G.R. No.

L-28896 February 17, 1988
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
ALGUE, INC., and THE COURT OF TAX APPEALS, respondents.
any action on the protest and it was only then that he accepted the
warrant of distraint and levy earlier sought to be served.5 Sixteen
days later, on April 23, 1965, Algue filed a petition for review of the
decision of the Commissioner of Internal Revenue with the Court of
Tax Appeals.6

CRUZ, J.:
Taxes are the lifeblood of the government and so should be collected
without unnecessary hindrance On the other hand, such collection
should be made in accordance with law as any arbitrariness will
negate the very reason for government itself. It is therefore
necessary to reconcile the apparently conflicting interests of the
authorities and the taxpayers so that the real purpose of taxation,
which is the promotion of the common good, may be achieved.
The above chronology shows that the petition was filed seasonably.
According to Rep. Act No. 1125, the appeal may be made within
thirty days after receipt of the decision or ruling challenged.7 It is true
that as a rule the warrant of distraint and levy is "proof of the finality
of the assessment" 8 and renders hopeless a request for
reconsideration," 9 being "tantamount to an outright denial thereof
and makes the said request deemed rejected." 10 But there is a
special circumstance in the case at bar that prevents application of
this accepted doctrine.

The main issue in this case is whether or not the Collector of Internal
Revenue correctly disallowed the P75,000.00 deduction claimed by
private respondent Algue as legitimate business expenses in its
income tax returns. The corollary issue is whether or not the appeal
of the private respondent from the decision of the Collector of
Internal Revenue was made on time and in accordance with law.
We deal first with the procedural question.
The record shows that on January 14, 1965, the private respondent,
a domestic corporation engaged in engineering, construction and
other allied activities, received a letter from the petitioner assessing it
in the total amount of P83,183.85 as delinquency income taxes for
the years 1958 and 1959.1 On January 18, 1965, Algue flied a letter
of protest or request for reconsideration, which letter was stamp
received on the same day in the office of the petitioner. 2 On March
12, 1965, a warrant of distraint and levy was presented to the private
respondent, through its counsel, Atty. Alberto Guevara, Jr., who
refused to receive it on the ground of the pending protest. 3 A search
of the protest in the dockets of the case proved fruitless. Atty.
Guevara produced his file copy and gave a photostat to BIR agent
Ramon Reyes, who deferred service of the warrant. 4 On April 7,
1965, Atty. Guevara was finally informed that the BIR was not taking
The proven fact is that four days after the private respondent
received the petitioner's notice of assessment, it filed its letter of
protest. This was apparently not taken into account before the
warrant of distraint and levy was issued; indeed, such protest could
not be located in the office of the petitioner. It was only after Atty.
Guevara gave the BIR a copy of the protest that it was, if at all,
considered by the tax authorities. During the intervening period, the
warrant was premature and could therefore not be served.
As the Court of Tax Appeals correctly noted," 11 the protest filed by
private respondent was not pro forma and was based on strong legal
considerations. It thus had the effect of suspending on January 18,
1965, when it was filed, the reglementary period which started on the
date the assessment was received, viz., January 14, 1965. The
period started running again only on April 7, 1965, when the private
respondent was definitely informed of the implied rejection of the
said protest and the warrant was finally served on it. Hence, when
the appeal was filed on April 23, 1965, only 20 days of the
reglementary period had been consumed.
Now for the substantive question.
The petitioner contends that the claimed deduction of P75,000.00
was properly disallowed because it was not an ordinary reasonable
or necessary business expense. The Court of Tax Appeals had seen
it differently. Agreeing with Algue, it held that the said amount had
been legitimately paid by the private respondent for actual services
rendered. The payment was in the form of promotional fees. These
were collected by the Payees for their work in the creation of the
Vegetable Oil Investment Corporation of the Philippines and its
subsequent purchase of the properties of the Philippine Sugar Estate
Development Company.
Parenthetically, it may be observed that the petitioner had Originally
claimed these promotional fees to be personal holding company
income 12 but later conformed to the decision of the respondent court
rejecting this assertion.13 In fact, as the said court found, the amount
was earned through the joint efforts of the persons among whom it
was distributed It has been established that the Philippine Sugar
Estate Development Company had earlier appointed Algue as its
agent, authorizing it to sell its land, factories and oil manufacturing
process. Pursuant to such authority, Alberto Guevara, Jr., Eduardo
Guevara, Isabel Guevara, Edith, O'Farell, and Pablo Sanchez,
worked for the formation of the Vegetable Oil Investment
Corporation, inducing other persons to invest in it.14 Ultimately, after
its incorporation largely through the promotion of the said persons,
this new corporation purchased the PSEDC properties.15 For this
sale, Algue received as agent a commission of P126,000.00, and it
was from this commission that the P75,000.00 promotional fees were
paid to the aforenamed individuals.16
There is no dispute that the payees duly reported their respective
shares of the fees in their income tax returns and paid the
corresponding taxes thereon.17 The Court of Tax Appeals also found,
after examining the evidence, that no distribution of dividends was
involved.18
The petitioner claims that these payments are fictitious because
most of the payees are members of the same family in control of
Algue. It is argued that no indication was made as to how such
payments were made, whether by check or in cash, and there is not
enough substantiation of such payments. In short, the petitioner
suggests a tax dodge, an attempt to evade a legitimate assessment
by involving an imaginary deduction.
We find that these suspicions were adequately met by the private
respondent when its President, Alberto Guevara, and the
accountant, Cecilia V. de Jesus, testified that the payments were not
made in one lump sum but periodically and in different amounts as
each payee's need arose. 19 It should be remembered that this was a
family corporation where strict business procedures were not applied
and immediate issuance of receipts was not required. Even so, at the
end of the year, when the books were to be closed, each payee
made an accounting of all of the fees received by him or her, to
make up the total of P75,000.00. 20 Admittedly, everything seemed to
be informal. This arrangement was understandable, however, in view
of the close relationship among the persons in the family corporation.
We agree with the respondent court that the amount of the
promotional fees was not excessive. The total commission paid by
the Philippine Sugar Estate Development Co. to the private
respondent was P125,000.00. 21After deducting the said fees, Algue
still had a balance of P50,000.00 as clear profit from the transaction.
The amount of P75,000.00 was 60% of the total commission. This
was a reasonable proportion, considering that it was the payees who
did practically everything, from the formation of the Vegetable Oil
Investment Corporation to the actual purchase by it of the Sugar
Estate properties. This finding of the respondent court is in accord
with the following provision of the Tax Code:
SEC. 30. Deductions from gross income.--In
computing net income there shall be allowed as
deductions —
(a) Expenses:
(1) In general.--All the ordinary and necessary
expenses paid or incurred during the taxable year in
carrying on any trade or business, including a
reasonable allowance for salaries or other
 compensation for personal services actually
rendered; ... 22
and Revenue Regulations No. 2, Section 70 (1), reading as follows:
SEC. 70. Compensation for personal services.--
Among the ordinary and necessary expenses paid
or incurred in carrying on any trade or business may
be included a reasonable allowance for salaries or
other compensation for personal services actually
rendered. The test of deductibility in the case of
compensation payments is whether they are
reasonable and are, in fact, payments purely for
service. This test and deductibility in the case of
compensation payments is whether they are
reasonable and are, in fact, payments purely for
service. This test and its practical application may be
further stated and illustrated as follows:
Any amount paid in the form of compensation, but
not in fact as the purchase price of services, is not
deductible. (a) An ostensible salary paid by a
corporation may be a distribution of a dividend on
stock. This is likely to occur in the case of a
corporation having few stockholders, Practically all
of whom draw salaries. If in such a case the salaries
are in excess of those ordinarily paid for similar
services, and the excessive payment correspond or
bear a close relationship to the stockholdings of the
officers of employees, it would seem likely that the
salaries are not paid wholly for services rendered,
but the excessive payments are a distribution of
earnings upon the stock. . . . (Promulgated Feb. 11,
1931, 30 O.G. No. 18, 325.)
It is worth noting at this point that most of the payees were not in the
regular employ of Algue nor were they its controlling stockholders. 23
The Solicitor General is correct when he says that the burden is on
the taxpayer to prove the validity of the claimed deduction. In the
present case, however, we find that the onus has been discharged
satisfactorily. The private respondent has proved that the payment of
the fees was necessary and reasonable in the light of the efforts
exerted by the payees in inducing investors and prominent
businessmen to venture in an experimental enterprise and involve
themselves in a new business requiring millions of pesos. This was
no mean feat and should be, as it was, sufficiently recompensed.
It is said that taxes are what we pay for civilization society. Without
taxes, the government would be paralyzed for lack of the motive
power to activate and operate it. Hence, despite the natural
reluctance to surrender part of one's hard earned income to the
taxing authorities, every person who is able to must contribute his
share in the running of the government. The government for its part,
is expected to respond in the form of tangible and intangible benefits
intended to improve the lives of the people and enhance their moral
and material values. This symbiotic relationship is the rationale of
taxation and should dispel the erroneous notion that it is an arbitrary
method of exaction by those in the seat of power.
But even as we concede the inevitability and indispensability of
taxation, it is a requirement in all democratic regimes that it be
exercised reasonably and in accordance with the prescribed
procedure. If it is not, then the taxpayer has a right to complain and
the courts will then come to his succor. For all the awesome power of
the tax collector, he may still be stopped in his tracks if the taxpayer
can demonstrate, as it has here, that the law has not been observed.
We hold that the appeal of the private respondent from the decision
of the petitioner was filed on time with the respondent court in
accordance with Rep. Act No. 1125. And we also find that the
claimed deduction by the private respondent was permitted under
the Internal Revenue Code and should therefore not have been
disallowed by the petitioner.
ACCORDINGLY, the appealed decision of the Court of Tax Appeals
is AFFIRMED in toto, without costs.
SO ORDERED. International Airport in the Province of Cebu and the
Lahug Airport in Cebu City, . . . and such other
Airports as may be established in the Province of
Cebu . . . (Sec. 3, RA 6958). It is also mandated to:
G.R. No. 120082 September 11, 1996
a) encourage,
promote and
MACTAN CEBU INTERNATIONAL AIRPORT develop
AUTHORITY, petitioner, international and
vs. domestic air traffic
HON. FERDINAND J. MARCOS, in his capacity as the Presiding in the Central
Judge of the Regional Trial Court, Branch 20, Cebu City, THE Visayas and
CITY OF CEBU, represented by its Mayor HON. TOMAS R. Mindanao regions
OSMEÑA, and EUSTAQUIO B. CESA, respondents. as a means of
making the regions
centers of
international trade
DAVIDE, JR., J.: and tourism, and
accelerating the
For review under Rule 45 of the Rules of Court on a pure development of the
question of law are the decision of 22 March 19951of the means of
Regional Trial Court (RTC) of Cebu City, Branch 20, transportation and
dismissing the petition for declaratory relief in Civil Case No. communication in
CEB-16900 entitled "Mactan Cebu International Airport the country; and
Authority vs. City of Cebu", and its order of 4, May
19952 denying the motion to reconsider the decision. b) upgrade the
services and
We resolved to give due course to this petition for its raises facilities of the
issues dwelling on the scope of the taxing power of local airports and to
government-owned and controlled corporations. formulate
internationally
acceptable
The uncontradicted factual antecedents are summarized in
standards of airport
the instant petition as follows:
accommodation
and service.
Petitioner Mactan Cebu International Airport
Authority (MCIAA) was created by virtue of Republic
Since the time of its creation, petitioner MCIAA
Act No. 6958, mandated to "principally undertake the
enjoyed the privilege of exemption from payment of
economical, efficient and effective control,
realty taxes in accordance with Section 14 of its
management and supervision of the Mactan
Charter.
 Sec. 14. Tax Exemptions. — The
authority shall be exempt from realty
taxes imposed by the National
Government or any of its political
subdivisions, agencies and
instrumentalities . . .
On October 11, 1994, however, Mr. Eustaquio B.
Cesa, Officer-in-Charge, Office of the Treasurer of
the City of Cebu, demanded payment for realty
taxes on several parcels of land belonging to the
petitioner (Lot Nos. 913-G, 743, 88 SWO, 948-A,
989-A, 474, 109(931), I-M, 918, 919, 913-F, 941,
942, 947, 77 Psd., 746 and 991-A), located at Barrio
Apas and Barrio Kasambagan, Lahug, Cebu City, in
the total amount of P2,229,078.79.
Petitioner objected to such demand for payment as
baseless and unjustified, claiming in its favor the
aforecited Section 14 of RA 6958 which exempt it
from payment of realty taxes. It was also asserted
that it is an instrumentality of the government
performing governmental functions, citing section
133 of the Local Government Code of 1991 which
puts limitations on the taxing powers of local
government units:
Sec. 133. Common Limitations on
the Taxing Powers of Local
Government Units. — Unless
otherwise provided herein, the
exercise of the taxing powers of
provinces, cities, municipalities, and
barangay shall not extend to the
levy of the following:
a) . . .
xxx xxx xxx
o) Taxes, fees or
charges of any kind
on the National
Government, its
agencies and
instrumentalities,
and local
government units.
(Emphasis
supplied)
Respondent City refused to cancel and set aside
petitioner's realty tax account, insisting that the
MCIAA is a government-controlled corporation
whose tax exemption privilege has been withdrawn
by virtue of Sections 193 and 234 of the Local
Governmental Code that took effect on January 1,
1992:
Sec. 193. Withdrawal of Tax Exemption Privilege. —
Unless otherwise provided in this Code, tax
exemptions or incentives granted to, or presently
enjoyed by all persons whether natural or
juridical, including government-owned or controlled
corporations, except local water districts,
cooperatives duly registered under RA No. 6938,
non-stock, and non-profit hospitals and educational
institutions, are hereby withdrawn upon the
effectivity of this Code. (Emphasis supplied)
xxx xxx xxx
Sec. 234. Exemptions from Real Property taxes. — .
..
(a) . . .
xxx xxx xxx
 (c) . . .
Except as provided herein, any
exemption from payment of real
property tax previously granted to,
or presently enjoyed by all persons,
whether natural or juridical,
including government-owned or
controlled corporations are hereby
withdrawn upon the effectivity of this
Code.
As the City of Cebu was about to issue a warrant of
levy against the properties of petitioner, the latter
was compelled to pay its tax account "under protest"
and thereafter filed a Petition for Declaratory Relief
with the Regional Trial Court of Cebu, Branch 20, on
December 29, 1994. MCIAA basically contended
that the taxing powers of local government units do
not extend to the levy of taxes or fees of any kind on
an instrumentality of the national government.
Petitioner insisted that while it is indeed a
government-owned corporation, it nonetheless
stands on the same footing as an agency or
instrumentality of the national government. Petitioner
insisted that while it is indeed a government-owned
corporation, it nonetheless stands on the same
footing as an agency or instrumentality of the
national government by the very nature of its powers
and functions.
Respondent City, however, asserted that MACIAA is
not an instrumentality of the government but merely
a government-owned corporation performing
proprietary functions As such, all exemptions
previously granted to it were deemed withdrawn by
operation of law, as provided under Sections 193
and 234 of the Local Government Code when it took
effect on January 1, 1992.3
The petition for declaratory relief was docketed as Civil Case
No. CEB-16900.
In its decision of 22 March 1995,4 the trial court dismissed
the petition in light of its findings, to wit:
A close reading of the New Local Government Code
of 1991 or RA 7160 provides the express
cancellation and withdrawal of exemption of taxes by
government owned and controlled corporation per
Sections after the effectivity of said Code on January
1, 1992, to wit: [proceeds to quote Sections 193 and
234]
Petitioners claimed that its real properties assessed
by respondent City Government of Cebu are
exempted from paying realty taxes in view of the
exemption granted under RA 6958 to pay the same
(citing Section 14 of RA 6958).
However, RA 7160 expressly provides that "All
general and special laws, acts, city charters, decress
[sic], executive orders, proclamations and
administrative regulations, or part or parts thereof
which are inconsistent with any of the provisions of
this Code are hereby repealed or modified
accordingly." ([f], Section 534, RA 7160).
With that repealing clause in RA 7160, it is safe to
infer and state that the tax exemption provided for in
RA 6958 creating petitioner had been expressly
repealed by the provisions of the New Local
Government Code of 1991.
So that petitioner in this case has to pay the
assessed realty tax of its properties effective after
January 1, 1992 until the present.
 This Court's ruling finds expression to give impetus
and meaning to the overall objectives of the New
Local Government Code of 1991, RA 7160. "It is
hereby declared the policy of the State that the
territorial and political subdivisions of the State shall
enjoy genuine and meaningful local autonomy to
enable them to attain their fullest development as
self-reliant communities and make them more
effective partners in the attainment of national goals.
Towards this end, the State shall provide for a more
responsive and accountable local government
structure instituted through a system of
decentralization whereby local government units
shall be given more powers, authority,
responsibilities, and resources. The process of
decentralization shall proceed from the national
government to the local government units. . . .5
Its motion for reconsideration having been denied by the trial
court in its 4 May 1995 order, the petitioner filed the instant
petition based on the following assignment of errors:
I RESPONDENT JUDGE ERRED
IN FAILING TO RULE THAT THE
PETITIONER IS VESTED WITH
GOVERNMENT POWERS AND
FUNCTIONS WHICH PLACE IT IN
THE SAME CATEGORY AS AN
INSTRUMENTALITY OR AGENCY
OF THE GOVERNMENT.
II RESPONDENT JUDGE ERRED
IN RULING THAT PETITIONER IS
LIABLE TO PAY REAL PROPERTY
TAXES TO THE CITY OF CEBU.
Anent the first assigned error, the petitioner asserts that
although it is a government-owned or controlled corporation
it is mandated to perform functions in the same category as
an instrumentality of Government. An instrumentality of
Government is one created to perform governmental
functions primarily to promote certain aspects of the
economic life of the people.6 Considering its task "not merely
to efficiently operate and manage the Mactan-Cebu
International Airport, but more importantly, to carry out the
Government policies of promoting and developing the
Central Visayas and Mindanao regions as centers of
international trade and tourism, and accelerating the
development of the means of transportation and
communication in the country,"7and that it is an attached
agency of the Department of Transportation and
Communication (DOTC),8 the petitioner "may stand in [sic]
the same footing as an agency or instrumentality of the
national government." Hence, its tax exemption privilege
under Section 14 of its Charter "cannot be considered
withdrawn with the passage of the Local Government Code
of 1991 (hereinafter LGC) because Section 133 thereof
specifically states that the taxing powers of local government
units shall not extend to the levy of taxes of fees or charges
of any kind on the national government its agencies and
instrumentalities."
As to the second assigned error, the petitioner contends that
being an instrumentality of the National Government,
respondent City of Cebu has no power nor authority to
impose realty taxes upon it in accordance with the aforesaid
Section 133 of the LGC, as explained in Basco vs. Philippine
Amusement and Gaming Corporation;9
Local governments have no power to tax
instrumentalities of the National Government.
PAGCOR is a government owned or controlled
corporation with an original character, PD 1869. All
its shares of stock are owned by the National
Government. . . .
PAGCOR has a dual role, to operate and regulate
gambling casinos. The latter joke is governmental,
which places it in the category of an agency or
instrumentality of the Government. Being an
instrumentality of the Government, PAGCOR should
be and actually is exempt from local taxes.
Otherwise, its operation might be burdened,
impeded or subjected to control by a mere Local
government.
The states have no power by taxation or otherwise,
to retard, impede, burden or in any manner control
the operation of constitutional laws enacted by
Congress to carry into execution the powers vested
in the federal government. (McCulloch v. Maryland,
4 Wheat 316, 4 L Ed. 579).
This doctrine emanates from the "supremacy" of the
National Government over local government.
Justice Holmes, speaking for the Supreme Court,
make references to the entire absence of power on
the part of the States to touch, in that way (taxation)
at least, the instrumentalities of the United States
(Johnson v. Maryland, 254 US 51) and it can be
agreed that no state or political subdivision can
regulate a federal instrumentality in such a way as to
prevent it from consummating its federal
responsibilities, or even to seriously burden it in the
accomplishment of them. (Antieau Modern
Constitutional Law, Vol. 2, p. 140)
Otherwise mere creature of the State can defeat
National policies thru extermination of what local
authorities may perceive to be undesirable activities
or enterprise using the power to tax as "a toll for
regulation" (U.S. v. Sanchez, 340 US 42). The
power to tax which was called by Justice Marshall as
the "power to destroy" (McCulloch v.
Maryland, supra) cannot be allowed to defeat an
instrumentality or creation of the very entity which
has the inherent power to wield it. (Emphasis
supplied)
It then concludes that the respondent Judge "cannot
therefore correctly say that the questioned provisions of the
Code do not contain any distinction between a governmental
function as against one performing merely proprietary ones
such that the exemption privilege withdrawn under the said
Code would apply to allgovernment corporations." For it is
clear from Section 133, in relation to Section 234, of the LGC
that the legislature meant to exclude instrumentalities of the
national government from the taxing power of the local
government units.
In its comment respondent City of Cebu alleges that as local
a government unit and a political subdivision, it has the
power to impose, levy, assess, and collect taxes within its
jurisdiction. Such power is guaranteed by the
Constitution10 and enhanced further by the LGC. While it
may be true that under its Charter the petitioner was exempt
from the payment of realty taxes,11 this exemption was
withdrawn by Section 234 of the LGC. In response to the
petitioner's claim that such exemption was not repealed
because being an instrumentality of the National
Government, Section 133 of the LGC prohibits local
government units from imposing taxes, fees, or charges of
any kind on it, respondent City of Cebu points out that the
petitioner is likewise a government-owned corporation, and
Section 234 thereof does not distinguish between
government-owned corporation, and Section 234 thereof
does not distinguish between government-owned
corporation, and Section 234 thereof does not distinguish
between government-owned or controlled corporations
performing governmental and purely proprietary functions.
Respondent city of Cebu urges this the Manila International
Airport Authority is a governmental-owned
corporation, 12 and to reject the application of Basco
because it was "promulgated . . . before the enactment and
the singing into law of R.A. No. 7160," and was not,
therefore, decided "in the light of the spirit and intention of
the framers of the said law.
As a general rule, the power to tax is an incident of
sovereignty and is unlimited in its range, acknowledging in
its very nature no limits, so that security against its abuse is
to be found only in the responsibility of the legislature which
imposes the tax on the constituency who are to pay it.
Nevertheless, effective limitations thereon may be imposed
by the people through their Constitutions.13 Our Constitution,
for instance, provides that the rule of taxation shall be
uniform and equitable and Congress shall evolve a
progressive system of taxation.14 So potent indeed is the
power that it was once opined that "the power to tax involves
the power to destroy."15 Verily, taxation is a destructive
power which interferes with the personal and property for the
support of the government. Accordingly, tax statutes must be
construed strictly against the government and liberally in
favor of the taxpayer.16 But since taxes are what we pay for
civilized society,17 or are the lifeblood of the nation, the law
frowns against exemptions from taxation and statutes
granting tax exemptions are thus construed strictissimi
juris against the taxpayers and liberally in favor of the taxing
authority.18 A claim of exemption from tax payment must be
clearly shown and based on language in the law too plain to
be mistaken.19 Elsewise stated, taxation is the rule,
exemption therefrom is the exception.20 However, if the
grantee of the exemption is a political subdivision or
instrumentality, the rigid rule of construction does not apply
because the practical effect of the exemption is merely to
reduce the amount of money that has to be handled by the
government in the course of its operations.21
The power to tax is primarily vested in the Congress;
however, in our jurisdiction, it may be exercised by local
legislative bodies, no longer merely by virtue of a valid
delegation as before, but pursuant to direct authority
conferred by Section 5, Article X of the Constitution.22 Under
the latter, the exercise of the power may be subject to such
guidelines and limitations as the Congress may provide
which, however, must be consistent with the basic policy of
local autonomy.
There can be no question that under Section 14 of R.A. No.
6958 the petitioner is exempt from the payment of realty
taxes imposed by the National Government or any of its
political subdivisions, agencies, and instrumentalities.
Nevertheless, since taxation is the rule and exemption
therefrom the exception, the exemption may thus be
withdrawn at the pleasure of the taxing authority. The only
exception to this rule is where the exemption was granted to
private parties based on material consideration of a mutual
nature, which then becomes contractual and is thus covered
by the non-impairment clause of the Constitution.23
The LGC, enacted pursuant to Section 3, Article X of the
constitution provides for the exercise by local government
units of their power to tax, the scope thereof or its limitations,
and the exemption from taxation.
Section 133 of the LGC prescribes the common limitations
on the taxing powers of local government units as follows:
Sec. 133. Common Limitations on the Taxing Power
of Local Government Units. — Unless otherwise
provided herein, the exercise of the taxing powers of
provinces, cities, municipalities, and barangays shall
not extend to the levy of the following:
(a) Income tax, except when levied
on banks and other financial
institutions;
(b) Documentary stamp tax;
(c) Taxes on estates, "inheritance,
gifts, legacies and other
acquisitions mortis causa, except as
otherwise provided herein
(d) Customs duties, registration fees
of vessels and wharfage on
wharves, tonnage dues, and all
other kinds of customs fees charges
and dues except wharfage on
wharves constructed and
maintained by the local government
unit concerned:
(e) Taxes, fees and charges and
other imposition upon goods carried
into or out of, or passing through,
the territorial jurisdictions of local
government units in the guise or
charges for wharfages, tolls for
bridges or otherwise, or other taxes,
fees or charges in any form
whatsoever upon such goods or
merchandise;
(f) Taxes fees or charges on
agricultural and aquatic products
when sold by marginal farmers or
fishermen;
(g) Taxes on business enterprise
certified to be the Board of
Investment as pioneer or non-
pioneer for a period of six (6) and
four (4) years, respectively from the
date of registration;
(h) Excise taxes on articles
enumerated under the National
Internal Revenue Code, as
amended, and taxes, fees or
charges on petroleum products;
(i) Percentage or value added tax
(VAT) on sales, barters or
exchanges or similar transactions
on goods or services except as
otherwise provided herein;
(j) Taxes on the gross receipts of
transportation contractor and person
engage in the transportation of
passengers of freight by hire and
common carriers by air, land, or
water, except as provided in this
code;
(k) Taxes on premiums paid by
ways reinsurance or retrocession;
(l) Taxes, fees, or charges for the
registration of motor vehicles and for
the issuance of all kinds of licenses
or permits for the driving of thereof,
except, tricycles;
(m) Taxes, fees, or other charges on
Philippine product actually exported,
except as otherwise provided
herein;
(n) Taxes, fees, or charges, on
Countryside and Barangay Business
Enterprise and Cooperatives duly
registered under R.A. No. 6810 and
Republic Act Numbered Sixty nine
hundred thirty-eight (R.A. No. 6938)
otherwise known as the
"Cooperative Code of the
Philippines; and
 (o) TAXES, FEES, OR CHARGES
OF ANY KIND ON THE NATIONAL
GOVERNMENT, ITS AGENCIES
AND INSTRUMENTALITIES, AND
LOCAL GOVERNMENT UNITS.
