thereof has
been granted, for consideration or otherwise, to a taxable person." MIAA, as a government
instrumentality, is not a taxable person under Section 133(o) of the Local Government Code. Thus,
even if we assume that the Republic has granted to MIAA the beneficial use of the Airport Lands and
Buildings, such fact does not make these real properties subject to real estate tax.

However, portions of the Airport Lands and Buildings that MIAA leases to private entities are not
exempt from real estate tax. For example, the land area occupied by hangars that MIAA leases to
private corporations is subject to real estate tax. In such a case, MIAA has granted the beneficial use
of such land area for a consideration to a taxable person and therefore such land area is subject to
real estate tax. In Lung Center of the Philippines v. Quezon City, the Court ruled:

Accordingly, we hold that the portions of the land leased to private entities as well as those
parts of the hospital leased to private individuals are not exempt from such taxes. On the
 other hand, the portions of the land occupied by the hospital and portions of the hospital
used for its patients, whether paying or non-paying, are exempt from real property taxes.29

3. Refutation of Arguments of Minority

The minority asserts that the MIAA is not exempt from real estate tax because Section 193 of the
Local Government Code of 1991 withdrew the tax exemption of "all persons, whether natural or
juridical" upon the effectivity of the Code. Section 193 provides:

SEC. 193. Withdrawal of Tax Exemption Privileges – Unless otherwise provided in this
Code, tax exemptions or incentives granted to, or presently enjoyed by all persons,
whether natural or juridical, including government-owned or controlled corporations,
except local water districts, cooperatives duly registered under R.A. No. 6938, non-stock and
non-profit hospitals and educational institutions are hereby withdrawn upon effectivity of this
Code. (Emphasis supplied)

The minority states that MIAA is indisputably a juridical person. The minority argues that since the
Local Government Code withdrew the tax exemption of all juridical persons, then MIAA is not
exempt from real estate tax. Thus, the minority declares:

It is evident from the quoted provisions of the Local Government Code that the
withdrawn exemptions from realty tax cover not just GOCCs, but all persons. To
repeat, the provisions lay down the explicit proposition that the withdrawal of realty tax
exemption applies to all persons. The reference to or the inclusion of GOCCs is only
clarificatory or illustrative of the explicit provision.

The term "All persons" encompasses the two classes of persons recognized under
our laws, natural and juridical persons. Obviously, MIAA is not a natural person. Thus,
the determinative test is not just whether MIAA is a GOCC, but whether MIAA is a
juridical person at all. (Emphasis and underscoring in the original)

The minority posits that the "determinative test" whether MIAA is exempt from local taxation is its
status — whether MIAA is a juridical person or not. The minority also insists that "Sections 193 and
234 may be examined in isolation from Section 133(o) to ascertain MIAA's claim of exemption."

The argument of the minority is fatally flawed. Section 193 of the Local Government Code expressly
withdrew the tax exemption of all juridical persons "[u]nless otherwise provided in this Code."
Now, Section 133(o) of the Local Government Code expressly provides otherwise,
specifically prohibiting local governments from imposing any kind of tax on national government
instrumentalities. Section 133(o) states:

SEC. 133. Common Limitations on the Taxing Powers of Local Government Units. – Unless
otherwise provided herein, the exercise of the taxing powers of provinces, cities,
municipalities, and barangays shall not extend to the levy of the following:

xxxx

(o) Taxes, fees or charges of any kinds on the National Government, its agencies and
instrumentalities, and local government units. (Emphasis and underscoring supplied)
By express mandate of the Local Government Code, local governments cannot impose any kind of
tax on national government instrumentalities like the MIAA. Local governments are devoid of power
to tax the national government, its agencies and instrumentalities. The taxing powers of local
governments do not extend to the national government, its agencies and instrumentalities, "[u]nless
otherwise provided in this Code" as stated in the saving clause of Section 133. The saving clause
refers to Section 234(a) on the exception to the exemption from real estate tax of real property
owned by the Republic.

The minority, however, theorizes that unless exempted in Section 193 itself, all juridical persons are
subject to tax by local governments. The minority insists that the juridical persons exempt from local
taxation are limited to the three classes of entities specifically enumerated as exempt in Section 193.
Thus, the minority states:

x x x Under Section 193, the exemption is limited to (a) local water districts; (b) cooperatives
duly registered under Republic Act No. 6938; and (c) non-stock and non-profit hospitals and
educational institutions. It would be belaboring the obvious why the MIAA does not fall within
any of the exempt entities under Section 193. (Emphasis supplied)

The minority's theory directly contradicts and completely negates Section 133(o) of the Local
Government Code. This theory will result in gross absurdities. It will make the national government,
which itself is a juridical person, subject to tax by local governments since the national government is
not included in the enumeration of exempt entities in Section 193. Under this theory, local
governments can impose any kind of local tax, and not only real estate tax, on the national
government.

Under the minority's theory, many national government instrumentalities with juridical personalities
will also be subject to any kind of local tax, and not only real estate tax. Some of the national
government instrumentalities vested by law with juridical personalities are: Bangko Sentral ng
Pilipinas,30 Philippine Rice Research Institute,31Laguna Lake

Development Authority,32 Fisheries Development Authority,33 Bases Conversion Development

Authority,34Philippine Ports Authority,35 Cagayan de Oro Port Authority,36 San Fernando Port
Authority,37 Cebu Port Authority,38 and Philippine National Railways.39

The minority's theory violates Section 133(o) of the Local Government Code which expressly
prohibits local governments from imposing any kind of tax on national government instrumentalities.
Section 133(o) does not distinguish between national government instrumentalities with or without
juridical personalities. Where the law does not distinguish, courts should not distinguish. Thus,
Section 133(o) applies to all national government instrumentalities, with or without juridical
personalities. The determinative test whether MIAA is exempt from local taxation is not whether
MIAA is a juridical person, but whether it is a national government instrumentality under Section
133(o) of the Local Government Code. Section 133(o) is the specific provision of law prohibiting local
governments from imposing any kind of tax on the national government, its agencies and
instrumentalities.

Section 133 of the Local Government Code starts with the saving clause "[u]nless otherwise
provided in this Code." This means that unless the Local Government Code grants an express
authorization, local governments have no power to tax the national government, its agencies and
instrumentalities. Clearly, the rule is local governments have no power to tax the national
government, its agencies and instrumentalities. As an exception to this rule, local governments may
tax the national government, its agencies and instrumentalities only if the Local Government Code
expressly so provides.
The saving clause in Section 133 refers to the exception to the exemption in Section 234(a) of the
Code, which makes the national government subject to real estate tax when it gives the beneficial
use of its real properties to a taxable entity. Section 234(a) of the Local Government Code provides:

SEC. 234. Exemptions from Real Property Tax – The following are exempted from payment
of the real property tax:

(a) Real property owned by the Republic of the Philippines or any of its political subdivisions
except when the beneficial use thereof has been granted, for consideration or otherwise, to a
taxable person.

x x x. (Emphasis supplied)

Under Section 234(a), real property owned by the Republic is exempt from real estate tax. The
exception to this exemption is when the government gives the beneficial use of the real property to a
taxable entity.

The exception to the exemption in Section 234(a) is the only instance when the national government,
its agencies and instrumentalities are subject to any kind of tax by local governments. The exception
to the exemption applies only to real estate tax and not to any other tax. The justification for the
exception to the exemption is that the real property, although owned by the Republic, is not devoted
to public use or public service but devoted to the private gain of a taxable person.

The minority also argues that since Section 133 precedes Section 193 and 234 of the Local
Government Code, the later provisions prevail over Section 133. Thus, the minority asserts:

x x x Moreover, sequentially Section 133 antecedes Section 193 and 234. Following an
accepted rule of construction, in case of conflict the subsequent provisions should prevail.
Therefore, MIAA, as a juridical person, is subject to real property taxes, the general
exemptions attaching to instrumentalities under Section 133(o) of the Local Government
Code being qualified by Sections 193 and 234 of the same law. (Emphasis supplied)

The minority assumes that there is an irreconcilable conflict between Section 133 on one hand, and
Sections 193 and 234 on the other. No one has urged that there is such a conflict, much less has
any one presenteda persuasive argument that there is such a conflict. The minority's assumption of
an irreconcilable conflict in the statutory provisions is an egregious error for two reasons.

First, there is no conflict whatsoever between Sections 133 and 193 because Section 193 expressly
admits its subordination to other provisions of the Code when Section 193 states "[u]nless otherwise
provided in this Code." By its own words, Section 193 admits the superiority of other provisions of
the Local Government Code that limit the exercise of the taxing power in Section 193. When a
provision of law grants a power but withholds such power on certain matters, there is no conflict
between the grant of power and the withholding of power. The grantee of the power simply cannot
exercise the power on matters withheld from its power.

Second, Section 133 is entitled "Common Limitations on the Taxing Powers of Local Government
Units." Section 133 limits the grant to local governments of the power to tax, and not merely the
exercise of a delegated power to tax. Section 133 states that the taxing powers of local governments
"shall not extend to the levy" of any kind of tax on the national government, its agencies and
instrumentalities. There is no clearer limitation on the taxing power than this.
Since Section 133 prescribes the "common limitations" on the taxing powers of local governments,
Section 133 logically prevails over Section 193 which grants local governments such taxing powers.
By their very meaning and purpose, the "common limitations" on the taxing power prevail over the
grant or exercise of the taxing power. If the taxing power of local governments in Section 193
prevails over the limitations on such taxing power in Section 133, then local governments can
impose any kind of tax on the national government, its agencies and instrumentalities — a gross
absurdity.

Local governments have no power to tax the national government, its agencies and
instrumentalities, except as otherwise provided in the Local Government Code pursuant to the
saving clause in Section 133 stating "[u]nless otherwise provided in this Code." This exception —
which is an exception to the exemption of the Republic from real estate tax imposed by local
governments — refers to Section 234(a) of the Code. The exception to the exemption in Section
234(a) subjects real property owned by the Republic, whether titled in the name of the national
government, its agencies or instrumentalities, to real estate tax if the beneficial use of such property
is given to a taxable entity.

The minority also claims that the definition in the Administrative Code of the phrase "government-
owned or controlled corporation" is not controlling. The minority points out that Section 2 of the
Introductory Provisions of the Administrative Code admits that its definitions are not controlling when
it provides:

SEC. 2. General Terms Defined. — Unless the specific words of the text, or the context as a
whole, or a particular statute, shall require a different meaning:

xxxx

The minority then concludes that reliance on the Administrative Code definition is "flawed."

The minority's argument is a non sequitur. True, Section 2 of the Administrative Code recognizes
that a statute may require a different meaning than that defined in the Administrative Code.
However, this does not automatically mean that the definition in the Administrative Code does not
apply to the Local Government Code. Section 2 of the Administrative Code clearly states that
"unless the specific words x x x of a particular statute shall require a different meaning," the definition
in Section 2 of the Administrative Code shall apply. Thus, unless there is specific language in the
Local Government Code defining the phrase "government-owned or controlled corporation"
differently from the definition in the Administrative Code, the definition in the Administrative Code
prevails.

The minority does not point to any provision in the Local Government Code defining the phrase
"government-owned or controlled corporation" differently from the definition in the Administrative
Code. Indeed, there is none. The Local Government Code is silent on the definition of the phrase
"government-owned or controlled corporation." The Administrative Code, however, expressly defines
the phrase "government-owned or controlled corporation." The inescapable conclusion is that the
Administrative Code definition of the phrase "government-owned or controlled corporation" applies to
the Local Government Code.

The third whereas clause of the Administrative Code states that the Code "incorporates in a unified
document the major structural, functional and procedural principles and rules of governance." Thus,
the Administrative Code is the governing law defining the status and relationship of government
departments, bureaus, offices, agencies and instrumentalities. Unless a statute expressly provides
for a different status and relationship for a specific government unit or entity, the provisions of the
Administrative Code prevail.

The minority also contends that the phrase "government-owned or controlled corporation" should
apply only to corporations organized under the Corporation Code, the general incorporation law, and
not to corporations created by special charters. The minority sees no reason why government
corporations with special charters should have a capital stock. Thus, the minority declares:

I submit that the definition of "government-owned or controlled corporations" under the

Administrative Code refer to those corporations owned by the government or its
instrumentalities which are created not by legislative enactment, but formed and organized
under the Corporation Code through registration with the Securities and Exchange
Commission. In short, these are GOCCs without original charters.

xxxx

It might as well be worth pointing out that there is no point in requiring a capital structure for
GOCCs whose full ownership is limited by its charter to the State or Republic. Such GOCCs
are not empowered to declare dividends or alienate their capital shares.

The contention of the minority is seriously flawed. It is not in accord with the Constitution and
existing legislations. It will also result in gross absurdities.

First, the Administrative Code definition of the phrase "government-owned or controlled corporation"
does not distinguish between one incorporated under the Corporation Code or under a special
charter. Where the law does not distinguish, courts should not distinguish.

Second, Congress has created through special charters several government-owned corporations
organized as stock corporations. Prime examples are the Land Bank of the Philippines and the
Development Bank of the Philippines. The special charter40 of the Land Bank of the Philippines
provides:

SECTION 81. Capital. — The authorized capital stock of the Bank shall be nine billion pesos,
divided into seven hundred and eighty million common shares with a par value of ten pesos
each, which shall be fully subscribed by the Government, and one hundred and twenty
million preferred shares with a par value of ten pesos each, which shall be issued in
accordance with the provisions of Sections seventy-seven and eighty-three of this Code.
(Emphasis supplied)

Likewise, the special charter41 of the Development Bank of the Philippines provides:

SECTION 7. Authorized Capital Stock – Par value. — The capital stock of the Bank shall be
Five Billion Pesos to be divided into Fifty Million common shares with par value of P100 per
share. These shares are available for subscription by the National Government. Upon the
effectivity of this Charter, the National Government shall subscribe to Twenty-Five Million
common shares of stock worth Two Billion Five Hundred Million which shall be deemed paid
for by the Government with the net asset values of the Bank remaining after the transfer of
assets and liabilities as provided in Section 30 hereof. (Emphasis supplied)

Other government-owned corporations organized as stock corporations under their special charters
are the Philippine Crop Insurance Corporation,42 Philippine International Trading Corporation,43 and
the Philippine National Bank44 before it was reorganized as a stock corporation under the
Corporation Code. All these government-owned corporations organized under special charters as
stock corporations are subject to real estate tax on real properties owned by them. To rule that they
are not government-owned or controlled corporations because they are not registered with the
Securities and Exchange Commission would remove them from the reach of Section 234 of the
Local Government Code, thus exempting them from real estate tax.

Third, the government-owned or controlled corporations created through special charters are those
that meet the two conditions prescribed in Section 16, Article XII of the Constitution. The first
condition is that the government-owned or controlled corporation must be established for the
common good. The second condition is that the government-owned or controlled corporation must
meet the test of economic viability. Section 16, Article XII of the 1987 Constitution provides:

SEC. 16. The Congress shall not, except by general law, provide for the formation,
organization, or regulation of private corporations. Government-owned or controlled
corporations may be created or established by special charters in the interest of the common
good and subject to the test of economic viability. (Emphasis and underscoring supplied)

The Constitution expressly authorizes the legislature to create "government-owned or controlled

corporations" through special charters only if these entities are required to meet the twin conditions
of common good and economic viability. In other words, Congress has no power to create
government-owned or controlled corporations with special charters unless they are made to comply
with the two conditions of common good and economic viability. The test of economic viability
applies only to government-owned or controlled corporations that perform economic or commercial
activities and need to compete in the market place. Being essentially economic vehicles of the State
for the common good — meaning for economic development purposes — these government-owned
or controlled corporations with special charters are usually organized as stock corporations just like
ordinary private corporations.

In contrast, government instrumentalities vested with corporate powers and performing

governmental or public functions need not meet the test of economic viability. These
instrumentalities perform essential public services for the common good, services that every modern
State must provide its citizens. These instrumentalities need not be economically viable since the
government may even subsidize their entire operations. These instrumentalities are not the
"government-owned or controlled corporations" referred to in Section 16, Article XII of the 1987
Constitution.

Thus, the Constitution imposes no limitation when the legislature creates government
instrumentalities vested with corporate powers but performing essential governmental or public
functions. Congress has plenary authority to create government instrumentalities vested with
corporate powers provided these instrumentalities perform essential government functions or public
services. However, when the legislature creates through special charters corporations that perform
economic or commercial activities, such entities — known as "government-owned or controlled
corporations" — must meet the test of economic viability because they compete in the market place.

This is the situation of the Land Bank of the Philippines and the Development Bank of the Philippines
and similar government-owned or controlled corporations, which derive their income to meet
operating expenses solely from commercial transactions in competition with the private sector. The
intent of the Constitution is to prevent the creation of government-owned or controlled corporations
that cannot survive on their own in the market place and thus merely drain the public coffers.
Commissioner Blas F. Ople, proponent of the test of economic viability, explained to the
Constitutional Commission the purpose of this test, as follows:

MR. OPLE: Madam President, the reason for this concern is really that when the government
creates a corporation, there is a sense in which this corporation becomes exempt from the
test of economic performance. We know what happened in the past. If a government
corporation loses, then it makes its claim upon the taxpayers' money through new equity
infusions from the government and what is always invoked is the common good. That is the
reason why this year, out of a budget of P115 billion for the entire government, about P28
billion of this will go into equity infusions to support a few government financial institutions.
And this is all taxpayers' money which could have been relocated to agrarian reform, to
social services like health and education, to augment the salaries of grossly underpaid public
employees. And yet this is all going down the drain.

Therefore, when we insert the phrase "ECONOMIC VIABILITY" together with the "common
good," this becomes a restraint on future enthusiasts for state capitalism to excuse
themselves from the responsibility of meeting the market test so that they become viable.
And so, Madam President, I reiterate, for the committee's consideration and I am glad that I
am joined in this proposal by Commissioner Foz, the insertion of the standard of
"ECONOMIC VIABILITY OR THE ECONOMIC TEST," together with the common good.45

Father Joaquin G. Bernas, a leading member of the Constitutional Commission, explains in his
textbook The 1987 Constitution of the Republic of the Philippines: A Commentary:

The second sentence was added by the 1986 Constitutional Commission. The significant
addition, however, is the phrase "in the interest of the common good and subject to the test
of economic viability." The addition includes the ideas that they must show capacity to
function efficiently in business and that they should not go into activities which the private
sector can do better. Moreover, economic viability is more than financial viability but also
includes capability to make profit and generate benefits not quantifiable in financial
terms.46(Emphasis supplied)

Clearly, the test of economic viability does not apply to government entities vested with corporate
powers and performing essential public services. The State is obligated to render essential public
services regardless of the economic viability of providing such service. The non-economic viability of
rendering such essential public service does not excuse the State from withholding such essential
services from the public.

However, government-owned or controlled corporations with special charters, organized essentially

for economic or commercial objectives, must meet the test of economic viability. These are the
government-owned or controlled corporations that are usually organized under their special charters
as stock corporations, like the Land Bank of the Philippines and the Development Bank of the
Philippines. These are the government-owned or controlled corporations, along with government-
owned or controlled corporations organized under the Corporation Code, that fall under the definition
of "government-owned or controlled corporations" in Section 2(10) of the Administrative Code.

The MIAA need not meet the test of economic viability because the legislature did not create MIAA
to compete in the market place. MIAA does not compete in the market place because there is no
competing international airport operated by the private sector. MIAA performs an essential public
service as the primary domestic and international airport of the Philippines. The operation of an
international airport requires the presence of personnel from the following government agencies:
 1. The Bureau of Immigration and Deportation, to document the arrival and departure of
passengers, screening out those without visas or travel documents, or those with hold
departure orders;

2. The Bureau of Customs, to collect import duties or enforce the ban on prohibited
importations;

3. The quarantine office of the Department of Health, to enforce health measures against the
spread of infectious diseases into the country;

4. The Department of Agriculture, to enforce measures against the spread of plant and
animal diseases into the country;

5. The Aviation Security Command of the Philippine National Police, to prevent the entry of
terrorists and the escape of criminals, as well as to secure the airport premises from terrorist
attack or seizure;

6. The Air Traffic Office of the Department of Transportation and Communications, to

authorize aircraft to enter or leave Philippine airspace, as well as to land on, or take off from,
the airport; and

7. The MIAA, to provide the proper premises — such as runway and buildings — for the
government personnel, passengers, and airlines, and to manage the airport operations.

All these agencies of government perform government functions essential to the operation of an
international airport.

MIAA performs an essential public service that every modern State must provide its citizens. MIAA
derives its revenues principally from the mandatory fees and charges MIAA imposes on passengers
and airlines. The terminal fees that MIAA charges every passenger are regulatory or administrative
fees47 and not income from commercial transactions.

MIAA falls under the definition of a government instrumentality under Section 2(10) of the
Introductory Provisions of the Administrative Code, which provides:

SEC. 2. General Terms Defined. – x x x x

(10) Instrumentality refers to any agency of the National Government, not integrated within
the department framework, vested with special functions or jurisdiction by law, endowed with
some if not all corporate powers, administering special funds, and enjoying operational
autonomy, usually through a charter. x x x (Emphasis supplied)

The fact alone that MIAA is endowed with corporate powers does not make MIAA a government-
owned or controlled corporation. Without a change in its capital structure, MIAA remains a
government instrumentality under Section 2(10) of the Introductory Provisions of the Administrative
Code. More importantly, as long as MIAA renders essential public services, it need not comply with
the test of economic viability. Thus, MIAA is outside the scope of the phrase "government-owned or
controlled corporations" under Section 16, Article XII of the 1987 Constitution.

The minority belittles the use in the Local Government Code of the phrase "government-owned or
controlled corporation" as merely "clarificatory or illustrative." This is fatal. The 1987 Constitution
prescribes explicit conditions for the creation of "government-owned or controlled corporations." The
Administrative Code defines what constitutes a "government-owned or controlled corporation." To
belittle this phrase as "clarificatory or illustrative" is grave error.

To summarize, MIAA is not a government-owned or controlled corporation under Section 2(13) of

the Introductory Provisions of the Administrative Code because it is not organized as a stock or non-
stock corporation. Neither is MIAA a government-owned or controlled corporation under Section 16,
Article XII of the 1987 Constitution because MIAA is not required to meet the test of economic
viability. MIAA is a government instrumentality vested with corporate powers and performing
essential public services pursuant to Section 2(10) of the Introductory Provisions of the
Administrative Code. As a government instrumentality, MIAA is not subject to any kind of tax by local
governments under Section 133(o) of the Local Government Code. The exception to the exemption
in Section 234(a) does not apply to MIAA because MIAA is not a taxable entity under the Local
Government Code. Such exception applies only if the beneficial use of real property owned by the
Republic is given to a taxable entity.

Finally, the Airport Lands and Buildings of MIAA are properties devoted to public use and thus are
properties of public dominion. Properties of public dominion are owned by the State or the Republic.
Article 420 of the Civil Code provides:

Art. 420. The following things are property of public dominion:

(1) Those intended for public use, such as roads, canals, rivers, torrents, ports and bridges
constructed by the State, banks, shores, roadsteads, and others of similar character;

(2) Those which belong to the State, without being for public use, and are intended for some
public service or for the development of the national wealth. (Emphasis supplied)

The term "ports x x x constructed by the State" includes airports and seaports. The Airport Lands
and Buildings of MIAA are intended for public use, and at the very least intended for public service.
Whether intended for public use or public service, the Airport Lands and Buildings are properties of
public dominion. As properties of public dominion, the Airport Lands and Buildings are owned by the
Republic and thus exempt from real estate tax under Section 234(a) of the Local Government Code.

4. Conclusion

Under Section 2(10) and (13) of the Introductory Provisions of the Administrative Code, which
governs the legal relation and status of government units, agencies and offices within the entire
government machinery, MIAA is a government instrumentality and not a government-owned or
controlled corporation. Under Section 133(o) of the Local Government Code, MIAA as a government
instrumentality is not a taxable person because it is not subject to "[t]axes, fees or charges of any
kind" by local governments. The only exception is when MIAA leases its real property to a "taxable
person" as provided in Section 234(a) of the Local Government Code, in which case the specific real
property leased becomes subject to real estate tax. Thus, only portions of the Airport Lands and
Buildings leased to taxable persons like private parties are subject to real estate tax by the City of
Parañaque.

Under Article 420 of the Civil Code, the Airport Lands and Buildings of MIAA, being devoted to public
use, are properties of public dominion and thus owned by the State or the Republic of the
Philippines. Article 420 specifically mentions "ports x x x constructed by the State," which includes
public airports and seaports, as properties of public dominion and owned by the Republic. As
properties of public dominion owned by the Republic, there is no doubt whatsoever that the Airport
Lands and Buildings are expressly exempt from real estate tax under Section 234(a) of the Local
Government Code. This Court has also repeatedly ruled that properties of public dominion are not
subject to execution or foreclosure sale.

WHEREFORE, we GRANT the petition. We SET ASIDE the assailed Resolutions of the Court of
Appeals of 5 October 2001 and 27 September 2002 in CA-G.R. SP No. 66878. We DECLARE the
Airport Lands and Buildings of the Manila International Airport Authority EXEMPT from the real
estate tax imposed by the City of Parañaque. We declare VOID all the real estate tax assessments,
including the final notices of real estate tax delinquencies, issued by the City of Parañaque on the
Airport Lands and Buildings of the Manila International Airport Authority, except for the portions that
the Manila International Airport Authority has leased to private parties. We also declare VOID the
assailed auction sale, and all its effects, of the Airport Lands and Buildings of the Manila
International Airport Authority.

No costs.

SO ORDERED.

Panganiban, C.J., Puno, Quisumbing, Ynares-Santiago, Sandoval-Gutierrez, Austria-Martinez,

Corona, Carpio Morales, Callejo, Sr., Azcuna, Tinga, Chico-Nazario, Garcia, Velasco, Jr.,
J.J., concur.

x-------------------------------------------------------------------------------x

DISSENTING OPINION

TINGA, J. :

The legally correct resolution of this petition would have had the added benefit of an utterly fair and
equitable result – a recognition of the constitutional and statutory power of the City of Parañaque to
impose real property taxes on the Manila International Airport Authority (MIAA), but at the same
time, upholding a statutory limitation that prevents the City of Parañaque from seizing and
conducting an execution sale over the real properties of MIAA. In the end, all that the City of
Parañaque would hold over the MIAA is a limited lien, unenforceable as it is through the sale or
disposition of MIAA properties. Not only is this the legal effect of all the relevant constitutional and
statutory provisions applied to this case, it also leaves the room for negotiation for a mutually
acceptable resolution between the City of Parañaque and MIAA.

Instead, with blind but measured rage, the majority today veers wildly off-course, shattering statutes
and judicial precedents left and right in order to protect the precious Ming vase that is the Manila
International Airport Authority (MIAA). While the MIAA is left unscathed, it is surrounded by the
wreckage that once was the constitutional policy, duly enacted into law, that was local autonomy.
Make no mistake, the majority has virtually declared war on the seventy nine (79) provinces, one
hundred seventeen (117) cities, and one thousand five hundred (1,500) municipalities of the
Philippines.1
The icing on this inedible cake is the strained and purposely vague rationale used to justify the
majority opinion. Decisions of the Supreme Court are expected to provide clarity to the parties and to
students of jurisprudence, as to what the law of the case is, especially when the doctrines of long
standing are modified or clarified. With all due respect, the decision in this case is plainly so, so
wrong on many levels. More egregious, in the majority's resolve to spare the Manila International
Airport Authority (MIAA) from liability for real estate taxes, no clear-cut rule emerges on the
important question of the power of local government units (LGUs) to tax government corporations,
instrumentalities or agencies.

The majority would overturn sub silencio, among others, at least one dozen precedents enumerated
below:

1) Mactan-Cebu International Airport Authority v. Hon. Marcos,2 the leading case penned in 1997 by
recently retired Chief Justice Davide, which held that the express withdrawal by the Local
Government Code of previously granted exemptions from realty taxes applied to instrumentalities
and government-owned or controlled corporations (GOCCs) such as the Mactan-Cebu International
Airport Authority (MCIAA). The majority invokes the ruling in Basco v. Pagcor,3 a precedent
discredited in Mactan, and a vanguard of a doctrine so noxious to the concept of local government
rule that the Local Government Code was drafted precisely to counter such philosophy. The efficacy
of several rulings that expressly rely on Mactan, such as PHILRECA v. DILG Secretary,4 City
Government of San Pablo v. Hon. Reyes5 is now put in question.

2) The rulings in National Power Corporation v. City of Cabanatuan,6 wherein the Court, through
Justice Puno, declared that the National Power Corporation, a GOCC, is liable for franchise taxes
under the Local Government Code, and succeeding cases that have relied on it such as Batangas
Power Corp. v. Batangas City7 The majority now states that deems instrumentalities as defined
under the Administrative Code of 1987 as purportedly beyond the reach of any form of taxation by
LGUs, stating "[l]ocal governments are devoid of power to tax the national government, its agencies
and instrumentalities."8 Unfortunately, using the definition employed by the majority, as provided by
Section 2(d) of the Administrative Code, GOCCs are also considered as instrumentalities, thus
leading to the astounding conclusion that GOCCs may not be taxed by LGUs under the Local
Government Code.

3) Lung Center of the Philippines v. Quezon City,9 wherein a unanimous en banc Court held that the
Lung Center of the Philippines may be liable for real property taxes. Using the majority's reasoning,
the Lung Center would be properly classified as an instrumentality which the majority now holds as
exempt from all forms of local taxation.10

4) City of Davao v. RTC,11 where the Court held that the Government Service Insurance System
(GSIS) was liable for real property taxes for the years 1992 to 1994, its previous exemption having
been withdrawn by the enactment of the Local Government Code.12 This decision, which expressly
relied on Mactan, would be directly though silently overruled by the majority.

5) The common essence of the Court's rulings in the two Philippine Ports Authority v. City of
Iloilo,13 cases penned by Justices Callejo and Azcuna respectively, which relied in part on Mactan in
holding the Philippine Ports Authority (PPA) liable for realty taxes, notwithstanding the fact that it is a
GOCC. Based on the reasoning of the majority, the PPA cannot be considered a GOCC. The
reliance of these cases on Mactan, and its rationale for holding governmental entities like the PPA
liable for local government taxation is mooted by the majority.

6) The 1963 precedent of Social Security System Employees Association v. Soriano,14 which
declared the Social Security Commission (SSC) as a GOCC performing proprietary functions. Based
on the rationale employed by the majority, the Social Security System is not a GOCC. Or perhaps
more accurately, "no longer" a GOCC.

7) The decision penned by Justice (now Chief Justice) Panganiban, Light Rail Transit Authority v.
Central Board of Assessment.15 The characterization therein of the Light Rail Transit Authority
(LRTA) as a "service-oriented commercial endeavor" whose patrimonial property is subject to local
taxation is now rendered inconsequential, owing to the majority's thinking that an entity such as the
LRTA is itself exempt from local government taxation16, irrespective of the functions it performs.
Moreover, based on the majority's criteria, LRTA is not a GOCC.

8) The cases of Teodoro v. National Airports Corporation17 and Civil Aeronautics Administration v.
Court of Appeals.18 wherein the Court held that the predecessor agency of the MIAA, which was
similarly engaged in the operation, administration and management of the Manila International
Agency, was engaged in the exercise of proprietary, as opposed to sovereign functions. The majority
would hold otherwise that the property maintained by MIAA is actually patrimonial, thus implying that
MIAA is actually engaged in sovereign functions.

9) My own majority in Phividec Industrial Authority v. Capitol Steel,19 wherein the Court held that the
Phividec Industrial Authority, a GOCC, was required to secure the services of the Office of the
Government Corporate Counsel for legal representation.20 Based on the reasoning of the majority,
Phividec would not be a GOCC, and the mandate of the Office of the Government Corporate
Counsel extends only to GOCCs.

10) Two decisions promulgated by the Court just last month (June 2006), National Power
Corporation v. Province of Isabela21 and GSIS v. City Assessor of Iloilo City.22 In the former, the
Court pronounced that "[a]lthough as a general rule, LGUs cannot impose taxes, fees, or charges of
any kind on the National Government, its agencies and instrumentalities, this rule admits of an
exception, i.e., when specific provisions of the LGC authorize the LGUs to impose taxes, fees or
charges on the aforementioned entities." Yet the majority now rules that the exceptions in the LGC
no longer hold, since "local governments are devoid of power to tax the national government, its
agencies and instrumentalities."23 The ruling in the latter case, which held the GSIS as liable for real
property taxes, is now put in jeopardy by the majority's ruling.

There are certainly many other precedents affected, perhaps all previous jurisprudence regarding
local government taxation vis-a-vis government entities, as well as any previous definitions of
GOCCs, and previous distinctions between the exercise of governmental and proprietary functions
(a distinction laid down by this Court as far back as 191624). What is the reason offered by the
majority for overturning or modifying all these precedents and doctrines? None is given, for the
majority takes comfort instead in the pretense that these precedents never existed. Only children
should be permitted to subscribe to the theory that something bad will go away if you pretend hard
enough that it does not exist.

I.

