1.

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

WALTER LUTZ, as Judicial Administrator of the Intestate Estate of the deceased Antonio
Jayme Ledesma, plaintiff-appellant,
vs.
J. ANTONIO ARANETA, as the Collector of Internal Revenue, defendant-appellee.

Ernesto J. Gonzaga for appellant.

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

REYES, J.B L., J.:

This case was initiated in the Court of First Instance of Negros Occidental to test the legality of the
taxes imposed by Commonwealth Act No. 567, otherwise known as the Sugar Adjustment Act.

Promulgated in 1940, the law in question opens (section 1) with a declaration of emergency, due to
the threat to our industry by the imminent imposition of export taxes upon sugar as provided in the
Tydings-McDuffe Act, and the "eventual loss of its preferential position in the United States market";
wherefore, the national policy was expressed "to obtain a readjustment of the benefits derived from
the sugar industry by the component elements thereof" and "to stabilize the sugar industry so as to
prepare it for the eventuality of the loss of its preferential position in the United States market and
the imposition of the export taxes."

In section 2, Commonwealth Act 567 provides for an increase of the existing tax on the manufacture
of sugar, on a graduated basis, on each picul of sugar manufactured; while section 3 levies on
owners or persons in control of lands devoted to the cultivation of sugar cane and ceded to others
for a consideration, on lease or otherwise —

a tax equivalent to the difference between the money value of the rental or consideration
collected and the amount representing 12 per centum of the assessed value of such land.

According to section 6 of the law —

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

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

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

Third, to limit the production of sugar to areas more economically suited to the production
thereof; and

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

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

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

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

As stated in Johnson vs. State ex rel. Marey, with reference to the citrus industry in Florida —
 The protection of a large industry constituting one of the great sources of the state's wealth
and therefore directly or indirectly affecting the welfare of so great a portion of the population
of the State is affected to such an extent by public interests as to be within the police power
of the sovereign. (128 Sp. 857).

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

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

From the point of view we have taken it appears of no moment that the funds raised under the Sugar
Stabilization Act, now in question, should be exclusively spent in aid of the sugar industry, since it is
that very enterprise that is being protected. It may be that other industries are also in need of similar
protection; that the legislature is not required by the Constitution to adhere to a policy of "all or
none." As ruled in Minnesota ex rel. Pearson vs. Probate Court, 309 U. S. 270, 84 L. Ed. 744, "if the
law presumably hits the evil where it is most felt, it is not to be overthrown because there are other
instances to which it might have been applied;" and that "the legislative authority, exerted within its
proper field, need not embrace all the evils within its reach" (N. L. R. B. vs. Jones & Laughlin Steel
Corp. 301 U. S. 1, 81 L. Ed. 893).

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

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

2.
G.R. No. 92585 May 8, 1992

CALTEX PHILIPPINES, INC., petitioner,

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

DAVIDE, JR., J.:

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

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

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

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

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

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

duty imposed on petroleum products subject to tax under this Decree
arising from exchange rate adjustment, as may be determined by the
Minister of Finance in consultation with the Board of Energy;
 b) Any increase in the tax collection as a result of the lifting of tax
exemptions of government corporations, as may be determined by
the Minister of Finance in consultation with the Board of Energy;

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

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

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

The Fund herein created shall be used for the following:

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

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

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

i. Reduction in oil company take as directed by the

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

ii. Reduction in internal ad valorem taxes as a result

of foregoing government mandated price reductions;

iii. Other factors as may be determined by the Ministry

of Finance to result in cost underrecovery.

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

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

On 2 February 1989, the COA sent a letter to Caltex Philippines, Inc. (CPI), hereinafter referred to as
Petitioner, directing the latter to remit to the OPSF its collection, excluding that unremitted for the
years 1986 and 1988, of the additional tax on petroleum products authorized under the aforesaid
Section 8 of P.D. No. 1956 which, as of 31 December 1987, amounted to P335,037,649.00 and
informing it that, pending such remittance, all of its claims for reimbursement from the OPSF shall be
held in abeyance. 6
On 9 March 1989, the COA sent another letter to petitioner informing it that partial verification with
the OEA showed that the grand total of its unremitted collections of the above tax is
P1,287,668,820.00, broken down as follows:

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

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

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

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

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

We, therefore, very respectfully propose the following:

(1) Any procedural arrangement acceptable to COA to facilitate

monitoring of payments and reimbursements will be administered by
the ERB/Finance Dept./OEA, as agencies designated by law to
administer/regulate OPSF.

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

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

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

expeditiously to preclude further accumulation of reimbursement from
OPSF.

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

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

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

Upon a circumspect evaluation of the circumstances herein obtaining, this

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

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

Dear Atty. dela Paz:

Pursuant to the Commission on Audit Decision No. 921 dated June 7, 1989, and
based on our initial verification of documents submitted to us by your Office in
support of Caltex (Philippines), Inc. offsets (sic) for the year 1986 to May 31, 1989,
as well as its outstanding claims against the Oil Price Stabilization Fund (OPSF) as
of May 31, 1989, we are pleased to inform your Office that Caltex (Philippines), Inc.
shall be required to remit to OPSF an amount of P1,505,668,906, representing
remittances to the OPSF which were offset against its claims reimbursements (net of
unsubmitted claims). In addition, the Commission hereby authorize (sic) the Office of
Energy Affairs (OEA) to cause payment of P1,959,182,612 to Caltex, representing
claims initially allowed in audit, the details of which are presented hereunder: . . .
As presented in the foregoing computation the disallowances totalled P387,683,535,
which included P130,420,235 representing those claims disallowed by OEA, details
of which is (sic) shown in Schedule 1 as summarized as follows:

Disallowance of COA
Particulars Amount

Recovery of financing charges P162,728,475 /a

Product sales 48,402,398 /b
Inventory losses
Borrow loan arrangement 14,034,786 /c
Sales to Atlas/Marcopper 32,097,083 /d
Sales to NPC 558
——————
P257,263,300

Disallowances of OEA 130,420,235

————————— ——————
Total P387,683,535

The reasons for the disallowances are discussed hereunder:

a. Recovery of Financing Charges

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

b. Product Sales –– Sales to International Vessels/Airlines

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

c. Inventory losses –– Settlement of Ad Valorem

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

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

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

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

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

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

xxx xxx xxx

B) ADMINISTRATIVE INTERPRETATIONS IN THE COURSE OF EXERCISE OF

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

xxx xxx xxx

C) LEGAL BASIS FOR RETENTION OF OFFSET ARRANGEMENT, AS

AUTHORIZED BY THE EXECUTIVE BRANCH OF GOVERNMENT, REMAINS
VALID.

xxx xxx xxx

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

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

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

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

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

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

With respect to product sales or those arising from sales to international vessels or
airlines, . . ., it is believed that export sales (product sales) are entitled to claim
refund from the OPSF.

As regard your claim for underrecovery arising from inventory losses, . . . It is the
considered view of this Commission that the OPSF is not liable to refund such surtax
on inventory losses because these are paid to BIR and not OPSF, in view of which
CPI (CALTEX) should seek refund from BIR. . . .

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

Upon a circumspect evaluation, this Commission believes and so holds that the CPI
(CALTEX) has no authority to claim reimbursement for this uncollected OPSF impost
because LOI 1416 dated July 17, 1984, which exempts distressed mining companies
from "all taxes, duties, import fees and other charges" was issued when OPSF was
not yet in existence and could not have contemplated OPSF imposts at the time of its
formulation. Moreover, it is evident that OPSF was not created to aid distressed
mining companies but rather to help the domestic oil industry by stabilizing oil prices.
Unsatisfied with the decision, petitioner filed on 28 March 1990 the present petition wherein it
imputes to the COA the commission of the following errors: 16

RESPONDENT COMMISSION ERRED IN DISALLOWING RECOVERY OF

FINANCING CHARGES FROM THE OPSF.

II

RESPONDENT COMMISSION ERRED IN DISALLOWING

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

III

RESPONDENT COMMISSION ERRED IN DENYING CPI's CLAIMS FOR

REIMBURSEMENT ON SALES TO ATLAS AND MARCOPPER.

IV

RESPONDENT COMMISSION ERRED IN PREVENTING CPI FROM EXERCISING

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

RESPONDENT COMMISSION ERRED IN DISALLOWING CPI's CLAIMS WHICH

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

In the Resolution of 5 April 1990, this Court required the respondents to comment on the petition
within ten (10) days from notice. 18

On 6 September 1990, respondents COA and Commissioners Fernandez and Cruz, assisted by the
Office of the Solicitor General, filed their Comment. 19

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

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

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

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

(1) In view of the expanded role of the OPSF pursuant to Executive Order No. 137, which added a
second purpose, to wit:
 2) To reimburse the oil companies for possible cost underrecovery incurred as a
result of the reduction of domestic prices of petroleum products. The magnitude of
the underrecovery, if any, shall be determined by the Ministry of Finance. "Cost
underrecovery" shall include the following:

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

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

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

government mandated price reductions;

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

result in cost underrecovery.

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

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

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

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

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

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

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

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

Less than 180 days None

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

The above rates shall be subject to review every sixty

days. 22

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

HON. VICENTE T. PATERNO

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

Dear Sir:

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

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

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

B. FINANCE CHARGES

1. Oil companies shall be allowed to recover financing charges

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

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

Less than 180 days None

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

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

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

Following are the supplemental rules to Department of Finance Circular No. 1-87
dated February 18, 1987 which allowed the recovery of financing charges directly
from the Oil Price Stabilization Fund. (OPSF):

1. The Claim for reimbursement shall be on a per shipment basis.

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

3. The reimbursement shall be on the form of reimbursement

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

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

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

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

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

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

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

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

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

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

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

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

We find no merit in the first assigned error.

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

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

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

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

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

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

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

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

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

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

The ruling on this particular point, quoted by petitioner from the cases of Guevarra
vs. Gimenez 32 and Ramos vs. Aquino, 33 are no longer controlling as the two (2) were decided in the
light of the 1935 Constitution.
There can be no doubt, however, that the audit power of the Auditor General under the 1935
Constitution and the Commission on Audit under the 1973 Constitution authorized them to
disallow illegal expenditures of funds or uses of funds and property. Our present Constitution retains
that same power and authority, further strengthened by the definition of the COA's general
jurisdiction in Section 26 of the Government Auditing Code of the Philippines 34 and Administrative
Code of 1987. 35 Pursuant to its power to promulgate accounting and auditing rules and regulations
for the prevention of irregular, unnecessary, excessive or extravagant expenditures or uses of
funds, 36 the COA promulgated on 29 March 1977 COA Circular No. 77-55. Since the COA is
responsible for the enforcement of the rules and regulations, it goes without saying that failure to
comply with them is a ground for disapproving the payment of the proposed expenditure. As
observed by one of the Commissioners of the 1986 Constitutional Commission, Fr. Joaquin G.
Bernas: 37

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

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

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

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

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

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

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

mandated price reductions;

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

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

Both views are unacceptable to this Court.

The rule of ejusdem generis states that "[w]here general words follow an enumeration of persons or
things, by words of a particular and specific meaning, such general words are not to be construed in
their widest extent, but are held to be as applying only to persons or things of the same kind or class
as those specifically mentioned. 38 A reading of subparagraphs (i) and (ii) easily discloses that they
do not have a common characteristic. The first relates to price reduction as directed by the Board of
Energy while the second refers to reduction in internal ad 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 cost underrecovery only if such were incurred as a result of the
reduction of domestic prices of petroleum products.

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

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

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

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

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

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

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

Hence, petitioner can recover its claim arising from sales of petroleum products to the National
Power Corporation.

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

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

In sustaining COA's stand, respondents vigorously maintain that LOI 1416 could not have intended
to exempt said distressed mining companies from the payment of OPSF dues for the following
reasons:
 a. LOI 1416 granting the alleged exemption was issued on July 17, 1984. P.D. 1956
creating the OPSF was promulgated on October 10, 1984, while E.O. 137, amending
P.D. 1956, was issued on February 25, 1987.

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

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

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

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

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

In applying said provision, this Court ruled in the case of Tañada vs. Tuvera: 46

WHEREFORE, the Court hereby orders respondents to publish in the Official

Gazette all unpublished presidential issuances which are of general application, and
unless so published they shall have no binding force and effect.

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

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

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

xxx xxx xxx

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

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

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

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

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

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

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

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

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

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

Furthermore, petitioner cites, as bases for offsetting, the provisions of the New Civil Code on
compensation and Section 21, Book V, Title I-B of the Revised Administrative Code which provides
for "Retention of Money for Satisfaction of Indebtedness to Government." 52 Petitioner also mentions
communications from the Board of Energy and the Department of Finance that supposedly authorize
compensation.
Respondents, on the other hand, citing Francia vs. IAC and Fernandez, 53 contend that there can be
no offsetting of taxes against the claims that a taxpayer may have against the government, as taxes
do not arise from contracts or depend upon the will of the taxpayer, but are imposed by law.
Respondents also allege that petitioner's reliance on Section 21, Book V, Title I-B of the Revised
Administrative Code, is misplaced because "while this provision empowers the COA to withhold
payment of a government indebtedness to a person who is also indebted to the government and
apply the government indebtedness to the satisfaction of the obligation of the person to the
government, like authority or right to make compensation is not given to the private person." 54 The
reason for this, as stated in Commissioner of Internal Revenue vs. Algue, Inc., 55 is that money due
the government, either in the form of taxes or other dues, is its lifeblood and should be collected
without hindrance. Thus, instead of giving petitioner a reason for compensation or set-off, the
Revised Administrative Code makes it the respondents' duty to collect petitioner's indebtedness to
the OPSF.

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

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

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

xxx xxx xxx

(3) That no amount of the Petroleum Price Standby Fund shall be

used to pay any oil company which has an outstanding obligation to
the Government without said obligation being offset first, subject to
the requirements of compensation or offset under the Civil Code.

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

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

It is settled that a taxpayer may not offset taxes due from the claims that he may have against the
government. 58 Taxes cannot be the subject of compensation because the government and taxpayer
are not mutually creditors and debtors of each other and a claim for taxes is not such a debt,
demand, contract or judgment as is allowed to be set-off. 59

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

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

(2) both debts consist in a sum of :money, or if the things due are consumable, they
be of the same kind, and also of the same quality if the latter has been stated;

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

(4) they be liquidated and demandable;

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

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

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

With costs against petitioner.

SO ORDERED.
3.

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

PHILIPPINE AIRLINES, INC., plaintiff-appellant,

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

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

GUTIERREZ, JR., J.:

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

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

This appeal was certified to us as one involving a pure question of law by the Court of Appeals in a
case where the then Court of First Instance of Rizal dismissed the portion-about complaint for refund
of registration fees paid under protest.

The disputed registration fees were imposed by the appellee, Commissioner Romeo F. Elevate
pursuant to Section 8, Republic Act No. 4136, otherwise known as the Land Transportation and
Traffic Code.

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

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

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

Sometime in 1971, however, appellee Commissioner Romeo F. Elevate issued a regulation requiring
all tax exempt entities, among them PAL to pay motor vehicle registration fees.
Despite PAL's protestations, the appellee refused to register the appellant's motor vehicles unless
the amounts imposed under Republic Act 4136 were paid. The appellant thus paid, under protest,
the amount of P19,529.75 as registration fees of its motor vehicles.

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

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

Appellee Romeo F. Elevate in his capacity as LTC Commissioner, and LOI Carbonell in his capacity
as National Treasurer, filed a motion to dismiss alleging that the complaint states no cause of action.
In support of the motion to dismiss, defendants repatriation the ruling in Republic v. Philippine Rabbit
Bus Lines, Inc., (supra) that registration fees of motor vehicles are not taxes, but regulatory fees
imposed as an incident of the exercise of the police power of the state. They contended that while
Act 4271 exempts PAL from the payment of any tax except two per cent on its gross revenue or
earnings, it does not exempt the plaintiff from paying regulatory fees, such as motor vehicle
registration fees. The resolution of the motion to dismiss was deferred by the Court until after trial on
the merits.

On April 24, 1973, the trial court rendered a decision dismissing the appellant's complaint "moved by
the later ruling laid down by the Supreme Court in the case or Republic v. Philippine Rabbit Bus
Lines, Inc., (supra)." From this judgment, PAL appealed to the Court of Appeals which certified the
case to us.

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

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

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

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

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

The charges prescribed by the Revised Motor Vehicle Law for the registration of
motor vehicles are in section 8 of that law called "fees". But the appellation is no
impediment to their being considered taxes if taxes they really are. For not the name
but the object of the charge determines whether it is a tax or a fee. Geveia speaking,
taxes are for revenue, whereas fees are exceptional. for purposes of regulation and
inspection and are for that reason limited in amount to what is necessary to cover the
cost of the services rendered in that connection. Hence, a charge fixed by statute for
the service to be person,-When by an officer, where the charge has no relation to the
value of the services performed and where the amount collected eventually finds its
way into the treasury of the branch of the government whose officer or officers
collected the chauffeur, is not a fee but a tax."(Cooley on Taxation, Vol. 1, 4th ed., p.
110.)

From the data submitted in the court below, it appears that the expenditures of the
Motor Vehicle Office are but a small portion—about 5 per centum—of the total
collections from motor vehicle registration fees. And as proof that the money
collected is not intended for the expenditures of that office, the law itself provides that
all such money shall accrue to the funds for the construction and maintenance of
public roads, streets and bridges. It is thus obvious that the fees are not collected for
regulatory purposes, that is to say, as an incident to the enforcement of regulations
governing the operation of motor vehicles on public highways, for their express
object is to provide revenue with which the Government is to discharge one of its
principal functions—the construction and maintenance of public highways for
everybody's use. They are veritable taxes, not merely fees.

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

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

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

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

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

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

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

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

Sec. 61. Disposal of Mortgage. Collected—Monies collected under the provisions of

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

It appears clear from the above provisions that the legislative intent and purpose behind the law
requiring owners of vehicles to pay for their registration is mainly to raise funds for the construction
and maintenance of highways and to a much lesser degree, pay for the operating expenses of the
administering agency. On the other hand, the Philippine Rabbit case mentions a presumption arising
from the use of the term "fees," which appears to have been favored by the legislature to distinguish
fees from other taxes such as those mentioned in Section 13 of Rep. Act 4136 which reads:

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

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

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

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

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

Indeed, taxation may be made the implement of the state's police power (Lutz v. Araneta, 98 Phil.
148).

If the purpose is primarily revenue, or if revenue is, at least, one of the real and substantial
purposes, then the exaction is properly called a tax (Umali, Id.) Such is the case of motor vehicle
registration fees. The conclusions become inescapable in view of Section 70(b) of Rep. Act 587
quoted in the Calalang case. The same provision appears as Section 591-593). in the Land
Transportation code. It is patent therefrom that the legislators had in mind a regulatory tax as the law
refers to the imposition on the registration, operation or ownership of a motor vehicle as a "tax or
fee." Though nowhere in Rep. Act 4136 does the law specifically state that the imposition is a tax,
Section 591-593). speaks of "taxes." or fees ... for the registration or operation or on the ownership
of any motor vehicle, or for the exercise of the profession of chauffeur ..." making the intent to
impose a tax more apparent. Thus, even Rep. Act 5448 cited by the respondents, speak of an
"additional" tax," where the law could have referred to an original tax and not one in addition to the
tax already imposed on the registration, operation, or ownership of a motor vehicle under Rep. Act
41383. Simply put, if the exaction under Rep. Act 4136 were merely a regulatory fee, the imposition
in Rep. Act 5448 need not be an "additional" tax. Rep. Act 4136 also speaks of other "fees," such as
the special permit fees for certain types of motor vehicles (Sec. 10) and additional fees for change of
registration (Sec. 11). These are not to be understood as taxes because such fees are very minimal
to be revenue-raising. Thus, they are not mentioned by Sec. 591-593). of the Code as taxes like the
motor vehicle registration fee and chauffers' license fee. Such fees are to go into the expenditures of
the Land Transportation Commission as provided for in the last proviso of see. 61, aforequoted.

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

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

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

The answer is NO.

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

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

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

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

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

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

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

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

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

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

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

xxx xxx xxx

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

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

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

SO ORDERED.
4.

[G.R. No. L-19842. December 26, 1969.]

REPUBLIC OF THE PHILIPPINES, Plaintiff-Appellee, v. CENTRAL AZUCARERA DEL

DANAO, Defendant-Appellant.

Solicitor General Arturo A. Alafriz, Assistant Solicitor General Antonio P. Torres and Solicitor
Jorge R. Coquia for Plaintiff-Appellee.

Tomas Besa and Conrado E. Medina, for Defendant-Appellant.

SYLLABUS

1. CONSTITUTIONAL LAW; POLICE POWER; LEVY FOR PHILSUGIN FUND; EXERCISE OF POLICE POWER. — A
levy of "ten centavos (10) per picul of sugar" authorized under Section 15 of R.A. 632, to be collected by the
PHILSUGIN from sugar cane planters and sugar centrals, the proceeds of which shall constitute the "Sugar
Research and Stabilization Fund" is not so much an exercise of the power of taxation, nor the imposition of a
special assessment, but the exercise of the police power of the state for the general welfare of the entire
country.

2. ID.; ID.; ID.; REMEDY AGAINST UNAUTHORIZED SPENDING OF SAID FUND. — The remedy of the
contributors to the Philsugin Fund the moment PHILSUGIN indulges in unauthorized ventures or projects is
to raise the illegality thereof in appropriate proceedings, either administrative or judicial so that the same
may be enjoined or annulled and those responsible therefor may be properly called to account for certainly.

DECISION

BARREDO, J.:

Appeal by Central Azucarera del Danao from the decision of the Court of First Instance of Manila in its Civil
Case No. 38624, Republic of the Philippines v. Central Azucarera del Danao sentencing herein appellant as
follows: jgc:c hanrobles. com.ph

"FOR THE FOREGOING CONSIDERATIONS, the Court hereby renders judgment sentencing: chan rob 1es vi rtual 1aw lib rary

x x x

"And the Defendant in Civil Case No. 38624 to pay the plaintiff P48,059.77, with 6% interest thereon from
the date of filing of the complaint to the date of payment.

"Defendants’ counterclaims in all these four cases are hereby dismissed." (Pp. 25-26, Rec. on App.)

Actually, there were four cases decided by the trial court in a single decision because they were
consolidated, since they involved identical issues. The three other cases were jointly appealed to this Court
and have already been decided. 1

No new issues are raised in this separate appeal. The following facts found by the court a quo in its joint
decision are undisputed: jg c:chan roble s.com.p h
". . . during the five crop years mentioned in the law, namely, 1951-1952, 1952-1953, 1953-1954, 1954-
1955 and 1955-1956, defendant Bacolod-Murcia Milling Co., Inc., has paid P267,468.00 but left an unpaid
balance of P216,070.50; defendant Ma-ao Sugar Central Co., Inc., has paid P177,613.44 but left an unpaid
balance of P235,800.20; defendant Talisay-Silay Milling Company has paid P251,812.43 but left an unpaid
balance of P208,193.74; and defendant Central Azucarera del Danao made a payment of P48,879.73 but left
an unpaid balance of P48,059.77. There is no question regarding the correctness of the amounts paid and
the amounts that remain unpaid.