(emphasis supplied)
Needless to say the last item (item o) is pertinent in this
case. The "taxes, fees or charges" referred to are "of any
kind", hence they include all of these, unless otherwise
provided by the LGC. The term "taxes" is well understood so
as to need no further elaboration, especially in the light of
the above enumeration. The term "fees" means charges
fixed by law or Ordinance for the regulation or inspection of
business activity,24 while "charges" are pecuniary liabilities
such as rents or fees against person or property.25
Among the "taxes" enumerated in the LGC is real property
tax, which is governed by Section 232. It reads as follows:
Sec. 232. Power to Levy Real Property Tax. — A
province or city or a municipality within the
Metropolitan Manila Area may levy on an annual ad
valorem tax on real property such as land, building,
machinery and other improvements not hereafter
specifically exempted.
Section 234 of LGC provides for the exemptions from
payment of real property taxes and withdraws previous
exemptions therefrom granted to natural and juridical
persons, including government owned and controlled
corporations, except as provided therein. It provides:
Sec. 234. Exemptions from Real Property Tax. —
The following are exempted from payment of the
real property tax:
(a) Real property owned by the
Republic of the Philippines or any of
its political subdivisions except
when the beneficial use thereof had
been granted, for reconsideration or
otherwise, to a taxable person;
(b) Charitable institutions, churches,
parsonages or convents
appurtenants thereto, mosques
nonprofits or religious cemeteries
and all lands, building and
improvements actually, directly, and
exclusively used for religious
charitable or educational purposes;
(c) All machineries and equipment
that are actually, directly and
exclusively used by local water
districts and government-owned or
controlled corporations engaged in
the supply and distribution of water
and/or generation and transmission
of electric power;
(d) All real property owned by duly
registered cooperatives as provided
for under R.A. No. 6938; and;
(e) Machinery and equipment used
for pollution control and
environmental protection.
Except as provided herein, any
exemptions from payment of real
property tax previously granted to or
presently enjoyed by, all persons
whether natural or juridical,
including all government owned or
controlled corporations are hereby
 withdrawn upon the effectivity of his
Code.
These exemptions are based on the ownership, character,
and use of the property. Thus;
(a) Ownership Exemptions.
Exemptions from real property taxes
on the basis of ownership are real
properties owned by: (i) the
Republic, (ii) a province, (iii) a city,
(iv) a municipality, (v) a barangay,
and (vi) registered cooperatives.
(b) Character Exemptions.
Exempted from real property taxes
on the basis of their character are:
(i) charitable institutions, (ii) houses
and temples of prayer like churches,
parsonages or convents
appurtenant thereto, mosques, and
(iii) non profit or religious
cemeteries.
(c) Usage exemptions. Exempted
from real property taxes on the
basis of the actual, direct and
exclusive use to which they are
devoted are: (i) all lands buildings
and improvements which are
actually, directed and exclusively
used for religious, charitable or
educational purpose; (ii) all
machineries and equipment
actually, directly and exclusively
used or by local water districts or by
government-owned or controlled
corporations engaged in the supply
and distribution of water and/or
generation and transmission of
electric power; and (iii) all machinery
and equipment used for pollution
control and environmental
protection.
To help provide a healthy environment in the midst
of the modernization of the country, all machinery
and equipment for pollution control and
environmental protection may not be taxed by local
governments.
2. Other Exemptions Withdrawn. All
other exemptions previously granted
to natural or juridical persons
including government-owned or
controlled corporations are
withdrawn upon the effectivity of the
Code.26
Section 193 of the LGC is the general provision on
withdrawal of tax exemption privileges. It provides:
Sec. 193. Withdrawal of Tax Exemption Privileges.
— Unless otherwise provided in this code, tax
exemptions or incentives granted to or presently
enjoyed by all persons, whether natural or juridical,
including government-owned, or controlled
corporations, except local water districts,
cooperatives duly registered under R.A. 6938, non
stock and non profit hospitals and educational
constitutions, are hereby withdrawn upon the
effectivity of this Code.
On the other hand, the LGC authorizes local government
units to grant tax exemption privileges. Thus, Section 192
thereof provides:
 Sec. 192. Authority to Grant Tax Exemption
Privileges. — Local government units may, through
ordinances duly approved, grant tax exemptions,
incentives or reliefs under such terms and conditions
as they may deem necessary.
The foregoing sections of the LGC speaks of: (a) the
limitations on the taxing powers of local government units
and the exceptions to such limitations; and (b) the rule on tax
exemptions and the exceptions thereto. The use
of exceptions of provisos in these section, as shown by the
following clauses:
(1) "unless otherwise provided
herein" in the opening paragraph of
Section 133;
(2) "Unless otherwise provided in
this Code" in section 193;
(3) "not hereafter specifically
exempted" in Section 232; and
(4) "Except as provided herein" in
the last paragraph of Section 234
initially hampers a ready understanding of the sections.
Note, too, that the aforementioned clause in section 133
seems to be inaccurately worded. Instead of the clause
"unless otherwise provided herein," with the "herein" to
mean, of course, the section, it should have used the clause
"unless otherwise provided in this Code." The former results
in absurdity since the section itself enumerates what are
beyond the taxing powers of local government units and,
where exceptions were intended, the exceptions were
explicitly indicated in the text. For instance, in item (a) which
excepts the income taxes "when livied on banks and other
financial institutions", item (d) which excepts "wharfage on
wharves constructed and maintained by the local
government until concerned"; and item (1) which excepts
taxes, fees, and charges for the registration and issuance of
license or permits for the driving of "tricycles". It may also be
observed that within the body itself of the section, there are
exceptions which can be found only in other parts of the
LGC, but the section interchangeably uses therein the
clause "except as otherwise provided herein" as in items (c)
and (i), or the clause "except as otherwise provided herein"
as in items (c) and (i), or the clause "excepts as provided in
this Code" in item (j). These clauses would be obviously
unnecessary or mere surplus-ages if the opening clause of
the section were" "Unless otherwise provided in this Code"
instead of "Unless otherwise provided herein". In any event,
even if the latter is used, since under Section 232 local
government units have the power to levy real property tax,
except those exempted therefrom under Section 234, then
Section 232 must be deemed to qualify Section 133.
Thus, reading together Section 133, 232 and 234 of the
LGC, we conclude that as a general rule, as laid down in
Section 133 the taxing powers of local government units
cannot extend to the levy of inter alia, "taxes, fees, and
charges of any kind of the National Government, its
agencies and instrumentalties, and local government units";
however, pursuant to Section 232, provinces, cities,
municipalities in the Metropolitan Manila Area may impose
the real property tax except on, inter alia, "real property
owned by the Republic of the Philippines or any of its
political subdivisions except when the beneficial used thereof
has been granted, for consideration or otherwise, to a
taxable person", as provided in item (a) of the first paragraph
of Section 234.
As to tax exemptions or incentives granted to or presently
enjoyed by natural or juridical persons, including
government-owned and controlled corporations, Section 193
of the LGC prescribes the general rule, viz., they
are withdrawn upon the effectivity of the LGC, except upon
the effectivity of the LGC, except those granted to local
water districts, cooperatives duly registered under R.A. No.
6938, non stock and non-profit hospitals and educational
institutions, and unless otherwise provided in the LGC. The
latter proviso could refer to Section 234, which enumerates
the properties exempt from real property tax. But the last
paragraph of Section 234 further qualifies the retention of the
exemption in so far as the real property taxes are concerned
by limiting the retention only to those enumerated there-in;
all others not included in the enumeration lost the privilege
upon the effectivity of the LGC. Moreover, even as the real
property is owned by the Republic of the Philippines, or any
of its political subdivisions covered by item (a) of the first
paragraph of Section 234, the exemption is withdrawn if the
beneficial use of such property has been granted to taxable
person for consideration or otherwise.
Since the last paragraph of Section 234 unequivocally
withdrew, upon the effectivity of the LGC, exemptions from
real property taxes granted to natural or juridical persons,
including government-owned or controlled corporations,
except as provided in the said section, and the petitioner is,
undoubtedly, a government-owned corporation, it
necessarily follows that its exemption from such tax granted
it in Section 14 of its charter, R.A. No. 6958, has been
withdrawn. Any claim to the contrary can only be justified if
the petitioner can seek refuge under any of the exceptions
provided in Section 234, but not under Section 133, as it now
asserts, since, as shown above, the said section is qualified
by Section 232 and 234.
In short, the petitioner can no longer invoke the general rule
in Section 133 that the taxing powers of the local
government units cannot extend to the levy of:
(o) taxes, fees, or charges of any
kind on the National Government, its
agencies, or instrumentalities, and
local government units.
I must show that the parcels of land in question, which are
real property, are any one of those enumerated in Section
234, either by virtue of ownership, character, or use of the
property. Most likely, it could only be the first, but not under
any explicit provision of the said section, for one exists. In
light of the petitioner's theory that it is an "instrumentality of
the Government", it could only be within be first item of the
first paragraph of the section by expanding the scope of the
terms Republic of the Philippines" to embrace . . . . .
. "instrumentalities" and "agencies" or expediency we quote:
(a) real property owned by the
Republic of the Philippines, or any
of the Philippines, or any of its
political subdivisions except when
the beneficial use thereof has been
granted, for consideration or
otherwise, to a taxable person.
This view does not persuade us. In the first place, the
petitioner's claim that it is an instrumentality of the
Government is based on Section 133(o), which expressly
mentions the word "instrumentalities"; and in the second
place it fails to consider the fact that the legislature used the
phrase "National Government, its agencies and
instrumentalities" "in Section 133(o),but only the phrase
"Republic of the Philippines or any of its political subdivision
"in Section 234(a).
The terms "Republic of the Philippines" and "National
Government" are not interchangeable. The former is boarder
and synonymous with "Government of the Republic of the
Philippines" which the Administrative Code of the 1987
defines as the "corporate governmental entity though which
the functions of the government are exercised through at the
Philippines, including, saves as the contrary appears from
the context, the various arms through which political
authority is made effective in the Philippines, whether
pertaining to the autonomous reason, the provincial, city,
municipal or barangay subdivision or other forms of local
government."27 These autonomous regions, provincial, city, (a) Real property
municipal or barangay subdivisions" are the political owned by the
subdivision.28 Republic of the
Philippines or any
On the other hand, "National Government" refers "to the of its political
entire machinery of the central government, as distinguished subdivisions and
from the different forms of local Governments."29 The any government-
National Government then is composed of the three great owned or controlled
departments the executive, the legislative and the judicial.30 corporations so
exempt by is
charter: Provided,
An "agency" of the Government refers to "any of the various
however, that this
units of the Government, including a department, bureau,
exemption shall not
office instrumentality, or government-owned or controlled
corporation, or a local government or a distinct unit apply to real
therein;"31 while an "instrumentality" refers to "any agency of property of the
above mentioned
the National Government, not integrated within the
entities the
department framework, vested with special functions or
beneficial use of
jurisdiction by law, endowed with some if not all corporate
which has been
powers, administering special funds, and enjoying
operational autonomy; usually through a charter. This term granted, for
includes regulatory agencies, chartered institutions and consideration or
otherwise, to a
government-owned and controlled corporations".32
taxable person.
If Section 234(a) intended to extend the exception therein to
the withdrawal of the exemption from payment of real Note that as a reproduced in Section 234(a), the phrase "and
any government-owned or controlled corporation so exempt
property taxes under the last sentence of the said section to
by its charter" was excluded. The justification for this
the agencies and instrumentalities of the National
restricted exemption in Section 234(a) seems obvious: to
Government mentioned in Section 133(o), then it should
limit further tax exemption privileges, specially in light of the
have restated the wording of the latter. Yet, it did not
Moreover, that Congress did not wish to expand the scope of general provision on withdrawal of exemption from payment
the exemption in Section 234(a) to include real property of real property taxes in the last paragraph of property taxes
in the last paragraph of Section 234. These policy
owned by other instrumentalities or agencies of the
considerations are consistent with the State policy to ensure
government including government-owned and controlled
autonomy to local governments33 and the objective of the
corporations is further borne out by the fact that the source
LGC that they enjoy genuine and meaningful local autonomy
of this exemption is Section 40(a) of P.D. No. 646, otherwise
known as the Real Property Tax Code, which reads: to enable them to attain their fullest development as self-
reliant communities and make them effective partners in the
attainment of national goals.34 The power to tax is the most
Sec 40. Exemption from Real Property Tax. — The effective instrument to raise needed revenues to finance and
exemption shall be as follows: support myriad activities of local government units for the
delivery of basic services essential to the promotion of the
general welfare and the enhancement of peace, progress,
and prosperity of the people. It may also be relevant to recall
that the original reasons for the withdrawal of tax exemption
privileges granted to government-owned and controlled
corporations and all other units of government were that
such privilege resulted in serious tax base erosion and
distortions in the tax treatment of similarly situated
enterprises, and there was a need for this entities to share in
the requirements of the development, fiscal or otherwise, by
paying the taxes and other charges due from them.35
The crucial issues then to be addressed are: (a) whether the
parcels of land in question belong to the Republic of the
Philippines whose beneficial use has been granted to the
petitioner, and (b) whether the petitioner is a "taxable
person".
Section 15 of the petitioner's Charter provides:
Sec. 15. Transfer of Existing Facilities and Intangible
Assets. — All existing public airport facilities,
runways, lands, buildings and other properties,
movable or immovable, belonging to or presently
administered by the airports, and all assets, powers,
rights, interests and privileges relating on airport
works, or air operations, including all equipment
which are necessary for the operations of air
navigation, acrodrome control towers, crash, fire,
and rescue facilities are hereby transferred to the
Authority: Provided however, that the operations
control of all equipment necessary for the operation
of radio aids to air navigation, airways
communication, the approach control office, and the
area control center shall be retained by the Air
Transportation Office. No equipment, however, shall
be removed by the Air Transportation Office from
Mactan without the concurrence of the authority. The
authority may assist in the maintenance of the Air
Transportation Office equipment.
The "airports" referred to are the "Lahug Air Port" in Cebu
City and the "Mactan International AirPort in the Province of
Cebu",36 which belonged to the Republic of the Philippines,
then under the Air Transportation Office (ATO).37
It may be reasonable to assume that the term "lands" refer to
"lands" in Cebu City then administered by the Lahug Air Port
and includes the parcels of land the respondent City of Cebu
seeks to levy on for real property taxes. This section involves
a "transfer" of the "lands" among other things, to the
petitioner and not just the transfer of the beneficial use
thereof, with the ownership being retained by the Republic of
the Philippines.
This "transfer" is actually an absolute conveyance of the
ownership thereof because the petitioner's authorized capital
stock consists of, inter alia "the value of such real estate
owned and/or administered by the airports."38 Hence, the
petitioner is now the owner of the land in question and the
exception in Section 234(c) of the LGC is inapplicable.
Moreover, the petitioner cannot claim that it was never a
"taxable person" under its Charter. It was only exempted
from the payment of real property taxes. The grant of the
privilege only in respect of this tax is conclusive proof of the
legislative intent to make it a taxable person subject to all
taxes, except real property tax.
Finally, even if the petitioner was originally not a taxable
person for purposes of real property tax, in light of the
forgoing disquisitions, it had already become even if it be
conceded to be an "agency" or "instrumentality" of the
Government, a taxable person for such purpose in view of
the withdrawal in the last paragraph of Section 234 of
exemptions from the payment of real property taxes, which,
as earlier adverted to, applies to the petitioner.
Accordingly, the position taken by the petitioner is untenable.
Reliance on Basco vs. Philippine Amusement and Gaming
 Corporation39 is unavailing since it was decided before the
effectivity of the LGC. Besides, nothing can prevent
Congress from decreeing that even instrumentalities or
agencies of the government performing governmental
functions may be subject to tax. Where it is done precisely to
fulfill a constitutional mandate and national policy, no one
can doubt its wisdom.
WHEREFORE, the instant petition is DENIED. The
challenged decision and order of the Regional Trial Court of
Cebu, Branch 20, in Civil Case No. CEB-16900 are
AFFIRMED.
No pronouncement as to costs.
SO ORDERED.
G.R. No. L-29059 December 15, 1987
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
CEBU PORTLAND CEMENT COMPANY and COURT OF TAX
APPEALS, respondents.
CRUZ, J.:
By virtue of a decision of the Court of Tax Appeals rendered on June
21, 1961, as modified on appeal by the Supreme Court on February
27, 1965, the Commissioner of Internal Revenue was ordered to
refund to the Cebu Portland Cement Company the amount of P
359,408.98, representing overpayments of ad valorem taxes on
cement produced and sold by it after October 1957. 1
On March 28, 1968, following denial of motions for reconsideration
filed by both the petitioner and the private respondent, the latter
moved for a writ of execution to enforce the said judgment . 2
The motion was opposed by the petitioner on the ground that the
private respondent had an outstanding sales tax liability to which the
judgment debt had already been credited. In fact, it was stressed,
there was still a balance owing on the sales taxes in the amount of P
4,789,279.85 plus 28% surcharge. 3
On April 22, 1968, the Court of Tax Appeals * granted the motion,
holding that the alleged sales tax liability of the private respondent
was still being questioned and therefore could not be set-off against
the refund. 4
In his petition to review the said resolution, the Commissioner of
Internal Revenue claims that the refund should be charged against
the tax deficiency of the private respondent on the sales of cement
under Section 186 of the Tax Code. His position is that cement is a
manufactured and not a mineral product and therefore not exempt
from sales taxes. He adds that enforcement of the said tax deficiency
was properly effected through his power of distraint of personal
property under Sections 316 and 318 5 of the said Code and,
moreover, the collection of any national internal revenue tax may not
be enjoined under Section 305, 6 subject only to the exception
prescribed in Rep. Act No. 1125. 7 This is not applicable to the
instant case. The petitioner also denies that the sales tax
assessments have already prescribed because the prescriptive
period should be counted from the filing of the sales tax returns,
which had not yet been done by the private respondent.
For its part, the private respondent disclaims liability for the sales
taxes, on the ground that cement is not a manufactured product but
a mineral product. 8 As such, it was exempted from sales taxes
under Section 188 of the Tax Code after the effectivity of Rep. Act
No. 1299 on June 16, 1955, in accordance with Cebu Portland
Cement Co. v. Collector of Internal Revenue, 9 decided in 1968.
Here Justice Eugenio Angeles declared that "before the effectivity of
Rep. Act No. 1299, amending Section 246 of the National Internal
Revenue Code, cement was taxable as a manufactured product
under Section 186, in connection with Section 194(4) of the said
Code," thereby implying that it was not considered a manufactured
product afterwards. Also, the alleged sales tax deficiency could not
as yet be enforced against it because the tax assessment was not
yet final, the same being still under protest and still to be definitely
resolved on the merits. Besides, the assessment had already
prescribed, not having been made within the reglementary five-year
period from the filing of the tax returns. 10
Our ruling is that the sales tax was properly imposed upon the
private respondent for the reason that cement has always been
considered a manufactured product and not a mineral product. This
matter was extensively discussed and categorically resolved
in Commissioner of Internal Revenue v. Republic Cement
Corporation, 11 decided on August 10, 1983, where Justice Efren L.
Plana, after an exhaustive review of the pertinent cases, declared for
a unanimous Court:
From all the foregoing cases, it is clear that
cement qua cement was never considered as a
mineral product within the meaning of Section 246 of
the Tax Code, notwithstanding that at least 80% of
its components are minerals, for the simple reason
that cement is the product of
a manufacturing process and is no longer the
mineral product contemplated in the Tax Code (i.e.;
minerals subjected to simple treatments) for the
purpose of imposing the ad valorem tax.
What has apparently encouraged the herein
respondents to maintain their present posture is the
case of Cebu Portland Cement Co. v. Collector of
Internal Revenue, L-20563, Oct. 29, 1968 (28 SCRA
789) penned by Justice Eugenio Angeles. For some
portions of that decision give the impression that
Republic Act No. 1299, which amended Section 246,
reclassified cement as a mineral product that was
not subject to sales tax. ...
xxx xxx xxx
After a careful study of the foregoing, we conclude
that reliance on the decision penned by Justice
Angeles is misplaced. The said decision is no
authority for the proposition that after the enactment
of Republic Act No. 1299 in 1955 (defining mineral
product as things with at least 80% mineral content),
cement became a 'mineral product," as distinguished
from a "manufactured product," and therefore
ceased to be subject to sales tax. It was not
necessary for the Court to so rule. It was enough for
the Court to say in effect that even assuming
Republic Act No. 1299 had reclassified cement was
a mineral product, the reclassification could not be
given retrospective application (so as to justify the
refund of sales taxes paid before Republic Act 1299
was adopted) because laws operate prospectively
only, unless the legislative intent to the contrary is
manifest, which was not so in the case of Republic
Act 1266. [The situation would have been different if
the Court instead had ruled in favor of refund, in
which case it would have been absolutely necessary
(1) to make an unconditional ruling that Republic Act
1299 re-classified cement as a mineral product (not
subject to sales tax), and (2) to declare the law
retroactive, as a basis for granting refund of sales
tax paid before Republic Act 1299.]
In any event, we overrule the CEPOC decision of
October 29, 1968 (G.R. No. L-20563) insofar as its
pronouncements or any implication therefrom
conflict with the instant decision.
The above views were reiterated in the resolution 12 denying
reconsideration of the said decision, thus:
The nature of cement as a "manufactured product"
(rather than a "mineral product") is well-settled. The
 issue has repeatedly presented itself as a threshold
question for determining the basis for computing
the ad valorem mining tax to be paid by cement
Companies. No pronouncement was made in these
cases that as a "manufactured product" cement is
subject to sales tax because this was not at issue.
The decision sought to be reconsidered here
referred to the legislative history of Republic Act No.
1299 which introduced a definition of the terms
"mineral" and "mineral products" in Sec. 246 of the
Tax Code. Given the legislative intent, the holding in
the CEPOC case (G.R. No. L-20563) that cement
was subject to sales tax prior to the effectivity •f
Republic Act No. 1299 cannot be construed to mean
that, after the law took effect, cement ceased to be
so subject to the tax. To erase any and all
misconceptions that may have been spawned by
reliance on the case of Cebu Portland Cement Co.
v. Collector of Internal Revenue, L-20563, October
29, 1968 (28 SCRA 789) penned by Justice Eugenio
Angeles, the Court has expressly overruled it insofar
as it may conflict with the decision of August 10,
1983, now subject of these motions for
reconsideration.
On the question of prescription, the private respondent claims that
the five-year reglementary period for the assessment of its tax
liability started from the time it filed its gross sales returns on June
30, 1962. Hence, the assessment for sales taxes made on January
16, 1968 and March 4, 1968, were already out of time. We disagree.
This contention must fail for what CEPOC filed was not the sales
returns required in Section 183(n) but the ad valorem tax returns
required under Section 245 of the Tax Code. As Justice Irene R.
Cortes emphasized in the aforestated resolution:
In order to avail itself of the benefits of the five-year
prescription period under Section 331 of the Tax
Code, the taxpayer should have filed the required
return for the tax involved, that is, a sales tax return.
(Butuan Sawmill, Inc. v. CTA, et al., G.R. No. L-
21516, April 29, 1966, 16 SCRA 277). Thus CEPOC
should have filed sales tax returns of its gross sales
for the subject periods. Both parties admit that
returns were made for the ad valorem mining tax.
CEPOC argues that said returns contain the
information necessary for the assessment of the
sales tax. The Commissioner does not consider
such returns as compliance with the requirement for
the filing of tax returns so as to start the running of
the five-year prescriptive period.
We agree with the Commissioner. It has been held
in Butuan Sawmill Inc. v. CTA, supra, that the filing
of an income tax return cannot be considered as
substantial compliance with the requirement of filing
sales tax returns, in the same way that an income
tax return cannot be considered as a return for
compensating tax for the purpose of computing the
period of prescription under Sec. 331. (Citing Bisaya
Land Transportation Co., Inc. v. Collector of Internal
Revenue, G.R. Nos. L-12100 and L-11812, May 29,
1959). There being no sales tax returns filed by
CEPOC, the statute of stations in Sec. 331 did not
begin to run against the government. The
assessment made by the Commissioner in 1968 on
CEPOC's cement sales during the period from July
1, 1959 to December 31, 1960 is not barred by the
five-year prescriptive period. Absent a return or
when the return is false or fraudulent, the applicable
period is ten (10) days from the discovery of the
fraud, falsity or omission. The question in this case
is: When was CEPOC's omission to file tha return
deemed discovered by the government, so as to
start the running of said period? 13
The argument that the assessment cannot as yet be enforced
because it is still being contested loses sight of the urgency of the
need to collect taxes as "the lifeblood of the government." If the
payment of taxes could be postponed by simply questioning their
validity, the machinery of the state would grind to a halt and all
government functions would be paralyzed. That is the reason why,
save for the exception already noted, the Tax Code provides:
Sec. 291. Injunction not available to restrain
collection of tax. — No court shall have authority to
grant an injunction to restrain the collection of any
national internal revenue tax, fee or charge imposed
by this Code.
It goes without saying that this injunction is available not only when
the assessment is already being questioned in a court of justice but
more so if, as in the instant case, the challenge to the assessment is
still-and only-on the administrative level. There is all the more reason
to apply the rule here because it appears that even after crediting of
the refund against the tax deficiency, a balance of more than P 4
million is still due from the private respondent.
To require the petitioner to actually refund to the private respondent
the amount of the judgment debt, which he will later have the right to
distrain for payment of its sales tax liability is in our view an Idle
ritual. We hold that the respondent Court of Tax Appeals erred in
ordering such a charade.
WHEREFORE, the petition is GRANTED. The resolution dated April
22, 1968, in CTA Case No. 786 is SET ASIDE, without any
pronouncement as to costs.
SO ORDERED.
G.R. No. L-22074 April 30, 1965
THE PHILIPPINE GUARANTY CO., INC., petitioner,
vs.
THE COMMISSIONER OF INTERNAL REVENUE and THE COURT
OF TAX APPEALS, respondents.
Josue H. Gustilo and Ramirez and Ortigas for petitioner.
