[G.R. No. 76778. June 6, 1990.] Presidential Decree No. 464 which provides, as follows: "SEC. 21.
General Revision of Assessments. — Beginning with the calendar
FRANCISCO I. CHAVEZ, Petitioner, v. JAIME B. ONGPIN, in
his capacity as Minister of Finance and FIDELINA CRUZ, in
her capacity as Acting Municipal Treasurer of the
Municipality of Las Piñas, Respondents, REALTY OWNERS
ASSOCIATION OF THE PHILIPPINES, INC., petitioner-
intervenor.
Brotherhood of Nationalistic, Involved and Free Attorneys to
Combat Injustice and Oppression (Bonifacio) for Petitioner.
Ambrosio Padilla, Mempin and Reyes Law Offices for movant
Realty Owners Association.
SYLLABUS
1. TAXATION; REAL PROPERTY TAX CODE (P.D. No. 464);
PROCEDURE FOR QUESTIONING TAX ASSESSMENT. — Within sixty
days from the date of receipt of the written notice of assessment,
any owner who doubts the assessment of his property, may appeal
to the Local Board of Assessment Appeals. In case the owner or
administrator of the property or the assessor is not satisfied with
the decision of the Local Board of Assessment Appeals, he may,
within thirty days from the receipt of the decision, appeal to the
Central Board of Assessment Appeals. The decision of the Central
Board of Assessment Appeals shall become final and executory
after the lapse of fifteen days from the date of receipt of the
decision.
2. ID.; ID.; COLLECTION OF REAL PROPERTY TAXES BASED ON
THE 1984 REAL PROPERTY VALUES (E.O. No. 73);
CONSTITUTIONAL. — Petitioner Chavez and intervenor ROAP
question the constitutionality of Executive Order No. 73 insofar as
the revision of the assessments and the effectivity thereof are
concerned. It should be emphasized that Executive Order No. 73
merely directs, in Section 1 thereof, that: "Section 1. Real property
values as of December 31, 1984 as determined by the local
assessors during the latest general revision of assessments shall
take effect beginning January 1, 1987 for purposes of real property
tax collection." (Emphasis supplied) The general revision of
assessments completed in 1984 is based on Section 21 of
year 1978, the provincial or city assessor shall make a general
revision of real property assessments in the province or city to take
effect January 1, 1979, and once every five years thereafter:
Provided; however, That if property values in a province or city, or
in any municipality, have greatly changed since the last general
revision, the provincial or city assessor may, with the approval of
the Secretary of Finance or upon his direction, undertake a general
revision of assessments in the province or city, or in any
municipality before the fifth year from the effectivity of the last
general revision."cralaw virtua1aw library
3. ID.; ID.; ID.; DOES NOT IMPOSE NEW TAXES NOR INCREASE
TAXES. — Chavez argues further that the unreasonable increase in
real property taxes brought about by Executive Order No. 73
amounts to a confiscation of property repugnant to the
constitutional guarantee of due process, invoking the cases of
Ermita-Malate Hotel, Et. Al. v. Mayor of Manila (G.R. No. L-24693,
July 31, 1967, 20 SCRA 849) and Sison v. Ancheta, Et. Al. (G.R.
No. 59431, July 25, 1984, 130 SCRA 654). The reliance on these
two cases is certainly misplaced because the due process
requirement called for therein applies to the "power to tax."
Executive Order No. 73 does not impose new taxes nor increase
taxes. Indeed, the government recognized the financial burden to
the taxpayers that will result from an increase in real property
taxes. Hence, Executive Order No. 1019 was issued on April 18,
1985, deferring the implementation of the increase in real property
taxes resulting from the revised real property assessments, from
January 1, 1985 to January 1, 1988.
4. ID.; SOUND TAX SYSTEM; FISCAL ADEQUACY; CONSTRUED IN
CASE AT BAR. — We agree with the observation of the Office of the
Solicitor General that without Executive Order No. 73, the basis for
collection of real property taxes will still be the 1978 revision of
property values. Certainly, to continue collecting real property
taxes based on valuations arrived at several years ago, in
disregard of the increases in the value of real properties that have
occurred since then, is not in consonance with a sound tax system.
Fiscal adequacy, which is one of the characteristics of a sound tax
system, requires that sources of revenues must be adequate to
meet government expenditures and their variations.
5. REMEDIAL LAW; INTERVENTION; LIMITED TO THE FIELD OF
LITIGATION OPEN TO THE ORIGINAL PARTIES. — The allegation of
ROAP that Presidential Decree No. 464 is unconstitutional, is not
proper to be resolved in the present petition. As stated at the
outset, the issue here is limited to the constitutionality of Executive
Order No. 73. Intervention is not an independent proceeding, but
an ancillary and supplemental one which, in the nature of things,
unless otherwise provided for by legislation (or Rules of Court),
must be in subordination to the main proceeding, and it may be
laid down as a general rule that an intervention is limited to the
field of litigation open to the original parties (59 Am. Jur. 950;
Garcia, etc., Et. Al. v. David, Et Al., 67 Phil. 279).
DECISION
MEDIALDEA, J.:
The petition seeks to declare unconstitutional Executive Order No.
73 dated November 25, 1986, which We quote in full, as follows
(78 O.G. 5861):jgc:chanrobles.com.ph
"EXECUTIVE ORDER No. 73
"PROVIDING FOR THE COLLECTION OF REAL PROPERTY TAXES
BASED ON THE 1984 REAL PROPERTY VALUES, AS PROVIDED FOR
UNDER SECTION 21 OF THE REAL PROPERTY TAX CODE, AS
AMENDED.
"WHEREAS, the collection of real property taxes is still based on
the 1978 revision of property values;
"WHEREAS, the latest general revision of real property
assessments completed in 1984 has rendered the 1978 revised
values obsolete;
"WHEREAS, the collection of real property taxes based on the 1984
real property values was deferred to take effect on January 1, 1988
instead of January 1, 1986, thus depriving the local government
units of an additional source of revenue;
"WHEREAS, there is an urgent need for local governments to
augment their financial resources to meet the rising cost of
rendering effective services to the people;
"NOW, THEREFORE, I, CORAZON C. AQUINO, President of the
Philippines, do hereby order:jgc:chanrobles.com.ph
"SECTION 1. Real property values as of December 31, 1984 as
determined by the local assessors during the latest general revision
of assessments shall take effect beginning January 1, 1987 for
purposes of real property tax collection.
"SEC. 2. The Minister of Finance shall promulgate the necessary
rules and regulations to implement this Executive Order.
"SEC. 3. Executive Order No. 1019, dated April 18, 1985, is hereby
repealed.
"SEC. 4. All laws, orders, issuances, and rules and regulations or
parts thereof inconsistent with this Executive Order are hereby
repealed or modified accordingly.
"SEC. 5. This Executive Order shall take effect immediately."cralaw
virtua1aw library
On March 31, 1987, Memorandum Order No. 77 was issued
suspending the implementation of Executive Order No. 73 until
June 30, 1987.
The petitioner, Francisco I. Chavez, 1 is a taxpayer and an owner
of three parcels of land. He alleges the following: that Executive
Order No. 73 accelerated the application of the general revision of
assessments to January 1, 1987 thereby mandating an excessive
increase in real property taxes by 100% to 400% on
improvements, and up to 100% on land; that any increase in the
value of real property brought about by the revision of real
property values and assessments would necessarily lead to a
proportionate increase in real property taxes; that sheer
oppression is the result of increasing real property taxes at a
period of time when harsh economic conditions prevail; and that
the increase in the market values of real property as reflected in
the schedule of values was brought about only by inflation and
economic recession.
The intervenor Realty Owners Association of the Philippines, Inc.
(ROAP), which is the national association of owners-lessors, joins
Chavez in his petition to declare unconstitutional Executive Order
No. 73, but additionally alleges the following: that Presidential
Decree No. 464 is unconstitutional insofar as it imposes an
additional one percent (1%) tax on all property owners to raise
funds for education, as real property tax is admittedly a local tax
for local governments; that the General Revision of Assessments
does not meet the requirements of due process as regards
publication, notice of hearing, opportunity to be heard and insofar
as it authorizes "replacement cost" of buildings (improvements)
which is not provided in Presidential Decree No. 464, but only in an
administrative regulation of the Department of Finance; and that
the Joint Local Assessment/Treasury Regulations No. 2-86 2 is
even more oppressive and unconstitutional as it imposes
successive increase of 150% over the 1986 tax.
The Office of the Solicitor General argues against the petition.
The petition is not impressed with merit.
Petitioner Chavez and intervenor ROAP question the
constitutionality of Executive Order No. 73 insofar as the revision
of the assessments and the effectivity thereof are concerned. It
should be emphasized that Executive Order No. 73 merely directs,
in Section 1 thereof, that:jgc:chanrobles.com.ph
"SECTION 1. Real property values as of December 31, 1984 as
determined by the local assessors during the latest general revision
of assessments shall take effect beginning January 1, 1987 for
purposes of real property tax collection." (Emphasis supplied)
The general revision of assessments completed in 1984 is based on
Section 21 of Presidential Decree No. 464 which provides, as
follows:jgc:chanrobles.com.ph
"SEC. 21. General Revision of Assessments. — Beginning with the
calendar year 1978, the provincial or city assessor shall make a
general revision of real property assessments in the province or
city to take effect January 1, 1979, and once every five years
thereafter: Provided; however, That if property values in a
province or city, or in any municipality, have greatly changed since
the last general revision, the provincial or city assessor may, with
the approval of the Secretary of Finance or upon his direction,
undertake a general revision of assessments in the province or
city, or in any municipality before the fifth year from the effectivity
of the last general revision."cralaw virtua1aw library
Thus, We agree with the Office of the Solicitor General that the
attack on Executive Order No. 73 has no legal basis as the general
revision of assessments is a continuing process mandated by
Section 21 of Presidential Decree No. 464. If at all, it is Presidential
Decree No. 464 which should be challenged as constitutionally
infirm. However, Chavez failed to raise any objection against said
decree. It was ROAP which questioned the constitutionality thereof.
Furthermore, Presidential Decree No. 464 furnishes the procedure
by which a tax assessment may be
questioned:jgc:chanrobles.com.ph
"SEC. 30. Local Board of Assessment Appeals. — Any owner who is
not satisfied with the action of the provincial or city assessor in the
assessment of his property may, within sixty days from the date of
receipt by him of the written notice of assessment as provided in
this Code, appeal to the Board of Assessment Appeals of the
province or city, by filing with it a petition under oath using the
form prescribed for the purpose, together with copies of the tax
declarations and such affidavit or documents submitted in support
of the appeal."cralaw virtua1aw library
x x x
"SEC. 34. Section by the Local of Assessment Appeals. — The Local
Board of Assessment Appeals shall decide the appeal within one
hundred and twenty days from the date of receipt of such appeal.
The decision rendered must be based on substantial evidence
presented at the hearing or at least contained in the record and
disclosed to the parties or such relevant evidence as a reasonable
mind might accept as adequate to support the conclusion.
"In the exercise of its appellate jurisdiction, the Board shall have
the power to summon witnesses, administer oaths, conduct ocular
inspection, take depositions, and issue subpoena and subpoena
duces tecum. The proceedings of the Board shall be conducted
solely for the purpose of ascertaining the truth without necessarily
adhering to technical rules applicable in judicial proceedings.
"The Secretary of the Board shall furnish the property owner and
the Provincial or City Assessor with a copy each of the decision of
the Board. In case the provincial or city assessor concurs in the
revision or the assessment, it shall be his duty to notify the
property owner of such fact using the form prescribed for the
purpose. The owner or administrator of the property or the
assessor who is not satisfied with the decision of the Board of
Assessment Appeals, may, within thirty days after receipt of the
decision of the local Board, appeal to the Central Board of
Assessment Appeals by filing his appeal under oath with the
Secretary of the proper provincial or city Board of Assessment
Appeals using the prescribed form stating therein the grounds and
the reasons for the appeal, and attaching thereto any evidence
pertinent to the case. A copy of the appeal should be also furnished
the Central Board of Assessment Appeals, through its Chairman, by
the Appellant.
"Within ten (10) days from receipt of the appeal, the Secretary of
the Board of Assessment Appeals concerned shall forward the same
and all papers related thereto, to the Central Board of Assessment
Appeals through the Chairman thereof."cralaw virtua1aw library
x x x increase taxes.
"SEC. 36. Scope of Powers and Functions. — The Central Board of
Assessment Appeals shall have jurisdiction over appealed
assessment cases decided by the Local Board of Assessment
Appeals. The said Board shall decide cases brought on appeal
within twelve (12) months from the date of receipt, which decision
shall become final and executory after the lapse of fifteen (15)
days from the date of receipt of a copy of the decision by
the Appellant.
"In the exercise of its appellate jurisdiction, the Central Board of
Assessment Appeals, or upon express authority, the Hearing
Commissioner, shall have the power to summon witnesses,
administer oaths, take depositions, and issue subpoenas and
subpoenas duces tecum.
"The Central Board of Assessment Appeals shall adopt and
promulgate rules of procedure relative to the conduct of its
business."cralaw virtua1aw library
Simply stated, within sixty days from the date of receipt of the
written notice of assessment, any owner who doubts the
assessment of his property, may appeal to the Local Board of
Assessment Appeals. In case the owner or administrator of the
property or the assessor is not satisfied with the decision of the
Local Board of Assessment Appeals, he may, within thirty days
from the receipt of the decision, appeal to the Central Board of
Assessment Appeals. The decision of the Central Board of
Assessment Appeals shall become final and executory after the
lapse of fifteen days from the date of receipt of the decision.
Chavez argues further that the unreasonable increase in real
property taxes brought about by Executive Order No. 73 amounts
to a confiscation of property repugnant to the constitutional
guarantee of due process, invoking the cases of Ermita-Malate
Hotel, Et. Al. v. Mayor of Manila (G.R. No. L-24693, July 31, 1967,
20 SCRA 849) and Sison v. Ancheta, Et. Al. (G.R. No. 59431, July
25, 1984, 130 SCRA 654).
The reliance on these two cases is certainly misplaced because the
due process requirement called for therein applies to the "power to
tax." Executive Order No. 73 does not impose new taxes nor
Indeed, the government recognized the financial burden to the
taxpayers that will result from an increase in real property taxes.
Hence, Executive Order No. 1019 was issued on April 18, 1985,
deferring the implementation of the increase in real property taxes
resulting from the revised real property assessments, from January
1, 1985 to January 1, 1988. Section 5 thereof is quoted herein as
follows:jgc:chanrobles.com.ph
"SEC. 5. The increase in real property taxes resulting from the
revised real property assessments as provided for under Section 21
of Presidential Decree No. 464, as amended by Presidential Decree
No. 1 621, shall be collected beginning January 1, 1988 instead of
January 1, 1985 in order to enable the Ministry of Finance and the
Ministry of Local Government to establish the new systems of tax
collection and assessment provided herein and in order to alleviate
the condition of the people, including real property owners, as a
result of temporary economic difficulties." (Emphasis supplied)
The issuance of Executive Order No. 73 which changed the date of
implementation of the increase in real property taxes from January
1, 1988 to January 1, 1987 and therefore repealed Executive Order
No. 1019, also finds ample justification in its "whereas" clauses, as
follows:jgc:chanrobles.com.ph

"WHEREAS, the collection of real property taxes based on the 1984

real property values was deferred to take effect on January 1, 1988
instead of January 1, 1985, thus depriving the local government
units of an additional source of revenue;

"WHEREAS, there is an urgent need for local governments to

augment their financial resources to meet the rising cost of
rendering effective services to the people; (Emphasis supplied)

x x x

The other allegation of ROAP that Presidential Decree No. 464 is

unconstitutional, is not proper to be resolved in the present
petition. As stated at the outset, the issue here is limited to the
constitutionality of Executive Order No. 73. Intervention is not an
independent proceeding, but an ancillary and supplemental one
which, in the nature of things, unless otherwise provided for by
legislation (or Rules of Court), must be in subordination to the
main proceeding, and it may be laid down as a general rule that an
intervention is limited to the field of litigation open to the original
parties (59 Am. Jur. 950; Garcia, etc., Et. Al. v. David, Et Al., 67
Phil. 279).

We agree with the observation of the Office of the Solicitor General

that without Executive Order No. 73, the basis for collection of real
property taxes will still be the 1978 revision of property values.
Certainly, to continue collecting real property taxes based on
valuations arrived at several years ago, in disregard of the
increases in the value of real properties that have occurred since
then, is not in consonance with a sound tax system. Fiscal
adequacy, which is one of the characteristics of a sound tax
system, requires that sources of revenues must be adequate to
meet government expenditures and their variations.chanrobles
virtual lawlibrary

ACCORDINGLY, the petition and the petition-in-intervention are

hereby DISMISSED.

SO ORDERED.
G.R. No. 81311 June 30, 1988
KAPATIRAN NG MGA NAGLILINGKOD SA PAMAHALAAN NG
PILIPINAS, INC., HERMINIGILDO C. DUMLAO, GERONIMO Q.
QUADRA, and MARIO C. VILLANUEVA, petitioners,
vs.
HON. BIENVENIDO TAN, as Commissioner of Internal
Revenue, respondent.
G.R. No. 81820 June 30, 1988
KILUSANG MAYO UNO LABOR CENTER (KMU), its officers
and affiliated labor federations and alliances, petitioners,
vs.
THE EXECUTIVE SECRETARY, SECRETARY OF FINANCE, THE
COMMISSIONER OF INTERNAL REVENUE, and SECRETARY
OF BUDGET, respondents.
G.R. No. 81921 June 30, 1988
INTEGRATED CUSTOMS BROKERS ASSOCIATION OF THE
PHILIPPINES and JESUS B. BANAL, petitioners,
vs.
The HON. COMMISSIONER, BUREAU OF INTERNAL
REVENUE, respondent.
G.R. No. 82152 June 30, 1988
RICARDO C. VALMONTE, petitioner,
vs.
THE EXECUTIVE SECRETARY, SECRETARY OF FINANCE,
COMMISSIONER OF INTERNAL REVENUE and SECRETARY OF
BUDGET, respondent.
Franklin S. Farolan for petitioner Kapatiran in G.R. No. 81311.
Jaime C. Opinion for individual petitioners in G.R. No. 81311.
Banzuela, Flores, Miralles, Rañeses, Sy, Taquio and Associates for
petitioners in G.R. No 81820.
Union of Lawyers and Advocates for Peoples Right collaborating
counsel for petitioners in G.R. No 81820.
Jose C. Leabres and Joselito R. Enriquez for petitioners in G.R. No.
81921.
PADILLA, J.:
These four (4) petitions, which have been consolidated because of
the similarity of the main issues involved therein, seek to nullify
Executive Order No. 273 (EO 273, for short), issued by the
President of the Philippines on 25 July 1987, to take effect on 1
January 1988, and which amended certain sections of the National
Internal Revenue Code and adopted the value-added tax (VAT, for
short), for being unconstitutional in that its enactment is not
alledgedly within the powers of the President; that the VAT is
oppressive, discriminatory, regressive, and violates the due
process and equal protection clauses and other provisions of the
1987 Constitution.
The Solicitor General prays for the dismissal of the petitions on the
ground that the petitioners have failed to show justification for the
exercise of its judicial powers, viz. (1) the existence of an
appropriate case; (2) an interest, personal and substantial, of the
party raising the constitutional questions; (3) the constitutional
question should be raised at the earliest opportunity; and (4) the
question of constitutionality is directly and necessarily involved in a
justiciable controversy and its resolution is essential to the
protection of the rights of the parties. According to the Solicitor
General, only the third requisite — that the constitutional question
should be raised at the earliest opportunity — has been complied
with. He also questions the legal standing of the petitioners who,
he contends, are merely asking for an advisory opinion from the
Court, there being no justiciable controversy for resolution.
Objections to taxpayers' suit for lack of sufficient personality
standing, or interest are, however, in the main procedural matters.
Considering the importance to the public of the cases at bar, and in
keeping with the Court's duty, under the 1987 Constitution, to
determine wether or not the other branches of government have
kept themselves within the limits of the Constitution and the laws
and that they have not abused the discretion given to them, the
Court has brushed aside technicalities of procedure and has taken
cognizance of these petitions.
But, before resolving the issues raised, a brief look into the tax law
in question is in order.
The VAT is a tax levied on a wide range of goods and services. It is
a tax on the value, added by every seller, with aggregate gross
annual sales of articles and/or services, exceeding P200,00.00, to
his purchase of goods and services, unless exempt. VAT is
computed at the rate of 0% or 10% of the gross selling price of
goods or gross receipts realized from the sale of services.
The VAT is said to have eliminated privilege taxes, multiple rated
sales tax on manufacturers and producers, advance sales tax, and
compensating tax on importations. The framers of EO 273 that it is
principally aimed to rationalize the system of taxing goods and
services; simplify tax administration; and make the tax system
more equitable, to enable the country to attain economic recovery.
The VAT is not entirely new. It was already in force, in a modified
form, before EO 273 was issued. As pointed out by the Solicitor
General, the Philippine sales tax system, prior to the issuance of
EO 273, was essentially a single stage value added tax system
computed under the "cost subtraction method" or "cost deduction
method" and was imposed only on original sale, barter or exchange
of articles by manufacturers, producers, or importers. Subsequent
sales of such articles were not subject to sales tax. However, with
the issuance of PD 1991 on 31 October 1985, a 3% tax was
imposed on a second sale, which was reduced to 1.5% upon the
issuance of PD 2006 on 31 December 1985, to take effect 1
January 1986. Reduced sales taxes were imposed not only on the
second sale, but on every subsequent sale, as well. EO 273 merely
increased the VAT on every sale to 10%, unless zero-rated or
exempt.
Petitioners first contend that EO 273 is unconstitutional on the
Ground that the President had no authority to issue EO 273 on 25
July 1987.
The contention is without merit.
It should be recalled that under Proclamation No. 3, which decreed
a Provisional Constitution, sole legislative authority was vested
upon the President. Art. II, sec. 1 of the Provisional Constitution
states:
Sec. 1. Until a legislature is elected and convened
under a new Constitution, the President shall
continue to exercise legislative powers.
On 15 October 1986, the Constitutional Commission of 1986
adopted a new Constitution for the Republic of the Philippines
which was ratified in a plebiscite conducted on 2 February 1987.
Article XVIII, sec. 6 of said Constitution, hereafter referred to as
the 1987 Constitution, provides:
Sec. 6. The incumbent President shall continue to
exercise legislative powers until the first Congress is
convened.
It should be noted that, under both the Provisional and the 1987
Constitutions, the President is vested with legislative powers until a
legislature under a new Constitution is convened. The first
Congress, created and elected under the 1987 Constitution, was
convened on 27 July 1987. Hence, the enactment of EO 273 on 25
July 1987, two (2) days before Congress convened on 27 July
1987, was within the President's constitutional power and authority
to legislate.
Petitioner Valmonte claims, additionally, that Congress was really
convened on 30 June 1987 (not 27 July 1987). He contends that
the word "convene" is synonymous with "the date when the elected
members of Congress assumed office."
The contention is without merit. The word "convene" which has
been interpreted to mean "to call together, cause to assemble, or
convoke," 1 is clearly different from assumption of office by
the individual members of Congress or their taking the oath of
office. As an example, we call to mind the interim National
Assembly created under the 1973 Constitution, which had not been
"convened" but some members of the body, more particularly the
delegates to the 1971 Constitutional Convention who had opted to
serve therein by voting affirmatively for the approval of said
Constitution, had taken their oath of office.
To uphold the submission of petitioner Valmonte would stretch the
definition of the word "convene" a bit too far. It would also defeat
the purpose of the framers of the 1987 Constitutional and render
meaningless some other provisions of said Constitution. For
example, the provisions of Art. VI, sec. 15, requiring Congress
to convene once every year on the fourth Monday of July for its
regular session would be a contrariety, since Congress would
already be deemed to be in session after the individual members
have taken their oath of office. A portion of the provisions of Art.
VII, sec. 10, requiring Congress to convene for the purpose of
enacting a law calling for a special election to elect a President and
Vice-President in case a vacancy occurs in said offices, would also
be a surplusage. The portion of Art. VII, sec. 11, third paragraph,
requiring Congress to convene, if not in session, to decide a conflict
between the President and the Cabinet as to whether or not the
President and the Cabinet as to whether or not the President can
re-assume the powers and duties of his office, would also be
redundant. The same is true with the portion of Art. VII, sec. 18,
which requires Congress to convene within twenty-four (24) hours
following the declaration of martial law or the suspension of the
privilage of the writ of habeas corpus.
The 1987 Constitution mentions a specific date when the President
loses her power to legislate. If the framers of said Constitution had
intended to terminate the exercise of legislative powers by the
President at the beginning of the term of office of the members of
Congress, they should have so stated (but did not) in clear and
unequivocal terms. The Court has not power to re-write the
Constitution and give it a meaning different from that intended.
The Court also finds no merit in the petitioners' claim that EO 273
was issued by the President in grave abuse of discretion amounting
to lack or excess of jurisdiction. "Grave abuse of discretion" has
been defined, as follows:
Grave abuse of discretion" implies such capricious
and whimsical exercise of judgment as is equivalent
to lack of jurisdiction (Abad Santos vs. Province of
Tarlac, 38 Off. Gaz. 834), or, in other words, where
the power is exercised in an arbitrary or despotic
manner by reason of passion or personal hostility,
and it must be so patent and gross as to amount to
an evasion of positive duty or to a virtual refusal to
perform the duty enjoined or to act at all in
contemplation of law. (Tavera-Luna, Inc. vs. Nable,
38 Off. Gaz. 62). 2
Petitioners have failed to show that EO 273 was issued capriciously
and whimsically or in an arbitrary or despotic manner by reason of
passion or personal hostility. It appears that a comprehensive
study of the VAT had been extensively discussed by this framers
and other government agencies involved in its implementation,
even under the past administration. As the Solicitor General
correctly sated. "The signing of E.O. 273 was merely the last stage
in the exercise of her legislative powers. The legislative process
started long before the signing when the data were gathered,
proposals were weighed and the final wordings of the measure
were drafted, revised and finalized. Certainly, it cannot be said that
the President made a jump, so to speak, on the Congress, two
days before it convened." 3
Next, the petitioners claim that EO 273 is oppressive,
discriminatory, unjust and regressive, in violation of the provisions
of Art. VI, sec. 28(1) of the 1987 Constitution, which states:
Sec. 28 (1) The rule of taxation shall be uniform and
equitable. The Congress shall evolve a progressive
system of taxation.
The petitioners" assertions in this regard are not supported by facts
and circumstances to warrant their conclusions. They have failed to
adequately show that the VAT is oppressive, discriminatory or
unjust. Petitioners merely rely upon newspaper articles which are
actually hearsay and have evidentiary value. To justify the
nullification of a law. there must be a clear and unequivocal breach
of the Constitution, not a doubtful and argumentative implication. 4
As the Court sees it, EO 273 satisfies all the requirements of a valid
tax. It is uniform. The court, in City of Baguio vs. De Leon, 5 said:
... In Philippine Trust Company v. Yatco (69 Phil.
420), Justice Laurel, speaking for the Court, stated:
"A tax is considered uniform when it operates with
the same force and effect in every place where the
subject may be found."
 There was no occasion in that case to consider the
possible effect on such a constitutional requirement
where there is a classification. The opportunity came
in Eastern Theatrical Co. v. Alfonso (83 Phil. 852,
862). Thus: "Equality and uniformity in taxation
means that all taxable articles or kinds of property of
the same class shall be taxed at the same rate. The
taxing power has the authority to make reasonable
and natural classifications for purposes of taxation; .
. ." About two years later, Justice Tuason, speaking
for this Court in Manila Race Horses Trainers Assn. v.
de la Fuente (88 Phil. 60, 65) incorporated the above
excerpt in his opinion and continued; "Taking
everything into account, the differentiation against
which the plaintiffs complain conforms to the
practical dictates of justice and equity and is not
discriminatory within the meaning of the
Constitution."
To satisfy this requirement then, all that is needed
as held in another case decided two years later, (Uy
Matias v. City of Cebu, 93 Phil. 300) is that the
statute or ordinance in question "applies equally to
all persons, firms and corporations placed in similar
situation." This Court is on record as accepting the
view in a leading American case (Carmichael v.
Southern Coal and Coke Co., 301 US 495) that
"inequalities which result from a singling out of one
particular class for taxation or exemption infringe no
constitutional limitation." (Lutz v. Araneta, 98 Phil.
148, 153).
The sales tax adopted in EO 273 is applied similarly on all goods
and services sold to the public, which are not exempt, at the
constant rate of 0% or 10%.
The disputed sales tax is also equitable. It is imposed only on sales
of goods or services by persons engage in business with an
aggregate gross annual sales exceeding P200,000.00. Small
corner sari-sari stores are consequently exempt from its
application. Likewise exempt from the tax are sales of farm and
marine products, spared as they are from the incidence of the VAT,
are expected to be relatively lower and within the reach of the
general public. 6
The Court likewise finds no merit in the contention of the petitioner
Integrated Customs Brokers Association of the Philippines that EO
273, more particularly the new Sec. 103 (r) of the National Internal
Revenue Code, unduly discriminates against customs brokers. The
contested provision states:
Sec. 103. Exempt transactions. — The following shall
be exempt from the value-added tax:
xxx xxx xxx
(r) Service performed in the exercise of profession or
calling (except customs brokers) subject to the
occupation tax under the Local Tax Code, and
professional services performed by registered
general professional partnerships;
The phrase "except customs brokers" is not meant to discriminate
against customs brokers. It was inserted in Sec. 103(r) to
complement the provisions of Sec. 102 of the Code, which makes
the services of customs brokers subject to the payment of the VAT
and to distinguish customs brokers from other professionals who
are subject to the payment of an occupation tax under the Local
Tax Code. Pertinent provisions of Sec. 102 read:
Sec. 102. Value-added tax on sale of services. —
There shall be levied, assessed and collected, a
value-added tax equivalent to 10% percent of gross
receipts derived by any person engaged in the sale
of services. The phrase sale of services" means the
performance of all kinds of services for others for a
fee, remuneration or consideration, including those
performed or rendered by construction and service
contractors; stock, real estate, commercial, customs
and immigration brokers; lessors of personal
property; lessors or distributors of cinematographic
films; persons engaged in milling, processing,
manufacturing or repacking goods for others; and
similar services regardless of whether or not the
 performance thereof call for the exercise or use of WHEREFORE, the petitions are DISMISSED. Without
the physical or mental faculties: ... pronouncement as to costs.

With the insertion of the clarificatory phrase "except customs SO ORDERED.

brokers" in Sec. 103(r), a potential conflict between the two
sections, (Secs. 102 and 103), insofar as customs brokers are
concerned, is averted.

At any rate, the distinction of the customs brokers from the other
professionals who are subject to occupation tax under the Local
Tax Code is based upon material differences, in that the activities
of customs brokers (like those of stock, real estate and
immigration brokers) partake more of a business, rather than a
profession and were thus subjected to the percentage tax under
Sec. 174 of the National Internal Revenue Code prior to its
amendment by EO 273. EO 273 abolished the percentage tax and
replaced it with the VAT. If the petitioner Association did not
protest the classification of customs brokers then, the Court sees
no reason why it should protest now.

The Court takes note that EO 273 has been in effect for more than
five (5) months now, so that the fears expressed by the petitioners
that the adoption of the VAT will trigger skyrocketing of prices of
basic commodities and services, as well as mass actions and
demonstrations against the VAT should by now be evident. The fact
that nothing of the sort has happened shows that the fears and
apprehensions of the petitioners appear to be more imagined than
real. It would seem that the VAT is not as bad as we are made to
believe.

In any event, if petitioners seriously believe that the adoption and

continued application of the VAT are prejudicial to the general
welfare or the interests of the majority of the people, they should
seek recourse and relief from the political branches of the
government. The Court, following the time-honored doctrine of
separation of powers, cannot substitute its judgment for that of the
President as to the wisdom, justice and advisability of the adoption
of the VAT. The Court can only look into and determine whether or
not EO 273 was enacted and made effective as law, in the manner
required by, and consistent with, the Constitution, and to make
sure that it was not issued in grave abuse of discretion amounting
to lack or excess of jurisdiction; and, in this regard, the Court finds
no reason to impede its application or continued implementation.
G.R. No. 193007 July 19, 2011
RENATO V. DIAZ and AURORA MA. F. TIMBOL, Petitioners,
vs.
THE SECRETARY OF FINANCE and THE COMMISSIONER OF
INTERNAL REVENUE, Respondents.
DECISION
ABAD, J.:
May toll fees collected by tollway operators be subjected to value-
added tax?
The Facts and the Case
Petitioners Renato V. Diaz and Aurora Ma. F. Timbol (petitioners)
filed this petition for declaratory relief1 assailing the validity of the
impending imposition of value-added tax (VAT) by the Bureau of
Internal Revenue (BIR) on the collections of tollway operators.
Petitioners claim that, since the VAT would result in increased toll
fees, they have an interest as regular users of tollways in stopping
the BIR action. Additionally, Diaz claims that he sponsored the
approval of Republic Act 7716 (the 1994 Expanded VAT Law or
EVAT Law) and Republic Act 8424 (the 1997 National Internal
Revenue Code or the NIRC) at the House of Representatives.
Timbol, on the other hand, claims that she served as Assistant
Secretary of the Department of Trade and Industry and consultant
of the Toll Regulatory Board (TRB) in the past administration.
Petitioners allege that the BIR attempted during the administration
of President Gloria Macapagal-Arroyo to impose VAT on toll fees.
The imposition was deferred, however, in view of the consistent
opposition of Diaz and other sectors to such move. But, upon
President Benigno C. Aquino III’s assumption of office in 2010, the
BIR revived the idea and would impose the challenged tax on toll
fees beginning August 16, 2010 unless judicially enjoined.
Petitioners hold the view that Congress did not, when it enacted
the NIRC, intend to include toll fees within the meaning of "sale of
services" that are subject to VAT; that a toll fee is a "user’s tax,"
not a sale of services; that to impose VAT on toll fees would
amount to a tax on public service; and that, since VAT was never
factored into the formula for computing toll fees, its imposition
would violate the non-impairment clause of the constitution.
On August 13, 2010 the Court issued a temporary restraining order
(TRO), enjoining the implementation of the VAT. The Court
required the government, represented by respondents Cesar V.
Purisima, Secretary of the Department of Finance, and Kim S.
Jacinto-Henares, Commissioner of Internal Revenue, to comment
on the petition within 10 days from notice.2 Later, the Court issued
another resolution treating the petition as one for prohibition. 3
On August 23, 2010 the Office of the Solicitor General filed the
government’s comment.4 The government avers that the NIRC
imposes VAT on all kinds of services of franchise grantees,
including tollway operations, except where the law provides
otherwise; that the Court should seek the meaning and intent of
the law from the words used in the statute; and that the imposition
of VAT on tollway operations has been the subject as early as 2003
of several BIR rulings and circulars.5
The government also argues that petitioners have no right to
invoke the non-impairment of contracts clause since they clearly
have no personal interest in existing toll operating agreements
(TOAs) between the government and tollway operators. At any
rate, the non-impairment clause cannot limit the State’s sovereign
taxing power which is generally read into contracts.
Finally, the government contends that the non-inclusion of VAT in
the parametric formula for computing toll rates cannot exempt
tollway operators from VAT. In any event, it cannot be claimed that
the rights of tollway operators to a reasonable rate of return will be
impaired by the VAT since this is imposed on top of the toll rate.
Further, the imposition of VAT on toll fees would have very minimal
effect on motorists using the tollways.
In their reply6 to the government’s comment, petitioners point out
that tollway operators cannot be regarded as franchise grantees
under the NIRC since they do not hold legislative franchises.
Further, the BIR intends to collect the VAT by rounding off the toll
rate and putting any excess collection in an escrow account. But
this would be illegal since only the Congress can modify VAT rates
and authorize its disbursement. Finally, BIR Revenue Memorandum
Circular 63-2010 (BIR RMC 63-2010), which directs toll companies
to record an accumulated input VAT of zero balance in their books
as of August 16, 2010, contravenes Section 111 of the NIRC which
grants entities that first become liable to VAT a transitional input
tax credit of 2% on beginning inventory. For this reason, the VAT
on toll fees cannot be implemented.
The Issues Presented
The case presents two procedural issues:
1. Whether or not the Court may treat the petition for
declaratory relief as one for prohibition; and
2. Whether or not petitioners Diaz and Timbol have legal
standing to file the action.
The case also presents two substantive issues:
1. Whether or not the government is unlawfully expanding
VAT coverage by including tollway operators and tollway
operations in the terms "franchise grantees" and "sale of
services" under Section 108 of the Code; and
2. Whether or not the imposition of VAT on tollway
operators a) amounts to a tax on tax and not a tax on
services; b) will impair the tollway operators’ right to a
reasonable return of investment under their TOAs; and c) is
not administratively feasible and cannot be implemented.
The Court’s Rulings
A. On the Procedural Issues:
On August 24, 2010 the Court issued a resolution, treating the
petition as one for prohibition rather than one for declaratory relief,
the characterization that petitioners Diaz and Timbol gave their
action. The government has sought reconsideration of the Court’s
resolution,7 however, arguing that petitioners’ allegations clearly
made out a case for declaratory relief, an action over which the
Court has no original jurisdiction. The government adds, moreover,
that the petition does not meet the requirements of Rule 65 for
actions for prohibition since the BIR did not exercise judicial, quasi-
judicial, or ministerial functions when it sought to impose VAT on
toll fees. Besides, petitioners Diaz and Timbol has a plain, speedy,
and adequate remedy in the ordinary course of law against the BIR
action in the form of an appeal to the Secretary of Finance.
But there are precedents for treating a petition for declaratory
relief as one for prohibition if the case has far-reaching implications
and raises questions that need to be resolved for the public
good.8 The Court has also held that a petition for prohibition is a
proper remedy to prohibit or nullify acts of executive officials that
amount to usurpation of legislative authority.9
Here, the imposition of VAT on toll fees has far-reaching
implications. Its imposition would impact, not only on the more
than half a million motorists who use the tollways everyday, but
more so on the government’s effort to raise revenue for funding
various projects and for reducing budgetary deficits.
To dismiss the petition and resolve the issues later, after the
challenged VAT has been imposed, could cause more mischief both
to the tax-paying public and the government. A belated declaration
of nullity of the BIR action would make any attempt to refund to
the motorists what they paid an administrative nightmare with no
solution. Consequently, it is not only the right, but the duty of the
Court to take cognizance of and resolve the issues that the petition
raises.
Although the petition does not strictly comply with the
requirements of Rule 65, the Court has ample power to waive such
technical requirements when the legal questions to be resolved are
of great importance to the public. The same may be said of the
requirement of locus standi which is a mere procedural requisite.10
B. On the Substantive Issues:
One. The relevant law in this case is Section 108 of the NIRC, as
amended. VAT is levied, assessed, and collected, according to
Section 108, on the gross receipts derived from the sale or
exchange of services as well as from the use or lease of properties.
The third paragraph of Section 108 defines "sale or exchange of
services" as follows:
The phrase ‘sale or exchange of services’ means the performance
of all kinds of services in the Philippines for others for a fee,
remuneration or consideration, including those performed or
rendered by construction and service contractors; stock, real
estate, commercial, customs and immigration brokers; lessors of
property, whether personal or real; warehousing services; lessors
or distributors of cinematographic films; persons engaged in
milling, processing, manufacturing or repacking goods for others;
proprietors, operators or keepers of hotels, motels, resthouses,
pension houses, inns, resorts; proprietors or operators of
restaurants, refreshment parlors, cafes and other eating places,
including clubs and caterers; dealers in securities; lending
investors; transportation contractors on their transport of goods or
cargoes, including persons who transport goods or cargoes for hire
and other domestic common carriers by land relative to their
transport of goods or cargoes; common carriers by air and sea
relative to their transport of passengers, goods or cargoes from
one place in the Philippines to another place in the Philippines;
sales of electricity by generation companies, transmission, and
distribution companies; services of franchise grantees of electric
utilities, telephone and telegraph, radio and television broadcasting
and all other franchise grantees except those under Section 119 of
this Code and non-life insurance companies (except their crop
insurances), including surety, fidelity, indemnity and bonding
companies; and similar services regardless of whether or not the
performance thereof calls for the exercise or use of the physical or
mental faculties. (Underscoring supplied)
It is plain from the above that the law imposes VAT on "all kinds of
services" rendered in the Philippines for a fee, including those
specified in the list. The enumeration of affected services is not
exclusive.11 By qualifying "services" with the words "all kinds,"
Congress has given the term "services" an all-encompassing
meaning. The listing of specific services are intended to illustrate
how pervasive and broad is the VAT’s reach rather than establish
concrete limits to its application. Thus, every activity that can be
imagined as a form of "service" rendered for a fee should be
deemed included unless some provision of law especially excludes
it.
Now, do tollway operators render services for a fee? Presidential
Decree (P.D.) 1112 or the Toll Operation Decree establishes the
legal basis for the services that tollway operators render.
Essentially, tollway operators construct, maintain, and operate
expressways, also called tollways, at the operators’ expense.
Tollways serve as alternatives to regular public highways that
meander through populated areas and branch out to local roads.
Traffic in the regular public highways is for this reason slow-
moving. In consideration for constructing tollways at their expense,
the operators are allowed to collect government-approved fees
from motorists using the tollways until such operators could fully
recover their expenses and earn reasonable returns from their
investments.
When a tollway operator takes a toll fee from a motorist, the fee is
in effect for the latter’s use of the tollway facilities over which the
operator enjoys private proprietary rights12 that its contract and
the law recognize. In this sense, the tollway operator is no different
from the following service providers under Section 108 who allow
others to use their properties or facilities for a fee:
1. Lessors of property, whether personal or real;
2. Warehousing service operators;
3. Lessors or distributors of cinematographic films;
4. Proprietors, operators or keepers of hotels, motels,
resthouses, pension houses, inns, resorts;
5. Lending investors (for use of money);
6. Transportation contractors on their transport of goods or
cargoes, including persons who transport goods or cargoes
for hire and other domestic common carriers by land
relative to their transport of goods or cargoes; and
7. Common carriers by air and sea relative to their transport
of passengers, goods or cargoes from one place in the
Philippines to another place in the Philippines.
It does not help petitioners’ cause that Section 108 subjects to VAT
"all kinds of services" rendered for a fee "regardless of whether or
not the performance thereof calls for the exercise or use of the
physical or mental faculties." This means that "services" to be
subject to VAT need not fall under the traditional concept of
services, the personal or professional kinds that require the use of
human knowledge and skills.
And not only do tollway operators come under the broad term "all
kinds of services," they also come under the specific class
described in Section 108 as "all other franchise grantees" who are
subject to VAT, "except those under Section 119 of this Code."
Tollway operators are franchise grantees and they do not belong to
exceptions (the low-income radio and/or television broadcasting
companies with gross annual incomes of less than ₱10 million and
gas and water utilities) that Section 11913 spares from the payment
of VAT. The word "franchise" broadly covers government grants of
a special right to do an act or series of acts of public concern. 14
Petitioners of course contend that tollway operators cannot be
considered "franchise grantees" under Section 108 since they do
not hold legislative franchises. But nothing in Section 108 indicates
that the "franchise grantees" it speaks of are those who hold
legislative franchises. Petitioners give no reason, and the Court
cannot surmise any, for making a distinction between franchises
granted by Congress and franchises granted by some other
government agency. The latter, properly constituted, may grant
franchises. Indeed, franchises conferred or granted by local
authorities, as agents of the state, constitute as much a legislative
franchise as though the grant had been made by Congress
itself.15 The term "franchise" has been broadly construed as
referring, not only to authorizations that Congress directly issues in
the form of a special law, but also to those granted by
administrative agencies to which the power to grant franchises has
been delegated by Congress.16
Tollway operators are, owing to the nature and object of their
business, "franchise grantees." The construction, operation, and
maintenance of toll facilities on public improvements are activities
of public consequence that necessarily require a special grant of
authority from the state. Indeed, Congress granted special
franchise for the operation of tollways to the Philippine National
Construction Company, the former tollway concessionaire for the
North and South Luzon Expressways. Apart from Congress, tollway
franchises may also be granted by the TRB, pursuant to the
exercise of its delegated powers under P.D. 1112.17 The franchise
in this case is evidenced by a "Toll Operation Certificate." 18
Petitioners contend that the public nature of the services rendered
by tollway operators excludes such services from the term "sale of
services" under Section 108 of the Code. But, again, nothing in
Section 108 supports this contention. The reverse is true. In
specifically including by way of example electric utilities, telephone,
telegraph, and broadcasting companies in its list of VAT-covered
businesses, Section 108 opens other companies rendering public
service for a fee to the imposition of VAT. Businesses of a public
nature such as public utilities and the collection of tolls or charges
for its use or service is a franchise.19
Nor can petitioners cite as binding on the Court statements made
by certain lawmakers in the course of congressional deliberations
of the would-be law. As the Court said in South African Airways v.
Commissioner of Internal Revenue,20 "statements made by
individual members of Congress in the consideration of a bill do not
necessarily reflect the sense of that body and are, consequently,
not controlling in the interpretation of law." The congressional will
is ultimately determined by the language of the law that the
lawmakers voted on. Consequently, the meaning and intention of
the law must first be sought "in the words of the statute itself, read
and considered in their natural, ordinary, commonly accepted and
most obvious significations, according to good and approved usage
and without resorting to forced or subtle construction."
Two. Petitioners argue that a toll fee is a "user’s tax" and to
impose VAT on toll fees is tantamount to taxing a tax.21 Actually,
petitioners base this argument on the following discussion in Manila
International Airport Authority (MIAA) v. Court of Appeals: 22
No one can dispute that properties of public dominion mentioned in
Article 420 of the Civil Code, like "roads, canals, rivers, torrents,
ports and bridges constructed by the State," are owned by the
State. The term "ports" includes seaports and airports. The MIAA
Airport Lands and Buildings constitute a "port" constructed by the
State. Under Article 420 of the Civil Code, the MIAA Airport Lands
and Buildings are properties of public dominion and thus owned by
the State or the Republic of the Philippines.
x x x The operation by the government of a tollway does not
change the character of the road as one for public use. Someone
must pay for the maintenance of the road, either the public
indirectly through the taxes they pay the government, or only
those among the public who actually use the road through the toll
fees they pay upon using the road. The tollway system is even a
more efficient and equitable manner of taxing the public for the
maintenance of public roads.
The charging of fees to the public does not determine the character
of the property whether it is for public dominion or not. Article 420
of the Civil Code defines property of public dominion as "one
intended for public use." Even if the government collects toll fees,
the road is still "intended for public use" if anyone can use the road
under the same terms and conditions as the rest of the public. The
charging of fees, the limitation on the kind of vehicles that can use
the road, the speed restrictions and other conditions for the use of
the road do not affect the public character of the road.
The terminal fees MIAA charges to passengers, as well as the
landing fees MIAA charges to airlines, constitute the bulk of the
income that maintains the operations of MIAA. The collection of
such fees does not change the character of MIAA as an airport for
public use. Such fees are often termed user’s tax. This means
taxing those among the public who actually use a public facility
instead of taxing all the public including those who never use the
particular public facility. A user’s tax is more equitable – a principle
of taxation mandated in the 1987 Constitution."23 (Underscoring
supplied)
Petitioners assume that what the Court said above, equating
terminal fees to a "user’s tax" must also pertain to tollway fees.
But the main issue in the MIAA case was whether or not Parañaque
City could sell airport lands and buildings under MIAA
administration at public auction to satisfy unpaid real estate taxes.
Since local governments have no power to tax the national
government, the Court held that the City could not proceed with
the auction sale. MIAA forms part of the national government
although not integrated in the department framework." 24 Thus, its
airport lands and buildings are properties of public dominion
beyond the commerce of man under Article 420(1) 25 of the Civil
Code and could not be sold at public auction.
As can be seen, the discussion in the MIAA case on toll roads and
toll fees was made, not to establish a rule that tollway fees are
user’s tax, but to make the point that airport lands and buildings
are properties of public dominion and that the collection of terminal
fees for their use does not make them private properties. Tollway
fees are not taxes. Indeed, they are not assessed and collected by
the BIR and do not go to the general coffers of the government.
It would of course be another matter if Congress enacts a law
imposing a user’s tax, collectible from motorists, for the
construction and maintenance of certain roadways. The tax in such
a case goes directly to the government for the replenishment of
resources it spends for the roadways. This is not the case here.
What the government seeks to tax here are fees collected from
tollways that are constructed, maintained, and operated by private
tollway operators at their own expense under the build, operate,
and transfer scheme that the government has adopted for
expressways.26 Except for a fraction given to the government, the
toll fees essentially end up as earnings of the tollway operators.
In sum, fees paid by the public to tollway operators for use of the
tollways, are not taxes in any sense. A tax is imposed under the
taxing power of the government principally for the purpose of
raising revenues to fund public expenditures.27 Toll fees, on the
other hand, are collected by private tollway operators as
reimbursement for the costs and expenses incurred in the
construction, maintenance and operation of the tollways, as well as
to assure them a reasonable margin of income. Although toll fees
are charged for the use of public facilities, therefore, they are not
government exactions that can be properly treated as a tax. Taxes
may be imposed only by the government under its sovereign
authority, toll fees may be demanded by either the government or
private individuals or entities, as an attribute of ownership. 28
Parenthetically, VAT on tollway operations cannot be deemed a tax
on tax due to the nature of VAT as an indirect tax. In indirect
taxation, a distinction is made between the liability for the tax and
burden of the tax. The seller who is liable for the VAT may shift or
pass on the amount of VAT it paid on goods, properties or services
to the buyer. In such a case, what is transferred is not the seller’s
liability but merely the burden of the VAT.29
Thus, the seller remains directly and legally liable for payment of
the VAT, but the buyer bears its burden since the amount of VAT
paid by the former is added to the selling price. Once shifted, the
VAT ceases to be a tax30 and simply becomes part of the cost that
the buyer must pay in order to purchase the good, property or
service.
Consequently, VAT on tollway operations is not really a tax on the
tollway user, but on the tollway operator. Under Section 105 of the
Code, 31 VAT is imposed on any person who, in the course of trade
or business, sells or renders services for a fee. In other words, the
seller of services, who in this case is the tollway operator, is the
person liable for VAT. The latter merely shifts the burden of VAT to
the tollway user as part of the toll fees.
For this reason, VAT on tollway operations cannot be a tax on tax
even if toll fees were deemed as a "user’s tax." VAT is assessed
against the tollway operator’s gross receipts and not necessarily on
the toll fees. Although the tollway operator may shift the VAT
burden to the tollway user, it will not make the latter directly liable
for the VAT. The shifted VAT burden simply becomes part of the toll
fees that one has to pay in order to use the tollways. 32
Three. Petitioner Timbol has no personality to invoke the non-
impairment of contract clause on behalf of private investors in the
tollway projects. She will neither be prejudiced by nor be affected
by the alleged diminution in return of investments that may result
from the VAT imposition. She has no interest at all in the profits to
be earned under the TOAs. The interest in and right to recover
investments solely belongs to the private tollway investors.
Besides, her allegation that the private investors’ rate of recovery
will be adversely affected by imposing VAT on tollway operations is
purely speculative. Equally presumptuous is her assertion that a
stipulation in the TOAs known as the Material Adverse Grantor
Action will be activated if VAT is thus imposed. The Court cannot
rule on matters that are manifestly conjectural. Neither can it
prohibit the State from exercising its sovereign taxing power based
on uncertain, prophetic grounds.
Four. Finally, petitioners assert that the substantiation
requirements for claiming input VAT make the VAT on tollway
operations impractical and incapable of implementation. They cite
the fact that, in order to claim input VAT, the name, address and
tax identification number of the tollway user must be indicated in
the VAT receipt or invoice. The manner by which the BIR intends to
implement the VAT – by rounding off the toll rate and putting any
excess collection in an escrow account – is also illegal, while the
alternative of giving "change" to thousands of motorists in order to
meet the exact toll rate would be a logistical nightmare. Thus,
according to them, the VAT on tollway operations is not
administratively feasible.33
Administrative feasibility is one of the canons of a sound tax
system. It simply means that the tax system should be capable of
being effectively administered and enforced with the least
inconvenience to the taxpayer. Non-observance of the canon,
however, will not render a tax imposition invalid "except to the
extent that specific constitutional or statutory limitations are
impaired."34 Thus, even if the imposition of VAT on tollway
operations may seem burdensome to implement, it is not
necessarily invalid unless some aspect of it is shown to violate any
law or the Constitution.
Here, it remains to be seen how the taxing authority will actually
implement the VAT on tollway operations. Any declaration by the
Court that the manner of its implementation is illegal or
unconstitutional would be premature. Although the transcript of the
August 12, 2010 Senate hearing provides some clue as to how the
BIR intends to go about it,35 the facts pertaining to the matter are
not sufficiently established for the Court to pass judgment on.
Besides, any concern about how the VAT on tollway operations will
be enforced must first be addressed to the BIR on whom the task
of implementing tax laws primarily and exclusively rests. The Court
cannot preempt the BIR’s discretion on the matter, absent any
clear violation of law or the Constitution.
For the same reason, the Court cannot prematurely declare as
illegal, BIR RMC 63-2010 which directs toll companies to record an
accumulated input VAT of zero balance in their books as of August
16, 2010, the date when the VAT imposition was supposed to take
effect. The issuance allegedly violates Section 111(A)36 of the Code
which grants first time VAT payers a transitional input VAT of 2%
on beginning inventory.
In this connection, the BIR explained that BIR RMC 63-2010 is
actually the product of negotiations with tollway operators who
have been assessed VAT as early as 2005, but failed to charge
VAT-inclusive toll fees which by now can no longer be collected.
The tollway operators agreed to waive the 2% transitional input
VAT, in exchange for cancellation of their past due VAT liabilities. WHEREFORE, the Court DENIES respondents Secretary of Finance
Notably, the right to claim the 2% transitional input VAT belongs to and Commissioner of Internal Revenue’s motion for reconsideration
the tollway operators who have not questioned the circular’s of its August 24, 2010 resolution, DISMISSES the petitioners
validity. They are thus the ones who have a right to challenge the Renato V. Diaz and Aurora Ma. F. Timbol’s petition for lack of
circular in a direct and proper action brought for the purpose. merit, and SETS ASIDE the Court’s temporary restraining order
dated August 13, 2010.
Conclusion
SO ORDERED.
In fine, the Commissioner of Internal Revenue did not usurp
legislative prerogative or expand the VAT law’s coverage when she
sought to impose VAT on tollway operations. Section 108(A) of the
Code clearly states that services of all other franchise grantees are
subject to VAT, except as may be provided under Section 119 of
the Code. Tollway operators are not among the franchise grantees
subject to franchise tax under the latter provision. Neither are their
services among the VAT-exempt transactions under Section 109 of
the Code.

If the legislative intent was to exempt tollway operations from VAT,

as petitioners so strongly allege, then it would have been well for
the law to clearly say so. Tax exemptions must be justified by clear
statutory grant and based on language in the law too plain to be
mistaken.37 But as the law is written, no such exemption obtains
for tollway operators. The Court is thus duty-bound to simply apply
the law as it is found.1avvphi1

Lastly, the grant of tax exemption is a matter of legislative policy

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

The VAT on franchise grantees has been in the statute books since
1994 when R.A. 7716 or the Expanded Value-Added Tax law was
passed. It is only now, however, that the executive has earnestly
pursued the VAT imposition against tollway operators. The
executive exercises exclusive discretion in matters pertaining to
the implementation and execution of tax laws. Consequently, the
executive is more properly suited to deal with the immediate and
practical consequences of the VAT imposition.
G.R. No. L-22074 April 30, 1965 Guaranty Co., Inc. and Swiss Reinsurance Company stipulated that
their contract shall be construed by the laws of the Philippines.
THE PHILIPPINE GUARANTY CO., INC., petitioner,
vs. Pursuant to the aforesaid reinsurance contracts, Philippine
THE COMMISSIONER OF INTERNAL REVENUE and THE Guaranty Co., Inc. ceded to the foreign reinsurers the following
COURT OF TAX APPEALS, respondents. premiums:

Josue H. Gustilo and Ramirez and Ortigas for petitioner.

1953 . . . . . . . . . . . . . . . . . . . . . P842,466.71
Office of the Solicitor General and Attorney V.G. Saldajena for
respondents. 1954 . . . . . . . . . . . . . . . . . . . . . 721,471.85

BENGZON, J.P., J.:

Said premiums were excluded by Philippine Guaranty Co., Inc.
from its gross income when it file its income tax returns for 1953
The Philippine Guaranty Co., Inc., a domestic insurance company,
and 1954. Furthermore, it did not withhold or pay tax on them.
entered into reinsurance contracts, on various dates, with foreign
Consequently, per letter dated April 13, 1959, the Commissioner of
insurance companies not doing business in the Philippines namely:
Internal Revenue assessed against Philippine Guaranty Co., Inc.
Imperio Compañia de Seguros, La Union y El Fenix Español,
withholding tax on the ceded reinsurance premiums, thus:
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 1953
Limited. Philippine Guaranty Co., Inc., thereby agreed to cede to
the foreign reinsurers a portion of the premiums on insurance it Gross premium per investigation . . . . . . . . . . P768,580.00
has originally underwritten in the Philippines, in consideration for
Withholding tax due thereon at 24% . . . . . . .
the assumption by the latter of liability on an equivalent portion of P184,459.00
.
the risks insured. Said reinsurrance contracts were signed by
Philippine Guaranty Co., Inc. in Manila and by the foreign
25% surcharge . . . . . . . . . . . . . . . . . . . . . .
reinsurers outside the Philippines, except the contract with Swiss 46,114.00
Reinsurance Company, which was signed by both parties in ....
Switzerland.
Compromise for non-filing of withholding
income tax return . . . . . . . . . . . . . . . . . . . . . 100.00
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 TOTAL AMOUNT DUE & COLLECTIBLE . . . . P230,673.00
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 1954
to be paid for by the foreign reinsurers. The foreign reinsurers
further agreed, in consideration for managing or administering Gross premium per investigation . . . . . . . . . . P780.880.68
their affairs in the Philippines, to compensate the Philippine
Withholding tax due thereon at 24% . . . . . . .
Guaranty Co., Inc., in an amount equal to 5% of the reinsurance P184,411.00
.
premiums. Conflicts and/or differences between the parties under
the reinsurance contracts were to be arbitrated in Manila. Philippine
 25% surcharge . . . . . . . . . . . . . . . . . . . . . .
P184,411.00
....
Compromise for non-filing of withholding
income tax return . . . . . . . . . . . . . . . . . . . . . 100.00
....
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
P375,345.00 as withholding income taxes for the years
1953 and 1954, plus the statutory delinquency penalties
thereon. With costs against petitioner.
Philippine Guaranty Co, Inc. has appealed, questioning the legality
of the Commissioner of Internal Revenue's assessment for
withholding tax on the reinsurance premiums ceded in 1953 and
1954 to the foreign reinsurers.
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.
The reinsurance contracts, however, show that the transactions or
activities that constituted the undertaking to reinsure Philippine
Guaranty Co., Inc. against loses arising from the original
insurances in the Philippines were performed in the Philippines. The
liability of the foreign reinsurers commenced simultaneously with
the liability of 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. L-10405 December 29, 1960
WENCESLAO PASCUAL, in his official capacity as Provincial
Governor of Rizal, petitioner-appellant,
vs.
THE SECRETARY OF PUBLIC WORKS AND
COMMUNICATIONS, ET AL., respondents-appellees.
Asst. Fiscal Noli M. Cortes and Jose P. Santos for appellant.
Office of the Asst. Solicitor General Jose G. Bautista and Solicitor A.
A. Torres for appellee.
CONCEPCION, J.:
Appeal, by petitioner Wenceslao Pascual, from a decision of the
Court of First Instance of Rizal, dismissing the above entitled case
and dissolving the writ of preliminary injunction therein issued,
without costs.
On August 31, 1954, petitioner Wenceslao Pascual, as Provincial
Governor of Rizal, instituted this action for declaratory relief, with
injunction, upon the ground that Republic Act No. 920, entitled "An
Act Appropriating Funds for Public Works", approved on June 20,
1953, contained, in section 1-C (a) thereof, an item (43[h]) of
P85,000.00 "for the construction, reconstruction, repair, extension
and improvement" of Pasig feeder road terminals (Gen. Roxas —
Gen. Araneta — Gen. Lucban — Gen. Capinpin — Gen. Segundo —
Gen. Delgado — Gen. Malvar — Gen. Lim)"; that, at the time of the
passage and approval of said Act, the aforementioned feeder roads
were "nothing but projected and planned subdivision roads, not yet
constructed, . . . within the Antonio Subdivision . . . situated at . . .
Pasig, Rizal" (according to the tracings attached to the petition as
Annexes A and B, near Shaw Boulevard, not far away from the
intersection between the latter and Highway 54), which projected
feeder roads "do not connect any government property or any
important premises to the main highway"; that the aforementioned
Antonio Subdivision (as well as the lands on which said feeder
roads were to be construed) were private properties of respondent
Jose C. Zulueta, who, at the time of the passage and approval of
said Act, was a member of the Senate of the Philippines; that on
May, 1953, respondent Zulueta, addressed a letter to the Municipal
Council of Pasig, Rizal, offering to donate said projected feeder
roads to the municipality of Pasig, Rizal; that, on June 13, 1953,
the offer was accepted by the council, subject to the condition
"that the donor would submit a plan of the said roads and agree to
change the names of two of them"; that no deed of donation in
favor of the municipality of Pasig was, however, executed; that on
July 10, 1953, respondent Zulueta wrote another letter to said
council, calling attention to the approval of Republic Act. No. 920,
and the sum of P85,000.00 appropriated therein for the
construction of the projected feeder roads in question; that the
municipal council of Pasig endorsed said letter of respondent
Zulueta to the District Engineer of Rizal, who, up to the present
"has not made any endorsement thereon" that inasmuch as the
projected feeder roads in question were private property at the
time of the passage and approval of Republic Act No. 920, the
appropriation of P85,000.00 therein made, for the construction,
reconstruction, repair, extension and improvement of said
projected feeder roads, was illegal and, therefore, void ab initio";
that said appropriation of P85,000.00 was made by Congress
because its members were made to believe that the projected
feeder roads in question were "public roads and not private streets
of a private subdivision"'; that, "in order to give a semblance of
legality, when there is absolutely none, to the aforementioned
appropriation", respondents Zulueta executed on December 12,
1953, while he was a member of the Senate of the Philippines, an
alleged deed of donation — copy of which is annexed to the
petition — of the four (4) parcels of land constituting said projected
feeder roads, in favor of the Government of the Republic of the
Philippines; that said alleged deed of donation was, on the same
date, accepted by the then Executive Secretary; that being subject
to an onerous condition, said donation partook of the nature of a
contract; that, such, said donation violated the provision of our
fundamental law prohibiting members of Congress from being
directly or indirectly financially interested in any contract with the
Government, and, hence, is unconstitutional, as well as null and
void ab initio, for the construction of the projected feeder roads in
question with public funds would greatly enhance or increase the
value of the aforementioned subdivision of respondent Zulueta,
"aside from relieving him from the burden of constructing his
subdivision streets or roads at his own expense"; that the
construction of said projected feeder roads was then being
undertaken by the Bureau of Public Highways; and that, unless
restrained by the court, the respondents would continue to
execute, comply with, follow and implement the aforementioned
illegal provision of law, "to the irreparable damage, detriment and
prejudice not only to the petitioner but to the Filipino nation."
Petitioner prayed, therefore, that the contested item of Republic
Act No. 920 be declared null and void; that the alleged deed of
donation of the feeder roads in question be "declared
unconstitutional and, therefor, illegal"; that a writ of injunction be
issued enjoining the Secretary of Public Works and
Communications, the Director of the Bureau of Public Works and
Highways and Jose C. Zulueta from ordering or allowing the
continuance of the above-mentioned feeder roads project, and
from making and securing any new and further releases on the
aforementioned item of Republic Act No. 920, and the disbursing
officers of the Department of Public Works and Highways from
making any further payments out of said funds provided for in
Republic Act No. 920; and that pending final hearing on the merits,
a writ of preliminary injunction be issued enjoining the
aforementioned parties respondent from making and securing any
new and further releases on the aforesaid item of Republic Act No.
920 and from making any further payments out of said illegally
appropriated funds.
Respondents moved to dismiss the petition upon the ground that
petitioner had "no legal capacity to sue", and that the petition did
"not state a cause of action". In support to this motion, respondent
Zulueta alleged that the Provincial Fiscal of Rizal, not its provincial
governor, should represent the Province of Rizal, pursuant to
section 1683 of the Revised Administrative Code; that said
respondent is " not aware of any law which makes illegal the
appropriation of public funds for the improvements of . . . private
property"; and that, the constitutional provision invoked by
petitioner is inapplicable to the donation in question, the same
being a pure act of liberality, not a contract. The other
respondents, in turn, maintained that petitioner could not assail
the appropriation in question because "there is no actual bona
fide case . . . in which the validity of Republic Act No. 920 is
necessarily involved" and petitioner "has not shown that he has a
personal and substantial interest" in said Act "and that its
enforcement has caused or will cause him a direct injury."
Acting upon said motions to dismiss, the lower court rendered the
aforementioned decision, dated October 29, 1953, holding that,
since public interest is involved in this case, the Provincial
Governor of Rizal and the provincial fiscal thereof who represents
him therein, "have the requisite personalities" to question the
constitutionality of the disputed item of Republic Act No. 920; that
"the legislature is without power appropriate public revenues for
anything but a public purpose", that the instructions and
improvement of the feeder roads in question, if such roads where
private property, would not be a public purpose; that, being
subject to the following condition:
The within donation is hereby made upon the condition that the
Government of the Republic of the Philippines will use the parcels
of land hereby donated for street purposes only and for no other
purposes whatsoever; it being expressly understood that should
the Government of the Republic of the Philippines violate the
condition hereby imposed upon it, the title to the land hereby
donated shall, upon such violation, ipso facto revert to the DONOR,
JOSE C. ZULUETA. (Emphasis supplied.)
which is onerous, the donation in question is a contract; that said
donation or contract is "absolutely forbidden by the Constitution"
and consequently "illegal", for Article 1409 of the Civil Code of the
Philippines, declares in existence and void from the very beginning
contracts "whose cause, objector purpose is contrary to law,
morals . . . or public policy"; that the legality of said donation may
not be contested, however, by petitioner herein, because his
"interest are not directly affected" thereby; and that, accordingly,
the appropriation in question "should be upheld" and the case
dismissed.
At the outset, it should be noted that we are concerned with a
decision granting the aforementioned motions to dismiss, which as
much, are deemed to have admitted hypothetically the allegations
of fact made in the petition of appellant herein. According to said
petition, respondent Zulueta is the owner of several parcels of
residential land situated in Pasig, Rizal, and known as the Antonio
Subdivision, certain portions of which had been reserved for the
projected feeder roads aforementioned, which, admittedly, were
private property of said respondent when Republic Act No. 920,
appropriating P85,000.00 for the "construction, reconstruction,
repair, extension and improvement" of said roads, was passed by
Congress, as well as when it was approved by the President on
June 20, 1953. The petition further alleges that the construction of
said roads, to be undertaken with the aforementioned
appropriation of P85,000.00, would have the effect of relieving
respondent Zulueta of the burden of constructing his subdivision
streets or roads at his own expenses, 1and would "greatly enhance
or increase the value of the subdivision" of said respondent. The
lower court held that under these circumstances, the appropriation
in question was "clearly for a private, not a public purpose."
Respondents do not deny the accuracy of this conclusion, which is
self-evident. 2However, respondent Zulueta contended, in his
motion to dismiss that:
A law passed by Congress and approved by the President can
never be illegal because Congress is the source of all laws . . .
Aside from the fact that movant is not aware of any law which
makes illegal the appropriation of public funds for the improvement
of what we, in the meantime, may assume as private property . . .
(Record on Appeal, p. 33.)
The first proposition must be rejected most emphatically, it being
inconsistent with the nature of the Government established under
the Constitution of the Republic of the Philippines and the system
of checks and balances underlying our political structure. Moreover,
it is refuted by the decisions of this Court invalidating legislative
enactments deemed violative of the Constitution or organic laws. 3
As regards the legal feasibility of appropriating public funds for a
public purpose, the principle according to Ruling Case Law, is this:
It is a general rule that the legislature is without power to
appropriate public revenue for anything but a public purpose. . . .
It is the essential character of the direct object of the expenditure
which must determine its validity as justifying a tax, and not the
magnitude of the interest to be affected nor the degree to which
the general advantage of the community, and thus the public
welfare, may be ultimately benefited by their
promotion. Incidental to the public or to the state, which results
from the promotion of private interest and the prosperity of private
enterprises or business, does not justify their aid by the use public
money. (25 R.L.C. pp. 398-400; Emphasis supplied.)
The rule is set forth in Corpus Juris Secundum in the following
language:
In accordance with the rule that the taxing power must be
exercised for public purposes only, discussed supra sec. 14, money
raised by taxation can be expended only for public purposes and
not for the advantage of private individuals. (85 C.J.S. pp. 645-
646; emphasis supplied.)
Explaining the reason underlying said rule, Corpus Juris Secundum
states:
Generally, under the express or implied provisions of the
constitution, public funds may be used only for public purpose. The
right of the legislature to appropriate funds is correlative with its
right to tax, and, under constitutional provisions against taxation
except for public purposes and prohibiting the collection of a tax for
one purpose and the devotion thereof to another purpose, no
appropriation of state funds can be made for other than for a public
purpose.
xxx xxx xxx
The test of the constitutionality of a statute requiring the use of
public funds is whether the statute is designed to promote the
public interest, as opposed to the furtherance of the advantage of
individuals, although each advantage to individuals
might incidentally serve the public. (81 C.J.S. pp. 1147; emphasis
supplied.)
Needless to say, this Court is fully in accord with the foregoing
views which, apart from being patently sound, are a necessary
corollary to our democratic system of government, which, as such,
exists primarily for the promotion of the general welfare. Besides,
reflecting as they do, the established jurisprudence in the United
States, after whose constitutional system ours has been patterned,
said views and jurisprudence are, likewise, part and parcel of our
own constitutional law.lawphil.net
This notwithstanding, the lower court felt constrained to uphold the
appropriation in question, upon the ground that petitioner may not
contest the legality of the donation above referred to because the
same does not affect him directly. This conclusion is, presumably,
based upon the following premises, namely: (1) that, if valid, said
donation cured the constitutional infirmity of the aforementioned
appropriation; (2) that the latter may not be annulled without a
previous declaration of unconstitutionality of the said donation; and
(3) that the rule set forth in Article 1421 of the Civil Code is
absolute, and admits of no exception. We do not agree with these
premises.
The validity of a statute depends upon the powers of Congress at
the time of its passage or approval, not upon events occurring, or
acts performed, subsequently thereto, unless the latter consists of
an amendment of the organic law, removing, with retrospective
operation, the constitutional limitation infringed by said statute.
Referring to the P85,000.00 appropriation for the projected feeder
roads in question, the legality thereof depended upon whether said
roads were public or private property when the bill, which, latter
on, became Republic Act 920, was passed by Congress, or, when
said bill was approved by the President and the disbursement of
said sum became effective, or on June 20, 1953 (see section 13 of
said Act). Inasmuch as the land on which the projected feeder
roads were to be constructed belonged then to respondent Zulueta,
the result is that said appropriation sought a private purpose, and
hence, was null and void. 4 The donation to the Government, over
five (5) months after the approval and effectivity of said Act,
made, according to the petition, for the purpose of giving a
"semblance of legality", or legalizing, the appropriation in question,
did not cure its aforementioned basic defect. Consequently, a
judicial nullification of said donation need not precede the
declaration of unconstitutionality of said appropriation.
Again, Article 1421 of our Civil Code, like many other statutory
enactments, is subject to exceptions. For instance, the creditors of
a party to an illegal contract may, under the conditions set forth in
Article 1177 of said Code, exercise the rights and actions of the
latter, except only those which are inherent in his person, including
therefore, his right to the annulment of said contract, even though
such creditors are not affected by the same, except indirectly, in
the manner indicated in said legal provision.
Again, it is well-stated that the validity of a statute may be
contested only by one who will sustain a direct injury in
consequence of its enforcement. Yet, there are many decisions
nullifying, at the instance of taxpayers, laws providing for the
disbursement of public funds, 5upon the theory that "the
expenditure of public funds by an officer of the State for the
purpose of administering an unconstitutional act constitutes
a misapplication of such funds," which may be enjoined at the
request of a taxpayer. 6Although there are some decisions to the
contrary, 7the prevailing view in the United States is stated in the
American Jurisprudence as follows:
In the determination of the degree of interest essential to give the
requisite standing to attack the constitutionality of a statute, the
general rule is that not only persons individually affected, but
also taxpayers, have sufficient interest in preventing the illegal
expenditure of moneys raised by taxation and may therefore
question the constitutionality of statutes requiring expenditure of
public moneys. (11 Am. Jur. 761; emphasis supplied.)
However, this view was not favored by the Supreme Court of the
U.S. in Frothingham vs. Mellon (262 U.S. 447), insofar
as federal laws are concerned, upon the ground that the
relationship of a taxpayer of the U.S. to its Federal Government is
different from that of a taxpayer of a municipal corporation to its
government. Indeed, under the composite system of government
existing in the U.S., the states of the Union are integral part of the
Federation from an international viewpoint, but, each state enjoys
internally a substantial measure of sovereignty, subject to the
limitations imposed by the Federal Constitution. In fact, the same
was made by representatives of each state of the Union, not of the
people of the U.S., except insofar as the former represented the
people of the respective States, and the people of each State has,
independently of that of the others, ratified said Constitution. In
other words, the Federal Constitution and the Federal statutes
have become binding upon the people of the U.S. in consequence
of an act of, and, in this sense, through the respective states of the
Union of which they are citizens. The peculiar nature of the relation
between said people and the Federal Government of the U.S. is
reflected in the election of its President, who is chosen
directly, not by the people of the U.S., but by electors chosen
by each State, in such manner as the legislature thereof may direct
(Article II, section 2, of the Federal Constitution).lawphi1.net
The relation between the people of the Philippines and its
taxpayers, on the other hand, and the Republic of the Philippines,
on the other, is not identical to that obtaining between the people
and taxpayers of the U.S. and its Federal Government. It is closer,
from a domestic viewpoint, to that existing between the people and
taxpayers of each state and the government thereof, except that
the authority of the Republic of the Philippines over the people of not inconsistent with this decision, with the costs of this instance
the Philippines is more fully direct than that of the states of the against respondent Jose C. Zulueta. It is so ordered.
Union, insofar as the simple and unitary type of our national
government is not subject to limitations analogous to those
imposed by the Federal Constitution upon the states of the Union,
and those imposed upon the Federal Government in the interest of
the Union. For this reason, the rule recognizing the right of
taxpayers to assail the constitutionality of a legislation
appropriating local or state public funds — which has been upheld
by the Federal Supreme Court (Crampton vs. Zabriskie, 101 U.S.
601) — has greater application in the Philippines than that adopted
with respect to acts of Congress of the United States appropriating
federal funds.

Indeed, in the Province of Tayabas vs. Perez (56 Phil., 257),

involving the expropriation of a land by the Province of Tayabas,
two (2) taxpayers thereof were allowed to intervene for the
purpose of contesting the price being paid to the owner thereof, as
unduly exorbitant. It is true that in Custodio vs. President of the
Senate (42 Off. Gaz., 1243), a taxpayer and employee of the
Government was not permitted to question the constitutionality of
an appropriation for backpay of members of Congress. However, in
Rodriguez vs. Treasurer of the Philippines and
Barredo vs. Commission on Elections (84 Phil., 368; 45 Off. Gaz.,
4411), we entertained the action of taxpayers impugning the
validity of certain appropriations of public funds, and invalidated
the same. Moreover, the reason that impelled this Court to take
such position in said two (2) cases — the importance of the issues
therein raised — is present in the case at bar. Again, like the
petitioners in the Rodriguez and Barredo cases, petitioner herein is
not merely a taxpayer. The Province of Rizal, which he represents
officially as its Provincial Governor, is our most populated political
subdivision, 8and, the taxpayers therein bear a substantial portion
of the burden of taxation, in the Philippines.

Hence, it is our considered opinion that the circumstances

surrounding this case sufficiently justify petitioners action in
contesting the appropriation and donation in question; that this
action should not have been dismissed by the lower court; and that
the writ of preliminary injunction should have been maintained.

Wherefore, the decision appealed from is hereby reversed, and the

records are remanded to the lower court for further proceedings
US v Blunt
G.R. No. L-77194 March 15, 1988
VIRGILIO GASTON, HORTENCIA STARKE, ROMEO GUANZON,
OSCAR VILLANUEVA, JOSE ABELLO, REMO RAMOS,
CAROLINA LOPEZ, JESUS ISASI, MANUEL LACSON, JAVIER
LACSON, TITO TAGARAO, EDUARDO SUATENGCO, AUGUSTO
LLAMAS, RODOLFO SIASON, PACIFICO MAGHARI, JR., JOSE
JAMANDRE, AURELIO GAMBOA, ET AL., petitioners,
vs.
REPUBLIC PLANTERS BANK, PHILIPPINE SUGAR
COMMISSION, and SUGAR REGULATORY ADMINISTRATION,
respondents, ANGEL H. SEVERINO, JR., GLICERIO
JAVELLANA, GLORIA P. DE LA PAZ, JOEY P. DE LA PAZ, ET
AL., and NATIONAL FEDERATION OF SUGARCANE
PLANTERS, intervenors.
MELENCIO-HERRERA, J.:
Petitioners are sugar producers, sugarcane planters and millers,
who have come to this Court in their individual capacities and in
representation of other sugar producers, planters and millers, said
to be so numerous that it is impracticable to bring them all before
the Court although the subject matter of the present controversy is
of common interest to all sugar producers, whether parties in this
action or not.
Respondent Philippine Sugar Commission (PHILSUCOM, for short)
was formerly the government office tasked with the function of
regulating and supervising the sugar industry until it was
superseded by its co-respondent Sugar Regulatory Administration
(SRA, for brevity) under Executive Order No. 18 on May 28, 1986.
Although said Executive Order abolished the PHILSUCOM, its
existence as a juridical entity was mandated to continue for three
(3) more years "for the purpose of prosecuting and defending suits
by or against it and enables it to settle and close its affairs, to
dispose of and convey its property and to distribute its assets."
Respondent Republic Planters Bank (briefly, the Bank) is a
commercial banking corporation.
Angel H. Severino, Jr., et al., who are sugarcane planters planting
and milling their sugarcane in different mill districts of Negros
Occidental, were allowed to intervene by the Court, since they
have common cause with petitioners and respondents having
interposed no objection to their intervention. Subsequently, on
January 14,1988, the National Federation of Sugar Planters (NFSP)
also moved to intervene, which the Court allowed on February
16,1988.
Petitioners and Intervenors have come to this Court praying for a
Writ of mandamus commanding respondents:
TO IMPLEMENT AND ACCOMPLISH THE PRIVATIZATION OF
REPUBLIC PLANTERS BANK BY THE TRANSFER AND DISTRIBUTION
OF THE SHARES OF STOCK IN THE SAID BANK; NOW HELD BY
AND STILL CARRIED IN THE NAME OF THE PHILIPPINE SUGAR
COMMISSION, TO THE SUGAR PRODUCERS, PLANTERS AND
MILLERS, WHO ARE THE TRUE BENEFICIAL OWNERS OF THE
761,416 COMMON SHARES VALUED AT P36,548.000.00, AND
53,005,045 PREFERRED SHARES (A, B & C) WITH A TOTAL PAR
VALUE OF P254,424,224.72, OR A TOTAL INVESTMENT OF
P290,972,224.72, THE SAID INVESTMENT HAVING BEEN FUNDED
BY THE DEDUCTION OF Pl.00 PER PICUL FROM SUGAR PROCEEDS
OF THE SUGAR PRODUCERS COMMENCING THE YEAR 1978-79
UNTIL THE PRESENT AS STABILIZATION FUND PURSUANT TO P.D.
# 388.
Respondent Bank does not take issue with either petitioners or its
correspondents as it has no beneficial or equitable interest that
may be affected by the ruling in this Petition, but welcomes the
filing of the Petition since it will settle finally the issue of legal
ownership of the questioned shares of stock.
Respondents PHILSUCOM and SRA, for their part, squarely traverse
the petition arguing that no trust results from Section 7 of P.D. No.
388; that the stabilization fees collected are considered
government funds under the Government Auditing Code; that the
transfer of shares of stock from PHILSUCOM to the sugar producers
would be irregular, if not illegal; and that this suit is barred by
laches.
The Solicitor General aptly summarizes the basic issues thus: (1)
whether the stabilization fees collected from sugar planters and
millers pursuant to Section 7 of P.D. No. 388 are funds in trust for
them, or public funds; and (2) whether shares of stock in
respondent Bank paid for with said stabilization fees belong to the
PHILSUCOM or to the different sugar planters and millers from
whom the fees were collected or levied.
P. D. No. 388, promulgated on February 2,1974, which created the
PHILSUCOM, provided for the collection of a Stabilization Fund as
follows:
SEC. 7. Capitalization, Special Fund of the Commission,
Development and Stabilization Fund. — There is hereby established
a fund for the commission for the purpose of financing the growth
and development of the sugar industry and all its components,
stabilization of the domestic market including the foreign market to
be administered in trust by the Commission and deposited in the
Philippine National Bank derived in the manner herein below cited
from the following sources:
a. Stabilization fund shall be collected as provided for in the
various provisions of this Decree.
b. Stabilization fees shall be collected from planters and millers in
the amount of Two (P2.00) Pesos for every picul produced and
milled for a period of five years from the approval of this Decree
and One (Pl.00) Peso for every picul produced and milled every
year thereafter.
Provided: That fifty (P0.50) centavos per picul of the amount levied
on planters, millers and traders under Section 4(c) of this Decree
will be used for the payment of salaries and wages of personnel,
fringe benefits and allowances of officers and employees for the
purpose of accomplishing and employees for the purpose of
accomplishing the efficient performance of the duties of the
Commission.
Provided, further: That said amount shall constitute a lien on the
sugar quedan and/or warehouse receipts and shall be paid
immediately by the planters and mill companies, sugar centrals
and refineries to the Commission. (paragraphing and bold
supplied).
Section 7 of P.D. No. 388 does provide that the stabilization fees
collected "shall be administered in trust by the Commission."
However, while the element of an intent to create a trust is
present, a resulting trust in favor of the sugar producers, millers
and planters cannot be said to have ensued because the
presumptive intention of the parties is not reasonably ascertainable
from the language of the statute itself.
The doctrine of resulting trusts is founded on the presumed
intention of the parties; and as a general rule, it arises where, and
only where such may be reasonably presumed to be the intention
of the parties, as determined from the facts and circumstances
existing at the time of the transaction out of which it is sought to
be established (89 C.J.S. 947).
No implied trust in favor of the sugar producers either can be
deduced from the imposition of the levy. "The essential Idea of an
implied trust involves a certain antagonism between the cestui que
trust and the trustee even when the trust has not arisen out of
fraud nor out of any transaction of a fraudulent or immoral
character (65 CJ 222). It is not clearly shown from the statute
itself that the PHILSUCOM imposed on itself the obligation of
holding the stabilization fund for the benefit of the sugar
producers. It must be categorically demonstrated that the very
administrative agency which is the source of such regulation would
place a burden on itself (Batchelder v. Central Bank of the
Philippines, L-25071, July 29,1972,46 SCRA 102, citing People v.
Que Po Lay, 94 Phil. 640 [1954]).
Neither can petitioners place reliance on the history of respondents
Bank. They recite that at the beginning, the Bank was owned by
the Roman-Rojas Group. Because it underwent difficulties early in
the year 1978, Mr. Roberto S. Benedicto, then Chairman of the
PHILSUCOM, submitted a proposal to the Central Bank for the
rehabilitation of the Bank. The Central Bank acted favorably on the
proposal at the meeting of the Monetary Board on March 31, 1978
subject to the infusion of fresh capital by the Benedicto Group.
Petitioners maintain that this infusion of fresh capital was
accomplished, not by any capital investment by Mr. Benedicto, but
by PHILSUCOM, which set aside the proceeds of the P1.00 per picul
stabilization fund to pay for its subscription in shares of stock of
respondent Bank. It is petitioners' submission that all shares were
placed in PHILSUCOM's name only out of convenience and
necessity and that they are the true and beneficial owners thereof.
In point of fact, we cannot see our way clear to upholding
petitioners' position that the investment of the proceeds from the
stabilization fund in subscriptions to the capital stock of the Bank
were being made for and on their behalf. That could have been
clarified by the Trust Agreement, dated May 28, 1986, entered into
between PHILSUCOM, as "Trustor" acting through Mr. Fred J.
Elizalde as Officer-in-Charge, and respondent RPB- Trust
Department' as "Trustee," acknowledging that PHILSUCOM holds
said shares for and in behalf of the sugar producers," the latter
"being the true and beneficial owners thereof." The Agreement,
however, did not get off the ground because it failed to receive the
approval of the PHILSUCOM Board of Commissioners as required in
the Agreement itself.
The SRA, which succeeded PHILSUCOM, neither approved the
Agreement because of the adverse opinion of the SRA, Resident
Auditor, dated June 25,1986, which was aimed by the Chairman of
the Commission on Audit, on January 26,1987.
On February 19, 1987, the SRA, resolved to revoke the Trust
Agreement "in the light of the ruling of the Commission on Audit
that the aforementioned Agreement is of doubtful validity."
From the legal standpoint, we find basis for the opinion of the
Commission on Audit reading:
That the government, PHILSUCOM or its successor-in-interest,
Sugar Regulatory Administration, in particular, owns and stocks.
While it is true that the collected stabilization fees were set aside
by PHILSUCOM to pay its subscription to RPB, it did not collect said
fees for the account of the sugar producers. That stabilization fees
are charges/levies on sugar produced and milled which accrued to
PHILSUCOM under PD 338, as amended. ...
The stabilization fees collected are in the nature of a tax, which is
within the power of the State to impose for the promotion of the
sugar industry (Lutz vs. Araneta, 98 Phil. 148). They constitute
sugar liens (Sec. 7[b], P.D. No. 388). The collections made accrue
to a "Special Fund," a "Development and Stabilization Fund,"
almost Identical to the "Sugar Adjustment and Stabilization Fund"
created under Section 6 of Commonwealth Act 567. 1 The tax
collected is not in a pure exercise of the taxing power. It is levied
with a regulatory purpose, to provide means for the stabilization of
the sugar industry. The levy is primarily in the exercise of the
police power of the State (Lutz vs. Araneta, supra.).
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. (Johnson vs. State ex rel.
Marey, 128 So. 857, cited in Lutz vs. Araneta, supra).
The stabilization fees in question are levied by the State upon
sugar millers, planters and producers for a special purpose — that
of "financing the growth and development of the sugar industry
and all its components, stabilization of the domestic market
including the foreign market the fact that the State has taken
possession of moneys pursuant to law is sufficient to constitute
them state funds, even though they are held for a special purpose
(Lawrence vs. American Surety Co., 263 Mich 586, 249 ALR 535,
cited in 42 Am. Jur. Sec. 2, p. 718). Having been levied for a
special purpose, the revenues collected are to be treated as a
special fund, to be, in the language of the statute, "administered in
trust' for the purpose intended. Once the purpose has been fulfilled
or abandoned, the balance, if any, is to be transferred to the
general funds of the Government. That is the essence of the trust
intended (See 1987 Constitution, Article VI, Sec. 29(3), lifted from
the 1935 Constitution, Article VI, Sec. 23(l]). 2
The character of the Stabilization Fund as a special fund is
emphasized by the fact that the funds are deposited in the
Philippine National Bank and not in the Philippine Treasury, moneys
from which may be paid out only in pursuance of an appropriation
made by law (1987) Constitution, Article VI, Sec. 29[1],1973
Constitution, Article VIII, Sec. 18[l]).
That the fees were collected from sugar producers, planters and
millers, and that the funds were channeled to the purchase of
shares of stock in respondent Bank do not convert the funds into a
trust fired for their benefit nor make them the beneficial owners of
the shares so purchased. It is but rational that the fees be
collected from them since it is also they who are to be benefited
from the expenditure of the funds derived from it. The investment
in shares of respondent Bank is not alien to the purpose intended
because of the Bank's character as a commodity bank for sugar
conceived for the industry's growth and development. Furthermore,
of note is the fact that one-half, (1/2) or PO.50 per picul, of the
amount levied under P.D. No. 388 is to be utilized for the "payment
of salaries and wages of personnel, fringe benefits and allowances
of officers and employees of PHILSUCOM" thereby immediately
negating the claim that the entire amount levied is in trust for
sugar, producers, planters and millers.

