CASE DIGEST: PAMBANSANG KOALISYON NG MGA SAMAHANG MAGSASAKA AT

MANGGAGAWA SA NIYUGAN (PKSMMN), etc. v. EXECUTIVE SECRETARY, etc.

CONSOLIDATED WITH G.R. No. 147811

FACTS: These are consolidated petitions to declare unconstitutional certain

presidential decrees and executive orders of the martial law era and under the
incumbency of Pres. Estrada relating to the raising and use of coco-levy funds,
particularly: Section 2 of P.D. 755, (b)Article III, Section 5 of P.D.s 961 and 1468, (c)
E.O. 312, and (d) E.O. 313.

On June 19, 1971 Congress enacted R.A. 6260 that established a Coconut Investment
Fund (CI Fund) for the development of the coconut industry through capital
financing. Coconut farmers were to capitalize and administer the Fund through the
Coconut Investment Company (CIC) whose objective was, among others, to advance
the coconut farmers interests.For this purpose, the law imposed a levy ofP0.55on the
coconut farmers first domestic sale of every 100 kilograms of copra, or its equivalent,
for which levy he was to get a receipt convertible into CIC shares of stock.

In 1975 President Marcos enacted P.D. 755 which approved the acquisition of a
commercial bank for the benefit of the coconut farmersto enable such bank to
promptly and efficiently realize the industry's credit policy.Thus, the PCA bought
72.2% of the shares of stock of First United Bank, headed by Pedro Cojuangco.Dueto
changes in its corporate identity and purpose, the banks articles of incorporation
were amended in July 1975, resulting in a change in the banks name from First
United Bank United Coconut Planters Bank (UCPB).

In November 2000 then President Joseph Estrada issued Executive Order (E.O.) 312,
establishing a Sagip Niyugan Program which sought to provide immediate income
supplement to coconut farmers and encourage the creation of a sustainable local
market demand for coconut oil and other coconut products.The Executive Order
sought to establish aP1-billion fund by disposing of assets acquired using coco-levy
funds or assets of entities supported by those funds.A committee was created to
manage the fund under this program.A majority vote of its members could engage
the services of a reputable auditing firm to conduct periodic audits.

At about the same time, President Estrada issued E.O. 313, which created an
irrevocable trust fund known as the Coconut Trust Fund (the Trust Fund).This aimed
to provide financial assistance to coconut farmers, to the coconut industry, and to
other agri-related programs.The shares of stock of SMC were to serve as the Trust
Funds initial capital.These shares were acquired with CII Funds and constituted
approximately 27% of the outstanding capital stock of SMC.E.O. 313 designated
UCPB, through its Trust Department, as the Trust Funds trustee bank.The Trust Fund
Committee would administer, manage, and supervise the operations of the Trust
Fund. The Committee would designate an external auditor to do an annual audit or
as often as needed but it may also request the Commission on Audit (COA) to
intervene.

To implement its mandate, E.O. 313 directed the Presidential Commission on Good
Government, the Office of the Solicitor General, and other government agencies to
exclude the 27% CIIF SMC shares from Civil Case 0033, entitled Republic of the
Philippines v. Eduardo Cojuangco, Jr., et al.,which was then pending before the
Sandiganbayan and to lift the sequestration over those shares.

On January 26, 2001, however, former President Gloria Macapagal-Arroyo ordered

the suspension of E.O.s 312 and 313. This notwithstanding, on March 1, 2001
petitioner organizations and individuals brought the present action in G.R. 147036-37
to declare E.O.s 312 and 313 as well as Article III, Section 5 of P.D. 1468
unconstitutional.On April 24, 2001 the other sets of petitioner organizations and
individuals instituted G.R. 147811 to nullify Section 2 of P.D. 755 and Article III,
Section 5 of P.D.s 961 and 1468 also for being unconstitutional.

ISSUE:

Are the coco-levy funds public funds?

Are (a) Section 2 of P.D. 755, (b)Article III, Section 5 of P.D.s 961 and 1468, (c) E.O.
312, and (d) E.O. 313 unconstitutional?
Have petitioners legal standing to bring the same to court?

HELD: Coco-levy funds are public funds. The Court was satisfied that the coco-levy
funds were raised pursuant to law to support a proper governmental purpose.They
were raised with the use of the police and taxing powers of the State for the benefit
of the coconut industry and its farmers in general. The COA reviewed the use of the
funds.The BIR treated them as public funds and the very laws governing coconut
levies recognize their public character.

The Court has also recently declared that the coco-levy funds are in the nature of
taxes and can only be used for public purpose.Taxes are enforced proportional
contributions from persons and property, levied by the State by virtue of its
sovereignty for the support of the government and for all itspublic needs. Here, the
coco-levy funds were imposed pursuant to law, namely, R.A. 6260 and P.D. 276.The
funds were collected and managed by the PCA,an independent government
corporation directly under the President.And, as the respondent public officials
pointed out, thepertinent laws used the termlevy, which meansto tax, in describing
the exaction.

R.A. 6260 and P.D. 276 did not raise money to boost the governments general funds
butto provide means for the rehabilitation and stabilization of a threatened industry,
the coconut industry, which is so affected with public interest as to be within the
police power of the State. The funds sought to support the coconut industry,one of
the main economic backbones of the country, and to secure economic benefits for
the coconut farmers and farm workers.

Lastly, the coco-levy funds are evidently special funds. Its character as such fund was
made clear by the fact that they were deposited in the PNB (then a wholly owned
government bank) and not in the Philippine Treasury.

***

The Court has already passed upon this question in Philippine Coconut Producers
Federation, Inc. (COCOFED) v. Republic of the Philippines. It held as unconstitutional
Section 2 of P.D. 755 for effectively authorizing the PCA to utilize portions of theCCS
Fundto pay the financial commitment of the farmers to acquire UCPB and to deposit
portions of the CCS Fund levies with UCPB interest free. And as there also provided,
the CCS Fund, CID Fund and like levies that PCA is authorized to collect shall be
considered as non-special or fiduciary funds to be transferred to the general fund of
the Government, meaning they shall be deemed private funds.

In any event, such declaration is void.There is ownership when a thing pertaining to a

person is completely subjected to his will in everything that is not prohibited by law
or the concurrence with the rights of another. An owner is free to exercise all
attributes ofownership: the right, among others, to possess, use and enjoy, abuse or
consume, and dispose or alienate the thing owned. The owner is free to waive all or
some of these rights in favor of others.But in the case of the coconut farmers, they
could not, individually or collectively, waive what have not been and could not be
legally imparted to them.
Section 2 of P.D. 755, Article III,Section 5of P.D. 961, and Article III, Section 5 of P.D.
1468 completely ignore the fact that coco-levy funds are public funds raised through
taxation.And since taxes could be exacted only for a public purpose, they cannot be
declared private properties of individuals although such individuals fall within a
distinct group of persons.

These assailed provisions,which removed the coco-levy funds from the general funds
of the government and declared them private properties of coconut farmers,do not
appear to have a color of social justice for their purpose.The levy on copra that
farmers produce appears, in the first place, to be a business tax judging by its tax
base.The concept of farmers-businessmen is incompatible with the idea that coconut
farmers are victims of social injustice and so should be beneficiaries of the taxes
raised from their earnings.

On another point, in stating that the coco-levy fund shall not be construed or
interpreted, under any law or regulation, as special and/or fiduciary funds, or as part
of the general funds of the national government,P.D.s 961 and 1468 seek to remove
such fund from COA scrutiny.

This is also the fault of President Estradas E.O. 312 which deals with P1 billion to be
generated out of the sale of coco-fund acquired assets.E.O. 313 has a substantially
identical provision governing the management and disposition of the Coconut Trust
Fund capitalized with the substantial SMC shares of stock that the coco-fund
acquired.

But, since coco-levy funds are taxes, the provisions of P.D.s755,961 and 1468 as well
as those of E.O.s 312 and 313 that remove such funds and the assets acquired
through them from the jurisdiction of the COA violate Article IX-D, Section 2(1) of the
1987 Constitution.Section 2(1) vests in the COA the power and authority to examine
uses of government money and property.The cited P.D.s and E.O.s also contravene
Section 2 of P.D. 898 (Providing for the Restructuring of the Commission on Audit),
which has the force of a statute.And there is no legitimate reason why such funds
should be shielded from COA review and audit.The PCA, which implements the coco-
levy laws and collects the coco-levy funds, is a government-owned and controlled
corporation subject to COA review and audit.

E.O. 313 suffers from an additional infirmity.Apparently, it intends to create a trust

fund out of the coco-levy funds to provide economic assistance to the coconut
farmers and, ultimately, benefit the coconut industry.But on closer look, E.O. 313
strays from the special purpose for which the law raises coco-levy funds in that it
permits the use of coco-levy funds for improving productivity in other food areas.

Clearly, E.O.313 above runs counter to the constitutional provision which directs
thatall money collected on any tax levied for a special purpose shall be treated as a
special fund and paid out for such purpose only.Assisting other agriculturally-related
programs is way off the coco-funds objective of promoting the general interests of
the coconut industry and its farmers.

A final point,the E.O.s also transgress P.D. 1445,Section 84(2),the first part by the
previously mentioned sections of E.O. 313 and the second part by Section 4 of E.O.
312 and Sections 6 and 7 of E.O. 313.E.O. 313 vests the power to administer,
manage, and supervise the operations and disbursements of the Trust Fund it
established (capitalized with SMC shares bought out of coco-levy funds) in a Coconut
Trust Fund Committee.

Section 4 ofE.O. 312 does essentially the same thing.It vests the management and
disposition of the assistance fund generated from the sale of coco-levy fund-acquired
assets into a Committee of five members.

In effect, the provision transfers the power to allocate, use, and disburse coco-levy
funds that P.D. 232 vested in the PCA and transferred the same, without legislative
authorization and in violation of P.D. 232, to the Committees mentioned above.An
executive order cannot repeal a presidential decree which has the same standing as
a statute enacted by Congress.

***

The Court has to uphold petitioners right to institute these petitions.The petitioner
organizations in these cases represent coconut farmers on whom the burden of the
coco-levies attaches.It is also primarily for their benefit that the levies were imposed.

The individual petitioners, on the other hand, join the petitions as taxpayers.The
Court recognizes their right to restrain officials from wasting public funds through
the enforcement of an unconstitutional statute.This so-called taxpayers suit is based
on the theory that expenditure of public funds for the purpose of executing an
unconstitutional act is a misapplication of such funds.

The petition in G.R.147036-37 is granted; The petition in G.R. 147811 is partially

granted; the following are declared void: a) E.O. 312; and b)E.O. 313.

Section 2 of P.D. 755 and Article III, Section 5 of P.D.s 961 and 1468 have been
previously unconstitutional.

EN BANC
 
Petitioner-Organizations, namely: G.R. Nos. 147036-37
PAMBANSANG KOALISYON NG MGA
SAMAHANG MAGSASAKA AT MANGGAGAWA
SA NIYUGAN (PKSMMN), COCONUT INDUSTRY
REFORM MOVEMENT (COIR), BUKLOD NG
MALAYANG MAGBUBUKID, PAMBANSANG
KILUSAN NG MGA SAMAHANG MAGSASAKA
(PAKISAMA), CENTER FOR AGRARIAN REFORM,
EMPOWERMENT AND TRANSFORMATION
(CARET), PAMBANSANG KATIPUNAN NG MGA
SAMAHAN SA KANAYUNAN (PKSK); Petitioner-
Legislator: REPRESENTATIVE LORETA ANN
ROSALES; and Petitioner-Individuals, namely:
VIRGILIO V. DAVID, JOSE MARIE FAUSTINO,
JOSE CONCEPCION, ROMEO ROYANDOYAN,
JOSE V. ROMERO, JR., ATTY. CAMILO L.
SABIO, and ATTY. ANTONIO T. CARPIO,
Petitioners, Present:
CORONA, C.J.,
CARPIO,
VELASCO, JR.,
LEONARDO-DE CASTRO,
BRION,
- versus - PERALTA,
BERSAMIN,
DEL CASTILLO,
ABAD,
VILLARAMA, JR.,
PEREZ,
MENDOZA,
SERENO,
REYES, and
PERLAS-BERNABE, JJ.
EXECUTIVE SECRETARY, SECRETARY OF
AGRICULTURE, SECRETARY OF AGRARIAN
REFORM, PRESIDENTIAL COMMISSION ON
GOOD GOVERNMENT, THE SOLICITOR
GENERAL, PHILIPPINE COCONUT PRODUCERS
FEDERATION, INC. (COCOFED), and UNITED
COCONUT PLANTERS BANK (UCPB),
Respondents.
x ------------------------------------------------------ x
 
TEODORO J. AMOR, representing the Peasant G.R. No. 147811
Alliance of Samar and Leyte (PASALEY),
DOMINGO C. ENCALLADO, representing
Aniban ng Magsasaka at Manggagawa sa Niyugan
(AMMANI), and VIDAL M. PILIIN, representing
the Laguna Coalition,
Petitioners,
 
- versus -
 
EXECUTIVE SECRETARY, SECRETARY OF
AGRICULTURE, SECRETARY OF AGRARIAN
REFORM, PRESIDENTIAL COMMISSION ON
GOOD GOVERNMENT, THE SOLICITOR
GENERAL, PHILIPPINE COCONUT
PRODUCERS FEDERATION, UNITED Promulgated:
COCONUT PLANTERS BANK,
Respondents. April 10, 2012
 
x ---------------------------------------------------------------------------------------- x
 
DECISION
 
ABAD, J.:
 
 
These are consolidated petitions to declare unconstitutional certain presidential
decrees and executive orders of the martial law era relating to the raising and use
of coco-levy funds.
 
The Facts and the Case
 
On June 19, 1971 Congress enacted Republic Act (R.A.) 6260[1] that established a
Coconut Investment Fund (CI Fund) for the development of the coconut industry
through capital financing.[2]Coconut farmers were to capitalize and administer the
Fund through the Coconut Investment Company (CIC)[3] whose objective was,
among others, to advance the coconut farmers interests. For this purpose, the law
imposed a levy of P0.55 on the coconut farmers first domestic sale of every 100
kilograms of copra, or its equivalent, for which levy he was to get a receipt
convertible into CIC shares of stock.[4]
 
About a year following his proclamation of martial law in the country or on August
20, 1973 President Ferdinand E. Marcos issued Presidential Decree (P.D.) 276,
[5]
 which established a Coconut Consumers Stabilization Fund (CCS Fund), to
address the crisis at that time in the domestic market for coconut-based consumer
goods. The CCS Fund was to be built up through the imposition of a P15.00-levy
for every first sale of 100 kilograms of copra resecada.[6] The levy was to cease
after a year or earlier provided the crisis was over. Any remaining balance of the
Fund was to revert to the CI Fund established under R.A. 6260.[7]
 
A year later or on November 14, 1974 President Marcos issued P.D. 582,[8] creating
a permanent fund called the Coconut Industry Development Fund (CID Fund) to
channel for the ultimate direct benefit of coconut farmers part of the levies that
they were already paying. The Philippine Coconut Authority (PCA) was to
provide P100 million as initial capital of the CID Fund and, thereafter, give the
Fund at least P0.20 per kilogram of copra resecada out of the PCAs collection of
coconut consumers stabilization levy. In case of the lifting of this levy, the PCA
was then to impose a permanent levy of P0.20 on the first sale of every kilogram of
copra to form part of the CID Fund.[9] Also, under P.D. 582, the Philippine
National Bank (PNB), then owned by the Government, was to receive on deposit,
administer, and use the CID Fund.[10] P.D. 582 authorized the PNB to invest the
unused portion of the CID Fund in easily convertible investments, the earnings of
which were to form part of the Fund.[11]
In 1975 President Marcos enacted P.D. 755[12] which approved the acquisition of a
commercial bank for the benefit of the coconut farmers to enable such bank to
promptly and efficiently realize the industrys credit policy.[13] Thus, the PCA
bought 72.2% of the shares of stock of First United Bank, headed
by Pedro Cojuangco.[14] Due to changes in its corporate identity and purpose, the
banks articles of incorporation were amended in July 1975, resulting in a change in
the banks name from First United Bank to United Coconut Planters Bank (UCPB).
[15]

 
On July 14, 1976 President Marcos enacted P.D. 961,[16] the Coconut Industry
Code, which consolidated and codified existing laws relating to the coconut
industry. The Code provided that surpluses from the CCS Fund and the CID Fund
collections, not used for replanting and other authorized purposes, were to be
invested by acquiring shares of stock of corporations, including the San Miguel
Corporation (SMC), engaged in undertakings related to the coconut and palm oil
industries.[17] UCPB was to make such investments and equitably distribute these
for free to coconut farmers.[18]These investments constituted the Coconut Industry
Investment Fund (CIIF). P.D. 961 also provided that the coconut levy funds (coco-
levy funds) shall be owned by the coconut farmers in their private capacities.
[19]
 This was reiterated in the PD 1468[20] amendment of June 11, 1978.
 