"From the evidence presented, on which there is no controversy, it was disclosed that on September 3,
1951, the Philippine Sugar Institute, known as the PHILSUGIN for short, acquired the Insular Sugar Refinery
for a total consideration of P3,070,909.60 payable, in accordance with the deed of sale Exhibit A, in 5
installments from the proceeds of the sugar tax to be collected under Republic Act 632. The evidence further
discloses that the operation of the Insular Sugar Refinery for the years 1954, 1955, 1956 and 1957 was
disastrous in the sense that PHILSUGIN incurred tremendous losses as shown by an examination of the
statements of income and expenses marked Exhibits 5, 6, 7 and 8. Through the testimony of Mr. Cenon Flor
Cruz, former acting general manager of PHILSUGIN and at present technical consultant of said entity,
presented by the defendants as witness, it has been shown that the operation of the Insular Refinery has
consumed 70% of the thinking time and effort of the PHILSUGIN management. . . ." cralaw virtua 1aw lib rary

The sole issue before Us now is the same as that in the other three cases already decided, which is: jgc:c han robles. com.ph

"Contending that the purchase of the Insular Sugar Refinery with money from the Philsugin Fund was not
authorized by Rep. Act 632 and that the continued operation of the said refinery was inimical to their
interests, the appellants refused to continue with their contributions to the said fund. They maintained that
their obligation to contribute or pay to the said Fund subsists only to the limit and extent that they are
benefited by such contributions since Rep. Act 632 is not a revenue measure but an Act which establishes a
‘special assessment.’ Adverting to the finding of the lower court that proceeds of the said Fund had been
used or applied to absorb the "tremendous losses" incurred by Philsugin in its "disastrous operation" of the
said refinery, the appellants herein argue that they should not only be released from their obligation to pay
the said assessment but be refunded, besides, of all that they might have previously paid thereunder.

"The appellants’ thesis is simply to the effect that the ‘10 centavos per picul of sugar’ authorized to be
collected under Sec. 15 of Republic Act 632 is a special assessment. As such, the proceeds thereof may be
devoted only to the specific purpose for which the assessment was authorized, a special assessment being a
levy upon property predicated on the doctrine that the property against which it is levied derives some
special benefit from the improvement. It is not a tax measure intended to raise revenues for the
Government. Consequently, once it has been determined that no benefit accrues or inures to the property
owners paying the assessment, or that the proceeds from the said assessment are being misapplied to the
prejudice of those against whom it has been levied, then the authority to insist on the payment of the said
assessment ceases." cralaw virtua 1aw lib rary

Accordingly, We reiterate: jg c:chan roble s.com. ph

"The nature of a ‘special assessment’ similar to the case at bar has already been discussed and explained by
this Court in the case of Lutz v. Araneta, 98 Phil. 148. For in this Lutz case, Commonwealth Act 567,
otherwise known as the Sugar Adjustment Act, levies on owners or persons in control of lands devoted to
the cultivation of sugar cane and ceded to others for a consideration, on lease or otherwise —

"‘a tax equivalent to the difference between the money value of the rental or consideration collected and the
amount representing 12 per centum of the assessed value of such land. (See. 3).’"

Under Section 6 of the said law, Commonwealth Act 567, all collections made thereunder ‘shall accrue to a
special fund in the Philippine Treasury, to be known as the "Sugar Adjustment and Stabilization Fund", and
shall be paid out only for any or all of the foregoing purposes or to attain any or all of the following
objectives, as may be provided by law.’ It then proceeds to enumerate the said purposes, among which are
‘to place the sugar industry in a position to maintain itself; . . . to readjust the benefits derived from the
sugar industry . . . so that all might continue profitably to engage therein, to limit the production of sugar to
areas more economically suited to the production thereof; and to afford laborers employed in the industry a
living wage and to improve their living and working conditions.’

"The plaintiff in the above case, Walter Lutz, contended that the aforementioned tax or special assessment
was unconstitutional because it was being ‘levied for the aid and support of the sugar industry exclusively,’
and therefore, not for a public purpose. In rejecting the theory advanced by the said plaintiff, this Court
said:jgc:chan roble s.com.p h

"‘The basic defect in the plaintiff’s position in his assumption that the tax provided for in Commonwealth Act
567 is a pure exercise of the taxing power. Analysis of the Act, and particularly section 6, will show that the
tax is levied with a regulatory purpose, to provide means for the rehabilitation and stabilization of the
threatened sugar industry. In other words, the Act is primarily an exercise of the police power.

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

"‘As stated in Johnson v. State ex rel. Marey, with reference to the citrus industry in Florida —

‘The protection of a large industry constituting one of the great sources of the state’s wealth and therefore
directly or indirectly affecting the welfare of so great a portion of the population of the State is affected to
such an extent by public interests as to be within the police power of the sovereign.’ (128 So. 837).

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

"On the authority of the above case, then, We hold that the special assessment at bar may be considered
similarly as the above, that is, that the levy for the Philsugin Fund is not so much an exercise of the power
of taxation, nor the imposition of a special assessment, but the exercise of the police power for the general
welfare of the entire country. It is, therefore, an exercise of a sovereign power which no private citizen may
lawfully resist.

"Besides, under Section 2(a) of the charter, the Philsugin is authorized ‘to conduct research work for the
sugar industry in all its phases, either agricultural or industrial, for the purpose of introducing into the sugar
industry such practices or processes that will reduce the cost of production, . . . and achieve greater
efficiency in the industry.’ This provision, first of all, more than justifies the acquisition of the refinery in
question. Who can dispute that the operation of a sugar refinery is a phase of sugar production and that
from such operation may be learned methods of reducing the cost of sugar manufacture no less than it may
afford the opportunity to discover the more effective means of achieving progress in the industry?
Philsugin’s experience alone of running a refinery is a gain to the entire industry. That the operation resulted
in a financial loss is by no means an index that the industry did not profit therefrom, as other gains of a
different nature may have been realized. Thus, from its financially unsuccessful venture, the Philsugin could
very well have advanced in its appreciation of the problems of management faced by sugar centrals. It could
have understood more clearly the difficulties of marketing sugar products. It could have known with better
intimacy the precise area of the industry in need of the most help from the government. The view of the
appellants herein, therefore, that they were not benefitted by the unsuccessful operation of the refinery in
question is not entirely accurate.

"Furthermore, Section 2(a) specifies a field of research which, indeed, would be difficult to carry out save
through the actual operation of a refinery. Quite obviously, the most practical or realistic approach to the
problem of what ‘practices or processes’ might most effectively cut the cost of production is to experiment
on production itself. And yet, how can such an experiment be carried out without the tools, which is all that
a refinery is?"

Moreover, even if it were assumed that the acquisition of a refinery is not contemplated in Rep. Act 632 as
within the objectives and powers of the Philsugin, there is no denying the fact that not all the money in the
Sugar Research and Stabilization Fund created by the law from the levy on the appellant and the other
sugar centrals and planters is involved in such purchase. Indisputably, the Philsugin is using the rest of the
said fund for purposes which cannot be questioned. Such being the case, the obligation of appellant to pay
the tax in question is clear. The idea of proportioning the amount it will pay according to its own
computation of how much of the above Fund is being devoted to what it deems to be legitimate ends only
cannot be sanctioned, if for no other reason than that such a manner of payment will unduly hamper the
proper programming and budgeting of the said Fund by the Philsugin even for its unquestionably authorized
projects, thereby reducing its efficacy and defeating the purpose for which it has been established. The
remedy that suggests itself the moment Philsugin indulges in unauthorized ventures or projects is to raise
the illegality thereof in appropriate proceedings, either administrative or judicial, so that the same may be
enjoined or annulled and those responsible therefor may be properly called to account, but, certainly, not by
refusing to pay the levy fixed by law.

As in the three other cases already referred to, the judgment of the trial court in this case is affirmed, with
costs against Appellant.

5.

G.R. No. 149110 April 9, 2003

NATIONAL POWER CORPORATION, petitioner,

vs.
CITY OF CABANATUAN, respondent.

PUNO, J.:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Government. PAGCOR is a government owned or controlled corporation with an
original charter, PD 1869. All of its shares of stocks are owned by the National
Government. xxx Being an instrumentality of the government, PAGCOR should be
and actually is exempt from local taxes. Otherwise, its operation might be burdened,
impeded or subjected to control by mere local government.'

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

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

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

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

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

"The Court finds no merit in NPC's motion for reconsideration. Its arguments reiterated
therein that the taxing power of the province under Art. 137 (sic) of the Local Government
Code refers merely to private persons or corporations in which category it (NPC) does not
 belong, and that the LGC (RA 7160) which is a general law may not impliedly repeal the
NPC Charter which is a special law—finds the answer in Section 193 of the LGC to the effect
that 'tax exemptions or incentives granted to, or presently enjoyed by all persons, whether
natural or juridical, including government-owned or controlled corporations except local water
districts xxx are hereby withdrawn.' The repeal is direct and unequivocal, not implied.

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

SO ORDERED."20

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

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

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

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

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

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

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

"Sec. 137. Franchise Tax. - Notwithstanding any exemption granted by any law or other
special law, the province may impose a tax on businesses enjoying a franchise, at a rate not
exceeding fifty percent (50%) of one percent (1%) of the gross annual receipts for the
preceding calendar year based on the incoming receipt, or realized, within its territorial
jurisdiction.

In the case of a newly started business, the tax shall not exceed one-twentieth (1/20) of one
percent (1%) of the capital investment. In the succeeding calendar year, regardless of when
the business started to operate, the tax shall be based on the gross receipts for the
preceding calendar year, or any fraction thereof, as provided herein." (emphasis supplied)

x x x

Sec. 151. Scope of Taxing Powers.- Except as otherwise provided in this Code, the city, may
levy the taxes, fees, and charges which the province or municipality may impose: Provided,
however, That the taxes, fees and charges levied and collected by highly urbanized and
independent component cities shall accrue to them and distributed in accordance with the
provisions of this Code.
 The rates of taxes that the city may levy may exceed the maximum rates allowed for the
province or municipality by not more than fifty percent (50%) except the rates of professional
and amusement taxes."

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

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

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

Petitioner also alleges that it is an instrumentality of the National Government,25 and as such, may
not be taxed by the respondent city government. It cites the doctrine in Basco vs. Philippine
Amusement and Gaming Corporation26 where this Court held that local governments have no power
to tax instrumentalities of the National Government, viz:

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

PAGCOR has a dual role, to operate and regulate gambling casinos. The latter role is
governmental, which places it in the category of an agency or instrumentality of the
Government. Being an instrumentality of the Government, PAGCOR should be and actually
is exempt from local taxes. Otherwise, its operation might be burdened, impeded or
subjected to control by a mere local government.

'The states have no power by taxation or otherwise, to retard, impede, burden or in

any manner control the operation of constitutional laws enacted by Congress to carry
into execution the powers vested in the federal government. (MC Culloch v.
Maryland, 4 Wheat 316, 4 L Ed. 579)'

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

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

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

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

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

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

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

The petition is without merit.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

"x x x

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

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

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

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

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

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

x x x

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

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

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

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

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

These contentions must necessarily fail.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Doubtless, the power to tax is the most effective instrument to raise needed revenues to finance and
support myriad activities of the local government units for the delivery of basic services essential to
the promotion of the general welfare and the enhancement of peace, progress, and prosperity of the
people. As this Court observed in the Mactan case, "the original reasons for the withdrawal of tax
exemption privileges granted to government-owned or controlled corporations and all other units of
government were that such privilege resulted in serious tax base erosion and distortions in the tax
treatment of similarly situated enterprises."78 With the added burden of devolution, it is even more
imperative for government entities to share in the requirements of development, fiscal or otherwise,
by paying taxes or other charges due from them.

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

SO ORDERED.

6.

G.R. No. 193007 July 19, 2011

RENATO V. DIAZ and AURORA MA. F. TIMBOL, Petitioners,

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

DECISION

ABAD, J.:

May toll fees collected by tollway operators be subjected to value- added tax?

The Facts and the Case

Petitioners Renato V. Diaz and Aurora Ma. F. Timbol (petitioners) filed this petition for declaratory
relief1 assailing the validity of the impending imposition of value-added tax (VAT) by the Bureau of
Internal Revenue (BIR) on the collections of tollway operators.

Petitioners claim that, since the VAT would result in increased toll fees, they have an interest as
regular users of tollways in stopping the BIR action. Additionally, Diaz claims that he sponsored the
approval of Republic Act 7716 (the 1994 Expanded VAT Law or EVAT Law) and Republic Act 8424
(the 1997 National Internal Revenue Code or the NIRC) at the House of Representatives. Timbol, on
the other hand, claims that she served as Assistant Secretary of the Department of Trade and
Industry and consultant of the Toll Regulatory Board (TRB) in the past administration.
Petitioners allege that the BIR attempted during the administration of President Gloria Macapagal-
Arroyo to impose VAT on toll fees. The imposition was deferred, however, in view of the consistent
opposition of Diaz and other sectors to such move. But, upon President Benigno C. Aquino III’s
assumption of office in 2010, the BIR revived the idea and would impose the challenged tax on toll
fees beginning August 16, 2010 unless judicially enjoined.

Petitioners hold the view that Congress did not, when it enacted the NIRC, intend to include toll fees
within the meaning of "sale of services" that are subject to VAT; that a toll fee is a "user’s tax," not a
sale of services; that to impose VAT on toll fees would amount to a tax on public service; and that,
since VAT was never factored into the formula for computing toll fees, its imposition would violate
the non-impairment clause of the constitution.

On August 13, 2010 the Court issued a temporary restraining order (TRO), enjoining the
implementation of the VAT. The Court required the government, represented by respondents Cesar
V. Purisima, Secretary of the Department of Finance, and Kim S. Jacinto-Henares, Commissioner of
Internal Revenue, to comment on the petition within 10 days from notice.2 Later, the Court issued
another resolution treating the petition as one for prohibition.3

On August 23, 2010 the Office of the Solicitor General filed the government’s comment.4 The
government avers that the NIRC imposes VAT on all kinds of services of franchise grantees,
including tollway operations, except where the law provides otherwise; that the Court should seek
the meaning and intent of the law from the words used in the statute; and that the imposition of VAT
on tollway operations has been the subject as early as 2003 of several BIR rulings and circulars.5

The government also argues that petitioners have no right to invoke the non-impairment of contracts
clause since they clearly have no personal interest in existing toll operating agreements (TOAs)
between the government and tollway operators. At any rate, the non-impairment clause cannot limit
the State’s sovereign taxing power which is generally read into contracts.

Finally, the government contends that the non-inclusion of VAT in the parametric formula for
computing toll rates cannot exempt tollway operators from VAT. In any event, it cannot be claimed
that the rights of tollway operators to a reasonable rate of return will be impaired by the VAT since
this is imposed on top of the toll rate. Further, the imposition of VAT on toll fees would have very
minimal effect on motorists using the tollways.

In their reply6 to the government’s comment, petitioners point out that tollway operators cannot be
regarded as franchise grantees under the NIRC since they do not hold legislative franchises.
Further, the BIR intends to collect the VAT by rounding off the toll rate and putting any excess
collection in an escrow account. But this would be illegal since only the Congress can modify VAT
rates and authorize its disbursement. Finally, BIR Revenue Memorandum Circular 63-2010 (BIR
RMC 63-2010), which directs toll companies to record an accumulated input VAT of zero balance in
their books as of August 16, 2010, contravenes Section 111 of the NIRC which grants entities that
first become liable to VAT a transitional input tax credit of 2% on beginning inventory. For this
reason, the VAT on toll fees cannot be implemented.

The Issues Presented

The case presents two procedural issues:

1. Whether or not the Court may treat the petition for declaratory relief as one for prohibition;
and
 2. Whether or not petitioners Diaz and Timbol have legal standing to file the action.

The case also presents two substantive issues:

1. Whether or not the government is unlawfully expanding VAT coverage by including tollway
operators and tollway operations in the terms "franchise grantees" and "sale of services"
under Section 108 of the Code; and

2. Whether or not the imposition of VAT on tollway operators a) amounts to a tax on tax and
not a tax on services; b) will impair the tollway operators’ right to a reasonable return of
investment under their TOAs; and c) is not administratively feasible and cannot be
implemented.

The Court’s Rulings

A. On the Procedural Issues:

On August 24, 2010 the Court issued a resolution, treating the petition as one for prohibition rather
than one for declaratory relief, the characterization that petitioners Diaz and Timbol gave their action.
The government has sought reconsideration of the Court’s resolution,7 however, arguing that
petitioners’ allegations clearly made out a case for declaratory relief, an action over which the Court
has no original jurisdiction. The government adds, moreover, that the petition does not meet the
requirements of Rule 65 for actions for prohibition since the BIR did not exercise judicial, quasi-
judicial, or ministerial functions when it sought to impose VAT on toll fees. Besides, petitioners Diaz
and Timbol has a plain, speedy, and adequate remedy in the ordinary course of law against the BIR
action in the form of an appeal to the Secretary of Finance.

But there are precedents for treating a petition for declaratory relief as one for prohibition if the case
has far-reaching implications and raises questions that need to be resolved for the public good.8 The
Court has also held that a petition for prohibition is a proper remedy to prohibit or nullify acts of
executive officials that amount to usurpation of legislative authority.9

Here, the imposition of VAT on toll fees has far-reaching implications. Its imposition would impact,
not only on the more than half a million motorists who use the tollways everyday, but more so on the
government’s effort to raise revenue for funding various projects and for reducing budgetary deficits.

To dismiss the petition and resolve the issues later, after the challenged VAT has been imposed,
could cause more mischief both to the tax-paying public and the government. A belated declaration
of nullity of the BIR action would make any attempt to refund to the motorists what they paid an
administrative nightmare with no solution. Consequently, it is not only the right, but the duty of the
Court to take cognizance of and resolve the issues that the petition raises.

Although the petition does not strictly comply with the requirements of Rule 65, the Court has ample
power to waive such technical requirements when the legal questions to be resolved are of great
importance to the public. The same may be said of the requirement of locus standi which is a mere
procedural requisite.10

B. On the Substantive Issues:

One. The relevant law in this case is Section 108 of the NIRC, as amended. VAT is levied,
assessed, and collected, according to Section 108, on the gross receipts derived from the sale or
exchange of services as well as from the use or lease of properties. The third paragraph of Section
108 defines "sale or exchange of services" as follows:

The phrase ‘sale or exchange of services’ means the performance of all kinds of services in the
Philippines for others for a fee, remuneration or consideration, including those performed or
rendered by construction and service contractors; stock, real estate, commercial, customs and
immigration brokers; lessors of property, whether personal or real; warehousing services; lessors or
distributors of cinematographic films; persons engaged in milling, processing, manufacturing or
repacking goods for others; proprietors, operators or keepers of hotels, motels, resthouses, pension
houses, inns, resorts; proprietors or operators of restaurants, refreshment parlors, cafes and other
eating places, including clubs and caterers; dealers in securities; lending investors; transportation
contractors on their transport of goods or cargoes, including persons who transport goods or
cargoes for hire and other domestic common carriers by land relative to their transport of goods or
cargoes; common carriers by air and sea relative to their transport of passengers, goods or cargoes
from one place in the Philippines to another place in the Philippines; sales of electricity by generation
companies, transmission, and distribution companies; services of franchise grantees of electric
utilities, telephone and telegraph, radio and television broadcasting and all other franchise grantees
except those under Section 119 of this Code and non-life insurance companies (except their crop
insurances), including surety, fidelity, indemnity and bonding companies; and similar services
regardless of whether or not the performance thereof calls for the exercise or use of the physical or
mental faculties. (Underscoring supplied)

It is plain from the above that the law imposes VAT on "all kinds of services" rendered in the
Philippines for a fee, including those specified in the list. The enumeration of affected services is not
exclusive.11 By qualifying "services" with the words "all kinds," Congress has given the term
"services" an all-encompassing meaning. The listing of specific services are intended to illustrate
how pervasive and broad is the VAT’s reach rather than establish concrete limits to its application.
Thus, every activity that can be imagined as a form of "service" rendered for a fee should be deemed
included unless some provision of law especially excludes it.

Now, do tollway operators render services for a fee? Presidential Decree (P.D.) 1112 or the Toll
Operation Decree establishes the legal basis for the services that tollway operators render.
Essentially, tollway operators construct, maintain, and operate expressways, also called tollways, at
the operators’ expense. Tollways serve as alternatives to regular public highways that meander
through populated areas and branch out to local roads. Traffic in the regular public highways is for
this reason slow-moving. In consideration for constructing tollways at their expense, the operators
are allowed to collect government-approved fees from motorists using the tollways until such
operators could fully recover their expenses and earn reasonable returns from their investments.

When a tollway operator takes a toll fee from a motorist, the fee is in effect for the latter’s use of the
tollway facilities over which the operator enjoys private proprietary rights12 that its contract and the
law recognize. In this sense, the tollway operator is no different from the following service providers
under Section 108 who allow others to use their properties or facilities for a fee:

1. Lessors of property, whether personal or real;

2. Warehousing service operators;

3. Lessors or distributors of cinematographic films;

4. Proprietors, operators or keepers of hotels, motels, resthouses, pension houses, inns,

resorts;
 5. Lending investors (for use of money);

6. Transportation contractors on their transport of goods or cargoes, including persons who

transport goods or cargoes for hire and other domestic common carriers by land relative to
their transport of goods or cargoes; and

7. Common carriers by air and sea relative to their transport of passengers, goods or
cargoes from one place in the Philippines to another place in the Philippines.

It does not help petitioners’ cause that Section 108 subjects to VAT "all kinds of services" rendered
for a fee "regardless of whether or not the performance thereof calls for the exercise or use of the
physical or mental faculties." This means that "services" to be subject to VAT need not fall under the
traditional concept of services, the personal or professional kinds that require the use of human
knowledge and skills.

And not only do tollway operators come under the broad term "all kinds of services," they also come
under the specific class described in Section 108 as "all other franchise grantees" who are subject to
VAT, "except those under Section 119 of this Code."

Tollway operators are franchise grantees and they do not belong to exceptions (the low-income
radio and/or television broadcasting companies with gross annual incomes of less than ₱10 million
and gas and water utilities) that Section 11913 spares from the payment of VAT. The word "franchise"
broadly covers government grants of a special right to do an act or series of acts of public concern.14

Petitioners of course contend that tollway operators cannot be considered "franchise grantees"
under Section 108 since they do not hold legislative franchises. But nothing in Section 108 indicates
that the "franchise grantees" it speaks of are those who hold legislative franchises. Petitioners give
no reason, and the Court cannot surmise any, for making a distinction between franchises granted
by Congress and franchises granted by some other government agency. The latter, properly
constituted, may grant franchises. Indeed, franchises conferred or granted by local authorities, as
agents of the state, constitute as much a legislative franchise as though the grant had been made by
Congress itself.15 The term "franchise" has been broadly construed as referring, not only to
authorizations that Congress directly issues in the form of a special law, but also to those granted by
administrative agencies to which the power to grant franchises has been delegated by Congress.16

Tollway operators are, owing to the nature and object of their business, "franchise grantees." The
construction, operation, and maintenance of toll facilities on public improvements are activities of
public consequence that necessarily require a special grant of authority from the state. Indeed,
Congress granted special franchise for the operation of tollways to the Philippine National
Construction Company, the former tollway concessionaire for the North and South Luzon
Expressways. Apart from Congress, tollway franchises may also be granted by the TRB, pursuant to
the exercise of its delegated powers under P.D. 1112.17 The franchise in this case is evidenced by a
"Toll Operation Certificate."18

Petitioners contend that the public nature of the services rendered by tollway operators excludes
such services from the term "sale of services" under Section 108 of the Code. But, again, nothing in
Section 108 supports this contention. The reverse is true. In specifically including by way of example
electric utilities, telephone, telegraph, and broadcasting companies in its list of VAT-covered
businesses, Section 108 opens other companies rendering public service for a fee to the imposition
of VAT. Businesses of a public nature such as public utilities and the collection of tolls or charges for
its use or service is a franchise.19
Nor can petitioners cite as binding on the Court statements made by certain lawmakers in the course
of congressional deliberations of the would-be law. As the Court said in South African Airways v.
Commissioner of Internal Revenue,20 "statements made by individual members of Congress in the
consideration of a bill do not necessarily reflect the sense of that body and are, consequently, not
controlling in the interpretation of law." The congressional will is ultimately determined by the
language of the law that the lawmakers voted on. Consequently, the meaning and intention of the
law must first be sought "in the words of the statute itself, read and considered in their natural,
ordinary, commonly accepted and most obvious significations, according to good and approved
usage and without resorting to forced or subtle construction."