To rule in petitioners' favor would contravene the general principle

that revenues derived from taxes cannot be used for purely private
purposes or for the exclusive benefit of private persons. The
Stabilization Fund is to be utilized for the benefit of the entire
sugar industry, "and all its components, stabilization of the
domestic market," including the foreign market the industry being
of vital importance to the country's economy and to national
interest.

WHEREFORE, the Writ of mandamus is denied and the Petition

hereby dismissed. No costs.

This Decision is immediately executory.

SO ORDERED.
G.R. No. 166006 March 14, 2008
PLANTERS PRODUCTS, INC., Petitioner,
vs.
FERTIPHIL CORPORATION, Respondent.
DECISION
REYES, R.T., J.:
THE Regional Trial Courts (RTC) have the authority and jurisdiction
to consider the constitutionality of statutes, executive orders,
presidential decrees and other issuances. The Constitution vests
that power not only in the Supreme Court but in all Regional Trial
Courts.
The principle is relevant in this petition for review on certiorari of
the Decision1 of the Court of Appeals (CA) affirming with
modification that of the RTC in Makati City,2 finding petitioner
Planters Products, Inc. (PPI) liable to private respondent Fertiphil
Corporation (Fertiphil) for the levies it paid under Letter of
Instruction (LOI) No. 1465.
The Facts
Petitioner PPI and private respondent Fertiphil are private
corporations incorporated under Philippine laws.3 They are both
engaged in the importation and distribution of fertilizers, pesticides
and agricultural chemicals.
On June 3, 1985, then President Ferdinand Marcos, exercising his
legislative powers, issued LOI No. 1465 which provided, among
others, for the imposition of a capital recovery component (CRC)
on the domestic sale of all grades of fertilizers in the
Philippines.4 The LOI provides:
3. The Administrator of the Fertilizer Pesticide Authority to include
in its fertilizer pricing formula a capital contribution component of
not less than ₱10 per bag. This capital contribution shall be
collected until adequate capital is raised to make PPI viable. Such
capital contribution shall be applied by FPA to all domestic sales of
fertilizers in the Philippines.5 (Underscoring supplied)
Pursuant to the LOI, Fertiphil paid ₱10 for every bag of fertilizer it
sold in the domestic market to the Fertilizer and Pesticide Authority
(FPA). FPA then remitted the amount collected to the Far East Bank
and Trust Company, the depositary bank of PPI. Fertiphil paid
₱6,689,144 to FPA from July 8, 1985 to January 24, 1986. 6
After the 1986 Edsa Revolution, FPA voluntarily stopped the
imposition of the ₱10 levy. With the return of democracy, Fertiphil
demanded from PPI a refund of the amounts it paid under LOI No.
1465, but PPI refused to accede to the demand.7
Fertiphil filed a complaint for collection and damages8 against FPA
and PPI with the RTC in Makati. It questioned the constitutionality
of LOI No. 1465 for being unjust, unreasonable, oppressive, invalid
and an unlawful imposition that amounted to a denial of due
process of law.9 Fertiphil alleged that the LOI solely favored PPI, a
privately owned corporation, which used the proceeds to maintain
its monopoly of the fertilizer industry.
In its Answer,10 FPA, through the Solicitor General, countered that
the issuance of LOI No. 1465 was a valid exercise of the police
power of the State in ensuring the stability of the fertilizer industry
in the country. It also averred that Fertiphil did not sustain any
damage from the LOI because the burden imposed by the levy fell
on the ultimate consumer, not the seller.
RTC Disposition
On November 20, 1991, the RTC rendered judgment in favor of
Fertiphil, disposing as follows:
WHEREFORE, in view of the foregoing, the Court hereby renders
judgment in favor of the plaintiff and against the defendant
Planters Product, Inc., ordering the latter to pay the former:
1) the sum of ₱6,698,144.00 with interest at 12% from the time of
judicial demand;
2) the sum of ₱100,000 as attorney’s fees;
3) the cost of suit.
SO ORDERED.11
Ruling that the imposition of the ₱10 CRC was an exercise of the
State’s inherent power of taxation, the RTC invalidated the levy for
violating the basic principle that taxes can only be levied for public
purpose, viz.:
It is apparent that the imposition of ₱10 per fertilizer bag sold in
the country by LOI 1465 is purportedly in the exercise of the power
of taxation. It is a settled principle that the power of taxation by
the state is plenary. Comprehensive and supreme, the principal
check upon its abuse resting in the responsibility of the members
of the legislature to their constituents. However, there are two
kinds of limitations on the power of taxation: the inherent
limitations and the constitutional limitations.
One of the inherent limitations is that a tax may be levied only for
public purposes:
The power to tax can be resorted to only for a constitutionally valid
public purpose. By the same token, taxes may not be levied for
purely private purposes, for building up of private fortunes, or for
the redress of private wrongs. They cannot be levied for the
improvement of private property, or for the benefit, and promotion
of private enterprises, except where the aid is incident to the public
benefit. It is well-settled principle of constitutional law that no
general tax can be levied except for the purpose of raising money
which is to be expended for public use. Funds cannot be exacted
under the guise of taxation to promote a purpose that is not of
public interest. Without such limitation, the power to tax could be
exercised or employed as an authority to destroy the economy of
the people. A tax, however, is not held void on the ground of want
of public interest unless the want of such interest is clear. (71 Am.
Jur. pp. 371-372)
In the case at bar, the plaintiff paid the amount of ₱6,698,144.00
to the Fertilizer and Pesticide Authority pursuant to the ₱10 per
bag of fertilizer sold imposition under LOI 1465 which, in turn,
remitted the amount to the defendant Planters Products, Inc. thru
the latter’s depository bank, Far East Bank and Trust Co. Thus, by
virtue of LOI 1465 the plaintiff, Fertiphil Corporation, which is a
private domestic corporation, became poorer by the amount of
₱6,698,144.00 and the defendant, Planters Product, Inc., another
private domestic corporation, became richer by the amount of
₱6,698,144.00.
Tested by the standards of constitutionality as set forth in the
afore-quoted jurisprudence, it is quite evident that LOI 1465
insofar as it imposes the amount of ₱10 per fertilizer bag sold in
the country and orders that the said amount should go to the
defendant Planters Product, Inc. is unlawful because it violates the
mandate that a tax can be levied only for a public purpose and not
to benefit, aid and promote a private enterprise such as Planters
Product, Inc.12
PPI moved for reconsideration but its motion was denied.13 PPI
then filed a notice of appeal with the RTC but it failed to pay the
requisite appeal docket fee. In a separate but related proceeding,
this Court14 allowed the appeal of PPI and remanded the case to
the CA for proper disposition.
CA Decision
On November 28, 2003, the CA handed down its decision affirming
with modification that of the RTC, with the following fallo:
IN VIEW OF ALL THE FOREGOING, the decision appealed from is
hereby AFFIRMED, subject to the MODIFICATION that the award of
attorney’s fees is hereby DELETED.15
In affirming the RTC decision, the CA ruled that the lis mota of the
complaint for collection was the constitutionality of LOI No. 1465,
thus:
The question then is whether it was proper for the trial court to
exercise its power to judicially determine the constitutionality of
the subject statute in the instant case.
As a rule, where the controversy can be settled on other grounds,
the courts will not resolve the constitutionality of a law (Lim v.
Pacquing, 240 SCRA 649 [1995]). The policy of the courts is to
avoid ruling on constitutional questions and to presume that the
acts of political departments are valid, absent a clear and
unmistakable showing to the contrary.
However, the courts are not precluded from exercising such power
when the following requisites are obtaining in a controversy before
it: First, there must be before the court an actual case calling for
the exercise of judicial review. Second, the question must be ripe
for adjudication. Third, the person challenging the validity of the
act must have standing to challenge. Fourth, the question of
constitutionality must have been raised at the earliest opportunity;
and lastly, the issue of constitutionality must be the very lis mota
of the case (Integrated Bar of the Philippines v. Zamora, 338 SCRA
81 [2000]).
Indisputably, the present case was primarily instituted for
collection and damages. However, a perusal of the complaint also
reveals that the instant action is founded on the claim that the levy
imposed was an unlawful and unconstitutional special assessment.
Consequently, the requisite that the constitutionality of the law in
question be the very lis mota of the case is present, making it
proper for the trial court to rule on the constitutionality of LOI
1465.16
The CA held that even on the assumption that LOI No. 1465 was
issued under the police power of the state, it is still
unconstitutional because it did not promote public welfare. The CA
explained:
In declaring LOI 1465 unconstitutional, the trial court held that the
levy imposed under the said law was an invalid exercise of the
State’s power of taxation inasmuch as it violated the inherent and
constitutional prescription that taxes be levied only for public
purposes. It reasoned out that the amount collected under the levy
was remitted to the depository bank of PPI, which the latter used
to advance its private interest.
On the other hand, appellant submits that the subject statute’s
passage was a valid exercise of police power. In addition, it
disputes the court a quo’s findings arguing that the collections
under LOI 1465 was for the benefit of Planters Foundation,
Incorporated (PFI), a foundation created by law to hold in trust for
millions of farmers, the stock ownership of PPI.
Of the three fundamental powers of the State, the exercise of
police power has been characterized as the most essential,
insistent and the least limitable of powers, extending as it does to
all the great public needs. It may be exercised as long as the
activity or the property sought to be regulated has some relevance
to public welfare (Constitutional Law, by Isagani A. Cruz, p. 38,
1995 Edition).
Vast as the power is, however, it must be exercised within the
limits set by the Constitution, which requires the concurrence of a
lawful subject and a lawful method. Thus, our courts have laid
down the test to determine the validity of a police measure as
follows: (1) the interests of the public generally, as distinguished
from those of a particular class, requires its exercise; and (2) the
means employed are reasonably necessary for the accomplishment
of the purpose and not unduly oppressive upon individuals
(National Development Company v. Philippine Veterans Bank, 192
SCRA 257 [1990]).
It is upon applying this established tests that We sustain the trial
court’s holding LOI 1465 unconstitutional. To be sure, ensuring the
continued supply and distribution of fertilizer in the country is an
undertaking imbued with public interest. However, the method by
which LOI 1465 sought to achieve this is by no means a measure
that will promote the public welfare. The government’s
commitment to support the successful rehabilitation and continued
viability of PPI, a private corporation, is an unmistakable attempt
to mask the subject statute’s impartiality. There is no way to treat
the self-interest of a favored entity, like PPI, as identical with the
general interest of the country’s farmers or even the Filipino people
in general. Well to stress, substantive due process exacts fairness
and equal protection disallows distinction where none is needed.
When a statute’s public purpose is spoiled by private interest, the
use of police power becomes a travesty which must be struck down
for being an arbitrary exercise of government power. To rule in
favor of appellant would contravene the general principle that
revenues derived from taxes cannot be used for purely private
purposes or for the exclusive benefit of private individuals.17
The CA did not accept PPI’s claim that the levy imposed under LOI
No. 1465 was for the benefit of Planters Foundation, Inc., a
foundation created to hold in trust the stock ownership of PPI. The
CA stated:
Appellant next claims that the collections under LOI 1465 was for
the benefit of Planters Foundation, Incorporated (PFI), a foundation
created by law to hold in trust for millions of farmers, the stock
ownership of PFI on the strength of Letter of Undertaking (LOU)
issued by then Prime Minister Cesar Virata on April 18, 1985 and
affirmed by the Secretary of Justice in an Opinion dated October
12, 1987, to wit:
"2. Upon the effective date of this Letter of Undertaking, the
Republic shall cause FPA to include in its fertilizer pricing formula a
capital recovery component, the proceeds of which will be used
initially for the purpose of funding the unpaid portion of the
outstanding capital stock of Planters presently held in trust by
Planters Foundation, Inc. (Planters Foundation), which unpaid
capital is estimated at approximately ₱206 million (subject to
validation by Planters and Planters Foundation) (such unpaid
portion of the outstanding capital stock of Planters being hereafter
referred to as the ‘Unpaid Capital’), and subsequently for such
capital increases as may be required for the continuing viability of
Planters.
The capital recovery component shall be in the minimum amount of
₱10 per bag, which will be added to the price of all domestic sales
of fertilizer in the Philippines by any importer and/or fertilizer
mother company. In this connection, the Republic hereby
acknowledges that the advances by Planters to Planters Foundation
which were applied to the payment of the Planters shares now held
in trust by Planters Foundation, have been assigned to, among
others, the Creditors. Accordingly, the Republic, through FPA,
hereby agrees to deposit the proceeds of the capital recovery
component in the special trust account designated in the notice
dated April 2, 1985, addressed by counsel for the Creditors to
Planters Foundation. Such proceeds shall be deposited by FPA on
or before the 15th day of each month.
The capital recovery component shall continue to be charged and
collected until payment in full of (a) the Unpaid Capital and/or (b)
any shortfall in the payment of the Subsidy Receivables, (c) any
carrying cost accruing from the date hereof on the amounts which
may be outstanding from time to time of the Unpaid Capital and/or
the Subsidy Receivables and (d) the capital increases contemplated
in paragraph 2 hereof. For the purpose of the foregoing clause (c),
the ‘carrying cost’ shall be at such rate as will represent the full
and reasonable cost to Planters of servicing its debts, taking into
account both its peso and foreign currency-denominated
obligations." (Records, pp. 42-43)
Appellant’s proposition is open to question, to say the least. The
LOU issued by then Prime Minister Virata taken together with the
Justice Secretary’s Opinion does not preponderantly demonstrate
that the collections made were held in trust in favor of millions of
farmers. Unfortunately for appellant, in the absence of sufficient
evidence to establish its claims, this Court is constrained to rely on
what is explicitly provided in LOI 1465 – that one of the primary
aims in imposing the levy is to support the successful rehabilitation
and continued viability of PPI.18
PPI moved for reconsideration but its motion was denied.19 It then
filed the present petition with this Court.
Issues
Petitioner PPI raises four issues for Our consideration, viz.:
I
THE CONSTITUTIONALITY OF LOI 1465 CANNOT BE COLLATERALLY
ATTACKED AND BE DECREED VIA A DEFAULT JUDGMENT IN A
CASE FILED FOR COLLECTION AND DAMAGES WHERE THE ISSUE
OF CONSTITUTIONALITY IS NOT THE VERY LIS MOTA OF THE
CASE. NEITHER CAN LOI 1465 BE CHALLENGED BY ANY PERSON
OR ENTITY WHICH HAS NO STANDING TO DO SO.
II
LOI 1465, BEING A LAW IMPLEMENTED FOR THE PURPOSE OF
ASSURING THE FERTILIZER SUPPLY AND DISTRIBUTION IN THE
COUNTRY, AND FOR BENEFITING A FOUNDATION CREATED BY
LAW TO HOLD IN TRUST FOR MILLIONS OF FARMERS THEIR
STOCK OWNERSHIP IN PPI CONSTITUTES A VALID LEGISLATION
PURSUANT TO THE EXERCISE OF TAXATION AND POLICE POWER
FOR PUBLIC PURPOSES.
III
THE AMOUNT COLLECTED UNDER THE CAPITAL RECOVERY
COMPONENT WAS REMITTED TO THE GOVERNMENT, AND BECAME
GOVERNMENT FUNDS PURSUANT TO AN EFFECTIVE AND VALIDLY
ENACTED LAW WHICH IMPOSED DUTIES AND CONFERRED RIGHTS
BY VIRTUE OF THE PRINCIPLE OF "OPERATIVE FACT" PRIOR TO
ANY DECLARATION OF UNCONSTITUTIONALITY OF LOI 1465.
IV
THE PRINCIPLE OF UNJUST VEXATION (SHOULD BE ENRICHMENT)
FINDS NO APPLICATION IN THE INSTANT CASE.20 (Underscoring
supplied)
Our Ruling
We shall first tackle the procedural issues of locus standi and the
jurisdiction of the RTC to resolve constitutional issues.
Fertiphil has locus standi because it suffered direct injury; doctrine
of standing is a mere procedural technicality which may be waived.
PPI argues that Fertiphil has no locus standi to question the
constitutionality of LOI No. 1465 because it does not have a
"personal and substantial interest in the case or will sustain direct
injury as a result of its enforcement."21 It asserts that Fertiphil did
not suffer any damage from the CRC imposition because "incidence
of the levy fell on the ultimate consumer or the farmers
themselves, not on the seller fertilizer company." 22
We cannot agree. The doctrine of locus standi or the right of
appearance in a court of justice has been adequately discussed by
this Court in a catena of cases. Succinctly put, the doctrine
requires a litigant to have a material interest in the outcome of a
case. In private suits, locus standi requires a litigant to be a "real
party in interest," which is defined as "the party who stands to be
benefited or injured by the judgment in the suit or the party
entitled to the avails of the suit."23
In public suits, this Court recognizes the difficulty of applying the
doctrine especially when plaintiff asserts a public right on behalf of
the general public because of conflicting public policy issues. 24 On
one end, there is the right of the ordinary citizen to petition the
courts to be freed from unlawful government intrusion and illegal
official action. At the other end, there is the public policy
precluding excessive judicial interference in official acts, which may
unnecessarily hinder the delivery of basic public services.
In this jurisdiction, We have adopted the "direct injury test" to
determine locus standi in public suits. In People v. Vera,25 it was
held that a person who impugns the validity of a statute must have
"a personal and substantial interest in the case such that he has
sustained, or will sustain direct injury as a result." The "direct
injury test" in public suits is similar to the "real party in interest"
rule for private suits under Section 2, Rule 3 of the 1997 Rules of
Civil Procedure.26
Recognizing that a strict application of the "direct injury" test may
hamper public interest, this Court relaxed the requirement in cases
of "transcendental importance" or with "far reaching implications."
Being a mere procedural technicality, it has also been held that
locus standi may be waived in the public interest.27
Whether or not the complaint for collection is characterized as a
private or public suit, Fertiphil has locus standi to file it. Fertiphil
suffered a direct injury from the enforcement of LOI No. 1465. It
was required, and it did pay, the ₱10 levy imposed for every bag of
fertilizer sold on the domestic market. It may be true that Fertiphil
has passed some or all of the levy to the ultimate consumer, but
that does not disqualify it from attacking the constitutionality of the
LOI or from seeking a refund. As seller, it bore the ultimate burden
of paying the levy. It faced the possibility of severe sanctions for
failure to pay the levy. The fact of payment is sufficient injury to
Fertiphil.
Moreover, Fertiphil suffered harm from the enforcement of the LOI
because it was compelled to factor in its product the levy. The levy
certainly rendered the fertilizer products of Fertiphil and other
domestic sellers much more expensive. The harm to their business
consists not only in fewer clients because of the increased price,
but also in adopting alternative corporate strategies to meet the
demands of LOI No. 1465. Fertiphil and other fertilizer sellers may
have shouldered all or part of the levy just to be competitive in the
market. The harm occasioned on the business of Fertiphil is
sufficient injury for purposes of locus standi.
Even assuming arguendo that there is no direct injury, We find that
the liberal policy consistently adopted by this Court on locus standi
must apply. The issues raised by Fertiphil are of paramount public
importance. It involves not only the constitutionality of a tax law
but, more importantly, the use of taxes for public purpose. Former
President Marcos issued LOI No. 1465 with the intention of
rehabilitating an ailing private company. This is clear from the text
of the LOI. PPI is expressly named in the LOI as the direct
beneficiary of the levy. Worse, the levy was made dependent and
conditional upon PPI becoming financially viable. The LOI provided
that "the capital contribution shall be collected until adequate
capital is raised to make PPI viable."
The constitutionality of the levy is already in doubt on a plain
reading of the statute. It is Our constitutional duty to squarely
resolve the issue as the final arbiter of all justiciable controversies.
The doctrine of standing, being a mere procedural technicality,
should be waived, if at all, to adequately thresh out an important
constitutional issue.
RTC may resolve constitutional issues; the constitutional issue was
adequately raised in the complaint; it is the lis mota of the case.
PPI insists that the RTC and the CA erred in ruling on the
constitutionality of the LOI. It asserts that the constitutionality of
the LOI cannot be collaterally attacked in a complaint for
collection.28 Alternatively, the resolution of the constitutional issue
is not necessary for a determination of the complaint for
collection.29
Fertiphil counters that the constitutionality of the LOI was
adequately pleaded in its complaint. It claims that the
constitutionality of LOI No. 1465 is the very lis mota of the case
because the trial court cannot determine its claim without resolving
the issue.30
It is settled that the RTC has jurisdiction to resolve the
constitutionality of a statute, presidential decree or an executive
order. This is clear from Section 5, Article VIII of the 1987
Constitution, which provides:
SECTION 5. The Supreme Court shall have the following powers:
xxxx
(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. (Underscoring supplied)
In Mirasol v. Court of Appeals,31 this Court recognized the power of
the RTC to resolve constitutional issues, thus:
On the first issue. It is settled that Regional Trial Courts have the
authority and jurisdiction to consider the constitutionality of a
statute, presidential decree, or executive order. The Constitution
vests the power of judicial review or the power to declare a law,
treaty, international or executive agreement, presidential decree,
order, instruction, ordinance, or regulation not only in this Court,
but in all Regional Trial Courts.32
In the recent case of Equi-Asia Placement, Inc. v. Department of
Foreign Affairs,33 this Court reiterated:
There is no denying that regular courts have jurisdiction over cases
involving the validity or constitutionality of a rule or regulation
issued by administrative agencies. Such jurisdiction, however, is
not limited to the Court of Appeals or to this Court alone for even
the regional trial courts can take cognizance of actions assailing a
specific rule or set of rules promulgated by administrative bodies.
Indeed, the Constitution vests the power of judicial review or the
power to declare a law, treaty, international or executive
agreement, presidential decree, order, instruction, ordinance, or
regulation in the courts, including the regional trial courts. 34
Judicial review of official acts on the ground of unconstitutionality
may be sought or availed of through any of the actions cognizable
by courts of justice, not necessarily in a suit for declaratory relief.
Such review may be had in criminal actions, as in People v.
Ferrer35 involving the constitutionality of the now defunct Anti-
Subversion law, or in ordinary actions, as in Krivenko v. Register of
Deeds36 involving the constitutionality of laws prohibiting aliens
from acquiring public lands. The constitutional issue, however, (a)
must be properly raised and presented in the case, and (b) its
resolution is necessary to a determination of the case, i.e., the
issue of constitutionality must be the very lis mota presented. 37
Contrary to PPI’s claim, the constitutionality of LOI No. 1465 was
properly and adequately raised in the complaint for collection filed
with the RTC. The pertinent portions of the complaint allege:
6. The CRC of ₱10 per bag levied under LOI 1465 on domestic
sales of all grades of fertilizer in the Philippines, is unlawful, unjust,
uncalled for, unreasonable, inequitable and oppressive because:
xxxx
(c) It favors only one private domestic corporation, i.e., defendant
PPPI, and imposed at the expense and disadvantage of the other
fertilizer importers/distributors who were themselves in tight
business situation and were then exerting all efforts and
maximizing management and marketing skills to remain viable;
xxxx
(e) It was a glaring example of crony capitalism, a forced program
through which the PPI, having been presumptuously masqueraded
as "the" fertilizer industry itself, was the sole and anointed
beneficiary;
7. The CRC was an unlawful; and unconstitutional special
assessment and its imposition is tantamount to illegal exaction
amounting to a denial of due process since the persons of entities
which had to bear the burden of paying the CRC derived no benefit
therefrom; that on the contrary it was used by PPI in trying to
regain its former despicable monopoly of the fertilizer industry to
the detriment of other distributors and importers.38 (Underscoring
supplied)
The constitutionality of LOI No. 1465 is also the very lis mota of
the complaint for collection. Fertiphil filed the complaint to compel
PPI to refund the levies paid under the statute on the ground that
the law imposing the levy is unconstitutional. The thesis is that an
unconstitutional law is void. It has no legal effect. Being void,
Fertiphil had no legal obligation to pay the levy. Necessarily, all
levies duly paid pursuant to an unconstitutional law should be
refunded under the civil code principle against unjust enrichment.
The refund is a mere consequence of the law being declared
unconstitutional. The RTC surely cannot order PPI to refund
Fertiphil if it does not declare the LOI unconstitutional. It is the
unconstitutionality of the LOI which triggers the refund. The issue
of constitutionality is the very lis mota of the complaint with the
RTC.
The ₱10 levy under LOI No. 1465 is an exercise of the power of
taxation.
At any rate, the Court holds that the RTC and the CA did not err in
ruling against the constitutionality of the LOI.
PPI insists that LOI No. 1465 is a valid exercise either of the police
power or the power of taxation. It claims that the LOI was
implemented for the purpose of assuring the fertilizer supply and
distribution in the country and for benefiting a foundation created
by law to hold in trust for millions of farmers their stock ownership
in PPI.
Fertiphil counters that the LOI is unconstitutional because it was
enacted to give benefit to a private company. The levy was
imposed to pay the corporate debt of PPI. Fertiphil also argues
that, even if the LOI is enacted under the police power, it is still
unconstitutional because it did not promote the general welfare of
the people or public interest.
Police power and the power of taxation are inherent powers of the
State. These powers are distinct and have different tests for
validity. Police power is the power of the State to enact legislation
that may interfere with personal liberty or property in order to
promote the general welfare,39 while the power of taxation is the
power to levy taxes to be used for public purpose. The main
purpose of police power is the regulation of a behavior or conduct,
while taxation is revenue generation. The "lawful subjects" and
"lawful means" tests are used to determine the validity of a law
enacted under the police power.40 The power of taxation, on the
other hand, is circumscribed by inherent and constitutional
limitations.
We agree with the RTC that the imposition of the levy was an
exercise by the State of its taxation power. While it is true that the
power of taxation can be used as an implement of police
power,41 the primary purpose of the levy is revenue generation. 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.42
In Philippine Airlines, Inc. v. Edu,43 it was held that the imposition
of a vehicle registration fee is not an exercise by the State of its
police power, but of its taxation power, thus:
It is clear from the provisions of Section 73 of Commonwealth Act
123 and Section 61 of the Land Transportation and Traffic Code
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. x x x Fees may be properly regarded as
taxes even though they also serve as an instrument of regulation.
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. Such is the case of motor
vehicle registration fees. The same provision appears as Section
59(b) 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." x x x 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. 59(b) of the Code as taxes like the
motor vehicle registration fee and chauffeurs’ license fee. Such
fees are to go into the expenditures of the Land Transportation
Commission as provided for in the last proviso of Sec.
61.44 (Underscoring supplied)
The ₱10 levy under LOI No. 1465 is too excessive to serve a mere
regulatory purpose. The levy, no doubt, was a big burden on the
seller or the ultimate consumer. It increased the price of a bag of
fertilizer by as much as five percent.45 A plain reading of the LOI
also supports the conclusion that the levy was for revenue
generation. The LOI expressly provided that the levy was imposed
"until adequate capital is raised to make PPI viable."
Taxes are exacted only for a public purpose. The ₱10 levy is
unconstitutional because it was not for a public purpose. The levy
was imposed to give undue benefit to PPI.
An inherent limitation on the power of taxation is public purpose.
Taxes are exacted only for a public purpose. They cannot be used
for purely private purposes or for the exclusive benefit of private
persons.46 The reason for this is simple. The power to tax exists for
the general welfare; hence, implicit in its power is the limitation
that it should be used only for a public purpose. It would be a
robbery for the State to tax its citizens and use the funds
generated for a private purpose. As an old United States case
bluntly put it: "To lay with one hand, the power of the government
on the property of the citizen, and with the other to bestow it upon
favored individuals to aid private enterprises and build up private
fortunes, is nonetheless a robbery because it is done under the
forms of law and is called taxation."47
The term "public purpose" is not defined. It is an elastic concept
that can be hammered to fit modern standards. Jurisprudence
states that "public purpose" should be given a broad interpretation.
It does not only pertain to those purposes which are traditionally
viewed as essentially government functions, such as building roads
and delivery of basic services, but also includes those purposes
designed to promote social justice. Thus, public money may now
be used for the relocation of illegal settlers, low-cost housing and
urban or agrarian reform.
While the categories of what may constitute a public purpose are
continually expanding in light of the expansion of government
functions, the inherent requirement that taxes can only be exacted
for a public purpose still stands. Public purpose is the heart of a tax
law. When a tax law is only a mask to exact funds from the public
when its true intent is to give undue benefit and advantage to a
private enterprise, that law will not satisfy the requirement of
"public purpose."
The purpose of a law is evident from its text or inferable from other
secondary sources. Here, We agree with the RTC and that CA that
the levy imposed under LOI No. 1465 was not for a public purpose.
First, the LOI expressly provided that the levy be imposed to
benefit PPI, a private company. The purpose is explicit from Clause
3 of the law, thus:
3. The Administrator of the Fertilizer Pesticide Authority to include
in its fertilizer pricing formula a capital contribution component of
not less than ₱10 per bag. This capital contribution shall be
collected until adequate capital is raised to make PPI viable. Such
capital contribution shall be applied by FPA to all domestic sales of
fertilizers in the Philippines.48 (Underscoring supplied)
It is a basic rule of statutory construction that the text of a statute
should be given a literal meaning. In this case, the text of the LOI
is plain that the levy was imposed in order to raise capital for PPI.
The framers of the LOI did not even hide the insidious purpose of
the law. They were cavalier enough to name PPI as the ultimate
beneficiary of the taxes levied under the LOI. We find it utterly
repulsive that a tax law would expressly name a private company
as the ultimate beneficiary of the taxes to be levied from the
public. This is a clear case of crony capitalism.
Second, the LOI provides that the imposition of the ₱10 levy was
conditional and dependent upon PPI becoming financially "viable."
This suggests that the levy was actually imposed to benefit PPI.
The LOI notably does not fix a maximum amount when PPI is
deemed financially "viable." Worse, the liability of Fertiphil and
other domestic sellers of fertilizer to pay the levy is made
indefinite. They are required to continuously pay the levy until
adequate capital is raised for PPI.
Third, the RTC and the CA held that the levies paid under the LOI
were directly remitted and deposited by FPA to Far East Bank and
Trust Company, the depositary bank of PPI.49 This proves that PPI
benefited from the LOI. It is also proves that the main purpose of
the law was to give undue benefit and advantage to PPI.
Fourth, the levy was used to pay the corporate debts of PPI. A
reading of the Letter of Understanding50 dated May 18, 1985
signed by then Prime Minister Cesar Virata reveals that PPI was in
deep financial problem because of its huge corporate debts. There
were pending petitions for rehabilitation against PPI before the
Securities and Exchange Commission. The government guaranteed
payment of PPI’s debts to its foreign creditors. To fund the
payment, President Marcos issued LOI No. 1465. The pertinent
portions of the letter of understanding read:
Republic of the Philippines
Office of the Prime Minister
Manila
LETTER OF UNDERTAKING
May 18, 1985
TO: THE BANKING AND FINANCIAL INSTITUTIONS
LISTED IN ANNEX A HERETO WHICH ARE
CREDITORS (COLLECTIVELY, THE "CREDITORS")
OF PLANTERS PRODUCTS, INC. ("PLANTERS")
Gentlemen:
This has reference to Planters which is the principal importer and
distributor of fertilizer, pesticides and agricultural chemicals in the
Philippines. As regards Planters, the Philippine Government
confirms its awareness of the following: (1) that Planters has
outstanding obligations in foreign currency and/or pesos, to the
Creditors, (2) that Planters is currently experiencing financial
difficulties, and (3) that there are presently pending with the
Securities and Exchange Commission of the Philippines a petition
filed at Planters’ own behest for the suspension of payment of all
its obligations, and a separate petition filed by Manufacturers
Hanover Trust Company, Manila Offshore Branch for the
appointment of a rehabilitation receiver for Planters.
In connection with the foregoing, the Republic of the Philippines
(the "Republic") confirms that it considers and continues to
consider Planters as a major fertilizer distributor. Accordingly, for
and in consideration of your expressed willingness to consider and
participate in the effort to rehabilitate Planters, the Republic hereby
manifests its full and unqualified support of the successful
rehabilitation and continuing viability of Planters, and to that end,
hereby binds and obligates itself to the creditors and Planters, as
follows:
xxxx
2. Upon the effective date of this Letter of Undertaking, the
Republic shall cause FPA to include in its fertilizer pricing formula a
capital recovery component, the proceeds of which will be used
initially for the purpose of funding the unpaid portion of the
outstanding capital stock of Planters presently held in trust by
Planters Foundation, Inc. ("Planters Foundation"), which unpaid
capital is estimated at approximately ₱206 million (subject to
validation by Planters and Planters Foundation) such unpaid portion
of the outstanding capital stock of Planters being hereafter referred
to as the "Unpaid Capital"), and subsequently for such capital
increases as may be required for the continuing viability of
Planters.
xxxx
The capital recovery component shall continue to be charged and
collected until payment in full of (a) the Unpaid Capital and/or (b)
any shortfall in the payment of the Subsidy Receivables, (c) any
carrying cost accruing from the date hereof on the amounts which
may be outstanding from time to time of the Unpaid Capital and/or
the Subsidy Receivables, and (d) the capital increases
contemplated in paragraph 2 hereof. For the purpose of the
foregoing clause (c), the "carrying cost" shall be at such rate as will
represent the full and reasonable cost to Planters of servicing its
debts, taking into account both its peso and foreign currency-
denominated obligations.
REPUBLIC OF THE PHILIPPINES
By:
(signed)
CESAR E. A. VIRATA
Prime Minister and Minister of Finance51
It is clear from the Letter of Understanding that the levy was
imposed precisely to pay the corporate debts of PPI. We cannot
agree with PPI that the levy was imposed to ensure the stability of
the fertilizer industry in the country. The letter of understanding
and the plain text of the LOI clearly indicate that the levy was
exacted for the benefit of a private corporation.
All told, the RTC and the CA did not err in holding that the levy
imposed under LOI No. 1465 was not for a public purpose. LOI No.
1465 failed to comply with the public purpose requirement for tax
laws.
The LOI is still unconstitutional even if enacted under the police
power; it did not promote public interest.
Even if We consider LOI No. 1695 enacted under the police power
of the State, it would still be invalid for failing to comply with the
test of "lawful subjects" and "lawful means." Jurisprudence states
the test as follows: (1) the interest of the public generally, as
distinguished from those of particular class, requires its exercise;
and (2) the means employed are reasonably necessary for the
accomplishment of the purpose and not unduly oppressive upon
individuals.52
For the same reasons as discussed, LOI No. 1695 is invalid because
it did not promote public interest. The law was enacted to give
undue advantage to a private corporation. We quote with approval
the CA ratiocination on this point, thus:
It is upon applying this established tests that We sustain the trial
court’s holding LOI 1465 unconstitutional.1awphil To be sure,
ensuring the continued supply and distribution of fertilizer in the
country is an undertaking imbued with public interest. However,
the method by which LOI 1465 sought to achieve this is by no
means a measure that will promote the public welfare. The
government’s commitment to support the successful rehabilitation
and continued viability of PPI, a private corporation, is an
unmistakable attempt to mask the subject statute’s impartiality.
There is no way to treat the self-interest of a favored entity, like
PPI, as identical with the general interest of the country’s farmers
or even the Filipino people in general. Well to stress, substantive
due process exacts fairness and equal protection disallows
distinction where none is needed. When a statute’s public purpose
is spoiled by private interest, the use of police power becomes a
travesty which must be struck down for being an arbitrary exercise
of government power. To rule in favor of appellant would
contravene the general principle that revenues derived from taxes
cannot be used for purely private purposes or for the exclusive
benefit of private individuals. (Underscoring supplied)
The general rule is that an unconstitutional law is void; the
doctrine of operative fact is inapplicable.
PPI also argues that Fertiphil cannot seek a refund even if LOI No.
1465 is declared unconstitutional. It banks on the doctrine of
operative fact, which provides that an unconstitutional law has an
effect before being declared unconstitutional. PPI wants to retain
the levies paid under LOI No. 1465 even if it is subsequently
declared to be unconstitutional.
We cannot agree. It is settled that no question, issue or argument
will be entertained on appeal, unless it has been raised in the court
a quo.53 PPI did not raise the applicability of the doctrine of
operative fact with the RTC and the CA. It cannot belatedly raise
the issue with Us in order to extricate itself from the dire effects of
an unconstitutional law.
At any rate, We find the doctrine inapplicable. The general rule is
that an unconstitutional law is void. It produces no rights, imposes
no duties and affords no protection. It has no legal effect. It is, in
legal contemplation, inoperative as if it has not been
passed.54 Being void, Fertiphil is not required to pay the levy. All
levies paid should be refunded in accordance with the general civil
code principle against unjust enrichment. The general rule is
supported by Article 7 of the Civil Code, which provides:
ART. 7. Laws are repealed only by subsequent ones, and their
violation or non-observance shall not be excused by disuse or
custom or practice to the contrary.
When the courts declare a law to be inconsistent with the
Constitution, the former shall be void and the latter shall govern.
The doctrine of operative fact, as an exception to the general rule,
only applies as a matter of equity and fair play.55 It nullifies the
effects of an unconstitutional law by recognizing that the existence
of a statute prior to a determination of unconstitutionality is an
operative fact and may have consequences which cannot always be
ignored. The past cannot always be erased by a new judicial
declaration.56
The doctrine is applicable when a declaration of unconstitutionality
will impose an undue burden on those who have relied on the
invalid law. Thus, it was applied to a criminal case when a
declaration of unconstitutionality would put the accused in double
jeopardy57 or would put in limbo the acts done by a municipality in
reliance upon a law creating it.58
Here, We do not find anything iniquitous in ordering PPI to refund
the amounts paid by Fertiphil under LOI No. 1465. It unduly
benefited from the levy. It was proven during the trial that the
levies paid were remitted and deposited to its bank account. Quite
the reverse, it would be inequitable and unjust not to order a
refund. To do so would unjustly enrich PPI at the expense of
Fertiphil. Article 22 of the Civil Code explicitly provides that "every
person who, through an act of performance by another comes into
possession of something at the expense of the latter without just
or legal ground shall return the same to him." We cannot allow PPI
to profit from an unconstitutional law. Justice and equity dictate
that PPI must refund the amounts paid by Fertiphil.
WHEREFORE, the petition is DENIED. The Court of Appeals Decision
dated November 28, 2003 is AFFIRMED.
SO ORDERED.
G.R. No. L-45685 November 16, 1937
THE PEOPLE OF THE PHILIPPINE ISLANDS and HONGKONG
& SHANGHAI BANKING CORPORATION, petitioners,
vs.
JOSE O. VERA, Judge . of the Court of First Instance of
Manila, and MARIANO CU UNJIENG, respondents.
Office of the Solicitor General Tuason and City Fiscal Diaz for the
Government.
De Witt, Perkins and Ponce Enrile for the Hongkong and Shanghai
Banking Corporation.
Vicente J. Francisco, Feria and La O, Orense and Belmonte, and
Gibbs and McDonough for respondent Cu Unjieng.
No appearance for respondent Judge.
LAUREL, J.:
This is an original action instituted in this court on August 19,
1937, for the issuance of the writ of certiorari and of prohibition to
the Court of First Instance of Manila so that this court may review
the actuations of the aforesaid Court of First Instance in criminal
case No. 42649 entitled "The People of the Philippine Islands vs.
Mariano Cu Unjieng, et al.", more particularly the application of the
defendant Mariano Cu Unjieng therein for probation under the
provisions of Act No. 4221, and thereafter prohibit the said Court
of First Instance from taking any further action or entertaining
further the aforementioned application for probation, to the end
that the defendant Mariano Cu Unjieng may be forthwith
committed to prison in accordance with the final judgment of
conviction rendered by this court in said case (G. R. No. 41200). 1
Petitioners herein, the People of the Philippine and the Hongkong
and Shanghai Banking Corporation, are respectively the plaintiff
and the offended party, and the respondent herein Mariano Cu
Unjieng is one of the defendants, in the criminal case entitled "The
People of the Philippine Islands vs. Mariano Cu Unjieng, et al.",
criminal case No. 42649 of the Court of First Instance of Manila and
G.R. No. 41200 of this court. Respondent herein, Hon. Jose O.
Vera, is the Judge ad interim of the seventh branch of the Court of
First Instance of Manila, who heard the application of the defendant
Mariano Cu Unjieng for probation in the aforesaid criminal case.
The information in the aforesaid criminal case was filed with the
Court of First Instance of Manila on October 15, 1931, petitioner
herein Hongkong and Shanghai Banking Corporation intervening in
the case as private prosecutor. After a protracted trial unparalleled
in the annals of Philippine jurisprudence both in the length of time
spent by the court as well as in the volume in the testimony and
the bulk of the exhibits presented, the Court of First Instance of
Manila, on January 8, 1934, rendered a judgment of conviction
sentencing the defendant Mariano Cu Unjieng to indeterminate
penalty ranging from four years and two months of prision
correccional to eight years of prision mayor, to pay the costs and
with reservation of civil action to the offended party, the Hongkong
and Shanghai Banking Corporation. Upon appeal, the court, on
March 26, 1935, modified the sentence to an indeterminate penalty
of from five years and six months of prision correccional to seven
years, six months and twenty-seven days of prision mayor, but
affirmed the judgment in all other respects. Mariano Cu Unjieng
filed a motion for reconsideration and four successive motions for
new trial which were denied on December 17, 1935, and final
judgment was accordingly entered on December 18, 1935. The
defendant thereupon sought to have the case elevated
on certiorari to the Supreme Court of the United States but the
latter denied the petition for certiorari in November, 1936.
This court, on November 24, 1936, denied the petition
subsequently filed by the defendant for leave to file a second
alternative motion for reconsideration or new trial and thereafter
remanded the case to the court of origin for execution of the
judgment.
The instant proceedings have to do with the application for
probation filed by the herein respondent Mariano Cu Unjieng
on November 27, 1936, before the trial court, under the
provisions of Act No. 4221 of the defunct Philippine Legislature.
Herein respondent Mariano Cu Unjieng states in his petition, inter
alia, that he is innocent of the crime of which he was convicted,
that he has no criminal record and that he would observe good
conduct in the future. The Court of First Instance of Manila, Judge
Pedro Tuason presiding, referred the application for probation of
the Insular Probation Office which recommended denial of the
same June 18, 1937. Thereafter, the Court of First Instance of
Manila, seventh branch, Judge Jose O. Vera presiding, set the
petition for hearing on April 5, 1937.
On April 2, 1937, the Fiscal of the City of Manila filed an opposition
to the granting of probation to the herein respondent Mariano Cu
Unjieng. The private prosecution also filed an opposition on April 5,
1937, alleging, among other things, that Act No. 4221, assuming
that it has not been repealed by section 2 of Article XV of the
Constitution, is nevertheless violative of section 1, subsection (1),
Article III of the Constitution guaranteeing equal protection of the
laws for the reason that its applicability is not uniform throughout
the Islands and because section 11 of the said Act endows the
provincial boards with the power to make said law effective or
otherwise in their respective or otherwise in their respective
provinces. The private prosecution also filed a supplementary
opposition on April 19, 1937, elaborating on the alleged
unconstitutionality on Act No. 4221, as an undue delegation of
legislative power to the provincial boards of several provinces (sec.
1, Art. VI, Constitution). The City Fiscal concurred in the opposition
of the private prosecution except with respect to the questions
raised concerning the constitutionality of Act No. 4221.
On June 28, 1937, herein respondent Judge Jose O. Vera
promulgated a resolution with a finding that "las pruebas no han
establecido de unamanera concluyente la culpabilidad del
peticionario y que todos los hechos probados no son inconsistentes
o incongrentes con su inocencia" and concludes that the herein
respondent Mariano Cu Unjieng "es inocente por duda racional" of
the crime of which he stands convicted by this court in G.R. No.
41200, but denying the latter's petition for probation for the reason
that:
. . . Si este Juzgado concediera la poblacion solicitada por las
circunstancias y la historia social que se han expuesto en el cuerpo
de esta resolucion, que hacen al peticionario acreedor de la misma,
una parte de la opinion publica, atizada por los recelos y las
suspicacias, podria levantarse indignada contra un sistema de
probacion que permite atisbar en los procedimientos ordinarios de
una causa criminal perturbando la quietud y la eficacia de las
decisiones ya recaidas al traer a la superficie conclusiones
enteramente differentes, en menoscabo del interes publico que
demanda el respeto de las leyes y del veredicto judicial.
On July 3, 1937, counsel for the herein respondent Mariano Cu
Unjieng filed an exception to the resolution denying probation and
a notice of intention to file a motion for reconsideration. An
alternative motion for reconsideration or new trial was filed by
counsel on July 13, 1937. This was supplemented by an additional
motion for reconsideration submitted on July 14, 1937. The
aforesaid motions were set for hearing on July 31, 1937, but said
hearing was postponed at the petition of counsel for the
respondent Mariano Cu Unjieng because a motion for leave to
intervene in the case as amici curiae signed by thirty-three (thirty-
four) attorneys had just been filed with the trial court. Attorney
Eulalio Chaves whose signature appears in the aforesaid motion
subsequently filed a petition for leave to withdraw his appearance
as amicus curiae on the ground that the motion for leave to
intervene as amici curiae was circulated at a banquet given by
counsel for Mariano Cu Unjieng on the evening of July 30, 1937,
and that he signed the same "without mature deliberation and
purely as a matter of courtesy to the person who invited me
(him)."
On August 6, 1937, the Fiscal of the City of Manila filed a motion
with the trial court for the issuance of an order of execution of the
judgment of this court in said case and forthwith to commit the
herein respondent Mariano Cu Unjieng to jail in obedience to said
judgment.
On August 7, 1937, the private prosecution filed its opposition to
the motion for leave to intervene as amici curiae aforementioned,
asking that a date be set for a hearing of the same and that, at all
events, said motion should be denied with respect to certain
attorneys signing the same who were members of the legal staff of
the several counsel for Mariano Cu Unjieng. On August 10, 1937,
herein respondent Judge Jose O. Vera issued an order requiring all
parties including the movants for intervention as amici curiae to
appear before the court on August 14, 1937. On the last-
mentioned date, the Fiscal of the City of Manila moved for the
hearing of his motion for execution of judgment in preference to
the motion for leave to intervene as amici curiae but, upon
objection of counsel for Mariano Cu Unjieng, he moved for the
postponement of the hearing of both motions. The respondent
judge thereupon set the hearing of the motion for execution on
August 21, 1937, but proceeded to consider the motion for leave to
intervene as amici curiae as in order. Evidence as to the
circumstances under which said motion for leave to intervene
as amici curiae was signed and submitted to court was to have
been heard on August 19, 1937. But at this juncture, herein
petitioners came to this court on extraordinary legal process to put
an end to what they alleged was an interminable proceeding in the
Court of First Instance of Manila which fostered "the campaign of
the defendant Mariano Cu Unjieng for delay in the execution of the
sentence imposed by this Honorable Court on him, exposing the
courts to criticism and ridicule because of the apparent inability of
the judicial machinery to make effective a final judgment of this
court imposed on the defendant Mariano Cu Unjieng."
The scheduled hearing before the trial court was accordingly
suspended upon the issuance of a temporary restraining order by
this court on August 21, 1937.
To support their petition for the issuance of the extraordinary writs
of certiorari and prohibition, herein petitioners allege that the
respondent judge has acted without jurisdiction or in excess of his
jurisdiction:
I. Because said respondent judge lacks the power to place
respondent Mariano Cu Unjieng under probation for the following
reason:
(1) Under section 11 of Act No. 4221, the said of the Philippine
Legislature is made to apply only to the provinces of the
Philippines; it nowhere states that it is to be made applicable to
chartered cities like the City of Manila.
(2) While section 37 of the Administrative Code contains a proviso
to the effect that in the absence of a special provision, the term
"province" may be construed to include the City of Manila for the
purpose of giving effect to laws of general application, it is also
true that Act No. 4221 is not a law of general application because it
is made to apply only to those provinces in which the respective
provincial boards shall have provided for the salary of a probation
officer.
(3) Even if the City of Manila were considered to be a province,
still, Act No. 4221 would not be applicable to it because it has
provided for the salary of a probation officer as required by section
11 thereof; it being immaterial that there is an Insular Probation
Officer willing to act for the City of Manila, said Probation Officer
provided for in section 10 of Act No. 4221 being different and
distinct from the Probation Officer provided for in section 11 of the
same Act.
II. Because even if the respondent judge originally had jurisdiction
to entertain the application for probation of the respondent Mariano
Cu Unjieng, he nevertheless acted without jurisdiction or in excess
thereof in continuing to entertain the motion for reconsideration
and by failing to commit Mariano Cu Unjieng to prison after he had
promulgated his resolution of June 28, 1937, denying Mariano Cu
Unjieng's application for probation, for the reason that:
(1) His jurisdiction and power in probation proceedings is limited
by Act No. 4221 to the granting or denying of applications for
probation.
(2) After he had issued the order denying Mariano Cu Unjieng's
petition for probation on June 28, 1937, it became final and
executory at the moment of its rendition.
(3) No right on appeal exists in such cases.
(4) The respondent judge lacks the power to grant a rehearing of
said order or to modify or change the same.
III. Because the respondent judge made a finding that Mariano Cu
Unjieng is innocent of the crime for which he was convicted by final
judgment of this court, which finding is not only presumptuous but
without foundation in fact and in law, and is furthermore in
contempt of this court and a violation of the respondent's oath of
office as ad interim judge of first instance.
IV. Because the respondent judge has violated and continues to
violate his duty, which became imperative when he issued his
order of June 28, 1937, denying the application for probation, to
commit his co-respondent to jail.
Petitioners also avers that they have no other plain, speedy and
adequate remedy in the ordinary course of law.
In a supplementary petition filed on September 9, 1937, the
petitioner Hongkong and Shanghai Banking Corporation further
contends that Act No. 4221 of the Philippine Legislature providing
for a system of probation for persons eighteen years of age or over
who are convicted of crime, is unconstitutional because it is
violative of section 1, subsection (1), Article III, of the Constitution
of the Philippines guaranteeing equal protection of the laws
because it confers upon the provincial board of its province the
absolute discretion to make said law operative or otherwise in their
respective provinces, because it constitutes an unlawful and
improper delegation to the provincial boards of the several
provinces of the legislative power lodged by the Jones Law (section
8) in the Philippine Legislature and by the Constitution (section 1,
Art. VI) in the National Assembly; and for the further reason that it
gives the provincial boards, in contravention of the Constitution
(section 2, Art. VIII) and the Jones Law (section 28), the authority
to enlarge the powers of the Court of First Instance of different
provinces without uniformity. In another supplementary petition
dated September 14, 1937, the Fiscal of the City of Manila, in
behalf of one of the petitioners, the People of the Philippine
Islands, concurs for the first time with the issues raised by other
petitioner regarding the constitutionality of Act No. 4221, and on
the oral argument held on October 6, 1937, further elaborated on
the theory that probation is a form of reprieve and therefore Act.
No. 4221 is an encroachment on the exclusive power of the Chief
Executive to grant pardons and reprieves. On October 7, 1937, the
City Fiscal filed two memorandums in which he contended that Act
No. 4221 not only encroaches upon the pardoning power to the
executive, but also constitute an unwarranted delegation of
legislative power and a denial of the equal protection of the laws.
On October 9, 1937, two memorandums, signed jointly by the City
Fiscal and the Solicitor-General, acting in behalf of the People of
the Philippine Islands, and by counsel for the petitioner, the
Hongkong and Shanghai Banking Corporation, one sustaining the
power of the state to impugn the validity of its own laws and the
other contending that Act No. 4221 constitutes an unwarranted
delegation of legislative power, were presented. Another joint
memorandum was filed by the same persons on the same day,
October 9, 1937, alleging that Act No. 4221 is unconstitutional
because it denies the equal protection of the laws and constitutes
an unlawful delegation of legislative power and, further, that the
whole Act is void: that the Commonwealth is not estopped from
questioning the validity of its laws; that the private prosecution
may intervene in probation proceedings and may attack the
probation law as unconstitutional; and that this court may pass
upon the constitutional question in prohibition proceedings.
Respondents in their answer dated August 31, 1937, as well as in
their oral argument and memorandums, challenge each and every
one of the foregoing proposition raised by the petitioners.
As special defenses, respondents allege:
(1) That the present petition does not state facts sufficient in law
to warrant the issuance of the writ of certiorari or of prohibition.
(2) That the aforesaid petition is premature because the remedy
sought by the petitioners is the very same remedy prayed for by
them before the trial court and was still pending resolution before
the trial court when the present petition was filed with this court.
(3) That the petitioners having themselves raised the question as
to the execution of judgment before the trial court, said trial court
has acquired exclusive jurisdiction to resolve the same under the
theory that its resolution denying probation is unappealable.
(4) That upon the hypothesis that this court has concurrent
jurisdiction with the Court of First Instance to decide the question
as to whether or not the execution will lie, this court nevertheless
cannot exercise said jurisdiction while the Court of First Instance
has assumed jurisdiction over the same upon motion of herein
petitioners themselves.
(5) That upon the procedure followed by the herein petitioners in
seeking to deprive the trial court of its jurisdiction over the case
and elevate the proceedings to this court, should not be tolerated
because it impairs the authority and dignity of the trial court which
court while sitting in the probation cases is "a court of limited
jurisdiction but of great dignity."
(6) That under the supposition that this court has jurisdiction to
resolve the question submitted to and pending resolution by the
trial court, the present action would not lie because the resolution
of the trial court denying probation is appealable; for although the
Probation Law does not specifically provide that an applicant for
probation may appeal from a resolution of the Court of First
Instance denying probation, still it is a general rule in this
jurisdiction that a final order, resolution or decision of an inferior
court is appealable to the superior court.
(7) That the resolution of the trial court denying probation of
herein respondent Mariano Cu Unjieng being appealable, the same
had not become final and executory for the reason that the said
respondent had filed an alternative motion for reconsideration and
new trial within the requisite period of fifteen days, which motion
the trial court was able to resolve in view of the restraining order
improvidently and erroneously issued by this court.lawphi1.net
(8) That the Fiscal of the City of Manila had by implication admitted
that the resolution of the trial court denying probation is not final
and unappealable when he presented his answer to the motion for
reconsideration and agreed to the postponement of the hearing of
the said motion.
(9) That under the supposition that the order of the trial court
denying probation is not appealable, it is incumbent upon the
accused to file an action for the issuance of the writ
of certiorari with mandamus, it appearing that the trial court,
although it believed that the accused was entitled to probation,
nevertheless denied probation for fear of criticism because the
accused is a rich man; and that, before a petition
for certiorari grounded on an irregular exercise of jurisdiction by
the trial court could lie, it is incumbent upon the petitioner to file a
motion for reconsideration specifying the error committed so that
the trial court could have an opportunity to correct or cure the
same.
(10) That on hypothesis that the resolution of this court is not
appealable, the trial court retains its jurisdiction within a
reasonable time to correct or modify it in accordance with law and
justice; that this power to alter or modify an order or resolution is
inherent in the courts and may be exercise either motu proprio or
upon petition of the proper party, the petition in the latter case
taking the form of a motion for reconsideration.
(11) That on the hypothesis that the resolution of the trial court is
appealable as respondent allege, said court cannot order execution
of the same while it is on appeal, for then the appeal would not be
availing because the doors of probation will be closed from the
moment the accused commences to serve his sentence (Act No.
4221, sec. 1; U.S. vs. Cook, 19 Fed. [2d], 827).
In their memorandums filed on October 23, 1937, counsel for the
respondents maintain that Act No. 4221 is constitutional because,
contrary to the allegations of the petitioners, it does not constitute
an undue delegation of legislative power, does not infringe the
equal protection clause of the Constitution, and does not encroach
upon the pardoning power of the Executive. In an additional
memorandum filed on the same date, counsel for the respondents
reiterate the view that section 11 of Act No. 4221 is free from
constitutional objections and contend, in addition, that the private
prosecution may not intervene in probation proceedings, much less
question the validity of Act No. 4221; that both the City Fiscal and
the Solicitor-General are estopped from questioning the validity of
the Act; that the validity of Act cannot be attacked for the first
time before this court; that probation in unavailable; and that, in
any event, section 11 of the Act No. 4221 is separable from the
rest of the Act. The last memorandum for the respondent Mariano
Cu Unjieng was denied for having been filed out of time but was
admitted by resolution of this court and filed anew
on November 5, 1937. This memorandum elaborates on
some of the points raised by the respondents and refutes those
brought up by the petitioners.
In the scrutiny of the pleadings and examination of the various
aspects of the present case, we noted that the court below, in
passing upon the merits of the application of the respondent
Mariano Cu Unjieng and in denying said application assumed the
task not only of considering the merits of the application, but of
passing upon the culpability of the applicant, notwithstanding the
final pronouncement of guilt by this court. (G.R. No. 41200.)
Probation implies guilt be final judgment. While a probation case
may look into the circumstances attending the commission of the
offense, this does not authorize it to reverse the findings and
conclusive of this court, either directly or indirectly, especially
wherefrom its own admission reliance was merely had on the
printed briefs, averments, and pleadings of the parties. As already
observed by this court in Shioji vs. Harvey ([1922], 43 Phil., 333,
337), and reiterated in subsequent cases, "if each and every Court
of First Instance could enjoy the privilege of overruling decisions of
the Supreme Court, there would be no end to litigation, and judicial
chaos would result." A becoming modesty of inferior courts
demands conscious realization of the position that they occupy in
the interrelation and operation of the intergrated judicial system of
the nation.
After threshing carefully the multifarious issues raised by both
counsel for the petitioners and the respondents, this court prefers
to cut the Gordian knot and take up at once the two fundamental
questions presented, namely, (1) whether or not the
constitutionality of Act No. 4221 has been properly raised in these
proceedings; and (2) in the affirmative, whether or not said Act is
constitutional. Considerations of these issues will involve a
discussion of certain incidental questions raised by the parties.
To arrive at a correct conclusion on the first question, resort to
certain guiding principles is necessary. It is a well-settled rule that
the constitutionality of an act of the legislature will not be
determined by the courts unless that question is properly raised
and presented inappropriate cases and is necessary to a
determination of the case; i.e., the issue of constitutionality must
be the very lis mota presented. (McGirr vs. Hamilton and Abreu
[1915], 30 Phil., 563, 568; 6 R. C. L., pp. 76, 77; 12 C. J., pp.
780-782, 783.)
The question of the constitutionality of an act of the legislature is
frequently raised in ordinary actions. Nevertheless, resort may be
made to extraordinary legal remedies, particularly where the
remedies in the ordinary course of law even if available, are not
plain, speedy and adequate. Thus, in Cu Unjieng vs.
Patstone ([1922]), 42 Phil., 818), this court held that the question
of the constitutionality of a statute may be raised by the petitioner
in mandamus proceedings (see, also, 12 C. J., p. 783); and
in Government of the Philippine Islands vs. Springer ([1927], 50
Phil., 259 [affirmed in Springer vs. Government of the Philippine
Islands (1928), 277 U. S., 189; 72 Law. ed., 845]), this court
declared an act of the legislature unconstitutional in an action
of quo warranto brought in the name of the Government of the
Philippines. It has also been held that the constitutionality of a
statute may be questioned in habeas corpus proceedings (12 C. J.,
p. 783; Bailey on Habeas Corpus, Vol. I, pp. 97, 117), although
there are authorities to the contrary; on an application for
injunction to restrain action under the challenged statute
(mandatory, see Cruz vs. Youngberg [1931], 56 Phil., 234); and
even on an application for preliminary injunction where the
determination of the constitutional question is necessary to a
decision of the case. (12 C. J., p. 783.) The same may be said as
regards prohibition and certiorari.(Yu Cong Eng vs. Trinidad
[1925], 47 Phil., 385; [1926], 271 U. S., 500; 70 Law. ed., 1059;
Bell vs. First Judicial District Court [1905], 28 Nev., 280; 81 Pac.,
875; 113 A. S. R., 854; 6 Ann. Cas., 982; 1 L. R. A. [N. S], 843,
and cases cited). The case of Yu Cong Eng vs. Trinidad, supra,
decided by this court twelve years ago was, like the present one,
an original action for certiorari and prohibition. The constitutionality
of Act No. 2972, popularly known as the Chinese Bookkeeping Law,
was there challenged by the petitioners, and the constitutional
issue was not met squarely by the respondent in a demurrer. A
point was raised "relating to the propriety of the constitutional
question being decided in original proceedings in prohibition." This
court decided to take up the constitutional question and, with two
justices dissenting, held that Act No. 2972 was constitutional. The
case was elevated on writ of certiorari to the Supreme Court of the
United States which reversed the judgment of this court and held
that the Act was invalid. (271 U. S., 500; 70 Law. ed., 1059.) On
the question of jurisdiction, however, the Federal Supreme Court,
though its Chief Justice, said:
By the Code of Civil Procedure of the Philippine Islands, section
516, the Philippine supreme court is granted concurrent jurisdiction
in prohibition with courts of first instance over inferior tribunals or
persons, and original jurisdiction over courts of first instance, when
such courts are exercising functions without or in excess of their
jurisdiction. It has been held by that court that the question of the
validity of the criminal statute must usually be raised by a
defendant in the trial court and be carried regularly in review to the
Supreme Court. (Cadwallader-Gibson Lumber Co. vs. Del Rosario,
26 Phil., 192). But in this case where a new act seriously affected
numerous persons and extensive property rights, and was likely to
cause a multiplicity of actions, the Supreme Court exercised its
discretion to bring the issue to the act's validity promptly before it
and decide in the interest of the orderly administration of justice.
The court relied by analogy upon the cases of Ex parte Young (209
U. S., 123;52 Law ed., 714; 13 L. R. A. [N. S.] 932; 28 Sup. Ct.
Rep., 441; 14 Ann. Ca., 764; Traux vs. Raich, 239 U. S., 33; 60
Law. ed., 131; L. R. A. 1916D, 545; 36 Sup. Ct. Rep., 7; Ann.
Cas., 1917B, 283; and Wilson vs. New, 243 U. S., 332; 61 Law.
ed., 755; L. R. A. 1917E, 938; 37 Sup. Ct. Rep., 298; Ann. Cas.
1918A, 1024). Although objection to the jurisdiction was raise by
demurrer to the petition, this is now disclaimed on behalf of the
respondents, and both parties ask a decision on the merits. In view
of the broad powers in prohibition granted to that court under the
Island Code, we acquiesce in the desire of the parties.
The writ of prohibition is an extraordinary judicial writ issuing out
of a court of superior jurisdiction and directed to an inferior court,
for the purpose of preventing the inferior tribunal from usurping a
jurisdiction with which it is not legally vested. (High, Extraordinary
Legal Remedies, p. 705.) The general rule, although there is a
conflict in the cases, is that the merit of prohibition will not lie
whether the inferior court has jurisdiction independent of the
statute the constitutionality of which is questioned, because in such
cases the interior court having jurisdiction may itself determine the
constitutionality of the statute, and its decision may be subject to
review, and consequently the complainant in such cases ordinarily
has adequate remedy by appeal without resort to the writ of
prohibition. But where the inferior court or tribunal derives its
jurisdiction exclusively from an unconstitutional statute, it may be
prevented by the writ of prohibition from enforcing that statute.
(50 C. J., 670; Ex parte Round tree [1874, 51 Ala., 42; In
re Macfarland, 30 App. [D. C.], 365; Curtis vs. Cornish [1912], 109
Me., 384; 84 A., 799; Pennington vs. Woolfolk [1880], 79 Ky., 13;
State vs. Godfrey [1903], 54 W. Va., 54; 46 S. E., 185; Arnold vs.
Shields [1837], 5 Dana, 19; 30 Am. Dec., 669.)
Courts of First Instance sitting in probation proceedings derived
their jurisdiction solely from Act No. 4221 which prescribes in
detailed manner the procedure for granting probation to accused
persons after their conviction has become final and before they
have served their sentence. It is true that at common law the
authority of the courts to suspend temporarily the execution of the
sentence is recognized and, according to a number of state courts,
including those of Massachusetts, Michigan, New York, and Ohio,
the power is inherent in the courts (Commonwealth vs. Dowdican's
Bail [1874], 115 Mass., 133; People vs. Stickel [1909], 156 Mich.,
557; 121 N. W., 497; People ex rel. Forsyth vs. Court of Session
[1894], 141 N. Y., 288; Weber vs. State [1898], 58 Ohio St., 616).
But, in the leading case of Ex parte United States ([1916], 242 U.
S., 27; 61 Law. ed., 129; L. R. A., 1917E, 1178; 37 Sup. Ct. Rep.,
72; Ann. Cas. 1917B, 355), the Supreme Court of the United
States expressed the opinion that under the common law the
power of the court was limited to temporary suspension, and
brushed aside the contention as to inherent judicial power saying,
through Chief Justice White:
Indisputably under our constitutional system the right to try
offenses against the criminal laws and upon conviction to impose
the punishment provided by law is judicial, and it is equally to be
conceded that, in exerting the powers vested in them on such
subject, courts inherently possess ample right to exercise
reasonable, that is, judicial, discretion to enable them to wisely
exert their authority. But these concessions afford no ground for
the contention as to power here made, since it must rest upon the
proposition that the power to enforce begets inherently a discretion
to permanently refuse to do so. And the effect of the proposition
urged upon the distribution of powers made by the Constitution will
become apparent when it is observed that indisputable also is it
that the authority to define and fix the punishment for crime is
legislative and includes the right in advance to bring within judicial
discretion, for the purpose of executing the statute, elements of
consideration which would be otherwise beyond the scope of
judicial authority, and that the right to relieve from the
punishment, fixed by law and ascertained according to the
methods by it provided belongs to the executive department.
Justice Carson, in his illuminating concurring opinion in the case
of Director of Prisons vs. Judge of First Instance of Cavite (29 Phil.,
265), decided by this court in 1915, also reached the conclusion
that the power to suspend the execution of sentences pronounced
in criminal cases is not inherent in the judicial function. "All are
agreed", he said, "that in the absence of statutory authority, it
does not lie within the power of the courts to grant such
suspensions." (at p. 278.) Both petitioner and respondents are
correct, therefore, when they argue that a Court of First Instance
sitting in probation proceedings is a court of limited jurisdiction. Its
jurisdiction in such proceedings is conferred exclusively by Act No.
4221 of the Philippine Legislature.
It is, of course, true that the constitutionality of a statute will not
be considered on application for prohibition where the question has
not been properly brought to the attention of the court by objection
of some kind (Hill vs. Tarver [1901], 130 Ala., 592; 30 S., 499;
State ex rel. Kelly vs. Kirby [1914], 260 Mo., 120; 168 S. W.,
746). In the case at bar, it is unquestionable that the constitutional
issue has been squarely presented not only before this court by the
petitioners but also before the trial court by the private
prosecution. The respondent, Hon. Jose O Vera, however, acting as
judge of the court below, declined to pass upon the question on the
ground that the private prosecutor, not being a party whose rights
are affected by the statute, may not raise said question. The
respondent judge cited Cooley on Constitutional Limitations (Vol. I,
p. 339; 12 C. J., sec. 177, pp. 760 and 762), and McGlue vs. Essex
County ([1916], 225 Mass., 59; 113 N. E., 742, 743), as authority
for the proposition that a court will not consider any attack made
on the constitutionality of a statute by one who has no interest in
defeating it because his rights are not affected by its operation.
The respondent judge further stated that it may not motu
proprio take up the constitutional question and, agreeing with
Cooley that "the power to declare a legislative enactment void is
one which the judge, conscious of the fallibility of the human
judgment, will shrink from exercising in any case where he can
conscientiously and with due regard to duty and official oath
decline the responsibility" (Constitutional Limitations, 8th ed., Vol.
I, p. 332), proceeded on the assumption that Act No. 4221 is
constitutional. While therefore, the court a quo admits that the
constitutional question was raised before it, it refused to consider
the question solely because it was not raised by a proper party.
Respondents herein reiterates this view. The argument is advanced
that the private prosecution has no personality to appear in the
hearing of the application for probation of defendant Mariano Cu
Unjieng in criminal case No. 42648 of the Court of First Instance of
Manila, and hence the issue of constitutionality was not properly
raised in the lower court. Although, as a general rule, only those
who are parties to a suit may question the constitutionality of a
statute involved in a judicial decision, it has been held that since
the decree pronounced by a court without jurisdiction is void,
where the jurisdiction of the court depends on the validity of the
statute in question, the issue of the constitutionality will be
considered on its being brought to the attention of the court by
persons interested in the effect to be given the statute.(12 C. J.,
sec. 184, p. 766.) And, even if we were to concede that the issue
was not properly raised in the court below by the proper party, it
does not follow that the issue may not be here raised in an original
action of certiorari and prohibitions. It is true that, as a general
rule, the question of constitutionality must be raised at the earliest
opportunity, so that if not raised by the pleadings, ordinarily it may
not be raised at the trial, and if not raised in the trial court, it will
not considered on appeal. (12 C. J., p. 786. See,
also, Cadwallader-Gibson Lumber Co. vs. Del Rosario, 26 Phil.,
192, 193-195.) But we must state that the general rule admits of
exceptions. Courts, in the exercise of sounds discretion, may
determine the time when a question affecting the constitutionality
of a statute should be presented. (In re Woolsey [1884], 95 N. Y.,
135, 144.) Thus, in criminal cases, although there is a very sharp
conflict of authorities, it is said that the question may be raised for
the first time at any stage of the proceedings, either in the trial
court or on appeal. (12 C. J., p. 786.) Even in civil cases, it has
been held that it is the duty of a court to pass on the constitutional
question, though raised for the first time on appeal, if it appears
that a determination of the question is necessary to a decision of
the case. (McCabe's Adm'x vs. Maysville & B. S. R. Co., [1910],
136 ky., 674; 124 S. W., 892; Lohmeyer vs. St. Louis Cordage Co.
[1908], 214 Mo., 685; 113 S. W. 1108; Carmody vs. St. Louis
Transit Co., [1905], 188 Mo., 572; 87 S. W., 913.) And it has been
held that a constitutional question will be considered by an
appellate court at any time, where it involves the jurisdiction of the
court below (State vs. Burke [1911], 175 Ala., 561; 57 S., 870.)
As to the power of this court to consider the constitutional question
raised for the first time before this court in these proceedings, we
turn again and point with emphasis to the case of Yu Cong Eng vs.
Trinidad, supra. And on the hypotheses that the Hongkong &
Shanghai Banking Corporation, represented by the private
prosecution, is not the proper party to raise the constitutional
question here — a point we do not now have to decide — we are of
the opinion that the People of the Philippines, represented by the
Solicitor-General and the Fiscal of the City of Manila, is such a
proper party in the present proceedings. The unchallenged rule is
that the person who impugns the validity of a statute must have a
personal and substantial interest in the case such that he has
sustained, or will sustained, direct injury as a result of its
enforcement. It goes without saying that if Act No. 4221 really
violates the constitution, the People of the Philippines, in whose
name the present action is brought, has a substantial interest in
having it set aside. Of grater import than the damage caused by
the illegal expenditure of public funds is the mortal wound inflicted
upon the fundamental law by the enforcement of an invalid statute.
Hence, the well-settled rule that the state can challenge the
validity of its own laws. In Government of the Philippine Islands vs.
Springer ([1927]), 50 Phil., 259 (affirmed in Springer vs.
Government of the Philippine Islands [1928], 277 U.S., 189; 72
Law. ed., 845), this court declared an act of the legislature
unconstitutional in an action instituted in behalf of the Government
of the Philippines. In Attorney General vs. Perkins ([1889], 73
Mich., 303, 311, 312; 41 N. W. 426, 428, 429), the State of
Michigan, through its Attorney General, instituted quo warranto
proceedings to test the right of the respondents to renew a mining
corporation, alleging that the statute under which the respondents
base their right was unconstitutional because it impaired the
obligation of contracts. The capacity of the chief law officer of the
state to question the constitutionality of the statute was though, as
a general rule, only those who are parties to a suit may question
the constitutionality of a statute involved in a judicial decision, it
has been held that since the decree pronounced by a court without
jurisdiction in void, where the jurisdiction of the court depends on
the validity of the statute in question, the issue of constitutionality
will be considered on its being brought to the attention of the court
by persons interested in the effect to begin the statute. (12 C.J.,
sec. 184, p. 766.) And, even if we were to concede that the issue
was not properly raised in the court below by the proper party, it
does not follow that the issue may not be here raised in an original
action of certiorari and prohibition. It is true that, as a general rule,
the question of constitutionality must be raised at the earliest
opportunity, so that if not raised by the pleadings, ordinarily it may
not be raised a the trial, and if not raised in the trial court, it will
not be considered on appeal. (12 C.J., p. 786. See, also,
Cadwallader-Gibson Lumber Co. vs. Del Rosario, 26 Phil., 192,
193-195.) But we must state that the general rule admits of
exceptions. Courts, in the exercise of sound discretion, may
determine the time when a question affecting the constitutionality
of a statute should be presented. (In re Woolsey [19884], 95 N.Y.,
135, 144.) Thus, in criminal cases, although there is a very sharp
conflict of authorities, it is said that the question may be raised for
the first time at any state of the proceedings, either in the trial
court or on appeal. (12 C.J., p. 786.) Even in civil cases, it has
been held that it is the duty of a court to pass on the constitutional
question, though raised for first time on appeal, if it appears that a
determination of the question is necessary to a decision of the
case. (McCabe's Adm'x vs. Maysville & B. S. R. Co. [1910], 136
Ky., 674; 124 S. W., 892; Lohmeyer vs. St. Louis, Cordage Co.
[1908], 214 Mo. 685; 113 S. W., 1108; Carmody vs. St. Louis
Transit Co. [1905], 188 Mo., 572; 87 S. W., 913.) And it has been
held that a constitutional question will be considered by an
appellate court at any time, where it involves the jurisdiction of the
court below (State vs. Burke [1911], 175 Ala., 561; 57 S., 870.)
As to the power of this court to consider the constitutional question
raised for the first time before this court in these proceedings, we
turn again and point with emphasis to the case of Yu Cong Eng. vs.
Trinidad, supra. And on the hypothesis that the Hongkong &
Shanghai Banking Corporation, represented by the private
prosecution, is not the proper party to raise the constitutional
question here — a point we do not now have to decide — we are of
the opinion that the People of the Philippines, represented by the
Solicitor-General and the Fiscal of the City of Manila, is such a
proper party in the present proceedings. The unchallenged rule is
that the person who impugns the validity of a statute must have a
personal and substantial interest in the case such that he has
sustained, or will sustain, direct injury as a result of its
enforcement. It goes without saying that if Act No. 4221 really
violates the Constitution, the People of the Philippines, in whose
name the present action is brought, has a substantial interest in
having it set aside. Of greater import than the damage caused by
the illegal expenditure of public funds is the mortal wound inflicted
upon the fundamental law by the enforcement of an invalid statute.
Hence, the well-settled rule that the state can challenge the
validity of its own laws. In Government of the Philippine Islands vs.
Springer ([1927]), 50 Phil., 259 (affirmed in Springer vs.
Government of the Philippine Islands [1928], 277 U.S., 189; 72
Law. ed., 845), this court declared an act of the legislature
unconstitutional in an action instituted in behalf of the Government
of the Philippines. In Attorney General vs. Perkings([1889], 73
Mich., 303, 311, 312; 41 N.W., 426, 428, 429), the State of
Michigan, through its Attorney General, instituted quo warranto
proceedings to test the right of the respondents to renew a mining
corporation, alleging that the statute under which the respondents
base their right was unconstitutional because it impaired the
obligation of contracts. The capacity of the chief law officer of the
state to question the constitutionality of the statute was itself
questioned. Said the Supreme Court of Michigan, through
Champlin, J.:
. . . The idea seems to be that the people are estopped from
questioning the validity of a law enacted by their representatives;
that to an accusation by the people of Michigan of usurpation their
government, a statute enacted by the people of Michigan is an
adequate answer. The last proposition is true, but, if the statute
relied on in justification is unconstitutional, it is statute only in
form, and lacks the force of law, and is of no more saving effect to
justify action under it than if it had never been enacted. The
constitution is the supreme law, and to its behests the courts, the
legislature, and the people must bow . . . The legislature and the
respondents are not the only parties in interest upon such
constitutional questions. As was remarked by Mr. Justice Story, in
speaking of an acquiescence by a party affected by an
unconstitutional act of the legislature: "The people have a deep
and vested interest in maintaining all the constitutional limitations
upon the exercise of legislative powers." (Allen vs. Mckeen, 1
Sum., 314.)
In State vs. Doane ([1916], 98 Kan., 435; 158 Pac., 38, 40), an
original action (mandamus) was brought by the Attorney-General
of Kansas to test the constitutionality of a statute of the state. In
disposing of the question whether or not the state may bring the
action, the Supreme Court of Kansas said:
. . . the state is a proper party — indeed, the proper party — to
bring this action. The state is always interested where the integrity
of its Constitution or statutes is involved.
"It has an interest in seeing that the will of the Legislature is not
disregarded, and need not, as an individual plaintiff must, show
grounds of fearing more specific injury. (State vs. Kansas City 60
Kan., 518 [57 Pac., 118])." (State vs. Lawrence, 80 Kan., 707; 103
Pac., 839.)
Where the constitutionality of a statute is in doubt the state's law
officer, its Attorney-General, or county attorney, may exercise his
bet judgment as to what sort of action he will bring to have the
matter determined, either by quo warranto to challenge its validity
(State vs. Johnson, 61 Kan., 803; 60 Pac., 1068; 49 L.R.A., 662),
by mandamus to compel obedience to its terms (State vs. Dolley,
82 Kan., 533; 108 Pac., 846), or by injunction to restrain
proceedings under its questionable provisions (State ex rel. vs. City
of Neodesha, 3 Kan. App., 319; 45 Pac., 122).
Other courts have reached the same conclusion (See State vs. St.
Louis S. W. Ry. Co. [1917], 197 S. W., 1006; State vs. S.H. Kress
& Co. [1934], 155 S., 823; State vs. Walmsley [1935], 181 La.,
597; 160 S., 91; State vs. Board of County Comr's [1934], 39 Pac.
[2d], 286; First Const. Co. of Brooklyn vs. State [1917], 211 N.Y.,
295; 116 N.E., 1020; Bush vs. State {1918], 187 Ind., 339; 119
N.E., 417; State vs. Watkins [1933], 176 La., 837; 147 S., 8, 10,
11). In the case last cited, the Supreme Court of Luisiana said:
It is contended by counsel for Herbert Watkins that a district
attorney, being charged with the duty of enforcing the laws, has no
right to plead that a law is unconstitutional. In support of the
argument three decisions are cited, viz.: State ex rel. Hall, District
Attorney, vs. Judge of Tenth Judicial District (33 La. Ann., 1222);
State ex rel. Nicholls, Governor vs. Shakespeare, Mayor of New
Orleans (41 Ann., 156; 6 So., 592); and State ex rel., Banking Co.,
etc. vs. Heard, Auditor (47 La. Ann., 1679; 18 So., 746; 47 L. R.
A., 512). These decisions do not forbid a district attorney to plead
that a statute is unconstitutional if he finds if in conflict with one
which it is his duty to enforce. In State ex rel. Hall, District
Attorney, vs. Judge, etc., the ruling was the judge should not,
merely because he believed a certain statute to be unconstitutional
forbid the district attorney to file a bill of information charging a
person with a violation of the statute. In other words, a judge
should not judicially declare a statute unconstitutional until the
question of constitutionality is tendered for decision, and unless it
must be decided in order to determine the right of a party litigant.
State ex rel. Nicholls, Governor, etc., is authority for the
proposition merely that an officer on whom a statute imposes the
duty of enforcing its provisions cannot avoid the duty upon the
ground that he considers the statute unconstitutional, and hence in
enforcing the statute he is immune from responsibility if the
statute be unconstitutional. State ex rel. Banking Co., etc., is
authority for the proposition merely that executive officers, e.g.,
the state auditor and state treasurer, should not decline to perform
ministerial duties imposed upon them by a statute, on the ground
that they believe the statute is unconstitutional.
It is the duty of a district attorney to enforce the criminal laws of
the state, and, above all, to support the Constitution of the state.
If, in the performance of his duty he finds two statutes in conflict
with each other, or one which repeals another, and if, in his
judgment, one of the two statutes is unconstitutional, it is his duty
to enforce the other; and, in order to do so, he is compelled to
submit to the court, by way of a plea, that one of the statutes is
unconstitutional. If it were not so, the power of the Legislature
would be free from constitutional limitations in the enactment of
criminal laws.
The respondents do not seem to doubt seriously the correctness of
the general proposition that the state may impugn the validity of
its laws. They have not cited any authority running clearly in the
opposite direction. In fact, they appear to have proceeded on the
assumption that the rule as stated is sound but that it has no
application in the present case, nor may it be invoked by the City
Fiscal in behalf of the People of the Philippines, one of the
petitioners herein, the principal reasons being that the validity
before this court, that the City Fiscal is estopped from attacking the
validity of the Act and, not authorized challenge the validity of the
Act in its application outside said city. (Additional memorandum of
respondents, October 23, 1937, pp. 8,. 10, 17 and 23.)