In 1980, President Marcos issued P.D. 1699,[21] suspending the collections of the
CCS Fund and the CID Fund. But in 1981 he issued P.D. 1841[22] which revived
the collection of coconut levies. P.D. 1841 renamed the CCS Fund into the
Coconut Industry Stabilization Fund (CIS Fund).[23] This Fund was to be earmarked
proportionately among several development programs, such as coconut hybrid
replanting program, insurance coverage for the coconut farmers, and scholarship
program for their children.[24]
 
In November 2000 then President Joseph Estrada issued Executive Order (E.O.)
312,[25] establishing a Sagip Niyugan Program which sought to provide immediate
income supplement to coconut farmers and encourage the creation of a sustainable
local market demand for coconut oil and other coconut products.[26] The Executive
Order sought to establish a P1-billion fund by disposing of assets acquired using
coco-levy funds or assets of entities supported by those funds.[27] A committee was
created to manage the fund under this program.[28] A majority vote of its members
could engage the services of a reputable auditing firm to conduct periodic audits.[29]
 
At about the same time, President Estrada issued E.O. 313,[30] which created an
irrevocable trust fund known as the Coconut Trust Fund (the Trust Fund). This
aimed to provide financial assistance to coconut farmers, to the coconut industry,
and to other agri-related programs.[31] The shares of stock of SMC were to serve as
the Trust Funds initial capital.[32] These shares were acquired with CII Funds and
constituted approximately 27% of the outstanding capital stock of SMC. E.O. 313
designated UCPB, through its Trust Department, as the Trust Funds trustee
bank. The Trust Fund Committee would administer, manage, and supervise the
operations of the Trust Fund.[33] The Committee would designate an external
auditor to do an annual audit or as often as needed but it may also request the
Commission on Audit (COA) to intervene.[34]
To implement its mandate, E.O. 313 directed the Presidential Commission on
Good Government, the Office of the Solicitor General, and other government
agencies to exclude the 27% CIIF SMC shares from Civil Case 0033,
entitled Republic of the Philippines v. Eduardo Cojuangco, Jr., et al., which was
then pending before the Sandiganbayan and to lift the sequestration over those
shares.[35]
 
On January 26, 2001, however, former President Gloria Macapagal-Arroyo
ordered the suspension of E.O.s 312 and 313.[36] This notwithstanding, on March 1,
2001 petitioner organizations and individuals brought the present action in G.R.
147036-37 to declare E.O.s 312 and 313 as well as Article III, Section 5 of P.D.
1468 unconstitutional. On April 24, 2001 the other sets of petitioner organizations
and individuals instituted G.R. 147811 to nullify Section 2 of P.D. 755 and Article
III, Section 5 of P.D.s 961 and 1468 also for being unconstitutional.
 
The Issues Presented
 
The parties submit the following issues for adjudication:
 
Procedurally
 
1. Whether or not petitioners special civil actions of certiorari under Rule 65
constituted the proper remedy for their actions; and
2. Whether or not petitioners have legal standing to bring the same to court.
 
On the substance
 
3. Whether or not the coco-levy funds are public funds; and
 
 4. Whether or not (a) Section 2 of P.D. 755, (b) Article III, Section 5 of
P.D.s 961 and 1468, (c) E.O. 312, and (d) E.O. 313 are unconstitutional.
 
The Rulings of the Court
 
First. UCPB questions the propriety of the present petitions
for certiorari and mandamus under Rule 65 on the ground that there are no
ongoing proceedings in any tribunal or board or before a government official
exercising judicial, quasi-judicial, or ministerial functions.[37] UCPB insists that the
Court exercises appellate jurisdiction with respect to issues of constitutionality or
validity of laws and presidential orders.[38]
 
But, as the Court previously held, where there are serious allegations that a
law has infringed the Constitution, it becomes not only the right but the duty of the
Court to look into such allegations and, when warranted, uphold the supremacy of
the Constitution.[39] Moreover, where the issues raised are of paramount importance
to the public, as in this case, the Court has the discretion to brush aside
technicalities of procedure.[40]
 
Second. The Court has to uphold petitioners right to institute these
petitions. The petitioner organizations in these cases represent coconut farmers on
whom the burden of the coco-levies attaches. It is also primarily for their benefit
that the levies were imposed.
 
The individual petitioners, on the other hand, join the petitions as
taxpayers. The Court recognizes their right to restrain officials from wasting public
funds through the enforcement of an unconstitutional statute.[41] This so-called
taxpayers suit is based on the theory that expenditure of public funds for the
purpose of executing an unconstitutional act is a misapplication of such funds.[42]
 
Besides, the 1987 Constitution accords to the citizens a greater participation
in the affairs of government. Indeed, it provides for people's initiative, the right to
information on matters of public concern (including the right to know the state of
health of their President), as well as the right to file cases questioning the factual
bases for the suspension of the privilege of writ of habeas corpus or declaration of
martial law. These provisions enlarge the peoples right in the political as well as
the judicial field. It grants them the right to interfere in the affairs of government
and challenge any act tending to prejudice their interest.
 
Third. For some time, different and conflicting notions had been formed as
to the nature and ownership of the coco-levy funds. The Court, however, finally
put an end to the dispute when it categorically ruled in Republic of the Philippines
v. COCOFED[43] that these funds are not only affected with public interest; they
are, in fact, prima facie public funds. Prima facie means a fact presumed to be true
unless disproved by some evidence to the contrary.[44]
 
The Court was satisfied that the coco-levy funds were raised pursuant to law
to support a proper governmental purpose. They were raised with the use of the
police and taxing powers of the State for the benefit of the coconut industry and its
farmers in general. The COA reviewed the use of the funds. The Bureau of Internal
Revenue (BIR) treated them as public funds and the very laws governing coconut
levies recognize their public character.[45]
 
The Court has also recently declared that the coco-levy funds are in the
nature of taxes and can only be used for public purpose.[46] Taxes are enforced
proportional contributions from persons and property, levied by the State by virtue
of its sovereignty for the support of the government and for all its public needs.
[47]
 Here, the coco-levy funds were imposed pursuant to law, namely, R.A. 6260
and P.D. 276. The funds were collected and managed by the PCA, an independent
government corporation directly under the President.[48] And, as the respondent
public officials pointed out, the pertinent laws used the term levy,[49] which
means to tax,[50] in describing the exaction.
 
Of course, unlike ordinary revenue laws, R.A. 6260 and P.D. 276 did not
raise money to boost the governments general funds but to provide means for the
rehabilitation and stabilization of a threatened industry, the coconut industry,
which is so affected with public interest as to be within the police power of the
State.[51] The funds sought to support the coconut industry, one of the main
economic backbones of the country, and to secure economic benefits for the
coconut farmers and farm workers. The subject laws are akin to the sugar liens
imposed by Sec. 7(b) of P.D. 388,[52] and the oil price stabilization funds under
P.D. 1956,[53] as amended by E.O. 137.[54]
 
Respondent UCPB suggests that the coco-levy funds are closely similar to
the Social Security System (SSS) funds, which have been declared to be not public
funds but properties of the SSS members and held merely in trust by the
government.[55] But the SSS Law[56] collects premium contributions. It does not
collect taxes from members for a specific public purpose. They pay contributions
in exchange for insurance protection and benefits like loans, medical or health
services, and retirement packages. The benefits accrue to every SSS member, not
to the public, in general.[57]
 
Furthermore, SSS members do not lose ownership of their
contributions. The government merely holds these in trust, together with his
employers contribution, to answer for his future benefits.[58] The coco-levy funds,
on the other hand, belong to the government and are subject to its administration
and disposition. Thus, these funds, including its incomes, interests, proceeds, or
profits, as well as all its assets, properties, and shares of stocks procured with such
funds must be treated, used, administered, and managed as public funds.[59]
 
Lastly, the coco-levy funds are evidently special funds. In Gaston v.
Republic Planters Bank,[60] the Court held that the State collected stabilization fees
from sugar millers, planters, and producers for a special purpose: to finance the
growth and development of the sugar industry and all its components. The fees
were levied for a special purpose and, therefore, constituted special fund when
collected. Its character as such fund was made clear by the fact that they were
deposited in the PNB (then a wholly owned government bank) and not in the
Philippine Treasury. In Osmea v. Orbos,[61] the Court held that the oil price
stabilization fund was a special fund mainly because this was segregated from the
general fund and placed in what the law referred to as a trust account. Yet it
remained subject to COA scrutiny and review. The Court finds no substantial
distinction between these funds and the coco-levy funds, except as to the industry
they each support.
 
Fourth. Petitioners in G.R. 147811 assert that Section 2 of P.D. 755 above
is void and unconstitutional for disregarding the public character of coco-levy
funds. The subject section provides:
 
 Section 2.  Financial Assistance. x x x and since the operations,
and activities of the Philippine Coconut Authority are all in accord with
the present social economic plans and programs of the Government, all
collections and levies which the Philippine Coconut Authority is
authorized to levy and collect such as but not limited to the Coconut
Consumers Stabilization Levy, and the Coconut Industry Development
Fund as prescribed by Presidential Decree No. 582 shall not be
considered or construed, under any law or regulation, special and/or
fiduciary funds and do not form part of the general funds of the
national government within the contemplation of Presidential Decree
No. 711. (Emphasis ours)
 
The Court has, however, already passed upon this question in Philippine
Coconut Producers Federation, Inc. (COCOFED) v. Republic of the Philippines.
[62]
 It held as unconstitutional Section 2 of P.D. 755 for effectively authorizing the
PCA to utilize portions of the CCS Fund to pay the financial commitment of the
farmers to acquire UCPB and to deposit portions of the CCS Fund levies with
UCPB interest free. And as there also provided, the CCS Fund, CID Fund and like
levies that PCA is authorized to collect shall be considered as non-special or
fiduciary funds to be transferred to the general fund of the Government, meaning
they shall be deemed private funds.
 
Identical provisions of subsequent presidential decrees likewise declared
coco-levy funds private properties of coconut farmers. Article III, Section 5 of P.D.
961 reads:
 
Section 5.  Exemptions.  The Coconut Consumers Stabilization
Fund and the Coconut Industry Development Fund as well as all
disbursements of said funds for the benefit of the coconut farmers as
herein authorized shall not be construed or interpreted, under any
law or regulation, as special and/or fiduciary funds, or as part of the
general funds of the national government within the contemplation of
P.D. No. 711; nor as a subsidy, donation, levy, government funded
investment, or government share within the contemplation of P.D.
898, the intention being that said Fund and the disbursements
thereof as herein authorized for the benefit of the coconut farmers
shall be owned by them in their own private capacities. (Emphasis
ours)
 
 Section 5 of P.D. 1468 basically reproduces the above provision, thus
 
Section 5.  Exemption. The Coconut Consumers Stabilization
Fund and the Coconut Industry Development Fund, as well as all
disbursements as herein authorized, shall not be construed or
interpreted, under any law or regulation, as special and/or fiduciary
funds, or as part of the general funds of the national
government within the contemplation of P.D. 711; nor as subsidy,
donation, levy government funded investment, or government share
within the contemplation of P.D. 898, the intention being that said
Fund and the disbursements thereof as herein authorized for the
benefit of the coconut farmers shall be owned by them in their
private capacities: Provided, however, That the President may at any
time authorize the Commission on Audit or any other officer of the
government to audit the business affairs, administration, and condition of
persons and entities who receive subsidy for coconut-based consumer
products x x x. (Emphasis ours) 
 
Notably, the raising of money by levy on coconut farm production, a form of
taxation as already stated, began in 1971 for the purpose of developing the coconut
industry and promoting the interest of coconut farmers. The use of the fund was
expanded in 1973 to include the stabilization of the domestic market for coconut-
based consumer goods and in 1974 to divert part of the funds for obtaining direct
benefit to coconut farmers. After five years or in 1976, however, P.D. 961 declared
the coco-levy funds private property of the farmers. P.D. 1468 reiterated this
declaration in 1978. But neither presidential decree actually turned over possession
or control of the funds to the farmers in their private capacity. The government
continued to wield undiminished authority over the management and disposition of
those funds.
 
In any event, such declaration is void. There is ownership when a thing
pertaining to a person is completely subjected to his will in everything that is not
prohibited by law or the concurrence with the rights of another.[63]  An owner is
free to exercise all attributes of ownership: the right, among others, to possess, use
and enjoy, abuse or consume, and dispose or alienate the thing owned.[64] The
owner is of course free to waive all or some of these rights in favor of others. But
in the case of the coconut farmers, they could not, individually or collectively,
waive what have not been and could not be legally imparted to them.
  
Section 2 of P.D. 755, Article III, Section 5 of P.D. 961, and Article III,
Section 5 of P.D. 1468 completely ignore the fact that coco-levy funds are public
funds raised through taxation. And since taxes could be exacted only for a public
purpose, they cannot be declared private properties of individuals although such
individuals fall within a distinct group of persons.[65]  
 
The Court of course grants that there is no hard-and-fast rule for determining
what constitutes public purpose.  It is an elastic concept that could be made to fit
into modern standards.  Public purpose, for instance, is no longer restricted to
traditional government functions like building roads and school houses or
safeguarding public health and safety. Public purpose has been construed as
including the promotion of social justice.  Thus, public funds may be used for
relocating illegal settlers, building low-cost housing for them, and financing both
urban and agrarian reforms that benefit certain poor individuals. Still, these uses
relieve volatile iniquities in society and, therefore, impact on public order and
welfare as a whole.
 
But the assailed provisions, which removed the coco-levy funds from the
general funds of the government and declared them private properties of coconut
farmers, do not appear to have a color of social justice for their purpose. The levy
on copra that farmers produce appears, in the first place, to be a business tax
judging by its tax base. The concept of farmers-businessmen is incompatible with
the idea that coconut farmers are victims of social injustice and so should be
beneficiaries of the taxes raised from their earnings.
 
It would altogether be different of course if the laws mentioned set apart a
portion of the coco-levy fund for improving the lives of destitute coconut farm
owners or workers for their social amelioration to establish a proper government
purpose. The support for the poor is generally recognized as a public duty and has
long been an accepted exercise of police power in the promotion of the common
good.[66] But the declarations do not distinguish between wealthy coconut farmers
and the impoverished ones. And even if they did, the Government cannot just
embark on a philanthropic orgy of inordinate dole-outs for motives political or
otherwise.[67] Consequently, such declarations are void since they appropriate
public funds for private purpose and, therefore, violate the citizens right to
substantive due process.[68]
On another point, in stating that the coco-levy fund shall not be construed or
interpreted, under any law or regulation, as special and/or fiduciary funds, or as
part of the general funds of the national government, P.D.s 961 and 1468 seek to
remove such fund from COA scrutiny.
 
This is also the fault of President Estradas E.O. 312 which deals with P1
billion to be generated out of the sale of coco-fund acquired assets. Thus
 
Section 5.  Audit of Fund and Submission of Report.  The
Committee, by a majority vote, shall engage the services of a reputable
auditing firm to conduct periodic audits of the fund.  It shall render a
quarterly report on all pertinent transactions and availments of the fund
to the Office of the President within the first three (3) working days of
the succeeding quarter. (Emphasis ours)
 
E.O. 313 has a substantially identical provision governing the management
and disposition of the Coconut Trust Fund capitalized with the substantial SMC
shares of stock that the coco-fund acquired. Thus
 
Section 13.  Accounting. x x x
 
The Fund shall be audited annually or as often as necessary by
an external auditor designated by the Committee. The
Committee may also request the Commission on Audit to conduct an
audit of the Fund. (Emphasis ours)
 
But, since coco-levy funds are taxes, the provisions of P.D.s 755, 961 and
1468 as well as those of E.O.s 312 and 313 that remove such funds and the assets
acquired through them from the jurisdiction of the COA violate Article IX-D,
Section 2(1)[69] of the 1987 Constitution. Section 2(1) vests in the COA the power
and authority to examine uses of government money and property. The cited P.D.s
and E.O.s also contravene Section 2[70] of P.D. 898 (Providing for the Restructuring
of the Commission on Audit), which has the force of a statute.
 