Office of the Solicitor General and Attorney V.G. Saldajena for
respondents.
BENGZON, J.P., J.:
The Philippine Guaranty Co., Inc., a domestic insurance company,
entered into reinsurance contracts, on various dates, with foreign
insurance companies not doing business in the Philippines namely:
Imperio Compañia de Seguros, La Union y El Fenix Español,
Overseas Assurance Corp., Ltd., Socieded Anonima de Reaseguros
Alianza, Tokio Marino & Fire Insurance Co., Ltd., Union Assurance
Society Ltd., Swiss Reinsurance Company and Tariff Reinsurance
Limited. Philippine Guaranty Co., Inc., thereby agreed to cede to the
foreign reinsurers a portion of the premiums on insurance it has
originally underwritten in the Philippines, in consideration for the
assumption by the latter of liability on an equivalent portion of the
risks insured. Said reinsurrance contracts were signed by Philippine
Guaranty Co., Inc. in Manila and by the foreign reinsurers outside the
Philippines, except the contract with Swiss Reinsurance Company,
which was signed by both parties in Switzerland.
The reinsurance contracts made the commencement of the
reinsurers' liability simultaneous with that of Philippine Guaranty Co.,
Inc. under the original insurance. Philippine Guaranty Co., Inc. was
required to keep a register in Manila where the risks ceded to the
foreign reinsurers where entered, and entry therein was binding upon
the reinsurers. A proportionate amount of taxes on insurance
premiums not recovered from the original assured were to be paid
for by the foreign reinsurers. The foreign reinsurers further agreed, in
consideration for managing or administering their affairs in the
Philippines, to compensate the Philippine Guaranty Co., Inc., in an
amount equal to 5% of the reinsurance premiums. Conflicts and/or
differences between the parties under the reinsurance contracts
were to be arbitrated in Manila. Philippine Guaranty Co., Inc. and
Swiss Reinsurance Company stipulated that their contract shall be
construed by the laws of the Philippines.
Pursuant to the aforesaid reinsurance contracts, Philippine Guaranty
Co., Inc. ceded to the foreign reinsurers the following premiums:
1953 . . . . . . . . . . . . . . . . . . . . . P842,466.71
1954 . . . . . . . . . . . . . . . . . . . . . 721,471.85
Said premiums were excluded by Philippine Guaranty Co., Inc. from
its gross income when it file its income tax returns for 1953 and
1954. Furthermore, it did not withhold or pay tax on them.
Consequently, per letter dated April 13, 1959, the Commissioner of
Internal Revenue assessed against Philippine Guaranty Co., Inc.
withholding tax on the ceded reinsurance premiums, thus:
1953
Gross premium per investigation . . . . . . . . . .
Withholding tax due thereon at 24% . . . . . . . .
25% surcharge . . . . . . . . . . . . . . . . . . . . . . . . . .
Compromise for non-filing of withholding
income tax return . . . . . . . . . . . . . . . . . . . . . . . . .
TOTAL AMOUNT DUE & COLLECTIBLE . . . .
1954
Gross premium per investigation . . . . . . . . . .
Withholding tax due thereon at 24% . . . . . . . .
25% surcharge . . . . . . . . . . . . . . . . . . . . . . . . . .
Compromise for non-filing of withholding
income tax return . . . . . . . . . . . . . . . . . . . . . . . . .
TOTAL AMOUNT DUE & COLLECTIBLE . . . . P234,364.00
==========
Philippine Guaranty Co., Inc., protested the assessment on the
ground that reinsurance premiums ceded to foreign reinsurers not
doing business in the Philippines are not subject to withholding tax.
Its protest was denied and it appealed to the Court of Tax Appeals.
On July 6, 1963, the Court of Tax Appeals rendered judgment with
this dispositive portion:
IN VIEW OF THE FOREGOING CONSIDERATIONS,
petitioner Philippine Guaranty Co., Inc. is hereby ordered to
pay to the Commissioner of Internal Revenue the respective
sums of P202,192.00 and P173,153.00 or the total sum of
P768,580.00 P375,345.00 as withholding income taxes for the years 1953
and 1954, plus the statutory delinquency penalties thereon.
P184,459.00 With costs against petitioner.
46,114.00
Philippine Guaranty Co, Inc. has appealed, questioning the legality of
the Commissioner of Internal Revenue's assessment for withholding
100.00 tax on the reinsurance premiums ceded in 1953 and 1954 to the
foreign reinsurers.
P230,673.00 Petitioner maintain that the reinsurance premiums in question did not
========== constitute income from sources within the Philippines because the
foreign reinsurers did not engage in business in the Philippines, nor
did they have office here.
P780.880.68
The reinsurance contracts, however, show that the transactions or
P184,411.00 activities that constituted the undertaking to reinsure Philippine
Guaranty Co., Inc. against loses arising from the original insurances
P184,411.00 in the Philippines were performed in the Philippines. The liability of
the foreign reinsurers commenced simultaneously with the liability of
100.00 Philippine Guaranty Co., Inc. under the original insurances.
Philippine Guaranty Co., Inc. kept in Manila a register of the risks
ceded to the foreign reinsurers. Entries made in such register bound
the foreign resinsurers, localizing in the Philippines the actual
cession of the risks and premiums and assumption of the
reinsurance undertaking by the foreign reinsurers. Taxes on
premiums imposed by Section 259 of the Tax Code for the privilege
of doing insurance business in the Philippines were payable by the
foreign reinsurers when the same were not recoverable from the
original assured. The foreign reinsurers paid Philippine Guaranty
Co., Inc. an amount equivalent to 5% of the ceded premiums, in
consideration for administration and management by the latter of the
affairs of the former in the Philippines in regard to their reinsurance
activities here. Disputes and differences between the parties were
subject to arbitration in the City of Manila. All the reinsurance
contracts, except that with Swiss Reinsurance Company, were
signed by Philippine Guaranty Co., Inc. in the Philippines and later
signed by the foreign reinsurers abroad. Although the contract
between Philippine Guaranty Co., Inc. and Swiss Reinsurance
Company was signed by both parties in Switzerland, the same
specifically provided that its provision shall be construed according to
the laws of the Philippines, thereby manifesting a clear intention of
the parties to subject themselves to Philippine law.
Section 24 of the Tax Code subjects foreign corporations to tax on
their income from sources within the Philippines. The word "sources"
has been interpreted as the activity, property or service giving rise to
the income. 1 The reinsurance premiums were income created from
the undertaking of the foreign reinsurance companies to reinsure
Philippine Guaranty Co., Inc., against liability for loss under original
insurances. Such undertaking, as explained above, took place in the
Philippines. These insurance premiums, therefore, came from
sources within the Philippines and, hence, are subject to corporate
income tax.
The foreign insurers' place of business should not be confused with
their place of activity. Business should not be continuity and
progression of transactions 2 while activity may consist of only a
single transaction. An activity may occur outside the place of
business. Section 24 of the Tax Code does not require a foreign
corporation to engage in business in the Philippines in subjecting its
income to tax. It suffices that the activity creating the income is
performed or done in the Philippines. What is controlling, therefore,
is not the place of business but the place of activity that created an
income.
Petitioner further contends that the reinsurance premiums are not
income from sources within the Philippines because they are not
specifically mentioned in Section 37 of the Tax Code. Section 37 is
not an all-inclusive enumeration, for it merely directs that the kinds of
income mentioned therein should be treated as income from sources
within the Philippines but it does not require that other kinds of
income should not be considered likewise.1äwphï1.ñët
The power to tax is an attribute of sovereignty. It is a power
emanating from necessity. It is a necessary burden to preserve the
State's sovereignty and a means to give the citizenry an army to
resist an aggression, a navy to defend its shores from invasion, a
corps of civil servants to serve, public improvement designed for the
enjoyment of the citizenry and those which come within the State's
territory, and facilities and protection which a government is
supposed to provide. Considering that the reinsurance premiums in
question were afforded protection by the government and the
recipient foreign reinsurers exercised rights and privileges
guaranteed by our laws, such reinsurance premiums and reinsurers
should share the burden of maintaining the state.
Petitioner would wish to stress that its reliance in good faith on the
rulings of the Commissioner of Internal Revenue requiring no
withholding of the tax due on the reinsurance premiums in question
relieved it of the duty to pay the corresponding withholding tax
thereon. This defense of petitioner may free if from the payment of
surcharges or penalties imposed for failure to pay the corresponding
withholding tax, but it certainly would not exculpate if from liability to
pay such withholding tax The Government is not estopped from
collecting taxes by the mistakes or errors of its agents. 3
In respect to the question of whether or not reinsurance premiums
ceded to foreign reinsurers not doing business in the Philippines are
subject to withholding tax under Section 53 and 54 of the Tax Code,
suffice it to state that this question has already been answered in the
affirmative in Alexander Howden & Co., Ltd. vs. Collector of Internal
Revenue, L-19393, April 14, 1965.
Finally, petitioner contends that the withholding tax should be
computed from the amount actually remitted to the foreign reinsurers
instead of from the total amount ceded. And since it did not remit any
amount to its foreign insurers in 1953 and 1954, no withholding tax
was due.
The pertinent section of the Tax Code States:
Sec. 54. Payment of corporation income tax at source. — In
the case of foreign corporations subject to taxation under
this Title not engaged in trade or business within the
Philippines and not having any office or place of business
therein, there shall be deducted and withheld at the source
in the same manner and upon the same items as is provided
in Section fifty-three a tax equal to twenty-four per
centum thereof, and such tax shall be returned and paid in
the same manner and subject to the same conditions as
provided in that section.
The applicable portion of Section 53 provides:
(b) Nonresident aliens. — All persons, corporations and
general copartnerships (compañias colectivas), in what ever
capacity acting, including lessees or mortgagors of real or
personal property, trustees acting in any trust capacity,
executors, administrators, receivers, conservators,
fiduciaries, employers, and all officers and employees of the
Government of the Philippines having the control, receipt,
custody, disposal, or payment of interest, dividends, rents,
salaries, wages, premiums, annuities, compensation,
remunerations, emoluments, or other fixed or determinable
annual or periodical gains, profits, and income of any
nonresident alien individual, not engaged in trade or
business within the Philippines and not having any office or
place of business therein, shall (except in the case provided
for in subsection [a] of this section) deduct and withhold from
such annual or periodical gains, profits, and income a tax
equal to twelve per centum thereof: Provided That no
deductions or withholding shall be required in the case of
dividends paid by a foreign corporation unless (1) such
corporation is engaged in trade or business within the
Philippines or has an office or place of business therein, and
(2) more than eighty-five per centum of the gross income of
such corporation for the three-year period ending with the
close of its taxable year preceding the declaration of such
dividends (or for such part of such period as the corporation
has been in existence)was derived from sources within the
Philippines as determined under the provisions of section
thirty-seven: Provided, further, That the Collector of Internal
Revenue may authorize such tax to be deducted and
withheld from the interest upon any securities the owners of
which are not known to the withholding agent.
The above-quoted provisions allow no deduction from the income
therein enumerated in determining the amount to be withheld.
According, in computing the withholding tax due on the reinsurance
premium in question, no deduction shall be recognized.
WHEREFORE, in affirming the decision appealed from, the
Philippine Guaranty Co., Inc. is hereby ordered to pay to the
Commissioner of Internal Revenue the sums of P202,192.00 and
P173,153.00, or a total amount of P375,345.00, as withholding tax
for the years 1953 and 1954, respectively. If the amount of
P375,345.00 is not paid within 30 days from the date this judgement
becomes final, there shall be collected a surcharged of 5% on the
amount unpaid, plus interest at the rate of 1% a month from the date
of delinquency to the date of payment, provided that the maximum
amount that may be collected as interest shall not exceed the
amount corresponding to a period of three (3) years. With costs
againsts petitioner.
 [G.R. No. 43082. June 18, 1937.]
PABLO LORENZO, as trustee of the estate of Thomas Hanley,
deceased, Plaintiff-Appellant, v. JUAN POSADAS, JR., Collector
of Internal Revenue, Defendant-Appellant.
Pablo Lorenzo and Delfin Joven, for Plaintiff-Appellant.
Solicitor-General Hilado, for Defendant-Appellant.
SYLLABUS
1. INHERITANCE TAX; ACCRUAL OF, DISTINCT FROM THE
OBLIGATION TO PAY IT. — The accrual of the inheritance tax is
distinct from the obligation to pay the same. Section 1536 as
amended, of the Administrative Code, imposes the tax upon "every
transmission by virtue of inheritance, devise, bequest, gift mortis
causa, or advance in anticipation of inheritance, devise, or bequest."
The tax therefore is upon transmission or the transfer or devolution
of property of a decedent, made effective by his death. (61 C. J., p.
1592.)
2. ID.; MEASURE OF, BY VALUE OF ESTATE. — If death is the
generating source from which the power of the state to impose
inheritance taxes takes its being and if, upon the death of the
decedent, succession takes place and the right of the state to tax
vests instantly, the tax should be measured by the value of the
estate as it stood at the time of the decedent’s death, regardless of
any subsequent contingency affecting value of any subsequent
increase or decrease in value. (61 C. J., pp. 1692, 1693; 26 R. C. L.,
232; Blakemore and Bancroft , Inheritance Taxes, p. 137. See also
Knowlton v. Moore, 178 U. S. 41; 20 Sup. Ct. Rep., 747; 44 Law. ed.,
968.)
3. ID.; ID. — "The right of the state to a inheritance tax accrues at the
moment of death, and hence is ordinarily measured as to any
beneficiary by the value at that time of such property as passes to
him. Subsequent appreciation or depreciation is immaterial." (Ross,
Inheritance Taxation, p. 72.)
4. ID.; ID. — Whatever may be the rule in other jurisdiction, we hold
that a transmission by inheritance is taxable at the time of the
predecessor’s death, notwithstanding the postponement of the actual
possession or enjoyment of the estate by the beneficiary, and the tax
measured by the value of the property transmitted at that time
regardless of its appreciation or depreciation.
5. ID.; TRUSTS AND TRUSTEES. — A trustee, no doubt, is entitled
to received a fair compensation for his services. (Barney v.
Saunders, 16 How., 535; 14 Law. ed., 1047.) But from this it does
not follow that the compensation due him may lawfully be deducted
in arriving at the net value of the estate subject to tax. There is no
statute in the Philippines which requires trustees commission to be
deducted in determining the net value of the estate subject to
inheritance tax (61 C. J., p. 1705.) Furthermore, though a
testamentary trust has been created, it does not appear that the
testator intended that the duties of his executors and trustees should
be separated. (Ibid.; In re Vanneck’s Estate, 161 N. Y. Supp., 893;
175 App. Div., 363 In re Collard’s Estate, 161 N. Y. Supp., 455.)
6. ID.; ID.; ADMINISTRATION EXPENSES. — Judicial expenses are
expenses of administration (61 C. J., P. 1705) but, in State v.
Hennepin County Probate Court (112 N. W., 878; 101 Minn., 485), it
was said: ". . . the compensation of a trustee, earned, not in the
administration of the estate, but in the management thereof for the
benefit of the legatees or devisees, does not come properly within
the class or reason for exempting administration expenses. . .
Services rendered in that behalf have no reference to closing the
estate for the purpose of a distribution thereof to those entitled to it,
and are not required or essential to the perfection of the rights of the
heirs or legatees. . . . Trusts . . . of the character of that here before
the court, are created for the benefit of those to whom the property
ultimately passes, are of voluntary creation, and intended for the
preservation of the estate. No sound reason is given to support the
contention that such expenses should be taken into consideration in
fixing the value of the estate for the purpose of this tax.
7. ID.; RETROACTIVE LEGISLATION. — It is well-settled that
inheritance taxation is governed by the statute in force at the time of
the death of the decedent (26 R. C. L., p. 206; 4 Cooley on Taxation,
 4th ed., p. 3461). The taxpayer cannot foresee and ought not to be
required to guess the outcome of pending measures. Of course, a
tax statute may be made retroactive in its operation. Liability for
taxes under retroactive legislation has been "one of the incidents of
social life." (Seattle v. Kelleher, 195 U. S. 351. 360; 49 Law. ed., 232;
25 Sup. Ct. Rep., 44.)
8. ID.; ID. — But legislative intent that a tax statute should operate
retroactively should be perfectly clear. (Scwab v. Doyle, 42 Sup. Ct.
Rep., 491; Smietanka v. First Trust & Savings Bank, 257 U. S. 602;
Stockdale v. Insurance Co., 20 Wall., 323; Lunch v. Turrish, 247 U.
S., 221.) "A statute should be considered as prospective in its
operation, whether it enacts, amends, or repeals an inheritance tax,
unless the language of the statute clearly demands or expresses that
it shall have a retroactive effect, . . ." (61 C. J., 1602.)
9. ID.; ID. — Though the last paragraph of section 5 of Regulations
No. 65 of the Department of Finance makes section 3 of Act No.
3606, amending section 1544 of the Revised Administrative Code,
applicable to all estates the inheritance taxes due from which have
not been paid, Act No. 3606 itself contains no provisions indicating
legislative intent to give it retroactive effect. No such effect can be
given the statute by this court.
10. ID.; ID.; PENAL STATUTES. — Properly speaking, a statute is
penal when it imposes punishment for an offense committed against
the state which, under the Constitution, the executive has the power
to pardon. In common use, however, this sense has been enlarged
to include within the term "penal statutes" all statutes which
command or prohibit certain acts, and establish penalties for their
violation, and even those which without expressly prohibiting certain
acts, impose a penalty upon their commission. (59 C. J., P. 1110.)
11. ID.; ID.; REVENUE LAW. — Revenue laws, generally, which
impose taxes collected by the means ordinarily resorted to for the
collection of taxes are not classed as penal laws, although there are
authorities to the contrary. (See Sutherland, Statutory Construction,
361; Twine Co. v. Worthington, 141 U. S. 468; 12 Sup. Ct., 55 Rice
v. U. S., 4 C. C. A., 104; 53 Fed., 910; Com. v. Standard Oil Co., 101
Pa. St., 150; State v. Wheeler, 44 P., 430; 25 Nev., 143.) Article 22
of the Revised Penal Code is not applicable to the case of bar, and
in the absence of clear legislative intent, we cannot give Act No.
3606 a retroactive effect.
12. ID.; TRUSTS AND TRUSTEES. — The word "trust" is not
mentioned or used in the will but the intention to create one is clear.
No particular or technical words are required to create a
testamentary trust. (69 C. J., p. 711.) The words "trust" and "trustee",
though apt for the purpose, are not necessary. In fact, the use of
these two words is not conclusive on the question that a trust is
created. (69 C. J., p. 714.)
13. ID.; ID. — There is no doubt that the testator intended to create a
trust. He ordered in his will that certain of his properties be kept
together undisposed during a fixed period, for a stated purpose. The
probate court certainly exercised sound judgment in appointing a
trustee to carry into effect the provision of the will. (See sec. 582,
Code of Civil Procedure.)
14. ID.; ID.; ERROR IN ENGLISH VERSION OF SUBSECTION (B),
SECTION 1543, REVISED ADMINISTRATIVE CODE. — The word
"trustee", appearing in subsection (b) of section 1543, should read
"fidei-commissary" or "cestui que trust." There was an obvious
mistake in translation from the Spanish to the English version.
DECISION
LAUREL, J.:
On October 4, 1932, the plaintiff, Pablo Lorenzo, in his capacity as
trustee of the estate of Thomas Hanley, deceased, brought this
action in the Court of First Instance of Zamboanga against the
defendant, Juan Posadas, Jr., then the Collector of Internal
Revenue, for the refund of the amount of P2,052.74, paid by the
plaintiff as inheritance tax on the estate of the deceased, and for the
collection of interest thereon at the rate of 6 per cent per annum,
computed from September 15, 1932, the date when the aforesaid tax
was paid under protest. The defendant set up a counterclaim for
P1,191.27 alleged to be interest due on the tax in question and
which was not included in the original assessment. From the
decision of the Court of First Instance of Zamboanga dismissing both
the plaintiff’s complaint and the defendant’s counterclaim, both
parties appealed to this court.
It appears that on May 27, 1922, one Thomas Hanley died in
Zamboanga, Zamboanga, leaving a will (Exhibit 5) and considerable
amount of real and personal properties. On June 14, 1922,
proceedings for the probate of his will and the settlement and
distribution of his estate were begun in the Court of First Instance of
Zamboanga. The will was admitted to probate. Said will provides
among other things, as follows:jgc:chanrobles.com.ph
"4. I direct that any money left by me be given to my nephew
Matthew Hanley.
"5. I direct that all real estate owned by me at the time of my death
be not sold or otherwise disposed of for a period of ten (10) years
after my death, and that the same be handled and managed by my
executors, and proceeds thereof to be given to my nephew, Matthew
Hanley, at Castlemore, Ballaghaderine, County of Rosecommon,
Ireland, and that he be directed that the same be used only for the
education of my brother’s children and their descendants.
"6. I direct that ten (10) years after my death my property be given to
the above-mentioned Matthew Hanley to be disposed of in the way
he thinks most advantageous.
x x x "I. In holding that the real property of Thomas Hanley, deceased,
"8. I state that at this time I have one brother living named Malachi
Hanley, and that my nephew, Matthew Hanley, is a son of my
brother, Malachi Hanley."cralaw virtua1aw library
The Court of First Instance of Zamboanga considered it proper for
the best interests of the estate to appoint a trustee to administer the
real properties which, under the will, were to pass to Matthew Hanley
ten years after the testator’s death. Accordingly, P. J. M. Moore, one
of the two executors named in the will, was, on March 8, 1924,
appointed trustee. Moore took his oath of office and gave bond on
March 10, 1924. He acted as trustee until February 29, 1932, when
he resigned and the plaintiff herein was appointed in his stead.
During the incumbency of the plaintiff as trustee, the defendant
Collector of Internal Revenue, alleging that the estate left by the
deceased at the time of his death consisted of realty valued at
P27,920 and personality valued at P1,465, and allowing a deduction
of P480.81, assessed against the estate an inheritance tax in the
amount of P1,434.24 which, together with the penalties for
delinquency in payment consisting of a 1 per cent monthly interest
from July 1, 1931 to the date of payment and a surcharge of 25 per
cent on the tax, amounted to P2,052.74. On march 15, 1932, the
defendant filed a motion in the testamentary proceedings pending
before the Court of First Instance of Zamboanga (Special
proceedings No. 302) praying that the trustee, plaintiff herein, be
ordered to pay to the Government the said sum of P2,052.74. The
motion was granted. On September 15, 1932, the plaintiff paid this
amount under protest, notifying the defendant at the same time that
unless the amount was promptly refunded suit would be brought for
its recovery. The defendant overruled the plaintiff’s protest and
refused to refund the said amount or any part thereof. His
administrative remedies exhausted, plaintiff went to court with the
result herein above indicated.
In his appeal, plaintiff contends that the lower court
erred:jgc:chanrobles.com.ph
passed to his instituted heir, Matthew Hanley, from the moment of
the death of the former, and that from that time, the latter became
the owner thereof.
"II. In holding, in effect, that there was delinquency in the payment of
inheritance tax due on the estate of said deceased.
"III. In holding that the inheritance tax in question be based upon the
value of the estate upon the death of the testator, and not, as it
should have been held, upon the value thereof at the expiration of
the period of ten years after which, according to the testator’s will,
the property could be and was to be delivered to the instituted heir.
"IV. In not allowing as lawful deductions, in the determination of the
net amount of the estate subject to said tax, the amounts allowed by
the court as compensation to the "trustee" and paid to them from the
decedent’s estate.
"V. In not rendering judgment in favor of the plaintiff and in denying
his motion for new trial."cralaw virtua1aw library
The defendant-appellant contradicts the theories of the plaintiff and
assigns the following error besides:jgc:chanrobles.com.ph
"The lower court erred in not ordering the plaintiff to pay to the
defendant the sum of P1,191.27, representing part of the interest at
the rate of 1 per cent per month from April 10, 1924, to June 30,
1931, which the plaintiff had failed to pay on the inheritance tax
assessed by the defendant against the estate of Thomas
Hanley."cralaw virtua1aw library
The following are the principal questions to be decided by this court
in this appeal: (a) When does the inheritance tax accrue and when
must it be satisfied? (b) Should the inheritance tax be computed on
the basis of the value of the estate at the time of the testator’s death,
or on its value ten years later? (c) In determining the net value of the
estate subject to tax, is it proper to deduct the compensation due to
trustees? (d) What law governs the case at bar? Should the
provisions of Act No. 3606 favorable to the taxpayer be given
retroactive effect? (e) Has there been delinquency in the payment of
the inheritance tax? If so, should the additional interest claimed by
the defendant in his appeal be paid by the estate? Other points of
incidental importance, raised by the parties in their briefs, will be
touched upon in the course of this opinion.
(a) The accrual of the inheritance tax is distinct from the obligation to
pay the same. Section 1536 as amended, of the Administrative code,
imposes the tax upon "every transmission by virtue of inheritance,
devise, bequest, gift mortis causa, or advance in anticipation of
inheritance, devise, or bequest." The tax therefore is upon
transmission or the transfer or devolution of property of a decedent,
made effective by his death. (61 C. J., p. 1592.) It is in reality an
excise or privilege tax imposed on the right to succeed to, receive, or
take property by or under a will or the intestacy law, or deed, grant,
or gift, to become operative at or after death. According to article 657
of the Civil Code, "the rights to the succession of a person are
transmitted from the moment of his death." "In other words", said
Arellano, C.J.,." . . the heirs succeed immediately to all of the
property of the deceased ancestor. The property belongs to the heirs
at the moment of the death of the ancestor as completely as if the
ancestor had executed and delivered to them a deed for the same
before his death." (Bondad v. Bondad, 34 Phil., 232. See also,
Mijares v. Nery, 3 Phil., 195; Suiliong & Co., v. Chio-Taysan, 12 Phil.,
13; Lubrico v. Arbado, 12 Phil., 391; Inocencio v. Gat- Pandan, 14
Phil., 491; Aliasas v. Alcantara, 16 Phil., 489; Ilustre v. Alaras
Frondosa, 17 Phil., 321; Malahacan v. Ignacio, 19 Phil., 434; Bowa v.