The mere fact that the Probation Act has been repeatedly relied
upon the past and all that time has not been attacked as
unconstitutional by the Fiscal of Manila but, on the contrary, has
been impliedly regarded by him as constitutional, is no reason for
considering the People of the Philippines estopped from nor
assailing its validity. For courts will pass upon a constitutional
questions only when presented before it in bona fide cases for
determination, and the fact that the question has not been raised
before is not a valid reason for refusing to allow it to be raised
later. The fiscal and all others are justified in relying upon the
statute and treating it as valid until it is held void by the courts in
proper cases.
It remains to consider whether the determination of the
constitutionality of Act No. 4221 is necessary to the resolution of
the instant case. For, ". . . while the court will meet the question
with firmness, where its decision is indispensable, it is the part of
wisdom, and just respect for the legislature, renders it proper, to
waive it, if the case in which it arises, can be decided on other
points." (Ex parte Randolph [1833], 20 F. Cas. No. 11, 558; 2
Brock., 447. Vide, also Hoover vs. wood [1857], 9 Ind., 286, 287.)
It has been held that the determination of a constitutional question
is necessary whenever it is essential to the decision of the case (12
C. J., p. 782, citing Long Sault Dev. Co. vs. Kennedy [1913], 158
App. Div., 398; 143 N. Y. Supp., 454 [aff. 212 N.Y., 1: 105 N. E.,
849; Ann. Cas. 1915D, 56; and app dism 242 U.S., 272]; Hesse
vs. Ledesma, 7 Porto Rico Fed., 520; Cowan vs. Doddridge, 22
Gratt [63 Va.], 458; Union Line Co., vs. Wisconsin R. Commn., 146
Wis., 523; 129 N. W., 605), as where the right of a party is
founded solely on a statute the validity of which is attacked. (12
C.J., p. 782, citing Central Glass Co. vs. Niagrara F. Ins. Co., 131
La., 513; 59 S., 972; Cheney vs. Beverly, 188 Mass., 81; 74 N.E.,
306). There is no doubt that the respondent Cu Unjieng draws his
privilege to probation solely from Act No. 4221 now being assailed.
Apart from the foregoing considerations, that court will also take
cognizance of the fact that the Probation Act is a new addition to
our statute books and its validity has never before been passed
upon by the courts; that may persons accused and convicted of
crime in the City of Manila have applied for probation; that some of
them are already on probation; that more people will likely take
advantage of the Probation Act in the future; and that the
respondent Mariano Cu Unjieng has been at large for a period of
about four years since his first conviction. All wait the decision of
this court on the constitutional question. Considering, therefore,
the importance which the instant case has assumed and to prevent
multiplicity of suits, strong reasons of public policy demand that
the constitutionality of Act No. 4221 be now resolved. (Yu Cong
Eng vs. Trinidad [1925], 47 Phil., 385; [1926], 271 U.S., 500; 70
Law. ed., 1059. See 6 R.C.L., pp. 77, 78; People vs. Kennedy
[1913], 207 N.Y., 533; 101 N.E., 442, 444; Ann. Cas. 1914C, 616;
Borginis vs. Falk Co. [1911], 147 Wis., 327; 133 N.W., 209, 211;
37 L.R.A. [N.S.] 489; Dimayuga and Fajardo vs. Fernandez [1922],
43 Phil., 304.) In Yu Cong Eng vs. Trinidad, supra, an analogous
situation confronted us. We said: "Inasmuch as the property and
personal rights of nearly twelve thousand merchants are affected
by these proceedings, and inasmuch as Act No. 2972 is a new law
not yet interpreted by the courts, in the interest of the public
welfare and for the advancement of public policy, we have
determined to overrule the defense of want of jurisdiction in order
that we may decide the main issue. We have here an extraordinary
situation which calls for a relaxation of the general rule." Our ruling
on this point was sustained by the Supreme Court of the United
States. A more binding authority in support of the view we have
taken can not be found.
We have reached the conclusion that the question of the
constitutionality of Act No. 4221 has been properly raised. Now for
the main inquiry: Is the Act unconstitutional?
Under a doctrine peculiarly American, it is the office and duty of
the judiciary to enforce the Constitution. This court, by clear
implication from the provisions of section 2, subsection 1, and
section 10, of Article VIII of the Constitution, may declare an act of
the national legislature invalid because in conflict with the
fundamental lay. It will not shirk from its sworn duty to enforce the
Constitution. And, in clear cases, it will not hesitate to give effect
to the supreme law by setting aside a statute in conflict therewith.
This is of the essence of judicial duty.
This court is not unmindful of the fundamental criteria in cases of
this nature that all reasonable doubts should be resolved in favor
of the constitutionality of a statute. An act of the legislature
approved by the executive, is presumed to be within constitutional
limitations. The responsibility of upholding the Constitution rests
not on the courts alone but on the legislature as well. "The
question of the validity of every statute is first determined by the
legislative department of the government itself." (U.S. vs. Ten Yu
[1912], 24 Phil., 1, 10; Case vs. Board of Health and Heiser
[1913], 24 Phil., 250, 276; U.S. vs. Joson [1913], 26 Phil., 1.) And
a statute finally comes before the courts sustained by the sanction
of the executive. The members of the Legislature and the Chief
Executive have taken an oath to support the Constitution and it
must be presumed that they have been true to this oath and that
in enacting and sanctioning a particular law they did not intend to
violate the Constitution. The courts cannot but cautiously exercise
its power to overturn the solemn declarations of two of the three
grand departments of the governments. (6 R.C.L., p. 101.) Then,
there is that peculiar political philosophy which bids the judiciary to
reflect the wisdom of the people as expressed through an elective
Legislature and an elective Chief Executive. It follows, therefore,
that the courts will not set aside a law as violative of the
Constitution except in a clear case. This is a proposition too plain to
require a citation of authorities.
One of the counsel for respondents, in the course of his
impassioned argument, called attention to the fact that the
President of the Philippines had already expressed his opinion
against the constitutionality of the Probation Act, adverting that as
to the Executive the resolution of this question was a foregone
conclusion. Counsel, however, reiterated his confidence in the
integrity and independence of this court. We take notice of the fact
that the President in his message dated September 1, 1937,
recommended to the National Assembly the immediate repeal of
the Probation Act (No. 4221); that this message resulted in the
approval of Bill No. 2417 of the Nationality Assembly repealing the
probation Act, subject to certain conditions therein mentioned; but
that said bill was vetoed by the President on September 13, 1937,
much against his wish, "to have stricken out from the statute
books of the Commonwealth a law . . . unfair and very likely
unconstitutional." It is sufficient to observe in this connection that,
in vetoing the bill referred to, the President exercised his
constitutional prerogative. He may express the reasons which he
may deem proper for taking such a step, but his reasons are not
binding upon us in the determination of actual controversies
submitted for our determination. Whether or not the Executive
should express or in any manner insinuate his opinion on a matter
encompassed within his broad constitutional power of veto but
which happens to be at the same time pending determination in
this court is a question of propriety for him exclusively to decide or
determine. Whatever opinion is expressed by him under these
circumstances, however, cannot sway our judgment on way or
another and prevent us from taking what in our opinion is the
proper course of action to take in a given case. It if is ever
necessary for us to make any vehement affirmance during this
formative period of our political history, it is that we are
independent of the Executive no less than of the Legislative
department of our government — independent in the performance
of our functions, undeterred by any consideration, free from
politics, indifferent to popularity, and unafraid of criticism in the
accomplishment of our sworn duty as we see it and as we
understand it.
The constitutionality of Act No. 4221 is challenged on three
principal grounds: (1) That said Act encroaches upon the pardoning
power of the Executive; (2) that its constitutes an undue
delegation of legislative power and (3) that it denies the equal
protection of the laws.
1. Section 21 of the Act of Congress of August 29, 1916, commonly
known as the Jones Law, in force at the time of the approval of Act
No. 4221, otherwise known as the Probation Act, vests in the
Governor-General of the Philippines "the exclusive power to grant
pardons and reprieves and remit fines and forfeitures". This power
is now vested in the President of the Philippines. (Art. VII, sec. 11,
subsec. 6.) The provisions of the Jones Law and the Constitution
differ in some respects. The adjective "exclusive" found in the
Jones Law has been omitted from the Constitution. Under the
Jones Law, as at common law, pardon could be granted any time
after the commission of the offense, either before or after
conviction (Vide Constitution of the United States, Art. II, sec.
2; In re Lontok [1922], 43 Phil., 293). The Governor-General of the
Philippines was thus empowered, like the President of the United
States, to pardon a person before the facts of the case were fully
brought to light. The framers of our Constitution thought this
undesirable and, following most of the state constitutions, provided
that the pardoning power can only be exercised "after conviction".
So, too, under the new Constitution, the pardoning power does not
extend to "cases of impeachment". This is also the rule generally
followed in the United States (Vide Constitution of the United
States, Art. II, sec. 2). The rule in England is different. There, a
royal pardon can not be pleaded in bar of an impeachment; "but,"
says Blackstone, "after the impeachment has been solemnly heard
and determined, it is not understood that the king's royal grace is
further restrained or abridged." (Vide, Ex parte Wells [1856], 18
How., 307; 15 Law. ed., 421; Com. vs. Lockwood [1872], 109
Mass., 323; 12 Am. Rep., 699; Sterling vs. Drake [1876], 29 Ohio
St., 457; 23 am. Rep., 762.) The reason for the distinction is
obvious. In England, Judgment on impeachment is not confined to
mere "removal from office and disqualification to hold and enjoy
any office of honor, trust, or profit under the Government" (Art. IX,
sec. 4, Constitution of the Philippines) but extends to the whole
punishment attached by law to the offense committed. The House
of Lords, on a conviction may, by its sentence, inflict capital
punishment, perpetual banishment, perpetual banishment, fine or
imprisonment, depending upon the gravity of the offense
committed, together with removal from office and incapacity to
hold office. (Com. vs. Lockwood, supra.) Our Constitution also
makes specific mention of "commutation" and of the power of the
executive to impose, in the pardons he may grant, such conditions,
restrictions and limitations as he may deem proper. Amnesty may
be granted by the President under the Constitution but only with
the concurrence of the National Assembly. We need not dwell at
length on the significance of these fundamental changes. It is
sufficient for our purposes to state that the pardoning power has
remained essentially the same. The question is: Has the pardoning
power of the Chief Executive under the Jones Law been impaired
by the Probation Act?
As already stated, the Jones Law vests the pardoning power
exclusively in the Chief Executive. The exercise of the power may
not, therefore, be vested in anyone else.
". . . The benign prerogative of mercy reposed in the executive
cannot be taken away nor fettered by any legislative restrictions,
nor can like power be given by the legislature to any other officer
or authority. The coordinate departments of government have
nothing to do with the pardoning power, since no person properly
belonging to one of the departments can exercise any powers
appertaining to either of the others except in cases expressly
provided for by the constitution." (20 R.C.L., pp., , and cases
cited.) " . . . where the pardoning power is conferred on the
executive without express or implied limitations, the grant is
exclusive, and the legislature can neither exercise such power itself
nor delegate it elsewhere, nor interfere with or control the proper
exercise thereof, . . ." (12 C.J., pp. 838, 839, and cases cited.) If
Act No. 4221, then, confers any pardoning power upon the courts it
is for that reason unconstitutional and void. But does it?
In the famous Killitts decision involving an embezzlement case, the
Supreme Court of the United States ruled in 1916 that an order
indefinitely suspending sentenced was void. (Ex parte United
States [1916], 242 U.S., 27; 61 Law. ed., 129; L.R.A. 1917E,
1178; 37 Sup. Ct. Rep., 72; Ann. Cas. 1917B, 355.) Chief Justice
White, after an exhaustive review of the authorities, expressed the
opinion of the court that under the common law the power of the
court was limited to temporary suspension and that the right to
suspend sentenced absolutely and permanently was vested in the
executive branch of the government and not in the judiciary. But,
the right of Congress to establish probation by statute was
conceded. Said the court through its Chief Justice: ". . . and so far
as the future is concerned, that is, the causing of the imposition of
penalties as fixed to be subject, by probation legislation or such
other means as the legislative mind may devise, to such judicial
discretion as may be adequate to enable courts to meet by the
exercise of an enlarged but wise discretion the infinite variations
which may be presented to them for judgment, recourse must be
had Congress whose legislative power on the subject is in the very
nature of things adequately complete." (Quoted in Riggs vs. United
States [1926], 14 F. [2d], 5, 6.) This decision led the National
Probation Association and others to agitate for the enactment by
Congress of a federal probation law. Such action was finally taken
on March 4, 1925 (chap. 521, 43 Stat. L. 159, U.S.C. title 18, sec.
724). This was followed by an appropriation to defray the salaries
and expenses of a certain number of probation officers chosen by
civil service. (Johnson, Probation for Juveniles and Adults, p. 14.)
In United States vs. Murray ([1925], 275 U.S., 347; 48 Sup. Ct.
Rep., 146; 72 Law. ed., 309), the Supreme Court of the United
States, through Chief Justice Taft, held that when a person
sentenced to imprisonment by a district court has begun to serve
his sentence, that court has no power under the Probation Act of
March 4, 1925 to grant him probation even though the term at
which sentence was imposed had not yet expired. In this case of
Murray, the constitutionality of the probation Act was not
considered but was assumed. The court traced the history of the
Act and quoted from the report of the Committee on the Judiciary
of the United States House of Representatives (Report No. 1377,
68th Congress, 2 Session) the following statement:
Prior to the so-called Killitts case, rendered in December, 1916, the
district courts exercised a form of probation either, by suspending
sentence or by placing the defendants under state probation
officers or volunteers. In this case, however (Ex parte United
States, 242 U.S., 27; 61 L. Ed., 129; L.R.A., 1917E, 1178; 37 Sup.
Ct. Rep., 72 Ann. Cas. 1917B, 355), the Supreme Court denied the
right of the district courts to suspend sentenced. In the same
opinion the court pointed out the necessity for action by Congress
if the courts were to exercise probation powers in the future . . .
Since this decision was rendered, two attempts have been made to
enact probation legislation. In 1917, a bill was favorably reported
by the Judiciary Committee and passed the House. In 1920, the
judiciary Committee again favorably reported a probation bill to the
House, but it was never reached for definite action.
If this bill is enacted into law, it will bring the policy of the Federal
government with reference to its treatment of those convicted of
violations of its criminal laws in harmony with that of the states of
the Union. At the present time every state has a probation law, and
in all but twelve states the law applies both to adult and juvenile
offenders. (see, also, Johnson, Probation for Juveniles and Adults
[1928], Chap. I.)
The constitutionality of the federal probation law has been
sustained by inferior federal courts. In Riggs vs. United
States supra, the Circuit Court of Appeals of the Fourth Circuit
said:
Since the passage of the Probation Act of March 4, 1925, the
questions under consideration have been reviewed by the Circuit
Court of Appeals of the Ninth Circuit (7 F. [2d], 590), and the
constitutionality of the act fully sustained, and the same held in no
manner to encroach upon the pardoning power of the President.
This case will be found to contain an able and comprehensive
review of the law applicable here. It arose under the act we have
to consider, and to it and the authorities cited therein special
reference is made (Nix vs. James, 7 F. [2d], 590, 594), as is also
to a decision of the Circuit Court of Appeals of the Seventh Circuit
(Kriebel vs. U.S., 10 F. [2d], 762), likewise construing the
Probation Act.
We have seen that in 1916 the Supreme Court of the United
States; in plain and unequivocal language, pointed to Congress as
possessing the requisite power to enact probation laws, that a
federal probation law as actually enacted in 1925, and that the
constitutionality of the Act has been assumed by the Supreme
Court of the United States in 1928 and consistently sustained by
the inferior federal courts in a number of earlier cases.
We are fully convinced that the Philippine Legislature, like the
Congress of the United States, may legally enact a probation law
under its broad power to fix the punishment of any and all penal
offenses. This conclusion is supported by other authorities. In Ex
parte Bates ([1915], 20 N. M., 542; L.R.A. 1916A, 1285; 151 Pac.,
698, the court said: "It is clearly within the province of the
Legislature to denominate and define all classes of crime, and to
prescribe for each a minimum and maximum punishment." And in
State vs. Abbott ([1910], 87 S.C., 466; 33 L.R.A. [N. S.], 112; 70
S. E., 6; Ann. Cas. 1912B, 1189), the court said: "The legislative
power to set punishment for crime is very broad, and in the
exercise of this power the general assembly may confer on trial
judges, if it sees fit, the largest discretion as to the sentence to be
imposed, as to the beginning and end of the punishment and
whether it should be certain or indeterminate or conditional."
(Quoted in State vs. Teal [1918], 108 S. C., 455; 95 S. E., 69.)
Indeed, the Philippine Legislature has defined all crimes and fixed
the penalties for their violation. Invariably, the legislature has
demonstrated the desire to vest in the courts — particularly the
trial courts — large discretion in imposing the penalties which the
law prescribes in particular cases. It is believed that justice can
best be served by vesting this power in the courts, they being in a
position to best determine the penalties which an individual
convict, peculiarly circumstanced, should suffer. Thus, while courts
are not allowed to refrain from imposing a sentence merely
because, taking into consideration the degree of malice and the
injury caused by the offense, the penalty provided by law is clearly
excessive, the courts being allowed in such case to submit to the
Chief Executive, through the Department of Justice, such
statement as it may deem proper (see art. 5, Revised Penal Code),
in cases where both mitigating and aggravating circumstances are
attendant in the commission of a crime and the law provides for a
penalty composed of two indivisible penalties, the courts may allow
such circumstances to offset one another in consideration of their
number and importance, and to apply the penalty according to the
result of such compensation. (Art. 63, rule 4, Revised Penal Code;
U.S. vs. Reguera and Asuategui [1921], 41 Phil., 506.) Again,
article 64, paragraph 7, of the Revised Penal Code empowers the
courts to determine, within the limits of each periods, in case the
penalty prescribed by law contains three periods, the extent of the
evil produced by the crime. In the imposition of fines, the courts
are allowed to fix any amount within the limits established by law,
considering not only the mitigating and aggravating circumstances,
but more particularly the wealth or means of the culprit. (Art. 66,
Revised Penal Code.) Article 68, paragraph 1, of the same Code
provides that "a discretionary penalty shall be imposed" upon a
person under fifteen but over nine years of age, who has not acted
without discernment, but always lower by two degrees at least
than that prescribed by law for the crime which he has committed.
Article 69 of the same Code provides that in case of "incomplete
self-defense", i.e., when the crime committed is not wholly
excusable by reason of the lack of some of the conditions required
to justify the same or to exempt from criminal liability in the
several cases mentioned in article 11 and 12 of the Code, "the
courts shall impose the penalty in the period which may be deemed
proper, in view of the number and nature of the conditions of
exemption present or lacking." And, in case the commission of
what are known as "impossible" crimes, "the court, having in mind
the social danger and the degree of criminality shown by the
offender," shall impose upon him either arresto mayor or a fine
ranging from 200 to 500 pesos. (Art. 59, Revised Penal Code.)
Under our Revised Penal Code, also, one-half of the period of
preventive imprisonment is deducted form the entire term of
imprisonment, except in certain cases expressly mentioned (art.
29); the death penalty is not imposed when the guilty person is
more than seventy years of age, or where upon appeal or revision
of the case by the Supreme Court, all the members thereof are not
unanimous in their voting as to the propriety of the imposition of
the death penalty (art. 47, see also, sec. 133, Revised
Administrative Code, as amended by Commonwealth Act No. 3);
the death sentence is not to be inflicted upon a woman within the
three years next following the date of the sentence or while she is
pregnant, or upon any person over seventy years of age (art. 83);
and when a convict shall become insane or an imbecile after final
sentence has been pronounced, or while he is serving his
sentenced, the execution of said sentence shall be suspended with
regard to the personal penalty during the period of such insanity or
imbecility (art. 79).
But the desire of the legislature to relax what might result in the
undue harshness of the penal laws is more clearly demonstrated in
various other enactments, including the probation Act. There is the
Indeterminate Sentence Law enacted in 1933 as Act No. 4103 and
subsequently amended by Act No. 4225, establishing a system of
parole (secs. 5 to 100 and granting the courts large discretion in
imposing the penalties of the law. Section 1 of the law as amended
provides; "hereafter, in imposing a prison sentence for an offenses
punished by the Revised Penal Code, or its amendments, the court
shall sentence the accused to an indeterminate sentence the
maximum term of which shall be that which, in view of the
attending circumstances, could be properly imposed under the
rules of the said Code, and to a minimum which shall be within the
range of the penalty next lower to that prescribed by the Code for
the offense; and if the offense is punished by any other law, the
court shall sentence the accused to an indeterminate sentence, the
maximum term of which shall not exceed the maximum fixed by
said law and the minimum shall not be less than the minimum
term prescribed by the same." Certain classes of convicts are, by
section 2 of the law, excluded from the operation thereof. The
Legislature has also enacted the Juvenile Delinquency Law (Act No.
3203) which was subsequently amended by Act No. 3559. Section
7 of the original Act and section 1 of the amendatory Act have
become article 80 of the Revised Penal Code, amended by Act No.
4117 of the Philippine Legislature and recently reamended by
Commonwealth Act No. 99 of the National Assembly. In this Act is
again manifested the intention of the legislature to "humanize" the
penal laws. It allows, in effect, the modification in particular cases
of the penalties prescribed by law by permitting the suspension of
the execution of the judgment in the discretion of the trial court,
after due hearing and after investigation of the particular
circumstances of the offenses, the criminal record, if any, of the
convict, and his social history. The Legislature has in reality
decreed that in certain cases no punishment at all shall be suffered
by the convict as long as the conditions of probation are faithfully
observed. It this be so, then, it cannot be said that the Probation
Act comes in conflict with the power of the Chief Executive to grant
pardons and reprieves, because, to use the language of the
Supreme Court of New Mexico, "the element of punishment or the
penalty for the commission of a wrong, while to be declared by the
courts as a judicial function under and within the limits of law as
announced by legislative acts, concerns solely the procedure and
conduct of criminal causes, with which the executive can have
nothing to do." (Ex parte Bates, supra.) In Williams vs. State
([1926], 162 Ga., 327; 133 S.E., 843), the court upheld the
constitutionality of the Georgia probation statute against the
contention that it attempted to delegate to the courts the
pardoning power lodged by the constitution in the governor alone
is vested with the power to pardon after final sentence has been
imposed by the courts, the power of the courts to imposed any
penalty which may be from time to time prescribed by law and in
such manner as may be defined cannot be questioned."
We realize, of course, the conflict which the American cases
disclose. Some cases hold it unlawful for the legislature to vest in
the courts the power to suspend the operation of a sentenced, by
probation or otherwise, as to do so would encroach upon the
pardoning power of the executive. (In re Webb [1895], 89 Wis.,
354; 27 L.R.A., 356; 46 Am. St. Rep., 846; 62 N.W., 177; 9 Am.
Crim., Rep., 702; State ex rel. Summerfield vs. Moran [1919], 43
Nev., 150; 182 Pac., 927; Ex parte Clendenning [1908], 22 Okla.,
108; 1 Okla. Crim. Rep., 227; 19 L.R.A. [N.S.], 1041; 132 Am. St.
Rep., 628; 97 Pac., 650; People vs. Barrett [1903], 202 Ill, 287;
67 N.E., 23; 63 L.R.A., 82; 95 Am. St. Rep., 230; Snodgrass vs.
State [1912], 67 Tex. Crim. Rep., 615; 41 L. R. A. [N. S.], 1144;
150 S. W., 162; Ex parte Shelor [1910], 33 Nev., 361;111 Pac.,
291; Neal vs. State [1898], 104 Ga., 509; 42 L. R. A., 190; 69 Am.
St. Rep., 175; 30 S. E. 858; State ex rel. Payne vs. Anderson
[1921], 43 S. D., 630; 181 N. W., 839; People vs. Brown, 54
Mich., 15; 19 N. W., 571; States vs. Dalton [1903], 109 Tenn.,
544; 72 S. W., 456.)
Other cases, however, hold contra. (Nix vs. James [1925; C. C. A.,
9th], 7 F. [2d], 590; Archer vs. Snook [1926; D. C.], 10 F. [2d],
567; Riggs. vs. United States [1926; C. C. A. 4th], 14]) [2d], 5;
Murphy vs. States [1926], 171 Ark., 620; 286 S. W., 871; 48 A. L.
R., 1189; Re Giannini [1912], 18 Cal. App., 166; 122 Pac., 831; Re
Nachnaber [1928], 89 Cal. App., 530; 265 Pac., 392; Ex parte De
Voe [1931], 114 Cal. App., 730; 300 Pac., 874; People vs. Patrick
[1897], 118 Cal., 332; 50 Pac., 425; Martin vs. People [1917], 69
Colo., 60; 168 Pac., 1171; Belden vs. Hugo [1914], 88 Conn., 50;
91 A., 369, 370, 371; Williams vs. State [1926], 162 Ga., 327;
133 S. E., 843; People vs. Heise [1913], 257 Ill., 443; 100 N. E.,
1000; Parker vs. State [1893], 135 Ind., 534; 35 N. E., 179; 23 L.
R. A., 859; St. Hillarie, Petitioner [1906], 101 Me., 522; 64 Atl.,
882; People vs. Stickle [1909], 156 Mich., 557; 121 N. W., 497;
State vs. Fjolander [1914], 125 Minn., 529; State ex rel.
Bottomnly vs. District Court [1925], 73 Mont., 541; 237 Pac., 525;
State vs. Everitt [1913], 164 N. C., 399; 79 S. E., 274; 47 L. R. A.
[N. S.], 848; State ex rel. Buckley vs. Drew [1909], 75 N. H., 402;
74 Atl., 875; State vs. Osborne [1911], 79 N. J. Eq., 430; 82 Atl.
424; Ex parte Bates [1915], 20 N. M., 542; L. R. A., 1916 A. 1285;
151 Pac., 698; People vs. ex rel. Forsyth vs. Court of Session
[1894], 141 N. Y., 288; 23 L. R. A., 856; 36 N. E., 386; 15 Am.
Crim. Rep., 675; People ex rel. Sullivan vs. Flynn [1907], 55 Misc.,
639; 106 N. Y. Supp., 928; People vs. Goodrich [1914], 149 N. Y.
Supp., 406; Moore vs. Thorn [1935], 245 App. Div., 180; 281 N. Y.
Supp., 49; Re Hart [1914], 29 N. D., 38; L. R. A., 1915C, 1169;
149 N. W., 568; Ex parte Eaton [1925], 29 Okla., Crim. Rep., 275;
233 P., 781; State vs. Teal [1918], 108 S. C., 455; 95 S. E., 69;
State vs. Abbot [1910], 87 S. C., 466; 33 L.R.A., [N. S.], 112; 70
S. E., 6; Ann. Cas., 1912B, 1189; Fults vs. States [1854],34 Tenn.,
232; Woods vs. State [1814], 130 Tenn., 100; 169 S. W., 558;
Baker vs. State [1814], 130 Tenn., 100; 169 S. W., 558; Baker vs.
State [1913],70 Tex., Crim. Rep., 618; 158 S. W., 998; Cook vs.
State [1914], 73 Tex. Crim. Rep., 548; 165 S. W., 573; King vs.
State [1914], 72 Tex. Crim. Rep., 394; 162 S. W., 890; Clare vs.
State [1932], 122 Tex. Crim. Rep., 394; 162 S. W., 890; Clare vs.
State [1932], 122 Tex. Crim. Rep., 211; 54 S. W. [2d], 127; Re
Hall [1927], 100 Vt., 197; 136 A., 24; Richardson vs. Com. [1921],
131 Va., 802; 109 S.E., 460; State vs. Mallahan [1911], 65 Wash.,
287; 118 Pac., 42; State ex rel. Tingstand vs. Starwich [1922],
119 Wash., 561; 206 Pac., 29; 26 A. L. R., 393; 396.) We elect to
follow this long catena of authorities holding that the courts may
be legally authorized by the legislature to suspend sentence by the
establishment of a system of probation however characterized.
State ex rel. Tingstand vs. Starwich ([1922], 119 Wash., 561; 206
Pac., 29; 26 A. L. R., 393), deserved particular mention. In that
case, a statute enacted in 1921 which provided for the suspension
of the execution of a sentence until otherwise ordered by the court,
and required that the convicted person be placed under the charge
of a parole or peace officer during the term of such suspension, on
such terms as the court may determine, was held constitutional
and as not giving the court a power in violation of the
constitutional provision vesting the pardoning power in the chief
executive of the state. (Vide, also, Re Giannini [1912], 18 Cal App.,
166; 122 Pac., 831.)
Probation and pardon are not coterminous; nor are they the same.
They are actually district and different from each other, both in
origin and in nature. In People ex rel. Forsyth vs. Court of Sessions
([1894], 141 N. Y., 288, 294; 36 N. E., 386, 388; 23 L. R. A., 856;
15 Am. Crim. Rep., 675), the Court of Appeals of New York said:
. . . The power to suspend sentence and the power to grant
reprieves and pardons, as understood when the constitution was
adopted, are totally distinct and different in their nature. The
former was always a part of the judicial power; the latter was
always a part of the executive power. The suspension of the
sentence simply postpones the judgment of the court temporarily
or indefinitely, but the conviction and liability following it, and the
civil disabilities, remain and become operative when judgment is
rendered. A pardon reaches both the punishment prescribed for the
offense and the guilt of the offender. It releases the punishment,
and blots out of existence the guilt, so that in the eye of the law,
the offender is as innocent as if he had never committed the
offense. It removes the penalties and disabilities, and restores him
to all his civil rights. It makes him, as it were, a new man, and
gives him a new credit and capacity. (Ex parte Garland, 71 U. S., 4
Wall., 333; 18 Law. ed., 366; U. S. vs. Klein, 80 U. S., 13 Wall.,
128; 20 Law. ed., 519; Knote vs. U. S., 95 U. S., 149; 24 Law. ed.,
442.)
The framers of the federal and the state constitutions were
perfectly familiar with the principles governing the power to grant
pardons, and it was conferred by these instruments upon the
executive with full knowledge of the law upon the subject, and the
words of the constitution were used to express the authority
formerly exercised by the English crown, or by its representatives
in the colonies. (Ex parte Wells, 59 U. S., 18 How., 307; 15 Law.
ed., 421.) As this power was understood, it did not comprehend
any part of the judicial functions to suspend sentence, and it was
never intended that the authority to grant reprieves and pardons
should abrogate, or in any degree restrict, the exercise of that
power in regard to its own judgments, that criminal courts has so
long maintained. The two powers, so distinct and different in their
nature and character, were still left separate and distinct, the one
to be exercised by the executive, and the other by the judicial
department. We therefore conclude that a statute which, in terms,
authorizes courts of criminal jurisdiction to suspend sentence in
certain cases after conviction, — a power inherent in such courts at
common law, which was understood when the constitution was
adopted to be an ordinary judicial function, and which, ever since
its adoption, has been exercised of legislative power under the
constitution. It does not encroach, in any just sense, upon the
powers of the executive, as they have been understood and
practiced from the earliest times. (Quoted with approval in
Directors of Prisons vs. Judge of First Instance of Cavite [1915], 29
Phil., 265, Carson, J., concurring, at pp. 294, 295.)
In probation, the probationer is in no true sense, as in pardon, a
free man. He is not finally and completely exonerated. He is not
exempt from the entire punishment which the law inflicts. Under
the Probation Act, the probationer's case is not terminated by the
mere fact that he is placed on probation. Section 4 of the Act
provides that the probation may be definitely terminated and the
probationer finally discharged from supervision only after the
period of probation shall have been terminated and the probation
officer shall have submitted a report, and the court shall have
found that the probationer has complied with the conditions of
probation. The probationer, then, during the period of probation,
remains in legal custody — subject to the control of the probation
officer and of the court; and, he may be rearrested upon the non-
fulfillment of the conditions of probation and, when rearrested,
may be committed to prison to serve the sentence originally
imposed upon him. (Secs. 2, 3, 5 and 6, Act No. 4221.)
The probation described in the act is not pardon. It is not complete
liberty, and may be far from it. It is really a new mode of
punishment, to be applied by the judge in a proper case, in
substitution of the imprisonment and find prescribed by the
criminal laws. For this reason its application is as purely a judicial
act as any other sentence carrying out the law deemed applicable
to the offense. The executive act of pardon, on the contrary, is
against the criminal law, which binds and directs the judges, or
rather is outside of and above it. There is thus no conflict with the
pardoning power, and no possible unconstitutionality of the
Probation Act for this cause. (Archer vs. Snook [1926], 10 F. [2d],
567, 569.)
Probation should also be distinguished from reprieve and from
commutation of the sentence. Snodgrass vs. State ([1912], 67
Tex. Crim. Rep., 615;41 L. R. A. [N. S.], 1144; 150 S. W., 162), is
relied upon most strongly by the petitioners as authority in support
of their contention that the power to grant pardons and reprieves,
having been vested exclusively upon the Chief Executive by the
Jones Law, may not be conferred by the legislature upon the courts
by means of probation law authorizing the indefinite judicial
suspension of sentence. We have examined that case and found
that although the Court of Criminal Appeals of Texas held that the
probation statute of the state in terms conferred on the district
courts the power to grant pardons to persons convicted of crime, it
also distinguished between suspensions sentence on the one hand,
and reprieve and commutation of sentence on the other. Said the
court, through Harper, J.:
That the power to suspend the sentence does not conflict with the
power of the Governor to grant reprieves is settled by the decisions
of the various courts; it being held that the distinction between a
"reprieve" and a suspension of sentence is that a reprieve
postpones the execution of the sentence to a day certain, whereas
a suspension is for an indefinite time. (Carnal vs. People, 1 Parker,
Cr. R., 262; In re Buchanan, 146 N. Y., 264; 40 N. E., 883), and
cases cited in 7 Words & Phrases, pp. 6115, 6116. This law cannot
be hold in conflict with the power confiding in the Governor to
grant commutations of punishment, for a commutations is not but
to change the punishment assessed to a less punishment.
In State ex rel. Bottomnly vs. District Court ([1925], 73 Mont.,
541; 237 Pac., 525), the Supreme Court of Montana had under
consideration the validity of the adult probation law of the state
enacted in 1913, now found in sections 12078-12086, Revised
Codes of 1921. The court held the law valid as not impinging upon
the pardoning power of the executive. In a unanimous decision
penned by Justice Holloway, the court said:
. . . . the term "pardon", "commutation", and "respite" each had a
well understood meaning at the time our Constitution was adopted,
and no one of them was intended to comprehend the suspension of
the execution of the judgment as that phrase is employed in
sections 12078-12086. A "pardon" is an act of grace, proceeding
from the power intrusted with the execution of the laws which
exempts the individual on whom it is bestowed from the
punishment the law inflicts for a crime he has committed (United
States vs. Wilson, 7 Pet., 150; 8 Law. ed., 640); It is a remission
of guilt (State vs. Lewis, 111 La., 693; 35 So., 816), a forgiveness
of the offense (Cook vs. Middlesex County, 26 N. J. Law, 326; Ex
parte Powell, 73 Ala., 517; 49 Am. Rep., 71). "Commutation" is a
remission of a part of the punishment; a substitution of a less
penalty for the one originally imposed (Lee vs. Murphy, 22 Grat.
[Va.] 789; 12 Am. Rep., 563; Rich vs. Chamberlain, 107 Mich.,
381; 65 N. W., 235). A "reprieve" or "respite" is the withholding of
the sentence for an interval of time (4 Blackstone's Commentaries,
394), a postponement of execution (Carnal vs. People, 1 Parker,
Cr. R. [N. Y.], 272), a temporary suspension of execution (Butler
vs. State, 97 Ind., 373).
Few adjudicated cases are to be found in which the validity of a
statute similar to our section 12078 has been determined; but the
same objections have been urged against parole statutes which
vest the power to parole in persons other than those to whom the
power of pardon is granted, and these statutes have been upheld
quite uniformly, as a reference to the numerous cases cited in the
notes to Woods vs. State (130 Tenn., 100; 169 S. W.,558,
reported in L. R. A., 1915F, 531), will disclose. (See, also, 20 R. C.
L., 524.)
We conclude that the Probation Act does not conflict with the
pardoning power of the Executive. The pardoning power, in respect
to those serving their probationary sentences, remains as full and
complete as if the Probation Law had never been enacted. The
President may yet pardon the probationer and thus place it beyond
the power of the court to order his rearrest and imprisonment.
(Riggs vs. United States [1926],
14 F. [2d], 5, 7.)
2. But while the Probation Law does not encroach upon the
pardoning power of the executive and is not for that reason void,
does section 11 thereof constitute, as contended, an undue
delegation of legislative power?
Under the constitutional system, the powers of government are
distributed among three coordinate and substantially independent
organs: the legislative, the executive and the judicial. Each of
these departments of the government derives its authority from
the Constitution which, in turn, is the highest expression of popular
will. Each has exclusive cognizance of the matters within its
jurisdiction, and is supreme within its own sphere.
The power to make laws — the legislative power — is vested in a
bicameral Legislature by the Jones Law (sec. 12) and in a
unicamiral National Assembly by the Constitution (Act. VI, sec. 1,
Constitution of the Philippines). The Philippine Legislature or the
National Assembly may not escape its duties and responsibilities by
delegating that power to any other body or authority. Any attempt
to abdicate the power is unconstitutional and void, on the principle
that potestas delegata non delegare potest. This principle is said to
have originated with the glossators, was introduced into English
law through a misreading of Bracton, there developed as a
principle of agency, was established by Lord Coke in the English
public law in decisions forbidding the delegation of judicial power,
and found its way into America as an enlightened principle of free
government. It has since become an accepted corollary of the
principle of separation of powers. (5 Encyc. of the Social Sciences,
p. 66.) The classic statement of the rule is that of Locke, namely:
"The legislative neither must nor can transfer the power of making
laws to anybody else, or place it anywhere but where the people
have." (Locke on Civil Government, sec. 142.) Judge Cooley
enunciates the doctrine in the following oft-quoted language: "One
of the settled maxims in constitutional law is, that the power
conferred upon the legislature to make laws cannot be delegated
by that department to any other body or authority. Where the
sovereign power of the state has located the authority, there it
must remain; and by the constitutional agency alone the laws must
be made until the Constitution itself is charged. The power to
whose judgment, wisdom, and patriotism this high prerogative has
been intrusted cannot relieve itself of the responsibilities by
choosing other agencies upon which the power shall be devolved,
nor can it substitute the judgment, wisdom, and patriotism of any
other body for those to which alone the people have seen fit to
confide this sovereign trust." (Cooley on Constitutional Limitations,
8th ed., Vol. I, p. 224. Quoted with approval in U. S. vs. Barrias
[1908], 11 Phil., 327.) This court posits the doctrine "on the ethical
principle that such a delegated power constitutes not only a right
but a duty to be performed by the delegate by the instrumentality
of his own judgment acting immediately upon the matter of
legislation and not through the intervening mind of another. (U. S.
vs. Barrias, supra, at p. 330.)
The rule, however, which forbids the delegation of legislative power
is not absolute and inflexible. It admits of exceptions. An
exceptions sanctioned by immemorial practice permits the central
legislative body to delegate legislative powers to local authorities.
(Rubi vs. Provincial Board of Mindoro [1919], 39 Phil., 660; U. S.
vs. Salaveria [1918], 39 Phil., 102; Stoutenburgh vs. Hennick
[1889], 129 U. S., 141; 32 Law. ed., 637; 9 Sup. Ct. Rep., 256;
State vs. Noyes [1855], 30 N. H., 279.) "It is a cardinal principle of
our system of government, that local affairs shall be managed by
local authorities, and general affairs by the central authorities; and
hence while the rule is also fundamental that the power to make
laws cannot be delegated, the creation of the municipalities
exercising local self government has never been held to trench
upon that rule. Such legislation is not regarded as a transfer of
general legislative power, but rather as the grant of the authority
to prescribed local regulations, according to immemorial practice,
subject of course to the interposition of the superior in cases of
necessity." (Stoutenburgh vs. Hennick, supra.) On quite the same
principle, Congress is powered to delegate legislative power to such
agencies in the territories of the United States as it may select. A
territory stands in the same relation to Congress as a municipality
or city to the state government. (United States vs. Heinszen
[1907], 206 U. S., 370; 27 Sup. Ct. Rep., 742; 51 L. ed., 1098; 11
Ann. Cas., 688; Dorr vs. United States [1904], 195 U.S., 138; 24
Sup. Ct. Rep., 808; 49 Law. ed., 128; 1 Ann. Cas., 697.) Courts
have also sustained the delegation of legislative power to the
people at large. Some authorities maintain that this may not be
done (12 C. J., pp. 841, 842; 6 R. C. L., p. 164, citing People vs.
Kennedy [1913], 207 N. Y., 533; 101 N. E., 442; Ann. Cas.,
1914C, 616). However, the question of whether or not a state has
ceased to be republican in form because of its adoption of the
initiative and referendum has been held not to be a judicial but a
political question (Pacific States Tel. & Tel. Co. vs. Oregon [1912],
223 U. S., 118; 56 Law. ed., 377; 32 Sup. Cet. Rep., 224), and as
the constitutionality of such laws has been looked upon with favor
by certain progressive courts, the sting of the decisions of the
more conservative courts has been pretty well drawn. (Opinions of
the Justices [1894], 160 Mass., 586; 36 N. E., 488; 23 L. R. A.,
113; Kiernan vs. Portland [1910], 57 Ore., 454; 111 Pac., 379;
1132 Pac., 402; 37 L. R. A. [N. S.], 332; Pacific States Tel. & Tel.
Co. vs. Oregon, supra.) Doubtless, also, legislative power may be
delegated by the Constitution itself. Section 14, paragraph 2, of
article VI of the Constitution of the Philippines provides that "The
National Assembly may by law authorize the President, subject to
such limitations and restrictions as it may impose, to fix within
specified limits, tariff rates, import or export quotas, and tonnage
and wharfage dues." And section 16 of the same article of the
Constitution provides that "In times of war or other national
emergency, the National Assembly may by law authorize the
President, for a limited period and subject to such restrictions as it
may prescribed, to promulgate rules and regulations to carry out a
declared national policy." It is beyond the scope of this decision to
determine whether or not, in the absence of the foregoing
constitutional provisions, the President could be authorized to
exercise the powers thereby vested in him. Upon the other hand,
whatever doubt may have existed has been removed by the
Constitution itself.
The case before us does not fall under any of the exceptions
hereinabove mentioned.
The challenged section of Act No. 4221 in section 11 which reads
as follows:
This Act shall apply only in those provinces in which the respective
provincial boards have provided for the salary of a probation
officer at rates not lower than those now provided for provincial
fiscals. Said probation officer shall be appointed by the Secretary of
Justice and shall be subject to the direction of the Probation Office.
(Emphasis ours.)
In testing whether a statute constitute an undue delegation of
legislative power or not, it is usual to inquire whether the statute
was complete in all its terms and provisions when it left the hands
of the legislature so that nothing was left to the judgment of any
other appointee or delegate of the legislature. (6 R. C. L., p. 165.)
In the United States vs. Ang Tang Ho ([1922], 43 Phil., 1), this
court adhered to the foregoing rule when it held an act of the
legislature void in so far as it undertook to authorize the Governor-
General, in his discretion, to issue a proclamation fixing the price of
rice and to make the sale of it in violation of the proclamation a
crime. (See and cf. Compañia General de Tabacos vs. Board of
Public Utility Commissioners [1916], 34 Phil., 136.) The general
rule, however, is limited by another rule that to a certain extent
matters of detail may be left to be filled in by rules and regulations
to be adopted or promulgated by executive officers and
administrative boards. (6 R. C. L., pp. 177-179.)
For the purpose of Probation Act, the provincial boards may be
regarded as administrative bodies endowed with power to
determine when the Act should take effect in their respective
provinces. They are the agents or delegates of the legislature in
this respect. The rules governing delegation of legislative power to
administrative and executive officers are applicable or are at least
indicative of the rule which should be here adopted. An
examination of a variety of cases on delegation of power to
administrative bodies will show that the ratio decidendi is at
variance but, it can be broadly asserted that the rationale revolves
around the presence or absence of a standard or rule of action —
or the sufficiency thereof — in the statute, to aid the delegate in
exercising the granted discretion. In some cases, it is held that the
standard is sufficient; in others that is insufficient; and in still
others that it is entirely lacking. As a rule, an act of the legislature
is incomplete and hence invalid if it does not lay down any rule or
definite standard by which the administrative officer or board may
be guided in the exercise of the discretionary powers delegated to
it. (See Schecter vs. United States [1925], 295 U. S., 495; 79 L.
ed., 1570; 55 Sup. Ct. Rep., 837; 97 A.L.R., 947; People ex rel.
Rice vs. Wilson Oil Co. [1936], 364 Ill., 406; 4 N. E. [2d], 847; 107
A.L.R., 1500 and cases cited. See also R. C. L., title "Constitutional
Law", sec 174.) In the case at bar, what rules are to guide the
provincial boards in the exercise of their discretionary power to
determine whether or not the Probation Act shall apply in their
respective provinces? What standards are fixed by the Act? We do
not find any and none has been pointed to us by the respondents.
The probation Act does not, by the force of any of its provisions, fix
and impose upon the provincial boards any standard or guide in
the exercise of their discretionary power. What is granted, if we
may use the language of Justice Cardozo in the recent case of
Schecter, supra, is a "roving commission" which enables the
provincial boards to exercise arbitrary discretion. By section 11 if
the Act, the legislature does not seemingly on its own authority
extend the benefits of the Probation Act to the provinces but in
reality leaves the entire matter for the various provincial boards to
determine. In other words, the provincial boards of the various
provinces are to determine for themselves, whether the Probation
Law shall apply to their provinces or not at all. The applicability and
application of the Probation Act are entirely placed in the hands of
the provincial boards. If the provincial board does not wish to have
the Act applied in its province, all that it has to do is to decline to
appropriate the needed amount for the salary of a probation
officer. The plain language of the Act is not susceptible of any other
interpretation. This, to our minds, is a virtual surrender of
legislative power to the provincial boards.
"The true distinction", says Judge Ranney, "is between the
delegation of power to make the law, which necessarily involves a
discretion as to what it shall be, and conferring an authority or
discretion as to its execution, to be exercised under and in
pursuance of the law. The first cannot be done; to the latter no
valid objection can be made." (Cincinnati, W. & Z. R. Co. vs.
Clinton County Comrs. [1852]; 1 Ohio St., 77, 88. See also,
Sutherland on Statutory Construction, sec 68.) To the same effect
are the decision of this court in Municipality of Cardona vs.
Municipality of Binangonan ([1917], 36 Phil., 547); Rubi vs.
Provincial Board of Mindoro ([1919],39 Phil., 660) and Cruz vs.
Youngberg ([1931], 56 Phil., 234). In the first of these cases, this
court sustained the validity of the law conferring upon the
Governor-General authority to adjust provincial and municipal
boundaries. In the second case, this court held it lawful for the
legislature to direct non-Christian inhabitants to take up their
habitation on unoccupied lands to be selected by the provincial
governor and approved by the provincial board. In the third case, it
was held proper for the legislature to vest in the Governor-General
authority to suspend or not, at his discretion, the prohibition of the
importation of the foreign cattle, such prohibition to be raised "if
the conditions of the country make this advisable or if deceased
among foreign cattle has ceased to be a menace to the agriculture
and livestock of the lands."
It should be observed that in the case at bar we are not concerned
with the simple transference of details of execution or the
promulgation by executive or administrative officials of rules and
regulations to carry into effect the provisions of a law. If we were,
recurrence to our own decisions would be sufficient. (U. S. vs.
Barrias [1908], 11 Phil., 327; U.S. vs. Molina [1914], 29 Phil., 119;
Alegre vs. Collector of Customs [1929], 53 Phil., 394; Cebu
Autobus Co. vs. De Jesus [1931], 56 Phil., 446; U. S. vs. Gomez
[1915], 31 Phil., 218; Rubi vs. Provincial Board of Mindoro [1919],
39 Phil., 660.)
It is connected, however, that a legislative act may be made to the
effect as law after it leaves the hands of the legislature. It is true
that laws may be made effective on certain contingencies, as by
proclamation of the executive or the adoption by the people of a
particular community (6 R. C. L., 116, 170-172; Cooley,
Constitutional Limitations, 8th ed., Vol. I, p. 227). In Wayman vs.
Southard ([1825], 10 Wheat. 1; 6 Law. ed., 253), the Supreme
Court of the United State ruled that the legislature may delegate a
power not legislative which it may itself rightfully exercise.(Vide,
also, Dowling vs. Lancashire Ins. Co. [1896], 92 Wis., 63; 65 N.
W., 738; 31 L. R. A., 112.) The power to ascertain facts is such a
power which may be delegated. There is nothing essentially
legislative in ascertaining the existence of facts or conditions as the
basis of the taking into effect of a law. That is a mental process
common to all branches of the government. (Dowling vs.
Lancashire Ins. Co., supra; In re Village of North Milwaukee
[1896], 93 Wis., 616; 97 N.W., 1033; 33 L.R.A., 938; Nash vs.
Fries [1906], 129 Wis., 120; 108 N.W., 210; Field vs. Clark [1892],
143 U.S., 649; 12 Sup. Ct., 495; 36 Law. ed., 294.)
Notwithstanding the apparent tendency, however, to relax the rule
prohibiting delegation of legislative authority on account of the
complexity arising from social and economic forces at work in this
modern industrial age (Pfiffner, Public Administration [1936] ch.
XX; Laski, "The Mother of Parliaments", foreign Affairs, July, 1931,
Vol. IX, No. 4, pp. 569-579; Beard, "Squirt-Gun Politics", in
Harper's Monthly Magazine, July, 1930, Vol. CLXI, pp. 147, 152),
the orthodox pronouncement of Judge Cooley in his work on
Constitutional Limitations finds restatement in Prof. Willoughby's
treatise on the Constitution of the United States in the following
language — speaking of declaration of legislative power to
administrative agencies: "The principle which permits the
legislature to provide that the administrative agent may determine
when the circumstances are such as require the application of a
law is defended upon the ground that at the time this authority is
granted, the rule of public policy, which is the essence of the
legislative act, is determined by the legislature. In other words, the
legislature, as it its duty to do, determines that, under given
circumstances, certain executive or administrative action is to be
taken, and that, under other circumstances, different of no action
at all is to be taken. What is thus left to the administrative official
is not the legislative determination of what public policy demands,
but simply the ascertainment of what the facts of the case require
to be done according to the terms of the law by which he is
governed." (Willoughby on the Constitution of the United States,
2nd ed., Vol. II, p. 1637.) In Miller vs. Mayer, etc., of New York
[1883], 109 U.S., 3 Sup. Ct. Rep., 228; 27 Law. ed., 971, 974), it
was said: "The efficiency of an Act as a declaration of legislative
will must, of course, come from Congress, but the ascertainment of
the contingency upon which the Act shall take effect may be left to
such agencies as it may designate." (See, also, 12 C.J., p. 864;
State vs. Parker [1854], 26 Vt., 357; Blanding vs. Burr [1859], 13
Cal., 343, 258.) The legislature, then may provide that a
contingencies leaving to some other person or body the power to
determine when the specified contingencies has arisen. But, in the
case at bar, the legislature has not made the operation of the
Prohibition Act contingent upon specified facts or conditions to be
ascertained by the provincial board. It leaves, as we have already
said, the entire operation or non-operation of the law upon the
provincial board. the discretion vested is arbitrary because it is
absolute and unlimited. A provincial board need not investigate
conditions or find any fact, or await the happening of any specified
contingency. It is bound by no rule, — limited by no principle of
expendiency announced by the legislature. It may take into
consideration certain facts or conditions; and, again, it may not. It
may have any purpose or no purpose at all. It need not give any
reason whatsoever for refusing or failing to appropriate any funds
for the salary of a probation officer. This is a matter which rest
entirely at its pleasure. The fact that at some future time — we
cannot say when — the provincial boards may appropriate funds
for the salaries of probation officers and thus put the law into
operation in the various provinces will not save the statute. The
time of its taking into effect, we reiterate, would yet be based
solely upon the will of the provincial boards and not upon the
happening of a certain specified contingency, or upon the
ascertainment of certain facts or conditions by a person or body
other than legislature itself.
The various provincial boards are, in practical effect, endowed with
the power of suspending the operation of the Probation Law in their
respective provinces. In some jurisdiction, constitutions provided
that laws may be suspended only by the legislature or by its
authority. Thus, section 28, article I of the Constitution of Texas
provides that "No power of suspending laws in this state shall be
exercised except by the legislature"; and section 26, article I of the
Constitution of Indiana provides "That the operation of the laws
shall never be suspended, except by authority of the General
Assembly." Yet, even provisions of this sort do not confer absolute
power of suspension upon the legislature. While it may be
undoubted that the legislature may suspend a law, or the
execution or operation of a law, a law may not be suspended as to
certain individuals only, leaving the law to be enjoyed by others.
The suspension must be general, and cannot be made for
individual cases or for particular localities. In Holden vs.
James ([1814], 11 Mass., 396; 6 Am. Dec., 174, 177, 178), it was
said:
By the twentieth article of the declaration of rights in the
constitution of this commonwealth, it is declared that the power of
suspending the laws, or the execution of the laws, ought never to
be exercised but by the legislature, or by authority derived from it,
to be exercised in such particular cases only as the legislature shall
expressly provide for. Many of the articles in that declaration of
rights were adopted from the Magna Charta of England, and from
the bill of rights passed in the reign of William and Mary. The bill of
rights contains an enumeration of the oppressive acts of James II,
tending to subvert and extirpate the protestant religion, and the
laws and liberties of the kingdom; and the first of them is the
assuming and exercising a power of dispensing with and
suspending the laws, and the execution of the laws without consent
of parliament. The first article in the claim or declaration of rights
contained in the statute is, that the exercise of such power, by
legal authority without consent of parliament, is illegal. In the
tenth section of the same statute it is further declared and
enacted, that "No dispensation by non obstante of or to any
statute, or part thereof, should be allowed; but the same should be
held void and of no effect, except a dispensation be allowed of in
such statute." There is an implied reservation of authority in the
parliament to exercise the power here mentioned; because,
according to the theory of the English Constitution, "that absolute
despotic power, which must in all governments reside somewhere,"
is intrusted to the parliament: 1 Bl. Com., 160.
The principles of our government are widely different in this
particular. Here the sovereign and absolute power resides in the
people; and the legislature can only exercise what is delegated to
them according to the constitution. It is obvious that the exercise
of the power in question would be equally oppressive to the
subject, and subversive of his right to protection, "according to
standing laws," whether exercised by one man or by a number of
men. It cannot be supposed that the people when adopting this
general principle from the English bill of rights and inserting it in
our constitution, intended to bestow by implication on the general
court one of the most odious and oppressive prerogatives of the
ancient kings of England. It is manifestly contrary to the first
principles of civil liberty and natural justice, and to the spirit of our
constitution and laws, that any one citizen should enjoy privileges
and advantages which are denied to all others under like
circumstances; or that ant one should be subject to losses,
damages, suits, or actions from which all others under like
circumstances are exempted.
To illustrate the principle: A section of a statute relative to dogs
made the owner of any dog liable to the owner of domestic animals
wounded by it for the damages without proving a knowledge of it
vicious disposition. By a provision of the act, power was given to
the board of supervisors to determine whether or not during the
current year their county should be governed by the provisions of
the act of which that section constituted a part. It was held that
the legislature could not confer that power. The court observed
that it could no more confer such a power than to authorize the
board of supervisors of a county to abolish in such county the days
of grace on commercial paper, or to suspend the statute of
limitations. (Slinger vs. Henneman [1875], 38 Wis., 504.) A similar
statute in Missouri was held void for the same reason in State vs.
Field ([1853, 17 Mo., 529;59 Am. Dec., 275.) In that case a
general statute formulating a road system contained a provision
that "if the county court of any county should be of opinion that the
provisions of the act should not be enforced, they might, in their
discretion, suspend the operation of the same for any specified
length of time, and thereupon the act should become inoperative in
such county for the period specified in such order; and thereupon
order the roads to be opened and kept in good repair, under the
laws theretofore in force." Said the court: ". . . this act, by its own
provisions, repeals the inconsistent provisions of a former act, and
yet it is left to the county court to say which act shall be enforce in
their county. The act does not submit the question to the county
court as an original question, to be decided by that tribunal,
whether the act shall commence its operation within the county;
but it became by its own terms a law in every county not excepted
by name in the act. It did not, then, require the county court to do
any act in order to give it effect. But being the law in the county,
and having by its provisions superseded and abrogated the
inconsistent provisions of previous laws, the county court is . . .
empowered, to suspend this act and revive the repealed provisions
of the former act. When the question is before the county court for
that tribunal to determine which law shall be in force, it is urge
before us that the power then to be exercised by the court is
strictly legislative power, which under our constitution, cannot be
delegated to that tribunal or to any other body of men in the state.
In the present case, the question is not presented in the abstract;
for the county court of Saline county, after the act had been for
several months in force in that county, did by order suspend its
operation; and during that suspension the offense was committed
which is the subject of the present indictment . . . ." (See Mitchell
vs. State [1901], 134 Ala., 392; 32 S., 687.)
True, the legislature may enact laws for a particular locality
different from those applicable to other localities and, while
recognizing the force of the principle hereinabove expressed,
courts in may jurisdiction have sustained the constitutionality of
the submission of option laws to the vote of the people. (6 R.C.L.,
p. 171.) But option laws thus sustained treat of subjects purely
local in character which should receive different treatment in
different localities placed under different circumstances. "They
relate to subjects which, like the retailing of intoxicating drinks, or
the running at large of cattle in the highways, may be differently
regarded in different localities, and they are sustained on what
seems to us the impregnable ground, that the subject, though not
embraced within the ordinary powers of municipalities to make by-
laws and ordinances, is nevertheless within the class of public
regulations, in respect to which it is proper that the local judgment
should control." (Cooley on Constitutional Limitations, 5th ed., p.
148.) So that, while we do not deny the right of local self-
government and the propriety of leaving matters of purely local
concern in the hands of local authorities or for the people of small
communities to pass upon, we believe that in matters of general of
general legislation like that which treats of criminals in general,
and as regards the general subject of probation, discretion may not
be vested in a manner so unqualified and absolute as provided in
Act No. 4221. True, the statute does not expressly state that the
provincial boards may suspend the operation of the Probation Act
in particular provinces but, considering that, in being vested with
the authority to appropriate or not the necessary funds for the
salaries of probation officers, they thereby are given absolute
discretion to determine whether or not the law should take effect
or operate in their respective provinces, the provincial boards are
in reality empowered by the legislature to suspend the operation of
the Probation Act in particular provinces, the Act to be held in
abeyance until the provincial boards should decide otherwise by
appropriating the necessary funds. The validity of a law is not
tested by what has been done but by what may be done under its
provisions. (Walter E. Olsen & Co. vs. Aldanese and Trinidad
[1922], 43 Phil., 259; 12 C. J., p. 786.)
It in conceded that a great deal of latitude should be granted to the
legislature not only in the expression of what may be termed
legislative policy but in the elaboration and execution thereof.
"Without this power, legislation would become oppressive and yet
imbecile." (People vs. Reynolds, 5 Gilman, 1.) It has been said that
popular government lives because of the inexhaustible reservoir of
power behind it. It is unquestionable that the mass of powers of
government is vested in the representatives of the people and that
these representatives are no further restrained under our system
than by the express language of the instrument imposing the
restraint, or by particular provisions which by clear intendment,
have that effect. (Angara vs. Electoral Commission [1936], 35 Off.
Ga., 23; Schneckenburger vs. Moran [1936], 35 Off. Gaz., 1317.)
But, it should be borne in mind that a constitution is both a grant
and a limitation of power and one of these time-honored limitations
is that, subject to certain exceptions, legislative power shall not be
delegated.
We conclude that section 11 of Act No. 4221 constitutes an
improper and unlawful delegation of legislative authority to the
provincial boards and is, for this reason, unconstitutional and void.
3. It is also contended that the Probation Act violates the
provisions of our Bill of Rights which prohibits the denial to any
person of the equal protection of the laws (Act. III, sec. 1 subsec.
1. Constitution of the Philippines.)
This basic individual right sheltered by the Constitution is a
restraint on all the tree grand departments of our government and
on the subordinate instrumentalities and subdivision thereof, and
on many constitutional power, like the police power, taxation and
eminent domain. The equal protection of laws, sententiously
observes the Supreme Court of the United States, "is a pledge of
the protection of equal laws." (Yick Wo vs. Hopkins [1886], 118 U.
S., 356; 30 Law. ed., 220; 6 Sup. Ct. Rep., 10464; Perley vs.
North Carolina, 249 U. S., 510; 39 Sup. Ct. Rep., 357; 63 Law.
ed., 735.) Of course, what may be regarded as a denial of the
equal protection of the laws in a question not always easily
determined. No rule that will cover every case can be formulated.
(Connolly vs. Union Sewer Pipe Co. [1902], 184, U. S., 540; 22
Sup. Ct., Rep., 431; 46 Law. ed., 679.) Class legislation
discriminating against some and favoring others in prohibited. But
classification on a reasonable basis, and nor made arbitrarily or
capriciously, is permitted. (Finely vs. California [1911], 222 U. S.,
28; 56 Law. ed., 75; 32 Sup. Ct. Rep., 13; Gulf. C. & S. F. Ry Co.
vs. Ellis [1897], 165 U. S., 150; 41 Law. ed., 666; 17 Sup. Ct.
Rep., 255; Smith, Bell & Co. vs. Natividad [1919], 40 Phil., 136.)
The classification, however, to be reasonable must be based on
substantial distinctions which make real differences; it must be
germane to the purposes of the law; it must not be limited to
existing conditions only, and must apply equally to each member of
the class. (Borgnis vs. Falk. Co. [1911], 147 Wis., 327, 353; 133
N. W., 209; 3 N. C. C. A., 649; 37 L. R. A. [N. S.], 489; State vs.
Cooley, 56 Minn., 540; 530-552; 58 N. W., 150; Lindsley vs.
Natural Carbonic Gas Co.[1911], 220 U. S., 61, 79, 55 Law. ed.,
369, 377; 31 Sup. Ct. Rep., 337; Ann. Cas., 1912C, 160; Lake
Shore & M. S. R. Co. vs. Clough [1917], 242 U.S., 375; 37 Sup. Ct.
Rep., 144; 61 Law. ed., 374; Southern Ry. Co. vs. Greene [1910],
216 U. S., 400; 30 Sup. Ct. Rep., 287; 54 Law. ed., 536; 17 Ann.
Cas., 1247; Truax vs. Corrigan [1921], 257 U. S., 312; 12 C. J.,
pp. 1148, 1149.)
In the case at bar, however, the resultant inequality may be said to
flow from the unwarranted delegation of legislative power,
although perhaps this is not necessarily the result in every case.
Adopting the example given by one of the counsel for the
petitioners in the course of his oral argument, one province may
appropriate the necessary fund to defray the salary of a probation
officer, while another province may refuse or fail to do so. In such
a case, the Probation Act would be in operation in the former
province but not in the latter. This means that a person otherwise
coming within the purview of the law would be liable to enjoy the
benefits of probation in one province while another person similarly
situated in another province would be denied those same benefits.
This is obnoxious discrimination. Contrariwise, it is also possible for
all the provincial boards to appropriate the necessary funds for the
salaries of the probation officers in their respective provinces, in
which case no inequality would result for the obvious reason that
probation would be in operation in each and every province by the
affirmative action of appropriation by all the provincial boards. On
that hypothesis, every person coming within the purview of the
Probation Act would be entitled to avail of the benefits of the Act.
Neither will there be any resulting inequality if no province,
through its provincial board, should appropriate any amount for the
salary of the probation officer — which is the situation now — and,
also, if we accept the contention that, for the purpose of the
Probation Act, the City of Manila should be considered as a
province and that the municipal board of said city has not made
any appropriation for the salary of the probation officer. These
different situations suggested show, indeed, that while inequality
may result in the application of the law and in the conferment of
the benefits therein provided, inequality is not in all cases the
necessary result. But whatever may be the case, it is clear that in
section 11 of the Probation Act creates a situation in which
discrimination and inequality are permitted or allowed. There are,
to be sure, abundant authorities requiring actual denial of the
equal protection of the law before court should assume the task of
setting aside a law vulnerable on that score, but premises and
circumstances considered, we are of the opinion that section 11 of
Act No. 4221 permits of the denial of the equal protection of the
law and is on that account bad. We see no difference between a
law which permits of such denial. A law may appear to be fair on
its face and impartial in appearance, yet, if it permits of unjust and
illegal discrimination, it is within the constitutional prohibitions. (By
analogy, Chy Lung vs. Freeman [1876], 292 U. S., 275; 23 Law.
ed., 550; Henderson vs. Mayor [1876], 92 U. S., 259; 23 Law. ed.,
543; Ex parte Virginia [1880], 100 U. S., 339; 25 Law. ed., 676;
Neal vs. Delaware [1881], 103 U. S., 370; 26 Law. ed., 567; Soon
Hing vs. Crowley [1885], 113 U. S., 703; 28 Law. ed., 1145, Yick
Wo vs. Hopkins [1886],118 U. S., 356; 30 Law. ed., 220; Williams
vs. Mississippi [1897], 170 U. S., 218; 18 Sup. Ct. Rep., 583; 42
Law. ed., 1012; Bailey vs. Alabama [1911], 219 U. S., 219; 31
Sup. Ct. Rep. 145; 55 Law. ed., Sunday Lake Iron Co. vs.
Wakefield [1918], 247 U. S., 450; 38 Sup. Ct. Rep., 495; 62 Law.
ed., 1154.) In other words, statutes may be adjudged
unconstitutional because of their effect in operation (General Oil
Co. vs. Clain [1907], 209 U. S., 211; 28 Sup. Ct. Rep., 475; 52
Law. ed., 754; State vs. Clement Nat. Bank [1911], 84 Vt., 167;
78 Atl., 944; Ann. Cas., 1912D, 22). If the law has the effect of
denying the equal protection of the law it is unconstitutional. (6 R.
C. L. p. 372; Civil Rights Cases, 109 U. S., 3; 3 Sup. Ct. Rep., 18;
27 Law. ed., 835; Yick Wo vs. Hopkins, supra; State vs.
Montgomery, 94 Me., 192; 47 Atl., 165; 80 A. S. R., 386; State vs.
Dering, 84 Wis., 585; 54 N. W., 1104; 36 A. S. R., 948; 19 L. R.
A., 858.) Under section 11 of the Probation Act, not only may said
Act be in force in one or several provinces and not be in force in
other provinces, but one province may appropriate for the salary of
the probation officer of a given year — and have probation during
that year — and thereafter decline to make further appropriation,
and have no probation is subsequent years. While this situation
goes rather to the abuse of discretion which delegation implies, it is
here indicated to show that the Probation Act sanctions a situation
which is intolerable in a government of laws, and to prove how
easy it is, under the Act, to make the guaranty of the equality
clause but "a rope of sand". (Brewer, J. Gulf C. & S. F. Ry. Co. vs.
Ellis [1897], 165 U. S., 150 154; 41 Law. ed., 666; 17 Sup. Ct.
Rep., 255.)lawph!1.net
Great reliance is placed by counsel for the respondents on the case
of Ocampo vs. United States ([1914], 234 U. S., 91; 58 Law. ed.,
1231). In that case, the Supreme Court of the United States
affirmed the decision of this court (18 Phil., 1) by declining to
uphold the contention that there was a denial of the equal
protection of the laws because, as held in Missouri vs. Lewis
(Bowman vs. Lewis) decided in 1880 (101 U. S., 220; 25 Law. ed.,
991), the guaranty of the equality clause does not require
territorial uniformity. It should be observed, however, that this
case concerns the right to preliminary investigations in criminal
cases originally granted by General Orders No. 58. No question of
legislative authority was involved and the alleged denial of the
equal protection of the laws was the result of the subsequent
enactment of Act No. 612, amending the charter of the City of
Manila (Act No. 813) and providing in section 2 thereof that "in
cases triable only in the court of first instance of the City of Manila,
the defendant . . . shall not be entitled as of right to a preliminary
examination in any case where the prosecuting attorney, after a
due investigation of the facts . . . shall have presented an
information against him in proper form . . . ." Upon the other hand,
an analysis of the arguments and the decision indicates that the
investigation by the prosecuting attorney — although not in the
form had in the provinces — was considered a reasonable
substitute for the City of Manila, considering the peculiar conditions
of the city as found and taken into account by the legislature itself.
Reliance is also placed on the case of Missouri vs. Lewis, supra.
That case has reference to a situation where the constitution of
Missouri permits appeals to the Supreme Court of the state from
final judgments of any circuit court, except those in certain
counties for which counties the constitution establishes a separate
court of appeals called St. Louis Court of Appeals. The provision
complained of, then, is found in the constitution itself and it is the
constitution that makes the apportionment of territorial jurisdiction.
We are of the opinion that section 11 of the Probation Act is
unconstitutional and void because it is also repugnant to equal-
protection clause of our Constitution.
Section 11 of the Probation Act being unconstitutional and void for
the reasons already stated, the next inquiry is whether or not the
entire Act should be avoided.
In seeking the legislative intent, the presumption is against any
mutilation of a statute, and the courts will resort to elimination
only where an unconstitutional provision is interjected into a
statute otherwise valid, and is so independent and separable that
its removal will leave the constitutional features and purposes of
the act substantially unaffected by the process. (Riccio vs.
Hoboken, 69 N. J. Law., 649, 662; 63 L. R. A., 485; 55 Atl., 1109,
quoted in Williams vs. Standard Oil Co. [1929], 278 U.S., 235,
240; 73 Law. ed., 287, 309; 49 Sup. Ct. Rep., 115; 60 A. L. R.,
596.) In Barrameda vs. Moir ([1913], 25 Phil., 44, 47), this court
stated the well-established rule concerning partial invalidity of
statutes in the following language:
. . . where part of the a statute is void, as repugnant to the
Organic Law, while another part is valid, the valid portion, if
separable from the valid, may stand and be enforced. But in order
to do this, the valid portion must be in so far independent of the
invalid portion that it is fair to presume that the Legislative would
have enacted it by itself if they had supposed that they could not
constitutionally enact the other. (Mutual Loan Co. vs. Martell, 200
Mass., 482; 86 N. E., 916; 128 A. S. R., 446; Supervisors of
Holmes Co. vs. Black Creek Drainage District, 99 Miss., 739; 55
Sou., 963.) Enough must remain to make a complete, intelligible,
and valid statute, which carries out the legislative intent. (Pearson
vs. Bass. 132 Ga., 117; 63 S. E., 798.) The void provisions must
be eliminated without causing results affecting the main purpose of
the Act, in a manner contrary to the intention of the Legislature.
(State vs. A. C. L. R., Co., 56 Fla., 617, 642; 47 Sou., 969; Harper
vs. Galloway, 58 Fla., 255; 51 Sou., 226; 26 L. R. A., N. S., 794;
Connolly vs. Union Sewer Pipe Co., 184 U. S., 540, 565; People vs.
Strassheim, 240 Ill., 279, 300; 88 N. E., 821; 22 L. R. A., N. S.,
1135; State vs. Cognevich, 124 La., 414; 50 Sou., 439.) The
language used in the invalid part of a statute can have no legal
force or efficacy for any purpose whatever, and what remains must
express the legislative will, independently of the void part, since
the court has no power to legislate. (State vs. Junkin, 85 Neb., 1;
122 N. W., 473; 23 L. R. A., N. S., 839; Vide, also,. U. S., vs.
Rodriguez [1918], 38 Phil., 759; Pollock vs. Farmers' Loan and
Trust Co. [1895], 158 U. S., 601, 635; 39 Law. ed., 1108, 1125;
15 Sup. Ct. Rep., 912; 6 R.C.L., 121.)
It is contended that even if section 11, which makes the Probation
Act applicable only in those provinces in which the respective
provincial boards provided for the salaries of probation officers
were inoperative on constitutional grounds, the remainder of the
Act would still be valid and may be enforced. We should be inclined
to accept the suggestions but for the fact that said section is, in
our opinion, is inseparably linked with the other portions of the Act
that with the elimination of the section what would be left is the
bare idealism of the system, devoid of any practical benefit to a
large number of people who may be deserving of the intended
beneficial result of that system. The clear policy of the law, as may
be gleaned from a careful examination of the whole context, is to
make the application of the system dependent entirely upon the
affirmative action of the different provincial boards through
appropriation of the salaries for probation officers at rates not
lower than those provided for provincial fiscals. Without such action
on the part of the various boards, no probation officers would be
appointed by the Secretary of Justice to act in the provinces. The
Philippines is divided or subdivided into provinces and it needs no
argument to show that if not one of the provinces — and this is the
actual situation now — appropriate the necessary fund for the
salary of a probation officer, probation under Act No. 4221 would
be illusory. There can be no probation without a probation officer.
Neither can there be a probation officer without the probation
system.
Section 2 of the Acts provides that the probation officer shall
supervise and visit the probationer. Every probation officer is
given, as to the person placed in probation under his care, the
powers of the police officer. It is the duty of the probation officer to
see that the conditions which are imposed by the court upon the
probationer under his care are complied with. Among those
conditions, the following are enumerated in section 3 of the Act:
That the probationer (a) shall indulge in no injurious or vicious
habits;
(b) Shall avoid places or persons of disreputable or harmful
character;
(c) Shall report to the probation officer as directed by the court or
probation officers;
(d) Shall permit the probation officer to visit him at reasonable
times at his place of abode or elsewhere;
(e) Shall truthfully answer any reasonable inquiries on the part of
the probation officer concerning his conduct or condition; "(f) Shall
endeavor to be employed regularly; "(g) Shall remain or reside
within a specified place or locality;
(f) Shall make reparation or restitution to the aggrieved parties for
actual damages or losses caused by his offense;
(g) Shall comply with such orders as the court may from time to
time make; and
(h) Shall refrain from violating any law, statute, ordinance, or any
by-law or regulation, promulgated in accordance with law.
The court is required to notify the probation officer in writing of the
period and terms of probation. Under section 4, it is only after the
period of probation, the submission of a report of the probation
officer and appropriate finding of the court that the probationer has
complied with the conditions of probation that probation may be
definitely terminated and the probationer finally discharged from
supervision. Under section 5, if the court finds that there is non-
compliance with said conditions, as reported by the probation
officer, it may issue a warrant for the arrest of the probationer and
said probationer may be committed with or without bail. Upon
arraignment and after an opportunity to be heard, the court may
revoke, continue or modify the probation, and if revoked, the court
shall order the execution of the sentence originally imposed.
Section 6 prescribes the duties of probation officers: "It shall be
the duty of every probation officer to furnish to all persons placed
on probation under his supervision a statement of the period and
conditions of their probation, and to instruct them concerning the
same; to keep informed concerning their conduct and condition; to
aid and encourage them by friendly advice and admonition, and by
such other measures, not inconsistent with the conditions imposed
by court as may seem most suitable, to bring about improvement
in their conduct and condition; to report in writing to the court
having jurisdiction over said probationers at least once every two
months concerning their conduct and condition; to keep records of
their work; make such report as are necessary for the information
of the Secretary of Justice and as the latter may require; and to
perform such other duties as are consistent with the functions of
the probation officer and as the court or judge may direct. The
probation officers provided for in this Act may act as parole officers
for any penal or reformatory institution for adults when so
requested by the authorities thereof, and, when designated by the
Secretary of Justice shall act as parole officer of persons released
on parole under Act Number Forty-one Hundred and Three, without
additional compensation."
It is argued, however, that even without section 11 probation
officers maybe appointed in the provinces under section 10 of Act
which provides as follows:
There is hereby created in the Department of Justice and subject to
its supervision and control, a Probation Office under the direction of
a Chief Probation Officer to be appointed by the Governor-General
with the advise and consent of the Senate who shall receive a
salary of four eight hundred pesos per annum. To carry out this Act
there is hereby appropriated out of any funds in the Insular
Treasury not otherwise appropriated, the sum of fifty thousand
pesos to be disbursed by the Secretary of Justice, who is hereby
authorized to appoint probation officers and the administrative
personnel of the probation officer under civil service regulations
from among those who possess the qualifications, training and
experience prescribed by the Bureau of Civil Service, and shall fix
the compensation of such probation officers and administrative
personnel until such positions shall have been included in the
Appropriation Act.
But the probation officers and the administrative personnel referred
to in the foregoing section are clearly not those probation officers
required to be appointed for the provinces under section 11. It may
be said, reddendo singula singulis, that the probation officers
referred to in section 10 above-quoted are to act as such, not in
the various provinces, but in the central office known as the
Probation Office established in the Department of Justice, under
the supervision of the Chief Probation Officer. When the law
provides that "the probation officer" shall investigate and make
reports to the court (secs. 1 and 4); that "the probation officer"
shall supervise and visit the probationer (sec. 2; sec. 6, par. d);
that the probationer shall report to the "probationer officer" (sec.
3, par. c.), shall allow "the probationer officer" to visit him (sec. 3,
par. d), shall truthfully answer any reasonable inquiries on the part
of "the probation officer" concerning his conduct or condition (sec.
3, par. 4); that the court shall notify "the probation officer" in
writing of the period and terms of probation (sec. 3, last par.), it
means the probation officer who is in charge of a particular
probationer in a particular province. It never could have been
intention of the legislature, for instance, to require the probationer
in Batanes, to report to a probationer officer in the City of Manila,
or to require a probation officer in Manila to visit the probationer in
the said province of Batanes, to place him under his care, to
supervise his conduct, to instruct him concerning the conditions of
his probation or to perform such other functions as are assigned to
him by law.
That under section 10 the Secretary of Justice may appoint as
many probation officers as there are provinces or groups of
provinces is, of course possible. But this would be arguing on what
the law may be or should be and not on what the law is. Between
is and ought there is a far cry. The wisdom and propriety of
legislation is not for us to pass upon. We may think a law better
otherwise than it is. But much as has been said regarding
progressive interpretation and judicial legislation we decline to
amend the law. We are not permitted to read into the law matters
and provisions which are not there. Not for any purpose — not
even to save a statute from the doom of invalidity.
Upon the other hand, the clear intention and policy of the law is
not to make the Insular Government defray the salaries of
probation officers in the provinces but to make the provinces
defray them should they desire to have the Probation Act apply
thereto. The sum of P50,000, appropriated "to carry out the
purposes of this Act", is to be applied, among other things, for the
salaries of probation officers in the central office at Manila. These
probation officers are to receive such compensations as the
Secretary of Justice may fix "until such positions shall have been
included in the Appropriation Act". It was the intention of the
legislature to empower the Secretary of Justice to fix the salaries of
the probation officers in the provinces or later on to include said
salaries in an appropriation act. Considering, further, that the sum
of P50,000 appropriated in section 10 is to cover, among other
things, the salaries of the administrative personnel of the Probation
Office, what would be left of the amount can hardly be said to be
sufficient to pay even nominal salaries to probation officers in the
provinces. We take judicial notice of the fact that there are 48
provinces in the Philippines and we do not think it is seriously
contended that, with the fifty thousand pesos appropriated for the
central office, there can be in each province, as intended, a
probation officer with a salary not lower than that of a provincial
fiscal. If this a correct, the contention that without section 11 of
Act No. 4221 said act is complete is an impracticable thing under
the remainder of the Act, unless it is conceded that in our case
there can be a system of probation in the provinces without
probation officers.
Probation as a development of a modern penology is a
commendable system. Probation laws have been enacted, here and
in other countries, to permit what modern criminologist call the
"individualization of the punishment", the adjustment of the
penalty to the character of the criminal and the circumstances of
his particular case. It provides a period of grace in order to aid in
the rehabilitation of a penitent offender. It is believed that, in any
cases, convicts may be reformed and their development into
hardened criminals aborted. It, therefore, takes advantage of an
opportunity for reformation and avoids imprisonment so long as
the convicts gives promise of reform. (United States vs. Murray
[1925], 275 U. S., 347 357, 358; 72 Law. ed., 309; 312, 313; 48
Sup. Ct. Rep., 146; Kaplan vs. Hecht, 24 F. [2d], 664, 665.) The
Welfare of society is its chief end and aim. The benefit to the
individual convict is merely incidental. But while we believe that
probation is commendable as a system and its implantation into
the Philippines should be welcomed, we are forced by our
inescapable duty to set the law aside because of the repugnancy to
our fundamental law.
In arriving at this conclusion, we have endeavored to consider the
different aspects presented by able counsel for both parties, as well
in their memorandums as in their oral argument. We have
examined the cases brought to our attention, and others we have
been able to reach in the short time at our command for the study
and deliberation of this case. In the examination of the cases and
in then analysis of the legal principles involved we have inclined to
adopt the line of action which in our opinion, is supported better
reasoned authorities and is more conducive to the general welfare.
(Smith, Bell & Co. vs. Natividad [1919], 40 Phil., 136.) Realizing
the conflict of authorities, we have declined to be bound by certain
adjudicated cases brought to our attention, except where the point
or principle is settled directly or by clear implication by the more
authoritative pronouncements of the Supreme Court of the United
States. This line of approach is justified because:
(a) The constitutional relations between the Federal and the State
governments of the United States and the dual character of the
American Government is a situation which does not obtain in the
Philippines;
(b) The situation of s state of the American Union of the District of
Columbia with reference to the Federal Government of the United
States is not the situation of the province with respect to the
Insular Government (Art. I, sec. 8 cl. 17 and 10th Amendment,
Constitution of the United States; Sims vs. Rives, 84 Fed. [2d],
871),

(c) The distinct federal and the state judicial organizations of the
United States do not embrace the integrated judicial system of the
Philippines (Schneckenburger vs. Moran [1936], 35 Off. Gaz., p.
1317);

(d) "General propositions do not decide concrete cases" (Justice

Holmes in Lochner vs. New York [1904], 198 U. S., 45, 76; 49
Law. ed., 937, 949) and, "to keep pace with . . . new developments
of times and circumstances" (Chief Justice Waite in Pensacola Tel.
Co. vs. Western Union Tel. Co. [1899], 96 U. S., 1, 9; 24 Law. ed.,
708; Yale Law Journal, Vol. XXIX, No. 2, Dec. 1919, 141, 142),
fundamental principles should be interpreted having in view
existing local conditions and environment.

Act No. 4221 is hereby declared unconstitutional and void and the
writ of prohibition is, accordingly, granted. Without any
pronouncement regarding costs. So ordered.