 And there is no legitimate reason why such funds should be shielded from
COA review and audit. The PCA, which implements the coco-levy laws and
collects the coco-levy funds, is a government-owned and controlled corporation
subject to COA review and audit.
 
E.O. 313 suffers from an additional infirmity. Its title, Rationalizing the Use
of the Coconut Levy Funds by Constituting a Fund for Assistance to Coconut
Farmers as an Irrevocable Trust Fund and Creating a Coconut Trust Fund
Committee for the Management thereof tends to mislead. Apparently, it intends to
create a trust fund out of the coco-levy funds to provide economic assistance to the
coconut farmers and, ultimately, benefit the coconut industry.[71] But on closer
look, E.O. 313 strays from the special purpose for which the law raises coco-levy
funds in that it permits the use of coco-levy funds for improving productivity in
other food areas. Thus:
 
Section 2.  Purpose of the Fund. The Fund shall be established for
the purpose of financing programs of assistance for the benefit of the
coconut farmers, the coconut industry, and other agri-related
programs intended to maximize food productivity, develop business
opportunities in the countryside, provide livelihood alternatives, and
promote anti-poverty programs. (Emphasis ours)
 
xxxx
 
Section 9.  Use and Disposition of the Trust Income. The Coconut
Trust Fund Committee, on an annual basis, shall determine and establish
the amount comprising the Trust Income. After such determination, the
Committee shall earmark, allocate and disburse the Trust Income for the
following purposes, namely:
 
xxxx
 
(d) Thirty percent (30%) of the Trust Income shall be used to
assist and fund agriculturally-related programs for the Government,
as reasonably determined by the Trust Fund Committee, implemented
for the purpose of: (i) maximizing food productivity in the agriculture
areas of the country, (ii) enhancing the upliftment and well-being of the
living conditions of farmers and agricultural workers, (iii) developing
viable industries and business opportunities in the countryside, (iv)
 providing alternative means of livelihood to the direct dependents of
agriculture businesses and enterprises, and (v) providing financial
assistance and support to coconut farmers in times of economic hardship
due to extremely low prices of copra and other coconut products, natural
calamities, world market dislocation and similar occurrences, including
financial support to the ERAPs Sagip Niyugan Program established
under Executive Order No. 312 dated November 3, 2000; x x x.
(Emphasis ours)
 
Clearly, E.O. 313 above runs counter to the constitutional provision which
directs that all money collected on any tax levied for a special purpose shall be
treated as a special fund and paid out for such purpose only.[72] Assisting other
agriculturally-related programs is way off the coco-funds objective of promoting
the general interests of the coconut industry and its farmers.
 
A final point, the E.O.s also transgress P.D. 1445,[73] Section 84(2),[74] the
first part by the previously mentioned sections of E.O. 313 and the second part by
Section 4 of E.O. 312 and Sections 6 and 7 of E.O. 313. E.O. 313 vests the power
to administer, manage, and supervise the operations and disbursements of the Trust
Fund it established (capitalized with SMC shares bought out of coco-levy funds) in
a Coconut Trust Fund Committee. Thus
 
Section 6.  Creation of the Coconut Trust Fund Committee. A
Committee is hereby created to administer, manage and supervise
the operations of the Trust Fund, chaired by the President with ten
(10) members, as follows:
 
(a) four (4) representatives from the government sector,
two of whom shall be the Secretary of Agriculture and the
Secretary of Agrarian Reform who shall act as Vice
Chairmen;
(b) four (4) representatives from coconut farmers
organizations, one of whom shall come from a list of
nominees from the Philippine Coconut Producers
Federation Inc. (COCOFED); 
(c) a representative from the CIIF; and
(d) a representative from a non-government organization
(NGO) involved in agricultural and rural development.
 All decisions of the Coconut Trust Fund Committee shall be determined
by a majority vote of all the members.  
 
The Coconut Trust Fund Committee shall perform the functions and
duties set forth in Section 7 hereof, with the skill, care, prudence and
diligence necessary under the circumstances then prevailing that a
prudent man acting in like capacity would exercise.

The members of the Coconut Trust Fund Committee shall be appointed

by the President and shall hold office at his pleasure.

The Coconut Trust Fund Committee is authorized to hire administrative,

technical and/or support staff as may be required to enable it to
effectively perform its functions and responsibilities. (Emphasis ours)
 
Section 7.  Functions and Responsibilities of the Committee. The
Coconut Trust Fund Committee shall have the following functions and
responsibilities:
(a) set the investment policy of the Trust Fund;
(b) establish priorities for assistance giving preference to small
coconut farmers and farmworkers which shall be reviewed
periodically and revised as necessary in accordance with changing
conditions; 
(c) receive, process and approve project proposals for financing
by the Trust Fund;
(d) decide on the use of the Trust Funds income or net
earnings including final action on applications for assistance,
grants and/or loans;
(e) avail of professional counsel and services by retaining an
investment and financial manager, if desired;
(f) formulate the rules and regulations governing the
allocation, utilization and disbursement of the Fund; and
(g) perform such other acts and things as may be necessary proper
or conducive to attain the purposes of the Fund. (Emphasis ours)
 
Section 4 of E.O. 312 does essentially the same thing. It vests the
management and disposition of the assistance fund generated from the sale of
coco-levy fund-acquired assets into a Committee of five members. Thus, Section 4
of E.O. 312 provides
  
Section 4.  Funding.  Assets acquired through the coconut levy
funds or by entities financed by the coconut levy funds identified by the
President for appropriate disposal or sale, shall be sold or disposed to
generate a maximum fund of ONE BILLION PESOS
(P1,000,000,000.00) which shall be managed by a Committee
composed of a Chairman and four (4) members to be appointed by
the President whose term shall be co-terminus with the Program.  x
x x (Emphasis ours)
 
In effect, the above transfers the power to allocate, use, and disburse coco-
levy funds that P.D. 232 vested in the PCA and transferred the same, without
legislative authorization and in violation of P.D. 232, to the Committees mentioned
above. An executive order cannot repeal a presidential decree which has the same
standing as a statute enacted by Congress.
UCPB invokes the principle of separability to save the assailed laws from
being struck down. The general rule is that where part of a statute is void as
repugnant to the Constitution, while another part is valid, the valid portion, if
susceptible to being separated from the invalid, may stand and be enforced. When
the parts of a statute, however, are so mutually dependent and connected, as
conditions, considerations, or compensations for each other, as to warrant a belief
that the legislature intended them as a whole, the nullity of one part will vitiate the
rest. In which case, if some parts are unconstitutional, all the other provisions
which are thus dependent, conditional, or connected must consequently fall with
them.[75]
 
But, given that the provisions of E.O.s 312 and 313, which as already stated
invalidly transferred powers over the funds to two committees that President
Estrada created, the rest of their provisions became non-operational. It is evident
that President Estrada would not have created the new funding programs if they
were to be managed by some other entity. Indeed, he made himself Chairman of
the Coconut Trust Fund and left to his discretion the appointment of the members
of the other committee.
 
WHEREFORE, the Court GRANTS the petition in G.R. 147036-
37, PARTLY GRANTS the petition in G.R. 147811, and declares the
following VOID:
  
a) E.O. 312, for being repugnant to Section 84(2) of P.D. 1445,
and Article IX-D, Section 2(1) of the Constitution; and
 
b) E.O. 313, for being in contravention of Section 84(2) of P.D.
1445, and Article IX-D, Section 2(1) and Article VI, Section 29(3) of
the Constitution.
 
The Court has previously declared Section 2 of P.D. 755 and Article III,
Section 5 of P.D.s 961 and 1468 unconstitutional.
 
SO ORDERED.
 
G.R. No. 120082 September 11, 1996

MACTAN CEBU INTERNATIONAL AIRPORT AUTHORITY, petitioner, 

vs.
HON. FERDINAND J. MARCOS, in his capacity as the Presiding Judge of the Regional Trial
Court, Branch 20, Cebu City, THE CITY OF CEBU, represented by its Mayor HON. TOMAS R.
OSMEÑA, and EUSTAQUIO B. CESA, respondents.

DAVIDE, JR., J.:

For review under Rule 45 of the Rules of Court on a pure question of law are the decision of
22 March 1995 of the Regional Trial Court (RTC) of Cebu City, Branch 20, dismissing the
1

petition for declaratory relief in Civil Case No. CEB-16900 entitled "Mactan Cebu
International Airport Authority vs. City of Cebu", and its order of 4, May 1995  denying the
2

motion to reconsider the decision.

We resolved to give due course to this petition for its raises issues dwelling on the scope of
the taxing power of local government-owned and controlled corporations.

The uncontradicted factual antecedents are summarized in the instant petition as follows:

Petitioner Mactan Cebu International Airport Authority (MCIAA) was created by virtue
of Republic Act No. 6958, mandated to "principally undertake the economical,
efficient and effective control, management and supervision of the Mactan
International Airport in the Province of Cebu and the Lahug Airport in Cebu City, . . .
and such other Airports as may be established in the Province of Cebu . . . (Sec. 3,
RA 6958). It is also mandated to:
 a) encourage, promote and develop international and
domestic air traffic in the Central Visayas and
Mindanao regions as a means of making the regions
centers of international trade and tourism, and
accelerating the development of the means of
transportation and communication in the country; and

b) upgrade the services and facilities of the airports

and to formulate internationally acceptable standards
of airport accommodation and service.

Since the time of its creation, petitioner MCIAA enjoyed the privilege of exemption
from payment of realty taxes in accordance with Section 14 of its Charter.

Sec. 14. Tax Exemptions. — The authority shall be exempt from

realty taxes imposed by the National Government or any of its
political subdivisions, agencies and instrumentalities . . .

On October 11, 1994, however, Mr. Eustaquio B. Cesa, Officer-in-Charge, Office of

the Treasurer of the City of Cebu, demanded payment for realty taxes on several
parcels of land belonging to the petitioner (Lot Nos. 913-G, 743, 88 SWO, 948-A,
989-A, 474, 109(931), I-M, 918, 919, 913-F, 941, 942, 947, 77 Psd., 746 and 991-A),
located at Barrio Apas and Barrio Kasambagan, Lahug, Cebu City, in the total
amount of P2,229,078.79.

Petitioner objected to such demand for payment as baseless and unjustified,

claiming in its favor the aforecited Section 14 of RA 6958 which exempt it from
payment of realty taxes. It was also asserted that it is an instrumentality of the
government performing governmental functions, citing section 133 of the Local
Government Code of 1991 which puts limitations on the taxing powers of local
government units:

Sec. 133. Common Limitations on the Taxing Powers of Local

Government Units. — Unless otherwise provided herein, the exercise
of the taxing powers of provinces, cities, municipalities, and barangay
shall not extend to the levy of the following:

a) . . .

x x x           x x x          x x x

o) Taxes, fees or charges of any kind on the National

Government, its agencies and instrumentalities, and
local government units. (Emphasis supplied)

Respondent City refused to cancel and set aside petitioner's realty tax account,
insisting that the MCIAA is a government-controlled corporation whose tax exemption
privilege has been withdrawn by virtue of Sections 193 and 234 of the Local
Governmental Code that took effect on January 1, 1992:
 Sec. 193. Withdrawal of Tax Exemption Privilege. — Unless otherwise provided in
this Code, tax exemptions or incentives granted to, or presently enjoyed by all
persons whether natural or juridical, including government-owned or controlled
corporations, except local water districts, cooperatives duly registered under RA No.
6938, non-stock, and non-profit hospitals and educational institutions, are hereby
withdrawn upon the effectivity of this Code. (Emphasis supplied)

xxx xxx xxx

Sec. 234. Exemptions from Real Property taxes. — . . .

(a) . . .

x x x           x x x          x x x

(c) . . .

Except as provided herein, any exemption from payment of real

property tax previously granted to, or presently enjoyed by all
persons, whether natural or juridical, including government-owned or
controlled corporations are hereby withdrawn upon the effectivity of
this Code.

As the City of Cebu was about to issue a warrant of levy against the properties of
petitioner, the latter was compelled to pay its tax account "under protest" and
thereafter filed a Petition for Declaratory Relief with the Regional Trial Court of Cebu,
Branch 20, on December 29, 1994. MCIAA basically contended that the taxing
powers of local government units do not extend to the levy of taxes or fees of any
kind on an instrumentality of the national government. Petitioner insisted that while it
is indeed a government-owned corporation, it nonetheless stands on the same
footing as an agency or instrumentality of the national government. Petitioner insisted
that while it is indeed a government-owned corporation, it nonetheless stands on the
same footing as an agency or instrumentality of the national government by the very
nature of its powers and functions.

Respondent City, however, asserted that MACIAA is not an instrumentality of the

government but merely a government-owned corporation performing proprietary
functions As such, all exemptions previously granted to it were deemed withdrawn by
operation of law, as provided under Sections 193 and 234 of the Local Government
Code when it took effect on January 1, 1992. 3

The petition for declaratory relief was docketed as Civil Case No. CEB-16900.

In its decision of 22 March 1995,  the trial court dismissed the petition in light of its findings,
4

to wit:

A close reading of the New Local Government Code of 1991 or RA 7160 provides
the express cancellation and withdrawal of exemption of taxes by government owned
and controlled corporation per Sections after the effectivity of said Code on January
1, 1992, to wit: [proceeds to quote Sections 193 and 234]
 Petitioners claimed that its real properties assessed by respondent City Government
of Cebu are exempted from paying realty taxes in view of the exemption granted
under RA 6958 to pay the same (citing Section 14 of RA 6958).

However, RA 7160 expressly provides that "All general and special laws, acts, city
charters, decress [sic], executive orders, proclamations and administrative
regulations, or part or parts thereof which are inconsistent with any of the provisions
of this Code are hereby repealed or modified accordingly." ([f], Section 534, RA
7160).

With that repealing clause in RA 7160, it is safe to infer and state that the tax
exemption provided for in RA 6958 creating petitioner had been expressly repealed
by the provisions of the New Local Government Code of 1991.

So that petitioner in this case has to pay the assessed realty tax of its properties
effective after January 1, 1992 until the present.

This Court's ruling finds expression to give impetus and meaning to the overall
objectives of the New Local Government Code of 1991, RA 7160. "It is hereby
declared the policy of the State that the territorial and political subdivisions of the
State shall enjoy genuine and meaningful local autonomy to enable them to attain
their fullest development as self-reliant communities and make them more effective
partners in the attainment of national goals. Towards this end, the State shall provide
for a more responsive and accountable local government structure instituted through
a system of decentralization whereby local government units shall be given more
powers, authority, responsibilities, and resources. The process of decentralization
shall proceed from the national government to the local government units. . . . 5

Its motion for reconsideration having been denied by the trial court in its 4 May 1995 order,
the petitioner filed the instant petition based on the following assignment of errors:

I RESPONDENT JUDGE ERRED IN FAILING TO RULE THAT THE

PETITIONER IS VESTED WITH GOVERNMENT POWERS AND
FUNCTIONS WHICH PLACE IT IN THE SAME CATEGORY AS AN
INSTRUMENTALITY OR AGENCY OF THE GOVERNMENT.

II RESPONDENT JUDGE ERRED IN RULING THAT PETITIONER

IS LIABLE TO PAY REAL PROPERTY TAXES TO THE CITY OF
CEBU.

Anent the first assigned error, the petitioner asserts that although it is a government-owned
or controlled corporation it is mandated to perform functions in the same category as an
instrumentality of Government. An instrumentality of Government is one created to perform
governmental functions primarily to promote certain aspects of the economic life of the
people.  Considering its task "not merely to efficiently operate and manage the Mactan-Cebu
6

International Airport, but more importantly, to carry out the Government policies of promoting
and developing the Central Visayas and Mindanao regions as centers of international trade
and tourism, and accelerating the development of the means of transportation and
communication in the country," and that it is an attached agency of the Department of
7

Transportation and Communication (DOTC),  the petitioner "may stand in [sic] the same
8

footing as an agency or instrumentality of the national government." Hence, its tax exemption
privilege under Section 14 of its Charter "cannot be considered withdrawn with the passage
of the Local Government Code of 1991 (hereinafter LGC) because Section 133 thereof
specifically states that the taxing powers of local government units shall not extend to the
levy of taxes of fees or charges of any kind on the national government its agencies and
instrumentalities."