Case Should Have Been Decided

Following Mactan Precedent

The core issue in this case, whether the MIAA is liable to the City of Parañaque for real property
taxes under the Local Government Code, has already been decided by this Court in the Mactan
case, and should have been resolved by simply applying precedent.
Mactan Explained

A brief recall of the Mactan case is in order. The Mactan-Cebu International Airport Authority
(MCIAA) claimed that it was exempt from payment of real property taxes to the City of Cebu,
invoking the specific exemption granted in Section 14 of its charter, Republic Act No. 6958, and its
status as an instrumentality of the government performing governmental functions.25 Particularly,
MCIAA invoked Section 133 of the Local Government Code, precisely the same provision utilized by
the majority as the basis for MIAA's exemption. Section 133 reads:

Sec. 133. Common Limitations on the Taxing Powers of Local Government Units.— Unless
otherwise provided herein, the exercise of the taxing powers of provinces, cities, municipalities, and
barangays shall not extend to the levy of the following:

xxx

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

However, the Court in Mactan noted that Section 133 qualified the exemption of the National
Government, its agencies and instrumentalities from local taxation with the phrase "unless otherwise
provided herein." It then considered the other relevant provisions of the Local Government Code,
particularly the following:

SEC. 193. Withdrawal of Tax Exemption Privileges. – Unless otherwise provided in this Code, tax
exemption or incentives granted to, or enjoyed by all persons, whether natural or juridical, including
government-owned and controlled corporations, except local water districts, cooperatives duly
registered under R.A. No. 6938, non-stock and non-profit hospitals and educational institutions, are
hereby withdrawn upon the effectivity of this Code.26

SECTION 232. Power to Levy Real Property Tax. – A province or city or a municipality within the
Metropolitan Manila area may levy an annual ad valorem tax on real property such as land, building,
machinery, and other improvements not hereafter specifically exempted.27

SECTION 234. Exemptions from Real Property Tax. -- The following are exempted from payment of
the real property tax:

(a) Real property owned by the Republic of the Philippines or any of its political subdivisions except
when the beneficial use thereof has been granted, for consideration or otherwise, to a taxable
person:

(b) Charitable institutions, churches, parsonages or convents appurtenant thereto, mosques, non-
profit or religious cemeteries and all lands, buildings, and improvements actually, directly, and
exclusively used for religious charitable or educational purposes;

(c) All machineries and equipment that are actually, directly and exclusively used by local water
districts and government-owned and controlled corporations engaged in the distribution of water
and/or generation and transmission of electric power;

(d) All real property owned by duly registered cooperatives as provided for under R.A. No. 6938; and

(e) Machinery and equipment used for pollution control and environmental protection.
Except as provided herein, any exemption from payment of real property tax previously granted to,
or presently enjoyed by, all persons, whether natural or juridical, including all government-owned or
controlled corporations are hereby withdrawn upon the effectivity of this Code.28

Clearly, Section 133 was not intended to be so absolute a prohibition on the power of LGUs to tax
the National Government, its agencies and instrumentalities, as evidenced by these cited provisions
which "otherwise provided." But what was the extent of the limitation under Section 133? This is how
the Court, correctly to my mind, defined the parameters in Mactan:

The foregoing sections of the LGC speak of: (a) the limitations on the taxing powers of local
government units and the exceptions to such limitations; and (b) the rule on tax exemptions and the
exceptions thereto. The use of exceptions or provisos in these sections, as shown by the following
clauses:

(1) "unless otherwise provided herein" in the opening paragraph of Section 133;

(2) "Unless otherwise provided in this Code" in Section 193;

(3) "not hereafter specifically exempted" in Section 232; and

(4) "Except as provided herein" in the last paragraph of Section 234

initially hampers a ready understanding of the sections. Note, too, that the aforementioned clause in
Section 133 seems to be inaccurately worded. Instead of the clause "unless otherwise provided
herein," with the "herein" to mean, of course, the section, it should have used the clause "unless
otherwise provided in this Code." The former results in absurdity since the section itself enumerates
what are beyond the taxing powers of local government units and, where exceptions were intended,
the exceptions are explicitly indicated in the next. For instance, in item (a) which excepts income
taxes "when levied on banks and other financial institutions"; item (d) which excepts "wharfage on
wharves constructed and maintained by the local government unit concerned"; and item (1) which
excepts taxes, fees and charges for the registration and issuance of licenses or permits for the
driving of "tricycles." It may also be observed that within the body itself of the section, there are
exceptions which can be found only in other parts of the LGC, but the section interchangeably uses
therein the clause, "except as otherwise provided herein" as in items (c) and (i), or the clause
"except as provided in this Code" in item (j). These clauses would be obviously unnecessary or mere
surplusages if the opening clause of the section were "Unless otherwise provided in this Code"
instead of "Unless otherwise provided herein." In any event, even if the latter is used, since under
Section 232 local government units have the power to levy real property tax, except those exempted
therefrom under Section 234, then Section 232 must be deemed to qualify Section 133.

Thus, reading together Sections 133, 232, and 234 of the LGC, we conclude that as a general rule,
as laid down in Section 133, the taxing powers of local government units cannot extend to the levy
of, inter alia, "taxes, fees and charges of any kind on the National Government, its agencies and
instrumentalities, and local government units"; however, pursuant to Section 232, provinces, cities,
and municipalities in the Metropolitan Manila Area may impose the real property tax except on, inter
alia, "real property owned by the Republic of the Philippines or any of its political subdivisions except
when the beneficial use thereof has been granted, for consideration or otherwise, to a taxable
person," as provided in item (a) of the first paragraph of Section 234.

As to tax exemptions or incentives granted to or presently enjoyed by natural or judicial persons,

including government-owned and controlled corporations, Section 193 of the LGC prescribes the
general rule, viz., they are withdrawn upon the effectivity of the LGC, except those granted to local
water districts, cooperatives duly registered under R.A. No. 6938, non-stock and non-profit hospitals
and educational institutions, and unless otherwise provided in the LGC. The latter proviso could refer
to Section 234 which enumerates the properties exempt from real property tax. But the last
paragraph of Section 234 further qualifies the retention of the exemption insofar as real property
taxes are concerned by limiting the retention only to those enumerated therein; all others not
included in the enumeration lost the privilege upon the effectivity of the LGC. Moreover, even as to
real property owned by the Republic of the Philippines or any of its political subdivisions covered by
item (a) of the first paragraph of Section 234, the exemption is withdrawn if the beneficial use of such
property has been granted to a taxable person for consideration or otherwise.

Since the last paragraph of Section 234 unequivocally withdrew, upon the effectivity of the LGC,
exemptions from payment of real property taxes granted to natural or juridical persons, including
government-owned or controlled corporations, except as provided in the said section, and the
petitioner is, undoubtedly, a government-owned corporation, it necessarily follows that its exemption
from such tax granted it in Section 14 of its Charter, R.A. No. 6958, has been withdrawn. Any claim
to the contrary can only be justified if the petitioner can seek refuge under any of the exceptions
provided in Section 234, but not under Section 133, as it now asserts, since, as shown above, the
said section is qualified by Sections 232 and 234.29

The Court in Mactan acknowledged that under Section 133, instrumentalities were generally exempt
from all forms of local government taxation, unless otherwise provided in the Code. On the other
hand, Section 232 "otherwise provided" insofar as it allowed LGUs to levy an ad valorem real
property tax, irrespective of who owned the property. At the same time, the imposition of real
property taxes under Section 232 is in turn qualified by the phrase "not hereinafter specifically
exempted." The exemptions from real property taxes are enumerated in Section 234, which
specifically states that only real properties owned "by the Republic of the Philippines or any of its
political subdivisions" are exempted from the payment of the tax. Clearly, instrumentalities or
GOCCs do not fall within the exceptions under Section 234.30

Mactan Overturned the

Precedents Now Relied

Upon by the Majority

But the petitioners in Mactan also raised the Court's ruling in Basco v. PAGCOR,31 decided before
the enactment of the Local Government Code. The Court in Basco declared the PAGCOR as
exempt from local taxes, justifying the exemption in this wise:

Local governments have no power to tax instrumentalities of the National Government. PAGCOR is
a government owned or controlled corporation with an original charter, PD 1869. All of its shares of
stocks are owned by the National Government. In addition to its corporate powers (Sec. 3, Title II,
PD 1869) it also exercises regulatory powers xxx

PAGCOR has a dual role, to operate and to regulate gambling casinos. The latter role is
governmental, which places it in the category of an agency or instrumentality of the Government.
Being an instrumentality of the Government, PAGCOR should be and actually is exempt from local
taxes. Otherwise, its operation might be burdened, impeded or subjected to control by a mere Local
government.
"The states have no power by taxation or otherwise, to retard impede, burden or in any manner
control the operation of constitutional laws enacted by Congress to carry into execution the powers
vested in the federal government." (McCulloch v. Marland, 4 Wheat 316, 4 L Ed. 579)

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

"Justice Holmes, speaking for the Supreme Court, made reference to the entire absence of power on
the part of the States to touch, in that way (taxation) at least, the instrumentalities of the United
States (Johnson v. Maryland, 254 US 51) and it can be agreed that no state or political subdivision
can regulate a federal instrumentality in such a way as to prevent it from consummating its federal
responsibilities, or even to seriously burden it in the accomplishment of them." (Antieau, Modern
Constitutional Law, Vol. 2, p. 140, emphasis supplied)

Otherwise, mere creatures of the State can defeat National policies thru extermination of what local
authorities may perceive to be undesirable activates or enterprise using the power to tax as "a tool
for regulation" (U.S. v. Sanchez, 340 US 42).

The power to tax which was called by Justice Marshall as the "power to destroy" (McCulloch v.
Maryland, supra) cannot be allowed to defeat an instrumentality or creation of the very entity which
has the inherent power to wield it.32

Basco is as strident a reiteration of the old guard view that frowned on the principle of local
autonomy, especially as it interfered with the prerogatives and privileges of the national government.
Also consider the following citation from Maceda v. Macaraig,33 decided the same year as Basco.
Discussing the rule of construction of tax exemptions on government instrumentalities, the
sentiments are of a similar vein.

Moreover, it is a recognized principle that the rule on strict interpretation does not apply in the case
of exemptions in favor of a government political subdivision or instrumentality.

The basis for applying the rule of strict construction to statutory provisions granting tax exemptions
or deductions, even more obvious than with reference to the affirmative or levying provisions of tax
statutes, is to minimize differential treatment and foster impartiality, fairness, and equality of
treatment among tax payers.

The reason for the rule does not apply in the case of exemptions running to the benefit of the
government itself or its agencies. In such case the practical effect of an exemption is merely to
reduce the amount of money that has to be handled by government in the course of its operations.
For these reasons, provisions granting exemptions to government agencies may be construed
liberally, in favor of non tax-liability of such agencies.

In the case of property owned by the state or a city or other public corporations, the express
exemption should not be construed with the same degree of strictness that applies to exemptions
contrary to the policy of the state, since as to such property "exemption is the rule and taxation the
exception."34

Strikingly, the majority cites these two very cases and the stodgy rationale provided therein. This
evinces the perspective from which the majority is coming from. It is admittedly a viewpoint once
shared by this Court, and en vogue prior to the enactment of the Local Government Code of 1991.
However, the Local Government Code of 1991 ushered in a new ethos on how the art of governance
should be practiced in the Philippines, conceding greater powers once held in the private reserve of
the national government to LGUs. The majority might have private qualms about the wisdom of the
policy of local autonomy, but the members of the Court are not expected to substitute their personal
biases for the legislative will, especially when the 1987 Constitution itself promotes the principle of
local autonomy.

Article II. Declaration of Principles and State Policies

xxx

Sec. 25. The State shall ensure the autonomy of local governments.

Article X. Local Government

xxx

Sec. 2. The territorial and political subdivisions shall enjoy local autonomy.

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

xxx

Section 5. Each local government unit shall have the power to create its own sources of revenues
and to levy taxes, fees, and charges subject to such guidelines and limitations as the Congress may
provide, consistent with the basic policy of local autonomy. Such taxes, fees, and charges shall
accrue exclusively to the local governments.

xxx

The Court in Mactan recognized that a new day had dawned with the enactment of the 1987
Constitution and the Local Government Code of 1991. Thus, it expressly rejected the contention of
the MCIAA that Basco was applicable to them. In doing so, the language of the Court was dramatic,
if only to emphasize how monumental the shift in philosophy was with the enactment of the Local
Government Code:

Accordingly, the position taken by the [MCIAA] is untenable. Reliance on Basco v. Philippine
Amusement and Gaming Corporation is unavailing since it was decided before the effectivity of the
[Local Government Code]. Besides, nothing can prevent Congress from decreeing that even
instrumentalities or agencies of the Government performing governmental functions may be subject
to tax. Where it is done precisely to fulfill a constitutional mandate and national policy, no one can
doubt its wisdom.35 (emphasis supplied)

The Court Has Repeatedly

Reaffirmed Mactan Over the

Precedents Now Relied Upon

By the Majority

Since then and until today, the Court has been emphatic in declaring the Basco doctrine as dead.
The notion that instrumentalities may be subjected to local taxation by LGUs was again affirmed in
National Power Corporation v. City of Cabanatuan,36 which was penned by Justice Puno. NPC or
Napocor, invoking its continued exemption from payment of franchise taxes to the City of
Cabanatuan, alleged that it was an instrumentality of the National Government which could not be
taxed by a city government. To that end, Basco was cited by NPC. The Court had this to say about
Basco.

xxx[T]he doctrine in Basco vs. Philippine Amusement and Gaming Corporation relied upon by the
petitioner to support its claim no longer applies. To emphasize, the Basco case was decided prior to
the effectivity of the LGC, when no law empowering the local government units to tax
instrumentalities of the National Government was in effect. However, as this Court ruled in the case
of Mactan Cebu International Airport Authority (MCIAA) vs. Marcos, nothing prevents Congress from
decreeing that even instrumentalities or agencies of the government performing governmental
functions may be subject to tax. In enacting the LGC, Congress exercised its prerogative to tax
instrumentalities and agencies of government as it sees fit. Thus, after reviewing the specific
provisions of the LGC, this Court held that MCIAA, although an instrumentality of the national
government, was subject to real property tax.37

In the 2003 case of Philippine Ports Authority v. City of Iloilo,38 the Court, in the able ponencia of
Justice Azcuna, affirmed the levy of realty taxes on the PPA. Although the taxes were assessed
under the old Real Property Tax Code and not the Local Government Code, the Court again cited
Mactan to refute PPA's invocation of Basco as the basis of its exemption.

[Basco] did not absolutely prohibit local governments from taxing government instrumentalities. In
fact we stated therein:

The power of local government to "impose taxes and fees" is always subject to "limitations" which
Congress may provide by law. Since P.D. 1869 remains an "operative" law until "amended, repealed
or revoked". . . its "exemption clause" remains an exemption to the exercise of the power of local
governments to impose taxes and fees.

Furthermore, in the more recent case of Mactan Cebu International Airport Authority v. Marcos,
where the Basco case was similarly invoked for tax exemption, we stated: "[N]othing can prevent
Congress from decreeing that even instrumentalities or agencies of the Government performing
governmental functions may be subject to tax. Where it is done precisely to fulfill a constitutional
mandate and national policy, no one can doubt its wisdom." The fact that tax exemptions of
government-owned or controlled corporations have been expressly withdrawn by the present Local
Government Code clearly attests against petitioner's claim of absolute exemption of government
instrumentalities from local taxation.39

Just last month, the Court in National Power Corporation v. Province of Isabela40 again rejected
Basco in emphatic terms. Held the Court, through Justice Callejo, Sr.:

Thus, the doctrine laid down in the Basco case is no longer true. In the Cabanatuan case, the Court
noted primarily that the Basco case was decided prior to the effectivity of the LGC, when no law
empowering the local government units to tax instrumentalities of the National Government was in
effect. It further explained that in enacting the LGC, Congress empowered the LGUs to impose
certain taxes even on instrumentalities of the National Government.41

The taxability of the PPA recently came to fore in Philippine Ports Authority v. City of Iloilo42 case, a
decision also penned by Justice Callejo, Sr., wherein the Court affirmed the sale of PPA's properties
at public auction for failure to pay realty taxes. The Court again reiterated that "it was the intention of
Congress to withdraw the tax exemptions granted to or presently enjoyed by all persons, including
government-owned or controlled corporations, upon the effectivity" of the Code.43 The Court in the
second Public Ports Authority case likewise cited Mactan as providing the "raison d'etre for the
withdrawal of the exemption," namely, "the State policy to ensure autonomy to local governments
and the objective of the [Local Government Code] that they enjoy genuine and meaningful local
autonomy to enable them to attain their fullest development as self-reliant communities. . . . "44

Last year, the Court, in City of Davao v. RTC,45 affirmed that the legislated exemption from real
property taxes of the Government Service Insurance System (GSIS) was removed under the Local
Government Code. Again, Mactan was relied upon as the governing precedent. The removal of the
tax exemption stood even though the then GSIS law46 prohibited the removal of GSIS' tax
exemptions unless the exemption was specifically repealed, "and a provision is enacted to substitute
the declared policy of exemption from any and all taxes as an essential factor for the solvency of the
fund."47 The Court, citing established doctrines in statutory construction and Duarte v. Dade48ruled
that such proscription on future legislation was itself prohibited, as "the legislature cannot bind a
future legislature to a particular mode of repeal."49

And most recently, just less than one month ago, the Court, through Justice Corona in Government
Service Insurance System v. City Assessor of Iloilo50 again affirmed that the Local Government Code
removed the previous exemption from real property taxes of the GSIS. Again Mactan was cited as
having "expressly withdrawn the [tax] exemption of the [GOCC].51

Clearly then, Mactan is not a stray or unique precedent, but the basis of a jurisprudential rule
employed by the Court since its adoption, the doctrine therein consistent with the Local Government
Code. Corollarily, Basco, the polar opposite of Mactan has been emphatically rejected and declared
inconsistent with the Local Government Code.

II.

Majority, in Effectively Overturning Mactan,

Refuses to Say Why Mactan Is Wrong

The majority cites Basco in support. It does not cite Mactan, other than an incidental reference that it
is relied upon by the respondents.52 However, the ineluctable conclusion is that the majority rejects
the rationale and ruling in Mactan. The majority provides for a wildly different interpretation of
Section 133, 193 and 234 of the Local Government Code than that employed by the Court in
Mactan. Moreover, the parties in Mactan and in this case are similarly situated, as can be obviously
deducted from the fact that both petitioners are airport authorities operating under similarly worded
charters. And the fact that the majority cites doctrines contrapuntal to the Local Government Code
as in Basco and Maceda evinces an intent to go against the Court's jurisprudential trend adopting
the philosophy of expanded local government rule under the Local Government Code.

Before I dwell upon the numerous flaws of the majority, a brief comment is necessitated on the
majority's studied murkiness vis-à-vis the Mactan precedent. The majority is obviously inconsistent
with Mactan and there is no way these two rulings can stand together. Following basic principles in
statutory construction, Mactan will be deemed as giving way to this new ruling.

However, the majority does not bother to explain why Mactan is wrong. The interpretation in Mactan
of the relevant provisions of the Local Government Code is elegant and rational, yet the majority
refuses to explain why this reasoning of the Court in Mactan is erroneous. In fact, the majority does
not even engage Mactan in any meaningful way. If the majority believes that Mactan may still stand
despite this ruling, it remains silent as to the viable distinctions between these two cases.

The majority's silence on Mactan is baffling, considering how different this new ruling is with the
ostensible precedent. Perhaps the majority does not simply know how to dispense with the ruling in
Mactan. If Mactan truly deserves to be discarded as precedent, it deserves a more honorable end
than death by amnesia or ignonominous disregard. The majority could have devoted its discussion in
explaining why it thinks Mactan is wrong, instead of pretending that Mactan never existed at all.
Such an approach might not have won the votes of the minority, but at least it would provide some
degree of intellectual clarity for the parties, LGUs and the national government, students of
jurisprudence and practitioners. A more meaningful debate on the matter would have been possible,
enriching the study of law and the intellectual dynamic of this Court.

There is no way the majority can be justified unless Mactan is overturned. The MCIAA and the MIAA
are similarly situated. They are both, as will be demonstrated, GOCCs, commonly engaged in the
business of operating an airport. They are the owners of airport properties they respectively maintain
and hold title over these properties in their name.53 These entities are both owned by the State, and
denied by their respective charters the absolute right to dispose of their properties without prior
approval elsewhere.54 Both of them are

not empowered to obtain loans or encumber their properties without prior approval the prior approval
of the President.55

III.

Instrumentalities, Agencies

And GOCCs Generally

Liable for Real Property Tax

I shall now proceed to demonstrate the errors in reasoning of the majority. A bulwark of my position
lies with Mactan, which will further demonstrate why the majority has found it inconvenient to even
grapple with the precedent that is Mactan in the first place.

Mactan held that the prohibition on taxing the national government, its agencies and
instrumentalities under Section 133 is qualified by Section 232 and Section 234, and accordingly, the
only relevant exemption now applicable to these bodies is as provided under Section 234(o), or on
"real property owned by the Republic of the Philippines or any of its political subdivisions except
when the beneficial use thereof has been granted, for consideration or otherwise, to a taxable
person."

It should be noted that the express withdrawal of previously granted exemptions by the Local
Government Code do not even make any distinction as to whether the exempt person is a
governmental entity or not. As Sections 193 and 234 both state, the withdrawal applies to "all
persons, including [GOCCs]", thus encompassing the two classes of persons recognized under our
laws, natural persons56 and juridical persons.57

The fact that the Local Government Code mandates the withdrawal of previously granted
exemptions evinces certain key points. If an entity was previously granted an express exemption
from real property taxes in the first place, the obvious conclusion would be that such entity would
ordinarily be liable for such taxes without the exemption. If such entities were already deemed
exempt due to some overarching principle of law, then it would be a redundancy or surplusage to
grant an exemption to an already exempt entity. This fact militates against the claim that MIAA is
preternaturally exempt from realty taxes, since it required the enactment of an express exemption
from such taxes in its charter.

Amazingly, the majority all but ignores the disquisition in Mactan and asserts that government
instrumentalities are not taxable persons unless they lease their properties to a taxable person. The
general rule laid down in Section 232 is given short shrift. In arriving at this conclusion, several leaps
in reasoning are committed.

Majority's Flawed Definition

of GOCCs.

The majority takes pains to assert that the MIAA is not a GOCC, but rather an instrumentality.
However, and quite grievously, the supposed foundation of this assertion is an adulteration.

The majority gives the impression that a government instrumentality is a distinct concept from a
government corporation.58 Most tellingly, the majority selectively cites a portion of Section 2(10) of
the Administrative Code of 1987, as follows:

Instrumentality refers to any agency of the National Government not integrated within the
department framework, vested with special functions or jurisdiction by law, endowed with some if not
all corporate powers, administering special funds, and enjoying operational autonomy, usually
through a charter. xxx59 (emphasis omitted)

However, Section 2(10) of the Administrative Code, when read in full, makes an important
clarification which the majority does not show. The portions omitted by the majority are highlighted
below:

(10)Instrumentality refers to any agency of the National Government not integrated within the
department framework, vested with special functions or jurisdiction by law, endowed with some if not
all corporate powers, administering special funds, and enjoying operational autonomy, usually
through a charter. This term includes regulatory agencies, chartered institutions and government—
owned or controlled corporations.60

Since Section 2(10) makes reference to "agency of the National Government," Section 2(4) is also
worth citing in full:

(4) Agency of the Government refers to any of the various units of the Government, including a
department, bureau, office, instrumentality, or government-owned or controlled corporation, or a
local government or a distinct unit therein. (emphasis supplied)61
Clearly then, based on the Administrative Code, a GOCC may be an instrumentality or an agency of
the National Government. Thus, there actually is no point in the majority's assertion that MIAA is not
a GOCC, since based on the majority's premise of Section 133 as the key provision, the material
question is whether MIAA is either an instrumentality, an agency, or the National Government itself.
The very provisions of the Administrative Code provide that a GOCC can be either an instrumentality
or an agency, so why even bother to extensively discuss whether or not MIAA is a GOCC?

Indeed as far back as the 1927 case of Government of the Philippine Islands v. Springer,62 the
Supreme Court already noted that a corporation of which the government is the majority stockholder
"remains an agency or instrumentality of government."63

Ordinarily, the inconsequential verbiage stewing in judicial opinions deserve little rebuttal. However,
the entire discussion of the majority on the definition of a GOCC, obiter as it may ultimately be,
deserves emphatic refutation. The views of the majority on this matter are very dangerous, and
would lead to absurdities, perhaps unforeseen by the majority. For in fact, the majority effectively
declassifies many entities created and recognized as GOCCs and would give primacy to the
Administrative Code of 1987 rather than their respective charters as to the definition of these
entities.

Majority Ignores the Power

Of Congress to Legislate and

Define Chartered Corporations

First, the majority declares that, citing Section 2(13) of the Administrative Code, a GOCC must be
"organized as a stock or non-stock corporation," as defined under the Corporation Code. To insist on
this as an absolute rule fails on bare theory. Congress has the undeniable power to create a
corporation by legislative charter, and has been doing so throughout legislative history. There is no
constitutional prohibition on Congress as to what structure these chartered corporations should take
on. Clearly, Congress has the prerogative to create a corporation in whatever form it chooses, and it
is not bound by any traditional format. Even if there is a definition of what a corporation is under the
Corporation Code or the Administrative Code, these laws are by no means sacrosanct. It should be
remembered that these two statutes fall within the same level of hierarchy as a congressional
charter, since they all are legislative enactments. Certainly, Congress can choose to disregard either
the Corporation Code or the Administrative Code in defining the corporate structure of a GOCC,
utilizing the same extent of legislative powers similarly vesting it the putative ability to amend or
abolish the Corporation Code or the Administrative Code.

These principles are actually recognized by both the Administrative Code and the Corporation Code.
The definition of GOCCs, agencies and instrumentalities under the Administrative Code are laid
down in the section entitled "General Terms Defined," which qualifies:

Sec. 2. General Terms Defined. – Unless the specific words of the text, or the context as a whole, or
a particular statute, shall require a different meaning: (emphasis supplied)

xxx

Similar in vein is Section 6 of the Corporation Code which provides:

SEC. 4. Corporations created by special laws or charters.— Corporations created by special laws or
charters shall be governed primarily by the provisions of the special law or charter creating them or
applicable to them, supplemented by the provisions of this Code, insofar as they are applicable.
(emphasis supplied)

Thus, the clear doctrine emerges – the law that governs the definition of a corporation or entity
created by Congress is its legislative charter. If the legislative enactment defines an entity as a
corporation, then it is a corporation, no matter if the Corporation Code or the Administrative Code
seemingly provides otherwise. In case of conflict between the legislative charter of a government
corporation, on one hand, and the Corporate Code and the Administrative Code, on the other, the
former always prevails.

Majority, in Ignoring the

Legislative Charters, Effectively

Classifies Duly Established GOCCs,

With Disastrous and Far Reaching

Legal Consequences

Second, the majority claims that MIAA does not qualify either as a stock or non-stock corporation, as
defined under the Corporation Code. It explains that the MIAA is not a stock corporation because it
does not have any capital stock divided into shares. Neither can it be considered as a non-stock
corporation because it has no members, and under Section 87, a non-stock corporation is one
where no part of its income is distributable as dividends to its members, trustees or officers.

This formulation of course ignores Section 4 of the Corporation Code, which again provides that
corporations created by special laws or charters shall be governed primarily by the provisions of the
special law or charter, and not the Corporation Code.

That the MIAA cannot be considered a stock corporation if only because it does not have a stock
structure is hardly a plausible proposition. Indeed, there is no point in requiring a capital stock
structure for GOCCs whose full ownership is limited by its charter to the State or Republic. Such
GOCCs are not empowered to declare dividends or alienate their capital shares.

Admittedly, there are GOCCs established in such a manner, such as the National Power Corporation
(NPC), which is provided with authorized capital stock wholly subscribed and paid for by the
Government of the Philippines, divided into shares but at the same time, is prohibited from
transferring, negotiating, pledging, mortgaging or otherwise giving these shares as security for
payment of any obligation.64 However, based on the Corporation Code definition relied upon by the
majority, even the NPC cannot be considered as a stock corporation. Under Section 3 of the
Corporation Code, stock corporations are defined as being "authorized to distribute to the holders of
its shares dividends or allotments of the surplus profits on the basis of the shares held."65 On the
other hand, Section 13 of the NPC's charter states that "the Corporation shall be non-profit and shall
devote all its returns from its capital investment, as well as excess revenues from its operation, for
expansion."66 Can the holder of the shares of NPC, the National Government, receive its surplus
profits on the basis of its shares held? It cannot, according to the NPC charter, and hence, following
Section 3 of the Corporation Code, the NPC is not a stock corporation, if the majority is to be
believed.
The majority likewise claims that corporations without members cannot be deemed non-stock
corporations. This would seemingly exclude entities such as the NPC, which like MIAA, has no
ostensible members. Moreover, non-stock corporations cannot distribute any part of its income as
dividends to its members, trustees or officers. The majority faults MIAA for remitting 20% of its gross
operating income to the national government. How about the Philippine Health Insurance
Corporation, created with the "status of a tax-exempt government corporation attached to the
Department of Health" under Rep. Act No. 7875.67 It too cannot be considered as a stock corporation
because it has no capital stock structure. But using the criteria of the majority, it is doubtful if it would
pass muster as a non-stock corporation, since the PHIC or Philhealth, as it is commonly known, is
expressly empowered "to collect, deposit, invest, administer and disburse" the National Health
Insurance Fund.68 Or how about the Social Security System, which under its revised charter,
Republic Act No. 8282, is denominated as a "corporate body."69 The SSS has no capital stock
structure, but has capital comprised of contributions by its members, which are eventually remitted
back to its members. Does this disqualify the SSS from classification as a GOCC, notwithstanding
this Court's previous pronouncement in Social Security System Employees Association v. Soriano?70

In fact, Republic Act No. 7656, enacted in 1993, requires that all GOCCs, whether stock or non-
stock,71 declare and remit at least fifty percent (50%) of their annual net earnings as cash, stock or
property dividends to the National Government.72 But according to the majority, non-stock
corporations are prohibited from declaring any part of its income as dividends. But if Republic Act
No. 7656 requires even non-stock corporations to declare dividends from income, should it not follow
that the prohibition against declaration of dividends by non-stock corporations under the Corporation
Code does not apply to government-owned or controlled corporations? For if not, and the majority's
illogic is pursued, Republic Act No. 7656, passed in 1993, would be fatally flawed, as it would
contravene the Administrative Code of 1987 and the Corporation Code.

In fact, the ruinous effects of the majority's hypothesis on the nature of GOCCs can be illustrated by
Republic Act No. 7656. Following the majority's definition of a GOCC and in accordance with
Republic Act No. 7656, here are but a few entities which are not obliged to remit fifty (50%) of its
annual net earnings to the National Government as they are excluded from the scope of Republic
Act No. 7656:

1) Philippine Ports Authority73 – has no capital stock74, no members, and obliged to apply the
balance of its income or revenue at the end of each year in a general reserve.75

2) Bases Conversion Development Authority76 - has no capital stock,77 no members.

3) Philippine Economic Zone Authority78 - no capital stock,79 no members.

4) Light Rail Transit Authority80 - no capital stock,81 no members.

5) Bangko Sentral ng Pilipinas82 - no capital stock,83 no members, required to remit fifty percent
(50%) of its net profits to the National Treasury.84

6) National Power Corporation85 - has capital stock but is prohibited from "distributing to the holders
of its shares dividends or allotments of the surplus profits on the basis of the shares held;"86 no
members.

7) Manila International Airport Authority – no capital stock87, no members88, mandated to remit twenty
percent (20%) of its annual gross operating income to the National Treasury.89
Thus, for the majority, the MIAA, among many others, cannot be considered as within the coverage
of Republic Act No. 7656. Apparently, President Fidel V. Ramos disagreed. How else then could
Executive Order No. 483, signed in 1998 by President Ramos, be explained? The issuance
provides:

WHEREAS, Section 1 of Republic Act No. 7656 provides that:

"Section 1. Declaration of Policy. - It is hereby declared the policy of the State that in order for the
National Government to realize additional revenues, government-owned and/or controlled
corporations, without impairing their viability and the purposes for which they have been established,
shall share a substantial amount of their net earnings to the National Government."

WHEREAS, to support the viability and mandate of government-owned and/or controlled

corporations [GOCCs], the liquidity, retained earnings position and medium-term plans and
programs of these GOCCs were considered in the determination of the reasonable dividend rates of
such corporations on their 1997 net earnings.

WHEREAS, pursuant to Section 5 of RA 7656, the Secretary of Finance recommended the

adjustment on the percentage of annual net earnings that shall be declared by the Manila
International Airport Authority [MIAA] and Phividec Industrial Authority [PIA] in the interest of national
economy and general welfare.

NOW, THEREFORE, I, FIDEL V. RAMOS, President of the Philippines, by virtue of the powers
vested in me by law, do hereby order:

SECTION 1. The percentage of net earnings to be declared and remitted by the MIAA and PIA as
dividends to the National Government as provided for under Section 3 of Republic Act No. 7656 is
adjusted from at least fifty percent [50%] to the rates specified hereunder:

1. Manila International Airport Authority - 35% [cash]

2. Phividec Industrial Authority - 25% [cash]

SECTION 2. The adjusted dividend rates provided for under Section 1 are only applicable on 1997
net earnings of the concerned government-owned and/or controlled corporations.

Obviously, it was the opinion of President Ramos and the Secretary of Finance that MIAA is a
GOCC, for how else could it have come under the coverage of Republic Act No. 7656, a law
applicable only to GOCCs? But, the majority apparently disagrees, and resultantly holds that MIAA is
not obliged to remit even the reduced rate of thirty five percent (35%) of its net earnings to the
national government, since it cannot be covered by Republic Act No. 7656.

All this mischief because the majority would declare the Administrative Code of 1987 and the
Corporation Code as the sole sources of law defining what a government corporation is. As I stated
earlier, I find it illogical that chartered corporations are compelled to comply with the templates of the
Corporation Code, especially when the Corporation Code itself states that these corporations are to
be governed by their own charters. This is especially true considering that the very provision cited by
the majority, Section 87 of the Corporation Code, expressly says that the definition provided therein
is laid down "for the purposes of this [Corporation] Code." Read in conjunction with Section 4 of the
Corporation Code which mandates that corporations created by charter be governed by the law
creating them, it is clear that contrary to the majority, MIAA is not disqualified from classification as a
non-stock corporation by reason of Section 87, the provision not being applicable to corporations
created by special laws or charters. In fact, I see no real impediment why the MIAA and similarly
situated corporations such as the PHIC, the SSS, the Philippine Deposit Insurance Commission, or
maybe even the NPC could at the very least, be deemed as no stock corporations (as differentiated
from non-stock corporations).

The point, stripped to bare simplicity, is that entity created by legislative enactment is a corporation if
the legislature says so. After all, it is the legislature that dictates what a corporation is in the first
place. This is better illustrated by another set of entities created before martial law. These include
the Mindanao Development Authority,90 the Northern Samar Development Authority,91 the Ilocos Sur
Development Authority,92 the Southeastern Samar Development Authority93 and the Mountain
Province Development Authority.94 An examination of the first section of the statutes creating these
entities reveal that they were established "to foster accelerated and balanced growth" of their
respective regions, and towards such end, the charters commonly provide that "it is recognized that
a government corporation should be created for the purpose," and accordingly, these charters
"hereby created a body corporate."95 However, these corporations do not have capital stock nor
members, and are obliged to return the unexpended balances of their appropriations and earnings to
a revolving fund in the National Treasury. The majority effectively declassifies these entities as
GOCCs, never mind the fact that their very charters declare them to be GOCCs.

I mention these entities not to bring an element of obscurantism into the fray. I cite them as
examples to emphasize my fundamental point—that it is the legislative charters of these entities, and
not the Administrative Code, which define the class of personality of these entities created by
Congress. To adopt the view of the majority would be, in effect, to sanction an implied repeal of
numerous congressional charters for the purpose of declassifying GOCCs. Certainly, this could not
have been the intent of the crafters of the Administrative Code when they drafted the "Definition of
Terms" incorporated therein.

MIAA Is Without

Doubt, A GOCC

Following the charters of government corporations, there are two kinds of GOCCs, namely: GOCCs
which are stock corporations and GOCCs which are no stock corporations (as distinguished from
non-stock corporation). Stock GOCCs are simply those which have capital stock while no stock
GOCCs are those which have no capital stock. Obviously these definitions are different from the
definitions of the terms in the Corporation Code. Verily, GOCCs which are not incorporated with the
Securities and Exchange Commission are not governed by the Corporation Code but by their
respective charters.

