G.R. No.

159796 July 17, 2007

ROMEO P. GEROCHI, KATULONG NG BAYAN (KB) and ENVIRONMENTALIST CONSUMERS

NETWORK, INC. (ECN), Petitioners,
vs.
DEPARTMENT OF ENERGY (DOE), ENERGY REGULATORY COMMISSION (ERC), NATIONAL
POWER CORPORATION (NPC), POWER SECTOR ASSETS AND LIABILITIES MANAGEMENT
GROUP (PSALM Corp.), STRATEGIC POWER UTILITIES GROUP (SPUG), and PANAY ELECTRIC
COMPANY INC. (PECO),Respondents.

DECISION

NACHURA, J.:

Petitioners Romeo P. Gerochi, Katulong Ng Bayan (KB), and Environmentalist Consumers Network, Inc.
(ECN) (petitioners), come before this Court in this original action praying that Section 34 of Republic Act
(RA) 9136, otherwise known as the "Electric Power Industry Reform Act of 2001" (EPIRA), imposing the
Universal Charge,1and Rule 18 of the Rules and Regulations (IRR) 2 which seeks to implement the said
imposition, be declared unconstitutional. Petitioners also pray that the Universal Charge imposed upon the
consumers be refunded and that a preliminary injunction and/or temporary restraining order (TRO) be
issued directing the respondents to refrain from implementing, charging, and collecting the said
charge.3 The assailed provision of law reads:

SECTION 34. Universal Charge. — Within one (1) year from the effectivity of this Act, a universal charge
to be determined, fixed and approved by the ERC, shall be imposed on all electricity end-users for the
following purposes:

(a) Payment for the stranded debts4 in excess of the amount assumed by the National Government
and stranded contract costs of NPC 5 and as well as qualified stranded contract costs of distribution
utilities resulting from the restructuring of the industry;

(b) Missionary electrification;6

(c) The equalization of the taxes and royalties applied to indigenous or renewable sources of energy
vis-à-vis imported energy fuels;

(d) An environmental charge equivalent to one-fourth of one centavo per kilowatt-hour

(₱0.0025/kWh), which shall accrue to an environmental fund to be used solely for watershed
rehabilitation and management. Said fund shall be managed by NPC under existing arrangements;
and

(e) A charge to account for all forms of cross-subsidies for a period not exceeding three (3) years.

The universal charge shall be a non-bypassable charge which shall be passed on and collected from all
end-users on a monthly basis by the distribution utilities. Collections by the distribution utilities and the
TRANSCO in any given month shall be remitted to the PSALM Corp. on or before the fifteenth (15th) of the
succeeding month, net of any amount due to the distribution utility. Any end-user or self-generating entity
not connected to a distribution utility shall remit its corresponding universal charge directly to the TRANSCO.
The PSALM Corp., as administrator of the fund, shall create a Special Trust Fund which shall be disbursed
only for the purposes specified herein in an open and transparent manner. All amount collected for the
universal charge shall be distributed to the respective beneficiaries within a reasonable period to be
provided by the ERC.

The Facts

Congress enacted the EPIRA on June 8, 2001; on June 26, 2001, it took effect. 7

On April 5, 2002, respondent National Power Corporation-Strategic Power Utilities Group8 (NPC-SPUG) filed
with respondent Energy Regulatory Commission (ERC) a petition for the availment from the Universal
Charge of its share for Missionary Electrification, docketed as ERC Case No. 2002-165.9

On May 7, 2002, NPC filed another petition with ERC, docketed as ERC Case No. 2002-194, praying that
the proposed share from the Universal Charge for the Environmental charge of ₱0.0025 per kilowatt-hour
(/kWh), or a total of ₱119,488,847.59, be approved for withdrawal from the Special Trust Fund (STF)
managed by respondent Power Sector Assets and

Liabilities Management Group (PSALM)10 for the rehabilitation and management of watershed areas.11

On December 20, 2002, the ERC issued an Order12 in ERC Case No. 2002-165 provisionally approving the
computed amount of ₱0.0168/kWh as the share of the NPC-SPUG from the Universal Charge for Missionary
Electrification and authorizing the National Transmission Corporation (TRANSCO) and Distribution Utilities
to collect the same from its end-users on a monthly basis.

On June 26, 2003, the ERC rendered its Decision 13 (for ERC Case No. 2002-165) modifying its Order of
December 20, 2002, thus:

WHEREFORE, the foregoing premises considered, the provisional authority granted to petitioner National
Power Corporation-Strategic Power Utilities Group (NPC-SPUG) in the Order dated December 20, 2002 is
hereby modified to the effect that an additional amount of ₱0.0205 per kilowatt-hour should be added to
the ₱0.0168 per kilowatt-hour provisionally authorized by the Commission in the said Order. Accordingly, a
total amount of ₱0.0373 per kilowatt-hour is hereby APPROVED for withdrawal from the Special Trust Fund
managed by PSALM as its share from the Universal Charge for Missionary Electrification (UC-ME) effective
on the following billing cycles:

(a) June 26-July 25, 2003 for National Transmission Corporation (TRANSCO); and

(b) July 2003 for Distribution Utilities (Dus).

Relative thereto, TRANSCO and Dus are directed to collect the UC-ME in the amount of ₱0.0373 per
kilowatt-hour and remit the same to PSALM on or before the 15th day of the succeeding month.

In the meantime, NPC-SPUG is directed to submit, not later than April 30, 2004, a detailed report to include
Audited Financial Statements and physical status (percentage of completion) of the projects using the
prescribed format.1avvphi1

Let copies of this Order be furnished petitioner NPC-SPUG and all distribution utilities (Dus).

SO ORDERED.

On August 13, 2003, NPC-SPUG filed a Motion for Reconsideration asking the ERC, among others, 14 to set
aside the above-mentioned Decision, which the ERC granted in its Order dated October 7, 2003, disposing:
WHEREFORE, the foregoing premises considered, the "Motion for Reconsideration" filed by petitioner
National Power Corporation-Small Power Utilities Group (NPC-SPUG) is hereby GRANTED. Accordingly, the
Decision dated June 26, 2003 is hereby modified accordingly.

Relative thereto, NPC-SPUG is directed to submit a quarterly report on the following:

1. Projects for CY 2002 undertaken;

2. Location

3. Actual amount utilized to complete the project;

4. Period of completion;

5. Start of Operation; and

6. Explanation of the reallocation of UC-ME funds, if any.

SO ORDERED.15

Meanwhile, on April 2, 2003, ERC decided ERC Case No. 2002-194, authorizing the NPC to draw up to
₱70,000,000.00 from PSALM for its 2003 Watershed Rehabilitation Budget subject to the availability of
funds for the Environmental Fund component of the Universal Charge. 16

On the basis of the said ERC decisions, respondent Panay Electric Company, Inc. (PECO) charged petitioner
Romeo P. Gerochi and all other end-users with the Universal Charge as reflected in their respective electric
bills starting from the month of July 2003.17

Hence, this original action.

Petitioners submit that the assailed provision of law and its IRR which sought to implement the same are
unconstitutional on the following grounds:

1) The universal charge provided for under Sec. 34 of the EPIRA and sought to be implemented
under Sec. 2, Rule 18 of the IRR of the said law is a tax which is to be collected from all electric
end-users and self-generating entities. The power to tax is strictly a legislative function and as
such, the delegation of said power to any executive or administrative agency like the ERC is
unconstitutional, giving the same unlimited authority. The assailed provision clearly provides that
the Universal Charge is to be determined, fixed and approved by the ERC, hence leaving to the
latter complete discretionary legislative authority.

2) The ERC is also empowered to approve and determine where the funds collected should be
used.