As to the second assigned error, the petitioner contends that being an instrumentality of the
National Government, respondent City of Cebu has no power nor authority to impose realty
taxes upon it in accordance with the aforesaid Section 133 of the LGC, as explained
in Basco vs. Philippine Amusement and Gaming Corporation; 9

Local governments have no power to tax instrumentalities of the National

Government. PAGCOR is a government owned or controlled corporation with an
original character, PD 1869. All its shares of stock are owned by the National
Government. . . .

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

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

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

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

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

Otherwise mere creature of the State can defeat National policies thru extermination
of what local authorities may perceive to be undesirable activities or enterprise using
the power to tax as "a toll for regulation" (U.S. v. Sanchez, 340 US 42). The power to
tax which was called by Justice Marshall as the "power to destroy" (McCulloch v.
Maryland, supra) cannot be allowed to defeat an instrumentality or creation of the
very entity which has the inherent power to wield it. (Emphasis supplied)

It then concludes that the respondent Judge "cannot therefore correctly say that the
questioned provisions of the Code do not contain any distinction between a governmental
function as against one performing merely proprietary ones such that the exemption privilege
withdrawn under the said Code would apply to allgovernment corporations." For it is clear
from Section 133, in relation to Section 234, of the LGC that the legislature meant to
exclude instrumentalities of the national government from the taxing power of the local
government units.
In its comment respondent City of Cebu alleges that as local a government unit and a
political subdivision, it has the power to impose, levy, assess, and collect taxes within its
jurisdiction. Such power is guaranteed by the Constitution  and enhanced further by the
10

LGC. While it may be true that under its Charter the petitioner was exempt from the payment
of realty taxes,  this exemption was withdrawn by Section 234 of the LGC. In response to the
11

petitioner's claim that such exemption was not repealed because being an instrumentality of
the National Government, Section 133 of the LGC prohibits local government units from
imposing taxes, fees, or charges of any kind on it, respondent City of Cebu points out that
the petitioner is likewise a government-owned corporation, and Section 234 thereof does not
distinguish between government-owned corporation, and Section 234 thereof does not
distinguish between government-owned corporation, and Section 234 thereof does not
distinguish between government-owned or controlled corporations performing governmental
and purely proprietary functions. Respondent city of Cebu urges this the Manila International
Airport Authority is a governmental-owned corporation,   and to reject the application of
12

Basco because it was "promulgated . . . before the enactment and the singing into law of
R.A. No. 7160," and was not, therefore, decided "in the light of the spirit and intention of the
framers of the said law.

As a general rule, the power to tax is an incident of sovereignty and is unlimited in its range,
acknowledging in its very nature no limits, so that security against its abuse is to be found
only in the responsibility of the legislature which imposes the tax on the constituency who are
to pay it. Nevertheless, effective limitations thereon may be imposed by the people through
their Constitutions.  Our Constitution, for instance, provides that the rule of taxation shall be
13

uniform and equitable and Congress shall evolve a progressive system of taxation.  So 14

potent indeed is the power that it was once opined that "the power to tax involves the power
to destroy."  Verily, taxation is a destructive power which interferes with the personal and
15

property for the support of the government. Accordingly, tax statutes must be construed
strictly against the government and liberally in favor of the taxpayer.  But since taxes are
16

what we pay for civilized society,  or are the lifeblood of the nation, the law frowns against
17

exemptions from taxation and statutes granting tax exemptions are thus
construed strictissimi juris against the taxpayers and liberally in favor of the taxing
authority.  A claim of exemption from tax payment must be clearly shown and based on
18

language in the law too plain to be mistaken.  Elsewise stated, taxation is the rule,
19

exemption therefrom is the exception.  However, if the grantee of the exemption is a political
20

subdivision or instrumentality, the rigid rule of construction does not apply because the
practical effect of the exemption is merely to reduce the amount of money that has to be
handled by the government in the course of its operations. 21

The power to tax is primarily vested in the Congress; however, in our jurisdiction, it may be
exercised by local legislative bodies, no longer merely by virtue of a valid delegation as
before, but pursuant to direct authority conferred by Section 5, Article X of the
Constitution.  Under the latter, the exercise of the power may be subject to such guidelines
22

and limitations as the Congress may provide which, however, must be consistent with the
basic policy of local autonomy.

There can be no question that under Section 14 of R.A. No. 6958 the petitioner is exempt
from the payment of realty taxes imposed by the National Government or any of its political
subdivisions, agencies, and instrumentalities. Nevertheless, since taxation is the rule and
exemption therefrom the exception, the exemption may thus be withdrawn at the pleasure of
the taxing authority. The only exception to this rule is where the exemption was granted to
private parties based on material consideration of a mutual nature, which then becomes
contractual and is thus covered by the non-impairment clause of the Constitution. 23
The LGC, enacted pursuant to Section 3, Article X of the constitution provides for the
exercise by local government units of their power to tax, the scope thereof or its limitations,
and the exemption from taxation.

Section 133 of the LGC prescribes the common limitations on the taxing powers of local
government units as follows:

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

(a) Income tax, except when levied on banks and other financial
institutions;

(b) Documentary stamp tax;

(c) Taxes on estates, "inheritance, gifts, legacies and other

acquisitions mortis causa, except as otherwise provided herein

(d) Customs duties, registration fees of vessels and wharfage on

wharves, tonnage dues, and all other kinds of customs fees charges
and dues except wharfage on wharves constructed and maintained
by the local government unit concerned:

(e) Taxes, fees and charges and other imposition upon goods carried
into or out of, or passing through, the territorial jurisdictions of local
government units in the guise or charges for wharfages, tolls for
bridges or otherwise, or other taxes, fees or charges in any form
whatsoever upon such goods or merchandise;

(f) Taxes fees or charges on agricultural and aquatic products when

sold by marginal farmers or fishermen;

(g) Taxes on business enterprise certified to be the Board of

Investment as pioneer or non-pioneer for a period of six (6) and four
(4) years, respectively from the date of registration;

(h) Excise taxes on articles enumerated under the National Internal

Revenue Code, as amended, and taxes, fees or charges on
petroleum products;

(i) Percentage or value added tax (VAT) on sales, barters or

exchanges or similar transactions on goods or services except as
otherwise provided herein;

(j) Taxes on the gross receipts of transportation contractor and

person engage in the transportation of passengers of freight by hire
and common carriers by air, land, or water, except as provided in this
code;

(k) Taxes on premiums paid by ways reinsurance or retrocession;

 (l) Taxes, fees, or charges for the registration of motor vehicles and
for the issuance of all kinds of licenses or permits for the driving of
thereof, except, tricycles;

(m) Taxes, fees, or other charges on Philippine product actually

exported, except as otherwise provided herein;

(n) Taxes, fees, or charges, on Countryside and Barangay Business

Enterprise and Cooperatives duly registered under R.A. No. 6810
and Republic Act Numbered Sixty nine hundred thirty-eight (R.A. No.
6938) otherwise known as the "Cooperative Code of the Philippines;
and

(o) TAXES, FEES, OR CHARGES OF ANY KIND ON THE

NATIONAL GOVERNMENT, ITS AGENCIES AND
INSTRUMENTALITIES, AND LOCAL GOVERNMENT UNITS.
(emphasis supplied)

Needless to say the last item (item o) is pertinent in this case. The "taxes, fees or charges"
referred to are "of any kind", hence they include all of these, unless otherwise provided by
the LGC. The term "taxes" is well understood so as to need no further elaboration, especially
in the light of the above enumeration. The term "fees" means charges fixed by law or
Ordinance for the regulation or inspection of business activity,  while "charges" are
24

pecuniary liabilities such as rents or fees against person or property.

25

Among the "taxes" enumerated in the LGC is real property tax, which is governed by Section
232. It reads as follows:

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

Section 234 of LGC provides for the exemptions from payment of real property taxes and
withdraws previous exemptions therefrom granted to natural and juridical persons, including
government owned and controlled corporations, except as provided therein. It provides:

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

(a) Real property owned by the Republic of the Philippines or any of

its political subdivisions except when the beneficial use thereof had
been granted, for reconsideration or otherwise, to a taxable person;

(b) Charitable institutions, churches, parsonages or convents

appurtenants thereto, mosques nonprofits or religious cemeteries and
all lands, building and improvements actually, directly, and
exclusively used for religious charitable or educational purposes;

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

(d) All real property owned by duly registered cooperatives as

provided for under R.A. No. 6938; and;

(e) Machinery and equipment used for pollution control and

environmental protection.

Except as provided herein, any exemptions from payment of real

property tax previously granted to or presently enjoyed by, all
persons whether natural or juridical, including all government owned
or controlled corporations are hereby withdrawn upon the effectivity
of his Code.

These exemptions are based on the ownership, character, and use of the property. Thus;

(a) Ownership Exemptions. Exemptions from real property taxes on

the basis of ownership are real properties owned by: (i) the Republic,
(ii) a province, (iii) a city, (iv) a municipality, (v) a barangay, and (vi)
registered cooperatives.

(b) Character Exemptions. Exempted from real property taxes on the

basis of their character are: (i) charitable institutions, (ii) houses and
temples of prayer like churches, parsonages or convents appurtenant
thereto, mosques, and (iii) non profit or religious cemeteries.

(c) Usage exemptions. Exempted from real property taxes on the

basis of the actual, direct and exclusive use to which they are
devoted are: (i) all lands buildings and improvements which are
actually, directed and exclusively used for religious, charitable or
educational purpose; (ii) all machineries and equipment actually,
directly and exclusively used or by local water districts or by
government-owned or controlled corporations engaged in the supply
and distribution of water and/or generation and transmission of
electric power; and (iii) all machinery and equipment used for
pollution control and environmental protection.

To help provide a healthy environment in the midst of the modernization of the

country, all machinery and equipment for pollution control and environmental
protection may not be taxed by local governments.

2. Other Exemptions Withdrawn. All other exemptions previously

granted to natural or juridical persons including government-owned or
controlled corporations are withdrawn upon the effectivity of the
Code. 26

Section 193 of the LGC is the general provision on withdrawal of tax exemption privileges. It
provides:
 Sec. 193. Withdrawal of Tax Exemption Privileges. — Unless otherwise provided in
this code, tax exemptions or incentives granted to or presently enjoyed by all
persons, whether natural or juridical, including government-owned, or controlled
corporations, except local water districts, cooperatives duly registered under R.A.
6938, non stock and non profit hospitals and educational constitutions, are hereby
withdrawn upon the effectivity of this Code.

On the other hand, the LGC authorizes local government units to grant tax exemption
privileges. Thus, Section 192 thereof provides:

Sec. 192. Authority to Grant Tax Exemption Privileges. — Local government units
may, through ordinances duly approved, grant tax exemptions, incentives or reliefs
under such terms and conditions as they may deem necessary.

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

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

Section 133;

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

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

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

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

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

As to tax exemptions or incentives granted to or presently enjoyed by natural or juridical

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

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

In short, the petitioner can no longer invoke the general rule in Section 133 that the taxing
powers of the local government units cannot extend to the levy of:

(o) taxes, fees, or charges of any kind on the National Government,

its agencies, or instrumentalities, and local government units.

I must show that the parcels of land in question, which are real property, are any one of
those enumerated in Section 234, either by virtue of ownership, character, or use of the
property. Most likely, it could only be the first, but not under any explicit provision of the said
section, for one exists. In light of the petitioner's theory that it is an "instrumentality of the
Government", it could only be within be first item of the first paragraph of the section by
expanding the scope of the terms Republic of the Philippines" to
embrace . . . . . . "instrumentalities" and "agencies" or expediency we quote:

(a) real property owned by the Republic of the Philippines, or any of

the Philippines, or any of its political subdivisions except when the
beneficial use thereof has been granted, for consideration or
otherwise, to a taxable person.

This view does not persuade us. In the first place, the petitioner's claim that it is an
instrumentality of the Government is based on Section 133(o), which expressly mentions the
word "instrumentalities"; and in the second place it fails to consider the fact that the
legislature used the phrase "National Government, its agencies and instrumentalities" "in
Section 133(o),but only the phrase "Republic of the Philippines or any of its political
subdivision "in Section 234(a).

The terms "Republic of the Philippines" and "National Government" are not interchangeable.
The former is boarder and synonymous with "Government of the Republic of the Philippines"
which the Administrative Code of the 1987 defines as the "corporate governmental entity
though which the functions of the government are exercised through at the Philippines,
including, saves as the contrary appears from the context, the various arms through which
political authority is made effective in the Philippines, whether pertaining to the autonomous
reason, the provincial, city, municipal or barangay subdivision or other forms of local
government."  These autonomous regions, provincial, city, municipal or barangay
27

subdivisions" are the political subdivision.28

On the other hand, "National Government" refers "to the entire machinery of the central
government, as distinguished from the different forms of local Governments."  The National
29

Government then is composed of the three great departments the executive, the legislative
and the judicial. 30

An "agency" of the Government refers to "any of the various units of the Government,
including a department, bureau, office instrumentality, or government-owned or controlled
corporation, or a local government or a distinct unit therein;"  while an "instrumentality" refers
31

to "any agency of the National Government, not integrated within the department framework,
vested with special functions or jurisdiction by law, endowed with some if not all corporate
powers, administering special funds, and enjoying operational autonomy; usually through a
charter. This term includes regulatory agencies, chartered institutions and government-
owned and controlled corporations". 32

If Section 234(a) intended to extend the exception therein to the withdrawal of the exemption
from payment of real property taxes under the last sentence of the said section to the
agencies and instrumentalities of the National Government mentioned in Section 133(o),
then it should have restated the wording of the latter. Yet, it did not Moreover, that Congress
did not wish to expand the scope of the exemption in Section 234(a) to include real property
owned by other instrumentalities or agencies of the government including government-
owned and controlled corporations is further borne out by the fact that the source of this
exemption is Section 40(a) of P.D. No. 646, otherwise known as the Real Property Tax
Code, which reads:

Sec 40. Exemption from Real Property Tax. — The exemption shall be as follows:

(a) Real property owned by the Republic of the

Philippines or any of its political subdivisions and any
government-owned or controlled corporations so
exempt by is charter: Provided, however, that this
exemption shall not apply to real property of the
above mentioned entities the beneficial use of which
has been granted, for consideration or otherwise, to a
taxable person.

Note that as a reproduced in Section 234(a), the phrase "and any government-owned or
controlled corporation so exempt by its charter" was excluded. The justification for this
restricted exemption in Section 234(a) seems obvious: to limit further tax exemption
privileges, specially in light of the general provision on withdrawal of exemption from
payment of real property taxes in the last paragraph of property taxes in the last paragraph
of Section 234. These policy considerations are consistent with the State policy to ensure
autonomy to local governments  and the objective of the LGC that they enjoy genuine and
33

meaningful local autonomy to enable them to attain their fullest development as self-reliant
communities and make them effective partners in the attainment of national goals.  The
34

power to tax is the most effective instrument to raise needed revenues to finance and
support myriad activities of local government units for the delivery of basic services essential
to the promotion of the general welfare and the enhancement of peace, progress, and
prosperity of the people. It may also be relevant to recall that the original reasons for the
withdrawal of tax exemption privileges granted to government-owned and controlled
corporations and all other units of government were that such privilege resulted in serious
tax base erosion and distortions in the tax treatment of similarly situated enterprises, and
there was a need for this entities to share in the requirements of the development, fiscal or
otherwise, by paying the taxes and other charges due from them. 35

The crucial issues then to be addressed are: (a) whether the parcels of land in question
belong to the Republic of the Philippines whose beneficial use has been granted to the
petitioner, and (b) whether the petitioner is a "taxable person".

Section 15 of the petitioner's Charter provides:

Sec. 15. Transfer of Existing Facilities and Intangible Assets. — All existing public
airport facilities, runways, lands, buildings and other properties, movable or
immovable, belonging to or presently administered by the airports, and all assets,
powers, rights, interests and privileges relating on airport works, or air operations,
including all equipment which are necessary for the operations of air navigation,
acrodrome control towers, crash, fire, and rescue facilities are hereby transferred to
the Authority: Provided however, that the operations control of all equipment
necessary for the operation of radio aids to air navigation, airways communication,
the approach control office, and the area control center shall be retained by the Air
Transportation Office. No equipment, however, shall be removed by the Air
Transportation Office from Mactan without the concurrence of the authority. The
authority may assist in the maintenance of the Air Transportation Office equipment.