G.R. No. 119252 August 18, 1997
COMMISSIONER OF INTERNAL REVENUE and
COMMISSIONER OF CUSTOMS, petitioners,
vs.
HON. APOLINARIO B. SANTOS, in his capacity as Presiding
Judge of the Regional Trial Court, Branch 67, Pasig City;
ANTONIO M. MARCO; JEWELRY BY MARCO & CO., INC., and
GUILD OF PHILIPPINE JEWELLERS, INC., respondents.
HERMOSISIMA, JR., J.:
Of grave concern to this Court is the judicial pronouncement of the
court a quo that certain provisions of the Tariff & Customs Code
and the National Internal Revenue Code are unconstitutional. This
provokes the issue: Can the Regional Trial Courts declare a law
inoperative and without force and effect or otherwise
unconstitutional? If it can, under what circumstances?
In this petition, the Commissioner of Internal Revenue and the
Commissioner of Customs jointly seek the reversal of the
Decision,1 dated February 16, 1995, of herein public respondent,
Hon. Apolinario B. Santos, Presiding Judge of Branch 67 of the
Regional Trial Court of Pasig City.
The following facts, concisely related in the petition2 of the Office of
the Solicitor General, appear to be undisputed:
1. Private respondent Guild of Philippine Jewelers, Inc., is an
association of Filipino jewelers engaged in the manufacture of
jewelries (sic) and allied undertakings. Among its members are
Hans Brumann, Inc., Miladay Jewels, Inc., Mercelles, Inc., Solid
Gold International Traders, Inc., Diagem Trading Corporation, and
private respondent Jewelry by Marco & Co., Inc. Private respondent
Antonio M. Marco is the President of the Guild.
2. On August 5, 1988, Felicidad L. Viray, then Regional Director,
Region No. 4-A of the Bureau of Internal Revenue, acting for and in
behalf of the Commissioner of Internal Revenue, issued Regional
Mission Order No. 109-88 to BIR officers, led by Eliseo Corcega, to
conduct surveillance, monitoring, and inventory of all imported
articles of Hans Brumann, Inc., and place the same under
preventive embargo. The duration of the mission was from August
8 to August 20, 1988 (Exhibit "1"; Exhibit "A").
3. On August 17, 1988, pursuant to the aforementioned Mission
Order, the BIR officers proceeded to the establishment of Hans
Brumann, Inc., served the Mission Order, and informed the
establishment that they were going to make an inventory of the
articles involved to see if the proper taxes thereon have been paid.
They then made an inventory of the articles displayed in the
cabinets with the assistance of an employee of the establishment.
They listed down the articles, which list was signed by the assistant
employee. They also requested the presentation of proof of
necessary payments for excise tax and value-added tax on said
articles (pp. 10-15, TSN, April 12, 1993, Exhibits "2", "2-A", "3",
"3-A").
4. The BIR officers requested the establishment not to sell the
articles until it can be proven that the necessary taxes thereon
have been paid. Accordingly, Mr. Hans Brumann, the owner of the
establishment, signed a receipt for Goods, Articles, and Things
Seized under Authority of the National Internal Revenue Code
(dated August 17, 1988), acknowledging that the articles
inventoried have been seized and left in his possession, and
promising not to dispose of the same without authority of the
Commissioner of Internal Revenue pending investigation. 3
5. Subsequently, BIR officer Eliseo Corcega submitted to his
superiors a report of the inventory conducted and a computation of
the value-added tax and ad valorem tax on the articles for
evaluation and disposition.4
6. Mr. Hans Brumann, the owner of the establishment, never filed a
protest with the BIR on the preventive embargo of the articles. 5
7. On October 17, 1988, Letter of Authority No. 0020596 was
issued by Deputy Commissioner Eufracio D. Santos to BIR officers
to examine the books of accounts and other accounting records of
Hans Brumann, Inc., for "stocktaking investigation for excise tax
purposes for the period January 1, 1988 to present" (Exhibit "C").
In a letter dated October 27, 1988, in connection with the physical
count of the inventory (stocks on hand) pursuant to said Letter of
Authority, Hans Brumann, Inc. was requested to prepare and make
available to the BIR the documents indicated therein (Exhibit "D").
8. Hans Brumann, Inc., did not produce the documents requested
by the BIR.6
9. Similar Letter of Authority were issued to BIR officers to
examine the books of accounts and other accounting records of
Miladay Jewels, Inc., Mercelles, Inc., Solid Gold International
Traders, Inc., (Exhibits "E", "G" and "N") and Diagem Trading
Corporation7 for "stocktaking/investigation far excise tax purpose
for the period January 1, 1988 to present."
10. In the case of Miladay Jewels, Inc. and Mercelles, Inc., there is
no account of what actually transpired in the implementation of the
Letters of Authority.
11. In the case of Solid Gold International Traders Corporation, the
BIR officers made an inventory of the articles in the
establishment.8 The same is true with respect to Diagem Traders
Corporation.9
12. On November 29, 1988, private respondents Antonio M. Marco
and Jewelry By Marco & Co., Inc. filed with the Regional Trial
Court, National Capital Judicial Region, Pasig City, Metro Manila, a
petition for declaratory relief with writ of preliminary injunction
and/or temporary restraining order against herein petitioners and
Revenue Regional Director Felicidad L. Viray (docketed as Civil
Case No. 56736) praying that Sections 126, 127(a) and (b) and
150(a) of the National Internal Revenue Code and Hdg. No. 71.01,
71.02, 71.03, and 71.04, Chapter 71 of the Tariff and Customs
Code of the Philippines be declared unconstitutional and void, and
that the Commissioner of Internal Revenue and Customs be
prevented or enjoined from issuing mission orders and other orders
of similar nature. . . .
13. On February 9, 1989, herein petitioners filed their answer to
the petition. . . .
14 On October 16, 1989, private respondents filed a Motion with
Leave to Amend Petition by including as petitioner the Guild of
Philippine Jewelers, Inc., which motion was granted. . . .
15. The case, which was originally assigned to Branch 154, was
later reassigned to Branch 67.
16. On February 16, 1995, public respondents rendered a decision,
the dispositive portion of which reads:
In view of the foregoing reflections, judgment is hereby rendered,
as follows:
1. Declaring Section 104 of the Tariff and the Customs Code of the
Philippines, Hdg. 71.01, 71.02, 71.03, and 71.04, Chapter 71 as
amended by Executive Order No. 470, imposing three to ten (3%
to 10%) percent tariff and customs duty on natural and cultured
pearls and precious or semi-precious stones, and Section 150 par.
(a) the National Internal Revenue Code of 1977, as amended,
renumbered and rearranged by Executive Order 273, imposing
twenty (20%) percent excise tax on jewelry, pearls and other
precious stones, as INOPERATIVE and WITHOUT FORCE and
EFFECT insofar as petitioners are concerned.
2. Enforcement of the same is hereby enjoined.
No cost.
SO ORDERED.
Section 150 (a) of Executive Order No. 273 reads:
Sec. 150. Non-essential goods. — There shall be levied, assessed
and collected a tax equivalent to 20% based on the wholesale price
or the value of importation used by the Bureau of Customs in
determining tariff and customs duties; net of the excise tax and
value-added tax, of the following goods:
(a) All goods commonly or commercially known as jewelry,
whether real or imitation, pearls, precious and semi-precious
stones and imitations thereof; goods made of, or ornamented,
mounted and fitted with, precious metals or imitations thereof or
ivory (not including surgical and dental instruments, silver-plated
wares, frames or mountings for spectacles or eyeglasses, and
dental gold or gold alloys and other precious metals used in filling,
mounting or fitting of the teeth); opera glasses and lorgnettes. The
term "precious metals" shall include platinum, gold, silver, and
other metals of similar or greater value. The term "imitations
thereof" shall include platings and alloys of such metals.
Section 150 (a) of Executive Order No. 273, which took effect on
January 1, 1988, amended the then Section 163 (a) of the Tax
Code of 1986 which provided that:
Sec. 163. Percentage tax on sales of non-essential articles. —
There shall be levied, assessed and collected, once only on every
original sale, barter, exchange or similar transaction for nominal or
valuable consideration intended to transfer ownership of, or title to,
the articles herein below enumerated a tax equivalent to 50% of
the gross value in money of the articles so sold, bartered,
exchanged or transferred, such tax to be paid by the manufacturer
or producer:
(a) All articles commonly or commercially known as jewelry,
whether real or imitation, pearls, precious and semi-precious
stones, and imitations thereof, articles made of, or ornamented,
mounted or fitted with, precious metals or imitations thereof or
ivory (not including surgical and dental instruments, silver-plated
wares, frames or mounting for spectacles or eyeglasses, and dental
gold or gold alloys and other precious metal used in filling,
mounting or fitting of the teeth); opera glasses, and lorgnettes.
The term "precious metals" shall include platinum, gold, silver, and
other metals of similar or greater value. The term "imitations
thereof" shall include platings and alloys of such metals;
Section 163 (a) of the 1986 Tax Code was formerly Section 194(a)
of the 1977 Tax Code and Section 184(a) of the Tax code, as
amended by Presidential Decree No. 69, which took effect on
January 1, 1974.
It will be noted that, while under the present law, jewelry is subject
to a 20% excise tax in addition to a 10% value-added tax under
the old law, it was subjected to 50% percentage tax. It was even
subjected to a 70% percentage tax under then Section 184(a) of
the Tax Code, as amended by P.D. 69.
Section 104, Hdg. Nos. 17.01, 17.02, 17.03 and 17.04, Chapter 71
of the Tariff and Customs Code, as amended by Executive Order
No. 470, dated July 20, 1991, imposes import duty on natural or
cultured pearls and precious or semi-precious stones at the rate of
3% to 10% to be applied in stages from 1991 to 1994 and 30% in
1995.
Prior to the issuance of E.O. 470, the rate of import duty in 1988
was 10% to 50% when the petition was filed in the court a quo.
In support of their petition before the lower court, the private
respondents submitted a position paper purporting to be an
exhaustive study of the tax rates on jewelry prevailing in other
Asian countries, in comparison to tax rates levied on the same in
the Philippines. 10
The following issues were thus raised therein:
1. Whether or not the Honorable Court has jurisdiction over the
subject matter of the petition.
2. Whether the petition states a cause of action or whether the
petition alleges a justiciable controversy between the parties.
3. Whether Section 150, par. (a) of the NIRC and Section 104,
Hdg. 71.01, 71.02, 71.03 and 71.04 of the Tariff and Customs
Code are unconstitutional.
4. Whether the issuance of the Mission Order and Letters of
Authority is valid and legal.
In the assailed decision, the public respondent held indeed that the
Regional Trial Court has jurisdiction to take cognizance of the
petition since "jurisdiction over the nature of the suit is conferred
by law and it is determine[d] through the allegations in the
petition," and that the "Court of Tax Appeals has no jurisdiction to
declare a statute unconstitutional much less issue writs
of certiorari and prohibition in order to correct acts of respondents
allegedly committed with grave abuse of discretion amounting to
lack of jurisdiction."
As to the second issue, the public respondent, made the holding
that there exists a justiciable controversy between the parties,
agreeing with the statements made in the position paper presented
by the private respondents, and considering these statements to
be factual evidence, to wit:
Evidence for the petitioners indeed reveals that government
taxation policy treats jewelry, pearls, and other precious stones
and metals as non-essential luxury items and therefore, taxed
heavily; that the atmospheric cost of taxation is killing the local
manufacturing jewelry industry because they cannot compete with
neighboring and other countries where importation and
manufacturing of jewelry is not taxed heavily, if not at all; that
while government incentives and subsidies exit, local
manufacturers cannot avail of the same because officially many of
them are unregistered and are unable to produce the required
official documents because they operate underground, outside the
tariff and tax structure; that local jewelry manufacturing is under
threat of extinction, otherwise discouraged, while domestic trading
has become more attractive; and as a consequence, neighboring
countries, such as: Hongkong, Singapore, Malaysia, Thailand, and
other foreign competitors supplying the Philippine market either
through local channels or through the black market for smuggled
goods are the ones who are getting business and making money,
while members of the petitioner Guild of Philippine Jewelers, Inc.
are constantly subjected to bureaucratic harassment instead of
being given by the government the necessary support in order to
survive and generate revenue for the government, and most of all
fight competitively not only in the domestic market but in the
arena of world market where the real contest is.
Considering the allegations of fact in the petition which were duly
proven during the trial, the Court holds that the petition states a
cause of action and there exists a justiciable controversy between
the parties which would require determination of constitutionality
of the laws imposing excise tax and customs duty on
jewelry. 11 (emphasis ours)
The public respondent, in addressing the third issue, ruled that the
laws in question are confiscatory and oppressive. Again, virtually
adopting verbatim the reasons presented by the private
respondents in their position paper, the lower court stated:
The Court finds that indeed government taxation policy trats(sic)
hewelry(sic) as non-essential luxury item and therefore, taxed
heavily. Aside from the ten (10%) percent value added tax (VAT),
local jewelry manufacturers contend with the (manufacturing)
excise tax of twenty (20%) percent (to be applied in stages)
customs duties on imported raw materials, the highest in the Asia-
Pacific region. In contrast, imported gemstones and other precious
metals are duty free in Hongkong, Thailand, Malaysia and
Singapore.
The Court elaborates further on the experiences of other countries
in their treatment of the jewelry sector.
MALAYSIA
Duties and taxes on imported gemstones and gold and the sales
tax on jewelry were abolished in Malaysia in 1984. They were
removed to encourage the development of Malaysia's jewelry
manufacturing industry and to increase exports of jewelry.
THAILAND
Gems and jewelry are Thailand's ninth most important export
earner. In the past, the industry was overlooked by successive
administrations much to the dismay of those involved in developing
trade. Prohibitive import duties and sales tax on precious
gemstones restricted the growht (sic) of the industry, resulting in
most of the business being unofficial. It was indeed difficult for a
government or businessman to promote an industry which did not
officially exist.
Despite these circumstances, Thailand's Gem business kept
growing up in (sic) businessmen began to realize it's potential. In
1978, the government quietly removed the severe duties on
precious stones, but imposed a sales tax of 3.5%. Little was said or
done at that time as the government wanted to see if a free trade
in gemstones and jewelry would increase local manufacturing and
exports or if it would mean more foreign made jewelry pouring into
Thailand. However, as time progressed, there were indications that
local manufacturing was indeed being encouraged and the
economy was earning mom from exports. The government soon
removed the 3% sales tax too, putting Thailand at par with
Hongkong and Singapore. In these countries, there are no more
import duties and sales tax on gems. (Cited in pages 6 and 7 of
Exhibit "M". The Center for Research and Communication in
cooperation with the Guild of Philippine Jewelers, Inc., June 1986).
To illustrate, shown hereunder is the Philippine tariff and tax
structure on jewelry and other precious and semi-precious stones
compared to other neighboring countries, to wit:
Tariff on imported
Jewelry and (Manufacturing) Sales Tax 10% (VAT)
precious stones Excise tax
Philippines 3% to 10% to be 20% 10% VAT
applied in stages
Malaysia None None None
Thailand None None None
Singapore None None None
Hongkong None None None
In this connection, the present tariff and tax structure increases
manufacturing costs and renders the local jewelry manufacturers
uncompetitive against other countries even before they start
manufacturing and trading. Because of the prohibitive cast (sic) of
taxation, most manufacturers source from black market for
smuggled goods, and that while manufacturers can avail of tax
exemption and/or tax credits from the (manufacturing) excise tax,
they have no documents to present when filing this exemption
because, or pointed out earlier, most of them source their raw
materials from the block market, and since many of them do not
legally exist or operate onofficially (sic), or underground, again
they have no records (receipts) to indicate where and when they
will utilize such tax credits. (Cited in Exhibit "M" — Buencamino
Report).
Given these constraints, the local manufacturer has no recourse
but to the back door for smuggled goods if only to be able to
compete even ineffectively, or cease manufacturing activities and
instead engage in the tradinf (sic) of smuggled finished jewelry.
Worthy of note is the fact that indeed no evidence was adduced by
respondents to disprove the foregoing allegations of fact. Under the
foregoing factual circumstances, the Court finds the questioned
statutory provisions confiscatory and destructive of the proprietary
right of the petitioners to engage in business in violation of Section
1, Article III of the Constitution which states, as follows:
No person shall be deprived of the life, liberty, or property without
due process of law . . . . 12
Anent the fourth and last issue, the herein public respondent did
not find it necessary to rule thereon, since, in his opinion, "the
same has been rendered moot and academic by the
aforementioned pronouncement." 13
The petitioners now assail the decision rendered by the public
respondent, contending that the latter has no authority to pass
judgment upon the taxation policy of the government. In addition,
the petitioners impugn the decision in question by asserting that
there was no showing that the tax laws on jewelry are confiscatory
and destructive of private respondent's proprietary rights.
We rule in favor of the petitioners.
It is interesting to note that public respondent, in the dispositive
portion of his decision, perhaps keeping in mind his limitations
under the law as a trial judge, did not go so far as to declare the
laws in question to be unconstitutional. However, therein he
declared the laws to be inoperative and without force and
effect insofar as the private respondents are concerned. But,
respondent judge, in the body of his decision, unequivocally but
wrongly declared the said provisions of law to be violative of
Section 1, Article III of the Constitution. In fact, in their
Supplemental Comment on the Petition for Review, 14 the private
respondents insist that Judge Santos, in his capacity as judge of
the Regional Trial Court, acted within his authority in passing upon
the issues, to wit:
A perusal of the appealed decision would undoubtedly disclose that
public respondent did not pass judgment on the soundness or
wisdom of the government's tax policy on jewelry. True, public
respondent, in his questioned decision, observed, inter alia, that
indeed government tax policy treats jewelry as non-essential item,
and therefore, taxed heavily; that the present tariff and tax
structure increase manufacturing cost and renders the local jewelry
manufacturers uncompetitive against other countries even before
they start manufacturing and trading; that many of the local
manufacturers do not legally exist or operate unofficially or
underground; and that the manufacturers have no recourse but to
the back door for smuggled goods if only to be able to compete
even if ineffectively or cease manufacturing activities.
BUT, public respondent did not, in any manner, interfere with or
encroach upon the prerogative of the legislature to determine what
should be the tax policy on jewelry. On the other hand, the issue
raised before, and passed upon by, the public respondent was
whether or not Section 150, paragraph (a) of the National Internal
Revenue Code (NIRC) and Section 104, Hdg. 71.01, 71.02, 71.03
and 71.04 of the Tariff and Customs Code are unconstitutional, or
differently stated, whether or not the questioned statutory
provisions affect the constitutional right of private respondents to
engage in business.
It is submitted that public respondent confined himself on this
issue which is clearly a judicial question.
We find it incongruous, in the face of the sweeping
pronouncements made by Judge Santos in his decision, that
private respondents can still persist in their argument that the
former did not overreach the restrictions dictated upon him by law.
There is no doubt in the Court's mind, despite protestations to the
contrary, that respondent judge encroached upon matters properly
falling within the province of legislative functions. In citing as basis
for his decision unproven comparative data pertaining to
differences between tax rates of various Asian countries, and
concluding that the jewelry industry in the Philippines suffers as a
result, the respondent judge took it upon himself to supplant
legislative policy regarding jewelry taxation. In advocating the
abolition of local tax and duty on jewelry simply because other
countries have adopted such policies, the respondent judge
overlooked the fact that such matters are not for him to decide.
There are reasons why jewelry, a non-essential item, is taxed as it
is in this country, and these reasons, deliberated upon by our
legislature, are beyond the reach of judicial questioning. As held
in Macasiano vs. National Housing Authority: 15
The policy of the courts is to avoid ruling on constitutional
questions and to presume that the acts of the political departments
are valid in the absence of a clear and unmistakable showing to the
contrary. To doubt is to sustain. This presumption is based on the
doctrine of separation of powers which enjoins upon each
department a becoming respect for the acts of the other
departments. The theory is that as the joint act of Congress and
the President of the Philippines, a law has been carefully studied
and determined to be in accordance with the fundamental low
before it was finally enacted. (emphasis ours)
What we see here is a debate on the WISDOM of the laws in
question. This is a matter on which the RTC is not competent to
rule. 16 As Cooley observed: "Debatable questions are for the
legislature to decide. The courts do not sit to resolve the merits of
conflicting issues." 17 In Angara vs. Electoral Commission, 18 Justice
Laurel made it clear that "the judiciary does not pass upon
questions of wisdom, justice or expediency of legislation." And
fittingly so, for in the exercise of judicial power, we are allowed
only "to settle actual controversies involving rights which are
legally demandable and enforceable", and may not annul an act of
the political departments simply because we feel it is unwise or
impractical. 19 This is not to say that Regional Trial Courts have no
power whatsoever to declare a law unconstitutional. In J.M. Tuason
and Co. v. Court of Appeals, 20 we said that "[p]lainly the
Constitution contemplates that the inferior courts should have
jurisdiction in cases involving constitutionality of any treaty or law,
for it speaks of appellate review of final judgments of inferior
courts in cases where such constitutionality happens to be in
issue." This authority of lower courts to decide questions of
constitutionality in the first instance reaffirmed in Ynos
v. Intermediate Court of Appeals. 21 But this authority does not
extend to deciding questions which pertain to legislative policy.
The trial court is not the proper forum for the ventilation of the
issues raised by the private respondents. The arguments they
presented focus on the wisdom of the provisions of law which they
seek to nullify. Regional Trial Courts can only look into the validity
of a provision, that is, whether or not it has been passed according
to the procedures laid down by law, and thus cannot inquire as to
the reasons for its existence. Granting arguendo that the private
respondents may have provided convincing arguments why the
jewelry industry in the Philippines should not be taxed as it is, it is
to the legislature that they must resort to for relief, since with the
legislature primarily lies the discretion to determine the nature
(kind), object (purpose), extent (rate), coverage (subjects)
and situs (place) of taxation. This Court cannot freely delve into
those matters which, by constitutional fiat, rightly rest on
legislative judgment. 22
As succinctly put in Lim vs. Pacquing: 23 "Where a controversy may
be settled on a platform other than one involving constitutional
adjudication, the court should exercise becoming modesty and
avoid the constitutional question." As judges, we can only interpret
and apply the law and, despite our doubts about its wisdom,
cannot repeal or amend it. 24
The respondents presented an exhaustive study on the tax rates on
jewelry levied by different Asian countries. This is meant to
convince us that compared to other countries, the tax rates
imposed on said industry in the Philippines is oppressive and
confiscatory. This Court, however, cannot subscribe to the theory
that the tax rates of other countries should be used as a yardstick
in determining what may be the proper subjects of taxation in our
own country. It should be pointed out that in imposing the
aforementioned taxes and duties, the State, acting through the
legislative and executive branches, is exercising its sovereign
prerogative. It is inherent in the power to tax that the State be free
to select the subjects of taxation, and it has been repeatedly held
that "inequalities which result from a singling out or one particular
class for taxation, or exemption, infringe no constitutional
limitation." 25
WHEREFORE, premises considered, the petition is hereby
GRANTED, and the Decision in Civil Case No. 56736 is hereby
REVERSED and SET ASIDE. No costs.
SO ORDERED.
G.R. No. 91649 May 14, 1991
ATTORNEYS HUMBERTO BASCO, EDILBERTO BALCE,
SOCRATES MARANAN AND LORENZO SANCHEZ, petitioners,
vs.
PHILIPPINE AMUSEMENTS AND GAMING CORPORATION
(PAGCOR), respondent.
H.B. Basco & Associates for petitioners.
Valmonte Law Offices collaborating counsel for petitioners.
Aguirre, Laborte and Capule for respondent PAGCOR.
PARAS, J.:
A TV ad proudly announces:
"The new PAGCOR — responding through responsible gaming."
But the petitioners think otherwise, that is why, they filed the
instant petition seeking to annul the Philippine Amusement and
Gaming Corporation (PAGCOR) Charter — PD 1869, because it is
allegedly contrary to morals, public policy and order, and because
— 1869 to enable the Government to regulate and centralize all
A. It constitutes a waiver of a right prejudicial to a third person
with a right recognized by law. It waived the Manila City
government's right to impose taxes and license fees, which is
recognized by law;
B. For the same reason stated in the immediately preceding
paragraph, the law has intruded into the local government's right
to impose local taxes and license fees. This, in contravention of the
constitutionally enshrined principle of local autonomy;
C. It violates the equal protection clause of the constitution in that
it legalizes PAGCOR — conducted gambling, while most other forms
of gambling are outlawed, together with prostitution, drug
trafficking and other vices;
D. It violates the avowed trend of the Cory government away from
monopolistic and crony economy, and toward free enterprise and
privatization. (p. 2, Amended Petition; p. 7, Rollo)
In their Second Amended Petition, petitioners also claim that PD
1869 is contrary to the declared national policy of the "new
restored democracy" and the people's will as expressed in the 1987
Constitution. The decree is said to have a "gambling objective" and
therefore is contrary to Sections 11, 12 and 13 of Article II, Sec. 1
of Article VIII and Section 3 (2) of Article XIV, of the present
Constitution (p. 3, Second Amended Petition; p. 21, Rollo).
The procedural issue is whether petitioners, as taxpayers and
practicing lawyers (petitioner Basco being also the Chairman of the
Committee on Laws of the City Council of Manila), can question and
seek the annulment of PD 1869 on the alleged grounds mentioned
above.
The Philippine Amusements and Gaming Corporation (PAGCOR)
was created by virtue of P.D. 1067-A dated January 1, 1977 and
was granted a franchise under P.D. 1067-B also dated January 1,
1977 "to establish, operate and maintain gambling casinos on land
or water within the territorial jurisdiction of the Philippines." Its
operation was originally conducted in the well known floating
casino "Philippine Tourist." The operation was considered a success
for it proved to be a potential source of revenue to fund
infrastructure and socio-economic projects, thus, P.D. 1399 was
passed on June 2, 1978 for PAGCOR to fully attain this objective.
Subsequently, on July 11, 1983, PAGCOR was created under P.D.
games of chance authorized by existing franchise or permitted by
law, under the following declared policy —
Sec. 1. Declaration of Policy. — It is hereby declared to be the
policy of the State to centralize and integrate all games of chance
not heretofore authorized by existing franchises or permitted by
law in order to attain the following objectives:
(a) To centralize and integrate the right and authority to operate
and conduct games of chance into one corporate entity to be
controlled, administered and supervised by the Government.
(b) To establish and operate clubs and casinos, for amusement and
recreation, including sports gaming pools, (basketball, football,
lotteries, etc.) and such other forms of amusement and recreation
including games of chance, which may be allowed by law within the
territorial jurisdiction of the Philippines and which will: (1) generate
sources of additional revenue to fund infrastructure and socio-civic
projects, such as flood control programs, beautification, sewerage
and sewage projects, Tulungan ng Bayan Centers, Nutritional
Programs, Population Control and such other essential public
services; (2) create recreation and integrated facilities which will
expand and improve the country's existing tourist attractions; and
(3) minimize, if not totally eradicate, all the evils, malpractices and
corruptions that are normally prevalent on the conduct and
operation of gambling clubs and casinos without direct government
involvement. (Section 1, P.D. 1869)
To attain these objectives PAGCOR is given territorial jurisdiction
all over the Philippines. Under its Charter's repealing clause, all
laws, decrees, executive orders, rules and regulations, inconsistent
therewith, are accordingly repealed, amended or modified.
It is reported that PAGCOR is the third largest source of
government revenue, next to the Bureau of Internal Revenue and
the Bureau of Customs. In 1989 alone, PAGCOR earned P3.43
Billion, and directly remitted to the National Government a total of
P2.5 Billion in form of franchise tax, government's income share,
the President's Social Fund and Host Cities' share. In addition,
PAGCOR sponsored other socio-cultural and charitable projects on
its own or in cooperation with various governmental agencies, and
other private associations and organizations. In its 3 1/2 years of
operation under the present administration, PAGCOR remitted to
the government a total of P6.2 Billion. As of December 31, 1989,
PAGCOR was employing 4,494 employees in its nine (9) casinos
nationwide, directly supporting the livelihood of Four Thousand
Four Hundred Ninety-Four (4,494) families.
But the petitioners, are questioning the validity of P.D. No. 1869.
They allege that the same is "null and void" for being "contrary to
morals, public policy and public order," monopolistic and tends
toward "crony economy", and is violative of the equal protection
clause and local autonomy as well as for running counter to the
state policies enunciated in Sections 11 (Personal Dignity and
Human Rights), 12 (Family) and 13 (Role of Youth) of Article II,
Section 1 (Social Justice) of Article XIII and Section 2 (Educational
Values) of Article XIV of the 1987 Constitution.
This challenge to P.D. No. 1869 deserves a searching and thorough
scrutiny and the most deliberate consideration by the Court,
involving as it does the exercise of what has been described as
"the highest and most delicate function which belongs to the
judicial department of the government." (State v. Manuel, 20 N.C.
144; Lozano v. Martinez, 146 SCRA 323).
As We enter upon the task of passing on the validity of an act of a
co-equal and coordinate branch of the government We need not be
reminded of the time-honored principle, deeply ingrained in our
jurisprudence, that a statute is presumed to be valid. Every
presumption must be indulged in favor of its constitutionality. This
is not to say that We approach Our task with diffidence or timidity.
Where it is clear that the legislature or the executive for that
matter, has over-stepped the limits of its authority under the
constitution, We should not hesitate to wield the axe and let it fall
heavily, as fall it must, on the offending statute (Lozano v.
Martinez, supra).
In Victoriano v. Elizalde Rope Workers' Union, et al, 59 SCRA 54,
the Court thru Mr. Justice Zaldivar underscored the —
. . . thoroughly established principle which must be followed in all
cases where questions of constitutionality as obtain in the instant
cases are involved. All presumptions are indulged in favor of
constitutionality; one who attacks a statute alleging
unconstitutionality must prove its invalidity beyond a reasonable
doubt; that a law may work hardship does not render it
unconstitutional; that if any reasonable basis may be conceived
which supports the statute, it will be upheld and the challenger
must negate all possible basis; that the courts are not concerned
with the wisdom, justice, policy or expediency of a statute and that
a liberal interpretation of the constitution in favor of the
constitutionality of legislation should be adopted. (Danner v. Hass,
194 N.W. 2nd 534, 539; Spurbeck v. Statton, 106 N.W. 2nd 660,
663; 59 SCRA 66; see also e.g. Salas v. Jarencio, 46 SCRA 734,
739 [1970]; Peralta v. Commission on Elections, 82 SCRA 30, 55
[1978]; and Heirs of Ordona v. Reyes, 125 SCRA 220, 241-242
[1983] cited in Citizens Alliance for Consumer Protection v. Energy
Regulatory Board, 162 SCRA 521, 540)
Of course, there is first, the procedural issue. The respondents are
questioning the legal personality of petitioners to file the instant
petition.
Considering however the importance to the public of the case at
bar, and in keeping with the Court's duty, under the 1987
Constitution, to determine whether or not the other branches of
government have kept themselves within the limits of the
Constitution and the laws and that they have not abused the
discretion given to them, the Court has brushed aside technicalities
of procedure and has taken cognizance of this petition. (Kapatiran
ng mga Naglilingkod sa Pamahalaan ng Pilipinas Inc. v. Tan, 163
SCRA 371)
With particular regard to the requirement of proper party as
applied in the cases before us, We hold that the same is satisfied
by the petitioners and intervenors because each of them has
sustained or is in danger of sustaining an immediate injury as a
result of the acts or measures complained of. And even if, strictly
speaking they are not covered by the definition, it is still within the
wide discretion of the Court to waive the requirement and so
remove the impediment to its addressing and resolving the serious
constitutional questions raised.
In the first Emergency Powers Cases, ordinary citizens and
taxpayers were allowed to question the constitutionality of several
executive orders issued by President Quirino although they were
involving only an indirect and general interest shared in common
with the public. The Court dismissed the objection that they were
not proper parties and ruled that "the transcendental importance to
the public of these cases demands that they be settled promptly
and definitely, brushing aside, if we must technicalities of
procedure." We have since then applied the exception in many
other cases. (Association of Small Landowners in the Philippines,
Inc. v. Sec. of Agrarian Reform, 175 SCRA 343).
Having disposed of the procedural issue, We will now discuss the
substantive issues raised.
Gambling in all its forms, unless allowed by law, is generally
prohibited. But the prohibition of gambling does not mean that the
Government cannot regulate it in the exercise of its police power.
The concept of police power is well-established in this jurisdiction.
It has been defined as the "state authority to enact legislation that
may interfere with personal liberty or property in order to promote
the general welfare." (Edu v. Ericta, 35 SCRA 481, 487) As defined,
it consists of (1) an imposition or restraint upon liberty or property,
(2) in order to foster the common good. It is not capable of an
exact definition but has been, purposely, veiled in general terms to
underscore its all-comprehensive embrace. (Philippine Association
of Service Exporters, Inc. v. Drilon, 163 SCRA 386).
Its scope, ever-expanding to meet the exigencies of the times,
even to anticipate the future where it could be done, provides
enough room for an efficient and flexible response to conditions
and circumstances thus assuming the greatest benefits. (Edu v.
Ericta, supra)
It finds no specific Constitutional grant for the plain reason that it
does not owe its origin to the charter. Along with the taxing power
and eminent domain, it is inborn in the very fact of statehood and
sovereignty. It is a fundamental attribute of government that has
enabled it to perform the most vital functions of governance.
Marshall, to whom the expression has been credited, refers to it
succinctly as the plenary power of the state "to govern its citizens".
(Tribe, American Constitutional Law, 323, 1978). The police power
of the State is a power co-extensive with self-protection and is
most aptly termed the "law of overwhelming necessity." (Rubi v.
Provincial Board of Mindoro, 39 Phil. 660, 708) It is "the most
essential, insistent, and illimitable of powers." (Smith Bell & Co. v.
National, 40 Phil. 136) It is a dynamic force that enables the state
to meet the agencies of the winds of change.
What was the reason behind the enactment of P.D. 1869?
P.D. 1869 was enacted pursuant to the policy of the government to
"regulate and centralize thru an appropriate institution all games of
chance authorized by existing franchise or permitted by law" (1st
whereas clause, PD 1869). As was subsequently proved, regulating
and centralizing gambling operations in one corporate entity — the
PAGCOR, was beneficial not just to the Government but to society
in general. It is a reliable source of much needed revenue for the
cash strapped Government. It provided funds for social impact
projects and subjected gambling to "close scrutiny, regulation,
supervision and control of the Government" (4th Whereas Clause,
PD 1869). With the creation of PAGCOR and the direct intervention
of the Government, the evil practices and corruptions that go with
gambling will be minimized if not totally eradicated. Public welfare,
then, lies at the bottom of the enactment of PD 1896.
Petitioners contend that P.D. 1869 constitutes a waiver of the right
of the City of Manila to impose taxes and legal fees; that the
exemption clause in P.D. 1869 is violative of the principle of local
autonomy. They must be referring to Section 13 par. (2) of P.D.
1869 which exempts PAGCOR, as the franchise holder from paying
any "tax of any kind or form, income or otherwise, as well as fees,
charges or levies of whatever nature, whether National or Local."
(2) Income and other taxes. — a) Franchise Holder: No tax of any
kind or form, income or otherwise as well as fees, charges or levies
of whatever nature, whether National or Local, shall be assessed
and collected under this franchise from the Corporation; nor shall
any form or tax or charge attach in any way to the earnings of the
Corporation, except a franchise tax of five (5%) percent of the
gross revenues or earnings derived by the Corporation from its
operations under this franchise. Such tax shall be due and payable
quarterly to the National Government and shall be in lieu of all
kinds of taxes, levies, fees or assessments of any kind, nature or
description, levied, established or collected by any municipal,
provincial or national government authority (Section 13 [2]).
Their contention stated hereinabove is without merit for the
following reasons:
(a) The City of Manila, being a mere Municipal corporation has no
inherent right to impose taxes (Icard v. City of Baguio, 83 Phil.
870; City of Iloilo v. Villanueva, 105 Phil. 337; Santos v.
Municipality of Caloocan, 7 SCRA 643). Thus, "the Charter or
statute must plainly show an intent to confer that power or the
municipality cannot assume it" (Medina v. City of Baguio, 12 SCRA
62). Its "power to tax" therefore must always yield to a legislative
act which is superior having been passed upon by the state itself
which has the "inherent power to tax" (Bernas, the Revised [1973]
Philippine Constitution, Vol. 1, 1983 ed. p. 445).
(b) The Charter of the City of Manila is subject to control by
Congress. It should be stressed that "municipal corporations are
mere creatures of Congress" (Unson v. Lacson, G.R. No. 7909,
January 18, 1957) which has the power to "create and abolish
municipal corporations" due to its "general legislative powers"
(Asuncion v. Yriantes, 28 Phil. 67; Merdanillo v. Orandia, 5 SCRA
541). Congress, therefore, has the power of control over Local
governments (Hebron v. Reyes, G.R. No. 9124, July 2, 1950). And
if Congress can grant the City of Manila the power to tax certain
matters, it can also provide for exemptions or even take back the
power.
(c) The City of Manila's power to impose license fees on gambling,
has long been revoked. As early as 1975, the power of local
governments to regulate gambling thru the grant of "franchise,
licenses or permits" was withdrawn by P.D. No. 771 and was
vested exclusively on the National Government, thus:
Sec. 1. Any provision of law to the contrary notwithstanding, the
authority of chartered cities and other local governments to issue
license, permit or other form of franchise to operate, maintain and
establish horse and dog race tracks, jai-alai and other forms of
gambling is hereby revoked.
Sec. 2. Hereafter, all permits or franchises to operate, maintain
and establish, horse and dog race tracks, jai-alai and other forms
of gambling shall be issued by the national government upon
proper application and verification of the qualification of the
applicant . . .
Therefore, only the National Government has the power to issue
"licenses or permits" for the operation of gambling. Necessarily,
the power to demand or collect license fees which is a consequence
of the issuance of "licenses or permits" is no longer vested in the
City of Manila.
(d) Local governments have no power to tax instrumentalities of
the National Government. PAGCOR is a government owned or
controlled corporation with an original charter, PD 1869. All of its
shares of stocks are owned by the National Government. In
addition to its corporate powers (Sec. 3, Title II, PD 1869) it also
exercises regulatory powers thus:
Sec. 9. Regulatory Power. — The Corporation shall maintain a
Registry of the affiliated entities, and shall exercise all the powers,
authority and the responsibilities vested in the Securities and
Exchange Commission over such affiliating entities mentioned
under the preceding section, including, but not limited to
amendments of Articles of Incorporation and By-Laws, changes in
corporate term, structure, capitalization and other matters
concerning the operation of the affiliated entities, the provisions of
the Corporation Code of the Philippines to the contrary
notwithstanding, except only with respect to original incorporation.
PAGCOR has a dual role, to operate and to regulate gambling
casinos. The latter role is governmental, which places it in the
category of an agency or instrumentality of the Government. Being
an instrumentality of the Government, PAGCOR should be and
actually is exempt from local taxes. Otherwise, its operation might
be burdened, impeded or subjected to control by a mere Local
government.
The states have no power by taxation or otherwise, to retard,
impede, burden or in any manner control the operation of
constitutional laws enacted by Congress to carry into execution the
powers vested in the federal government. (MC Culloch v. Marland,
4 Wheat 316, 4 L Ed. 579)
This doctrine emanates from the "supremacy" of the National
Government over local governments.
Justice Holmes, speaking for the Supreme Court, made reference
to the entire absence of power on the part of the States to touch,
in that way (taxation) at least, the instrumentalities of the United
States (Johnson v. Maryland, 254 US 51) and it can be agreed
that no state or political subdivision can regulate a federal
instrumentality in such a way as to prevent it from consummating
its federal responsibilities, or even to seriously burden it in the
accomplishment of them. (Antieau, Modern Constitutional Law, Vol.
2, p. 140, emphasis supplied)
Otherwise, mere creatures of the State can defeat National policies
thru extermination of what local authorities may perceive to be
undesirable activities or enterprise using the power to tax as "a
tool for regulation" (U.S. v. Sanchez, 340 US 42).
The power to tax which was called by Justice Marshall as the
"power to destroy" (Mc Culloch v. Maryland, supra) cannot be
allowed to defeat an instrumentality or creation of the very entity
which has the inherent power to wield it.
(e) Petitioners also argue that the Local Autonomy Clause of the
Constitution will be violated by P.D. 1869. This is a pointless
argument. Article X of the 1987 Constitution (on Local Autonomy)
provides:
Sec. 5. Each local government unit shall have the power to create
its own source of revenue and to levy taxes, fees, and other
charges subject to such guidelines and limitation as the congress
may provide, consistent with the basic policy on local autonomy.
Such taxes, fees and charges shall accrue exclusively to the local
government. (emphasis supplied)
The power of local government to "impose taxes and fees" is
always subject to "limitations" which Congress may provide by law.
Since PD 1869 remains an "operative" law until "amended,
repealed or revoked" (Sec. 3, Art. XVIII, 1987 Constitution), its
"exemption clause" remains as an exception to the exercise of the
power of local governments to impose taxes and fees. It cannot
therefore be violative but rather is consistent with the principle of
local autonomy.
Besides, the principle of local autonomy under the 1987
Constitution simply means "decentralization" (III Records of the
1987 Constitutional Commission, pp. 435-436, as cited in Bernas,
The Constitution of the Republic of the Philippines, Vol. II, First Ed.,
1988, p. 374). It does not make local governments sovereign
within the state or an "imperium in imperio."
Local Government has been described as a political subdivision of a
nation or state which is constituted by law and has substantial
control of local affairs. In a unitary system of government, such as
the government under the Philippine Constitution, local
governments can only be an intra sovereign subdivision of one
sovereign nation, it cannot be an imperium in imperio. Local
government in such a system can only mean a measure of
decentralization of the function of government. (emphasis
supplied)
As to what state powers should be "decentralized" and what may
be delegated to local government units remains a matter of policy,
which concerns wisdom. It is therefore a political question.
(Citizens Alliance for Consumer Protection v. Energy Regulatory
Board, 162 SCRA 539).
What is settled is that the matter of regulating, taxing or otherwise
dealing with gambling is a State concern and hence, it is the sole
prerogative of the State to retain it or delegate it to local
governments.
As gambling is usually an offense against the State, legislative
grant or express charter power is generally necessary to empower
the local corporation to deal with the subject. . . . In the absence of
express grant of power to enact, ordinance provisions on this
subject which are inconsistent with the state laws are void. (Ligan
v. Gadsden, Ala App. 107 So. 733 Ex-Parte Solomon, 9, Cals. 440,
27 PAC 757 following in re Ah You, 88 Cal. 99, 25 PAC 974, 22 Am
St. Rep. 280, 11 LRA 480, as cited in Mc Quinllan Vol. 3 Ibid, p.
548, emphasis supplied)
Petitioners next contend that P.D. 1869 violates the equal
protection clause of the Constitution, because "it legalized PAGCOR
— conducted gambling, while most gambling are outlawed together
with prostitution, drug trafficking and other vices" (p. 82, Rollo).
We, likewise, find no valid ground to sustain this contention. The
petitioners' posture ignores the well-accepted meaning of the
clause "equal protection of the laws." The clause does not preclude
classification of individuals who may be accorded different
treatment under the law as long as the classification is not
unreasonable or arbitrary (Itchong v. Hernandez, 101 Phil. 1155).
A law does not have to operate in equal force on all persons or
things to be conformable to Article III, Section 1 of the Constitution
(DECS v. San Diego, G.R. No. 89572, December 21, 1989).
The "equal protection clause" does not prohibit the Legislature from
establishing classes of individuals or objects upon which different
rules shall operate (Laurel v. Misa, 43 O.G. 2847). The Constitution
does not require situations which are different in fact or opinion to
be treated in law as though they were the same (Gomez v.
Palomar, 25 SCRA 827).
Just how P.D. 1869 in legalizing gambling conducted by PAGCOR is
violative of the equal protection is not clearly explained in the
petition. The mere fact that some gambling activities like
cockfighting (P.D 449) horse racing (R.A. 306 as amended by RA
983), sweepstakes, lotteries and races (RA 1169 as amended by
B.P. 42) are legalized under certain conditions, while others are
prohibited, does not render the applicable laws, P.D. 1869 for one,
unconstitutional.
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. (Gomez v. Palomar, 25 SCRA 827)
The equal protection clause of the 14th Amendment does not mean
that all occupations called by the same name must be treated the
same way; the state may do what it can to prevent which is
deemed as evil and stop short of those cases in which harm to the
few concerned is not less than the harm to the public that would
insure if the rule laid down were made mathematically exact.
(Dominican Hotel v. Arizona, 249 US 2651).
Anent petitioners' claim that PD 1869 is contrary to the "avowed
trend of the Cory Government away from monopolies and crony
economy and toward free enterprise and privatization" suffice it to
state that this is not a ground for this Court to nullify P.D. 1869. If,
indeed, PD 1869 runs counter to the government's policies then it
is for the Executive Department to recommend to Congress its
repeal or amendment.
The judiciary does not settle policy issues. The Court can only
declare what the law is and not what the law should
be.1âwphi1 Under our system of government, policy issues are
within the domain of the political branches of government and of
the people themselves as the repository of all state power.
(Valmonte v. Belmonte, Jr., 170 SCRA 256).
On the issue of "monopoly," however, the Constitution provides
that:
Sec. 19. The State shall regulate or prohibit monopolies when
public interest so requires. No combinations in restraint of trade or
unfair competition shall be allowed. (Art. XII, National Economy
and Patrimony)
It should be noted that, as the provision is worded, monopolies are
not necessarily prohibited by the Constitution. The state must still
decide whether public interest demands that monopolies be
regulated or prohibited. Again, this is a matter of policy for the
Legislature to decide.
On petitioners' allegation that P.D. 1869 violates Sections 11
(Personality Dignity) 12 (Family) and 13 (Role of Youth) of Article
II; Section 13 (Social Justice) of Article XIII and Section 2
(Educational Values) of Article XIV of the 1987 Constitution, suffice
it to state also that these are merely statements of principles and,
policies. As such, they are basically not self-executing, meaning a
law should be passed by Congress to clearly define and effectuate
such principles.
In general, therefore, the 1935 provisions were not intended to be
self-executing principles ready for enforcement through the courts.
They were rather directives addressed to the executive and the
legislature. If the executive and the legislature failed to heed the
directives of the articles the available remedy was not judicial or
political. The electorate could express their displeasure with the
failure of the executive and the legislature through the language of
the ballot. (Bernas, Vol. II, p. 2)
Every law has in its favor the presumption of constitutionality (Yu
Cong Eng v. Trinidad, 47 Phil. 387; Salas v. Jarencio, 48 SCRA
734; Peralta v. Comelec, 82 SCRA 30; Abbas v. Comelec, 179
SCRA 287). Therefore, for PD 1869 to be nullified, it must be
shown that there is a clear and unequivocal breach of the
Constitution, not merely a doubtful and equivocal one. In other
words, the grounds for nullity must be clear and beyond reasonable
doubt. (Peralta v. Comelec, supra) Those who petition this Court to
declare a law, or parts thereof, unconstitutional must clearly
establish the basis for such a declaration. Otherwise, their petition
must fail. Based on the grounds raised by petitioners to challenge
the constitutionality of P.D. 1869, the Court finds that petitioners
have failed to overcome the presumption. The dismissal of this
petition is therefore, inevitable. But as to whether P.D. 1869
remains a wise legislation considering the issues of "morality,
monopoly, trend to free enterprise, privatization as well as the
state principles on social justice, role of youth and educational
values" being raised, is up for Congress to determine.

As this Court held in Citizens' Alliance for Consumer Protection v.

Energy Regulatory Board, 162 SCRA 521 —

Presidential Decree No. 1956, as amended by Executive Order No.

137 has, in any case, in its favor the presumption of validity and
constitutionality which petitioners Valmonte and the KMU have not
overturned. Petitioners have not undertaken to identify the
provisions in the Constitution which they claim to have been
violated by that statute. This Court, however, is not compelled to
speculate and to imagine how the assailed legislation may possibly
offend some provision of the Constitution. The Court notes, further,
in this respect that petitioners have in the main put in question the
wisdom, justice and expediency of the establishment of the OPSF,
issues which are not properly addressed to this Court and which
this Court may not constitutionally pass upon. Those issues should
be addressed rather to the political departments of government:
the President and the Congress.

Parenthetically, We wish to state that gambling is generally

immoral, and this is precisely so when the gambling resorted to is
excessive. This excessiveness necessarily depends not only on the
financial resources of the gambler and his family but also on his
mental, social, and spiritual outlook on life. However, the mere fact
that some persons may have lost their material fortunes, mental
control, physical health, or even their lives does not necessarily
mean that the same are directly attributable to
gambling. Gambling may have been the antecedent, but certainly
not necessarily the cause. For the same consequences could have
been preceded by an overdose of food, drink, exercise, work, and
even sex.

WHEREFORE, the petition is DISMISSED for lack of merit.

SO ORDERED.
G.R. No. 162015 March 6, 2006
THE CITY GOVERNMENT OF QUEZON CITY, AND THE CITY
TREASURER OF QUEZON CITY, DR. VICTOR B.
ENRIGA, Petitioners,
vs.
BAYAN TELECOMMUNICATIONS, INC., Respondent.
DECISION
GARCIA,J.:
Before the Court, on pure questions of law, is this petition for
review on certiorari under Rule 45 of the Rules of Court to nullify
and set aside the following issuances of the Regional Trial Court
(RTC) of Quezon City, Branch 227, in its Civil Case No. Q-02-
47292, to wit:
1) Decision1 dated June 6, 2003, declaring respondent Bayan
Telecommunications, Inc. exempt from real estate taxation on its
real properties located in Quezon City; and
2) Order2 dated December 30, 2003, denying petitioners’ motion
for reconsideration.
The facts:
3
Respondent Bayan Telecommunications, Inc. (Bayantel) is a
legislative franchise holder under Republic Act (Rep. Act) No.
32594 to establish and operate radio stations for domestic
telecommunications, radiophone, broadcasting and telecasting.
Of relevance to this controversy is the tax provision of Rep. Act No.
3259, embodied in Section 14 thereof, which reads:
SECTION 14. (a) The grantee shall be liable to pay the same taxes
on its real estate, buildings and personal property, exclusive of the
franchise, as other persons or corporations are now or hereafter
may be required by law to pay. (b) The grantee shall further pay to
the Treasurer of the Philippines each year, within ten days after the
audit and approval of the accounts as prescribed in this Act, one
and one-half per centum of all gross receipts from the business
transacted under this franchise by the said grantee (Emphasis
supplied).
On January 1, 1992, Rep. Act No. 7160, otherwise known as the
"Local Government Code of 1991" (LGC), took effect. Section 232
of the Code grants local government units within the Metro Manila
Area the power to levy tax on real properties, thus:
SEC. 232. – Power to Levy Real Property Tax. – A province or city
or a municipality within the Metropolitan Manila Area may levy an
annual ad valorem tax on real property such as land, building,
machinery and other improvements not hereinafter specifically
exempted.
Complementing the aforequoted provision is the second paragraph
of Section 234 of the same Code which withdrew any exemption
from realty tax heretofore granted to or enjoyed by all persons,
natural or juridical, to wit:
SEC. 234 - Exemptions from Real Property Tax. The following are
exempted from payment of the real property tax:
xxx xxx xxx
Except as provided herein, any exemption from payment of real
property tax previously granted to, or enjoyed by, all persons,
whether natural or juridical, including government-owned-or-
controlled corporations is hereby withdrawn upon effectivity of this
Code (Emphasis supplied).
On July 20, 1992, barely few months after the LGC took effect,
Congress enacted Rep. Act No. 7633, amending Bayantel’s original
franchise. The amendatory law (Rep. Act No. 7633) contained the
following tax provision:
SEC. 11. The grantee, its successors or assigns shall be liable to
pay the same taxes on their real estate, buildings and personal
property, exclusive of this franchise, as other persons or
corporations are now or hereafter may be required by law to pay.
In addition thereto, the grantee, its successors or assigns shall pay
a franchise tax equivalent to three percent (3%) of all gross
receipts of the telephone or other telecommunications businesses
transacted under this franchise by the grantee, its successors or
assigns and the said percentage shall be in lieu of all taxes on this
franchise or earnings thereof. Provided, That the grantee, its
successors or assigns shall continue to be liable for income taxes
payable under Title II of the National Internal Revenue Code ….
xxx. [Emphasis supplied]
It is undisputed that within the territorial boundary of Quezon City,
Bayantel owned several real properties on which it maintained
various telecommunications facilities. These real properties, as
hereunder described, are covered by the following tax declarations:
(a) Tax Declaration Nos. D-096-04071, D-096-04074, D-096-
04072 and D-096-04073 pertaining to Bayantel’s Head Office and
Operations Center in Roosevelt St., San Francisco del Monte,
Quezon City allegedly the nerve center of petitioner’s
telecommunications franchise operations, said Operation Center
housing mainly petitioner’s Network Operations Group and
switching, transmission and related equipment;
(b) Tax Declaration Nos. D-124-01013, D-124-00939, D-124-
00920 and D-124-00941 covering Bayantel’s land, building and
equipment in Maginhawa St., Barangay East Teacher’s Village,
Quezon City which houses telecommunications facilities; and
(c) Tax Declaration Nos. D-011-10809, D-011-10810, D-011-
10811, and D-011-11540 referring to Bayantel’s Exchange Center
located in Proj. 8, Brgy. Bahay Toro, Tandang Sora, Quezon City
which houses the Network Operations Group and cover switching,
transmission and other related equipment.
In 1993, the government of Quezon City, pursuant to the taxing
power vested on local government units by Section 5, Article X of
the 1987 Constitution, infra, in relation to Section 232 of the LGC,
supra, enacted City Ordinance No. SP-91, S-93, otherwise known
as the Quezon City Revenue Code (QCRC),5 imposing, under
Section 5 thereof, a real property tax on all real properties in
Quezon City, and, reiterating in its Section 6, the withdrawal of
exemption from real property tax under Section 234 of the LGC,
supra. Furthermore, much like the LGC, the QCRC, under its
Section 230, withdrew tax exemption privileges in general, as
follows:
SEC. 230. 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 RA
6938, non-stock and non-profit hospitals and educational
institutions, business enterprises certified by the Board of
Investments (BOI) as pioneer or non-pioneer for a period of six (6)
and four (4) years, respectively, … are hereby withdrawn effective
upon approval of this Code (Emphasis supplied).
Conformably with the City’s Revenue Code, new tax declarations
for Bayantel’s real properties in Quezon City were issued by the
City Assessor and were received by Bayantel on August 13, 1998,
except one (Tax Declaration No. 124-01013) which was received
on July 14, 1999.
Meanwhile, on March 16, 1995, Rep. Act No. 7925,6 otherwise
known as the "Public Telecommunications Policy Act of the
Philippines," envisaged to level the playing field among
telecommunications companies, took effect. Section 23 of the Act
provides:
SEC. 23. Equality of Treatment in the Telecommunications
Industry. – Any advantage, favor, privilege, exemption, or
immunity granted under existing franchises, or may hereafter be
granted, shall ipso facto become part of previously granted
telecommunications franchises and shall be accorded immediately
and unconditionally to the grantees of such franchises: Provided,
however, That the foregoing shall neither apply to nor affect
provisions of telecommunications franchises concerning territory
covered by the franchise, the life span of the franchise, or the type
of service authorized by the franchise.
On January 7, 1999, Bayantel wrote the office of the City Assessor
seeking the exclusion of its real properties in the city from the roll
of taxable real properties. With its request having been denied,
Bayantel interposed an appeal with the Local Board of Assessment
Appeals (LBAA). And, evidently on its firm belief of its exempt
status, Bayantel did not pay the real property taxes assessed
against it by the Quezon City government.
On account thereof, the Quezon City Treasurer sent out notices of
delinquency for the total amount of P43,878,208.18, followed by
the issuance of several warrants of levy against Bayantel’s
properties preparatory to their sale at a public auction set on July
30, 2002.
Threatened with the imminent loss of its properties, Bayantel
immediately withdrew its appeal with the LBAA and instead filed
with the RTC of Quezon City a petition for prohibition with an
urgent application for a temporary restraining order (TRO) and/or
writ of preliminary injunction, thereat docketed as Civil Case No. Q-
02-47292, which was raffled to Branch 227 of the court.
On July 29, 2002, or in the eve of the public auction scheduled the
following day, the lower court issued a TRO, followed, after due
hearing, by a writ of preliminary injunction via its order of August
20, 2002.
And, having heard the parties on the merits, the same court came
out with its challenged Decision of June 6, 2003, the dispositive
portion of which reads:
WHEREFORE, premises considered, pursuant to the enabling
franchise under Section 11 of Republic Act No. 7633, the real
estate properties and buildings of petitioner [now, respondent
Bayantel] which have been admitted to be used in the operation of
petitioner’s franchise described in the following tax declarations are
hereby DECLARED exempt from real estate taxation:
(1) Tax Declaration No. D-096-04071 –
(2) Tax Declaration No. D-096-04074 –
(3) Tax Declaration No. D-124-01013 –
(4) Tax Declaration No. D-011-10810 –
(5) Tax Declaration No. D-011-10811 –
(6) Tax Declaration No. D-011-10809 –
(7) Tax Declaration No. D-124-00941 –
(8) Tax Declaration No. D-124-00940 –
(9) Tax Declaration No. D-124-00939 –
(10) Tax Declaration No. D-096-04072 –
(11) Tax Declaration No. D-096-04073 –
(12) Tax Declaration No. D-011-11540 –
The preliminary prohibitory injunction issued in the August 20,
2002 Order of this Court is hereby made permanent. Since this is a
resolution of a purely legal issue, there is no pronouncement as to
costs.
SO ORDERED.
Their motion for reconsideration having been denied by the court in
its Order dated December 30, 2003, petitioners elevated the case
directly to this Court on pure questions of law, ascribing to the
lower court the following errors:
I. [I]n declaring the real properties of respondent exempt from real
property taxes notwithstanding the fact that the tax exemption
granted to Bayantel in its original franchise had been withdrawn by
the [LGC] and that the said exemption was not restored by the
enactment of RA 7633.
II. [In] declaring the real properties of respondent exempt from
real property taxes notwithstanding the enactment of the [QCRC]
which withdrew the tax exemption which may have been granted
by RA 7633.
III. [In] declaring the real properties of respondent exempt from
real property taxes notwithstanding the vague and ambiguous
grant of tax exemption provided under Section 11 of RA 7633.
IV. [In] declaring the real properties of respondent exempt from
real property taxes notwithstanding the fact that [it] had failed to
exhaust administrative remedies in its claim for real property tax
exemption. (Words in bracket added.)
As we see it, the errors assigned may ultimately be reduced to two
(2) basic issues, namely:
1. Whether or not Bayantel’s real properties in Quezon City are
exempt from real property taxes under its legislative franchise; and
2. Whether or not Bayantel is required to exhaust administrative
remedies before seeking judicial relief with the trial court.
We shall first address the second issue, the same being procedural
in nature.
Petitioners argue that Bayantel had failed to avail itself of the
administrative remedies provided for under the LGC, adding that
the trial court erred in giving due course to Bayantel’s petition for
prohibition. To petitioners, the appeal mechanics under the LGC
constitute Bayantel’s plain and speedy remedy in this case.
The Court does not agree.
Petitions for prohibition are governed by the following provision of
Rule 65 of the Rules of Court:
SEC. 2. Petition for prohibition. – When the proceedings of any
tribunal, … are without or in excess of its or his jurisdiction, or with
grave abuse of discretion amounting to lack or excess of
jurisdiction, and there is no appeal or any other plain, speedy, and
adequate remedy in the ordinary course of law, a person aggrieved
thereby may file a verified petition in the proper court, alleging the
facts with certainty and praying that judgment be rendered
commanding the respondent to desist from further proceedings in
the action or matter specified therein, or otherwise, granting such
incidental reliefs as law and justice may require.
With the reality that Bayantel’s real properties were already levied
upon on account of its nonpayment of real estate taxes thereon,
the Court agrees with Bayantel that an appeal to the LBAA is not a
speedy and adequate remedy within the context of the aforequoted
Section 2 of Rule 65. This is not to mention of the auction sale of
said properties already scheduled on July 30, 2002.
Moreover, one of the recognized exceptions to the exhaustion- of-
administrative remedies rule is when, as here, only legal issues are
to be resolved. In fact, the Court, cognizant of the nature of the
questions presently involved, gave due course to the instant
petition. As the Court has said in Ty vs. Trampe: 7
xxx. Although as a rule, administrative remedies must first be
exhausted before resort to judicial action can prosper, there is a
well-settled exception in cases where the controversy does not
involve questions of fact but only of law. xxx.
Lest it be overlooked, an appeal to the LBAA, to be properly
considered, required prior payment under protest of the amount
of P43,878,208.18, a figure which, in the light of the then
prevailing Asian financial crisis, may have been difficult to raise up.
Given this reality, an appeal to the LBAA may not be considered as
a plain, speedy and adequate remedy. It is thus understandable
why Bayantel opted to withdraw its earlier appeal with the LBAA
and, instead, filed its petition for prohibition with urgent application
for injunctive relief in Civil Case No. Q-02-47292. The remedy
availed of by Bayantel under Section 2, Rule 65 of the Rules of
Court must be upheld.
This brings the Court to the more weighty question of whether or
not Bayantel’s real properties in Quezon City are, under its
franchise, exempt from real property tax.
The lower court resolved the issue in the affirmative, basically
owing to the phrase "exclusive of this franchise" found in Section
11 of Bayantel’s amended franchise, Rep. Act No. 7633. To
petitioners, however, the language of Section 11 of Rep. Act No.
7633 is neither clear nor unequivocal. The elaborate and extensive
discussion devoted by the trial court on the meaning and import of
said phrase, they add, suggests as much. It is petitioners’ thesis
that Bayantel was in no time given any express exemption from
the payment of real property tax under its amendatory franchise.
There seems to be no issue as to Bayantel’s exemption from real
estate taxes by virtue of the term "exclusive of the franchise"
qualifying the phrase "same taxes on its real estate, buildings and
personal property," found in Section 14, supra, of its franchise,
Rep. Act No. 3259, as originally granted.
The legislative intent expressed in the phrase "exclusive of this
franchise" cannot be construed other than distinguishing between
two (2) sets of properties, be they real or personal, owned by the
franchisee, namely, (a) those actually, directly and exclusively
used in its radio or telecommunications business, and (b) those
properties which are not so used. It is worthy to note that the
properties subject of the present controversy are only those which
are admittedly falling under the first category.
To the mind of the Court, Section 14 of Rep. Act No. 3259
effectively works to grant or delegate to local governments of
Congress’ inherent power to tax the franchisee’s properties
belonging to the second group of properties indicated above, that
is, all properties which, "exclusive of this franchise," are not
actually and directly used in the pursuit of its franchise. As may be
recalled, the taxing power of local governments under both the
1935 and the 1973 Constitutions solely depended upon an enabling
law. Absent such enabling law, local government units were
without authority to impose and collect taxes on real properties
within their respective territorial jurisdictions. While Section 14 of
Rep. Act No. 3259 may be validly viewed as an implied delegation
of power to tax, the delegation under that provision, as couched, is
limited to impositions over properties of the franchisee which are
not actually, directly and exclusively used in the pursuit of its
franchise. Necessarily, other properties of Bayantel directly used in
the pursuit of its business are beyond the pale of the delegated
taxing power of local governments. In a very real sense, therefore,
real properties of Bayantel, save those exclusive of its franchise,
are subject to realty taxes. Ultimately, therefore, the inevitable
result was that all realties which are actually, directly and
exclusively used in the operation of its franchise are "exempted"
from any property tax.
Bayantel’s franchise being national in character, the "exemption"
thus granted under Section 14 of Rep. Act No. 3259 applies to all
its real or personal properties found anywhere within the Philippine
archipelago.
However, with the LGC’s taking effect on January 1, 1992,
Bayantel’s "exemption" from real estate taxes for properties of
whatever kind located within the Metro Manila area was, by force
of Section 234 of the Code, supra, expressly withdrawn. But, not
long thereafter, however, or on July 20, 1992, Congress passed
Rep. Act No. 7633 amending Bayantel’s original franchise. Worthy
of note is that Section 11 of Rep. Act No. 7633 is a virtual
reenacment of the tax provision, i.e., Section 14, supra, of
Bayantel’s original franchise under Rep. Act No. 3259. Stated
otherwise, Section 14 of Rep. Act No. 3259 which was deemed
impliedly repealed by Section 234 of the LGC was expressly revived
under Section 14 of Rep. Act No. 7633. In concrete terms, the
realty tax exemption heretofore enjoyed by Bayantel under its
original franchise, but subsequently withdrawn by force of Section
234 of the LGC, has been restored by Section 14 of Rep. Act No.
7633.
The Court has taken stock of the fact that by virtue of Section 5,
Article X of the 1987 Constitution,8 local governments are
empowered to levy taxes. And pursuant to this constitutional
empowerment, juxtaposed with Section 2329 of the LGC, the
Quezon City government enacted in 1993 its local Revenue Code,
imposing real property tax on all real properties found within its
territorial jurisdiction. And as earlier stated, the City’s Revenue
Code, just like the LGC, expressly withdrew, under Section 230
thereof, supra, all tax exemption privileges in general.
This thus raises the question of whether or not the City’s Revenue
Code pursuant to which the city treasurer of Quezon City levied
real property taxes against Bayantel’s real properties located within
the City effectively withdrew the tax exemption enjoyed by
Bayantel under its franchise, as amended.
Bayantel answers the poser in the negative arguing that once again
it is only "liable to pay the same taxes, as any other persons or
corporations on all its real or personal properties, exclusive of its
franchise."
Bayantel’s posture is well-taken. While the system of local
government taxation has changed with the onset of the 1987
Constitution, the power of local government units to tax is still
limited. As we explained in Mactan Cebu International Airport
Authority:10
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 be virtue of a valid delegation as before, but
pursuant to direct authority conferred by Section 5, Article X of the
Constitution. 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. (at p. 680; Emphasis supplied.)
Clearly then, while a new slant on the subject of local taxation now
prevails in the sense that the former doctrine of local government
units’ delegated power to tax had been effectively modified with
Article X, Section 5 of the 1987 Constitution now in place, .the
basic doctrine on local taxation remains essentially the same. For
as the Court stressed in Mactan, "the power to tax is [still]
primarily vested in the Congress."
This new perspective is best articulated by Fr. Joaquin G. Bernas,
S.J., himself a Commissioner of the 1986 Constitutional
Commission which crafted the 1987 Constitution, thus:
What is the effect of Section 5 on the fiscal position of municipal
corporations? Section 5 does not change the doctrine that
municipal corporations do not possess inherent powers of taxation.
What it does is to confer municipal corporations a general power to
levy taxes and otherwise create sources of revenue. They no longer
have to wait for a statutory grant of these powers. The power of
the legislative authority relative to the fiscal powers of local
governments has been reduced to the authority to impose
limitations on municipal powers. Moreover, these limitations must
be "consistent with the basic policy of local autonomy." The
important legal effect of Section 5 is thus to reverse the principle
that doubts are resolved against municipal corporations.
Henceforth, in interpreting statutory provisions on municipal fiscal
powers, doubts will be resolved in favor of municipal corporations.
It is understood, however, that taxes imposed by local government
must be for a public purpose, uniform within a locality, must not be
confiscatory, and must be within the jurisdiction of the local unit to
pass.11 (Emphasis supplied).
In net effect, the controversy presently before the Court involves,
at bottom, a clash between the inherent taxing power of the
legislature, which necessarily includes the power to exempt, and
the local government’s delegated power to tax under the aegis of
the 1987 Constitution.
Now to go back to the Quezon City Revenue Code which imposed
real estate taxes on all real properties within the city’s territory and
removed exemptions theretofore "previously granted to, or
presently enjoyed by all persons, whether natural or juridical
….,"12 there can really be no dispute that the power of the Quezon
City Government to tax is limited by Section 232 of the LGC which
expressly provides that "a province or city or municipality within
the Metropolitan Manila Area may levy an annual ad valorem tax
on real property such as land, building, machinery, and other
improvement not hereinafter specifically exempted." Under this
law, the Legislature highlighted its power to thereafter exempt
certain realties from the taxing power of local government units.
An interpretation denying Congress such power to exempt would
reduce the phrase "not hereinafter specifically exempted" as a pure
jargon, without meaning whatsoever. Needless to state, such
absurd situation is unacceptable.
taxes on their real estate, buildings and personal property,
exclusive of this franchise, as other persons or corporations are
now or hereafter may be required by law to pay." The Court views
this subsequent piece of legislation as an express and real intention
on the part of Congress to once again remove from the LGC’s
delegated taxing power, all of the franchisee’s (Bayantel’s)
properties that are actually, directly and exclusively used in the
pursuit of its franchise.
WHEREFORE, the petition is DENIED.
No pronouncement as to costs.
SO ORDERED.

For sure, in Philippine Long Distance Telephone Company, Inc.

(PLDT) vs. City of Davao,13 this Court has upheld the power of
Congress to grant exemptions over the power of local government
units to impose taxes. There, the Court wrote:

Indeed, the grant of taxing powers to local government units under

the Constitution and the LGC does not affect the power of Congress
to grant exemptions to certain persons, pursuant to a declared
national policy. The legal effect of the constitutional grant to local
governments simply means that in interpreting statutory provisions
on municipal taxing powers, doubts must be resolved in favor of
municipal corporations. (Emphasis supplied.)

As we see it, then, the issue in this case no longer dwells on

whether Congress has the power to exempt Bayantel’s properties
from realty taxes by its enactment of Rep. Act No. 7633 which
amended Bayantel’s original franchise. The more decisive question
turns on whether Congress actually did exempt Bayantel’s
properties at all by virtue of Section 11 of Rep. Act No. 7633.