3) The imposition of the Universal Charge on all end-users is oppressive and confiscatory and
amounts to taxation without representation as the consumers were not given a chance to be heard
and represented.18

Petitioners contend that the Universal Charge has the characteristics of a tax and is collected to fund the
operations of the NPC. They argue that the cases19 invoked by the respondents clearly show the regulatory
purpose of the charges imposed therein, which is not so in the case at bench. In said cases, the respective
funds20 were created in order to balance and stabilize the prices of oil and sugar, and to act as buffer to
counteract the changes and adjustments in prices, peso devaluation, and other variables which cannot be
adequately and timely monitored by the legislature. Thus, there was a need to delegate powers to
administrative bodies.21 Petitioners posit that the Universal Charge is imposed not for a similar purpose.

On the other hand, respondent PSALM through the Office of the Government Corporate Counsel (OGCC)
contends that unlike a tax which is imposed to provide income for public purposes, such as support of the
government, administration of the law, or payment of public expenses, the assailed Universal Charge is
levied for a specific regulatory purpose, which is to ensure the viability of the country's electric power
industry. Thus, it is exacted by the State in the exercise of its inherent police power. On this premise,
PSALM submits that there is no undue delegation of legislative power to the ERC since the latter merely
exercises a limited authority or discretion as to the execution and implementation of the provisions of the
EPIRA.22

Respondents Department of Energy (DOE), ERC, and NPC, through the Office of the Solicitor General
(OSG), share the same view that the Universal Charge is not a tax because it is levied for a specific
regulatory purpose, which is to ensure the viability of the country's electric power industry, and is,
therefore, an exaction in the exercise of the State's police power. Respondents further contend that said
Universal Charge does not possess the essential characteristics of a tax, that its imposition would redound
to the benefit of the electric power industry and not to the public, and that its rate is uniformly levied on
electricity end-users, unlike a tax which is imposed based on the individual taxpayer's ability to pay.
Moreover, respondents deny that there is undue delegation of legislative power to the ERC since the EPIRA
sets forth sufficient determinable standards which would guide the ERC in the exercise of the powers
granted to it. Lastly, respondents argue that the imposition of the Universal Charge is not oppressive and
confiscatory since it is an exercise of the police power of the State and it complies with the requirements
of due process.23

On its part, respondent PECO argues that it is duty-bound to collect and remit the amount pertaining to
the Missionary Electrification and Environmental Fund components of the Universal Charge, pursuant to
Sec. 34 of the EPIRA and the Decisions in ERC Case Nos. 2002-194 and 2002-165. Otherwise, PECO could
be held liable under Sec. 4624 of the EPIRA, which imposes fines and penalties for any violation of its
provisions or its IRR.25

The Issues

The ultimate issues in the case at bar are:

1) Whether or not, the Universal Charge imposed under Sec. 34 of the EPIRA is a tax; and

2) Whether or not there is undue delegation of legislative power to tax on the part of the ERC. 26

Before we discuss the issues, the Court shall first deal with an obvious procedural lapse.

Petitioners filed before us an original action particularly denominated as a Complaint assailing the
constitutionality of Sec. 34 of the EPIRA imposing the Universal Charge and Rule 18 of the EPIRA's IRR. No
doubt, petitioners havelocus standi. They impugn the constitutionality of Sec. 34 of the EPIRA because they
sustained a direct injury as a result of the imposition of the Universal Charge as reflected in their electric
bills.

However, petitioners violated the doctrine of hierarchy of courts when they filed this "Complaint" directly
with us. Furthermore, the Complaint is bereft of any allegation of grave abuse of discretion on the part of
the ERC or any of the public respondents, in order for the Court to consider it as a petition for certiorari or
prohibition.

Article VIII, Section 5(1) and (2) of the 1987 Constitution27 categorically provides that:

SECTION 5. The Supreme Court shall have the following powers:

1. Exercise original jurisdiction over cases affecting ambassadors, other public ministers and
consuls, and over petitions for certiorari, prohibition, mandamus, quo warranto, and habeas
corpus.

2. Review, revise, reverse, modify, or affirm on appeal or certiorari, as the law or the rules of court
may provide, final judgments and orders of lower courts in:

(a) All cases in which the constitutionality or validity of any treaty, international or executive
agreement, law, presidential decree, proclamation, order, instruction, ordinance, or regulation is in
question.

But this Court's jurisdiction to issue writs of certiorari, prohibition, mandamus, quo warranto, and habeas
corpus, while concurrent with that of the regional trial courts and the Court of Appeals, does not give
litigants unrestrained freedom of choice of forum from which to seek such relief.28 It has long been
established that this Court will not entertain direct resort to it unless the redress desired cannot be obtained
in the appropriate courts, or where exceptional and compelling circumstances justify availment of a remedy
within and call for the exercise of our primary jurisdiction. 29 This circumstance alone warrants the outright
dismissal of the present action.

This procedural infirmity notwithstanding, we opt to resolve the constitutional issue raised herein. We are
aware that if the constitutionality of Sec. 34 of the EPIRA is not resolved now, the issue will certainly
resurface in the near future, resulting in a repeat of this litigation, and probably involving the same parties.
In the public interest and to avoid unnecessary delay, this Court renders its ruling now.

The instant complaint is bereft of merit.

The First Issue

To resolve the first issue, it is necessary to distinguish the State’s power of taxation from the police power.

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 that is to pay it. 30 It is based on the principle that taxes are the
lifeblood of the government, and their prompt and certain availability is an imperious need. 31 Thus, the
theory behind the exercise of the power to tax emanates from necessity; without taxes, government cannot
fulfill its mandate of promoting the general welfare and well-being of the people.32

On the other hand, police power is the power of the state to promote public welfare by restraining and
regulating the use of liberty and property. 33 It is the most pervasive, the least limitable, and the most
demanding of the three fundamental powers of the State. The justification is found in the Latin
maxims salus populi est suprema lex (the welfare of the people is the supreme law) and sic utere tuo ut
alienum non laedas (so use your property as not to injure the property of others). As an inherent attribute
of sovereignty which virtually extends to all public needs, police power grants a wide panoply of instruments
through which the State, as parens patriae, gives effect to a host of its regulatory powers.34 We have held
that the power to "regulate" means the power to protect, foster, promote, preserve, and control, with due
regard for the interests, first and foremost, of the public, then of the utility and of its patrons. 35

The conservative and pivotal distinction between these two powers rests in the purpose for which the
charge is made. If generation of revenue is the primary purpose and regulation is merely incidental, the
imposition is a tax; but if regulation is the primary purpose, the fact that revenue is incidentally raised does
not make the imposition a tax.36

In exacting the assailed Universal Charge through Sec. 34 of the EPIRA, the State's police power,
particularly its regulatory dimension, is invoked. Such can be deduced from Sec. 34 which enumerates the
purposes for which the Universal Charge is imposed37 and which can be amply discerned as regulatory in
character. The EPIRA resonates such regulatory purposes, thus:

SECTION 2. Declaration of Policy. — It is hereby declared the policy of the State:

(a) To ensure and accelerate the total electrification of the country;

(b) To ensure the quality, reliability, security and affordability of the supply of electric power;

(c) To ensure transparent and reasonable prices of electricity in a regime of free and fair
competition and full public accountability to achieve greater operational and economic efficiency
and enhance the competitiveness of Philippine products in the global market;

(d) To enhance the inflow of private capital and broaden the ownership base of the power
generation, transmission and distribution sectors;

(e) To ensure fair and non-discriminatory treatment of public and private sector entities in the
process of restructuring the electric power industry;

(f) To protect the public interest as it is affected by the rates and services of electric utilities and
other providers of electric power;

(g) To assure socially and environmentally compatible energy sources and infrastructure;

(h) To promote the utilization of indigenous and new and renewable energy resources in power
generation in order to reduce dependence on imported energy;

(i) To provide for an orderly and transparent privatization of the assets and liabilities of the National
Power Corporation (NPC);

(j) To establish a strong and purely independent regulatory body and system to ensure consumer
protection and enhance the competitive operation of the electricity market; and

(k) To encourage the efficient use of energy and other modalities of demand side management.

From the aforementioned purposes, it can be gleaned that the assailed Universal Charge is not a tax, but
an exaction in the exercise of the State's police power. Public welfare is surely promoted.