The "airports" referred to are the "Lahug Air Port" in Cebu City and the "Mactan International
AirPort in the Province of Cebu",  which belonged to the Republic of the Philippines, then
36

under the Air Transportation Office (ATO). 37

It may be reasonable to assume that the term "lands" refer to "lands" in Cebu City then
administered by the Lahug Air Port and includes the parcels of land the respondent City of
Cebu seeks to levy on for real property taxes. This section involves a "transfer" of the "lands"
among other things, to the petitioner and not just the transfer of the beneficial use thereof,
with the ownership being retained by the Republic of the Philippines.

This "transfer" is actually an absolute conveyance of the ownership thereof because the
petitioner's authorized capital stock consists of, inter alia "the value of such real estate
owned and/or administered by the airports."  Hence, the petitioner is now the owner of the
38

land in question and the exception in Section 234(c) of the LGC is inapplicable.
 Moreover, the petitioner cannot claim that it was never a "taxable person" under its Charter.
It was only exempted from the payment of real property taxes. The grant of the privilege only
in respect of this tax is conclusive proof of the legislative intent to make it a taxable person
subject to all taxes, except real property tax.

Finally, even if the petitioner was originally not a taxable person for purposes of real property
tax, in light of the forgoing disquisitions, it had already become even if it be conceded to be
an "agency" or "instrumentality" of the Government, a taxable person for such purpose in
view of the withdrawal in the last paragraph of Section 234 of exemptions from the payment
of real property taxes, which, as earlier adverted to, applies to the petitioner.

Accordingly, the position taken by the petitioner is untenable. Reliance on Basco

vs. Philippine Amusement and Gaming Corporation  is unavailing since it was decided
39

before the effectivity of the LGC. Besides, nothing can prevent Congress from decreeing that
even instrumentalities or agencies of the government performing governmental functions
may be subject to tax. Where it is done precisely to fulfill a constitutional mandate and
national policy, no one can doubt its wisdom.

WHEREFORE, the instant petition is DENIED. The challenged decision and order of the
Regional Trial Court of Cebu, Branch 20, in Civil Case No. CEB-16900 are AFFIRMED.

No pronouncement as to costs.

SO ORDERED.

FACTS:

CREBA assails the imposition of the minimum corporate income tax (MCIT) as being
violative of the due process clause as it levies income tax even if there is no realized
gain. They also question the creditable withholding tax (CWT) on sales of real
properties classified as ordinary assets stating that (1) they ignore the different
treatment of ordinary assets and capital assets; (2) the use of gross selling price or fair
market value as basis for the CWT and the collection of tax on a per transaction basis
(and not on the net income at the end of the year) are inconsistent with the tax on
ordinary real properties; (3) the government collects income tax even when the net
income has not yet been determined; and (4) the CWT is being levied upon real estate
enterprises but not on other enterprises, more particularly those in the manufacturing
sector.

ISSUE:
Are the impositions of the MCIT on domestic corporations and     CWT on income from
sales of real properties classified as     ordinary assets unconstitutional?

HELD:

NO. MCIT does not tax capital but only taxes income as shown by the fact that the
MCIT is arrived at by deducting the capital spent by a corporation in the sale of its
goods, i.e., the cost of goods and other direct expenses from gross sales. Besides,
there are sufficient safeguards that exist for the MCIT: (1) it is only imposed on the 4th
year of operations; (2) the law allows the carry forward of any excess MCIT paid over
the normal income tax; and (3) the Secretary of Finance can suspend the imposition of
MCIT in justifiable instances.

The regulations on CWT did not shift the tax base of a real estate business’ income tax
from net income to GSP or FMV of the property sold since the taxes withheld are in the
nature of advance tax payments and they are thus just installments on the annual tax
which may be due at the end of the taxable year. As such the tax base for the sale of
real property classified as ordinary assets remains to be the net taxable income and the
use of the GSP or FMV is because these are the only factors reasonably known to the
buyer in connection with the performance of the duties as a withholding agent.
Neither is there violation of equal protection even if the CWT is levied only on the real
industry as the real estate industry is, by itself, a class on its own and can be validly
treated different from other businesses. 

CHAMBER OF REAL G.R. No. 160756

ESTATE AND BUILDERS

ASSOCIATIONS, INC.,

Petitioner, Present:

PUNO, C.J.,

CARPIO,
CORONA,

CARPIO MORALES,

VELASCO, JR.,

NACHURA,

- v e r s u s - LEONARDO-DE CASTRO,

BRION,

PERALTA,

BERSAMIN,

DEL CASTILLO,

ABAD,

VILLARAMA, JR.,

PEREZ and

MENDOZA, JJ.

THE HON. EXECUTIVE

SECRETARY ALBERTO ROMULO,

THE HON. ACTING SECRETARY OF

FINANCE JUANITA D. AMATONG,

and THE HON. COMMISSIONER OF

INTERNAL REVENUE GUILLERMO

PARAYNO, JR.,
 Respondents. Promulgated:

March 9, 2010

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

DECISION
 

CORONA, J.:

In this original petition for certiorari and mandamus,[1] petitioner Chamber of Real

Estate and Builders Associations, Inc. is questioning the constitutionality of
Section 27 (E) of Republic Act (RA) 8424[2] and the revenue regulations (RRs)
issued by the Bureau of Internal Revenue (BIR) to implement said provision and
those involving creditable withholding taxes.[3]
 
Petitioner is an association of real estate developers and builders in the
Philippines. It impleaded former Executive Secretary Alberto Romulo, then acting
Secretary of Finance Juanita D. Amatong and then Commissioner of Internal
Revenue Guillermo Parayno, Jr. as respondents.
 

Petitioner assails the validity of the imposition of minimum corporate income tax
(MCIT) on corporations and creditable withholding tax (CWT) on sales of real
properties classified as ordinary assets.
 

Section 27(E) of RA 8424 provides for MCIT on domestic corporations and is

implemented by RR 9-98. Petitioner argues that the MCIT violates the due process
clause because it levies income tax even if there is no realized gain.
 

Petitioner also seeks to nullify Sections 2.57.2(J) (as amended by RR 6-2001) and
2.58.2 of RR 2-98, and Section 4(a)(ii) and (c)(ii) of RR 7-2003, all of which
prescribe the rules and procedures for the collection of CWT on the sale of real
properties categorized as ordinary assets. Petitioner contends that these revenue
regulations are contrary to law for two reasons: first, they ignore the different
treatment by RA 8424 of ordinary assets and capital assets and second,
respondent Secretary of Finance has no authority to collect CWT, much less, to
base the CWT on the gross selling price or fair market value of the real properties
classified as ordinary assets.
 
Petitioner also asserts that the enumerated provisions of the subject revenue
regulations violate the due process clause because, like the MCIT, the government
collects income tax even when the net income has not yet been determined. They
contravene the equal protection clause as well because the CWT is being levied
upon real estate enterprises but not on other business enterprises, more
particularly those in the manufacturing sector.
 

The issues to be resolved are as follows:

(1) whether or not this Court should take cognizance of the present case;

(2) whether or not the imposition of the MCIT on domestic corporations is

unconstitutional and

(3) whether or not the imposition of CWT on income from sales of real

properties classified as ordinary assets under RRs 2-98, 6-2001 and 7-
2003, is unconstitutional.
 

 
OVERVIEW OF THE ASSAILED PROVISIONS

Under the MCIT scheme, a corporation, beginning on its fourth year of

operation, is assessed an MCIT of 2% of its gross income when such MCIT is
greater than the normal corporate income tax imposed under Section 27(A). [4] If
the regular income tax is higher than the MCIT, the corporation does not pay the
MCIT. Any excess of the MCIT over the normal tax shall be carried forward and
credited against the normal income tax for the three immediately succeeding
taxable years. Section 27(E) of RA 8424 provides:
 

Section 27 (E). [MCIT] on Domestic Corporations. -

(1)      Imposition of Tax. A [MCIT] of two percent (2%) of the gross

income as of the end of the taxable year, as defined herein,
is hereby imposed on a corporation taxable under this Title,
beginning on the fourth taxable year immediately following
the year in which such corporation commenced its business
operations, when the minimum income tax is greater than
the tax computed under Subsection (A) of this Section for
the taxable year.

(2)      Carry Forward of Excess Minimum Tax. Any excess of the

[MCIT] over the normal income tax as computed under
Subsection (A) of this Section shall be carried forward and
credited against the normal income tax for the three (3)
immediately succeeding taxable years.

(3)      Relief from the [MCIT] under certain conditions. The

Secretary of Finance is hereby authorized to suspend the
imposition of the [MCIT] on any corporation which suffers
losses on account of prolonged labor dispute, or because
of force majeure, or because of legitimate business reverses.

 
 The Secretary of Finance is hereby authorized to
promulgate, upon recommendation of the Commissioner, the
necessary rules and regulations that shall define the terms
and conditions under which he may suspend the imposition
of the [MCIT] in a meritorious case.

(4)      Gross Income Defined. For purposes of applying the [MCIT]

provided under Subsection (E) hereof, the term gross income
shall mean gross sales less sales returns, discounts and
allowances and cost of goods sold. Cost of goods sold shall
include all business expenses directly incurred to produce
the merchandise to bring them to their present location and
use.

For trading or merchandising concern, cost of goods

sold shall include the invoice cost of the goods sold, plus
import duties, freight in transporting the goods to the place
where the goods are actually sold including insurance while
the goods are in transit.

For a manufacturing concern, cost of goods

manufactured and sold shall include all costs of production of
finished goods, such as raw materials used, direct labor and
manufacturing overhead, freight cost, insurance premiums
and other costs incurred to bring the raw materials to the
factory or warehouse.

In the case of taxpayers engaged in the sale of service,

gross income means gross receipts less sales returns,
allowances, discounts and cost of services. Cost of services
 shall mean all direct costs and expenses necessarily incurred
to provide the services required by the customers and clients
including (A) salaries and employee benefits of personnel,
consultants and specialists directly rendering the service
and (B) cost of facilities directly utilized in providing the
service such as depreciation or rental of equipment used and
cost of supplies: Provided, however, that in the case of banks,
cost of services shall include interest expense.

On August 25, 1998, respondent Secretary of Finance (Secretary), on the

recommendation of the Commissioner of Internal Revenue (CIR), promulgated RR
9-98 implementing Section 27(E).[5] The pertinent portions thereof read:
 

Sec. 2.27(E) [MCIT] on Domestic Corporations.

(1)     Imposition of the Tax. A [MCIT] of two percent (2%) of the

gross income as of the end of the taxable year (whether
calendar or fiscal year, depending on the accounting period
employed) is hereby imposed upon any domestic
corporation beginning the fourth (4th) taxable year
immediately following the taxable year in which such
corporation commenced its business operations. The MCIT
shall be imposed whenever such corporation has zero or
negative taxable income or whenever the amount of
minimum corporate income tax is greater than the normal
income tax due from such corporation.
 

For purposes of these Regulations, the term, normal

income tax means the income tax rates prescribed under Sec.
27(A) and Sec. 28(A)(1) of the Code xxx at 32% effective
January 1, 2000 and thereafter.

xxx xxx xxx

(2)      Carry forward of excess [MCIT]. Any excess of the [MCIT]

over the normal income tax as computed under Sec. 27(A) of
the Code shall be carried forward on an annual basis and
credited against the normal income tax for the three (3)
immediately succeeding taxable years.

xxx xxx xxx

 
 

Meanwhile, on April 17, 1998, respondent Secretary, upon recommendation of

respondent CIR, promulgated RR 2-98 implementing certain provisions of RA 8424
involving the withholding of taxes.[6] Under Section 2.57.2(J) of RR No. 2-98,
income payments from the sale, exchange or transfer of real property, other than
capital assets, by persons residing in the Philippines and habitually engaged in the
real estate business were subjected to CWT:
 
 Sec. 2.57.2. Income payment subject to [CWT] and rates
prescribed thereon:

xxx xxx xxx

(J) Gross selling price or total amount of consideration or its

equivalent paid to the seller/owner for the sale, exchange or transfer
of. Real property, other than capital assets, sold by an individual,
corporation, estate, trust, trust fund or pension fund and the
seller/transferor is habitually engaged in the real estate business in
accordance with the following schedule
Those which are exempt from a    
withholding tax at source as
 
prescribed in Sec. 2.57.5 of these xxx xxx xxx
regulations.  
 
Exempt

   

With a selling price of five hundred  

thousand pesos (P500,000.00) or
 
less.
1.5%

   

With a selling price of more than five  

hundred thousand pesos
 
(P500,000.00) but not more than two
million pesos (P2,000,000.00).  

3.0%

   

With selling price of more than two  

million pesos (P2,000,000.00)
 

5.0%

Gross selling price shall mean the consideration stated in the sales
document or the fair market value determined in accordance with
Section 6 (E) of the Code, as amended, whichever is higher. In an
exchange, the fair market value of the property received in exchange,
as determined in the Income Tax Regulations shall be used.

 
 Where the consideration or part thereof is payable on installment, no
withholding tax is required to be made on the periodic installment
payments where the buyer is an individual not engaged in trade or
business. In such a case, the applicable rate of tax based on the entire
consideration shall be withheld on the last installment or installments
to be paid to the seller.

However, if the buyer is engaged in trade or business, whether a

corporation or otherwise, the tax shall be deducted and withheld by the
buyer on every installment.

This provision was amended by RR 6-2001 on July 31, 2001:

Sec. 2.57.2. Income payment subject to [CWT] and rates
prescribed thereon:

xxx xxx xxx
(J)      Gross selling price or total amount of consideration or its
equivalent paid to the seller/owner for the sale, exchange or
transfer of real property classified as ordinary asset. - A
[CWT] based on the gross selling price/total amount of
consideration or the fair market value determined in
accordance with Section 6(E) of the Code, whichever is
higher, paid to the seller/owner for the sale, transfer or
exchange of real property, other than capital asset, shall be
imposed upon the withholding agent,/buyer, in accordance
with the following schedule:

 
Where the seller/transferor is exempt from [CWT]  
in accordance with Sec. 2.57.5 of these
regulations.  
 Exempt

   

Upon the following values of real property, where

the seller/transferor is habitually engaged in the
real estate business.

   

With a selling price of Five Hundred Thousand  

Pesos (P500,000.00) or less.
1.5%

   

With a selling price of more than Five Hundred  

Thousand Pesos (P500,000.00) but not more than
 
Two Million Pesos (P2,000,000.00).
 

3.0%

   

With a selling price of more than two Million  

Pesos (P2,000,000.00).
5.0%

xxx xxx xxx

Gross selling price shall remain the consideration stated in the

sales document or the fair market value determined in accordance
with Section 6 (E) of the Code, as amended, whichever is higher. In an
exchange, the fair market value of the property received in
exchange shall be considered as the consideration.

xxx xxx xxx

 
 However, if the buyer is engaged in trade or business, whether a
corporation or otherwise, these rules shall apply:

(i) If the sale is a sale of property on the installment plan

(that is, payments in the year of sale do not exceed 25%
of the selling price), the tax shall be deducted and
withheld by the buyer on every installment.

(ii) If, on the other hand, the sale is on a cash basis or is a

deferred-payment sale not on the installment plan (that
is, payments in the year of sale exceed 25% of the selling
price), the buyer shall withhold the tax based on the gross
selling price or fair market value of the property,
whichever is higher, on the first installment.

In any case, no Certificate Authorizing Registration (CAR) shall be

issued to the buyer unless the [CWT] due on the sale, transfer or
exchange of real property other than capital asset has been fully paid.
(Underlined amendments in the original)

Section 2.58.2 of RR 2-98 implementing Section 58(E) of RA 8424 provides

that any sale, barter or exchange subject to the CWT will not be recorded by the
Registry of Deeds until the CIR has certified that such transfers and conveyances
have been reported and the taxes thereof have been duly paid:[7]
 
 Sec. 2.58.2. Registration with the Register of Deeds. Deeds of
conveyances of land or land and building/improvement thereon arising
from sales, barters, or exchanges subject to the creditable expanded
withholding tax shall not be recorded by the Register of Deeds unless
the [CIR] or his duly authorized representative has certified that such
transfers and conveyances have been reported and the expanded
withholding tax, inclusive of the documentary stamp tax, due thereon
have been fully paid xxxx.