Two. Petitioners argue that a toll fee is a "user’s tax" and to impose VAT on toll fees is tantamount to
taxing a tax.21 Actually, petitioners base this argument on the following discussion in Manila
International Airport Authority (MIAA) v. Court of Appeals:22

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.

x x x 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 for
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."23 (Underscoring supplied)

Petitioners assume that what the Court said above, equating terminal fees to a "user’s tax" must also
pertain to tollway fees. But the main issue in the MIAA case was whether or not Parañaque City
could sell airport lands and buildings under MIAA administration at public auction to satisfy unpaid
real estate taxes. Since local governments have no power to tax the national government, the Court
held that the City could not proceed with the auction sale. MIAA forms part of the national
government although not integrated in the department framework."24 Thus, its airport lands and
buildings are properties of public dominion beyond the commerce of man under Article 420(1)25 of
the Civil Code and could not be sold at public auction.

As can be seen, the discussion in the MIAA case on toll roads and toll fees was made, not to
establish a rule that tollway fees are user’s tax, but to make the point that airport lands and buildings
are properties of public dominion and that the collection of terminal fees for their use does not make
them private properties. Tollway fees are not taxes. Indeed, they are not assessed and collected by
the BIR and do not go to the general coffers of the government.

It would of course be another matter if Congress enacts a law imposing a user’s tax, collectible from
motorists, for the construction and maintenance of certain roadways. The tax in such a case goes
directly to the government for the replenishment of resources it spends for the roadways. This is not
the case here. What the government seeks to tax here are fees collected from tollways that are
constructed, maintained, and operated by private tollway operators at their own expense under the
build, operate, and transfer scheme that the government has adopted for expressways.26 Except for
a fraction given to the government, the toll fees essentially end up as earnings of the tollway
operators.

In sum, fees paid by the public to tollway operators for use of the tollways, are not taxes in any
sense. A tax is imposed under the taxing power of the government principally for the purpose of
raising revenues to fund public expenditures.27 Toll fees, on the other hand, are collected by private
tollway operators as reimbursement for the costs and expenses incurred in the construction,
maintenance and operation of the tollways, as well as to assure them a reasonable margin of
income. Although toll fees are charged for the use of public facilities, therefore, they are not
government exactions that can be properly treated as a tax. Taxes may be imposed only by the
government under its sovereign authority, toll fees may be demanded by either the government or
private individuals or entities, as an attribute of ownership.28

Parenthetically, VAT on tollway operations cannot be deemed a tax on tax due to the nature of VAT
as an indirect tax. In indirect taxation, a distinction is made between the liability for the tax and
burden of the tax. The seller who is liable for the VAT may shift or pass on the amount of VAT it paid
on goods, properties or services to the buyer. In such a case, what is transferred is not the seller’s
liability but merely the burden of the VAT.29

Thus, the seller remains directly and legally liable for payment of the VAT, but the buyer bears its
burden since the amount of VAT paid by the former is added to the selling price. Once shifted, the
VAT ceases to be a tax30 and simply becomes part of the cost that the buyer must pay in order to
purchase the good, property or service.

Consequently, VAT on tollway operations is not really a tax on the tollway user, but on the tollway
operator. Under Section 105 of the Code, 31 VAT is imposed on any person who, in the course of
trade or business, sells or renders services for a fee. In other words, the seller of services, who in
this case is the tollway operator, is the person liable for VAT. The latter merely shifts the burden of
VAT to the tollway user as part of the toll fees.

For this reason, VAT on tollway operations cannot be a tax on tax even if toll fees were deemed as a
"user’s tax." VAT is assessed against the tollway operator’s gross receipts and not necessarily on
the toll fees. Although the tollway operator may shift the VAT burden to the tollway user, it will not
make the latter directly liable for the VAT. The shifted VAT burden simply becomes part of the toll
fees that one has to pay in order to use the tollways.32

Three. Petitioner Timbol has no personality to invoke the non-impairment of contract clause on
behalf of private investors in the tollway projects. She will neither be prejudiced by nor be affected by
the alleged diminution in return of investments that may result from the VAT imposition. She has no
interest at all in the profits to be earned under the TOAs. The interest in and right to recover
investments solely belongs to the private tollway investors.
Besides, her allegation that the private investors’ rate of recovery will be adversely affected by
imposing VAT on tollway operations is purely speculative. Equally presumptuous is her assertion
that a stipulation in the TOAs known as the Material Adverse Grantor Action will be activated if VAT
is thus imposed. The Court cannot rule on matters that are manifestly conjectural. Neither can it
prohibit the State from exercising its sovereign taxing power based on uncertain, prophetic grounds.

Four. Finally, petitioners assert that the substantiation requirements for claiming input VAT make the
VAT on tollway operations impractical and incapable of implementation. They cite the fact that, in
order to claim input VAT, the name, address and tax identification number of the tollway user must
be indicated in the VAT receipt or invoice. The manner by which the BIR intends to implement the
VAT – by rounding off the toll rate and putting any excess collection in an escrow account – is also
illegal, while the alternative of giving "change" to thousands of motorists in order to meet the exact
toll rate would be a logistical nightmare. Thus, according to them, the VAT on tollway operations is
not administratively feasible.33

Administrative feasibility is one of the canons of a sound tax system. It simply means that the tax
system should be capable of being effectively administered and enforced with the least
inconvenience to the taxpayer. Non-observance of the canon, however, will not render a tax
imposition invalid "except to the extent that specific constitutional or statutory limitations are
impaired."34 Thus, even if the imposition of VAT on tollway operations may seem burdensome to
implement, it is not necessarily invalid unless some aspect of it is shown to violate any law or the
Constitution.

Here, it remains to be seen how the taxing authority will actually implement the VAT on tollway
operations. Any declaration by the Court that the manner of its implementation is illegal or
unconstitutional would be premature. Although the transcript of the August 12, 2010 Senate hearing
provides some clue as to how the BIR intends to go about it,35 the facts pertaining to the matter are
not sufficiently established for the Court to pass judgment on. Besides, any concern about how the
VAT on tollway operations will be enforced must first be addressed to the BIR on whom the task of
implementing tax laws primarily and exclusively rests. The Court cannot preempt the BIR’s discretion
on the matter, absent any clear violation of law or the Constitution.

For the same reason, the Court cannot prematurely declare as illegal, BIR RMC 63-2010 which
directs toll companies to record an accumulated input VAT of zero balance in their books as of
August 16, 2010, the date when the VAT imposition was supposed to take effect. The issuance
allegedly violates Section 111(A)36 of the Code which grants first time VAT payers a transitional input
VAT of 2% on beginning inventory.

In this connection, the BIR explained that BIR RMC 63-2010 is actually the product of negotiations
with tollway operators who have been assessed VAT as early as 2005, but failed to charge VAT-
inclusive toll fees which by now can no longer be collected. The tollway operators agreed to waive
the 2% transitional input VAT, in exchange for cancellation of their past due VAT liabilities. Notably,
the right to claim the 2% transitional input VAT belongs to the tollway operators who have not
questioned the circular’s validity. They are thus the ones who have a right to challenge the circular in
a direct and proper action brought for the purpose.

Conclusion

In fine, the Commissioner of Internal Revenue did not usurp legislative prerogative or expand the
VAT law’s coverage when she sought to impose VAT on tollway operations. Section 108(A) of the
Code clearly states that services of all other franchise grantees are subject to VAT, except as may
be provided under Section 119 of the Code. Tollway operators are not among the franchise grantees
subject to franchise tax under the latter provision. Neither are their services among the VAT-exempt
transactions under Section 109 of the Code.

If the legislative intent was to exempt tollway operations from VAT, as petitioners so strongly allege,
then it would have been well for the law to clearly say so. Tax exemptions must be justified by clear
statutory grant and based on language in the law too plain to be mistaken.37 But as the law is written,
no such exemption obtains for tollway operators. The Court is thus duty-bound to simply apply the
law as it is found.1avvphi 1

Lastly, the grant of tax exemption is a matter of legislative policy that is within the exclusive
prerogative of Congress. The Court’s role is to merely uphold this legislative policy, as reflected first
and foremost in the language of the tax statute. Thus, any unwarranted burden that may be
perceived to result from enforcing such policy must be properly referred to Congress. The Court has
no discretion on the matter but simply applies the law.

The VAT on franchise grantees has been in the statute books since 1994 when R.A. 7716 or the
Expanded Value-Added Tax law was passed. It is only now, however, that the executive has
earnestly pursued the VAT imposition against tollway operators. The executive exercises exclusive
discretion in matters pertaining to the implementation and execution of tax laws. Consequently, the
executive is more properly suited to deal with the immediate and practical consequences of the VAT
imposition.

WHEREFORE, the Court DENIES respondents Secretary of Finance and Commissioner of Internal
Revenue’s motion for reconsideration of its August 24, 2010 resolution, DISMISSES the petitioners
Renato V. Diaz and Aurora Ma. F. Timbol’s petition for lack of merit, and SETS ASIDE the Court’s
temporary restraining order dated August 13, 2010.

SO ORDERED.

7.

[G.R. No. L-10574. May 28, 1958.]

PANAY ELECTRIC CO., INC., Petitioner, v. THE COLLECTOR OF INTERNAL REVENUE and THE
COURT OF TAX APPEALS, Respondents.

Felipe Ysmael for Petitioner.

Solicitor General Ambrosio Padilla, Assistant Solicitor Jose P. Alejandro and Special Attorney
Ricardo J. Mateo for Respondents.

SYLLABUS
1. TAXATION; FRANCHISE TAX, NATURE OF; REFUND OF OVERPAYMENT; REQUISITES BEFORE SUIT COULD
BE MAINTAINED. — franchise tax is an internal revenue tax, and consequently, refund of any overpayment
is governed by Section 306 of the Tax Code, to wit: That before a suit could be maintained in any court for
the recovery of any tax said to have been erroneously or illegally assessed or collected, a written claim for
refund of said overpayment or illegal collection should first be made, and the action to enforce said refund
should be instituted within two years from the date of payment.

2. ID.; ID.; ID.; REFUND, COUNTED FROM DATE OF COURT ACTION. — A claim for refund not followed by a
judicial action avails the claimant nothing. Besides, the refund of any tax already paid or illegally collected is
limited to a period of two years, counted from the date of the suit in court, not from the date of the claim for
refund. The claim for refund is only a preliminary step to court action.

3. ID.; ID., REFUND FROM DATE OF CLAIM, WHEN MAY BE ALLOWED; CASE AT BAR. — In the case at bar,
however, because of his erroneous interpretation of the law on franchise taxes, the Collector had illegally
collected franchise taxes from petitioner. While petitioner was to blame in part for supposedly sleeping on its
right and in not filing the claim for refund and the suit to enforce said refund on time, there is evidence to
the effect that if petitioner did not file its suit for refund earlier, it was because of an agreement with an
agent of the Collector that they should await the result of the case of Philippine Railway v. Collector of
Internal Revenue, then pending in this Court in order that the parties may act correctly. On moral and
equitable grounds, therefore, petitioner is entitled to refund from the date of the claim for refund. Moreover,
under Section 309 of the Tax Code, the Collector of Internal Revenue is authorized to credit or refund taxes
erroneously or illegally received, for a period of two years from the date of the claim for refund. In the case
at bar, the Collector not only offered to credit but took steps to credit petitioner with overpayment for a
period of two years from the date of the claim for refund. In so doing, he waived the prescriptive period of
two years from the date of the actual filing of the suit.

DECISION

MONTEMAYOR, J.:

Petitioner Panay Electric Co., Inc. is appealing the decision of the Court of Tax Appeals, denying the refund
to it of the amount of P85,355.72, balance of P135,872.67, representing overpayment of franchise taxes
from January 19, 1947 to January 18, 1952.

Petitioner is a grantee of a legislative franchise under Act No. 2983, as amended by Act No. 3665, to install,
operate, and maintain an electric light, heat and power system in certain municipalities of Iloilo, for a period
of fifty years from the approval of its franchise on January 22, 1921. Under the franchise, it was required to
pay a franchise tax equal to 1 1/2 per cent of its gross earnings, during the first twenty years, and 2 per
cent during the remaining thirty years.

Upon the promulgation of Republic Act No. 39, amending Section 259 of the National Internal Revenue
Code, respondent Collector of Internal Revenue required petitioner to pay a franchise tax of 5 per cent
instead of 2 per cent of its gross earnings. In view of the insistence of respondent in his demand, petitioner
paid the franchise tax of 5 per cent, as provided for in Section 259 of the Revenue Code as amended,
beginning January 19, 1947 and up to January 18, 1952, in the total sum of P135,872.67, at the same time
protesting the imposition and collection of the 5 per cent tax, in its letters of May 7, 1948 and June 7, 1948.
The protest, however, was denied by Respondent.

On March 25, 1952, the Supreme Court promulgated, its decision in the case of Philippine Railway v.
Collector of Internal Revenue (91 Phil., 35), wherein it was held that the rate of tax provided in Section 259
of the Revenue Code as amended by Republic Act No. 39, is not applicable to holders of franchises which fix
a specific rate of franchise tax. On the basis of this decision, petitioner on April 16, 1952, wrote a letter to
the City Treasurer of Iloilo City, demanding the refund of excess franchise taxes paid since October 1, 1946.
This claim for refund was reiterated in a letter to respondent Collector, dated July 8, 1952, wherein
petitioner demanded the refund of excess franchise taxes from January 19, 1947 to January 18, 1952, in the
amount of P135,872.67. In the meantime, respondent Collector accepted the ruling laid down in the case of
Philippine Railway v. Collector of Internal Revenue, supra, and thereafter, collected from petitioner franchise
taxes at the rate of only 2 per cent. The last payment made by petitioner at the rate of 5 per cent was on
January 18, 1952. On July 22, 1952, respondent Collector wrote to petitioner, informing it of his stand on
the question of refund, to the effect that the first claim for refund filed by it was made only in its letter of
April 16, 1952, and that refund may be effected only of the overpayment made two years prior to said
demand, that is to say, from April 16, 1950. Petitioner on August 20, 1952, filed a petition for review with
the defunct Board of Tax Appeals, docketed as, BTA case No. 85, seeking the refund in the amount of
P135,872.67.

In his answer, respondent admitted that there had been overpayment, but contended that it could allow a
refund of overpayment made for a period of only two years prior to April 16, 1952, when petitioner filed a
formal demand for refund. Respondent accordingly agreed to credit petitioner with P64,607.07, the amount
of the overpayment from April 19, 1950 to January 18, 1952, and stated that "steps have been taken by the
respondent to credit to the petitioner the amount of P64,607.07, computed below, as overpayment. . . ." cralaw virt ua1aw li bra ry

On October 18, 1952, the Board of Tax Appeals rendered its decision reversing that of respondent Collector
and ordering him to refund to petitioner not only the P64,607.07 as overpayment for the period 1950-51,
and which respondent was willing and even offered to credit petitioner, but also P70,272.49, covering the
period of 1947- 50. However, upon motion for reconsideration by respondent, the Board of Tax Appeals on
December 29, 1952, modified its decision in the sense that the refund to petitioner should be only
P64,607.07, corresponding to the period of two years prior to the filing of the letter of demand for refund,
dated April 18, 1952. Petitioner appealed the decision as modified to the Supreme Court and this Tribunal in
its resolution of March 30, 1954, following its decision in the case of University of Santo Tomas v. Board of
Tax Appeals, * G. R. No. L-5701, promulgated on June 23, 1953, dismissed the appeal without prejudice.

Thereafter, petitioner filed the corresponding complaint against respondent in the Court of First Instance of
Iloilo for the refund of the whole amount of P135,872.67. Upon the creation of the Court of Tax Appeals
under Republic Act No. 1125, the case was sent up to said court for final disposition. After due hearing, the
Tax Court decided on March 10, 1956 that "only the excess payments made by plaintiffs from October 18,
1950 to January 18, 1952 in the aggregate amount of P50,516.95 were made within two years prior to the
institution of judicial proceedings for recovery thereof. The excess payments made prior to October 18, 1950
(from January 19, 1947 to July 18, 1950) in the amount of P85,355.72 cannot be recovered, the right of
action of plaintiff in regard thereto having prescribed." Consequently respondent was ordered to refund to
petitioner only the sum of P50,516.95. It is this decision which is now before us on a petition for review by
the petitioner, Panay Electric Co., Inc.

The pertinent provisions of law applicable to the present case are sections 306 and 309 of the Revenue
Code, which we reproduce for purposes of reference: jg c:chan roble s.com.p h

"SEC. 306. Recovery of tax erroneously or illegally collected. — No suit or proceeding shall be maintained in
any court for the recovery of any national internal revenue tax hereafter alleged to have been erroneously or
illegally assessed or collected, or of any penalty claimed to have been collected without authority, or of any
sum alleged to have been excessive or in any manner wrongfully collected, until a claim for refund or credit
has been duly filed with the Collector of Internal Revenue; but such suit or proceeding may be maintained,
whether or not such tax, penalty, or sum has been paid under protest or duress. In any case, no such suit or
proceeding shall be begun after the expiration of two years from the date of payment of the tax or penalty."
virtua 1aw lib rary
cralaw

"SEC. 309. Authority of Collector to make compromises and to refund to taxes. — The Collector of Internal
Revenue may compromise any civil or other case arising under this Code or other law or part of law
administered by the Bureau of Internal Revenue, may credit or refund taxes erroneously or illegally
received, or penalty imposed without authority, and may remit before payment any tax that appears to be
unjustly assessed or excessive.

"He shall refund the value of internal-revenue stamps when the same are returned in good condition by the
purchaser, and may, in his discretion, redeem or exchange unused stamps that have been rendered unfit for
use, and may refund their value upon proof of destruction.

"The authority of the Collector of Internal Revenue to credit or refund taxes or penalties under this section
can only be exercised if the claim for credit or refund is made in writing and filed with him within two years
after the payment of the tax or penalty." cralaw virt ua1aw lib ra ry

Petitioner in its appeal, reiterates its contention before the Court of Tax Appeals that the Franchise tax
stipulated and payable under its franchise is not an internal revenue tax and, therefore, Section 306 of the
Tax Code, providing for refund of overpayment for a period of only two years, is not applicable to it; that the
legislative franchise constituted a contract between itself and the Government; that the rate of franchise tax
payable under it is part of said contract and the collection of any amount in excess of said rate fixed in the
contract is a violation of the contract itself; and that under said view, petitioner may avail itself of the
regular ten year period of prescription within which to bring an action for redress.

We are satisfied that the franchise tax is an internal revenue tax within the meaning of the Tax Code, and
we agree with the Court of Tax Appeals on its view and ruling on this point, and reproduce with favor the
pertinent portion of its decision overruling the contention of the petitioner, and holding that a franchise tax
is an internal revenue tax, and consequently, refund of any overpayment is governed by Section 306 of the
Tax Code: chanro b1es vi rt ual 1aw li bra ry

. . . "Defendant contends that plaintiff failed to comply with the requirements of Section 306 of the Revenue
Code relative to the filing of a written claim for refund and the institution of judicial proceedings for recovery
of taxes erroneously or illegally collected within two years from the date of payment. On the other hand,
plaintiff contends that Section 306 of the Revenue Code does not apply, its franchise tax liability not being
an internal revenue tax.

"On the question whether or not the tax payable by plaintiff under its franchise is an internal revenue tax,
the former Board of Tax Appeals expressed the opinion that the same is an internal revenue tax.

"‘. . . Petitioner draws a distinction between tax proper and franchise tax.

‘A tax is a forced charge, imposition or contribution; it operates in invitum, and is in no way dependent upon
the will or contractual assent, express or implied, of the person taxed. (51 Am. Jur. pp. 38-39.)

‘Franchise tax is "in consideration of the granting of the franchise," and it operates because a person taxed
assents expressly or impliedly. It is, in one word, a contractual assent. As correctly maintained by the
respondent, Section 18 of the Tax Code enumerates what are National Internal Revenue Taxes, and among
others franchise taxes are clearly listed; Section 259, Tax on Corporate Franchises, deals with franchise
taxes.’ (B.T.A. No. 85, October 18, 1952.)

"It is clear from a reading of Section 259 of the Revenue Code that the ‘franchise tax’ provided therein
refers not only to the tax imposed in said section but also to the ‘taxes, charges, and percentages’
prescribed in the special charters under which holders of franchises operate. In fact, the collection of
franchise taxes and the penalty for delinquency are governed by Section 259, in so far as the provisions
thereof are not inconsistent with the special charters. And Section 18 of the Revenue Code, as pointed out
by the former Board of Tax Appeals, clearly classifies franchise taxes as national internal revenue taxes. We
might also add that Section 359 of the Revenue Code provides for the disposition of franchise taxes as other
national internal revenue taxes. We have, therefore, no doubt in our minds that the franchise taxes
prescribed in Act No. 2983, as amended by Act No. 3665, under which plaintiff operates, is a national
internal revenue tax, and the provisions of law governing refunds of national internal revenue taxes are
applicable to refunds of the franchise tax here in question." cralaw virtua 1aw lib rary

Petitioner contends that its letters of May 7, 1948 and June 7, 1948 (Annexes A and B of the Petition for
Review) should be considered claims for refund. Whether they are demand for refund or not does not really
matter because a claim for refund not followed by a judicial action avails the claimant nothing. Besides, the
refund of any tax already paid or illegally collected is limited to a period of two years, counted from the date
of the suit in court, not from the date of the claim for refund. The claim for refund is only a preliminary step
to court action. As a matter of fact, we believe that the letters of May 7, 1948 and June 7, 1948 are not
really claims for refund, but mere protests against the action of the Collector or his agent in claiming and
collecting 5 per cent instead of 2 per cent of the gross earnings, and may well be regarded as requests that
the Collector and his agent stop making the illegal collection, nothing more. The real claim for refund was
made only on April 16, 1952 in petitioner’s letter to the Iloilo Treasurer, acting as agent of the Collector.

Applying the doctrine laid down in the case of Philippine Railway v. Collector of Internal Revenue, supra, it is
clear that under the franchise of the petitioner, it was liable to pay only a franchise tax of 2 per cent of its
gross earning and not 5 per cent, consequently, the difference between 5 per cent and 2 per cent should be
considered as overpayment. From a reading of Section 306 of the Tax Code above reproduced, it is also
equally clear that aside from the requirement that before a suit or proceeding could be maintained in any
court for the recovery of any tax said to have been erroneously or illegally assessed or collected, a claim for
refund of said overpayment or illegal collection should first be made, the taxpayer is entitled to refund only
if he brought the action within two years from the date of the payment. In other words, all overpayment or
illegal collection made beyond the said two year period may not be refunded.