Moreover, it is a well-established doctrine that the taxing power may be used as an implement of police
power.38 In Valmonte v. Energy Regulatory Board, et al. 39 and in Gaston v. Republic Planters Bank ,40 this
Court held that the Oil Price Stabilization Fund (OPSF) and the Sugar Stabilization Fund (SSF) were
exactions made in the exercise of the police power. The doctrine was reiterated in Osmeña v. Orbos41 with
respect to the OPSF. Thus, we disagree with petitioners that the instant case is different from the
aforementioned cases. With the Universal Charge, a Special Trust Fund (STF) is also created under the
administration of PSALM.42 The STF has some notable characteristics similar to the OPSF and the SSF, viz.:

1) In the implementation of stranded cost recovery, the ERC shall conduct a review to determine
whether there is under-recovery or over recovery and adjust (true-up) the level of the stranded
cost recovery charge. In case of an over-recovery, the ERC shall ensure that any excess amount
shall be remitted to the STF. A separate account shall be created for these amounts which shall be
held in trust for any future claims of distribution utilities for stranded cost recovery. At the end of
the stranded cost recovery period, any remaining amount in this account shall be used to reduce
the electricity rates to the end-users.43

2) With respect to the assailed Universal Charge, if the total amount collected for the same is
greater than the actual availments against it, the PSALM shall retain the balance within the STF to
pay for periods where a shortfall occurs.44

3) Upon expiration of the term of PSALM, the administration of the STF shall be transferred to the
DOF or any of the DOF attached agencies as designated by the DOF Secretary. 45

The OSG is in point when it asseverates:

Evidently, the establishment and maintenance of the Special Trust Fund, under the last paragraph of
Section 34, R.A. No. 9136, is well within the pervasive and non-waivable power and responsibility of the
government to secure the physical and economic survival and well-being of the community, that
comprehensive sovereign authority we designate as the police power of the State. 46

This feature of the Universal Charge further boosts the position that the same is an exaction imposed
primarily in pursuit of the State's police objectives. The STF reasonably serves and assures the attainment
and perpetuity of the purposes for which the Universal Charge is imposed, i.e., to ensure the viability of
the country's electric power industry.

The Second Issue

The principle of separation of powers ordains that each of the three branches of government has exclusive
cognizance of and is supreme in matters falling within its own constitutionally allocated sphere. A logical
corollary to the doctrine of separation of powers is the principle of non-delegation of powers, as expressed
in the Latin maxim potestas delegata non delegari potest (what has been delegated cannot be delegated).
This is based on the ethical principle that such delegated power constitutes not only a right but a duty to
be performed by the delegate through the instrumentality of his own judgment and not through the
intervening mind of another. 47

In the face of the increasing complexity of modern life, delegation of legislative power to various specialized
administrative agencies is allowed as an exception to this principle. 48 Given the volume and variety of
interactions in today's society, it is doubtful if the legislature can promulgate laws that will deal adequately
with and respond promptly to the minutiae of everyday life. Hence, the need to delegate to administrative
bodies - the principal agencies tasked to execute laws in their specialized fields - the authority to promulgate
rules and regulations to implement a given statute and effectuate its policies. All that is required for the
valid exercise of this power of subordinate legislation is that the regulation be germane to the objects and
purposes of the law and that the regulation be not in contradiction to, but in conformity with, the standards
prescribed by the law. These requirements are denominated as the completeness test and the sufficient
standard test.
Under the first test, the law must be complete in all its terms and conditions when it leaves the legislature
such that when it reaches the delegate, the only thing he will have to do is to enforce it. The second test
mandates adequate guidelines or limitations in the law to determine the boundaries of the delegate's
authority and prevent the delegation from running riot. 49

The Court finds that the EPIRA, read and appreciated in its entirety, in relation to Sec. 34 thereof, is
complete in all its essential terms and conditions, and that it contains sufficient standards.

Although Sec. 34 of the EPIRA merely provides that "within one (1) year from the effectivity thereof, a
Universal Charge to be determined, fixed and approved by the ERC, shall be imposed on all electricity end-
users," and therefore, does not state the specific amount to be paid as Universal Charge, the amount
nevertheless is made certain by the legislative parameters provided in the law itself. For one, Sec. 43(b)(ii)
of the EPIRA provides:

SECTION 43. Functions of the ERC. — The ERC shall promote competition, encourage market development,
ensure customer choice and penalize abuse of market power in the restructured electricity industry. In
appropriate cases, the ERC is authorized to issue cease and desist order after due notice and hearing.
Towards this end, it shall be responsible for the following key functions in the restructured industry:

xxxx

(b) Within six (6) months from the effectivity of this Act, promulgate and enforce, in accordance with law,
a National Grid Code and a Distribution Code which shall include, but not limited to the following:

xxxx

(ii) Financial capability standards for the generating companies, the TRANSCO, distribution utilities and
suppliers: Provided, That in the formulation of the financial capability standards, the nature and function
of the entity shall be considered: Provided, further, That such standards are set to ensure that the electric
power industry participants meet the minimum financial standards to protect the public interest. Determine,
fix, and approve, after due notice and public hearings the universal charge, to be imposed on all electricity
end-users pursuant to Section 34 hereof;

Moreover, contrary to the petitioners’ contention, the ERC does not enjoy a wide latitude of discretion in
the determination of the Universal Charge. Sec. 51(d) and (e) of the EPIRA50 clearly provides:

SECTION 51. Powers. — The PSALM Corp. shall, in the performance of its functions and for the attainment
of its objective, have the following powers:

xxxx

(d) To calculate the amount of the stranded debts and stranded contract costs of NPC which shall
form the basis for ERC in the determination of the universal charge;

(e) To liquidate the NPC stranded contract costs, utilizing the proceeds from sales and other
property contributed to it, including the proceeds from the universal charge.

Thus, the law is complete and passes the first test for valid delegation of legislative power.

As to the second test, this Court had, in the past, accepted as sufficient standards the following: "interest
of law and order;"51 "adequate and efficient instruction;"52 "public interest;"53 "justice and equity;"54 "public
convenience and welfare;"55 "simplicity, economy and efficiency;"56 "standardization and regulation of
medical education;"57 and "fair and equitable employment practices."58 Provisions of the EPIRA such as,
among others, "to ensure the total electrification of the country and the quality, reliability, security and
affordability of the supply of electric power"59 and "watershed rehabilitation and management"60 meet the
requirements for valid delegation, as they provide the limitations on the ERC’s power to formulate the IRR.
These are sufficient standards.

It may be noted that this is not the first time that the ERC's conferred powers were challenged. In Freedom
from Debt Coalition v. Energy Regulatory Commission,61 the Court had occasion to say:

In determining the extent of powers possessed by the ERC, the provisions of the EPIRA must not be read
in separate parts. Rather, the law must be read in its entirety, because a statute is passed as a whole, and
is animated by one general purpose and intent. Its meaning cannot to be extracted from any single part
thereof but from a general consideration of the statute as a whole. Considering the intent of Congress in
enacting the EPIRA and reading the statute in its entirety, it is plain to see that the law has expanded the
jurisdiction of the regulatory body, the ERC in this case, to enable the latter to implement the reforms
sought to be accomplished by the EPIRA. When the legislators decided to broaden the jurisdiction of the
ERC, they did not intend to abolish or reduce the powers already conferred upon ERC's predecessors. To
sustain the view that the ERC possesses only the powers and functions listed under Section 43 of the EPIRA
is to frustrate the objectives of the law.