Briones, 38 Phil., 276; Osorio v. Osorio & Ynchausti Steamship Co.,
41 Phil., 531; Fule v. Fule, 46 Phil., 317; Dais v. Court of First
Instance of Capiz, 51 Phil., 396; Baun v. Heirs of Baun, 53 Phil.,
654.) Plaintiff, however, asserts that while article 657 of the Civil
Code is applicable to testate as well as intestate succession, it
operates only in so far as forced heirs are concerned. But the
language of Article 657 of the Civil Code is broad and makes no
distinction between different classes of heirs. That article does not
speak of forced heirs; it does not even use the word "heir." It speaks
of the rights of succession and of the transmission thereof from the
moment of death. The provision of section 625 of the Code of Civil
Procedure regarding the authentication and probate of a will as a
necessary condition to effect transmission of property does not effect
the general rule laid down in article 647 of the Civil Code. The
authentication of a will implies its due execution but once probated
and allowed the transmission is effective as of the death of the
testator in accordance with article 657 of the Civil Code. Whatever
may be the time when actual transmission of the inheritance takes
place, succession takes place in any event at the moment of the
decedent’s death. The time when the heirs legally succeed to the
inheritance may differ from the time when the heirs actually received
such inheritance. "Poco importa", says Manresa commenting on
article 567 of the Civil Code, "que desde el fallecimiento del
causante, hasta que el heredero o legatario entre en posesion de los
bienes de la herencia a del legado, transcurra mucho o poco tiempo,
pues la adquisicion ha de retrotraerse al momento de la muerte, y
asi lo ordena el articulo 989, que debe considerarse como
complemento del presente." (5 Manresa, 305; see also art. 440, par.
1, Civil Code.) Thomas Hanley having died on May 27, 1922, the
inheritance tax accrued as of that date.
From the fact, however, that Thomas Hanley died on May 27, 1922,
it dies not follow that the obligation to pay the tax arose as of that
date. The time for the payment of inheritance tax is clearly fixed by
section 1544 of the Revised Administrative code as amended by Act
No. 3031, in relation to section 1543 of the same code. The two
sections follow:jgc:chanrobles.com.ph
"SEC. 1543. Exemption of certain acquisitions and transmission. —
The following shall not be taxed:jgc:chanrobles.com.ph
"(a) The merger of the usufruct in the owner of the naked title.
"(b) The transmission or delivery of the inheritance or legacy by the
fiduciary heir or legatee to the trustees.
"(c) The transmission from the first heir, legatee, or donee in favor of
another beneficiary, in accordance with the desire of the
predecessor.
"In the last two cases, if the scale of taxation appropriate to the new
beneficiary is greater than that paid by the first, the former must pay
the difference.
"SEC. 1544. When tax to be paid. — The Tax fixed in this article
shall be paid:jgc:chanrobles.com.ph
"(a) In the second and third cases of the next preceding section,
before entrance into possession of the property.
"(b) In other cases, within the six months subsequent to the death of
the predecessor; but if judicial testamentary or intestate proceedings
shall be instituted prior to the expiration of said period, the payment
shall be made by the executor or administrator before delivering to
each beneficiary his share.
"If the tax is not paid within the time hereinbefore prescribed, interest
at the rate of twelve per centum per annum shall be added as part of
the tax; and to the tax and interest due and unpaid within ten days
after the date of notice and demand thereof by the Collector, there
shall be further added a surcharge of twenty-five per centum.
"A certified copy of all letters testamentary or of administration shall
be furnished the Collector of Internal Revenue by the Clerk of Court
within thirty days after their issuance."cralaw virtua1aw library
It should be observed in passing that the word "trustee", appearing in
subsection (b) of section 1543, should read "fideicommissary" or
"cestui que trust." There was an obvious mistake in translation from
the Spanish to the English version.
The instant case does not fall under subsection (a), but under
subsection (b), of section 1544 above-quoted, as there is here no
fiduciary heir, first heir, legatee or donee. Under that subsection, the
tax should have been paid before the delivery of the properties in
question to P. J. M. Moore as trustee on March 10, 1924.
(b) The plaintiff contends that the estate of Thomas Hanley, in so far
as the real properties are concerned, did not and could not legally
pass to the instituted heir, Matthew Hanley, until after the expiration
of ten years from the death of the testator on May 27, 1922 and, that
the inheritance tax should be based on the value of the estate in
1932, or ten years after the testator’s death. The plaintiff introduced
evidence tending to show that in 1932 the real properties in question
had a reasonable value of only P5,787. This amount added to the
value of the personal property left by the deceased, which the
plaintiff admits is P1,465, would generate an inheritance tax which,
excluding deductions, interest and surcharge, would amount only to
about P169.52.
If death is the generating source from which the power of the state to
impose inheritance taxes its being and if, upon the death of the
decedent, succession takes place and the right of the state to tax
vests instantly, the tax should be measured by the value of the
estate as it stood at the time of the decedent’s death, regardless of
any subsequent contingency affecting value or any subsequent
increase or decrease in value. (61 C. J., pp. 1692, 1693; 26 R. C. L.,
p. 232; Blakemore and Bancroft, Inheritance Taxes, p. 137. See also
Knowlton v. Moore, 178 U. S., 41; 20 Sup. Ct. Rep., 747; 44 Law ed.,
969.) "The right of the state to an inheritance tax accrues at the
moment of death, and hence is ordinarily measured as to any
beneficiary by the value at that time of such property as passes to
him. Subsequent appreciation or depreciation is immaterial." (Ross,
Inheritance Taxation, p. 72.) .
Our attention is directed to the statement of the rule in Cyclopedia of
Law and Procedure (vol. 37, pp. 1574, 1575) that, in the case of
contingent remainders, taxation is postponed until the estate vests in
possession or the contingency is settled. This rule was formerly
followed in New York and has been adopted in Illinois, Minnesota,
Massachusetts, Ohio, Pennsylvania and Wisconsin. this rule,
however, is by no means entirely satisfactory either to the estate or
to those interested in the property (26 R. C. L., p. 231). Realizing,
perhaps, the defects of its anterior system, we find upon examination
of cases and authorities that New York has varied and now requires
the immediate appraisal of the postponed estate at its clear market
value and the payment forthwith of the tax on it out of the corpus of
the estate transferred. (In re Vanderbilt, 172 N. Y., 69; 69 N. E., 782;
In re Hober, 86 N. Y. App. Div., 458; 83 N. Y. Supp., 769; Estate of
Tracy, 179, 179 N. Y., 501; 72 N. Y., 519; Estate of Brez, 172 N. Y.,
609; 64; 64 N. E., 958; Estate of Post, 85 App. Div., 611; 82 N. Y.
Supp., 1079. Vide also, Saltoun v. Lord Advocate, 1 Pater. Sc. App.,
970; 3 Macq. H. L., 659; 23 Eng. Rul. Cas., 888.) California adheres
to this new rule (Stats. 1905, sec. 5, p. 343).
But whatever may be the rule in other jurisdiction, we hold that a
transmission by inheritance is taxable at the time of the
predecessor’s death, notwithstanding the postponement of the actual
possession or enjoyment of the estate by the beneficiary, and the tax
measured by the value of the property transmitted at that time
regardless of its appreciation or depreciation.
(c) Certain items are required by law to be deducted from the
appraised gross value in arriving at the net value of the estate on
which the inheritance tax is to be computed (sec. 1539, Revised
Administrative Code). In the case at of only P480.81. This sum
represents the expenses and disbursement of the executors until
March 10, 1924, among which were their fees and the proven debts
of the deceased. The plaintiff contends that the compensation and
fees of the trustees, which aggregate P1,187.28 (Exhibits C, AA, EE,
PP, HH, JJ, LL, NN, OO)., should also be deducted under section
1539 of the Revised Administrative Code which provides, in part, as
follows: "In order to determine the net sum which must bear the tax,
when an inheritance is concerned, there shall be deducted, in case
of a resident, . . . the judicial expenses of the testamentary or
intestate proceedings, . . . ."cralaw virtua1aw library
A trustee, no doubt, is entitled to receive a fair compensation for his
services (Barney v. Saunders, 16 How., 535; 14 Law. ed., 1047). But
from this it does not follow that the compensation due him may
lawfully be deducted in arriving at the net value of the estate subject
to tax. There is no statute in the Philippines which requires trustees’
commissions to be deducted in determining the net value of the
estate subject to inheritance tax (61 C. J., p. 1705). Furthermore,
though a testamentary trust has been created, it does not appear
that the testator intended that the duties of his executors and
trustees should be separated. (Ibid.; In re Vanneck’s Estate, 161 N.
Y. Supp., 893; 175 App. Div., 363; In re Collard’s Estate, 161 N. Y.
Supp., 455.) On the contrary, in paragraph 5 of his will, the testator
expressed the desire that his real estate be handled and managed
by his executors until the expiration of the period of ten years therein
provided. Judicial expenses are expenses of administration (61 C. J.,
p. 1705) but, in State v. Hennepin County Probate Court (112 N. W.,
878; 101 Minn., 485), it was said: ". . . The compensation of a
trustee, earned, not in the administration of the estate, but in the
management thereof for the benefit of the legatees or devisees, does
not come properly within the class or reason for exempting
administration expenses. . . . Services rendered in that behalf have
no reference to closing the estate for the purpose of a distribution
thereof to those entitled to it and are not required or essential to the
perfection of the rights of the heirs or legatees. . . . Trusts . . . of the
character of that here before the court, are created for the benefit of
those to whom the property ultimately passes, are of voluntary
creation, and intended for the preservation of the estate. No sound
reason is given to support the contention that such expenses should
be taken into consideration in fixing the value of the estate for the
purpose of this tax."cralaw virtua1aw library
(d) The defendant levied and assessed the inheritance tax due from
the estate of Thomas Hanley under the provisions of section 1544 of
the Revised Administrative Code, as amended by section 3 of Act
No. 3606. But Act No. 3606 went into effect on January 1, 1930. It,
therefore, was not the law in force when the testator died on May 27,
1922. The law at that time was section 1544 above-mentioned, as
amended by Act No. 3031, which took effect on March 9, 1922.
It is well-settled that inheritance taxation is governed by the statute in
force at the time of the death of the decedent (26 R. C. L., p. 206; 4
Cooley on Taxation, 4th ed., p. 3461). The taxpayer can not foresee
and ought not to be required to guess the outcome of pending
measures. Of course, a tax statute may be made retroactive in its
operation. Liability for taxes under retroactive legislation has been
"one of the incidents of social life." (Seattle v. Kelleher, 195 U.S.,
351, 360; 49 Law. ed., 232; 25 Sup. Ct. Rep., 44.) But legislative
intent that a tax statute should operate retroactively should be
perfectly clear. (Scwab v. Doyle, 42 Sup. Ct., Rep., 491; Smietanka
v. First Trust & Savings Bank, 257 U. S., 602; Stockdale v. Insurance
Co., 20 Wall., 323 Lunch v. Turrish, 247 U. S., 221.) "A statute
should be considered as prospective in its operation, whether it
enacts, amends, or repeals an inheritance tax, unless the language
of the statute clearly demands or presses that it shall have a
retroactive effect, . . . (61 C. J., p. 1602.) Though the last paragraph
of section of Regulations No. 65 of the Department of Finance
makes section 3 of Act No. 3606, amending section 1544 of the
Revised Administrative Code, applicable to all estates the
inheritance taxes due from which have not been paid, Act No. 3606
itself contains no provisions indicating legislative intent to give it
retroactive effect. No Such effect can be given the statute by this
court.
The defendant Collector of Internal Revenue maintains, however,
that certain provisions of Act No. 3606 are more favorable to the
taxpayer than those of Act No. 3031, that said provisions are penal in
nature and, therefore, should operate retroactively in conformity with
the provisions of article 22 of the Revised Penal Code. This is the
reason why he applied Act No. 3606 instead of Act No. 3031.
Indeed, under Act No. 3606, (1) the surcharge of 25 per cent is
based on the tax only, instead of on both the tax and the interest, as
provided for in Act No. 3031, and (2) the taxpayer is allowed twenty
days from notice and demand by the Collector of Internal Revenue
within which to pay the tax, instead of ten days only as required by
the old law.
Properly speaking, a statute is penal when it imposes punishment for
an offense committed against the state which, under the
Constitution, the Executive has the power to pardon. In common use,
however, this sense has been enlarged to include within the term
"penal statutes" all statutes which command or prohibit certain acts,
and establish penalties for their violation, and even those which,
without expressly prohibiting certain acts, impose a penalty upon
their commission (59 C. J., p. 1110). Revenue laws, generally, which
impose taxes collected by the means ordinarily resorted to for the
collection of taxes are not classed as penal laws, although there are
authorities to the contrary. (See Sutherland, Statutory Construction,
361; Twine Co., v. Worthington, 141 U.S., 468; 12 Sup. Ct., 55; Rice
v. U. S., 4 C. C. A., 104; 53 Fed., 910; Com. v. Standard Oil Co., 101
Pa. St., 150; State v. Wheeler, 44 P., 430; 25 Nev., 143.) Article 22
of the Revised Penal Code is not applicable to the case at bar, and
in the absence of clear legislative intent, we cannot give Act No.
3606 a retroactive effect.
(e) The plaintiff correctly states that the liability to pay a tax may
arise at a certain time and the tax may be paid within another given
time. As stated by this court, "the mere failure to pay one’s tax does
not render one delinquent until and unless the entire period has
elapsed within which the taxpayer is authorized by law to make such
payments without being subjected to the payment of penalties for
failure to pay his taxes within the prescribed period." (U. S. v.
Labadan, 26 Phil., 239.)
The defendant maintains that it was the duty of the executor to pay
the inheritance tax before the delivery of the decedent’s property to
the trustee. Stated otherwise, the defendant contends that delivery to
the trustee was delivery to the cestui que trust, the beneficiary in this
case, within the meaning of the first paragraph of subsection (b) of
section 1544 of the Revised Administrative Code. This contention is
well taken and is sustained. The appointment of P. J. M. Moore as
trustee was made by the trial court in conformity with the wishes of
the testator as expressed in his will. It is true that the word "trust" is
not mentioned or used in the will but the intention to create one is
clear. No particular or technical words are required to create a
testamentary trust (69 C. J., p. 711). The words "trust" and "trustee",
though apt for the purpose, are not necessary. In fact, the use of
these two words is not conclusive on the question that a trust is
created (69 C. J., p. 714). "To create a trust by will the testator must
indicate in the will his intention so to do by using language sufficient
to separate the legal from the equitable estate, and with sufficient
certainly designate the beneficiaries, their interest in the trust, the
purpose or object of the trust, and the property or subject matter
thereof, Stated otherwise, to constitute a valid testamentary trust
there must be a concurrence of three circumstances: (1) Sufficient
words to raise a trust; (2) a definite subject; (3) a certain or
ascertained object; statutes in some jurisdictions expressly or in
effect so providing." (69 C. J., pp. 705, 706.) There is no doubt that
the testator intended to create a trust. He ordered in his will that
certain of his properties be kept together undisposed during a fixed
period, for a stated purpose. The probate court certainly exercised
sound judgment in appointing a trustee to carry into effect the
provisions of the will (see sec. 582, Code of Civil Procedure).
P. J. M. Moore became trustee on March 10, 1924. On that date the
trust estate vested in him (sec. 582 in relation to sec. 590, Code of
Civil Procedure). The mere fact that the estate of the deceased was
placed in trust did not remove it from the operation of our inheritance
tax laws or exempt it from the payment of the inheritance tax. The
corresponding inheritance tax should have been paid on or before
March 10, 1924, to escape the penalties of the law. This is so for the
reason already stated that the delivery of the estate to the trustee
was in esse delivery of the same estate to the cestui que trust, the
beneficiary in this case. A trustee is but an instrument or agent for
the cestui que trust (Shelton v. King, 299 U. S., 90; 33 Sup. Ct. Rep.,
689; 57 Law. ed., 1086). When Moore accepted the trust and took
possession of the trust estate he thereby admitted that the estate
belonged not to him but to his cestui que trust (Tolentino v. Vitug, 39
Phil., 126, cited in 65 C. J., p. 692, n. 63). He did not acquire any
beneficial interest in the estate. He took such legal estate only as the
proper execution of the trust required (65 C. J., p. 528) and, his
estate ceased upon the fulfillment of the testator’s wishes. The
estate then vested absolutely in the beneficiary (65 C. J., p. 542).
The highest considerations of public policy also justify the conclusion
we have reached. Were we to hold that the payment of the tax could
be postponed or delayed by the creation of a trust of the type at
hand, the result would be plainly disastrous. Testators may provide,
as Thomas Hanley has provided, that their estates be not delivered
to their beneficiaries until after the lapse of a certain period of time.
In the case at bar, the period is ten years. In other cases, the trust
may last for fifty years, or for a longer period which does not offend
the rule against perpetuities. The collection of the tax would then be
left to the will of a private individual. The mere suggestion of this
result is a sufficient warning against the acceptance of the contention
of the plaintiff in the case at bar. Taxes are essential to the very
existence of government. (Dobbins v. Erie County, 16 Pet., 435; 10
Law. ed., 1022; Kirkland v. Hotchkiss, 100 U. S., 491; 25 Law. ed.,
558; Lane County v. Oregon, 7 Wall, 71; 19 Law. ed., 101; Union
Refrigerator Transit Co., v. Kentucky, 199 U. S., 194; 26 Sup. Ct.,
Rep., 36; 50 Law. ed., 150; Charles River Bridge v. Warren Bridge,
11 Pet., 420; 9 Law. ed., 773.) The obligation to pay taxes rests not
upon the privileges enjoyed by, or the protection afforded to, a citizen
by the government, but upon the necessity of money for the support
of the state (Dobbins v. Erie County, supra). For this reason, no one
is allowed to object to or resist the payment of taxes solely because
no personal benefit to him can be pointed out. (Thomas v. Gay, 169
U. S., 264; 18 Sup. Ct. Rep., 340; 43 Law. ed., 740.) While courts
will not enlarge, by construction, the government’s power of taxation
(Bromley v. McCaughn, 280 U. S., 124; 74 Law. ed., 226; 50 Sup.
Ct. Rep., 46) they also will not place upon tax laws so loose a
construction as to permit evasions on merely fanciful and
insubstantial distinctions. (U. S. v. Watts, 1 Bond, 580; Fed. Cas. No.
16,653; U. S. v. Wigglesworth, 2 Story, 369; Fed. Cas. No. 16,690,
followed in Froelich & Kuttner v. Collector of Customs, 18 Phil., 461,
481; Castle Bros., Wolf & Sons v. McCoy, 21 Phil., 300; Muñoz &
Co. v. Hord, 12 Phil., 624; Hongkong & Shanghai Banking
Corporation v. Rafferty, 39 Phil., 145; Luzon Stevedoring Co. v.
Trinidad, 43 Phil., 803.) When proper, a tax statute should be
construed to avoid the possibilities of tax evasion. Construed this
way, the statute, without resulting in injustice to the taxpayer,
becomes fair to the government.
That taxes must be collected promptly is a policy deeply intrenched
in our tax system. Thus, no court is allowed to grant injunction to
restrain the collection of any internal revenue tax (sec. 1578,
Revised Administrative Code; Sarasola v. Trinidad, 40 Phil., 252). In
the case of Lim Co Chui v. Posadas (47 Phil., 461), this court had
occasion to demonstrate trenchant adherence to this policy of the
law. It held that "the fact that on account of riots directed against the
Chinese on October 18, 19, and 20, 1924, they were prevented from
paying their internal revenue taxes on time and by mutual agreement
closed their homes and stores and remained therein, does not
authorize the Collector of Internal Revenue to extend the time
prescribed for the payment of the taxes or to accept them without the
additional penalty of twenty five per cent." (Syllabus, No. 3.)." . . It is
of the utmost importance," said the Supreme Court of the United
Stated.." . . that the modes adopted to enforce the taxes levied
should be interfered with as little as possible. Any delay in the
proceedings of the officers, upon whom the duty is devolved of
collecting the taxes, may derange the operations of government, and
thereby cause serious detriment to the public." (Dows v. Chicago, 11
Wall., 108; 20 Law. ed., 65.66; Churchill and Tait v. Rafferty, 32 Phil.,
580.)
It results that the estate which plaintiff represents has been
delinquent in the payment of inheritance tax and, therefore, liable for
the payment of interest and surcharge provided by law in such
cases.
The delinquency in payment occurred on March 10, 1924, the date
when Moore became trustee. The interest due should be computed
from that date and it is error on the part of the defendant to compute
it one month later. The provision of law requiring the payment of
interest in appropriate cases is mandatory (see and cf. Lim Co Chui
v. Posadas, supra), and neither the Collector of Internal Revenue nor
this court may remit or decrease such interest, no matter how heavily
it may burden the taxpayer.
To the tax and interest due and unpaid within ten days after the date
of notice and demand thereof by the Collector of Internal Revenue, a
surcharge of twenty-five per centum should be added (sec. 1544,
subsec. (b), par. 2 Revised Administrative Code). Demand was
made by the Deputy Collector of Internal Revenue upon Moore in a
communication dated October 16, 1931 (Exhibit 29). The date fixed
for the payment of the tax and interest was November 30, 1931.
November 30 being an official holiday, the tenth day fell on
December 1, 1931. As the tax and interest due were not paid on that
date, the estate became liable for the payment of the surcharge.
In view of the foregoing, it becomes unnecessary for us to discuss
the fifth error assigned by the plaintiff in his brief.
We shall now compute the tax, together with the interest and
surcharge, due from the estate of Thomas Hanley in accordance with
the conclusion we have reached.
At the time of his death, the deceased left real properties valued at
P27,920 and personal properties worth P1,465, or a total of P29,385.
Deducting from this amount the sum of P480.81, representing
allowable deductions under section 1539 of the Revised
Administrative Code, we have P28,904.19 as the net value of the
estate subject to inheritance tax.
The primary tax, according to section 1536, subsection (c), of the
Revised Administrative Code, should be imposed at the rate of one
per centum upon the first ten thousand pesos and two per centum
upon the amount by which the share of the beneficiary exceeds ten
thousand pesos but does not exceed thirty thousand pesos, plus an
additional two hundred per centum. One per centum of ten thousand
pesos is P100. Two per centum of P18,904.19 is P378.08. Adding to
these two sums an additional two hundred per centum, or P956.16,
we have as primary tax, correctly computed by the defendant, the
sum of P1,434.24.
To the primary tax thus computed should be added the sums
collectible under section 1544 of the Revised Administrative Code.
First should be added P1,465.31 which stands for interest at the rate
of twelve per centum per annum from March 10, 1924, the date of
delinquency, to September 15, 1932, the date of payment under
protest, a period covering 8 years, 6 months and 5 days. To the tax
and interest thus computed should be added the sum of P724.88,
representing a surcharge of 25 per cent on both the tax and interest,
and also P10, the compromise sum fixed by the defendant (Exh. 29),
giving a grand total of P3,634.43.
As the plaintiff has already paid the sum of P2,052.74, only the sum
of P1,581.69 is legally due from the estate. This last sum is P390.42
more than the amount demanded by the defendant in his
counterclaim. But, as we cannot give the defendant more than what
he claims, we must hold that the plaintiff is liable only in the sum of
P1,191.27, the amount stated in the counterclaim.
The judgment of the lower court is accordingly modified, with costs
against the plaintiff in both instances. So ordered.
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.
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.chanroblesvirtualawlibrary chanrobles virtual law
library
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."chanrobles virtual law library
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.chanroblesvirtualawlibrary chanrobles virtual law library
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;chanrobles virtual law library
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;chanrobles virtual law library
Third, to limit the production of sugar to areas more economically
suited to the production thereof; andchanrobles virtual law library
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).chanroblesvirtualawlibrary chanrobles virtual law library
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.chanroblesvirtualawlibrary chanrobles virtual law library
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).chanroblesvirtualawlibrary chanrobles virtual law
library
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).chanroblesvirtualawlibrarychanrobles virtual law library
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).chanroblesvirtualawlibrary chanrobles virtual law library
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).chanroblesvirtualawlibrary chanrobles virtual law library
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).chanroblesvirtualawlibrary chanrobles virtual
law library
The decision appealed from is affirmed, with costs against appellant.
So ordered.chanroblesvirtualawlibrary chanrobles virtual la
G.R. No. 158540 July 8, 2004
SOUTHERN CROSS CEMENT CORPORATION, petitioner,
vs.
THE PHILIPPINE CEMENT MANUFACTURERS CORP., THE
SECRETARY OF THE DEPARTMENT OF TRADE & INDUSTRY,
THE SECRETARY OF THE DEPARTMENT OF FINANCE, and
THE COMMISSIONER OF THE BUREAU OF
CUSTOMS, respondents.
DECISION
TINGA, J.:
"Good fences make good neighbors," so observed Robert Frost, the
archetype of traditional New England detachment. The Frost ethos
has been heeded by nations adjusting to the effects of the liberalized
global market.1The Philippines, for one, enacted Republic Act (Rep.
Act) No. 8751 (on the imposition of countervailing duties), Rep. Act
No. 8752 (on the imposition of anti-dumping duties) and, finally, Rep.
Act No. 8800, also known as the Safeguard Measures Act
("SMA")2 soon after it joined the General Agreement on Tariff and
Trade (GATT) and the World Trade Organization (WTO)
Agreement.3
The SMA provides the structure and mechanics for the imposition of
emergency measures, including tariffs, to protect domestic industries
and producers from increased imports which inflict or could inflict
serious injury on them.4 The wisdom of the policies behind the SMA,
however, is not put into question by the petition at bar. The questions
submitted to the Court relate to the means and the procedures
ordained in the law to ensure that the determination of the imposition
or non-imposition of a safeguard measure is proper.