For the MIAA's part, its charter is replete with provisions that indubitably classify it as a GOCC.
Observe the following provisions from MIAA's charter:

SECTION 3. Creation of the Manila International Airport Authority.—There is hereby established a

body corporate to be known as the Manila International Airport Authority which shall be attached to
the Ministry of Transportation and Communications. The principal office of the Authority shall be
located at the New Manila International Airport. The Authority may establish such offices, branches,
agencies or subsidiaries as it may deem proper and necessary; Provided, That any subsidiary that
may be organized shall have the prior approval of the President.

The land where the Airport is presently located as well as the surrounding land area of
approximately six hundred hectares, are hereby transferred, conveyed and assigned to the
ownership and administration of the Authority, subject to existing rights, if any. The Bureau of Lands
and other appropriate government agencies shall undertake an actual survey of the area transferred
within one year from the promulgation of this Executive Order and the corresponding title to be
issued in the name of the Authority. Any portion thereof shall not be disposed through sale or
through any other mode unless specifically approved by the President of the Philippines.

xxx

SECTION 5. Functions, Powers, and Duties. — The Authority shall have the following functions,
powers and duties:

xxx

(d) To sue and be sued in its corporate name;

(e) To adopt and use a corporate seal;

(f) To succeed by its corporate name;

(g) To adopt its by-laws, and to amend or repeal the same from time to time;

(h) To execute or enter into contracts of any kind or nature;

(i) To acquire, purchase, own, administer, lease, mortgage, sell or otherwise dispose of any land,
building, airport facility, or property of whatever kind and nature, whether movable or immovable, or
any interest therein;

(j) To exercise the power of eminent domain in the pursuit of its purposes and objectives;

xxx

(o) To exercise all the powers of a corporation under the Corporation Law, insofar as these powers
are not inconsistent with the provisions of this Executive Order.

xxx

SECTION 16. Borrowing Power. — The Authority may, after consultation with the Minister of
Finance and with the approval of the President of the Philippines, as recommended by the Minister
of Transportation and Communications, raise funds, either from local or international sources, by
way of loans, credits or securities, and other borrowing instruments, with the power to create
pledges, mortgages and other voluntary liens or encumbrances on any of its assets or properties.

All loans contracted by the Authority under this Section, together with all interests and other sums
payable in respect thereof, shall constitute a charge upon all the revenues and assets of the
Authority and shall rank equally with one another, but shall have priority over any other claim or
charge on the revenue and assets of the Authority: Provided, That this provision shall not be
construed as a prohibition or restriction on the power of the Authority to create pledges, mortgages,
and other voluntary liens or encumbrances on any assets or property of the Authority.
Except as expressly authorized by the President of the Philippines the total outstanding
indebtedness of the Authority in the principal amount, in local and foreign currency, shall not at any
time exceed the net worth of the Authority at any given time.

xxx

The President or his duly authorized representative after consultation with the Minister of Finance
may guarantee, in the name and on behalf of the Republic of the Philippines, the payment of the
loans or other indebtedness of the Authority up to the amount herein authorized.

These cited provisions establish the fitness of MIAA to be the subject of legal relations.96 MIAA under
its charter may acquire and possess property, incur obligations, and bring civil or criminal actions. It
has the power to contract in its own name, and to acquire title to real or personal property. It likewise
may exercise a panoply of corporate powers and possesses all the trappings of corporate
personality, such as a corporate name, a corporate seal and by-laws. All these are contained in
MIAA's charter which, as conceded by the Corporation Code and even the Administrative Code, is
the primary law that governs the definition and organization of the MIAA.

In fact, MIAA itself believes that it is a GOCC represents itself as such. It said so itself in the very
first paragraph of the present petition before this Court.97 So does, apparently, the Department of
Budget and Management, which classifies MIAA as a "government owned & controlled corporation"
on its internet website.98 There is also the matter of Executive Order No. 483, which evinces the
belief of the then-president of the Philippines that MIAA is a GOCC. And the Court before had
similarly characterized MIAA as a government-owned and controlled corporation in the earlier MIAA
case, Manila International Airport Authority v. Commission on Audit.99

Why then the hesitance to declare MIAA a GOCC? As the majority repeatedly asserts, it is because
MIAA is actually an instrumentality. But the very definition relied upon by the majority of an
instrumentality under the Administrative Code clearly states that a GOCC is likewise an
instrumentality or an agency. The question of whether MIAA is a GOCC might not even be
determinative of this Petition, but the effect of the majority's disquisition on that matter may even be
more destructive than the ruling that MIAA is exempt from realty taxes. Is the majority ready to live
up to the momentous consequences of its flawed reasoning?

Novel Proviso in 1987 Constitution

Prescribing Standards in the

Creation of GOCCs Necessarily

Applies only to GOCCs Created

After 1987.

One last point on this matter on whether MIAA is a GOCC. The majority triumphantly points to
Section 16, Article XII of the 1987 Constitution, which mandates that the creation of GOCCs through
special charters be "in the interest of the common good and subject to the test of economic viability."
For the majority, the test of economic viability does not apply to government entities vested with
corporate powers and performing essential public services. But this test of "economic viability" is
new to the constitutional framework. No such test was imposed in previous Constitutions, including
the 1973 Constitution which was the fundamental law in force when the MIAA was created. How
then could the MIAA, or any GOCC created before 1987 be expected to meet this new precondition
to the creation of a GOCC? Does the dissent seriously suggest that GOCCs created before 1987
may be declassified on account of their failure to meet this "economic viability test"?

Instrumentalities and Agencies

Also Generally Liable For

Real Property Taxes

Next, the majority, having bludgeoned its way into asserting that MIAA is not a GOCC, then argues
that MIAA is an instrumentality. It cites incompletely, as earlier stated, the provision of Section 2(10)
of the Administrative Code. A more convincing view offered during deliberations, but which was not
adopted by the ponencia, argued that MIAA is not an instrumentality but an agency, considering the
fact that under the Administrative Code, the MIAA is attached within the department framework of
the Department of Transportation and Communications.100 Interestingly, Executive Order No. 341,
enacted by President Arroyo in 2004, similarly calls MIAA an agency. Since instrumentalities are
expressly defined as "an agency not integrated within the department framework," that view
concluded that MIAA cannot be deemed an instrumentality.

Still, that distinction is ultimately irrelevant. Of course, as stated earlier, the Administrative Code
considers GOCCs as agencies,101 so the fact that MIAA is an agency does not exclude it from
classification as a GOCC. On the other hand, the majority justifies MIAA's purported exemption on
Section 133 of the Local Government Code, which similarly situates "agencies and instrumentalities"
as generally exempt from the taxation powers of LGUs. And on this point, the majority again evades
Mactan and somehow concludes that Section 133 is the general rule, notwithstanding Sections 232
and 234(a) of the Local Government Code. And the majority's ultimate conclusion? "By express
mandate of the Local Government Code, local governments cannot impose any kind of tax on
national government instrumentalities like the MIAA. Local governments are devoid of power to tax
the national government, its agencies and instrumentalities."102

The Court's interpretation of the Local Government Code in Mactan renders the law integrally
harmonious and gives due accord to the respective prerogatives of the national government and
LGUs. Sections 133 and 234(a) ensure that the Republic of the Philippines or its political
subdivisions shall not be subjected to any form of local government taxation, except realty taxes if
the beneficial use of the property owned has been granted for consideration to a taxable entity or
person. On the other hand, Section 133 likewise assures that government instrumentalities such as
GOCCs may not be arbitrarily taxed by LGUs, since they could be subjected to local taxation if there
is a specific proviso thereon in the Code. One such proviso is Section 137, which as the Court found
in National Power Corporation,103 permits the imposition of a franchise tax on businesses enjoying a
franchise, even if it be a GOCC such as NPC. And, as the Court acknowledged in Mactan, Section
232 provides another exception on the taxability of instrumentalities.

The majority abjectly refuses to engage Section 232 of the Local Government Code although it
provides the indubitable general rule that LGUs "may levy an annual ad valorem tax on real property
such as land, building, machinery, and other improvements not hereafter specifically exempted." The
specific exemptions are provided by Section 234. Section 232 comes sequentially after Section
133(o),104 and even if the sequencing is irrelevant, Section 232 would fall under the qualifying phrase
of Section 133, "Unless otherwise provided herein." It is sad, but not surprising that the majority is
not willing to consider or even discuss the general rule, but only the exemptions under Section 133
and Section 234. After all, if the majority is dead set in ruling for MIAA no matter what the law says,
why bother citing what the law does say.
Constitution, Laws and

Jurisprudence Have Long

Explained the Rationale

Behind the Local Taxation

Of GOCCs.

This blithe disregard of precedents, almost all of them unanimously decided, is nowhere more
evident than in the succeeding discussion of the majority, which asserts that the power of local
governments to tax national government instrumentalities be construed strictly against local
governments. The Maceda case, decided before the Local Government Code, is cited, as is Basco.
This section of the majority employs deliberate pretense that the Code never existed, or that the
fundamentals of local autonomy are of limited effect in our country. Why is it that the Local
Government Code is barely mentioned in this section of the majority? Because Section 5 of the
Code, purposely omitted by the majority provides for a different rule of interpretation than that
asserted:

Section 5. Rules of Interpretation. – In the interpretation of the provisions of this Code, the following
rules shall apply:

(a) Any provision on a power of a local government unit shall be liberally interpreted in its favor, and
in case of doubt, any question thereon shall be resolved in favor of devolution of powers and of the
lower local government unit. Any fair and reasonable doubt as to the existence of the power shall be
interpreted in favor of the local government unit concerned;

(b) In case of doubt, any tax ordinance or revenue measure shall be construed strictly against the
local government unit enacting it, and liberally in favor of the taxpayer. Any tax exemption, incentive
or relief granted by any local government unit pursuant to the provisions of this Code shall be
construed strictly against the person claiming it; xxx

Yet the majority insists that "there is no point in national and local governments taxing each other,
unless a sound and compelling policy requires such transfer of public funds from one government
pocket to another."105 I wonder whether the Constitution satisfies the majority's desire for "a sound
and compelling policy." To repeat:

Article II. Declaration of Principles and State Policies

xxx

Sec. 25. The State shall ensure the autonomy of local governments.

Article X. Local Government

xxx

Sec. 2. The territorial and political subdivisions shall enjoy local autonomy.

xxx
Section 5. Each local government unit shall have the power to create its own sources of revenues
and to levy taxes, fees, and charges subject to such guidelines and limitations as the Congress may
provide, consistent with the basic policy of local autonomy. Such taxes, fees, and charges shall
accrue exclusively to the local governments.

Or how about the Local Government Code, presumably an expression of sound and compelling
policy considering that it was enacted by the legislature, that veritable source of all statutes:

SEC. 129. Power to Create Sources of Revenue. - Each local government unit shall exercise its
power to create its own sources of revenue and to levy taxes, fees, and charges subject to the
provisions herein, consistent with the basic policy of local autonomy. Such taxes, fees, and charges
shall accrue exclusively to the local government units.

Justice Puno, in National Power Corporation v. City of Cabanatuan,106 provides a more "sound and
compelling policy considerations" that would warrant sustaining the taxability of government-owned
entities by local government units under the Local Government Code.

Doubtless, the power to tax is the most effective instrument to raise needed revenues to finance and
support myriad activities of the local government units for the delivery of basic services essential to
the promotion of the general welfare and the enhancement of peace, progress, and prosperity of the
people. As this Court observed in the Mactan case, "the original reasons for the withdrawal of tax
exemption privileges granted to government-owned or controlled corporations and all other units of
government were that such privilege resulted in serious tax base erosion and distortions in the tax
treatment of similarly situated enterprises." With the added burden of devolution, it is even more
imperative for government entities to share in the requirements of development, fiscal or otherwise,
by paying taxes or other charges due from them.107

I dare not improve on Justice Puno's exhaustive disquisition on the statutory and jurisprudential shift
brought about the acceptance of the principles of local autonomy:

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

"Section 5. Each Local Government unit shall have the power to create its own sources of revenue,
to levy taxes, fees and charges subject to such guidelines and limitations as the Congress may
provide, consistent with the basic policy of local autonomy. Such taxes, fees and charges shall
accrue exclusively to the Local Governments."

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

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

To recall, prior to the enactment of the Rep. Act No. 7160, also known as the Local Government
Code of 1991 (LGC), various measures have been enacted to promote local autonomy. These
include the Barrio Charter of 1959, the Local Autonomy Act of 1959, the Decentralization Act of 1967
and the Local Government Code of 1983. Despite these initiatives, however, the shackles of
dependence on the national government remained. Local government units were faced with the
same problems that hamper their capabilities to participate effectively in the national development
efforts, among which are: (a) inadequate tax base, (b) lack of fiscal control over external sources of
income, (c) limited authority to prioritize and approve development projects, (d) heavy dependence
on external sources of income, and (e) limited supervisory control over personnel of national line
agencies.

Considered as the most revolutionary piece of legislation on local autonomy, the LGC effectively
deals with the fiscal constraints faced by LGUs. It widens the tax base of LGUs to include taxes
which were prohibited by previous laws such as the imposition of taxes on forest products, forest
concessionaires, mineral products, mining operations, and the like. The LGC likewise provides
enough flexibility to impose tax rates in accordance with their needs and capabilities. It does not
prescribe graduated fixed rates but merely specifies the minimum and maximum tax rates and
leaves the determination of the actual rates to the respective sanggunian.108

And the Court's ruling through Justice Azcuna in Philippine Ports Authority v. City of Iloilo109, provides
especially clear and emphatic rationale:

In closing, we reiterate that in taxing government-owned or controlled corporations, the State

ultimately suffers no loss. In National Power Corp. v. Presiding Judge, RTC, Br. XXV, 38 we
elucidated:

Actually, the State has no reason to decry the taxation of NPC's properties, as and by way of real
property taxes. Real property taxes, after all, form part and parcel of the financing apparatus of the
Government in development and nation-building, particularly in the local government level.

xxxxxxxxx

To all intents and purposes, real property taxes are funds taken by the State with one hand and
given to the other. In no measure can the government be said to have lost anything.

Finally, we find it appropriate to restate that the primary reason for the withdrawal of tax exemption
privileges granted to government-owned and controlled corporations and all other units of
government was that such privilege resulted in serious tax base erosion and distortions in the tax
treatment of similarly situated enterprises, hence resulting in the need for these entities to share in
the requirements of development, fiscal or otherwise, by paying the taxes and other charges due
from them.110
How does the majority counter these seemingly valid rationales which establish the soundness of a
policy consideration subjecting national instrumentalities to local taxation? Again, by simply ignoring
that these doctrines exist. It is unfortunate if the majority deems these cases or the principles of
devolution and local autonomy as simply too inconvenient, and relies instead on discredited
precedents. Of course, if the majority faces the issues squarely, and expressly discusses why Basco
was right and Mactan was wrong, then this entire endeavor of the Court would be more intellectually
satisfying. But, this is not a game the majority wants to play.

Mischaracterization of My

Views on the Tax Exemption

Enjoyed by the National Government

Instead, the majority engages in an extended attack pertaining to Section 193, mischaracterizing my
views on that provision as if I had been interpreting the provision as making "the national
government, which itself is a juridical person, subject to tax by local governments since the national
government is not included in the enumeration of exempt entities in Section 193."111

Nothing is farther from the truth. I have never advanced any theory of the sort imputed in the
majority. My main thesis on the matter merely echoes the explicit provision of Section 193 that
unless otherwise provided in the Local Government Code (LGC) all tax exemptions enjoyed by all
persons, whether natural or juridical, including GOCCs, were withdrawn upon the effectivity of the
Code. Since the provision speaks of withdrawal of tax exemptions of persons, it follows that the
exemptions theretofore enjoyed by MIAA which is definitely a person are deemed withdrawn upon
the advent of the Code.

On the other hand, the provision does not address the question of who are beyond the reach of the
taxing power of LGUs. In fine, the grant of tax exemption or the withdrawal thereof assumes that the
person or entity involved is subject to tax. Thus, Section 193 does not apply to entities which were
never given any tax exemption. This would include the national government and its political
subdivisions which, as a general rule, are not subjected to tax in the first place.112 Corollarily, the
national government and its political subdivisions do not need tax exemptions. And Section 193
which ordains the withdrawal of tax exemptions is obviously irrelevant to them.

Section 193 is in point for the disposition of this case as it forecloses dependence for the grant of tax
exemption to MIAA on Section 21 of its charter. Even the majority should concede that the charter
section is now ineffectual, as Section 193 withdraws the tax exemptions previously enjoyed by all
juridical persons.

With Section 193 mandating the withdrawal of tax exemptions granted to all persons upon the
effectivity of the LGC, for MIAA to continue enjoying exemption from realty tax, it will have to rely on
a basis other than Section 21 of its charter.

Lung Center of the Philippines v. Quezon City113 provides another illustrative example of the
jurisprudential havoc wrought about by the majority. Pursuant to its charter, the Lung Center was
organized as a trust administered by an eponymous GOCC organized with the SEC.114 There is no
doubt it is a GOCC, even by the majority's reckoning. Applying the Administrative Code, it is also
considered as an agency, the term encompassing even GOCCs. Yet since the Administrative Code
definition of "instrumentalities" encompasses agencies, especially those not attached to a line
department such as the Lung Center, it also follows that the Lung Center is an instrumentality, which
for the majority is exempt from all local government taxes, especially real estate taxes. Yet just in
2004, the Court unanimously held that the Lung Center was not exempt from real property taxes.
Can the majority and Lung Center be reconciled? I do not see how, and no attempt is made to
demonstrate otherwise.

Another key point. The last paragraph of Section 234 specifically asserts that any previous
exemptions from realty taxes granted to or enjoyed by all persons, including all GOCCs, are thereby
withdrawn. The majority's interpretation of Sections 133 and 234(a) however necessarily implies that
all instrumentalities, including GOCCs, can never be subjected to real property taxation under the
Code. If that is so, what then is the sense of the last paragraph specifically withdrawing previous tax
exemptions to all persons, including GOCCs when juridical persons such as MIAA are anyway, to
his view, already exempt from such taxes under Section 133? The majority's interpretation would
effectively render the express and emphatic withdrawal of previous exemptions to GOCCs inutile. Ut
magis valeat quam pereat. Hence, where a statute is susceptible of more than one interpretation, the
court should adopt such reasonable and beneficial construction which will render the provision
thereof operative and effective, as well as harmonious with each other.115

But, the majority seems content rendering as absurd the Local Government Code, since it does not
have much use anyway for the Code's general philosophy of fiscal autonomy, as evidently seen by
the continued reliance on Basco or Maceda. Local government rule has never been a grant of
emancipation from the national government. This is the favorite bugaboo of the opponents of local
autonomy—the fallacy that autonomy equates to independence.

Thus, the conclusion of the majority is that under Section 133(o), MIAA as a government
instrumentality is beyond the reach of local taxation because it is not subject to taxes, fees or
charges of any kind. Moreover, the taxation of national instrumentalities and agencies by LGUs
should be strictly construed against the LGUs, citing Maceda and Basco. No mention is made of the
subsequent rejection of these cases in jurisprudence following the Local Government Code,
including Mactan. The majority is similarly silent on the general rule under Section 232 on real
property taxation or Section 5 on the rules of construction of the Local Government Code.

V.

MIAA, and not the National Government

Is the Owner of the Subject Taxable Properties

Section 232 of the Local Government Code explicitly provides that there are exceptions to the
general rule on rule property taxation, as "hereafter specifically exempted." Section 234, certainly
"hereafter," provides indubitable basis for exempting entities from real property taxation. It provides
the most viable legal support for any claim that an governmental entity such as the MIAA is exempt
from real property taxes. To repeat:

SECTION 234. Exemptions from Real Property Tax. -- The following are exempted from payment of
the real property tax:

xxx

(f) Real property owned by the Republic of the Philippines or any of its political subdivisions except
when the beneficial use thereof has been granted, for consideration or otherwise, to a taxable
person:
The majority asserts that the properties owned by MIAA are owned by the Republic of the
Philippines, thus placing them under the exemption under Section 234. To arrive at this conclusion,
the majority employs four main arguments.

MIAA Property Is Patrimonial

And Not Part of Public Dominion

The majority claims that the Airport Lands and Buildings are property of public dominion as defined
by the Civil Code, and therefore owned by the State or the Republic of the Philippines. But as
pointed out by Justice Azcuna in the first PPA case, if indeed a property is considered part of the
public dominion, such property is "owned by the general public and cannot be declared to be owned
by a public corporation, such as [the PPA]."

Relevant on this point are the following provisions of the MIAA charter:

Section 3. Creation of the Manila International Airport Authority. – xxx

The land where the Airport is presently located as well as the surrounding land area of
approximately six hundred hectares, are hereby transferred, conveyed and assigned to the
ownership and administration of the Authority, subject to existing rights, if any. xxx Any portion
thereof shall not be disposed through sale or through any other mode unless specifically approved
by the President of the Philippines.

Section 22. Transfer of Existing Facilities and Intangible Assets. – All existing public airport facilities,
runways, lands, buildings and other property, movable or immovable, belonging to the Airport, and
all assets, powers rights, interests and privileges belonging to the Bureau of Air Transportation
relating to airport works or air operations, including all equipment which are necessary for the
operation of crash fire and rescue facilities, are hereby transferred to the Authority.

Clearly, it is the MIAA, and not either the State, the Republic of the Philippines or the national
government that asserts legal title over the Airport Lands and Buildings. There was an express
transfer of ownership between the MIAA and the national government. If the distinction is to be
blurred, as the majority does, between the State/Republic/Government and a body corporate such
as the MIAA, then the MIAA charter showcases the remarkable absurdity of an entity transferring
property to itself.

Nothing in the Civil Code or the Constitution prohibits the State from transferring ownership over
property of public dominion to an entity that it similarly owns. It is just like a family transferring
ownership over the properties its members own into a family corporation. The family exercises
effective control over the administration and disposition of these properties. Yet for several purposes
under the law, such as taxation, it is the corporation that is deemed to own those properties. A
similar situation obtains with MIAA, the State, and the Airport Lands and Buildings.

The second Public Ports Authority case, penned by Justice Callejo, likewise lays down useful
doctrines in this regard. The Court refuted the claim that the properties of the PPA were owned by
the Republic of the Philippines, noting that PPA's charter expressly transferred ownership over these
properties to the PPA, a situation which similarly obtains with MIAA. The Court even went as far as
saying that the fact that the PPA "had not been issued any torrens title over the port and port
facilities and appurtenances is of no legal consequence. A torrens title does not, by itself, vest
ownership; it is merely an evidence of title over properties. xxx It has never been recognized as a
mode of acquiring ownership over real properties."116
The Court further added:

xxx The bare fact that the port and its facilities and appurtenances are accessible to the general
public does not exempt it from the payment of real property taxes. It must be stressed that the said
port facilities and appurtenances are the petitioner's corporate patrimonial properties, not for public
use, and that the operation of the port and its facilities and the administration of its buildings are in
the nature of ordinary business. The petitioner is clothed, under P.D. No. 857, with corporate status
and corporate powers in the furtherance of its proprietary interests xxx The petitioner is even
empowered to invest its funds in such government securities approved by the Board of Directors,
and derives its income from rates, charges or fees for the use by vessels of the port premises,
appliances or equipment. xxx Clearly then, the petitioner is a profit-earning corporation; hence, its
patrimonial properties are subject to tax.117

There is no doubt that the properties of the MIAA, as with the PPA, are in a sense, for public use. A
similar argument was propounded by the Light Rail Transit Authority in Light Rail Transit Authority v.
Central Board of Assessment,118which was cited in Philippine Ports Authority and deserves renewed
emphasis. The Light Rail Transit Authority (LRTA), a body corporate, "provides valuable
transportation facilities to the paying public."119 It claimed that its carriage-ways and terminal stations
are immovably attached to government-owned national roads, and to impose real property taxes
thereupon would be to impose taxes on public roads. This view did not persuade the Court, whose
decision was penned by Justice (now Chief Justice) Panganiban. It was noted:

Though the creation of the LRTA was impelled by public service — to provide mass transportation to
alleviate the traffic and transportation situation in Metro Manila — its operation undeniably partakes
of ordinary business. Petitioner is clothed with corporate status and corporate powers in the
furtherance of its proprietary objectives. Indeed, it operates much like any private corporation
engaged in the mass transport industry. Given that it is engaged in a service-oriented commercial
endeavor, its carriageways and terminal stations are patrimonial property subject to tax,
notwithstanding its claim of being a government-owned or controlled corporation.

xxx

Petitioner argues that it merely operates and maintains the LRT system, and that the actual users of
the carriageways and terminal stations are the commuting public. It adds that the public use
character of the LRT is not negated by the fact that revenue is obtained from the latter's operations.

We do not agree. Unlike public roads which are open for use by everyone, the LRT is accessible
only to those who pay the required fare. It is thus apparent that petitioner does not exist solely for
public service, and that the LRT carriageways and terminal stations are not exclusively for public
use. Although petitioner is a public utility, it is nonetheless profit-earning. It actually uses those
carriageways and terminal stations in its public utility business and earns money therefrom.120

xxx

Even granting that the national government indeed owns the carriageways and terminal stations, the
exemption would not apply because their beneficial use has been granted to petitioner, a taxable
entity.121

There is no substantial distinction between the properties held by the PPA, the LRTA, and the MIAA.
These three entities are in the business of operating facilities that promote public transportation.
The majority further asserts that MIAA's properties, being part of the public dominion, are outside the
commerce of man. But if this is so, then why does Section 3 of MIAA's charter authorize the
President of the Philippines to approve the sale of any of these properties? In fact, why does MIAA's
charter in the first place authorize the transfer of these airport properties, assuming that indeed
these are beyond the commerce of man?

No Trust Has Been Created

Over MIAA Properties For

The Benefit of the Republic

The majority posits that while MIAA might be holding title over the Airport Lands and Buildings, it is
holding it in trust for the Republic. A provision of the Administrative Code is cited, but said provision
does not expressly provide that the property is held in trust. Trusts are either express or implied, and
only those situations enumerated under the Civil Code would constitute an implied trust. MIAA does
not fall within this enumeration, and neither is there a provision in MIAA's charter expressly stating
that these properties are being held in trust. In fact, under its charter, MIAA is obligated to retain up
to eighty percent (80%) of its gross operating income, not an inconsequential sum assuming that the
beneficial owner of MIAA's properties is actually the Republic, and not the MIAA.

Also, the claim that beneficial ownership over the MIAA remains with the government and not MIAA
is ultimately irrelevant. Section 234(a) of the Local Government Code provides among those
exempted from paying real property taxes are "[r]eal property owned by the [Republic]… except
when the beneficial use thereof has been granted, for consideration or otherwise, to a taxable
person." In the context of Section 234(a), the identity of the beneficial owner over the properties is
not determinative as to whether the exemption avails. It is the identity of the beneficial user of the
property owned by the Republic or its political subdivisions that is crucial, for if said beneficial user is
a taxable person, then the exemption does not lie.

I fear the majority confuses the notion of what might be construed as "beneficial ownership" of the
Republic over the properties of MIAA as nothing more than what arises as a consequence of the fact
that the capital of MIAA is contributed by the National Government.122 If so, then there is no
difference between the State's ownership rights over MIAA properties than those of a majority
stockholder over the properties of a corporation. Even if such shareholder effectively owns the
corporation and controls the disposition of its assets, the personality of the stockholder remains
separately distinct from that of the corporation. A brief recall of the entrenched rule in corporate law
is in order:

The first consequence of the doctrine of legal entity regarding the separate identity of the corporation
and its stockholders insofar as their obligations and liabilities are concerned, is spelled out in this
general rule deeply entrenched in American jurisprudence:

Unless the liability is expressly imposed by constitutional or statutory provisions, or by the charter, or
by special agreement of the stockholders, stockholders are not personally liable for debts of the
corporation either at law or equity. The reason is that the corporation is a legal entity or artificial
person, distinct from the members who compose it, in their individual capacity; and when it contracts
a debt, it is the debt of the legal entity or artificial person – the corporation – and not the debt of the
individual members. (13A Fletcher Cyc. Corp. Sec. 6213)

The entirely separate identity of the rights and remedies of a corporation itself and its individual
stockholders have been given definite recognition for a long time. Applying said principle, the
Supreme Court declared that a corporation may not be made to answer for acts or liabilities of its
stockholders or those of legal entities to which it may be connected, or vice versa. (Palay Inc. v.
Clave et. al. 124 SCRA 638) It was likewise declared in a similar case that a bonafide corporation
should alone be liable for corporate acts duly authorized by its officers and directors. (Caram Jr. v.
Court of Appeals et.al. 151 SCRA, p. 372)123

It bears repeating that MIAA under its charter, is expressly conferred the right to exercise all the
powers of a corporation under the Corporation Law, including the right to corporate succession, and
the right to sue and be sued in its corporate name.124 The national government made a particular
choice to divest ownership and operation of the Manila International Airport and transfer the same to
such an empowered entity due to perceived advantages. Yet such transfer cannot be deemed
consequence free merely because it was the State which contributed the operating capital of this
body corporate.

The majority claims that the transfer the assets of MIAA was meant merely to effect a reorganization.
The imputed rationale for such transfer does not serve to militate against the legal consequences of
such assignment. Certainly, if it was intended that the transfer should be free of consequence, then
why was it effected to a body corporate, with a distinct legal personality from that of the State or
Republic? The stated aims of the MIAA could have very well been accomplished by creating an
agency without independent juridical personality.

VI.

MIAA Performs Proprietary Functions

Nonetheless, Section 234(f) exempts properties owned by the Republic of the Philippines or its
political subdivisions from realty taxation. The obvious question is what comprises "the Republic of
the Philippines." I think the key to understanding the scope of "the Republic" is the phrase "political
subdivisions." Under the Constitution, political subdivisions are defined as "the provinces, cities,
municipalities and barangays."125 In correlation, the Administrative Code of 1987 defines "local
government" as referring to "the political subdivisions established by or in accordance with the
Constitution."

Clearly then, these political subdivisions are engaged in the exercise of sovereign functions and are
accordingly exempt. The same could be said generally of the national government, which would be
similarly exempt. After all, even with the principle of local autonomy, it is inherently noxious and self-
defeatist for local taxation to interfere with the sovereign exercise of functions. However, the
exercise of proprietary functions is a different matter altogether.

Sovereign and Proprietary

Functions Distinguished

Sovereign or constituent functions are those which constitute the very bonds of society and are
compulsory in nature, while ministrant or proprietary functions are those undertaken by way of
advancing the general interests of society and are merely optional.126 An exhaustive discussion on
the matter was provided by the Court in Bacani v. NACOCO:127

xxx This institution, when referring to the national government, has reference to what our
Constitution has established composed of three great departments, the legislative, executive, and
the judicial, through which the powers and functions of government are exercised. These functions
are twofold: constituent and ministrant. The former are those which constitute the very bonds of
society and are compulsory in nature; the latter are those that are undertaken only by way of
advancing the general interests of society, and are merely optional. President Wilson enumerates
the constituent functions as follows:

"'(1) The keeping of order and providing for the protection of persons and property from violence and
robbery.

'(2) The fixing of the legal relations between man and wife and between parents and children.

'(3) The regulation of the holding, transmission, and interchange of property, and the determination
of its liabilities for debt or for crime.

'(4) The determination of contract rights between individuals.

'(5) The definition and punishment of crime.

'(6) The administration of justice in civil cases.

'(7) The determination of the political duties, privileges, and relations of citizens.

'(8) Dealings of the state with foreign powers: the preservation of the state from external danger or
encroachment and the advancement of its international interests.'" (Malcolm, The Government of the
Philippine Islands, p. 19.)

The most important of the ministrant functions are: public works, public education, public charity,
health and safety regulations, and regulations of trade and industry. The principles determining
whether or not a government shall exercise certain of these optional functions are: (1) that a
government should do for the public welfare those things which private capital would not naturally
undertake and (2) that a government should do these things which by its very nature it is better
equipped to administer for the public welfare than is any private individual or group of individuals.
(Malcolm, The Government of the Philippine Islands, pp. 19-20.)

From the above we may infer that, strictly speaking, there are functions which our government is
required to exercise to promote its objectives as expressed in our Constitution and which are
exercised by it as an attribute of sovereignty, and those which it may exercise to promote merely the
welfare, progress and prosperity of the people. To this latter class belongs the organization of those
corporations owned or controlled by the government to promote certain aspects of the economic life
of our people such as the National Coconut Corporation. These are what we call government-owned
or controlled corporations which may take on the form of a private enterprise or one organized with
powers and formal characteristics of a private corporations under the Corporation Law.128

The Court in Bacani rejected the proposition that the National Coconut Corporation exercised
sovereign functions:

Does the fact that these corporations perform certain functions of government make them a part of
the Government of the Philippines?

The answer is simple: they do not acquire that status for the simple reason that they do not come
under the classification of municipal or public corporation. Take for instance the National Coconut
Corporation. While it was organized with the purpose of "adjusting the coconut industry to a position
independent of trade preferences in the United States" and of providing "Facilities for the better
curing of copra products and the proper utilization of coconut by-products," a function which our
government has chosen to exercise to promote the coconut industry, however, it was given a
corporate power separate and distinct from our government, for it was made subject to the
provisions of our Corporation Law in so far as its corporate existence and the powers that it may
exercise are concerned (sections 2 and 4, Commonwealth Act No. 518). It may sue and be sued in
the same manner as any other private corporations, and in this sense it is an entity different from our
government. As this Court has aptly said, "The mere fact that the Government happens to be a
majority stockholder does not make it a public corporation" (National Coal Co. vs. Collector of
Internal Revenue, 46 Phil., 586-587). "By becoming a stockholder in the National Coal Company, the
Government divested itself of its sovereign character so far as respects the transactions of the
corporation. . . . Unlike the Government, the corporation may be sued without its consent, and is
subject to taxation. Yet the National Coal Company remains an agency or instrumentality of
government." (Government of the Philippine Islands vs. Springer, 50 Phil., 288.)

The following restatement of the entrenched rule by former SEC Chairperson Rosario Lopez bears
noting:

The fact that government corporations are instrumentalities of the State does not divest them with
immunity from suit. (Malong v. PNR, 138 SCRA p. 63) It is settled that when the government
engages in a particular business through the instrumentality of a corporation, it divests itself pro hoc
vice of its sovereign character so as to subject itself to the rules governing private corporations,
(PNB v. Pabolan 82 SCRA 595) and is to be treated like any other corporation. (PNR v. Union de
Maquinistas Fogonero y Motormen, 84 SCRA 223)

In the same vein, when the government becomes a stockholder in a corporation, it does not exercise
sovereignty as such. It acts merely as a corporator and exercises no other power in the
management of the affairs of the corporation than are expressly given by the incorporating act. Nor
does the fact that the government may own all or a majority of the capital stock take from the
corporation its character as such, or make the government the real party in interest. (Amtorg Trading
Corp. v. US 71 F2d 524, 528)129

MIAA Performs Proprietary

Functions No Matter How

Vital to the Public Interest

The simple truth is that, based on these accepted doctrinal tests, MIAA performs proprietary
functions. The operation of an airport facility by the State may be imbued with public interest, but it is
by no means indispensable or obligatory on the national government. In fact, as demonstrated in
other countries, it makes a lot of economic sense to leave the operation of airports to the private
sector.