Under a strict interpretation and application of law, petitioner is entitled to a refund of this overpayment or
illegal collection for a period of only two years prior to the date of the suit or proceedings before the Board
of Tax Appeals on August 20, 1952, that is to say, all payments and illegal collections from August 20, 1950
which amount to P50,516.95 as found and adjudged by the Court of Tax Appeals. Legally speaking, the
decision of the Tax Court is therefore correct, being in accordance with law. However, one’s conscience does
not and cannot rest easy on this strict application of the law, considering the special circumstances that
surround this case. Because of his erroneous interpretation of the law on franchise taxes, the Collector, from
the year 1947, had illegally collected from petitioner the respectable sum of P135,872.65. From a moral
standpoint, the Government would be enriching itself of this amount at the expense of the taxpayer. True,
the Tax Court ordered the Collector to refund to it (petitioner) the sum of P50,516.95, which approximately,
is only 37% of the whole illegal collection. Of course, petitioner is to blame in part for supposedly sleeping
on its rights and in not filing the claim for refund and the suit to enforce said refund earlier. It should be
borne in mind, however, that before the promulgation of our decision in the case of Philippine Railway v.
Collector of Internal Revenue, there had been no court ruling or doctrine on the relation between a franchise
tax stipulated in a legislative franchise and the ordinary or regular internal revenue tax fixed in the Tax
Code, on the gross earnings of a corporation or a public utility. The Collector played safe and collected the
regular 5 per cent rate. The petitioner should have also done the same by not merely protesting the illegal
collection, but by claiming a refund of the overpayment and filing a suit to enforce the same, and should
have asked the courts to decide the controversy. We do not advocate the refund of the entire overpayment
of P135,872.67, but on moral and equitable grounds, we believe that the petitioner is entitled to the refund
of P64,607.07, basing on the two year period, beginning from the day the claim for refund was made on
April 18, 1952.

It will be recalled that under Section 309 of the Tax Code, the Collector of Internal Revenue is authorized to
credit or refund taxes erroneously or illegally received, for a period of two years from the date of the claim
for refund. In other words, the Collector had authority to refund or credit this overpayment of P64,607.07.
He not only offered to do this, but in his answer to the suit filed by petitioner with the Board of Tax Appeals,
he also assured the Board that steps were being taken to credit petitioner with this amount. One aspect of
this question is that by not only offering to credit but also taking steps to credit petitioner with overpayment
for a period of two years from the date of the claim for refund, he waived the prescriptive period of two
years from the date of the actual filing of the suit, a time difference of about four months. The claim was
filed on April 18 and the suit was filed on August 20 of the same year. As a matter of fact, this was the final
decision of the Board of Tax Appeals, ordering the Collector to refund the amount of P64,607.07. There is
also some evidence to the effect that if petitioner did not file its suit for refund earlier than August 20, 1952,
it was because of an agreement or understanding with the agent of the Collector that they should await the
result of the then pending case in this Court of Philippine Railway v. Collector of Internal Revenue, in order
that the parties may act correctly and in accordance with the law, as interpreted by this High Tribunal. By
modifying as we do, the decision of the Tax Court so as to increase the amount of the refund from
P50,516.95 to P64,607.07 for the reasons above-stated, and considering as we said, the peculiar
circumstances involved in the case, we would be tempering the rigors of the law with fairness and equity.

In view of the foregoing, and with the modification above-indicated, the appealed decision is hereby
affirmed. No costs.

Paras, C.J., Bengzon, Bautista Angelo, Labrador, Concepcion, Reyes, J. B. L., Endencia and Felix, JJ., concur.

8.

G.R. No. L-18330 July 31, 1963

JOSE DE BORJA, petitioner-appellee,
vs.
VICENTE G. GELLA, ET AL., respondents-appellants.

David Guevara for petitioner-appellee.

Office of the Solicitor General for respondent-appellant Treasurer of the Philippines.
Assistant City Fiscal H. A. Avendano for respondent-appellant Treasurer of Pasay City.

BAUTISTA ANGELO, J.:

Jose de Borja has been delinquent in the payment of his real estate taxes since 1958 for properties
located in the City of Manila and Pasay City and has offered to pay them with two negotiable,
certificates of indebtedness Nos. 3064 and 3065 in the amounts of P793.40 and P717.69,
respectively. Borja was, however, a mere assignee of the aforesaid negotiable certificates, the
applicants for backpay rights covered by them being respectively Rafael Vizcaya and Pablo Batario
Luna.

The offers to pay the estate taxes in question were rejected by the city treasurers of both Manila and
Pasay cities on the ground of their limited negotiability under Section 2, Republic Act No. 304, as
amended by Republic Act 800, and in the case of the city treasurer of Manila on the further ground
that he was ordered not to accept them by the city mayor, for which reason Borja was prompted to
bring the question to the Treasurer of the Philippines who opined, among others, that the negotiable
certificates cannot be accepted as payment of real estate taxes inasmuch as the law provides for
their acceptance from their backpay holder only or the original applicant himself, but not his
assignee. In his letter of April 29, 1960 to the Treasurer of the Philippines, however, Borja
entertained hope that the certificates would be accepted for payment in view of the fact that they are
already long past due and redeemable, but his hope was frustrated. So on June 30, 1960, Borja filed
an action against the treasurers of both the City of Manila and Pasay City, as well as the Treasurer
of the Philippines, to impel them to execute an act which the law allegedly requires them to perform,
to wit: to accept the above-mentioned certificates of indebtedness considering that they were already
due and redeemable so as not to deprive him illegally of his privilege to pay his obligation to the
government thru such means.

Respondents in due time filed their answer setting up the reasons for their refusal to accept the
certificates, and after the requisite trial was held, the court a quo rendered judgment the dispositive
part of which reads:

WHEREFORE, the treasurers of the City of Manila and Pasay City, their agents and other
persons acting in their behalf are hereby enjoined from including petitioner's properties in the
payment of real estate, taxes, and to sell them at public auction and respondent Treasurer of
the Philippines, and the treasurers of the City of Manila and Pasay City are hereby ordered
to accept petitioner's Negotiable Certificates of Indebtedness Nos. 3064 and 3065 in the
sums of P793.40 and P717.39 in payment of real estate taxes of his properties in the City of
Manila and Pasay City, respectively, without costs.

Respondents took this appeal on purely questions of law. 1äwphï1.ñët

Reduced to bare essentials, the 12 errors assigned by appellants may be boiled down to the
following: (a) has appellee the right to apply to the payment of his real estate taxes to the
government of Manila and Pasay cities the certificates of indebtedness he holds while appellants
have the correlative legal duty to accept the certificates in payment of said taxes?; (b) can
compensation be invoked to extinguish appellee's real estate tax liability between the latter's
obligation and the credit represented by said certificates of indebtedness?

Anent the first issue, the pertinent legal provision to be reckoned with is Section 2 of Republic Act
No. 304, as amended by Republic Act No. 800, which in part reads:

SEC. 2. The Treasurer of the Philippines shall, upon application, and within one year from
the approval of this Act, and under such rules and regulations as may be promulgated by the
Secretary of Finance, acknowledge and file requests for the recognition of the right to the
salaries and wages as provided in section one hereof, and notice of such acknowledgment
shall be issued to the applicant which shall state the total amount of such salaries or wages
due to the applicant, and certify that it shall be redeemed by the Government of the
Philippines within ten years from the date of their issuance without interest: Provided, that
upon application . . . a certificate of indebtedness may be issued by the Treasurer of the
Philippines covering the whole or part of the total salaries or wages the right to which has
been duly acknowledged and recognized, provided that the face value of such certificate of
indebtedness shall not exceed the amount that the applicant may need for the payment of
(1) obligations subsisting at the time of the approval of this Act for which the applicant may
directly be liable to the Government or to any of its branches or instrumentalities, or the
corporations owned or controlled by the Government, or to any citizen of the Philippines, who
may be willing to accept the same for such settlement; (2) his taxes; . . . and Provided, also,
That any person who is not an alien, bank or other financial institution at least sixty per
centum of whose capital is owned by Filipinos may, notwithstanding any provision of its
charter, articles of incorporation, by-laws, or rules and regulations to the contrary, accept or
discount at not more than three and one-half per centum per annum for ten years a
negotiable certificate of indebtedness which shall be issued by the Treasurer of the
Philippines upon application by a holder of a back pay acknowledgment. . . . .

To begin with, it cannot be contended that appellants are in duty bound to accept the negotiable
certificates of indebtedness held by appellee in payment of his real estate taxes for the simple
reason that they were not obligations subsisting at the time of the approval of Republic Act No. 304
which took effect on June 18, 1948. It should be noted that the real estate taxes in question have
reference to those due in 1958 and subsequent years. The law is explicit that in order that a
certificate may be used in payment of an obligation the same must be subsisting at the time of its
approval even if we hold that a tax partakes of this character, neither can it be contended that
appellee can compel the government to accept the alleged certificates of indebtedness in payment
of his real estate taxes under proviso No. 2 abovequoted also for the reason that in order that such
payment may be allowed the tax must be owed by the applicant himself . This is the correct
implication that may be drawn from the use by the law of the words "his taxes". Verily, the right to
use the backpay certificate in settlement of taxes is given only to the applicant and not to any holder
of any negotiable certificate to whom the law only gives the right to have it discounted by a Filipino
citizen or corporation under certain limitations. Here appellee is not himself the applicant of the
certificate, in question. He is merely an assignee thereof, or a subsequent holder whose right is at
most to have it discounted upon maturity — or to negotiate it in the meantime. A fortiori, it may be
included that, not having the right to use said certificates to pay his taxes, appellee cannot compel
appellants to accept them as he requests in the present petition for mandamus. As a consequence,
we cannot but hold that mandamus does not lie against appellants because they have in no way
neglected to perform an act enjoined upon them by law as a duty, nor have they unlawfully excluded
appellee from the use or enjoyment of a right to which be is entitled.1

We are aware of the cases2 cited by the court a quo wherein the government banking institutions
were ordered to accept the backpay certificates of petitioners in payment of their indebtedness to
them, but they are not here in point because in the cases mentioned the petitioners were applicants
and original holders of the corresponding backpay certificates. Here appellee is not.

With regard to the second issue, i.e., whether compensation can be invoked insofar as the two
obligations are concerned, Articles 1278 and 1279 of the new Civil Code provide:

ART. 1278. Compensation shall take place when two persons, in their own right, are
creditors and debtors of each other.

ART. 1279. In order that compensation may be proper, it is necessary:

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

(2) That both debts consist in a sum of money, or if the things due are consumable, they be
of the same kind, and also of the same quality if the latter has been stated;

(3) That the two debts be due;

(4) That they two liquidated and demandable;

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

It is clear from the above legal provisions that compensation cannot be effected with regard to the
two obligations in question. In the first place, the debtor insofar as the certificates of indebtedness
are concerned is the Republic of the Philippines, whereas the real estate taxes owed by appellee are
due to the City of Manila and Pasay City, each one of which having a distinct and separate
personality from our Republic. With regard to the certificates, the creditor is the appellee while the
debtor is the Republic of the Philippines. And with regard to the taxes, the creditors are the City of
Manila and Pasay City while the debtor is the appellee. It appears, therefore, that each one of the
obligors concerning the two obligations is not at the same time the principal creditor of the other. It
cannot also be said for certain that the certificates are already due. Although on their faces the
certificates issued to appellee state that they are redeemable on June 18, 1958, yet the law does not
say that they are redeemable from its approval on June 18, 1948 but "within ten years from the date
of issuance" of the certificates. There is no certainty, therefore, when the certificates are really
redeemable within the meaning of the law. Since the requisites for the accomplishment of legal
compensation cannot be fulfilled, the latter cannot take place with regard to the two obligations as
found by the court a quo.

WHEREFORE, the decision appealed from is reversed. The petition for mandamus is dismissed.
The injunction issued against respondents-appellants is hereby lifted. No costs.

Padilla, Labrador, Concepcion, Reyes, J.B.L., Barrera, Paredes, Dizon, Regala and Makalintal, JJ.,
concur.
Bengzon, C.J., took no part.
9.

G.R. No. L-31364 March 30, 1979

MISAEL P. VERA, as Commissioner of Internal Revenue, and JAIME ARANETA, as Regional

Director, Revenue Region No. 14, Bureau of Internal Revenue, petitioners,
vs.
HON. JOSE F. FERNANDEZ, Judge of the Court of First Instance of Negros Occidental,
Branch V, and FRANCIS A. TONGOY, Administrator of the Estate of the late LUIS D.
TONGOY respondents.

DE CASTRO, J.:

Appeal from two orders of the Court of First Instance of Negros Occidental, Branch V in Special
Proceedings No. 7794, entitled: "Intestate Estate of Luis D. Tongoy," the first dated July 29, 1969
dismissing the Motion for Allowance of Claim and for an Order of Payment of Taxes by the
Government of the Republic of the Philippines against the Estate of the late Luis D. Tongoy, for
deficiency income taxes for the years 1963 and 1964 of the decedent in the total amount of
P3,254.80, inclusive 5% surcharge, 1% monthly interest and compromise penalties, and the second,
dated October 7, 1969, denying the Motion for reconsideration of the Order of dismissal.

The Motion for allowance of claim and for payment of taxes dated May 28, 1969 was filed on June 3,
1969 in the abovementioned special proceedings, (par. 3, Annex A, Petition, pp. 1920, Rollo). The
claim represents the indebtedness to the Government of the late Luis D. Tongoy for deficiency
income taxes in the total sum of P3,254.80 as above stated, covered by Assessment Notices Nos.
11-50-29-1-11061-21-63 and 11-50-291-1 10875-64, to which motion was attached Proof of Claim
(Annex B, Petition, pp. 21-22, Rollo). The Administrator opposed the motion solely on the ground
that the claim was barred under Section 5, Rule 86 of the Rules of Court (par. 4, Opposition to
Motion for Allowance of Claim, pp. 23-24, Rollo). Finding the opposition well-founded, the
respondent Judge, Jose F. Fernandez, dismissed the motion for allowance of claim filed by herein
petitioner, Regional Director of the Bureau of Internal Revenue, in an order dated July 29, 1969
(Annex D, Petition, p. 26, Rollo). On September 18, 1969, a motion for reconsideration was filed, of
the order of July 29, 1969, but was denied in an Order dated October 7, 1969.

Hence, this appeal on certiorari, petitioner assigning the following errors:

1. The lower court erred in holding that the claim for taxes by the government against
the estate of Luis D. Tongoy was filed beyond the period provided in Section 2, Rule
86 of the Rules of Court.

2. The lower court erred in holding that the claim for taxes of the government was
already barred under Section 5, Rule 86 of the Rules of Court.

which raise the sole issue of whether or not the statute of non-claims Section 5, Rule 86 of the New
Rule of Court, bars claim of the government for unpaid taxes, still within the period of limitation
prescribed in Section 331 and 332 of the National Internal Revenue Code.
Section 5, Rule 86, as invoked by the respondent Administrator in hid Oppositions to the Motion for
Allowance of Claim, etc. of the petitioners reads as follows:

All claims for money against the decedent, arising from contracts, express or implied,
whether the same be due, not due, or contingent, all claims for funeral expenses and
expenses for the last sickness of the decedent, and judgment for money against the
decedent, must be filed within the time limited in they notice; otherwise they are
barred forever, except that they may be set forth as counter claims in any action that
the executor or administrator may bring against the claimants. Where the executor or
administrator commence an action, or prosecutes an action already commenced by
the deceased in his lifetime, the debtor may set forth may answer the claims he has
against the decedents, instead of presenting them independently to the court has
herein provided, and mutual claims may be set off against each other in such action;
and in final judgment is rendered in favored of the decedent, the amount to
determined shall be considered the true balance against the estate, as though the
claim has been presented directly before the court in the administration proceedings.
Claims not yet due, or contingent may be approved at their present value.

A perusal of the aforequoted provisions shows that it makes no mention of claims for monetary
obligation of the decedent created by law, such as taxes which is entirely of different character from
the claims expressly enumerated therein, such as: "all claims for money against the decedent arising
from contract, express or implied, whether the same be due, not due or contingent, all claim for
funeral expenses and expenses for the last sickness of the decedent and judgment for money
against the decedent." Under the familiar rule of statutory construction of expressio unius est
exclusio alterius, the mention of one thing implies the exclusion of another thing not mentioned.
Thus, if a statute enumerates the things upon which it is to operate, everything else must
necessarily, and by implication be excluded from its operation and effect (Crawford, Statutory
Construction, pp. 334-335).

In the case of Commissioner of Internal Revenue vs. Ilagan Electric & Ice Plant, et al., G.R. No. L-
23081, December 30, 1969, it was held that the assessment, collection and recovery of taxes, as
well as the matter of prescription thereof are governed by the provisions of the National Internal
revenue Code, particularly Sections 331 and 332 thereof, and not by other provisions of law. (See
also Lim Tio, Dy Heng and Dee Jue vs. Court of Tax Appeals & Collector of Internal Revenue, G.R.
No. L-10681, March 29, 1958). Even without being specifically mentioned, the provisions of Section
2 of Rule 86 of the Rules of Court may reasonably be presumed to have been also in the mind of the
Court as not affecting the aforecited Section of the National Internal Revenue Code.

In the case of Pineda vs. CFI of Tayabas, 52 Phil. 803, it was even more pointedly held that "taxes
assessed against the estate of a deceased person ... need not be submitted to the committee on
claims in the ordinary course of administration. In the exercise of its control over the administrator,
the court may direct the payment of such taxes upon motion showing that the taxes have been
assessed against the estate." The abolition of the Committee on Claims does not alter the basic
ruling laid down giving exception to the claim for taxes from being filed as the other claims
mentioned in the Rule should be filed before the Court. Claims for taxes may be collected even after
the distribution of the decedent's estate among his heirs who shall be liable therefor in proportion of
their share in the inheritance. (Government of the Philippines vs. Pamintuan, 55 Phil. 13).

The reason for the more liberal treatment of claims for taxes against a decedent's estate in the form
of exception from the application of the statute of non-claims, is not hard to find. Taxes are the
lifeblood of the Government and their prompt and certain availability are imperious need.
(Commissioner of Internal Revenue vs. Pineda, G. R. No. L-22734, September 15, 1967, 21 SCRA
105). Upon taxation depends the Government ability to serve the people for whose benefit taxes are
collected. To safeguard such interest, neglect or omission of government officials entrusted with the
collection of taxes should not be allowed to bring harm or detriment to the people, in the same
manner as private persons may be made to suffer individually on account of his own negligence, the
presumption being that they take good care of their personal affairs. This should not hold true to
government officials with respect to matters not of their own personal concern. This is the philosophy
behind the government's exception, as a general rule, from the operation of the principle of estoppel.
(Republic vs. Caballero, L-27437, September 30, 1977, 79 SCRA 177; Manila Lodge No. 761,
Benevolent and Protective Order of the Elks Inc. vs. Court of Appeals, L-41001, September 30,
1976, 73 SCRA 162; Sy vs. Central Bank of the Philippines, L-41480, April 30,1976, 70 SCRA 571;
Balmaceda vs. Corominas & Co., Inc., 66 SCRA 553; Auyong Hian vs. Court of Tax Appeals, 59
SCRA 110; Republic vs. Philippine Rabbit Bus Lines, Inc., 66 SCRA 553; Republic vs. Philippine
Long Distance Telephone Company, L-18841, January 27, 1969, 26 SCRA 620; Zamora vs. Court of
Tax Appeals, L-23272, November 26, 1970, 36 SCRA 77; E. Rodriguez, Inc. vs. Collector of Internal
Revenue, L- 23041, July 31, 1969, 28 SCRA 119.) As already shown, taxes may be collected even
after the distribution of the estate of the decedent among his heirs (Government of the Philippines
vs. Pamintuan, supra; Pineda vs. CFI of Tayabas, supra Clara Diluangco Palanca vs. Commissioner
of Internal Revenue, G. R. No. L-16661, January 31, 1962).

Furthermore, as held in Commissioner of Internal Revenue vs. Pineda, supra, citing the last
paragraph of Section 315 of the Tax Code payment of income tax shall be a lien in favor of the
Government of the Philippines from the time the assessment was made by the Commissioner of
Internal Revenue until paid with interests, penalties, etc. By virtue of such lien, this court held that
the property of the estate already in the hands of an heir or transferee may be subject to the
payment of the tax due the estate. A fortiori before the inheritance has passed to the heirs, the
unpaid taxes due the decedent may be collected, even without its having been presented under
Section 2 of Rule 86 of the Rules of Court. It may truly be said that until the property of the estate of
the decedent has vested in the heirs, the decedent, represented by his estate, continues as if he
were still alive, subject to the payment of such taxes as would be collectible from the estate even
after his death. Thus in the case above cited, the income taxes sought to be collected were due from
the estate, for the three years 1946, 1947 and 1948 following his death in May, 1945.

Even assuming arguendo that claims for taxes have to be filed within the time prescribed in Section
2, Rule 86 of the Rules of Court, the claim in question may be filed even after the expiration of the
time originally fixed therein, as may be gleaned from the italicized portion of the Rule herein cited
which reads:

Section 2. Time within which claims shall be filed. - In the notice provided in the
preceding section, the court shall state the time for the filing of claims against the
estate, which shall not be more than twelve (12) nor less than six (6) months after the
date of the first publication of the notice. However, at any time before an order of
distribution is entered, on application of a creditor who has failed to file his claim
within the time previously limited the court may, for cause shown and on such terms
as are equitable, allow such claim to be flied within a time not exceeding one (1)
month. (Emphasis supplied)

In the instant case, petitioners filed an application (Motion for Allowance of Claim and for an Order of
Payment of Taxes) which, though filed after the expiration of the time previously limited but before
an order of the distribution is entered, should have been granted by the respondent court, in the
absence of any valid ground, as none was shown, justifying denial of the motion, specially
considering that it was for allowance Of claim for taxes due from the estate, which in effect
represents a claim of the people at large, the only reason given for the denial that the claim was filed
out of the previously limited period, sustaining thereby private respondents' contention, erroneously
as has been demonstrated.

WHEREFORE, the order appealed from is reverse. Since the Tax Commissioner's assessment in
the total amount of P3,254.80 with 5 % surcharge and 1 % monthly interest as provided in the Tax
Code is a final one and the respondent estate's sole defense of prescription has been herein
overruled, the Motion for Allowance of Claim is herein granted and respondent estate is ordered to
pay and discharge the same, subject only to the limitation of the interest collectible thereon as
provided by the Tax Code. No pronouncement as to costs.

SO ORDERED

10.

G.R. No. L-34915 June 24, 1983

CITY GOVERNMENT OF QUEZON CITY and CITY COUNCIL OF QUEZON CITY, petitioners,
vs.
HON. JUDGE VICENTE G. ERICTA as Judge of the Court of First Instance of Rizal, Quezon
City, Branch XVIII; HIMLAYANG PILIPINO, INC., respondents.

City Fiscal for petitioners.

Manuel Villaruel, Jr. and Feliciano Tumale for respondents.

GUTIERREZ, JR., J.:

This is a petition for review which seeks the reversal of the decision of the Court of First Instance of
Rizal, Branch XVIII declaring Section 9 of Ordinance No. 6118, S-64, of the Quezon City Council null
and void.

Section 9 of Ordinance No. 6118, S-64, entitled "ORDINANCE REGULATING THE

ESTABLISHMENT, MAINTENANCE AND OPERATION OF PRIVATE MEMORIAL TYPE
CEMETERY OR BURIAL GROUND WITHIN THE JURISDICTION OF QUEZON CITY AND
PROVIDING PENALTIES FOR THE VIOLATION THEREOF" provides:

Sec. 9. At least six (6) percent of the total area of the memorial park cemetery shall
be set aside for charity burial of deceased persons who are paupers and have been
residents of Quezon City for at least 5 years prior to their death, to be determined by
competent City Authorities. The area so designated shall immediately be developed
 and should be open for operation not later than six months from the date of approval
of the application.