On February 11, 2003, RR No. 7-2003[8] was promulgated, providing for the

guidelines in determining whether a particular real property is a capital or an
ordinary asset for purposes of imposing the MCIT, among others. The pertinent
portions thereof state:
Section 4. Applicable taxes on sale, exchange or other
disposition of real property. - Gains/Income derived from sale,
exchange, or other disposition of real properties shall, unless
otherwise exempt, be subject to applicable taxes imposed
under the Code, depending on whether the subject properties
are classified as capital assets or ordinary assets;

a.            In the case of individual citizen (including estates and

trusts), resident aliens, and non-resident aliens engaged in
trade or business in the Philippines;

xxx xxx xxx

 
 (ii)               The sale of real property located in the Philippines,
classified as ordinary assets, shall be subject to the
[CWT] (expanded) under Sec. 2.57..2(J) of [RR 2-
98], as amended, based on the gross selling price
or current fair market value as determined in
accordance with Section 6(E) of the Code,
whichever is higher, and consequently, to the
ordinary income tax imposed under Sec. 24(A)(1)(c)
or 25(A)(1) of the Code, as the case may be, based
on net taxable income.

xxx xxx xxx

c.       In the case of domestic corporations.

xxx xxx xxx

(ii)               The sale of land and/or building classified as ordinary

asset and other real property (other than land and/or
building treated as capital asset), regardless of the
classification thereof, all of which are located in the
Philippines, shall be subject to the [CWT] (expanded)
under Sec. 2.57.2(J) of [RR 2-98], as amended, and
consequently, to the ordinary income tax under Sec. 27(A)
of the Code. In lieu of the ordinary income tax, however,
domestic corporations may become subject to the [MCIT]
under Sec. 27(E) of the Code, whichever is applicable.

xxx xxx xxx
 

We shall now tackle the issues raised.

 

EXISTENCE OF A JUSTICIABLE CONTROVERSY

Courts will not assume jurisdiction over a constitutional question unless the
following requisites are satisfied: (1) there must be an actual case calling for the
exercise of judicial review; (2) the question before the court must be ripe for
adjudication; (3) the person challenging the validity of the act must have standing
to do so; (4) the question of constitutionality must have been raised at the
earliest opportunity and (5) the issue of constitutionality must be the very lis
mota of the case.[9]
 

Respondents aver that the first three requisites are absent in this
case. According to them, there is no actual case calling for the exercise of judicial
power and it is not yet ripe for adjudication because
 

[petitioner] did not allege that CREBA, as a corporate entity, or any of

its members, has been assessed by the BIR for the payment of [MCIT] or
[CWT] on sales of real property. Neither did petitioner allege that its
members have shut down their businesses as a result of the payment of
the MCIT or CWT. Petitioner has raised concerns in mere abstract and
 hypothetical form without any actual, specific and concrete instances
cited that the assailed law and revenue regulations have actually and
adversely affected it. Lacking empirical data on which to base any
conclusion, any discussion on the constitutionality of the MCIT or CWT
on sales of real property is essentially an academic exercise.

Perceived or alleged hardship to taxpayers alone is not an adequate

justification for adjudicating abstract issues. Otherwise, adjudication
would be no different from the giving of advisory opinion that does not
really settle legal issues.[10]

An actual case or controversy involves a conflict of legal rights or an

assertion of opposite legal claims which is susceptible of judicial resolution as
distinguished from a hypothetical or abstract difference or dispute. [11] On the
other hand, a question is considered ripe for adjudication when the act being
challenged has a direct adverse effect on the individual challenging it. [12]
 

Contrary to respondents assertion, we do not have to wait until petitioners

members have shut down their operations as a result of the MCIT or CWT. The
assailed provisions are already being implemented. As we stated in Didipio Earth-
Savers Multi-Purpose Association, Incorporated (DESAMA) v. Gozun:[13]
 

By the mere enactment of the questioned law or the approval of

the challenged act, the dispute is said to have ripened into a judicial
controversy even without any other overt act. Indeed, even a singular
violation of the Constitution and/or the law is enough to awaken
judicial duty.[14]
  

If the assailed provisions are indeed unconstitutional, there is no better time than
the present to settle such question once and for all.
 

Respondents next argue that petitioner has no legal standing to sue:

 

Petitioner is an association of some of the real estate developers

and builders in the Philippines. Petitioners did not allege that [it] itself is
in the real estate business. It did not allege any material interest or any
wrong that it may suffer from the enforcement of [the assailed
provisions].[15]

Legal standing or locus standi is a partys personal and substantial interest in

a case such that it has sustained or will sustain direct injury as a result of the
governmental act being challenged.[16]In Holy Spirit Homeowners Association, Inc.
v. Defensor,[17] we held that the association had legal standing because its
members stood to be injured by the enforcement of the assailed provisions:
 

Petitioner association has the legal standing to institute the

instant petition xxx. There is no dispute that the individual members of
petitioner association are residents of the NGC. As such they are
covered and stand to be either benefited or injured by the enforcement
of the IRR, particularly as regards the selection process of beneficiaries
and lot allocation to qualified beneficiaries. Thus, petitioner association
may assail those provisions in the IRR which it believes to be
unfavorable to the rights of its members. xxx Certainly, petitioner and
 its members have sustained direct injury arising from the enforcement
of the IRR in that they have been disqualified and eliminated from the
selection process.[18]

In any event, this Court has the discretion to take cognizance of a suit which does
not satisfy the requirements of an actual case, ripeness or legal standing when
paramount public interest is involved.[19] The questioned MCIT and CWT affect not
only petitioners but practically all domestic corporate taxpayers in our country.
The transcendental importance of the issues raised and their overreaching
significance to society make it proper for us to take cognizance of this petition. [20]

 
CONCEPT AND RATIONALE OF THE MCIT

The MCIT on domestic corporations is a new concept introduced by RA

8424 to the Philippine taxation system. It came about as a result of the perceived
inadequacy of the self-assessment system in capturing the true income of
corporations.[21] It was devised as a relatively simple and effective revenue-raising
instrument compared to the normal income tax which is more difficult to control
and enforce. It is a means to ensure that everyone will make some minimum
contribution to the support of the public sector. The congressional deliberations
on this are illuminating:
 

Senator Enrile. Mr. President, we are not unmindful of the practice of

certain corporations of reporting constantly a loss in their operations to
 avoid the payment of taxes, and thus avoid sharing in the cost of
government.In this regard, the Tax Reform Act introduces for the first
time a new concept called the [MCIT] so as to minimize tax evasion, tax
avoidance, tax manipulation in the country and for administrative
convenience. This will go a long way in ensuring that corporations will
pay their just share in supporting our public life and our economic
advancement.[22]

Domestic corporations owe their corporate existence and their privilege to

do business to the government. They also benefit from the efforts of the
government to improve the financial market and to ensure a favorable business
climate. It is therefore fair for the government to require them to make a
reasonable contribution to the public expenses.
 

Congress intended to put a stop to the practice of corporations which,

while having large turn-overs, report minimal or negative net income resulting in
minimal or zero income taxes year in and year out, through under-declaration of
income or over-deduction of expenses otherwise called tax shelters. [23]
 

Mr. Javier (E.) [This] is what the Finance Dept. is trying to remedy, that
is why they have proposed the [MCIT]. Because from experience too,
you have corporations which have been losing year in and year out and
paid no tax. So, if the corporation has been losing for the past five years
to ten years, then that corporation has no business to be in business. It
is dead. Why continue if you are losing year in and year out? So, we
have this provision to avoid this type of tax shelters, Your Honor. [24]

 
 The primary purpose of any legitimate business is to earn a
profit. Continued and repeated losses after operations of a corporation or
consistent reports of minimal net income render its financial statements and its
tax payments suspect. For sure, certain tax avoidance schemes resorted to by
corporations are allowed in our jurisdiction. The MCIT serves to put a cap on such
tax shelters. As a tax on gross income, it prevents tax evasion and minimizes tax
avoidance schemes achieved through sophisticated and artful manipulations of
deductions and other stratagems. Since the tax base was broader, the tax rate
was lowered.
 

To further emphasize the corrective nature of the MCIT, the following safeguards
were incorporated into the law:
 

First, recognizing the birth pangs of businesses and the reality of the need
to recoup initial major capital expenditures, the imposition of the MCIT
commences only on the fourth taxable year immediately following the year in
which the corporation commenced its operations.[25] This grace period allows a
new business to stabilize first and make its ventures viable before it is subjected
to the MCIT.[26]
 

Second, the law allows the carrying forward of any excess of the MCIT paid
over the normal income tax which shall be credited against the normal income tax
for the three immediately succeeding years.[27]
 Third, since certain businesses may be incurring genuine repeated losses,
the law authorizes the Secretary of Finance to suspend the imposition of MCIT if a
corporation suffers losses due to prolonged labor dispute, force majeure and
legitimate business reverses.[28]

Even before the legislature introduced the MCIT to the Philippine taxation
system, several other countries already had their own system of minimum
corporate income taxation. Our lawmakers noted that most developing countries,
particularly Latin American and Asian countries, have the same form of
safeguards as we do. As pointed out during the committee hearings:
 

[Mr. Medalla:] Note that most developing countries where you have of
course quite a bit of room for underdeclaration of gross receipts have
this same form of safeguards.

In the case of Thailand, half a percent (0.5%), theres a minimum of

income tax of half a percent (0.5%) of gross assessable income. In
Korea a 25% of taxable income before deductions and exemptions. Of
course the different countries have different basis for that minimum
income tax.

The other thing youll notice is the preponderance of Latin American

countries that employed this method. Okay, those are additional Latin
American countries.[29]

 
At present, the United States of America, Mexico, Argentina, Tunisia, Panama and
Hungary have their own versions of the MCIT.[30]

 
MCIT IS NOT VIOLATIVE OF DUE PROCESS

Petitioner claims that the MCIT under Section 27(E) of RA 8424 is unconstitutional
because it is highly oppressive, arbitrary and confiscatory which amounts to
deprivation of property without due process of law. It explains that gross income
as defined under said provision only considers the cost of goods sold and other
direct expenses; other major expenditures, such as administrative and interest
expenses which are equally necessary to produce gross income, were not taken
into account.[31] Thus, pegging the tax base of the MCIT to a corporations gross
income is tantamount to a confiscation of capital because gross income, unlike
net income, is not realized gain.[32]
 

We disagree.
 

Taxes are the lifeblood of the government. Without taxes, the government

can neither exist nor endure. The exercise of taxing power derives its source from
the very existence of the State whose social contract with its citizens obliges it to
promote public interest and the common good.[33]
 

Taxation is an inherent attribute of sovereignty.[34] It is a power that is

purely legislative.[35] Essentially, this means that in the legislature primarily lies the
discretion to determine the nature (kind), object (purpose), extent (rate),
coverage (subjects) and situs (place) of taxation.[36] It has the authority to
prescribe a certain tax at a specific rate for a particular public purpose on persons
or things within its jurisdiction. In other words, the legislature wields the power to
define what tax shall be imposed, why it should be imposed, how much tax shall
be imposed, against whom (or what) it shall be imposed and where it shall be
imposed.
 

As a general rule, the power to tax is plenary and unlimited in its range,
acknowledging in its very nature no limits, so that the principal check against its
abuse is to be found only in the responsibility of the legislature (which imposes
the tax) to its constituency who are to pay it.[37] Nevertheless, it is circumscribed
by constitutional limitations. At the same time, like any other statute, tax
legislation carries a presumption of constitutionality.
 

The constitutional safeguard of due process is embodied in the fiat [no]

person shall be deprived of life, liberty or property without due process of
law. In Sison, Jr. v. Ancheta, et al.,[38] we held that the due process clause may
properly be invoked to invalidate, in appropriate cases, a revenue
measure[39] when it amounts to a confiscation of property.[40] But in the same case,
we also explained that we will not strike down a revenue measure as
unconstitutional (for being violative of the due process clause) on the mere
allegation of arbitrariness by the taxpayer.[41] There must be a factual foundation
to such an unconstitutional taint.[42] This merely adheres to the authoritative
doctrine that, where the due process clause is invoked, considering that it is not a
fixed rule but rather a broad standard, there is a need for proof of such
persuasive character.[43]
 

Petitioner is correct in saying that income is distinct from capital.[44] Income

means all the wealth which flows into the taxpayer other than a mere return on
capital. Capital is a fund or property existing at one distinct point in time while
income denotes a flow of wealth during a definite period of time. [45] Income is
gain derived and severed from capital.[46] For income to be taxable, the following
requisites must exist:
 

(1) there must be gain;

(2) the gain must be realized or received and

(3) the gain must not be excluded by law or treaty from

taxation.[47]
 

Certainly, an income tax is arbitrary and confiscatory if it taxes capital because

capital is not income. In other words, it is income, not capital, which is subject to
income tax. However, the MCIT is not a tax on capital.

The MCIT is imposed on gross income which is arrived at by deducting the

capital spent by a corporation in the sale of its goods, i.e., the cost of goods[48] and
other direct expenses from gross sales. Clearly, the capital is not being taxed.
 
Furthermore, the MCIT is not an additional tax imposition. It is imposed in
lieu of the normal net income tax, and only if the normal income tax is
suspiciously low. The MCIT merely approximates the amount of net income tax
due from a corporation, pegging the rate at a very much reduced 2% and uses as
the base the corporations gross income.
 

Besides, there is no legal objection to a broader tax base or taxable income by

eliminating all deductible items and at the same time reducing the applicable tax
rate.[49]
 

Statutes taxing the gross "receipts," "earnings," or "income" of

particular corporations are found in many jurisdictions. Tax thereon is
generally held to be within the power of a state to impose; or
constitutional, unless it interferes with interstate commerce or violates
the requirement as to uniformity of taxation.[50]

The United States has a similar alternative minimum tax (AMT) system
which is generally characterized by a lower tax rate but a broader tax base.
[51]
 Since our income tax laws are of American origin, interpretations by American
courts of our parallel tax laws have persuasive effect on the interpretation of
these laws.[52] Although our MCIT is not exactly the same as the AMT, the policy
behind them and the procedure of their implementation are comparable. On the
question of the AMTs constitutionality, the United States Court of Appeals for the
Ninth Circuit stated in Okin v. Commissioner:[53]
  

In enacting the minimum tax, Congress attempted to remedy general

taxpayer distrust of the system growing from large numbers of
taxpayers with large incomes who were yet paying no taxes.

xxx xxx xxx

We thus join a number of other courts in upholding the constitutionality

of the [AMT]. xxx [It] is a rational means of obtaining a broad-based tax,
and therefore is constitutional.[54]

The U.S. Court declared that the congressional intent to ensure that corporate
taxpayers would contribute a minimum amount of taxes was a legitimate
governmental end to which the AMT bore a reasonable relation. [55]

American courts have also emphasized that Congress has the power to condition,
limit or deny deductions from gross income in order to arrive at the net that it
chooses to tax.[56] This is because deductions are a matter of legislative grace.[57]
 

Absent any other valid objection, the assignment of gross income, instead
of net income, as the tax base of the MCIT, taken with the reduction of the tax
rate from 32% to 2%, is not constitutionally objectionable.

Moreover, petitioner does not cite any actual, specific and concrete
negative experiences of its members nor does it present empirical data to show
that the implementation of the MCIT resulted in the confiscation of their
property.

In sum, petitioner failed to support, by any factual or legal basis, its

allegation that the MCIT is arbitrary and confiscatory. The Court cannot strike
down a law as unconstitutional simply because of its yokes.[58] Taxation is
necessarily burdensome because, by its nature, it adversely affects property
rights.[59] The party alleging the laws unconstitutionality has the burden to
demonstrate the supposed violations in understandable terms.[60]
 

RR 9-98 MERELY CLARIFIES

SECTION 27(E) OF RA 8424

Petitioner alleges that RR 9-98 is a deprivation of property without due

process of law because the MCIT is being imposed and collected even when there
is actually a loss, or a zero or negative taxable income:
Sec. 2.27(E) [MCIT] on Domestic Corporations.