The majority tries to becloud this issue by pointing out that the MIAA does not compete in the
marketplace as there is no competing international airport operated by the private sector; and that
MIAA performs an essential public service as the primary domestic and international airport of the
Philippines. This premise is false, for one. On a local scale, MIAA competes with other international
airports situated in the Philippines, such as Davao International Airport and MCIAA. More pertinently,
MIAA also competes with other international airports in Asia, at least. International airlines take into
account the quality and conditions of various international airports in determining the number of
flights it would assign to a particular airport, or even in choosing a hub through which destinations
necessitating connecting flights would pass through.
Even if it could be conceded that MIAA does not compete in the market place, the example of the
Philippine National Railways should be taken into account. The PNR does not compete in the
marketplace, and performs an essential public service as the operator of the railway system in the
Philippines. Is the PNR engaged in sovereign functions? The Court, in Malong v. Philippine National
Railways,130 held that it was not.131

Even more relevant to this particular case is Teodoro v. National Airports Corporation,132 concerning
the proper appreciation of the functions performed by the Civil Aeronautics Administration (CAA),
which had succeeded the defunction National Airports Corporation. The CAA claimed that as an
unincorporated agency of the Republic of the Philippines, it was incapable of suing and being sued.
The Court noted:

Among the general powers of the Civil Aeronautics Administration are, under Section 3, to execute
contracts of any kind, to purchase property, and to grant concession rights, and under Section 4, to
charge landing fees, royalties on sales to aircraft of aviation gasoline, accessories and supplies, and
rentals for the use of any property under its management.

These provisions confer upon the Civil Aeronautics Administration, in our opinion, the power to sue
and be sued. The power to sue and be sued is implied from the power to transact private business.
And if it has the power to sue and be sued on its behalf, the Civil Aeronautics Administration with
greater reason should have the power to prosecute and defend suits for and against the National
Airports Corporation, having acquired all the properties, funds and choses in action and assumed all
the liabilities of the latter. To deny the National Airports Corporation's creditors access to the courts
of justice against the Civil Aeronautics Administration is to say that the government could impair the
obligation of its corporations by the simple expedient of converting them into unincorporated
agencies. 133

xxx

Eventually, the charter of the CAA was revised, and it among its expanded functions was "[t]o
administer, operate, manage, control, maintain and develop the Manila International
Airport."134 Notwithstanding this expansion, in the 1988 case of CAA v. Court of Appeals135 the Court
reaffirmed the ruling that the CAA was engaged in "private or non-governmental functions."136 Thus,
the Court had already ruled that the predecessor agency of MIAA, the CAA was engaged in private
or non-governmental functions. These are more precedents ignored by the majority. The following
observation from the Teodoro case very well applies to MIAA.

The Civil Aeronautics Administration comes under the category of a private entity. Although not a
body corporate it was created, like the National Airports Corporation, not to maintain a necessary
function of government, but to run what is essentially a business, even if revenues be not its prime
objective but rather the promotion of travel and the convenience of the traveling public. It is engaged
in an enterprise which, far from being the exclusive prerogative of state, may, more than the
construction of public roads, be undertaken by private concerns.137

If the determinative point in distinguishing between sovereign functions and proprietary functions is
the vitality of the public service being performed, then it should be noted that there is no more
important public service performed than that engaged in by public utilities. But notably, the
Constitution itself authorizes private persons to exercise these functions as it allows them to operate
public utilities in this country138 If indeed such functions are actually sovereign and belonging
properly to the government, shouldn't it follow that the exercise of these tasks remain within the
exclusive preserve of the State?
There really is no prohibition against the government taxing itself,139 and nothing obscene with
allowing government entities exercising proprietary functions to be taxed for the purpose of raising
the coffers of LGUs. On the other hand, it would be an even more noxious proposition that the
government or the instrumentalities that it owns are above the law and may refuse to pay a validly
imposed tax. MIAA, or any similar entity engaged in the exercise of proprietary, and not sovereign
functions, cannot avoid the adverse-effects of tax evasion simply on the claim that it is imbued with
some of the attributes of government.

VII.

MIAA Property Not Subject to

Execution Sale Without Consent

Of the President.

Despite the fact that the City of Parañaque ineluctably has the power to impose real property taxes
over the MIAA, there is an equally relevant statutory limitation on this power that must be fully
upheld. Section 3 of the MIAA charter states that "[a]ny portion [of the [lands transferred, conveyed
and assigned to the ownership and administration of the MIAA] shall not be disposed through sale or
through any other mode unless specifically approved by the President of the Philippines."140

Nothing in the Local Government Code, even with its wide grant of powers to LGUs, can be deemed
as repealing this prohibition under Section 3, even if it effectively forecloses one possible remedy of
the LGU in the collection of delinquent real property taxes. While the Local Government Code
withdrew all previous local tax exemptions of the MIAA and other natural and juridical persons, it did
not similarly withdraw any previously enacted prohibitions on properties owned by GOCCs, agencies
or instrumentalities. Moreover, the resulting legal effect, subjecting on one hand the MIAA to local
taxes but on the other hand shielding its properties from any form of sale or disposition, is not
contradictory or paradoxical, onerous as its effect may be on the LGU. It simply means that the LGU
has to find another way to collect the taxes due from MIAA, thus paving the way for a mutually
acceptable negotiated solution.141

There are several other reasons this statutory limitation should be upheld and applied to this case. It
is at this juncture that the importance of the Manila Airport to our national life and commerce may be
accorded proper consideration. The closure of the airport, even by reason of MIAA's legal omission
to pay its taxes, will have an injurious effect to our national economy, which is ever reliant on air
travel and traffic. The same effect would obtain if ownership and administration of the airport were to
be transferred to an LGU or some other entity which were not specifically chartered or tasked to
perform such vital function. It is for this reason that the MIAA charter specifically forbids the sale or
disposition of MIAA properties without the consent of the President. The prohibition prevents the
peremptory closure of the MIAA or the hampering of its operations on account of the demands of its
creditors. The airport is important enough to be sheltered by legislation from ordinary legal
processes.

Section 3 of the MIAA charter may also be appreciated as within the proper exercise of executive
control by the President over the MIAA, a GOCC which despite its separate legal personality, is still
subsumed within the executive branch of government. The power of executive control by the
President should be upheld so long as such exercise does not contravene the Constitution or the
law, the President having the corollary duty to faithfully execute the Constitution and the laws of the
land.142 In this case, the exercise of executive control is precisely recognized and authorized by the
legislature, and it should be upheld even if it comes at the expense of limiting the power of local
government units to collect real property taxes.

Had this petition been denied instead with Mactan as basis, but with the caveat that the MIAA
properties could not be subject of execution sale without the consent of the President, I suspect that
the parties would feel little distress. Through such action, both the Local Government Code and the
MIAA charter would have been upheld. The prerogatives of LGUs in real property taxation, as
guaranteed by the Local Government Code, would have been preserved, yet the concerns about the
ruinous effects of having to close the Manila International Airport would have been averted. The
parties would then be compelled to try harder at working out a compromise, a task, if I might add,
they are all too willing to engage in.143 Unfortunately, the majority will cause precisely the opposite
result of unremitting hostility, not only to the City of Parañaque, but to the thousands of LGUs in the
country.

VIII.

Summary of Points

My points may be summarized as follows:

1) Mactan and a long line of succeeding cases have already settled the rule that under the Local
Government Code, enacted pursuant to the constitutional mandate of local autonomy, all natural and
juridical persons, even those GOCCs, instrumentalities and agencies, are no longer exempt from
local taxes even if previously granted an exemption. The only exemptions from local taxes are those
specifically provided under the Local Government Code itself, or those enacted through subsequent
legislation.

2) Under the Local Government Code, particularly Section 232, instrumentalities, agencies and
GOCCs are generally liable for real property taxes. The only exemptions therefrom under the same
Code are provided in Section 234, which include real property owned by the Republic of the
Philippines or any of its political subdivisions.

3) The subject properties are owned by MIAA, a GOCC, holding title in its own name. MIAA, a
separate legal entity from the Republic of the Philippines, is the legal owner of the properties, and is
thus liable for real property taxes, as it does not fall within the exemptions under Section 234 of the
Local Government Code.

4) The MIAA charter expressly bars the sale or disposition of MIAA properties. As a result, the City
of Parañaque is prohibited from seizing or selling these properties by public auction in order to
satisfy MIAA's tax liability. In the end, MIAA is encumbered only by a limited lien possessed by the
City of Parañaque.

On the other hand, the majority's flaws are summarized as follows:

1) The majority deliberately ignores all precedents which run counter to its hypothesis, including
Mactan. Instead, it relies and directly cites those doctrines and precedents which were overturned by
Mactan. By imposing a different result than that warranted by the precedents without explaining why
Mactan or the other precedents are wrong, the majority attempts to overturn all these ruling sub
silencio and without legal justification, in a manner that is not sanctioned by the practices and
traditions of this Court.
2) The majority deliberately ignores the policy and philosophy of local fiscal autonomy, as mandated
by the Constitution, enacted under the Local Government Code, and affirmed by precedents.
Instead, the majority asserts that there is no sound rationale for local governments to tax national
government instrumentalities, despite the blunt existence of such rationales in the Constitution, the
Local Government Code, and precedents.

3) The majority, in a needless effort to justify itself, adopts an extremely strained exaltation of the
Administrative Code above and beyond the Corporation Code and the various legislative charters, in
order to impose a wholly absurd definition of GOCCs that effectively declassifies innumerable
existing GOCCs, to catastrophic legal consequences.

4) The majority asserts that by virtue of Section 133(o) of the Local Government Code, all national
government agencies and instrumentalities are exempt from any form of local taxation, in
contravention of several precedents to the contrary and the proviso under Section 133, "unless
otherwise provided herein [the Local Government Code]."

5) The majority erroneously argues that MIAA holds its properties in trust for the Republic of the
Philippines, and that such properties are patrimonial in character. No express or implied trust has
been created to benefit the national government. The legal distinction between sovereign and
proprietary functions, as affirmed by jurisprudence, likewise preclude the classification of MIAA
properties as patrimonial.

IX.

Epilogue

If my previous discussion still fails to convince on how wrong the majority is, then the following points
are well-worth considering. The majority cites the Bangko Sentral ng Pilipinas (Bangko Sentral) as a
government instrumentality that exercises corporate powers but not organized as a stock or non-
stock corporation. Correspondingly for the majority, the Bangko ng Sentral is exempt from all forms
of local taxation by LGUs by virtue of the Local Government Code.

Section 125 of Rep. Act No. 7653, The New Central Bank Act, states:

SECTION 125. Tax Exemptions. — The Bangko Sentral shall be exempt for a period of five (5)
years from the approval of this Act from all national, provincial, municipal and city taxes, fees,
charges and assessments.

The New Central Bank Act was promulgated after the Local Government Code if the BSP is already
preternaturally exempt from local taxation owing to its personality as an "government
instrumentality," why then the need to make a new grant of exemption, which if the majority is to be
believed, is actually a redundancy. But even more tellingly, does not this provision evince a clear
intent that after the lapse of five (5) years, that the Bangko Sentral will be liable for provincial,
municipal and city taxes? This is the clear congressional intent, and it is Congress, not this Court
which dictates which entities are subject to taxation and which are exempt.

Perhaps this notion will offend the majority, because the Bangko Sentral is not even a government
owned corporation, but a government instrumentality, or perhaps "loosely", a "government corporate
entity." How could such an entity like the Bangko Sentral , which is not even a government owned
corporation, be subjected to local taxation like any mere mortal? But then, see Section 1 of the New
Central Bank Act:
SECTION 1. Declaration of Policy. — The State shall maintain a central monetary authority that shall
function and operate as an independent and accountable body corporate in the discharge of its
mandated responsibilities concerning money, banking and credit. In line with this policy, and
considering its unique functions and responsibilities, the central monetary authority established
under this Act, while being a government-owned corporation, shall enjoy fiscal and administrative
autonomy.

Apparently, the clear legislative intent was to create a government corporation known as the Bangko
Sentral ng Pilipinas. But this legislative intent, the sort that is evident from the text of the provision
and not the one that needs to be unearthed from the bowels of the archival offices of the House and
the Senate, is for naught to the majority, as it contravenes the Administrative Code of 1987, which
after all, is "the governing law defining the status and relationship of government agencies and
instrumentalities" and thus superior to the legislative charter in determining the personality of a
chartered entity. Its like saying that the architect who designed a school building is better equipped
to teach than the professor because at least the architect is familiar with the geometry of the
classroom.

Consider further the example of the Philippine Institute of Traditional and Alternative Health Care
(PITAHC), created by Republic Act No. 8243 in 1997. It has similar characteristics as MIAA in that it
is established as a body corporate,144 and empowered with the attributes of a
corporation,145 including the power to purchase or acquire real properties.146 However the PITAHC
has no capital stock and no members, thus following the majority, it is not a GOCC.

The state policy that guides PITAHC is the development of traditional and alternative health
care,147 and its objectives include the promotion and advocacy of alternative, preventive and curative
health care modalities that have been proven safe, effective and cost effective.148 "Alternative health
care modalities" include "other forms of non-allophatic, occasionally non-indigenous or imported
healing methods" which include, among others "reflexology, acupuncture, massage, acupressure"
and chiropractics.149

Given these premises, there is no impediment for the PITAHC to purchase land and construct
thereupon a massage parlor that would provide a cheaper alternative to the opulent spas that have
proliferated around the metropolis. Such activity is in line with the purpose of the PITAHC and with
state policy. Is such massage parlor exempt from realty taxes? For the majority, it is, for PITAHC is
an instrumentality or agency exempt from local government taxation, which does not fall under the
exceptions under Section 234 of the Local Government Code. Hence, this massage parlor would not
just be a shelter for frazzled nerves, but for taxes as well.

Ridiculous? One might say, certainly a decision of the Supreme Court cannot be construed to
promote an absurdity. But precisely the majority, and the faulty reasoning it utilizes, opens itself up
to all sorts of mischief, and certainly, a tax-exempt massage parlor is one of the lesser evils that
could arise from the majority ruling. This is indeed a very strange and very wrong decision.

I dissent.

DANTE O. TINGA

Associate Justice
Footnotes

1 Dated 16 September 1983.

2 Dated 26 July 1987.

3 Section 3, MIAA Charter.

4 Section 22, MIAA Charter.

5 Section 3, MIAA Charter.

6 Rollo, pp. 22-23.

7 Under Rule 45 of the 1997 Rules of Civil Procedure.

8 330 Phil. 392 (1996).

9 MIAA Charter as amended by Executive Order No. 298. See note 2.

10 Batas Pambansa Blg. 68.

11 Section 11 of the MIAA Charter provides:

Contribution to the General Fund for the Maintenance and Operation of other
Airports. – Within thirty (30) days after the close of each quarter, twenty percentum
(20%) of the gross operating income, excluding payments for utilities of tenants and
concessionaires and terminal fee collections, shall be remitted to the General Fund in
the National Treasury to be used for the maintenance and operation of other
international and domestic airports in the country. Adjustments in the amount paid by
the Authority to the National Treasury under this Section shall be made at the end of
each year based on the audited financial statements of the Authority.

12 Section 5(j), MIAA Charter.

13 Section 6, MIAA Charter.

14 Section 5(k), MIAA Charter.

15
Section 5(o), MIAA Charter.

16 Third Whereas Clause, MIAA Charter.

17 Id.

18 Constitution, Art. X, Sec. 5.

274 Phil. 1060, 1100 (1991) quoting C. Dallas Sands, 3 Statutes and Statutory
19

Construction 207.
20 274 Phil. 323, 339-340 (1991).

21 Constitution, Art. VI, Sec. 28(1).

22 First Whereas Clause, MIAA Charter.

23 30 Phil. 602, 606-607 (1915).

24 102 Phil. 866, 869-870 (1958).

25 PNB v. Puruganan, 130 Phil. 498 (1968). See also Martinez v. CA, 155 Phil. 591 (1974).

26 MIAA Charter, Sec.16.

27 Chavez v. Public Estates Authority, 433 Phil. 506 (2002).

28 Section 3, MIAA Charter.

29 G.R. No. 144104, 29 June 2004, 433 SCRA 119, 138.

30 Republic Act No. 7653, 14 June 1993, Sec. 5.

31 Executive Order No. 1061, 5 November 1985, Sec. 3(p).

32 Republic Act No. 4850, 18 July 1966, Sec. 5.

33 Presidential Decree No. 977, 11 August 1976, Section 4(j).

34 Republic Act No. 7227, 13 March 1992, Sec. 3.

35 Presidential Decree No. 857, 23 December 1975, Sec. 6(b)(xvi).

36 Republic Act No. 4663, 18 June 1966, Sec. 7(m).

37 Republic Act No. 4567, 19 June 1965, Sec. 7(m).

38 Republic Act No. 7621, 26 June 1992, Sec. 7(m).

39 Republic Act No. 4156, 20 June 1964. Section 4(b).

40Republic Act No. 3844, 8 August 1963, as amended by Republic Act No. 7907, 23
February 1995.

41 Executive Order No. 81, 3 December 1986.

42 Republic Act No. 8175, 29 December 1995.

43Presidential Decree No. 252, 21 July 1973, as amended by Presidential Decree No. 1071,
25 January 1977 and Executive Order No. 1067, 25 November 1985.
 44 Executive Order No. 80, 3 December 1986.

45 III Records, Constitutional Commission 63 (22 August 1986).

46 2003 ed., 1181.

Manila International Airport Authority v. Airspan Corporation, G.R. No. 157581, 1

47

December 2004, 445 SCRA 471.

TINGA, J.

1 Per Department of Interior and Local Government. See also "Summary" from the National
Statistical Coordination Board, http://www.nscb.gov.ph/activestats
/psgc/NSCB_PSGC_SUMMARY_DEC04.pdf.

2 330 Phil. 392 (1996).

3 G.R. No. 91649, 14 May 1991, 197 SCRA 52.

4 451 Phil. 683, 698 (2003).

5 364 Phil. 843, 855 (1999).

6 449 Phil. 233 (2003).

7 G.R. No. 152675 & 152771, 28 April 2004.

8 Decision, p. 24.

9 G.R. No. 144104, 29 June 2004, 433 SCRA 119.

10 Supra note 8.

G.R. No. 127383, 18 August 2005, 467 SCRA 280. Per the author of this Dissenting
11

Opinion.

12Nonetheless, the Court noted therein GSIS's exemption from real property taxes was
reenacted in 1997, and the GSIS at present is exempt from such taxes under the GSIS Act
of 1997. Id., at 299.

13G.R. No. 109791, 14 July 2003, 406 SCRA 88, and G.R. No. 143214, 11 November 2004,
442 SCRA 175, respectively.

14 118 Phil. 1354 (1963).

15 396 Phil. 860 (2000).

16 Supra note 8.

17 91 Phil 203 (1952).

18 G.R. No. L-51806, 8 November 1988, 167 SCRA 28.

19 G.R. No. 155692, 23 October 2003, 414 SCRA 327.

20 Id. at 333, citing Section 10, Book IV, Title III, Chapter 3, Administrative Code of 1987.

21 G.R. No. 165827, 16 June 2006.

22 G.R. No. 147192, 27 June 2006.

23 Supra note 8.

24 See Mendoza v. De Leon, 33 Phil. 508 (1916).

25 Mactan, supra note 2, at 397-398.

26 Section 193, Rep. Act No. 7160.

27 Section 232, Rep. Act No. 7160.

28 Section 234, Rep. Act No. 7160. Emphasis supplied.

29 Id. at 411-413.

30 See City of Davao v. RTC, supra note 11, at 293.

31 Supra note 3.

32 Id. at 63-65.

33 G.R. No. 88921, 31 May 1991, 197 SCRA 771.

34 Id. at 799.

35 Mactan, supra note 2, at 419-420.

36 Supra note 6.

37 Id. at 250-251.

38 G.R. No. 109791, 14 July 2003, 406 SCRA 88.

39 Id. at 99-100.

40 Supra note 21.

41 Id.

42 G.R. No. 143214, 11 November 2004, 442 SCRA 175.

43 Id., at 184.

44 Id. at 185-186, citing MCIAA v. Marcos, supra note 2.

45 Supra note 11.

46 P.D. No. 1981. See City of Davao v. RTC, supra note 40, at 289.

47 Id. at 287-288.

48 32 Phil. 36, 49; cited in City of Davao v. RTC, supra note 40 at 296-297.

49 Id.

50 Supra note 22.

51 Id.

52 Decision, p. 6.

53 MIAA's Charter (E.O No. 903, as amended) provides:

Section 3. Creation of the Manila International Airport Authority. – xxx

The land where the Airport is presently located as well as the surrounding land area
of approximately six hundred hectares, are hereby transferred, conveyed and
assigned to the ownership and administration of the Authority, subject to existing
rights, if any. xxx Any portion thereof shall not be disposed through sale or through
any other mode unless specifically approved by the President of the Philippines.

Section 22. Transfer of Existing Facilities and Intangible Assets. – All existing public
airport facilities, runways, lands, buildings and other property, movable or
immovable, belonging to the Airport, and all assets, powers rights, interests and
privileges belonging to the Bureau of Air Transportation relating to airport works or air
operations, including all equipment which are necessary for the operation of crash
fire and rescue facilities, are hereby transferred to the Authority.

On the other hand, MCIAA's charter (Rep. Act No. 6958) provides:

Section 15. Transfer of Existing Facilities and Intangible Assets. – All existing public
airport facilities, runways, lands, buildings and other properties, movable or
immovable, belonging to or presently administered by the airports, and all assets,
powers, rights, interest and privileges relating to airport works or air operations,
including all equipment which are necessary for the operation of air navigation,
aerodrome control towers, crash, fire, and rescue facilities are hereby transferred to
the Authority: Provided, however, That the operational control of all equipment
necessary for the operation of radio aids to air navigation, airways communication,
the approach control office and the area control center shall be retained by the Air
Transportation Office. xxx
54See Section 3, E.O. 903 (as amended), infra note 140; and Section Section 4(c), Rep. Act
No. 6958, which qualifies the power of the MCIAA to sell its properties, providing that "any
asset located in the Mactan International Airport important to national security shall not be
subject to alienation or mortgage by the Authority nor to transfer to any entity other than the
National Government."

55 See Section 16, E.O. 903 (as amended) and Section 13, Rep. Act No. 6958.

56 See Articles 40 to 43, Civil Code.

57 See Articles 44 to 47, Civil Code.

58This is apparent from such assertions as "When the law vests in a government
instrumentality corporate powers, the instrumentality does not become a corporation. Unless
the government instrumentality is organized as a stock or non-stock corporation, it remains a
government instrumentality exercising not only governmental but also corporate powers."
See Decision, p. 9-10.

59 Decision, p. 9.

60 See Section 2(10), E.O. 292.

61 See Section 2(4), E.O No. 292.

62 50 Phil. 259 (1927).

63 Id., at 288.

64 See Sec. 5, Rep. Act No. 6395.

65 Section 3, Corporation Code.

66 See Section 13, Rep. Act No. 6395.

67 See Section 1, Rep. Act No. 7875.

68 See Section 16(i), Rep. Act No. 7875.

69 See Section 3, Rep. Act 8282.

70 Supra note 14.

71See Section 2(b), Rep. Act No. 7656, which defines GOCCs as "corporations organized as
a stock or non-stock corporation xxx"

72 See Rep. Act No. 7656, the pertinent provisions of which read:

c. 3. Dividends.—All government-owned or -controlled corporations shall declare and

remit at least fifty percent (50%) of their annual net earnings as cash, stock or
property dividends to the National Government. This section shall also apply to those
 government-owned or -controlled corporations whose profit distribution is provided by
their respective charters or by special law, but shall exclude those enumerated in
Section 4 hereof: Provided, That such dividends accruing to the National
Government shall be received by the National Treasury and recorded as income of
the General Fund.

Sec. 4. Exemptions.—The provisions of the preceding section notwithstanding,

government-owned or -controlled corporations created or organized by law to
administer real or personal properties or funds held in trust for the use and the
benefit of its members, shall not be covered by this Act such as, but not limited to:
the Government Service Insurance System, the Home Development Mutual Fund,
the Employees Compensation Commission, the Overseas Workers Welfare
Administration, and the Philippine Medical Care Commission.

73 See Pres. Decree No. 857 (as amended).

74 See Section 10, Pres. Decree No. 857.

75 See Section 11, Pres. Decree No. 857.

76 See Rep. Act No. 7227.

77 See Section 6, Rep. Act No. 7227.

78 See Rep. Act No. 7916.

79 See Section 47, Rep. Act No. 7916 in relation to Section 5, Pres. Decree No. 66.

80 See Executive Order No. 603, as amended.

81 See Article 6, Section 15 of Executive Order No. 603, as amended.

82See Rep. Act No. 7653. If there is any doubt whether the BSP was intended to be covered
by Rep. Act No. 7656, see Section 2(b), Rep. Act No. 7656, which states that "This term
[GOCCs shall also include financial institutions, owned or controlled by the National
Government, but shall exclude acquired asset corporations, as defined in the next
paragraphs, state universities, and colleges."

83 See Section 2, Rep. Act No. 7653.

84 See Sections 43 & 44, Rep. Act No. 7653.

85 See Rep. Act No. 6395.

86 Supra note 35.

87 See Decision, p. 10.

88 Id. at 10-11.
89 Id.

90 See Rep. Act No. 3034.

91 See Rep. Act No. 4132.

92 See Rep. Act No. 6070.

93 See Rep. Act No. 5920.

94 See Rep. Act No. 4071.

95 See e.g., Sections 1 & 2, Rep. Act No. 6070.

Section 1. Declaration of Policy. – It is hereby declared to be the policy of the

Congress to foster the accelerated and balanced growth of the Province of Ilocos
Sur, within the context of national plans and policies for social and economic
development, through the leadership, guidance, and support of the government. To
achieve this end, it is recognized that a government corporation should be created
for the purpose of drawing up the necessary plans of provincial development; xxx

Sec. 2. Ilocos Sur Development Authority created. – There is hereby created a body
corporate to be known as the Ilocos Sur Development Authority xxx. The Authority
shall execute the powers and functions herein vested and conferred upon it in such
manner as will in its judgment, aid to the fullest possible extent in carrying out the
aims and purposes set forth below."

96See Art. 37, Civil Code, which provides in part, "Juridical capacity, which is the fitness to
be the subject of legal relations…"

97See rollo, p. 18. "Petitioner [MIAA] is a government-owned and controlled corporation with
original charter as it was created by virtue of Executive Order No. 903 issued by then
President Ferdinand E. Marcos on July 21, 1983, as amended by Executive Order No. 298
issued by President Corazon C. Aquino on July 26, 1987, and with office address at the
MIAA Administration Bldg Complex, MIAA Road, Pasay City." (emphasis supplied).

98See "Department of Budget and Management – Web Linkages," http://www.dbm.

gov.ph/web_linkages.htm (Last visited 25 February 2005).

99G.R. No. 104217, 5 December 1994, 238 SCRA 714; per Quiazon, J.. "Petitioner MIAA is
a government-owned and controlled corporation for the purpose, among others, of
encouraging and promoting international and domestic air traffic in the Philippines as a
means of making the Philippines a center of international trade and tourism and accelerating
the development of the means of transportation and communications in the country". Id. at
716.

100 See Section 23, Chapter 6, Title XV, Book IV, Administrative Code of 1987.

101 Supra note 60.

102 Supra note 8.

103 Supra note 6.

104Assuming that there is conflict between Section 133(o), Section 193, Section 232 and
Section 234 of the Local Government Code, the rule in statutory construction is, "If there be
no such ground for choice between inharmonious provisions or sections, the latter provision
or section, being the last expression of the legislative will, must, in construction, vacate the
former to the extent of the repugnancy. It has been held that in case of irreconcilable conflict
between two provisions of the same statute, the last in order of position is frequently held to
prevail, unless it clearly appears that the intent of the legislature is otherwise." R. Agpalo,
Statutory Construction (3rd ed., 1995), p. 201; citing Lichauco & Co. v. Apostol, 44 Phil. 138
(1922); Cuyegkeng v. Cruz, 108 Phil. 1147 (1960); Montenegro v. Castañeda, 91 Phil. 882
(1952).

105 Decision, p. 12.

106 Supra note 6.

107 Id. at 261-262.

108 Id., at 248-250.

109 Supra note 38.

110Id, at 102; citing National Power Corp. v. Presiding Judge, RTC, Br. XXV, 190 SCRA 477
(1990).

111 Decision, p. 25.

112"Unless otherwise expressed in the tax law, the government and its political subdivisions
are exempt therefrom." J. Vitug and E. Acosta, Tax Law and Jurisprudence (2nd ed., 2000),
at 36.

113 Supra note 9.

114
See P.D. No. 1423.

R. Agpalo, Statutory Construction (3rd ed., 1995), at 199; citing Javellana v. Tayo, G.R.
115

No. 18919, 29 December 1982, 6 SCRA 1042 (1962); Radiola-Toshiba Phil., Inc. v. IAC, 199
SCRA 373 (1991).

116 PPA v. City of Iloilo, supra note 42.

117 Id., at 186-187.

118 Supra note 15.

119 Id. at 869.

120 Id. at 871.

121 Id. at 872.

122 See Section 10, E.O. No. 903.

123 R. Lopez, I The Corporation Code of the Philippines Annotated, pp. 15-16 (1994).

124 See Section 5, E.O. No. 903.

See Section 1, Article X of the Constitution, which reads: "The territorial and political
125

subdivisions of the Republic of the Philippines are the provinces, cities, municipalities and
barangays xxx"

126 Romualdez-Yap v. CSC, G.R. No. 104226, 12 August 1993, 225 SCRA 285, 294.

127 100 Phil. 468. (1956)

128 Id., at 471-473.

129 Lopez, supra note 123 at 67.

130 G.R. No. L-49930, 7 August 1985, 138 SCRA 63.

131 "Did the State act in a sovereign capacity or in a corporate capacity when it organized the
PNR for the purpose of engaging in transportation? Did it act differently when it organized
the PNR as successor of the Manila Railroad Company? xxx We hold that in the instant case
the State divested itself of its sovereign capacity when it organized the PNR which is no
different from its predecessor, the Manila Railroad Company." Id, at 66.

132 Supra note 17.

133 Id., at 206.

134 Section 32(24), Rep. Act No. 776. See CAA v. Court of Appeals, supra note 18, at 36.

135 Supra note 18.

136 Id., at 36.

137 Teodoro v. National Airports Commission, supra note 17, at 207.

138 See Article XII, Section 11, Const.

Vitug & Acosta, supra note 112, at 35; citing Bisaya Land Transportation Co., Inc. v.
139

Collector of Internal Revenue, L-11812, 29 May 1959, 105 Phil. 1338.

140 See Section 3, E.O. 903, as amended.

141 Indeed, last 4 February 2005, the MIAA filed a Manifestation before this Court stating that
its new General Manager had been conferring with the newly elected local government of
Parañaque with the end of settling the case at mutually acceptable terms. See rollo, pp. 315-
316. While this Manifestation was withdrawn a few weeks later, see rollo, pp. 320-322, it still
stands as proof that the parties are nevertheless willing to explore an extrajudicial settlement
of this case.

See Section 17, Article VII, Constitution. "The President shall have control of all the
142

executive departments. He shall ensure that the laws be faithfully executed."

143 See note 141.

144 See Section 5, Rep. Act No. 8423.

145 See Section 6(s), Rep. Act No. 8423.

146
See Section 6(r), Rep. Act No. 8423.

147 See Section 2, Rep. Act No. 8423.

148 See Section 3(b), Rep. Act No. 8423.

149 See Section 4(d), Rep. Act No. 8423.

 Republic of the Philippines
SUPREME COURT
Manila

EN BANC

G.R. Nos. L-49839-46 April 26, 1991

JOSE B. L. REYES and EDMUNDO A. REYES, petitioners,

vs.
PEDRO ALMANZOR, VICENTE ABAD SANTOS, JOSE ROÑO, in their capacities as appointed
and Acting Members of the CENTRAL BOARD OF ASSESSMENT APPEALS; TERESITA H.
NOBLEJAS, ROMULO M. DEL ROSARIO, RAUL C. FLORES, in their capacities as appointed
and Acting Members of the BOARD OF ASSESSMENT APPEALS of Manila; and NICOLAS
CATIIL in his capacity as City Assessor of Manila,respondents.

Barcelona, Perlas, Joven & Academia Law Offices for petitioners.

PARAS, J.:

This is a petition for review on certiorari to reverse the June 10, 1977 decision of the Central Board
of Assessment Appeals1 in CBAA Cases Nos. 72-79 entitled "J.B.L. Reyes, Edmundo Reyes, et al. v.
Board of Assessment Appeals of Manila and City Assessor of Manila" which affirmed the March 29,
1976 decision of the Board of Tax Assessment Appeals2 in BTAA Cases Nos. 614, 614-A-J, 615,
615-A, B, E, "Jose Reyes, et al. v. City Assessor of Manila" and "Edmundo Reyes and Milagros
Reyes v. City Assessor of Manila" upholding the classification and assessments made by the City
Assessor of Manila.

The facts of the case are as follows:

Petitioners J.B.L. Reyes, Edmundo and Milagros Reyes are owners of parcels of land situated in
Tondo and Sta. Cruz Districts, City of Manila, which are leased and entirely occupied as dwelling
sites by tenants. Said tenants were paying monthly rentals not exceeding three hundred pesos
(P300.00) in July, 1971. On July 14, 1971, the National Legislature enacted Republic Act No. 6359
prohibiting for one year from its effectivity, an increase in monthly rentals of dwelling units or of lands
on which another's dwelling is located, where such rentals do not exceed three hundred pesos
(P300.00) a month but allowing an increase in rent by not more than 10% thereafter. The said Act
also suspended paragraph (1) of Article 1673 of the Civil Code for two years from its effectivity
thereby disallowing the ejectment of lessees upon the expiration of the usual legal period of lease.
On October 12, 1972, Presidential Decree No. 20 amended R.A. No. 6359 by making absolute the
prohibition to increase monthly rentals below P300.00 and by indefinitely suspending the
aforementioned provision of the Civil Code, excepting leases with a definite period. Consequently,
the Reyeses, petitioners herein, were precluded from raising the rentals and from ejecting the
tenants. In 1973, respondent City Assessor of Manila re-classified and reassessed the value of the
subject properties based on the schedule of market values duly reviewed by the Secretary of
Finance. The revision, as expected, entailed an increase in the corresponding tax rates prompting
petitioners to file a Memorandum of Disagreement with the Board of Tax Assessment Appeals. They
averred that the reassessments made were "excessive, unwarranted, inequitable, confiscatory and
unconstitutional" considering that the taxes imposed upon them greatly exceeded the annual income
derived from their properties. They argued that the income approach should have been used in
determining the land values instead of the comparable sales approach which the City Assessor
adopted (Rollo, pp. 9-10-A). The Board of Tax Assessment Appeals, however, considered the
assessments valid, holding thus:

WHEREFORE, and considering that the appellants have failed to submit concrete evidence
which could overcome the presumptive regularity of the classification and assessments
appear to be in accordance with the base schedule of market values and of the base
schedule of building unit values, as approved by the Secretary of Finance, the cases should
be, as they are hereby, upheld.