Admittedly, Rep. Act No. 7633 was enacted subsequent to the LGC.
Perfectly aware that the LGC has already withdrawn Bayantel’s
former exemption from realty taxes, Congress opted to pass Rep.
Act No. 7633 using, under Section 11 thereof, exactly the same
defining phrase "exclusive of this franchise" which was the basis for
Bayantel’s exemption from realty taxes prior to the LGC. In plain
language, Section 11 of Rep. Act No. 7633 states that "the
grantee, its successors or assigns shall be liable to pay the same
G.R. No. 168056 September 1, 2005
ABAKADA GURO PARTY LIST (Formerly AASJAS) OFFICERS
SAMSON S. ALCANTARA and ED VINCENT S.
ALBANO, Petitioners,
vs.
THE HONORABLE EXECUTIVE SECRETARY EDUARDO
ERMITA; HONORABLE SECRETARY OF THE DEPARTMENT OF
FINANCE CESAR PURISIMA; and HONORABLE
COMMISSIONER OF INTERNAL REVENUE GUILLERMO
PARAYNO, JR., Respondent.
x-------------------------x
G.R. No. 168207
AQUILINO Q. PIMENTEL, JR., LUISA P. EJERCITO-ESTRADA,
JINGGOY E. ESTRADA, PANFILO M. LACSON, ALFREDO S. LIM,
JAMBY A.S. MADRIGAL, AND SERGIO R. OSMEÑA III, Petitioners,
vs.
EXECUTIVE SECRETARY EDUARDO R. ERMITA, CESAR V.
PURISIMA, SECRETARY OF FINANCE, GUILLERMO L.
PARAYNO, JR., COMMISSIONER OF THE BUREAU OF
INTERNAL REVENUE, Respondent.
x-------------------------x
G.R. No. 168461
ASSOCIATION OF PILIPINAS SHELL DEALERS, INC. represented by
its President, ROSARIO ANTONIO; PETRON DEALERS’
ASSOCIATION represented by its President, RUTH E. BARBIBI;
ASSOCIATION OF CALTEX DEALERS’ OF THE PHILIPPINES
represented by its President, MERCEDITAS A. GARCIA; ROSARIO
ANTONIO doing business under the name and style of "ANB NORTH
SHELL SERVICE STATION"; LOURDES MARTINEZ doing business
under the name and style of "SHELL GATE – N. DOMINGO";
BETHZAIDA TAN doing business under the name and style of
"ADVANCE SHELL STATION"; REYNALDO P. MONTOYA doing
business under the name and style of "NEW LAMUAN SHELL
SERVICE STATION"; EFREN SOTTO doing business under the name
and style of "RED FIELD SHELL SERVICE STATION"; DONICA
CORPORATION represented by its President, DESI TOMACRUZ;
RUTH E. MARBIBI doing business under the name and style of
"R&R PETRON STATION"; PETER M. UNGSON doing business under
the name and style of "CLASSIC STAR GASOLINE SERVICE
STATION"; MARIAN SHEILA A. LEE doing business under the name
and style of "NTE GASOLINE & SERVICE STATION"; JULIAN CESAR
P. POSADAS doing business under the name and style of
"STARCARGA ENTERPRISES"; ADORACION MAÑEBO doing business
under the name and style of "CMA MOTORISTS CENTER"; SUSAN
M. ENTRATA doing business under the name and style of "LEONA’S
GASOLINE STATION and SERVICE CENTER"; CARMELITA
BALDONADO doing business under the name and style of "FIRST
CHOICE SERVICE CENTER"; MERCEDITAS A. GARCIA doing
business under the name and style of "LORPED SERVICE CENTER";
RHEAMAR A. RAMOS doing business under the name and style of
"RJRAM PTT GAS STATION"; MA. ISABEL VIOLAGO doing business
under the name and style of "VIOLAGO-PTT SERVICE CENTER";
MOTORISTS’ HEART CORPORATION represented by its Vice-
President for Operations, JOSELITO F. FLORDELIZA; MOTORISTS’
HARVARD CORPORATION represented by its Vice-President for
Operations, JOSELITO F. FLORDELIZA; MOTORISTS’ HERITAGE
CORPORATION represented by its Vice-President for Operations,
JOSELITO F. FLORDELIZA; PHILIPPINE STANDARD OIL
CORPORATION represented by its Vice-President for Operations,
JOSELITO F. FLORDELIZA; ROMEO MANUEL doing business under
the name and style of "ROMMAN GASOLINE STATION"; ANTHONY
ALBERT CRUZ III doing business under the name and style of
"TRUE SERVICE STATION", Petitioners,
vs.
CESAR V. PURISIMA, in his capacity as Secretary of the
Department of Finance and GUILLERMO L. PARAYNO, JR., in
his capacity as Commissioner of Internal
Revenue, Respondent.
x-------------------------x
G.R. No. 168463
FRANCIS JOSEPH G. ESCUDERO, VINCENT CRISOLOGO,
EMMANUEL JOEL J. VILLANUEVA, RODOLFO G. PLAZA, DARLENE
ANTONINO-CUSTODIO, OSCAR G. MALAPITAN, BENJAMIN C.
AGARAO, JR. JUAN EDGARDO M. ANGARA, JUSTIN MARC SB.
CHIPECO, FLORENCIO G. NOEL, MUJIV S. HATAMAN, RENATO B.
MAGTUBO, JOSEPH A. SANTIAGO, TEOFISTO DL. GUINGONA III,
RUY ELIAS C. LOPEZ, RODOLFO Q. AGBAYANI and TEODORO A.
CASIÑO, Petitioners,
vs.
CESAR V. PURISIMA, in his capacity as Secretary of Finance,
GUILLERMO L. PARAYNO, JR., in his capacity as
Commissioner of Internal Revenue, and EDUARDO R.
ERMITA, in his capacity as Executive Secretary, Respondent.
x-------------------------x
G.R. No. 168730
BATAAN GOVERNOR ENRIQUE T. GARCIA, JR. Petitioner,
vs.
HON. EDUARDO R. ERMITA, in his capacity as the Executive
Secretary; HON. MARGARITO TEVES, in his capacity as Secretary
of Finance; HON. JOSE MARIO BUNAG, in his capacity as the OIC
Commissioner of the Bureau of Internal Revenue; and HON.
ALEXANDER AREVALO, in his capacity as the OIC Commissioner of
the Bureau of Customs, Respondent.
DECISION
AUSTRIA-MARTINEZ, J.:
The expenses of government, having for their object the interest of
all, should be borne by everyone, and the more man enjoys the
advantages of society, the more he ought to hold himself honored
in contributing to those expenses.
-Anne Robert Jacques Turgot (1727-1781)
French statesman and economist
Mounting budget deficit, revenue generation, inadequate fiscal
allocation for education, increased emoluments for health workers,
and wider coverage for full value-added tax benefits … these are
the reasons why Republic Act No. 9337 (R.A. No. 9337) 1 was
enacted. Reasons, the wisdom of which, the Court even with its
extensive constitutional power of review, cannot probe. The
petitioners in these cases, however, question not only the wisdom
of the law, but also perceived constitutional infirmities in its
passage.
Every law enjoys in its favor the presumption of constitutionality.
Their arguments notwithstanding, petitioners failed to justify their
call for the invalidity of the law. Hence, R.A. No. 9337 is not
unconstitutional.
LEGISLATIVE HISTORY
R.A. No. 9337 is a consolidation of three legislative bills namely,
House Bill Nos. 3555 and 3705, and Senate Bill No. 1950.
House Bill No. 35552 was introduced on first reading on January
7, 2005. The House Committee on Ways and Means approved the
bill, in substitution of House Bill No. 1468, which Representative
(Rep.) Eric D. Singson introduced on August 8, 2004. The President
certified the bill on January 7, 2005 for immediate enactment. On
January 27, 2005, the House of Representatives approved the bill
on second and third reading.
House Bill No. 37053 on the other hand, substituted House Bill
No. 3105 introduced by Rep. Salacnib F. Baterina, and House Bill
No. 3381 introduced by Rep. Jacinto V. Paras. Its "mother bill" is
House Bill No. 3555. The House Committee on Ways and Means
approved the bill on February 2, 2005. The President also certified
it as urgent on February 8, 2005. The House of Representatives
approved the bill on second and third reading on February 28,
2005.
Meanwhile, the Senate Committee on Ways and Means
approved Senate Bill No. 19504 on March 7, 2005, "in
substitution of Senate Bill Nos. 1337, 1838 and 1873, taking into
consideration House Bill Nos. 3555 and 3705." Senator Ralph G.
Recto sponsored Senate Bill No. 1337, while Senate Bill Nos. 1838
and 1873 were both sponsored by Sens. Franklin M. Drilon, Juan
M. Flavier and Francis N. Pangilinan. The President certified the bill
on March 11, 2005, and was approved by the Senate on second
and third reading on April 13, 2005.
On the same date, April 13, 2005, the Senate agreed to the
request of the House of Representatives for a committee
conference on the disagreeing provisions of the proposed bills.
Before long, the Conference Committee on the Disagreeing
Provisions of House Bill No. 3555, House Bill No. 3705, and Senate
Bill No. 1950, "after having met and discussed in full free and
conference," recommended the approval of its report, which the
Senate did on May 10, 2005, and with the House of
Representatives agreeing thereto the next day, May 11, 2005.
On May 23, 2005, the enrolled copy of the consolidated House and
Senate version was transmitted to the President, who signed the
same into law on May 24, 2005. Thus, came R.A. No. 9337.
July 1, 2005 is the effectivity date of R.A. No. 9337.5 When said
date came, the Court issued a temporary restraining order,
effective immediately and continuing until further orders, enjoining
respondents from enforcing and implementing the law.
Oral arguments were held on July 14, 2005. Significantly, during
the hearing, the Court speaking through Mr. Justice Artemio V.
Panganiban, voiced the rationale for its issuance of the temporary
restraining order on July 1, 2005, to wit:
J. PANGANIBAN : . . . But before I go into the details of your
presentation, let me just tell you a little background. You know
when the law took effect on July 1, 2005, the Court issued a TRO
at about 5 o’clock in the afternoon. But before that, there was a lot
of complaints aired on television and on radio. Some people in a
gas station were complaining that the gas prices went up by 10%.
Some people were complaining that their electric bill will go up by
10%. Other times people riding in domestic air carrier were
complaining that the prices that they’ll have to pay would have to
go up by 10%. While all that was being aired, per your
presentation and per our own understanding of the law, that’s not
true. It’s not true that the e-vat law necessarily increased prices by
10% uniformly isn’t it?
ATTY. BANIQUED : No, Your Honor.
J. PANGANIBAN : It is not?
ATTY. BANIQUED : It’s not, because, Your Honor, there is an
Executive Order that granted the Petroleum companies some
subsidy . . . interrupted
J. PANGANIBAN : That’s correct . . .
ATTY. BANIQUED : . . . and therefore that was meant to temper
the impact . . . interrupted
J. PANGANIBAN : . . . mitigating measures . . .
ATTY. BANIQUED : Yes, Your Honor.
J. PANGANIBAN : As a matter of fact a part of the mitigating
measures would be the elimination of the Excise Tax and the
import duties. That is why, it is not correct to say that the VAT as
to petroleum dealers increased prices by 10%.
ATTY. BANIQUED : Yes, Your Honor.
J. PANGANIBAN : And therefore, there is no justification for
increasing the retail price by 10% to cover the E-Vat tax. If you
consider the excise tax and the import duties, the Net Tax would
probably be in the neighborhood of 7%? We are not going into
exact figures I am just trying to deliver a point that different
industries, different products, different services are hit differently.
So it’s not correct to say that all prices must go up by 10%.
ATTY. BANIQUED : You’re right, Your Honor.
J. PANGANIBAN : Now. For instance, Domestic Airline companies,
Mr. Counsel, are at present imposed a Sales Tax of 3%. When this
E-Vat law took effect the Sales Tax was also removed as a
mitigating measure. So, therefore, there is no justification to
increase the fares by 10% at best 7%, correct?
ATTY. BANIQUED : I guess so, Your Honor, yes.
J. PANGANIBAN : There are other products that the people were
complaining on that first day, were being increased arbitrarily by
10%. And that’s one reason among many others this Court had to
issue TRO because of the confusion in the implementation. That’s
why we added as an issue in this case, even if it’s tangentially
taken up by the pleadings of the parties, the confusion in the
implementation of the E-vat. Our people were subjected to the
mercy of that confusion of an across the board increase of 10%,
which you yourself now admit and I think even the Government
will admit is incorrect. In some cases, it should be 3% only, in
some cases it should be 6% depending on these mitigating
measures and the location and situation of each product, of each
service, of each company, isn’t it?
ATTY. BANIQUED : Yes, Your Honor.
J. PANGANIBAN : Alright. So that’s one reason why we had to issue
a TRO pending the clarification of all these and we wish the
government will take time to clarify all these by means of a more
detailed implementing rules, in case the law is upheld by this
Court. . . .6
The Court also directed the parties to file their respective
Memoranda.
G.R. No. 168056
Before R.A. No. 9337 took effect, petitioners ABAKADA GURO Party
List, et al., filed a petition for prohibition on May 27, 2005. They
question the constitutionality of Sections 4, 5 and 6 of R.A. No.
9337, amending Sections 106, 107 and 108, respectively, of the
National Internal Revenue Code (NIRC). Section 4 imposes a 10%
VAT on sale of goods and properties, Section 5 imposes a 10% VAT
on importation of goods, and Section 6 imposes a 10% VAT on sale
of services and use or lease of properties. These questioned
provisions contain a uniform proviso authorizing the President,
upon recommendation of the Secretary of Finance, to raise the VAT
rate to 12%, effective January 1, 2006, after any of the following
conditions have been satisfied, to wit:
. . . That the President, upon the recommendation of the Secretary
of Finance, shall, effective January 1, 2006, raise the rate of value-
added tax to twelve percent (12%), after any of the following
conditions has been satisfied:
(i) Value-added tax collection as a percentage of Gross Domestic
Product (GDP) of the previous year exceeds two and four-fifth
percent (2 4/5%); or
(ii) National government deficit as a percentage of GDP of the
previous year exceeds one and one-half percent (1 ½%).
Petitioners argue that the law is unconstitutional, as it constitutes
abandonment by Congress of its exclusive authority to fix the rate
of taxes under Article VI, Section 28(2) of the 1987 Philippine
Constitution.
G.R. No. 168207
On June 9, 2005, Sen. Aquilino Q. Pimentel, Jr., et al., filed a
petition for certiorari likewise assailing the constitutionality of
Sections 4, 5 and 6 of R.A. No. 9337.
Aside from questioning the so-called stand-by authority of the
President to increase the VAT rate to 12%, on the ground that it
amounts to an undue delegation of legislative power, petitioners
also contend that the increase in the VAT rate to 12% contingent
on any of the two conditions being satisfied violates the due
process clause embodied in Article III, Section 1 of the
Constitution, as it imposes an unfair and additional tax burden on
the people, in that: (1) the 12% increase is ambiguous because it
does not state if the rate would be returned to the original 10% if
the conditions are no longer satisfied; (2) the rate is unfair and
unreasonable, as the people are unsure of the applicable VAT rate
from year to year; and (3) the increase in the VAT rate, which is
supposed to be an incentive to the President to raise the VAT
collection to at least 2 4/5 of the GDP of the previous year, should
only be based on fiscal adequacy.
Petitioners further claim that the inclusion of a stand-by
authority granted to the President by the Bicameral Conference
Committee is a violation of the "no-amendment rule" upon last
reading of a bill laid down in Article VI, Section 26(2) of the
Constitution.
G.R. No. 168461
Thereafter, a petition for prohibition was filed on June 29, 2005, by
the Association of Pilipinas Shell Dealers, Inc., et al., assailing the
following provisions of R.A. No. 9337:
1) Section 8, amending Section 110 (A)(2) of the NIRC, requiring
that the input tax on depreciable goods shall be amortized over a
60-month period, if the acquisition, excluding the VAT components,
exceeds One Million Pesos (₱1, 000,000.00);
2) Section 8, amending Section 110 (B) of the NIRC, imposing a
70% limit on the amount of input tax to be credited against the
output tax; and
3) Section 12, amending Section 114 (c) of the NIRC, authorizing
the Government or any of its political subdivisions,
instrumentalities or agencies, including GOCCs, to deduct a 5%
final withholding tax on gross payments of goods and services,
which are subject to 10% VAT under Sections 106 (sale of goods
and properties) and 108 (sale of services and use or lease of
properties) of the NIRC.
Petitioners contend that these provisions are unconstitutional for
being arbitrary, oppressive, excessive, and confiscatory.
Petitioners’ argument is premised on the constitutional right of
non-deprivation of life, liberty or property without due process of
law under Article III, Section 1 of the Constitution. According to
petitioners, the contested sections impose limitations on the
amount of input tax that may be claimed. Petitioners also argue
that the input tax partakes the nature of a property that may not
be confiscated, appropriated, or limited without due process of law.
Petitioners further contend that like any other property or property
right, the input tax credit may be transferred or disposed of, and
that by limiting the same, the government gets to tax a profit or
value-added even if there is no profit or value-added.
Petitioners also believe that these provisions violate the
constitutional guarantee of equal protection of the law under Article
III, Section 1 of the Constitution, as the limitation on the creditable
input tax if: (1) the entity has a high ratio of input tax; or (2)
invests in capital equipment; or (3) has several transactions with
the government, is not based on real and substantial differences to
meet a valid classification.
Lastly, petitioners contend that the 70% limit is anything but
progressive, violative of Article VI, Section 28(1) of the
Constitution, and that it is the smaller businesses with higher input
tax to output tax ratio that will suffer the consequences thereof for
it wipes out whatever meager margins the petitioners make.
G.R. No. 168463
Several members of the House of Representatives led by Rep.
Francis Joseph G. Escudero filed this petition for certiorari on June
30, 2005. They question the constitutionality of R.A. No. 9337 on
the following grounds:
1) Sections 4, 5, and 6 of R.A. No. 9337 constitute an undue
delegation of legislative power, in violation of Article VI, Section
28(2) of the Constitution;
2) The Bicameral Conference Committee acted without jurisdiction
in deleting the no pass on provisions present in Senate Bill No.
1950 and House Bill No. 3705; and
3) Insertion by the Bicameral Conference Committee of Sections
27, 28, 34, 116, 117, 119, 121, 125,7 148, 151, 236, 237 and 288,
which were present in Senate Bill No. 1950, violates Article VI,
Section 24(1) of the Constitution, which provides that all
appropriation, revenue or tariff bills shall originate exclusively in
the House of Representatives
G.R. No. 168730
On the eleventh hour, Governor Enrique T. Garcia filed a petition
for certiorari and prohibition on July 20, 2005, alleging
unconstitutionality of the law on the ground that the limitation on
the creditable input tax in effect allows VAT-registered
establishments to retain a portion of the taxes they collect, thus
violating the principle that tax collection and revenue should be
solely allocated for public purposes and expenditures. Petitioner
Garcia further claims that allowing these establishments to pass on
the tax to the consumers is inequitable, in violation of Article VI,
Section 28(1) of the Constitution.
RESPONDENTS’ COMMENT
The Office of the Solicitor General (OSG) filed a Comment in behalf
of respondents. Preliminarily, respondents contend that R.A. No.
9337 enjoys the presumption of constitutionality and petitioners
failed to cast doubt on its validity.
Relying on the case of Tolentino vs. Secretary of Finance, 235
SCRA
630 (1994), respondents argue that the procedural issues raised
by petitioners, i.e., legality of the bicameral proceedings, exclusive
origination of revenue measures and the power of the Senate
concomitant thereto, have already been settled. With regard to the
issue of undue delegation of legislative power to the President,
respondents contend that the law is complete and leaves no
discretion to the President but to increase the rate to 12% once
any of the two conditions provided therein arise.
Respondents also refute petitioners’ argument that the increase to
12%, as well as the 70% limitation on the creditable input tax, the
60-month amortization on the purchase or importation of capital
goods exceeding ₱1,000,000.00, and the 5% final withholding tax
by government agencies, is arbitrary, oppressive, and confiscatory,
and that it violates the constitutional principle on progressive
taxation, among others.
Finally, respondents manifest that R.A. No. 9337 is the anchor of
the government’s fiscal reform agenda. A reform in the value-
added system of taxation is the core revenue measure that will tilt
the balance towards a sustainable macroeconomic environment
necessary for economic growth.
ISSUES
The Court defined the issues, as follows:
PROCEDURAL ISSUE
Whether R.A. No. 9337 violates the following provisions of the
Constitution:
a. Article VI, Section 24, and
b. Article VI, Section 26(2)
SUBSTANTIVE ISSUES
1. Whether Sections 4, 5 and 6 of R.A. No. 9337, amending
Sections 106, 107 and 108 of the NIRC, violate the following
provisions of the Constitution:
a. Article VI, Section 28(1), and
b. Article VI, Section 28(2)
2. Whether Section 8 of R.A. No. 9337, amending Sections
110(A)(2) and 110(B) of the NIRC; and Section 12 of R.A. No.
9337, amending Section 114(C) of the NIRC, violate the following
provisions of the Constitution:
a. Article VI, Section 28(1), and
b. Article III, Section 1
RULING OF THE COURT
As a prelude, the Court deems it apt to restate the general
principles and concepts of value-added tax (VAT), as the confusion
and inevitably, litigation, breeds from a fallacious notion of its
nature.
The VAT is a tax on spending or consumption. It is levied on the
sale, barter, exchange or lease of goods or properties and
services.8 Being an indirect tax on expenditure, the seller of goods
or services may pass on the amount of tax paid to the buyer, 9 with
the seller acting merely as a tax collector.10 The burden of VAT is
intended to fall on the immediate buyers and ultimately, the end-
consumers.
In contrast, a direct tax is a tax for which a taxpayer is directly
liable on the transaction or business it engages in, without
transferring the burden to someone else.11 Examples are individual
and corporate income taxes, transfer taxes, and residence taxes.12
In the Philippines, the value-added system of sales taxation has
long been in existence, albeit in a different mode. Prior to 1978,
the system was a single-stage tax computed under the "cost
deduction method" and was payable only by the original sellers.
The single-stage system was subsequently modified, and a mixture
of the "cost deduction method" and "tax credit method" was used
to determine the value-added tax payable.13 Under the "tax credit
method," an entity can credit against or subtract from the VAT
charged on its sales or outputs the VAT paid on its purchases,
inputs and imports.14
It was only in 1987, when President Corazon C. Aquino issued
Executive Order No. 273, that the VAT system was rationalized by
imposing a multi-stage tax rate of 0% or 10% on all sales using
the "tax credit method."15
E.O. No. 273 was followed by R.A. No. 7716 or the Expanded VAT
Law,16 R.A. No. 8241 or the Improved VAT Law,17 R.A. No. 8424 or
the Tax Reform Act of 1997,18 and finally, the presently
beleaguered R.A. No. 9337, also referred to by respondents as the
VAT Reform Act.
The Court will now discuss the issues in logical sequence.
PROCEDURAL ISSUE
I.
Whether R.A. No. 9337 violates the following provisions of the
Constitution:
a. Article VI, Section 24, and
b. Article VI, Section 26(2)
A. The Bicameral Conference Committee
Petitioners Escudero, et al., and Pimentel, et al., allege that the
Bicameral Conference Committee exceeded its authority by:
1) Inserting the stand-by authority in favor of the President in
Sections 4, 5, and 6 of R.A. No. 9337;
2) Deleting entirely the no pass-on provisions found in both the
House and Senate bills;
3) Inserting the provision imposing a 70% limit on the amount of
input tax to be credited against the output tax; and
4) Including the amendments introduced only by Senate Bill No.
1950 regarding other kinds of taxes in addition to the value-added
tax.
Petitioners now beseech the Court to define the powers of the
Bicameral Conference Committee.
It should be borne in mind that the power of internal regulation
and discipline are intrinsic in any legislative body for, as unerringly
elucidated by Justice Story, "[i]f the power did not exist, it
would be utterly impracticable to transact the business of
the nation, either at all, or at least with decency,
deliberation, and order."19 Thus, Article VI, Section 16 (3) of the
Constitution provides that "each House may determine the rules of
its proceedings." Pursuant to this inherent constitutional power to
promulgate and implement its own rules of procedure, the
respective rules of each house of Congress provided for the
creation of a Bicameral Conference Committee.
Thus, Rule XIV, Sections 88 and 89 of the Rules of House of
Representatives provides as follows:
Sec. 88. Conference Committee. – In the event that the House
does not agree with the Senate on the amendment to any bill or
joint resolution, the differences may be settled by the conference
committees of both chambers.
In resolving the differences with the Senate, the House panel shall,
as much as possible, adhere to and support the House Bill. If the
differences with the Senate are so substantial that they materially
impair the House Bill, the panel shall report such fact to the House
for the latter’s appropriate action.
Sec. 89. Conference Committee Reports. – . . . Each report shall
contain a detailed, sufficiently explicit statement of the changes in
or amendments to the subject measure.
...
The Chairman of the House panel may be interpellated on the
Conference Committee Report prior to the voting thereon. The
House shall vote on the Conference Committee Report in the same
manner and procedure as it votes on a bill on third and final
reading.
Rule XII, Section 35 of the Rules of the Senate states:
Sec. 35. In the event that the Senate does not agree with the
House of Representatives on the provision of any bill or joint
resolution, the differences shall be settled by a conference
committee of both Houses which shall meet within ten (10) days
after their composition. The President shall designate the members
of the Senate Panel in the conference committee with the approval
of the Senate.
Each Conference Committee Report shall contain a detailed and
sufficiently explicit statement of the changes in, or amendments to
the subject measure, and shall be signed by a majority of the
members of each House panel, voting separately.
A comparative presentation of the conflicting House and Senate
provisions and a reconciled version thereof with the explanatory
statement of the conference committee shall be attached to the
report.
...
The creation of such conference committee was apparently in
response to a problem, not addressed by any constitutional
provision, where the two houses of Congress find themselves in
disagreement over changes or amendments introduced by the
other house in a legislative bill. Given that one of the most basic
powers of the legislative branch is to formulate and implement its
own rules of proceedings and to discipline its members, may the
Court then delve into the details of how Congress complies with its
internal rules or how it conducts its business of passing legislation?
Note that in the present petitions, the issue is not whether
provisions of the rules of both houses creating the bicameral
conference committee are unconstitutional, but whether the
bicameral conference committee has strictly complied with
the rules of both houses, thereby remaining within the
jurisdiction conferred upon it by Congress.
In the recent case of Fariñas vs. The Executive Secretary,20 the
Court En Banc, unanimously reiterated and emphasized its
adherence to the "enrolled bill doctrine," thus, declining therein
petitioners’ plea for the Court to go behind the enrolled copy of the
bill. Assailed in said case was Congress’s creation of two sets of
bicameral conference committees, the lack of records of said
committees’ proceedings, the alleged violation of said committees
of the rules of both houses, and the disappearance or deletion of
one of the provisions in the compromise bill submitted by the
bicameral conference committee. It was argued that such
irregularities in the passage of the law nullified R.A. No. 9006, or
the Fair Election Act.
Striking down such argument, the Court held thus:
Under the "enrolled bill doctrine," the signing of a bill by the
Speaker of the House and the Senate President and the
certification of the Secretaries of both Houses of Congress that it
was passed are conclusive of its due enactment. A review of cases
reveals the Court’s consistent adherence to the rule. The Court
finds no reason to deviate from the salutary rule in this case Court cannot apply to questions regarding only the internal
where the irregularities alleged by the petitioners mostly operation of Congress, thus, the Court is wont to deny a review of
involved the internal rules of Congress, e.g., creation of the the internal proceedings of a co-equal branch of government.
2nd or 3rd Bicameral Conference Committee by the
House. This Court is not the proper forum for the Moreover, as far back as 1994 or more than ten years ago, in the
enforcement of these internal rules of Congress, whether case of Tolentino vs. Secretary of Finance,23 the Court already
House or Senate. Parliamentary rules are merely procedural made the pronouncement that "[i]f a change is desired in the
and with their observance the courts have no concern. practice [of the Bicameral Conference Committee] it must
Whatever doubts there may be as to the formal validity of be sought in Congress since this question is not covered by
Rep. Act No. 9006 must be resolved in its favor. The Court any constitutional provision but is only an internal rule of
reiterates its ruling in Arroyo vs. De Venecia, viz.: each house." 24 To date, Congress has not seen it fit to make such
changes adverted to by the Court. It seems, therefore, that
But the cases, both here and abroad, in varying forms of Congress finds the practices of the bicameral conference
expression, all deny to the courts the power to inquire into committee to be very useful for purposes of prompt and efficient
allegations that, in enacting a law, a House of Congress legislative action.
failed to comply with its own rules, in the absence of
showing that there was a violation of a constitutional Nevertheless, just to put minds at ease that no blatant
provision or the rights of private individuals. In Osmeña v. irregularities tainted the proceedings of the bicameral conference
Pendatun, it was held: "At any rate, courts have declared that ‘the committees, the Court deems it necessary to dwell on the issue.
rules adopted by deliberative bodies are subject to revocation, The Court observes that there was a necessity for a conference
modification or waiver at the pleasure of the body adopting committee because a comparison of the provisions of House Bill
them.’ And it has been said that "Parliamentary rules are Nos. 3555 and 3705 on one hand, and Senate Bill No. 1950 on the
merely procedural, and with their observance, the courts other, reveals that there were indeed disagreements. As pointed
have no concern. They may be waived or disregarded by the out in the petitions, said disagreements were as follows:
legislative body." Consequently, "mere failure to conform to House Bill No. House Bill No.3705 Senate Bill No.
parliamentary usage will not invalidate the action (taken by 3555 1950
a deliberative body) when the requisite number of members
have agreed to a particular measure."21 (Emphasis supplied) With regard to "Stand-By Authority" in favor of President
The foregoing declaration is exactly in point with the present cases, Provides for 12% Provides for 12% VAT Provides for a
where petitioners allege irregularities committed by the conference VAT on every sale in general on sales of single rate of 10%
committee in introducing changes or deleting provisions in the of goods or goods or properties VAT on sale of
House and Senate bills. Akin to the Fariñas case,22 the present properties and reduced rates for goods or properties
petitions also raise an issue regarding the actions taken by the (amending Sec. sale of certain locally (amending Sec.
conference committee on matters regarding Congress’ compliance 106 of NIRC); 12% manufactured goods 106 of NIRC), 10%
with its own internal rules. As stated earlier, one of the most basic VAT on importation and petroleum VAT on sale of
and inherent power of the legislature is the power to formulate of goods products and raw services including
rules for its proceedings and the discipline of its members. (amending Sec. materials to be used sale of electricity by
Congress is the best judge of how it should conduct its own 107 of NIRC); and in the manufacture generation
business expeditiously and in the most orderly manner. It is also 12% VAT on sale thereof (amending companies,
the sole of services and use Sec. 106 of NIRC); transmission and
concern of Congress to instill discipline among the members of its or lease of 12% VAT on distribution
conference committee if it believes that said members violated any properties importation of goods companies, and use
of its rules of proceedings. Even the expanded jurisdiction of this and reduced rates for or lease of
(amending Sec. certain imported properties which a VAT has which a VAT has
108 of NIRC) products including (amending Sec. been paid shall be been paid shall be
petroleum products 108 of NIRC) equally distributed equally distributed
(amending Sec. 107 over 5 years or the over 5 years or the
of NIRC); and 12% depreciable life of depreciable life of
VAT on sale of such capital goods; such capital goods;
services and use or the input tax credit the input tax credit
lease of properties for goods and for goods and
and a reduced rate services other than services other than
for certain services capital goods shall capital goods shall
including power not exceed 5% of not exceed 90% of
generation the total amount of the output VAT.
(amending Sec. 108 such goods and
of NIRC) services; and for
persons engaged
With regard to the "no pass-on" provision in retail trading of
goods, the
No similar Provides that the VAT Provides that the
allowable input tax
provision imposed on power VAT imposed on
credit shall not
generation and on sales of electricity
exceed 11% of the
the sale of petroleum by generation
total amount of
products shall be companies and
goods purchased.
absorbed by services of
generation companies transmission With regard to amendments to be made to NIRC provisions regardin
or sellers, companies and excise taxes
respectively, and distribution
shall not be passed companies, as well No similar provision No similar provision Provided f
on to consumers as those of to several
franchise grantees regarding
of electric utilities income, pe
shall not apply to franchise a
residential
The disagreements between the provisions in the House bills and
end-users. VAT the Senate bill were with regard to (1) what rate of VAT is to be
shall be absorbed imposed; (2) whether only the VAT imposed on electricity
by generation, generation, transmission and distribution companies should not be
transmission, and passed on to consumers, as proposed in the Senate bill, or both
distribution the VAT imposed on electricity generation, transmission and
companies. distribution companies and the VAT imposed on sale of petroleum
products should not be passed on to consumers, as proposed in the
With regard to 70% limit on input tax credit House bill; (3) in what manner input tax credits should be limited;
(4) and whether the NIRC provisions on corporate income taxes,
Provides that the No similar provision Provides that the
percentage, franchise and excise taxes should be amended.
input tax credit for input tax credit for
capital goods on capital goods on
There being differences and/or disagreements on the foregoing
provisions of the House and Senate bills, the Bicameral Conference
Committee was mandated by the rules of both houses of Congress
to act on the same by settling said differences and/or
disagreements. The Bicameral Conference Committee acted on the
disagreeing provisions by making the following changes:
1. With regard to the disagreement on the rate of VAT to be
imposed, it would appear from the Conference Committee Report
that the Bicameral Conference Committee tried to bridge the gap in
the difference between the 10% VAT rate proposed by the Senate,
and the various rates with 12% as the highest VAT rate proposed
by the House, by striking a compromise whereby the present 10%
VAT rate would be retained until certain conditions arise, i.e., the
value-added tax collection as a percentage of gross domestic
product (GDP) of the previous year exceeds 2 4/5%, or National
Government deficit as a percentage of GDP of the previous year
exceeds 1½%, when the President, upon recommendation of the
Secretary of Finance shall raise the rate of VAT to 12% effective
January 1, 2006.
2. With regard to the disagreement on whether only the VAT
imposed on electricity generation, transmission and distribution
companies should not be passed on to consumers or whether both
the VAT imposed on electricity generation, transmission and
distribution companies and the VAT imposed on sale of petroleum
products may be passed on to consumers, the Bicameral
Conference Committee chose to settle such disagreement by
altogether deleting from its Report any no pass-on provision.
3. With regard to the disagreement on whether input tax credits
should be limited or not, the Bicameral Conference Committee
decided to adopt the position of the House by putting a limitation
on the amount of input tax that may be credited against the output
tax, although it crafted its own language as to the amount of the
limitation on input tax credits and the manner of computing the
same by providing thus:
(A) Creditable Input Tax. – . . .
...
Provided, The input tax on goods purchased or imported in a
calendar month for use in trade or business for which deduction for
depreciation is allowed under this Code, shall be spread evenly
over the month of acquisition and the fifty-nine (59) succeeding
months if the aggregate acquisition cost for such goods, excluding
the VAT component thereof, exceeds one million Pesos
(₱1,000,000.00): PROVIDED, however, that if the estimated useful
life of the capital good is less than five (5) years, as used for
depreciation purposes, then the input VAT shall be spread over
such shorter period: . . .
(B) Excess Output or Input Tax. – If at the end of any taxable
quarter the output tax exceeds the input tax, the excess shall be
paid by the VAT-registered person. If the input tax exceeds the
output tax, the excess shall be carried over to the succeeding
quarter or quarters: PROVIDED that the input tax inclusive of input
VAT carried over from the previous quarter that may be credited in
every quarter shall not exceed seventy percent (70%) of the
output VAT: PROVIDED, HOWEVER, THAT any input tax
attributable to zero-rated sales by a VAT-registered person may at
his option be refunded or credited against other internal revenue
taxes, . . .
4. With regard to the amendments to other provisions of the NIRC
on corporate income tax, franchise, percentage and excise taxes,
the conference committee decided to include such amendments
and basically adopted the provisions found in Senate Bill No. 1950,
with some changes as to the rate of the tax to be imposed.
Under the provisions of both the Rules of the House of
Representatives and Senate Rules, the Bicameral Conference
Committee is mandated to settle the differences between the
disagreeing provisions in the House bill and the Senate bill. The
term "settle" is synonymous to "reconcile" and "harmonize."25 To
reconcile or harmonize disagreeing provisions, the Bicameral
Conference Committee may then (a) adopt the specific provisions
of either the House bill or Senate bill, (b) decide that neither
provisions in the House bill or the provisions in the Senate bill
would
be carried into the final form of the bill, and/or (c) try to arrive at a
compromise between the disagreeing provisions.
In the present case, the changes introduced by the Bicameral
Conference Committee on disagreeing provisions were meant only
to reconcile and harmonize the disagreeing provisions for it did not
inject any idea or intent that is wholly foreign to the subject
embraced by the original provisions.
The so-called stand-by authority in favor of the President, whereby
the rate of 10% VAT wanted by the Senate is retained until such
time that certain conditions arise when the 12% VAT wanted by
the House shall be imposed, appears to be a compromise to try to
bridge the difference in the rate of VAT proposed by the two
houses of Congress. Nevertheless, such compromise is still totally
within the subject of what rate of VAT should be imposed on
taxpayers.
The no pass-on provision was deleted altogether. In the transcripts
of the proceedings of the Bicameral Conference Committee held on
May 10, 2005, Sen. Ralph Recto, Chairman of the Senate Panel,
explained the reason for deleting the no pass-on provision in this
wise:
. . . the thinking was just to keep the VAT law or the VAT bill
simple. And we were thinking that no sector should be a
beneficiary of legislative grace, neither should any sector be
discriminated on. The VAT is an indirect tax. It is a pass on-tax.
And let’s keep it plain and simple. Let’s not confuse the bill and put
a no pass-on provision. Two-thirds of the world have a VAT system
and in this two-thirds of the globe, I have yet to see a VAT with a
no pass-though provision. So, the thinking of the Senate is
basically simple, let’s keep the VAT simple.26 (Emphasis supplied)
Rep. Teodoro Locsin further made the manifestation that the no
pass-on provision "never really enjoyed the support of either
House."27
With regard to the amount of input tax to be credited against
output tax, the Bicameral Conference Committee came to a
compromise on the percentage rate of the limitation or cap on such
input tax credit, but again, the change introduced by the Bicameral
Conference Committee was totally within the intent of both houses
to put a cap on input tax that may be
credited against the output tax. From the inception of the subject
revenue bill in the House of Representatives, one of the major
objectives was to "plug a glaring loophole in the tax policy and
administration by creating vital restrictions on the claiming of input
VAT tax credits . . ." and "[b]y introducing limitations on the
claiming of tax credit, we are capping a major leakage that has
placed our collection efforts at an apparent disadvantage." 28
As to the amendments to NIRC provisions on taxes other than the
value-added tax proposed in Senate Bill No. 1950, since said
provisions were among those referred to it, the conference
committee had to act on the same and it basically adopted the
version of the Senate.
Thus, all the changes or modifications made by the Bicameral
Conference Committee were germane to subjects of the provisions
referred
to it for reconciliation. Such being the case, the Court does not see
any grave abuse of discretion amounting to lack or excess of
jurisdiction committed by the Bicameral Conference Committee. In
the earlier cases of Philippine Judges Association vs.
Prado29 and Tolentino vs. Secretary of Finance,30 the Court
recognized the long-standing legislative practice of giving said
conference committee ample latitude for compromising differences
between the Senate and the House. Thus, in the Tolentino case, it
was held that:
. . . it is within the power of a conference committee to include in
its report an entirely new provision that is not found either in the
House bill or in the Senate bill. If the committee can propose an
amendment consisting of one or two provisions, there is no reason
why it cannot propose several provisions, collectively considered as
an "amendment in the nature of a substitute," so long as such
amendment is germane to the subject of the bills before the
committee. After all, its report was not final but needed the
approval of both houses of Congress to become valid as an act of
the legislative department. The charge that in this case the
Conference Committee acted as a third legislative chamber
is thus without any basis.31 (Emphasis supplied)
B. R.A. No. 9337 Does Not Violate Article VI, Section 26(2) of the
Constitution on the "No-Amendment Rule"
Article VI, Sec. 26 (2) of the Constitution, states:
No bill passed by either House shall become a law unless it has
passed three readings on separate days, and printed copies thereof
in its final form have been distributed to its Members three days
before its passage, except when the President certifies to the
necessity of its immediate enactment to meet a public calamity or
emergency. Upon the last reading of a bill, no amendment thereto
shall be allowed, and the vote thereon shall be taken immediately
thereafter, and the yeas and nays entered in the Journal.
Petitioners’ argument that the practice where a bicameral
conference committee is allowed to add or delete provisions in the
House bill and the Senate bill after these had passed three
readings is in effect a circumvention of the "no amendment rule"
(Sec. 26 (2), Art. VI of the 1987 Constitution), fails to convince the
Court to deviate from its ruling in the Tolentino case that:
Nor is there any reason for requiring that the Committee’s Report
in these cases must have undergone three readings in each of the
two houses. If that be the case, there would be no end to
negotiation since each house may seek modification of the
compromise bill. . . .
Art. VI. § 26 (2) must, therefore, be construed as referring
only to bills introduced for the first time in either house of
Congress, not to the conference committee
report.32 (Emphasis supplied)
The Court reiterates here that the "no-amendment rule" refers
only to the procedure to be followed by each house of
Congress with regard to bills initiated in each of said
respective houses, before said bill is transmitted to the
other house for its concurrence or amendment. Verily, to
construe said provision in a way as to proscribe any further
changes to a bill after one house has voted on it would lead to
absurdity as this would mean that the other house of Congress
would be deprived of its constitutional power to amend or introduce
changes to said bill. Thus, Art. VI, Sec. 26 (2) of the Constitution
cannot be taken to mean that the introduction by the Bicameral
Conference Committee of amendments and modifications to
disagreeing provisions in bills that have been acted upon by both
houses of Congress is prohibited.
C. R.A. No. 9337 Does Not Violate Article VI, Section 24 of the
Constitution on Exclusive Origination of Revenue Bills
Coming to the issue of the validity of the amendments made
regarding the NIRC provisions on corporate income taxes and
percentage, excise taxes. Petitioners refer to the following
provisions, to wit:
Section 27 Rates of Income Tax on Domestic Corporation
28(A)(1) Tax on Resident Foreign Corporation
28(B)(1) Inter-corporate Dividends
34(B)(1) Inter-corporate Dividends
116 Tax on Persons Exempt from VAT
117 Percentage Tax on domestic carriers and keepers of Garage
119 Tax on franchises
121 Tax on banks and Non-Bank Financial Intermediaries
148 Excise Tax on manufactured oils and other fuels
151 Excise Tax on mineral products
236 Registration requirements
237 Issuance of receipts or sales or commercial invoices
288 Disposition of Incremental Revenue
Petitioners claim that the amendments to these provisions of the
NIRC did not at all originate from the House. They aver that House
Bill No. 3555 proposed amendments only regarding Sections 106,
107, 108, 110 and 114 of the NIRC, while House Bill No. 3705
proposed amendments only to Sections 106, 107,108, 109, 110
and 111 of the NIRC; thus, the other sections of the NIRC which
the Senate amended but which amendments were not found in the
House bills are not intended to be amended by the House of
Representatives. Hence, they argue that since the proposed
amendments did not originate from the House, such amendments
are a violation of Article VI, Section 24 of the Constitution.
The argument does not hold water.
Article VI, Section 24 of the Constitution reads:
Sec. 24. All appropriation, revenue or tariff bills, bills authorizing
increase of the public debt, bills of local application, and private
bills shall originate exclusively in the House of Representatives but
the Senate may propose or concur with amendments.
In the present cases, petitioners admit that it was indeed House
Bill Nos. 3555 and 3705 that initiated the move for amending
provisions of the NIRC dealing mainly with the value-added tax.
Upon transmittal of said House bills to the Senate, the Senate
came out with Senate Bill No. 1950 proposing amendments not
only to NIRC provisions on the value-added tax but also
amendments to NIRC provisions on other kinds of taxes. Is the
introduction by the Senate of provisions not dealing directly with
the value- added tax, which is the only kind of tax being amended
in the House bills, still within the purview of the constitutional
provision authorizing the Senate to propose or concur with
amendments to a revenue bill that originated from the House?
The foregoing question had been squarely answered in
the Tolentino case, wherein the Court held, thus:
. . . To begin with, it is not the law – but the revenue bill – which is
required by the Constitution to "originate exclusively" in the House
of Representatives. It is important to emphasize this, because a bill
originating in the House may undergo such extensive changes in
the Senate that the result may be a rewriting of the whole. . . . At
this point, what is important to note is that, as a result of the
Senate action, a distinct bill may be produced. To insist that a
revenue statute – and not only the bill which initiated the
legislative process culminating in the enactment of the law
– must substantially be the same as the House bill would be
to deny the Senate’s power not only to "concur with
amendments" but also to "propose amendments." It would
be to violate the coequality of legislative power of the two houses
of Congress and in fact make the House superior to the Senate.
… will result to significant expenditure savings have been identified
…Given, then, the power of the Senate to propose
amendments, the Senate can propose its own version even
with respect to bills which are required by the Constitution
to originate in the House.
...
Indeed, what the Constitution simply means is that the initiative
for filing revenue, tariff or tax bills, bills authorizing an increase of
the public debt, private bills and bills of local application must
come from the House of Representatives on the theory that,
elected as they are from the districts, the members of the House
can be expected to be more sensitive to the local needs and
problems. On the other hand, the senators, who are elected
at large, are expected to approach the same problems from
the national perspective. Both views are thereby made to
bear on the enactment of such laws.33 (Emphasis supplied)
Since there is no question that the revenue bill exclusively
originated in the House of Representatives, the Senate was acting
within its
constitutional power to introduce amendments to the House bill
when it included provisions in Senate Bill No. 1950 amending
corporate income taxes, percentage, excise and franchise taxes.
Verily, Article VI, Section 24 of the Constitution does not contain
any prohibition or limitation on the extent of the amendments that
may be introduced by the Senate to the House revenue bill.
Furthermore, the amendments introduced by the Senate to the
NIRC provisions that had not been touched in the House bills are
still in furtherance of the intent of the House in initiating the
subject revenue bills. The Explanatory Note of House Bill No. 1468,
the very first House bill introduced on the floor, which was later
substituted by House Bill No. 3555, stated:
One of the challenges faced by the present administration is the
urgent and daunting task of solving the country’s serious financial
problems. To do this, government expenditures must be strictly
monitored and controlled and revenues must be significantly
increased. This may be easier said than done, but our fiscal
authorities are still optimistic the government will be operating on
a balanced budget by the year 2009. In fact, several measures that
by the administration. It is supported with a credible package
of revenue measures that include measures to improve tax
administration and control the leakages in revenues from
income taxes and the value-added tax (VAT). (Emphasis
supplied)
Rep. Eric D. Singson, in his sponsorship speech for House Bill No.
3555, declared that:
In the budget message of our President in the year 2005, she
reiterated that we all acknowledged that on top of our agenda must
be the restoration of the health of our fiscal system.
In order to considerably lower the consolidated public sector deficit
and eventually achieve a balanced budget by the year 2009, we
need to seize windows of opportunities which might seem
poignant in the beginning, but in the long run prove
effective and beneficial to the overall status of our economy.
One such opportunity is a review of existing tax rates,
evaluating the relevance given our present
conditions.34 (Emphasis supplied)
Notably therefore, the main purpose of the bills emanating from
the House of Representatives is to bring in sizeable revenues for
the government
to supplement our country’s serious financial problems, and
improve tax administration and control of the leakages in revenues
from income taxes and value-added taxes. As these house bills
were transmitted to the Senate, the latter, approaching the
measures from the point of national perspective, can introduce
amendments within the purposes of those bills. It can provide for
ways that would soften the impact of the VAT measure on the
consumer, i.e., by distributing the burden across all sectors instead
of putting it entirely on the shoulders of the consumers. The
sponsorship speech of Sen. Ralph Recto on why the provisions on
income tax on corporation were included is worth quoting:
All in all, the proposal of the Senate Committee on Ways and
Means will raise ₱64.3 billion in additional revenues annually even
while by mitigating prices of power, services and petroleum
products.
However, not all of this will be wrung out of VAT. In fact, only
₱48.7 billion amount is from the VAT on twelve goods and services.
The rest of the tab – ₱10.5 billion- will be picked by corporations.
What we therefore prescribe is a burden sharing between corporate
Philippines and the consumer. Why should the latter bear all the
pain? Why should the fiscal salvation be only on the burden of the
consumer?
The corporate world’s equity is in form of the increase in the
corporate income tax from 32 to 35 percent, but up to 2008 only.
This will raise ₱10.5 billion a year. After that, the rate will slide
back, not to its old rate of 32 percent, but two notches lower, to 30
percent.
Clearly, we are telling those with the capacity to pay, corporations,
to bear with this emergency provision that will be in effect for
1,200 days, while we put our fiscal house in order. This fiscal
medicine will have an expiry date.
For their assistance, a reward of tax reduction awaits them. We
intend to keep the length of their sacrifice brief. We would like to
assure them that not because there is a light at the end of the
tunnel, this government will keep on making the tunnel long.
The responsibility will not rest solely on the weary shoulders of the
small man. Big business will be there to share the burden. 35
As the Court has said, the Senate can propose amendments and in
fact, the amendments made on provisions in the tax on income of
corporations are germane to the purpose of the house bills which is
to raise revenues for the government.
Likewise, the Court finds the sections referring to other percentage
and excise taxes germane to the reforms to the VAT system, as
these sections would cushion the effects of VAT on consumers.
Considering that certain goods and services which were subject to
percentage tax and excise tax would no longer be VAT-exempt, the
consumer would be burdened more as they would be paying the
VAT in addition to these taxes. Thus, there is a need to amend
these sections to soften the impact of VAT. Again, in his
sponsorship speech, Sen. Recto said:
However, for power plants that run on oil, we will reduce to zero
the present excise tax on bunker fuel, to lessen the effect of a VAT
on this product.
For electric utilities like Meralco, we will wipe out the franchise tax
in exchange for a VAT.
And in the case of petroleum, while we will levy the VAT on oil
products, so as not to destroy the VAT chain, we will however bring
down the excise tax on socially sensitive products such as diesel,
bunker, fuel and kerosene.
...
What do all these exercises point to? These are not contortions of
giving to the left hand what was taken from the right. Rather,
these sprang from our concern of softening the impact of VAT, so
that the people can cushion the blow of higher prices they will have
to pay as a result of VAT.36
The other sections amended by the Senate pertained to matters of
tax administration which are necessary for the implementation of
the changes in the VAT system.
To reiterate, the sections introduced by the Senate are germane to
the subject matter and purposes of the house bills, which is to
supplement our country’s fiscal deficit, among others. Thus, the
Senate acted within its power to propose those amendments.
SUBSTANTIVE ISSUES
I.
Whether Sections 4, 5 and 6 of R.A. No. 9337, amending Sections
106, 107 and 108 of the NIRC, violate the following provisions of
the Constitution:
a. Article VI, Section 28(1), and
b. Article VI, Section 28(2)
A. No Undue Delegation of Legislative Power
Petitioners ABAKADA GURO Party List, et al., Pimentel, Jr., et al.,
and Escudero, et al. contend in common that Sections 4, 5 and 6 of
R.A. No. 9337, amending Sections 106, 107 and 108, respectively,
of the NIRC giving the President the stand-by authority to raise the
VAT rate from 10% to 12% when a certain condition is met,
constitutes undue delegation of the legislative power to tax.
The assailed provisions read as follows:
SEC. 4. Sec. 106 of the same Code, as amended, is hereby further
amended to read as follows:
SEC. 106. Value-Added Tax on Sale of Goods or Properties. –
(A) Rate and Base of Tax. – There shall be levied, assessed and
collected on every sale, barter or exchange of goods or properties,
a value-added tax equivalent to ten percent (10%) of the gross
selling price or gross value in money of the goods or properties
sold, bartered or exchanged, such tax to be paid by the seller or
transferor: provided, that the President, upon the
recommendation of the Secretary of Finance, shall, effective
January 1, 2006, raise the rate of value-added tax to twelve
percent (12%), after any of the following conditions has
been satisfied.
(i) value-added tax collection as a percentage of Gross
Domestic Product (GDP) of the previous year exceeds two
and four-fifth percent (2 4/5%) or
(ii) national government deficit as a percentage of GDP of
the previous year exceeds one and one-half percent (1
½%).
SEC. 5. Section 107 of the same Code, as amended, is hereby
further amended to read as follows:
SEC. 107. Value-Added Tax on Importation of Goods. –
(A) In General. – There shall be levied, assessed and collected on
every importation of goods a value-added tax equivalent to ten
percent (10%) based on the total value used by the Bureau of
Customs in determining tariff and customs duties, plus customs
duties, excise taxes, if any, and other charges, such tax to be paid
by the importer prior to the release of such goods from customs
custody: Provided, That where the customs duties are determined
on the basis of the quantity or volume of the goods, the value-
added tax shall be based on the landed cost plus excise taxes, if
any: provided, further, that the President, upon the
recommendation of the Secretary of Finance, shall, effective
January 1, 2006, raise the rate of value-added tax to twelve
percent (12%) after any of the following conditions has
been satisfied.
(i) value-added tax collection as a percentage of Gross
Domestic Product (GDP) of the previous year exceeds two
and four-fifth percent (2 4/5%) or
(ii) national government deficit as a percentage of GDP of
the previous year exceeds one and one-half percent (1
½%).
SEC. 6. Section 108 of the same Code, as amended, is hereby
further amended to read as follows:
SEC. 108. Value-added Tax on Sale of Services and Use or Lease of
Properties –
(A) Rate and Base of Tax. – There shall be levied, assessed and
collected, a value-added tax equivalent to ten percent (10%) of
gross receipts derived from the sale or exchange of
services: provided, that the President, upon the
recommendation of the Secretary of Finance, shall, effective
January 1, 2006, raise the rate of value-added tax to twelve
percent (12%), after any of the following conditions has
been satisfied.
(i) value-added tax collection as a percentage of Gross
Domestic Product (GDP) of the previous year exceeds two
and four-fifth percent (2 4/5%) or
(ii) national government deficit as a percentage of GDP of
the previous year exceeds one and one-half percent (1
½%). (Emphasis supplied)
Petitioners allege that the grant of the stand-by authority to the
President to increase the VAT rate is a virtual abdication by
Congress of its exclusive power to tax because such delegation is
not within the purview of Section 28 (2), Article VI of the
Constitution, which provides:
The Congress may, by law, authorize the President to fix within
specified limits, and 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.
They argue that the VAT is a tax levied on the sale, barter or
exchange of goods and properties as well as on the sale or
exchange of services, which cannot be included within the purview
of tariffs under the exempted delegation as the latter refers to
customs duties, tolls or tribute payable upon merchandise to the
government and usually imposed on goods or merchandise
imported or exported.
Petitioners ABAKADA GURO Party List, et al., further contend that
delegating to the President the legislative power to tax is contrary
to republicanism. They insist that accountability, responsibility and
transparency should dictate the actions of Congress and they
should not pass to the President the decision to impose taxes. They
also argue that the law also effectively nullified the President’s
power of control, which includes the authority to set aside and
nullify the acts of her subordinates like the Secretary of Finance, by
mandating the fixing of the tax rate by the President upon the
recommendation of the Secretary of Finance.
Petitioners Pimentel, et al. aver that the President has ample
powers to cause, influence or create the conditions provided by the
law to bring about either or both the conditions precedent.
On the other hand, petitioners Escudero, et al. find bizarre and
revolting the situation that the imposition of the 12% rate would be
subject to the whim of the Secretary of Finance, an unelected
bureaucrat, contrary to the principle of no taxation without
representation. They submit that the Secretary of Finance is not
mandated to give a favorable recommendation and he may not
even give his recommendation. Moreover, they allege that no
guiding standards are provided in the law on what basis and as to
how he will make his recommendation. They claim, nonetheless,
that any recommendation of the Secretary of Finance can easily be
brushed aside by the President since the former is a mere alter ego
of the latter, such that, ultimately, it is the President who decides
whether to impose the increased tax rate or not.
A brief discourse on the principle of non-delegation of powers is
instructive.
The principle of separation of powers ordains that each of the three
great branches of government has exclusive cognizance of and is
supreme in matters falling within its own constitutionally allocated
sphere.37 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 which means "what
has been delegated, cannot be delegated."38 This doctrine is based
on the ethical principle that such as 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.39
With respect to the Legislature, Section 1 of Article VI of the
Constitution provides that "the Legislative power shall be vested in
the Congress of the Philippines which shall consist of a Senate and
a House of Representatives." The powers which Congress is
prohibited from delegating are those which are strictly, or
inherently and exclusively, legislative. Purely legislative power,
which can never be delegated, has been described as
the authority to make a complete law – complete as to the
time when it shall take effect and as to whom it shall be
applicable – and to determine the expediency of its
enactment.40 Thus, the rule is that in order that a court may be
justified in holding a statute unconstitutional as a delegation of
legislative power, it must appear that the power involved is purely
legislative in nature – that is, one appertaining exclusively to the
legislative department. It is the nature of the power, and not the
liability of its use or the manner of its exercise, which determines
the validity of its delegation.
Nonetheless, the general rule barring delegation of legislative
powers is subject to the following recognized limitations or
exceptions:
(1) Delegation of tariff powers to the President under Section 28
(2) of Article VI of the Constitution;
(2) Delegation of emergency powers to the President under Section
23 (2) of Article VI of the Constitution;
(3) Delegation to the people at large;
(4) Delegation to local governments; and
(5) Delegation to administrative bodies.
In every case of permissible delegation, there must be a showing
that the delegation itself is valid. It is valid only if the law (a) is
complete in itself, setting forth therein the policy to be executed,
carried out, or implemented by the delegate; 41 and (b) fixes a
standard — the limits of which are sufficiently determinate and
determinable — to which the delegate must conform in the
performance of his functions.42 A sufficient standard is one which
defines legislative policy, marks its limits, maps out its boundaries
and specifies the public agency to apply it. It indicates the
circumstances under which the legislative command is to be
effected.43 Both tests are intended to prevent a total transference
of legislative authority to the delegate, who is not allowed to step
into the shoes of the legislature and exercise a power essentially
legislative.44
In People vs. Vera,45 the Court, through eminent Justice Jose P.
Laurel, expounded on the concept and extent of delegation of
power in this wise:
In testing whether a statute constitutes an undue delegation of
legislative power or not, it is usual to inquire whether the statute
was complete in all its terms and provisions when it left the hands
of the legislature so that nothing was left to the judgment of any
other appointee or delegate of the legislature.
...
‘The true distinction’, says Judge Ranney, ‘is between the
delegation of power to make the law, which necessarily
involves a discretion as to what it shall be, and conferring
an authority or discretion as to its execution, to be
exercised under and in pursuance of the law. The first
cannot be done; to the latter no valid objection can be
made.’
...
It is contended, however, that a legislative act may be made to the
effect as law after it leaves the hands of the legislature. It is true
that laws may be made effective on certain contingencies, as by
proclamation of the executive or the adoption by the people of a
particular community. In Wayman vs. Southard, the Supreme
Court of the United States ruled that the legislature may delegate a
power not legislative which it may itself rightfully exercise. The
power to ascertain facts is such a power which may be
delegated. There is nothing essentially legislative in
ascertaining the existence of facts or conditions as the basis
of the taking into effect of a law. That is a mental process
common to all branches of the government. Notwithstanding
the apparent tendency, however, to relax the rule prohibiting
delegation of legislative authority on account of the complexity
arising from social and economic forces at work in this modern
industrial age, the orthodox pronouncement of Judge Cooley in his
work on Constitutional Limitations finds restatement in Prof.
Willoughby's treatise on the Constitution of the United States in the
following language — speaking of declaration of legislative power
to administrative agencies: The principle which permits the
legislature to provide that the administrative agent may
determine when the circumstances are such as require the
application of a law is defended upon the ground that at the
time this authority is granted, the rule of public policy,
which is the essence of the legislative act, is determined by
the legislature. In other words, the legislature, as it is its
duty to do, determines that, under given circumstances,
certain executive or administrative action is to be taken,
and that, under other circumstances, different or no action
at all is to be taken. What is thus left to the administrative
official is not the legislative determination of what public
policy demands, but simply the ascertainment of what the
facts of the case require to be done according to the terms
of the law by which he is governed. The efficiency of an Act
as a declaration of legislative will must, of course, come
from Congress, but the ascertainment of the contingency
upon which the Act shall take effect may be left to such
agencies as it may designate. The legislature, then, may
provide that a law shall take effect upon the happening of
future specified contingencies leaving to some other person
or body the power to determine when the specified
contingency has arisen. (Emphasis supplied).46
In Edu vs. Ericta,47 the Court reiterated:
What cannot be delegated is the authority under the Constitution
to make laws and to alter and repeal them; the test is the
completeness of the statute in all its terms and provisions when it
leaves the hands of the legislature. To determine whether or not
there is an undue delegation of legislative power, the inquiry must
be directed to the scope and definiteness of the measure
enacted. The legislative does not abdicate its functions when
it describes what job must be done, who is to do it, and
what is the scope of his authority. For a complex economy,
that may be the only way in which the legislative process can go
forward. A distinction has rightfully been made between
delegation of power to make the laws which necessarily
involves a discretion as to what it shall be, which
constitutionally may not be done, and delegation of
authority or discretion as to its execution to be exercised
under and in pursuance of the law, to which no valid
objection can be made. The Constitution is thus not to be
regarded as denying the legislature the necessary resources of
flexibility and practicability. (Emphasis supplied). 48
Clearly, the legislature may delegate to executive officers or bodies
the power to determine certain facts or conditions, or the
happening of contingencies, on which the operation of a statute is,
by its terms, made to depend, but the legislature must prescribe
sufficient standards, policies or limitations on their
authority.49 While the power to tax cannot be delegated to
executive agencies, details as to the enforcement and
administration of an exercise of such power may be left to them,
including the power to determine the existence of facts on which its
operation depends.50
The rationale for this is that the preliminary ascertainment of facts
as basis for the enactment of legislation is not of itself a legislative
function, but is simply ancillary to legislation. Thus, the duty of
correlating information and making recommendations is the kind of
subsidiary activity which the legislature may perform through its
members, or which it may delegate to others to perform.
Intelligent legislation on the complicated problems of modern
society is impossible in the absence of accurate information on the
part of the legislators, and any reasonable method of securing such
information is proper.51 The Constitution as a continuously
operative charter of government does not require that Congress
find for itself
every fact upon which it desires to base legislative action or that it
make for itself detailed determinations which it has declared to be
prerequisite to application of legislative policy to particular facts
and circumstances impossible for Congress itself properly to
investigate.52
In the present case, the challenged section of R.A. No. 9337 is the
common proviso in Sections 4, 5 and 6 which reads as follows:
That the President, upon the recommendation of the Secretary of
Finance, shall, effective January 1, 2006, raise the rate of value-
added tax to twelve percent (12%), after any of the following
conditions has been satisfied:
(i) Value-added tax collection as a percentage of Gross Domestic
Product (GDP) of the previous year exceeds two and four-fifth
percent (2 4/5%); or
(ii) National government deficit as a percentage of GDP of the
previous year exceeds one and one-half percent (1 ½%).
The case before the Court is not a delegation of legislative power.
It is simply a delegation of ascertainment of facts upon which
enforcement and administration of the increase rate under the law
is contingent. The legislature has made the operation of the 12%
rate effective January 1, 2006, contingent upon a specified fact or
condition. It leaves the entire operation or non-operation of the
12% rate upon factual matters outside of the control of the
executive.
No discretion would be exercised by the President. Highlighting the
absence of discretion is the fact that the word shall is used in the
common proviso. The use of the word shall connotes a mandatory
order. Its use in a statute denotes an imperative obligation and is
inconsistent with the idea of discretion.53 Where the law is clear
and unambiguous, it must be taken to mean exactly what it says,
and courts have no choice but to see to it that the mandate is
obeyed.54
Thus, it is the ministerial duty of the President to immediately
impose the 12% rate upon the existence of any of the conditions
specified by Congress. This is a duty which cannot be evaded by
the President. Inasmuch as the law specifically uses the word shall,
the exercise of discretion by the President does not come into play.
It is a clear directive to impose the 12% VAT rate when the
specified conditions are present. The time of taking into effect of
the 12% VAT rate is based on the happening of a certain specified
contingency, or upon the ascertainment of certain facts or
conditions by a person or body other than the legislature itself.
The Court finds no merit to the contention of petitioners ABAKADA
GURO Party List, et al. that the law effectively nullified the
President’s power of control over the Secretary of Finance by
mandating the fixing of the tax rate by the President upon the
recommendation of the Secretary of Finance. The Court cannot also
subscribe to the position of petitioners
Pimentel, et al. that the word shall should be interpreted to
mean may in view of the phrase "upon the recommendation of the
Secretary of Finance." Neither does the Court find persuasive the
submission of petitioners Escudero, et al. that any recommendation
by the Secretary of Finance can easily be brushed aside by the
President since the former is a mere alter ego of the latter.
When one speaks of the Secretary of Finance as the alter ego of
the President, it simply means that as head of the Department of
Finance he is the assistant and agent of the Chief Executive. The
multifarious executive and administrative functions of the Chief
Executive are performed by and through the executive
departments, and the acts of the secretaries of such departments,
such as the Department of Finance, performed and promulgated in
the regular course of business, are, unless disapproved or
reprobated by the Chief Executive, presumptively the acts of the
Chief Executive. The Secretary of Finance, as such, occupies a
political position and holds office in an advisory capacity, and, in
the language of Thomas Jefferson, "should be of the President's
bosom confidence" and, in the language of Attorney-General
Cushing, is "subject to the direction of the President." 55
In the present case, in making his recommendation to the
President on the existence of either of the two conditions, the
Secretary of Finance is not acting as the alter ego of the President
or even her subordinate. In such instance, he is not subject to the
power of control and direction of the President. He is acting as the
agent of the legislative department, to determine and declare the
event upon which its expressed will is to take effect. 56 The
Secretary of Finance becomes the means or tool by which
legislative policy is determined and implemented, considering that
he possesses all the facilities to gather data and information and
has a much broader perspective to properly evaluate them. His
function is to gather and collate statistical data and other pertinent
information and verify if any of the two conditions laid out by
Congress is present. His personality in such instance is in reality
but a projection of that of Congress. Thus, being the agent of
Congress and not of the President, the President cannot alter or
modify or nullify, or set aside the findings of the Secretary of
Finance and to substitute the judgment of the former for that of
the latter.
Congress simply granted the Secretary of Finance the authority to
ascertain the existence of a fact, namely, whether by December
31, 2005, the value-added tax collection as a percentage of Gross
Domestic Product (GDP) of the previous year exceeds two and
four-fifth percent (24/5%) or the national government deficit as a
percentage of GDP of the previous year exceeds one and one-half
percent (1½%). If either of these two instances has occurred, the
Secretary of Finance, by legislative mandate, must submit such
information to the President. Then the 12% VAT rate must be
imposed by the President effective January 1, 2006. There is no
undue delegation of legislative power but only of the
discretion as to the execution of a law. This is
constitutionally permissible.57 Congress does not abdicate its
functions or unduly delegate power when it describes what job
must be done, who must do it, and what is the scope of his
authority; in our complex economy that is frequently the only way
in which the legislative process can go forward.58
As to the argument of petitioners ABAKADA GURO Party List, et
al. that delegating to the President the legislative power to tax is
contrary to the principle of republicanism, the same deserves scant
consideration. Congress did not delegate the power to tax but the
mere implementation of the law. The intent and will to increase the
VAT rate to 12% came from Congress and the task of the President
is to simply execute the legislative policy. That Congress chose to
do so in such a manner is not within the province of the Court to
inquire into, its task being to interpret the law.59
The insinuation by petitioners Pimentel, et al. that the President
has ample powers to cause, influence or create the conditions to
bring about either or both the conditions precedent does not
deserve any merit as this argument is highly speculative. The Court
does not rule on allegations which are manifestly conjectural, as
these may not exist at all. The Court deals with facts, not fancies;
on realities, not appearances. When the Court acts on appearances
instead of realities, justice and law will be short-lived.
B. The 12% Increase VAT Rate Does Not Impose an Unfair and
Unnecessary Additional Tax Burden
Petitioners Pimentel, et al. argue that the 12% increase in the VAT
rate imposes an unfair and additional tax burden on the people.
Petitioners also argue that the 12% increase, dependent on any of
the 2 conditions set forth in the contested provisions, is ambiguous
because it does not state if the VAT rate would be returned to the
original 10% if the rates are no longer satisfied. Petitioners also
argue that such rate is unfair and unreasonable, as the people are
unsure of the applicable VAT rate from year to year.
Under the common provisos of Sections 4, 5 and 6 of R.A. No.
9337, if any of the two conditions set forth therein are satisfied,
the President shall increase the VAT rate to 12%. The provisions of
the law are clear. It does not provide for a return to the 10% rate
nor does it empower the President to so revert if, after the rate is
increased to 12%, the VAT collection goes below the 2 4/5 of the
GDP of the previous year or that the national government deficit as
a percentage of GDP of the previous year does not exceed 1½%.
Therefore, no statutory construction or interpretation is needed.
Neither can conditions or limitations be introduced where none is
provided for. Rewriting the law is a forbidden ground that only
Congress may tread upon.60
Thus, in the absence of any provision providing for a return to the
10% rate, which in this case the Court finds none, petitioners’
argument is, at best, purely speculative. There is no basis for
petitioners’ fear of a fluctuating VAT rate because the law itself
does not provide that the rate should go back to 10% if the
conditions provided in Sections 4, 5 and 6 are no longer present.
The rule is that where the provision of the law is clear and
unambiguous, so that there is no occasion for the court's seeking
the legislative intent, the law must be taken as it is, devoid of
judicial addition or subtraction.61
Petitioners also contend that the increase in the VAT rate, which
was allegedly an incentive to the President to raise the VAT
collection to at least 2 4/5 of the GDP of the previous year, should
be based on fiscal adequacy.
Petitioners obviously overlooked that increase in VAT collection is
not the only condition. There is another condition, i.e., the national
government deficit as a percentage of GDP of the previous year
exceeds one and one-half percent (1 ½%).
Respondents explained the philosophy behind these alternative
conditions:
1. VAT/GDP Ratio > 2.8%
The condition set for increasing VAT rate to 12% have economic or
fiscal meaning. If VAT/GDP is less than 2.8%, it means that
government has weak or no capability of implementing the VAT or
that VAT is not effective in the function of the tax collection.
Therefore, there is no value to increase it to 12% because such
action will also be ineffectual.
2. Nat’l Gov’t Deficit/GDP >1.5%
The condition set for increasing VAT when deficit/GDP is 1.5% or
less means the fiscal condition of government has reached a
relatively sound position or is towards the direction of a balanced
budget position. Therefore, there is no need to increase the VAT
rate since the fiscal house is in a relatively healthy position.
Otherwise stated, if the ratio is more than 1.5%, there is indeed a
need to increase the VAT rate.62
That the first condition amounts to an incentive to the President to
increase the VAT collection does not render it unconstitutional so
long as there is a public purpose for which the law was passed,
which in this case, is mainly to raise revenue. In fact, fiscal
adequacy dictated the need for a raise in revenue.
The principle of fiscal adequacy as a characteristic of a sound tax
system was originally stated by Adam Smith in his Canons of
Taxation (1776), as:
IV. Every tax ought to be so contrived as both to take out and to
keep out of the pockets of the people as little as possible over and
above what it brings into the public treasury of the state. 63
It simply means that sources of revenues must be adequate to
meet government expenditures and their variations.64
The dire need for revenue cannot be ignored. Our country is in a
quagmire of financial woe. During the Bicameral Conference
Committee hearing, then Finance Secretary Purisima bluntly
depicted the country’s gloomy state of economic affairs, thus:
First, let me explain the position that the Philippines finds itself in
right now. We are in a position where 90 percent of our revenue is
used for debt service. So, for every peso of revenue that we
currently raise, 90 goes to debt service. That’s interest plus
amortization of our debt. So clearly, this is not a sustainable
situation. That’s the first fact.
The second fact is that our debt to GDP level is way out of line
compared to other peer countries that borrow money from that
international financial markets. Our debt to GDP is approximately
equal to our GDP. Again, that shows you that this is not a
sustainable situation.
The third thing that I’d like to point out is the environment that we
are presently operating in is not as benign as what it used to be
the past five years.
What do I mean by that?
In the past five years, we’ve been lucky because we were
operating in a period of basically global growth and low interest
rates. The past few months, we have seen an inching up, in fact, a
rapid increase in the interest rates in the leading economies of the
world. And, therefore, our ability to borrow at reasonable prices is
going to be challenged. In fact, ultimately, the question is our
ability to access the financial markets.
When the President made her speech in July last year, the
environment was not as bad as it is now, at least based on the
forecast of most financial institutions. So, we were assuming that
raising 80 billion would put us in a position where we can then
convince them to improve our ability to borrow at lower rates. But
conditions have changed on us because the interest rates have
gone up. In fact, just within this room, we tried to access the
market for a billion dollars because for this year alone, the
Philippines will have to borrow 4 billion dollars. Of that amount, we
have borrowed 1.5 billion. We issued last January a 25-year bond
at 9.7 percent cost. We were trying to access last week and the
market was not as favorable and up to now we have not accessed
and we might pull back because the conditions are not very good.
So given this situation, we at the Department of Finance believe
that we really need to front-end our deficit reduction. Because it is
deficit that is causing the increase of the debt and we are in what
we call a debt spiral. The more debt you have, the more deficit you
have because interest and debt service eats and eats more of your
revenue. We need to get out of this debt spiral. And the only way,
I think, we can get out of this debt spiral is really have a front-end
adjustment in our revenue base.65
The image portrayed is chilling. Congress passed the law hoping for
rescue from an inevitable catastrophe. Whether the law is indeed
sufficient to answer the state’s economic dilemma is not for the
Court to judge. In the Fariñas case, the Court refused to consider
the various arguments raised therein that dwelt on the wisdom of
Section 14 of R.A. No. 9006 (The Fair Election Act), pronouncing
that:
. . . policy matters are not the concern of the Court. Government
policy is within the exclusive dominion of the political branches of
the government. It is not for this Court to look into the wisdom or
propriety of legislative determination. Indeed, whether an
enactment is wise or unwise, whether it is based on sound
economic theory, whether it is the best means to achieve the
desired results, whether, in short, the legislative discretion within
its prescribed limits should be exercised in a particular manner are
matters for the judgment of the legislature, and the serious conflict
of opinions does not suffice to bring them within the range of
judicial cognizance.66
In the same vein, the Court in this case will not dawdle on the
purpose of Congress or the executive policy, given that it is not for
the judiciary to "pass upon questions of wisdom, justice or
expediency of legislation."67
II.
Whether Section 8 of R.A. No. 9337, amending Sections 110(A)(2)
and 110(B) of the NIRC; and Section 12 of R.A. No. 9337,
amending Section 114(C) of the NIRC, violate the following
provisions of the Constitution:
a. Article VI, Section 28(1), and
b. Article III, Section 1
A. Due Process and Equal Protection Clauses
Petitioners Association of Pilipinas Shell Dealers, Inc., et al. argue
that Section 8 of R.A. No. 9337, amending Sections 110 (A)(2),
110 (B), and Section 12 of R.A. No. 9337, amending Section 114
(C) of the NIRC are arbitrary, oppressive, excessive and
confiscatory. Their argument is premised on the constitutional right
against deprivation of life, liberty of property without due process
of law, as embodied in Article III, Section 1 of the Constitution.
Petitioners also contend that these provisions violate the
constitutional guarantee of equal protection of the law.
The doctrine is that where the due process and equal protection
clauses are invoked, considering that they are not fixed rules but
rather broad standards, there is a need for proof of such
persuasive character as would lead to such a conclusion. Absent
such a showing, the presumption of validity must prevail. 68
Section 8 of R.A. No. 9337, amending Section 110(B) of the NIRC
imposes a limitation on the amount of input tax that may be
credited against the output tax. It states, in part: "[P]rovided, that
the input tax inclusive of the input VAT carried over from the
previous quarter that may be credited in every quarter shall not
exceed seventy percent (70%) of the output VAT: …"
Input Tax is defined under Section 110(A) of the NIRC, as
amended, as the value-added tax due from or paid by a VAT-
registered person on the importation of goods or local purchase of
good and services, including lease or use of property, in the course
of trade or business, from a VAT-registered person, and Output
Tax is the value-added tax due on the sale or lease of taxable
goods or properties or services by any person registered or
required to register under the law.
Petitioners claim that the contested sections impose limitations on
the amount of input tax that may be claimed. In effect, a portion of
the input tax that has already been paid cannot now be credited
against the output tax.
Petitioners’ argument is not absolute. It assumes that the input tax
exceeds 70% of the output tax, and therefore, the input tax in
excess of 70% remains uncredited. However, to the extent that the
input tax is less than 70% of the output tax, then 100% of such
input tax is still creditable.
More importantly, the excess input tax, if any, is retained in a
business’s books of accounts and remains creditable in the
succeeding quarter/s. This is explicitly allowed by Section 110(B),
which provides that "if the input tax exceeds the output tax, the
excess shall be carried over to the succeeding quarter or quarters."
In addition, Section 112(B) allows a VAT-registered person to apply
for the issuance of a tax credit certificate or refund for any unused
input taxes, to the extent that such input taxes have not been
applied against the output taxes. Such unused input tax may be
used in payment of his other internal revenue taxes.
The non-application of the unutilized input tax in a given quarter is
not ad infinitum, as petitioners exaggeratedly contend. Their
analysis of the effect of the 70% limitation is incomplete and one-
sided. It ends at the net effect that there will be
unapplied/unutilized inputs VAT for a given quarter. It does not
proceed further to the fact that such unapplied/unutilized input tax
may be credited in the subsequent periods as allowed by the carry-
over provision of Section 110(B) or that it may later on be
refunded through a tax credit certificate under Section 112(B).
Therefore, petitioners’ argument must be rejected.
On the other hand, it appears that petitioner Garcia failed to
comprehend the operation of the 70% limitation on the input tax.
According to petitioner, the limitation on the creditable input tax in
effect allows VAT-registered establishments to retain a portion of
the taxes they collect, which violates the principle that tax
collection and revenue should be for public purposes and
expenditures
As earlier stated, the input tax is the tax paid by a person, passed
on to him by the seller, when he buys goods. Output tax
meanwhile is the tax due to the person when he sells goods. In
computing the VAT payable, three possible scenarios may arise:
First, if at the end of a taxable quarter the output taxes charged by
the seller are equal to the input taxes that he paid and passed on
by the suppliers, then no payment is required;
Second, when the output taxes exceed the input taxes, the person
shall be liable for the excess, which has to be paid to the Bureau of
Internal Revenue (BIR);69 and
Third, if the input taxes exceed the output taxes, the excess shall
be carried over to the succeeding quarter or quarters. Should the
input taxes result from zero-rated or effectively zero-rated
transactions, any excess over the output taxes shall instead be
refunded to the taxpayer or credited against other internal revenue
taxes, at the taxpayer’s option.70
Section 8 of R.A. No. 9337 however, imposed a 70% limitation on
the input tax. Thus, a person can credit his input tax only up to the
extent of 70% of the output tax. In layman’s term, the value-
added taxes that a person/taxpayer paid and passed on to him by
a seller can only be credited up to 70% of the value-added taxes
that is due to him on a taxable transaction. There is no retention of
any tax collection because the person/taxpayer has already
previously paid the input tax to a seller, and the seller will
subsequently remit such input tax to the BIR. The party directly
liable for the payment of the tax is the seller. 71 What only needs to
be done is for the person/taxpayer to apply or credit these input
taxes, as evidenced by receipts, against his output taxes.
Petitioners Association of Pilipinas Shell Dealers, Inc., et al. also
argue that the input tax partakes the nature of a property that may
not be confiscated, appropriated, or limited without due process of
law.
The input tax is not a property or a property right within the
constitutional purview of the due process clause. A VAT-registered
person’s entitlement to the creditable input tax is a mere statutory
privilege.
The distinction between statutory privileges and vested rights must
be borne in mind for persons have no vested rights in statutory
privileges. The state may change or take away rights, which were
created by the law of the state, although it may not take away
property, which was vested by virtue of such rights.72
Under the previous system of single-stage taxation, taxes paid at
every level of distribution are not recoverable from the taxes
payable, although it becomes part of the cost, which is deductible
from the gross revenue. When Pres. Aquino issued E.O. No. 273
imposing a 10% multi-stage tax on all sales, it was then that the
crediting of the input tax paid on purchase or importation of goods
and services by VAT-registered persons against the output tax was
introduced.73 This was adopted by the Expanded VAT Law (R.A. No.
7716),74 and The Tax Reform Act of 1997 (R.A. No. 8424).75 The
right to credit input tax as against the output tax is clearly a
privilege created by law, a privilege that also the law can remove,
or in this case, limit.
Petitioners also contest as arbitrary, oppressive, excessive and
confiscatory, Section 8 of R.A. No. 9337, amending Section 110(A)
of the NIRC, which provides:
SEC. 110. Tax Credits. –
(A) Creditable Input Tax. – …
Provided, That the input tax on goods purchased or imported in a
calendar month for use in trade or business for which deduction for
depreciation is allowed under this Code, shall be spread evenly
over the month of acquisition and the fifty-nine (59) succeeding
months if the aggregate acquisition cost for such goods, excluding
the VAT component thereof, exceeds One million pesos
(₱1,000,000.00): Provided, however, That if the estimated useful
life of the capital goods is less than five (5) years, as used for
depreciation purposes, then the input VAT shall be spread over
such a shorter period: Provided, finally, That in the case of
purchase of services, lease or use of properties, the input tax shall
be creditable to the purchaser, lessee or license upon payment of
the compensation, rental, royalty or fee.
The foregoing section imposes a 60-month period within which to
amortize the creditable input tax on purchase or importation of
capital goods with acquisition cost of ₱1 Million pesos, exclusive of
the VAT component. Such spread out only poses a delay in the
crediting of the input tax. Petitioners’ argument is without basis
because the taxpayer is not permanently deprived of his privilege
to credit the input tax.
It is worth mentioning that Congress admitted that the spread-out
of the creditable input tax in this case amounts to a 4-year
interest-free loan to the government.76 In the same breath,
Congress also justified its move by saying that the provision was
designed to raise an annual revenue of 22.6 billion.77 The
legislature also dispelled the fear that the provision will fend off
foreign investments, saying that foreign investors have other tax
incentives provided by law, and citing the case of China, where
despite a 17.5% non-creditable VAT, foreign investments were not
deterred.78 Again, for whatever is the purpose of the 60-month
amortization, this involves executive economic policy and
legislative wisdom in which the Court cannot intervene.
With regard to the 5% creditable withholding tax imposed on
payments made by the government for taxable transactions,
Section 12 of R.A. No. 9337, which amended Section 114 of the
NIRC, reads:
SEC. 114. Return and Payment of Value-added Tax. –
(C) Withholding of Value-added Tax. – The Government or any of
its political subdivisions, instrumentalities or agencies, including
government-owned or controlled corporations (GOCCs) shall,
before making payment on account of each purchase of goods and
services which are subject to the value-added tax imposed in
Sections 106 and 108 of this Code, deduct and withhold a final
value-added tax at the rate of five percent (5%) of the gross
payment thereof: Provided, That the payment for lease or use of
properties or property rights to nonresident owners shall be subject
to ten percent (10%) withholding tax at the time of payment. For
purposes of this Section, the payor or person in control of the
payment shall be considered as the withholding agent.
The value-added tax withheld under this Section shall be remitted
within ten (10) days following the end of the month the withholding
was made.
Section 114(C) merely provides a method of collection, or as stated
by respondents, a more simplified VAT withholding system. The
government in this case is constituted as a withholding agent with
respect to their payments for goods and services.
Prior to its amendment, Section 114(C) provided for different rates
of value-added taxes to be withheld -- 3% on gross payments for
purchases of goods; 6% on gross payments for services supplied
by contractors other than by public works contractors; 8.5% on
gross payments for services supplied by public work contractors; or
10% on payment for the lease or use of properties or property
rights to nonresident owners. Under the present Section 114(C),
these different rates, except for the 10% on lease or property
rights payment to nonresidents, were deleted, and a uniform rate
of 5% is applied.
The Court observes, however, that the law the used the word final.
In tax usage, final, as opposed to creditable, means full. Thus, it is
provided in Section 114(C): "final value-added tax at the rate of
five percent (5%)."
In Revenue Regulations No. 02-98, implementing R.A. No. 8424
(The Tax Reform Act of 1997), the concept of final withholding tax
on income was explained, to wit:
SECTION 2.57. Withholding of Tax at Source
(A) Final Withholding Tax. – Under the final withholding tax system
the amount of income tax withheld by the withholding agent is
constituted as full and final payment of the income tax due from
the payee on the said income. The liability for payment of the tax
rests primarily on the payor as a withholding agent. Thus, in case
of his failure to withhold the tax or in case of underwithholding, the
deficiency tax shall be collected from the payor/withholding agent.
…
(B) Creditable Withholding Tax. – Under the creditable withholding
tax system, taxes withheld on certain income payments are
intended to equal or at least approximate the tax due of the payee
on said income. … Taxes withheld on income payments covered by
the expanded withholding tax (referred to in Sec. 2.57.2 of these
regulations) and compensation income (referred to in Sec. 2.78
also of these regulations) are creditable in nature.
As applied to value-added tax, this means that taxable transactions
with the government are subject to a 5% rate, which constitutes as
full payment of the tax payable on the transaction. This represents
the net VAT payable of the seller. The other 5% effectively
accounts for the standard input VAT (deemed input VAT), in lieu of
the actual input VAT directly or attributable to the taxable
transaction.79
The Court need not explore the rationale behind the provision. It is
clear that Congress intended to treat differently taxable
transactions with the government.80 This is supported by the fact
that under the old provision, the 5% tax withheld by the
government remains creditable against the tax liability of the seller
or contractor, to wit:
SEC. 114. Return and Payment of Value-added Tax. –
(C) Withholding of Creditable Value-added Tax. – The
Government or any of its political subdivisions, instrumentalities or
agencies, including government-owned or controlled corporations
(GOCCs) shall, before making payment on account of each
purchase of goods from sellers and services rendered by
contractors which are subject to the value-added tax imposed in
Sections 106 and 108 of this Code, deduct and withhold the value-
added tax due at the rate of three percent (3%) of the gross
payment for the purchase of goods and six percent (6%) on gross
receipts for services rendered by contractors on every sale or
installment payment which shall be creditable against the
value-added tax liability of the seller or contractor: Provided,
however, That in the case of government public works contractors,
the withholding rate shall be eight and one-half percent (8.5%):
Provided, further, That the payment for lease or use of properties
or property rights to nonresident owners shall be subject to ten
percent (10%) withholding tax at the time of payment. For this
purpose, the payor or person in control of the payment shall be
considered as the withholding agent.
The valued-added tax withheld under this Section shall be remitted
within ten (10) days following the end of the month the withholding
was made. (Emphasis supplied)
As amended, the use of the word final and the deletion of the
word creditable exhibits Congress’s intention to treat transactions
with the government differently. Since it has not been shown that
the class subject to the 5% final withholding tax has been
unreasonably narrowed, there is no reason to invalidate the
provision. Petitioners, as petroleum dealers, are not the only ones
subjected to the 5% final withholding tax. It applies to all those
who deal with the government.
Moreover, the actual input tax is not totally lost or uncreditable, as
petitioners believe. Revenue Regulations No. 14-2005 or the
Consolidated Value-Added Tax Regulations 2005 issued by the BIR,
provides that should the actual input tax exceed 5% of gross
payments, the excess may form part of the cost. Equally, should
the actual input tax be less than 5%, the difference is treated as
income.81
Petitioners also argue that by imposing a limitation on the
creditable input tax, the government gets to tax a profit or value-
added even if there is no profit or value-added.
Petitioners’ stance is purely hypothetical, argumentative, and
again, one-sided. The Court will not engage in a legal joust where
premises are what ifs, arguments, theoretical and facts, uncertain.
Any disquisition by the Court on this point will only be, as
Shakespeare describes life in Macbeth,82 "full of sound and fury,
signifying nothing."
What’s more, petitioners’ contention assumes the proposition that
there is no profit or value-added. It need not take an astute
businessman to know that it is a matter of exception that a
business will sell goods or services without profit or value-added. It
cannot be overstressed that a business is created precisely for
profit.
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."83
The power of the State to make reasonable and natural
classifications for the purposes of taxation has long been
established. Whether it relates to the subject of taxation, the kind
of property, the rates to be levied, or the amounts to be raised, the
methods of assessment, valuation and collection, the State’s power
is entitled to presumption of validity. As a rule, the judiciary will
not interfere with such power absent a clear showing of
unreasonableness, discrimination, or arbitrariness.84
Petitioners point out that the limitation on the creditable input tax
if the entity has a high ratio of input tax, or invests in capital
equipment, or has several transactions with the government, is not
based on real and substantial differences to meet a valid
classification.
The argument is pedantic, if not outright baseless. The law does
not make any classification in the subject of taxation, the kind of
property, the rates to be levied or the amounts to be raised, the
methods of assessment, valuation and collection. Petitioners’
alleged distinctions are based on variables that bear different
consequences. While the implementation of the law may yield
varying end results depending on one’s profit margin and value-
added, the Court cannot go beyond what the legislature has laid
down and interfere with the affairs of business.
The equal protection clause does not require the universal
application of the laws on all persons or things without distinction.
This might in fact sometimes result in unequal protection. What the
clause requires is equality among equals as determined according
to a valid classification. By classification is meant the grouping of
persons or things similar to each other in certain particulars and
different from all others in these same particulars.85
Petitioners brought to the Court’s attention the introduction of
Senate Bill No. 2038 by Sens. S.R. Osmeña III and Ma. Ana
Consuelo A.S. – Madrigal on June 6, 2005, and House Bill No. 4493
by Rep. Eric D. Singson. The proposed legislation seeks to amend
the 70% limitation by increasing the same to 90%. This, according
to petitioners, supports their stance that the 70% limitation is
arbitrary and confiscatory. On this score, suffice it to say that these
are still proposed legislations. Until Congress amends the law, and
absent any unequivocal basis for its unconstitutionality, the 70%
limitation stays.
B. Uniformity and Equitability of Taxation
Article VI, Section 28(1) of the Constitution reads:
The rule of taxation shall be uniform and equitable. The Congress
shall evolve a progressive system of taxation.
Uniformity in taxation means that all taxable articles or kinds of
property of the same class shall be taxed at the same rate.
Different articles may be taxed at different amounts provided that
the rate is uniform on the same class everywhere with all people at
all times.86
In this case, the tax law is uniform as it provides a standard rate of
0% or 10% (or 12%) on all goods and services. Sections 4, 5 and
6 of R.A. No. 9337, amending Sections 106, 107 and 108,
respectively, of the NIRC, provide for a rate of 10% (or 12%) on
sale of goods and properties, importation of goods, and sale of
services and use or lease of properties. These same sections also
provide for a 0% rate on certain sales and transaction.
Neither does the law make any distinction as to the type of
industry or trade that will bear the 70% limitation on the creditable
input tax, 5-year amortization of input tax paid on purchase of
capital goods or the 5% final withholding tax by the government. It
must be stressed that the rule of uniform taxation does not deprive
Congress of the power to classify subjects of taxation, and only
demands uniformity within the particular class.87
R.A. No. 9337 is also equitable. The law is equipped with a
threshold margin. The VAT rate of 0% or 10% (or 12%) does not
apply to sales of goods or services with gross annual sales or
receipts not exceeding ₱1,500,000.00.88 Also, basic marine and
agricultural food products in their original state are still not subject
to the tax,89 thus ensuring that prices at the grassroots level will
remain accessible. As was stated in Kapatiran ng mga Naglilingkod
sa Pamahalaan ng Pilipinas, Inc. vs. Tan:90
The disputed sales tax is also equitable. It is imposed only on sales
of goods or services by persons engaged in business with an
aggregate gross annual sales exceeding ₱200,000.00. Small
corner sari-sari stores are consequently exempt from its
application. Likewise exempt from the tax are sales of farm and
marine products, so that the costs of basic food and other