(1) Imposition of the Tax. xxx The MCIT shall be imposed whenever such
corporation has zero or negative taxable income or whenever the
amount of [MCIT] is greater than the normal income tax due from such
corporation. (Emphasis supplied)

 
 RR 9-98, in declaring that MCIT should be imposed whenever such
corporation has zero or negative taxable income, merely defines the coverage of
Section 27(E). This means that even if a corporation incurs a net loss in its
business operations or reports zero income after deducting its expenses, it is still
subject to an MCIT of 2% of its gross income. This is consistent with the law which
imposes the MCIT on gross income notwithstanding the amount of the net
income. But the law also states that the MCIT is to be paid only if it is greater than
the normal net income. Obviously, it may well be the case that the MCIT would be
less than the net income of the corporation which posts a zero or negative taxable
income.
 

We now proceed to the issues involving the CWT.

 

The withholding tax system is a procedure through which taxes (including

income taxes) are collected.[61] Under Section 57 of RA 8424, the types of income
subject to withholding tax are divided into three categories: (a) withholding of
final tax on certain incomes; (b) withholding of creditable tax at source and (c)
tax-free covenant bonds. Petitioner is concerned with the second category (CWT)
and maintains that the revenue regulations on the collection of CWT on sale of
real estate categorized as ordinary assets are unconstitutional.
 

Petitioner, after enumerating the distinctions between capital and ordinary

assets under RA 8424, contends that Sections 2.57.2(J) and 2.58.2 of RR 2-98 and
Sections 4(a)(ii) and (c)(ii) of RR 7-2003 were promulgated with grave abuse of
discretion amounting to lack of jurisdiction and patently in contravention of
law[62] because they ignore such distinctions. Petitioners conclusion is based on
the following premises: (a) the revenue regulations use gross selling price (GSP) or
fair market value (FMV) of the real estate as basis for determining the income tax
for the sale of real estate classified as ordinary assets and (b) they mandate the
collection of income tax on a per transaction basis, i.e., upon consummation of
the sale via the CWT, contrary to RA 8424 which calls for the payment of the net
income at the end of the taxable period.[63]

Petitioner theorizes that since RA 8424 treats capital assets and ordinary
assets differently, respondents cannot disregard the distinctions set by the
legislators as regards the tax base, modes of collection and payment of taxes on
income from the sale of capital and ordinary assets.

Petitioners arguments have no merit.

 

 
AUTHORITY OF THE SECRETARY OF FINANCE TO

ORDER THE COLLECTION OF CWT ON SALES OF REAL

PROPERTY CONSIDERED AS ORDINARY ASSETS

The Secretary of Finance is granted, under Section 244 of RA 8424, the

authority to promulgate the necessary rules and regulations for the effective
enforcement of the provisions of the law.Such authority is subject to the
limitation that the rules and regulations must not override, but must remain
consistent and in harmony with, the law they seek to apply and implement. [64] It is
well-settled that an administrative agency cannot amend an act of Congress.[65]
  

We have long recognized that the method of withholding tax at source is a

procedure of collecting income tax which is sanctioned by our tax laws. [66] The
withholding tax system was devised for three primary reasons: first, to provide
the taxpayer a convenient manner to meet his probable income tax liability;
second, to ensure the collection of income tax which can otherwise be lost or
substantially reduced through failure to file the corresponding returns and third,
to improve the governments cash flow.[67] This results in administrative savings,
prompt and efficient collection of taxes, prevention of delinquencies and
reduction of governmental effort to collect taxes through more complicated
means and remedies.[68]

Respondent Secretary has the authority to require the withholding of a tax

on items of income payable to any person, national or juridical, residing in the
Philippines. Such authority is derived from Section 57(B) of RA 8424 which
provides:
 

SEC. 57. Withholding of Tax at Source.

xxx xxx xxx

(B)     Withholding of Creditable Tax at Source. The [Secretary]

may, upon the recommendation of the [CIR], require the
withholding of a tax on the items of income payable to
natural or juridical persons, residing in the Philippines, by
payor-corporation/persons as provided for by law, at the
rate of not less than one percent (1%) but not more than
 thirty-two percent (32%) thereof, which shall be credited
against the income tax liability of the taxpayer for the
taxable year.

The questioned provisions of RR 2-98, as amended, are well within the

authority given by Section 57(B) to the Secretary, i.e., the graduated rate of 1.5%-
5% is between the 1%-32% range; the withholding tax is imposed on the income
payable and the tax is creditable against the income tax liability of the taxpayer
for the taxable year.

 
EFFECT OF RRS ON THE TAX BASE FOR THE INCOME

TAX OF INDIVIDUALS OR CORPORATIONS ENGAGED

IN THE REAL ESTATE BUSINESS

Petitioner maintains that RR 2-98, as amended, arbitrarily shifted the tax base of a
real estate business income tax from net income to GSP or FMV of the property
sold.

Petitioner is wrong.
 
The taxes withheld are in the nature of advance tax payments by a taxpayer in
order to extinguish its possible tax obligation. [69] They are installments on the
annual tax which may be due at the end of the taxable year.[70]

Under RR 2-98, the tax base of the income tax from the sale of real
property classified as ordinary assets remains to be the entitys net income
imposed under Section 24 (resident individuals) or Section 27 (domestic
corporations) in relation to Section 31 of RA 8424, i.e. gross income less allowable
deductions. The CWT is to be deducted from the net income tax payable by the
taxpayer at the end of the taxable year.[71] Precisely, Section 4(a)(ii) and (c)(ii) of
RR 7-2003 reiterate that the tax base for the sale of real property classified as
ordinary assets remains to be the net taxable income:
 

Section 4. Applicable taxes on sale, exchange or other disposition of

real property. - Gains/Income derived from sale, exchange, or other
disposition of real properties shall unless otherwise exempt, be subject
to applicable taxes imposed under the Code, depending on whether
the subject properties are classified as capital assets or ordinary assets;

xxx xxx xxx

a. In the case of individual citizens (including estates and trusts),

resident aliens, and non-resident aliens engaged in trade or
business in the Philippines;

xxx xxx xxx

 
 (ii) The sale of real property located in the Philippines, classified as
ordinary assets, shall be subject to the [CWT] (expanded) under Sec.
2.57.2(j) of [RR 2-98], as amended, based on the [GSP] or current
[FMV] as determined in accordance with Section 6(E) of the Code,
whichever is higher, and consequently, to the ordinary income tax
imposed under Sec. 24(A)(1)(c) or 25(A)(1) of the Code, as the case
may be, based on net taxable income.

xxx xxx xxx

c. In the case of domestic corporations.

The sale of land and/or building classified as ordinary asset and other
real property (other than land and/or building treated as capital asset),
regardless of the classification thereof, all of which are located in the
Philippines, shall be subject to the [CWT] (expanded) under Sec.
2.57.2(J) of [RR 2-98], as amended, and consequently, to the ordinary
income tax under Sec. 27(A) of the Code. In lieu of the ordinary income
tax, however, domestic corporations may become subject to the
[MCIT] under Sec. 27(E) of the same Code, whichever is
applicable. (Emphasis supplied)

Accordingly, at the end of the year, the taxpayer/seller shall file its income tax
return and credit the taxes withheld (by the withholding agent/buyer) against its
tax due. If the tax due is greater than the tax withheld, then the taxpayer shall pay
the difference. If, on the other hand, the tax due is less than the tax withheld, the
taxpayer will be entitled to a refund or tax credit. Undoubtedly, the taxpayer is
taxed on its net income.
 The use of the GSP/FMV as basis to determine the withholding taxes is
evidently for purposes of practicality and convenience. Obviously, the withholding
agent/buyer who is obligated to withhold the tax does not know, nor is he privy
to, how much the taxpayer/seller will have as its net income at the end of the
taxable year. Instead, said withholding agents knowledge and privity are limited
only to the particular transaction in which he is a party. In such a case, his basis
can only be the GSP or FMV as these are the only factors reasonably known or
knowable by him in connection with the performance of his duties as a
withholding agent.
 

 
NO BLURRING OF DISTINCTIONS BETWEEN ORDINARY

ASSETS AND CAPITAL ASSETS

RR 2-98 imposes a graduated CWT on income based on the GSP or FMV of the
real property categorized as ordinary assets. On the other hand, Section 27(D)(5)
of RA 8424 imposes a final tax and flat rate of 6% on the gain presumed to be
realized from the sale of a capital asset based on its GSP or FMV. This final tax is
also withheld at source.[72]

The differences between the two forms of withholding tax, i.e., creditable

and final, show that ordinary assets are not treated in the same manner as capital
assets. Final withholding tax (FWT) and CWT are distinguished as follows:
 
  

FWT-Sale of Capital Assets CWT-Sale of Ordinary Assets

a) The amount of income tax a) Taxes withheld on certain income

withheld by the withholding agent is payments are intended to equal or at
constituted as a full and final least approximate the tax due of the
payment of the income tax due from payee on said income.
the payee on the said income.

b)The liability for payment of the tax b) Payee of income is required to

rests primarily on the payor as a
withholding agent.
report the income and/or pay the
difference between the tax withheld
and the tax due on the income. The
payee also has the right to ask for a
refund if the tax withheld is more than
the tax due.

c) The payee is not required to file  

an income tax return for the
particular income.[73]
c) The income recipient is still required
to file an income tax return, as
prescribed in Sec. 51 and Sec. 52 of
the NIRC, as amended.[74]

As previously stated, FWT is imposed on the sale of capital assets. On the other
hand, CWT is imposed on the sale of ordinary assets. The inherent and substantial
differences between FWT and CWT disprove petitioners contention that ordinary
assets are being lumped together with, and treated similarly as, capital assets in
contravention of the pertinent provisions of RA 8424.
 

Petitioner insists that the levy, collection and payment of CWT at the time
of transaction are contrary to the provisions of RA 8424 on the manner and time
of filing of the return, payment and assessment of income tax involving ordinary
assets.[75]

The fact that the tax is withheld at source does not automatically mean that
it is treated exactly the same way as capital gains. As aforementioned, the
mechanics of the FWT are distinct from those of the CWT. The withholding
agent/buyers act of collecting the tax at the time of the transaction by
withholding the tax due from the income payable is the essence of the
withholding tax method of tax collection.

 
NO RULE THAT ONLY PASSIVE

INCOMES CAN BE SUBJECT TO CWT

 
Petitioner submits that only passive income can be subjected to
withholding tax, whether final or creditable. According to petitioner, the whole of
Section 57 governs the withholding of income tax on passive income. The
enumeration in Section 57(A) refers to passive income being subjected to FWT. It
follows that Section 57(B) on CWT should also be limited to passive income:
 

SEC. 57. Withholding of Tax at Source.

(A) Withholding of Final Tax on Certain Incomes. Subject to rules and

regulations, the [Secretary] may promulgate, upon the
recommendation of the [CIR], requiring the filing of income tax return
by certain income payees, the tax imposed or prescribed by Sections
 24(B)(1), 24(B)(2), 24(C), 24(D)(1); 25(A)(2), 25(A)(3), 25(B), 25(C),
25(D), 25(E); 27(D)(1), 27(D)(2), 27(D)(3), 27(D)(5); 28(A)(4), 28(A)(5),
28(A)(7)(a), 28(A)(7)(b), 28(A)(7)(c), 28(B)(1), 28(B)(2), 28(B)(3), 28(B)
(4), 28(B)(5)(a), 28(B)(5)(b), 28(B)(5)(c); 33; and 282 of this Code on
specified items of income shall be withheld by payor-corporation
and/or person and paid in the same manner and subject to the same
conditions as provided in Section 58 of this Code.

(B) Withholding of Creditable Tax at Source. The [Secretary] may, upon

the recommendation of the [CIR], require the withholding of a tax on
the items of income payable to natural or juridical persons, residing in
the Philippines, by payor-corporation/persons as provided for by law,
at the rate of not less than one percent (1%) but not more than thirty-
two percent (32%) thereof, which shall be credited against the income
tax liability of the taxpayer for the taxable year. (Emphasis supplied)

This line of reasoning is non sequitur.

 

Section 57(A) expressly states that final tax can be imposed on certain kinds
of income and enumerates these as passive income. The BIR defines passive
income by stating what it is not:
 

if the income is generated in the active pursuit and performance

of the corporations primary purposes, the same is not passive income [76]

 
It is income generated by the taxpayers assets. These assets can be in the form of
real properties that return rental income, shares of stock in a corporation that
earn dividends or interest income received from savings.
 

On the other hand, Section 57(B) provides that the Secretary can require a
CWT on income payable to natural or juridical persons, residing in the
Philippines. There is no requirement that this income be passive income. If that
were the intent of Congress, it could have easily said so.
 

Indeed, Section 57(A) and (B) are distinct. Section 57(A) refers to FWT while
Section 57(B) pertains to CWT. The former covers the kinds of passive income
enumerated therein and the latter encompasses any income other than those
listed in 57(A). Since the law itself makes distinctions, it is wrong to regard 57(A)
and 57(B) in the same way.
 

To repeat, the assailed provisions of RR 2-98, as amended, do not modify or

deviate from the text of Section 57(B). RR 2-98 merely implements the law by
specifying what income is subject to CWT. It has been held that, where a statute
does not require any particular procedure to be followed by an administrative
agency, the agency may adopt any reasonable method to carry out its functions.
[77]
 Similarly, considering that the law uses the general term income, the Secretary
and CIR may specify the kinds of income the rules will apply to based on what is
feasible. In addition, administrative rules and regulations ordinarily deserve to be
given weight and respect by the courts[78] in view of the rule-making authority
given to those who formulate them and their specific expertise in their respective
fields.

 
 
NO DEPRIVATION OF PROPERTY

WITHOUT DUE PROCESS

Petitioner avers that the imposition of CWT on GSP/FMV of real estate

classified as ordinary assets deprives its members of their property without due
process of law because, in their line of business, gain is never assured by mere
receipt of the selling price. As a result, the government is collecting tax from net
income not yet gained or earned.

Again, it is stressed that the CWT is creditable against the tax due from the seller
of the property at the end of the taxable year. The seller will be able to claim a tax
refund if its net income is less than the taxes withheld. Nothing is taken that is not
due so there is no confiscation of property repugnant to the constitutional
guarantee of due process. More importantly, the due process requirement
applies to the power to tax.[79] The CWT does not impose new taxes nor does it
increase taxes.[80] It relates entirely to the method and time of payment.
 

Petitioner protests that the refund remedy does not make the CWT less
burdensome because taxpayers have to wait years and may even resort to
litigation before they are granted a refund.[81]This argument is misleading. The
practical problems encountered in claiming a tax refund do not affect the
constitutionality and validity of the CWT as a method of collecting the tax.
 Petitioner complains that the amount withheld would have otherwise been
used by the enterprise to pay labor wages, materials, cost of money and other
expenses which can then save the entity from having to obtain loans entailing
considerable interest expense. Petitioner also lists the expenses and pitfalls of the
trade which add to the burden of the realty industry: huge investments and
borrowings; long gestation period; sudden and unpredictable interest rate surges;
continually spiraling development/construction costs; heavy taxes and prohibitive
up-front regulatory fees from at least 20 government agencies. [82]

Petitioners lamentations will not support its attack on the constitutionality

of the CWT. Petitioners complaints are essentially matters of policy best
addressed to the executive and legislative branches of the government. Besides,
the CWT is applied only on the amounts actually received or receivable by the real
estate entity. Sales on installment are taxed on a per-installment basis.
[83]
Petitioners desire to utilize for its operational and capital expenses money
earmarked for the payment of taxes may be a practical business option but it is
not a fundamental right which can be demanded from the court or from the
government.
 

 
NO VIOLATION OF EQUAL PROTECTION

 
Petitioner claims that the revenue regulations are violative of the equal
protection clause because the CWT is being levied only on real estate
enterprises. Specifically, petitioner points out that manufacturing enterprises are
not similarly imposed a CWT on their sales, even if their manner of doing business
is not much different from that of a real estate enterprise. Like a manufacturing
concern, a real estate business is involved in a continuous process of production
and it incurs costs and expenditures on a regular basis. The only difference is that
goods produced by the real estate business are house and lot units. [84]
 

Again, we disagree.
 