SO ORDERED. (Decision of the Board of Tax Assessment Appeals, Rollo, p. 22).

The Reyeses appealed to the Central Board of Assessment Appeals. They submitted, among
1âwphi 1

others, the summary of the yearly rentals to show the income derived from the properties.
Respondent City Assessor, on the other hand, submitted three (3) deeds of sale showing the
different market values of the real property situated in the same vicinity where the subject properties
of petitioners are located. To better appreciate the locational and physical features of the land, the
Board of Hearing Commissioners conducted an ocular inspection with the presence of two
representatives of the City Assessor prior to the healing of the case. Neither the owners nor their
authorized representatives were present during the said ocular inspection despite proper notices
served them. It was found that certain parcels of land were below street level and were affected by
the tides (Rollo, pp. 24-25).

On June 10, 1977, the Central Board of Assessment Appeals rendered its decision, the dispositive
portion of which reads:

WHEREFORE, the appealed decision insofar as the valuation and assessment of the lots
covered by Tax Declaration Nos. (5835) PD-5847, (5839), (5831) PD-5844 and PD-3824 is
affirmed.

For the lots covered by Tax Declaration Nos. (1430) PD-1432, PD-1509, 146 and (1) PD-
266, the appealed Decision is modified by allowing a 20% reduction in their respective
market values and applying therein the assessment level of 30% to arrive at the
corresponding assessed value.

SO ORDERED. (Decision of the Central Board of Assessment Appeals, Rollo, p. 27)

Petitioner's subsequent motion for reconsideration was denied, hence, this petition.

The Reyeses assigned the following error:

THE HONORABLE BOARD ERRED IN ADOPTING THE "COMPARABLE SALES

APPROACH" METHOD IN FIXING THE ASSESSED VALUE OF APPELLANTS'
PROPERTIES.

The petition is impressed with merit.

The crux of the controversy is in the method used in tax assessment of the properties in question.
Petitioners maintain that the "Income Approach" method would have been more realistic for in
disregarding the effect of the restrictions imposed by P.D. 20 on the market value of the properties
affected, respondent Assessor of the City of Manila unlawfully and unjustifiably set increased new
assessed values at levels so high and successive that the resulting annual real estate taxes would
admittedly exceed the sum total of the yearly rentals paid or payable by the dweller tenants under
P.D. 20. Hence, petitioners protested against the levels of the values assigned to their properties as
revised and increased on the ground that they were arbitrarily excessive, unwarranted, inequitable,
confiscatory and unconstitutional (Rollo, p. 10-A).

On the other hand, while respondent Board of Tax Assessment Appeals admits in its decision that
the income approach is used in determining land values in some vicinities, it maintains that when
income is affected by some sort of price control, the same is rejected in the consideration and study
of land values as in the case of properties affected by the Rent Control Law for they do not project
the true market value in the open market (Rollo, p. 21). Thus, respondents opted instead for the
"Comparable Sales Approach" on the ground that the value estimate of the properties predicated
upon prices paid in actual, market transactions would be a uniform and a more credible standards to
use especially in case of mass appraisal of properties (Ibid.). Otherwise stated, public respondents
would have this Court completely ignore the effects of the restrictions of P.D. No. 20 on the market
value of properties within its coverage. In any event, it is unquestionable that both the "Comparable
Sales Approach" and the "Income Approach" are generally acceptable methods of appraisal for
taxation purposes (The Law on Transfer and Business Taxation by Hector S. De Leon, 1988
Edition). However, it is conceded that the propriety of one as against the other would of course
depend on several factors. Hence, as early as 1923 in the case of Army & Navy Club, Manila v.
Wenceslao Trinidad, G.R. No. 19297 (44 Phil. 383), it has been stressed that the assessors, in
finding the value of the property, have to consider all the circumstances and elements of value and
must exercise a prudent discretion in reaching conclusions.

Under Art. VIII, Sec. 17 (1) of the 1973 Constitution, then enforced, the rule of taxation must not only
be uniform, but must also be equitable and progressive.

Uniformity has been defined as that principle by which all taxable articles or kinds of property of the
same class shall be taxed at the same rate (Churchill v. Concepcion, 34 Phil. 969 [1916]).

Notably in the 1935 Constitution, there was no mention of the equitable or progressive aspects of
taxation required in the 1973 Charter (Fernando "The Constitution of the Philippines", p. 221,
Second Edition). Thus, the need to examine closely and determine the specific mandate of the
Constitution.

Taxation is said to be equitable when its burden falls on those better able to pay. Taxation is
progressive when its rate goes up depending on the resources of the person affected (Ibid.).

The power to tax "is an attribute of sovereignty". In fact, it is the strongest of all the powers of
government. But for all its plenitude the power to tax is not unconfined as there are restrictions.
Adversely effecting as it does property rights, both the due process and equal protection clauses of
the Constitution may properly be invoked to invalidate in appropriate cases a revenue measure. If it
were otherwise, there would be truth to the 1903 dictum of Chief Justice Marshall that "the power to
tax involves the power to destroy." The web or unreality spun from Marshall's famous dictum was
brushed away by one stroke of Mr. Justice Holmes pen, thus: "The power to tax is not the power to
destroy while this Court sits. So it is in the Philippines " (Sison, Jr. v. Ancheta, 130 SCRA 655 [1984];
Obillos, Jr. v. Commissioner of Internal Revenue, 139 SCRA 439 [1985]).

In the same vein, the due process clause may be invoked where a taxing statute is so arbitrary that it
finds no support in the Constitution. An obvious example is where it can be shown to amount to
confiscation of property. That would be a clear abuse of power (Sison v. Ancheta, supra).
The taxing power has the authority to make a reasonable and natural classification for purposes of
taxation but the government's act must not be prompted by a spirit of hostility, or at the very least
discrimination that finds no support in reason. It suffices then that the laws operate equally and
uniformly on all persons under similar circumstances or that all persons must be treated in the same
manner, the conditions not being different both in the privileges conferred and the liabilities imposed
(Ibid., p. 662).

Finally under the Real Property Tax Code (P.D. 464 as amended), it is declared that the first
Fundamental Principle to guide the appraisal and assessment of real property for taxation purposes
is that the property must be "appraised at its current and fair market value."

By no strength of the imagination can the market value of properties covered by P.D. No. 20 be
equated with the market value of properties not so covered. The former has naturally a much lesser
market value in view of the rental restrictions.

Ironically, in the case at bar, not even the factors determinant of the assessed value of subject
properties under the "comparable sales approach" were presented by the public respondents,
namely: (1) that the sale must represent a bonafide arm's length transaction between a willing seller
and a willing buyer and (2) the property must be comparable property (Rollo, p. 27). Nothing can
justify or support their view as it is of judicial notice that for properties covered by P.D. 20 especially
during the time in question, there were hardly any willing buyers. As a general rule, there were no
takers so that there can be no reasonable basis for the conclusion that these properties were
comparable with other residential properties not burdened by P.D. 20. Neither can the given
circumstances be nonchalantly dismissed by public respondents as imposed under distressed
conditions clearly implying that the same were merely temporary in character. At this point in time,
the falsity of such premises cannot be more convincingly demonstrated by the fact that the law has
existed for around twenty (20) years with no end to it in sight.

Verily, taxes are the lifeblood of the government and so should be collected without unnecessary
hindrance. However, such collection should be made in accordance with law as any arbitrariness will
negate the very reason for government itself It is therefore necessary to reconcile the apparently
conflicting interests of the authorities and the taxpayers so that the real purpose of taxations, which
is the promotion of the common good, may be achieved (Commissioner of Internal Revenue v. Algue
Inc., et al., 158 SCRA 9 [1988]). Consequently, it stands to reason that petitioners who are burdened
by the government by its Rental Freezing Laws (then R.A. No. 6359 and P.D. 20) under the principle
of social justice should not now be penalized by the same government by the imposition of
excessive taxes petitioners can ill afford and eventually result in the forfeiture of their properties.

By the public respondents' own computation the assessment by income approach would amount to
only P10.00 per sq. meter at the time in question.

PREMISES CONSIDERED, (a) the petition is GRANTED; (b) the assailed decisions of public
respondents are REVERSED and SET ASIDE; and (e) the respondent Board of Assessment
Appeals of Manila and the City Assessor of Manila are ordered to make a new assessment by the
income approach method to guarantee a fairer and more realistic basis of computation (Rollo, p. 71).

SO ORDERED.

Fernan, C.J., Narvasa, Melencio-Herrera, Gutierrez, Jr., Cruz, Feliciano, Gancayco, Padilla, Bidin,
Sarmiento, Griño-Aquino, Medialdea, Regalado and Davide, Jr., JJ., concur.
Footnotes

1
Penned by former Chairman and Acting Minister Pedro Almanzor and concurred in by the
then Minister of Justice Vicente Abad Santos and Minister of Local Government and
Community Development Jose Rono.

2
Rendered by then Acting Register of Deeds of Manila Teresita H. Noblejas and concurred
in by former City Engineer of Manila Romulo M. del Rosario and OIC of the Office of the City
of Auditor Raul C. Flores.
 Republic of the Philippines
SUPREME COURT
Manila

FIRST DIVISION

G.R. No. 119761 August 29, 1996

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
HON. COURT OF APPEALS, HON. COURT OF TAX APPEALS and FORTUNE TOBACCO
CORPORATION, respondents.

VITUG, J.:p

The Commissioner of Internal Revenue ("CIR") disputes the decision, dated 31 March 1995, of respondent Court of Appeals 1 affirming the
10th August 1994 decision and the 11th October 1994 resolution of the Court of Tax Appeals 2 ("CTA") in C.T.A. Case No. 5015, entitled
"Fortune Tobacco Corporation vs. Liwayway Vinzons-Chato in her capacity as Commissioner of Internal Revenue."

The facts, by and large, are not in dispute.

Fortune Tobacco Corporation ("Fortune Tobacco") is engaged in the manufacture of different brands
of cigarettes.

On various dates, the Philippine Patent Office issued to the corporation separate certificates of
trademark registration over "Champion," "Hope," and "More" cigarettes. In a letter, dated 06 January
1987, of then Commissioner of Internal Revenue Bienvenido A. Tan, Jr., to Deputy Minister Ramon
Diaz of the Presidential Commission on Good Government, "the initial position of the Commission
was to classify 'Champion,' 'Hope,' and 'More' as foreign brands since they were listed in the World
Tobacco Directory as belonging to foreign companies. However, Fortune Tobacco changed the
names of 'Hope' to 'Hope Luxury' and 'More' to 'Premium More,' thereby removing the said brands
from the foreign brand category. Proof was also submitted to the Bureau (of Internal Revenue ['BIR'])
that 'Champion' was an original Fortune Tobacco Corporation register and therefore a local
brand." 3 Ad Valorem taxes were imposed on these brands, 4 at the following rates:

BRAND AD VALOREM TAX RATE

E.O. 22 and E.O. 273 RA 6956
06-23-86 07-25-87 06-18-90
07-01-86 01-01-88 07-05-90

Hope Luxury M. 100's

Sec. 142, (c), (2) 40% 45%
Hope Luxury M. King
Sec. 142, (c), (2) 40% 45%
More Premium M. 100's
Sec. 142, (c), (2) 40% 45%
More Premium International
Sec. 142, (c), (2) 40% 45%
Champion Int'l. M. 100's
Sec. 142, (c), (2) 40% 45%
Champion M. 100's
Sec. 142, (c), (2) 40% 45%
Champion M. King
Sec. 142, (c), last par. 15% 20%
Champion Lights
Sec. 142, (c), last par. 15% 20% 5

A bill, which later became Republic Act ("RA") No. 7654, 6 was enacted, on 10 June 1993, by
the legislature and signed into law, on 14 June 1993, by the President of the Philippines. The
new law became effective on 03 July 1993. It amended Section 142(c)(1) of the National
Internal Revenue Code ("NIRC") to read; as follows:

Sec. 142. Cigars and Cigarettes. —

xxx xxx xxx

(c) Cigarettes packed by machine. — There shall be levied, assessed and collected
on cigarettes packed by machine a tax at the rates prescribed below based on the
constructive manufacturer's wholesale price or the actual manufacturer's wholesale
price, whichever is higher:

(1) On locally manufactured cigarettes which are currently classified and taxed at
fifty-five percent (55%) or the exportation of which is not authorized by contract or
otherwise, fifty-five (55%) provided that the minimum tax shall not be less than Five
Pesos (P5.00) per pack.

(2) On other locally manufactured cigarettes, forty-five percent (45%) provided that
the minimum tax shall not be less than Three Pesos (P3.00) per pack.

xxx xxx xxx

When the registered manufacturer's wholesale price or the actual manufacturer's

wholesale price whichever is higher of existing brands of cigarettes, including the
amounts intended to cover the taxes, of cigarettes packed in twenties does not
exceed Four Pesos and eighty centavos (P4.80) per pack, the rate shall be twenty
percent (20%). 7 (Emphasis supplied)

About a month after the enactment and two (2) days before the effectivity of RA 7654,
Revenue Memorandum Circular No. 37-93 ("RMC 37-93"), was issued by the BIR the full
text of which expressed:

REPUBLIKA NG PILIPINAS
KAGAWARAN NG PANANALAPI
KAWANIHAN NG RENTAS INTERNAS

J
u
l
y
 1
,
1
9
9
3

REVENUE MEMORANDUM CIRCULAR NO. 37-93

SUBJECT: Reclassification of Cigarettes Subject to Excise Tax

TO: All Internal Revenue Officers and Others Concerned.

In view of the issues raised on whether "HOPE," "MORE" and "CHAMPION"

cigarettes which are locally manufactured are appropriately considered as locally
manufactured cigarettes bearing a foreign brand, this Office is compelled to review
the previous rulings on the matter.

Section 142 (c)(1) National Internal Revenue Code, as amended by R.A. No. 6956,
provides:

On locally manufactured cigarettes bearing a foreign brand, fifty-five

percent (55%) Provided, That this rate shall apply regardless of
whether or not the right to use or title to the foreign brand was sold or
transferred by its owner to the local manufacturer. Whenever it has to
be determined whether or not a cigarette bears a foreign brand, the
listing of brands manufactured in foreign countries appearing in the
current World Tobacco Directory shall govern.

Under the foregoing, the test for imposition of the 55% ad valorem tax on cigarettes
is that the locally manufactured cigarettes bear a foreign brand regardless of whether
or not the right to use or title to the foreign brand was sold or transferred by its owner
to the local manufacturer. The brand must be originally owned by a foreign
manufacturer or producer. If ownership of the cigarette brand is, however, not
definitely determinable, ". . . the listing of brands manufactured in foreign countries
appearing in the current World Tobacco Directory shall govern. . . ."

"HOPE" is listed in the World Tobacco Directory as being manufactured by (a) Japan
Tobacco, Japan and (b) Fortune Tobacco, Philippines. "MORE" is listed in the said
directory as being manufactured by: (a) Fills de Julia Reig, Andorra; (b) Rothmans,
Australia; (c) RJR-Macdonald Canada; (d) Rettig-Strenberg, Finland; (e) Karellas,
Greece; (f) R.J. Reynolds, Malaysia; (g) Rothmans, New Zealand; (h) Fortune
Tobacco, Philippines; (i) R.J. Reynolds, Puerto Rico; (j) R.J. Reynolds, Spain; (k)
Tabacalera, Spain; (l) R.J. Reynolds, Switzerland; and (m) R.J. Reynolds, USA.
"Champion" is registered in the said directory as being manufactured by (a)
Commonwealth Bangladesh; (b) Sudan, Brazil; (c) Japan Tobacco, Japan; (d)
Fortune Tobacco, Philippines; (e) Haggar, Sudan; and (f) Tabac Reunies,
Switzerland.

Since there is no showing who among the above-listed manufacturers of the

cigarettes bearing the said brands are the real owner/s thereof, then it follows that
the same shall be considered foreign brand for purposes of determining the ad
 valorem tax pursuant to Section 142 of the National Internal Revenue Code. As held
in BIR Ruling No. 410-88, dated August 24, 1988, "in cases where it cannot be
established or there is dearth of evidence as to whether a brand is foreign or not,
resort to the World Tobacco Directory should be made."

In view of the foregoing, the aforesaid brands of cigarettes, viz: "HOPE," "MORE"
and "CHAMPION" being manufactured by Fortune Tobacco Corporation are hereby
considered locally manufactured cigarettes bearing a foreign brand subject to the
55% ad valorem tax on cigarettes.

Any ruling inconsistent herewith is revoked or modified accordingly.

(SGD)
LIWAYWAY
VINZONS-
CHATO
Commissioner

On 02 July 1993, at about 17:50 hours, BIR Deputy Commissioner Victor A. Deoferio, Jr.,
sent via telefax a copy of RMC 37-93 to Fortune Tobacco but it was addressed to no one in
particular. On 15 July 1993, Fortune Tobacco received, by ordinary mail, a certified xerox
copy of RMC 37-93.

In a letter, dated 19 July 1993, addressed to the appellate division of the BIR, Fortune
Tobacco requested for a review, reconsideration and recall of RMC 37-93. The request was
denied on 29 July 1993. The following day, or on 30 July 1993, the CIR assessed Fortune
Tobacco for ad valorem tax deficiency amounting to P9,598,334.00.

On 03 August 1993, Fortune Tobacco filed a petition for review with the CTA. 8

On 10 August 1994, the CTA upheld the position of Fortune Tobacco and adjudged:

WHEREFORE, Revenue Memorandum Circular No. 37-93 reclassifying the brands

of cigarettes, viz: "HOPE," "MORE" and "CHAMPION" being manufactured by
Fortune Tobacco Corporation as locally manufactured cigarettes bearing a foreign
brand subject to the 55% ad valorem tax on cigarettes is found to be defective,
invalid and unenforceable, such that when R.A. No. 7654 took effect on July 3, 1993,
the brands in question were not CURRENTLY CLASSIFIED AND TAXED at 55%
pursuant to Section 1142(c)(1) of the Tax Code, as amended by R.A. No. 7654 and
were therefore still classified as other locally manufactured cigarettes and taxed at
45% or 20% as the case may be.

Accordingly, the deficiency ad valorem tax assessment issued on petitioner Fortune

Tobacco Corporation in the amount of P9,598,334.00, exclusive of surcharge and
interest, is hereby canceled for lack of legal basis.

Respondent Commissioner of Internal Revenue is hereby enjoined from collecting

the deficiency tax assessment made and issued on petitioner in relation to the
implementation of RMC No. 37-93.

SO ORDERED. 9
In its resolution, dated 11 October 1994, the CTA dismissed for lack of merit the motion for
reconsideration.

The CIR forthwith filed a petition for review with the Court of Appeals, questioning the CTA's
10th August 1994 decision and 11th October 1994 resolution. On 31 March 1993, the
appellate court's Special Thirteenth Division affirmed in all respects the assailed decision
and resolution.

In the instant petition, the Solicitor General argues: That —

I. RMC 37-93 IS A RULING OR OPINION OF THE COMMISSIONER

OF INTERNAL REVENUE INTERPRETING THE PROVISIONS OF
THE TAX CODE.

II. BEING AN INTERPRETATIVE RULING OR OPINION, THE

PUBLICATION OF RMC 37-93, FILING OF COPIES THEREOF
WITH THE UP LAW CENTER AND PRIOR HEARING ARE NOT
NECESSARY TO ITS VALIDITY, EFFECTIVITY AND
ENFORCEABILITY.

III. PRIVATE RESPONDENT IS DEEMED TO HAVE BEEN

NOTIFIED OR RMC 37-93 ON JULY 2, 1993.

IV. RMC 37-93 IS NOT DISCRIMINATORY SINCE IT APPLIES TO

ALL LOCALLY MANUFACTURED CIGARETTES SIMILARLY
SITUATED AS "HOPE," "MORE" AND "CHAMPION" CIGARETTES.

V. PETITIONER WAS NOT LEGALLY PROSCRIBED FROM

RECLASSIFYING "HOPE," "MORE" AND "CHAMPION"
CIGARETTES BEFORE THE EFFECTIVITY OF R.A. NO. 7654.

VI. SINCE RMC 37-93 IS AN INTERPRETATIVE RULE, THE

INQUIRY IS NOT INTO ITS VALIDITY, EFFECTIVITY OR
ENFORCEABILITY BUT INTO ITS CORRECTNESS OR
PROPRIETY; RMC 37-93 IS CORRECT. 10

In fine, petitioner opines that RMC 37-93 is merely an interpretative ruling of the BIR which
can thus become effective without any prior need for notice and hearing, nor publication, and
that its issuance is not discriminatory since it would apply under similar circumstances to all
locally manufactured cigarettes.

The Court must sustain both the appellate court and the tax court.

Petitioner stresses on the wide and ample authority of the BIR in the issuance of rulings for
the effective implementation of the provisions of the National Internal Revenue Code. Let it
be made clear that such authority of the Commissioner is not here doubted. Like any other
government agency, however, the CIR may not disregard legal requirements or applicable
principles in the exercise of its quasi-legislative powers.

Let us first distinguish between two kinds of administrative issuances — a legislative rule and
an interpretative rule.
In Misamis Oriental Association of Coco Traders, Inc., vs. Department of Finance
Secretary, 11 the Court expressed:

. . . a legislative rule is in the nature of subordinate legislation, designed to implement

a primary legislation by providing the details thereof . In the same way that laws must
have the benefit of public hearing, it is generally required that before a legislative rule
is adopted there must be hearing. In this connection, the Administrative Code of
1987 provides:

Public Participation. — If not otherwise required by law, an agency shall, as far as

practicable, publish or circulate notices of proposed rules and afford interested
parties the opportunity to submit their views prior to the adoption of any rule.

(2) In the fixing of rates, no rule or final order shall be valid unless the proposed rates
shall have been published in a newspaper of general circulation at least two (2)
weeks before the first hearing thereon.

(3) In case of opposition, the rules on contested cases shall be observed.

In addition such rule must be published. On the other hand, interpretative rules are
designed to provide guidelines to the law which the administrative agency is in
charge of enforcing. 12

It should be understandable that when an administrative rule is merely interpretative in

nature, its applicability needs nothing further than its bare issuance for it gives no real
consequence more than what the law itself has already prescribed. When, upon the other
hand, the administrative rule goes beyond merely providing for the means that can facilitate
or render least cumbersome the implementation of the law but substantially adds to or
increases the burden of those governed, it behooves the agency to accord at least to those
directly affected a chance to be heard, and thereafter to be duly informed, before that new
issuance is given the force and effect of law.

A reading of RMC 37-93, particularly considering the circumstances under which it has been
issued, convinces us that the circular cannot be viewed simply as a corrective measure
(revoking in the process the previous holdings of past Commissioners) or merely as
construing Section 142(c)(1) of the NIRC, as amended, but has, in fact and most importantly,
been made in order to place "Hope Luxury," "Premium More" and "Champion" within the
classification of locally manufactured cigarettes bearing foreign brands and to thereby have
them covered by RA 7654. Specifically, the new law would have its amendatory provisions
applied to locally manufactured cigarettes which at the time of its effectivity were not so
classified as bearing foreign brands. Prior to the issuance of the questioned circular, "Hope
Luxury," "Premium More," and "Champion" cigarettes were in the category of locally
manufactured cigarettes not bearing foreign brand subject to 45% ad valorem tax. Hence,
without RMC 37-93, the enactment of RA 7654, would have had no new tax rate
consequence on private respondent's products. Evidently, in order to place "Hope Luxury,"
"Premium More," and "Champion" cigarettes within the scope of the amendatory law and
subject them to an increased tax rate, the now disputed RMC 37-93 had to be issued. In so
doing, the BIR not simply intrepreted the law; verily, it legislated under its quasi-
legislative authority. The due observance of the requirements of notice, of hearing, and of
publication should not have been then ignored.

Indeed, the BIR itself, in its RMC 10-86, has observed and provided:
 RMC NO. 10-86
Effectivity of Internal Revenue Rules and Regulations

It has been observed that one of the problem areas bearing on compliance with
Internal Revenue Tax rules and regulations is lack or insufficiency of due notice to
the tax paying public. Unless there is due notice, due compliance therewith may not
be reasonably expected. And most importantly, their strict enforcement could
possibly suffer from legal infirmity in the light of the constitutional provision on "due
process of law" and the essence of the Civil Code provision concerning effectivity of
laws, whereby due notice is a basic requirement (Sec. 1, Art. IV, Constitution; Art. 2,
New Civil Code).

In order that there shall be a just enforcement of rules and regulations, in conformity
with the basic element of due process, the following procedures are hereby
prescribed for the drafting, issuance and implementation of the said Revenue Tax
Issuances:

(1) This Circular shall apply only to (a) Revenue Regulations; (b)
Revenue Audit Memorandum Orders; and (c) Revenue Memorandum
Circulars and Revenue Memorandum Orders bearing on internal
revenue tax rules and regulations.

(2) Except when the law otherwise expressly provides, the aforesaid
internal revenue tax issuances shall not begin to be operative until
after due notice thereof may be fairly presumed.

Due notice of the said issuances may be fairly presumed only after
the following procedures have been taken;

xxx xxx xxx

(5) Strict compliance with the foregoing procedures is

enjoined. 13

Nothing on record could tell us that it was either impossible or impracticable for the BIR to
observe and comply with the above requirements before giving effect to its questioned
circular.

Not insignificantly, RMC 37-93 might have likewise infringed on uniformity of taxation.

Article VI, Section 28, paragraph 1, of the 1987 Constitution mandates taxation to be uniform
and equitable. Uniformity requires that all subjects or objects of taxation, similarly situated,
are to be treated alike or put on equal footing both in privileges and liabilities. 14 Thus, all
taxable articles or kinds of property of the same class must be taxed at the same rate 15 and
the tax must operate with the same force and effect in every place where the subject may be
found.

Apparently, RMC 37-93 would only apply to "Hope Luxury," "Premium More" and
"Champion" cigarettes and, unless petitioner would be willing to concede to the submission
of private respondent that the circular should, as in fact my esteemed colleague Mr. Justice
Bellosillo so expresses in his separate opinion, be considered adjudicatory in nature and
thus violative of due process following the Ang Tibay 16 doctrine, the measure suffers from
lack of uniformity of taxation. In its decision, the CTA has keenly noted that other cigarettes
bearing foreign brands have not been similarly included within the scope of the circular, such
as —

1. Locally manufactured by ALHAMBRA INDUSTRIES, INC.

(a) "PALM TREE" is listed as manufactured by office of Monopoly,

Korea (Exhibit "R")

2. Locally manufactured by LA SUERTE CIGAR and CIGARETTE COMPANY

(a) "GOLDEN KEY" is listed being manufactured by United Tobacco,

Pakistan (Exhibit "S")

(b) "CANNON" is listed as being manufactured by Alpha Tobacco,

Bangladesh (Exhibit "T")

3. Locally manufactured by LA PERLA INDUSTRIES, INC.

(a) "WHITE HORSE" is listed as being manufactured by Rothman's,

Malaysia (Exhibit "U")

(b) "RIGHT" is listed as being manufactured by SVENSKA, Tobaks,

Sweden (Exhibit "V-1")

4. Locally manufactured by MIGHTY CORPORATION

(a) "WHITE HORSE" is listed as being manufactured by Rothman's,

Malaysia (Exhibit "U-1")

5. Locally manufactured by STERLING TOBACCO CORPORATION

(a) "UNION" is listed as being manufactured by Sumatra Tobacco,

Indonesia and Brown and Williamson, USA (Exhibit "U-3")

(b) "WINNER" is listed as being manufactured by Alpha Tobacco,

Bangladesh; Nangyang, Hongkong; Joo Lan, Malaysia; Pakistan
Tobacco Co., Pakistan; Premier Tobacco, Pakistan and Haggar,
Sudan (Exhibit "U-4"). 17

The court quoted at length from the transcript of the hearing conducted on 10 August 1993
by the Committee on Ways and Means of the House of Representatives; viz:

THE CHAIRMAN. So you have specific information on Fortune Tobacco alone. You
don't have specific information on other tobacco manufacturers. Now, there are other
brands which are similarly situated. They are locally manufactured bearing foreign
brands. And may I enumerate to you all these brands, which are also listed in the
World Tobacco Directory . . . Why were these brand not reclassified at 55 if your
want to give a level playing filed to foreign manufacturers?
MS. CHATO. Mr. Chairman, in fact, we have already prepared a Revenue
Memorandum Circular that was supposed to come after RMC No. 37-93 which have
really named specifically the list of locally manufactured cigarettes bearing a foreign
brand for excise tax purposes and includes all these brands that you mentioned at 55
percent except that at that time, when we had to come up with this, we were forced
to study the brands of Hope, More and Champion because we were given
documents that would indicate the that these brands were actually being claimed or
patented in other countries because we went by Revenue Memorandum Circular
1488 and we wanted to give some rationality to how it came about but we couldn't
find the rationale there. And we really found based on our own interpretation that the
only test that is given by that existing law would be registration in the World Tobacco
Directory. So we came out with this proposed revenue memorandum circular which
we forwarded to the Secretary of Finance except that at that point in time, we went
by the Republic Act 7654 in Section 1 which amended Section 142, C-1, it said, that
on locally manufactured cigarettes which are currently classified and taxed at 55
percent. So we were saying that when this law took effect in July 3 and if we are
going to come up with this revenue circular thereafter, then I think our action would
really be subject to question but we feel that . . . Memorandum Circular Number 37-
93 would really cover even similarly situated brands. And in fact, it was really
because of the study, the short time that we were given to study the matter that we
could not include all the rest of the other brands that would have been really
classified as foreign brand if we went by the law itself. I am sure that by the reading
of the law, you would without that ruling by Commissioner Tan they would really have
been included in the definition or in the classification of foregoing brands. These
brands that you referred to or just read to us and in fact just for your information, we
really came out with a proposed revenue memorandum circular for those brands.
(Emphasis supplied)

(Exhibit "FF-2-C," pp. V-5 TO V-6, VI-1 to VI-3).

xxx xxx xxx

MS. CHATO. . . . But I do agree with you now that it cannot and in fact that is why I
felt that we . . . I wanted to come up with a more extensive coverage and precisely
why I asked that revenue memorandum circular that would cover all those similarly
situated would be prepared but because of the lack of time and I came out with a
study of RA 7654, it would not have been possible to really come up with the
reclassification or the proper classification of all brands that are listed there. .
. (emphasis supplied) (Exhibit "FF-2d," page IX-1)

xxx xxx xxx

HON. DIAZ. But did you not consider that there are similarly situated?

MS. CHATO. That is precisely why, Sir, after we have come up with this Revenue
Memorandum Circular No. 37-93, the other brands came about the would have also
clarified RMC 37-93 by I was saying really because of the fact that I was just recently
appointed and the lack of time, the period that was allotted to us to come up with the
right actions on the matter, we were really caught by the July 3 deadline. But in fact,
We have already prepared a revenue memorandum circular clarifying with the other .
. . does not yet, would have been a list of locally manufactured cigarettes bearing a
foreign brand for excise tax purposes which would include all the other brands that
 were mentioned by the Honorable Chairman. (Emphasis supplied) (Exhibit "FF-2-d,"
par. IX-4). 18

All taken, the Court is convinced that the hastily promulgated RMC 37-93 has fallen short of a valid
and effective administrative issuance.

WHEREFORE, the decision of the Court of Appeals, sustaining that of the Court of Tax Appeals, is
AFFIRMED. No costs.

SO ORDERED.

Kapunan, J., concurs.

Separate Opinions

BELLOSILLO, J.: separate opinion:

RA 7654 was enacted by Congress on 10 June 1993, signed into law by the President on 14 June
1993, and took effect 3 July 1993. It amended partly Sec. 142, par. (c), of the National Internal
Revenue Code (NIRC) to read —

Sec. 142. Cigars and cigarettes. — . . . . (c) Cigarettes packed by machine. — There
shall be levied, assessed and collected on cigarettes packed by machine a tax at the
rates prescribed below based on the constructive manufacturer's wholesale price or
the actual manufacturer's wholesale price, whichever is higher.

(1) On locally manufactured cigarettes which are currently classified and taxed at
fifty-five percent (55%) or the exportation of which is not authorized by contract or
otherwise, fifty-five percent (55%) provided that the minimum tax shall not be less
than Five Pesos (P5.00) per pack (emphasis supplied).

(2) On other locally manufactured cigarettes, forty-five percent (45%) provided that
the minimum tax shall not be less than Three Pesos (P3.00) per pack.

Prior to the effectivity of RA 7654, cigarette brands Hope Luxury, Premium

More and Champion were considered local brands subjected to an ad valorem tax at the rate of 20-
45%. However, on 1 July 1993 or two (2) days before RA 7654 took effect, petitioner Commissioner
of Internal Revenue issued RMC 37-93 reclassifying "Hope, More and Champion being
manufactured by Fortune Tobacco Corporation . . . . (as) locally manufactured cigarettes bearing a
foreign brand subject to the 55% ad valorem tax on cigarettes." 1 RMC 37-93 in effect
subjected Hope Luxury, Premium More and Champion cigarettes to the provisions of Sec. 142, par.
(c), subpar. (1), NIRC, as amended by RA 7654, imposing upon these cigarette brands an ad
valorem tax of "fifty-five percent (55%) provided that the minimum tax shall not be less than Five
Pesos (P5.00) per pack."

On 2 July 1993, Friday, at about five-fifty in the afternoon, or a few hours before the effectivity of RA
7654, a copy of RMC 37-93 with a cover letter signed by Deputy Commissioner Victor A. Deoferio of
the Bureau of Internal Revenue was sent by facsimile to the factory of respondent corporation in
Parang, Marikina, Metro Manila. It appears that the letter together with a copy of RMC 37-93 did not
immediately come to the knowledge of private respondent as it was addressed to no one in
particular. It was only when the reclassification of respondent corporation's cigarette brands was
reported in the column of Fil C. Sionil in Business Bulletin on 4 July 1993 that the president of
respondent corporation learned of the matter, prompting him to inquire into its veracity and to
request from petitioner a copy of RMC 37-93. On 15 July 1993 respondent corporation received by
ordinary mail a certified machine copy of RMC 37-93.