In his Concurring and Dissenting Opinion62 in the same case, then Associate Justice, now Chief Justice,
Reynato S. Puno described the immensity of police power in relation to the delegation of powers to the
ERC and its regulatory functions over electric power as a vital public utility, to wit:

Over the years, however, the range of police power was no longer limited to the preservation of public
health, safety and morals, which used to be the primary social interests in earlier times. Police power now
requires the State to "assume an affirmative duty to eliminate the excesses and injustices that are the
concomitants of an unrestrained industrial economy." Police power is now exerted "to further the public
welfare — a concept as vast as the good of society itself." Hence, "police power is but another name for
the governmental authority to further the welfare of society that is the basic end of all government." When
police power is delegated to administrative bodies with regulatory functions, its exercise should be given a
wide latitude. Police power takes on an even broader dimension in developing countries such as ours,
where the State must take a more active role in balancing the many conflicting interests in society. The
Questioned Order was issued by the ERC, acting as an agent of the State in the exercise of police power.
We should have exceptionally good grounds to curtail its exercise. This approach is more compelling in the
field of rate-regulation of electric power rates. Electric power generation and distribution is a traditional
instrument of economic growth that affects not only a few but the entire nation. It is an important factor
in encouraging investment and promoting business. The engines of progress may come to a screeching
halt if the delivery of electric power is impaired. Billions of pesos would be lost as a result of power outages
or unreliable electric power services. The State thru the ERC should be able to exercise its police power
with great flexibility, when the need arises.

This was reiterated in National Association of Electricity Consumers for Reforms v. Energy Regulatory
Commission63 where the Court held that the ERC, as regulator, should have sufficient power to respond in
real time to changes wrought by multifarious factors affecting public utilities.

From the foregoing disquisitions, we therefore hold that there is no undue delegation of legislative power
to the ERC.

Petitioners failed to pursue in their Memorandum the contention in the Complaint that the imposition of the
Universal Charge on all end-users is oppressive and confiscatory, and amounts to taxation without
representation. Hence, such contention is deemed waived or abandoned per Resolution 64 of August 3,
2004.65 Moreover, the determination of whether or not a tax is excessive, oppressive or confiscatory is an
issue which essentially involves questions of fact, and thus, this Court is precluded from reviewing the
same.66

As a penultimate statement, it may be well to recall what this Court said of EPIRA:

One of the landmark pieces of legislation enacted by Congress in recent years is the EPIRA. It established
a new policy, legal structure and regulatory framework for the electric power industry. The new thrust is
to tap private capital for the expansion and improvement of the industry as the large government debt and
the highly capital-intensive character of the industry itself have long been acknowledged as the critical
constraints to the program. To attract private investment, largely foreign, the jaded structure of the industry
had to be addressed. While the generation and transmission sectors were centralized and monopolistic, the
distribution side was fragmented with over 130 utilities, mostly small and uneconomic. The pervasive flaws
have caused a low utilization of existing generation capacity; extremely high and uncompetitive power
rates; poor quality of service to consumers; dismal to forgettable performance of the government power
sector; high system losses; and an inability to develop a clear strategy for overcoming these shortcomings.

Thus, the EPIRA provides a framework for the restructuring of the industry, including the privatization of
the assets of the National Power Corporation (NPC), the transition to a competitive structure, and the
delineation of the roles of various government agencies and the private entities. The law ordains the division
of the industry into four (4) distinct sectors, namely: generation, transmission, distribution and supply.

Corollarily, the NPC generating plants have to privatized and its transmission business spun off and
privatized thereafter.67

Finally, every law has in its favor the presumption of constitutionality, and to justify its nullification, there
must be a clear and unequivocal breach of the Constitution and not one that is doubtful, speculative, or
argumentative.68Indubitably, petitioners failed to overcome this presumption in favor of the EPIRA. We find
no clear violation of the Constitution which would warrant a pronouncement that Sec. 34 of the EPIRA and
Rule 18 of its IRR are unconstitutional and void.

WHEREFORE, the instant case is hereby DISMISSED for lack of merit.

SO ORDERED.
G.R. No. 166494 June 29, 2007

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

DECISION

AZCUNA, J.:

This is a petition1 for Prohibition with Prayer for Preliminary Injunction assailing the constitutionality of
Section 4(a) of Republic Act (R.A.) No. 9257, 2 otherwise known as the "Expanded Senior Citizens Act of
2003."

Petitioners are domestic corporations and proprietors operating drugstores in the Philippines.

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

The antecedents are as follows:

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

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

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

...

The establishment may claim the discounts granted under (a), (f), (g) and (h) as tax deduction based
on the net cost of the goods sold or services rendered: Provided, That the cost of the discount shall be
allowed as deduction from gross income for the same taxable year that the discount is granted. Provided,
further, That the total amount of the claimed tax deduction net of value added tax if applicable, shall be
included in their gross sales receipts for tax purposes and shall be subject to proper documentation and to
the provisions of the National Internal Revenue Code, as amended. 4
On May 28, 2004, the DSWD approved and adopted the Implementing Rules and Regulations of R.A. No.
9257, Rule VI, Article 8 of which states:

Article 8. Tax Deduction of Establishments. – The establishment may claim the discounts granted
under Rule V, Section 4 – Discounts for Establishments;5 Section 9, Medical and Dental Services in Private
Facilities[,]6 and Sections 107 and 118 – Air, Sea and Land Transportation as tax deduction based on the
net cost of the goods sold or services rendered. Provided, That the cost of the discount shall be allowed as
deduction from gross income for the same taxable year that the discount is granted; Provided, further, That
the total amount of the claimed tax deduction net of value added tax if applicable, shall be included in their
gross sales receipts for tax purposes and shall be subject to proper documentation and to the provisions
of the National Internal Revenue Code, as amended; Provided, finally, that the implementation of the tax
deduction shall be subject to the Revenue Regulations to be issued by the Bureau of Internal Revenue
(BIR) and approved by the Department of Finance (DOF).9

On July 10, 2004, in reference to the query of the Drug Stores Association of the Philippines (DSAP)
concerning the meaning of a tax deduction under the Expanded Senior Citizens Act, the DOF, through
Director IV Ma. Lourdes B. Recente, clarified as follows:

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

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

Effectively, a tax credit is a peso-for-peso deduction from a taxpayer’s tax liability due to the government
of the amount of discounts such establishment has granted to a senior citizen. The establishment recovers
the full amount of discount given to a senior citizen and hence, the government shoulders 100% of the
discounts granted.

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

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

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

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

A simple illustration might help amplify the points discussed above, as follows:

Tax Deduction Tax Credit

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

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

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

Less: Operating Expenses:

Tax Deduction on Discounts x x x x --

Other deductions: x x x x x x x x

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

Tax Due x x x x x x

Less: Tax Credit -- ______x x

Net Tax Due -- x x

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

Meanwhile, on October 1, 2004, Administrative Order (A.O.) No. 171 or the Policies and Guidelines to
Implement the Relevant Provisions of Republic Act 9257, otherwise known as the "Expanded Senior Citizens
Act of 2003"11was issued by the DOH, providing the grant of twenty percent (20%) discount in the purchase
of unbranded generic medicines from all establishments dispensing medicines for the exclusive use of the
senior citizens.

On November 12, 2004, the DOH issued Administrative Order No 17712 amending A.O. No. 171. Under A.O.
No. 177, the twenty percent discount shall not be limited to the purchase of unbranded generic medicines
only, but shall extend to both prescription and non-prescription medicines whether branded or generic.
Thus, it stated that "[t]he grant of twenty percent (20%) discount shall be provided in the purchase of
medicines from all establishments dispensing medicines for the exclusive use of the senior citizens."

Petitioners assail the constitutionality of Section 4(a) of the Expanded Senior Citizens Act based on the
following grounds:13

1) The law is confiscatory because it infringes Art. III, Sec. 9 of the Constitution which provides that private
property shall not be taken for public use without just compensation;
2) It violates the equal protection clause (Art. III, Sec. 1) enshrined in our Constitution which states that
"no person shall be deprived of life, liberty or property without due process of law, nor shall any person be
denied of the equal protection of the laws;" and

3) The 20% discount on medicines violates the constitutional guarantee in Article XIII, Section 11 that
makes "essential goods, health and other social services available to all people at affordable cost."14

Petitioners assert that Section 4(a) of the law is unconstitutional because it constitutes deprivation of private
property. Compelling drugstore owners and establishments to grant the discount will result in a loss of
profit

and capital because 1) drugstores impose a mark-up of only 5% to 10% on branded medicines; and 2) the
law failed to provide a scheme whereby drugstores will be justly compensated for the discount.