Antecedent Facts
Petitioner Southern Cross Cement Corporation ("Southern Cross") is
a domestic corporation engaged in the business of cement
manufacturing, production, importation and exportation. Its principal
stockholders are Taiheiyo Cement Corporation and Tokuyama
Corporation, purportedly the largest cement manufacturers in
Japan.5
Private respondent Philippine Cement Manufacturers
Corporation6 ("Philcemcor") is an association of domestic cement
manufacturers. It has eighteen (18) members,7 per Record. While
Philcemcor heralds itself to be an association of domestic cement
manufacturers, it appears that considerable equity holdings, if not
controlling interests in at least twelve (12) of its member-
corporations, were acquired by the three largest cement
manufacturers in the world, namely Financiere Lafarge S.A. of
France, Cemex S.A. de C.V. of Mexico, and Holcim Ltd. of
Switzerland (formerly Holderbank Financiere Glaris, Ltd., then
Holderfin B.V.).8
On 22 May 2001, respondent Department of Trade and Industry
("DTI") accepted an application from Philcemcor, alleging that the
importation of gray Portland cement9 in increased quantities has
caused declines in domestic production, capacity utilization, market
share, sales and employment; as well as caused depressed local
prices. Accordingly, Philcemcor sought the imposition at first of
provisional, then later, definitive safeguard measures on the import
of cement pursuant to the SMA. Philcemcor filed the application in
behalf of twelve (12) of its member-companies.10
After preliminary investigation, the Bureau of Import Services of the
DTI, determined that critical circumstances existed justifying the
imposition of provisional measures.11 On 7 November 2001, the DTI
issued an Order, imposing a provisional measure equivalent to
Twenty Pesos and Sixty Centavos (P20.60) per forty (40) kilogram
bag on all importations of gray Portland cement for a period not
exceeding two hundred (200) days from the date of issuance by the
Bureau of Customs (BOC) of the implementing Customs
Memorandum Order.12 The corresponding Customs Memorandum
Order was issued on 10 December 2001, to take effect that same
day and to remain in force for two hundred (200) days. 13
In the meantime, the Tariff Commission, on 19 November 2001,
received a request from the DTI for a formal investigation to
determine whether or not to impose a definitive safeguard measure
on imports of gray Portland cement, pursuant to Section 9 of the
SMA and its Implementing Rules and Regulations. A notice of
commencement of formal investigation was published in the
newspapers on 21 November 2001. Individual notices were likewise
sent to concerned parties, such as Philcemcor, various importers
and exporters, the Embassies of Indonesia, Japan and Taiwan,
contractors/builders associations, industry associations, cement
workers' groups, consumer groups, non-government organizations
and concerned government agencies.14 A preliminary conference
was held on 27 November 2001, attended by several concerned
parties, including Southern Cross.15 Subsequently, the Tariff
Commission received several position papers both in support and
against Philcemcor's application.16 The Tariff Commission also
visited the corporate offices and manufacturing facilities of each of
the applicant companies, as well as that of Southern Cross and two
other cement importers.17
On 13 March 2002, the Tariff Commission issued its Formal
Investigation Report ("Report"). Among the factors studied by the
Tariff Commission in its Report were the market share of the
domestic industry,18 production and sales,19 capacity
utilization,20 financial performance and profitability,21 and return on
sales.22 The Tariff Commission arrived at the following conclusions:
1. The circumstances provided in Article XIX of GATT 1994
need not be demonstrated since the product under
consideration (gray Portland cement) is not the subject of
any Philippine obligation or tariff concession under the WTO
Agreement. Nonetheless, such inquiry is governed by the
national legislation (R.A. 8800) and the terms and conditions
of the Agreement on Safeguards.
2. The collective output of the twelve (12) applicant
companies constitutes a major proportion of the total
domestic production of gray Portland cement and blended
Portland cement.
3. Locally produced gray Portland cement and blended
Portland cement (Pozzolan) are "like" to imported gray
Portland cement.
 4. Gray Portland cement is being imported into the
Philippines in increased quantities, both in absolute terms
and relative to domestic production, starting in 2000. The
increase in volume of imports is recent, sudden, sharp and
significant.
5. The industry has not suffered and is not suffering
significant overall impairment in its condition, i.e., serious
injury.
6. There is no threat of serious injury that is imminent from
imports of gray Portland cement.
7. Causation has become moot and academic in view of the
negative determination of the elements of serious injury and
imminent threat of serious injury.23
Accordingly, the Tariff Commission made the following
recommendation, to wit:
The elements of serious injury and imminent threat of
serious injury not having been established, it is hereby
recommended that no definitive general safeguard measure
be imposed on the importation of gray Portland cement.24
The DTI received the Report on 14 March 2002. After reviewing the
report, then DTI Secretary Manuel Roxas II ("DTI Secretary")
disagreed with the conclusion of the Tariff Commission that there
was no serious injury to the local cement industry caused by the
surge of imports.25 In view of this disagreement, the DTI requested
an opinion from the Department of Justice ("DOJ") on the DTI
Secretary's scope of options in acting on the Commission's
recommendations. Subsequently, then DOJ Secretary Hernando
Perez rendered an opinion stating that Section 13 of the SMA
precluded a review by the DTI Secretary of the Tariff Commission's
negative finding, or finding that a definitive safeguard measure
should not be imposed.26
On 5 April 2002, the DTI Secretary promulgated a Decision. After
quoting the conclusions of the Tariff Commission, the DTI Secretary
noted the DTI's disagreement with the conclusions. However, he also
cited the DOJ Opinion advising the DTI that it was bound by the
negative finding of the Tariff Commission. Thus, he ruled as follows:
The DTI has no alternative but to abide by the [Tariff]
Commission's recommendations.
IN VIEW OF THE FOREGOING, and in accordance with
Section 13 of RA 8800 which states:
"In the event of a negative final determination; or
if the cash bond is in excess of the definitive
safeguard duty assessed, the Secretary shall
immediately issue, through the Secretary of
Finance, a written instruction to the
Commissioner of Customs, authorizing the
return of the cash bond or the remainder thereof,
as the case may be, previously collected as
provisional general safeguard measure within
ten (10) days from the date a final decision has
been made; Provided, that the government shall
not be liable for any interest on the amount to be
returned. The Secretary shall not accept for
consideration another petition from the same
industry, with respect to the same imports of the
product under consideration within one (1) year
after the date of rendering such a decision."
The DTI hereby issues the following:
The application for safeguard measures against the
importation of gray Portland cement filed by PHILCEMCOR
(Case No. 02-2001) is hereby denied.27 (Emphasis in the
original)
Philcemcor received a copy of the DTI Decision on 12 April 2002.
Ten days later, it filed with the Court of Appeals a Petition for
Certiorari, Prohibition and Mandamus28 seeking to set aside the
DTI Decision, as well as the Tariff Commission's Report. Philcemcor
likewise applied for a Temporary Restraining Order/Injunction to
enjoin the DTI and the BOC from implementing the
questioned Decision and Report. It prayed that the Court of Appeals
direct the DTI Secretary to disregard the Report and to render
judgment independently of the Report. Philcemcor argued that the
DTI Secretary, vested as he is under the law with the power of
review, is not bound to adopt the recommendations of the Tariff
Commission; and, that the Report is void, as it is predicated on a
flawed framework, inconsistent inferences and erroneous
methodology.29
On 10 June 2002, Southern Cross filed its Comment.30 It argued that
the Court of Appeals had no jurisdiction over Philcemcor's Petition,
for it is on the Court of Tax Appeals ("CTA") that the SMA conferred
jurisdiction to review rulings of the Secretary in connection with the
imposition of a safeguard measure. It likewise argued that
Philcemcor's resort to the special civil action of certiorari is improper,
considering that what Philcemcor sought to rectify is an error of
judgment and not an error of jurisdiction or grave abuse of discretion,
and that a petition for review with the CTA was available as a plain,
speedy and adequate remedy. Finally, Southern Cross echoed the
DOJ Opinion that Section 13 of the SMA precludes a review by the
DTI Secretary of a negative finding of the Tariff Commission.
After conducting a hearing on 19 June 2002 on Philcemcor's
application for preliminary injunction, the Court of Appeals' Twelfth
Division31 granted the writ sought in its Resolution dated 21 June
2002.32 Seven days later, on 28 June 2002, the two-hundred (200)-
day period for the imposition of the provisional measure expired.
Despite the lapse of the period, the BOC continued to impose the
provisional measure on all importations of Portland cement made by
Southern Cross. The uninterrupted assessment of the tariff,
according to Southern Cross, worked to its detriment to the point that
the continued imposition would eventually lead to its closure.33
Southern Cross timely filed a Motion for Reconsideration of
the Resolution on 9 September 2002. Alleging that Philcemcor was
not entitled to provisional relief, Southern Cross likewise sought a
clarificatory order as to whether the grant of the writ of preliminary
injunction could extend the earlier imposition of the provisional
measure beyond the two hundred (200)-day limit imposed by law.
The appeals' court failed to take immediate action on Southern
Cross's motion despite the four (4) motions for early resolution the
latter filed between September of 2002 and February of 2003. After
six (6) months, on 19 February 2003, the Court of Appeals directed
Philcemcor to comment on Southern Cross's Motion for
Reconsideration.34 After Philcemcor filed its Opposition35 on 13
March 2003, Southern Cross filed another set of four (4) motions for
early resolution.
Despite the efforts of Southern Cross, the Court of Appeals failed to
directly resolve the Motion for Reconsideration. Instead, on 5 June
2003, it rendered a Decision,36 granting in part Philcemcor's petition.
The appellate court ruled that it had jurisdiction over the petition for
certiorari since it alleged grave abuse of discretion. It refused to
annul the findings of the Tariff Commission, citing the rule that
factual findings of administrative agencies are binding upon the
courts and its corollary, that courts should not interfere in matters
addressed to the sound discretion and coming under the special
technical knowledge and training of such agencies.37 Nevertheless, it
held that the DTI Secretary is not bound by the factual findings of the
Tariff Commission since such findings are merely recommendatory
and they fall within the ambit of the Secretary's discretionary review.
It determined that the legislative intent is to grant the DTI Secretary
the power to make a final decision on the Tariff Commission's
recommendation.38 The dispositive portion of the Decision reads:
WHEREFORE, based on the foregoing premises, petitioner's
prayer to set aside the findings of the Tariff Commission in
its assailed Report dated March 13, 2002 is DENIED. On the
other hand, the assailed April 5, 2002 Decision of the
Secretary of the Department of Trade and Industry is
hereby SET ASIDE. Consequently, the case
is REMANDED to the public respondent Secretary of
Department of Trade and Industry for a final decision in
accordance with RA 8800 and its Implementing Rules and
Regulations.
 SO ORDERED.39
On 23 June 2003, Southern Cross filed the present petition, assailing
the appellate court's Decision for departing from the accepted and
usual course of judicial proceedings, and not deciding the substantial
questions in accordance with law and jurisprudence. The petition
argues in the main that the Court of Appeals has no jurisdiction over
Philcemcor's petition, the proper remedy being a petition for review
with the CTA conformably with the SMA, and; that the factual
findings of the Tariff Commission on the existence or non-existence
conditions warranting the imposition of general safeguard measures
are binding upon the DTI Secretary.
The timely filing of Southern Cross's petition before this Court
necessarily prevented the Court of Appeals Decisionfrom becoming
final.40 Yet on 25 June 2003, the DTI Secretary issued a
new Decision, ruling this time that that in light of the appellate
court's Decision there was no longer any legal impediment to his
deciding Philcemcor's application for definitive safeguard
measures.41 He made a determination that, contrary to the findings of
the Tariff Commission, the local cement industry had suffered
serious injury as a result of the import surges.42 Accordingly, he
imposed a definitive safeguard measure on the importation of gray
Portland cement, in the form of a definitive safeguard duty in the
amount of P20.60/40 kg. bag for three years on imported gray
Portland Cement.43
On 7 July 2003, Southern Cross filed with the Court a "Very Urgent
Application for a Temporary Restraining Order and/or A Writ of
Preliminary Injunction" ("TRO Application"), seeking to enjoin the DTI
Secretary from enforcing his Decision of 25 June 2003 in view of the
pending petition before this Court. Philcemcor filed an opposition,
claiming, among others, that it is not this Court but the CTA that has
jurisdiction over the application under the law.
On 1 August 2003, Southern Cross filed with the CTA a Petition for
Review, assailing the DTI Secretary's 25 June 2003 Decision which
imposed the definite safeguard measure. Prescinding from this
action, Philcemcor filed with this Court a Manifestation and Motion to
Dismiss in regard to Southern Cross's petition, alleging that it
deliberately and willfully resorted to forum-shopping. It points out that
Southern Cross's TRO Application seeks to enjoin the DTI
Secretary's second decision, while its Petition before the CTA prays
for the annulment of the same decision.44
Reiterating its Comment on Southern Cross's Petition for Review,
Philcemcor also argues that the CTA, being a special court of limited
jurisdiction, could only review the ruling of the DTI Secretary when a
safeguard measure is imposed, and that the factual findings of the
Tariff Commission are not binding on the DTI Secretary. 45
After giving due course to Southern Cross's Petition, the Court called
the case for oral argument on 18 February 2004.46 At the oral
argument, attended by the counsel for Philcemcor and Southern
Cross and the Office of the Solicitor General, the Court simplified the
issues in this wise: (i) whether the Decision of the DTI Secretary is
appealable to the CTA or the Court of Appeals; (ii) assuming that the
Court of Appeals has jurisdiction, whether its Decision is in
accordance with law; and, (iii) whether a Temporary Restraining
Order is warranted.47
During the oral arguments, counsel for Southern Cross manifested
that due to the imposition of the general safeguard measures,
Southern Cross was forced to cease operations in the Philippines in
November of 2003.48
Propriety of the Temporary Restraining Order
Before the merits of the Petition, a brief comment on Southern
Cross's application for provisional relief. It sought to enjoin the DTI
Secretary from enforcing the definitive safeguard measure he
imposed in his 25 June 2003 Decision. The Court did not grant the
provisional relief for it would be tantamount to enjoining the collection
of taxes, a peremptory judicial act which is traditionally frowned
upon,49 unless there is a clear statutory basis for it.50 In that regard,
Section 218 of the Tax Reform Act of 1997 prohibits any court from
granting an injunction to restrain the collection of any national
internal revenue tax, fee or charge imposed by the internal revenue
code.51 A similar philosophy is expressed by Section 29 of the SMA,
which states that the filing of a petition for review before the CTA
does not stop, suspend, or otherwise toll the imposition or collection
of the appropriate tariff duties or the adoption of other appropriate
safeguard measures.52 This evinces a clear legislative intent that the
imposition of safeguard measures, despite the availability of judicial
review, should not be enjoined notwithstanding any timely appeal of
the imposition.
The Forum-Shopping Issue
In the same breath, we are not convinced that the allegation of
forum-shopping has been duly proven, or that sanction should befall
upon Southern Cross and its counsel. The standard by Section 5,
Rule 7 of the 1997 Rules of Civil Procedure in order that sanction
may be had is that "the acts of the party or his counsel clearly
constitute willful and deliberate forum shopping."53 The standard
implies a malicious intent to subvert procedural rules, and such state
of mind is not evident in this case.
The Jurisdictional Issue
On to the merits of the present petition.
In its assailed Decision, the Court of Appeals, after asserting only in
brief that it had jurisdiction over Philcemcor's Petition, discussed the
issue of whether or not the DTI Secretary is bound to adopt the
negative recommendation of the Tariff Commission on the
application for safeguard measure. The Court of Appeals maintained
that it had jurisdiction over the petition, as it alleged grave abuse of
discretion on the part of the DTI Secretary, thus:
A perusal of the instant petition reveals allegations of grave
abuse of discretion on the part of the DTI Secretary in
rendering the assailed April 5, 2002 Decision wherein it was
ruled that he had no alternative but to abide by the findings
of the Commission on the matter of safeguard measures for
the local cement industry. Abuse of discretion is admittedly
within the ambit of certiorari.
Grave abuse of discretion implies such capricious and
whimsical exercise of judgment as is equivalent to lack of
jurisdiction. It is alleged that, in the assailed Decision, the
DTI Secretary gravely abused his discretion in wantonly
evading to discharge his duty to render an independent
determination or decision in imposing a definitive safeguard
measure.54
We do not doubt that the Court of Appeals' certiorari powers extend
to correcting grave abuse of discretion on the part of an officer
exercising judicial or quasi-judicial functions.55 However, the special
civil action of certiorari is available only when there is no plain,
speedy and adequate remedy in the ordinary course of
law.56 Southern Cross relies on this limitation, stressing that Section
29 of the SMA is a plain, speedy and adequate remedy in the
ordinary course of law which Philcemcor did not avail of. The Section
reads:
Section 29. Judicial Review. – Any interested party who is
adversely affected by the ruling of the Secretary in
connection with the imposition of a safeguard
measure may file with the CTA, a petition for review of such
ruling within thirty (30) days from receipt thereof.
Provided, however, that the filing of such petition for review
shall not in any way stop, suspend or otherwise toll the
imposition or collection of the appropriate tariff duties or the
adoption of other appropriate safeguard measures, as the
case may be.
The petition for review shall comply with the same
requirements and shall follow the same rules of procedure
and shall be subject to the same disposition as in appeals in
connection with adverse rulings on tax matters to the Court
of Appeals.57 (Emphasis supplied)
It is not difficult to divine why the legislature singled out the CTA as
the court with jurisdiction to review the ruling of the DTI Secretary in
connection with the imposition of a safeguard measure. The Court
has long recognized the legislative determination to vest sole and
exclusive jurisdiction on matters involving internal revenue and
customs duties to such a specialized court.58 By the very nature of its
function, the CTA is dedicated exclusively to the study and
consideration of tax problems and has necessarily developed an
expertise on the subject.59
At the same time, since the CTA is a court of limited jurisdiction, its
jurisdiction to take cognizance of a case should be clearly conferred
and should not be deemed to exist on mere
implication.60 Concededly, Rep. Act No. 1125, the statute creating
the CTA, does not extend to it the power to review decisions of the
DTI Secretary in connection with the imposition of safeguard
measures.61 Of course, at that time which was before the advent of
trade liberalization the notion of safeguard measures or safety nets
was not yet in vogue.
Undeniably, however, the SMA expanded the jurisdiction of the CTA
by including review of the rulings of the DTI Secretary in connection
with the imposition of safeguard measures. However, Philcemcor
and the public respondents agree that the CTA has appellate
jurisdiction over a decision of the DTI Secretary imposing a
safeguard measure, but not when his ruling is not to impose such
measure.
In a related development, Rep. Act No. 9282, enacted on 30 March
2004, expressly vests unto the CTA jurisdiction over "[d]ecisions of
the Secretary of Trade and Industry, in case of nonagricultural
product, commodity or article xxx involving xxx safeguard measures
under Republic Act No. 8800, where either party may appeal the
decision to impose or not to impose said duties."62 Had Rep. Act
No. 9282 already been in force at the beginning of the incidents
subject of this case, there would have been no need to make any
deeper inquiry as to the extent of the CTA's jurisdiction. But as Rep.
Act No. 9282 cannot be applied retroactively to the present case, the
question of whether such jurisdiction extends to a decision not to
impose a safeguard measure will have to be settled principally on the
basis of the SMA.
Under Section 29 of the SMA, there are three requisites to enable
the CTA to acquire jurisdiction over the petition for review
contemplated therein: (i) there must be a ruling by the DTI Secretary;
(ii) the petition must be filed by an interested party adversely affected
by the ruling; and (iii) such ruling must be in connection with the
imposition of a safeguard measure. The first two requisites are
clearly present. The third requisite deserves closer scrutiny.
Contrary to the stance of the public respondents and Philcemcor, in
this case where the DTI Secretary decides not to impose a
safeguard measure, it is the CTA which has jurisdiction to review his
decision. The reasons are as follows:
First. Split jurisdiction is abhorred.
Essentially, respondents' position is that judicial review of the DTI
Secretary's ruling is exercised by two different courts, depending on
whether or not it imposes a safeguard measure, and in either case
the court exercising jurisdiction does so to the exclusion of the other.
Thus, if the DTI decision involves the imposition of a safeguard
measure it is the CTA which has appellate jurisdiction; otherwise, it is
the Court of Appeals. Such setup is as novel and unusual as it is
cumbersome and unwise. Essentially, respondents advocate that
Section 29 of the SMA has established split appellate jurisdiction
over rulings of the DTI Secretary on the imposition of safeguard
measure.
This interpretation cannot be favored, as the Court has consistently
refused to sanction split jurisdiction.63 The power of the DTI
Secretary to adopt or withhold a safeguard measure emanates from
the same statutory source, and it boggles the mind why the appeal
modality would be such that one appellate court is qualified if what is
to be reviewed is a positive determination, and it is not if what is
appealed is a negative determination. In deciding whether or not to
impose a safeguard measure, provisional or general, the DTI
Secretary would be evaluating only one body of facts and applying
them to one set of laws. The reviewing tribunal will be called upon to
examine the same facts and the same laws, whether or not the
determination is positive or negative.
In short, if we were to rule for respondents we would be confirming
the exercise by two judicial bodies of jurisdiction over basically the
same subject matter¾precisely the split-jurisdiction situation which is
anathema to the orderly administration of justice.64 The Court cannot
accept that such was the legislative motive especially considering
that the law expressly confers on the CTA, the tribunal with the
specialized competence over tax and tariff matters, the role of
judicial review without mention of any other court that may exercise
corollary or ancillary jurisdiction in relation to the SMA. The provision
refers to the Court of Appeals but only in regard to procedural rules
and dispositions of appeals from the CTA to the Court of Appeals.65
The principle enunciated in Tejada v. Homestead Property
Corporation66 is applicable to the case at bar:
The Court agrees with the observation of the [that] when an
administrative agency or body is conferred quasi-judicial
functions, all controversies relating to the subject matter
pertaining to its specialization are deemed to be
included within the jurisdiction of said administrative
agency or body. Split jurisdiction is not favored.67
Second. The interpretation of the provisions of the SMA favors
vesting untrammeled appellate jurisdiction on the CTA.
A plain reading of Section 29 of the SMA reveals that Congress did
not expressly bar the CTA from reviewing a negative determination
by the DTI Secretary nor conferred on the Court of Appeals such
review authority. Respondents note, on the other hand, that neither
did the law expressly grant to the CTA the power to review a
negative determination. However, under the clear text of the law, the
CTA is vested with jurisdiction to review the ruling of the DTI
Secretary "in connection with the imposition of a safeguard
measure." Had the law been couched instead to incorporate the
phrase "the ruling imposing a safeguard measure," then
respondent's claim would have indisputable merit. Undoubtedly, the
phrase "in connection with" not only qualifies but clarifies the
succeeding phrase "imposition of a safeguard measure." As
expounded later, the phrase also encompasses the opposite or
converse ruling which is the non-imposition of a safeguard measure.
In the American case of Shaw v. Delta Air Lines, Inc.,68 the United
States Supreme Court, in interpreting a key provision of the
Employee Retirement Security Act of 1974, construed the phrase
"relates to" in its normal sense which is the same as "if it has
connection with or reference to."69 There is no serious dispute that
the phrase "in connection with" is synonymous to "relates to" or
"reference to," and that all three phrases are broadly expansive. This
is affirmed not just by jurisprudential fiat, but also the acquired
connotative meaning of "in connection with" in common parlance.
Consequently, with the use of the phrase "in connection with,"
Section 29 allows the CTA to review not only the ruling imposing a
safeguard measure, but all other rulings related or have reference
to the application for such measure.
Now, let us determine the maximum scope and reach of the phrase
"in connection with" as used in Section 29 of the SMA. A literalist
reading or linguistic survey may not satisfy. Even the US Supreme
Court in New York State Blue Cross Plans v. Travelers
Ins.70 conceded that the phrases "relate to" or "in connection with"
may be extended to the farthest stretch of indeterminacy for,
universally, relations or connections are infinite and stop
nowhere.71 Thus, in the case the US High Court, examining the same
phrase of the same provision of law involved in Shaw, resorted to
looking at the statute and its objectives as the alternative to an
"uncritical literalism."72 A similar inquiry into the other provisions of
the SMA is in order to determine the scope of review accorded
therein to the CTA.73
The authority to decide on the safeguard measure is vested in the
DTI Secretary in the case of non-agricultural products, and in the
Secretary of the Department of Agriculture in the case of agricultural
products.74 Section 29 is likewise explicit that only the rulings of the
DTI Secretary or the Agriculture Secretary may be reviewed by the
CTA.75 Thus, the acts of other bodies that were granted some
powers by the SMA, such as the Tariff Commission, are not subject
to direct review by the CTA.
Under the SMA, the Department Secretary concerned is authorized
to decide on several matters. Within thirty (30) days from receipt of a
petition seeking the imposition of a safeguard measure, or from the
date he made motu proprio initiation, the Secretary shall make a
preliminary determination on whether the increased imports of the
product under consideration substantially cause or threaten to cause
serious injury to the domestic industry.76 Such ruling is crucial since
only upon the Secretary's positive preliminary determination that a
threat to the domestic industry exists shall the matter be referred to
the Tariff Commission for formal investigation, this time, to determine
whether the general safeguard measure should be imposed or
not.77 Pursuant to a positive preliminary determination, the Secretary
may also decide that the imposition of a provisional safeguard
measure would be warranted under Section 8 of the SMA.78 The
Secretary is also authorized to decide, after receipt of the report of
the Tariff Commission, whether or not to impose the general
safeguard measure, and if in the affirmative, what general safeguard
measures should be applied.79 Even after the general safeguard
measure is imposed, the Secretary is empowered to extend the
safeguard measure,80 or terminate, reduce or modify his previous
rulings on the general safeguard measure.81
With the explicit grant of certain powers involving safeguard
measures by the SMA on the DTI Secretary, it follows that he is
empowered to rule on several issues. These are the issues which
arise in connection with, or in relation to, the imposition of a
safeguard measure. They may arise at different stages – the
preliminary investigation stage, the post-formal investigation stage,
or the post-safeguard measure stage – yet all these issues do
become ripe for resolution because an initiatory action has been
taken seeking the imposition of a safeguard measure. It is the
initiatory action for the imposition of a safeguard measure that sets
the wheels in motion, allowing the Secretary to make successive
rulings, beginning with the preliminary determination.
Clearly, therefore, the scope and reach of the phrase "in connection
with," as intended by Congress, pertain to all rulings of the DTI
Secretary or Agriculture Secretary which arise from the time an
application or motu proprioinitiation for the imposition of a safeguard
measure is taken. Indeed, the incidents which require resolution
come to the fore only because there is an initial application or action
seeking the imposition of a safeguard measure. From the legislative
standpoint, it was a matter of sense and practicality to lump up the
questions related to the initiatory application or action for safeguard
measure and to assign only one court and; that is the CTA to initially
review all the rulings related to such initiatory application or action.
Both directions Congress put in place by employing the phrase "in
connection with" in the law.
Given the relative expanse of decisions subject to judicial review by
the CTA under Section 29, we do not doubt that a negative ruling
refusing to impose a safeguard measure falls within the scope of its
jurisdiction. On a literal level, such negative ruling is "a ruling of the
Secretary in connection with the imposition of a safeguard measure,"
as it is one of the possible outcomes that may result from the initial
application or action for a safeguard measure. On a more critical
level, the rulings of the DTI Secretary in connection with a safeguard
measure, however diverse the outcome may be, arise from the same
grant of jurisdiction on the DTI Secretary by the SMA.82 The refusal
by the DTI Secretary to grant a safeguard measure involves the
same grant of authority, the same statutory prescriptions, and the
same degree of discretion as the imposition by the DTI Secretary of
a safeguard measure.