For several years, the aforequoted section of the Ordinance was not enforced by city authorities but
seven years after the enactment of the ordinance, the Quezon City Council passed the following
resolution:

RESOLVED by the council of Quezon assembled, to request, as it does hereby

request the City Engineer, Quezon City, to stop any further selling and/or transaction
of memorial park lots in Quezon City where the owners thereof have failed to donate
the required 6% space intended for paupers burial.

Pursuant to this petition, the Quezon City Engineer notified respondent Himlayang Pilipino, Inc. in
writing that Section 9 of Ordinance No. 6118, S-64 would be enforced

Respondent Himlayang Pilipino reacted by filing with the Court of First Instance of Rizal Branch XVIII
at Quezon City, a petition for declaratory relief, prohibition and mandamus with preliminary injunction
(Sp. Proc. No. Q-16002) seeking to annul Section 9 of the Ordinance in question The respondent
alleged that the same is contrary to the Constitution, the Quezon City Charter, the Local Autonomy
Act, and the Revised Administrative Code.

There being no issue of fact and the questions raised being purely legal both petitioners and
respondent agreed to the rendition of a judgment on the pleadings. The respondent court, therefore,
rendered the decision declaring Section 9 of Ordinance No. 6118, S-64 null and void.

A motion for reconsideration having been denied, the City Government and City Council filed the
instant petition.

Petitioners argue that the taking of the respondent's property is a valid and reasonable exercise of
police power and that the land is taken for a public use as it is intended for the burial ground of
paupers. They further argue that the Quezon City Council is authorized under its charter, in the
exercise of local police power, " to make such further ordinances and resolutions not repugnant to
law as may be necessary to carry into effect and discharge the powers and duties conferred by this
Act and such as it shall deem necessary and proper to provide for the health and safety, promote the
prosperity, improve the morals, peace, good order, comfort and convenience of the city and the
inhabitants thereof, and for the protection of property therein."

On the other hand, respondent Himlayang Pilipino, Inc. contends that the taking or confiscation of
property is obvious because the questioned ordinance permanently restricts the use of the property
such that it cannot be used for any reasonable purpose and deprives the owner of all beneficial use
of his property.

The respondent also stresses that the general welfare clause is not available as a source of power
for the taking of the property in this case because it refers to "the power of promoting the public
welfare by restraining and regulating the use of liberty and property." The respondent points out that
if an owner is deprived of his property outright under the State's police power, the property is
generally not taken for public use but is urgently and summarily destroyed in order to promote the
general welfare. The respondent cites the case of a nuisance per se or the destruction of a house to
prevent the spread of a conflagration.
We find the stand of the private respondent as well as the decision of the respondent Judge to be
well-founded. We quote with approval the lower court's ruling which declared null and void Section 9
of the questioned city ordinance:

The issue is: Is Section 9 of the ordinance in question a valid exercise of the police
power?

An examination of the Charter of Quezon City (Rep. Act No. 537), does not reveal
any provision that would justify the ordinance in question except the provision
granting police power to the City. Section 9 cannot be justified under the power
granted to Quezon City to tax, fix the license fee, and regulate such other business,
trades, and occupation as may be established or practised in the City.' (Subsections
'C', Sec. 12, R.A. 537).

The power to regulate does not include the power to prohibit (People vs. Esguerra,
81 PhiL 33, Vega vs. Municipal Board of Iloilo, L-6765, May 12, 1954; 39 N.J. Law,
70, Mich. 396). A fortiori, the power to regulate does not include the power to
confiscate. The ordinance in question not only confiscates but also prohibits the
operation of a memorial park cemetery, because under Section 13 of said ordinance,
'Violation of the provision thereof is punishable with a fine and/or imprisonment and
that upon conviction thereof the permit to operate and maintain a private cemetery
shall be revoked or cancelled.' The confiscatory clause and the penal provision in
effect deter one from operating a memorial park cemetery. Neither can the ordinance
in question be justified under sub- section "t", Section 12 of Republic Act 537 which
authorizes the City Council to-

'prohibit the burial of the dead within the center of population of the
city and provide for their burial in such proper place and in such
manner as the council may determine, subject to the provisions of the
general law regulating burial grounds and cemeteries and governing
funerals and disposal of the dead.' (Sub-sec. (t), Sec. 12, Rep. Act
No. 537).

There is nothing in the above provision which authorizes confiscation or as

euphemistically termed by the respondents, 'donation'

We now come to the question whether or not Section 9 of the ordinance in question
is a valid exercise of police power. The police power of Quezon City is defined in
sub-section 00, Sec. 12, Rep. Act 537 which reads as follows:

(00) To make such further ordinance and regulations not repugnant to

law as may be necessary to carry into effect and discharge the
powers and duties conferred by this act and such as it shall deem
necessary and proper to provide for the health and safety, promote,
the prosperity, improve the morals, peace, good order, comfort and
convenience of the city and the inhabitants thereof, and for the
protection of property therein; and enforce obedience thereto with
such lawful fines or penalties as the City Council may prescribe under
the provisions of subsection (jj) of this section.

We start the discussion with a restatement of certain basic principles. Occupying the
forefront in the bill of rights is the provision which states that 'no person shall be
 deprived of life, liberty or property without due process of law' (Art. Ill, Section 1
subparagraph 1, Constitution).

On the other hand, there are three inherent powers of government by which the state
interferes with the property rights, namely-. (1) police power, (2) eminent domain, (3)
taxation. These are said to exist independently of the Constitution as necessary
attributes of sovereignty.

Police power is defined by Freund as 'the power of promoting the public welfare by
restraining and regulating the use of liberty and property' (Quoted in Political Law by
Tanada and Carreon, V-11, p. 50). It is usually exerted in order to merely regulate
the use and enjoyment of property of the owner. If he is deprived of his property
outright, it is not taken for public use but rather to destroy in order to promote the
general welfare. In police power, the owner does not recover from the government
for injury sustained in consequence thereof (12 C.J. 623). It has been said that police
power is the most essential of government powers, at times the most insistent, and
always one of the least limitable of the powers of government (Ruby vs. Provincial
Board, 39 PhiL 660; Ichong vs. Hernandez, 1,7995, May 31, 1957). This power
embraces the whole system of public regulation (U.S. vs. Linsuya Fan, 10 PhiL 104).
The Supreme Court has said that police power is so far-reaching in scope that it has
almost become impossible to limit its sweep. As it derives its existence from the very
existence of the state itself, it does not need to be expressed or defined in its scope.
Being coextensive with self-preservation and survival itself, it is the most positive and
active of all governmental processes, the most essential insistent and illimitable
Especially it is so under the modern democratic framework where the demands of
society and nations have multiplied to almost unimaginable proportions. The field and
scope of police power have become almost boundless, just as the fields of public
interest and public welfare have become almost all embracing and have transcended
human foresight. Since the Courts cannot foresee the needs and demands of public
interest and welfare, they cannot delimit beforehand the extent or scope of the police
power by which and through which the state seeks to attain or achieve public interest
and welfare. (Ichong vs. Hernandez, L-7995, May 31, 1957).

The police power being the most active power of the government and the due
process clause being the broadest station on governmental power, the conflict
between this power of government and the due process clause of the Constitution is
oftentimes inevitable.

It will be seen from the foregoing authorities that police power is usually exercised in
the form of mere regulation or restriction in the use of liberty or property for the
promotion of the general welfare. It does not involve the taking or confiscation of
property with the exception of a few cases where there is a necessity to confiscate
private property in order to destroy it for the purpose of protecting the peace and
order and of promoting the general welfare as for instance, the confiscation of an
illegally possessed article, such as opium and firearms.

It seems to the court that Section 9 of Ordinance No. 6118, Series of 1964 of Quezon
City is not a mere police regulation but an outright confiscation. It deprives a person
of his private property without due process of law, nay, even without compensation.

In sustaining the decision of the respondent court, we are not unmindful of the heavy burden
shouldered by whoever challenges the validity of duly enacted legislation whether national or local
As early as 1913, this Court ruled in Case v. Board of Health (24 PhiL 250) that the courts resolve
every presumption in favor of validity and, more so, where the ma corporation asserts that the
ordinance was enacted to promote the common good and general welfare.

In the leading case of Ermita-Malate Hotel and Motel Operators Association Inc. v. City Mayor of
Manila (20 SCRA 849) the Court speaking through the then Associate Justice and now Chief Justice
Enrique M. Fernando stated

Primarily what calls for a reversal of such a decision is the a of any evidence to offset
the presumption of validity that attaches to a statute or ordinance. As was expressed
categorically by Justice Malcolm 'The presumption is all in favor of validity. ... The
action of the elected representatives of the people cannot be lightly set aside. The
councilors must, in the very nature of things, be familiar with the necessities of their
particular ... municipality and with all the facts and lances which surround the subject
and necessitate action. The local legislative body, by enacting the ordinance, has in
effect given notice that the regulations are essential to the well-being of the people.
... The Judiciary should not lightly set aside legislative action when there is not a
clear invasion of personal or property rights under the guise of police regulation.
(U.S. v. Salaveria (1918], 39 Phil. 102, at p. 111. There was an affirmation of the
presumption of validity of municipal ordinance as announced in the leading Salaveria
decision in Ebona v. Daet, [1950]85 Phil. 369.)

We have likewise considered the principles earlier stated in Case v. Board of

Health supra :

... Under the provisions of municipal charters which are known as the general welfare
clauses, a city, by virtue of its police power, may adopt ordinances to the peace,
safety, health, morals and the best and highest interests of the municipality. It is a
well-settled principle, growing out of the nature of well-ordered and society, that
every holder of property, however absolute and may be his title, holds it under the
implied liability that his use of it shall not be injurious to the equal enjoyment of others
having an equal right to the enjoyment of their property, nor injurious to the rights of
the community. An property in the state is held subject to its general regulations,
which are necessary to the common good and general welfare. Rights of property,
like all other social and conventional rights, are subject to such reasonable limitations
in their enjoyment as shall prevent them from being injurious, and to such reasonable
restraints and regulations, established by law, as the legislature, under the governing
and controlling power vested in them by the constitution, may think necessary and
expedient. The state, under the police power, is possessed with plenary power to
deal with all matters relating to the general health, morals, and safety of the people,
so long as it does not contravene any positive inhibition of the organic law and
providing that such power is not exercised in such a manner as to justify the
interference of the courts to prevent positive wrong and oppression.

but find them not applicable to the facts of this case.

There is no reasonable relation between the setting aside of at least six (6) percent of the total area
of an private cemeteries for charity burial grounds of deceased paupers and the promotion of health,
morals, good order, safety, or the general welfare of the people. The ordinance is actually a taking
without compensation of a certain area from a private cemetery to benefit paupers who are charges
of the municipal corporation. Instead of building or maintaining a public cemetery for this purpose,
the city passes the burden to private cemeteries.
The expropriation without compensation of a portion of private cemeteries is not covered by Section
12(t) of Republic Act 537, the Revised Charter of Quezon City which empowers the city council to
prohibit the burial of the dead within the center of population of the city and to provide for their burial
in a proper place subject to the provisions of general law regulating burial grounds and cemeteries.
When the Local Government Code, Batas Pambansa Blg. 337 provides in Section 177 (q) that a
Sangguniang panlungsod may "provide for the burial of the dead in such place and in such manner
as prescribed by law or ordinance" it simply authorizes the city to provide its own city owned land or
to buy or expropriate private properties to construct public cemeteries. This has been the law and
practise in the past. It continues to the present. Expropriation, however, requires payment of just
compensation. The questioned ordinance is different from laws and regulations requiring owners of
subdivisions to set aside certain areas for streets, parks, playgrounds, and other public facilities from
the land they sell to buyers of subdivision lots. The necessities of public safety, health, and
convenience are very clear from said requirements which are intended to insure the development of
communities with salubrious and wholesome environments. The beneficiaries of the regulation, in
turn, are made to pay by the subdivision developer when individual lots are sold to home-owners.

As a matter of fact, the petitioners rely solely on the general welfare clause or on implied powers of
the municipal corporation, not on any express provision of law as statutory basis of their exercise of
power. The clause has always received broad and liberal interpretation but we cannot stretch it to
cover this particular taking. Moreover, the questioned ordinance was passed after Himlayang
Pilipino, Inc. had incorporated. received necessary licenses and permits and commenced operating.
The sequestration of six percent of the cemetery cannot even be considered as having been
impliedly acknowledged by the private respondent when it accepted the permits to commence
operations.

WHEREFORE, the petition for review is hereby DISMISSED. The decision of the respondent court is
affirmed.

SO ORDERED

11.

G.R. No. L-24153 February 14, 1983

TOMAS VELASCO, LOURDES RAMIREZ, SY PIN, EDMUNDO UNSON, APOLONIA RAMIREZ

and LOURDES LOMIBAO, as component members of the STA. CRUZ BARBERSHOP
ASSOCIATION, in their own behalf and in representation of the other owners of barbershops
in the City of Manila, petitioners-appellants,
vs.
HON. ANTONIO J. VILLEGAS, City Mayor of Manila, HON. HERMINIO A. ASTORGA, Vice-
Mayor and Presiding Officer of the Municipal Board in relation to Republic Act 4065, THE
MUNICIPAL BOARD OF THE CITY OF MANILA and EDUARDO QUINTOS SR., Chief of Police
of the City of Manila, respondents-appellees.
Leonardo L. Arguelles for respondent-appellant.

FERNANDO, C.J.:

This is an appeal from an order of the lower court dismissing a suit for declaratory relief challenging
the constitutionality based on Ordinance No. 4964 of the City of Manila, the contention being that it
amounts to a deprivation of property of petitioners-appellants of their means of livelihood without due
process of law. The assailed ordinance is worded thus: "It shall be prohibited for any operator of any
barber shop to conduct the business of massaging customers or other persons in any adjacent room
or rooms of said barber shop, or in any room or rooms within the same building where the barber
shop is located as long as the operator of the barber shop and the room where massaging is
conducted is the same person." 1 As noted in the appealed order, petitioners-appellants admitted that
criminal cases for the violation of this ordinance had been previously filed and decided. The lower
court, therefore, held that a petition for declaratory relief did not lie, its availability being dependent
on there being as yet no case involving such issue having been filed. 2

Even if such were not the case, the attack against the validity cannot succeed. As pointed out in the
brief of respondents-appellees, it is a police power measure. The objectives behind its enactment
are: "(1) To be able to impose payment of the license fee for engaging in the business of massage
clinic under Ordinance No. 3659 as amended by Ordinance 4767, an entirely different measure than
the ordinance regulating the business of barbershops and, (2) in order to forestall possible
immorality which might grow out of the construction of separate rooms for massage of
customers." 3 This Court has been most liberal in sustaining ordinances based on the general
welfare clause. As far back as U.S. v. Salaveria, 4 a 1918 decision, this Court through Justice
Malcolm made clear the significance and scope of such a clause, which "delegates in statutory form
the police power to a municipality. As above stated, this clause has been given wide application by
municipal authorities and has in its relation to the particular circumstances of the case been liberally
construed by the courts. Such, it is well to really is the progressive view of Philippine
jurisprudence." 5 As it was then, so it has continued to be. 6 There is no showing, therefore, of the
unconstitutionality of such ordinance.

WHEREFORE, the appealed order of the lower court is affirmed. No costs.

12.

G.R. No. L-75697

VALENTIN TIO doing business under the name and style of OMI ENTERPRISES, petitioner,
vs.
VIDEOGRAM REGULATORY BOARD, MINISTER OF FINANCE, METRO MANILA COMMISSION,
CITY MAYOR and CITY TREASURER OF MANILA, respondents.
Nelson Y. Ng for petitioner.
The City Legal Officer for respondents City Mayor and City Treasurer.

MELENCIO-HERRERA, J.:

This petition was filed on September 1, 1986 by petitioner on his own behalf and purportedly on
behalf of other videogram operators adversely affected. It assails the constitutionality of Presidential
Decree No. 1987 entitled "An Act Creating the Videogram Regulatory Board" with broad powers to
regulate and supervise the videogram industry (hereinafter briefly referred to as the BOARD). The
Decree was promulgated on October 5, 1985 and took effect on April 10, 1986, fifteen (15) days
after completion of its publication in the Official Gazette.

On November 5, 1985, a month after the promulgation of the abovementioned decree, Presidential
Decree No. 1994 amended the National Internal Revenue Code providing, inter alia:

SEC. 134. Video Tapes. — There shall be collected on each processed video-tape cassette,
ready for playback, regardless of length, an annual tax of five pesos; Provided, That locally
manufactured or imported blank video tapes shall be subject to sales tax.

On October 23, 1986, the Greater Manila Theaters Association, Integrated Movie Producers,
Importers and Distributors Association of the Philippines, and Philippine Motion Pictures Producers
Association, hereinafter collectively referred to as the Intervenors, were permitted by the Court to
intervene in the case, over petitioner's opposition, upon the allegations that intervention was
necessary for the complete protection of their rights and that their "survival and very existence is
threatened by the unregulated proliferation of film piracy." The Intervenors were thereafter allowed to
file their Comment in Intervention.

The rationale behind the enactment of the DECREE, is set out in its preambular clauses as follows:

1. WHEREAS, the proliferation and unregulated circulation of videograms including, among

others, videotapes, discs, cassettes or any technical improvement or variation thereof, have
greatly prejudiced the operations of moviehouses and theaters, and have caused a sharp
decline in theatrical attendance by at least forty percent (40%) and a tremendous drop in the
collection of sales, contractor's specific, amusement and other taxes, thereby resulting in
substantial losses estimated at P450 Million annually in government revenues;

2. WHEREAS, videogram(s) establishments collectively earn around P600 Million per annum
from rentals, sales and disposition of videograms, and such earnings have not been
subjected to tax, thereby depriving the Government of approximately P180 Million in taxes
each year;

3. WHEREAS, the unregulated activities of videogram establishments have also affected the
viability of the movie industry, particularly the more than 1,200 movie houses and theaters
throughout the country, and occasioned industry-wide displacement and unemployment due
to the shutdown of numerous moviehouses and theaters;

4. "WHEREAS, in order to ensure national economic recovery, it is imperative for the

Government to create an environment conducive to growth and development of all business
 industries, including the movie industry which has an accumulated investment of about P3
Billion;

5. WHEREAS, proper taxation of the activities of videogram establishments will not only
alleviate the dire financial condition of the movie industry upon which more than 75,000
families and 500,000 workers depend for their livelihood, but also provide an additional
source of revenue for the Government, and at the same time rationalize the heretofore
uncontrolled distribution of videograms;

6. WHEREAS, the rampant and unregulated showing of obscene videogram features

constitutes a clear and present danger to the moral and spiritual well-being of the youth, and
impairs the mandate of the Constitution for the State to support the rearing of the youth for
civic efficiency and the development of moral character and promote their physical,
intellectual, and social well-being;

7. WHEREAS, civic-minded citizens and groups have called for remedial measures to curb
these blatant malpractices which have flaunted our censorship and copyright laws;

8. WHEREAS, in the face of these grave emergencies corroding the moral values of the
people and betraying the national economic recovery program, bold emergency measures
must be adopted with dispatch; ... (Numbering of paragraphs supplied).

Petitioner's attack on the constitutionality of the DECREE rests on the following grounds:

1. Section 10 thereof, which imposes a tax of 30% on the gross receipts payable to the local
government is a RIDER and the same is not germane to the subject matter thereof;

2. The tax imposed is harsh, confiscatory, oppressive and/or in unlawful restraint of trade in
violation of the due process clause of the Constitution;

3. There is no factual nor legal basis for the exercise by the President of the vast powers
conferred upon him by Amendment No. 6;

4. There is undue delegation of power and authority;

5. The Decree is an ex-post facto law; and

6. There is over regulation of the video industry as if it were a nuisance, which it is not.

We shall consider the foregoing objections in seriatim.

1. The Constitutional requirement that "every bill shall embrace only one subject which shall be
expressed in the title thereof" 1 is sufficiently complied with if the title be comprehensive enough to
include the general purpose which a statute seeks to achieve. It is not necessary that the title
express each and every end that the statute wishes to accomplish. The requirement is satisfied if all
the parts of the statute are related, and are germane to the subject matter expressed in the title, or
as long as they are not inconsistent with or foreign to the general subject and title. 2 An act having a
single general subject, indicated in the title, may contain any number of provisions, no matter how
diverse they may be, so long as they are not inconsistent with or foreign to the general subject, and
may be considered in furtherance of such subject by providing for the method and means of carrying
out the general object." 3 The rule also is that the constitutional requirement as to the title of a bill
should not be so narrowly construed as to cripple or impede the power of legislation. 4 It should be
given practical rather than technical construction. 5

Tested by the foregoing criteria, petitioner's contention that the tax provision of the DECREE is a
rider is without merit. That section reads, inter alia:

Section 10. Tax on Sale, Lease or Disposition of Videograms. — Notwithstanding any

provision of law to the contrary, the province shall collect a tax of thirty percent (30%) of the
purchase price or rental rate, as the case may be, for every sale, lease or disposition of a
videogram containing a reproduction of any motion picture or audiovisual program. Fifty
percent (50%) of the proceeds of the tax collected shall accrue to the province, and the other
fifty percent (50%) shall acrrue to the municipality where the tax is collected; PROVIDED,
That in Metropolitan Manila, the tax shall be shared equally by the City/Municipality and the
Metropolitan Manila Commission.

xxx xxx xxx

The foregoing provision is allied and germane to, and is reasonably necessary for the
accomplishment of, the general object of the DECREE, which is the regulation of the video industry
through the Videogram Regulatory Board as expressed in its title. The tax provision is not
inconsistent with, nor foreign to that general subject and title. As a tool for regulation 6 it is simply one
of the regulatory and control mechanisms scattered throughout the DECREE. The express purpose
of the DECREE to include taxation of the video industry in order to regulate and rationalize the
heretofore uncontrolled distribution of videograms is evident from Preambles 2 and 5, supra. Those
preambles explain the motives of the lawmaker in presenting the measure. The title of the DECREE,
which is the creation of the Videogram Regulatory Board, is comprehensive enough to include the
purposes expressed in its Preamble and reasonably covers all its provisions. It is unnecessary to
express all those objectives in the title or that the latter be an index to the body of the DECREE. 7

2. Petitioner also submits that the thirty percent (30%) tax imposed is harsh and oppressive,
confiscatory, and in restraint of trade. However, it is beyond serious question that a tax does not
cease to be valid merely because it regulates, discourages, or even definitely deters the activities
taxed. 8 The power to impose taxes is one so unlimited in force and so searching in extent, that the
courts scarcely venture to declare that it is subject to any restrictions whatever, except such as rest
in the discretion of the authority which exercises it. 9 In imposing a tax, the legislature acts upon its
constituents. This is, in general, a sufficient security against erroneous and oppressive taxation. 10

The tax imposed by the DECREE is not only a regulatory but also a revenue measure prompted by
the realization that earnings of videogram establishments of around P600 million per annum have
not been subjected to tax, thereby depriving the Government of an additional source of revenue. It is
an end-user tax, imposed on retailers for every videogram they make available for public viewing. It
is similar to the 30% amusement tax imposed or borne by the movie industry which the theater-
owners pay to the government, but which is passed on to the entire cost of the admission ticket, thus
shifting the tax burden on the buying or the viewing public. It is a tax that is imposed uniformly on all
videogram operators.

The levy of the 30% tax is for a public purpose. It was imposed primarily to answer the need for
regulating the video industry, particularly because of the rampant film piracy, the flagrant violation of
intellectual property rights, and the proliferation of pornographic video tapes. And while it was also
an objective of the DECREE to protect the movie industry, the tax remains a valid imposition.
 The public purpose of a tax may legally exist even if the motive which impelled the legislature
to impose the tax was to favor one industry over another. 11

It is inherent in the power to tax that a state be free to select the subjects of taxation, and it
has been repeatedly held that "inequities which result from a singling out of one particular
class for taxation or exemption infringe no constitutional limitation". 12 Taxation has been
made the implement of the state's police power.13

At bottom, the rate of tax is a matter better addressed to the taxing legislature.