Examining petitioners’ arguments, it is apparent that what petitioners are ultimately questioning is the
validity of the tax deduction scheme as a reimbursement mechanism for the twenty percent (20%) discount
that they extend to senior citizens.

Based on the afore-stated DOF Opinion, the tax deduction scheme does not fully reimburse petitioners for
the discount privilege accorded to senior citizens. This is because the discount is treated as a deduction, a
tax-deductible expense that is subtracted from the gross income and results in a lower taxable income.
Stated otherwise, it is an amount that is allowed by law 15 to reduce the income prior to the application of
the tax rate to compute the amount of tax which is due. 16 Being a tax deduction, the discount does not
reduce taxes owed on a peso for peso basis but merely offers a fractional reduction in taxes owed.

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

The permanent reduction in their total revenues is a forced subsidy corresponding to the taking of private
property for public use or benefit.17 This constitutes compensable taking for which petitioners would
ordinarily become entitled to a just compensation.

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

A tax deduction does not offer full reimbursement of the senior citizen discount. As such, it would not meet
the definition of just compensation.19

Having said that, this raises the question of whether the State, in promoting the health and welfare of a
special group of citizens, can impose upon private establishments the burden of partly subsidizing a
government program.

The Court believes so.

The Senior Citizens Act was enacted primarily to maximize the contribution of senior citizens to nation-
building, and to grant benefits and privileges to them for their improvement and well-being as the State
considers them an integral part of our society.20
The priority given to senior citizens finds its basis in the Constitution as set forth in the law itself. Thus, the
Act provides:

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

SECTION 1. Declaration of Policies and Objectives. – Pursuant to Article XV, Section 4 of the Constitution,
it is the duty of the family to take care of its elderly members while the State may design programs of
social security for them. In addition to this, Section 10 in the Declaration of Principles and State Policies
provides: "The State shall provide social justice in all phases of national development." Further, Article XIII,
Section 11, provides: "The State shall adopt an integrated and comprehensive approach to health
development which shall endeavor to make essential goods, health and other social services available to
all the people at affordable cost. There shall be priority for the needs of the underprivileged sick, elderly,
disabled, women and children." Consonant with these constitutional principles the following are the
declared policies of this Act:

...

(f) To recognize the important role of the private sector in the improvement of the welfare of
senior citizens and to actively seek their partnership.21

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

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

For this reason, when the conditions so demand as determined by the legislature, property rights must bow
to the primacy of police power because property rights, though sheltered by due process, must yield to
general welfare.25

Police power as an attribute to promote the common good would be diluted considerably if on the mere
plea of petitioners that they will suffer loss of earnings and capital, the questioned provision is invalidated.
Moreover, in the absence of evidence demonstrating the alleged confiscatory effect of the provision in
question, there is no basis for its nullification in view of the presumption of validity which every law has in
its favor.26

Given these, it is incorrect for petitioners to insist that the grant of the senior citizen discount is unduly
oppressive to their business, because petitioners have not taken time to calculate correctly and come up
with a financial report, so that they have not been able to show properly whether or not the tax deduction
scheme really works greatly to their disadvantage.27
In treating the discount as a tax deduction, petitioners insist that they will incur losses because, referring
to the DOF Opinion, for every ₱1.00 senior citizen discount that petitioners would give, ₱0.68 will be
shouldered by them as only ₱0.32 will be refunded by the government by way of a tax deduction.

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

Petitioners’ computation is flawed. For purposes of reimbursement, the law states that the cost of the
discount shall be deducted from gross income, 29 the amount of income derived from all sources before
deducting allowable expenses, which will result in net income. Here, petitioners tried to show a loss on a
per transaction basis, which should not be the case. An income statement, showing an accounting of
petitioners’ sales, expenses, and net profit (or loss) for a given period could have accurately reflected the
effect of the discount on their income. Absent any financial statement, petitioners cannot substantiate their
claim that they will be operating at a loss should they give the discount. In addition, the computation was
erroneously based on the assumption that their customers consisted wholly of senior citizens. Lastly, the
32% tax rate is to be imposed on income, not on the amount of the discount.

Furthermore, it is unfair for petitioners to criticize the law because they cannot raise the prices of their
medicines given the cutthroat nature of the players in the industry. It is a business decision on the part of
petitioners to peg the mark-up at 5%. Selling the medicines below acquisition cost, as alleged by
petitioners, is merely a result of this decision. Inasmuch as pricing is a property right, petitioners cannot
reproach the law for being oppressive, simply because they cannot afford to raise their prices for fear of
losing their customers to competition.

The Court is not oblivious of the retail side of the pharmaceutical industry and the competitive pricing
component of the business. While the Constitution protects property rights, petitioners must accept the
realities of business and the State, in the exercise of police power, can intervene in the operations of a
business which may result in an impairment of property rights in the process.

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

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

WHEREFORE, the petition is DISMISSED for lack of merit.

No costs.

SO ORDERED
G.R. No. L-28896 February 17, 1988

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
ALGUE, INC., and THE COURT OF TAX APPEALS, respondents.

CRUZ, J.:

Taxes are the lifeblood of the government and so should be collected without unnecessary hindrance On
the other hand, such collection should be made in accordance with law as any arbitrariness will negate the
very reason for government itself. It is therefore necessary to reconcile the apparently conflicting interests
of the authorities and the taxpayers so that the real purpose of taxation, which is the promotion of the
common good, may be achieved.

The main issue in this case is whether or not the Collector of Internal Revenue correctly disallowed the
P75,000.00 deduction claimed by private respondent Algue as legitimate business expenses in its income
tax returns. The corollary issue is whether or not the appeal of the private respondent from the decision of
the Collector of Internal Revenue was made on time and in accordance with law.

We deal first with the procedural question.

The record shows that on January 14, 1965, the private respondent, a domestic corporation engaged in
engineering, construction and other allied activities, received a letter from the petitioner assessing it in the
total amount of P83,183.85 as delinquency income taxes for the years 1958 and 1959. 1 On January 18,
1965, Algue flied a letter of protest or request for reconsideration, which letter was stamp received on the
same day in the office of the petitioner. 2 On March 12, 1965, a warrant of distraint and levy was presented
to the private respondent, through its counsel, Atty. Alberto Guevara, Jr., who refused to receive it on the
ground of the pending protest. 3 A search of the protest in the dockets of the case proved fruitless. Atty.
Guevara produced his file copy and gave a photostat to BIR agent Ramon Reyes, who deferred service of
the warrant. 4 On April 7, 1965, Atty. Guevara was finally informed that the BIR was not taking any action
on the protest and it was only then that he accepted the warrant of distraint and levy earlier sought to be
served.5 Sixteen days later, on April 23, 1965, Algue filed a petition for review of the decision of the
Commissioner of Internal Revenue with the Court of Tax Appeals.6

The above chronology shows that the petition was filed seasonably. According to Rep. Act No. 1125, the
appeal may be made within thirty days after receipt of the decision or ruling challenged. 7 It is true that as
a rule the warrant of distraint and levy is "proof of the finality of the assessment" 8 and renders hopeless
a request for reconsideration," 9 being "tantamount to an outright denial thereof and makes the said
request deemed rejected." 10 But there is a special circumstance in the case at bar that prevents application
of this accepted doctrine.

The proven fact is that four days after the private respondent received the petitioner's notice of assessment,
it filed its letter of protest. This was apparently not taken into account before the warrant of distraint and
levy was issued; indeed, such protest could not be located in the office of the petitioner. It was only after
Atty. Guevara gave the BIR a copy of the protest that it was, if at all, considered by the tax authorities.
During the intervening period, the warrant was premature and could therefore not be served.