The position of the respondents is one of "uncritical
literalism"83 incongruent with the animus of the law. Moreover, a
fundamentalist approach to Section 29 is not warranted, considering
the absurdity of the consequences.
Third. Interpretatio Talis In Ambiguis Semper Fienda Est, Ut Evitur
Inconveniens Et Absurdum.84
Even assuming arguendo that Section 29 has not expressly granted
the CTA jurisdiction to review a negative ruling of the DTI Secretary,
the Court is precluded from favoring an interpretation that would
cause inconvenience and absurdity.85 Adopting the respondents'
position favoring the CTA's minimal jurisdiction would unnecessarily
lead to illogical and onerous results.
Indeed, it is illiberal to assume that Congress had intended to
provide appellate relief to rulings imposing a safeguard measure but
not to those declining to impose the measure. Respondents might
argue that the right to relief from a negative ruling is not lost since
the applicant could, as Philcemcor did, question such ruling through
a special civil action for certiorari under Rule 65 of the 1997 Rules of
Civil Procedure, in lieu of an appeal to the CTA. Yet these two reliefs
are of differing natures and gravamen. While an appeal may be
predicated on errors of fact or errors of law, a special civil action for
certiorari is grounded on grave abuse of discretion or lack of or
excess of jurisdiction on the part of the decider. For a special civil
action for certiorari to succeed, it is not enough that the questioned
act of the respondent is wrong. As the Court clarified in Sempio v.
Court of Appeals:
A tribunal, board or officer acts without jurisdiction if it/he
does not have the legal power to determine the case. There
is excess of jurisdiction where, being clothed with the power
to determine the case, the tribunal, board or officer
oversteps its/his authority as determined by law. And there is
grave abuse of discretion where the tribunal, board or officer
acts in a capricious, whimsical, arbitrary or despotic manner
in the exercise of his judgment as to be said to be equivalent
to lack of jurisdiction. Certiorari is often resorted to in order
to correct errors of jurisdiction. Where the error is one of law
or of fact, which is a mistake of judgment, appeal is the
remedy.86
It is very conceivable that the DTI Secretary, after deliberate thought
and careful evaluation of the evidence, may either make a negative
preliminary determination as he is so empowered under Section 7 of
the SMA, or refuse to adopt the definitive safeguard measure under
Section 13 of the same law. Adopting the respondents' theory, this
negative ruling is susceptible to reversal only through a special civil
action for certiorari, thus depriving the affected party the chance to
elevate the ruling on appeal on the rudimentary grounds of errors in
fact or in law. Instead, and despite whatever indications that the DTI
Secretary acted with measure and within the bounds of his
jurisdiction are, the aggrieved party will be forced to resort to a
gymnastic exercise, contorting the straight and narrow in an effort to
discombobulate the courts into believing that what was within was
actually beyond and what was studied and deliberate actually
whimsical and capricious. What then would be the remedy of the
party aggrieved by a negative ruling that simply erred in interpreting
the facts or the law? It certainly cannot be the special civil action for
certiorari, for as the Court held in Silverio v. Court of
Appeals: "Certiorari is a remedy narrow in its scope and inflexible in
its character. It is not a general utility tool in the legal workshop."87
Fortunately, this theoretical quandary need not come to pass.
Section 29 of the SMA is worded in such a way that it places under
the CTA's judicial review all rulings of the DTI Secretary, which are
connected with the imposition of a safeguard measure. This is sound
and proper in light of the specialized jurisdiction of the CTA over tax
matters. In the same way that a question of whether to tax or not to
tax is properly a tax matter, so is the question of whether to impose
or not to impose a definitive safeguard measure.
On another note, the second paragraph of Section 29 similarly
reveals the legislative intent that rulings of the DTI Secretary over
safeguard measures should first be reviewed by the CTA and not the
Court of Appeals. It reads:
The petition for review shall comply with the same
requirements and shall follow the same rules of procedure
and shall be subject to the same disposition as in appeals in
connection with adverse rulings on tax matters to the Court
of Appeals.
This is the only passage in the SMA in which the Court of Appeals is
mentioned. The express wish of Congress is that the petition
conform to the requirements and procedure under Rule 43 of the
Rules of Civil Procedure. Since Congress mandated that the form
and procedure adopted be analogous to a review of a CTA ruling by
the Court of Appeals, the legislative contemplation could not have
been that the appeal be directly taken to the Court of Appeals.
Issue of Binding Effect of Tariff
Commission's Factual Determination
on DTI Secretary.
The next issue for resolution is whether the factual determination
made by the Tariff Commission under the SMA is binding on the DTI
Secretary. Otherwise stated, the question is whether the DTI
Secretary may impose general safeguard measures in the absence
of a positive final determination by the Tariff Commission.
The Court of Appeals relied upon Section 13 of the SMA in ruling
that the findings of the Tariff Commission do not necessarily
constitute a final decision. Section 13 details the procedure for the
adoption of a safeguard measure, as well as the steps to be taken in
case there is a negative final determination. The implication of the
Court of Appeals' holding is that the DTI Secretary may adopt a
definitive safeguard measure, notwithstanding a negative
determination made by the Tariff Commission.
Undoubtedly, Section 13 prescribes certain limitations and
restrictions before general safeguard measures may be imposed.
However, the most fundamental restriction on the DTI
Secretary's power in that respect is contained in Section 5 of
the SMA¾that there should first be a positive final
determination of the Tariff Commission¾which the Court of
Appeals curiously all but ignored. Section 5 reads:
Sec. 5. Conditions for the Application of General Safeguard
Measures. – The Secretary shall apply a general
safeguard measure upon a positive final determination
of the [Tariff] Commission that a product is being imported
into the country in increased quantities, whether absolute or
relative to the domestic production, as to be a substantial
cause of serious injury or threat thereof to the domestic
industry; however, in the case of non-agricultural products,
the Secretary shall first establish that the application of such
safeguard measures will be in the public interest. (emphasis
supplied)
The plain meaning of Section 5 shows that it is the Tariff
Commission that has the power to make a "positive final
determination." This power lodged in the Tariff Commission, must be
distinguished from the power to impose the general safeguard
measure which is properly vested on the DTI Secretary. 88
All in all, there are two condition precedents that must be satisfied
before the DTI Secretary may impose a general safeguard measure
on grey Portland cement. First, there must be a positive final
determination by the Tariff Commission that a product is being
imported into the country in increased quantities (whether absolute
or relative to domestic production), as to be a substantial cause of
serious injury or threat to the domestic industry. Second, in the case
of non-agricultural products the Secretary must establish that the
application of such safeguard measures is in the public interest.89 As
Southern Cross argues, Section 5 is quite clear-cut, and it is
impossible to finagle a different conclusion even through overarching
methods of statutory construction. There is no safer nor better settled
canon of interpretation that when language is clear and
unambiguous it must be held to mean what it plainly expresses:90 In
the quotable words of an illustrious member of this Court, thus:
[I]f a statute is clear, plain and free from ambiguity, it must
be given its literal meaning and applied without attempted
interpretation. The verba legis or plain meaning rule rests on
the valid presumption that the words employed by the
legislature in a statute correctly express its intent or will and
preclude the court from construing it differently. The
legislature is presumed to know the meaning of the words, to
have used words advisedly, and to have expressed its intent
by the use of such words as are found in the statute.91
Moreover, Rule 5 of the Implementing Rules and Regulations of the
SMA,92 which interprets Section 5 of the law, likewise requires a
positive final determination on the part of the Tariff Commission
before the application of the general safeguard measure.
The SMA establishes a distinct allocation of functions between the
Tariff Commission and the DTI Secretary. The plain meaning of
Section 5 shows that it is the Tariff Commission that has the power
to make a "positive final determination." This power, which belongs
to the Tariff Commission, must be distinguished from the power to
impose general safeguard measure properly vested on the DTI
Secretary. The distinction is vital, as a "positive final determination"
clearly antecedes, as a condition precedent, the imposition of a
general safeguard measure. At the same time, a positive final
determination does not necessarily result in the imposition of a
general safeguard measure. Under Section 5, notwithstanding the
positive final determination of the Tariff Commission, the DTI
Secretary is tasked to decide whether or not that the application of
the safeguard measures is in the public interest.
It is also clear from Section 5 of the SMA that the positive final
determination to be undertaken by the Tariff Commission does not
entail a mere gathering of statistical data. In order to arrive at such
determination, it has to establish causal linkages from the statistics
that it compiles and evaluates: after finding there is an importation in
increased quantities of the product in question, that such importation
is a substantial cause of serious threat or injury to the domestic
industry.
The Court of Appeals relies heavily on the legislative record of a
congressional debate during deliberations on the SMA to assert a
purported legislative intent that the findings of the Tariff Commission
do not bind the DTI Secretary.93 Yet as explained earlier, the plain
meaning of Section 5 emphasizes that only if the Tariff Commission
renders a positive determination could the DTI Secretary impose a
safeguard measure. Resort to the congressional records to ascertain
legislative intent is not warranted if a statute is clear, plain and free
from ambiguity. The legislature is presumed to know the meaning of
the words, to have used words advisedly, and to have expressed its
intent by the use of such words as are found in the statute.94
Indeed, the legislative record, if at all to be availed of, should be
approached with extreme caution, as legislative debates and
proceedings are powerless to vary the terms of the statute when the
meaning is clear.95 Our holding in Civil Liberties Union v. Executive
Secretary96 on the resort to deliberations of the constitutional
convention to interpret the Constitution is likewise appropriate in
ascertaining statutory intent:
While it is permissible in this jurisdiction to consult the
debates and proceedings of the constitutional convention in
order to arrive at the reason and purpose of the resulting
Constitution, resort thereto may be had only when other
guides fail as said proceedings are powerless to vary the
terms of the Constitution when the meaning is clear.
Debates in the constitutional convention "are of value as
showing the views of the individual members, and as
indicating the reasons for their votes, but they give us no
light as to the views of the large majority who did not talk
xxx. We think it safer to construe the constitution from what
appears upon its face."97
Moreover, it is easy to selectively cite passages, sometimes out of
their proper context, in order to assert a misleading interpretation.
The effect can be dangerous. Minority or solitary views, anecdotal
ruminations, or even the occasional crude witticisms, may improperly
acquire the mantle of legislative intent by the sole virtue of their
publication in the authoritative congressional record. Hence, resort to
legislative deliberations is allowable when the statute is crafted in
such a manner as to leave room for doubt on the real intent of the
legislature.
Section 5 plainly evinces legislative intent to restrict the DTI
Secretary's power to impose a general safeguard measure by
preconditioning such imposition on a positive determination by the
Tariff Commission. Such legislative intent should be given full force
and effect, as the executive power to impose definitive safeguard
measures is but a delegated power¾the power of taxation, by nature
and by command of the fundamental law, being a preserve of the
legislature.98 Section 28(2), Article VI of the 1987 Constitution
confirms the delegation of legislative power, yet ensures that the
prerogative of Congress to impose limitations and restrictions on the
executive exercise of this power:
 The Congress may, by law, authorize the President to fix
within specified limits, and subject to such limitations and
restrictions as it may impose, tariff rates, import and export
quotas, tonnage and wharfage dues, and other duties or
imposts within the framework of the national development
program of the Government.99
The safeguard measures which the DTI Secretary may impose under
the SMA may take the following variations, to wit: (a) an increase in,
or imposition of any duty on the imported product; (b) a decrease in
or the imposition of a tariff-rate quota on the product; (c) a
modification or imposition of any quantitative restriction on the
importation of the product into the Philippines; (d) one or more
appropriate adjustment measures, including the provision of trade
adjustment assistance; and (e) any combination of the above-
described actions. Except for the provision of trade adjustment
assistance, the measures enumerated by the SMA are essentially
imposts, which precisely are the subject of delegation under Section
28(2), Article VI of the 1987 Constitution.100
This delegation of the taxation power by the legislative to the
executive is authorized by the Constitution itself.101 At the same time,
the Constitution also grants the delegating authority (Congress) the
right to impose restrictions and limitations on the taxation power
delegated to the President.102 The restrictions and limitations
imposed by Congress take on the mantle of a constitutional
command, which the executive branch is obliged to observe.
The SMA empowered the DTI Secretary, as alter ego of the
President,103 to impose definitive general safeguard measures, which
basically are tariff imposts of the type spoken of in the Constitution.
However, the law did not grant him full, uninhibited discretion to
impose such measures. The DTI Secretary authority is derived from
the SMA; it does not flow from any inherent executive power. Thus,
the limitations imposed by Section 5 are absolute, warranted as they
are by a constitutional fiat.104
Philcemcor cites our 1912 ruling in Lamb v. Phipps105 to assert that
the DTI Secretary, having the final decision on the safeguard
measure, has the power to evaluate the findings of the Tariff
Commission and make an independent judgment thereon. Given the
constitutional and statutory limitations governing the present case,
the citation is misplaced. Lamb pertained to the discretion of the
Insular Auditor of the Philippine Islands, whom, as the Court
recognized, "[t]he statutes of the United States require[d] xxx to
exercise his judgment upon the legality xxx [of] provisions of law and
resolutions of Congress providing for the payment of money, the
means of procuring testimony upon which he may act."106
Thus in Lamb, while the Court recognized the wide latitude of
discretion that may have been vested on the Insular Auditor, it also
recognized that such latitude flowed from, and is consequently
limited by, statutory grant. However, in this case, the provision of the
Constitution in point expressly recognizes the authority of Congress
to prescribe limitations in the case of tariffs, export/import quotas and
other such safeguard measures. Thus, the broad discretion granted
to the Insular Auditor of the Philippine Islands cannot be analogous
to the discretion of the DTI Secretary which is circumscribed by
Section 5 of the SMA.
For that matter, Cariño v. Commissioner on Human
Rights,107 likewise cited by Philcemcor, is also inapplicable owing to
the different statutory regimes prevailing over that case and the
present petition. In Cariño, the Court ruled that the constitutional
power of the Commission on Human Rights (CHR) to investigate
human rights' violations did not extend to adjudicating claims on the
merits.108 Philcemcor claims that the functions of the Tariff
Commission being "only investigatory," it could neither decide nor
adjudicate.109
The applicable law governing the issue in Cariño is Section 18,
Article XIII of the Constitution, which delineates the powers and
functions of the CHR. The provision does not vest on the CHR the
power to adjudicate cases, but only to investigate all forms of human
rights violations.110 Yet, without modifying the thorough disquisition of
the Court in Cariño on the general limitations on the investigatory
power, the precedent is inapplicable because of the difference in the
involved statutory frameworks. The Constitution does not repose
binding effect on the results of the CHR's investigation. 111 On the
other hand, through Section 5 of the SMA and under the authority of
Section 28(2), Article VI of the Constitution, Congress did intend to
bind the DTI Secretary to the determination made by the Tariff
Commission.112 It is of no consequence that such determination
results from the exercise of investigatory powers by the Tariff
Commission since Congress is well within its constitutional mandate
to limit the authority of the DTI Secretary to impose safeguard
measures in the manner that it sees fit.
The Court of Appeals and Philcemcor also rely on Section 13 of the
SMA and Rule 13 of the SMA's Implementing Rules in support of the
view that the DTI Secretary may decide independently of the
determination made by the Tariff Commission. Admittedly, there are
certain infelicities in the language of Section 13 and Rule 13. But
reliance should not be placed on the textual imprecisions. Rather,
Section 13 and Rule 13 must be viewed in light of the fundamental
prescription imposed by Section 5. 113
Section 13 of the SMA lays down the procedure to be followed after
the Tariff Commission renders its report. The provision reads in full:
SEC. 13. Adoption of Definitive Measures. — Upon its
positive determination, the Commission shall recommend to
the Secretary an appropriate definitive measure, in the form
of:
(a) An increase in, or imposition of, any duty on the imported
product;
(b) A decrease in or the imposition of a tariff-rate quota
(MAV) on the product;
(c) A modification or imposition of any quantitative restriction
on the importation of the product into the Philippines;
(d) One or more appropriate adjustment measures, including
the provision of trade adjustment assistance;
(e) Any combination of actions described in subparagraphs
(a) to (d).
The Commission may also recommend other actions,
including the initiation of international negotiations to
address the underlying cause of the increase of imports of
the product, to alleviate the injury or threat thereof to the
domestic industry, and to facilitate positive adjustment to
import competition.
The general safeguard measure shall be limited to the extent
of redressing or preventing the injury and to facilitate
adjustment by the domestic industry from the adverse effects
directly attributed to the increased imports: Provided,
however, That when quantitative import restrictions are
used, such measures shall not reduce the quantity of imports
below the average imports for the three (3) preceding
representative years, unless clear justification is given that a
different level is necessary to prevent or remedy a serious
injury.
A general safeguard measure shall not be applied to a
product originating from a developing country if its share of
total imports of the product is less than three percent
(3%): Provided, however, That developing countries with
less than three percent (3%) share collectively account for
not more than nine percent (9%) of the total imports.
The decision imposing a general safeguard measure, the
duration of which is more than one (1) year, shall be
reviewed at regular intervals for purposes of liberalizing or
reducing its intensity. The industry benefiting from the
application of a general safeguard measure shall be required
to show positive adjustment within the allowable period. A
general safeguard measure shall be terminated where the
benefiting industry fails to show any improvement, as may
be determined by the Secretary.
 The Secretary shall issue a written instruction to the heads
of the concerned government agencies to implement the
appropriate general safeguard measure as determined by
the Secretary within fifteen (15) days from receipt of the
report.
In the event of a negative final determination, or if the cash
bond is in excess of the definitive safeguard duty assessed,
the Secretary shall immediately issue, through the Secretary
of Finance, a written instruction to the Commissioner of
Customs, authorizing the return of the cash bond or the
remainder thereof, as the case may be, previously collected
as provisional general safeguard measure within ten (10)
days from the date a final decision has been
made: Provided, That the government shall not be liable for
any interest on the amount to be returned. The Secretary
shall not accept for consideration another petition from the
same industry, with respect to the same imports of the
product under consideration within one (1) year after the
date of rendering such a decision.
When the definitive safeguard measure is in the form of a
tariff increase, such increase shall not be subject or limited
to the maximum levels of tariff as set forth in Section 401(a)
of the Tariff and Customs Code of the Philippines.
To better comprehend Section 13, note must be taken of the
distinction between the investigatory and recommendatory functions
of the Tariff Commission under the SMA.
The word "determination," as used in the SMA, pertains to the factual
findings on whether there are increased imports into the country of
the product under consideration, and on whether such increased
imports are a substantial cause of serious injury or threaten to
substantially cause serious injury to the domestic industry.114 The
SMA explicitly authorizes the DTI Secretary to make a preliminary
determination,115 and the Tariff Commission to make the final
determination.116 The distinction is fundamental, as these functions
are not interchangeable. The Tariff Commission makes its
determination only after a formal investigation process, with such
investigation initiated only if there is a positive preliminary
determination by the DTI Secretary under Section 7 of the
SMA.117 On the other hand, the DTI Secretary may impose definitive
safeguard measure only if there is a positive final determination
made by the Tariff Commission.118
In contrast, a "recommendation" is a suggested remedial measure
submitted by the Tariff Commission under Section 13 after making a
positive final determination in accordance with Section 5. The Tariff
Commission is not empowered to make a recommendation absent a
positive final determination on its part.119 Under Section 13, the Tariff
Commission is required to recommend to the [DTI] Secretary an
"appropriate definitive measure."120 The Tariff Commission "may also
recommend other actions, including the initiation of international
negotiations to address the underlying cause of the increase of
imports of the products, to alleviate the injury or threat thereof to the
domestic industry and to facilitate positive adjustment to import
competition."121
The recommendations of the Tariff Commission, as rendered under
Section 13, are not obligatory on the DTI Secretary. Nothing in the
SMA mandates the DTI Secretary to adopt the recommendations
made by the Tariff Commission. In fact, the SMA requires that the
DTI Secretary establish that the application of such safeguard
measures is in the public interest, notwithstanding the Tariff
Commission's recommendation on the appropriate safeguard
measure based on its positive final determination.122 The non-binding
force of the Tariff Commission's recommendations is congruent with
the command of Section 28(2), Article VI of the 1987 Constitution
that only the President may be empowered by the Congress to
impose appropriate tariff rates, import/export quotas and other
similar measures.123 It is the DTI Secretary, as alter ego of the
President, who under the SMA may impose such safeguard
measures subject to the limitations imposed therein. A contrary
conclusion would in essence unduly arrogate to the Tariff
Commission the executive power to impose the appropriate tariff
measures. That is why the SMA empowers the DTI Secretary to
adopt safeguard measures other than those recommended by the
Tariff Commission.
Unlike the recommendations of the Tariff Commission, its
determination has a different effect on the DTI Secretary. Only on the
basis of a positive final determination made by the Tariff Commission
under Section 5 can the DTI Secretary impose a general safeguard
measure. Clearly, then the DTI Secretary is bound by
the determinationmade by the Tariff Commission.
Some confusion may arise because the sixth paragraph of Section
13124 uses the variant word "determined" in a different context, as it
contemplates "the appropriate general safeguard measure as
determined by the Secretary within fifteen (15) days from receipt of
the report." Quite plainly, the word "determined" in this context
pertains to the DTI Secretary's power of choice of the appropriate
safeguard measure, as opposed to the Tariff Commission's power to
determine the existence of conditions necessary for the imposition of
any safeguard measure. In relation to Section 5, such choice also
relates to the mandate of the DTI Secretary to establish that the
application of safeguard measures is in the public interest, also
within the fifteen (15) day period. Nothing in Section 13 contradicts
the instruction in Section 5 that the DTI Secretary is allowed to
impose the general safeguard measures only if there is a positive
determination made by the Tariff Commission.
Unfortunately, Rule 13.2 of the Implementing Rules of the SMA is
captioned "Final Determination by the Secretary." The
assailed Decision and Philcemcor latch on this phraseology to imply
that the factual determination rendered by the Tariff Commission
under Section 5 may be amended or reversed by the DTI Secretary.
Of course, implementing rules should conform, not clash, with the
law that they seek to implement, for a regulation which operates to
create a rule out of harmony with the statute is a nullity.125 Yet
imperfect draftsmanship aside, nothing in Rule 13.2 implies that the
DTI Secretary can set aside the determination made by the Tariff
Commission under the aegis of Section 5. This can be seen by
examining the specific provisions of Rule 13.2, thus:
RULE 13.2. Final Determination by the Secretary
RULE 13.2.a. Within fifteen (15) calendar days from
receipt of the Report of the Commission, the
Secretary shall make a decision, taking into
consideration the measures recommended by the
Commission.
RULE 13.2.b. If the determination is affirmative, the
Secretary shall issue, within two (2) calendar days
after making his decision, a written instruction to the
heads of the concerned government agencies to
immediately implement the appropriate general
safeguard measure as determined by him. Provided,
however, that in the case of non-agricultural
products, the Secretary shall first establish that the
imposition of the safeguard measure will be in the
public interest.
RULE 13.2.c. Within two (2) calendar days after
making his decision, the Secretary shall also order
its publication in two (2) newspapers of general
circulation. He shall also furnish a copy of his Order
to the petitioner and other interested parties,
whether affirmative or negative. (Emphasis
supplied.)
Moreover, the DTI Secretary does not have the power to review the
findings of the Tariff Commission for it is not subordinate to the
Department of Trade and Industry ("DTI"). It falls under the
supervision, not of the DTI nor of the Department of Finance (as
mistakenly asserted by Southern Cross),126 but of the National
Economic Development Authority, an independent planning
agency of the government of co-equal rank as the DTI.127 As the
supervision and control of a Department Secretary is limited to the
bureaus, offices, and agencies under him,128 the DTI Secretary
generally cannot exercise review authority over actions of the Tariff
Commission. Neither does the SMA specifically authorize the DTI
Secretary to alter, amend or modify in any way the determination
made by the Tariff Commission. The most that the DTI Secretary
could do to express displeasure over the Tariff Commission's actions
is to ignore its recommendation, but not its determination.
The word "determination" as used in Rule 13.2 of the Implementing
Rules is dissonant with the same word as employed in the SMA,
which in the latter case is undeviatingly in reference to the
determination made by the Tariff Commission. Beyond the resulting
confusion, however, the divergent use in Rule 13.2 is explicable as
the Rule textually pertains to the power of the DTI Secretary to
review the recommendations of the Tariff Commission, not the
latter's determination. Indeed, an examination of the specific
provisions show that there is no real conflict to reconcile. Rule 13.2
respects the logical order imposed by the SMA. The Rule does not
remove the essential requirement under Section 5 that a positive
final determination be made by the Tariff Commission before a
definitive safeguard measure may be imposed by the DTI Secretary.
The assailed Decision characterizes the findings of the Tariff
Commission as merely recommendatory and points to the DTI
Secretary as the authority who renders the final decision.129 At the
same time, Philcemcor asserts that the Tariff Commission's functions
are merely investigatory, and as such do not include the power to
decide or adjudicate. These contentions, viewed in the context of the
fundamental requisite set forth by Section 5, are untenable. They run
counter to the statutory prescription that a positive final determination
made by the Tariff Commission should first be obtained before the
definitive safeguard measures may be laid down.
Was it anomalous for Congress to have provided for a system
whereby the Tariff Commission may preclude the DTI, an office of
higher rank, from imposing a safeguard measure? Of course, this
Court does not inquire into the wisdom of the legislature but only
charts the boundaries of powers and functions set in its enactments.
But then, it is not difficult to see the internal logic of this statutory
framework.
For one, as earlier stated, the DTI cannot exercise review powers
over the Tariff Commission which is not its subordinate office.
Moreover, the mechanism established by Congress establishes a
measure of check and balance involving two different governmental
agencies with disparate specializations. The matter of safeguard
measures is of such national importance that a decision either to
impose or not to impose then could have ruinous effects on
companies doing business in the Philippines. Thus, it is ideal to put
in place a system which affords all due deliberation and calls to fore
various governmental agencies exercising their particular
specializations.