necessities, spared as they are from the incidence of the VAT, are
expected to be relatively lower and within the reach of the general
public.
It is admitted that R.A. No. 9337 puts a premium on businesses
with low profit margins, and unduly favors those with high profit
margins. Congress was not oblivious to this. Thus, to equalize the
weighty burden the law entails, the law, under Section 116,
imposed a 3% percentage tax on VAT-exempt persons under
Section 109(v), i.e., transactions with gross annual sales and/or
receipts not exceeding ₱1.5 Million. This acts as a equalizer
because in effect, bigger businesses that qualify for VAT coverage
and VAT-exempt taxpayers stand on equal-footing.
Moreover, Congress provided mitigating measures to cushion the
impact of the imposition of the tax on those previously exempt.
Excise taxes on petroleum products91 and natural gas92 were
reduced. Percentage tax on domestic carriers was
removed.93 Power producers are now exempt from paying franchise
tax.94
Aside from these, Congress also increased the income tax rates of
corporations, in order to distribute the burden of taxation.
Domestic, foreign, and non-resident corporations are now subject
to a 35% income tax rate, from a previous 32%.95 Intercorporate
dividends of non-resident foreign corporations are still subject to
15% final withholding tax but the tax credit allowed on the
corporation’s domicile was increased to 20%.96 The Philippine
Amusement and Gaming Corporation (PAGCOR) is not exempt from
income taxes anymore.97 Even the sale by an artist of his works or
services performed for the production of such works was not
spared.
All these were designed to ease, as well as spread out, the burden
of taxation, which would otherwise rest largely on the consumers.
It cannot therefore be gainsaid that R.A. No. 9337 is equitable.
C. Progressivity of Taxation
Lastly, petitioners contend that the limitation on the creditable
input tax is anything but regressive. It is the smaller business with
higher input tax-output tax ratio that will suffer the consequences.
Progressive taxation is built on the principle of the taxpayer’s
ability to pay. This principle was also lifted from Adam
Smith’s Canons of Taxation, and it states:
I. The subjects of every state ought to contribute towards the
support of the government, as nearly as possible, in proportion to
their respective abilities; that is, in proportion to the revenue which
they respectively enjoy under the protection of the state.
Taxation is progressive when its rate goes up depending on the
resources of the person affected.98
The VAT is an antithesis of progressive taxation. By its very nature,
it is regressive. The principle of progressive taxation has no
relation with the VAT system inasmuch as the VAT paid by the
consumer or business for every goods bought or services enjoyed
is the same regardless of income. In
other words, the VAT paid eats the same portion of an income,
whether big or small. The disparity lies in the income earned by a
person or profit margin marked by a business, such that the higher
the income or profit margin, the smaller the portion of the income
or profit that is eaten by VAT. A converso, the lower the income or
profit margin, the bigger the part that the VAT eats away. At the
end of the day, it is really the lower income group or businesses
with low-profit margins that is always hardest hit.
Nevertheless, the Constitution does not really prohibit the
imposition of indirect taxes, like the VAT. What it simply provides is
that Congress shall "evolve a progressive system of taxation." The
Court stated in the Tolentino case, thus:
The Constitution does not really prohibit the imposition of indirect
taxes which, like the VAT, are regressive. What it simply provides
is that Congress shall ‘evolve a progressive system of taxation.’
The constitutional provision has been interpreted to mean simply
that ‘direct taxes are . . . to be preferred [and] as much as
possible, indirect taxes should be minimized.’ (E. FERNANDO, THE
CONSTITUTION OF THE PHILIPPINES 221 (Second ed. 1977))
Indeed, the mandate to Congress is not to prescribe, but to evolve,
a progressive tax system. Otherwise, sales taxes, which perhaps
are the oldest form of indirect taxes, would have been prohibited
with the proclamation of Art. VIII, §17 (1) of the 1973 Constitution
from which the present Art. VI, §28 (1) was taken. Sales taxes are
also regressive.
Resort to indirect taxes should be minimized but not avoided
entirely because it is difficult, if not impossible, to avoid them by
imposing such taxes according to the taxpayers' ability to pay. In
the case of the VAT, the law minimizes the regressive effects of
this imposition by providing for zero rating of certain transactions
(R.A. No. 7716, §3, amending §102 (b) of the NIRC), while
granting exemptions to other transactions. (R.A. No. 7716, §4
amending §103 of the NIRC)99
CONCLUSION
It has been said that taxes are the lifeblood of the government. In
this case, it is just an enema, a first-aid measure to resuscitate an
economy in distress. The Court is neither blind nor is it turning a
deaf ear on the plight of the masses. But it does not have the
panacea for the malady that the law seeks to remedy. As in other
cases, the Court cannot strike down a law as unconstitutional
simply because of its yokes.
Let us not be overly influenced by the plea that for every wrong
there is a remedy, and that the judiciary should stand ready to
afford relief. There are undoubtedly many wrongs the judicature
may not correct, for instance, those involving political questions. . .
.
Let us likewise disabuse our minds from the notion that the
judiciary is the repository of remedies for all political or social ills;
We should not forget that the Constitution has judiciously allocated
the powers of government to three distinct and separate
compartments; and that judicial interpretation has tended to the
preservation of the independence of the three, and a zealous
regard of the prerogatives of each, knowing full well that one is not
the guardian of the others and that, for official wrong-doing, each
may be brought to account, either by impeachment, trial or by the
ballot box.100
The words of the Court in Vera vs. Avelino101 holds true then, as it
still holds true now. All things considered, there is no raison
d'être for the unconstitutionality of R.A. No. 9337.
WHEREFORE, Republic Act No. 9337 not being unconstitutional, the
petitions in G.R. Nos. 168056, 168207, 168461, 168463, and
168730, are hereby DISMISSED.
There being no constitutional impediment to the full enforcement
and implementation of R.A. No. 9337, the temporary restraining
order issued by the Court on July 1, 2005 is LIFTED upon finality
of herein decision.
SO ORDERED.
G.R. No. 88291 May 31, 1991
ERNESTO M. MACEDA, petitioner,
vs.
HON. CATALINO MACARAIG, JR., in his capacity as Executive
Secretary, Office of the President; HON. VICENTE R. JAYME,
in his capacity as Secretary of the Department of Finance;
HON. SALVADOR MISON, in his capacity as Commissioner,
Bureau of Customs; HON. JOSE U. ONG, in his capacity as
Commissioner of Internal Revenue; NATIONAL POWER
CORPORATION; the FISCAL INCENTIVES REVIEW BOARD;
Caltex (Phils.) Inc.; Pilipinas Shell Petroleum Corporation;
Philippine National Oil Corporation; and Petrophil
Corporation, respondents.
Villamor & Villamor Law Offices for petitioner.
Angara, Abello, Concepcion, Regala & Cruz for Pilipinas Shell
Petroleum Corporation.
Siguion Reyna, Montecillo & Ongsiako for Caltex (Phils.), Inc.
GANCAYCO, J.:
This petition seeks to nullify certain decisions, orders, rulings, and
resolutions of respondents Executive Secretary, Secretary of
Finance, Commissioner of Internal Revenue, Commissioner of
Customs and the Fiscal Incentives Review Board FIRB for
exempting the National Power Corporation (NPC) from indirect tax
and duties.
The relevant facts are not in dispute.
On November 3, 1986, Commonwealth Act No. 120 created the
NPC as a public corporation to undertake the development of
hydraulic power and the production of power from other sources. 1
On June 4, 1949, Republic Act No. 358 granted NPC tax and duty
exemption privileges under—
Sec. 2. To facilitate payment of its indebtedness, the National
Power Corporation shall be exempt from all taxes, duties, fees,
imposts, charges and restrictions of the Republic of the Philippines,
its provinces, cities and municipalities.
On September 10, 1971, Republic Act No. 6395 revised the charter
of the NPC wherein Congress declared as a national policy the total
electrification of the Philippines through the development of power
from all sources to meet the needs of industrial development and
rural electrification which should be pursued coordinately and
supported by all instrumentalities and agencies of the government,
including its financial institutions.2 The corporate existence of NPC
was extended to carry out this policy, specifically to undertake the
development of hydro electric generation of power and the
production of electricity from nuclear, geothermal and other
sources, as well as the transmission of electric power on a
nationwide basis.3 Being a non-profit corporation, Section 13 of the
law provided in detail the exemption of the NPC from all taxes,
duties, fees, imposts and other charges by the government and its
instrumentalities.
On January 22, 1974, Presidential Decree No. 380 amended
section 13, paragraphs (a) and (d) of Republic Act No. 6395 by
specifying, among others, the exemption of NPC from such taxes,
duties, fees, imposts and other charges imposed "directly or
indirectly," on all petroleum products used by NPC in its operation.
Presidential Decree No. 938 dated May 27, 1976 further amended
the aforesaid provision by integrating the tax exemption in general
terms under one paragraph.
On June 11, 1984, Presidential Decree No. 1931 withdrew all tax
exemption privileges granted in favor of government-owned or
controlled corporations including their subsidiaries.4 However, said
law empowered the President and/or the then Minister of Finance,
upon recommendation of the FIRB to restore, partially or totally,
the exemption withdrawn, or otherwise revise the scope and
coverage of any applicable tax and duty.
Pursuant to said law, on February 7, 1985, the FIRB issued
Resolution No. 10-85 restoring the tax and duty exemption
privileges of NPC from June 11, 1984 to June 30, 1985. On January
7, 1986, the FIRB issued resolution No. 1-86 indefinitely restoring
the NPC tax and duty exemption privileges effective July 1, 1985.
However, effective March 10, 1987, Executive Order No. 93 once
again withdrew all tax and duty incentives granted to government
and private entities which had been restored under Presidential
Decree Nos. 1931 and 1955 but it gave the authority to FIRB to
restore, revise the scope and prescribe the date of effectivity of
such tax and/or duty exemptions.
On June 24, 1987 the FIRB issued Resolution No. 17-87 restoring
NPC's tax and duty exemption privileges effective March 10, 1987.
On October 5, 1987, the President, through respondent Executive
Secretary Macaraig, Jr., confirmed and approved FIRB Resolution
No. 17-87.
As alleged in the petition, the following are the background facts:
The following are the facts relevant to NPC's questioned claim for
refunds of taxes and duties originally paid by respondents Caltex,
Petrophil and Shell for specific and ad valorem taxes to the BIR;
and for Customs duties and ad valorem taxes paid by PNOC, Shell
and Caltex to the Bureau of Customs on its crude oil importation.
Many of the factual statements are reproduced from the Senate
Committee on Accountability of Public Officers and Investigations
(Blue Ribbon) Report No. 474 dated January 12, 1989 and
approved by the Senate on April 21, 1989 (copy attached hereto as
Annex "A") and are identified in quotation marks:
1. Since May 27, 1976 when P.D. No. 938 was issued until June 11,
1984 when P.D. No. 1931 was promulgated abolishing the tax
exemptions of all government-owned or-controlled corporations,
the oil firms never paid excise or specific and ad valorem taxes for
petroleum products sold and delivered to the NPC. This non-
payment of taxes therefore spanned a period of eight (8) years.
(par. 23, p. 7, Annex "A")
During this period, the Bureau of Internal Revenue was not
collecting specific taxes on the purchases of NPC of petroleum
products from the oil companies on the erroneous belief that the
National Power Corporation (NPC) was exempt from indirect taxes
as reflected in the letter of Deputy Commissioner of Internal
Revenue (DCIR) Romulo Villa to the NPC dated October 29, 1980
granting blanket authority to the NPC to purchase petroleum
products from the oil companies without payment of specific tax
(copy of this letter is attached hereto as petitioner's Annex "B").
2. The oil companies started to pay specific and ad valorem taxes
on their sales of oil products to NPC only after the promulgation of
P.D. No. 1931 on June 11, 1984, withdrawing all exemptions
granted in favor of government-owned or-controlled corporations
and empowering the FIRB to recommend to the President or to the
Minister of Finance the restoration of the exemptions which were
withdrawn. "Specifically, Caltex paid the total amount of
P58,020,110.79 in specific and ad valorem taxes for deliveries of
petroleum products to NPC covering the period from October 31,
1984 to April 27, 1985." (par. 23, p. 7, Annex "A")
3. Caltex billings to NPC until June 10, 1984 always included
customs duty without the tax portion. Beginning June 11, 1984,
when P.D. 1931 was promulgated abolishing NPC's tax exemptions,
Caltex's billings to NPC always included both duties and taxes.
(Caturla, tsn, Oct. 10, 1988, pp. 1-5) (par. 24, p, 7, Annex "A")
4. For the sales of petroleum products delivered to NPC during the
period from October, 1984 to April, 1985, NPC was billed a total of
P522,016,77.34 (sic) including both duties and taxes, the specific
tax component being valued at P58,020,110.79. (par. 25, p. 8,
Annex "A").
5. Fiscal Incentives Review Board (FIRB) Resolution 10-85, dated
February 7, 1985, certified true copy of which is hereto attached as
Annex "C", restored the tax exemption privileges of NPC effective
retroactively to June 11, 1984 up to June 30, 1985. The first
paragraph of said resolution reads as follows:
1. Effective June 11, 1984, the tax and duty exemption privileges
enjoyed by the National Power Corporation under C.A. No. 120, as
amended, are restored up to June 30, 1985.
Because of this restoration (Annex "G") the NPC applied on
September 11, 1985 with the BIR for a "refund of Specific Taxes
paid on petroleum products . . . in the total amount of
P58,020,110.79. (par. 26, pp. 8-9, Annex "A")
6. In a letter to the president of the NPC dated May 8, 1985 (copy
attached as petitioner's Annex "D"), Acting BIR Commissioner
Ruben Ancheta declared:
FIRB Resolution No. 10-85 serves as sufficient basis to allow NPC
to purchase petroleum products from the oil companies free of
specific and ad valorem taxes, during the period in question.
The "period in question" is June 1 1, 1 984 to June 30, 1 985.
7. On June 6, 1985—The president of the NPC, Mr. Gabriel Itchon,
wrote Mr. Cesar Virata, Chairman of the FIRB (Annex "E"),
requesting "the FIRB to resolve conflicting rulings on the tax
exemption privileges of the National Power Corporation (NPC)."
These rulings involve FIRB Resolutions No. 1-84 and 10-85. (par.
40, p. 12, Annex "A")
8. In a letter to the President of NPC (Annex "F"), dated June 26,
1985, Minister Cesar Virata confirmed the ruling of May 8, 1985 of
Acting BIR Commissioner Ruben Ancheta, (par. 41, p. 12, Annex
"A")
9. On October 22, 1985, however, under BIR Ruling No. 186-85,
addressed to Hanil Development Co., Ltd., a Korean contractor of
NPC for its infrastructure projects, certified true copy of which is
attached hereto as petitioner's Annex "E", BIR Acting
Commissioner Ruben Ancheta ruled:
In Reply please be informed that after a re-study of Section 13,
R.A. 6395, as amended by P.D. 938, this Office is of the opinion,
and so holds, that the scope of the tax exemption privilege enjoyed
by NPC under said section covers only taxes for which it is directly
liable and not on taxes which are only shifted to it. (Phil. Acetylene
vs. C.I.R. et al., G.R. L-19707, Aug. 17, 1967) Since contractor's
tax is directly payable by the contractor, not by NPC, your request
for exemption, based on the stipulation in the aforesaid contract
that NPC shall assume payment of your contractor's tax liability,
cannot be granted for lack of legal basis." (Annex "H") (emphasis
added)
Said BIR ruling clearly states that NPC's exemption privileges
covers (sic) only taxes for which it is directly liable and does not
cover taxes which are only shifted to it or for indirect taxes. The
BIR, through Ancheta, reversed its previous position of May 8,
1985 adopted by Ancheta himself favoring NPC's indirect tax
exemption privilege.
10. Furthermore, "in a BIR Ruling, unnumbered, "dated June 30,
1986, "addressed to Caltex (Annex "F"), the BIR Commissioner
declared that PAL's tax exemption is limited to taxes for which PAL
is directly liable, and that the payment of specific and ad
valorem taxes on petroleum products is a direct liability of the
manufacturer or producer thereof". (par. 51, p. 15, Annex "A")
11. On January 7, 1986, FIRB Resolution No. 1-86 was issued
restoring NPC's tax exemptions retroactively from July 1, 1985 to a
indefinite period, certified true copy of which is hereto attached as
petitioner's Annex "H".
12. NPC's total refund claim was P468.58 million but only a portion
thereof i.e. the P58,020,110.79 (corresponding to Caltex) was
approved and released by way of a Tax Credit Memo (Annex "Q")
dated July 7, 1986, certified true copy of which [is) attached hereto
as petitioner's Annex "F," which was assigned by NPC to Caltex.
BIR Commissioner Tan approved the Deed of Assignment on July
30, 1987, certified true copy of which is hereto attached as
petitioner's Annex "G"). (pars. 26, 52, 53, pp. 9 and 15, Annex
"A")
The Deed of Assignment stipulated among others that NPC is
assigning the tax credit to Caltex in partial settlement of its
outstanding obligations to the latter while Caltex, in turn, would
apply the assigned tax credit against its specific tax payments for
two (2) months. (per memorandum dated July 28, 1986 of DCIR
Villa, copy attached as petitioner Annex "G")
13. As a result of the favorable action taken by the BIR in the
refund of the P58.0 million tax credit assigned to Caltex, the NPC
reiterated its request for the release of the balance of its pending
refunds of taxes paid by respondents Petrophil, Shell and Caltex
covering the period from June 11, 1984 to early part of 1986
amounting to P410.58 million. (The claim of the first two (2) oil
companies covers the period from June 11, 1984 to early part of
1986; while that of Caltex starts from July 1, 1985 to early 1986).
This request was denied on August 18, 1986, under BIR Ruling
152-86 (certified true copy of which is attached hereto as
petitioner's Annex "I"). The BIR ruled that NPC's tax free privilege
to buy petroleum products covered only the period from June 11,
1984 up to June 30, 1985. It further declared that, despite FIRB
No. 1-86, NPC had already lost its tax and duty exemptions
because it only enjoys special privilege for taxes for which it
is directly liable. This ruling, in effect, denied the P410 Million tax
refund application of NPC (par. 28, p. 9, Annex "A")
14. NPC filed a motion for reconsideration on September 18, 1986.
Until now the BIR has not resolved the motion. (Benigna, II 3, Oct.
17, 1988, p. 2; Memorandum for the Complainant, Oct. 26, 1988,
p. 15)." (par. 29, p. 9, Annex "A")
15. On December 22, 1986, in a 2nd Indorsement to the Hon.
Fulgencio S. Factoran, Jr., BIR Commissioner Tan, Jr. (certified
true copy of which is hereto attached and made a part hereof as
petitioner's Annex "J"), reversed his previous position and states
this time that all deliveries of petroleum products to NPC are tax
exempt, regardless of the period of delivery.
16. On December 17, 1986, President Corazon C. Aquino enacted
Executive Order No. 93, entitled "Withdrawing All Tax and Duty
Incentives, Subject to Certain Exceptions, Expanding the Powers of
the Fiscal Incentives Review Board and Other Purposes."
17. On June 24, 1987, the FIRB issued Resolution No. 17-87, which
restored NPC's tax exemption privilege and included in the
exemption "those pertaining to its domestic purchases of
petroleum and petroleum products, and the restorations were
made to retroact effective March 10, 1987, a certified true copy of
which is hereto attached and made a part hereof as Annex "K".
18. On August 6, 1987, the Hon. Sedfrey A. Ordoñez, Secretary of
Justice, issued Opinion No. 77, series of 1987, opining that "the
power conferred upon Fiscal Incentives Review Board by Section 2a
(b), (c) and (d) of Executive order No. 93 constitute undue
delegation of legislative power and, therefore, [are]
unconstitutional," a copy of which is hereto attached and made a
part hereof as Petitioner's Annex "L."
19. On October 5, 1987, respondent Executive Secretary Macaraig,
Jr. in a Memorandum to the Chairman of the FIRB a certified true
copy of which is hereto attached and made a part hereof as
petitioner's Annex "M," confirmed and approved FIRB Res. No. 17-
87 dated June 24, 1987, allegedly pursuant to Sections 1 (f) and 2
(e) of Executive Order No. 93.
20. Secretary Vicente Jayme in a reply dated May 20, 1988 to
Secretary Catalino Macaraig, who by letter dated May 2, 1988
asked him to rule "on whether or not, as the law now stands, the
National Power Corporation is still exempt from taxes, duties . . .
on its local purchases of . . . petroleum products . . ." declared that
"NPC under the provisions of its Revised Charter retains its
exemption from duties and taxes imposed on the petroleum
products purchased locally and used for the generation of
electricity," a certified true copy of which is attached hereto as
petitioner's Annex "N." (par. 30, pp. 9-10, Annex "A")
21. Respondent Executive Secretary came up likewise with a
confirmatory letter dated June 1 5, 1988 but without the usual
official form of "By the Authority of the President," a certified true
copy of which is hereto attached and made a part hereof as
Petitioner's Annex "O".
22. The actions of respondents Finance Secretary and the
Executive Secretary are based on the RESOLUTION No. 17-87 of
FIRB restoring the tax and duty exemption of the respondent NPC
pertaining to its domestic purchases of petroleum products
(petitioner's Annex K supra).
23. Subsequently, the newspapers particularly, the Daily Globe, in
its issue of July 11, 1988 reported that the Office of the President
and the Department of Finance had ordered the BIR to refund the
tax payments of the NPC amounting to Pl.58 Billion which includes
the P410 Million Tax refund already rejected by BIR Commissioner
Tan, Jr., in his BIR Ruling No. 152-86. And in a letter dated July
28, 1988 of Undersecretary Marcelo B. Fernando to BIR
Commissioner Tan, Jr. the Pl.58 Billion tax refund was ordered
released to NPC (par. 31, p. 1 0, Annex "A")
24. On August 8, 1988, petitioner "wrote both Undersecretary
Fernando and Commissioner Tan requesting them to hold in
abeyance the release of the Pl.58 billion and await the outcome of
the investigation in regard to Senate Resolution No. 227," copies
attached as Petitioner's Annexes "P" and "P-1 " (par. 32, p. 10,
Annex "A").
Reacting to this letter of the petitioner, Undersecretary Fernando
wrote Commissioner Tan of the BIR dated August, 1988 requesting
him to hold in abeyance the release of the tax refunds to NPC until
after the termination of the Blue Ribbon investigation.
25. In the Bureau of Customs, oil companies import crude oil and
before removal thereof from customs custody, the corresponding
customs duties and ad valorem taxes are paid. Bunker fuel oil is
one of the petroleum products processed from the crude oil; and
same is sold to NPC. After the sale, NPC applies for tax credit
covering the duties and ad valorem exemption under its Charter.
Such applications are processed by the Bureau of Customs and the
corresponding tax credit certificates are issued in favor of NPC
which, in turn assigns it to the oil firm that imported the crude oil.
These certificates are eventually used by the assignee-oil firms in
payment of their other duty and tax liabilities with the Bureau of
Customs. (par. 70, p. 19, Annex "A")
A lesser amount totalling P740 million, covering the period from
1985 to the present, is being sought by respondent NPC for refund
from the Bureau of Customs for duties paid by the oil companies
on the importation of crude oil from which the processed products
sold locally by them to NPC was derived. However, based on
figures submitted to the Blue Ribbon Committee of the Philippine
Senate which conducted an investigation on this matter as
mandated by Senate Resolution No. 227 of which the herein
petitioner was the sponsor, a much bigger figure was actually
refunded to NPC representing duties and ad valorem taxes paid to
the Bureau of Customs by the oil companies on the importation of
crude oil from 1979 to 1985.
26. Meantime, petitioner, as member of the Philippine Senate
introduced P.S. Res. No. 227, entitled:
Resolution Directing the Senate Blue Ribbon Committee, In Aid of
Legislation, To conduct a Formal and Extensive Inquiry into the
Reported Massive Tax Manipulations and Evasions by Oil
Companies, particularly Caltex (Phils.) Inc., Pilipinas Shell and
Petrophil, Which Were Made Possible By Their Availing of the Non-
Existing Exemption of National Power Corporation (NPC) from
Indirect Taxes, Resulting Recently in Their Obtaining A Tax Refund
Totalling P1.55 Billion From the Department of Finance, Their
Refusal to Pay Since 1976 Customs Duties Amounting to Billions of
Pesos on Imported Crude Oil Purportedly for the Use of the
National Power Corporation, the Non-Payment of Surtax on
Windfall Profits from Increases in the Price of Oil Products in
August 1987 amounting Maybe to as Much as Pl.2 Billion Surtax
Paid by Them in 1984 and For Other Purposes.
27. Acting on the above Resolution, the Blue Ribbon Committee of
the Senate did conduct a lengthy formal inquiry on the matter,
calling all parties interested to the witness stand including
representatives from the different oil companies, and in due time
submitted its Committee Report No. 474 . . . — The Blue Ribbon
Committee recommended the following courses of action.
1. Cancel its approval of the tax refund of P58,020,110.70 to the
National Power Corporation (NPC) and its approval of Tax Credit
memo covering said amount (Annex "P" hereto), dated July 7,
1986, and cancel its approval of the Deed of Assignment (Annex
"Q" hereto) by NPC to Caltex, dated July 28, 1986, and collect from
Caltex its tax liabilities which were erroneously treated as paid or
settled with the use of the tax credit certificate that NPC assigned
to said firm.:
1.1. NPC did not have any indirect tax exemption since May 27,
1976 when PD 938 was issued. Therefore, the grant of a tax refund
to NPC in the amount of P58 million was illegal, and therefore, null
and void. Such refund was a nullity right from the beginning.
Hence, it never transferred any right in favor of NPC.
2. Stop the processing and/or release of Pl.58 billion tax refund to
NPC and/or oil companies on the same ground that the NPC, since
May 27, 1976 up to June 17, 1987 was never granted any indirect
tax exemption. So, the P1.58 billion represent taxes legally and
properly paid by the oil firms.
3. Start collection actions of specific or excise and ad
valorem taxes due on petroleum products sold to NPC from May
27, 1976 (promulgation of PD 938) to June 17, 1987 (issuance of
EO 195).
B. For the Bureau of Customs (BOC) to do the following:
1. Start recovery actions on the illegal duty refunds or duty credit
certificates for purchases of petroleum products by NPC and
allegedly granted under the NPC charter covering the years 1978-
1988 . . .
28. On March 30, 1989, acting on the request of respondent
Finance Secretary for clearance to direct the Bureau of Internal
Revenue and of Customs to proceed with the processing of claims
for tax credits/refunds of the NPC, respondent Executive Secretary
rendered his ruling, the dispositive portion of which reads:
IN VIEW OF THE FOREGOING, the clearance is hereby GRANTED
and, accordingly, unless restrained by proper authorities, that
department and/or its line-tax bureaus may now proceed with the
processing of the claims of the National Power Corporation for duty
and tax free exemption and/or tax credits/ refunds, if there be any,
in accordance with the ruling of that Department dated May
20,1988, as confirmed by this Office on June 15, 1988 . . . 5
Hence, this petition for certiorari, prohibition and mandamus with
prayer for a writ of preliminary injunction and/or restraining order,
praying among others that:
1. Upon filing of this petition, a temporary restraining order
forthwith be issued against respondent FIRB Executive Secretary
Macaraig, and Secretary of Finance Jayme restraining them and
other persons acting for, under, and in their behalf from enforcing
their resolution, orders and ruling, to wit:
A. FIRB Resolution No. 17-87 dated June 24, 1987 (petitioner's
Annex "K");
B. Memorandum-Order of the Office of the President dated October
5, 1987 (petitioner's Annex "M");
C. Order of the Executive Secretary dated June 15, 1988
(petitioner's Annex "O");
D. Order of the Executive Secretary dated March 30, l989
(petitioner's Annex "Q"); and
E. Ruling of the Finance Secretary dated May 20, 1988 (petitioner's
Annex "N").
2. Said temporary restraining order should also include respondent
Commissioners of Customs Mison and Internal Revenue Ong
restraining them from processing and releasing any pending claim
or application by respondent NPC for tax and duty refunds.
3. Thereafter, and during the pendency of this petition, to issue a
writ or preliminary injunction against above-named respondents
and all persons acting for and in their behalf.
4. A decision be rendered in favor of the petitioner and against the
respondents:
A. Declaring that respondent NPC did not enjoy indirect tax
exemption privilege since May 27, 1976 up to the present;
B. Nullifying the setting aside the following:
1. FIRB Resolution No. 17-87 dated June 24, 1987 (petitioner's
Annex "K");
2. Memorandum-Order of the Office of the President dated October
5, 1987 (petitioner's Annex "M");
3. Order of the Executive Secretary dated June 15, 1988
(petitioner's Annex "O");
4. Order of the Executive Secretary dated March 30, 1989
(petitioner's Annex "Q");
5. Ruling of the Finance Secretary dated May 20, 1988 (petitioner's
Annex "N"
6. Tax Credit memo dated July 7, 1986 issued to respondent NPC
representing tax refund for P58,020,110.79 (petitioner's Annex
"F");
7. Deed of Assignment of said tax credit memo to respondent
Caltex dated July 30, 1987 (petitioner's Annex "G");
8. Application of the assigned tax credit of Caltex in payment of its
tax liabilities with the Bureau of Internal Revenue and
9. Illegal duty and tax refunds issued by the Bureau of Customs to
respondent NPC by way of tax credit certificates from 1979 up to
the present.
C. Declaring as illegal and null and void the pending claims for tax
and duty refunds by respondent NPC with the Bureau of Customs
and the Bureau of Internal Revenue;
D. Prohibiting respondents Commissioner of Customs and
Commissioner of Internal Revenue from enforcing the
abovequestioned resolution, orders and ruling of respondents
Executive Secretary, Secretary of Finance, and FIRB by processing
and releasing respondent NPC's tax and duty refunds;
E. Ordering the respondent Commissioner of Customs to deny as
being null and void the pending claims for refund of respondent
NPC with the Bureau of Customs covering the period from 1985 to
the present; to cancel and invalidate the illegal payment made by
respondents Caltex, Shell and PNOC by using the tax credit
certificates assigned to them by NPC and to recover from
respondents Caltex, Shell and PNOC all the amounts appearing in
said tax credit certificates which were used to settle their duty and
tax liabilities with the Bureau of Customs.
F. Ordering respondent Commissioner of Internal Revenue to deny
as being null and void the pending claims for refund of respondent
NPC with the Bureau of Internal Revenue covering the period from
June 11, 1984 to June 17, 1987.
PETITIONER prays for such other relief and remedy as may be just
and equitable in the premises.6
The issues raised in the petition are the following:
To determine whether respondent NPC is legally entitled to the
questioned tax and duty refunds, this Honorable Court must
resolve the following issues:
Main issue—
Whether or not the respondent NPC has ceased to
enjoy indirect tax and duty exemption with the enactment of P.D.
No. 938 on May 27, 1976 which amended P.D. No. 380, issued on
January 11, 1974.
Corollary issues—
1. Whether or not FIRB Resolution No. 10-85 dated February 7,
1985 which restored NPC's tax exemption privilege effective June
11, 1984 to June 30, 1985 and FIRB Resolution No. 1-86 dated
January 7, 1986 restoring NPC's tax exemption privilege effective
July 1, 1985 included the restoration of indirect tax exemption to
NPC and
2. Whether or not FIRB could validly and legally issue Resolution
No. 17-87 dated June 24, 1987 which restored NPC's tax
exemption privilege effective March 10, 1987; and if said
Resolution was validly issued, the nature and extent of the tax
exemption privilege restored to NPC.7
In a resolution dated June 6, 1989, the Court, without giving due
course to the petition, required respondents to comment thereon,
within ten (10) days from notice. The respondents having
submitted their comment, on October 10, 1989 the Court required
petitioner to file a consolidated reply to the same. After said reply
was filed by petitioner on November 15, 1989 the Court gave due
course to the petition, considering the comments of respondents as
their answer to the petition, and requiring the parties to file
simultaneously their respective memoranda within twenty (20)
days from notice. The parties having submitted their respective
memoranda, the petition was deemed submitted for resolution.
First the preliminary issues.
Public respondents allege that petitioner does not have the
standing to challenge the questioned orders and resolution.
In the petition it is alleged that petitioner is "instituting this suit in
his capacity as a taxpayer and a duly-elected Senator of the
Philippines." Public respondent argues that petitioner must show he
has sustained direct injury as a result of the action and that it is
not sufficient for him to have a mere general interest common to
all members of the public.8
The Court however agrees with the petitioner that as a taxpayer he
may file the instant petition following the ruling in Lozada when it
involves illegal expenditure of public money. The petition questions
the legality of the tax refund to NPC by way of tax credit
certificates and the use of said assigned tax credits by respondent
oil companies to pay for their tax and duty liabilities to the BIR and
Bureau of Customs.
Assuming petitioner has the personality to file the petition, public
respondents also allege that the proper remedy for petitioner is an
appeal to the Court of Tax Appeals under Section 7 of R.A. No. 125
instead of this petition. However Section 11 of said law provides—
Sec. 11. Who may appeal; effect of appeal—Any person,
association or corporation adversely affected by a decision or ruling
of the Commissioner of Internal Revenue, the Collector of Customs
(Commissioner of Customs) or any provincial or City Board of
Assessment Appeals may file an appeal in the Court of Tax Appeals
within thirty days after receipt of such decision or ruling.
From the foregoing, it is only the taxpayer adversely affected by a
decision or ruling of the Commissioner of Internal Revenue, the
Commissioner of Customs or any provincial or city Board of
Assessment Appeal who may appeal to the Court of Tax Appeals.
Petitioner does not fall under this category.
Public respondents also contend that mandamus does not lie to
compel the Commissioner of Internal Revenue to impose a tax
assessment not found by him to be proper. It would be tantamount
to a usurpation of executive functions.9
Even in Meralco, this Court recognizes the situation
when mandamus can control the discretion of the Commissioners
of Internal Revenue and Customs when the exercise of discretion is
tainted with arbitrariness and grave abuse as to go beyond
statutory authority.10
Public respondents then assert that a writ of prohibition is not
proper as its function is to prevent an unlawful exercise of
jurisdiction11 or to prevent the oppressive exercise of legal
authority.12 Precisely, petitioner questions the lawfulness of the
acts of public respondents in this case.
Now to the main issue.
It may be useful to make a distinction, for the purpose of this
disposition, between a direct tax and an indirect tax. A direct tax is
a tax for which a taxpayer is directly liable on the transaction or
business it engages in. Examples are the custom duties and ad
valorem taxes paid by the oil companies to the Bureau of Customs
for their importation of crude oil, and the specific and ad
valorem taxes they pay to the Bureau of Internal Revenue after
converting the crude oil into petroleum products.
On the other hand, "indirect taxes are taxes primarily paid by
persons who can shift the burden upon someone else ." 13 For
example, the excise and ad valorem taxes that oil companies pay
to the Bureau of Internal Revenue upon removal of petroleum
products from its refinery can be shifted to its buyer, like the NPC,
by adding them to the "cash" and/or "selling price."
The main thrust of the petition is that under the latest amendment
to the NPC charter by Presidential Decree No. 938, the exemption
of NPC from indirect taxation was revoked and repealed. While
petitioner concedes that NPC enjoyed broad exemption privileges
from both direct and indirect taxes on the petroleum products it
used, under Section 13 of Republic Act No, 6395 and more so
under Presidential Decree No. 380, however, by the deletion of the
phrases "directly or indirectly" and "on all petroleum products used
by the Corporation in the generation, transmission, utilization and
sale of electric power" he contends that the exemption from
indirect taxes was withdrawn by P.D. No. 938.
Petitioner further states that the exemption of NPC provided in
Section 13 of Presidential Decree No. 938 regarding the payments
of "all forms of taxes, etc." cannot be interpreted to include indirect
tax exemption. He cites Philippine Aceytelene Co. Inc. vs.
Commissioner of Internal Revenue.14 Petitioner emphasizes the
principle in taxation that the exception contained in the tax
statutes must be strictly construed against the one claiming the
exemption, and that the rule that a tax statute granting exemption
must be strictly construed against the one claiming the exemption
is similar to the rule that a statute granting taxing power is to be
construed strictly, with doubts resolved against its
existence.15 Petitioner cites rulings of the BIR that the phrase
exemption from "all taxes, etc." from "all forms of taxes" and "in
lieu of all taxes" covers only taxes for which the taxpayer is directly
liable.16
On the corollary issues. First, FIRB Resolution Nos. 10-85 and 10-
86 issued under Presidential Decree No. 1931, the relevant
provision of which are to wit:
P.D. No. 1931 provides as follows:
Sec. 1. The provisions of special or general law to the contrary
notwithstanding, all exemptions from the payment of duties,
taxes . . . heretofore granted in favor of government-owned or
controlled corporations are hereby withdrawn. (Emphasis supplied.)
Sec. 2. The President of the Philippines and/or the Minister of
Finance, upon the recommendation of the Fiscal Incentives Review
Board . . . is hereby empowered to restore, partially or totally, the
exemptions withdrawn by Section 1 above . . . (Emphasis
supplied.)
The relevant provisions of FIRB resolution Nos. 10-85 and 1-86 are
the following:
Resolution. No. 10-85
BE IT RESOLVED AS IT IS HEREBY RESOLVED, That:
1. Effective June 11, 1984, the tax and duty exemption privileges
enjoyed by the National Power Corporation under C.A. No. 120 as
amended are restored up to June 30, 1985.
2. Provided, That to restoration does not apply to the following:
a. importations of fuel oil (crude equivalent) and coal as per FIRB
Resolution No. 1-84;
b. commercially-funded importations; and
c. interest income derived from any investment source.
3. Provided further, That in case of importations funded by
international financing agreements, the NPC is hereby required to
furnish the FIRB on a periodic basis the particulars of items
received or to be received through such arrangements, for
purposes of tax and duty exemptions privileges.17
Resolution No. 1-86
BE IT RESOLVED AS IT IS HEREBY RESOLVED: That:
1. Effective July 1, 1985, the tax and duty exemption privileges
enjoyed by the National Power Corporation (NPC) under
Commonwealth Act No. 120, as amended, are restored: Provided,
That importations of fuel oil (crude oil equivalent), and coal of the
herein grantee shall be subject to the basic and additional import
duties; Provided, further, that the following shall remain fully
taxable:
a. Commercially-funded importations; and
b. Interest income derived by said grantee from bank deposits and
yield or any other monetary benefits from deposit substitutes, trust
funds and other similar arrangements.
2. The NPC as a government corporation is exempt from the real
property tax on land and improvements owned by it provided that
the beneficial use of the property is not transferred to another
pursuant to the provisions of Sec. 10(a) of the Real Property Tax
Code, as amended.18
Petitioner does not question the validity and enforceability of FIRB
Resolution Nos. 10-85 and 1-86. Indeed, they were issued in
compliance with the requirement of Section 2, P.D. No. 1931,
whereby the FIRB should make the recommendation subject to the
approval of "the President of the Philippines and/or the Minister of
Finance." While said Resolutions do not appear to have been
approved by the President, they were nevertheless approved by
the Minister of Finance who is also duly authorized to approve the
same. In fact it was the Minister of Finance who signed and
promulgated said resolutions.19
The observation of Mr. Justice Sarmiento in the dissenting opinion
that FIRB Resolution Nos. 10-85 and 1-86 which were promulgated
by then Acting Minister of Finance Alfredo de Roda, Jr. and Minister
of Finance Cesar E.A Virata, as Chairman of FIRB respectively,
should be separately approved by said Minister of Finance as
required by P.D. 1931 is, a superfluity. An examination of the said
resolutions which are reproduced in full in the dissenting opinion
show that the said officials signed said resolutions in the dual
capacity of Chairman of FIRB and Minister of Finance.
Mr. Justice Sarmiento also makes reference to the case National
Power Corporation vs. Province of Albay,20 wherein the Court
observed that under P.D. No. 776 the power of the FIRB was only
recommendatory and requires the approval of the President to be
valid. Thus, in said case the Court held that FIRB Resolutions Nos.
10-85 and 1-86 not having been approved by the President were
not valid and effective while the validity of FIRB 17-87 was upheld
as it was duly approved by the Office of the President on October
5, 1987.
However, under Section 2 of P.D. No. 1931 of June 11, 1984,
hereinabove reproduced, which amended P.D. No. 776, it is clearly
provided for that such FIRB resolution, may be approved by the
"President of the Philippines and/or the Minister of Finance." To
repeat, as FIRB Resolutions Nos. 10-85 and 1-86 were duly
approved by the Minister of Finance, hence they are valid and
effective. To this extent, this decision modifies or supersedes the
Court's earlier decision in Albay afore-referred to.
Petitioner, however, argues that under both FIRB resolutions, only
the tax and duty exemption privileges enjoyed by the NPC under
its charter, C.A. No. 120, as amended, are restored, that is, only
its direct tax exemption privilege; and that it cannot be interpreted
to cover indirect taxes under the principle that tax exemptions are
construed stricissimi juris against the taxpayer and liberally in
favor of the taxing authority.
Petitioner argues that the release by the BIR of the P58.0 million
refund to respondent NPC by way of a tax credit certificate21 which
was assigned to respondent Caltex through a deed of assignment
approved by the BIR22 is patently illegal. He also contends that the
pending claim of respondent NPC in the amount of P410.58 million
with respondent BIR for the sale and delivery to it of bunker fuel by
respondents Petrophil, Shell and Caltex from July 1, 1985 up to
1986, being illegal, should not be released.
Now to the second corollary issue involving the validity of FIRB
Resolution No. 17-87 issued on June 24, 1987. It was issued under
authority of Executive Order No. 93 dated December 17, 1986
which grants to the FIRB among others, the power to recommend
the restoration of the tax and duty exemptions/incentives
withdrawn thereunder.
Petitioner stresses that on August 6, 1987 the Secretary of Justice
rendered Opinion No. 77 to the effect that the powers conferred
upon the FIRB by Section 2(a), (b), and (c) and (4) of Executive
Order No. 93 "constitute undue delegation of legislative power and
is, therefore, unconstitutional." Petitioner observes that the FIRB
did not merely recommend but categorically restored the tax and
duty exemption of the NPC so that the memorandum of the
respondent Executive Secretary dated October 5, 1987 approving
the same is a surplusage.
Further assuming that FIRB Resolution No. 17-87 to have been
legally issued, following the doctrine in Philippine Aceytelene,
petitioner avers that the restoration cannot cover indirect taxes
and it cannot create new indirect tax exemption not otherwise
granted in the NPC charter as amended by Presidential Decree No.
938.
The petition is devoid of merit.
The NPC is a non-profit public corporation created for the general
good and welfare23 wholly owned by the government of the
Republic of the Philippines.24 From the very beginning of its
corporate existence, the NPC enjoyed preferential tax
treatment25 to enable the Corporation to pay the indebtedness and
obligation and in furtherance and effective implementation of the
policy enunciated in Section one of "Republic Act No. 6395"26 which
provides:
Sec. 1. Declaration of Policy—Congress hereby declares that (1)
the comprehensive development, utilization and conservation of
Philippine water resources for all beneficial uses, including power
generation, and (2) the total electrification of the Philippines
through the development of power from all sources to meet the
need of rural electrification are primary objectives of the nation
which shall be pursued coordinately and supported by all
instrumentalities and agencies of the government including its
financial institutions.
From the changes made in the NPC charter, the intention to
strengthen its preferential tax treatment is obvious.
Under Republic Act No. 358, its exemption is provided as follows:
Sec. 2. To facilitate payment of its indebtedness, the National
Power Corporation shall be exempt from all taxes, duties, fees,
imposts, charges, and restrictions of the Republic of the
Philippines, its provinces, cities and municipalities."
Under Republic Act No. 6395:
Sec. 13. Non-profit Character of the Corporation; Exemption from
all Taxes, Duties, Fees, Imposts and other Charges by Government
and Governmental Instrumentalities.— The Corporation shall be
non-profit and shall devote all its returns from its capital
investment, as well as excess revenues from its operation, for
expansion. To enable the Corporation to pay its indebtedness and
obligations and in furtherance and effective implementation of the
policy enunciated in Section one of this Act, the Corporation is
hereby declared exempt:
(a) From the payment of all taxes, duties, fees, imposts, charges,
costs and service fees in any court or administrative proceedings in
which it may be a party, restrictions and duties to the Republic of
the Philippines, its provinces, cities, municipalities and other
government agencies and instrumentalities;
(b) From all income taxes, franchise taxes and realty taxes to be
paid to the National Government, its provinces, cities,
municipalities and other government agencies and
instrumentalities;
(c) From all import duties, compensating taxes and advanced sales
tax, and wharfage fees on import of foreign goods required for its
operations and projects; and
(d) From all taxes, duties, fees, imposts, and all other charges
imposed by the Republic of the Philippines, its provinces, cities,
municipalities and other government agencies and
instrumentalities, on all petroleum products used by the
Corporation in the generation, transmission, utilization, and sale of
electric power. (Emphasis supplied.)
Under Presidential Decree No. 380:
Sec. 13. Non-profit Character of the Corporation: Exemption from
all Taxes, Duties, Fees, Imposts and other Charges by the
Government and Government Instrumentalities.— The Corporation
shall be non-profit and shall devote all its returns from its capital
investment as well as excess revenues from its operation, for
expansion. To enable the Corporation to pay its indebtedness and
obligations and in furtherance and effective implementation of the
policy enunciated in Section one of this Act, the Corporation,
including its subsidiaries, is hereby declared, exempt:
(a) From the payment of all taxes, duties, fees, imposts, charges,
costs and services fees in any court or administrative proceedings
in which it may be a party, restrictions and duties to the Republic
of the Philippines, its provinces, cities, municipalities and other
government agencies and instrumentalities;
(b) From all income taxes, franchise taxes and realty taxes to be
paid to the National Government, its provinces, cities,
municipalities and other governmental agencies and
instrumentalities;
(c) From all import duties, compensating taxes and advanced sales
tax, and wharfage fees on import of foreign goods required for its
operation and projects; and
(d) From all taxes, duties, fees, imposts, and all other charges
imposed directly or indirectly by the Republic of the Philippines, its
provinces, cities, municipalities and other government agencies
and instrumentalities, on all petroleum produced used by the
Corporation in the generation, transmission, utilization, and sale of
electric power. (Emphasis supplied.)
Under Presidential Decree No. 938:
Sec. 13. Non-profit Character of the Corporation: Exemption from
All Taxes, Duties, Fees, Imposts and Other Charges by the
Government and Government Instrumentalities.—The Corporation
shall be non-profit and shall devote all its returns from its capital
investment as well as excess revenues from its operation, for
expansion. To enable the Corporation to pay the indebtedness and
obligations and in furtherance and effective implementation of the
policy enunciated in Section One of this Act, the Corporation,
including its subsidiaries hereby declared exempt from the
payment of all forms of taxes, duties, fees, imposts as well as costs
and service fees including filing fees, appeal bonds, supersedeas
bonds, in any court or administrative proceedings. (Emphasis
supplied.)
It is noted that in the earlier law, R.A. No. 358 the exemption was
worded in general terms, as to cover "all taxes, duties, fees,
imposts, charges, etc. . . ." However, the amendment under
Republic Act No. 6395 enumerated the details covered by the
exemption. Subsequently, P.D. No. 380, made even more specific
the details of the exemption of NPC to cover, among others, both
direct and indirect taxes on all petroleum products used in its
operation. Presidential Decree No. 938 amended the tax exemption
by simplifying the same law in general terms. It succinctly exempts
NPC from "all forms of taxes, duties, fees, imposts, as well as costs
and service fees including filing fees, appeal bonds, supersedeas
bonds, in any court or administrative proceedings."
The use of the phrase "all forms" of taxes demonstrate the
intention of the law to give NPC all the tax exemptions it has been
enjoying before. The rationale for this exemption is that being non-
profit the NPC "shall devote all its returns from its capital
investment as well as excess revenues from its operation, for
expansion. To enable the Corporation to pay the indebtedness and
obligations and in furtherance and effective implementation of the
policy enunciated in Section one of this Act, . . ." 27
The preamble of P.D. No. 938 states—
WHEREAS, in the application of the tax exemption provision of the
Revised Charter, the non-profit character of the NPC has not been
fully utilized because of restrictive interpretations of the taxing
agencies of the government on said provisions. . . . (Emphasis
supplied.)
It is evident from the foregoing that the lawmaker did not intend
that the said provisions of P.D. No. 938 shall be construed strictly
against NPC. On the contrary, the law mandates that it should be
interpreted liberally so as to enhance the tax exempt status of
NPC.
Hence, petitioner cannot invoke the rule on strictissimi juris with
respect to the interpretation of statutes granting tax exemptions to
NPC.
Moreover, it is a recognized principle that the rule on strict
interpretation does not apply in the case of exemptions in favor of
a government political subdivision or instrumentality. 28
The basis for applying the rule of strict construction to statutory
provisions granting tax exemptions or deductions, even more
obvious than with reference to the affirmative or levying provisions
of tax statutes, is to minimize differential treatment and foster
impartiality, fairness, and equality of treatment among tax payers.
The reason for the rule does not apply in the case of exemptions
running to the benefit of the government itself or its agencies. In
such case the practical effect of an exemption is merely to reduce
the amount of money that has to be handled by government in the
course of its operations. For these reasons, provisions granting
exemptions to government agencies may be construed liberally, in
favor of non tax liability of such agencies.29
In the case of property owned by the state or a city or other public
corporations, the express exemption should not be construed with
the same degree of strictness that applies to exemptions contrary
to the policy of the state, since as to such property "exemption is
the rule and taxation the exception."30
The contention of petitioner that the exemption of NPC from
indirect taxes under Section 13 of R.A. No. 6395 and P.D. No. 380,
is deemed repealed by P.D. No. 938 when the reference to it was
deleted is not well-taken.
Repeal by implication is not favored unless it is manifest that the
legislature so intended. As laws are presumed to be passed with
deliberation and with knowledge of all existing ones on the subject,
it is logical to conclude that in passing a statute it is not intended
to interfere with or abrogate a former law relating to the same
subject matter, unless the repugnancy between the two is not only
irreconcilable but also clear and convincing as a result of the
language used, or unless the latter Act fully embraces the subject
matter of the earlier.31 The first effort of a court must always be to
reconcile or adjust the provisions of one statute with those of
another so as to give sensible effect to both provisions.32
The legislative intent must be ascertained from a consideration of
the statute as a whole, and not of an isolated part or a particular
provision alone.33 When construing a statute, the reason for its
enactment should be kept in mind and the statute should be
construed with reference to its intended scope and purpose 34 and
the evil sought to be remedied.35
The NPC is a government instrumentality with the enormous task
of undertaking development of hydroelectric generation of power
and production of electricity from other sources, as well as the
transmission of electric power on a nationwide basis, to improve
the quality of life of the people pursuant to the State policy
embodied in Section E, Article II of the 1987 Constitution.
It is evident from the provision of P.D. No. 938 that its purpose is
to maintain the tax exemption of NPC from all forms of taxes
including indirect taxes as provided for under R.A. No. 6895 and
P.D. No. 380 if it is to attain its goals.
Further, the construction of P.D. No. 938 by the Office charged
with its implementation should be given controlling weight. 36
Since the May 8, 1985 ruling of Commissioner Ancheta, to the
letter of the Secretary of Finance of June 26, 1985 confirming said
ruling, the letters of the BIR of August 18, 1986, and December
22, 1986, the letter of the Secretary of Finance of February 19,
1987, the Memorandum of the Executive Secretary of October 9,
1987, by authority of the President, confirming and approving FIRB
Resolution No. 17-87, the letter of the Secretary of Finance of May
20, 1988 to the Executive Secretary rendering his opinion as
requested by the latter, and the latter's reply of June 15, 1988, it
was uniformly held that the grant of tax exemption to NPC under
C.A. No. 120, as amended, included exemption from payment of all
taxes relative to NPC's petroleum purchases including indirect
taxes.37 Thus, then Secretary of Finance Vicente Jayme in his letter
of May 20, 1988 to the Executive Secretary Macaraig aptly stated
the justification for this tax exemption of NPC —
The issue turns on the effect to the exemption of NPC from taxes of
the deletion of the phrase 'taxes imposed indirectly on oil products
and its exemption from 'all forms of taxes.' It is suggested that the
change in language evidenced an intention to exempt NPC only
from taxes directly imposed on or payable by it; since taxes on
fuel-oil purchased by it; since taxes on fuel-oil purchased by NPC
locally are levied on and paid by its oil suppliers, NPC thereby lost
its exemption from those taxes. The principal authority relied on is
the 1967 case of Philippine Acetylene Co., Inc. vs. Commissioner of
Internal Revenue, 20 SCRA 1056.
First of all, tracing the changes made through the years in the
Revised Charter, the strengthening of NPC's preferential tax
treatment was clearly the intention. To the extent that the
explanatory "whereas clauses" may disclose the intent of the law-
maker, the changes effected by P.D. 938 can only be read as being
expansive rather than restrictive, including its version of Section
13.
Our Tax Code does not recognize that there are taxes directly
imposed and those imposed indirectly. The textbook distinction
between a direct and an indirect tax may be based on the
possibility of shifting the incidence of the tax. A direct tax is one
which is demanded from the very person intended to be the payor,
although it may ultimately be shifted to another. An example of a
direct tax is the personal income tax. On the other hand, indirect
taxes are those which are demanded from one person in the
expectation and intention that he shall indemnify himself at the
expense of another. An example of this type of tax is the sales tax
levied on sales of a commodity.
The distinction between a direct tax and one indirectly imposed (or
an indirect tax) is really of no moment. What is more relevant is
that when an "indirect tax" is paid by those upon whom the tax
ultimately falls, it is paid not as a tax but as an additional part of
the cost or of the market price of the commodity.
This distinction was made clear by Chief Justice Castro in the
Philippine Acetylene case, when he analyzed the nature of the
percentage (sales) tax to determine whether it is a tax on the
producer or on the purchaser of the commodity. Under out Tax
Code, the sales tax falls upon the manufacturer or producer. The
phrase "pass on" the tax was criticized as being inaccurate. Justice
Castro says that the tax remains on the manufacturer alone. The
purchaser does not pay the tax; he pays an amount added to the
price because of the tax. Therefore, the tax is not "passed on" and
does not for that reason become an "indirect tax" on the
purchaser. It is eminently possible that the law maker in enacting
P.D. 938 in 1976 may have used lessons from the analysis of Chief
Justice Castro in 1967 Philippine Acetylene case.
When P.D. 938 which exempted NPC from "all forms of taxes" was
issued in May 1976, the so-called oil crunch had already drastically
pushed up crude oil Prices from about $1.00 per bbl in 1971 to
about $10 and a peak (as it turned out) of about $34 per bbl in
1981. In 1974-78, NPC was operating the Meralco thermal plants
under a lease agreement. The power generated by the leased
plants was sold to Meralco for distribution to its customers. This
lease and sale arrangement was entered into for the benefit of the
consuming public, by reducing the burden on the swiftly rising
world crude oil prices. This objective was achieved by the use of
NPC's "tax umbrella under its Revised Charter—the exemption from
specific taxes on locally purchased fuel oil. In this context, I can
not interpret P.D. 938 to have withdrawn the exemption from tax
on fuel oil to which NPC was already entitled and which exemption
Government in fact was utilizing to soften the burden of high crude
prices.
There is one other consideration which I consider pivotal. The taxes
paid by oil companies on oil products sold to NPC, whether paid to
them by NPC or no never entered into the rates charged by NPC to
its customers not even during those periods of uncertainty
engendered by the issuance of P.D. 1931 and E. 0. 93 on NP/Cs
tax status. No tax component on the fuel have been charged or
recovered by NPC through its rates.
There is an import duty on the crude oil imported by the local
refineries. After the refining process, specific and ad valorem taxes
are levied on the finished products including fuel oil or residue
upon their withdrawal from the refinery. These taxes are paid by
the oil companies as the manufacturer thereof.
In selling the fuel oil to NPC, the oil companies include in their
billings the duty and tax component. NPC pays the oil companies'
invoices including the duty component but net of the tax
component. NPC then applies for drawback of customs duties paid
and for a credit in amount equivalent to the tax paid (by the oil
companies) on the products purchased. The tax credit is assigned
to the oil companies—as payment, in effect, of the tax component
shown in the sales invoices. (NOTE: These procedures varied over
time—There were instances when NPC paid the tax component that
was shifted to it and then applied for tax credit. There were also
side issues raised because of P.D. 1931 and E.O. 93 which
withdrew all exemptions of government corporations. In these
latter instances, the resolutions of the Fiscal Incentives Review
Board (FIRB) come into play. These incidents will not be touched
upon for purposes of this discussion).
NPC rates of electricity are structured such that changes in its cost
of fuel are automatically (without need of fresh approvals) reflected
in the subsequent months billing rates.
This Fuel Cost Adjustment clause protects NPC's rate of return. If
NPC should ever accept liability to the tax and duty component on
the oil products, such amount will go into its fuel cost and be
passed on to its customers through corresponding increases in
rates. Since 1974, when NPC operated the oil-fired generating
stations leased from Meralco (which plants it bought in 1979), until
the present time, no tax on fuel oil ever went into NPC's electric
rates.
That the exemption of NPC from the tax on fuel was not withdrawn
by P.D. 938 is impressed upon me by yet another circumstance. It
is conceded that NPC at the very least, is exempt from taxes to
which it is directly liable. NPC therefore could very well have
imported its fuel oil or crude residue for burning at its thermal
plants. There would have been no question in such a case as to its
exemption from all duties and taxes, even under the strictest
interpretation that can be put forward. However, at the time P.D.
938 was issued in 1976, there were already operating in the
Philippines three oil refineries. The establishment of these
refineries in the Philippines involved heavy investments, were
economically desirable and enabled the country to import crude oil
and process / refine the same into the various petroleum products
at a savings to the industry and the public. The refining process
produced as its largest output, in volume, fuel oil or residue, whose
conventional economic use was for burning in electric or steam
generating plants. Had there been no use locally for the residue,
the oil refineries would have become largely unviable.
Again, in this circumstances, I cannot accept that P.D. 938 would
have in effect forced NPC to by-pass the local oil refineries and
import its fossil fuel requirements directly in order to avail itself of
its exemption from "direct taxes." The oil refineries had to keep
operating both for economic development and national security
reasons. In fact, the restoration by the FIRB of NPC's exemption
after P.D. 1931 and E.O. 93 expressly excluded direct fuel oil
importations, so as not to prejudice the continued operations of the
local oil refineries.
To answer your query therefore, it is the opinion of this
Department that NPC under the provisions of its Revised Charter
retains its exemption from duties and taxes imposed on the
petroleum products purchased locally and used for the generation
of electricity.
The Department in issuing this ruling does so pursuant to its power
and function to supervise and control the collection of government
revenues by the application and implementation of revenue laws. It
is prepared to take the measures supplemental to this ruling
necessary to carry the same into full effect.
As presented rather extensively above, the NPC electric power
rates did not carry the taxes and duties paid on the fuel oil it used.
The point is that while these levies were in fact paid to the
government, no part thereof was recovered from the sale of
electricity produced. As a consequence, as of our most recent
information, some P1.55 B in claims represent amounts for which
the oil suppliers and NPC are "out-of-pocket. There would have to
be specific order to the Bureaus concerned for the resumption of
the processing of these claims."38
In the latter of June 15, 1988 of then Executive Secretary Macaraig
to the then Secretary of Finance, the said opinion ruling of the
latter was confirmed and its implementation was directed. 39
The Court finds and so holds that the foregoing reasons adduced in
the aforestated letter of the Secretary of Finance as confirmed by
the then Executive Secretary are well-taken. When the NPC was
exempted from all forms of taxes, duties, fees, imposts and other
charges, under P.D. No. 938, it means exactly what it says, i.e., all
forms of taxes including those that were imposed directly or
indirectly on petroleum products used in its operation.
Reference is made in the dissenting opinion to contrary rulings of
the BIR that the exemption of the NPC extends only to taxes for
which it is directly liable and not to taxes merely shifted to it.
However, these rulings are predicated on Philippine Acytelene.
The doctrine in Philippine Acytelene decided in 1967 by this Court
cannot apply to the present case. It involved the sales tax of
products the plaintiff sold to NPC from June 2, 1953 to June
30,1958 when NPC was enjoying tax exemption from all taxes
under Commonwealth Act No. 120, as amended by Republic Act
No. 358 issued on June 4, 1949 hereinabove reproduced.
In said case, this Court held, that the sales tax is due from the
manufacturer and not the buyer, so plaintiff cannot claim
exemptions simply because the NPC, the buyer, was exempt.
However, on September 10, 1971, Republic Act No. 6395 was
passed as the revised charter of NPC whereby Section 13 thereof
was amended by emphasizing its non-profit character and
expanding the extent of its tax exemption.
As petitioner concedes, Section 13(d) aforestated of this
amendment under Republic Act No. 6345 spells out clearly the
exemption of the NPC from indirect taxes. And as hereinabove
stated, in P.D. No. 380, the exemption of NPC from indirect taxes
was emphasized when it was specified to include those imposed
"directly and indirectly."
Thereafter, under P.D. No. 938 the tax exemption of NPC was
integrated under Section 13 defining the same in general terms to
cover "all forms of taxes, duties, fees, imposts, etc." which, as
hereinabove discussed, logically includes exemption from indirect
taxes on petroleum products used in its operation.
This is the status of the tax exemptions the NPC was enjoying
when P.D. No. 1931 was passed, on the authority of which FIRB
Resolution Nos. 10-85 and 1-86 were issued, and when Executive
Order No. 93 was promulgated, by which FIRB Resolution 17-87
was issued.
Thus, the ruling in Philippine Acetylene cannot apply to this case
due to the different environmental circumstances. As a matter of
fact, the amendments of Section 13, under R.A. No. 6395, P.D. No,
380 and P.D. No. 838 appear to have been brought about by the
earlier inconsistent rulings of the tax agencies due to the doctrine
in Philippine Acetylene, so as to leave no doubt as to the
exemption of the NPC from indirect taxes on petroleum products it
uses in its operation. Effectively, said amendments superseded if
not abrogated the ruling in Philippine Acetylene that the tax
exemption of NPC should be limited to direct taxes only.
In the light of the foregoing discussion the first corollary issue must
consequently be resolved in the affirmative, that is, FIRB
Resolution No. 10-85 dated February 7, 1985 and FIRB Resolution
No. 1-86 dated January 7, 1986 which restored NPC's tax
exemption privileges included the restoration of the indirect tax
exemption of the NPC on petroleum products it used.
On the second corollary issue as to the validity of FIRB resolution
No. 17-87 dated June 24, 1987 which restored NPC's tax
exemption privilege effective March 10, 1987, the Court finds that
the same is valid and effective.
It provides as follows:
BE IT RESOLVED, AS IT IS HEREBY RESOLVED, That the tax and
duty exemption privileges of the National Power Corporation,
including those pertaining to its domestic purchases of petroleum
and petroleum products, granted under the terms and conditions of
Commonwealth Act No. 120 (Creating the National Power
Corporation, defining its powers, objectives and functions, and for
other purposes), as amended, are restored effective March 10,
1987, subject to the following conditions:
1. The restoration of the tax and duty exemption privileges does
not apply to the following:
1.1. Importation of fuel oil (crude equivalent) and coal;
1.2. Commercially-funded importations (i.e., importations which
include but are not limited to those financed by the NPC's own
internal funds, domestic borrowings from any source whatsoever,
borrowing from foreign-based private financial institutions, etc.);
and
1.3. Interest income derived from any source.
2. The NPC shall submit to the FIRB a report of its expansion
program, including details of disposition of relieved tax and duty
payments for such expansion on an annual basis or as often as the
FIRB may require it to do so. This report shall be in addition to the
usual FIRB reporting requirements on incentive availment. 40
Executive Order No. 93 provides as follows—
Sec. 1. The provisions of any general or special law to the contrary
notwithstanding, all tax and duty incentives granted " to
government and private entities are hereby withdrawn, except:
a) those covered by the non-impairment clause of the Constitution;
b) those conferred by effective international agreements to which
the Government of the Republic of the Philippines is a signatory;
c) those enjoyed-by enterprises registered with:
(i) the Board of Investments pursuant to Presidential Decree No.
1789, as amended;
(ii) the Export Processing Zone Authority, pursuant to Presidential
Decree No. 66, as amended;
(iii) the Philippine Veterans Investment Development Corporation
Industrial Authority pursuant to Presidential Decree No. 538, as
amended;
d) those enjoyed by the copper mining industry pursuant to the
provisions of Letter of Instruction No. 1416;
e) those conferred under the four basic codes namely:
(i) the Tariff and Customs Code, as amended;
(ii) the National Internal Revenue Code, as amended;
(iii) the Local Tax Code, as amended;
(iv) the Real Property Tax Code, as amended;
f) those approved by the President upon the recommendation of
the Fiscal Incentives Review Board.
Sec. 2. The Fiscal Incentives Review Board created under
Presidential Decree No. 776, as amended, is hereby authorized to:
a) restore tax and/or duty exemptions withdrawn hereunder in
whole or in part;
b) revise the scope and coverage of tax and/of duty exemption
that may be restored.
c) impose conditions for the restoration of tax and/or duty
exemption;
d) prescribe the date or period of effectivity of the restoration of
tax and/or duty exemption;
e) formulate and submit to the President for approval, a complete
system for the grant of subsidies to deserving beneficiaries, in lieu
of or in combination with the restoration of tax and duty
exemptions or preferential treatment in taxation, indicating the
source of funding therefor, eligible beneficiaries and the terms and
conditions for the grant thereof taking into consideration the
international commitments of the Philippines and the necessary
precautions such that the grant of subsidies does not become the
basis for countervailing action.
Sec. 3. In the discharge of its authority hereunder, the Fiscal
Incentives Review Board shall take into account any or all of the
following considerations:
a) the effect on relative price levels;
b) relative contribution of the beneficiary to the revenue generation
effort;
c) nature of the activity the beneficiary is engaged;
d) in general, the greater national interest to be served.
True it is that the then Secretary of Justice in Opinion No. 77 dated
August 6, 1977 was of the view that the powers conferred upon the
FIRB by Sections 2(a), (b), (c), and (d) of Executive Order No. 93
constitute undue delegation of legislative power and is therefore
unconstitutional. However, he was overruled by the respondent
Executive Secretary in a letter to the Secretary of Finance dated
March 30, 1989. The Executive Secretary, by authority of the
President, has the power to modify, alter or reverse the
construction of a statute given by a department secretary. 41
A reading of Section 3 of said law shows that it set the policy to be
the greater national interest. The standards of the delegated power
are also clearly provided for.
The required "standard" need not be expressed. In Edu vs.
Ericta42 and in De la Llana vs. Alba43 this Court held: "The standard
may be either express or implied. If the former, the non-delegated
objection is easily met. The standard though does not have to be
spelled out specifically. It could be implied from the policy and
purpose of the act considered as a whole."
In People vs. Rosenthal44 the broad standard of "public interest"
was deemed sufficient. In Calalang vs. Williams,45, it was "public
welfare" and in Cervantes vs. Auditor General,46 it was the purpose
of promotion of "simplicity, economy and efficiency." And, implied
from the purpose of the law as a whole, "national security" was
considered sufficient standard47 and so was "protection of fish fry
or fish eggs.48
The observation of petitioner that the approval of the President was
not even required in said Executive Order of the tax exemption
privilege approved by the FIRB unlike in previous similar issuances,
is not well-taken. On the contrary, under Section l(f) of Executive
Order No. 93, aforestated, such tax and duty exemptions extended
by the FIRB must be approved by the President. In this case, FIRB
Resolution No. 17-87 was approved by the respondent Executive
Secretary, by authority of the President, on October 15, 1987.49
Mr. Justice Isagani A. Cruz commenting on the delegation of
legislative power stated —
The latest in our jurisprudence indicates that delegation of
legislative power has become the rule and its non-delegation the
exception. The reason is the increasing complexity of modern life
and many technical fields of governmental functions as in matters
pertaining to tax exemptions. This is coupled by the growing
inability of the legislature to cope directly with the many problems
demanding its attention. The growth of society has ramified its
activities and created peculiar and sophisticated problems that the
legislature cannot be expected reasonably to comprehend.
Specialization even in legislation has become necessary. To many
of the problems attendant upon present day undertakings, the
legislature may not have the competence, let alone the interest
and the time, to provide the required direct and efficacious, not to
say specific solutions.50
Thus, in the case of Tablarin vs. Gutierrez,51 this Court enunciated
the rationale in favor of delegation of legislative functions—
One thing however, is apparent in the development of the principle
of separation of powers and that is that the maxim of delegatus
non potest delegare or delegati potestas non potest delegare,
adopted this practice (Delegibus et Consuetudiniis Anglia edited by
G.E. Woodline, Yale University Press, 1922, Vol. 2, p. 167) but
which is also recognized in principle in the Roman Law d.
17.18.3) has been made to adapt itself to the complexities of
modern government, giving rise to the adoption, within certain
limits, of the principle of subordinate legislation, not only in the
United States and England but in practically all modern
governments. (People vs. Rosenthal and Osmeña, 68 Phil. 318,
1939). Accordingly, with the growing complexities of modern life,
the multiplication of the subjects of governmental regulation, and
the increased difficulty of administering the laws, there is a
constantly growing tendency toward the delegation of greater
power by the legislative, and toward the approval of the practice
by the Courts. (Emphasis supplied.)
The legislative authority could not or is not expected to state all
the detailed situations wherein the tax exemption privileges of
persons or entities would be restored. The task may be assigned to
an administrative body like the FIRB.
Moreover, all presumptions are indulged in favor of the
constitutionality and validity of the statute. Such presumption can
be overturned if its invalidity is proved beyond reasonable doubt.
Otherwise, a liberal interpretation in favor of constitutionality of
legislation should be adopted.52
E.O. No. 93 is complete in itself and constitutes a valid delegation
of legislative power to the FIRB And as above discussed, the tax
exemption privilege that was restored to NPC by FIRB Resolution
No. 17-87 of June 1987 includes exemption from indirect taxes and
duties on petroleum products used in its operation.
Indeed, the validity of Executive Order No. 93 as well as of FIRB
Resolution No. 17-87 has been upheld in Albay.53
In the dissenting opinion of Mr. Justice Cruz, it is stated that P.D.
Nos. 1931 and 1955 issued by President Marcos in 1984 are invalid
as they were presumably promulgated under the infamous
Amendment No. 6 and that as they cover tax exemption, under
Section 17(4), Article VIII of the 1973 Constitution, the same
cannot be passed "without the concurrence of the majority of all
the members of the Batasan Pambansa." And, even conceding that
the reservation of legislative power in the President was valid, it is
opined that it was not validly exercised as there is no showing that
such presidential encroachment was justified under the conditions
then existing. Consequently, it is concluded that Executive Order
No. 93, which was intended to implement said decrees, is also
illegal. The authority of the President to sub-delegate to the FIRB
powers delegated to him is also questioned.
In Albay,54 as above stated, this Court upheld the validity of P.D.
Nos. 776 and 1931. The latter decree withdrew tax exemptions of
government-owned or controlled corporations including their
subsidiaries but authorized the FIRB to restore the same.
Nevertheless, in Albay, as above-discussed, this Court ruled that
the tax exemptions under FIRB Resolution Nos. 10-85 and 1-86
cannot be enforced as said resolutions were only recommendatory
and were not duly approved by the President of the Philippines as
required by P.D. No. 776.55 The Court also sustained in Albay the
validity of Executive Order No. 93, and of the tax exemptions
restored under FIRB Resolution No. 17-87 which was issued
pursuant thereto, as it was duly approved by the President as
required by said executive order.
Moreover, under Section 3, Article XVIII of the Transitory
Provisions of the 1987 Constitution, it is provided that:
All existing laws, decrees, executive orders, proclamation, letters of
instructions, and other executive issuances not inconsistent with
this constitution shall remain operative until amended, repealed or
revoked.
Thus, P.D. Nos. 776 and 1931 are valid and operative unless it is
shown that they are inconsistent with the Constitution.1âwphi1
Even assuming arguendo that P.D. Nos. 776, 1931 and Executive
Order No. 93 are not valid and are unconstitutional, the result
would be the same, as then the latest applicable law would be P.D.
No. 938 which amended the NPC charter by granting exemption to
NPC from all forms of taxes. As above discussed, this exemption of
NPC covers direct and indirect taxes on petroleum products used in
its operation. This is as it should be, if We are to hold as invalid
and inoperative the withdrawal of such tax exemptions under P.D.
No. 1931 as well as under Executive Order No. 93 and the
delegation of the power to restore these exemptions to the FIRB.
The Court realizes the magnitude of the consequences of this
decision. To reiterate, in Albay this Court ruled that the NPC is
liable for real estate taxes as of June 11, 1984 (the date of
promulgation of P.D. No. 1931) when NPC had ceased to enjoy tax
exemption privileges since FIRB Resolution Nos. 1085 and 1-86
were not validly issued. The real estate tax liability of NPC from
June 11, 1984 to December 1, 1990 is estimated to amount to
P7.49 billion plus another P4.76 billion in fuel import duties the
firm had earlier paid to the government which the NPC now
proposed to pass on to the consumers by another 33-centavo
increase per kilowatt hour in power rates on top of the 17-centavo
increase per kilowatt hour that took effect just over a week
ago.,56 Hence, another case has been filed in this Court to stop this
proposed increase without a hearing.
As above-discussed, at the time FIRB Resolutions Nos. 10-85 and
1-86 were issued, P.D. No. 776 dated August 24, 1975 was already
amended by P.D. No. 1931 ,57 wherein it is provided that such FIRB
resolutions may be approved not only by the President of the
Philippines but also by the Minister of Finance. Such resolutions
were promulgated by the Minister of Finance in his own right and
also in his capacity as FIRB Chairman. Thus, a separate approval
thereof by the Minister of Finance or by the President is
unnecessary.
As earlier stated a reexamination of the ruling in Albay on this
aspect is therefore called for and consequently, Albay must be
considered superseded to this extent by this decision. This is
because P.D. No. 938 which is the latest amendment to the NPC
charter granting the NPC exemption from all forms of
taxes certainly covers real estate taxes which are direct taxes.
This tax exemption is intended not only to insure that the NPC shall
continue to generate electricity for the country but more
importantly, to assure cheaper rates to be paid by the consumers.
The allegation that this is in effect allowing tax evasion by oil
companies is not quite correct.1a\^/phi1 There are various
arrangements in the payment of crude oil purchased by NPC from
oil companies. Generally, the custom duties paid by the oil
companies are added to the selling price paid by NPC. As to the
specific and ad valorem taxes, they are added a part of the seller's
price, but NPC pays the price net of tax, on condition that NPC
would seek a tax refund to the oil companies. No tax component on
fuel had been charged or recovered by NPC from the consumers
through its power rates.58 Thus, this is not a case of tax evasion of
the oil companies but of tax relief for the NPC. The billions of pesos
involved in these exemptions will certainly inure to the ultimate
good and benefit of the consumers who are thereby spared the
additional burden of increased power rates to cover these taxes
paid or to be paid by the NPC if it is held liable for the same.
The fear of the serious implication of this decision in that NPC's
suppliers, importers and contractors may claim the same privilege
should be dispelled by the fact that (a) this decision particularly
treats of only the exemption of the NPC from all taxes, duties, fees,
imposts and all other charges imposed by the government on the
petroleum products it used or uses for its operation; and (b)
Section 13(d) of R.A. No. 6395 and Section 13(d) of P.D. No. 380,
both specifically exempt the NPC from all taxes, duties, fees,
imposts and all other charges imposed by the government on all
petroleum products used in its operation only, which is the very
exemption which this Court deems to be carried over by the
passage of P.D. No. 938. As a matter of fact in Section 13(d) of
P.D. No. 380 it is specified that the aforesaid exemption from
taxes, etc. covers those "directly or indirectly" imposed by the
"Republic of the Philippines, its provincies, cities, municipalities and
other government agencies and instrumentalities" on said
petroleum products. The exemption therefore from direct and
indirect tax on petroleum products used by NPC cannot benefit the
suppliers, importers and contractors of NPC of other products or
services.
The Court realizes the laudable objective of petitioner to improve
the revenue of the government. The amount of revenue received or
expected to be received by this tax exemption is, however, not
going to any of the oil companies. There would be no loss to the
government. The said amount shall accrue to the benefit of the
NPC, a government corporation, so as to enable it to sustain its
tremendous task of providing electricity for the country and at the
least cost to the consumers. Denying this tax exemption would
mean hampering if not paralyzing the operations of the NPC. The
resulting increased revenue in the government will also mean
increased power rates to be shouldered by the consumers if the
NPC is to survive and continue to provide our power
requirements.59 The greater interest of the people must be
paramount.
WHEREFORE, the petition is DISMISSED for lack of merit. No
pronouncement as to costs.
SO ORDERED.
G.R. No. 119761 August 29, 1996 Hope Luxury M. 100's
Sec. 142, (c), (2) 40% 45%
COMMISSIONER OF INTERNAL REVENUE, petitioner, Hope Luxury M. King
vs. Sec. 142, (c), (2) 40% 45%
HON. COURT OF APPEALS, HON. COURT OF TAX APPEALS More Premium M. 100's
and FORTUNE TOBACCO CORPORATION, respondents. Sec. 142, (c), (2) 40% 45%
More Premium International
Sec. 142, (c), (2) 40% 45%
VITUG, J.:p Champion Int'l. M. 100's
Sec. 142, (c), (2) 40% 45%
The Commissioner of Internal Revenue ("CIR") disputes the Champion M. 100's
decision, dated 31 March 1995, of respondent Court of Sec. 142, (c), (2) 40% 45%
Appeals 1 affirming the 10th August 1994 decision and the 11th Champion M. King
October 1994 resolution of the Court of Tax Appeals 2 ("CTA") in Sec. 142, (c), last par. 15% 20%
C.T.A. Case No. 5015, entitled "Fortune Tobacco Corporation vs. Champion Lights
Liwayway Vinzons-Chato in her capacity as Commissioner of Sec. 142, (c), last par. 15% 20% 5
Internal Revenue."
A bill, which later became Republic Act ("RA") No. 7654, 6 was
The facts, by and large, are not in dispute. enacted, on 10 June 1993, by the legislature and signed into law,
Fortune Tobacco Corporation ("Fortune Tobacco") is engaged in the on 14 June 1993, by the President of the Philippines. The new law
manufacture of different brands of cigarettes. became effective on 03 July 1993. It amended Section 142(c)(1) of
the National Internal Revenue Code ("NIRC") to read; as follows:
On various dates, the Philippine Patent Office issued to the
corporation separate certificates of trademark registration over Sec. 142. Cigars and Cigarettes. —
"Champion," "Hope," and "More" cigarettes. In a letter, dated 06 xxx xxx xxx
January 1987, of then Commissioner of Internal Revenue
Bienvenido A. Tan, Jr., to Deputy Minister Ramon Diaz of the (c) Cigarettes packed by machine. — There shall be levied,
Presidential Commission on Good Government, "the initial position assessed and collected on cigarettes packed by machine a tax at
of the Commission was to classify 'Champion,' 'Hope,' and 'More' as the rates prescribed below based on the constructive
foreign brands since they were listed in the World Tobacco manufacturer's wholesale price or the actual manufacturer's
Directory as belonging to foreign companies. However, Fortune wholesale price, whichever is higher:
Tobacco changed the names of 'Hope' to 'Hope Luxury' and 'More'
to 'Premium More,' thereby removing the said brands from the (1) On locally manufactured cigarettes which are currently
foreign brand category. Proof was also submitted to the Bureau (of classified and taxed at fifty-five percent (55%) or the exportation
Internal Revenue ['BIR']) that 'Champion' was an original Fortune of which is not authorized by contract or otherwise, fifty-five (55%)
Tobacco Corporation register and therefore a local brand." 3 Ad provided that the minimum tax shall not be less than Five Pesos
Valorem taxes were imposed on these brands, 4 at the following (P5.00) per pack.
rates: (2) On other locally manufactured cigarettes, forty-five percent
BRAND AD VALOREM TAX RATE (45%) provided that the minimum tax shall not be less than Three
E.O. 22 and E.O. 273 RA 6956 Pesos (P3.00) per pack.
06-23-86 07-25-87 06-18-90 xxx xxx xxx
07-01-86 01-01-88 07-05-90
When the registered manufacturer's wholesale price or the actual
manufacturer's wholesale price whichever is higher of existing
brands of cigarettes, including the amounts intended to cover the
taxes, of cigarettes packed in twenties does not exceed Four Pesos
and eighty centavos (P4.80) per pack, the rate shall be twenty
percent (20%). 7 (Emphasis supplied)
About a month after the enactment and two (2) days before the
effectivity of RA 7654, Revenue Memorandum Circular No. 37-93
("RMC 37-93"), was issued by the BIR the full text of which
expressed:
REPUBLIKA NG PILIPINAS
KAGAWARAN NG PANANALAPI
KAWANIHAN NG RENTAS INTERNAS
July 1, 1993
REVENUE MEMORANDUM CIRCULAR NO. 37-93
SUBJECT: Reclassification of Cigarettes Subject to Excise Tax
TO: All Internal Revenue Officers and Others Concerned.
In view of the issues raised on whether "HOPE," "MORE" and
"CHAMPION" cigarettes which are locally manufactured are
appropriately considered as locally manufactured cigarettes bearing
a foreign brand, this Office is compelled to review the previous
rulings on the matter.
Section 142 (c)(1) National Internal Revenue Code, as amended by
R.A. No. 6956, provides:
On locally manufactured cigarettes bearing a foreign brand, fifty-
five percent (55%) Provided, That this rate shall apply regardless
of whether or not the right to use or title to the foreign brand was
sold or transferred by its owner to the local manufacturer.
Whenever it has to be determined whether or not a cigarette bears
a foreign brand, the listing of brands manufactured in foreign
countries appearing in the current World Tobacco Directory shall
govern.
Under the foregoing, the test for imposition of the 55% ad
valorem tax on cigarettes is that the locally manufactured
cigarettes bear a foreign brand regardless of whether or not the
right to use or title to the foreign brand was sold or transferred by
its owner to the local manufacturer. The brand must be originally
owned by a foreign manufacturer or producer. If ownership of the
cigarette brand is, however, not definitely determinable, ". . . the
listing of brands manufactured in foreign countries appearing in the
current World Tobacco Directory shall govern. . . ."
"HOPE" is listed in the World Tobacco Directory as being
manufactured by (a) Japan Tobacco, Japan and (b) Fortune
Tobacco, Philippines. "MORE" is listed in the said directory as being
manufactured by: (a) Fills de Julia Reig, Andorra; (b) Rothmans,
Australia; (c) RJR-Macdonald Canada; (d) Rettig-Strenberg,
Finland; (e) Karellas, Greece; (f) R.J. Reynolds, Malaysia; (g)
Rothmans, New Zealand; (h) Fortune Tobacco, Philippines; (i) R.J.
Reynolds, Puerto Rico; (j) R.J. Reynolds, Spain; (k) Tabacalera,
Spain; (l) R.J. Reynolds, Switzerland; and (m) R.J. Reynolds, USA.
"Champion" is registered in the said directory as being
manufactured by (a) Commonwealth Bangladesh; (b) Sudan,
Brazil; (c) Japan Tobacco, Japan; (d) Fortune Tobacco, Philippines;
(e) Haggar, Sudan; and (f) Tabac Reunies, Switzerland.
Since there is no showing who among the above-listed
manufacturers of the cigarettes bearing the said brands are the
real owner/s thereof, then it follows that the same shall be
considered foreign brand for purposes of determining the ad
valorem tax pursuant to Section 142 of the National Internal
Revenue Code. As held in BIR Ruling No. 410-88, dated August 24,
1988, "in cases where it cannot be established or there is dearth of
evidence as to whether a brand is foreign or not, resort to the
World Tobacco Directory should be made."
In view of the foregoing, the aforesaid brands of cigarettes, viz:
"HOPE," "MORE" and "CHAMPION" being manufactured by Fortune
Tobacco Corporation are hereby considered locally manufactured
cigarettes bearing a foreign brand subject to the 55% ad
valorem tax on cigarettes.
Any ruling inconsistent herewith is revoked or modified accordingly.
(SGD) LIWAYWAY VINZONS-CHATO
Commissioner
On 02 July 1993, at about 17:50 hours, BIR Deputy Commissioner
Victor A. Deoferio, Jr., sent via telefax a copy of RMC 37-93 to
Fortune Tobacco but it was addressed to no one in particular. On
15 July 1993, Fortune Tobacco received, by ordinary mail, a
certified xerox copy of RMC 37-93.
In a letter, dated 19 July 1993, addressed to the appellate division
of the BIR, Fortune Tobacco requested for a review,
reconsideration and recall of RMC 37-93. The request was denied
on 29 July 1993. The following day, or on 30 July 1993, the CIR
assessed Fortune Tobacco for ad valorem tax deficiency amounting
to P9,598,334.00.
On 03 August 1993, Fortune Tobacco filed a petition for review
with the CTA. 8
On 10 August 1994, the CTA upheld the position of Fortune
Tobacco and adjudged:
WHEREFORE, Revenue Memorandum Circular No. 37-93
reclassifying the brands of cigarettes, viz: "HOPE," "MORE" and
"CHAMPION" being manufactured by Fortune Tobacco Corporation
as locally manufactured cigarettes bearing a foreign brand subject
to the 55% ad valorem tax on cigarettes is found to be defective,
invalid and unenforceable, such that when R.A. No. 7654 took
effect on July 3, 1993, the brands in question were not CURRENTLY
CLASSIFIED AND TAXED at 55% pursuant to Section 1142(c)(1) of
the Tax Code, as amended by R.A. No. 7654 and were therefore
still classified as other locally manufactured cigarettes and taxed at
45% or 20% as the case may be.
Accordingly, the deficiency ad valorem tax assessment issued on
petitioner Fortune Tobacco Corporation in the amount of
P9,598,334.00, exclusive of surcharge and interest, is hereby
canceled for lack of legal basis.
Respondent Commissioner of Internal Revenue is hereby enjoined
from collecting the deficiency tax assessment made and issued on
petitioner in relation to the implementation of RMC No. 37-93.
9
SO ORDERED.
In its resolution, dated 11 October 1994, the CTA dismissed for
lack of merit the motion for reconsideration.
The CIR forthwith filed a petition for review with the Court of
Appeals, questioning the CTA's 10th August 1994 decision and
11th October 1994 resolution. On 31 March 1993, the appellate
court's Special Thirteenth Division affirmed in all respects the
assailed decision and resolution.
In the instant petition, the Solicitor General argues: That —
I. RMC 37-93 IS A RULING OR OPINION OF THE COMMISSIONER
OF INTERNAL REVENUE INTERPRETING THE PROVISIONS OF THE
TAX CODE.
II. BEING AN INTERPRETATIVE RULING OR OPINION, THE
PUBLICATION OF RMC 37-93, FILING OF COPIES THEREOF WITH
THE UP LAW CENTER AND PRIOR HEARING ARE NOT NECESSARY
TO ITS VALIDITY, EFFECTIVITY AND ENFORCEABILITY.
III. PRIVATE RESPONDENT IS DEEMED TO HAVE BEEN NOTIFIED
OR RMC 37-93 ON JULY 2, 1993.
IV. RMC 37-93 IS NOT DISCRIMINATORY SINCE IT APPLIES TO ALL
LOCALLY MANUFACTURED CIGARETTES SIMILARLY SITUATED AS
"HOPE," "MORE" AND "CHAMPION" CIGARETTES.
V. PETITIONER WAS NOT LEGALLY PROSCRIBED FROM
RECLASSIFYING "HOPE," "MORE" AND "CHAMPION" CIGARETTES
BEFORE THE EFFECTIVITY OF R.A. NO. 7654.
VI. SINCE RMC 37-93 IS AN INTERPRETATIVE RULE, THE INQUIRY
IS NOT INTO ITS VALIDITY, EFFECTIVITY OR ENFORCEABILITY
BUT INTO ITS CORRECTNESS OR PROPRIETY; RMC 37-93 IS
CORRECT. 10
In fine, petitioner opines that RMC 37-93 is merely an
interpretative ruling of the BIR which can thus become effective
without any prior need for notice and hearing, nor publication, and
that its issuance is not discriminatory since it would apply under
similar circumstances to all locally manufactured cigarettes.
The Court must sustain both the appellate court and the tax court.
Petitioner stresses on the wide and ample authority of the BIR in
the issuance of rulings for the effective implementation of the
provisions of the National Internal Revenue Code. Let it be made
clear that such authority of the Commissioner is not here doubted.
Like any other government agency, however, the CIR may not
disregard legal requirements or applicable principles in the exercise
of its quasi-legislative powers.
Let us first distinguish between two kinds of administrative
issuances — a legislative rule and an interpretative rule.
In Misamis Oriental Association of Coco Traders,
Inc., vs. Department of Finance Secretary, 11 the Court expressed:
. . . a legislative rule is in the nature of subordinate legislation,
designed to implement a primary legislation by providing the
details thereof . In the same way that laws must have the benefit
of public hearing, it is generally required that before a legislative
rule is adopted there must be hearing. In this connection, the
Administrative Code of 1987 provides:
Public Participation. — If not otherwise required by law, an agency
shall, as far as practicable, publish or circulate notices of proposed
rules and afford interested parties the opportunity to submit their
views prior to the adoption of any rule.
(2) In the fixing of rates, no rule or final order shall be valid unless
the proposed rates shall have been published in a newspaper of
general circulation at least two (2) weeks before the first hearing
thereon.
(3) In case of opposition, the rules on contested cases shall be
observed.
In addition such rule must be published. On the other
hand, interpretative rules are designed to provide guidelines to the
law which the administrative agency is in charge of enforcing. 12
It should be understandable that when an administrative rule is
merely interpretative in nature, its applicability needs nothing
further than its bare issuance for it gives no real consequence
more than what the law itself has already prescribed. When, upon
the other hand, the administrative rule goes beyond merely
providing for the means that can facilitate or render least
cumbersome the implementation of the law but substantially adds
to or increases the burden of those governed, it behooves the
agency to accord at least to those directly affected a chance to be
heard, and thereafter to be duly informed, before that new
issuance is given the force and effect of law.
A reading of RMC 37-93, particularly considering the circumstances
under which it has been issued, convinces us that the circular
cannot be viewed simply as a corrective measure (revoking in the
process the previous holdings of past Commissioners) or merely as
construing Section 142(c)(1) of the NIRC, as amended, but has, in
fact and most importantly, been made in order to place "Hope
Luxury," "Premium More" and "Champion" within the classification
of locally manufactured cigarettes bearing foreign brands and to
thereby have them covered by RA 7654. Specifically, the new law
would have its amendatory provisions applied to locally
manufactured cigarettes which at the time of its effectivity were
not so classified as bearing foreign brands. Prior to the issuance of
the questioned circular, "Hope Luxury," "Premium More," and
"Champion" cigarettes were in the category of locally manufactured
cigarettes not bearing foreign brand subject to 45% ad
valorem tax. Hence, without RMC 37-93, the enactment of RA
7654, would have had no new tax rate consequence on private
respondent's products. Evidently, in order to place "Hope Luxury,"
"Premium More," and "Champion" cigarettes within the scope of
the amendatory law and subject them to an increased tax rate, the
now disputed RMC 37-93 had to be issued. In so doing, the BIR not
simply intrepreted the law; verily, it legislated under its quasi-
legislative authority. The due observance of the requirements of
notice, of hearing, and of publication should not have been then
ignored.
Indeed, the BIR itself, in its RMC 10-86, has observed and
provided:
RMC NO. 10-86
Effectivity of Internal Revenue Rules and Regulations
It has been observed that one of the problem areas bearing on
compliance with Internal Revenue Tax rules and regulations is lack
or insufficiency of due notice to the tax paying public. Unless there
is due notice, due compliance therewith may not be reasonably
expected. And most importantly, their strict enforcement could
possibly suffer from legal infirmity in the light of the constitutional
provision on "due process of law" and the essence of the Civil Code
provision concerning effectivity of laws, whereby due notice is a
basic requirement (Sec. 1, Art. IV, Constitution; Art. 2, New Civil
Code).
In order that there shall be a just enforcement of rules and
regulations, in conformity with the basic element of due process,
the following procedures are hereby prescribed for the drafting,
issuance and implementation of the said Revenue Tax Issuances:
(1) This Circular shall apply only to (a) Revenue Regulations; (b)
Revenue Audit Memorandum Orders; and (c) Revenue
Memorandum Circulars and Revenue Memorandum Orders bearing
on internal revenue tax rules and regulations.
(2) Except when the law otherwise expressly provides, the
aforesaid internal revenue tax issuances shall not begin to be
operative until after due notice thereof may be fairly presumed.
Due notice of the said issuances may be fairly presumed only after
the following procedures have been taken;
xxx xxx xxx
(5) Strict compliance with the foregoing procedures is
enjoined. 13
Nothing on record could tell us that it was either impossible or
impracticable for the BIR to observe and comply with the above
requirements before giving effect to its questioned circular.
Not insignificantly, RMC 37-93 might have likewise infringed on
uniformity of taxation.
Article VI, Section 28, paragraph 1, of the 1987 Constitution
mandates taxation to be uniform and equitable. Uniformity requires
that all subjects or objects of taxation, similarly situated, are to be
treated alike or put on equal footing both in privileges and
liabilities. 14 Thus, all taxable articles or kinds of property of the
same class must be taxed at the same rate 15 and the tax must
operate with the same force and effect in every place where the
subject may be found.
Apparently, RMC 37-93 would only apply to "Hope Luxury,"
"Premium More" and "Champion" cigarettes and, unless petitioner
would be willing to concede to the submission of private
respondent that the circular should, as in fact my esteemed
colleague Mr. Justice Bellosillo so expresses in his separate opinion,
be considered adjudicatory in nature and thus violative of due
process following the Ang Tibay 16 doctrine, the measure suffers
from lack of uniformity of taxation. In its decision, the CTA has
keenly noted that other cigarettes bearing foreign brands have not
been similarly included within the scope of the circular, such as —
1. Locally manufactured by ALHAMBRA INDUSTRIES, INC.
(a) "PALM TREE" is listed as manufactured by office of Monopoly,
Korea (Exhibit "R")
2. Locally manufactured by LA SUERTE CIGAR and CIGARETTE
COMPANY
(a) "GOLDEN KEY" is listed being manufactured by United Tobacco,
Pakistan (Exhibit "S")
(b) "CANNON" is listed as being manufactured by Alpha Tobacco,
Bangladesh (Exhibit "T")
3. Locally manufactured by LA PERLA INDUSTRIES, INC.
(a) "WHITE HORSE" is listed as being manufactured by Rothman's,
Malaysia (Exhibit "U")
(b) "RIGHT" is listed as being manufactured by SVENSKA, Tobaks,
Sweden (Exhibit "V-1")
4. Locally manufactured by MIGHTY CORPORATION
(a) "WHITE HORSE" is listed as being manufactured by Rothman's,
Malaysia (Exhibit "U-1")
5. Locally manufactured by STERLING TOBACCO CORPORATION
(a) "UNION" is listed as being manufactured by Sumatra Tobacco,
Indonesia and Brown and Williamson, USA (Exhibit "U-3")
(b) "WINNER" is listed as being manufactured by Alpha Tobacco,
Bangladesh; Nangyang, Hongkong; Joo Lan, Malaysia; Pakistan
Tobacco Co., Pakistan; Premier Tobacco, Pakistan and Haggar,
Sudan (Exhibit "U-4"). 17
The court quoted at length from the transcript of the hearing
conducted on 10 August 1993 by the Committee on Ways and
Means of the House of Representatives; viz:
THE CHAIRMAN. So you have specific information on Fortune
Tobacco alone. You don't have specific information on other
tobacco manufacturers. Now, there are other brands which are
similarly situated. They are locally manufactured bearing foreign
brands. And may I enumerate to you all these brands, which are
also listed in the World Tobacco Directory . . . Why were these
brand not reclassified at 55 if your want to give a level playing filed
to foreign manufacturers?
MS. CHATO. Mr. Chairman, in fact, we have already prepared a
Revenue Memorandum Circular that was supposed to come after
RMC No. 37-93 which have really named specifically the list of
locally manufactured cigarettes bearing a foreign brand for excise
tax purposes and includes all these brands that you mentioned at
55 percent except that at that time, when we had to come up with
this, we were forced to study the brands of Hope, More and
Champion because we were given documents that would indicate
the that these brands were actually being claimed or patented in
other countries because we went by Revenue Memorandum
Circular 1488 and we wanted to give some rationality to how it
came about but we couldn't find the rationale there. And we really
found based on our own interpretation that the only test that is
given by that existing law would be registration in the World
Tobacco Directory. So we came out with this proposed revenue
memorandum circular which we forwarded to the Secretary of
Finance except that at that point in time, we went by the Republic
Act 7654 in Section 1 which amended Section 142, C-1, it said,
that on locally manufactured cigarettes which are currently
classified and taxed at 55 percent. So we were saying that when
this law took effect in July 3 and if we are going to come up with
this revenue circular thereafter, then I think our action would really
be subject to question but we feel that . . . Memorandum Circular
Number 37-93 would really cover even similarly situated
brands. And in fact, it was really because of the study, the short
time that we were given to study the matter that we could not
include all the rest of the other brands that would have been really
classified as foreign brand if we went by the law itself. I am sure
that by the reading of the law, you would without that ruling by
Commissioner Tan they would really have been included in the
definition or in the classification of foregoing brands. These brands
that you referred to or just read to us and in fact just for your
information, we really came out with a proposed revenue
memorandum circular for those brands. (Emphasis supplied)
saying really because of the fact that I was just recently appointed
and the lack of time, the period that was allotted to us to come up
with the right actions on the matter, we were really caught by the
July 3 deadline. But in fact, We have already prepared a revenue
memorandum circular clarifying with the other . . . does not yet,
would have been a list of locally manufactured cigarettes bearing a
foreign brand for excise tax purposes which would include all the
other brands that were mentioned by the Honorable Chairman.
(Emphasis supplied) (Exhibit "FF-2-d," par. IX-4). 18
All taken, the Court is convinced that the hastily promulgated RMC
37-93 has fallen short of a valid and effective administrative
issuance.
WHEREFORE, the decision of the Court of Appeals, sustaining that
of the Court of Tax Appeals, is AFFIRMED. No costs.
SO ORDERED.