As the Court of Tax Appeals correctly noted," 11 the protest filed by private respondent was not pro
forma and was based on strong legal considerations. It thus had the effect of suspending on January 18,
1965, when it was filed, the reglementary period which started on the date the assessment was received,
viz., January 14, 1965. The period started running again only on April 7, 1965, when the private respondent
was definitely informed of the implied rejection of the said protest and the warrant was finally served on
it. Hence, when the appeal was filed on April 23, 1965, only 20 days of the reglementary period had been
consumed.

Now for the substantive question.

The petitioner contends that the claimed deduction of P75,000.00 was properly disallowed because it was
not an ordinary reasonable or necessary business expense. The Court of Tax Appeals had seen it differently.
Agreeing with Algue, it held that the said amount had been legitimately paid by the private respondent for
actual services rendered. The payment was in the form of promotional fees. These were collected by the
Payees for their work in the creation of the Vegetable Oil Investment Corporation of the Philippines and its
subsequent purchase of the properties of the Philippine Sugar Estate Development Company.

Parenthetically, it may be observed that the petitioner had Originally claimed these promotional fees to be
personal holding company income 12 but later conformed to the decision of the respondent court rejecting
this assertion.13 In fact, as the said court found, the amount was earned through the joint efforts of the
persons among whom it was distributed It has been established that the Philippine Sugar Estate
Development Company had earlier appointed Algue as its agent, authorizing it to sell its land, factories and
oil manufacturing process. Pursuant to such authority, Alberto Guevara, Jr., Eduardo Guevara, Isabel
Guevara, Edith, O'Farell, and Pablo Sanchez, worked for the formation of the Vegetable Oil Investment
Corporation, inducing other persons to invest in it. 14 Ultimately, after its incorporation largely through the
promotion of the said persons, this new corporation purchased the PSEDC properties. 15 For this sale, Algue
received as agent a commission of P126,000.00, and it was from this commission that the P75,000.00
promotional fees were paid to the aforenamed individuals.16

There is no dispute that the payees duly reported their respective shares of the fees in their income tax
returns and paid the corresponding taxes thereon.17 The Court of Tax Appeals also found, after examining
the evidence, that no distribution of dividends was involved. 18

The petitioner claims that these payments are fictitious because most of the payees are members of the
same family in control of Algue. It is argued that no indication was made as to how such payments were
made, whether by check or in cash, and there is not enough substantiation of such payments. In short, the
petitioner suggests a tax dodge, an attempt to evade a legitimate assessment by involving an imaginary
deduction.

We find that these suspicions were adequately met by the private respondent when its President, Alberto
Guevara, and the accountant, Cecilia V. de Jesus, testified that the payments were not made in one lump
sum but periodically and in different amounts as each payee's need arose. 19 It should be remembered that
this was a family corporation where strict business procedures were not applied and immediate issuance
of receipts was not required. Even so, at the end of the year, when the books were to be closed, each
payee made an accounting of all of the fees received by him or her, to make up the total of
P75,000.00. 20 Admittedly, everything seemed to be informal. This arrangement was understandable,
however, in view of the close relationship among the persons in the family corporation.

We agree with the respondent court that the amount of the promotional fees was not excessive. The total
commission paid by the Philippine Sugar Estate Development Co. to the private respondent was
P125,000.00. 21After deducting the said fees, Algue still had a balance of P50,000.00 as clear profit from
the transaction. The amount of P75,000.00 was 60% of the total commission. This was a reasonable
proportion, considering that it was the payees who did practically everything, from the formation of the
Vegetable Oil Investment Corporation to the actual purchase by it of the Sugar Estate properties. This
finding of the respondent court is in accord with the following provision of the Tax Code:
 SEC. 30. Deductions from gross income.--In computing net income there shall be allowed
as deductions —

(a) Expenses:

(1) In general.--All the ordinary and necessary expenses paid or incurred during the taxable
year in carrying on any trade or business, including a reasonable allowance for salaries or
other compensation for personal services actually rendered; ... 22

and Revenue Regulations No. 2, Section 70 (1), reading as follows:

SEC. 70. Compensation for personal services .--Among the ordinary and necessary
expenses paid or incurred in carrying on any trade or business may be included a
reasonable allowance for salaries or other compensation for personal services actually
rendered. The test of deductibility in the case of compensation payments is whether they
are reasonable and are, in fact, payments purely for service. This test and deductibility in
the case of compensation payments is whether they are reasonable and are, in fact,
payments purely for service. This test and its practical application may be further stated
and illustrated as follows:

Any amount paid in the form of compensation, but not in fact as the purchase price of
services, is not deductible. (a) An ostensible salary paid by a corporation may be a
distribution of a dividend on stock. This is likely to occur in the case of a corporation having
few stockholders, Practically all of whom draw salaries. If in such a case the salaries are in
excess of those ordinarily paid for similar services, and the excessive payment correspond
or bear a close relationship to the stockholdings of the officers of employees, it would seem
likely that the salaries are not paid wholly for services rendered, but the excessive
payments are a distribution of earnings upon the stock. . . . (Promulgated Feb. 11, 1931,
30 O.G. No. 18, 325.)

It is worth noting at this point that most of the payees were not in the regular employ of Algue nor were
they its controlling stockholders. 23

The Solicitor General is correct when he says that the burden is on the taxpayer to prove the validity of the
claimed deduction. In the present case, however, we find that the onus has been discharged satisfactorily.
The private respondent has proved that the payment of the fees was necessary and reasonable in the light
of the efforts exerted by the payees in inducing investors and prominent businessmen to venture in an
experimental enterprise and involve themselves in a new business requiring millions of pesos. This was no
mean feat and should be, as it was, sufficiently recompensed.

It is said that taxes are what we pay for civilization society. Without taxes, the government would be
paralyzed for lack of the motive power to activate and operate it. Hence, despite the natural reluctance to
surrender part of one's hard earned income to the taxing authorities, every person who is able to must
contribute his share in the running of the government. The government for its part, is expected to respond
in the form of tangible and intangible benefits intended to improve the lives of the people and enhance
their moral and material values. This symbiotic relationship is the rationale of taxation and should dispel
the erroneous notion that it is an arbitrary method of exaction by those in the seat of power.

But even as we concede the inevitability and indispensability of taxation, it is a requirement in all democratic
regimes that it be exercised reasonably and in accordance with the prescribed procedure. If it is not, then
the taxpayer has a right to complain and the courts will then come to his succor. For all the awesome
power of the tax collector, he may still be stopped in his tracks if the taxpayer can demonstrate, as it has
here, that the law has not been observed.

We hold that the appeal of the private respondent from the decision of the petitioner was filed on time with
the respondent court in accordance with Rep. Act No. 1125. And we also find that the claimed deduction
by the private respondent was permitted under the Internal Revenue Code and should therefore not have
been disallowed by the petitioner.

ACCORDINGLY, the appealed decision of the Court of Tax Appeals is AFFIRMED in toto, without costs.

SO ORDERED
G.R. No. 166134 June 29, 2010

ANGELES CITY, Petitioner,

vs.
ANGELES CITY ELECTRIC CORPORATION and REGIONAL TRIAL COURT BRANCH 57, ANGELES
CITY,Respondents.

DECISION

DEL CASTILLO, J.:

The prohibition on the issuance of a writ of injunction to enjoin the collection of taxes applies only to
national internal revenue taxes, and not to local taxes.

This Petition1 for Certiorari under Rule 65 of the Rules of Court seeks to set aside the Writ of Preliminary
Injunction issued by the Regional Trial Court (RTC) of Angeles City, Branch 57, in Civil Case No. 11401,
enjoining Angeles City and its City Treasurer from levying, seizing, disposing and selling at public auction
the properties owned by Angeles Electric Corporation (AEC).