Respondent corporation sought a review, reconsideration and recall of RMC 37-93 but was forthwith
denied by the Appellate Division of the Bureau of Internal Revenue. As a consequence, on 30 July
1993 private respondent was assessed an ad valorem tax deficiency amounting to P9,598,334.00.
Respondent corporation went to the Court of Tax Appeals (CTA) on a petition for review.

On 10 August 1994, after due hearing, the CTA found the petition meritorious and ruled —

Revenue Memorandum Circular No. 37-93 reclassifying the brands of

cigarettes, viz: Hope, More and Champion being manufactured by Fortune Tobacco
Corporation as locally manufactured cigarettes bearing a foreign brand subject to the
55% ad valorem tax on cigarettes is found to be defective, invalid and unenforceable
. . . . Accordingly, the deficiency ad valorem tax assessment issued on petitioner
Fortune Tobacco Corporation in the amount of P9,598,334.00, exclusive of
surcharge and interest, is hereby cancelled for lack of legal basis. 2

The CTA held that petitioner Commissioner of Internal Revenue failed to observe due
process of law in issuing RMC 37-93 as there was no prior notice and hearing, and that RMC
37-93 was in itself discriminatory. The motion to reconsider its decision was denied by the
CTA for lack of merit. On 31 March 1995 respondent Court of Appeals affirmed in toto the
decision of the CTA. 3 Hence, the instant petition for review.

Petitioner now submits through the Solicitor General that RMC 37-93 reclassifying Hope
Luxury, Premium More and Champion as locally manufactured cigarettes bearing brands is merely
an interpretative ruling which needs no prior notice and hearing as held in Misamis Oriental
Association of Coco Traders, Inc. v. Department of Finance Secretary. 4 It maintains that neither is
the assailed revenue memorandum circular discriminatory as it merely "lays down the test in
determining whether or not a locally manufactured cigarette bears a foreign brand using (only) the
cigarette brands Hope, More and Champion as specific examples." 5

Respondent corporation on the other hand contends that RMC 37-93 is not a mere interpretative
ruling but is adjudicatory in nature where prior notice and hearing are mandatory, and that Misamis
Oriental Association of Coco Traders, Inc. v. Department of Finance Secretary on which the Solicitor
General relies heavily is not applicable. Respondent Fortune Tobacco Corporation also argues that
RMC 37-93 discriminates against its cigarette brands since those of its competitors which are
similarly situated have not been reclassified.
The main issues before us are (a) whether RMC 37-93 is merely an interpretative rule the issuance
of which needs no prior notice and hearing, or an adjudicatory ruling which calls for the twin
requirements of prior notice and hearing, and, (b) whether RMC 37-93 is discriminatory in nature.

A brief discourse on the powers and functions of administrative bodies may be instructive.

Administrative agencies posses quasi-legislative or rule making powers and quasi-judicial or

administrative adjudicatory powers. Quasi-legislative or rule making power is the power to make
rules and regulations which results in delegated legislation that is within the confines of the granting
statute and the doctrine of nondelegability and separability of powers.

Interpretative rule, one of the three (3) types of quasi-legislative or rule making powers of an
administrative agency (the other two being supplementary or detailed legislation, and contingent
legislation), is promulgated by the administrative agency to interpret, clarify or explain statutory
regulations under which the administrative body operates. The purpose or objective of an
interpretative rule is merely to construe the statute being administered. It purports to do no more
than interpret the statute. Simply, the rule tries to say what the statute means. Generally, it refers to
no single person or party in particular but concerns all those belonging to the same class which may
be covered by the said interpretative rule. It need not be published and neither is a hearing required
since it is issued by the administrative body as an incident of its power to enforce the law and is
intended merely to clarify statutory provisions for proper observance by the people. In Tañada
v. Tuvera, 6 this Court expressly said that "[i]interpretative regulations . . . . need not be published."

Quasi-judicial or administrative adjudicatory power on the other hand is the power of the
administrative agency to adjudicate the rights of persons before it. It is the power to hear and
determine questions of fact to which the legislative policy is to apply and to decide in accordance
with the standards laid down by the law itself in enforcing and administering the same law. 7 The
administrative body exercises its quasi-judicial power when it performs in a judicial manner an act
which is essentially of an executive or administrative nature, where the power to act in such manner
is incidental to or reasonably necessary for the performance of the executive or administrative duty
entrusted to it. 8 In carrying out their quasi-judicial functions the administrative officers or bodies are
required to investigate facts or ascertain the existence of facts, hold hearings, weigh evidence, and
draw conclusions from them as basis for their official action and exercise of discretion in a judicial
nature. Since rights of specific persons are affected it is elementary that in the proper exercise of
quasi-judicial power due process must be observed in the conduct of the proceedings.

The importance of due process cannot be underestimated. Too basic is the rule that no person shall
be deprived of life, liberty or property without due process of law. Thus when an administrative
proceeding is quasi-judicial in character, notice and fair open hearing are essential to the validity of
the proceeding. The right to reasonable prior notice and hearing embraces not only the right to
present evidence but also the opportunity to know the claims of the opposing party and to meet
them. The right to submit arguments implies that opportunity otherwise the right may as well be
considered impotent. And those who are brought into contest with government in a quasi-judicial
proceeding aimed at the control of their activities are entitled to be fairy advised of what the
government proposes and to be heard upon its proposal before it issues its final command.

There are cardinal primary rights which must be respected in administrative proceedings. The
landmark case of Ang Tibay v. The Court of Industrial Relations 9 enumerated these rights: (1) the
right to a hearing, which includes the right of the party interested or affected to present his own case
and submit evidence in support thereof; (2) the tribunal must consider the evidence presented; (3)
the decision must have something to support itself; (4) the evidence must be substantial; (5) the
decision must be rendered on the evidence presented at the hearing, or at least contained in the
record and disclosed to the parties affected; (6) the tribunal or any of its judges must act on its or his
own independent consideration of the law and facts of the controversy, and not simply accept the
views of a subordinate in arriving at a decision; and, (7) the tribunal should in all controversial
questions render its decision in such manner that the parties to the proceeding may know the
various issues involved and the reasons for the decision rendered.

In determining whether RMC No. 37-93 is merely an interpretative rule which requires no prior notice
and hearing, or an adjudicatory rule which demands the observance of due process, a close
examination of RMC 37-93 is in order. Noticeably, petitioner Commissioner of Internal Revenue at
first interprets Sec. 142, par. (c), subpar. (1), of the NIRC, as amended, by citing the law and
clarifying or explaining what it means —

Section 142 (c) (1), National Internal Revenue Code, as amended by R.A. No. 6956,
provides: On locally manufactured cigarettes bearing a foreign brand, fifty-five
percent (55%) Provided, That this rate shall apply regardless of whether or not the
right to use or title to the foreign brand was sold or transferred by its owner to the
local manufacturer. Whenever it has to be determined whether or not a cigarette
bears a foreign brand, the listing of brands manufactured in foreign countries
appearing in the current World Tobacco Directory shall govern.

Under the foregoing, the test for imposition of the 55% ad valorem tax on cigarettes
is that the locally manufactured cigarettes bear a foreign brand regardless of whether
or not the right to use or title to the foreign brand was sold or transferred by its owner
to the local manufacturer. The brand must be originally owned by a foreign
manufacturer or producer. If ownership of the cigarette brand is, however, not
definitely determinable,
". . . the listing of brands manufactured in foreign countries appearing in the current
World Tobacco Directory shall govern . . ."

Then petitioner makes a factual finding by declaring that Hope (Luxury),

(Premium) More and Champion are manufactured by other foreign manufacturers —

Hope is listed in the World Tobacco Directory as being manufactured by (a) Japan
Tobacco, Japan and (b) Fortune Tobacco, Philippines. More is listed in the said
directory as being manufactured by: (a) Fills de Julia Reig, Andorra; (b) Rothmans,
Australia; (c) RJR-MacDonald, Canada; (d) Rettig-Strenberg, Finland; (e) Karellas,
Greece; (f) R.J. Reynolds, Malaysia; (g) Rothmans, New Zealand; (h) Fortune
Tobacco, Philippines; (i) R.J. Reynolds, Puerto Rico; (j) R.J. Reynolds, Spain; (k)
Tabacalera, Spain; (l) R.J. Reynolds, Switzerland; and (m) R.J. Reynolds, USA.
"Champion" is registered in the said directory as being manufactured by: (a)
Commonwealth Bangladesh; (b) Sudan, Brazil; (c) Japan Tobacco, Japan; (d)
Fortune Tobacco, Philippines; (e) Haggar, Sudan; and (f) Tabac Reunies,
Switzerland.

From this finding, petitioner thereafter formulates an inference that since it cannot be determined
who among the manufacturers are the real owners of the brands in question, then these cigarette
brands should be considered foreign brands —

Since there is no showing who among the above-listed manufacturers of the

cigarettes bearing the said brands are the real owner/s thereof, then it follows that
the same shall be considered foreign brand for purposes of determining the ad
valorem tax pursuant to Section 142 of the National Internal Revenue Code. As held
 in BIR Ruling No. 410-88, dated August 24, 1988, "in cases where it cannot be
established or there is dearth of evidence as to whether a brand is foreign or not,
resort to the World Tobacco Directory should be made."

Finally, petitioner caps RMC 37-93 with a disposition specifically directed at respondent corporation
reclassifying its cigarette brands as locally manufactured bearing foreign brands —

In view of the foregoing, the aforesaid brands of

cigarettes, viz: Hope, More and Champion being manufactured by Fortune Tobacco
Corporation are hereby considered locally manufactured cigarettes bearing a foreign
brand subject to the 55% ad valorem tax on cigarettes.

Any ruling inconsistent herewith is revoked or modified accordingly.

It is evident from the foregoing that in issuing RMC 37-93 petitioner Commissioner of Internal
Revenue was exercising her quasi-judicial or administrative adjudicatory power. She cited and
interpreted the law, made a factual finding, applied the law to her given set of facts, arrived at a
conclusion, and issued a ruling aimed at a specific individual. Consequently prior notice and hearing
are required. It must be emphasized that even the text alone of RMC 37-93 implies that reception of
evidence during a hearing is appropriate if not necessary since it invokes BIR Ruling No. 410-88,
dated August 24, 1988, which provides that "in cases where it cannot be established or there is
dearth of evidence as to whether a brand is foreign or not . . . ." Indeed, it is difficult to determine
whether a brand is foreign or not if it is not established by, or there is dearth of, evidence because no
hearing has been called and conducted for the reception of such evidence. In fine, by no stretch of
the imagination can RMC 37-93 be considered purely as an interpretative rule — requiring no
previous notice and hearing and simply interpreting, construing, clarifying or explaining statutory
regulations being administered by or under which the Bureau of Internal Revenue operates.

It is true that both RMC 47-91 in Misamis Oriental Association of Coco Traders v. Department of
Finance Secretary, and RMC 37-93 in the instant case reclassify certain products for purposes of
taxation. But the similarity between the two revenue memorandum circulars ends there. For in
properly determining whether a revenue memorandum circular is merely an interpretative rule or an
adjudicatory rule, its very tenor and text, and the circumstances surrounding its issuance will have
no to be considered.

We quote RMC 47-91 promulgated 11 June 1991 —

Revenue Memorandum Circular No. 47-91

SUBJECT : Taxability of Copra

TO : All Revenue Officials and Employees and Others Concerned.

For the information and guidance of all officials and employees and others
concerned, quoted hereunder in its entirety is VAT Ruling No. 190-90 dated August
17, 1990:

COCOFED MARKETING RESEARCH CORPORATION

6th Floor Cocofed Building
144 Amorsolo Street
Legaspi Village, Makati
Metro Manila
 Attention:
Ms. Esmyrna E. Reyes
Vice President —
Finance

Sirs:

This has reference to your letter dated January 16, 1990 wherein you
represented that inspite of your VAT registration of your copra trading
company, you are supposed to be exempt from VAT on the basis of
BIR Ruling dated January 8, 1988 which considered copra as an
agricultural food product in its original state. In this connection, you
request for a confirmation of your opinion as aforestated.

In reply, please be informed that copra, being an agricultural non-food

product, is exempt from VAT only if sale is made by the primary
producer pursuant to Section 103 (a) of the Tax Code, as amended.
Thus as a trading company and a subsequent seller, your sale of
copra is already subject to VAT pursuant to Section 9(b) (1) of
Revenue Regulations 5-27.

This revokes VAT Ruling Nos. 009-88 and 279-88.

Very
truly
yours,

(Sgd.)
JOSE
U.
ONG
Commi
ssioner
of
Internal
Reven
ue

As a clarification, this is the present and official stand of this Office unless sooner
revoked or amended. All revenue officials and employees are enjoined to give this
Circular as wide a publicity as possible.

(Sgd.)
JOSE
U.
ONG
Commi
ssioner
of
Internal
Reven
ue
Quite obviously, the very text of RMC 47-91 itself shows that it is merely an interpretative rule as it
simply quotes a VAT Ruling and reminds those concerned that the ruling is the present and official
stand of the Bureau of Internal Revenue. Unlike in RMC 37-93 where petitioner Commissioner
manifestly exercised her quasi-judicial or administrative adjudicatory power, in RMC 47-91 there
were no factual findings, no application of laws to a given set of facts, no conclusions of law, and no
dispositive portion directed at any particular party.

Another difference is that in the instant case, the issuance of the assailed revenue memorandum
circular operated to subject the taxpayer to the new law which was yet to take effect, while
in Misamis, the disputed revenue memorandum circular was issued simply to restate and then clarify
the prevailing position and ruling of the administrative agency, and no new law yet to take effect was
involved. It merely interpreted an existing law which had already been in effect for some time and
which was not set to be amended. RMC 37-93 is thus prejudicial to private respondent alone.

A third difference, and this likewise resolves the issue of discrimination, is that RMC 37-93 was
ostensibly issued to subject the cigarette brands of respondent corporation to a new law as it was
promulgated two days before the expiration of the old law and a few hours before the effectivity of
the new law. That RMC 37-93 is particularly aimed only at respondent corporation and its three (3)
cigarette brands can be seen from the dispositive portion of the assailed revenue memorandum
circular —

In view of the foregoing, the aforesaid brands of cigarettes, viz: Hope, More,
and Champion being manufactured by Fortune Tobacco Corporation are hereby
considered locally manufactured cigarettes bearing a foreign brand subject to the
55% ad valorem tax on cigarettes.

Any ruling inconsistent herewith is revoked or modified accordingly.

Thus the argument of the Solicitor General that RMC 37-93 is not discriminatory as "[i]t merely lays
down the test in determining whether or not a locally manufactured cigarette bears a foreign brand
using the cigarette brands Hope, More and Champion as specific examples," cannot be accepted,
much less sustained. Without doubt, RMC 37-93 has a tremendous effect on respondent corporation
— and solely on respondent corporation — as its deficiency ad valorem tax assessment on its
removals of Hope, Luxury, Premium More, and Champion cigarettes for six (6) hours alone, i.e.,
from six o'clock in the evening of 2 July 1993 which is presumably the time respondent corporation
was supposed to have received the facsimile message sent by Deputy Commissioner Victor A.
Deoferio, until twelve o'clock midnight upon the effectivity of the new law, was already
P9,598,334.00. On the other hand, RMC 47-91 was issued with no purpose except to state and
declare what has been the official stand of the administrative agency on the specific subject matter,
and was indiscriminately directed to all copra traders with no particular individual in mind.

That petitioner Commissioner of Internal Revenue is an expert in her filed is not attempted to be
disputed; hence, we do not question the wisdom of her act in reclassifying the cigarettes. Neither do
we deny her the exercise of her quasi-legislative or quasi-judicial powers. But most certainly, by
constitutional mandate, the Court must check the exercise of these powers and ascertain whether
petitioner has gone beyond the legitimate bounds of her authority.

In the final analysis, the issue before us in not the expertise, the authority to promulgate rules, or the
wisdom of petitioner as Commissioner of Internal Revenue is reclassifying the cigarettes of private
respondents. It is simply the faithful observance by government by government of the basic
constitutional right of a taxpayer to due process of law and equal protection of the laws. This is what
distresses me no end — the manner and the circumstances under which the cigarettes of private
respondent were reclassified and correspondingly taxed under RMC 37-93, and adjudicatory rule
which therefore requires reasonable notice and hearing before its issuance. It should not be
confused with RMC 47-91, which is a mere interpretative rule.

In the earlier case of G.R. No. 119322, which practically involved the same opposing interests, I also
voted to uphold the constitutional right of the taxpayer concerned to due process and equal
protection of the laws. By a vote of 3-2, that view prevailed. In sequela, we in the First Division who
constituted the majority found ourselves unjustly drawn into the vortex of a nightmarish episode. The
strong ripples whipped up by my opinion expressed therein — and of the majority — have yet to
varnish when we are again in the imbroglio of a similar dilemma. The unpleasant experience should
be reason enough to simply steer clear of this controversy and surf on a pretended loss of judicial
objectivity. Such would have been an easy way out, a gracious exit, so to speak, albeit lame. But to
camouflage my leave with a sham excuse would be to turn away from a professional vow I keep at
all times; I would not be true to myself, and to the people I am committed to serve. Thus, as I have
earlier expressed, if placed under similar circumstances in some future time, I shall have to brave
again the prospect of another vilification and a tarnished image if only to show proudly to the whole
world that under the present dispensation judicial independence in our country is a true component
of our democracy.

In fine, I am greatly perturbed by the manner RMC No. 37-93 was issued as well as the effect of
such issuance. For it cannot be denied that the circumstances clearly demonstrate that it was hastily
issued — without prior notice and hearing, and singling out private respondent alone — when two
days before a new tax law was to take effect petitioner reclassified and taxed the cigarette brands of
private respondent at a higher rate. Obviously, this was to make it appear that even before the
anticipated date of effectivity of the statute — which was undeniably priorly known to petitioner —
these brands were already currently classified and taxed at fifty-five percent (55%), thus shoving
them into the purview of the law that was to take effect two days after!

For sure, private respondent was not properly informed before the issuance of the questioned
memorandum circular that its cigarette brands Hope Luxury, Premium More and Champion were
being reclassified and subjected to a higher tax rate. Naturally, the result would be to lose financially
because private respondent was still selling its cigarettes at a price based on the old, lower tax rate.
Had there been previous notice and hearing, as claimed by private respondent, it could have very
well presented its side, either by opposing the reclassification, or by acquiescing thereto but
increasing the price of its cigarettes to adjust to the higher tax rate. The reclassification and the
ensuing imposition of a tax rate increase therefore could not be anything but confiscatory if we are
also to consider the claim of private respondent that the new tax is even higher than the cost of its
cigarettes.

Accordingly, I vote to deny the petition.

HERMOSISIMA, JR., J.: dissenting

Private respondent Fortune Tobacco Corporation in the instant case disputes its liability for
deficiency ad valorem excise taxes on its removals of "Hope," "More," and "Champion" cigarettes
from 6:00 p.m. to 12:00 midnight of July 2, 1993, in the total amount of P9,598,334.00. It claims that
the circular, upon which the assessment was based and made, is defective, invalid and
unenforceable for having been issued without notice and hearing and in violation of the equal
protection clause guaranteed by the Constitution.
The majority upholds these claims of private respondent, convinced that the Circular in question, in
the first place, did not give prior notice and hearing, and so, it could not have been valid and
effective. It proceeds to affirm the factual findings of the Court of Tax Appeals, which findings were
considered correct by respondent Court of Appeals, to the effect that the petitioner Commissioner of
Internal Revenue had indeed blatantly failed to comply with the said twin requirements of notice and
hearing, thereby rendering the issuance of the questioned Circular to be in violation of the due
process clause of the Constitution. It is also its dominant opinion that the questioned Circular
discriminates against private respondent Fortune Tobacco Corporation insofar as it seems to affect
only its "Hope," "More," and "Champion" cigarettes, to the exclusion of other cigarettes apparently of
the same kind or classification as these cigarettes manufactured by private respondent.

With all due respect, I disagree with the majority in its disquisition of the issues and its resulting
conclusions.

Section 245 of the National Internal Revenue Code,

as amended, empowers the Commissioner of Internal
Revenue to issue the questioned Circular

Section 245 of the National Internal Revenue Code, as amended, provides:

Sec. 245. Authority of Secretary of Finance to promulgate rules and regulations. —

The Secretary of Finance, upon recommendation of the Commissioner, shall
promulgate all needful rules and regulations for the effective enforcement of the
provisions of this Code . . . without prejudice to the power of the Commissioner of
Internal Revenue to make rulings or opinions in connection with the implementation
of the provisions of internal revenue laws, including rulings on the classification of
articles for sales tax and similar purposes.

The subject of the questioned Circular is the reclassification of cigarettes subject to excise taxes. It
was issued in connection with Section 142 (c) (1) of the National Internal Revenue Code, as
amended, which imposes ad valorem excise taxes on locally manufactured cigarettes bearing a
foreign brand. The same provision prescribes the ultimate criterion that determines which cigarettes
are to be considered "locally manufactured cigarettes bearing a foreign brand." It provides:

. . . Whenever it has to be determined whether or not a cigarette bears a foreign

brand, the listing of brands manufactured in foreign countries appearing in the
current World Tobacco Directory shall govern.

There is only one World Tobacco Directory for a given current year, and the same is
mandated by law to be the BIR Commissioner's controlling basis for determining whether or
not a particular locally manufactured cigarette is one bearing a foreign brand. In so making a
determination, petitioner should inquire into the entries in the World Tobacco Directory for
the given current year and shall be held bound by such entries therein. She is not required to
subject the results of her inquiries to feedback from the concerned cigarette manufacturers,
and it is doubtlessly not desirable nor managerially sound to court dispute thereon when the
law does not, in the first place, require debate or hearing thereon. Petitioner may make such
a determination because she is the Chief Executive Officer of the administrative agency that
is the Bureau of Internal Revenue in which are vested quasi-legislative powers entrusted to it
by the legislature in recognition of its more encompassing and unequalled expertise in the
field of taxation.
 The vesture of quasi-legislative and quasi-judicial powers in administrative bodies is
not unconstitutional, unreasonable and oppressive. It has been necessitated by "the
growing complexity of the modern society" (Solid Homes, Inc. vs. Payawal, 177
SCRA 72, 79). More and more administrative bodies are necessary to help in the
regulation of society's ramified activities. "Specialized in the particular field assigned
to them, they can deal with the problems thereof with more expertise and dispatch
than can be expected from the legislature or the courts of justice" . . . 1

Statutorily empowered to issue rulings or opinions embodying the proper determination in respect to
classifying articles, including cigarettes, for purposes of tax assessment and collection, petitioner
was acting well within her prerogatives when she issued the questioned Circular. And in the exercise
of such prerogatives under the law, she has in her favor the presumption of regular performance of
official duty which must be overcome by clearly persuasive evidence of stark error and grave abuse
of discretion in order to be overturned and disregarded.

It is irrelevant that the Court of Tax Appeals makes much of the effect of the passing of Republic Act
No. 7654 2 on petitioner's power to classify cigarettes. Although the decisions assailed and sought to
be reviewed, as well as the pleadings of private respondent, are replete with alleged admissions of
our legislators to the effect that the said Act was intended to freeze the current classification of
cigarettes and make the same an integral part of the said Act, certainly the repeal, if any, of
petitioner's power to classify cigarettes must be reckoned from the effectivity of the said Act and not
before. Suffice it to say that indisputable is the plain fact that the questioned Circular was issued on
July 1, 1993, while the said Act took effect on July 3, 1993.

The contents of the questioned circular have not

been proven to be erroneous or illegal as to render
issuance thereof an act of grave abuse of
discretion on the part of petitioner Commissioner

Prior to the effectivity of R.A. No. 7654, Section 142 (c) (1) of the National Internal Revenue Code,
as amended, levies the following ad valorem taxes on cigarettes in accordance with their
predetermined classifications as established by the Commissioner of Internal Revenue:

. . . based on the manufacturer's registered wholesale price:

(1) On locally manufactured cigarettes bearing a foreign brand, fifty-five percent

(55%) Provided, That this rate shall apply regardless of whether or not the right to
use or title to the foreign brand was sold or transferred by its owner to the local
manufacturer. Whenever it has to be determined whether or not a cigarette bears a
foreign brand, the listing of brands manufactured in foreign countries appearing in the
current World Tobacco Directory shall govern.

(2) Other locally manufactured cigarettes, forty five percent (45%).

xxx xxx xxx

Prior to the issuance of the questioned Circular, assessed against and paid by private respondent
as ad valorem excise taxes on their removals of "Hope," "More," and "Champion" cigarettes were
amounts based on paragraph (2) above, i.e., the tax rate made applicable on the said cigarettes was
45% at the most. The reason for this is that apparently, petitioner's predecessors have all made
determinations to the effect that the said cigarettes were to be considered "other locally
manufactured cigarettes" and not "locally manufactured cigarettes bearing a foreign brand." Even
petitioner, until her issuance of the questioned Circular, adhered to her predecessors' determination
as to the proper classification of the above-mentioned cigarettes for purposes of ad valorem excise
taxes. Apparently, the past determination that the said cigarettes were to be classified as "other
locally manufactured cigarettes" was based on private respodnent's convenient move of changing
the names of "Hope" to "Hope Luxury" and "More" to "Premium More." It also submitted proof that
"Champion" was an original Fortune Tobacco Corporation register and, therefore, a local brand.
Having registered these brands with the Philippine Patent Office and with corresponding evidence to
the effect, private respondent paid ad valorem excise taxes computed at the rate of not more than
45% which is the rate applicable to cigarettes considered as locally manufactured brands.

How these past determinations pervaded notwithstanding their erroneous basis is only tempered by
their innate quality of being merely errors in interpretative ruling, the formulation of which does not
bind the government. Advantage over such errors may precipitously be withdrawn from those who
have been benefiting from them once the same have been discovered and rectified.

Petitioner correctly emphasizes that:

. . . the registration of said brands in the name of private respondent is proof only that
it is the exclusive owner thereof in the Philippines; it does not necessarily follow,
however, that it is the exclusive owner thereof in the whole world. Assuming
arguendo that private respondent is the exclusive owner of said brands in the
Philippines, it does not mean that they are local. Otherwise, they would not have
been listed in the WTD as international brands manufactured by different entities in
different countries. Moreover, it cannot be said that the brands registered in the
names of private respondent are not the same brands listed in the WTD because
private respondent is one of the manufacturers of said brands listed in the WTD. 3

Private respondent attempts to cast doubt on the determination made by petitioner in the questioned
Circular that Japan is a manufacturer of "Hope" cigarettes. Private respondent's own inquiry into the
World Tobacco Directory reveals that Japan is not a manufacturer of "Hope" cigarettes. In pointing
this out, private respondent concludes that the entire Circular is erroneous and makes such error the
principal proof of its claim that the nature of the determination embodied in the questioned Circular
requires a hearing on the facts and a debate on the applicable law. Such a determination is
adjudicatory in nature and, therefore, requires notice and hearing. Private respondent is, however,
apparently only eager to show error on the part of petitioner for acting with grave abuse of discretion.
Private respondent conveniently forgets that petitioner, equipped with the expertise in taxation,
recognized in that expertise by the legislature that vested in her the power to make rules respecting
classification of articles for taxation purposes, and presumed to have regularly exercised her
prerogatives within the scope of her statutory power to issue determinations specifically under
Section 142 (c) (1) in relation to Section 245 of the National Internal Revenue Code, as amended,
simply followed the law as she understood it. Her task was to determine which cigarette brands were
foreign, and she was directed by the law to look into the World Tobacco Directory. Foreign cigarette
brands were legislated to be taxed at higher rates because of their more extensive public exposure
and international reputation; their competitive edge against local brands may easily be checked by
imposition of higher tax rates. Private respondent makes a mountain of the mole hill circumstance
that "Hope" is listed, not as being "manufactured" by Japan but as being "used" by Japan. Whether
manufactured or used by Japan, however, "Hope" remains a cigarette brand that can not be said to
be limited to local manufacture in the Philippines. The undeniable fact is that it is a foreign brand the
sales in the Philippines of which are greatly boosted by its international exposure and reputation.
The petitioner was well within her prerogatives, in the exercise of her rule-making power, to classify
articles for taxation purposes, to interpret the laws which she is mandated to administer. In
interpreting the same, petitioner must, in general, be guided by the principles underlying
taxation, i.e., taxes are the lifeblood of Government, and revenue laws ought to be interpreted in
favor of the Government, for Government can not survive without the funds to underwrite its varied
operational expenses in pursuit of the welfare of the society which it serves and protects.

Private respondent claims that its business will be destroyed by the imposition of additional ad
valorem taxes as a result of the effectivity of the questioned Circular. It claims that under the vested
rights theory, it cannot now be made to pay higher taxes after having been assessed for less in the
past. Of course private respondent will trumpet its losses, its interests, after all, being its sole
concern. What private respondent fails to see is the loss of revenue by the Government which,
because of erroneous determinations made by its past revenue commissioners, collected lesser
taxes than what it was entitled to in the first place. It is every citizen's duty to pay the correct amount
of taxes. Private respondent will not be shielded by any vested rights, for there are not vested rights
to speak of respecting a wrong construction of the law by administrative officials, and such wrong
interpretation does not place the Government in estoppel to correct or overrule the same. 4

The Questioned Circular embodies an interpretative

ruling of petitioner Commissioner which as such does
not require notice and hearing

As one of the public offices of the Government, the Bureau of Internal Revenue, through its
Commissioner, has grown to be a typical administrative agency vested with a fusion of different
governmental powers: the power to investigate, initiate action and control the range of investigation,
the power to promulgate rules and regulations to better carry out statutory policies, and the power to
adjudicate controversies within the scope of their activities. 5 In the realm of administrative law, we
understand that such an empowerment of administrative agencies was evolved in response to the
needs of a changing society. This development arose as the need for broad social control over
complex conditions and activities became more and more pressing, and such complexity could no
longer be dealt with effectivity and directly by the legislature or the judiciary. The theory which
underlies the empowerment of administrative agencies like the Bureau of Internal Revenue, is that
the issues with which such agencies deal ought to be decided by experts, and not be a judge, at
least not in the first instance or until the facts have been sifted and arranged. 6

One of the powers of administrative agencies like the Bureau of Internal Revenue, is the power to
make rules. The necessity for vesting administrative agencies with this power stems from the
impracticability of the lawmakers providing general regulations for various and varying details
pertinent to a particular legislation. 7

The rules that administrative agencies may promulgate may either be legislative or interpretative.
The former is a form of subordinate legislation whereby the administrative agency is acting in a
legislative capacity, supplementing the statute, filling in the details, pursuant to a specific delegation
of legislative power. 8

Interpretative rules, on the other hand, are "those which purport to do no more than interpret the
statute being administered, to say what it means." 9

There can be no doubt that there is a distinction between an administrative rule or

regulation and an administrative interpretation of a law whose enforcement is
entrusted to an administrative body. When an administrative agency promulgates
rules and regulations, it "makes" a new law with the force and effect of a valid law,
while when it renders an opinion or gives a statement of policy, it merely interprets a
pre-existing law (Parker, Administrative Law, p. 197; Davis Administrative Law, p.
194). Rules and regulations when promulgated in pursuance of the procedure or
authority conferred upon the administrative agency by law, partake of the nature of a
 statute, and compliance therewith may be enforced by a penal sanction provided in
the law. This is so because statutes are usually couched in general terms, after
expressing the policy, purposes, objectives, remedies and sanctions intended by the
legislature. The details and the manner of carrying out the law are often times left to
the administrative agency entrusted with its enforcement. In this sense, it has been
said that rules and regulations are the product of a delegated power to create new or
additional legal provisions that have the effect of law. (Davis, op. cit. p. 194.)

A rule is binding on the courts as long as the procedure fixed for its promulgation is
followed and its scope is within the statutory authority granted by the legislature,
even if the courts are not in agreement with the policy stated therein or its innate
wisdom (Davis, op. cit. pp. 195-197). On the other hand, administrative interpretation
of the law is at best merely advisory, for it is the courts that finally determine what the
law means. 10

"Whether a given statutory delegation authorizes legislative or interpretative regulations depends

upon whether the statute places specific 'sanctions' behind the regulations authorized, as for
example, by making it a criminal offense to disobey them, or by making conformity with their
provisions a condition of the exercise of legal privileges." 11 This is because interpretative regulations
are by nature simply statutory interpretations, which have behind them no statutory sanction. Such
regulations, whether so expressly authorized by statute or issued only as an incident of statutory
administration, merely embody administrative findings of law which are always subject to judicial
determination as to whether they are erroneous or not, even when their issuance is authorized by
statute.

The questioned Circular has undisputedly been issued by petitioner in pursuance of her rule-making
powers under Section 245 of the National Internal Revenue Code, as amended. Exercising such
powers, petitioner re-classified "Hope," "More" and "Champion" cigarettes as locally manufactured
cigarettes bearing foreign brands. The re-classification, as previously explained, is the correct
interpretation of Section 142 (c) (1) of the said Code. The said legal provision is not accompanied by
any penal sanction, and no detail had to be filled in by petitioner. The basis for the classification of
cigarettes has been provided for by the legislature, and all petitioner has to do, on behalf of the
government agency she heads, is to proceed to make the proper determination using the criterion
stipulated by the lawmaking body. In making the proper determination, petitioner gave it a liberal
construction consistent with the rule that revenue laws are to be construed in favor of the
Government whose survival depends on the contributions that taxpayers give to the public coffers
that finance public services and other governmental operations.

The Bureau of Internal Revenue which petitioner heads, is the government agency charged with the
enforcement of the laws pertinent to this case and so, the opinion of the Commissioner of Internal
Revenue, in the absence of a clear showing that it is plainly wrong, is entitled to great weight. Private
respondent claims that its rights under previous interpretations of Section 142 (c) (1) may not
abruptly be cut by a new interpretation of the said section, but precisely the said section is subject to
various and changing construction, and hence, any ruling issued by petitioner thereon is necessarily
interpretative and not legislative. Private respondent insists that the questioned circular is
adjudicatory in nature because it determined the rights of private respondent in a controversy
involving his tax liability. It also asseverates that the questioned circular involved administrative
action that is particular and immediate, thereby rendering it subject to the requirements of notice and
hearing in compliance with the due process clause of the Constitution.

We find private respondent's arguments to be rather strained.

Petitioner made a determination as to the classification of cigarettes as mandated by the aforecited
provisions in the National Internal Revenue Code, as amended. Such determination was an
interpretation by petitioner of the said legal provisions. If in the course of making the interpretation
and embodying the same in the questioned circular which the petitioner subsequently issued after
making such a determination, private respondent's cigarettes products, by their very nature of being
foreign brands as evidenced by their enlistment in the World Tobacco Directory, which is the
controlling basis for the proper classification of cigarettes as stipulated by the law itself, have come
to be classified as locally manufactured cigarettes bearing foreign brands and as such subject to a
tax rate higher than what was previously imposed thereupon based on past rulings of other revenue
commissioners, such a situation is simply a consequence of the performance by petitioner of here
duties under the law. No adjudication took place, much less was there any controversy ripe for
adjudication. The natural consequences of making a classification in accordance with law may not
be used by private respondent in arguing that the questioned circular is in fact adjudicatory in nature.
Such an exercise in driving home a point is illogical as it is fallacious and misplaced.