(Exhibit "FF-2-C," pp. V-5 TO V-6, VI-1 to VI-3).

xxx xxx xxx

MS. CHATO. . . . But I do agree with you now that it cannot and in
fact that is why I felt that we . . . I wanted to come up with a more
extensive coverage and precisely why I asked that revenue
memorandum circular that would cover all those similarly situated
would be prepared but because of the lack of time and I came out
with a study of RA 7654, it would not have been possible to really
come up with the reclassification or the proper classification of all
brands that are listed there. . . (emphasis supplied) (Exhibit "FF-
2d," page IX-1)

xxx xxx xxx

HON. DIAZ. But did you not consider that there are similarly
situated?

MS. CHATO. That is precisely why, Sir, after we have come up with
this Revenue Memorandum Circular No. 37-93, the other brands
came about the would have also clarified RMC 37-93 by I was
G.R. No. 84818 December 18, 1989
PHILIPPINE COMMUNICATIONS SATELLITE
CORPORATION, petitioner,
vs.
JOSE LUIS A. ALCUAZ, as NTC Commissioner, and NATIONAL
TELECOMMUNICATIONS COMMISSION, respondents.
Rilloraza, Africa, De Ocampo & Africa for petitioner.
Victor de la Serna for respondent Alcuaz.
REGALADO, J.:
This case is posed as one of first impression in the sense that it
involves the public utility services of the petitioner Philippine
Communications Satellite Corporation (PHILCOMSAT, for short)
which is the only one rendering such services in the Philippines.
The petition before us seeks to annul and set aside an
Order 1 issued by respondent Commissioner Jose Luis Alcuaz of the
National Telecommunications Commission (hereafter, NTC), dated
September 2, 1988, which directs the provisional reduction of the
rates which may be charged by petitioner for certain specified lines
of its services by fifteen percent (15%) with the reservation to
make further reductions later, for being violative of the
constitutional prohibition against undue delegation of legislative
power and a denial of procedural, as well as substantive, due
process of law.
2
The antecedental facts as summarized by petitioner are not in
dispute. By virtue of Republic Act No. 5514, PHILCOMSAT was
granted "a franchise to establish, construct, maintain and operate
in the Philippines, at such places as the grantee may select, station
or stations and associated equipment and facilities for international
satellite communications." Under this franchise, it was likewise
granted the authority to "construct and operate such ground
facilities as needed to deliver telecommunications services from the
communications satellite system and ground terminal or
terminals."
Pursuant to said franchise, petitioner puts on record that it
undertook the following activities and established the following
installations:
1. In 1967, PHILCOMSAT established its provisional earth station in
Pinugay, Rizal.
2. In 1968, earth station standard "A" antenna (Pinugay I) was
established. Pinugay I provided direct satellite communication links
with the Pacific Ocean Region (the United States, Australia,
Canada, Hawaii, Guam, Korea, Thailand, China [PROC], New
Zealand and Brunei) thru the Pacific Ocean INTELSAT satellite.
3. In 1971, a second earth station standard "A" antenna(Pinugay
III) was established. Pinugay II provided links with the Indian
Ocean Region (major cities in Europe, Middle East, Africa, and
other Asia Pacific countries operating within the region) thru the
Indian Ocean INTELSAT satellite.
4. In 1983, a third earth station standard "B" antenna (Pinugay III)
was established to temporarily assume the functions of Pinugay I
and then Pinugay II while they were being refurbished. Pinugay III
now serves as spare or reserved antenna for possible
contingencies.
5. In 1983, PHILCOMSAT constructed and installed a standard "B"
antenna at Clark Air Field, Pampanga as a television receive-only
earth station which provides the U.S. Military bases with a 24-hour
television service.
6. In 1989, petitioner completed the installation of a third standard
"A" earth station (Pinugay IV) to take over the links in Pinugay I
due to obsolescence. 3
By designation of the Republic of the Philippines, the petitioner is
also the sole signatory for the Philippines in the Agreement and the
Operating Agreement relating to the International
Telecommunications Satellite Organization (INTELSAT) of 115
member nations, as well as in the Convention and the Operating
Agreement of the International Maritime Satellite Organization
(INMARSAT) of 53 member nations, which two global commercial
telecommunications satellite corporations were collectively
established by various states in line with the principles set forth in
Resolution 1721 (XVI) of the General Assembly of the United
Nations.
Since 1968, the petitioner has been leasing its satellite circuits to:
1. Philippine Long Distance Telephone Company;
2. Philippine Global Communications, Inc.;
3. Eastern Telecommunications Phils., Inc.;
4. Globe Mackay Cable and Radio Corp. ITT; and
5. Capitol Wireless, Inc.
or their predecessors-in-interest. The satellite services thus
provided by petitioner enable said international carriers to serve
the public with indispensable communication services, such as
overseas telephone, telex, facsimile, telegrams, high speed data,
live television in full color, and television standard conversion from
European to American or vice versa.
Under Section 5 of Republic Act No. 5514, petitioner was exempt
from the jurisdiction of the then Public Service Commission, now
respondent NTC. However, pursuant to Executive Order No. 196
issued on June 17, 1987, petitioner was placed under the
jurisdiction, control and regulation of respondent NTC, including all
its facilities and services and the fixing of rates. Implementing said
Executive Order No. 196, respondents required petitioner to apply
for the requisite certificate of public convenience and necessity
covering its facilities and the services it renders, as well as the
corresponding authority to charge rates therefor.
Consequently, under date of September 9, 1987, petitioner filed
with respondent NTC an application 4 for authority to continue
operating and maintaining the same facilities it has been
continuously operating and maintaining since 1967, to continue
providing the international satellite communications services it has
likewise been providing since 1967, and to charge the current rates
applied for in rendering such services. Pending hearing, it also
applied for a provisional authority so that it can continue to operate
and maintain the above mentioned facilities, provide the services
and charge therefor the aforesaid rates therein applied for.
On September 16, 1987, petitioner was granted a provisional
authority to continue operating its existing facilities, to render the
services it was then offering, and to charge the rates it was then
charging. This authority was valid for six (6) months from the date
of said order. 5 When said provisional authority expired on March
17, 1988, it was extended for another six (6) months, or up to
September 16, 1988.
The NTC order now in controversy had further extended the
provisional authority of the petitioner for another six (6) months,
counted from September 16, 1988, but it directed the petitioner to
charge modified reduced rates through a reduction of fifteen
percent (15%) on the present authorized rates. Respondent
Commissioner ordered said reduction on the following ground:
The Commission in its on-going review of present service rates
takes note that after an initial evaluation by the Rates Regulation
Division of the Common Carriers Authorization Department of the
financial statements of applicant, there is merit in a REDUCTION in
some of applicant's rates, subject to further reductions, should the
Commission finds (sic) in its further evaluation that more reduction
should be effected either on the basis of a provisional authorization
or in the final consideration of the case. 6
PHILCOMSAT assails the above-quoted order for the following
reasons:
1. The enabling act (Executive Order No. 546) of respondent NTC
empowering it to fix rates for public service communications does
not provide the necessary standards constitutionally required,
hence there is an undue delegation of legislative power,
particularly the adjudicatory powers of NTC;
2. Assuming arguendo that the rate-fixing power was properly and
constitutionally conferred, the same was exercised in an
unconstitutional manner, hence it is ultra vires, in that (a) the
questioned order violates procedural due process for having been
issued without prior notice and hearing; and (b) the rate reduction
it imposes is unjust, unreasonable and confiscatory, thus
constitutive of a violation of substantive due process.
I. Petitioner asseverates that nowhere in the provisions of
Executive Order No. 546, providing for the creation of respondent
NTC and granting its rate-fixing powers, nor of Executive Order No.
196, placing petitioner under the jurisdiction of respondent NTC,
can it be inferred that respondent NTC is guided by any standard in
the exercise of its rate-fixing and adjudicatory powers. While
petitioner in its petition-in-chief raised the issue of undue
delegation of legislative power, it subsequently clarified its said
submission to mean that the order mandating a reduction of
certain rates is undue delegation not of legislative but of quasi-
judicial power to respondent NTC, the exercise of which allegedly
requires an express conferment by the legislative body.
Whichever way it is presented, petitioner is in effect questioning
the constitutionality of Executive Orders Nos. 546 and 196 on the
ground that the same do not fix a standard for the exercise of the
power therein conferred.
We hold otherwise.
Fundamental is the rule that delegation of legislative power may be
sustained only upon the ground that some standard for its exercise
is provided and that the legislature in making the delegation has
prescribed the manner of the exercise of the delegated power.
Therefore, when the administrative agency concerned, respondent
NTC in this case, establishes a rate, its act must both be non-
confiscatory and must have been established in the manner
prescribed by the legislature; otherwise, in the absence of a fixed
standard, the delegation of power becomes unconstitutional. In
case of a delegation of rate-fixing power, the only standard which
the legislature is required to prescribe for the guidance of the
administrative authority is that the rate be reasonable and just.
However, it has been held that even in the absence of an express
requirement as to reasonableness, this standard may be implied. 7
It becomes important then to ascertain the nature of the power
delegated to respondent NTC and the manner required by the
statute for the lawful exercise thereof.
Pursuant to Executive Orders Nos. 546 and 196, respondent NTC is
empowered, among others, to determine and prescribe rates
pertinent to the operation of public service communications which
necessarily include the power to promulgate rules and regulations
in connection therewith. And, under Section 15(g) of Executive
Order No. 546, respondent NTC should be guided by the
requirements of public safety, public interest and reasonable
feasibility of maintaining effective competition of private entities in
communications and broadcasting facilities. Likewise, in Section
6(d) thereof, which provides for the creation of the Ministry of
Transportation and Communications with control and supervision
over respondent NTC, it is specifically provided that the national
economic viability of the entire network or components of the
communications systems contemplated therein should be
maintained at reasonable rates. We need not go into an in-depth
analysis of the pertinent provisions of the law in order to conclude
that respondent NTC, in the exercise of its rate-fixing power, is
limited by the requirements of public safety, public interest,
reasonable feasibility and reasonable rates, which conjointly more
than satisfy the requirements of a valid delegation of legislative
power.
II. On another tack, petitioner submits that the questioned order
violates procedural due process because it was issued motu
proprio, without notice to petitioner and without the benefit of a
hearing. Petitioner laments that said order was based merely on an
"initial evaluation," which is a unilateral evaluation, but had
petitioner been given an opportunity to present its side before the
order in question was issued, the confiscatory nature of the rate
reduction and the consequent deterioration of the public service
could have been shown and demonstrated to respondents.
Petitioner argues that the function involved in the rate fixing-power
of NTC is adjudicatory and hence quasi-judicial, not quasi-
legislative; thus, notice and hearing are necessary and the absence
thereof results in a violation of due process.
Respondents admit that the application of a policy like the fixing of
rates as exercised by administrative bodies is quasi-judicial rather
than quasi-legislative: that where the function of the administrative
agency is legislative, notice and hearing are not required, but
where an order applies to a named person, as in the instant case,
the function involved is adjudicatory. 8 Nonetheless, they insist that
under the facts obtaining the order in question need not be
preceded by a hearing, not because it was issued pursuant to
respondent NTC's legislative function but because the assailed
order is merely interlocutory, it being an incident in the ongoing
proceedings on petitioner's application for a certificate of public
convenience; and that petitioner is not the only primary source of
data or information since respondent is currently engaged in a
continuing review of the rates charged.
We find merit in petitioner's contention.
In Vigan Electric Light Co., Inc. vs. Public Service Commission,9 we
made a categorical classification as to when the rate-filing power of
administrative bodies is quasi-judicial and when it is legislative,
thus:
Moreover, although the rule-making power and even the power to
fix rates- when such rules and/or rates are meant to apply to all
enterprises of a given kind throughout the Philippines-may partake
of a legislative character, such is not the nature of the order
complained of. Indeed, the same applies exclusively to petitioner
herein. What is more, it is predicated upon the finding of fact-
based upon a report submitted by the General Auditing Office-that
petitioner is making a profit of more than 12% of its invested
capital, which is denied by petitioner. Obviously, the latter is
entitled to cross-examine the maker of said report, and to
introduce evidence to disprove the contents thereof and/or explain
or complement the same, as well as to refute the conclusion drawn
therefrom by the respondent. In other words, in making said
finding of fact, respondent performed a function partaking of a
quasi-judicial character, the valid exercise of which demands
previous notice and hearing.
This rule was further explained in the subsequent case of The
Central Bank of the Philippines vs. Cloribel, et al. 10 to wit:
It is also clear from the authorities that where the function of the
administrative body is legislative, notice of hearing is not required
by due process of law (See Oppenheimer, Administrative Law, 2
Md. L.R. 185, 204, supra, where it is said: 'If the nature of the
administrative agency is essentially legislative, the requirements of
notice and hearing are not necessary. The validity of a rule of
future action which affects a group, if vested rights of liberty or
property are not involved, is not determined according to the same
rules which apply in the case of the direct application of a policy to
a specific individual) ... It is said in 73 C.J.S. Public Administrative
Bodies and Procedure, sec. 130, pages 452 and 453: 'Aside from
statute, the necessity of notice and hearing in an administrative
proceeding depends on the character of the proceeding and the
circumstances involved. In so far as generalization is possible in
view of the great variety of administrative proceedings, it may be
stated as a general rule that notice and hearing are not essential to
the validity of administrative action where the administrative body
acts in the exercise of executive, administrative, or legislative
functions; but where a public administrative body acts in a judicial
or quasi-judicial matter, and its acts are particular and immediate
rather than general and prospective, the person whose rights or
property may be affected by the action is entitled to notice and
hearing. 11
The order in question which was issued by respondent Alcuaz no
doubt contains all the attributes of a quasi-judicial adjudication.
Foremost is the fact that said order pertains exclusively to
petitioner and to no other. Further, it is premised on a finding of
fact, although patently superficial, that there is merit in a reduction
of some of the rates charged- based on an initial evaluation of
petitioner's financial statements-without affording petitioner the
benefit of an explanation as to what particular aspect or aspects of
the financial statements warranted a corresponding rate reduction.
No rationalization was offered nor were the attending
contingencies, if any, discussed, which prompted respondents to
impose as much as a fifteen percent (15%) rate reduction. It is not
far-fetched to assume that petitioner could be in a better position
to rationalize its rates vis-a-vis the viability of its business
requirements. The rates it charges result from an exhaustive and
detailed study it conducts of the multi-faceted intricacies attendant
to a public service undertaking of such nature and magnitude. We
are, therefore, inclined to lend greater credence to petitioner's
ratiocination that an immediate reduction in its rates would
adversely affect its operations and the quality of its service to the
public considering the maintenance requirements, the projects it
still has to undertake and the financial outlay involved. Notably,
petitioner was not even afforded the opportunity to cross-examine
the inspector who issued the report on which respondent NTC
based its questioned order.
At any rate, there remains the categorical admission made by
respondent NTC that the questioned order was issued pursuant to
its quasi-judicial functions. It, however, insists that notice and
hearing are not necessary since the assailed order is merely
incidental to the entire proceedings and, therefore, temporary in
nature. This postulate is bereft of merit.
While respondents may fix a temporary rate pending final
determination of the application of petitioner, such rate-fixing
order, temporary though it may be, is not exempt from the
statutory procedural requirements of notice and hearing, as well as
the requirement of reasonableness. Assuming that such power is
vested in NTC, it may not exercise the same in an arbitrary and
confiscatory manner. Categorizing such an order as temporary in
nature does not perforce entail the applicability of a different rule
of statutory procedure than would otherwise be applied to any
other order on the same matter unless otherwise provided by the
applicable law. In the case at bar, the applicable statutory
provision is Section 16(c) of the Public Service Act which provides:
Section 16. Proceedings of the Commission, upon notice and
hearing the Commission shall have power, upon proper notice and
hearing in accordance with the rules and provisions of this Act,
subject to the limitations and exceptions mentioned and saving
provisions to the contrary:
xxx xxx xxx
(c) To fix and determine individual or joint rates, ... which shall be
imposed, observed and followed thereafter by any public service;
...
There is no reason to assume that the aforesaid provision does not
apply to respondent NTC, there being no limiting, excepting, or
saving provisions to the contrary in Executive Orders Nos. 546 and
196.
It is thus clear that with regard to rate-fixing, respondent has no
authority to make such order without first giving petitioner a
hearing, whether the order be temporary or permanent, and it is
immaterial whether the same is made upon a complaint, a
summary investigation, or upon the commission's own motion as in
the present case. That such a hearing is required is evident in
respondents' order of September 16, 1987 in NTC Case No. 87-94
which granted PHILCOMSAT a provisional authority "to continue
operating its existing facilities, to render the services it presently
offers, and to charge the rates as reduced by them "under the
condition that "(s)ubject to hearing and the final consideration of
the merit of this application, the Commission may modify, revise or
amend the rates ..." 12
While it may be true that for purposes of rate-fixing respondents
may have other sources of information or data, still, since a
hearing is essential, respondent NTC should act solely on the basis
of the evidence before it and not on knowledge or information
otherwise acquired by it but which is not offered in evidence or,
even if so adduced, petitioner was given no opportunity to
controvert.
Again, the order requires the new reduced rates to be made
effective on a specified date. It becomes a final legislative act as to
the period during which it has to remain in force pending the final
determination of the case. 13 An order of respondent NTC
prescribing reduced rates, even for a temporary period, could be
unjust, unreasonable or even confiscatory, especially if the rates
are unreasonably low, since the utility permanently loses its just
revenue during the prescribed period. In fact, such order is in
effect final insofar as the revenue during the period covered by the
order is concerned. Upon a showing, therefore, that the order
requiring a reduced rate is confiscatory, and will unduly deprive
petitioner of a reasonable return upon its property, a declaration of
its nullity becomes inductible, which brings us to the issue on
substantive due process.
III. Petitioner contends that the rate reduction is confiscatory in
that its implementation would virtually result in a cessation of its
operations and eventual closure of business. On the other hand,
respondents assert that since petitioner is operating its
communications satellite facilities through a legislative franchise,
as such grantee it has no vested right therein. What it has is
merely a privilege or license which may be revoked at will by the
State at any time without necessarily violating any vested property
right of herein petitioner. While petitioner concedes this thesis of
respondent, it counters that the withdrawal of such privilege should
nevertheless be neither whimsical nor arbitrary, but it must be fair
and reasonable.
There is no question that petitioner is a mere grantee of a
legislative franchise which is subject to amendment, alteration, or
repeal by Congress when the common good so
requires. 14 Apparently, therefore, such grant cannot be unilaterally
revoked absent a showing that the termination of the operation of
said utility is required by the common good.
The rule is that the power of the State to regulate the conduct and
business of public utilities is limited by the consideration that it is
not the owner of the property of the utility, or clothed with the
general power of management incident to ownership, since the
private right of ownership to such property remains and is not to
be destroyed by the regulatory power. The power to regulate is not
the power to destroy useful and harmless enterprises, but is the
power to protect, foster, promote, preserve, and control with due
regard for the interest, first and foremost, of the public, then of the
utility and of its patrons. Any regulation, therefore, which operates
as an effective confiscation of private property or constitutes an
arbitrary or unreasonable infringement of property rights is void,
because it is repugnant to the constitutional guaranties of due
process and equal protection of the laws. 15
Hence, the inherent power and authority of the State, or its
authorized agent, to regulate the rates charged by public utilities
should be subject always to the requirement that the rates so fixed
shall be reasonable and just. A commission has no power to fix
rates which are unreasonable or to regulate them arbitrarily. This
basic requirement of reasonableness comprehends such rates
which must not be so low as to be confiscatory, or too high as to
be oppressive. 16
What is a just and reasonable rate is not a question of formula but
of sound business judgment based upon the evidence 17 it is a
question of fact calling for the exercise of discretion, good sense,
and a fair, enlightened and independent judgment. 18 In
determining whether a rate is confiscatory, it is essential also to
consider the given situation, requirements and opportunities of the
utility. A method often employed in determining reasonableness is
the fair return upon the value of the property to the public utility.
Competition is also a very important factor in determining the
reasonableness of rates since a carrier is allowed to make such
rates as are necessary to meet competition. 19
A cursory perusal of the assailed order reveals that the rate
reduction is solely and primarily based on the initial evaluation
made on the financial statements of petitioner, contrary to
respondent NTC's allegation that it has several other sources of
information without, however, divulging such sources.
Furthermore, it did not as much as make an attempt to elaborate
on how it arrived at the prescribed rates. It just perfunctorily
declared that based on the financial statements, there is merit for
a rate reduction without any elucidation on what implications and
conclusions were necessarily inferred by it from said statements.
Nor did it deign to explain how the data reflected in the financial
statements influenced its decision to impose a rate reduction.
On the other hand, petitioner may likely suffer a severe drawback,
with the consequent detriment to the public service, should the
order of respondent NTC turn out to be unreasonable and
improvident. The business in which petitioner is engaged is unique
in that its machinery and equipment have always to be taken in
relation to the equipment on the other end of the transmission
arrangement. Any lack, aging, acquisition, rehabilitation, or
refurbishment of machinery and equipment necessarily entails a
major adjustment or innovation on the business of petitioner. As
pointed out by petitioner, any change in the sending end abroad
has to be matched with the corresponding change in the receiving
end in the Philippines. Conversely, any in the receiving end abroad
has to be matched with the corresponding change in the sending
end in the Philippines. An inability on the part of petitioner to meet
the variegations demanded be technology could result in a
deterioration or total failure of the service of satellite
communications.
At present, petitioner is engaged in several projects aimed at
refurbishing, rehabilitating, and renewing its machinery and
equipment in order to keep up with the continuing charges of the
times and to maintain its facilities at a competitive level with the
technological advances abroad. There projected undertakings were
formulated on the premise that rates are maintained at their
present or at reasonable levels. Hence, an undue reduction thereof
may practically lead to a cessation of its business. While we
concede the primacy of the public interest in an adequate and
efficient service, the same is not necessarily to be equated with
reduced rates. Reasonableness in the rates assumes that the same
is fair to both the public utility and the consumer.
Consequently, we hold that the challenged order, particularly on
the issue of rates provided therein, being violative of the due
process clause is void and should be nullified. Respondents should
now proceed, as they should heretofore have done, with the
hearing and determination of petitioner's pending application for a
certificate of public convenience and necessity and in which
proceeding the subject of rates involved in the present
controversy, as well as other matter involved in said application, be
duly adjudicated with reasonable dispatch and with due observance
of our pronouncements herein.
WHEREFORE, the writ prayed for is GRANTED and the order of
respondents, dated September 2, 1988, in NTC Case No. 87-94 is
hereby SET ASIDE. The temporary restraining order issued under
our resolution of September 13, 1988, as specifically directed
against the aforesaid order of respondents on the matter of
existing rates on petitioner's present authorized services, is hereby
made permanent.
SO ORDERED.
G.R. No. L-65773-74 April 30, 1987
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
BRITISH OVERSEAS AIRWAYS CORPORATION and COURT OF
TAX APPEALS, respondents.
Quasha, Asperilla, Ancheta, Peña, Valmonte & Marcos for
respondent British Airways.
MELENCIO-HERRERA, J.:
Petitioner Commissioner of Internal Revenue (CIR) seeks a review
on certiorari of the joint Decision of the Court of Tax Appeals (CTA)
in CTA Cases Nos. 2373 and 2561, dated 26 January 1983, which
set aside petitioner's assessment of deficiency income taxes
against respondent British Overseas Airways Corporation (BOAC)
for the fiscal years 1959 to 1967, 1968-69 to 1970-71,
respectively, as well as its Resolution of 18 November, 1983
denying reconsideration.
BOAC is a 100% British Government-owned corporation organized
and existing under the laws of the United Kingdom It is engaged in
the international airline business and is a member-signatory of the
Interline Air Transport Association (IATA). As such it operates air
transportation service and sells transportation tickets over the
routes of the other airline members. During the periods covered by
the disputed assessments, it is admitted that BOAC had no landing
rights for traffic purposes in the Philippines, and was not granted a
Certificate of public convenience and necessity to operate in the
Philippines by the Civil Aeronautics Board (CAB), except for a nine-
month period, partly in 1961 and partly in 1962, when it was
granted a temporary landing permit by the CAB. Consequently, it
did not carry passengers and/or cargo to or from the Philippines,
although during the period covered by the assessments, it
maintained a general sales agent in the Philippines — Wamer
Barnes and Company, Ltd., and later Qantas Airways — which was
responsible for selling BOAC tickets covering passengers and
cargoes. 1
G.R. No. 65773 (CTA Case No. 2373, the First Case)
On 7 May 1968, petitioner Commissioner of Internal Revenue (CIR,
for brevity) assessed BOAC the aggregate amount of
P2,498,358.56 for deficiency income taxes covering the years 1959
to 1963. This was protested by BOAC. Subsequent investigation
resulted in the issuance of a new assessment, dated 16 January
1970 for the years 1959 to 1967 in the amount of P858,307.79.
BOAC paid this new assessment under protest.
On 7 October 1970, BOAC filed a claim for refund of the amount of
P858,307.79, which claim was denied by the CIR on 16 February
1972. But before said denial, BOAC had already filed a petition for
review with the Tax Court on 27 January 1972, assailing the
assessment and praying for the refund of the amount paid.
G.R. No. 65774 (CTA Case No. 2561, the Second Case)
On 17 November 1971, BOAC was assessed deficiency income
taxes, interests, and penalty for the fiscal years 1968-1969 to
1970-1971 in the aggregate amount of P549,327.43, and the
additional amounts of P1,000.00 and P1,800.00 as compromise
penalties for violation of Section 46 (requiring the filing of
corporation returns) penalized under Section 74 of the National
Internal Revenue Code (NIRC).
On 25 November 1971, BOAC requested that the assessment be
countermanded and set aside. In a letter, dated 16 February 1972,
however, the CIR not only denied the BOAC request for refund in
the First Case but also re-issued in the Second Case the deficiency
income tax assessment for P534,132.08 for the years 1969 to
1970-71 plus P1,000.00 as compromise penalty under Section 74
of the Tax Code. BOAC's request for reconsideration was denied by
the CIR on 24 August 1973. This prompted BOAC to file the Second
Case before the Tax Court praying that it be absolved of liability for
deficiency income tax for the years 1969 to 1971.
This case was subsequently tried jointly with the First Case.
On 26 January 1983, the Tax Court rendered the assailed joint
Decision reversing the CIR. The Tax Court held that the proceeds
of sales of BOAC passage tickets in the Philippines by Warner
Barnes and Company, Ltd., and later by Qantas Airways, during
the period in question, do not constitute BOAC income from
Philippine sources "since no service of carriage of passengers or
freight was performed by BOAC within the Philippines" and,
therefore, said income is not subject to Philippine income tax. The
CTA position was that income from transportation is income from
services so that the place where services are rendered determines
the source. Thus, in the dispositive portion of its Decision, the Tax
Court ordered petitioner to credit BOAC with the sum of
P858,307.79, and to cancel the deficiency income tax assessments
against BOAC in the amount of P534,132.08 for the fiscal years
1968-69 to 1970-71.
Hence, this Petition for Review on certiorari of the Decision of the
Tax Court.
The Solicitor General, in representation of the CIR, has aptly
defined the issues, thus:
1. Whether or not the revenue derived by private respondent
British Overseas Airways Corporation (BOAC) from sales of tickets
in the Philippines for air transportation, while having no landing
rights here, constitute income of BOAC from Philippine sources,
and, accordingly, taxable.
2. Whether or not during the fiscal years in question BOAC s a
resident foreign corporation doing business in the Philippines or has
an office or place of business in the Philippines.
3. In the alternative that private respondent may not be considered
a resident foreign corporation but a non-resident foreign
corporation, then it is liable to Philippine income tax at the rate of
thirty-five per cent (35%) of its gross income received from all
sources within the Philippines.
Under Section 20 of the 1977 Tax Code:
(h) the term resident foreign corporation engaged in trade or
business within the Philippines or having an office or place of
business therein.
(i) The term "non-resident foreign corporation" applies to a foreign
corporation not engaged in trade or business within the Philippines
and not having any office or place of business therein
It is our considered opinion that BOAC is a resident foreign
corporation. There is no specific criterion as to what constitutes
"doing" or "engaging in" or "transacting" business. Each case must
be judged in the light of its peculiar environmental circumstances.
The term implies a continuity of commercial dealings and
arrangements, and contemplates, to that extent, the performance
of acts or works or the exercise of some of the functions normally
incident to, and in progressive prosecution of commercial gain or
for the purpose and object of the business organization. 2 "In order
that a foreign corporation may be regarded as doing business
within a State, there must be continuity of conduct and intention to
establish a continuous business, such as the appointment of a local
agent, and not one of a temporary character. 3
BOAC, during the periods covered by the subject - assessments,
maintained a general sales agent in the Philippines, That general
sales agent, from 1959 to 1971, "was engaged in (1) selling and
issuing tickets; (2) breaking down the whole trip into series of trips
— each trip in the series corresponding to a different airline
company; (3) receiving the fare from the whole trip; and (4)
consequently allocating to the various airline companies on the
basis of their participation in the services rendered through the
mode of interline settlement as prescribed by Article VI of the
Resolution No. 850 of the IATA Agreement." 4 Those activities were
in exercise of the functions which are normally incident to, and are
in progressive pursuit of, the purpose and object of its organization
as an international air carrier. In fact, the regular sale of tickets, its
main activity, is the very lifeblood of the airline business, the
generation of sales being the paramount objective. There should be
no doubt then that BOAC was "engaged in" business in the
Philippines through a local agent during the period covered by the
assessments. Accordingly, it is a resident foreign corporation
subject to tax upon its total net income received in the preceding
taxable year from all sources within the Philippines. 5
Sec. 24. Rates of tax on corporations. — ...
(b) Tax on foreign corporations. — ...
(2) Resident corporations. — A corporation organized, authorized,
or existing under the laws of any foreign country, except a foreign
fife insurance company, engaged in trade or business within the
Philippines, shall be taxable as provided in subsection (a) of this
section upon the total net income received in the preceding taxable
year from all sources within the Philippines. (Emphasis supplied)
Next, we address ourselves to the issue of whether or not the
revenue from sales of tickets by BOAC in the Philippines constitutes
income from Philippine sources and, accordingly, taxable under our
income tax laws.
The Tax Code defines "gross income" thus:
"Gross income" includes gains, profits, and income derived from
salaries, wages or compensation for personal service of whatever
kind and in whatever form paid, or from profession, vocations,
trades, business, commerce, sales, or dealings in property,
whether real or personal, growing out of the ownership or use of or
interest in such property; also from interests, rents, dividends,
securities, or the transactions of any business carried on for gain or
profile, or gains, profits, and income derived from any source
whatever (Sec. 29[3]; Emphasis supplied)
The definition is broad and comprehensive to include proceeds
from sales of transport documents. "The words 'income from any
source whatever' disclose a legislative policy to include all income
not expressly exempted within the class of taxable income under
our laws." Income means "cash received or its equivalent"; it is the
amount of money coming to a person within a specific time ...; it
means something distinct from principal or capital. For, while
capital is a fund, income is a flow. As used in our income tax law,
"income" refers to the flow of wealth. 6
The records show that the Philippine gross income of BOAC for the
fiscal years 1968-69 to 1970-71 amounted to P10,428,368 .00. 7
Did such "flow of wealth" come from "sources within the
Philippines",
The source of an income is the property, activity or service that
produced the income. 8 For the source of income to be considered
as coming from the Philippines, it is sufficient that the income is
derived from activity within the Philippines. In BOAC's case, the
sale of tickets in the Philippines is the activity that produces the
income. The tickets exchanged hands here and payments for fares
were also made here in Philippine currency. The site of the source
of payments is the Philippines. The flow of wealth proceeded from,
and occurred within, Philippine territory, enjoying the protection
accorded by the Philippine government. In consideration of such
protection, the flow of wealth should share the burden of
supporting the government.
A transportation ticket is not a mere piece of paper. When issued
by a common carrier, it constitutes the contract between the
ticket-holder and the carrier. It gives rise to the obligation of the
purchaser of the ticket to pay the fare and the corresponding
obligation of the carrier to transport the passenger upon the terms
and conditions set forth thereon. The ordinary ticket issued to
members of the traveling public in general embraces within its
terms all the elements to constitute it a valid contract, binding
upon the parties entering into the relationship. 9
True, Section 37(a) of the Tax Code, which enumerates items of
gross income from sources within the Philippines, namely: (1)
interest, (21) dividends, (3) service, (4) rentals and royalties, (5)
sale of real property, and (6) sale of personal property, does not
mention income from the sale of tickets for international
transportation. However, that does not render it less an income
from sources within the Philippines. Section 37, by its language,
does not intend the enumeration to be exclusive. It merely directs
that the types of income listed therein be treated as income from
sources within the Philippines. A cursory reading of the section will
show that it does not state that it is an all-inclusive enumeration,
and that no other kind of income may be so considered. " 10
BOAC, however, would impress upon this Court that income
derived from transportation is income for services, with the result
that the place where the services are rendered determines the
source; and since BOAC's service of transportation is performed
outside the Philippines, the income derived is from sources without
the Philippines and, therefore, not taxable under our income tax
laws. The Tax Court upholds that stand in the joint Decision under
review.
The absence of flight operations to and from the Philippines is not
determinative of the source of income or the site of income
taxation. Admittedly, BOAC was an off-line international airline at
the time pertinent to this case. The test of taxability is the
"source"; and the source of an income is that activity ... which
produced the income. 11 Unquestionably, the passage
documentations in these cases were sold in the Philippines and the
revenue therefrom was derived from a activity regularly pursued
within the Philippines. business a And even if the BOAC tickets sold
covered the "transport of passengers and cargo to and from foreign
cities", 12 it cannot alter the fact that income from the sale of
tickets was derived from the Philippines. The word "source"
conveys one essential idea, that of origin, and the origin of the
income herein is the Philippines. 13
It should be pointed out, however, that the assessments upheld
herein apply only to the fiscal years covered by the questioned
deficiency income tax assessments in these cases, or, from 1959 to
1967, 1968-69 to 1970-71. For, pursuant to Presidential Decree
No. 69, promulgated on 24 November, 1972, international carriers
are now taxed as follows:
... Provided, however, That international carriers shall pay a tax of years in accordance with the Tax Code. The BOAC claim for refund
2-½ per cent on their cross Philippine billings. (Sec. 24[b] [21, Tax in the amount of P858,307.79 is hereby denied. Without costs.
Code).
SO ORDERED.
Presidential Decree No. 1355, promulgated on 21 April, 1978,
provided a statutory definition of the term "gross Philippine
billings," thus:

... "Gross Philippine billings" includes gross revenue realized from

uplifts anywhere in the world by any international carrier doing
business in the Philippines of passage documents sold therein,
whether for passenger, excess baggage or mail provided the cargo
or mail originates from the Philippines. ...

The foregoing provision ensures that international airlines are

taxed on their income from Philippine sources. The 2-½ % tax on
gross Philippine billings is an income tax. If it had been intended as
an excise or percentage tax it would have been place under Title V
of the Tax Code covering Taxes on Business.

Lastly, we find as untenable the BOAC argument that the dismissal

for lack of merit by this Court of the appeal in JAL vs.
Commissioner of Internal Revenue (G.R. No. L-30041) on February
3, 1969, is res judicata to the present case. The ruling by the Tax
Court in that case was to the effect that the mere sale of tickets,
unaccompanied by the physical act of carriage of transportation,
does not render the taxpayer therein subject to the common
carrier's tax. As elucidated by the Tax Court, however, the
common carrier's tax is an excise tax, being a tax on the activity of
transporting, conveying or removing passengers and cargo from
one place to another. It purports to tax the business of
transportation. 14 Being an excise tax, the same can be levied by
the State only when the acts, privileges or businesses are done or
performed within the jurisdiction of the Philippines. The subject
matter of the case under consideration is income tax, a direct tax
on the income of persons and other entities "of whatever kind and
in whatever form derived from any source." Since the two cases
treat of a different subject matter, the decision in one cannot
be res judicata to the other.

WHEREFORE, the appealed joint Decision of the Court of Tax

Appeals is hereby SET ASIDE. Private respondent, the British
Overseas Airways Corporation (BOAC), is hereby ordered to pay
the amount of P534,132.08 as deficiency income tax for the fiscal
years 1968-69 to 1970-71 plus 5% surcharge, and 1% monthly
interest from April 16, 1972 for a period not to exceed three (3)
G.R. No. L-52019 August 19, 1988
ILOILO BOTTLERS, INC., plaintiff-appellee,
vs.
CITY OF ILOILO, defendant-appellant.
Efrain B. Trenas for plaintiff-appellee.
Diosdado Garingalao for defendant-appellant.
CORTES, J.:
The fundamental issue in this appeal is whether the Iloilo Bottlers,
Inc. which had its bottling plant in Pavia, Iloilo, but which sold
softdrinks in Iloilo City, is liable under Iloilo City tax Ordinance No.
5, series of 1960, as amended, which imposes a municipal license
tax on distributors of soft-drinks.
On July 12,1972, Iloilo Bottlers, Inc. filed a complaint docketed as
Civil Case No. 9046 with the Court of First Instance of Iloilo praying
for the recovery of the sum of P3,329.20, which amount allegedly
constituted payments of municipal license taxes under Ordinance
No. 5 series of 1960, as amended, that the company paid under
protest.
On November 15,1972, the parties submitted a partial stipulation
of facts, the material portions of which state
xxx xxx xxx
2. That plaintiff is engaged in the business of bottling softdrinks
under the trade name of Pepsi Cola And 7-up and selling the same
to its customers, with a bottling plant situated at Barrio Ungca
Municipality of Pavia, Iloilo, Philippines and which is outside the
jurisdiction of defendant;
3. That defendant enacted an ordinance on January 11, 1960
known as Ordinance No. 5, Series of 1960 which ordinance was
successively amended by Ordinance No. 28, Series of 1960;
Ordinance No. 15, Series of 1964; and Ordinance No. 45, Series of
1964; which provides as follows:
Section l. — Any person, firm or corporation engaged in the
distribution, manufacture or bottling of coca-cola, pepsi cola, tru-
orange, seven-up and other soft drinks within the jurisdiction of
the City of Iloilo, shall pay a municipal license tax of ten (P0.10)
centavos for every case of twenty-four bottles; PROVIDED,
HOWEVER, that softdrinks sold to the public at not more than five
(P0.05) centavos per bottle shall pay a tax of one and one half
(P0.015) (centavos) per case of twenty four bottles.
Section 1-A—For purposes of this Ordinance, all deliveries and/or
dispatches emanating or made at the plant and all goods or stocks
taken out of the plant for distribution, sale or exchange irrespective
(of) where it would take place shall be covered by the operation of
this Ordinance.
4. That prior to September, 1966, Santiago Syjuco Inc., owned and
operated a bottling plant at Muelle Loney Street, Iloilo City, which
was doing business under the name of Seven-up Bottling Company
of the Philippines and bottled the soft-drinks Pepsi-Cola and 7-up;
however sometime on September 14,1966, Santiago Syjuco, Inc.,
informed all its employees that it (was) closing its Iloilo Plant due
to financial losses and in fact closed the same and later sold the
plant to the plaintiff Iloilo Bottlers, Inc.
5. That thereafter, plaintiff operated the said plant by bottling the
soft drinks Pepsi-Cola and 7-up; however, sometime in July 1968,
plaintiff closed said bottling plant at Muelle Loney, Iloilo City, and
transferred its bottling operations to its new plant in Barrio Ungca,
Municipality of Pavia, Province of Iloilo, and which is outside the
jurisdiction of the City of Iloilo;
6. That from the time of (the) enactment (of the ordinance), the
Seven Up Bottling Company of the Philippines under Santiago
Syjuco Inc., had been religiously paying the defendant City of Iloilo
the above- mentioned municipal license tax due therefrom for
bottler because its bottling plant was then still situated at Muelle
Loney St., Iloilo City; but the plaintiff stopped paying the municipal
license tax (after) October 21, 1968 (when) it transferred its plant
to Barrio Ungca Municipality of Pavia, Iloilo which is outside the
jurisdiction of the City of Iloilo;
7. That sometime on July 31, 1969, the defendant demanded from
the plaintiff the payment of the municipal license tax under the
above-mentioned ordinance, a xerox copy of the said letter is
attached to the complaint as Annex "A" and made an integral part
hereof by reference.
8. That plaintiff explained in a letter to the defendant that it could
not anymore be liable to pay the municipal license fee because its
bottling plant (was) not anymore inside the City of Iloilo, and that
moreover, since it itself (sold) its own products to its (customers) SEVEN-UP PEPSI-COLATOTAL TAX DUE
directly, it could not be considered as a distributor in line with the
doctrines enunciated by the Supreme Court in the cases of City of 1968 Jul to Dec 39,340 49,060 88,400 P8,840
Manila vs. Bugsuk Lumber Co., L- 8255, July 11, 1957; Manila 1969 Jan. to Dec. 81,240 87,660 168,900 16,890
Trading & Supply Co., Inc. vs. City of Manila L-1 2156, April 29,
1959; Central Azucarera de Don Pedro vs. City of Manila et al., 1970 Jan. to Dec. 79,389 89,211 168,600 16,600
G.R. No. L7679, September 29,1955; Cebu Portland Cement vs.
City of Manila and City Treasurer of Manila, L-1 4229,July 26,1960. 1971 Jan. to Dec. 80,670 88,480 169,150 16,915
A xerox copy of the said letter is attached as Annex "B" to the TOTAL 280,639 314,411 595,050 P 59,505
complaint and made an integral part hereof by reference. As a
result of the said letter of the plaintiff, the defendant did not 13. That the plaintiff does not maintain any store or commercial
anymore press the plaintiff to pay the said municipal license tax; establishment in the City of Iloilo from which it distributes its
products, but by means of a fleet of delivery trucks, plaintiff
9. That sometime on January 25, 1972, the defendant demanded distributes its products from its bottling plant at Barrio Ungca
from the plaintiff compliance with the said ordinance for 1972 in Municipality of Pavia, Iloilo, directly to its customers in the different
view of the fact that it was engaged in distribution of the softdrinks towns of the Province of Iloilo as well as the City of Iloilo;
in the City of Iloilo, and it further demanded from the plaintiff
payment of back taxes from the time it transferred its bottling 14. That the plaintiff is already paying the National Government a
plant to the Municipality of Pavia, Iloilo; percentage Tax of 71/t, as manufacturer's sales tax on all the
softdrinks it manufactures as follows:
10. That the plaintiff demurred to the said demand of the
defendant raising as its jurisdiction the reason that its bottling O.R. No. 4683995 - January, 1972 Sales P17,222.90
plant is situated outside the City of Iloilo and as bottler could not
be considered as distributor under the said ordinance although it O.R. No. 5614767 - February " " 17,024.81
sells its product directly to the consumer, in line with the O.R. No. .5614870 - March " " 17,589.19
jurisprudence enunciated by the Supreme Court but due to
insistence of the defendant, the plaintiff paid on April 20, 1972, the O.R. No. 5614891 - April " " 18,726.77
first quarter payment of the municipal licence tax in the sum of
O.R. No. 5614897 - May " " 16,710.99
P3,329.20, under protest, and thereafter has been paying
defendant every quarter under protest; O.R. No. 5614935 - June " " 14,791.20
11. That on June l5, 1972,the defendant informed the plaintiff that O.R. No. 5614967 - July " " 13,952.00
it must pay all the taxes due since July, 1968 up to the last quarter
of 1971, otherwise it shall be constrained to cancel the operation of O.R. No. 5614973 - August " " 15,726.16
the business of the plaintiff, and because of this threat, and so as
O.R. No. 56'L4999 - September " " 19,159.54
not to occasion disruption of its business operation, the plaintiff
under protest agreed to the payment of the back taxes, on and is also paying the municipal license tax to the municipality of
staggered basis, which was acceded to by the defendant; Pavia, Iloilo in the amount of P l0,000.00 every year, plus a
municipal license tax for engaging in its business to the
12. That as computed by the plaintiff the following are its
municipality of Pavia in its amount of P2,000.00 every year.
softdrinks sold in Iloilo City since it transferred its bottling plant
from the City of Iloilo to Barrio Ungca Pavia, Iloilo in July 1968, to xxx xxx xxx
wit:
[Rollo, P. 10 (Record on Appeal, pp. 25-31)]
No. of Cases sold
On the basis of the above stipulations, the court a quo rendered on
January 26, 1973 a decision in favor of Iloilo Bottlers, Inc.
declaring the Corporation not liable under the ordinance and
directing the City of Iloilo to pay the sum of' P3,329.20. The
decision was amended in an Order dated March 15, 1973, so as to
include the amounts paid by the company after the filing of the
complaint. The City of Iloilo appealed to the Court of Appeals which
certified the case to this Court.
The tax ordinance imposes a tax on persons, firms, and
corporations engaged in the business of:
1. distribution of soft-drinks
2. manufacture of soft-drinks, and
3. bottling of softdrinks within the territorial jurisdiction of the City
of Iloilo.
There is no question that after it transferred its plant to Pavia,
Iloilo province, Iloilo Bottlers, Inc. no longer manufactured/bottled
its softdrinks within Iloilo City. Thus, it cannot be taxed as one
falling under the second or the third type of business. The
resolution of this case therefore hinges on whether the company
may be considered engaged in the distribution of softdrinks in Iloilo
City, even after it had transferred its bottling plant to Pavia, so as
to be within the purview of the ordinance.
Iloilo Bottlers, Inc. disclaims liability on two grounds: First, it
contends that since it is not engaged in the independent business
of distributing soft-drinks, but that its activity of selling is merely
an incident to, or is a necessary consequence of its main or
principal business of bottling, then it is NOT liable under the city
tax ordinance. Second, it claims that only manufacturers or bottlers
having their plants inside the territorial jurisdiction of the city are
covered by the ordinance.
The second ground is manifestly devoid of merit. It is clear from
the ordinance that three types of activities are covered: (1)
distribution, (2) manufacture and (3) bottling of softdrinks. A
person engaged in any or all of these activities is subject to the
tax.
The first ground, however, merits serious consideration.
This Court has always recognized that the right to manufacture
implies the right to sell/distribute the manufactured products [See
Central Azucarera de Don Pedro v. City of Manila and Sarmiento,
97 Phil. 627 (1955); Caltex (Philippines), Inc. v. City of Manila and
Cudiamat, G.R. No. L-22764, July 28, 1969, 28 SCRA 840, 843.]
Hence, for tax purposes, a manufacturer does not necessarily
become engaged in the separate business of selling simply because
it sells the products it manufactures. In certain cases, however, a
manufacturer may also be considered as engaged in the separate
business of selling its products.
To determine whether an entity engaged in the principal business
of manufacturing, is likewise engaged in the separate business of
selling, its marketing system or sales operations must be looked
into.
In several cases [See Central Azucarera de Don Pedro v. City of
Manila and Sarmiento, supra; Cebu Portland Cement Co. v. City of
Manila and the City Treasurer, 108 Phil. 1063 (1960); Caltex
(Philippines), Inc. v. City of Manila and Cudiamat, supra], this
Court had occasion to distinguish two marketing systems:
Under the first system, the manufacturer enters into sales
transactions and invoices the sales at its main office where
purchase orders are received and approved before delivery orders
are sent to the company's warehouses, where in turn actual
deliveries are made. No warehouse sales are made; nor are
separate stores maintained where products may be sold
independently from the main office. The warehouses only serve as
storage sites and delivery points of the products earlier sold at the
main office. Under the second system, sales transactions are
entered into and perfected at stores or warehouses maintained by
the company. Any one who desires to purchase the product may go
to the store or warehouse and there purchase the merchandise.
The stores and warehouses serve as selling centers.
Entities operating under the first system are NOT considered
engaged in the separate business of selling or dealing in their
products, independent of their manufacturing business. Entities
operating under the second system are considered engaged in the
separate business of selling.
In the case at bar, the company distributed its softdrinks by means
of a fleet of delivery trucks which went directly to customers in the
different places in lloilo province. Sales transactions with customers
were entered into and sales were perfected and consummated by
route salesmen. Truck sales were made independently of
transactions in the main office. The delivery trucks were not used
solely for the purpose of delivering softdrinks previously sold at
Pavia. They served as selling units. They were what were called,
until recently, "rolling stores". The delivery trucks were therefore
much the same as the stores and warehouses under the second
marketing system. Iloilo Bottlers, Inc. thus falls under the second
category above. That is, the corporation was engaged in the
separate business of selling or distributing soft-drinks,
independently of its business of bottling them.

The tax imposed under Ordinance No. 5 is an excise tax. It is a tax

on the privilege of distributing, manufacturing or bottling
softdrinks. Being an excise tax, it can be levied by the taxing
authority only when the acts, privileges or businesses are done or
performed within the jurisdiction of said authority [Commissioner
of Internal Revenue v. British Overseas Airways Corp. and Court of
Appeals, G.R. Nos. 65773-74, April 30, 1987, 149 SCRA 395, 410.]
Specifically, the situs of the act of distributing, bottling or
manufacturing softdrinks must be within city limits, before an
entity engaged in any of the activities may be taxed in Iloilo City.

As stated above, sales were made by Iloilo Bottlers, Inc. in Iloilo

City. Thus, We have no option but to declare the company liable
under the tax ordinance.

With the foregoing discussion, it becomes unnecessary to discuss

the other issues raised by the parties.

WHEREFORE, the appealed decision is hereby REVERSED. The

complaint in Civil Case No. 9046 is ordered DISMISSED. No Costs.

SO ORDERED.
G.R. No. 45697 November 1, 1939
MANILA ELECTRIC COMPANY, plaintiff-appellant,
vs.
A.L. YATCO, Collector of Internal Revenue, defendant-
appellee.
Ross, Lawrence, Selph and Carrascoso for appellant.
Office of the Solicitor-General Tuason for appellee.
MORAN, J.:
In 1935, plaintiff Manila Electric Company, a corporation organized
and existing under the laws of the Philippines, with its principal
office and place of business in the City of Manila, insured with the
city of New York Insurance Company and the United States
Guaranty Company, certain real and personal properties situated in
the Philippines. The insurance was entered into in behalf of said
plaintiff by its broker in New York City. The insurance companies
are foreign corporations not licensed to do business in the
Philippines and having no agents therein. The policies contained
provisions for the settlement and payment of losses upon the
occurence of any risk insured against, a sample of which is policy
No. 20 of the New York insurance Company attached to and made
an integral part of the agreed statement of facts.
Plaintiff through its broker paid, in New York, to said insurance
company premiums in the sum of P91,696. The Collector of
Internal Revenue, under the authority of section 192 of act No.
2427, as amended, assessed and levied a tax of one per centum on
said premiums, which plaintiff paid under protest. The protest
having been overruled, plaintiff instituted the present action to
recover the tax. The trial court dismissed the complaint, and from
the judgment thus rendered, plaintiff took the instant appeal.
The pertinent portions of the Act here involved read:
SEC. 192. It shall be unlawful for any person, company or
corporation, or forward applications for insurance in or to issue or
to deliver or accept policies of or for any company or companies
not having been legally authorized to transact business in the
Philippine Islands, as provided in this chapter; and any such
person, company or corporation violating the provisions of this
section shall be deemed guilty of a penal offense, and upon
conviction thereof, shall for each such offense be punished by a
fine of two hundred pesos, or imprisonment for two months, or
both in the discretion not authorized to transact business in the
Philippine Island may be placed upon terms and conditions as
follows:
xxx xxx xxx
. . . . And provided further, that the prohibitions of this section
shall not affect the right of an owner of property to apply for and
obtain for himself policies in foreign companies in cases were said
owner does not make use of the services of any agent, company or
corporation residing or doing business in the Philippine Islands. In
all case where owners of property obtain insurance directly with
foreign companies, it shall be the duty of said owners to report to
the insurance commissioner and to the Collector of Internal
Revenue each case where insurance has been so effected, and
shall pay the tax of one per centum on premium paid, in the
manner required by law of insurance companies, and shall be
subject to the same penalties for failure to do so.
Appellant maintains that the second paragraph of the provisions of
the Act aforecited is unconstitutional, and has been so declared by
the Supreme Court of the United States in the case of Compania
General de Tabacos v. Collector of Internal Revenue, 275 U.S., 87,
48 Sup. Ct. Rep., 100, 72 Law. ed., 177.
The case relied upon involves a suit to recover from the Collector
of Internal Revenue certain taxes in connection with insurance
premiums which the Tobacco Barcelona, Spain, paid to the
Guardian Insurance Company of London, England, and to Le
Comite des Assurances Maritimes de Paris, of Paris, France. The
Tobacco Company, through its head office in Barcelona, insured
against fire with the London Company the merchandise it had in
deposit in the warehouse in the Philippines. As the merchandise
were from time to time shipped to Europe, the head office at
Barcelona insured the same with the Paris Company against marine
risks while such merchandise were in transit from the Philippines to
Spain. The London Company, unlike the Paris Company, was
licensed to do insurance business in the Philippines and had an
agent therein. Losses, if any, on policies were to be paid to the
Tobacco Company in Paris. The tax assessed and levied by the
Collector of Internal Revenue, under the same law now involved,
was challenged as unconstitutional. The Supreme Court of the
united States sustained the tax with respect to premiums paid to
the London Company and held it erroneous with respect to
premiums paid to the Paris Company.lawphi1.net
The factual basis upon which the imposition of the tax on
premiums paid to the Paris Company was declared erroneous, is
stated by the Supreme Court of the United States thus:
Coming then to the tax on the premiums paid to the Paris
Company the contract of insurance on which the premium was paid
was made at Barcelona in Spain, the headquarters of the Tobacco
Company between the Tobacco Company and the Paris Company,
and any losses arising thereunder were to be paid in Paris. The
Paris Company had no communication whatever with anyone in the
Philippine Islands. The collection of this tax involves an ex-action
upon a company of Spain lawfully doing business in the Philippine
Islands effected by reason of a contract made by that company
with a company in Paris on merchandise shipped from the
Philippine Islands for delivery in Barcelona. It is an imposition upon
a contract not made in the Philippines and having no situs there
and to be measured by money paid as premiums in Paris, with the
place of payment of loss, if any, in Paris. We are very clear that the
contract and the premiums paid under it are not within the
jurisdiction of the government of the Philippine Islands.
And, upon the authority of the cases of Allgeyer v. Lousiana, 165
U.S., 578, 41 Law. ed., 832, and St. Louis Cotton Compress
Company v. Arkansas, 250 U.S., 346, 677 Law. ed., 279, the
Supreme Court of the United States held that "as the state is
forbidden to deprive a person of his liberty without due process of
law, it may not compel anyone within its jurisdiction to pay tribute
to it for contracts or money paid to secure the benefits of contract
made and to be performed outside of the state."
On the other hand, the Supreme Court of the United States, in
sustaining the imposition of the tax upon premiums paid by the
assured to the London Company, says:
. . . . Does the fact that while the Tobacco Company and the
London Company were within the jurisdiction of the Philippines
they made a contract outside of the Philippines, prevent the
imposition upon the assured of a tax of 1 per cent upon the money
paid by it as a premium to the London Company? We may properly
assume that this tax placed upon the assured must ultimately be
paid by the insurer, and treating its real incidence as such, the
question arises whether making and carrying out the policy does
not involve an exercise or use of the right of the London Company
to do business in the Philippine Islands under its license, because
the policy covers fire risks no property within the Philippine Islands
which may require adjustment and the activities of agents in the
Philippine Islands with respect to settlement of losses arising
thereunder. This we think must be answered affirmatively
under Equitable Life Assur. Soc. v. Pennsylvania, 238 U.S., 143
Law. ed., 1239, 35 Sup. Ct. Rep., 829. The case is a close one, but
in deference to the conclusion we reached in the latter case, we
affirm the judgment of the court below in respect to the tax upon
the premium paid to the London Company.
The ruling in the Paris Company case is obviously not applicable in
the instant one, for there, not only was the contract executed in a
foreign country, but the merchandise insured was in transit from
the Philippines to Spain, and nothing was to be done in the
Philippines in pursuance of the contract. However, the rule laid
down in connection with the London Company may, by analogy, be
applied in the present case, the essential facts of both cases being
similar. Here, the insured is a corporation organized under the laws
of the Philippines, its principal office and place of business being in
the City of Manila. The New York Insurance Company and the
United States Guaranty Company may be said to be doing policies
issued by them cover risks on properties within the Philippines,
which may require adjustment and the activities of agents in the
Philippines with respect to the settlement of losses arising
thereunder. For instance, it is therein stipulated that "the insured,
as often as may be reasonably required, shall exhibit to any person
designated by the company all the remains of any property therein
described and submit to examination under oath by any person
named by the company, and as often as may be reasonably
required, shall exhibit to any person designated by the company all
the remains of any property therein described and submit to an
examination all books of accounts . . . at such reasonable time and
place as may be designated by the company or its representative."
And, in case of disagreement as to the amount of losses or
damages as to require the appointment of appraisers, the
insurance contract provides that "the appraisers shall first select a
competent umpire; and failure for fifteen days to agree to such
umpire, then, on request of the insured or of the company, such
umpire shall be selected by a judge of the court of record in the
state in which the property insured is located.".
True it is that the London Company had a license to do business in
the Philippines, but this fact was not a decisive factor in the
decision of that case, for reliance was therein placed on
the Equitable Life Assurance Society v. Pennsylvania, 238 U.S.,
143, 59 Law. ed., 1239, 35 Sup. Ct. Rep., 829, wherein it was said
that "the Equitable Society was doing business in Pennsylvania
when it was annually paying the dividends in Pennsylvania or
sending an adjuster into the state in case of dispute or making
proof of death," and therefore "the taxpayer had subjected itself to
the jurisdiction of Pennsylvania in doing business there." (See
Compañia General de Tabacos v. Collector of Internal Revenue,
275 U.S., 87, 72 Law. ed., 177, 182.)
The controlling consideration, therefore, in the decision of the
London Company case was that said company, by making and
carrying out policies covering risks located in this country which
might require adjustment or the making of proof of loss therein,
did business in the Philippines and subjected itself to its
jurisdiction, a rule that can perfectly be applied in the present case
to the new York Insurance Company and the United States
Guaranty Company.
ultimately be passed on the insurer, thus constituting an indirect
tax upon the foreign corporation, it would still be valid, because the
foreign corporation, by the stipulations of its contract, has
subjected itself to the taxing jurisdiction of the Philippines. After
all, Commonwealth of the Philippines, by protecting the properties
insured, benefits the foreign corporation, and it is but reasonable
that the latter should pay a just contribution therefor. It would
certainly be a discrimination against domestic corporations to hold
the tax valid when the policy is given by them and invalid when
issued by foreign corporations.
Judgment affirmed, with costs against appellant.

It is argued, however, that the sending of an unjuster to the

Philippines to fix the amount of losses, is a mere contingency and
not an actual fact, as such, it cannot be a ground for holding that
the insurance companies subjected themselves to the taxing
jurisdiction of the Philippines. This argument could have been
made in the London Company case where no adjuster appears to
have ever been sent to the Philippines nor any adjustment ever
made, and yet the stipulations to that effect were held to be
sufficient to bring the foreign corporation within the taxing
jurisdiction of the Philippines.

In epitome, then, the whole question involved in this appeal is

whether or not the disputed tax is one imposed by the
Commonwealth of the Philippines upon a contract beyond its
jurisdiction. We are of the opinion and so hold that where the
insured against also within the Philippines, the risk insured against
also within the Philippines, and certain incidents of the contract are
to be attended to in the Philippines, such as, payment of dividends
when received in cash, sending of an unjuster into the Philippines
in case of dispute, or making of proof of loss, the Commonwealth
of the Philippines has the power to impose the tax upon the
insured, regardless of whether the contract is executed in a foreign
country and with a foreign corporation. Under such circumstances,
substantial elements of the contract may be said to be so situated
in the Philippines as to give its government the power to tax. And,
even if it be assumed that the tax imposed upon the insured will
G.R. No. 153793 August 29, 2006
COMMISSIONER OF INTERNAL REVENUE, Petitioner,
vs.
JULIANE BAIER-NICKEL, as represented by Marina Q.
Guzman (Attorney-in-fact) Respondent.
DECISION
YNARES-SANTIAGO, J.:
Petitioner Commissioner of Internal Revenue (CIR) appeals from
the January 18, 2002 Decision1 of the Court of Appeals in CA-G.R.
SP No. 59794, which granted the tax refund of respondent Juliane
Baier-Nickel and reversed the June 28, 2000 Decision2 of the Court
of Tax Appeals (CTA) in C.T.A. Case No. 5633. Petitioner also
assails the May 8, 2002 Resolution3 of the Court of Appeals
denying its motion for reconsideration.
The facts show that respondent Juliane Baier-Nickel, a non-resident
German citizen, is the President of JUBANITEX, Inc., a domestic
corporation engaged in "[m]anufacturing, marketing on wholesale
only, buying or otherwise acquiring, holding, importing and
exporting, selling and disposing embroidered textile
products."4 Through JUBANITEX’s General Manager, Marina Q.
Guzman, the corporation appointed and engaged the services of
respondent as commission agent. It was agreed that respondent
will receive 10% sales commission on all sales actually concluded
and collected through her efforts.5
In 1995, respondent received the amount of P1,707,772.64,
representing her sales commission income from which JUBANITEX
withheld the corresponding 10% withholding tax amounting to
P170,777.26, and remitted the same to the Bureau of Internal
Revenue (BIR). On October 17, 1997, respondent filed her 1995
income tax return reporting a taxable income of P1,707,772.64 and
a tax due of P170,777.26.6
On April 14, 1998, respondent filed a claim to refund the amount of
P170,777.26 alleged to have been mistakenly withheld and
remitted by JUBANITEX to the BIR. Respondent contended that her
sales commission income is not taxable in the Philippines because
the same was a compensation for her services rendered in
Germany and therefore considered as income from sources outside
the Philippines.
The next day, April 15, 1998, she filed a petition for review with
the CTA contending that no action was taken by the BIR on her
claim for refund.7 On June 28, 2000, the CTA rendered a decision
denying her claim. It held that the commissions received by
respondent were actually her remuneration in the performance of
her duties as President of JUBANITEX and not as a mere sales
agent thereof. The income derived by respondent is therefore an
income taxable in the Philippines because JUBANITEX is a domestic
corporation.
On petition with the Court of Appeals, the latter reversed the
Decision of the CTA, holding that respondent received the
commissions as sales agent of JUBANITEX and not as President
thereof. And since the "source" of income means the activity or
service that produce the income, the sales commission received by
respondent is not taxable in the Philippines because it arose from
the marketing activities performed by respondent in Germany. The
dispositive portion of the appellate court’s Decision, reads:
WHEREFORE, premises considered, the assailed decision of the
Court of Tax Appeals dated June 28, 2000 is hereby REVERSED and
SET ASIDE and the respondent court is hereby directed to grant
petitioner a tax refund in the amount of Php 170,777.26.
SO ORDERED.8
Petitioner filed a motion for reconsideration but was
denied.9 Hence, the instant recourse.
Petitioner maintains that the income earned by respondent is
taxable in the Philippines because the source thereof is JUBANITEX,
a domestic corporation located in the City of Makati. It thus implied
that source of income means the physical source where the income
came from. It further argued that since respondent is the President
of JUBANITEX, any remuneration she received from said
corporation should be construed as payment of her overall
managerial services to the company and should not be interpreted
as a compensation for a distinct and separate service as a sales
commission agent.
Respondent, on the other hand, claims that the income she
received was payment for her marketing services. She contended
that income of nonresident aliens like her is subject to tax only if
the source of the income is within the Philippines. Source,
according to respondent is the situs of the activity which produced
the income. And since the source of her income were her
marketing activities in Germany, the income she derived from said
activities is not subject to Philippine income taxation.
The issue here is whether respondent’s sales commission income is
taxable in the Philippines.
Pertinent portion of the National Internal Revenue Code (NIRC),
states:
SEC. 25. Tax on Nonresident Alien Individual. –
(A) Nonresident Alien Engaged in Trade or Business Within the
Philippines. –
(1) In General. – A nonresident alien individual engaged in trade or
business in the Philippines shall be subject to an income tax in the
same manner as an individual citizen and a resident alien
individual, on taxable income received from all sources within the
Philippines. A nonresident alien individual who shall come to the
Philippines and stay therein for an aggregate period of more than
one hundred eighty (180) days during any calendar year shall be
deemed a ‘nonresident alien doing business in the Philippines,’
Section 22(G) of this Code notwithstanding.
xxxx
(B) Nonresident Alien Individual Not Engaged in Trade or Business
Within the Philippines. – There shall be levied, collected and paid
for each taxable year upon the entire income received from all
sources within the Philippines by every nonresident alien individual
not engaged in trade or business within the Philippines x x x a tax
equal to twenty-five percent (25%) of such income. x x x
Pursuant to the foregoing provisions of the NIRC, non-resident
aliens, whether or not engaged in trade or business, are subject to
Philippine income taxation on their income received from all
sources within the Philippines. Thus, the keyword in determining
the taxability of non-resident aliens is the income’s "source." In
construing the meaning of "source" in Section 25 of the NIRC,
resort must be had on the origin of the provision.
The first Philippine income tax law enacted by the Philippine
Legislature was Act No. 2833,10 which took effect on January 1,
1920.11 Under Section 1 thereof, nonresident aliens are likewise
subject to tax on income "from all sources within the Philippine
Islands," thus –
SECTION 1. (a) There shall be levied, assessed, collected, and paid
annually upon the entire net income received in the preceding
calendar year from all sources by every individual, a citizen or
resident of the Philippine Islands, a tax of two per centum upon
such income; and a like tax shall be levied, assessed, collected,
and paid annually upon the entire net income received in the
preceding calendar year from all sources within the Philippine
Islands by every individual, a nonresident alien, including interest
on bonds, notes, or other interest-bearing obligations of residents,
corporate or otherwise.
Act No. 2833 substantially reproduced the United States (U.S.)
Revenue Law of 1916 as amended by U.S. Revenue Law of
1917.12 Being a law of American origin, the authoritative decisions
of the official charged with enforcing it in the U.S. have peculiar
persuasive force in the Philippines.13
The Internal Revenue Code of the U.S. enumerates specific types
of income to be treated as from sources within the U.S. and
specifies when similar types of income are to be treated as from
sources outside the U.S.14 Under the said Code, compensation for
labor and personal services performed in the U.S., is generally
treated as income from U.S. sources; while compensation for said
services performed outside the U.S., is treated as income from
sources outside the U.S.15 A similar provision is found in Section 42
of our NIRC, thus:
SEC. 42. x x x
(A) Gross Income From Sources Within the Philippines. x x x
xxxx
(3) Services. – Compensation for labor or personal services
performed in the Philippines;
xxxx
(C) Gross Income From Sources Without the Philippines. x x x
xxxx
(3) Compensation for labor or personal services performed without
the Philippines;
The following discussions on sourcing of income under the Internal
Revenue Code of the U.S., are instructive:
The Supreme Court has said, in a definition much quoted but often
debated, that income may be derived from three possible sources
only: (1) capital and/or (2) labor; and/or (3) the sale of capital
assets. While the three elements of this attempt at definition need
not be accepted as all-inclusive, they serve as useful guides in any
inquiry into whether a particular item is from "sources within the
United States" and suggest an investigation into the nature and
location of the activities or property which produce the income.
If the income is from labor the place where the labor is done
should be decisive; if it is done in this country, the income should
be from "sources within the United States." If the income is from
capital, the place where the capital is employed should be decisive;
if it is employed in this country, the income should be from
"sources within the United States." If the income is from the sale of
capital assets, the place where the sale is made should be likewise
decisive.
Much confusion will be avoided by regarding the term "source" in
this fundamental light. It is not a place, it is an activity or property.
As such, it has a situs or location, and if that situs or location is
within the United States the resulting income is taxable to
nonresident aliens and foreign corporations.
The intention of Congress in the 1916 and subsequent statutes was
to discard the 1909 and 1913 basis of taxing nonresident aliens
and foreign corporations and to make the test of taxability the
"source," or situs of the activities or property which produce the
income. The result is that, on the one hand, nonresident aliens and
nonresident foreign corporations are prevented from deriving
income from the United States free from tax, and, on the other
hand, there is no undue imposition of a tax when the activities do
not take place in, and the property producing income is not
employed in, this country. Thus, if income is to be taxed, the
recipient thereof must be resident within the jurisdiction, or the
property or activities out of which the income issues or is derived
must be situated within the jurisdiction so that the source of the
income may be said to have a situs in this country.
The underlying theory is that the consideration for taxation is
protection of life and property and that the income rightly to be
levied upon to defray the burdens of the United States Government
is that income which is created by activities and property protected
by this Government or obtained by persons enjoying that
protection. 16
The important factor therefore which determines the source of
income of personal services is not the residence of the payor, or
the place where the contract for service is entered into, or the
place of payment, but the place where the services were actually
rendered.17
In Alexander Howden & Co., Ltd. v. Collector of Internal
Revenue,18 the Court addressed the issue on the applicable source
rule relating to reinsurance premiums paid by a local insurance
company to a foreign insurance company in respect of risks located
in the Philippines. It was held therein that the undertaking of the
foreign insurance company to indemnify the local insurance
company is the activity that produced the income. Since the
activity took place in the Philippines, the income derived therefrom
is taxable in our jurisdiction. Citing Mertens, The Law of Federal
Income Taxation, the Court emphasized that the technical meaning
of source of income is the property, activity or service that
produced the same. Thus:
The source of an income is the property, activity or service that
produced the income. The reinsurance premiums remitted to
appellants by virtue of the reinsurance contracts, accordingly, had
for their source the undertaking to indemnify Commonwealth
Insurance Co. against liability. Said undertaking is the activity that
produced the reinsurance premiums, and the same took place in
the Philippines. x x x the reinsured, the liabilities insured and the
risk originally underwritten by Commonwealth Insurance Co., upon
which the reinsurance premiums and indemnity were based, were
all situated in the Philippines. x x x 19
In Commissioner of Internal Revenue v. British Overseas Airways
Corporation (BOAC),20 the issue was whether BOAC, a foreign
airline company which does not maintain any flight to and from the
Philippines is liable for Philippine income taxation in respect of
sales of air tickets in the Philippines, through a general sales agent
relating to the carriage of passengers and cargo between two
points both outside the Philippines. Ruling in the affirmative, the
Court applied the case of Alexander Howden & Co., Ltd. v. Collector
of Internal Revenue, and reiterated the rule that the source of
income is that "activity" which produced the income. It was held
that the "sale of tickets" in the Philippines is the "activity" that
produced the income and therefore BOAC should pay income tax in
the Philippines because it undertook an income producing activity
in the country.
Both the petitioner and respondent cited the case of Commissioner
of Internal Revenue v. British Overseas Airways Corporation in
support of their arguments, but the correct interpretation of the
said case favors the theory of respondent that it is the situs of the
activity that determines whether such income is taxable in the
Philippines. The conflict between the majority and the dissenting
opinion in the said case has nothing to do with the underlying
principle of the law on sourcing of income. In fact, both applied the
case of Alexander Howden & Co., Ltd. v. Collector of Internal
Revenue. The divergence in opinion centered on whether the sale
of tickets in the Philippines is to be construed as the "activity" that
produced the income, as viewed by the majority, or merely the
physical source of the income, as ratiocinated by Justice Florentino
P. Feliciano in his dissent. The majority, through Justice Ameurfina
Melencio-Herrera, as ponente, interpreted the sale of tickets as a
business activity that gave rise to the income of BOAC. Petitioner
cannot therefore invoke said case to support its view that source of
income is the physical source of the money earned. If such was the
interpretation of the majority, the Court would have simply stated
that source of income is not the business activity of BOAC but the
place where the person or entity disbursing the income is located
or where BOAC physically received the same. But such was not the
import of the ruling of the Court. It even explained in detail
the business activity undertaken by BOAC in the Philippines to
pinpoint the taxable activity and to justify its conclusion that BOAC
is subject to Philippine income taxation. Thus –
BOAC, during the periods covered by the subject assessments,
maintained a general sales agent in the Philippines. That general
sales agent, from 1959 to 1971, "was engaged in (1) selling and
issuing tickets; (2) breaking down the whole trip into series of trips
— each trip in the series corresponding to a different airline
company; (3) receiving the fare from the whole trip; and (4)
consequently allocating to the various airline companies on the
basis of their participation in the services rendered through the
mode of interline settlement as prescribed by Article VI of the
Resolution No. 850 of the IATA Agreement." Those activities were
in exercise of the functions which are normally incident to, and are
in progressive pursuit of, the purpose and object of its organization
as an international air carrier. In fact, the regular sale of tickets, its
main activity, is the very lifeblood of the airline business, the
generation of sales being the paramount objective. There should be
no doubt then that BOAC was "engaged in" business in the
Philippines through a local agent during the period covered by the
assessments. x x x21
xxxx
The source of an income is the property, activity or service that
produced the income. For the source of income to be considered as
coming from the Philippines, it is sufficient that the income is
derived from activity within the Philippines. In BOAC's case, the
sale of tickets in the Philippines is the activity that produces the
income. The tickets exchanged hands here and payments for fares
were also made here in Philippine currency. The situs of the source
of payments is the Philippines. The flow of wealth proceeded from,
and occurred within, Philippine territory, enjoying the protection
accorded by the Philippine government. In consideration of such
protection, the flow of wealth should share the burden of
supporting the government.
A transportation ticket is not a mere piece of paper. When issued
by a common carrier, it constitutes the contract between the
ticket-holder and the carrier. It gives rise to the obligation of the
purchaser of the ticket to pay the fare and the corresponding
obligation of the carrier to transport the passenger upon the terms
and conditions set forth thereon. The ordinary ticket issued to
members of the traveling public in general embraces within its
terms all the elements to constitute it a valid contract, binding
upon the parties entering into the relationship.22
The Court reiterates the rule that "source of income" relates to the
property, activity or service that produced the income. With
respect to rendition of labor or personal service, as in the instant
case, it is the place where the labor or service was performed that
determines the source of the income. There is therefore no merit in
petitioner’s interpretation which equates source of income in labor
or personal service with the residence of the payor or the place of
payment of the income.
Having disposed of the doctrine applicable in this case, we will now
determine whether respondent was able to establish the factual
circumstances showing that her income is exempt from Philippine
income taxation.
The decisive factual consideration here is not the capacity in which
respondent received the income, but the sufficiency of evidence to
prove that the services she rendered were performed in Germany.
Though not raised as an issue, the Court is clothed with authority
to address the same because the resolution thereof will settle the
vital question posed in this controversy.23
The settled rule is that tax refunds are in the nature of tax
exemptions and are to be construed strictissimi juris against the
taxpayer.24 To those therefore, who claim a refund rest the burden
of proving that the transaction subjected to tax is actually exempt
from taxation.
In the instant case, the appointment letter of respondent as agent
of JUBANITEX stipulated that the activity or the service which
would entitle her to 10% commission income, are "sales actually
concluded and collected through [her] efforts." 25 What she
presented as evidence to prove that she performed income
producing activities abroad, were copies of documents she
allegedly faxed to JUBANITEX and bearing instructions as to the
sizes of, or designs and fabrics to be used in the finished products
as well as samples of sales orders purportedly relayed to her by
clients. However, these documents do not show whether the
instructions or orders faxed ripened into concluded or collected
sales in Germany. At the very least, these pieces of evidence show
that while respondent was in Germany, she sent
instructions/orders to JUBANITEX. As to whether these
instructions/orders gave rise to consummated sales and whether
these sales were truly concluded in Germany, respondent
presented no such evidence. Neither did she establish reasonable
connection between the orders/instructions faxed and the reported
monthly sales purported to have transpired in Germany.
The paucity of respondent’s evidence was even noted by Atty.
Minerva Pacheco, petitioner’s counsel at the hearing before the
Court of Tax Appeals. She pointed out that respondent presented
no contracts or orders signed by the customers in Germany to
prove the sale transactions therein.26 Likewise, in her Comment to
the Formal Offer of respondent’s evidence, she objected to the
admission of the faxed documents bearing instruction/orders
marked as Exhibits "R,"27 "V," "W", and "X,"28 for being self
serving.29 The concern raised by petitioner’s counsel as to the
absence of substantial evidence that would constitute proof that
the sale transactions for which respondent was paid commission
actually transpired outside the Philippines, is relevant because
respondent stayed in the Philippines for 89 days in 1995. Except
for the months of July and September 1995, respondent was in the
Philippines in the months of March, May, June, and August
1995,30 the same months when she earned commission income for
services allegedly performed abroad. Furthermore, respondent
presented no evidence to prove that JUBANITEX does not sell
embroidered products in the Philippines and that her appointment
as commission agent is exclusively for Germany and other
European markets.
In sum, we find that the faxed documents presented by respondent
did not constitute substantial evidence, or that relevant evidence
that a reasonable mind might accept as adequate to support the
conclusion31 that it was in Germany where she performed the
income producing service which gave rise to the reported monthly
sales in the months of March and May to September of 1995. She
thus failed to discharge the burden of proving that her income was
from sources outside the Philippines and exempt from the
application of our income tax law. Hence, the claim for tax refund
should be denied.
The Court notes that in Commissioner of Internal Revenue v. Baier-
Nickel,32 a previous case for refund of income withheld from
respondent’s remunerations for services rendered abroad, the
Court in a Minute Resolution dated February 17, 2003, 33 sustained
the ruling of the Court of Appeals that respondent is entitled to
refund the sum withheld from her sales commission income for the
year 1994. This ruling has no bearing in the instant controversy
because the subject matter thereof is the income of respondent for
the year 1994 while, the instant case deals with her income
in 1995. Otherwise, stated, res judicata has no application here.
Its elements are: (1) there must be a final judgment or order; (2)
the court that rendered the judgment must have jurisdiction over
the subject matter and the parties; (3) it must be a judgment on
the merits; (4) there must be between the two cases identity of
parties, of subject matter, and of causes of action. 34 The instant
case, however, did not satisfy the fourth requisite because there is
no identity as to the subject matter of the previous and present
case of respondent which deals with income earned and activities
performed for different taxable years.
WHEREFORE, the petition is GRANTED and the January 18, 2002
Decision and May 8, 2002 Resolution of the Court of Appeals in CA-
G.R. SP No. 59794, are REVERSED and SET ASIDE. The June 28,
2000 Decision of the Court of Tax Appeals in C.T.A. Case No. 5633,
which denied respondent’s claim for refund of income tax paid for
the year 1995 is REINSTATED.
SO ORDERED.
[G.R. No. 118295. May 2, 1997.]
WIGBERTO E. TAÑADA and ANNA DOMINIQUE COSETENG,
as members of the Philippine Senate and as taxpayers;
GREGORIO ANDOLANA and JOKER ARROYO as members of
the House of Representatives and as taxpayers; NICANOR P.
PERLAS and HORACIO R. MORALES, both as taxpayers:
CIVIL LIBERTIES UNION, NATIONAL ECONOMIC
PROTECTIONISM ASSOCIATION, CENTER FOR ALTERNATIVE
DEVELOPMENT INITIATIVES, LIKAS-KAYANG KAUNLARAN
FOUNDATION, INC., PHILIPPINE RURAL RECONSTRUCTION
MOVEMENT, DEMOKRATIKONG KILUSAN NG MAGBUBUKID
NG PILIPINAS, INC., and PHILIPPINE PEASANT INSTITUTE,
in representation of various taxpayers and as non-
governmental organizations, Petitioners, v. EDGARDO
ANGARA, ALBERTO ROMULO, LETICIA RAMOS-SHAHANI,
HEHERSON ALVAREZ, AGAPITO AQUINO, RODOLFO BIAZON,
NEPTALI GONZALES, ERNESTO HERRERA, JOSE LINA,
GLORIA MACAPAGAL-ARROYO, ORLANDO MERCADO, BLAS
OPLE, JOHN OSMEÑA, SANTANINA RASUL, RAMON REVILLA,
RAUL ROCO, FRANCISCO TATAD and FREDDIE WEBB, in their
respective capacities as members of the Philippine Senate
who concurred in the ratification by the President of the
Philippines of the Agreement Establishing the World Trade
Organization; SALVADOR ENRIQUEZ, in his capacity as
Secretary of Budget and Management; CARIDAD
VALDEHUESA, in her capacity as National Treasurer;
RIZALINO NAVARRO, in his capacity as Secretary of Trade
and Industry; ROBERTO SEBASTIAN, in his capacity as
Secretary of Agriculture; ROBERTO DE OCAMPO, in his
capacity as Secretary of Finance; ROBERTO ROMULO, in his
capacity as Secretary of Foreign Affairs; and TEOFISTO T.
GUINGONA, in his capacity as Executive
Secretary, Respondents.
Abelardo T . Domondon, for Petitioners.
The Solicitor General for Respondents.
SYLLABUS
1. REMEDIAL LAW; ACTIONS; ESTOPPEL, SUBJECT TO WAIVER. —
The matter of estoppel will not be taken up because this defense is
waivable and the respondents have effectively, waived it by not
pursuing it in any of their pleadings; in any event, this issue, even
if ruled in respondents’ favor, will not cause the petition’s dismissal
as there are petitioners other than the two senators, who are not
vulnerable to the defense of estoppel.
2. ID.; ID.; PARTIES; LOCUS PROBANDI; SUBJECT TO WAIVER. —
During its deliberations on the case, the Court noted that the
respondents did not question the locus standi of petitioners. Hence,
they are also deemed to have waived the benefit of such issue.
They probably realized that grave constitutional issues,
expenditures of public funds and serious international
commitments of the nation are involved here, and that
transcendental public interest requires that the substantive issues
be met head on and decided on the merits, rather than skirted or
deflected by procedural matters.
3. ID.; ID.; PETITION SEEKING TO NULLIFY ACT OF SENATE ON
GROUND THAT IT CONTRAVENES THE CONSTITUTION, A
JUSTICIABLE QUESTION. — In seeking to nullify an act of the
Philippine Senate on the ground that it contravenes the
Constitution, the petition no doubt raises a justiciable controversy.
Where an action of the legislative branch is seriously alleged to
have infringed the Constitution, it becomes not only the right but in
fact the duty of the judiciary to settle the dispute. "The question
thus posed is judicial rather than political. The duty (to adjudicate)
remains to assure that the supremacy of the Constitution is
upheld." Once a "controversy as to the application or interpretation
of a constitutional provision is raised before this Court (as in the
instant case), it becomes a legal issue which the Court is bound by
constitutional mandate to decide."cralaw virtua1aw library
4. ID.; SUPREME COURT; JUDICIAL POWER; SCOPE. — The
jurisdiction of this Court to adjudicate the matters raised in the
petition is clearly set out in the 1987 Constitution, as follows:
"Judicial power includes the duty of the courts of justice to settle
actual controversies involving rights which are legally demandable
and enforceable, and to determine whether or not there has been a
grave abuse of discretion amounting to lack or excess of
jurisdiction on the part of any branch or instrumentality, of the
government." The foregoing text emphasizes the judicial
department’s duty and power to strike down grave abuse of
discretion on the part of any branch or instrumentality, of
government including Congress. It is an innovation in our political
law. As explained by former Chief Justice Roberto Concepcion, "the
judiciary is the final arbiter on the question of whether or not a
branch of government or any of its officials has acted without
jurisdiction or in excess of jurisdiction or so capriciously, as to
constitute an abuse of discretion amounting to excess of
jurisdiction. This is not only a judicial power but a duty to pass
judgment on matters of this nature." As this Court has repeatedly
and firmly emphasized in many cases, it will not shirk, digress from
or abandon its sacred duty and authority to uphold the Constitution
in matters that involve grave abuse of discretion brought before it
in appropriate cases, committed by any officer, agency,
instrumentality or department of the government.
5. ID.; SPECIAL CIVIL ACTIONS; CERTIORARI, PROHIBITION AND
MANDAMUS; APPROPRIATE REMEDIES TO REVIEW ACTS OF
LEGISLATIVE AND EXECUTIVE OFFICIALS. — Certiorari, prohibition
and mandamus are appropriate remedies to raise constitutional
issues and to review and/or prohibit/nullify, when proper, acts of
legislative and executive officials.
6. POLITICAL LAW; CONSTITUTION; DECLARATION OF PRINCIPLES
AND STATE POLICIES; AIDS OR GUIDES IN THE EXERCISE OF
JUDICIAL AND LEGISLATIVE POWERS. — By its very title, Article II
of the Constitution is a "declaration of principles and state policies."
The counterpart of this article in the 1935 Constitution is called the
"basic political creed of the nation" by Dean Vicente Sinco. These
principles in Article II are not intended to be self-executing
principles ready for enforcement through the courts. They are used
by the judiciary as aids or as guides in the exercise of its power of
judicial review, and by the legislature in its enactment of laws. As
held in the leading case of Kilosbayan, Incorporated v. Morato, the
principles and state policies enumerated in Article II and some
sections of Article XII are not "self-executing provisions, the
disregard of which can give rise to a cause of action in the courts.
They do not embody judicially enforceable constitutional rights but
guidelines for legislation."cralaw virtua1aw library
7. ID.; ID.; THOUGH IT MANDATES A BIAS IN FAVOR OF FILIPINO
GOODS, SERVICES, LABOR AND ENTERPRISES, IT RECOGNIZES
THE NEED FOR BUSINESS EXCHANGE WITH THE REST OF THE
WORLD. — While the Constitution indeed mandates a bias in favor
of Filipino goods, services, labor and enterprises, at the same time,
it recognizes the need for business exchange with the rest of the
world on the bases of equality and reciprocity and limits protection
of Filipino enterprises only against foreign competition and trade
practices that are unfair. In other words, the Constitution did not
intend to pursue an isolationist policy. It did not shut out foreign
investments, goods and services in the development of the
Philippine economy. While the Constitution does not encourage the
unlimited entry of foreign goods, services and investments into the
country, it does not prohibit them either. In fact, it allows an
exchange on the basis of equality and reciprocity, frowning only on
foreign competition that is unfair.
8. REMEDIAL LAW; SPECIAL CIVIL ACTIONS; CERTIORARI;
JOINING THE WORLD TRADE ORGANIZATION, NOT A GRAVE
ABUSE OF DISCRETION. — The basic principles underlying the
WTO Agreement recognize the need of developing countries like
the Philippines to "share in the growth in international trade
commensurate with the needs of their economic development."
GATT has provided built-in protection from unfair foreign
competition and trade practices including anti-dumping measures,
countervailing measures and safeguards against import surges.
Where local businesses are jeopardized by unfair foreign
competition, the Philippines can avail of these measures. There is
hardly therefore any basis for the statement that under the WTO,
local industries and enterprises will all be wiped out and that
Filipinos will be deprived of control of the economy. Quite the
contrary, the weaker situations of developing nations like the
Philippines have been taken into account; thus, there would be no
basis to say that in joining the WTO, the respondents have gravely
abused their discretion. True, they have made a bold decision to
steer the ship of state into the yet uncharted sea of economic
liberalization. But such decision cannot be set aside on the ground
of grave abuse of discretion simply because we disagree with it or
simply because we believe only in other economic policies. As
earlier stated, the Court in taking jurisdiction of this case will not
pass upon the advantages and disadvantages of trade liberalization
as an economic policy. It will only, perform its constitutional duty
of determining whether the Senate committed grave abuse of
discretion.
9. POLITICAL LAW; CONSTITUTION; DECLARATION OF PRINCIPLES
AND STATE POLICIES; POLICE OF "SELF-RELIANT AND
INDEPENDENT NATIONAL ECONOMY" DOES NOT RULE OUT ENTRY
OF FOREIGN INVESTMENTS, GOODS AND SERVICES. — The
constitutional policy of a "self-reliant and independent national
economy" does not necessarily rule out the entry, of foreign
investments, goods and services. It contemplates neither
"economic seclusion" nor "mendicancy in the international
community."cralaw virtua1aw library
10. POLITICAL LAW; INTERNATIONAL LAW; WORLD TRADE LAW
ORGANIZATION/GENERAL AGREEMENT ON TARIFFS AND TRADE;
RELIANCE ON "MOST FAVORED NATIONS", CONSTITUTIONAL. —
The WTO reliance on "most favored nation", "national treatment",
and "trade without discrimination" cannot be struck down as
unconstitutional as in fact they are rules of equality and reciprocity,
that apply to all WTO members. Aside from envisioning a trade
policy based on "equality and reciprocal", the fundamental law
encourages industries that are "competitive in both domestic and
foreign markets," thereby demonstrating a clear policy against a
sheltered domestic trade environment, but one in favor of the
gradual development of robust industries that can compete with
the best in the foreign markets. Indeed, Filipino managers and
Filipino enterprises have shown capability and tenacity to compete
internationally. And given a free trade environment, Filipino
entrepreneurs and managers in Hongkong have demonstrated the
Filipino capacity to grow and to prosper against the best offered
under a policy of laissez faire.
11. REMEDIAL LAW; ACTIONS; QUESTIONS INVOLVING
"JUDGMENT CALLS", NOT SUBJECT TO JUDICIAL REVIEW. — Will
adherence to the WTO treaty bring this ideal (of favoring the
general welfare) to reality? Will WTO/GATT succeed in promoting
the Filipinos’ general welfare because it will — as promised by its
promoters — expand the country’s exports and generate more
employment? Will it bring more prosperity, employment,
purchasing power and quality products at the most reasonable
rates to the Filipino public? The responses to these questions
involve "judgment calls" by our policy makers, for which they are
answerable to our people during appropriate electoral exercises.
Such questions and the answers thereto are not subject to judicial
pronouncements based on grave abuse of discretion.
12. POLITICAL LAW; SOVEREIGNTY; SUBJECT TO RESTRICTIONS
AND LIMITATIONS VOLUNTARILY AGREED TO BY THE STATE; CASE
AT BAR. — While sovereignty has traditionally been deemed
absolute and all-encompassing on the domestic level, it is however
subject to restrictions and limitations voluntarily agreed to by the
Philippines, expressly or impliedly, as a member of the family of
nations. In its Declaration of Principles and State Policies, the
Constitution "adopts the generally accepted principles of
international law as part of the law of the land, and adheres to the
policy of peace, equality, justice, freedom, cooperation and amity,
with all nations." By the doctrine of incorporation, the country is
bound by generally accepted principles of international law, which
are considered to be automatically part of our own laws. One of the
oldest and most fundamental rules in international law is pacta
sunt servanda — international agreements must be performed in
good faith. "A treaty engagement is not a mere moral obligation
but creates a legally binding obligation on the parties . . . A state
which has contracted valid international obligations is bound to
make in its legislations such modifications as may be necessary to
ensure the fulfillment of the obligations undertaken."cralaw
virtua1aw library
13. ID.; ID.; ID.; ID. — When the Philippines joined the United
Nations as one of its 51 charter members, it consented to restrict
its sovereign rights under the "concept of sovereignty as auto-
limitation." Under Article 2 of the UN Charter," (a)ll members shall
give the United Nations every assistance in any action it takes in
accordance with the present Charter, and shall refrain from giving
assistance to any state against which the United Nations is taking
preventive or enforcement action." Apart from the UN Treaty, the
Philippines has entered into many other international pacts — both
bilateral and multilateral — that involve limitations on Philippine
sovereignty the Philippines has effectively agreed to limit the
exercise of its sovereign powers of taxation, eminent domain and
police power. The underlying consideration in this partial surrender
of sovereignty is the reciprocal commitment of the other
contracting states in granting the same privilege and immunities to
the Philippines, its officials and its citizens. The same reciprocity
characterizes the Philippine commitments under WTO-GATT. The
point is that, as shown by the foregoing treaties, a portion of
sovereignty may be waived without violating the Constitution,
based on the rationale that the Philippines "adopts the generally
accepted principles of international law as part of the law of the
land and adheres to the policy of . . . cooperation and amity with
all nations."cralaw virtua1aw library
14. ID.; ID.; ID.; WORLD TRADE ORGANIZATION; PARAGRAPH 1,
ARTICLE 34 OF THE GENERAL PROVISIONS AND BASIC
PRINCIPLES OF THE AGREEMENT ON TRADE-RELATED ASPECTS OF
INTELLECTUAL PROPERTY RIGHTS (TRIPS); DOES NOT INTRUDE
ON THE POWER OF THE SUPREME COURT TO PROMULGATE RULES
ON PLEADING, PRACTICE AND PROCEDURES. — Petitioners aver
that paragraph 1, Article 34 (Process Patents: Burden of Proof) of
the General Provisions and Basic Principles of the Agreement on
Trade-Related Aspects of Intellectual Property Rights (TRIPS)
intrudes on the power of the Supreme Court to promulgate rules
concerning pleading, practice and procedures. A WTO Member is
required to provide a rule of disputable (note the words "in the
absence of proof to the contrary") presumption that a product
shown to be identical to one produced with the use of a patented
process shall be deemed to have been obtained by the (illegal) use
of the said patented process, (1) where such product obtained by
the patented product is new, or (2) where there is "substantial
likelihood" that the identical product was made with the use of the
said patented process but the owner of the patent could not
determine the exact process used in obtaining such identical
product. Hence, the "burden of proof" contemplated by Article 34
should actually be understood as the duty of the alleged patent
infringer to overthrow such presumption. Such burden, properly
understood, actually refers to the "burden of evidence" (burden of
going forward) placed on the producer of the identical (or fake)
product to show that his product was produced without the use of
the patented process. The foregoing notwithstanding, the patent
owner still has the "burden of proof" since, regardless of the
presumption provided under paragraph 1 of Article 34, such owner
still has to introduce evidence of the existence of the alleged
identical product, the fact that it is "identical" to the genuine one
produced by the patented process and the fact of "newness" of the
genuine product was made by the patented process. Moreover, it
should be noted that the requirement of Article 34 to provide a
disputable presumption applies only if (1) the product obtained by
the patented process is NEW or (2) there is a substantial likelihood
that the identical product was made by the process and the
process owner has not been able through reasonable effort to
determine the process used. Where either of these two provisos
does not obtain, members shall be free to determine the
appropriate method of implementing the provisions of TRIPS within
their own internal systems and processes. By and large, the
arguments adduced in connection with our disposition of the third
issue — derogation of a legislative power — will apply to this fourth
issue also. Suffice it to say that the reciprocity clause more than
justifies such intrusion, if any actually exists. Besides, Article 34
does not contain an unreasonable burden, consistent as it is with
due process and the concept of adversarial dispute settlement
inherent in our judicial system. So too, since the Philippine is a
signatory to most international conventions on patents, trademarks
and copyrights, the adjustments in legislation and rules of
procedure will not be substantial.
15. ID.; ID.; ID.; ID.; MINISTERIAL DECLARATION AND
DECISIONS AND THE UNDERSTANDING ON COMMITMENTS IN
FINANCIAL SERVICES, NOT SUBJECT TO CONCURRENCE BY THE
SENATE. — "A final act, sometimes called protocol de cloture, is an
instrument which records the winding up of the proceedings of a
diplomatic conference and usually includes a reproduction of the
texts of treaties, conventions, recommendations and other acts
agreed upon and signed by the plenipotentiaries attending the
conference." It is not the treaty itself. It is rather a summary of the
proceedings of a protracted conference which may have taken
place over several years. The assailed Senate Resolution No. 97
expressed concurrence in exactly what the Final Act required from
its signatories, namely, concurrence of the Senate in the WTO
Agreement. The Ministerial Declarations and Decisions were
deemed adopted without need for ratification. They were approved
by the ministers by virtue of Article XXV: 1 of GATT which provides
that representatives of the members can meet "to give effect to
those provision of this Agreement which invoke joint action, and
generally with a view to facilitating the operation and furthering
the objectives of this Agreement." The Understanding on
Commitments in Financial Services also approved in Marrakesh
does not apply to the Philippines. It applies only to those 27
Members which "have indicated in their respective schedules of
commitments on standstill, elimination of monopoly, expansion of
operation of existing financial service suppliers, temporary entry of
personnel, free transfer and processing of information, and national
treatment with respect to access to payment, clearing systems and
refinancing available in the normal course of business."cralaw
virtua1aw library
16. REMEDIAL LAW; SPECIAL CIVIL ACTIONS; CERTIORARI;
RESORT THERETO ON GROUND OF GRAVE ABUSE OF DISCRETION
AVAILABLE ONLY WHERE THERE IS NO PLAIN, SPEEDY AND
ADEQUATE REMEDY IN THE ORDINARY COURSE OF LAW. —
Procedurally. a writ of certiorari grounded on grave abuse of
discretion may be issued by the Court under Rule 65 of the Rules
of Court when it is amply shown that petitioners have no other
plain, speedy and adequate remedy in the ordinary course of law.