Factual Antecedents

On June 18, 1964, AEC was granted a legislative franchise under Republic Act No. (RA) 4079 2 to construct,
maintain and operate an electric light, heat, and power system for the purpose of generating and
distributing electric light, heat and power for sale in Angeles City, Pampanga. Pursuant to Section 3-A
thereof,3 AEC’s payment of franchise tax for gross earnings from electric current sold was in lieu of all
taxes, fees and assessments.

On September 11, 1974, Presidential Decree No. (PD) 551 reduced the franchise tax of electric franchise
holders. Section 1 of PD 551 provided that:

SECTION 1. Any provision of law or local ordinance to the contrary notwithstanding, the franchise tax
payable by all grantees of franchises to generate, distribute and sell electric current for light, heat and
power shall be two percent (2%) of their gross receipts received from the sale of electric current and from
transactions incident to the generation, distribution and sale of electric current.

Such franchise tax shall be payable to the Commissioner of Internal Revenue or his duly authorized
representative on or before the twentieth day of the month following the end of each calendar quarter or
month as may be provided in the respective franchise or pertinent municipal regulation and shall, any
provision of the Local Tax Code or any other law to the contrary notwithstanding, be in lieu of all taxes and
assessments of whatever nature imposed by any national or local authority on earnings, receipts, income
and privilege of generation, distribution and sale of electric current.

On January 1, 1992, RA 7160 or the Local Government Code (LGC) of 1991 was passed into law, conferring
upon provinces and cities the power, among others, to impose tax on businesses enjoying franchise. 4 In
accordance with the LGC, the Sangguniang Panlungsod of Angeles City enacted on December 23, 1993 Tax
Ordinance No. 33, S-93, otherwise known as the Revised Revenue Code of Angeles City (RRCAC).

On February 7, 1994, a petition seeking the reduction of the tax rates and a review of the provisions of the
RRCAC was filed with the Sangguniang Panlungsod by Metro Angeles Chamber of Commerce and Industry
Inc. (MACCI) of which AEC is a member. There being no action taken by the Sangguniang Panlungsod on
the matter, MACCI elevated the petition5 to the Department of Finance, which referred the same to the
Bureau of Local Government Finance (BLGF). In the petition, MACCI alleged that the RRCAC is oppressive,
excessive, unjust and confiscatory; that it was published only once, simultaneously on January 22, 1994;
and that no public hearings were conducted prior to its enactment. Acting on the petition, the BLGF issued
a First Indorsement6 to the City Treasurer of Angeles City, instructing the latter to make representations
with the Sangguniang Panlungsod for the appropriate amendment of the RRCAC in order to ensure
compliance with the provisions of the LGC, and to make a report on the action taken within five days.

Thereafter, starting July 1995, AEC has been paying the local franchise tax to the Office of the City
Treasurer on a quarterly basis, in addition to the national franchise tax it pays every quarter to the Bureau
of Internal Revenue (BIR).

Proceedings before the City Treasurer

On January 22, 2004, the City Treasurer issued a Notice of Assessment 7 to AEC for payment of business
tax, license fee and other charges for the period 1993 to 2004 in the total amount of ₱94,861,194.10.
Within the period prescribed by law, AEC protested the assessment claiming that:

(a) pursuant to RA 4079, it is exempt from paying local business tax;

(b) since it is already paying franchise tax on business, the payment of business tax would result
in double taxation;

(c) the period to assess had prescribed because under the LGC, taxes and fees can only be assessed
and collected within five (5) years from the date they become due; and

(d) the assessment and collection of taxes under the RRCAC cannot be made retroactive to 1993
or prior to its effectivity.8

On February 17, 2004, the City Treasurer denied the protest for lack of merit and requested AEC to settle
its tax liabilities.9

Proceedings before the RTC

Aggrieved, AEC appealed the denial of its protest to the RTC of Angeles City via a Petition for Declaratory
Relief,10docketed as Civil Case No. 11401.

On April 5, 2004, the City Treasurer levied on the real properties of AEC. 11 A Notice of Auction Sale12 was
published and posted announcing that a public auction of the levied properties of AEC would be held on
May 7, 2004.

This prompted AEC to file with the RTC, where the petition for declaratory relief was pending, an Urgent
Motion for Issuance of Temporary Restraining Order and/or Writ of Preliminary Injunction13 to enjoin
Angeles City and its City Treasurer from levying, annotating the levy, seizing, confiscating, garnishing,
selling and disposing at public auction the properties of AEC.

Meanwhile, in response to the petition for declaratory relief filed by AEC, Angeles City and its City Treasurer
filed an Answer with Counterclaim14 to which AEC filed a Reply.15

After due notice and hearing, the RTC issued a Temporary Restraining Order (TRO) 16 on May 4, 2004,
followed by an Order17 dated May 24, 2004 granting the issuance of a Writ of Preliminary Injunction,
conditioned upon the filing of a bond in the amount of ₱10,000,000.00. Upon AEC’s posting of the required
bond, the RTC issued a Writ of Preliminary Injunction on May 28, 2004,18 which was amended on May 31,
2004 due to some clerical errors.19

On August 5, 2004, Angeles City and its City Treasurer filed a "Motion for Dissolution of Preliminary
Injunction and Motion for Reconsideration of the Order dated May 24, 2004," 20 which was opposed by
AEC.21

Finding no compelling reason to disturb and reconsider its previous findings, the RTC denied the joint
motion on October 14, 2004.22

Issue

Being a special civil action for certiorari, the issue in the instant case is limited to the determination of
whether the RTC gravely abused its discretion in issuing the writ of preliminary injunction enjoining Angeles
City and its City Treasurer from levying, selling, and disposing the properties of AEC. All other matters
pertaining to the validity of the tax assessment and AEC’s tax exemption must therefore be left for the
determination of the RTC where the main case is pending decision.

Petitioner’s Arguments

Petitioner’s main argument is that the collection of taxes cannot be enjoined by the RTC, citing Valley
Trading Co., Inc. v. Court of First Instance of Isabela, Branch II,23 wherein the lower court’s denial of a
motion for the issuance of a writ of preliminary injunction to enjoin the collection of a local tax was upheld.
Petitioner further reasons that since the levy and auction of the properties of a delinquent taxpayer are
proper and lawful acts specifically allowed by the LGC, these cannot be the subject of an injunctive writ.
Petitioner likewise insists that AEC must first pay the tax before it can protest the assessment. Finally,
petitioner contends that the tax exemption claimed by AEC has no legal basis because RA 4079 has been
expressly repealed by the LGC.

Private respondent’s Arguments

Private respondent AEC on the other hand asserts that there was no grave abuse of discretion on the part
of the RTC in issuing the writ of preliminary injunction because it was issued after due notice and hearing,
and was necessary to prevent the petition from becoming moot. In addition, AEC claims that the issuance
of the writ of injunction was proper since the tax assessment issued by the City Treasurer is not yet final,
having been seasonably appealed pursuant to Section 195 24 of the LGC. AEC likewise points out that
following the case of Pantoja v. David,25 proceedings to invalidate a warrant of distraint and levy to restrain
the collection of taxes do not violate the prohibition against injunction to restrain the collection of taxes
because the proceedings are directed at the right of the City Treasurer to collect the tax by distraint or
levy. As to its tax liability, AEC maintains that it is exempt from paying local business tax. In any case, AEC
counters that the issue of whether it is liable to pay the assessed local business tax is a factual issue that
should be determined by the RTC and not by the Supreme Court via a petition for certiorari under Rule 65
of the Rules of Court.

Our Ruling

We find the petition bereft of merit.