3. Petitioner argues that there was no legal nor factual basis for the promulgation of the DECREE by
the former President under Amendment No. 6 of the 1973 Constitution providing that "whenever in
the judgment of the President ... , there exists a grave emergency or a threat or imminence thereof,
or whenever the interim Batasang Pambansa or the regular National Assembly fails or is unable to
act adequately on any matter for any reason that in his judgment requires immediate action, he may,
in order to meet the exigency, issue the necessary decrees, orders, or letters of instructions, which
shall form part of the law of the land."

In refutation, the Intervenors and the Solicitor General's Office aver that the 8th "whereas" clause
sufficiently summarizes the justification in that grave emergencies corroding the moral values of the
people and betraying the national economic recovery program necessitated bold emergency
measures to be adopted with dispatch. Whatever the reasons "in the judgment" of the then
President, considering that the issue of the validity of the exercise of legislative power under the said
Amendment still pends resolution in several other cases, we reserve resolution of the question
raised at the proper time.

4. Neither can it be successfully argued that the DECREE contains an undue delegation of
legislative power. The grant in Section 11 of the DECREE of authority to the BOARD to "solicit the
direct assistance of other agencies and units of the government and deputize, for a fixed and limited
period, the heads or personnel of such agencies and units to perform enforcement functions for the
Board" is not a delegation of the power to legislate but merely a conferment of authority or discretion
as to its execution, enforcement, and implementation. "The true distinction is between the delegation
of power to make the law, which necessarily involves a discretion as to what it shall be, and
conferring authority or discretion as to its execution to be exercised under and in pursuance of the
law. The first cannot be done; to the latter, no valid objection can be made." 14 Besides, in the very
language of the decree, the authority of the BOARD to solicit such assistance is for a "fixed and
limited period" with the deputized agencies concerned being "subject to the direction and control of
the BOARD." That the grant of such authority might be the source of graft and corruption would not
stigmatize the DECREE as unconstitutional. Should the eventuality occur, the aggrieved parties will
not be without adequate remedy in law.

5. The DECREE is not violative of the ex post facto principle. An ex post facto law is, among other
categories, one which "alters the legal rules of evidence, and authorizes conviction upon less or
different testimony than the law required at the time of the commission of the offense." It is
petitioner's position that Section 15 of the DECREE in providing that:

All videogram establishments in the Philippines are hereby given a period of forty-five (45)
days after the effectivity of this Decree within which to register with and secure a permit from
the BOARD to engage in the videogram business and to register with the BOARD all their
inventories of videograms, including videotapes, discs, cassettes or other technical
improvements or variations thereof, before they could be sold, leased, or otherwise disposed
of. Thereafter any videogram found in the possession of any person engaged in the
 videogram business without the required proof of registration by the BOARD, shall be prima
facie evidence of violation of the Decree, whether the possession of such videogram be for
private showing and/or public exhibition.

raises immediately a prima facie evidence of violation of the DECREE when the required proof of
registration of any videogram cannot be presented and thus partakes of the nature of an ex post
facto law.

The argument is untenable. As this Court held in the recent case of Vallarta vs. Court of Appeals, et
al. 15

... it is now well settled that "there is no constitutional objection to the passage of a law
providing that the presumption of innocence may be overcome by a contrary presumption
founded upon the experience of human conduct, and enacting what evidence shall be
sufficient to overcome such presumption of innocence" (People vs. Mingoa 92 Phil. 856
[1953] at 858-59, citing 1 COOLEY, A TREATISE ON THE CONSTITUTIONAL
LIMITATIONS, 639-641). And the "legislature may enact that when certain facts have been
proved that they shall be prima facie evidence of the existence of the guilt of the accused
and shift the burden of proof provided there be a rational connection between the facts
proved and the ultimate facts presumed so that the inference of the one from proof of the
others is not unreasonable and arbitrary because of lack of connection between the two in
common experience". 16

Applied to the challenged provision, there is no question that there is a rational connection between
the fact proved, which is non-registration, and the ultimate fact presumed which is violation of the
DECREE, besides the fact that the prima facie presumption of violation of the DECREE attaches
only after a forty-five-day period counted from its effectivity and is, therefore, neither retrospective in
character.

6. We do not share petitioner's fears that the video industry is being over-regulated and being eased
out of existence as if it were a nuisance. Being a relatively new industry, the need for its regulation
was apparent. While the underlying objective of the DECREE is to protect the moribund movie
industry, there is no question that public welfare is at bottom of its enactment, considering "the unfair
competition posed by rampant film piracy; the erosion of the moral fiber of the viewing public brought
about by the availability of unclassified and unreviewed video tapes containing pornographic films
and films with brutally violent sequences; and losses in government revenues due to the drop in
theatrical attendance, not to mention the fact that the activities of video establishments are virtually
untaxed since mere payment of Mayor's permit and municipal license fees are required to engage in
business. 17

The enactment of the Decree since April 10, 1986 has not brought about the "demise" of the video
industry. On the contrary, video establishments are seen to have proliferated in many places
notwithstanding the 30% tax imposed.

In the last analysis, what petitioner basically questions is the necessity, wisdom and expediency of
the DECREE. These considerations, however, are primarily and exclusively a matter of legislative
concern.

Only congressional power or competence, not the wisdom of the action taken, may be the
basis for declaring a statute invalid. This is as it ought to be. The principle of separation of
powers has in the main wisely allocated the respective authority of each department and
confined its jurisdiction to such a sphere. There would then be intrusion not allowable under
 the Constitution if on a matter left to the discretion of a coordinate branch, the judiciary would
substitute its own. If there be adherence to the rule of law, as there ought to be, the last
offender should be courts of justice, to which rightly litigants submit their controversy
precisely to maintain unimpaired the supremacy of legal norms and prescriptions. The attack
on the validity of the challenged provision likewise insofar as there may be objections, even if
valid and cogent on its wisdom cannot be sustained. 18

In fine, petitioner has not overcome the presumption of validity which attaches to a challenged
statute. We find no clear violation of the Constitution which would justify us in pronouncing
Presidential Decree No. 1987 as unconstitutional and void.

WHEREFORE, the instant Petition is hereby dismissed.

No costs.

SO ORDERED.

13.

G.R. No. L-24670 December 14, 1979

ORTIGAS & CO., LIMITED PARTNERSHIP, plaintiff-appellant,

vs.
FEATI BANK AND TRUST CO., defendant-appellee.

Ramirez & Ortigas for appellant.

Tañada, Teehankee & Carreon for appellee.

SANTOS, J.:

An appeal interposed on June 23, 1965 by plaintiff-appellant, Ortigas & Co., Limited Partnership,
from the decision of the Court of First Instance of Rizal, Branch VI, at Pasig, Hon. Andres Reyes
presiding, which dismissed its complaint in Civil Case No. 7706, entitled, "Ortigas & Company,
Limited Partnership, plaintiff, v. Feati Bank and Trust Company, defendant," for lack of merit.

The following facts — a reproduction of the lower court's findings, which, in turn, are based on a
stipulation of facts entered into by the parties are not disputed. Plaintiff (formerly known as "Ortigas,
Madrigal y Cia") is a limited partnership and defendant Feati Bank and Trust Co., is a corporation
duly organized and existing in accordance with the laws of the Philippines. Plaintiff is engaged in real
estate business, developing and selling lots to the public, particularly the Highway Hills Subdivision
along Epifanio de los Santos Avenue, Mandaluyong, Rizal. 1

On March 4, 1952, plaintiff, as vendor, and Augusto Padilla y Angeles and Natividad Angeles, as
vendees, entered into separate agreements of sale on installments over two parcels of land, known
as Lots Nos. 5 and 6, Block 31, of the Highway Hills Subdivision, situated at Mandaluyong, Rizal. On
July 19, 1962, the said vendees transferred their rights and interests over the aforesaid lots in favor
of one Emma Chavez. Upon completion of payment of the purchase price, the plaintiff executed the
corresponding deeds of sale in favor of Emma Chavez. Both the agreements (of sale on installment)
and the deeds of sale contained the stipulations or restrictions that:

1. The parcel of land subject of this deed of sale shall be used the Buyer exclusively
for residential purposes, and she shall not be entitled to take or remove soil, stones
or gravel from it or any other lots belonging to the Seller.

2. All buildings and other improvements (except the fence) which may be constructed
at any time in said lot must be, (a) of strong materials and properly painted, (b)
provided with modern sanitary installations connected either to the public sewer or to
an approved septic tank, and (c) shall not be at a distance of less than two (2) meters
from its boundary lines. 2

The above restrictions were later annotated in TCT Nos. 101509 and 101511 of the Register of
Deeds of Rizal, covering the said lots and issued in the name of Emma Chavez.3

Eventually, defendant-appellee acquired Lots Nos. 5 and 6, with TCT Nos. 101613 and 106092
issued in its name, respectively and the building restrictions were also annotated
therein. 4 Defendant-appellee bought Lot No. 5 directly from Emma Chavez, "free from all liens and
encumbrances as stated in Annex 'D', 5 while Lot No. 6 was acquired from Republic Flour Mills
through a "Deed of Exchange," Annex "E". 6 TCT No. 101719 in the name of Republic Flour Mills
likewise contained the same restrictions, although defendant-appellee claims that Republic Flour
Mills purchased the said Lot No. 6 "in good faith. free from all liens and encumbrances," as stated in
the Deed of Sale, Annex "F" 7 between it and Emma Chavez.

Plaintiff-appellant claims that the restrictions annotated on TCT Nos. 101509, 101511, 101719,
101613, and 106092 were imposed as part of its general building scheme designed for the
beautification and development of the Highway Hills Subdivision which forms part of the big landed
estate of plaintiff-appellant where commercial and industrial sites are also designated or
established. 8

Defendant-appellee, upon the other hand, maintains that the area along the western part of Epifanio
de los Santos Avenue (EDSA) from Shaw Boulevard to Pasig River, has been declared a
commercial and industrial zone, per Resolution No. 27, dated February 4, 1960 of the Municipal
Council of Mandaluyong, Rizal. 9 It alleges that plaintiff-appellant 'completely sold and transferred to
third persons all lots in said subdivision facing Epifanio de los Santos Avenue" 10 and the subject lots
thereunder were acquired by it "only on July 23, 1962 or more than two (2) years after the area ...
had been declared a commercial and industrial zone ... 11

On or about May 5, 1963, defendant-appellee began laying the foundation and commenced the
construction of a building on Lots Nos. 5 and 6, to be devoted to banking purposes, but which
defendant-appellee claims could also be devoted to, and used exclusively for, residential purposes.
The following day, plaintiff-appellant demanded in writing that defendant-appellee stop the
construction of the commerical building on the said lots. The latter refused to comply with the
demand, contending that the building was being constructed in accordance with the zoning
regulations, defendant-appellee having filed building and planning permit applications with the
Municipality of Mandaluyong, and it had accordingly obtained building and planning permits to
proceed with the construction.12

On the basis of the foregoing facts, Civil Case No. 7706, supra, was submitted in the lower court for
decision. The complaint sought, among other things, the issuance of "a writ of preliminary injunction
... restraining and enjoining defendant, its agents, assigns, and those acting on its or their behalf
from continuing or completing the construction of a commercial bank building in the premises ...
involved, with the view to commanding the defendant to observe and comply with the building
restrictions annotated in the defendant's transfer certificate of title."

In deciding the said case, the trial court considered, as the fundamental issue, whether or not the
resolution of the Municipal Council of Mandaluyong declaring Lots Nos. 5 and 6, among others, as
part of the commercial and industrial zone of the municipality, prevailed over the building restrictions
imposed by plaintiff-appellant on the lots in question. 13 The records do not show that a writ of
preliminary injunction was issued.

The trial court upheld the defendant-appellee and dismissed the complaint, holding that the subject
restrictions were subordinate to Municipal Resolution No. 27, supra. It predicated its conclusion on
the exercise of police power of the said municipality, and stressed that private interest should "bow
down to general interest and welfare. " In short, it upheld the classification by the Municipal Council
of the area along Epifanio de los Santos Avenue as a commercial and industrial zone, and held that
the same rendered "ineffective and unenforceable" the restrictions in question as against defendant-
appellee.14 The trial court decision further emphasized that it "assumes said resolution to be valid,
considering that there is no issue raised by either of the parties as to whether the same is null and
void. 15

On March 2, 1965, plaintiff-appellant filed a motion for reconsideration of the above decision, 16 which
motion was opposed by defendant-appellee on March 17, 1965.17 It averred, among others, in the
motion for reconsideration that defendant- appellee "was duty bound to comply with the conditions of
the contract of sale in its favor, which conditions were duly annotated in the Transfer Certificates of
Title issued in her (Emma Chavez) favor." It also invited the trial court's attention to its claim that the
Municipal Council had (no) power to nullify the contractual obligations assumed by the defendant
corporation." 18

The trial court denied the motion for reconsideration in its order of March 26, 1965. 19

On April 2, 1965 plaintiff-appellant filed its notice of appeal from the decision dismissing the
complaint and from the order of March 26, 1965 denying the motion for reconsideration, its record on
appeal, and a cash appeal bond." 20 On April 14, the appeal was given due course 21 and the records
of the case were elevated directly to this Court, since only questions of law are raised. 22

Plaintiff-appellant alleges in its brief that the trial court erred —

I. When it sustained the view that Resolution No. 27, series of 1960 of the Municipal
Council of Mandaluyong, Rizal declaring Lots Nos. 5 and 6, among others, as part of
the commercial and industrial zone, is valid because it did so in the exercise of its
police power; and

II. When it failed to consider whether or not the Municipal Council had the power to
nullify the contractual obligations assumed by defendant-appellee and when it did not
 make a finding that the building was erected along the property line, when it should
have been erected two meters away from said property line. 23

The defendant-appellee submitted its counter-assignment of errors. In this connection, We already

had occasion to hold in Relativo v. Castro 24 that "(I)t is not incumbent on the appellee, who occupies
a purely defensive position, and is seeking no affirmative relief, to make assignments of error, "

The only issues to be resolved, therefore, are: (1) whether Resolution No. 27 s-1960 is a valid
exercise of police power; and (2) whether the said Resolution can nullify or supersede the
contractual obligations assumed by defendant-appellee.

1. The contention that the trial court erred in sustaining the validity of Resolution No. 27 as an
exercise of police power is without merit. In the first place, the validity of the said resolution was
never questioned before it. The rule is that the question of law or of fact which may be included in
the appellant's assignment of errors must be those which have been raised in the court below, and
are within the issues framed by the parties. 25 The object of requiring the parties to present all
questions and issues to the lower court before they can be presented to the appellate court is to
enable the lower court to pass thereon, so that the appellate court upon appeal may determine
whether or not such ruling was erroneous. The requirement is in furtherance of justice in that the
other party may not be taken by surprise. 26 The rule against the practice of blowing "hot and cold" by
assuming one position in the trial court and another on appeal will, in the words of Elliot, prevent
deception. 27 For it is well-settled that issues or defenses not raised 28 or properly litigated 29 or
pleaded 30 in the Court below cannot be raised or entertained on appeal.

In this particular case, the validity of the resolution was admitted at least impliedly, in the stipulation
of facts below. when plaintiff-appellant did not dispute the same. The only controversy then as stated
by the trial court was whether or not the resolution of the Municipal Council of Mandaluyong ... which
declared lots Nos. 4 and 5 among others, as a part of the commercial and industrial zone of the
municipality, prevails over the restrictions constituting as encumbrances on the lots in
question. 31 Having admitted the validity of the subject resolution below, even if impliedly, plaintiff-
appellant cannot now change its position on appeal.

But, assuming arguendo that it is not yet too late in the day for plaintiff-appellant to raise the issue of
the invalidity of the municipal resolution in question, We are of the opinion that its posture is
unsustainable. Section 3 of R.A. No. 2264, otherwise known as the Local Autonomy
Act," 32 empowers a Municipal Council "to adopt zoning and subdivision ordinances
or regulations"; 33 for the municipality. Clearly, the law does not restrict the exercise of the power
through an ordinance. Therefore, granting that Resolution No. 27 is not an ordinance, it certainly is a
regulatory measure within the intendment or ambit of the word "regulation" under the provision. As a
matter of fact the same section declares that the power exists "(A)ny provision of law to the contrary
notwithstanding ... "

An examination of Section 12 of the same law 34 which prescribes the rules for its interpretation
likewise reveals that the implied power of a municipality should be "liberally construed in its favor"
and that "(A)ny fair and reasonable doubt as to the existence of the power should be interpreted in
favor of the local government and it shall be presumed to exist." The same section further mandates
that the general welfare clause be liberally interpreted in case of doubt, so as to give more power to
local governments in promoting the economic conditions, social welfare and material progress of the
people in the community. The only exceptions under Section 12 are existing vested rights arising out
of a contract between "a province, city or municipality on one hand and a third party on the other," in
which case the original terms and provisions of the contract should govern. The exceptions, clearly,
do not apply in the case at bar.
2. With regard to the contention that said resolution cannot nullify the contractual obligations
assumed by the defendant-appellee – referring to the restrictions incorporated in the deeds of sale
and later in the corresponding Transfer Certificates of Title issued to defendant-appellee – it should
be stressed, that while non-impairment of contracts is constitutionally guaranteed, the rule is not
absolute, since it has to be reconciled with the legitimate exercise of police power, i.e., "the power to
prescribe regulations to promote the health, morals, peace, education, good order or safety and
general welfare of the people. 35 Invariably described as "the most essential, insistent, and illimitable
of powers" 36 and "in a sense, the greatest and most powerful attribute of government, 37 the exercise
of the power may be judicially inquired into and corrected only if it is capricious, 'whimsical, unjust or
unreasonable, there having been a denial of due process or a violation of any other applicable
constitutional guarantee. 38 As this Court held through Justice Jose P. Bengzon in Philippine Long
Distance Company vs. City of Davao, et al. 39 police power "is elastic and must be responsive to
various social conditions; it is not, confined within narrow circumscriptions of precedents resting on
past conditions; it must follow the legal progress of a democratic way of life." We were even more
emphatic in Vda. de Genuino vs. The Court of Agrarian Relations, et al., 40 when We declared: "We
do not see why public welfare when clashing with the individual right to property should not be made
to prevail through the state's exercise of its police power.

Resolution No. 27, s-1960 declaring the western part of highway 54, now E. de los Santos Avenue
(EDSA, for short) from Shaw Boulevard to the Pasig River as an industrial and commercial zone,
was obviously passed by the Municipal Council of Mandaluyong, Rizal in the exercise of police
power to safeguard or promote the health, safety, peace, good order and general welfare of the
people in the locality, Judicial notice may be taken of the conditions prevailing in the area, especially
where lots Nos. 5 and 6 are located. The lots themselves not only front the highway; industrial and
commercial complexes have flourished about the place. EDSA, a main traffic artery which runs
through several cities and municipalities in the Metro Manila area, supports an endless stream of
traffic and the resulting activity, noise and pollution are hardly conducive to the health, safety or
welfare of the residents in its route. Having been expressly granted the power to adopt zoning and
subdivision ordinances or regulations, the municipality of Mandaluyong, through its Municipal
'council, was reasonably, if not perfectly, justified under the circumstances, in passing the subject
resolution.

The scope of police power keeps expanding as civilization advances, stressed this Court, speaking
thru Justice Laurel in the leading case of Calalang v. Williams et al., 41 Thus-

As was said in the case of Dobbins v. Los Angeles (195 US 223, 238 49 L. ed.
169), 'the right to exercise the police power is a continuing one, and a business
lawful today may in the future, because of changed situation, the growth of
population or other causes, become a menace to the public health and welfare, and
be required to yield to the public good.' And in People v. Pomar (46 Phil. 440), it was
observed that 'advancing civilization is bringing within the scope of police power of
the state today things which were not thought of as being with in such power
yesterday. The development of civilization), the rapidly increasing population, the
growth of public opinion, with an increasing desire on the part of the masses and of
the government to look after and care for the interests of the individuals of the state,
have brought within the police power many questions for regulation which formerly
were not so considered. 42 (Emphasis, supplied.)

Thus, the state, in order to promote the general welfare, may interfere with personal liberty, with
property, and with business and occupations. Persons may be subjected to all kinds of restraints and
burdens, in order to secure the general comfort health and prosperity of the state 43 and to this
fundamental aim of our Government, the rights of the individual are subordinated. 44
The need for reconciling the non-impairment clause of the Constitution and the valid exercise of
police power may also be gleaned from Helvering v. Davis 45 wherein Mr. Justice Cardozo, speaking
for the Court, resolved the conflict "between one welfare and another, between particular and
general, thus —

Nor is the concept of the general welfare static. Needs that were narrow or parochial
a century ago may be interwoven in our day with the well-being of the nation What is
critical or urgent changes with the times. 46

The motives behind the passage of the questioned resolution being reasonable, and it being a "
legitimate response to a felt public need," 47 not whimsical or oppressive, the non-impairment of
contracts clause of the Constitution will not bar the municipality's proper exercise of the power. Now
Chief Justice Fernando puts it aptly when he declared: "Police power legislation then is not likely to
succumb to the challenge that thereby contractual rights are rendered nugatory." 48

Furthermore, We restated in Philippine American Life Ins. Co. v. Auditor General49 that laws and
reservation of essential attributes of sovereign power are read into contracts agreed upon by the
parties. Thus —

Not only are existing laws read into contracts in order to fix obligations as between
the parties, but the reservation of essential attributes of sovereign power is also read
into contracts as a postulate of the legal order. The policy of protecting contracts
against impairments presupposes the maintenance of a government by virtue of
which contractual relations are worthwhile – a government which retains adequate
authority to secure the peace and good order of society.

Again, We held in Liberation Steamship Co., Inc. v. Court of Industrial Relations, 50 through Justice
J.B.L. Reyes, that ... the law forms part of, and is read into, every contract, unless clearly excluded
therefrom in those cases where such exclusion is allowed." The decision in Maritime Company of the
Philippines v. Reparations Commission, 51 written for the Court by Justice Fernando, now Chief
Justice, restates the rule.

One last observation. Appellant has placed unqualified reliance on American jurisprudence and
authorities 52 to bolster its theory that the municipal resolution in question cannot nullify or supersede
the agreement of the parties embodied in the sales contract, as that, it claims, would impair the
obligation of contracts in violation of the Constitution. Such reliance is misplaced.

In the first place, the views set forth in American decisions and authorities are not per se controlling
in the Philippines, the laws of which must necessarily be construed in accordance with the intention
of its own lawmakers and such intent may be deduced from the language of each law and the
context of other local legislation related thereto. 53 and Burgess, et al v. Magarian, et al., 55 two Of the
cases cited by plaintiff-appellant, lend support to the conclusion reached by the trial court, i.e. that
the municipal resolution supersedes/supervenes over the contractual undertaking between the
parties. Dolan v. Brown, states that "Equity will not, as a rule, enforce a restriction upon the use of
property by injunction where the property has so changed in character and environment as to make
it unfit or unprofitable for use should the restriction be enforced, but will, in such a case, leave the
complainant to whatever remedy he may have at law. 56 (Emphasis supplied.) Hence, the remedy of
injunction in Dolan vs. Brown was denied on the specific holding that "A grantor may lawfully insert in
his deed conditions or restrictions which are not against public policy and do not materially impair the
beneficial enjoyment of the estate. 57 Applying the principle just stated to the present controversy, We
can say that since it is now unprofitable, nay a hazard to the health and comfort, to use Lots Nos. 5
and 6 for strictly residential purposes, defendants- appellees should be permitted, on the strength of
the resolution promulgated under the police power of the municipality, to use the same for
commercial purposes. In Burgess v. Magarian et al. it was, held that "restrictive covenants running
with the land are binding on all subsequent purchasers ... " However, Section 23 of the zoning
ordinance involved therein contained a proviso expressly declaring that the ordinance was not
intended "to interfere with or abrogate or annul any easements, covenants or other agreement
between parties." 58 In the case at bar, no such proviso is found in the subject resolution.