Finally, if this arrangement drawn up by Congress makes it difficult to
obtain a general safeguard measure, it is because such safeguard
measure is the exception, rather than the rule. The Philippines is
obliged to observe its obligations under the GATT, under whose
framework trade liberalization, not protectionism, is laid down. Verily,
the GATT actually prescribes conditions before a member-country
may impose a safeguard measure. The pertinent portion of the
GATT Agreement on Safeguards reads:
2. A Member may only apply a safeguard measure to a
product only if that member has determined, pursuant to the
provisions set out below, that such product is being imported
into its territory in such increased quantities, absolute or
relative to domestic production, and under such conditions
as to cause or threaten to cause serious injury to the
domestic industry that produces like or directly competitive
products.130
3. (a) A Member may apply a safeguard measure only
following an investigation by the competent authorities of
that Member pursuant to procedures previously established
and made public in consonance with Article X of the GATT
1994. This investigation shall include reasonable public
notice to all interested parties and public hearings or other
appropriate means in which importers, exporters and other
interested parties could present evidence and their views,
including the opportunity to respond to the presentations of
other parties and to submit their views, inter alia, as to
whether or not the application of a safeguard measure would
be in the public interest. The competent authorities shall
publish a report setting forth their findings and reasoned
conclusions reached on all pertinent issues of fact and
law.131
The SMA was designed not to contradict the GATT, but to
complement it. The two requisites laid down in Section 5 for a
positive final determination are the same conditions provided under
the GATT Agreement on Safeguards for the application of safeguard
measures by a member country. Moreover, the investigatory
procedure laid down by the SMA conforms to the procedure required
by the GATT Agreement on Safeguards. Congress has chosen the
Tariff Commission as the competent authority to conduct such
investigation. Southern Cross stresses that applying the provision of
the GATT Agreement on Safeguards, the Tariff Commission is
clearly empowered to arrive at binding conclusions.132 We agree:
binding on the DTI Secretary is the Tariff Commission's
determinations on whether a product is imported in increased
quantities, absolute or relative to domestic production and whether
any such increase is a substantial cause of serious injury or threat
thereof to the domestic industry.133
Satisfied as we are with the proper statutory paradigm within which
the SMA should be analyzed, the flaws in the reasoning of the Court
of Appeals and in the arguments of the respondents become
apparent. To better understand the dynamics of the procedure set up
by the law leading to the imposition of definitive safeguard measures,
a brief step-by-step recount thereof is in order.
1. After the initiation of an action involving a general safeguard
measure,134 the DTI Secretary makes a preliminary determination
whether the increased imports of the product under consideration
substantially cause or threaten to substantially cause serious injury
to the domestic industry,135 and whether the imposition of a
provisional measure is warranted under Section 8 of the SMA.136 If
the preliminary determination is negative, it is implied that no further
action will be taken on the application.
2. When his preliminary determination is positive, the Secretary
immediately transmits the records covering the application to the
Tariff Commission for immediate formal investigation.137
3. The Tariff Commission conducts its formal investigation, keyed
towards making a final determination. In the process, it holds public
hearings, providing interested parties the opportunity to present
evidence or otherwise be heard.138 To repeat, Section 5 enumerates
what the Tariff Commission is tasked to determine: (a) whether a
product is being imported into the country in increased quantities,
irrespective of whether the product is absolute or relative to the
domestic production; and (b) whether the importation in increased
quantities is such that it causes serious injury or threat to the
domestic industry.139 The findings of the Tariff Commission as to
these matters constitute the final determination, which may be either
positive or negative.
4. Under Section 13 of the SMA, if the Tariff Commission makes a
positive determination, the Tariff Commission "recommends to the
[DTI] Secretary an appropriate definitive measure." The Tariff
Commission "may also recommend other actions, including the
initiation of international negotiations to address the underlying
cause of the increase of imports of the products, to alleviate the
injury or threat thereof to the domestic industry, and to facilitate
positive adjustment to import competition."140
5. If the Tariff Commission makes a positive final determination, the
DTI Secretary is then to decide, within fifteen (15) days from receipt
of the report, as to what appropriate safeguard measures should he
impose.
6. However, if the Tariff Commission makes a negative final
determination, the DTI Secretary cannot impose any definitive
safeguard measure. Under Section 13, he is instructed instead to
return whatever cash bond was paid by the applicant upon the
initiation of the action for safeguard measure.
The Effect of the Court's Decision
The Court of Appeals erred in remanding the case back to the DTI
Secretary, with the instruction that the DTI Secretary may impose a
general safeguard measure even if there is no positive final
determination from the Tariff Commission. More crucially, the Court
of Appeals could not have acquired jurisdiction over Philcemcor's
petition for certiorari in the first place, as Section 29 of the SMA
properly vests jurisdiction on the CTA. Consequently, the
assailed Decision is an absolute nullity, and we declare it as such.
What is the effect of the nullity of the assailed Decision on the 5 June
2003 Decision of the DTI Secretary imposing the general safeguard
measure? We have recognized that any initial judicial review of a DTI
ruling in connection with the imposition of a safeguard measure
belongs to the CTA. At the same time, the Court also recognizes the
fundamental principle that a null and void judgment cannot produce
any legal effect. There is sufficient cause to establish that the 5 June
2003 Decision of the DTI Secretary resulted from the assailed Court
of Appeals Decision, even if the latter had not yet become final.
Conversely, it can be concluded that it was because of the putative
imprimatur of the Court of Appeals' Decision that the DTI Secretary
issued his ruling imposing the safeguard measure. Since the 5 June
2003 Decision derives its legal effect from the void Decision of the
Court of Appeals, this ruling of the DTI Secretary is consequently
void. The spring cannot rise higher than the source.
The DTI Secretary himself acknowledged that he drew stimulating
force from the appellate court's Decision for in his own 5 June
2003 Decision, he declared:
From the aforementioned ruling, the CA has remanded the
case to the DTI Secretary for a final decision. Thus, there is
no legal impediment for the Secretary to decide on the
application.141
The inescapable conclusion is that the DTI Secretary needed the
assailed Decision of the Court of Appeals to justify his rendering a
second Decision. He explicitly invoked the Court of
Appeals' Decision as basis for rendering his 5 June 2003 ruling, and
implicitly recognized that without such Decision he would not have
the authority to revoke his previous ruling and render a new, obverse
ruling.
It is clear then that the 25 June 2003 Decision of the DTI Secretary is
a product of the void Decision, it being an attempt to carry out such
null judgment. There is therefore no choice but to declare it void as
well, lest we sanction the perverse existence of a fruit from a non-
existent tree. It does not even matter what the disposition of the 25
June 2003 Decision was, its nullity would be warranted even if the
DTI Secretary chose to uphold his earlier ruling denying the
application for safeguard measures.
It is also an unfortunate spectacle to behold the DTI Secretary,
seeking to enforce a judicial decision which is not yet final and
actually pending review on appeal. Had it been a judge who
attempted to enforce a decision that is not yet final and executory, he
or she would have readily been subjected to sanction by this Court.
The DTI Secretary may be beyond the ambit of administrative review
by this Court, but we are capacitated to allocate the boundaries set
by the law of the land and to exact fealty to the legal order, especially
from the instrumentalities and officials of government.
WHEREFORE, the petition is GRANTED. The assailed Decision of
the Court of Appeals is DECLARED NULL AND VOID and SET
ASIDE. The Decision of the DTI Secretary dated 25 June 2003 is
also DECLARED NULL AND VOID and SET ASIDE. No Costs.
SO ORDERED.
G.R. No. 160756 March 9, 2010
CHAMBER OF REAL ESTATE AND BUILDERS' ASSOCIATIONS,
INC., Petitioner,
vs.
THE HON. EXECUTIVE SECRETARY ALBERTO ROMULO, THE
HON. ACTING SECRETARY OF FINANCE JUANITA D.
AMATONG, and THE HON. COMMISSIONER OF INTERNAL
REVENUE GUILLERMO PARAYNO, JR., Respondents.
DECISION
CORONA, J.:
In this original petition for certiorari and mandamus,1 petitioner estate enterprises but not on other business enterprises, more
Chamber of Real Estate and Builders’ Associations, Inc. is particularly those in the manufacturing sector.
questioning the constitutionality of Section 27 (E) of Republic Act
(RA) 84242 and the revenue regulations (RRs) issued by the Bureau The issues to be resolved are as follows:
of Internal Revenue (BIR) to implement said provision and those
involving creditable withholding taxes.3
(1) whether or not this Court should take cognizance of the
present case;
Petitioner is an association of real estate developers and builders in
the Philippines. It impleaded former Executive Secretary Alberto
(2) whether or not the imposition of the MCIT on domestic
Romulo, then acting Secretary of Finance Juanita D. Amatong and
corporations is unconstitutional and
then Commissioner of Internal Revenue Guillermo Parayno, Jr. as
respondents.
(3) whether or not the imposition of CWT on income from
sales of real properties classified as ordinary assets under
Petitioner assails the validity of the imposition of minimum corporate
RRs 2-98, 6-2001 and 7-2003, is unconstitutional.
income tax (MCIT) on corporations and creditable withholding tax
(CWT) on sales of real properties classified as ordinary assets.
Overview of the Assailed Provisions
Section 27(E) of RA 8424 provides for MCIT on domestic
corporations and is implemented by RR 9-98. Petitioner argues that Under the MCIT scheme, a corporation, beginning on its fourth year
the MCIT violates the due process clause because it levies income of operation, is assessed an MCIT of 2% of its gross income when
tax even if there is no realized gain. such MCIT is greater than the normal corporate income tax imposed
under Section 27(A).4 If the regular income tax is higher than the
MCIT, the corporation does not pay the MCIT. Any excess of the
Petitioner also seeks to nullify Sections 2.57.2(J) (as amended by MCIT over the normal tax shall be carried forward and credited
RR 6-2001) and 2.58.2 of RR 2-98, and Section 4(a)(ii) and (c)(ii) of
against the normal income tax for the three immediately succeeding
RR 7-2003, all of which prescribe the rules and procedures for the
taxable years. Section 27(E) of RA 8424 provides:
collection of CWT on the sale of real properties categorized as
ordinary assets. Petitioner contends that these revenue regulations
are contrary to law for two reasons: first, they ignore the different Section 27 (E). [MCIT] on Domestic Corporations. -
treatment by RA 8424 of ordinary assets and capital assets
and second, respondent Secretary of Finance has no authority to (1) Imposition of Tax. – A [MCIT] of two percent (2%) of the
collect CWT, much less, to base the CWT on the gross selling price gross income as of the end of the taxable year, as defined
or fair market value of the real properties classified as ordinary herein, is hereby imposed on a corporation taxable under
assets. this Title, beginning on the fourth taxable year immediately
following the year in which such corporation commenced its
Petitioner also asserts that the enumerated provisions of the subject business operations, when the minimum income tax is
revenue regulations violate the due process clause because, like the greater than the tax computed under Subsection (A) of this
MCIT, the government collects income tax even when the net Section for the taxable year.
income has not yet been determined. They contravene the equal
protection clause as well because the CWT is being levied upon real
 (2) Carry Forward of Excess Minimum Tax. – Any excess of
the [MCIT] over the normal income tax as computed under
Subsection (A) of this Section shall be carried forward and
credited against the normal income tax for the three (3)
immediately succeeding taxable years.
(3) Relief from the [MCIT] under certain conditions. – The
Secretary of Finance is hereby authorized to suspend the
imposition of the [MCIT] on any corporation which suffers
losses on account of prolonged labor dispute, or because
of force majeure, or because of legitimate business
reverses.
The Secretary of Finance is hereby authorized to
promulgate, upon recommendation of the Commissioner, the
necessary rules and regulations that shall define the terms
and conditions under which he may suspend the imposition
of the [MCIT] in a meritorious case.
(4) Gross Income Defined. – For purposes of applying the
[MCIT] provided under Subsection (E) hereof, the term
‘gross income’ shall mean gross sales less sales returns,
discounts and allowances and cost of goods sold. "Cost of
goods sold" shall include all business expenses directly
incurred to produce the merchandise to bring them to their
present location and use.
For trading or merchandising concern, "cost of goods sold" shall
include the invoice cost of the goods sold, plus import duties, freight
in transporting the goods to the place where the goods are actually
sold including insurance while the goods are in transit.
For a manufacturing concern, "cost of goods manufactured and sold"
shall include all costs of production of finished goods, such as raw
materials used, direct labor and manufacturing overhead, freight
cost, insurance premiums and other costs incurred to bring the raw
materials to the factory or warehouse.
In the case of taxpayers engaged in the sale of service, "gross
income" means gross receipts less sales returns, allowances,
discounts and cost of services. "Cost of services" shall mean all
direct costs and expenses necessarily incurred to provide the
services required by the customers and clients including (A) salaries
and employee benefits of personnel, consultants and specialists
directly rendering the service and (B) cost of facilities directly utilized
in providing the service such as depreciation or rental of equipment
used and cost of supplies: Provided, however, that in the case of
banks, "cost of services" shall include interest expense.
On August 25, 1998, respondent Secretary of Finance (Secretary),
on the recommendation of the Commissioner of Internal Revenue
(CIR), promulgated RR 9-98 implementing Section 27(E).5 The
pertinent portions thereof read:
Sec. 2.27(E) [MCIT] on Domestic Corporations. –
(1) Imposition of the Tax. – A [MCIT] of two percent (2%) of the gross
income as of the end of the taxable year (whether calendar or fiscal
year, depending on the accounting period employed) is hereby
imposed upon any domestic corporation beginning the fourth (4th)
taxable year immediately following the taxable year in which such
corporation commenced its business operations. The MCIT shall be
imposed whenever such corporation has zero or negative taxable
income or whenever the amount of minimum corporate income tax is
greater than the normal income tax due from such corporation.
For purposes of these Regulations, the term, "normal income tax"
means the income tax rates prescribed under Sec. 27(A) and Sec.
28(A)(1) of the Code xxx at 32% effective January 1, 2000 and
thereafter.
xxx xxx xxx
(2) Carry forward of excess [MCIT]. – Any excess of the [MCIT] over
the normal income tax as computed under Sec. 27(A) of the Code
shall be carried forward on an annual basis and credited against the
normal income tax for the three (3) immediately succeeding taxable
years. With selling price of more than two 5.0%
million pesos (₱2,000,000.00)
xxx xxx xxx
xxx xxx xxx
Meanwhile, on April 17, 1998, respondent Secretary, upon
recommendation of respondent CIR, promulgated RR 2-98 Gross selling price shall mean the consideration stated in the sales
implementing certain provisions of RA 8424 involving the withholding document or the fair market value determined in accordance with
of taxes.6 Under Section 2.57.2(J) of RR No. 2-98, income payments Section 6 (E) of the Code, as amended, whichever is higher. In an
from the sale, exchange or transfer of real property, other than exchange, the fair market value of the property received in
capital assets, by persons residing in the Philippines and habitually exchange, as determined in the Income Tax Regulations shall be
engaged in the real estate business were subjected to CWT: used.

Sec. 2.57.2. Income payment subject to [CWT] and rates prescribed Where the consideration or part thereof is payable on installment, no
thereon: withholding tax is required to be made on the periodic installment
payments where the buyer is an individual not engaged in trade or
xxx xxx xxx business. In such a case, the applicable rate of tax based on the
entire consideration shall be withheld on the last installment or
(J) Gross selling price or total amount of consideration or its installments to be paid to the seller.
equivalent paid to the seller/owner for the sale, exchange or transfer
of. – Real property, other than capital assets, sold by an individual, However, if the buyer is engaged in trade or business, whether a
corporation, estate, trust, trust fund or pension fund and the corporation or otherwise, the tax shall be deducted and withheld by
seller/transferor is habitually engaged in the real estate business in the buyer on every installment.
accordance with the following schedule –
This provision was amended by RR 6-2001 on July 31, 2001:
Those which are exempt from a Exempt
withholding tax at source as Sec. 2.57.2. Income payment subject to [CWT] and rates prescribed
prescribed in Sec. 2.57.5 of these thereon:
regulations.
xxx xxx xxx
With a selling price of five hundred 1.5%
thousand pesos (₱500,000.00) or less. (J) Gross selling price or total amount of consideration or its
equivalent paid to the seller/owner for the sale, exchange or transfer
of real property classified as ordinary asset. - A [CWT] based on the
With a selling price of more than five 3.0%
gross selling price/total amount of consideration or the fair market
hundred thousand pesos
value determined in accordance with Section 6(E) of the Code,
(₱500,000.00) but not more than two
whichever is higher, paid to the seller/owner for the sale, transfer or
million pesos (₱2,000,000.00).
exchange of real property, other than capital asset, shall be imposed
upon the withholding agent,/buyer, in accordance with the following
schedule:
Where the seller/transferor is exempt from [CWT] in
accordance with Sec. 2.57.5 of these regulations.
Upon the following values of real property, where the
seller/transferor is habitually engaged in the real estate
business.
With a selling price of Five Hundred Thousand Pesos
(₱500,000.00) or less.
With a selling price of more than Five Hundred Thousand
Pesos (₱500,000.00) but not more than Two Million Pesos
(₱2,000,000.00).
With a selling price of more than two Million Pesos
(₱2,000,000.00).
xxx xxx xxx
Gross selling price shall remain the consideration stated in the sales
document or the fair market value determined in accordance with
Section 6 (E) of the Code, as amended, whichever is higher. In an
exchange, the fair market value of the property received in
exchange shall be considered as the consideration.
xxx xxx xxx
However, if the buyer is engaged in trade or business, whether a
corporation or otherwise, these rules shall apply:
(i) If the sale is a sale of property on the installment plan (that is,
payments in the year of sale do not exceed 25% of the selling price),
the tax shall be deducted and withheld by the buyer on every
installment.
(ii) If, on the other hand, the sale is on a "cash basis" or is a
"deferred-payment sale not on the installment plan" (that is,
payments in the year of sale exceed 25% of the selling price), the
buyer shall withhold the tax based on the gross selling price or fair
market value of the property, whichever is higher, on the first
installment.
InExempt
any case, no Certificate Authorizing Registration (CAR) shall be
issued to the buyer unless the [CWT] due on the sale, transfer or
exchange of real property other than capital asset has been fully
paid. (Underlined amendments in the original)
Section
1.5% 2.58.2 of RR 2-98 implementing Section 58(E) of RA 8424
provides that any sale, barter or exchange subject to the CWT will
not3.0%
be recorded by the Registry of Deeds until the CIR has certified
that such transfers and conveyances have been reported and the
taxes thereof have been duly paid:7
5.0%
Sec. 2.58.2. Registration with the Register of Deeds. – Deeds of
conveyances of land or land and building/improvement thereon
arising from sales, barters, or exchanges subject to the creditable
expanded withholding tax shall not be recorded by the Register of
Deeds unless the [CIR] or his duly authorized representative has
certified that such transfers and conveyances have been reported
and the expanded withholding tax, inclusive of the documentary
stamp tax, due thereon have been fully paid xxxx.
On February 11, 2003, RR No. 7-20038 was promulgated, providing
for the guidelines in determining whether a particular real property is
a capital or an ordinary asset for purposes of imposing the MCIT,
among others. The pertinent portions thereof state:
Section 4. Applicable taxes on sale, exchange or other disposition of
real property. - Gains/Income derived from sale, exchange, or other
disposition of real properties shall, unless otherwise exempt, be
subject to applicable taxes imposed under the Code, depending on
whether the subject properties are classified as capital assets or
ordinary assets;
a. In the case of individual citizen (including estates and trusts),
resident aliens, and non-resident aliens engaged in trade or business
in the Philippines;
 xxx xxx xxx
(ii) The sale of real property located in the Philippines, classified as
ordinary assets, shall be subject to the [CWT] (expanded) under Sec.
2.57..2(J) of [RR 2-98], as amended, based on the gross selling price
or current fair market value as determined in accordance with
Section 6(E) of the Code, whichever is higher, and consequently, to
the ordinary income tax imposed under Sec. 24(A)(1)(c) or 25(A)(1)
of the Code, as the case may be, based on net taxable income.
xxx xxx xxx
c. In the case of domestic corporations. –
xxx xxx xxx
(ii) The sale of land and/or building classified as ordinary asset and
other real property (other than land and/or building treated as capital
asset), regardless of the classification thereof, all of which are
located in the Philippines, shall be subject to the [CWT] (expanded)
under Sec. 2.57.2(J) of [RR 2-98], as amended, and consequently, to
the ordinary income tax under Sec. 27(A) of the Code. In lieu of the
ordinary income tax, however, domestic corporations may become
subject to the [MCIT] under Sec. 27(E) of the Code, whichever is
applicable.
xxx xxx xxx
We shall now tackle the issues raised.
Existence of a Justiciable Controversy
Courts will not assume jurisdiction over a constitutional question
unless the following requisites are satisfied: (1) there must be an
actual case calling for the exercise of judicial review; (2) the question
before the court must be ripe for adjudication; (3) the person
challenging the validity of the act must have standing to do so; (4)
the question of constitutionality must have been raised at the earliest
opportunity and (5) the issue of constitutionality must be the very lis
mota of the case.9
Respondents aver that the first three requisites are absent in this
case. According to them, there is no actual case calling for the
exercise of judicial power and it is not yet ripe for adjudication
because
[petitioner] did not allege that CREBA, as a corporate entity, or any
of its members, has been assessed by the BIR for the payment of
[MCIT] or [CWT] on sales of real property. Neither did petitioner
allege that its members have shut down their businesses as a result
of the payment of the MCIT or CWT. Petitioner has raised concerns
in mere abstract and hypothetical form without any actual, specific
and concrete instances cited that the assailed law and revenue
regulations have actually and adversely affected it. Lacking empirical
data on which to base any conclusion, any discussion on the
constitutionality of the MCIT or CWT on sales of real property is
essentially an academic exercise.
Perceived or alleged hardship to taxpayers alone is not an adequate
justification for adjudicating abstract issues. Otherwise, adjudication
would be no different from the giving of advisory opinion that does
not really settle legal issues.10
An actual case or controversy involves a conflict of legal rights or an
assertion of opposite legal claims which is susceptible of judicial
resolution as distinguished from a hypothetical or abstract difference
or dispute.11 On the other hand, a question is considered ripe for
adjudication when the act being challenged has a direct adverse
effect on the individual challenging it.12
Contrary to respondents’ assertion, we do not have to wait until
petitioner’s members have shut down their operations as a result of
the MCIT or CWT. The assailed provisions are already being
implemented. As we stated in Didipio Earth-Savers’ Multi-Purpose
Association, Incorporated (DESAMA) v. Gozun:13
By the mere enactment of the questioned law or the approval of the
challenged act, the dispute is said to have ripened into a judicial
controversy even without any other overt act. Indeed, even a singular
violation of the Constitution and/or the law is enough to awaken
judicial duty.14
If the assailed provisions are indeed unconstitutional, there is no
better time than the present to settle such question once and for all.
Respondents next argue that petitioner has no legal standing to sue:
Petitioner is an association of some of the real estate developers and
builders in the Philippines. Petitioners did not allege that [it] itself is in
the real estate business. It did not allege any material interest or any
wrong that it may suffer from the enforcement of [the assailed
provisions].15
Legal standing or locus standi is a party’s personal and substantial
interest in a case such that it has sustained or will sustain direct
injury as a result of the governmental act being challenged.16 In Holy
Spirit Homeowners Association, Inc. v. Defensor,17 we held that the
association had legal standing because its members stood to be
injured by the enforcement of the assailed provisions:
Petitioner association has the legal standing to institute the instant
petition xxx. There is no dispute that the individual members of
petitioner association are residents of the NGC. As such they are
covered and stand to be either benefited or injured by the
enforcement of the IRR, particularly as regards the selection process
of beneficiaries and lot allocation to qualified beneficiaries. Thus,
petitioner association may assail those provisions in the IRR which it
believes to be unfavorable to the rights of its members. xxx Certainly,
petitioner and its members have sustained direct injury arising from
the enforcement of the IRR in that they have been disqualified and
eliminated from the selection process.18
In any event, this Court has the discretion to take cognizance of a
suit which does not satisfy the requirements of an actual case,
ripeness or legal standing when paramount public interest is
involved.19 The questioned MCIT and CWT affect not only petitioners
but practically all domestic corporate taxpayers in our country. The
transcendental importance of the issues raised and their
overreaching significance to society make it proper for us to take
cognizance of this petition.20
Concept and Rationale of the MCIT
The MCIT on domestic corporations is a new concept introduced by
RA 8424 to the Philippine taxation system. It came about as a result
of the perceived inadequacy of the self-assessment system in
capturing the true income of corporations.21 It was devised as a
relatively simple and effective revenue-raising instrument compared
to the normal income tax which is more difficult to control and
enforce. It is a means to ensure that everyone will make some
minimum contribution to the support of the public sector. The
congressional deliberations on this are illuminating:
Senator Enrile. Mr. President, we are not unmindful of the practice of
certain corporations of reporting constantly a loss in their operations
to avoid the payment of taxes, and thus avoid sharing in the cost of
government. In this regard, the Tax Reform Act introduces for the
first time a new concept called the [MCIT] so as to minimize tax
evasion, tax avoidance, tax manipulation in the country and for
administrative convenience. … This will go a long way in ensuring
that corporations will pay their just share in supporting our public life
and our economic advancement.22
Domestic corporations owe their corporate existence and their
privilege to do business to the government. They also benefit from
the efforts of the government to improve the financial market and to
ensure a favorable business climate. It is therefore fair for the
government to require them to make a reasonable contribution to the
public expenses.
Congress intended to put a stop to the practice of corporations
which, while having large turn-overs, report minimal or negative net
income resulting in minimal or zero income taxes year in and year
out, through under-declaration of income or over-deduction of
expenses otherwise called tax shelters.23
Mr. Javier (E.) … [This] is what the Finance Dept. is trying to remedy,
that is why they have proposed the [MCIT]. Because from
experience too, you have corporations which have been losing year
in and year out and paid no tax. So, if the corporation has been
losing for the past five years to ten years, then that corporation has
no business to be in business. It is dead. Why continue if you are
losing year in and year out? So, we have this provision to avoid this
type of tax shelters, Your Honor.24
The primary purpose of any legitimate business is to earn a profit.
Continued and repeated losses after operations of a corporation or
consistent reports of minimal net income render its financial
statements and its tax payments suspect. For sure, certain tax
avoidance schemes resorted to by corporations are allowed in our
jurisdiction. The MCIT serves to put a cap on such tax shelters. As a
tax on gross income, it prevents tax evasion and minimizes tax
avoidance schemes achieved through sophisticated and artful
manipulations of deductions and other stratagems. Since the tax
base was broader, the tax rate was lowered.