Private respondent concedes that under general rules of administrative law, "a ruling which is merely
'interpretative' in character may not require prior notice to affected parties before its issuance as well
as a hearing" and "for this reason, in most instances, interpretative regulations are not given the
force of law." 12 Indeed, "interpretative regulations and those merely internal in nature
. . . need not be published." 13 And it is now settled that only legislative regulations and not
interpretative rulings must have the benefit of public
hearing. 14

Because (1) the questioned circular merely embodied an interpretation or a way of reading and
giving meaning to Section 142 (c) (1) of the National Internal Revenue Code, as amended; (2)
petitioner did not fill in any details in the aforecited section but only classified cigarettes on the basis
of the World Tobacco Directory in the light of the paramount principle of construing revenue laws in
favor of the Government to the end that Government collects as much tax money as it is entitled to
in order to fulfill its public purposes for the general good of its citizens; (3) no penal sanction is
provided in the aforecited section that was construed by petitioner in the questioned circular; and (4)
a similar circular declassifying copra from being an agricultural food to non-food product for
purposes of the value added tax laws, resulting in the revocation of an exemption previously enjoyed
by copra traders, has been ruled by us to be merely an interpretative ruling and not a legislative,
much less, an adjudicatory, action on the part of the revenue commissioner, 15 this Court must not be
blind to the fact that the questioned Circular is indeed an interpretative ruling not subject to notice
and hearing.

Neither is the questioned Circular tainted by a

violation of the equal protection clause under the
Constitution

Private respondent anchors its claim of violation of its equal protection rights upon the too obvious
fact that only its cigarette brands, i.e., "Hope," "More" and "Champion," are mentioned in the
questioned circular. Because only the cigarettes that they manufacture are enumerated in the
questioned circular, private respondent proceeded to attack the same as being discriminatory
against it. On the surface, private respondent seems to have a point there. A scrutiny of the
questioned Circular, however, will show that it is undisputedly one of general application for all
cigarettes that are similarly situated as private respondent's brands. The new interpretation of
Section 142 (1) (c) has been well illustrated in its application upon private respondent's brands,
which illustration is properly a subject of the questioned Circular. Significantly, indicated as the
subject of the questioned circular is the "reclassification of cigarettes subject to excise taxes." The
reclassification resulted in the foregrounding of private respondent's cigarette brands, which
incidentally is largely due to the controversy spawned no less by private respondent's own action of
conveniently changing its brand names to avoid falling under a classification that would subject it to
higher ad valorem tax rates. This caused then Commissioner Bienvenido Tan to depart from his
initial determination that private respondent's cigarette brands are foreign brands. The consequent
specific mention of such brands in the questioned Circular, does not change the fact that the
questioned Circular has always been intended for and did cover, all cigarettes similarly situated as
"Hope," "More" and "Champion." Petitioner is thus correct in stating that:

. . . RMC 37-93 is not discriminatory. It lays down the test in determining whether or
not a locally manufactured cigarette bears a foreign brand using the cigarette brands
"Hope," More and "Champion" as specific examples. Such test applies to all locally
manufactured cigarette brands similarly situated as the cigarette brands
aforementioned. While it is true that only "Hope," "More" and "Champion" cigarettes
are actually determined as locally manufactured cigarettes bearing a foreign brand,
RMC 37-93 does not state that ONLY cigarettes fall under such classification to the
exclusion of other cigarettes similarly situated. Otherwise stated, RMC 37-93 does
not exclude the coverage of other cigarettes similarly situated. Otherwise stated,
RMC 37-93 does not exclude the coverage of other cigarettes similarly situated as
locally manufactured cigarettes bearing a foreign brand. Hence, in itself, RMC 37-93
is not discriminatory. 16

Both the respondent Court of Appeals and the Court of Tax Appeals held that the questioned
Circular reclassifying "Hope," "More" and "Champion" cigarettes, is defective, invalid and
unenforceable and has rendered the assessment against private respondent of deficiency ad
valorem excise taxes to be without legal basis. The majority agrees with private respondent and
respondent Courts. As the foregoing opinion chronicles the fatal flaws in private respondent's
arguments, it becomes more apparent that the questioned Circular is in fact a valid and subsisting
interpretative ruling that the petitioner had power to promulgate and enforce.

WHEREFORE, I vote to grant the petition and set aside the decisions of the Court of Tax Appeals
and the Court of Appeals, respectively, and to reinstate the decision of petitioner Commissioner of
Internal Revenue denying private respondent's request for a review, reconsideration and recall of
Revenue Memorandum Circular No. 37-93 dated July 1, 1993.

Padilla, J., concurs.

Separate Opinions

BELLOSILLO, J.: separate opinion:

RA 7654 was enacted by Congress on 10 June 1993, signed into law by the President on 14 June
1993, and took effect 3 July 1993. It amended partly Sec. 142, par. (c), of the National Internal
Revenue Code (NIRC) to read —

Sec. 142. Cigars and cigarettes. — . . . . (c) Cigarettes packed by machine. — There
shall be levied, assessed and collected on cigarettes packed by machine a tax at the
rates prescribed below based on the constructive manufacturer's wholesale price or
the actual manufacturer's wholesale price, whichever is higher.
 (1) On locally manufactured cigarettes which are currently classified and taxed at
fifty-five percent (55%) or the exportation of which is not authorized by contract or
otherwise, fifty-five percent (55%) provided that the minimum tax shall not be less
than Five Pesos (P5.00) per pack (emphasis supplied).

(2) On other locally manufactured cigarettes, forty-five percent (45%) provided that
the minimum tax shall not be less than Three Pesos (P3.00) per pack.

Prior to the effectivity of RA 7654, cigarette brands Hope Luxury, Premium

More and Champion were considered local brands subjected to an ad valorem tax at the rate of 20-
45%. However, on 1 July 1993 or two (2) days before RA 7654 took effect, petitioner Commissioner
of Internal Revenue issued RMC 37-93 reclassifying "Hope, More and Champion being
manufactured by Fortune Tobacco Corporation . . . . (as) locally manufactured cigarettes bearing a
foreign brand subject to the 55% ad valorem tax on cigarettes." 1 RMC 37-93 in effect
subjected Hope Luxury, Premium More and Champion cigarettes to the provisions of Sec. 142, par.
(c), subpar. (1), NIRC, as amended by RA 7654, imposing upon these cigarette brands an ad
valorem tax of "fifty-five percent (55%) provided that the minimum tax shall not be less than Five
Pesos (P5.00) per pack."

On 2 July 1993, Friday, at about five-fifty in the afternoon, or a few hours before the effectivity of RA
7654, a copy of RMC 37-93 with a cover letter signed by Deputy Commissioner Victor A. Deoferio of
the Bureau of Internal Revenue was sent by facsimile to the factory of respondent corporation in
Parang, Marikina, Metro Manila. It appears that the letter together with a copy of RMC 37-93 did not
immediately come to the knowledge of private respondent as it was addressed to no one in
particular. It was only when the reclassification of respondent corporation's cigarette brands was
reported in the column of Fil C. Sionil in Business Bulletin on 4 July 1993 that the president of
respondent corporation learned of the matter, prompting him to inquire into its veracity and to
request from petitioner a copy of RMC 37-93. On 15 July 1993 respondent corporation received by
ordinary mail a certified machine copy of RMC 37-93.

Respondent corporation sought a review, reconsideration and recall of RMC 37-93 but was forthwith
denied by the Appellate Division of the Bureau of Internal Revenue. As a consequence, on 30 July
1993 private respondent was assessed an ad valorem tax deficiency amounting to P9,598,334.00.
Respondent corporation went to the Court of Tax Appeals (CTA) on a petition for review.

On 10 August 1994, after due hearing, the CTA found the petition meritorious and ruled —

Revenue Memorandum Circular No. 37-93 reclassifying the brands of

cigarettes, viz: Hope, More and Champion being manufactured by Fortune Tobacco
Corporation as locally manufactured cigarettes bearing a foreign brand subject to the
55% ad valorem tax on cigarettes is found to be defective, invalid and unenforceable
. . . . Accordingly, the deficiency ad valorem tax assessment issued on petitioner
Fortune Tobacco Corporation in the amount of P9,598,334.00, exclusive of
surcharge and interest, is hereby cancelled for lack of legal basis. 2

The CTA held that petitioner Commissioner of Internal Revenue failed to observe due
process of law in issuing RMC 37-93 as there was no prior notice and hearing, and that RMC
37-93 was in itself discriminatory. The motion to reconsider its decision was denied by the
CTA for lack of merit. On 31 March 1995 respondent Court of Appeals affirmed in toto the
decision of the CTA. 3 Hence, the instant petition for review.
Petitioner now submits through the Solicitor General that RMC 37-93 reclassifying Hope
Luxury, Premium More and Champion as locally manufactured cigarettes bearing brands is merely
an interpretative ruling which needs no prior notice and hearing as held in Misamis Oriental
Association of Coco Traders, Inc. v. Department of Finance Secretary. 4 It maintains that neither is
the assailed revenue memorandum circular discriminatory as it merely "lays down the test in
determining whether or not a locally manufactured cigarette bears a foreign brand using (only) the
cigarette brands Hope, More and Champion as specific examples." 5

Respondent corporation on the other hand contends that RMC 37-93 is not a mere interpretative
ruling but is adjudicatory in nature where prior notice and hearing are mandatory, and that Misamis
Oriental Association of Coco Traders, Inc. v. Department of Finance Secretary on which the Solicitor
General relies heavily is not applicable. Respondent Fortune Tobacco Corporation also argues that
RMC 37-93 discriminates against its cigarette brands since those of its competitors which are
similarly situated have not been reclassified.

The main issues before us are (a) whether RMC 37-93 is merely an interpretative rule the issuance
of which needs no prior notice and hearing, or an adjudicatory ruling which calls for the twin
requirements of prior notice and hearing, and, (b) whether RMC 37-93 is discriminatory in nature.

A brief discourse on the powers and functions of administrative bodies may be instructive.

Administrative agencies posses quasi-legislative or rule making powers and quasi-judicial or

administrative adjudicatory powers. Quasi-legislative or rule making power is the power to make
rules and regulations which results in delegated legislation that is within the confines of the granting
statute and the doctrine of nondelegability and separability of powers.

Interpretative rule, one of the three (3) types of quasi-legislative or rule making powers of an
administrative agency (the other two being supplementary or detailed legislation, and contingent
legislation), is promulgated by the administrative agency to interpret, clarify or explain statutory
regulations under which the administrative body operates. The purpose or objective of an
interpretative rule is merely to construe the statute being administered. It purports to do no more
than interpret the statute. Simply, the rule tries to say what the statute means. Generally, it refers to
no single person or party in particular but concerns all those belonging to the same class which may
be covered by the said interpretative rule. It need not be published and neither is a hearing required
since it is issued by the administrative body as an incident of its power to enforce the law and is
intended merely to clarify statutory provisions for proper observance by the people. In Tañada
v. Tuvera, 6 this Court expressly said that "[i]interpretative regulations . . . . need not be published."

Quasi-judicial or administrative adjudicatory power on the other hand is the power of the
administrative agency to adjudicate the rights of persons before it. It is the power to hear and
determine questions of fact to which the legislative policy is to apply and to decide in accordance
with the standards laid down by the law itself in enforcing and administering the same law. 7 The
administrative body exercises its quasi-judicial power when it performs in a judicial manner an act
which is essentially of an executive or administrative nature, where the power to act in such manner
is incidental to or reasonably necessary for the performance of the executive or administrative duty
entrusted to it. 8 In carrying out their quasi-judicial functions the administrative officers or bodies are
required to investigate facts or ascertain the existence of facts, hold hearings, weigh evidence, and
draw conclusions from them as basis for their official action and exercise of discretion in a judicial
nature. Since rights of specific persons are affected it is elementary that in the proper exercise of
quasi-judicial power due process must be observed in the conduct of the proceedings.
The importance of due process cannot be underestimated. Too basic is the rule that no person shall
be deprived of life, liberty or property without due process of law. Thus when an administrative
proceeding is quasi-judicial in character, notice and fair open hearing are essential to the validity of
the proceeding. The right to reasonable prior notice and hearing embraces not only the right to
present evidence but also the opportunity to know the claims of the opposing party and to meet
them. The right to submit arguments implies that opportunity otherwise the right may as well be
considered impotent. And those who are brought into contest with government in a quasi-judicial
proceeding aimed at the control of their activities are entitled to be fairy advised of what the
government proposes and to be heard upon its proposal before it issues its final command.

There are cardinal primary rights which must be respected in administrative proceedings. The
landmark case of Ang Tibay v. The Court of Industrial Relations 9 enumerated these rights: (1) the
right to a hearing, which includes the right of the party interested or affected to present his own case
and submit evidence in support thereof; (2) the tribunal must consider the evidence presented; (3)
the decision must have something to support itself; (4) the evidence must be substantial; (5) the
decision must be rendered on the evidence presented at the hearing, or at least contained in the
record and disclosed to the parties affected; (6) the tribunal or any of its judges must act on its or his
own independent consideration of the law and facts of the controversy, and not simply accept the
views of a subordinate in arriving at a decision; and, (7) the tribunal should in all controversial
questions render its decision in such manner that the parties to the proceeding may know the
various issues involved and the reasons for the decision rendered.

In determining whether RMC No. 37-93 is merely an interpretative rule which requires no prior notice
and hearing, or an adjudicatory rule which demands the observance of due process, a close
examination of RMC 37-93 is in order. Noticeably, petitioner Commissioner of Internal Revenue at
first interprets Sec. 142, par. (c), subpar. (1), of the NIRC, as amended, by citing the law and
clarifying or explaining what it means —

Section 142 (c) (1), National Internal Revenue Code, as amended by R.A. No. 6956,
provides: On locally manufactured cigarettes bearing a foreign brand, fifty-five
percent (55%) Provided, That this rate shall apply regardless of whether or not the
right to use or title to the foreign brand was sold or transferred by its owner to the
local manufacturer. Whenever it has to be determined whether or not a cigarette
bears a foreign brand, the listing of brands manufactured in foreign countries
appearing in the current World Tobacco Directory shall govern.

Under the foregoing, the test for imposition of the 55% ad valorem tax on cigarettes
is that the locally manufactured cigarettes bear a foreign brand regardless of whether
or not the right to use or title to the foreign brand was sold or transferred by its owner
to the local manufacturer. The brand must be originally owned by a foreign
manufacturer or producer. If ownership of the cigarette brand is, however, not
definitely determinable,
". . . the listing of brands manufactured in foreign countries appearing in the current
World Tobacco Directory shall govern . . ."

Then petitioner makes a factual finding by declaring that Hope (Luxury),

(Premium) More and Champion are manufactured by other foreign manufacturers —

Hope is listed in the World Tobacco Directory as being manufactured by (a) Japan
Tobacco, Japan and (b) Fortune Tobacco, Philippines. More is listed in the said
directory as being manufactured by: (a) Fills de Julia Reig, Andorra; (b) Rothmans,
Australia; (c) RJR-MacDonald, Canada; (d) Rettig-Strenberg, Finland; (e) Karellas,
 Greece; (f) R.J. Reynolds, Malaysia; (g) Rothmans, New Zealand; (h) Fortune
Tobacco, Philippines; (i) R.J. Reynolds, Puerto Rico; (j) R.J. Reynolds, Spain; (k)
Tabacalera, Spain; (l) R.J. Reynolds, Switzerland; and (m) R.J. Reynolds, USA.
"Champion" is registered in the said directory as being manufactured by: (a)
Commonwealth Bangladesh; (b) Sudan, Brazil; (c) Japan Tobacco, Japan; (d)
Fortune Tobacco, Philippines; (e) Haggar, Sudan; and (f) Tabac Reunies,
Switzerland.

From this finding, petitioner thereafter formulates an inference that since it cannot be determined
who among the manufacturers are the real owners of the brands in question, then these cigarette
brands should be considered foreign brands —

Since there is no showing who among the above-listed manufacturers of the

cigarettes bearing the said brands are the real owner/s thereof, then it follows that
the same shall be considered foreign brand for purposes of determining the ad
valorem tax pursuant to Section 142 of the National Internal Revenue Code. As held
in BIR Ruling No. 410-88, dated August 24, 1988, "in cases where it cannot be
established or there is dearth of evidence as to whether a brand is foreign or not,
resort to the World Tobacco Directory should be made."

Finally, petitioner caps RMC 37-93 with a disposition specifically directed at respondent corporation
reclassifying its cigarette brands as locally manufactured bearing foreign brands —

In view of the foregoing, the aforesaid brands of

cigarettes, viz: Hope, More and Champion being manufactured by Fortune Tobacco
Corporation are hereby considered locally manufactured cigarettes bearing a foreign
brand subject to the 55% ad valorem tax on cigarettes.

Any ruling inconsistent herewith is revoked or modified accordingly.

It is evident from the foregoing that in issuing RMC 37-93 petitioner Commissioner of Internal
Revenue was exercising her quasi-judicial or administrative adjudicatory power. She cited and
interpreted the law, made a factual finding, applied the law to her given set of facts, arrived at a
conclusion, and issued a ruling aimed at a specific individual. Consequently prior notice and hearing
are required. It must be emphasized that even the text alone of RMC 37-93 implies that reception of
evidence during a hearing is appropriate if not necessary since it invokes BIR Ruling No. 410-88,
dated August 24, 1988, which provides that "in cases where it cannot be established or there is
dearth of evidence as to whether a brand is foreign or not . . . ." Indeed, it is difficult to determine
whether a brand is foreign or not if it is not established by, or there is dearth of, evidence because no
hearing has been called and conducted for the reception of such evidence. In fine, by no stretch of
the imagination can RMC 37-93 be considered purely as an interpretative rule — requiring no
previous notice and hearing and simply interpreting, construing, clarifying or explaining statutory
regulations being administered by or under which the Bureau of Internal Revenue operates.

It is true that both RMC 47-91 in Misamis Oriental Association of Coco Traders v. Department of
Finance Secretary, and RMC 37-93 in the instant case reclassify certain products for purposes of
taxation. But the similarity between the two revenue memorandum circulars ends there. For in
properly determining whether a revenue memorandum circular is merely an interpretative rule or an
adjudicatory rule, its very tenor and text, and the circumstances surrounding its issuance will have
no to be considered.

We quote RMC 47-91 promulgated 11 June 1991 —

 Revenue Memorandum Circular No. 47-91

SUBJECT : Taxability of Copra

TO : All Revenue Officials and Employees and Others Concerned.

For the information and guidance of all officials and employees and others
concerned, quoted hereunder in its entirety is VAT Ruling No. 190-90 dated August
17, 1990:

COCOFED MARKETING RESEARCH CORPORATION

6th Floor Cocofed Building
144 Amorsolo Street
Legaspi Village, Makati
Metro Manila

Attention:
Ms. Esmyrna E. Reyes
Vice President —
Finance

Sirs:

This has reference to your letter dated January 16, 1990 wherein you
represented that inspite of your VAT registration of your copra trading
company, you are supposed to be exempt from VAT on the basis of
BIR Ruling dated January 8, 1988 which considered copra as an
agricultural food product in its original state. In this connection, you
request for a confirmation of your opinion as aforestated.

In reply, please be informed that copra, being an agricultural non-food

product, is exempt from VAT only if sale is made by the primary
producer pursuant to Section 103 (a) of the Tax Code, as amended.
Thus as a trading company and a subsequent seller, your sale of
copra is already subject to VAT pursuant to Section 9(b) (1) of
Revenue Regulations 5-27.

This revokes VAT Ruling Nos. 009-88 and 279-88.

Very
truly
yours,

(Sgd.)
JOSE
U.
ONG
Commi
ssioner
of
Internal
Reven
ue
 As a clarification, this is the present and official stand of this Office unless sooner
revoked or amended. All revenue officials and employees are enjoined to give this
Circular as wide a publicity as possible.

(Sgd.)
JOSE
U.
ONG
Commi
ssioner
of
Internal
Reven
ue

Quite obviously, the very text of RMC 47-91 itself shows that it is merely an interpretative rule as it
simply quotes a VAT Ruling and reminds those concerned that the ruling is the present and official
stand of the Bureau of Internal Revenue. Unlike in RMC 37-93 where petitioner Commissioner
manifestly exercised her quasi-judicial or administrative adjudicatory power, in RMC 47-91 there
were no factual findings, no application of laws to a given set of facts, no conclusions of law, and no
dispositive portion directed at any particular party.

Another difference is that in the instant case, the issuance of the assailed revenue memorandum
circular operated to subject the taxpayer to the new law which was yet to take effect, while
in Misamis, the disputed revenue memorandum circular was issued simply to restate and then clarify
the prevailing position and ruling of the administrative agency, and no new law yet to take effect was
involved. It merely interpreted an existing law which had already been in effect for some time and
which was not set to be amended. RMC 37-93 is thus prejudicial to private respondent alone.

A third difference, and this likewise resolves the issue of discrimination, is that RMC 37-93 was
ostensibly issued to subject the cigarette brands of respondent corporation to a new law as it was
promulgated two days before the expiration of the old law and a few hours before the effectivity of
the new law. That RMC 37-93 is particularly aimed only at respondent corporation and its three (3)
cigarette brands can be seen from the dispositive portion of the assailed revenue memorandum
circular —

In view of the foregoing, the aforesaid brands of cigarettes, viz: Hope, More,
and Champion being manufactured by Fortune Tobacco Corporation are hereby
considered locally manufactured cigarettes bearing a foreign brand subject to the
55% ad valorem tax on cigarettes.

Any ruling inconsistent herewith is revoked or modified accordingly.

Thus the argument of the Solicitor General that RMC 37-93 is not discriminatory as "[i]t merely lays
down the test in determining whether or not a locally manufactured cigarette bears a foreign brand
using the cigarette brands Hope, More and Champion as specific examples," cannot be accepted,
much less sustained. Without doubt, RMC 37-93 has a tremendous effect on respondent corporation
— and solely on respondent corporation — as its deficiency ad valorem tax assessment on its
removals of Hope, Luxury, Premium More, and Champion cigarettes for six (6) hours alone, i.e.,
from six o'clock in the evening of 2 July 1993 which is presumably the time respondent corporation
was supposed to have received the facsimile message sent by Deputy Commissioner Victor A.
Deoferio, until twelve o'clock midnight upon the effectivity of the new law, was already
P9,598,334.00. On the other hand, RMC 47-91 was issued with no purpose except to state and
declare what has been the official stand of the administrative agency on the specific subject matter,
and was indiscriminately directed to all copra traders with no particular individual in mind.

That petitioner Commissioner of Internal Revenue is an expert in her filed is not attempted to be
disputed; hence, we do not question the wisdom of her act in reclassifying the cigarettes. Neither do
we deny her the exercise of her quasi-legislative or quasi-judicial powers. But most certainly, by
constitutional mandate, the Court must check the exercise of these powers and ascertain whether
petitioner has gone beyond the legitimate bounds of her authority.

In the final analysis, the issue before us in not the expertise, the authority to promulgate rules, or the
wisdom of petitioner as Commissioner of Internal Revenue is reclassifying the cigarettes of private
respondents. It is simply the faithful observance by government by government of the basic
constitutional right of a taxpayer to due process of law and equal protection of the laws. This is what
distresses me no end — the manner and the circumstances under which the cigarettes of private
respondent were reclassified and correspondingly taxed under RMC 37-93, and adjudicatory rule
which therefore requires reasonable notice and hearing before its issuance. It should not be
confused with RMC 47-91, which is a mere interpretative rule.

In the earlier case of G.R. No. 119322, which practically involved the same opposing interests, I also
voted to uphold the constitutional right of the taxpayer concerned to due process and equal
protection of the laws. By a vote of 3-2, that view prevailed. In sequela, we in the First Division who
constituted the majority found ourselves unjustly drawn into the vortex of a nightmarish episode. The
strong ripples whipped up by my opinion expressed therein — and of the majority — have yet to
varnish when we are again in the imbroglio of a similar dilemma. The unpleasant experience should
be reason enough to simply steer clear of this controversy and surf on a pretended loss of judicial
objectivity. Such would have been an easy way out, a gracious exit, so to speak, albeit lame. But to
camouflage my leave with a sham excuse would be to turn away from a professional vow I keep at
all times; I would not be true to myself, and to the people I am committed to serve. Thus, as I have
earlier expressed, if placed under similar circumstances in some future time, I shall have to brave
again the prospect of another vilification and a tarnished image if only to show proudly to the whole
world that under the present dispensation judicial independence in our country is a true component
of our democracy.

In fine, I am greatly perturbed by the manner RMC No. 37-93 was issued as well as the effect of
such issuance. For it cannot be denied that the circumstances clearly demonstrate that it was hastily
issued — without prior notice and hearing, and singling out private respondent alone — when two
days before a new tax law was to take effect petitioner reclassified and taxed the cigarette brands of
private respondent at a higher rate. Obviously, this was to make it appear that even before the
anticipated date of effectivity of the statute — which was undeniably priorly known to petitioner —
these brands were already currently classified and taxed at fifty-five percent (55%), thus shoving
them into the purview of the law that was to take effect two days after!

For sure, private respondent was not properly informed before the issuance of the questioned
memorandum circular that its cigarette brands Hope Luxury, Premium More and Champion were
being reclassified and subjected to a higher tax rate. Naturally, the result would be to lose financially
because private respondent was still selling its cigarettes at a price based on the old, lower tax rate.
Had there been previous notice and hearing, as claimed by private respondent, it could have very
well presented its side, either by opposing the reclassification, or by acquiescing thereto but
increasing the price of its cigarettes to adjust to the higher tax rate. The reclassification and the
ensuing imposition of a tax rate increase therefore could not be anything but confiscatory if we are
also to consider the claim of private respondent that the new tax is even higher than the cost of its
cigarettes.

Accordingly, I vote to deny the petition.

HERMOSISIMA, JR., J.: dissenting

Private respondent Fortune Tobacco Corporation in the instant case disputes its liability for
deficiency ad valorem excise taxes on its removals of "Hope," "More," and "Champion" cigarettes
from 6:00 p.m. to 12:00 midnight of July 2, 1993, in the total amount of P9,598,334.00. It claims that
the circular, upon which the assessment was based and made, is defective, invalid and
unenforceable for having been issued without notice and hearing and in violation of the equal
protection clause guaranteed by the Constitution.

The majority upholds these claims of private respondent, convinced that the Circular in question, in
the first place, did not give prior notice and hearing, and so, it could not have been valid and
effective. It proceeds to affirm the factual findings of the Court of Tax Appeals, which findings were
considered correct by respondent Court of Appeals, to the effect that the petitioner Commissioner of
Internal Revenue had indeed blatantly failed to comply with the said twin requirements of notice and
hearing, thereby rendering the issuance of the questioned Circular to be in violation of the due
process clause of the Constitution. It is also its dominant opinion that the questioned Circular
discriminates against private respondent Fortune Tobacco Corporation insofar as it seems to affect
only its "Hope," "More," and "Champion" cigarettes, to the exclusion of other cigarettes apparently of
the same kind or classification as these cigarettes manufactured by private respondent.

With all due respect, I disagree with the majority in its disquisition of the issues and its resulting
conclusions.

Section 245 of the National Internal Revenue Code,

as amended, empowers the Commissioner of Internal
Revenue to issue the questioned Circular

Section 245 of the National Internal Revenue Code, as amended, provides:

Sec. 245. Authority of Secretary of Finance to promulgate rules and regulations. —

The Secretary of Finance, upon recommendation of the Commissioner, shall
promulgate all needful rules and regulations for the effective enforcement of the
provisions of this Code . . . without prejudice to the power of the Commissioner of
Internal Revenue to make rulings or opinions in connection with the implementation
of the provisions of internal revenue laws, including rulings on the classification of
articles for sales tax and similar purposes.

The subject of the questioned Circular is the reclassification of cigarettes subject to excise taxes. It
was issued in connection with Section 142 (c) (1) of the National Internal Revenue Code, as
amended, which imposes ad valorem excise taxes on locally manufactured cigarettes bearing a
foreign brand. The same provision prescribes the ultimate criterion that determines which cigarettes
are to be considered "locally manufactured cigarettes bearing a foreign brand." It provides:
 . . . Whenever it has to be determined whether or not a cigarette bears a foreign
brand, the listing of brands manufactured in foreign countries appearing in the
current World Tobacco Directory shall govern.

There is only one World Tobacco Directory for a given current year, and the same is
mandated by law to be the BIR Commissioner's controlling basis for determining whether or
not a particular locally manufactured cigarette is one bearing a foreign brand. In so making a
determination, petitioner should inquire into the entries in the World Tobacco Directory for
the given current year and shall be held bound by such entries therein. She is not required to
subject the results of her inquiries to feedback from the concerned cigarette manufacturers,
and it is doubtlessly not desirable nor managerially sound to court dispute thereon when the
law does not, in the first place, require debate or hearing thereon. Petitioner may make such
a determination because she is the Chief Executive Officer of the administrative agency that
is the Bureau of Internal Revenue in which are vested quasi-legislative powers entrusted to it
by the legislature in recognition of its more encompassing and unequalled expertise in the
field of taxation.

The vesture of quasi-legislative and quasi-judicial powers in administrative bodies is

not unconstitutional, unreasonable and oppressive. It has been necessitated by "the
growing complexity of the modern society" (Solid Homes, Inc. vs. Payawal, 177
SCRA 72, 79). More and more administrative bodies are necessary to help in the
regulation of society's ramified activities. "Specialized in the particular field assigned
to them, they can deal with the problems thereof with more expertise and dispatch
than can be expected from the legislature or the courts of justice" . . . 1

Statutorily empowered to issue rulings or opinions embodying the proper determination in respect to
classifying articles, including cigarettes, for purposes of tax assessment and collection, petitioner
was acting well within her prerogatives when she issued the questioned Circular. And in the exercise
of such prerogatives under the law, she has in her favor the presumption of regular performance of
official duty which must be overcome by clearly persuasive evidence of stark error and grave abuse
of discretion in order to be overturned and disregarded.

It is irrelevant that the Court of Tax Appeals makes much of the effect of the passing of Republic Act
No. 7654 2 on petitioner's power to classify cigarettes. Although the decisions assailed and sought to
be reviewed, as well as the pleadings of private respondent, are replete with alleged admissions of
our legislators to the effect that the said Act was intended to freeze the current classification of
cigarettes and make the same an integral part of the said Act, certainly the repeal, if any, of
petitioner's power to classify cigarettes must be reckoned from the effectivity of the said Act and not
before. Suffice it to say that indisputable is the plain fact that the questioned Circular was issued on
July 1, 1993, while the said Act took effect on July 3, 1993.

The contents of the questioned circular have not

been proven to be erroneous or illegal as to render
issuance thereof an act of grave abuse of
discretion on the part of petitioner Commissioner

Prior to the effectivity of R.A. No. 7654, Section 142 (c) (1) of the National Internal Revenue Code,
as amended, levies the following ad valorem taxes on cigarettes in accordance with their
predetermined classifications as established by the Commissioner of Internal Revenue:

. . . based on the manufacturer's registered wholesale price:

 (1) On locally manufactured cigarettes bearing a foreign brand, fifty-five percent
(55%) Provided, That this rate shall apply regardless of whether or not the right to
use or title to the foreign brand was sold or transferred by its owner to the local
manufacturer. Whenever it has to be determined whether or not a cigarette bears a
foreign brand, the listing of brands manufactured in foreign countries appearing in the
current World Tobacco Directory shall govern.

(2) Other locally manufactured cigarettes, forty five percent (45%).

xxx xxx xxx

Prior to the issuance of the questioned Circular, assessed against and paid by private respondent
as ad valorem excise taxes on their removals of "Hope," "More," and "Champion" cigarettes were
amounts based on paragraph (2) above, i.e., the tax rate made applicable on the said cigarettes was
45% at the most. The reason for this is that apparently, petitioner's predecessors have all made
determinations to the effect that the said cigarettes were to be considered "other locally
manufactured cigarettes" and not "locally manufactured cigarettes bearing a foreign brand." Even
petitioner, until her issuance of the questioned Circular, adhered to her predecessors' determination
as to the proper classification of the above-mentioned cigarettes for purposes of ad valorem excise
taxes. Apparently, the past determination that the said cigarettes were to be classified as "other
locally manufactured cigarettes" was based on private respodnent's convenient move of changing
the names of "Hope" to "Hope Luxury" and "More" to "Premium More." It also submitted proof that
"Champion" was an original Fortune Tobacco Corporation register and, therefore, a local brand.
Having registered these brands with the Philippine Patent Office and with corresponding evidence to
the effect, private respondent paid ad valorem excise taxes computed at the rate of not more than
45% which is the rate applicable to cigarettes considered as locally manufactured brands.

How these past determinations pervaded notwithstanding their erroneous basis is only tempered by
their innate quality of being merely errors in interpretative ruling, the formulation of which does not
bind the government. Advantage over such errors may precipitously be withdrawn from those who
have been benefiting from them once the same have been discovered and rectified.

Petitioner correctly emphasizes that:

. . . the registration of said brands in the name of private respondent is proof only that
it is the exclusive owner thereof in the Philippines; it does not necessarily follow,
however, that it is the exclusive owner thereof in the whole world. Assuming
arguendo that private respondent is the exclusive owner of said brands in the
Philippines, it does not mean that they are local. Otherwise, they would not have
been listed in the WTD as international brands manufactured by different entities in
different countries. Moreover, it cannot be said that the brands registered in the
names of private respondent are not the same brands listed in the WTD because
private respondent is one of the manufacturers of said brands listed in the WTD. 3

Private respondent attempts to cast doubt on the determination made by petitioner in the questioned
Circular that Japan is a manufacturer of "Hope" cigarettes. Private respondent's own inquiry into the
World Tobacco Directory reveals that Japan is not a manufacturer of "Hope" cigarettes. In pointing
this out, private respondent concludes that the entire Circular is erroneous and makes such error the
principal proof of its claim that the nature of the determination embodied in the questioned Circular
requires a hearing on the facts and a debate on the applicable law. Such a determination is
adjudicatory in nature and, therefore, requires notice and hearing. Private respondent is, however,
apparently only eager to show error on the part of petitioner for acting with grave abuse of discretion.
Private respondent conveniently forgets that petitioner, equipped with the expertise in taxation,
recognized in that expertise by the legislature that vested in her the power to make rules respecting
classification of articles for taxation purposes, and presumed to have regularly exercised her
prerogatives within the scope of her statutory power to issue determinations specifically under
Section 142 (c) (1) in relation to Section 245 of the National Internal Revenue Code, as amended,
simply followed the law as she understood it. Her task was to determine which cigarette brands were
foreign, and she was directed by the law to look into the World Tobacco Directory. Foreign cigarette
brands were legislated to be taxed at higher rates because of their more extensive public exposure
and international reputation; their competitive edge against local brands may easily be checked by
imposition of higher tax rates. Private respondent makes a mountain of the mole hill circumstance
that "Hope" is listed, not as being "manufactured" by Japan but as being "used" by Japan. Whether
manufactured or used by Japan, however, "Hope" remains a cigarette brand that can not be said to
be limited to local manufacture in the Philippines. The undeniable fact is that it is a foreign brand the
sales in the Philippines of which are greatly boosted by its international exposure and reputation.
The petitioner was well within her prerogatives, in the exercise of her rule-making power, to classify
articles for taxation purposes, to interpret the laws which she is mandated to administer. In
interpreting the same, petitioner must, in general, be guided by the principles underlying
taxation, i.e., taxes are the lifeblood of Government, and revenue laws ought to be interpreted in
favor of the Government, for Government can not survive without the funds to underwrite its varied
operational expenses in pursuit of the welfare of the society which it serves and protects.