It is, therefore, clear that even if the subject building restrictions were assumed by the defendant-
appellee as vendee of Lots Nos. 5 and 6, in the corresponding deeds of sale, and later, in Transfer
Certificates of Title Nos. 101613 and 106092, the contractual obligations so assumed cannot prevail
over Resolution No. 27, of the Municipality of Mandaluyong, which has validly exercised its police
power through the said resolution. Accordingly, the building restrictions, which declare Lots Nos. 5
and 6 as residential, cannot be enforced.

IN VIEW OF THE FOREGOING, the decision appealed from, dismissing the complaint, is hereby
AFFIRMED. "without pronouncement as to costs.

SO ORDERED.

14.

[G.R. No. L-16626. October 29, 1966.]

COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. CARLOS PALANCA, JR., Respondent.

Solicitor General for Petitioner.

Manuel B. San Jose for Respondent.

SYLLABUS

1. TAXATION; TAXES AND DEBTS AS LEGAL CONCEPTS DISTINGUISHED. — While taxes and debts are
distinguishable legal concepts, in certain cases as in the suit at bar, on account of their nature, the
distinction becomes inconsequential. This qualification is recognized even in the United States. Thus, "The
term debt is properly used in a comprehensive sense as embracing not merely money due by contract, but
whatever one is bound to render to another, either for contract or the requirement of the law. (Camden v.
Fink Coule and Coke Co., 61 ALR 584).

"Where statutes impose a personal liability for a tax, the tax becomes at least in a broad sense, a debt."
(Idem)

"Some American authorities hold that, especially for remedial purposes, Federal taxes are debts." (Tax
Commission v. National Malleable Castings Co., 35 ALR 1448.)

2. ID.; ID.; ID.; RULE IN OUR JURISDICTION. — In our jurisdiction, the rule is settled that although taxes
already due have not, strictly speaking, the same concept as debts, they are however, obligations that may
be considered as such. (Sambrano v. Court of Tax Appeals, G. R. No. L-8652, March 30, 1957). In a more
recent case, Commissioner of Internal Revenue v. Prieto, G. R. No. L-13192, September 30, 1960, we
explicitly announced that while the distinction between "taxes" and "debts" was recognized in this
jurisdiction, the variance in their legal conception does not extend to the interests paid on them, at least
insofar as section 30(b) (1) of the National Internal Revenue Code is concerned.

3. ID.; INTERESTS ON TAXES TO BE CONSIDERED AS INTERESTS ON INDEBTEDNESS. — The taxpayer

sought the allowance as deductible items from the gross income of the amounts paid by them as interests
on delinquent tax liabilities. Of course, what was involved in the cited case (Prieto case) was the donor’s tax
while the present suit pertains to interest paid on the estafa and inheritance tax. This difference, however,
submits no appreciable consequence to the rationale of this Court’s previous determination that interests on
taxes should be considered as interests on indebtedness within the meaning of section 30(b) (1) of the Tax
Code. The interpretation we have placed upon the said section was predicated on the congressional intent,
not on the nature of the tax for which the interest was paid.

4. ID.; PRESCRIPTION OF CLAIM FOR REFUND OF TAX UNDER SEC. 11 OF REP. ACT 1125 AND UNDER SEC.
306 OF THE INTERNAL REVENUE CODE. — The 30-day period under Section 11 of Republic Act 1125 should
be computed from the receipt of the final denial by the Bureau of Internal Revenue of the said claim.
Palanca’s claim in this incident was filed with the Court of Tax Appeals even before it had been denied by the
herein petitioner or the Bureau of Internal Revenue, i.e., the claim was filed with the former Court on Aug.
13, 1958, while the petitioner denied it on July 24, 1959. The claim at bar refers to the alleged overpayment
by respondents of the 1955 income tax. Inasmuch as the said account was paid by him by installment, then
the computation of the two-year prescriptive period, under Section 306 of the National Internal Revenue
Code, should be from the date of the last installment, (Antonio Prieto, Et. Al. v. Collector of Internal
Revenue, G. R. No. L-11976, August 29, 1961). Palanca paid the last installment on his 1955 income tax on
August 14, 1956. His claim for refund of the alleged overpayment was filed with the Court on August 13,
1958. It was, therefore, still timely instituted.

DECISION

REGALA, J.:

This is an appeal by the Government from the decision of the Court of Tax Appeals in CTA Case No. 571
ordering the petitioner to refund to the respondent the amount of P20,624.01 representing alleged
overpayment of income taxes for the calendar year 1955. The facts are: jgc:chanrob les.co m.ph

"Sometime in July, 1950, the late Don Carlos Palanca, Sr. donated in favor of his son, the petitioner herein,
shares of stock in La Tondeña, Inc. amounting to 12,500 shares. For failure to file a return on the donation
within the statutory period, the petitioner was assessed the sums of P97,691.23, P24,442.81 and
P47,868.70 as gift tax, 25% surcharge and interest, respectively, which he paid on June 22, 1955.

"On March 1, 1956, the petitioner filed with the Bureau of Internal Revenue his income tax return for the
calendar year 1955, claiming, among others, a deduction for interest amounting to P9,706.45 and reporting
a taxable income of P65,982.12. On the basis of this return, he was assessed the sum of P21,052.91*, as
income tax, which he paid, as follows: chan rob1es v irt ual 1aw l ibra ry

Taxes withheld by the La Tondeña Inc.

from Mr.Palanca’s wage P13,172.41

Payment under Income Tax Receipt

No. 677359 dated May 11, 1956 3,939.80

Payment under Income Tax Receipt

No. 742334 dated August 14, 1956 3,939.80

Total P21,052.01

"Subsequently, on November 10, 1956, the petitioner filed an amended return for the calendar year 1955,
claiming therein an additional deduction in the amount of P47,868.70 representing interest paid on the
donee’s gift tax, thereby reporting a taxable net income of P18,113.42 and a tax due thereon in the sum of
P3,167.00. The claim for deduction was based on the provisions of Section 30(b)(1) of the Tax Code, which
authorizes the deduction from gross income of interest paid within the taxable year on indebtedness. A claim
for the refund of alleged overpaid income taxes for the year 1955 amounting to P17,885.01, which is the
difference between the amount of P21,052.01 he paid as income taxes under his original return and of
P3,167.00, was filed together with this amended return. In a communication dated June 20, 1957, the
respondent (BIR) denied the claim for refund.

"On August 27, 1957, the petitioner reiterated his claim for refund, and at the same time requested that the
case be elevated to the Appellate Division of the Bureau of Internal Revenue for decision. The reiterated
claim was denied on October 14, 1957.

"On November 2, 1957, the petitioner requested that the case be referred to the Conference Staff of the
Bureau of Internal Revenue for review. Later, on November 6, 1957, he requested the respondent to hold
his action on the case in abeyance until after the Court of Tax Appeals renders its decision on a similar case.
And on November 7, 1957, the respondent denied the claim for the refund of the sum of P17,885.01.

"Meanwhile, the Bureau of Internal Revenue considered the transfer of 12,500 shares of stock of La
Tondeña, Inc. to be a transfer in contemplation of death pursuant to section 88(b) of the National Internal
Revenue Code. Consequently the respondent assessed against the petitioner the sum of P191,591.62 as
estate and inheritance taxes on the transfer of said 12,500 shares of stock. The amount of P170,002.74 paid
on June 22, 1955 by the petitioner as gift tax, including interest and surcharge, under Official Receipt No.
2855 was applied to his estate and inheritance tax liability. On the tax liability of P191,591.62, the petitioner
paid the amount of P60,581.80 as interest for delinquency as follows: chanro b1es vi rtua l 1aw li bra ry

1 % monthly interest on P76,724.38

September 2, 1952 to February 16, 1955 P22,633.69

1 % monthly interest on P71,264.77

February 16, 1955 to March 31, 1955 1,068.97

1 % monthly interest on P114,867.24

September 2, 1952 to April 16, 1953 4,287.99

1 % monthly interest on P50,832.77

March 31, 1955 to June 22, 1955 1,372.48

1 % monthly interest on P119,155.23

April 16, 1953 to June 22, 1955 31,218.67

————

Total P60,581.80

"On August 12, 1958, the petitioner once more filed an amended income tax return for the calendar year
1955, claiming, in addition to the interest deduction of P9,076.45 appearing in his original return, a
deduction in the amount of P60,581.80, representing interest on the estate and inheritance taxes on the
12,500 shares of stock, thereby reporting a net taxable income for 1955 in the amount of P5,400.32 and an
income tax due thereon in the sum of P428.00. Attached to this amended return was a letter of the
petitioner, dated August 11, 1958, wherein he requested the refund of P20,624.01 which is the difference
between the amounts of P21,052.01 he paid as income tax under his original return and of P428.00.
"Without waiting for the respondent’s decision on this claim for refund, the petitioner filed his petition for
review before this Court on August 13, 1958. On July 24, 1959, the respondent denied the petitioner’s
request for the refund of the sum of P20,624.01." cralaw virtua 1aw lib rary

The Commissioner of Internal Revenue now seeks the reversal of the Court of Tax Appeal’s ruling on the
aforementioned petition for review. Specifically, he takes issue with the said court’s determination that the
amount paid by respondent Palanca for interest on his delinquent estate and inheritance tax is deductible
from the gross income for that year under section 30(b)(1) of the Revenue Code, and, that said
respondent’s claim for refund therefor has not prescribed.

On the first point, the Commissioner urges that a tax is not an indebtedness. Citing American cases, he
argues that there is a material and fundamental distinction between a "tax" and a "debt." (Meriwather v.
Garrett, 102 U.S. 427; Liberty Mutual Ins. Co. v. Johnson Shipyards Corporation, 5 AFTR pp. 5504, 5507;
City of Camden v. Allen, 26, N. J. Law, p. 398). He adopts the view that "debts are due to the government
in its corporate capacity, while taxes are due to the government in its sovereign capacity. A debt is a sum of
money due upon contract express or implied or one which is evidenced by a judgment. Taxes are imposts
levied by government for its support or some special purpose which the government has recognized." In
view of the distinction, then, the Commissioner submits that the deductibility of "interest on indebtedness"
from a person’s income tax under section 30(b)(1) cannot extend to "interest on taxes." cralaw virt ua1aw lib ra ry

We find for the respondents. While "taxes" and "debt" are distinguishable legal concepts, in certain cases as
in the suit at bar, on account of their nature, the distinction becomes inconsequential. This qualification is
recognized even in the United States. Thus,

"The term ‘debt’ is properly used in a comprehensive sense as embracing not merely money due by
contract, but whatever one is bound to render to another, either for contract or the requirements of the law.
(Camden v. Fink Coule and Coke Co., 61 ALR 584).

"Where statutes impose a personal liability for a tax, the tax becomes at least in a broad sense, a debt."
(Idem.)

"Some American authorities hold that, especially for remedial purposes, Federal taxes are debts." (Tax
Commission v. National Malleable Castings Co., 35 ALR 1448)

In our jurisdiction, the rule is settled that although taxes already due have not, strictly speaking, the same
concept as debts, they are, however, obligations that may be considered as such. (Sambrano v. Court of
Tax Appeals, 101 Phil. 1). In a more recent case, Commissioner of Internal Revenue v. Prieto, 109 Phil. 592,
we explicitly announced that while the distinction between "taxes" and "debts" was recognized in this
jurisdiction, the variance in their legal conception does not extend to the interests paid on them, at least
insofar as Section 30(b) (1) of the National Internal Revenue Code is concerned. Thus,

"Under the law, for interest to be deductible, it must be shown that there be an indebtedness, that there
should be interest upon it, and that what is claimed as an interest deduction should have been paid or
accrued within the year. It is here conceded that the interest paid by respondent was in consequence of the
late payment of her donor’s tax, and the same was paid within the year it is sought to be deducted. The only
question to be determined, as stated by the parties, is whether or not such interest was paid upon an
indebtedness within the contemplation of Section (30) (b) (1) of the Tax Code, the pertinent part of which
reads:jgc:chan roble s.com.p h

"Sec. 30. Deductions from gross income. — In computing net income there shall be allowed as deductions —

x x x

‘Interest: chanrob1e s virt ual 1aw l ibra ry

‘(1) In general. — The amount of interest paid within the taxable year on indebtedness, except on
indebtedness incurred or continued to purchase or carry obligations the interest upon which is exempt from
taxation as income under this Title.

‘The term "indebtedness" as used in the Tax Code of the United States containing similar provisions as in the
above-quoted section has been defined as the unconditional and legally enforceable obligation for the
payment of money. (Federal Taxes Vol. 2, p. 13,019, Prentice Hall, Inc.; Merterns’ Law of Federal Income
Taxation, Vol. 4 p. 542.) Within the meaning of that definition it is apparent that a tax may be considered an
indebtedness . . . (Emphasis supplied)

‘It follows that the interest paid by herein respondent for the late payment of her donor’s tax is deductible
from her gross income under Section 30(b) of the Tax Code above-quoted.’"

We do not see any element in this case which can justify a departure from or abandonment of the doctrine
in the Prieto case above. In both this and the said case, the taxpayer sought the allowance as deductible
items from the gross income of the amounts paid by them as interests on delinquent tax liabilities. Of
course, what was involved in the cited case was the donor’s tax while the present suit pertains to interest
paid on the estate and inheritance tax. This difference, however, submits no appreciable consequence to the
rationale of this Court’s previous determination that interests on taxes should be considered as interest on
indebtedness within the meaning of Section 30(b)(1) of the Tax Code. The interpretation we have placed
upon the said section was predicated on the congressional intent, not on the nature of the tax for which the
interest was paid.

On the issue of prescription: There were actually two claims for refund filed by the herein respondent, Carlos
Palanca, Jr., anent the case at bar. The first one was on November 10, 1956, when he filed a claim for
refund on the interest paid by him on the donee’s gift tax of P17,885.01, as originally demanded by the
Bureau of Internal Revenue. The second one was the one filed by him on August 12, 1958, which was a
claim for refund on the interest paid by him on the estate and inheritance tax assessed by the same Bureau
in the amount of P20,624.01. Actually, this second assessment by the Bureau was for the same transaction
as that for which they assessed respondent Palanca the above donee’s gift tax. The Bureau, however, on
further consideration, decided that the donation of the stocks in question was made in contemplation of
death, and hence, should be assessed as an inheritance. Thus the second assessment. The first claim was
denied by the petitioner for the first time on June 20, 1957. Thereafter, the said denial was twice reiterated:
on October 14, 1957 and November 7, 1957, upon respondent Palanca’s plea for the reconsideration of the
ruling of June 20, 1957. The second claim was filed with the Court of Tax Appeals on August 13, 1958, or
even before the same had been denied by the petitioner. Respondent Palanca’s second claim was denied by
the latter on July 24, 1959.

The petitioner contends that under Section 11 of Republic Act 1124, 1 the herein claimant’s claim for refund
has prescribed since the same was filed outside the 30-day period provided for therein. According to the
petitioner, the said prescriptive period commenced to run on October 14, 1947 when the denial by the
Bureau of Internal Revenue of the respondent Palanca’s claim for refund, under his letter of November 10,
1956, became final. Considering that the case was filed with the Court of Tax Appeals only on August 13,
1958, then it is urged that the same had prescribed.

The petitioner also invokes prescription, at least with respect to the sum of P17,112.21, under Section 306
of the Tax Code. 2 He claims that for the calendar year 1955, respondent Palanca paid his income tax as
follows:
cha nro b1es vi rtua l 1aw lib ra ry

Taxes withheld by La Tondeña, Inc. from

Mr. Palanca’s wages P13,172.41

Payment under Income Tax Receipt No.

677395 dated May 11, 1956 3,939.89 *

Payment under Income Tax Receipt No.

742334 dated August 14, 1956 3,939.89

————

P21,952.01**

Therefore, the petitioner contends, the amounts paid by claimant Palanca under his withheld tax and under
Receipt No. 677395 dated May 11, 1956 may no longer be refunded since the claim therefor was filed in
court only on August 13, 1958, or beyond two years of their payment.
We find the petitioner’s contention on prescription untenable.

In the first place, the 30-day period under Section 11 of Republic Act 1125 did not even commence to run in
this incident. It should be recalled that while the herein petitioner originally assessed the respondent-
claimant for alleged gift tax liabilities, the said assessment was subsequently abandoned and in its lieu, a
new one was prepared and served on the respondent-taxpayer. In this new assessment, the petitioner
charged the said respondent with an entirely new liability and for a substantially different amount from the
first. While initially the petitioner assessed the respondent for donee’s gift tax in the amount of
P170,002.74, in the subsequent assessment the latter was asked to pay P191,591.62 for delinquent estate
and inheritance tax. Considering that it is the interest paid on this latter-assessed estate and inheritance tax
that respondent Palanca is claiming refund for, then the 30-day period under the above-mentioned section
of Republic Act 1125 should be computed from the receipt of the final denial by the Bureau of Internal
Revenue of the said claim. As has earlier been recited, respondent Palanca’s claim in this incident was filed
with the Court of Tax Appeals even before it had been denied by the herein petitioner or the Bureau of
Internal Revenue. The case was filed with the said court on August 13, 1958 while the petitioner denied the
claim subject of the said case only on July 24, 1959.

In the second place, the claim at bar refers to the alleged overpayment by respondent Palanca of his 1955
income tax. Inasmuch as the said account was paid by him by installment, then the computation of the 2-
year prescriptive period, under Section 306 of the National Internal Revenue Code, should be from the date
of the last installment. (Antonio Prieto et al v. Collector of Internal Revenue, G. R. No. L-11976, August 29,
1961). Respondent Palanca paid the last installment on his 1955 income tax account on August 14, 1956.
His claim for refund of the alleged overpayment on it was filed with the court on August 13, 1958. It was,
therefore, still timely instituted.

WHEREFORE, the decision appealed from is affirmed in full, without pronouncement on costs.

Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal, Bengzon, J.P., Zaldivar, Sanchez and Castro, JJ., concur.

15.

G.R. No. L-36081 April 24, 1989

PROGRESSIVE DEVELOPMENT CORPORATION, petitioner ,

vs.
QUEZON CITY, respondent.

Jalandoni, Herrera, Del Castillo & Associates for petitioner.

FELICIANO, J.:

On 24 December 1969, the City Council of respondent Quezon City adopted Ordinance No. 7997,
Series of 1969, otherwise known as the Market Code of Quezon City, Section 3 of which provided:
 Sec. 3. Supervision Fee.- Privately owned and operated public markets shall submit
monthly to the Treasurer's Office, a certified list of stallholders showing the amount of
stall fees or rentals paid daily by each stallholder, ... and shall pay 10% of the gross
receipts from stall rentals to the City, ... , as supervision fee. Failure to submit said
list and to pay the corresponding amount within the period herein prescribed shall
subject the operator to the penalties provided in this Code ... including revocation of
permit to operate. ... .1

The Market Code was thereafter amended by Ordinance No. 9236, Series of 1972, on 23 March
1972, which reads:

SECTION 1. There is hereby imposed a five percent (5 %) tax on gross receipts on

rentals or lease of space in privately-owned public markets in Quezon City.

xxx xxx xxx

SECTION 3. For the effective implementation of this Ordinance, owners of privately

owned public markets shall submit ... a monthly certified list of stallholders of lessees
of space in their markets showing ... :

a. name of stallholder or lessee;

b. amount of rental;

c. period of lease, indicating therein whether the same is on a daily, monthly or yearly
basis.

xxx xxx xxx

SECTION 4. ... In case of consistent failure to pay the percentage tax for the (3)
consecutive months, the City shall revoke the permit of the privately-owned market to
operate and/or take any other appropriate action or remedy allowed by law for the
collection of the overdue percentage tax and surcharge.

xxx xxx xxx 2

On 15 July 1972, petitioner Progressive Development Corporation, owner and operator of a public
market known as the "Farmers Market & Shopping Center" filed a Petition for Prohibition with
Preliminary Injunction against respondent before the then Court of First Instance of Rizal on the
ground that the supervision fee or license tax imposed by the above-mentioned ordinances is in
reality a tax on income which respondent may not impose, the same being expressly prohibited by
Republic Act No. 2264, as amended.

In its Answer, respondent, through the City Fiscal, contended that it had authority to enact the
questioned ordinances, maintaining that the tax on gross receipts imposed therein is not a tax on
income. The Solicitor General also filed an Answer arguing that petitioner, not having paid the ten
percent (10%) supervision fee prescribed by Ordinance No. 7997, had no personality to question,
and was estopped from questioning, its validity; that the tax on gross receipts was not a tax on
income but one imposed for the enjoyment of the privilege to engage in a particular trade or
business which was within the power of respondent to impose.
In its Supplemental Petition of 23 September 1972, petitioner alleged having paid under protest the
five percent (5%) tax under Ordinance No. 9236 for the months of June to September 1972. Two (2)
days later, on 25 September 1972, petitioner moved for judgment on the pleadings, alleging that the
material facts had been admitted by the parties.

On 21 October 1972, the lower court dismissed the petition, ruling 3 that the questioned imposition is not a tax on
income, but rather a privilege tax or license fee which local governments, like respondent, are empowered to impose and collect.

Having failed to obtain reconsideration of said decision, petitioner came to us on the present Petition
for Review.

The only issue to be resolved here is whether the tax imposed by respondent on gross receipts of
stall rentals is properly characterized as partaking of the nature of an income tax or, alternatively, of
a license fee.

We begin with the fact that Section 12, Article III of Republic Act No. 537, otherwise known as the
Revised Charter of Quezon City, authorizes the City Council:

xxx xxx xxx

(b) To provide for the levy and collection of taxes and other city revenues and apply
the same to the payment of city expenses in accordance with appropriations.