To further emphasize the corrective nature of the MCIT, the following
safeguards were incorporated into the law:
First, recognizing the birth pangs of businesses and the reality of the
need to recoup initial major capital expenditures, the imposition of
the MCIT commences only on the fourth taxable year immediately
following the year in which the corporation commenced its
operations.25 This grace period allows a new business to stabilize
first and make its ventures viable before it is subjected to the MCIT.26
Second, the law allows the carrying forward of any excess of the
MCIT paid over the normal income tax which shall be credited
against the normal income tax for the three immediately succeeding
years.27
Third, since certain businesses may be incurring genuine repeated
losses, the law authorizes the Secretary of Finance to suspend the
imposition of MCIT if a corporation suffers losses due to prolonged
labor dispute, force majeure and legitimate business reverses.28
Even before the legislature introduced the MCIT to the Philippine
taxation system, several other countries already had their own
system of minimum corporate income taxation. Our lawmakers noted
that most developing countries, particularly Latin American and
Asian countries, have the same form of safeguards as we do. As
pointed out during the committee hearings:
[Mr. Medalla:] Note that most developing countries where you have
of course quite a bit of room for underdeclaration of gross receipts
have this same form of safeguards.
In the case of Thailand, half a percent (0.5%), there’s a minimum of
income tax of half a percent (0.5%) of gross assessable income. In
Korea a 25% of taxable income before deductions and exemptions.
Of course the different countries have different basis for that
minimum income tax.
The other thing you’ll notice is the preponderance of Latin American
countries that employed this method. Okay, those are additional
Latin American countries.29
At present, the United States of America, Mexico, Argentina, Tunisia,
Panama and Hungary have their own versions of the MCIT.30
MCIT Is Not Violative of Due Process
Petitioner claims that the MCIT under Section 27(E) of RA 8424 is
unconstitutional because it is highly oppressive, arbitrary and
confiscatory which amounts to deprivation of property without due
process of law. It explains that gross income as defined under said
provision only considers the cost of goods sold and other direct
expenses; other major expenditures, such as administrative and
interest expenses which are equally necessary to produce gross
income, were not taken into account.31 Thus, pegging the tax base of
the MCIT to a corporation’s gross income is tantamount to a
confiscation of capital because gross income, unlike net income, is
not "realized gain."32
We disagree.
Taxes are the lifeblood of the government. Without taxes, the
government can neither exist nor endure. 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 the common good.33
Taxation is an inherent attribute of sovereignty.34 It is a power that is
purely legislative.35 Essentially, this means that in the legislature
primarily lies the discretion to determine the nature (kind), object
(purpose), extent (rate), coverage (subjects) and situs (place) of
taxation.36 It has the authority to prescribe a certain tax at a specific
rate for a particular public purpose on persons or things within its
jurisdiction. In other words, the legislature wields the power to define
what tax shall be imposed, why it should be imposed, how much tax
shall be imposed, against whom (or what) it shall be imposed and
where it shall be imposed.
As a general rule, the power to tax is plenary and unlimited in its
range, acknowledging in its very nature no limits, so that the principal
check against its abuse is to be found only in the responsibility of the
legislature (which imposes the tax) to its constituency who are to pay
it.37 Nevertheless, it is circumscribed by constitutional limitations. At
the same time, like any other statute, tax legislation carries a
presumption of constitutionality.
The constitutional safeguard of due process is embodied in the fiat
"[no] person shall be deprived of life, liberty or property without due
process of law." In Sison, Jr. v. Ancheta, et al.,38 we held that the due
process clause may properly be invoked to invalidate, in appropriate
cases, a revenue measure39 when it amounts to a confiscation of
property.40 But in the same case, we also explained that we will not
strike down a revenue measure as unconstitutional (for being
violative of the due process clause) on the mere allegation of
arbitrariness by the taxpayer.41 There must be a factual foundation to
such an unconstitutional taint.42 This merely adheres to the
authoritative doctrine that, where the due process clause is invoked,
considering that it is not a fixed rule but rather a broad standard,
there is a need for proof of such persuasive character. 43
Petitioner is correct in saying that income is distinct from
capital.44 Income means all the wealth which flows into the taxpayer
other than a mere return on capital. Capital is a fund or property
existing at one distinct point in time while income denotes a flow of
wealth during a definite period of time.45 Income is gain derived and
severed from capital.46 For income to be taxable, the following
requisites must exist:
(1) there must be gain;
(2) the gain must be realized or received and
(3) the gain must not be excluded by law or treaty from
taxation.47
Certainly, an income tax is arbitrary and confiscatory if it taxes
capital because capital is not income. In other words, it is income,
not capital, which is subject to income tax. However, the MCIT is not
a tax on capital.
The MCIT is imposed on gross income which is arrived at by
deducting the capital spent by a corporation in the sale of its
goods, i.e., the cost of goods48 and other direct expenses from gross
sales. Clearly, the capital is not being taxed.
Furthermore, the MCIT is not an additional tax imposition. It is
imposed in lieu of the normal net income tax, and only if the normal
income tax is suspiciously low. The MCIT merely approximates the
amount of net income tax due from a corporation, pegging the rate at
a very much reduced 2% and uses as the base the corporation’s
gross income.
Besides, there is no legal objection to a broader tax base or taxable
income by eliminating all deductible items and at the same time
reducing the applicable tax rate.49
Statutes taxing the gross "receipts," "earnings," or "income" of
particular corporations are found in many jurisdictions. Tax
thereon is generally held to be within the power of a state to impose;
or constitutional, unless it interferes with interstate commerce or
violates the requirement as to uniformity of taxation.50
The United States has a similar alternative minimum tax (AMT)
system which is generally characterized by a lower tax rate but a
broader tax base.51 Since our income tax laws are of American
origin, interpretations by American courts of our parallel tax laws
have persuasive effect on the interpretation of these laws.52 Although
our MCIT is not exactly the same as the AMT, the policy behind them
and the procedure of their implementation are comparable. On the
question of the AMT’s constitutionality, the United States Court of
Appeals for the Ninth Circuit stated in Okin v. Commissioner:53
In enacting the minimum tax, Congress attempted to remedy general
taxpayer distrust of the system growing from large numbers of
taxpayers with large incomes who were yet paying no taxes.
xxx xxx xxx
We thus join a number of other courts in upholding the
constitutionality of the [AMT]. xxx [It] is a rational means of obtaining
a broad-based tax, and therefore is constitutional.54
The U.S. Court declared that the congressional intent to ensure that
corporate taxpayers would contribute a minimum amount of taxes
was a legitimate governmental end to which the AMT bore a
reasonable relation.55
American courts have also emphasized that Congress has the power
to condition, limit or deny deductions from gross income in order to
arrive at the net that it chooses to tax.56 This is because deductions
are a matter of legislative grace.57
Absent any other valid objection, the assignment of gross income,
instead of net income, as the tax base of the MCIT, taken with the
reduction of the tax rate from 32% to 2%, is not constitutionally
objectionable.
Moreover, petitioner does not cite any actual, specific and concrete
negative experiences of its members nor does it present empirical
data to show that the implementation of the MCIT resulted in the
confiscation of their property.
In sum, petitioner failed to support, by any factual or legal basis, its
allegation that the MCIT is arbitrary and confiscatory. The Court
cannot strike down a law as unconstitutional simply because of its
yokes.58 Taxation is necessarily burdensome because, by its nature,
it adversely affects property rights.59 The party alleging the law’s
unconstitutionality has the burden to demonstrate the supposed
violations in understandable terms.60
RR 9-98 Merely Clarifies Section 27(E) of RA 8424
Petitioner alleges that RR 9-98 is a deprivation of property without
due process of law because the MCIT is being imposed and
collected even when there is actually a loss, or a zero or negative
taxable income:
Sec. 2.27(E) [MCIT] on Domestic Corporations. —
(1) Imposition of the Tax. — xxx The MCIT shall be imposed
whenever such corporation has zero or negative taxable income or
whenever the amount of [MCIT] is greater than the normal income
tax due from such corporation. (Emphasis supplied)
RR 9-98, in declaring that MCIT should be imposed whenever such
corporation has zero or negative taxable income, merely defines the
coverage of Section 27(E). This means that even if a corporation
incurs a net loss in its business operations or reports zero income
after deducting its expenses, it is still subject to an MCIT of 2% of its
gross income. This is consistent with the law which imposes the
MCIT on gross income notwithstanding the amount of the net
income. But the law also states that the MCIT is to be paid only if it is
greater than the normal net income. Obviously, it may well be the
case that the MCIT would be less than the net income of the
corporation which posts a zero or negative taxable income.
We now proceed to the issues involving the CWT.
The withholding tax system is a procedure through which taxes
(including income taxes) are collected.61 Under Section 57 of RA
8424, the types of income subject to withholding tax are divided into
three categories: (a) withholding of final tax on certain incomes; (b)
withholding of creditable tax at source and (c) tax-free covenant
bonds. Petitioner is concerned with the second category (CWT) and
maintains that the revenue regulations on the collection of CWT on
sale of real estate categorized as ordinary assets are
unconstitutional.
Petitioner, after enumerating the distinctions between capital and
ordinary assets under RA 8424, contends that Sections 2.57.2(J)
and 2.58.2 of RR 2-98 and Sections 4(a)(ii) and (c)(ii) of RR 7-2003
were promulgated "with grave abuse of discretion amounting to lack
of jurisdiction" and "patently in contravention of law"62 because they
ignore such distinctions. Petitioner’s conclusion is based on the
following premises: (a) the revenue regulations use gross selling
price (GSP) or fair market value (FMV) of the real estate as basis for
determining the income tax for the sale of real estate classified as
ordinary assets and (b) they mandate the collection of income tax on
a per transaction basis, i.e., upon consummation of the sale via the
CWT, contrary to RA 8424 which calls for the payment of the net
income at the end of the taxable period.63
Petitioner theorizes that since RA 8424 treats capital assets and
ordinary assets differently, respondents cannot disregard the
distinctions set by the legislators as regards the tax base, modes of
collection and payment of taxes on income from the sale of capital
and ordinary assets.
Petitioner’s arguments have no merit.
Authority of the Secretary of Finance to Order the Collection of
CWT on Sales of Real Property Considered as Ordinary Assets
The Secretary of Finance is granted, under Section 244 of RA 8424,
the authority to promulgate the necessary rules and regulations for
the effective enforcement of the provisions of the law. Such authority
is subject to the limitation that the rules and regulations must not
override, but must remain consistent and in harmony with, the law
they seek to apply and implement.64 It is well-settled that an
administrative agency cannot amend an act of Congress.65
We have long recognized that the method of withholding tax at
source is a procedure of collecting income tax which is sanctioned by
our tax laws.66 The withholding tax system was devised for three
primary reasons: first, to provide the taxpayer a convenient manner
to meet his probable income tax liability; second, to ensure the
collection of income tax which can otherwise be lost or substantially
reduced through failure to file the corresponding returns and third, to
improve the government’s cash flow.67 This results in administrative
savings, prompt and efficient collection of taxes, prevention of
delinquencies and reduction of governmental effort to collect taxes
through more complicated means and remedies.68
Respondent Secretary has the authority to require the withholding of
a tax on items of income payable to any person, national or juridical,
residing in the Philippines. Such authority is derived from Section
57(B) of RA 8424 which provides:
SEC. 57. Withholding of Tax at Source. –
xxx xxx xxx
(B) Withholding of Creditable Tax at Source. The [Secretary] may,
upon the recommendation of the [CIR], require the withholding of a
tax on the items of income payable to natural or juridical persons,
residing in the Philippines, by payor-corporation/persons as provided
for by law, at the rate of not less than one percent (1%) but not more
than thirty-two percent (32%) thereof, which shall be credited against
the income tax liability of the taxpayer for the taxable year.
The questioned provisions of RR 2-98, as amended, are well within
the authority given by Section 57(B) to the Secretary, i.e., the
graduated rate of 1.5%-5% is between the 1%-32% range; the
withholding tax is imposed on the income payable and the tax is
creditable against the income tax liability of the taxpayer for the
taxable year.
Effect of RRs on the Tax Base for the Income Tax of Individuals
or Corporations Engaged in the Real Estate Business
Petitioner maintains that RR 2-98, as amended, arbitrarily shifted the
tax base of a real estate business’ income tax from net income to
GSP or FMV of the property sold.
Petitioner is wrong.
The taxes withheld are in the nature of advance tax payments by a
taxpayer in order to extinguish its possible tax obligation. 69 They are
installments on the annual tax which may be due at the end of the
taxable year.70
Under RR 2-98, the tax base of the income tax from the sale of real
property classified as ordinary assets remains to be the entity’s net
income imposed under Section 24 (resident individuals) or Section
27 (domestic corporations) in relation to Section 31 of RA
8424, i.e. gross income less allowable deductions. The CWT is to be
deducted from the net income tax payable by the taxpayer at the end
of the taxable year.71 Precisely, Section 4(a)(ii) and (c)(ii) of RR 7-
2003 reiterate that the tax base for the sale of real property classified
as ordinary assets remains to be the net taxable income:
Section 4. – Applicable taxes on sale, exchange or other disposition
of real property. - Gains/Income derived from sale, exchange, or
other disposition of real properties shall unless otherwise exempt, be
subject to applicable taxes imposed under the Code, depending on
whether the subject properties are classified as capital assets or
ordinary assets;
xxx xxx xxx
a. In the case of individual citizens (including estates and trusts),
resident aliens, and non-resident aliens engaged in trade or business
in the Philippines;
xxx xxx xxx
(ii) The sale of real property located in the Philippines, classified as
ordinary assets, shall be subject to the [CWT] (expanded) under
Sec. 2.57.2(j) of [RR 2-98], as amended, based on the [GSP] or
current [FMV] as determined in accordance with Section 6(E) of the
Code, whichever is higher, and consequently, to the ordinary
income tax imposed under Sec. 24(A)(1)(c) or 25(A)(1) of the
Code, as the case may be, based on net taxable income.
xxx xxx xxx
c. In the case of domestic corporations.
The sale of land and/or building classified as ordinary asset and
other real property (other than land and/or building treated as capital
asset), regardless of the classification thereof, all of which are
located in the Philippines, shall be subject to the [CWT] (expanded)
under Sec. 2.57.2(J) of [RR 2-98], as amended, and consequently,
to theordinary income tax under Sec. 27(A) of the Code. In lieu of
the ordinary income tax, however, domestic corporations may
become subject to the [MCIT] under Sec. 27(E) of the same Code,
whichever is applicable. (Emphasis supplied)
Accordingly, at the end of the year, the taxpayer/seller shall file its
income tax return and credit the taxes withheld (by the withholding
agent/buyer) against its tax due. If the tax due is greater than the tax
withheld, then the taxpayer shall pay the difference. If, on the other
hand, the tax due is less than the tax withheld, the taxpayer will be
entitled to a refund or tax credit. Undoubtedly, the taxpayer is taxed
on its net income.
The use of the GSP/FMV as basis to determine the withholding taxes
is evidently for purposes of practicality and convenience. Obviously,
the withholding agent/buyer who is obligated to withhold the tax does
not know, nor is he privy to, how much the taxpayer/seller will have
as its net income at the end of the taxable year. Instead, said for a refund if the tax withheld is mo
withholding agent’s knowledge and privity are limited only to the the tax due.
particular transaction in which he is a party. In such a case, his basis
can only be the GSP or FMV as these are the only factors
reasonably known or knowable by him in connection with the
performance of his duties as a withholding agent. c) The payee is not required to file an c) The income recipient is still requ
income tax return for the particular file an income tax return, as prescr
No Blurring of Distinctions Between Ordinary Assets and income.73 Sec. 51 and Sec. 52 of the NIRC, a
Capital Assets amended.74

RR 2-98 imposes a graduated CWT on income based on the GSP or

FMV of the real property categorized as ordinary assets. On the
other hand, Section 27(D)(5) of RA 8424 imposes a final tax and flat
rate of 6% on the gain presumed to be realized from the sale of a
capital asset based on its GSP or FMV. This final tax is also withheld
at source.72
The differences between the two forms of withholding tax, i.e.,
creditable and final, show that ordinary assets are not treated in the
same manner as capital assets. Final withholding tax (FWT) and
CWT are distinguished as follows:
As previously stated, FWT is imposed on the sale of capital assets.
On the other hand, CWT is imposed on the sale of ordinary assets.
The inherent and substantial differences between FWT and CWT
disprove petitioner’s contention that ordinary assets are being
lumped together with, and treated similarly as, capital assets in
contravention of the pertinent provisions of RA 8424.
Petitioner insists that the levy, collection and payment of CWT at the
time of transaction are contrary to the provisions of RA 8424 on the
manner and time of filing of the return, payment and assessment of
income tax involving ordinary assets.75

FWT
a) The amount of income tax withheld by
the withholding agent is constituted as a full
and final payment of the income tax due
from the payee on the said income.
CWT The fact that the tax is withheld at source does not automatically
mean that it is treated exactly the same way as capital gains. As
aforementioned, the mechanics of the FWT are distinct from those of
the CWT. The withholding agent/buyer’s act of collecting the tax at
a) Taxes withheld on certain
theincome
time of the transaction by withholding the tax due from the
payments are intended to equal
income or payable
at least is the essence of the withholding tax method of tax
approximate the tax due ofcollection.
the payee on
said income.
No Rule that Only Passive

b)The liability for payment of the tax rests Incomes

b) Payee of income is required Canthe
to report Be Subject to CWT
primarily on the payor as a withholding income and/or pay the difference between
agent. the tax withheld and the taxPetitioner
due on thesubmits that only passive income can be subjected to
income. The payee also has the right to
withholding askwhether final or creditable. According to petitioner,
tax,
the whole of Section 57 governs the withholding of income tax on
passive income. The enumeration in Section 57(A) refers to passive
income being subjected to FWT. It follows that Section 57(B) on
CWT should also be limited to passive income:
SEC. 57. Withholding of Tax at Source. —
(A) Withholding of Final Tax on Certain Incomes. — Subject
to rules and regulations, the [Secretary] may promulgate,
upon the recommendation of the [CIR], requiring the filing of
income tax return by certain income payees, the tax
imposed or prescribed by Sections 24(B)(1), 24(B)(2),
24(C), 24(D)(1); 25(A)(2), 25(A)(3), 25(B), 25(C), 25(D),
25(E); 27(D)(1), 27(D)(2), 27(D)(3), 27(D)(5); 28(A)(4),
28(A)(5), 28(A)(7)(a), 28(A)(7)(b), 28(A)(7)(c), 28(B)(1),
28(B)(2), 28(B)(3), 28(B)(4), 28(B)(5)(a), 28(B)(5)(b),
28(B)(5)(c); 33; and 282 of this Code on specified items
of income shall be withheld by payor-corporation and/or
person and paid in the same manner and subject to the
same conditions as provided in Section 58 of this Code.
(B) Withholding of Creditable Tax at Source. — The
[Secretary] may, upon the recommendation of the [CIR],
require the withholding of a tax on the items of income
payable to natural or juridical persons, residing in the
Philippines, by payor-corporation/persons as provided for
by law, at the rate of not less than one percent (1%) but not
more than thirty-two percent (32%) thereof, which shall be
credited against the income tax liability of the taxpayer for
the taxable year. (Emphasis supplied)
This line of reasoning is non sequitur.
Section 57(A) expressly states that final tax can be imposed on
certain kinds of income and enumerates these as passive income.
The BIR defines passive income by stating what it is not:
…if the income is generated in the active pursuit and performance of
the corporation’s primary purposes, the same is not passive
income…76
It is income generated by the taxpayer’s assets. These assets can
be in the form of real properties that return rental income, shares of
stock in a corporation that earn dividends or interest income received
from savings.
On the other hand, Section 57(B) provides that the Secretary can
require a CWT on "income payable to natural or juridical persons,
residing in the Philippines." There is no requirement that this income
be passive income. If that were the intent of Congress, it could have
easily said so.
Indeed, Section 57(A) and (B) are distinct. Section 57(A) refers to
FWT while Section 57(B) pertains to CWT. The former covers the
kinds of passive income enumerated therein and the latter
encompasses any income other than those listed in 57(A). Since the
law itself makes distinctions, it is wrong to regard 57(A) and 57(B) in
the same way.
To repeat, the assailed provisions of RR 2-98, as amended, do not
modify or deviate from the text of Section 57(B). RR 2-98 merely
implements the law by specifying what income is subject to CWT. It
has been held that, where a statute does not require any particular
procedure to be followed by an administrative agency, the agency
may adopt any reasonable method to carry out its
functions.77 Similarly, considering that the law uses the general term
"income," the Secretary and CIR may specify the kinds of income the
rules will apply to based on what is feasible. In addition,
administrative rules and regulations ordinarily deserve to be given
weight and respect by the courts78 in view of the rule-making
authority given to those who formulate them and their specific
expertise in their respective fields.
No Deprivation of Property Without Due Process
Petitioner avers that the imposition of CWT on GSP/FMV of real
estate classified as ordinary assets deprives its members of their
property without due process of law because, in their line of
business, gain is never assured by mere receipt of the selling price.
As a result, the government is collecting tax from net income not yet
gained or earned.
Again, it is stressed that the CWT is creditable against the tax due
from the seller of the property at the end of the taxable year. The
seller will be able to claim a tax refund if its net income is less than
the taxes withheld. Nothing is taken that is not due so there is no
confiscation of property repugnant to the constitutional guarantee of
due process. More importantly, the due process requirement applies
to the power to tax.79 The CWT does not impose new taxes nor does
it increase taxes.80 It relates entirely to the method and time of
payment.
Petitioner protests that the refund remedy does not make the CWT
less burdensome because taxpayers have to wait years and may
even resort to litigation before they are granted a refund.81 This
argument is misleading. The practical problems encountered in
claiming a tax refund do not affect the constitutionality and validity of
the CWT as a method of collecting the tax.1avvphi1
Petitioner complains that the amount withheld would have otherwise
been used by the enterprise to pay labor wages, materials, cost of
money and other expenses which can then save the entity from
having to obtain loans entailing considerable interest expense.
Petitioner also lists the expenses and pitfalls of the trade which add
to the burden of the realty industry: huge investments and
borrowings; long gestation period; sudden and unpredictable interest
rate surges; continually spiraling development/construction costs;
heavy taxes and prohibitive "up-front" regulatory fees from at least
20 government agencies.82
Petitioner’s lamentations will not support its attack on the
constitutionality of the CWT. Petitioner’s complaints are essentially
matters of policy best addressed to the executive and legislative
branches of the government. Besides, the CWT is applied only on
the amounts actually received or receivable by the real estate entity.
Sales on installment are taxed on a per-installment
basis.83 Petitioner’s desire to utilize for its operational and capital
expenses money earmarked for the payment of taxes may be a
practical business option but it is not a fundamental right which can
be demanded from the court or from the government.
No Violation of Equal Protection
Petitioner claims that the revenue regulations are violative of the
equal protection clause because the CWT is being levied only on
real estate enterprises. Specifically, petitioner points out that
manufacturing enterprises are not similarly imposed a CWT on their
sales, even if their manner of doing business is not much different
from that of a real estate enterprise. Like a manufacturing concern, a
real estate business is involved in a continuous process of
production and it incurs costs and expenditures on a regular basis.
The only difference is that "goods" produced by the real estate
business are house and lot units.84
Again, we disagree.
The equal protection clause under the Constitution means that "no
person or class of persons shall be deprived of the same protection
of laws which is enjoyed by other persons or other classes in the
same place and in like circumstances."85 Stated differently, all
persons belonging to the same class shall be taxed alike. It follows
that the guaranty of the equal protection of the laws is not violated by
legislation based on a reasonable classification. Classification, to be
valid, must (1) rest on substantial distinctions; (2) be germane to the
purpose of the law; (3) not be limited to existing conditions only and
(4) apply equally to all members of the same class.86
The taxing power has the authority to make reasonable
classifications for purposes of taxation.87 Inequalities which result
from a singling out of one particular class for taxation, or exemption,
infringe no constitutional limitation.88 The real estate industry is, by
itself, a class and can be validly treated differently from other
business enterprises.
Petitioner, in insisting that its industry should be treated similarly as
manufacturing enterprises, fails to realize that what distinguishes the
real estate business from other manufacturing enterprises, for
purposes of the imposition of the CWT, is not their production
processes but the prices of their goods sold and the number of
transactions involved. The income from the sale of a real property is
bigger and its frequency of transaction limited, making it less
cumbersome for the parties to comply with the withholding tax
scheme.
On the other hand, each manufacturing enterprise may have tens of
thousands of transactions with several thousand customers every
month involving both minimal and substantial amounts. To require
the customers of manufacturing enterprises, at present, to withhold
the taxes on each of their transactions with their tens or hundreds of
suppliers may result in an inefficient and unmanageable system of
taxation and may well defeat the purpose of the withholding tax
system.
wording as Section 58(E) of RA 8424 and is unquestionably in
accordance with it:
Sec. 58. Returns and Payment of Taxes Withheld at Source. –
(E) Registration with Register of Deeds. - No registration of any
document transferring real property shall be effected by the
Register of Deeds unless the [CIR] or his duly authorized
representative has certified that such transfer has been
reported, and the capital gains or [CWT], if any, has been paid:
xxxx any violation of this provision by the Register of Deeds shall be
subject to the penalties imposed under Section 269 of this Code.
(Emphasis supplied)
Conclusion

Petitioner counters that there are other businesses wherein

The renowned genius Albert Einstein was once quoted as saying
expensive items are also sold infrequently, e.g. heavy equipment,
"[the] hardest thing in the world to understand is the income
jewelry, furniture, appliance and other capital goods yet these are not tax."92 When a party questions the constitutionality of an income tax
similarly subjected to the CWT.89As already discussed, the Secretary
measure, it has to contend not only with Einstein’s observation but
may adopt any reasonable method to carry out its functions.90 Under
also with the vast and well-established jurisprudence in support of
Section 57(B), it may choose what to subject to CWT.
the plenary powers of Congress to impose taxes. Petitioner has
miserably failed to discharge its burden of convincing the Court that
A reading of Section 2.57.2 (M) of RR 2-98 will also show that the imposition of MCIT and CWT is unconstitutional.
petitioner’s argument is not accurate. The sales of manufacturers
who have clients within the top 5,000 corporations, as specified by WHEREFORE, the petition is hereby DISMISSED.
the BIR, are also subject to CWT for their transactions with said
5,000 corporations.91
Costs against petitioner.
Section 2.58.2 of RR No. 2-98 Merely Implements Section 58 of
RA 8424 SO ORDERED.

Lastly, petitioner assails Section 2.58.2 of RR 2-98, which provides

that the Registry of Deeds should not effect the regisration of any
document transferring real property unless a certification is issued by
the CIR that the withholding tax has been paid. Petitioner proffers
hardly any reason to strike down this rule except to rely on its
contention that the CWT is unconstitutional. We have ruled that it is
not. Furthermore, this provision uses almost exactly the same