Private respondent claims that its business will be destroyed by the imposition of additional ad
valorem taxes as a result of the effectivity of the questioned Circular. It claims that under the vested
rights theory, it cannot now be made to pay higher taxes after having been assessed for less in the
past. Of course private respondent will trumpet its losses, its interests, after all, being its sole
concern. What private respondent fails to see is the loss of revenue by the Government which,
because of erroneous determinations made by its past revenue commissioners, collected lesser
taxes than what it was entitled to in the first place. It is every citizen's duty to pay the correct amount
of taxes. Private respondent will not be shielded by any vested rights, for there are not vested rights
to speak of respecting a wrong construction of the law by administrative officials, and such wrong
interpretation does not place the Government in estoppel to correct or overrule the same. 4

The Questioned Circular embodies an interpretative

ruling of petitioner Commissioner which as such does
not require notice and hearing

As one of the public offices of the Government, the Bureau of Internal Revenue, through its
Commissioner, has grown to be a typical administrative agency vested with a fusion of different
governmental powers: the power to investigate, initiate action and control the range of investigation,
the power to promulgate rules and regulations to better carry out statutory policies, and the power to
adjudicate controversies within the scope of their activities. 5 In the realm of administrative law, we
understand that such an empowerment of administrative agencies was evolved in response to the
needs of a changing society. This development arose as the need for broad social control over
complex conditions and activities became more and more pressing, and such complexity could no
longer be dealt with effectivity and directly by the legislature or the judiciary. The theory which
underlies the empowerment of administrative agencies like the Bureau of Internal Revenue, is that
the issues with which such agencies deal ought to be decided by experts, and not be a judge, at
least not in the first instance or until the facts have been sifted and arranged. 6

One of the powers of administrative agencies like the Bureau of Internal Revenue, is the power to
make rules. The necessity for vesting administrative agencies with this power stems from the
impracticability of the lawmakers providing general regulations for various and varying details
pertinent to a particular legislation. 7
The rules that administrative agencies may promulgate may either be legislative or interpretative.
The former is a form of subordinate legislation whereby the administrative agency is acting in a
legislative capacity, supplementing the statute, filling in the details, pursuant to a specific delegation
of legislative power. 8

Interpretative rules, on the other hand, are "those which purport to do no more than interpret the
statute being administered, to say what it means." 9

There can be no doubt that there is a distinction between an administrative rule or

regulation and an administrative interpretation of a law whose enforcement is
entrusted to an administrative body. When an administrative agency promulgates
rules and regulations, it "makes" a new law with the force and effect of a valid law,
while when it renders an opinion or gives a statement of policy, it merely interprets a
pre-existing law (Parker, Administrative Law, p. 197; Davis Administrative Law, p.
194). Rules and regulations when promulgated in pursuance of the procedure or
authority conferred upon the administrative agency by law, partake of the nature of a
statute, and compliance therewith may be enforced by a penal sanction provided in
the law. This is so because statutes are usually couched in general terms, after
expressing the policy, purposes, objectives, remedies and sanctions intended by the
legislature. The details and the manner of carrying out the law are often times left to
the administrative agency entrusted with its enforcement. In this sense, it has been
said that rules and regulations are the product of a delegated power to create new or
additional legal provisions that have the effect of law. (Davis, op. cit. p. 194.)

A rule is binding on the courts as long as the procedure fixed for its promulgation is
followed and its scope is within the statutory authority granted by the legislature,
even if the courts are not in agreement with the policy stated therein or its innate
wisdom (Davis, op. cit. pp. 195-197). On the other hand, administrative interpretation
of the law is at best merely advisory, for it is the courts that finally determine what the
law means. 10

"Whether a given statutory delegation authorizes legislative or interpretative regulations depends

upon whether the statute places specific 'sanctions' behind the regulations authorized, as for
example, by making it a criminal offense to disobey them, or by making conformity with their
provisions a condition of the exercise of legal privileges." 11 This is because interpretative regulations
are by nature simply statutory interpretations, which have behind them no statutory sanction. Such
regulations, whether so expressly authorized by statute or issued only as an incident of statutory
administration, merely embody administrative findings of law which are always subject to judicial
determination as to whether they are erroneous or not, even when their issuance is authorized by
statute.

The questioned Circular has undisputedly been issued by petitioner in pursuance of her rule-making
powers under Section 245 of the National Internal Revenue Code, as amended. Exercising such
powers, petitioner re-classified "Hope," "More" and "Champion" cigarettes as locally manufactured
cigarettes bearing foreign brands. The re-classification, as previously explained, is the correct
interpretation of Section 142 (c) (1) of the said Code. The said legal provision is not accompanied by
any penal sanction, and no detail had to be filled in by petitioner. The basis for the classification of
cigarettes has been provided for by the legislature, and all petitioner has to do, on behalf of the
government agency she heads, is to proceed to make the proper determination using the criterion
stipulated by the lawmaking body. In making the proper determination, petitioner gave it a liberal
construction consistent with the rule that revenue laws are to be construed in favor of the
Government whose survival depends on the contributions that taxpayers give to the public coffers
that finance public services and other governmental operations.

The Bureau of Internal Revenue which petitioner heads, is the government agency charged with the
enforcement of the laws pertinent to this case and so, the opinion of the Commissioner of Internal
Revenue, in the absence of a clear showing that it is plainly wrong, is entitled to great weight. Private
respondent claims that its rights under previous interpretations of Section 142 (c) (1) may not
abruptly be cut by a new interpretation of the said section, but precisely the said section is subject to
various and changing construction, and hence, any ruling issued by petitioner thereon is necessarily
interpretative and not legislative. Private respondent insists that the questioned circular is
adjudicatory in nature because it determined the rights of private respondent in a controversy
involving his tax liability. It also asseverates that the questioned circular involved administrative
action that is particular and immediate, thereby rendering it subject to the requirements of notice and
hearing in compliance with the due process clause of the Constitution.

We find private respondent's arguments to be rather strained.

Petitioner made a determination as to the classification of cigarettes as mandated by the aforecited

provisions in the National Internal Revenue Code, as amended. Such determination was an
interpretation by petitioner of the said legal provisions. If in the course of making the interpretation
and embodying the same in the questioned circular which the petitioner subsequently issued after
making such a determination, private respondent's cigarettes products, by their very nature of being
foreign brands as evidenced by their enlistment in the World Tobacco Directory, which is the
controlling basis for the proper classification of cigarettes as stipulated by the law itself, have come
to be classified as locally manufactured cigarettes bearing foreign brands and as such subject to a
tax rate higher than what was previously imposed thereupon based on past rulings of other revenue
commissioners, such a situation is simply a consequence of the performance by petitioner of here
duties under the law. No adjudication took place, much less was there any controversy ripe for
adjudication. The natural consequences of making a classification in accordance with law may not
be used by private respondent in arguing that the questioned circular is in fact adjudicatory in nature.
Such an exercise in driving home a point is illogical as it is fallacious and misplaced.

Private respondent concedes that under general rules of administrative law, "a ruling which is merely
'interpretative' in character may not require prior notice to affected parties before its issuance as well
as a hearing" and "for this reason, in most instances, interpretative regulations are not given the
force of law." 12 Indeed, "interpretative regulations and those merely internal in nature
. . . need not be published." 13 And it is now settled that only legislative regulations and not
interpretative rulings must have the benefit of public
hearing. 14

Because (1) the questioned circular merely embodied an interpretation or a way of reading and
giving meaning to Section 142 (c) (1) of the National Internal Revenue Code, as amended; (2)
petitioner did not fill in any details in the aforecited section but only classified cigarettes on the basis
of the World Tobacco Directory in the light of the paramount principle of construing revenue laws in
favor of the Government to the end that Government collects as much tax money as it is entitled to
in order to fulfill its public purposes for the general good of its citizens; (3) no penal sanction is
provided in the aforecited section that was construed by petitioner in the questioned circular; and (4)
a similar circular declassifying copra from being an agricultural food to non-food product for
purposes of the value added tax laws, resulting in the revocation of an exemption previously enjoyed
by copra traders, has been ruled by us to be merely an interpretative ruling and not a legislative,
much less, an adjudicatory, action on the part of the revenue commissioner, 15 this Court must not be
blind to the fact that the questioned Circular is indeed an interpretative ruling not subject to notice
and hearing.

Neither is the questioned Circular tainted by a

violation of the equal protection clause under the
Constitution

Private respondent anchors its claim of violation of its equal protection rights upon the too obvious
fact that only its cigarette brands, i.e., "Hope," "More" and "Champion," are mentioned in the
questioned circular. Because only the cigarettes that they manufacture are enumerated in the
questioned circular, private respondent proceeded to attack the same as being discriminatory
against it. On the surface, private respondent seems to have a point there. A scrutiny of the
questioned Circular, however, will show that it is undisputedly one of general application for all
cigarettes that are similarly situated as private respondent's brands. The new interpretation of
Section 142 (1) (c) has been well illustrated in its application upon private respondent's brands,
which illustration is properly a subject of the questioned Circular. Significantly, indicated as the
subject of the questioned circular is the "reclassification of cigarettes subject to excise taxes." The
reclassification resulted in the foregrounding of private respondent's cigarette brands, which
incidentally is largely due to the controversy spawned no less by private respondent's own action of
conveniently changing its brand names to avoid falling under a classification that would subject it to
higher ad valorem tax rates. This caused then Commissioner Bienvenido Tan to depart from his
initial determination that private respondent's cigarette brands are foreign brands. The consequent
specific mention of such brands in the questioned Circular, does not change the fact that the
questioned Circular has always been intended for and did cover, all cigarettes similarly situated as
"Hope," "More" and "Champion." Petitioner is thus correct in stating that:

. . . RMC 37-93 is not discriminatory. It lays down the test in determining whether or
not a locally manufactured cigarette bears a foreign brand using the cigarette brands
"Hope," More and "Champion" as specific examples. Such test applies to all locally
manufactured cigarette brands similarly situated as the cigarette brands
aforementioned. While it is true that only "Hope," "More" and "Champion" cigarettes
are actually determined as locally manufactured cigarettes bearing a foreign brand,
RMC 37-93 does not state that ONLY cigarettes fall under such classification to the
exclusion of other cigarettes similarly situated. Otherwise stated, RMC 37-93 does
not exclude the coverage of other cigarettes similarly situated. Otherwise stated,
RMC 37-93 does not exclude the coverage of other cigarettes similarly situated as
locally manufactured cigarettes bearing a foreign brand. Hence, in itself, RMC 37-93
is not discriminatory. 16

Both the respondent Court of Appeals and the Court of Tax Appeals held that the questioned
Circular reclassifying "Hope," "More" and "Champion" cigarettes, is defective, invalid and
unenforceable and has rendered the assessment against private respondent of deficiency ad
valorem excise taxes to be without legal basis. The majority agrees with private respondent and
respondent Courts. As the foregoing opinion chronicles the fatal flaws in private respondent's
arguments, it becomes more apparent that the questioned Circular is in fact a valid and subsisting
interpretative ruling that the petitioner had power to promulgate and enforce.

WHEREFORE, I vote to grant the petition and set aside the decisions of the Court of Tax Appeals
and the Court of Appeals, respectively, and to reinstate the decision of petitioner Commissioner of
Internal Revenue denying private respondent's request for a review, reconsideration and recall of
Revenue Memorandum Circular No. 37-93 dated July 1, 1993.

Padilla, J., concurs.

Footnotes

1 Through Associate Justices Justo P. Torres, Jr. ( ponente ), Corona Ibay-Somera and
Conrado M. Vasquez, Jr. (members).

2 Penned by Presiding Judge Ernesto D. Acosta and concurred in by Associate Judges

Ramon O. De Veyra and Manuel K. Gruba.

3 Emphasis supplied. Rollo, pp. 55-58.

4 Since the institution of Executive Order No. 22 on 23 June 1986.

5 Rollo, p. 56.

6 An Act Revising The Excise Tax Base, Allocating a Portion Of The Incremental Revenue
Collected For The Emergency Employment Program For Certain Workers Amending For The
Purpose Section 142 Of The National Internal Revenue Code, As Amended, And For Other
Purposes.

7 Official Gazette, Vol. 89., No. 32, 09 August 1993, p. 4476.

8 The petition was subsequently amended on 12 August 1993.

9 Rollo, pp. 115-116.

10 Rollo, pp. 21-22.

11 238 SCRA 63.

12 Emphasis supplied. At p. 69.

13 Rollo, pp. 65-66.

14 See Juan Luna Subdivision vs. Sarmiento, 91 Phil. 371.

15 City of Baguio vs. De Leon, 25 SCRA 938.

16 Ang Tibay vs. Court of Industrial Relations, 69 Phil. 635.

17 Rollo, pp. 97-98.

18 Rollo, pp. 98-100.

Bellosillo, J.; concurring

1 See penultimate paragraph of RMC 37-93.

2 Decision penned by Presiding Judge Ernesto D. Acosta, concurred in by Associate Jusges

Manuel K. Gruba and Ramon O. De Veyra.

3 Special Thirteenth Division; Decision penned by Associate Justice Justo P. Torres as

Chairman, concurred in by Associate Justices Corona Ibay-Somera and Conrado M.
Vasquez, Jr.

4 G.R. No. 108524, 10 November 1994; 238 SCRA 63.

5 Petition for Review, p. 28; Rollo, p. 38.

6 No. L-63915, 29 December 1986, 146 SCRA 446.

7 Hormed v. Helvering, 312 U.S. 552; Reetz v. Michigan, 188 U.S. 505; Gudmindson v.
Cardollo, 126 F 2d. 521.

8 Collins v. Selectmen of Brookline, 91 N.E. 2d, 747.

9 69 Phil. 635 (1940).

Hermosisima, Jr., J., dissenting

1 Phil. Association of Service Exporters, Inc. vs. Torres, 212 SCRA 304.

2 Entitled, "An Act Revising the Excise Tax Base, Allocting a Portion of the Incremental
Revenue Collected for the Emergency Employment Program for Certain Workers Amending
for the Purpose Section 142 of the National Internal Revenue Code, as amended, and for
Other Purposes," 89 O.G. 4475-4480, August 9, 1993.

3 Petition for Review dated May 9, 1995, p. 38, Rollo, p. 48.

4 Tan Guan vs. Court of Appeals, 19 SCRA 903; Compania General de Tabacos de Filipinas
vs. City of Manila, 8 SCRA 367.

5 1 Am. Jur. 2d., p. 816.

6 73 C.J.S. pp. 295-296.

7 1 Am. Jur. 2d., p. 890.

8 1 Am. Jur. 2d., p. 892.

9 de Leon, Hector, Administrative Law, 1989 ed., p. 67.

10 Victorias Milling Co. Inc. vs. Social Security Commission, 114 Phil. 558.

11 de Leon, supra, p. 69.

12 Comment of Fortune Tobacco Corporation, p. 52; Rollo, p. 199.

13 Tanada vs. Tuvera, 146 SCRA 454.

14 Misamis Oriental Association of Coco Traders, Inc. vs. Department of Finance Secretary,
238 SCRA 63.

15 Ibid.

16 Petition for Review dated May 9, 1995, pp. 28-29, Rollo, pp. 38-39.
 Republic of the Philippines
SUPREME COURT
Manila

EN BANC

G.R. No. L-23794 February 17, 1968

ORMOC SUGAR COMPANY, INC., plaintiff-appellant,

vs.
THE TREASURER OF ORMOC CITY, THE MUNICIPAL BOARD OF ORMOC CITY, HON.
ESTEBAN C. CONEJOS as Mayor of Ormoc City and ORMOC CITY, defendants-appellees.

Ponce Enrile, Siguion Reyna, Montecillo & Belo and Teehankee, Carreon & Tañada for plaintiff-
appellant.
Ramon O. de Veyra for defendants-appellees.

BENGZON, J.P., J.:

On January 29, 1964, the Municipal Board of Ormoc City passed 1 Ordinance No. 4, Series of
1964, imposing "on any and all productions of centrifugal sugar milled at the Ormoc Sugar
Company, Inc., in Ormoc City a municipal tax equivalent to one per centum (1%) per export sale to
the United States of America and other foreign countries." 2

Payments for said tax were made, under protest, by Ormoc Sugar Company, Inc. on March
20, 1964 for P7,087.50 and on April 20, 1964 for P5,000, or a total of P12,087.50.

On June 1, 1964, Ormoc Sugar Company, Inc. filed before the Court of First Instance of Leyte,
with service of a copy upon the Solicitor General, a complaint 3 against the City of Ormoc as well as
its Treasurer, Municipal Board and Mayor, alleging that the afore-stated ordinance is unconstitutional
for being violative of the equal protection clause (Sec. 1[1], Art. III, Constitution) and the rule of
uniformity of taxation (Sec. 22[1]), Art. VI, Constitution), aside from being an export tax forbidden
under Section 2287 of the Revised Administrative Code. It further alleged that the tax is neither a
production nor a license tax which Ormoc City under Section 15-kk of its charter and under Section 2
of Republic Act 2264, otherwise known as the Local Autonomy Act, is authorized to impose; and that
the tax amounts to a customs duty, fee or charge in violation of paragraph 1 of Section 2 of Republic
Act 2264 because the tax is on both the sale and export of sugar.

Answering, the defendants asserted that the tax ordinance was within defendant city's power
to enact under the Local Autonomy Act and that the same did not violate the afore-cited
constitutional limitations. After pre-trial and submission of the case on memoranda, the Court of First
Instance, on August 6, 1964, rendered a decision that upheld the constitutionality of the ordinance
and declared the taxing power of defendant chartered city broadened by the Local Autonomy Act to
include all other forms of taxes, licenses or fees not excluded in its charter.

Appeal therefrom was directly taken to Us by plaintiff Ormoc Sugar Company, Inc. Appellant
alleges the same statutory and constitutional violations in the aforesaid taxing ordinance mentioned
earlier.

Section 1 of the ordinance states: "There shall be paid to the City Treasurer on any and all
productions of centrifugal sugar milled at the Ormoc Sugar Company, Incorporated, in Ormoc City, a
municipal tax equivalent to one per centum (1%) per export sale to the United States of America and
other foreign countries." Though referred to as a tax on the export of centrifugal sugar produced at
Ormoc Sugar Company, Inc. For production of sugar alone is not taxable; the only time the tax
applies is when the sugar produced is exported.

Appellant questions the authority of the defendant Municipal Board to levy such an export tax,
in view of Section 2287 of the Revised Administrative Code which denies from municipal councils
the power to impose an export tax. Section 2287 in part states: "It shall not be in the power of the
municipal council to impose a tax in any form whatever, upon goods and merchandise carried into
the municipality, or out of the same, and any attempt to impose an import or export tax upon such
goods in the guise of an unreasonable charge for wharfage use of bridges or otherwise, shall be
void."

Subsequently, however, Section 2 of Republic Act 2264 effective June 19, 1959, gave
chartered cities, municipalities and municipal districts authority to levy for public purposes just and
uniform taxes, licenses or fees. Anent the inconsistency between Section 2287 of the Revised
Administrative Code and Section 2 of Republic Act 2264, this Court, in Nin Bay Mining Co. v.
Municipality of Roxas 4 held the former to have been repealed by the latter. And expressing Our
awareness of the transcendental effects that municipal export or import taxes or licenses will have
on the national economy, due to Section 2 of Republic Act 2264, We stated that there was no other
alternative until Congress acts to provide remedial measures to forestall any unfavorable results.

The point remains to be determined, however, whether constitutional limits on the power of
taxation, specifically the equal protection clause and rule of uniformity of taxation, were infringed.

The Constitution in the bill of rights provides: ". . . nor shall any person be denied the equal
protection of the laws." (Sec. 1 [1], Art. III) In Felwa vs. Salas, 5 We ruled that the equal protection
clause applies only to persons or things identically situated and does not bar a reasonable
classification of the subject of legislation, and a classification is reasonable where (1) it is based on
substantial distinctions which make real differences; (2) these are germane to the purpose of the
law; (3) the classification applies not only to present conditions but also to future conditions which
are substantially identical to those of the present; (4) the classification applies only to those who
belong to the same class.

A perusal of the requisites instantly shows that the questioned ordinance does not meet them,
for it taxes only centrifugal sugar produced and exported by the Ormoc Sugar Company, Inc. and
none other. At the time of the taxing ordinance's enactment, Ormoc Sugar Company, Inc., it is true,
was the only sugar central in the city of Ormoc. Still, the classification, to be reasonable, should be in
terms applicable to future conditions as well. The taxing ordinance should not be singular and
exclusive as to exclude any subsequently established sugar central, of the same class as plaintiff,
for the coverage of the tax. As it is now, even if later a similar company is set up, it cannot be subject
to the tax because the ordinance expressly points only to Ormoc City Sugar Company, Inc. as the
entity to be levied upon.

Appellant, however, is not entitled to interest; on the refund because the taxes were not
arbitrarily collected (Collector of Internal Revenue v. Binalbagan). 6 At the time of collection, the
ordinance provided a sufficient basis to preclude arbitrariness, the same being then presumed
constitutional until declared otherwise.

WHEREFORE, the decision appealed from is hereby reversed, the challenged ordinance is
declared unconstitutional and the defendants-appellees are hereby ordered to refund the
P12,087.50 plaintiff-appellant paid under protest. No costs. So ordered.
Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal, Zaldivar, Sanchez, Castro, Angeles and
Fernando, JJ., concur. 1äw phï1.ñët

Footnotes

1 Resolution No. 30, Series of 1964.

2 Section 1, emphasis supplied.

3An action for declaratory judgment was also filed on May 23, 1964 (Civil Case No. 665-0)
but this and the present case were tried jointly.

4 L-20125, July 20, 1965.

5 L-26511, Oct. 29, 1966.

6 L-12752, Jan. 30, 1965.

 Republic of the Philippines
SUPREME COURT
Manila

SECOND DIVISION

G.R. No. 108524 November 10, 1994

MISAMIS ORIENTAL ASSOCIATION OF COCO TRADERS, INC., petitioner,

vs.
DEPARTMENT OF FINANCE SECRETARY, COMMISSIONER OF THE BUREAU OF INTERNAL
REVENUE (BIR), AND REVENUE DISTRICT OFFICER, BIR MISAMIS ORIENTAL, respondents.

Damasing Law Office for petitioner.

MENDOZA, J.:

This is a petition for prohibition and injunction seeking to nullify Revenue Memorandum Circular No.
47-91 and enjoin the collection by respondent revenue officials of the Value Added Tax (VAT) on the
sale of copra by members of petitioner organization. 1

Petitioner Misamis Oriental Association of Coco Traders, Inc. is a domestic corporation whose
members, individually or collectively, are engaged in the buying and selling of copra in Misamis
Oriental. The petitioner alleges that prior to the issuance of Revenue Memorandum Circular 47-91
on June 11, 1991, which implemented VAT Ruling 190-90, copra was classified as agricultural food
product under $ 103(b) of the National Internal Revenue Code and, therefore, exempt from VAT at
all stages of production or distribution.

Respondents represent departments of the executive branch of government charged with the
generation of funds and the assessment, levy and collection of taxes and other imposts.

The pertinent provision of the NIRC states:

Sec. 103. Exempt Transactions. — The following shall be exempt from the value-
added tax:

(a) Sale of nonfood agricultural, marine and forest products in their original state by
the primary producer or the owner of the land where the same are produced;

(b) Sale or importation in their original state of agricultural and marine food products,
livestock and poultry of a kind generally used as, or yielding or producing foods for
human consumption, and breeding stock and genetic material therefor;

Under §103(a), as above quoted, the sale of agricultural non-food products in their original state is
exempt from VAT only if the sale is made by the primary producer or owner of the land from which
the same are produced. The sale made by any other person or entity, like a trader or dealer, is not
exempt from the tax. On the other hand, under §103(b) the sale of agricultural food products in their
original state is exempt from VAT at all stages of production or distribution regardless of who the
seller is.

The question is whether copra is an agricultural food or non-food product for purposes of this
provision of the NIRC. On June 11, 1991, respondent Commissioner of Internal Revenue issued the
circular in question, classifying copra as an agricultural non-food product and declaring it "exempt
from VAT only if the sale is made by the primary producer pursuant to Section 103(a) of the Tax
Code, as amended." 2

The reclassification had the effect of denying to the petitioner the exemption it previously enjoyed
when copra was classified as an agricultural food product under §103(b) of the NIRC. Petitioner
challenges RMC No. 47-91 on various grounds, which will be presently discussed although not in the
order raised in the petition for prohibition.

First. Petitioner contends that the Bureau of Food and Drug of the Department of Health and not the
BIR is the competent government agency to determine the proper classification of food products.
Petitioner cites the opinion of Dr. Quintin Kintanar of the Bureau of Food and Drug to the effect that
copra should be considered "food" because it is produced from coconut which is food and 80% of
coconut products are edible.

On the other hand, the respondents argue that the opinion of the BIR, as the government agency
charged with the implementation and interpretation of the tax laws, is entitled to great respect.

We agree with respondents. In interpreting §103(a) and (b) of the NIRC, the Commissioner of
Internal Revenue gave it a strict construction consistent with the rule that tax exemptions must be
strictly construed against the taxpayer and liberally in favor of the state. Indeed, even Dr. Kintanar
said that his classification of copra as food was based on "the broader definition of food which
includes agricultural commodities and other components used in the manufacture/processing of
food." The full text of his letter reads:

10 April 1991

Mr. VICTOR A. DEOFERIO, JR.

Chairman VAT Review Committee
Bureau of Internal Revenue
Diliman, Quezon City

Dear Mr. Deoferio:

This is to clarify a previous communication made by this Office about copra in a letter
dated 05 December 1990 stating that copra is not classified as food. The statement
was made in the context of BFAD's regulatory responsibilities which focus mainly on
foods that are processed and packaged, and thereby copra is not covered.

However, in the broader definition of food which include agricultural commodities and
other components used in the manufacture/ processing of food, it is our opinion that
copra should be classified as an agricultural food product since copra is produced
from coconut meat which is food and based on available information, more than 80%
of products derived from copra are edible products.
 Very
truly
yours,

QUINTI
N L.
KINTA
NAR,
M.D.,
Ph.D.
Directo
r
Assista
nt
Secret
ary of
Health
for
Standa
rds and
Regula
tions

Moreover, as the government agency charged with the enforcement of the law, the opinion of the
Commissioner of Internal Revenue, in the absence of any showing that it is plainly wrong, is entitled
to great weight. Indeed, the ruling was made by the Commissioner of Internal Revenue in the
exercise of his power under § 245 of the NIRC to "make rulings or opinions in connection with the
implementation of the provisions of internal revenue laws, including rulings on the classification of
articles for sales tax and similar purposes."

Second. Petitioner complains that it was denied due process because it was not heard before the
ruling was made. There is a distinction in administrative law between legislative rules and
interpretative rules. 3 There would be force in petitioner's argument if the circular in question were in
the nature of a legislative rule. But it is not. It is a mere interpretative rule.

The reason for this distinction is that a legislative rule is in the nature of subordinate legislation,
designed to implement a primary legislation by providing the details thereof. In the same way that
laws must have the benefit of public hearing, it is generally required that before a legislative rule is
adopted there must be hearing. In this connection, the Administrative Code of 1987 provides:

Public Participation. — If not otherwise required by law, an agency shall, as far as

practicable, publish or circulate notices of proposed rules and afford interested
parties the opportunity to submit their views prior to the adoption of any rule.

(2) In the fixing of rates, no rule or final order shall be valid unless the proposed rates
shall have been published in a newspaper of general circulation at least two (2)
weeks before the first hearing thereon.

(3) In case of opposition, the rules on contested cases shall be observed. 4

In addition such rule must be published.5 On the other hand, interpretative rules are designed to
provide guidelines to the law which the administrative agency is in charge of enforcing.
Accordingly, in considering a legislative rule a court is free to make three inquiries: (i) whether the
rule is within the delegated authority of the administrative agency; (ii) whether it is reasonable; and
(iii) whether it was issued pursuant to proper procedure. But the court is not free to substitute its
judgment as to the desirability or wisdom of the rule for the legislative body, by its delegation of
administrative judgment, has committed those questions to administrative judgments and not to
judicial judgments. In the case of an interpretative rule, the inquiry is not into the validity but into the
correctness or propriety of the rule. As a matter of power a court, when confronted with an
interpretative rule, is free to (i) give the force of law to the rule; (ii) go to the opposite extreme and
substitute its judgment; or (iii) give some intermediate degree of authoritative weight to the
interpretative rule. 6

In the case at bar, we find no reason for holding that respondent Commissioner erred in not
considering copra as an "agricultural food product" within the meaning of § 103(b) of the NIRC. As
the Solicitor General contends, "copra per se is not food, that is, it is not intended for human
consumption. Simply stated, nobody eats copra for food." That previous Commissioners considered
it so, is not reason for holding that the present interpretation is wrong. The Commissioner of Internal
Revenue is not bound by the ruling of his predecessors. 7 To the contrary, the overruling of decisions
is inherent in the interpretation of laws.

Third. Petitioner likewise claims that RMC No. 47-91 is discriminatory and violative of the equal
protection clause of the Constitution because while coconut farmers and copra producers are
exempt, traders and dealers are not, although both sell copra in its original state. Petitioners add that
oil millers do not enjoy tax credit out of the VAT payment of traders and dealers.

The argument has no merit. There is a material or substantial difference between coconut farmers
and copra producers, on the one hand, and copra traders and dealers, on the other. The
former produce and sell copra, the latter merely sell copra. The Constitution does not forbid the
differential treatment of persons so long as there is a reasonable basis for classifying them
differently. 8

It is not true that oil millers are exempt from VAT. Pursuant to § 102 of the NIRC, they are subject to
10% VAT on the sale of services. Under § 104 of the Tax Code, they are allowed to credit the input
tax on the sale of copra by traders and dealers, but there is no tax credit if the sale is made directly
by the copra producer as the sale is VAT exempt. In the same manner, copra traders and dealers
are allowed to credit the input tax on the sale of copra by other traders and dealers, but there is no
tax credit if the sale is made by the producer.

Fourth. It is finally argued that RMC No. 47-91 is counterproductive because traders and dealers
would be forced to buy copra from coconut farmers who are exempt from the VAT and that to the
extent that prices are reduced the government would lose revenues as the 10% tax base is
correspondingly diminished.

This is not so. The sale of agricultural non-food products is exempt from VAT only when made by the
primary producer or owner of the land from which the same is produced, but in the case of
agricultural food products their sale in their original state is exempt at all stages of production or
distribution. At any rate, the argument that the classification of copra as agricultural non-food product
is counterproductive is a question of wisdom or policy which should be addressed to respondent
officials and to Congress.

WHEREFORE, the petition is DISMISSED.

SO ORDERED.
Narvasa, C.J., Regalado and Puno, JJ., concur.

#Footnotes

1 The value-added tax is a percentage tax on the sale, barter, exchange or

importation of goods or services. (NIRC, §99) Insofar as the sale, barter or exchange
of goods is concerned, the tax is equivalent to 10% of the gross selling price or gross
value in money of the goods sold, bartered or exchanged, such tax to be paid by the
seller or transferor. (§ 100(a)) The tax is determined as follows:

(d) Determination of the tax. — (1) Tax billed as separate item in the invoice. If the
tax is billed as a separate item in the invoice, the tax shall be based on the gross
selling price, excluding the tax. "Gross selling price" means the total amount of
money or its equivalent which the purchaser pays or is obligated to pay to the seller
in the consideration of the sale, barter or exchange of the goods, excluding the
value-added tax. The excise tax, if any, on such goods shall form part of the gross
selling price.

(2) Tax not billed separately or is billed erroneously in the

invoice. — In case the tax is not billed separately or is billed erroneously in the
invoice, the tax shall be determined by multiplying the gross selling price, including
the amount intended by the seller to cover the tax or the tax billed erroneously, by
the factor 1/11 or such factor as may be prescribed by regulations in case of persons
partially exempt under special laws.

(3) Sales returns, allowances and sales discounts. — The value of goods sold and
subsequently returned or for which allowances were granted by a VAT-registered
person may be deducted from the gross sales or receipts for the quarter in which a
refund is made or a credit memorandum or refund is issued. Sales discounts granted
and indicated in the invoice at the time of sale may be excluded from the gross sales
within the same quarter. (§100(d))

2 This circular is based on VAT Ruling No. 190-90 dated August 17, 1990 which
revoked VAT Ruling No. 009-88 and VAT Ruling No. 279-88, June 30, 1988,
classifying copra as an agricultural food product.

3 See Victorias Milling Co. v. Social Security Commission, 114 Phil. 555 (1962);
Philippine Blooming Mills v. Social Security System, 124 Phil. 499 (1966).

4 Bk. VII, Ch. 2, § 9.

5 Tañada v. Tuvera, 146 SCRA 446 (1986). See Victorias Milling Co. v.
SSC, supra note 3.

6 K. DAVIS, Administrative Law 116 (1965).

7 Petitioner's claim that RMC No. 47-91 erroneously revoked irrelevant VAT rulings
of the BIR is not correct. RMC No. 47-91 revoked VAT Rulings No. 009-88 and No.
279-88, which dealt with the question whether copra is an agricultural food or non-
food product. VAT ruling No. 009-88 held that "copra as an agricultural product is
exempt from VAT in all stages of distribution." On the other hand, VAT Ruling No.
279-88 treated "copra . . . as an agricultural food product in its original state" and,
therefore, "exempt from VAT under Section 103(b) of the TAX Code, as amended by
EO 273 regardless of whether the sale is made by producer or subsequent sale."

8 Kapatiran ng mga Naglilingkod sa Pamahalaan ng Pilipinas, Inc. v. Tan, 163 SCRA

371 (1988) (sustaining the validity of E.O. 273 adopting the VAT); Sison, Jr. v.
Ancheta, 130 SCRA 653 (1984) (sustaining the validity of B.P. Blg. 135 providing for
taxable income taxation).