The LGC does not specifically prohibit an injunction enjoining the collection of taxes
A principle deeply embedded in our jurisprudence is that taxes being the lifeblood of the government should
be collected promptly,26 without unnecessary hindrance27 or delay.28 In line with this principle, the National
Internal Revenue Code of 1997 (NIRC) expressly provides that no court shall have the authority to grant
an injunction to restrain the collection of any national internal revenue tax, fee or charge imposed by the
code.29 An exception to this rule obtains only when in the opinion of the Court of Tax Appeals (CTA) the
collection thereof may jeopardize the interest of the government and/or the taxpayer. 30

The situation, however, is different in the case of the collection of local taxes as there is no express provision
in the LGC prohibiting courts from issuing an injunction to restrain local governments from collecting taxes.
Thus, in the case of Valley Trading Co., Inc. v. Court of First Instance of Isabela, Branch II, cited by the
petitioner, we ruled that:

Unlike the National Internal Revenue Code, the Local Tax Code31 does not contain any specific provision
prohibiting courts from enjoining the collection of local taxes. Such statutory lapse or intent, however it
may be viewed, may have allowed preliminary injunction where local taxes are involved but cannot negate
the procedural rules and requirements under Rule 58. 32

In light of the foregoing, petitioner’s reliance on the above-cited case to support its view that the collection
of taxes cannot be enjoined is misplaced. The lower court’s denial of the motion for the issuance of a writ
of preliminary injunction to enjoin the collection of the local tax was upheld in that case, not because courts
are prohibited from granting such injunction, but because the circumstances required for the issuance of
writ of injunction were not present.

Nevertheless, it must be emphasized that although there is no express prohibition in the LGC, injunctions
enjoining the collection of local taxes are frowned upon. Courts therefore should exercise extreme caution
in issuing such injunctions.

No grave abuse of discretion was committed by the RTC

Section 3, Rule 58, of the Rules of Court lays down the requirements for the issuance of a writ of preliminary
injunction, viz:

(a) That the applicant is entitled to the relief demanded, and the whole or part of such relief
consists in restraining the commission or continuance of the acts complained of, or in the
performance of an act or acts, either for a limited period or perpetually;

(b) That the commission, continuance or non-performance of the act or acts complained of during
the litigation would probably work injustice to the applicant; or

(c) That a party, court, or agency or a person is doing, threatening, or attempting to do, or is
procuring or suffering to be done, some act or acts probably in violation of the rights of the
applicant respecting the subject of the action or proceeding, and tending to render the judgment
ineffectual.

Two requisites must exist to warrant the issuance of a writ of preliminary injunction, namely: (1) the
existence of a clear and unmistakable right that must be protected; and (2) an urgent and paramount
necessity for the writ to prevent serious damage.33

In issuing the injunction, the RTC ratiocinated that:

It is very evident on record that petitioner34 resorted and filed an urgent motion for issuance of a temporary
restraining order and preliminary injunction to stop the scheduled auction sale only when a warrant of levy
was issued and published in the newspaper setting the auction sale of petitioner’s property by the City
Treasurer, merely few weeks after the petition for declaratory relief has been filed, because if the
respondent will not be restrained, it will render this petition moot and academic. To the mind of the Court,
since there is no other plain, speedy and adequate remedy available to the petitioner in the ordinary course
of law except this application for a temporary restraining order and/or writ of preliminary injunction to stop
the auction sale and/or to enjoin and/or restrain respondents from levying, annotating the levy, seizing,
confiscating, garnishing, selling and disposing at public auction the properties of petitioner, or otherwise
exercising other administrative remedies against the petitioner and its properties, this alone justifies the
move of the petitioner in seeking the injunctive reliefs sought for.

Petitioner in its petition is questioning the assessment or the ruling of the City Treasurer on the business
tax and fees, and not the local ordinance concerned. This being the case, the Court opines that notice is
not required to the Solicitor General since what is involved is just a violation of a private right involving the
right of ownership and possession of petitioner’s properties. Petitioner, therefore, need not comply with
Section 4, Rule 63 requiring such notice to the Office of the Solicitor General.

The Court is fully aware of the Supreme Court pronouncement that injunction is not proper to restrain the
collection of taxes. The issue here as of the moment is the restraining of the respondent from pursuing its
auction sale of the petitioner’s properties. The right of ownership and possession of the petitioner over the
properties subject of the auction sale is at stake.

Respondents assert that not one of the witnesses presented by the petitioner have proven what kind of
right has been violated by the respondent, but merely mentioned of an injury which is only a scenario
based on speculation because of petitioner’s claim that electric power may be disrupted.

Engr. Abordo’s testimony reveals and even his Affidavit Exhibit "S" showed that if the auction sale will push
thru, petitioner will not only lose control and operation of its facility, but its employees will also be denied
access to equipments vital to petitioner’s operations, and since only the petitioner has the capability to
operate Petersville sub station, there will be a massive power failure or blackout which will adversely affect
business and economy, if not lives and properties in Angeles City and surrounding communities.

Petitioner, thru its witnesses, in the hearing of the temporary restraining order, presented sufficient and
convincing evidence proving irreparable damages and injury which were already elaborated in the
temporary restraining order although the same may be realized only if the auction sale will proceed. And
unless prevented, restrained, and enjoined, grave and irreparable damage will be suffered not only by the
petitioner but all its electric consumers in Angeles, Clark, Dau and Bacolor, Pampanga.

The purpose of injunction is to prevent injury and damage from being incurred, otherwise, it will render
any judgment in this case ineffectual.

"As an extraordinary remedy, injunction is calculated to preserve or maintain the status quo of things and
is generally availed of to prevent actual or threatened acts, until the merits of the case can be heard"
(Cagayan de Oro City Landless Res. Assn. Inc. vs. CA, 254 SCRA 220)

It appearing that the two essential requisites of an injunction have been satisfied, as there exists a right
on the part of the petitioner to be protected, its right[s] of ownership and possession of the properties
subject of the auction sale, and that the acts (conducting an auction sale) against which the injunction is
to be directed, are violative of the said rights of the petitioner, the Court has no other recourse but to grant
the prayer for the issuance of a writ of preliminary injunction considering that if the respondent will not be
restrained from doing the acts complained of, it will preempt the Court from properly adjudicating on the
merits the various issues between the parties, and will render moot and academic the proceedings before
this court.35

As a rule, the issuance of a preliminary injunction rests entirely within the discretion of the court taking
cognizance of the case and will not be interfered with, except where there is grave abuse of discretion
committed by the court.36For grave abuse of discretion to prosper as a ground for certiorari, it must be
demonstrated that the lower court or tribunal has exercised its power in an arbitrary and despotic manner,
by reason of passion or personal hostility, and it must be patent and gross as would amount to an evasion
or to a unilateral refusal to perform the duty enjoined or to act in contemplation of law. 37 In other words,
mere abuse of discretion is not enough.381avvph!1

Guided by the foregoing, we find no grave abuse of discretion on the part of the RTC in issuing the writ of
injunction. Petitioner, who has the burden to prove grave abuse of discretion, 39 failed to show that the RTC
acted arbitrarily and capriciously in granting the injunction. Neither was petitioner able to prove that the
injunction was issued without any factual or legal justification. In assailing the injunction, petitioner
primarily relied on the prohibition on the issuance of a writ of injunction to restrain the collection of taxes.
But as we have already said, there is no such prohibition in the case of local taxes. Records also show that
before issuing the injunction, the RTC conducted a hearing where both parties were given the opportunity
to present their arguments. During the hearing, AEC was able to show that it had a clear and unmistakable
legal right over the properties to be levied and that it would sustain serious damage if these properties,
which are vital to its operations, would be sold at public auction. As we see it then, the writ of injunction
was properly issued.

A final note. While we are mindful that the damage to a taxpayer’s property rights generally takes a back
seat to the paramount need of the State for funds to sustain governmental functions, 40 this rule finds no
application in the instant case where the disputed tax assessment is not yet due and demandable.
Considering that AEC was able to appeal the denial of its protest within the period prescribed under Section
195 of the LGC, the collection of business taxes 41 through levy at this time is, to our mind, hasty, if not
premature.42 The issues of tax exemption, double taxation, prescription and the alleged retroactive
application of the RRCAC, raised in the protest of AEC now pending with the RTC, must first be resolved
before the properties of AEC can be levied. In the meantime, AEC’s rights of ownership and possession
must be respected.

WHEREFORE, the petition is hereby DISMISSED.

SO ORDERED.