17. ID.; ID.; ID.; GRAVE ABUSE OF DISCRETION, CONSTRUED. —
By grave abuse of discretion is meant such capricious and
whimsical exercise of judgment as is equivalent to lack of
jurisdiction. Mere abuse of discretion is not enough. It must be
grave abuse of discretion as when the power is exercised in an
arbitrary or despotic manner by reason of passion or personal
hostility, and must be so patent and so gross as to amount to an
evasion of a positive duty or to a virtual refusal to perform the
duty, enjoined or to act at all in contemplation of law. Failure on
the part of the petitioner to show grave abuse of discretion will
result in the dismissal of the petition.
18. ID.; ID.; ID.; CONCURRENCE BY THE SENATE IN THE WORLD
TRADE ORGANIZATION, NOT A GRAVE ABUSE OF DISCRETION. —
In rendering this Decision, this Court never forgets that the
Senate, whose act is under review, is one of two sovereign houses
of Congress and is thus entitled to great respect in its actions. It is
itself a constitutional body independent and coordinate, and thus
its actions are presumed regular and done in good faith. Unless
convincing proof and persuasive arguments are presented to
overthrow such presumptions, this Court will resolve every doubt in
its favor. Using the foregoing well-accepted definition of grave
abuse of discretion and the presumption of regularity in the
Senate’s processes, this Court cannot find any cogent reason to
impute grave abuse of discretion to the Senate’s exercise of its
power of concurrence in the WTO Agreement granted it by Sec. 21
of Article VII of the Constitution. That the Senate, after deliberation
and voting, voluntarily and overwhelmingly gave its consent to the
WTO Agreement thereby making it "a part of the law of the land" is
a legitimate exercise of its sovereign duty and power. We find no
"patent and gross" arbitrariness or despotism "by reason of passion
or personal hostility" in such exercise. It is not impossible to
surmise that this Court, or at least some of its members, may even
agree with petitioners that it is more advantageous to the national
interest to strike down Senate Resolution No. 97. But that is not a
legal reason to attribute grave abuse of discretion to the Senate
and to nullify its decision. To do so would constitute grave abuse in
the exercise of our own judicial power and duty. Ineludably, what
the Senate did was a valid exercise of its authority. As to whether
such exercise was wise, beneficial or viable is outside the realm of
judicial inquiry and review. That is a matter between the elected
policy makers and the people. As to whether the nation should join
the worldwide march toward trade liberalization and economic
globalization is a matter that our people should determine in
electing their policy makers. After all, the WTO Agreement allows
withdrawal of membership, should this be the political desire of a
member.
DECISION
PANGANIBAN, J.:
The emergence on January 1, 1995 of the World Trade
Organization, abetted by the membership thereto of the vast
majority of countries, has revolutionized international business and
economic relations amongst states. It has irreversibly propelled the
world towards trade liberalization and economic globalization.
Liberalization, globalization, deregulation and privatization, the
third-millennium buzz words, are ushering in a new borderless
world of business by sweeping away as mere historical relics the
heretofore traditional modes of promoting and protecting national
economies like tariffs, export subsidies, import quotas, quantitative
restrictions, tax exemptions and currency controls. Finding market
niches and becoming the best in specific industries in a market-
driven and export-oriented global scenario are replacing age-old
"beggar-thy-neighbor" policies that unilaterally protect weak and
inefficient domestic producers of goods and services. In the words
of Peter Drucker, the well-known management guru, "Increased
participation in the world economy has become the key to domestic
economic growth and prosperity." chanrobles.com : virtual law
library
Brief Historical Background
To hasten worldwide recovery from the devastation wrought by the
Second World War, plans for the establishment of three multilateral
institutions — inspired by that grand political body, the United
Nations — were discussed at Dumbarton Oaks and Bretton Woods.
The first was the World Bank (WB) which was to address the
rehabilitation and reconstruction of war-ravaged and later
developing countries; the second, the International Monetary Fund
(IMF) which was to deal with currency problems; and the third, the
International Trade Organization (ITO), which was to foster order
and predictability in world trade and to minimize unilateral
protectionist policies that invite challenge, even retaliation, from
other states. However, for a variety of reasons, including its non-
ratification by the United States, the ITO, unlike the IMF and WB,
never took off. What remained was only GATT — the General
Agreement on Tariffs and Trade. GATT was a collection of treaties
governing access to the economies of treaty adherents with no
institutionalized body administering the agreements or dependable
system of dispute settlement.
After half a century and several dizzying rounds of negotiations,
principally the Kennedy Round, the Tokyo Round and the Uruguay
Round, the world finally gave birth to that administering body —
the World Trade Organization — with the signing of the "Final Act"
in Marrakesh, Morocco and the ratification of the WTO Agreement
by its members. 1 1a 1b 1c
Like many other developing countries, the Philippines joined WTO
as a founding member with the goal, as articulated by President
Fidel V. Ramos in two letters to the Senate (infra), of improving
"Philippine access to foreign markets, especially its major trading
partners, through the reduction of tariffs on its exports, particularly
agricultural and industrial products." The President also saw in the
WTO the opening of "new opportunities for the services sector . . .,
(the reduction of) costs and uncertainty associated with exporting .
. ., and (the attraction of) more investments into the country."
Although the Chief Executive did not expressly mention it in his
letter, the Philippines — and this is of special interest to the legal
profession — will benefit from the WTO system of dispute
settlement by judicial adjudication through the independent WTO
settlement bodies called (1) Dispute Settlement Panels and (2)
Appellate Tribunal. Heretofore, trade disputes were settled mainly
through negotiations where solutions were arrived at frequently on
the basis of relative bargaining strengths, and where naturally,
weak and underdeveloped countries were at a disadvantage.
The Petition in Brief
Arguing mainly (1) that the WTO requires the Philippines "to place
nationals and products of member-countries on the same footing
as Filipinos and local products" and (2) that the WTO "intrudes,
limits and/or impairs" the constitutional powers of both Congress
and the Supreme Court, the instant petition before this Court
assails the WTO Agreement for violating the mandate of the 1987
Constitution to "develop a self-reliant and independent national
economy effectively controlled by Filipinos . . . (to) give preference
to qualified Filipinos (and to) promote the preferential use of
Filipino labor, domestic materials and locally produced
goods."cralaw virtua1aw library
Simply stated, does the Philippine Constitution prohibit Philippine
participation in worldwide trade liberalization and economic
globalization? Does it proscribe Philippine integration into a global
economy that is liberalized, deregulated and privatized? These are
the main questions raised in this petition for certiorari, prohibition
and mandamus under Rule 65 of the Rules of Court praying (1) for
the nullification, on constitutional grounds, of the concurrence of
the Philippine Senate in the ratification by the President of the
Philippines of the Agreement Establishing the World Trade
Organization (WTO Agreement, for brevity) and (2) for the
prohibition of its implementation and enforcement through the
release and utilization of public funds, the assignment of public
officials and employees, as well as the use of government
properties and resources by respondent-heads of various executive
offices concerned therewith. This concurrence is embodied in
Senate Resolution No. 97, dated December 14, 1994.
The Facts
On April 15, 1994, Respondent Rizalino Navarro, then Secretary of
the Department of Trade and Industry (Secretary Navarro, for
brevity), representing the Government of the Republic of the
Philippines, signed in Marrakesh, Morocco, the Final Act Embodying
the Results of the Uruguay Round of Multilateral Negotiations (Final
Act, for brevity).
By signing the Final Act, 2 Secretary Navarro on behalf of the
Republic of the Philippines, agreed:jgc:chanrobles.com.ph
"(a) to submit, as appropriate, the WTO Agreement for the
consideration of their respective competent authorities, with a view
to seeking approval of the Agreement in accordance with their
procedures; and
(b) to adopt the Ministerial Declarations and Decisions."cralaw
virtua1aw library Agreement on the Application of Sanitary and Phytosanitary

On August 12, 1994, the members of the Philippine Senate Measures

received a letter dated August 11, 1994 from the President of the
Philippines, 3 stating among others that "the Uruguay Round Final Agreement on Textiles and Clothing
Act is hereby submitted to the Senate for its concurrence pursuant
to Section 21, Article VII of the Constitution."cralaw virtua1aw Agreement on Technical Barriers to Trade
library
Agreement on Trade-Related Investment Measures
On August 13, 1994, the members of the Philippine Senate
received another letter from the President of the Philippines 4 Agreement on Implementation of Article VI of the General
likewise dated August 11, 1994, which stated among others that
"the Uruguay Round Final Act, the Agreement Establishing the Agreement on Tariffs and Trade 1994
World Trade Organization, the Ministerial Declarations and
Decisions, and the Understanding on Commitments in Financial Agreement on Implementation of Article VII of the General
Services are hereby submitted to the Senate for its concurrence
pursuant to Section 21, Article VII of the Constitution."cralaw on Tariffs and Trade 1994
virtua1aw library
Agreement on Pre-Shipment Inspection
On December 9, 1994, the President of the Philippines certified the
necessity of the immediate adoption of P.S. 1083, a resolution Agreement on Rules of Origin
entitled "Concurring in the Ratification of the Agreement
Establishing the World Trade Organization." 5 Agreement on Imports Licensing Procedures

On December 14, 1994, the Philippine Senate adopted Resolution Agreement on Subsidies and Coordinating Measures
No. 97 which "Resolved, as it is hereby resolved, that the Senate
concur, as it hereby concurs, in the ratification by the President of Agreement on Safeguards
the Philippines of the Agreement Establishing the World Trade
Organization." 6 The text of the WTO Agreement is written on Annex 1B: General Agreement on Trade in Services and Annexes
pages 137 et seq. of Volume I of the 36-volume Uruguay Round of
Multilateral Trade Negotiations and includes various agreements Annex 1C: Agreement on Trade-Related Aspects of Intellectual
and associated legal instruments (identified in the said Agreement
as Annexes 1, 2 and 3 thereto and collectively referred to as Property Rights
Multilateral Trade Agreements, for brevity) as
follows:jgc:chanrobles.com.ph ANNEX 2

"ANNEX I Understanding on Rules and Procedures Governing the

Annex 1A: Multilateral Agreement on Trade in Goods Settlement of Disputes

General Agreement on Tariffs and Trade 1994 ANNEX 3

Agreement on Agriculture Trade Policy Review Mechanism"


On December 16, 1994, the President of the Philippines signed 7
the Instrument of Ratification, declaring:jgc:chanrobles.com.ph
"NOW THEREFORE, be it known that I, FIDEL V. RAMOS, President
of the Republic of the Philippines, after having seen and considered
the aforementioned Agreement Establishing the World Trade
Organization and the agreements and associated legal instruments
included in Annexes one (1), two (2) and three (3) of that
Agreement which are integral parts thereof, signed at Marrakesh,
Morocco on 15 April 1994, do hereby ratify and confirm the same
and every Article and Clause thereof."cralaw virtua1aw library
To emphasize, the WTO Agreement ratified by the President of the
Philippines is composed of the Agreement Proper and "the
associated legal instruments included in Annexes one (1), two (2)
and three (3) of that Agreement which are integral parts
thereof."cralaw virtua1aw library
On the other hand, the Final Act signed by Secretary Navarro
embodies not only the WTO Agreement (and its integral annexes
aforementioned) but also (1) the Ministerial Declarations and
Decisions and (2) the Understanding on Commitments in Financial
Services. In his Memorandum dated May 13, 1996, 8 the Solicitor
General describes these two latter documents as
follows:jgc:chanrobles.com.ph
"The Ministerial Decisions and Declarations are twenty-five
declarations and decisions on a wide range of matters, such as
measures in favor of least developed countries, notification
procedures, relationship of WTO with the International Monetary
Fund (IMF), and agreements on technical barriers to trade and on
dispute settlement.
The Understanding on Commitments in Financial Services dwell on,
among other things, standstill or limitations and qualifications of
commitments to existing non-conforming measures, market
access, national treatment, and definitions of non-resident supplier
of financial services, commercial presence and new financial
service." cdti
On December 29, 1994, the present petition was filed. After careful
deliberation on respondents’ comment and petitioners’ reply
thereto, the Court resolved on December 12, 1995, to give due
course to the petition, and the parties thereafter filed their
respective memoranda. The Court also requested the Honorable
Lilia R. Bautista, the Philippine Ambassador to the United Nations
stationed in Geneva, Switzerland, to submit a paper, hereafter
referred to as "Bautista Paper," 9 for brevity, (1) providing a
historical background of and (2) summarizing the said agreements.
During the Oral Argument held on August 27, 1996, the Court
directed:jgc:chanrobles.com.ph
"(a) the petitioners to submit the (1) Senate Committee Report on
the matter in controversy and (2) the transcript of
proceedings/hearings in the Senate; and
(b) the Solicitor General, as counsel for respondents, to file (1) a
list of Philippine treaties signed prior to the Philippine adherence to
the WTO Agreement, which derogate from Philippine sovereignty
and (2) copies of the multi-volume WTO Agreement and other
documents mentioned in the Final Act, as soon as possible."cralaw
virtua1aw library
After receipt of the foregoing documents, the Court said it would
consider the case submitted for resolution. In a Compliance dated
September 16, 1996, the Solicitor General submitted a printed
copy of the 36-volume Uruguay Round of Multilateral Trade
Negotiations, and in another Compliance dated October 24, 1996,
he listed the various "bilateral or multilateral treaties or
international instruments involving derogation of Philippine
sovereignty." Petitioners, on the other hand, submitted their
Compliance dated January 28, 1997, on January 30, 1997.
The Issues
In their Memorandum dated March 11, 1996, petitioners
summarized the issues as follows:jgc:chanrobles.com.ph
"A. Whether the petition presents a political question or is
otherwise not justiciable.
B. Whether the petitioner members of the Senate who participated
in the deliberations and voting leading to the concurrence are
estopped from impugning the validity of the Agreement
Establishing the World Trade Organization or of the validity or of
the concurrence.
C. Whether the provisions of the Agreement Establishing the World
Trade Organization contravene the provisions of Sec. 19, Article II,
and Secs. 10 and 12, Article XII, all of the 1987 Philippine
Constitution.
D. Whether provisions of the Agreement Establishing the World
Trade Organization unduly limit, restrict and impair Philippine
sovereignty specifically the legislative power which, under Sec. 2,
Article VI, 1987 Philippine Constitution is ‘vested in the Congress of
the Philippines’;
E. Whether provisions of the Agreement Establishing the World
Trade Organization interfere with the exercise of judicial power.
F. Whether the respondent members of the Senate acted in grave
abuse of discretion amounting to lack or excess of jurisdiction
when they voted for concurrence in the ratification of the
constitutionally-infirm Agreement Establishing the World Trade
Organization.
G. Whether the respondent members of the Senate acted in grave
abuse of discretion amounting to lack or excess of jurisdiction
when they concurred only in the ratification of the Agreement
Establishing the World Trade Organization, and not with the
Presidential submission which included the Final Act, Ministerial
Declaration and Decisions, and the Understanding on Commitments
in Financial Services."cralaw virtua1aw library
On the other hand, the Solicitor General as counsel for respondents
"synthesized the several issues raised by petitioners into the
following" : 10
"1. Whether or not the provisions of the ‘Agreement Establishing
the World Trade Organization and the Agreements and Associated
Legal Instruments included in Annexes one (1), two (2) and three
(3) of that agreement’ cited by petitioners directly contravene or
undermine the letter, spirit and intent of Section 19, Article II and
Sections 10 and 12, Article XII of the 1987 Constitution.
2. Whether or not certain provisions of the Agreement unduly limit,
restrict or impair the exercise of legislative power by Congress.
3. Whether or not certain provisions of the Agreement impair the
exercise of judicial power by this Honorable Court in promulgating
the rules of evidence.
4. Whether or not the concurrence of the Senate ‘in the ratification
by the President of the Philippines of the Agreement establishing
the World Trade Organization’ implied rejection of the treaty
embodied in the Final Act."cralaw virtua1aw library
By raising and arguing only four issues against the seven
presented by petitioners, the Solicitor General has effectively
ignored three, namely: (1) whether the petition presents a political
question or is otherwise not justiciable; (2) whether petitioner-
members of the Senate (Wigberto E. Tañada and Anna Dominique
Coseteng) are estopped from joining this suit; and (3) whether the
respondent-members of the Senate acted in grave abuse of
discretion when they voted for concurrence in the ratification of the
WTO Agreement. The foregoing notwithstanding, this Court
resolved to deal with these three issues
thus:chanroblesvirtuallawlibrary
(1) The "political question" issue — being very fundamental and
vital, and being a matter that probes into the very jurisdiction of
this Court to hear and decide this case — was deliberated upon by
the Court and will thus be ruled upon as the first issue;
(2) The matter of estoppel will not be taken up because this
defense is waivable and the respondents have effectively waived it
by not pursuing it in any of their pleadings; in any event, this
issue, even if ruled in respondents’ favor, will not cause the
petition’s dismissal as there are petitioners other than the two
senators, who are not vulnerable to the defense of estoppel; and
(3) The issue of alleged grave abuse of discretion on the part of the
respondent senators will be taken up as an integral part of the
disposition of the four issues raised by the Solicitor General.
During its deliberations on the case, the Court noted that the
respondents did not question the locus standi of petitioners. Hence,
they are also deemed to have waived the benefit of such issue.
They probably realized that grave constitutional issues,
expenditures of public funds and serious international
commitments of the nation are involved here, and that
transcendental public interest requires that the substantive issues
be met head on and decided on the merits, rather than skirted or
deflected by procedural matters. 11
To recapitulate, the issues that will be ruled upon shortly
are:chanrob1es virtual 1aw library
(1) DOES THE PETITION PRESENT A JUSTICIABLE CONTROVERSY?
OTHERWISE STATED, DOES THE PETITION INVOLVE A POLITICAL
QUESTION OVER WHICH THIS COURT HAS NO JURISDICTION?
(2) DO THE PROVISIONS OF THE WTO AGREEMENT AND ITS
THREE ANNEXES CONTRAVENE SEC. 19, ARTICLE II, AND SECS.
10 AND 12, ARTICLE XII, OF THE PHILIPPINE CONSTITUTION?
(3) DO THE PROVISIONS OF SAID AGREEMENT AND ITS ANNEXES
LIMIT, RESTRICT, OR IMPAIR THE EXERCISE OF LEGISLATIVE
POWER BY CONGRESS?
(4) DO SAID PROVISIONS UNDULY IMPAIR OR INTERFERE WITH
THE EXERCISE OF JUDICIAL POWER BY THIS COURT IN
PROMULGATING RULES ON EVIDENCE?
(5) WAS THE CONCURRENCE OF THE SENATE IN THE WTO
AGREEMENT AND ITS ANNEXES SUFFICIENT AND/OR VALID,
CONSIDERING THAT IT DID NOT INCLUDE THE FINAL ACT,
MINISTERIAL DECLARATIONS AND DECISIONS, AND THE
UNDERSTANDING ON COMMITMENTS IN FINANCIAL SERVICES?
The First Issue: Does the Court Have Jurisdiction Over the
Controversy?
In seeking to nullify an act of the Philippine Senate on the ground
that it contravenes the Constitution, the petition no doubt raises a
justiciable controversy. Where an action of the legislative branch is
seriously alleged to have infringed the Constitution, it becomes not
only the right but in fact the duty of the judiciary to settle the
dispute. "The question thus posed is judicial rather than political.
The duty (to adjudicate) remains to assure that the supremacy of
the Constitution is upheld." 12 Once a "controversy as to the
application or interpretation of a constitutional provision is raised
before this Court (as in the instant case), it becomes a legal issue
which the Court is bound by constitutional mandate to decide." 13
The jurisdiction of this Court to adjudicate the matters 14 raised in
the petition is clearly set out in the 1987 Constitution, 15 as
follows:jgc:chanrobles.com.ph
"Judicial power includes the duty of the courts of justice to settle
actual controversies involving rights which are legally demandable
and enforceable, and to determine whether or not there has been a
grave abuse of discretion amounting to lack or excess of
jurisdiction on the part of any branch or instrumentality of the
government."cralaw virtua1aw library
The foregoing text emphasizes the judicial department’s duty and
power to strike down grave abuse of discretion on the part of any
branch or instrumentality of government including Congress. It is
an innovation in our political law. 16 As explained by former Chief
Justice Roberto Concepcion, 17 "the judiciary is the final arbiter on
the question of whether or not a branch of government or any of
its officials has acted without jurisdiction or in excess of jurisdiction
or so capriciously as to constitute an abuse of discretion amounting
to excess of jurisdiction. This is not only a judicial power but a duty
to pass judgment on matters of this nature."cralaw virtua1aw
library
As this Court has repeatedly and firmly emphasized in many cases,
18 it will not shirk, digress from or abandon its sacred duty and
authority to uphold the Constitution in matters that involve grave
abuse of discretion brought before it in appropriate cases,
committed by any officer, agency, instrumentality or department of
the government.chanrobles.com:cralaw:red
As the petition alleges grave abuse of discretion and as there is no
other plain, speedy or adequate remedy in the ordinary course of
law, we have no hesitation at all in holding that this petition should
be given due course and the vital questions raised therein ruled
upon under Rule 65 of the Rules of Court. Indeed, certiorari,
prohibition and mandamus are appropriate remedies to raise
constitutional issues and to review and/or prohibit/nullify, when
proper, acts of legislative and executive officials. On this, we have
no equivocation.
We should stress that, in deciding to take jurisdiction over this
petition, this Court will not review the wisdom of the decision of the
President and the Senate in enlisting the country into the WTO, or
pass upon the merits of trade liberalization as a policy espoused by
said international body. Neither will it rule on the propriety of the
government’s economic policy of reducing/removing tariffs, taxes,
subsidies, quantitative restrictions, and other import/trade barriers.
Rather, it will only exercise its constitutional duty "to determine
whether or not there had been a grave abuse of discretion
amounting to lack or excess of jurisdiction" on the part of the
Senate in ratifying the WTO Agreement and its three annexes.
Second Issue: The WTO Agreement and Economic Nationalism
This is the lis mota, the main issue, raised by the petition.
Petitioners vigorously argue that the "letter, spirit and intent" of
the Constitution mandating "economic nationalism" are violated by
the so-called "parity provisions" and "national treatment" clauses
scattered in various parts not only of the WTO Agreement and its
annexes but also in the Ministerial Decisions and Declarations and
in the Understanding on Commitments in Financial Services.
Specifically, the "flagship" constitutional provisions referred to are
Sec. 19, Article II, and Secs. 10 and 12, Article XII, of the
Constitution, which are worded as follows:jgc:chanrobles.com.ph
"Article II
DECLARATION OF PRINCIPLES AND STATE POLICIES
x x x
Sec. 19. The State shall develop a self-reliant and independent
national economy effectively controlled by Filipinos.
x x x provided for in paragraph I of Article XI of GATT 1994 is contained
Article XII
NATIONAL ECONOMY AND PATRIMONY
x x x "ANNEX
Sec. 10 . . . The Congress shall enact measures that will encourage
the formation and operation of enterprises whose capital is wholly
owned by Filipinos.
In the grant of rights, privileges, and concessions covering the
national economy and patrimony, the State shall give preference to
qualified Filipinos.
x x x
Sec. 12. The State shall promote the preferential use of Filipino
labor, domestic materials and locally produced goods, and adopt
measures that help make them competitive."cralaw virtua1aw
library
Petitioners aver that these sacred constitutional principles are
desecrated by the following WTO provisions quoted in their
memorandum: 19
"a) In the area of investment measures related to trade in goods
(TRIMS, for brevity):jgc:chanrobles.com.ph
"Article 2
National Treatment and Quantitative Restrictions.
1. Without prejudice to other rights and obligations under GATT
1994. No Member shall apply any TRIM that is inconsistent with the
provisions of Article III or Article XI of GATT 1994.
2. An Illustrative list of TRIMS that are inconsistent with the
obligations of general elimination of quantitative restrictions
in the Annex to this Agreement." (Agreement on Trade-Related
Investment Measures, Vol. 27, Uruguay Round, Legal Instruments,
p. 22121, Emphasis supplied).
The Annex referred to reads as follows:jgc:chanrobles.com.ph
Illustrative List
1. TRIMS that are inconsistent with the obligation of national
treatment provided for in paragraph 4 of Article III of GATT 1994
include those which are mandatory or enforceable under domestic
law or under administrative rulings, or compliance with which is
necessary to obtain an advantage, and which require:chanrob1es
virtual 1aw library
(a) the purchase or use by an enterprise of products of domestic
origin or from any domestic source, whether specified in terms of
particular products, in terms of volume or value of products, or in
terms of proportion of volume or value of its local production; or
(b) that an enterprise’s purchases or use of imported products be
limited to an amount related to the volume or value of local
products that it exports.chanrobles virtualawlibrary
chanrobles.com:chanrobles.com.ph
2. TRIMS that are inconsistent with the obligations of general
elimination of quantitative restrictions provided for in paragraph 1
of Article XI of GATT 1994 include those which are mandatory or
enforceable under domestic laws or under administrative rulings, or
compliance with which is necessary to obtain an advantage, and
which restrict:chanrob1es virtual 1aw library
(a) the importation by an enterprise of products used in or related
to the local production that it exports;
(b) the importation by an enterprise of products used in or related
to its local production by restricting its access to foreign exchange
inflows attributable to the enterprise; or
(c) the exportation or sale for export specified in terms of
particular products, in terms of volume or value of products, or in
terms of a preparation of volume or value of its local production."
(Annex to the Agreement on Trade-Related Investment Measures,
Vol. 27, Uruguay Round Legal Documents, p. 22125, Emphasis
supplied).
The paragraph 4 of Article III of GATT 1994 referred to is quoted
as follows:chanrob1es virtual 1aw library
The products of the territory of any contracting party imported into
the territory of any other contracting party shall be accorded
treatment no less favorable than that accorded to like products of
national origin in respect of laws, regulations and requirements
affecting their internal sale, offering for sale, purchase,
transportation, distribution or use. The provisions of this paragraph
shall not prevent the application of differential internal
transportation charges which are based exclusively on the
economic operation of the means of transport and not on the
nationality of the product." (Article III, GATT 1947, as amended by
the Protocol Modifying Part II, and Article XXVI of GATT, 14
September 1948, 62 UMTS 82-84 in relation to paragraph 1 (a) of
the General Agreement on Tariffs and Trade 1994, Vol. 1, Uruguay
Round, Legal Instruments p. 177, Emphasis supplied).
"b) In the area of trade-related aspects of intellectual property
rights (TRIPS, for brevity):chanrob1es virtual 1aw library
Each Member shall accord to the nationals of other Members
treatment no less favourable than that it accords to its own
nationals with regard to the protection of intellectual property . . .
(par. 1, Article 3, Agreement on Trade-Related Aspect of
Intellectual Property rights, Vol. 31, Uruguay Round, Legal
Instruments, p. 25432 (Emphasis supplied)
"(c) In the area of the General Agreement on Trade in
Services:chanrob1es virtual 1aw library
National Treatment
1. In the sectors inscribed in its schedule, and subject to any
conditions and qualifications set out therein, each Member shall
accord to services and service suppliers of any other Member, in
respect of all measures affecting the supply of services, treatment
no less favourable than it accords to its own like services and
service suppliers.
2. A Member may meet the requirement of paragraph I by
according to services and service suppliers of any other Member,
either formally identical treatment or formally different treatment
to that it accords to its own like services and service suppliers.
3. Formally identical or formally different treatment shall be
considered to be less favourable if it modifies the conditions of
completion in favour of services or service suppliers of the Member
compared to like services or service suppliers of any other Member.
(Article XVII, General Agreement on Trade in Services, Vol. 28,
Uruguay Round Legal Instruments, p. 22610 Emphasis
supplied)."cralaw virtua1aw library
It is petitioners’ position that the foregoing "national treatment"
and "parity provisions" of the WTO Agreement "place nationals and
products of member countries on the same footing as Filipinos and
local products," in contravention of the "Filipino First" policy of the
Constitution. They allegedly render meaningless the phrase
"effectively controlled by Filipinos." The constitutional conflict
becomes more manifest when viewed in the context of the clear
duty imposed on the Philippines as a WTO member to ensure the
conformity of its laws, regulations and administrative procedures
with its obligations as provided in the annexed agreements. 20
Petitioners further argue that these provisions contravene
constitutional limitations on the role exports play in national
development and negate the preferential treatment accorded to
Filipino labor, domestic materials and locally produced goods.
On the other hand, respondents through the Solicitor General
counter (1) that such Charter provisions are not self-executing and
merely set out general policies; (2) that these nationalistic portions
of the Constitution invoked by petitioners should not be read in
isolation but should be related to other relevant provisions of Art.
XII, particularly Secs. 1 and 13 thereof; (3) that read properly, the
cited WTO clauses do not conflict with the Constitution; and (4)
that the WTO Agreement contains sufficient provisions to protect
developing countries like the Philippines from the harshness of
sudden trade liberalization.chanrobles law library
We shall now discuss and rule on these arguments.
Declaration of Principles Not Self-Executing
By its very title, Article II of the Constitution is a "declaration of
principles and state policies." The counterpart of this article in the
1935 Constitution 21 is called the "basic political creed of the
nation" by Dean Vicente Sinco. 22 These principles in Article II are
not intended to be self-executing principles ready for enforcement
through the courts. 23 They are used by the judiciary as aids or as
guides in the exercise of its power of judicial review, and by the
legislature in its enactment of laws. As held in the leading case of
Kilosbayan, Incorporated v. Morato, 24 the principles and state
policies enumerated in Article II and some sections of Article XII
are not "self-executing provisions, the disregard of which can give
rise to a cause of action in the courts. They do not embody
judicially enforceable constitutional rights but guidelines for
legislation."cralaw virtua1aw library
In the same light, we held in Basco v. Pagcor 25 that broad
constitutional principles need legislative enactments to implement
them, thus:jgc:chanrobles.com.ph
"On petitioners’ allegation that P.D. 1869 violates Sections 11
(Personal Dignity) 12 (Family) and 13 (Role of Youth) of Article II;
Section 13 (Social Justice) of Article XIII and Section 2
(Educational Values) of Article XIV of the 1987 Constitution, suffice
it to state also that these are merely statements of principles and
policies. As such, they are basically not self-executing, meaning a
law should be passed by Congress to clearly define and effectuate
such principles.
‘In general, therefore, the 1935 provisions were not intended to be
self-executing principles ready for enforcement through the courts.
They were rather directives addressed to the executive and to the
legislature. If the executive and the legislature failed to heed the
directives of the article, the available remedy was not judicial but
political. The electorate could express their displeasure with the
failure of the executive and the legislature through the language of
the ballot. (Bernas, Vol. II, p. 2)."cralaw virtua1aw library
The reasons for denying a cause of action to an alleged
infringement of broad constitutional principles are sourced from
basic considerations of due process and the lack of judicial
authority to wade "into the uncharted ocean of social and economic
policy making." Mr. Justice Florentino P. Feliciano in his concurring
opinion in Oposa v. Factoran, Jr., 26 explained these reasons as
follows:jgc:chanrobles.com.ph
"My suggestion is simply that petitioners must, before the trial
court, show a more specific legal right — a right cast in language of
a significantly lower order of generality than Article II (15) of the
Constitution — that is or may be violated by the actions, or failures
to act, imputed to the public respondent by petitioners so that the
trial court can validly render judgment granting all or part of the
relief prayed for. To my mind, the court should be understood as
simply saying that such a more specific legal right or rights may
well exist in our corpus of law, considering the general policy
principles found in the Constitution and the existence of the
Philippine Environment Code, and that the trial court should have
given petitioners an effective opportunity so to demonstrate,
instead of aborting the proceedings on a motion to dismiss.
It seems to me important that the legal right which is an essential
component of a cause of action be a specific, operable legal right,
rather than a constitutional or statutory policy, for at least two (2)
reasons. One is that unless the legal right claimed to have been
violated or disregarded is given specification in operational terms,
defendants may well be unable to defend themselves intelligently
and effectively; in other words, there are due process dimensions
to this matter.
The second is a broader-gauge consideration — where a specific
violation of law or applicable regulation is not alleged or proved,
petitioners can be expected to fall back on the expanded
conception of judicial power in the second paragraph of Section 1
of Article VIII of the Constitution which reads:chanrob1es virtual
1aw library
‘Section 1. . . .
Judicial power includes the duty of the courts of justice to settle
actual controversies involving rights which are legally demandable
and enforceable, and to determine whether or not there has been a
grave abuse of discretion amounting to lack or excess of
jurisdiction on the part of any branch or instrumentality of the
Government.’ (Emphasis supplied)
When substantive standards as general as ‘the right to a balanced
and healthy ecology’ and ‘the right to health’ are combined with
remedial standards as broad ranging as ‘a grave abuse of
discretion amounting to lack or excess of jurisdiction,’ the result
will be, it is respectfully submitted, to propel courts into the
uncharted ocean of social and economic policy making. At least in
respect of the vast area of environmental protection and
management, our courts have no claim to special technical
competence and experience and professional qualification. Where
no specific, operable norms and standards are shown to exist, then
the policy making departments — the legislative and executive
departments — must be given a real and effective opportunity to
fashion and promulgate those norms and standards, and to
implement them before the courts should
intervene." chanroblesvirtuallawlibrary
Economic Nationalism Should Be Read with Other Constitutional
Mandates to Attain Balanced Development of Economy
On the other hand, Secs. 10 and 12 of Article XII, apart from
merely laying down general principles relating to the national
economy and patrimony, should be read and understood in relation
to the other sections in said article, especially Secs. 1 and 13
thereof which read:jgc:chanrobles.com.ph
"Section 1. The goals of the national economy are a more equitable
distribution of opportunities, income, and wealth; a sustained
increase in the amount of goods and services produced by the
nation for the benefit of the people; and an expanding productivity
as the key to raising the quality of life for all, especially the
underprivileged.
The State shall promote industrialization and full employment
based on sound agricultural development and agrarian reform,
through industries that make full and efficient use of human and
natural resources, and which are competitive in both domestic and
foreign markets. However, the State shall protect Filipino
enterprises against unfair foreign competition and trade practices.
In the pursuit of these goals, all sectors of the economy and all
regions of the country shall be given optimum opportunity to
develop. . .
x x x
Sec. 13. The State shall pursue a trade policy that serves the
general welfare and utilizes all forms and arrangements of
exchange on the basis of equality and reciprocity."cralaw virtua1aw
library
As pointed out by the Solicitor General, Sec. 1 lays down the basic
goals of national economic development, as follows:chanrob1es
virtual 1aw library
1. A more equitable distribution of opportunities, income and
wealth;
2. A sustained increase in the amount of goods and services
provided by the nation for the benefit of the people; and

3. An expanding productivity as the key to raising the quality of life
for all especially the underprivileged.
With these goals in context, the Constitution then ordains the
ideals of economic nationalism (1) by expressing preference in
favor of qualified Filipinos "in the grant of rights, privileges and
concessions covering the national economy and patrimony" 27 and
in the use of "Filipino labor, domestic materials and locally-
produced goods" ; (2) by mandating the State to "adopt measures
that help make them competitive; 28 and (3) by requiring the
State to "develop a self-reliant and independent national economy
effectively controlled by Filipinos." 29 In similar language, the
Constitution takes into account the realities of the outside world as
it requires the pursuit of "a trade policy that serves the general
welfare and utilizes all forms and arrangements of exchange on the
basis of equality and reciprocity" ; 30 and speaks of industries
"which are competitive in both domestic and foreign markets" as
well as of the protection of "Filipino enterprises against unfair
foreign competition and trade practices."cralaw virtua1aw library
It is true that in the recent case of Manila Prince Hotel v.
Government Service Insurance System, Et Al., 31 this Court held
that "Sec. 10, second par., Art. XII of the 1987 Constitution is a
mandatory, positive command which is complete in itself and which
needs no further guidelines or implementing laws or rules for its
enforcement. From its very words the provision does not require
any legislation to put it in operation. It is per se judicially
enforceable." However, as the constitutional provision itself states,
it is enforceable only in regard to "the grants of rights, privileges
and concessions covering national economy and patrimony" and
not to every aspect of trade and commerce. It refers to exceptions
rather than the rule. The issue here is not whether this paragraph
of Sec. 10 of Art. XII is self-executing or not. Rather, the issue is
whether, as a rule, there are enough balancing provisions in the
Constitution to allow the Senate to ratify the Philippine concurrence
in the WTO Agreement. And we hold that there are.
All told, while the Constitution indeed mandates a bias in favor of
Filipino goods, services, labor and enterprises, at the same time, it
recognizes the need for business exchange with the rest of the
world on the bases of equality and reciprocity and limits protection
of Filipino enterprises only against foreign competition and trade
practices that are unfair. 32 In other words, the Constitution did
not intend to pursue an isolationist policy. It did not shut out
foreign investments, goods and services in the development of the
Philippine economy. While the Constitution does not encourage the
unlimited entry of foreign goods, services and investments into the
country, it does not prohibit them either. In fact, it allows an
exchange on the basis of equality and reciprocity, frowning only on
foreign competition that is unfair.
WTO Recognizes Need to Protect Weak Economies
Upon the other hand, respondents maintain that the WTO itself has
some built-in advantages to protect weak and developing
economies, which comprise the vast majority of its members.
Unlike in the UN where major states have permanent seats and
veto powers in the Security Council, in the WTO, decisions are
made on the basis of sovereign equality, with each member’s vote
equal in weight to that of any other. There is no WTO equivalent of
the UN Security Council.chanrobles.com : virtual lawlibrary
"WTO decides by consensus whenever possible, otherwise,
decisions of the Ministerial Conference and the General Council
shall be taken by the majority of the votes cast, except in cases of
interpretation of the Agreement or waiver of the obligation of a
member which would require three fourths vote. Amendments
would require two thirds vote in general. Amendments to MFN
provisions and the Amendments provision will require assent of all
members. Any member may withdraw from the Agreement upon
the expiration of six months from the date of notice of
withdrawals." 33
Hence, poor countries can protect their common interests more
effectively through the WTO than through one-on-one negotiations
with developed countries. Within the WTO, developing countries
can form powerful blocs to push their economic agenda more
decisively than outside the Organization. This is not merely a
matter of practical alliances but a negotiating strategy rooted in
law. Thus, the basic principles underlying the WTO Agreement
recognize the need of developing countries like the Philippines to
"share in the growth in international trade commensurate with the
needs of their economic development." These basic principles are
found in the preamble 34 of the WTO Agreement as
follows:jgc:chanrobles.com.ph
"The Parties to this Agreement,

Recognizing that their relations in the field of trade and economic
endeavour should be conducted with a view to raising standards of
living, ensuring full employment and a large and steadily growing
volume of real income and effective demand, and expanding the
production of and trade in goods and services, while allowing for
the optimal use of the world’s resources in accordance with the
objective of sustainable development, seeking both to protect and
preserve the environment and to enhance the means for doing so
in a manner consistent with their respective needs and concerns at
different levels of economic development,
Recognizing further that there is need for positive efforts designed
to ensure that developing countries, and especially the least
developed among them, secure a share in the growth in
international trade commensurate with the needs of their economic
development,
Being desirous of contributing to these objectives by entering into
reciprocal and mutually advantageous arrangements directed to
the substantial reduction of tariffs and other barriers to trade and
to the elimination of discriminatory treatment in international trade
relations,
Resolved, therefore, to develop an integrated, more viable and
durable multilateral trading system encompassing the General
Agreement on Tariffs and Trade, the results of past trade
liberalization efforts, and all of the results of the Uruguay Round of
Multilateral Trade Negotiations,
Determined to preserve the basic principles and to further the
objectives underlying this multilateral trading system, . . ."
(Emphasis supplied.)
Specific WTO Provisos Protect Developing Countries
So too, the Solicitor General points out that pursuant to and
consistent with the foregoing basic principles, the WTO Agreement
grants developing countries a more lenient treatment, giving their
domestic industries some protection from the rush of foreign
competition. Thus, with respect to tariffs in general, preferential
treatment is given to developing countries in terms of the amount
of tariff reduction and the period within which the reduction is to be
spread out. Specifically, GATT requires an average tariff reduction
rate of 36% for developed countries to be effected within a period
of six (6) years while developing countries — including the
Philippines — are required to effect an average tariff reduction of
only 24% within ten (10) years.
In respect to domestic subsidy, GATT requires developed countries
to reduce domestic support to agricultural products by 20% over
six (6) years, as compared to only 13% for developing countries to
be effected within ten (10) years.
In regard to export subsidy for agricultural products, GATT requires
developed countries to reduce their budgetary outlays for export
subsidy by 36% and export volumes receiving export subsidy by
21% within a period of six (6) years. For developing countries,
however, the reduction rate is only two-thirds of that prescribed for
developed countries and a longer period of ten (10) years within
which to effect such reduction.
Moreover, GATT itself has provided built-in protection from unfair
foreign competition and trade practices including anti-dumping
measures, countervailing measures and safeguards against import
surges. Where local businesses are jeopardized by unfair foreign
competition, the Philippines can avail of these measures. There is
hardly therefore any basis for the statement that under the WTO,
local industries and enterprises will all be wiped out and that
Filipinos will be deprived of control of the economy. Quite the
contrary, the weaker situations of developing nations like the
Philippines have been taken into account; thus, there would be no
basis to say that in joining the WTO, the respondents have gravely
abused their discretion. True, they have made a bold decision to
steer the ship of state into the yet uncharted sea of economic
liberalization. But such decision cannot be set aside on the ground
of grave abuse of discretion, simply because we disagree with it or
simply because we believe only in other economic policies. As
earlier stated, the Court in taking jurisdiction of this case will not
pass upon the advantages and disadvantages of trade liberalization
as an economic policy. It will only perform its constitutional duty of
determining whether the Senate committed grave abuse of
discretion.chanroblesvirtual|awlibrary
Constitution Does Not Rule Out Foreign Competition
Furthermore, the constitutional policy of a "self-reliant and
independent national economy" 35 does not necessarily rule out
the entry of foreign investments, goods and services. It
contemplates neither "economic seclusion" nor "mendicancy in the
international community." As explained by Constitutional
Commissioner Bernardo Villegas, sponsor of this constitutional
policy:jgc:chanrobles.com.ph
"Economic self reliance is a primary objective of a developing
country that is keenly aware of overdependence on external
assistance for even its most basic needs. It does not mean autarky
or economic seclusion; rather, it means avoiding mendicancy in the
international community. Independence refers to the freedom from
undue foreign control of the national economy, especially in such
strategic industries as in the development of natural resources and
public utilities." 36
The WTO reliance on "most favored nation," "national treatment,"
and "trade without discrimination" cannot be struck down as
unconstitutional as in fact they are rules of equality and reciprocity
that apply to all WTO members. Aside from envisioning a trade
policy based on "equality and reciprocity," 37 the fundamental law
encourages industries that are "competitive in both domestic and
foreign markets," thereby demonstrating a clear policy against a
sheltered domestic trade environment, but one in favor of the
gradual development of robust industries that can compete with
the best in the foreign markets. Indeed, Filipino managers and
Filipino enterprises have shown capability and tenacity to compete
internationally. And given a free trade environment, Filipino
entrepreneurs and managers in Hongkong have demonstrated the
Filipino capacity to grow and to prosper against the best offered
under a policy of laissez faire.
Constitution Favors Consumers, Not Industries or Enterprises
The Constitution has not really shown any unbalanced bias in favor
of any business or enterprise, nor does it contain any specific
pronouncement that Filipino companies should be pampered with a
total proscription of foreign competition. On the other hand,
respondents claim that WTO/GATT aims to make available to the
Filipino consumer the best goods and services obtainable anywhere
in the world at the most reasonable prices. Consequently, the
question boils down to whether WTO/GATT will favor the general
welfare of the public at large.
Will adherence to the WTO treaty bring this ideal (of favoring the
general welfare) to reality?
Will WTO/GATT succeed in promoting the Filipinos’ general welfare
because it will — as promised by its promoters — expand the
country’s exports and generate more employment?
Will it bring more prosperity, employment, purchasing power and
quality products at the most reasonable rates to the Filipino public?
The responses to these questions involve "judgment calls" by our
policy makers, for which they are answerable to our people during
appropriate electoral exercises. Such questions and the answers
thereto are not subject to judicial pronouncements based on grave
abuse of discretion.
Constitution Designed to Meet Future Events and Contingencies
No doubt, the WTO Agreement was not yet in existence when the
Constitution was drafted and ratified in 1987. That does not mean
however that the Charter is necessarily flawed in the sense that its
framers might not have anticipated the advent of a borderless
world of business. By the same token, the United Nations was not
yet in existence when the 1935 Constitution became effective. Did
that necessarily mean that the then Constitution might not have
contemplated a diminution of the absoluteness of sovereignty when
the Philippines signed the UN Charter, thereby effectively
surrendering part of its control over its foreign relations to the
decisions of various UN organs like the Security Council?
It is not difficult to answer this question. Constitutions are
designed to meet not only the vagaries of contemporary events.
They should be interpreted to cover even future and unknown
circumstances. It is to the credit of its drafters that a Constitution
can withstand the assaults of bigots and infidels but at the same
time bend with the refreshing winds of change necessitated by
unfolding events. As one eminent political law writer and respected
jurist 38 explains:jgc:chanrobles.com.ph
"The Constitution must be quintessential rather than superficial,
the root and not the blossom, the base and framework only of the
edifice that is yet to rise. It is but the core of the dream that must
take shape, not in a twinkling by mandate of our delegates, but
slowly ‘in the crucible of Filipino minds and hearts,’ where it will in
time develop its sinews and gradually gather its strength and
finally achieve its substance. In fine, the Constitution cannot, like
the goddess Athena, rise full-grown from the brow of the
Constitutional Convention, nor can it conjure by mere fiat an
instant Utopia. It must grow with the society it seeks to re-
structure and march apace with the progress of the race, drawing
from the vicissitudes of history the dynamism and vitality that will
keep it, far from becoming a petrified rule, a pulsing, living law
attuned to the heartbeat of the nation." cdtech
Third Issue: The WTO Agreement and Legislative Power
The WTO Agreement provides that" (e)ach Member shall ensure
the conformity of its laws, regulations and administrative
procedures with its obligations as provided in the annexed
Agreements." 39 Petitioners maintain that this undertaking "unduly
limits, restricts and impairs Philippine sovereignty, specifically the
legislative power which under Sec. 2, Article VI of the 1987
Philippine Constitution is vested in the Congress of the Philippines.
It is an assault on the sovereign powers of the Philippines because
this means that Congress could not pass legislation that will be
good for our national interest and general welfare if such legislation
will not conform with the WTO Agreement, which not only relates
to the trade in goods . . . but also to the flow of investments and
money . . . as well as to a whole slew of agreements on socio-
cultural matters . . ." 40
More specifically, petitioners claim that said WTO proviso derogates
from the power to tax, which is lodged in the Congress. 41 And
while the Constitution allows Congress to authorize the President to
fix tariff rates, import and export quotas, tonnage and wharfage
dues, and other duties or imposts, such authority is subject to
"specified limits and . . . such limitations and restrictions" as
Congress may provide, 42 as in fact it did under Sec. 401 of the
Tariff and Customs Code.
Sovereignty Limited by International Law and Treaties
This Court notes and appreciates the ferocity and passion by which
petitioners stressed their arguments on this issue. However, while
sovereignty has traditionally been deemed absolute and all-
encompassing on the domestic level, it is however subject to
restrictions and limitations voluntarily agreed to by the Philippines,
expressly or impliedly, as a member of the family of nations.
Unquestionably, the Constitution did not envision a hermit-type
isolation of the country from the rest of the world. In its
Declaration of Principles and State Policies, the Constitution
"adopts the generally accepted principles of international law as
part of the law of the land, and adheres to the policy of peace,
equality, justice, freedom, cooperation and amity, with all nations."
43 By the doctrine of incorporation, the country is bound by
generally accepted principles of international law, which are
considered to be automatically part of our own laws. 44 One of the
oldest and most fundamental rules in international law is pacta
sunt servanda — international agreements must be performed in
good faith. "A treaty engagement is not a mere moral obligation
but creates a legally binding obligation on the parties . . . A state
which has contracted valid international obligations is bound to
make in its legislations such modifications as may be necessary to
ensure the fulfillment of the obligations undertaken." 45
By their inherent nature, treaties really limit or restrict the
absoluteness of sovereignty. By their voluntary act, nations may
surrender some aspects of their state power in exchange for
greater benefits granted by or derived from a convention or pact.
After all, states, like individuals, live with coequals, and in pursuit
of mutually covenanted objectives and benefits, they also
commonly agree to limit the exercise of their otherwise absolute
rights. Thus, treaties have been used to record agreements
between States concerning such widely diverse matters as, for
example, the lease of naval bases, the sale or cession of territory,
the termination of war, the regulation of conduct of hostilities, the
formation of alliances, the regulation of commercial relations, the
settling of claims, the laying down of rules governing conduct in
peace and the establishment of international organizations. 46 The
sovereignty of a state therefore cannot in fact and in reality be
considered absolute. Certain restrictions enter into the picture: (1)
limitations imposed by the very nature of membership in the family
of nations and (2) limitations imposed by treaty stipulations. As
aptly put by John F. Kennedy, "Today, no nation can build its
destiny alone. The age of self-sufficient nationalism is over. The
age of interdependence is here." 47
UN Charter and Other Treaties Limit Sovereignty
Thus, when the Philippines joined the United Nations as one of its
51 charter members, it consented to restrict its sovereign rights
under the "concept of sovereignty as auto-limitation." 47-A Under
Article 2 of the UN Charter," (a)ll members shall give the United
Nations every assistance in any action it takes in accordance with
the present Charter, and shall refrain from giving assistance to any
state against which the United Nations is taking preventive or
enforcement action." Such assistance includes payment of its
corresponding share not merely in administrative expenses but
also in expenditures for the peace-keeping operations of the
organization. In its advisory opinion of July 20, 1961, the
International Court of Justice held that money used by the United
Nations Emergency Force in the Middle East and in the Congo were
"expenses of the United Nations" under Article 17, paragraph 2, of
the UN Charter. Hence, all its members must bear their
corresponding share in such expenses. In this sense, the Philippine
Congress is restricted in its power to appropriate. It is compelled to
appropriate funds whether it agrees with such peace-keeping
expenses or not. So too, under Article 105 of the said Charter, the
UN and its representatives enjoy diplomatic privileges and
immunities, thereby limiting again the exercise of sovereignty of
members within their own territory. Another example: although
"sovereign equality" and "domestic jurisdiction" of all members are
set forth as underlying principles in the UN Charter, such provisos
are however subject to enforcement measures decided by the
Security Council for the maintenance of international peace and
security under Chapter VII of the Charter. A final example: under
Article 103," (i)n the event of a conflict between the obligations of
the Members of the United Nations under the present Charter and
their obligations under any other international agreement, their
obligation under the present charter shall prevail," thus
unquestionably denying the Philippines — as a member — the
sovereign power to make a choice as to which of conflicting
obligations, if any, to honor.chanroblesvirtuallawlibrary:red
Apart from the UN Treaty, the Philippines has entered into many
other international pacts — both bilateral and multilateral — that
involve limitations on Philippine sovereignty. These are enumerated
by the Solicitor General in his Compliance dated October 24, 1996,
as follows:jgc:chanrobles.com.ph
"(a) Bilateral convention with the United States regarding taxes on
income, where the Philippines agreed, among others, to exempt
from tax, income received in the Philippines by, among others, the
Federal Reserve Bank of the United States, the Export/Import Bank
of the United States, the Overseas Private Investment Corporation
of the United States. Likewise, in said convention, wages, salaries
and similar remunerations paid by the United States to its citizens
for labor and personal services performed by them as employees or
officials of the United States are exempt from income tax by the
Philippines.
(b) Bilateral agreement with Belgium, providing, among others, for
the avoidance of double taxation with respect to taxes on income.
(c) Bilateral convention with the Kingdom of Sweden for the
avoidance of double taxation.
(d) Bilateral convention with the French Republic for the avoidance
of double taxation.
(e) Bilateral air transport agreement with Korea where the
Philippines agreed to exempt from all customs duties, inspection
fees and other duties or taxes aircrafts of South Korea and the
regular equipment, spare parts and supplies arriving with said
aircrafts.
(f) Bilateral air service agreement with Japan, where the
Philippines agreed to exempt from customs duties, excise taxes,
inspection fees and other similar duties, taxes or charges fuel,
lubricating oils, spare parts, regular equipment, stores on board
Japanese aircrafts while on Philippine soil.
(g) Bilateral air service agreement with Belgium where the
Philippines granted Belgian air carriers the same privileges as those
granted to Japanese and Korean air carriers under separate air
service agreements.
(h) Bilateral notes with Israel for the abolition of transit and visitor
visas where the Philippines exempted Israeli nationals from the
requirement of obtaining transit or visitor visas for a sojourn in the
Philippines not exceeding 59 days.
(i) Bilateral agreement with France exempting French nationals
from the requirement of obtaining transit and visitor visa for a
sojourn not exceeding 59 days.
(j) Multilateral Convention on Special Missions, where the
Philippines agreed that premises of Special Missions in the
Philippines are inviolable and its agents can not enter said
premises without consent of the Head of Mission concerned.
Special Missions are also exempted from customs duties, taxes and
related charges.
(k) Multilateral Convention on the Law of Treaties. In this
convention, the Philippines agreed to be governed by the Vienna
Convention on the Law of Treaties.
(l) Declaration of the President of the Philippines accepting
compulsory jurisdiction of the International Court of Justice. The
International Court of Justice has jurisdiction in all legal disputes
concerning the interpretation of a treaty, any question of
international law, the existence of any fact which, if established,
would constitute a breach of international obligation."cralaw
virtua1aw library
In the foregoing treaties, the Philippines has effectively agreed to
limit the exercise of its sovereign powers of taxation, eminent
domain and police power. The underlying consideration in this
partial surrender of sovereignty is the reciprocal commitment of
the other contracting states in granting the same privilege and
immunities to the Philippines, its officials and its citizens. The same
reciprocity characterizes the Philippine commitments under WTO-
GATT.
"International treaties, whether relating to nuclear disarmament,
human rights, the environment, the law of the sea, or trade,
constrain domestic political sovereignty through the assumption of
external obligations. But unless anarchy in international relations is
preferred as an alternative, in most cases we accept that the
benefits of the reciprocal obligations involved outweigh the costs
associated with any loss of political sovereignty. (T)rade treaties
that structure relations by reference to durable, well-defined
substantive norms and objective dispute resolution procedures
reduce the risks of larger countries exploiting raw economic power
to bully smaller countries, by subjecting power relations to some
form of legal ordering. In addition, smaller countries typically stand
to gain disproportionately from trade liberalization. This is due to
the simple fact that liberalization will provide access to a larger set
of potential new trading relationship than in case of the larger
country gaining enhanced success to the smaller country’s
market." 48
The point is that, as shown by the foregoing treaties, a portion of
sovereignty may be waived without violating the Constitution,
based on the rationale that the Philippines "adopts the generally
accepted principles of international law as part of the law of the
land and adheres to the policy of . . . cooperation and amity with
all nations." casia
Fourth Issue: The WTO Agreement and Judicial Power
Petitioners aver that paragraph 1, Article 34 of the General
Provisions and Basic Principles of the Agreement on Trade-Related
Aspects of Intellectual Property Rights (TRIPS) 49 intrudes on the
power of the Supreme Court to promulgate rules concerning
pleading, practice and procedures. 50
To understand the scope and meaning of Article 34, TRIPS, 51 it
will be fruitful to restate its full text as
follows:jgc:chanrobles.com.ph
"Article 34
Process Patents: Burden of Proof
1. For the purposes of civil proceedings in respect of the
infringement of the rights of the owner referred to in paragraph 1
(b) of Article 28, if the subject matter of a patent is a process for
obtaining a product, the judicial authorities shall have the authority
to order the defendant to prove that the process to obtain an
identical product is different from the patented process. Therefore,
Members shall provide, in at least one of the following
circumstances, that any identical product when produced without
the consent of the patent owner shall, in the absence of proof to
the contrary, be deemed to have been obtained by the patented
process:chanrob1es virtual 1aw library
(a) if the product obtained by the patented process is new;
(b) if there is a substantial likelihood that the identical product was
made by the process and the owner of the patent has been unable
through reasonable efforts to determine the process actually used.
2. Any Member shall be free to provide that the burden of proof
indicated in paragraph 1 shall be on the alleged infringer only if the
condition referred to in subparagraph (a) is fulfilled or only if the
condition referred to in subparagraph (b) is fulfilled.
3. In the adduction of proof to the contrary, the legitimate interests
of defendants in protecting their manufacturing and business
secrets shall be taken into account."cralaw virtua1aw library
From the above, a WTO Member is required to provide a rule of
disputable (note the words "in the absence of proof to the
contrary") presumption that a product shown to be identical to one
produced with the use of a patented process shall be deemed to
have been obtained by the (illegal) use of the said patented
process, (1) where such product obtained by the patented product
is new, or (2) where there is "substantial likelihood" that the
identical product was made with the use of the said patented
process but the owner of the patent could not determine the exact
process used in obtaining such identical product. Hence, the
"burden of proof" contemplated by Article 34 should actually be
understood as the duty of the alleged patent infringer to overthrow
such presumption. Such burden, properly understood, actually
refers to the "burden of evidence" (burden of going forward) placed
on the producer of the identical (or fake) product to show that his
product was produced without the use of the patented process.
The foregoing notwithstanding, the patent owner still has the
"burden of proof" since, regardless of the presumption provided
under paragraph 1 of Article 34, such owner still has to introduce
evidence of the existence of the alleged identical product, the fact
that it is "identical" to the genuine one produced by the patented
process and the fact of "newness" of the genuine product or the
fact of "substantial likelihood" that the identical product was made
by the patented process.
The foregoing should really present no problem in changing the
rules of evidence as the present law on the subject, Republic Act
No. 165, as amended, otherwise known as the Patent Law,
provides a similar presumption in cases of infringement of patented
design or utility model, thus:jgc:chanrobles.com.ph
"SEC. 60. Infringement. — Infringement of a design patent or of a
patent for utility model shall consist in unauthorized copying of the
patented design or utility model for the purpose of trade or
industry in the article or product and in the making, using or selling
of the article or product copying the patented design or utility
model. Identity or substantial identity with the patented design or
utility model shall constitute evidence of copying." (Emphasis
supplied)
Moreover, it should be noted that the requirement of Article 34 to
provide a disputable presumption applies only if (1) the product
obtained by the patented process is NEW or (2) there is a
substantial likelihood that the identical product was made by the
process and the process owner has not been able through
reasonable effort to determine the process used. Where either of
these two provisos does not obtain, members shall be free to
determine the appropriate method of implementing the provisions
of TRIPS within their own internal systems and processes.
By and large, the arguments adduced in connection with our
disposition of the third issue — derogation of legislative power —
will apply to this fourth issue also. Suffice it to say that the
reciprocity clause more than justifies such intrusion, if any actually
exists. Besides, Article 34 does not contain an unreasonable
burden, consistent as it is with due process and the concept of
adversarial dispute settlement inherent in our judicial system.
So too, since the Philippine is a signatory to most international
conventions on patents, trademarks and copyrights, the
adjustment in legislation and rules of procedure will not be
substantial. 52
Fifth Issue: Concurrence Only in the WTO Agreement and Not in
Other Documents Contained in the Final Act
Petitioners allege that the Senate concurrence in the WTO
Agreement and its annexes — but not in the other documents
referred to in the Final Act, namely the Ministerial Declaration and
Decisions and the Understanding on Commitments in Financial
Services — is defective and insufficient and thus constitutes abuse
of discretion. They submit that such concurrence in the WTO
Agreement alone is flawed because it is in effect a rejection of the
Final Act, which in turn was the document signed by Secretary
Navarro, in representation of the Republic upon authority of the
President. They contend that the second letter of the President to
the Senate 53 which enumerated what constitutes the Final Act
should have been the subject of concurrence of the
Senate.chanroblesvirtuallawlibrary
"A final act, sometimes called protocol de clôture, is an instrument
which records the winding up of the proceedings of a diplomatic
conference and usually includes a reproduction of the texts of
treaties, conventions, recommendations and other acts agreed
upon and signed by the plenipotentiaries attending the
conference." 54 It is not the treaty itself. It is rather a summary of
the proceedings of a protracted conference which may have taken
place over several years. The text of the "Final Act Embodying the
Results of the Uruguay Round of Multilateral Trade Negotiations" is
contained in just one page 55 in Vol. I of the 36-volume Uruguay
Round of Multilateral Trade Negotiations. By signing said Final Act,
Secretary Navarro as representative of the Republic of the
Philippines undertook:jgc:chanrobles.com.ph
"(a) to submit, as appropriate, the WTO Agreement for the
consideration of their respective competent authorities with a view
to seeking approval of the Agreement in accordance with their
procedures; and
(b) to adopt the Ministerial Declarations and Decisions."cralaw
virtua1aw library
The assailed Senate Resolution No. 97 expressed concurrence in
exactly what the Final Act required from its signatories, namely,
concurrence of the Senate in the WTO Agreement.
The Ministerial Declarations and Decisions were deemed adopted
without need for ratification. They were approved by the ministers
by virtue of Article XXV: 1 of GATT which provides that
representatives of the members can meet "to give effect to those
provisions of this Agreement which invoke joint action, and
generally with a view to facilitating the operation and furthering
the objectives of this Agreement." 56
The Understanding on Commitments in Financial Services also
approved in Marrakesh does not apply to the Philippines. It applies
only to those 27 Members which "have indicated in their respective
schedules of commitments on standstill, elimination of monopoly,
expansion of operation of existing financial service suppliers,
temporary entry of personnel, free transfer and processing of
information, and national treatment with respect to access to
payment, clearing systems and refinancing available in the normal
course of business." 57
On the other hand, the WTO Agreement itself expresses what
multilateral agreements are deemed included as its integral parts,
58 as follows:jgc:chanrobles.com.ph
"Article II
Scope of the WTO
1. The WTO shall provide the common institutional framework for
the conduct of trade relations among its Members in matters to the
agreements and associated legal instruments included in the
Annexes to this Agreement.
2. The Agreements and associated legal instruments included in
Annexes 1, 2, and 3 (hereinafter referred to as "Multilateral
Agreements") are integral parts of this Agreement, binding on all
Members.
3. The Agreements and associated legal instruments included in
Annex 4 (hereinafter referred to as "Plurilateral Trade
Agreements") are also part of this Agreement for those Members
that have accepted them, and are binding on those Members. The
Plurilateral Trade Agreements do not create either obligation or
rights for Members that have not accepted them.
4. The General Agreement on Tariffs and Trade 1994 as specified in
annex 1A (hereinafter referred to as "GATT 1994") is legally
distinct from the General Agreement on Tariffs and Trade, dated 30
October 1947, annexed to the Final Act adopted at the conclusion
of the Second Session of the Preparatory Committee of the United
Nations Conference on Trade and Employment, as subsequently
rectified, amended or modified (hereinafter referred to as "GATT
1947").
It should be added that the Senate was well-aware of what it was
concurring in as shown by the members’ deliberation on August 25,
1994. After reading the letter of President Ramos dated August 11,
1994, 59 the senators of the Republic minutely dissected what the
Senate was concurring in, as follows: 60
"THE CHAIRMAN: Yes. Now, the question of the validity of the
submission came up in the first day hearing of this Committee
yesterday. Was the observation made by Senator Tañada that what
was submitted to the Senate was not the agreement on
establishing the World Trade Organization by the final act of the
Uruguay Round which is not the same as the agreement
establishing the World Trade Organization? And on that basis,
Senator Tolentino raised a point of order which, however, he
agreed to withdraw upon understanding that his suggestion for an
alternative solution at that time was acceptable. That suggestion
was to treat the proceedings of the Committee as being in the
nature of briefings for Senators until the question of the submission
could be clarified.
And so, Secretary Romulo, in effect, is the President submitting a
new. . . is he making a new submission which improves on the
clarity of the first submission?
MR. ROMULO: Mr. Chairman, to make sure that it is clear cut and
there should be no misunderstanding, it was his intention to clarify
all matters by giving this letter.
THE CHAIRMAN: Thank you.
Can this Committee hear from Senator Tañada and later on
Senator Tolentino since they were the ones that raised this
question yesterday?
Senator Tañada, please.
SEN. TAÑADA: Thank you, Mr. Chairman.
Based on what Secretary Romulo has read, it would now clearly
appear that what is being submitted to the Senate for ratification is
not the Final Act of the Uruguay Round, but rather the Agreement
on the World Trade Organization as well as the Ministerial
Declarations and Decisions, and the Understanding and
Commitments in Financial Services.
I am now satisfied with the wording of the new submission of
President Ramos.
SEN. TAÑADA. . . . of President Ramos, Mr. Chairman.
THE CHAIRMAN. Thank you, Senator Tañada. Can we hear from
Senator Tolentino? And after him Senator Neptali Gonzales and
Senator Lina.
SEN. TOLENTINO, Mr. Chairman, I have not seen the new
submission actually transmitted to us but I saw the draft of his
earlier, and I think it now complies with the provisions of the
Constitution, and with the Final Act itself . The Constitution does
not require us to ratify the Final Act. It requires us to ratify the
Agreement which is now being submitted. The Final Act itself
specifies what is going to be submitted to with the governments of
the participants.chanrobles.com : virtual law library
In paragraph 2 of the Final Act, we read and I quote:chanrob1es
virtual 1aw library
‘By signing the present Final Act, the representatives agree: (a) to
submit as appropriate the WTO Agreement for the consideration of
the respective competent authorities with a view of seeking
approval of the Agreement in accordance with their procedures.’
In other words, it is not the Final Act that was agreed to be
submitted to the governments for ratification or acceptance as
whatever their constitutional procedures may provide but it is the
World Trade Organization Agreement. And if that is the one that is
being submitted now, I think it satisfies both the Constitution and
the Final Act itself .
Thank you, Mr. Chairman.
THE CHAIRMAN. Thank you, Senator Tolentino, May I call on
Senator Gonzales.
SEN. GONZALES. Mr. Chairman, my views on this matter are
already a matter of record. And they had been adequately reflected
in the journal of yesterday’s session and I don’t see any need for
repeating the same.
Now, I would consider the new submission as an act ex abudante
cautela.
THE CHAIRMAN. Thank you, Senator Gonzales. Senator Lina, do
you want to make any comment on this?
SEN. LINA, Mr. President, I agree with the observation just made
by Senator Gonzales out of the abundance of question. Then the
new submission is, I believe, stating the obvious and therefore I
have no further comment to make."cralaw virtua1aw library
Epilogue
In praying for the nullification of the Philippine ratification of the
WTO Agreement, petitioners are invoking this Court’s
constitutionally imposed duty "to determine whether or not there
has been grave abuse of discretion amounting to lack or excess of
jurisdiction" on the part of the Senate in giving its concurrence
therein via Senate Resolution No. 97. Procedurally, a writ
of certiorari grounded on grave abuse of discretion may be issued
by the Court under Rule 65 of the Rules of Court when it is amply
shown that petitioners have no other plain, speedy and adequate
remedy in the ordinary course of law.
By grave abuse of discretion is meant such capricious and
whimsical exercise of judgment as is equivalent to lack of
jurisdiction. 61 Mere abuse of discretion is not enough. It must be
grave abuse of discretion as when the power is exercised in an
arbitrary or despotic manner by reason of passion or personal
hostility, and must be so patent and so gross as to amount to an
evasion of a positive duty or to a virtual refusal to perform the duty
enjoined or to act at all in contemplation of law. 62 Failure on the
part of the petitioner to show grave abuse of discretion will result
in the dismissal of the petition. 63
In rendering this Decision, this Court never forgets that the
Senate, whose act is under review, is one of two sovereign houses
of Congress and is thus entitled to great respect in its actions. It is
itself a constitutional body independent and coordinate, and thus
its actions are presumed regular and done in good faith. Unless
convincing proof and persuasive arguments are presented to
overthrow such presumptions, this Court will resolve every doubt in
its favor. Using the foregoing well-accepted definition of grave
abuse of discretion and the presumption of regularity in the
Senate’s processes, this Court cannot find any cogent reason to
impute grave abuse of discretion to the Senate’s exercise of its
power of concurrence in the WTO Agreement granted it by Sec. 21
of Article VII of the Constitution. 64
It is true, as alleged by petitioners, that broad constitutional
principles require the State to develop an independent national
economy effectively controlled by Filipinos; and to protect and/or
prefer Filipino labor, products, domestic materials and locally
produced goods. But it is equally true that such principles — while
serving as judicial and legislative guides — are not in themselves
sources of causes of action. Moreover, there are other equally
fundamental constitutional principles relied upon by the Senate
which mandate the pursuit of a "trade policy that serves the
general welfare and utilizes all forms and arrangements of
exchange on the basis of equality and reciprocity" and the
promotion of industries "which are competitive in both domestic
and foreign markets," thereby justifying its acceptance of said
treaty. So too, the alleged impairment of sovereignty in the
exercise of legislative and judicial powers is balanced by the
adoption of the generally accepted principles of international law as
part of the law of the land and the adherence of the Constitution to
the policy of cooperation and amity with all
nations.chanroblesvirtuallawlibrary
That the Senate, after deliberation and voting, voluntarily and
overwhelmingly gave its consent to the WTO Agreement thereby
making it "a part of the law of the land" is a legitimate exercise of
its sovereign duty and power. We find no "patent and gross"
arbitrariness or despotism "by reason of passion or personal
hostility" in such exercise. It is not impossible to surmise that this
Court, or at least some of its members, may even agree with
petitioners that it is more advantageous to the national interest to
strike down Senate Resolution No. 97. But that is not a legal
reason to attribute grave abuse of discretion to the Senate and to
nullify its decision. To do so would constitute grave abuse in the
exercise of our own judicial power and duty. Ineludably, what the
Senate did was a valid exercise of its authority. As to whether such
exercise was wise, beneficial or viable is outside the realm of
judicial inquiry and review. That is a matter between the elected
policy makers and the people. As to whether the nation should join
the worldwide march toward trade liberalization and economic
globalization is a matter that our people should determine in
electing their policy makers. After all, the WTO Agreement allows
withdrawal of membership, should this be the political desire of a
member.
The eminent futurist John Naisbitt, author of the best seller
Megatrends, predicts an Asian Renaissance 65 where "the East will
become the dominant region of the world economically, politically
and culturally in the next century." He refers to the "free market"
espoused by WTO as the "catalyst" in this coming Asian
ascendancy. There are at present about 31 countries including
China, Russia and Saudi Arabia negotiating for membership in the
WTO. Notwithstanding objections against possible limitations on
national sovereignty, the WTO remains as the only viable structure
for multilateral trading and the veritable forum for the development
of international trade law. The alternative to WTO is isolation,
stagnation, if not economic self-destruction. Duly enriched with
original membership, keenly aware of the advantages and
disadvantages of globalization with its on-line experience, and
endowed with a vision of the future, the Philippines now straddles
the crossroads of an international strategy for economic prosperity
and stability in the new millennium. Let the people, through their
duly authorized elected officers, make their free choice.

WHEREFORE, the petition is DISMISSED for lack of merit.

SO ORDERED.