(c) To tax, fix the license fee, and regulate the business of the following:

... preparation and sale of meat, poultry, fish, game, butter, cheese, lard vegetables,
bread and other provisions. 4

The scope of legislative authority conferred upon the Quezon City Council in respect of businesses like that of the petitioner, is
comprehensive: the grant of authority is not only" [to] regulate" and "fix the license fee," but also " to tax" 5

Moreover, Section 2 of Republic Act No. 2264, as amended, otherwise known as the Local Autonomy Act, provides that:

Any provision of law to the contrary notwithstanding, all chartered

cities, municipalities and municipal districts shall have authority to impose municipal
license taxes or fees upon persons engaged in any occupation or business, or
exercising privileges in chartered cities, municipalities or municipal districts by
requiring them to secure licenses at rates fixed by the municipal board or city council
of the city, the municipal council of the municipality, or the municipal district council of
the municipal district; to collect fees and charges for service rendered by the city,
municipality or municipal district; to regulate and impose reasonable fees for services
rendered in connection with any business, profession or occupation being conducted
within the city, municipality or municipal district and otherwise to levy for public
purposes just and uniform taxes licenses or fees: ... 6

It is now settled that Republic Act No. 2264 confers upon local governments broad taxing authority
extending to almost "everything, excepting those which are mentioned therein," provided that the tax
levied is "for public purposes, just and uniform," does not transgress any constitutional provision and
is not repugnant to a controlling statute. 7 Both the Local Autonomy Act and the Charter of respondent clearly show that
respondent is authorized to fix the license fee collectible from and regulate the business of petitioner as operator of a privately-owned public
market.
Petitioner, however, insist that the "supervision fee" collected from rentals, being a return from
capital invested in the construction of the Farmers Market, practically operates as a tax on income,
one of those expressly excepted from respondent's taxing authority, and thus beyond the latter's
competence. Petitioner cites the same Section 2 of the Local Autonomy Act which goes on to state: 8

... Provided, however, That no city, municipality or municipal district may levy or
impose any of the following:

xxx xxx xxx

(g) Taxes on income of any kind whatsoever;

The term "tax" frequently applies to all kinds of exactions of monies which become public funds. It is
often loosely used to include levies for revenue as well as levies for regulatory purposes such that
license fees are frequently called taxes although license fee is a legal concept distinguishable
from tax: the former is imposed in the exercise of police power primarily for purposes of regulation,
while the latter is imposed under the taxing power primarily for purposes of raising revenues. 9 Thus, if
the generating of revenue is the primary purpose and regulation is merely incidental, the imposition is a tax; but if regulation is the primary
purpose, the fact that incidentally revenue is also obtained does not make the imposition a tax. 10

To be considered a license fee, the imposition questioned must relate to an occupation or activity
that so engages the public interest in health, morals, safety and development as to require regulation
for the protection and promotion of such public interest; the imposition must also bear a reasonable
relation to the probable expenses of regulation, taking into account not only the costs of direct
regulation but also its incidental consequences as well. 11 When an activity, occupation or profession is of such a
character that inspection or supervision by public officials is reasonably necessary for the safeguarding and furtherance of public health,
morals and safety, or the general welfare, the legislature may provide that such inspection or supervision or other form of regulation shall be
carried out at the expense of the persons engaged in such occupation or performing such activity, and that no one shall engage in the
occupation or carry out the activity until a fee or charge sufficient to cover the cost of the inspection or supervision has been
paid. 12 Accordingly, a charge of a fixed sum which bears no relation at all to the cost of inspection and regulation may be held to be a tax
rather than an exercise of the police power. 13

In the case at bar, the "Farmers Market & Shopping Center" was built by virtue of Resolution No. 7350 passed on 30 January 1967 by
respondents's local legislative body authorizing petitioner to establish and operate a market with a permit to sell fresh meat, fish, poultry and
other foodstuffs. 14 The same resolution imposed upon petitioner, as a condition for continuous operation, the obligation to "abide by and
comply with the ordinances, rules and regulations prescribed for the establishment, operation and maintenance of markets in Quezon
City." 15

The "Farmers' Market and Shopping Center" being a public market in the' sense of a market open to
and inviting the patronage of the general public, even though privately owned, petitioner's operation
thereof required a license issued by the respondent City, the issuance of which, applying the
standards set forth above, was done principally in the exercise of the respondent's police
power. 16 The operation of a privately owned market is, as correctly noted by the Solicitor General, equivalent to or quite the same as the
operation of a government-owned market; both are established for the rendition of service to the general public, which warrants close
supervision and control by the respondent City, 17 for the protection of the health of the public by insuring, e.g., the maintenance of sanitary
and hygienic conditions in the market, compliance of all food stuffs sold therein with applicable food and drug and related standards, for the
prevention of fraud and imposition upon the buying public, and so forth.

We believe and so hold that the five percent (5%) tax imposed in Ordinance No. 9236 constitutes,
not a tax on income, not a city income tax (as distinguished from the national income tax imposed by
the National Internal Revenue Code) within the meaning of Section 2 (g) of the Local Autonomy Act,
but rather a license tax or fee for the regulation of the business in which the petitioner is engaged.
While it is true that the amount imposed by the questioned ordinances may be considered in
determining whether the exaction is really one for revenue or prohibition, instead of one of regulation
under the police power, 18 it nevertheless will be presumed to be reasonable. Local' governments are allowed wide discretion in
determining the rates of imposable license fees even in cases of purely police power measures, in the absence of proof as to particular
municipal conditions and the nature of the business being taxed as well as other detailed factors relevant to the issue of arbitrariness or
unreasonableness of the questioned rates. 19 Thus:
 [A]n ordinance carries with it the presumption of validity. The question of
reasonableness though is open to judicial inquiry. Much should be left thus to the
discretion of municipal authorities. Courts will go slow in writing off an ordinance as
unreasonable unless the amount is so excessive as to be prohibitory, arbitrary,
unreasonable, oppressive, or confiscatory. A rule which has gained acceptance is
that factors relevant to such an inquiry are the municipal conditions as a whole and
the nature of the business made subject to imposition. 20

Petitioner has not shown that the rate of the gross receipts tax is so unreasonably large and
excessive and so grossly disproportionate to the costs of the regulatory service being performed by
the respondent as to compel the Court to characterize the imposition as a revenue measure
exclusively. The lower court correctly held that the gross receipts from stall rentals have been used
only as a basis for computing the fees or taxes due respondent to cover the latter's administrative
expenses, i.e., for regulation and supervision of the sale of foodstuffs to the public. The use of the
gross amount of stall rentals as basis for determining the collectible amount of license tax, does not
by itself, upon the one hand, convert or render the license tax into a prohibited city tax on income.
Upon the other hand, it has not been suggested that such basis has no reasonable relationship to
the probable costs of regulation and supervision of the petitioner's kind of business. For, ordinarily,
the higher the amount of stall rentals, the higher the aggregate volume of foodstuffs and related
items sold in petitioner's privately owned market; and the higher the volume of goods sold in such
private market, the greater the extent and frequency of inspection and supervision that may be
reasonably required in the interest of the buying public. Moreover, what we started with should be
recalled here: the authority conferred upon the respondent's City Council is not merely "to regulate"
but also embraces the power "to tax" the petitioner's business.

Finally, petitioner argues that respondent is without power to impose a gross receipts tax for revenue
purposes absent an express grant from the national government. As a general rule, there must be a
statutory grant for a local government unit to impose lawfully a gross receipts tax, that unit not
having the inherent power of taxation. 21 The rule, however, finds no application in the instant case where what is involved is
an exercise of, principally, the regulatory power of the respondent City and where that regulatory power is expressly accompanied by the
taxing power.

ACCORDINGLY, the Decision of the then Court of First Instance of Rizal, Quezon City, Branch 18,
is hereby AFFIRMED and the Court Resolved to DENY the Petition for lack of merit.

SO ORDERED

16.

[G.R. No. 131512. January 20, 2000.]

LAND TRANSPORTATION OFFICE [LTO], represented by Assistant Secretary Manuel F. Bruan, LTO
Regional Office, Region X represented by its Regional Director, Timoteo A. Garcia; and LTO
Butuan represented by Rosita G. Sadiaga, its Registrar, Petitioners, v. CITY OF BUTUAN,
represented in this case by Democrito D. Plaza II, City Mayor, Respondents.

DECISION

VITUG, J.:

The 1987 Constitution enunciates the policy that the territorial and political subdivisions shall enjoy local
autonomy. 1 In obedience to that, mandate of the fundamental law, Republic Act ("R.A.") No.7160,
otherwise known as the Local Government Code, 2 expresses that the territorial and political subdivisions of
the State shall enjoy genuine and meaningful local autonomy in order to enable them to attain their fullest
development as self-reliant communities and make them more effective partners in the attainment of
national goals, and that it is a basic aim of the State to provide for a more responsive and accountable local
government structure instituted through a system of decentralization whereby local government units shall
be given more powers, authority, responsibilities and resources. chanrob les vi rtua l lawlib ra ry

While the Constitution seeks to strengthen local units and ensure their viability, clearly, however, it has
never been the intention of that organic law to create an imperium in imperio and install an intra sovereign
political subdivision independent of a single sovereign state.

The Court is asked in this instance to resolve the issue of whether under the present set up the power of the
Land Registration Office ("LTO") to register, tricycles in particular, as well as to issue licenses for the driving
thereof, has likewise devolved to local government units.

The Regional Trial Court (Branch 2) of Butuan City held: 3 that the authority to register tricycles, the grant
of the corresponding franchise, the issuance of tricycle drivers’ license, and the collection of fees therefor
had all been vested in the Local Government Units ("LGUs"). Accordingly, it decreed the issuance of a
permanent writ of injunction against LTO, prohibiting and enjoining LTO, as well as its employees and other
persons acting in its behalf, from (a) registering tricycles and (b) issuing licenses to drivers of tricycles. The
Court of Appeals, on appeal to it, sustained the trial court.

The adverse rulings of both the court a quo and the appellate court prompted the LTO to file the instant
petition for review on certiorari to annul and set aside the decision, 4 dated 17 November 1997, of the Court
of Appeals affirming the permanent injunctive writ order of the Regional Trial Court (Branch 2) of Butuan
City.

Respondent City of Butuan asserts that one of the salient provisions introduced by the Local Government
Code is in the area of local taxation which allows LGUs to collect registration fees or charges along with, in
its view, the corresponding issuance of all kinds of licenses or permits for the driving of tricycles.

The 1987 Constitution provides: jgc:chan rob les.com. ph

"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." 5

Section 129 and Section 133 of the Local Government Code read: jgc:chan robles. com.ph

"SECTION 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." cralaw virtua 1aw lib rary

"SECTION 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: jg c:chan roble s.com.p h
"x x x.

"(I) Taxes, fees or charges for the registration of motor vehicles and for the issuance of all kinds of licenses
or permits for the driving thereof, except tricycles." cra law virtua1aw li bra ry

Relying on the foregoing provisions of the law, the Sangguniang Panlungsod ("SP") of Butuan, on 16 August
1992, passed SP Ordinance No.916-92 entitled "An Ordinance Regulating the Operation of Tricycles-for-Hire,
providing mechanism for the issuance of Franchise, Registration and Permit, and Imposing Penalties for
Violations thereof and for other Purposes." The ordinance provided for, among other things, the payment of
franchise fees for the grant of the franchise of tricycles-for-hire, fees for the registration of the vehicle, and
fees for the issuance of a permit for the driving thereof.

Petitioner LTO explains that one of the functions of the national government that, indeed, has been
transferred to local government units is the franchising authority over tricycles-for-hire of the Land
Transportation Franchising and Regulatory Board ("LTFRB") but not, it asseverates, the authority of LTO to
register all motor vehicles and to issue to qualified persons of licenses to drive such vehicles.

In order to settle the variant positions of the parties, the City of Butuan, represented by its City Mayor
Democrito D. Plaza, filed on 28 June 1994 with the trial court a petition for "prohibition, mandamus,
injunction with a prayer for preliminary restraining order ex-parte" seeking the declaration of the validity of
SP Ordinance No.962-93 and the prohibition of the registration of tricycles-for-hire and the issuance of
licenses for the driving thereof by the LTO.

LTO opposed the prayer in the petition.

On 20 March 1995, the trial court rendered a resolution; the dispositive portion read: chan roblesv irtuallawl ib rary

"In view of the foregoing, let a permanent injunctive writ be issued against the respondent Land
Transportation Office and the other respondents, prohibiting and enjoining them, their employees, officers,
attorney’s or other persons acting in their behalf from forcing or compelling Tricycles to be registered with,
and drivers to secure their licenses from respondent LTO or secure franchise from LTFRB and from collecting
fees thereon. It should be understood that the registration, franchise of tricycles and driver’s license/permit
granted or issued by the City of Butuan are valid only within the territorial limits of Butuan City.

"No pronouncement as to costs." 6

Petitioners timely moved for a reconsideration of the above resolution but it was to no avail. Petitioners then
appealed to the Court of Appeals. In its now assailed decision, the appellate court, on 17 November 1997,
sustained the trial court. It ruled:
jgc:c hanro bles. com.ph

"WHEREFORE, the petition is hereby DISMISSED and the questioned permanent injunctive writ issued by the
court a quo dated March 20, 1995 AFFIRMED." 7

Coming up to this Court, petitioners raise this sole assignment of error, to wit: jgc:chan roble s.com.p h

"The Court of Appeals [has] erred in sustaining the validity of the writ of injunction issued by the trial court
which enjoined LTO from (1) registering tricycles-for-hire and (2) issuing licenses for the driving thereof
since the Local Government Code devolved only the franchising authority of the LTFRB. Functions of the LTO
were not devolved to the LGU’s." 8

The petition is impressed with merit.

The Department of Transportation and Communications 9 ("DOTC"), through the LTO and the LTFRB, has
since been tasked with implementing laws pertaining to land transportation. The LTO is a line agency under
the DOTC whose powers and functions, pursuant to Article III, Section 4 (d) (1), 10 of R.A. No.4136,
otherwise known as Land Transportation and Traffic Code, as amended, deal primarily with the registration
of all motor vehicles and the licensing of drivers thereof. The LTFRB, upon the other hand, is the governing
body tasked by E.O. No. 202, dated 19 June 1987, to regulate the operation of public utility or "for hire"
vehicles and to grant franchises or certificates of public convenience ("CPC"). 11 Finely put, registration and
licensing functions are vested in the LTO while franchising and regulatory responsibilities had been vested in
the LTFRB.
Under the Local Government Code, certain functions of the DOTC were transferred to the LGUs, thusly: jgc:chanrob les.co m.ph

"SECTION 458. Powers, Duties, Functions and Compensation. —

"x x x

"(3) Subject to the provisions of Book II of this Code, enact ordinances granting franchises and authorizing
the issuance of permits or licenses, upon such conditions and for such purposes intended to promote the
general welfare of the inhabitants of the city and pursuant to this legislative authority shall: jgc:chan roble s.com.p h

"x x x.

"(VI) Subject to the guidelines prescribed by the Department of Transportation and Communications,
regulate the operation of tricycles and grant franchises for the operation thereof within the territorial
jurisdiction of the city." (Emphasis supplied)

LGUs indubitably now have the power to regulate the operation of tricycles-for-hire and to grant franchises
for the operation thereof. "To regulate" means to fix, establish, or control; to adjust by rule, method, or
established mode; to direct by rule or restriction; or to subject to governing principles or laws. 12 A
franchise is defined to be a special privilege to do certain things conferred by government on an individual or
corporation, and which does not belong to citizens generally of common right. 13 On the other hand, "to
register" means to record formally and exactly, to enroll, or to enter precisely in a list or the like, 14 and a
"driver’s license" is the certificate or license issued by the government which authorizes a person to operate
a motor vehicle. 15 The devolution of the functions of the DOTC, performed by the LTFRB, to the LGUs, as
so aptly observed by the Solicitor General, is aimed at curbing the alarming increase of accidents in national
highways involving tricycles. It has been the perception that local governments are in good position to
achieve the end desired by the law-making body because of their proximity to the situation that can enable
them to address that serious concern better than the national government.

It may not be amiss to state, nevertheless, that under Article 458 (a)[3-VI] of the Local Government Code,
the power of LGUs to regulate the operation of tricycles and to grant franchises for the operation thereof is
still subject to the guidelines prescribed by the DOTC. In compliance therewith, the Department of
Transportation and Communications ("DOTC") issued "Guidelines to Implement the Devolution of LTFRBs
Franchising Authority over Tricycles-For-Hire to Local Government units pursuant to the Local Government
Code." Pertinent provisions of the guidelines state:cha nrob les.co m : chan roble s.com.p h

"In lieu of the Land Transportation Franchising and Regulatory Board (LTFRB) in the DOTC, the Sangguniang
Bayan/Sangguniang Panlungsod (SB/SP) shall perform the following: jg c:chan roble s.com.p h

"(a) Issue, amend, revise, renew, suspend, or cancel MTOP and prescribe the appropriate terms and
conditions therefor;

"x x x.

"Operating Conditions: jgc:chanro bles. com.ph

"1. For safety reasons, no tricycles should operate on national highways utilized by 4 wheel vehicles greater
than 4 tons and where normal speed exceed 40 KPH. However, the SB/SP may provide exceptions if there is
no alternative routs.

"2. Zones must be within the boundaries of the municipality/city. However, existing zones within more than
one municipality/city shall be maintained, provided that operators serving said zone shall secure MTOP’s
from each of the municipalities/cities having jurisdiction over the areas covered by the zone.

"3. A common color for tricycles-for-hire operating in the same zone may be imposed. Each unit shall be
assigned and bear an identification number, aside from its LTO license plate number.

"4. An operator wishing to stop service completely, or to suspend service for more than one month, should
report in writing such termination or suspension to the SB/SP which originally granted the MTOP prior
thereto. Transfer to another zone may be permitted upon application.

"5. The MTOP shall be valid for three (3) years, renewable for the same period. Transfer to another zone,
change of ownership of unit or transfer of MTOP shall be construed as an amendment to an MTOP and shall
require appropriate approval of the SB/SP.

"6. Operators shall employ only drivers duly licensed by LTO for tricycles-for-hire.

"7. No tricycle-for-hire shall be allowed to carry more passengers and/or goods than it is designed for.

"8. A tricycle-for-hire shall be allowed to operate like a taxi service, i.e., service is rendered upon demand
and without a fixed route within a zone." 16

Such as can be gleaned from the explicit language of the statute, as well as the corresponding guidelines
issued by DOTC, the newly delegated powers pertain to the franchising and regulatory powers theretofore
exercised by the LTFRB and not to the functions of the LTO relative to the registration of motor vehicles and
issuance of licenses for the driving thereof . Clearly unaffected by the Local Government Code are the
powers of LTO under R.A. No.4136 requiring the registration of all kinds of motor vehicles "used or operated
on or upon any public highway" in the country. Thus —

"SECTION 5. All motor vehicles and other vehicles must be registered. — (a) No motor vehicle shall be used
or operated on or upon any public highway of the Philippines unless the same is properly registered for the
current year in accordance with the provisions of this Act (Article 1, Chapter II, R.A. No. 4136).

The Commissioner of Land Transportation and his deputies are empowered at anytime to examine and
inspect such motor vehicles to determine whether said vehicles are registered, or are unsightly, unsafe,
improperly marked or equipped, or otherwise unfit to be operated on because of possible excessive damage
to highways, bridges and other infrastructures. 17 The LTO is additionally charged with being the central
repository and custodian of all records of all motor vehicles. 18

The Court shares the apprehension of the Solicitor General if the above functions were to likewise devolve to
local government units; he states: jgc:chanro bles. com.ph

"If the tricycle registration function of respondent LTO is decentralized, the incidence of theft of tricycles will
most certainly go up, and stolen tricycles registered in one local government could be registered in another
with ease. The determination of ownership thereof will also become very difficult.

"Fake driver’s licenses will likewise proliferate. This likely scenario unfolds where a tricycle driver, not
qualified by petitioner LTO’s testing, could secure a license from one municipality, and when the same is
confiscated, could just go another municipality to secure another license. chan robles. com : virtual lawlib rary

"Devolution will entail the hiring of additional personnel charged with inspecting tricycles for road
worthiness, testing drivers, and documentation. Revenues raised from tricycle registration may not be
enough to meet salaries of additional personnel and incidental costs for tools and equipment." 19

The reliance made by respondents on the broad taxing power of local government units, specifically under
Section 133 of the Local Government Code, is tangential. Police power and taxation, along with eminent
domain, are inherent powers of sovereignty which the State might share with local government units by
delegation given under a constitutional or a statutory fiat. All these inherent powers are for a public purpose
and legislative in nature but the similarities just about end there. The basic aim of police power is public
good and welfare. Taxation, in its case, focuses on the power of government to raise revenue in order to
support its existence and carry out its legitimate objectives. Although correlative to each other in many
respects, the grant of one does not necessarily carry with it the grant of the other. The two powers are, by
tradition and jurisprudence, separate and distinct powers, varying in their respective concepts, character,
scopes and limitations. To construe the tax provisions of Section 133(1) indistinctively would result in the
repeal to that extent of LTO’s regulatory power which evidently has not been intended. If it were otherwise,
the law could have just said so in Section 447 and 458 of Book III of the Local Government Code in the
same manner that the specific devolution of LTFRB’s power on franchising of tricycles has been provided.
Repeal by implication is not favored. 20 The power over tricycles granted under Section 458(a)(3)(VI) of the
Local Government Code to LGUs is the power to regulate their operation and to grant franchises for the
operation thereof. The exclusionary clause contained in the tax provisions of Section 133(1) of the Local
Government Code must not be held to have had the effect of withdrawing the express power of LTO to
cause the registration of all motor vehicles and the issuance of licenses for the driving thereof. These
functions of the LTO are essentially regulatory in nature, exercised pursuant to the police power of the
State, whose basic objectives are to achieve road safety by insuring the road worthiness of these motor
vehicles and the competence of drivers prescribed by R. A. 4136. Not insignificant is the rule that a statute
must not be construed in isolation but must be taken in harmony with the extant body of laws. 21

The Court cannot end this decision without expressing its own serious concern over the seeming laxity in the
grant of franchises for the operation of tricycles-for-hire and in allowing the indiscriminate use by such
vehicles on public highways and principal thoroughfares. Senator Aquilino C. Pimentel, Jr., the principal
author, and sponsor of the bill that eventually has become to be known as the Local Government Code, has
aptly remarked: jgc:chan rob les.com. ph

"Tricycles are a popular means of transportation, specially in the countryside. They are, unfortunately, being
allowed to drive along highways and principal thoroughfares where they pose hazards to their passengers
arising from potential collisions with buses, cars and jeepneys.

"The operation of tricycles within a municipality may be regulated by the Sangguniang Bayan. In this
connection, the Sangguniang concerned would do well to consider prohibiting the operation of tricycles along
or across highways invite collisions with faster and bigger vehicles and impede the flow of traffic." 22

The need for ensuring public safety and convenience to commuters and pedestrians alike is paramount. It
might be well, indeed, for public officials concerned to pay heed to a number of provisions in our laws that
can warrant in appropriate cases an incurrence of criminal and civil liabilities. Thus —

The Revised Penal Code —

"ARTICLE 208. Prosecution of offenses; negligence and tolerance. — The penalty of prision correccional in its
minimum period and suspension shall be imposed upon any public officer, or officer of the law, who, in
dereliction of the duties of his office, shall maliciously refrain from instituting prosecution for the punishment
of violators of the law, or shall tolerate the commission of offenses." cralaw virtua 1aw lib rary

The Civil Code —

"ARTICLE 27. Any person suffering material or moral loss because a public servant or employee refuses or
neglects, without just cause, to perform his official duty may file an action for damages and other relief
against the latter, without prejudice to any disciplinary administrative action that may be taken." cralaw virt ua1aw lib ra ry

"ARTICLE 34. When a member of a city or municipal police force refuses or fails to render aid or protection
to any person in case of danger to life or property, such peace officer shall be primarily liable for damages,
and the city or municipality shall be subsidiarily responsible therefor. The civil action herein recognized shall
be independent of any criminal, proceedings, and a preponderance of evidence shall suffice to support such
action."cralaw virtua1aw lib rary

"ARTICLE 2189. Provinces, cities and municipalities shall be liable for damages for the death of, or injuries
suffered by, any person by reason of the defective condition of roads, streets, bridges, public buildings, and
other public works under their control or supervision." cralaw vi rt ua1aw libra ry

The Local Government Code —

"SECTION 24. Liability for Damages. — Local government units and their officials are not exempt from
liability for death or injury to persons or damage to property." chanrob lesvi rtua llawlib ra ry

WHEREFORE, the assailed decision which enjoins the Land Transportation Office from requiring the due
registration of tricycles and a license for the driving thereof is REVERSED and SET ASIDE.

No pronouncements on costs.

Let copies of this decision be likewise furnished the Department of Interior and Local Governments, the
Department of Public Works and Highways and the Department of Transportation and Communication.

SO ORDERED
17.