The equal protection clause under the Constitution means that no person
or class of persons shall be deprived of the same protection of laws which is
enjoyed by other persons or other classes in the same place and in like
circumstances.[85] Stated differently, all persons belonging to the same class shall
be taxed alike. It follows that the guaranty of the equal protection of the laws is
not violated by legislation based on a reasonable classification. Classification, to
be valid, must (1) rest on substantial distinctions; (2) be germane to the purpose
of the law; (3) not be limited to existing conditions only and (4) apply equally to all
members of the same class.[86]
 

The taxing power has the authority to make reasonable classifications for
purposes of taxation.[87] Inequalities which result from a singling out of one
particular class for taxation, or exemption, infringe no constitutional limitation.
[88]
 The real estate industry is, by itself, a class and can be validly treated
differently from other business enterprises.
 

Petitioner, in insisting that its industry should be treated similarly as

manufacturing enterprises, fails to realize that what distinguishes the real estate
business from other manufacturing enterprises, for purposes of the imposition of
the CWT, is not their production processes but the prices of their goods sold and
the number of transactions involved. The income from the sale of a real property
is bigger and its frequency of transaction limited, making it less cumbersome for
the parties to comply with the withholding tax scheme.
 

On the other hand, each manufacturing enterprise may have tens of thousands of
transactions with several thousand customers every month involving both
minimal and substantial amounts. To require the customers of manufacturing
enterprises, at present, to withhold the taxes on each of their transactions with
their tens or hundreds of suppliers may result in an inefficient and unmanageable
system of taxation and may well defeat the purpose of the withholding tax
system.

Petitioner counters that there are other businesses wherein expensive items are
also sold infrequently, e.g. heavy equipment, jewelry, furniture, appliance and
other capital goods yet these are not similarly subjected to the CWT. [89] As already
discussed, the Secretary may adopt any reasonable method to carry out its
functions.[90] Under Section 57(B), it may choose what to subject to CWT.
A reading of Section 2.57.2 (M) of RR 2-98 will also show that petitioners
argument is not accurate. The sales of manufacturers who have clients within the
top 5,000 corporations, as specified by the BIR, are also subject to CWT for their
transactions with said 5,000 corporations.[91]
 

SECTION 2.58.2 OF RR NO. 2-98 MERELY

IMPLEMENTS SECTION 58 OF RA 8424

Lastly, petitioner assails Section 2.58.2 of RR 2-98, which provides that the
Registry of Deeds should not effect the regisration of any document transferring
real property unless a certification is issued by the CIR that the withholding tax
has been paid. Petitioner proffers hardly any reason to strike down this rule
except to rely on its contention that the CWT is unconstitutional. We have ruled
that it is not. Furthermore, this provision uses almost exactly the same wording as
Section 58(E) of RA 8424 and is unquestionably in accordance with it:
 

Sec. 58. Returns and Payment of Taxes Withheld at Source.

(E) Registration with Register of Deeds. - No registration of any

document transferring real property shall be effected by the Register
of Deeds unless the [CIR] or his duly authorized representative has
certified that such transfer has been reported, and the capital gains or
[CWT], if any, has been paid: xxxx any violation of this provision by the
 Register of Deeds shall be subject to the penalties imposed under
Section 269 of this Code. (Emphasis supplied)

 
CONCLUSION

The renowned genius Albert Einstein was once quoted as saying [the] hardest
thing in the world to understand is the income tax.[92] When a party questions the
constitutionality of an income tax measure, it has to contend not only with
Einsteins observation but also with the vast and well-established jurisprudence in
support of the plenary powers of Congress to impose taxes. Petitioner has
miserably failed to discharge its burden of convincing the Court that the
imposition of MCIT and CWT is unconstitutional.

WHEREFORE, the petition is hereby DISMISSED.

 

Costs against petitioner.

 

SO ORDERED.
G.R. No. 149110            April 9, 2003
NATIONAL POWER CORPORATION, petitioner, 
vs.
CITY OF CABANATUAN, respondent.

PUNO, J.:

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

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

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

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

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

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

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

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

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

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

"Sec. 193. Withdrawal of Tax Exemption Privileges.- Unless otherwise provided in this Code,

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

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

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

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

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

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

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

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

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

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

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

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

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

SO ORDERED."20

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

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

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

FROM ALL FORMS OF TAXES HAS BEEN REPEALED BY THE PROVISION OF THE
LOCAL GOVERNMENT CODE AS THE ENACTMENT OF A LATER LEGISLATION,
WHICH IS A GENERAL LAW, CANNOT BE CONSTRUED TO HAVE REPEALED A
SPECIAL LAW.
 C. THE COURT OF APPEALS GRAVELY ERRED IN NOT CONSIDERING THAT AN
EXERCISE OF POLICE POWER THROUGH TAX EXEMPTION SHOULD PREVAIL OVER
THE LOCAL GOVERNMENT CODE."21

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

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

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

x   x   x

Sec. 151. Scope of Taxing Powers.- Except as otherwise provided in this Code, the city, may
levy the taxes, fees, and charges which the province or municipality may impose: Provided,
however, That the taxes, fees and charges levied and collected by highly urbanized and
independent component cities shall accrue to them and distributed in accordance with the
provisions of this Code.

The rates of taxes that the city may levy may exceed the maximum rates allowed for the
province or municipality by not more than fifty percent (50%) except the rates of professional
and amusement taxes."

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

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

On the other hand, section 131 (d) of the LGC defines "business" as "trade or commercial activity
regularly engaged in as means of livelihood or with a view to profit." Petitioner claims that it is not
engaged in an activity for profit, in as much as its charter specifically provides that it is a "non-profit
organization." In any case, petitioner argues that the accumulation of profit is merely incidental to its
operation; all these profits are required by law to be channeled for expansion and improvement of its
facilities and services.24
Petitioner also alleges that it is an instrumentality of the National Government,25 and as such, may
not be taxed by the respondent city government. It cites the doctrine in Basco vs. Philippine
Amusement and Gaming Corporation26where this Court held that local governments have no power
to tax instrumentalities of the National Government, viz:

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

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

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

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

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

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

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

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

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

"It is a well-settled rule of statutory construction that repeals of statutes by implication are not
favored and as much as possible, effect must be given to all enactments of the legislature.
Moreover, it has to be conceded that the charter of the NPC constitutes a special law.
Republic Act No. 7160, is a general law. It is a basic rule in statutory construction that the
enactment of a later legislation which is a general law cannot be construed to have repealed
a special law. Where there is a conflict between a general law and a special statute, the
special statute should prevail since it evinces the legislative intent more clearly than the
general statute."28
Finally, petitioner submits that the charter of the NPC, being a valid exercise of police power, should
prevail over the LGC. It alleges that the power of the local government to impose franchise tax is
subordinate to petitioner's exemption from taxation; "police power being the most pervasive, the
least limitable and most demanding of all powers, including the power of taxation."29

The petition is without merit.

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

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

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

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

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

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

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

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

"Section 133. Common Limitations on the Taxing Powers of the Local Government

Units.- Unless otherwise provided herein, the exercise of the taxing powers of provinces,
cities, municipalities, and barangays shall not extend to the levy of the following:

x   x   x

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

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

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

In the case at bar, section 151 in relation to section 137 of the LGC clearly authorizes the
respondent city government to impose on the petitioner the franchise tax in question.
In its general signification, a franchise is a privilege conferred by government authority, which does
not belong to citizens of the country generally as a matter of common right.48 In its specific sense, a
franchise may refer to a general or primary franchise, or to a special or secondary franchise. The
former relates to the right to exist as a corporation, by virtue of duly approved articles of
incorporation, or a charter pursuant to a special law creating the corporation.49 The right under a
primary or general franchise is vested in the individuals who compose the corporation and not in the
corporation itself.50 On the other hand, the latter refers to the right or privileges conferred upon an
existing corporation such as the right to use the streets of a municipality to lay pipes of tracks, erect
poles or string wires.51 The rights under a secondary or special franchise are vested in the
corporation and may ordinarily be conveyed or mortgaged under a general power granted to a
corporation to dispose of its property, except such special or secondary franchises as are charged
with a public use.52

In section 131 (m) of the LGC, Congress unmistakably defined a franchise in the sense of a
secondary or special franchise. This is to avoid any confusion when the word franchise is used in the
context of taxation. As commonly used, a franchise tax is "a tax on the privilege of transacting
business in the state and exercising corporate franchises granted by the state."53 It is not levied on
the corporation simply for existing as a corporation, upon its property54 or its income,55 but on its
exercise of the rights or privileges granted to it by the government. Hence, a corporation need not
pay franchise tax from the time it ceased to do business and exercise its franchise.56 It is within this
context that the phrase "tax on businesses enjoying a franchise" in section 137 of the LGC should be
interpreted and understood. Verily, to determine whether the petitioner is covered by the franchise
tax in question, the following requisites should concur: (1) that petitioner has a "franchise" in the
sense of a secondary or special franchise; and (2) that it is exercising its rights or privileges under
this franchise within the territory of the respondent city government.

Petitioner fulfills the first requisite. Commonwealth Act No. 120, as amended by Rep. Act No. 7395,
constitutes petitioner's primary and secondary franchises. It serves as the petitioner's charter,
defining its composition, capitalization, the appointment and the specific duties of its corporate
officers, and its corporate life span.57 As its secondary franchise, Commonwealth Act No. 120, as
amended, vests the petitioner the following powers which are not available to ordinary
corporations, viz:

"x x x

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

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

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

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

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

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

x   x   x

(m) To cooperate with, and to coordinate its operations with those of the National
Electrification Administration and public service entities;

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

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

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

Petitioner also fulfills the second requisite. It is operating within the respondent city government's
territorial jurisdiction pursuant to the powers granted to it by Commonwealth Act No. 120, as
amended. From its operations in the City of Cabanatuan, petitioner realized a gross income of
P107,814,187.96 in 1992. Fulfilling both requisites, petitioner is, and ought to be, subject of the
franchise tax in question.
Petitioner, however, insists that it is excluded from the coverage of the franchise tax simply because
its stocks are wholly owned by the National Government, and its charter characterized it as a "non-
profit" organization.

These contentions must necessarily fail.

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

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

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

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

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

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

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

"(n) When essential to the proper administration of its corporate affairs or necessary for the
proper transaction of its business or to carry out the purposes for which it was organized, to
contract indebtedness and issue bonds subject to approval of the President upon
recommendation of the Secretary of Finance;
 (o) To exercise such powers and do such things as may be reasonably necessary to carry
out the business and purposes for which it was organized, or which, from time to time, may
be declared by the Board to be necessary, useful, incidental or auxiliary to accomplish the
said purpose xxx."(emphases supplied)

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

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

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

"Sec. 193. Withdrawal of Tax Exemption Privileges.- Unless otherwise provided in this Code,

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

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

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

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

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

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

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

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

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

SO ORDERED.

G.R. No. L-22734             September 15, 1967

COMMISSIONER OF INTERNAL REVENUE, petitioner, 

vs.
MANUEL B. PINEDA, as one of the heirs of deceased ATANASIO PINEDA, respondent.
Office of the Solicitor General for petitioner.
Manuel B. Pineda for and in his own behalf as respondent.

BENGZON, J.P., J.:

On May 23, 1945 Atanasio Pineda died, survived by his wife, Felicisima Bagtas, and 15 children, the
eldest of whom is Manuel B. Pineda, a lawyer. Estate proceedings were had in the Court of First
Instance of Manila (Case No. 71129) wherein the surviving widow was appointed administratrix. The
estate was divided among and awarded to the heirs and the proceedings terminated on June 8,
1948. Manuel B. Pineda's share amounted to about P2,500.00.

After the estate proceedings were closed, the Bureau of Internal Revenue investigated the income
tax liability of the estate for the years 1945, 1946, 1947 and 1948 and it found that the corresponding
income tax returns were not filed. Thereupon, the representative of the Collector of Internal Revenue
filed said returns for the estate on the basis of information and data obtained from the aforesaid
estate proceedings and issued an assessment for the following:

1. Deficiency income tax

1945 P135.83
1946 436.95
1947 1,206.91 P1,779.69
  Add: 5%
surcharge 88.98
1% monthly
interest from
November 30,
1953 to April
15, 1957 720.77
Compromise
for late filing 80.00
Compromise
for late
payment 40.00

Total amount due P2,707.44

===========
Additional residence P14.50
2.
tax for 1945 ===========
3. Real Estate dealer's
tax for the fourth
quarter of 1946 and
the whole year of P207.50
1947 ===========

Manuel B. Pineda, who received the assessment, contested the same. Subsequently, he appealed
to the Court of Tax Appeals alleging that he was appealing "only that proportionate part or portion
pertaining to him as one of the heirs."
After hearing the parties, the Court of Tax Appeals rendered judgment reversing the decision of the
Commissioner on the ground that his right to assess and collect the tax has prescribed. The
Commissioner appealed and this Court affirmed the findings of the Tax Court in respect to the
assessment for income tax for the year 1947 but held that the right to assess and collect the taxes
for 1945 and 1946 has not prescribed. For 1945 and 1946 the returns were filed on August 24, 1953;
assessments for both taxable years were made within five years therefrom or on October 19, 1953;
and the action to collect the tax was filed within five years from the latter date, on August 7, 1957.
For taxable year 1947, however, the return was filed on March 1, 1948; the assessment was made
on October 19, 1953, more than five years from the date the return was filed; hence, the right to
assess income tax for 1947 had prescribed. Accordingly, We remanded the case to the Tax Court
for further appropriate proceedings.1

In the Tax Court, the parties submitted the case for decision without additional evidence.

On November 29, 1963 the Court of Tax Appeals rendered judgment holding Manuel B. Pineda
liable for the payment corresponding to his share of the following taxes:

Deficiency income tax

1945 P135.83
1946 436.95
Real estate
dealer's fixed
tax 4th quarter
of 1946 and
whole year of
1947 P187.50

The Commissioner of Internal Revenue has appealed to Us and has proposed to hold Manuel B.
Pineda liable for the payment of all the taxes found by the Tax Court to be due from the estate in the
total amount of P760.28 instead of only for the amount of taxes corresponding to his share in the
estate.1awphîl.nèt

Manuel B. Pineda opposes the proposition on the ground that as an heir he is liable for unpaid
income tax due the estate only up to the extent of and in proportion to any share he received. He
relies on Government of the Philippine Islands v. Pamintuan 2 where We held that "after the partition
of an estate, heirs and distributees are liable individually for the payment of all lawful outstanding
claims against the estate in proportion to the amount or value of the property they have respectively
received from the estate."

We hold that the Government can require Manuel B. Pineda to pay the full amount of the taxes
assessed.

Pineda is liable for the assessment as an heir and as a holder-transferee of property belonging to
the estate/taxpayer. As an heir he is individually answerable for the part of the tax proportionate to
the share he received from the inheritance.3 His liability, however, cannot exceed the amount of his
share.4

As a holder of property belonging to the estate, Pineda is liable for he tax up to the amount of the
property in his possession. The reason is that the Government has a lien on the P2,500.00 received
by him from the estate as his share in the inheritance, for unpaid income taxes4a for which said
estate is liable, pursuant to the last paragraph of Section 315 of the Tax Code, which we quote
hereunder:

If any person, corporation, partnership, joint-account (cuenta en participacion), association,

or insurance company liable to pay the income tax, neglects or refuses to pay the same after
demand, the amount shall be a lien in favor of the Government of the Philippines from the
time when the assessment was made by the Commissioner of Internal Revenue until paid
with interest, penalties, and costs that may accrue in addition thereto upon all property and
rights to property belonging to the taxpayer: . . .

By virtue of such lien, the Government has the right to subject the property in Pineda's possession,
i.e., the P2,500.00, to satisfy the income tax assessment in the sum of P760.28. After such payment,
Pineda will have a right of contribution from his co-heirs,5 to achieve an adjustment of the proper
share of each heir in the distributable estate.

All told, the Government has two ways of collecting the tax in question. One, by going after all the
heirs and collecting from each one of them the amount of the tax proportionate to the inheritance
received. This remedy was adopted in Government of the Philippine Islands v. Pamintuan ,  supra. In
said case, the Government filed an action against all the heirs for the collection of the tax. This
action rests on the concept that hereditary property consists only of that part which remains after the
settlement of all lawful claims against the estate, for the settlement of which the entire estate is first
liable.6 The reason why in case suit is filed against all the heirs the tax due from the estate is levied
proportionately against them is to achieve thereby two results: first, payment of the tax; and second,
adjustment of the shares of each heir in the distributed estate as lessened by the tax.

Another remedy, pursuant to the lien created by Section 315 of the Tax Code upon all property and
rights to property belonging to the taxpayer for unpaid income tax, is by subjecting said property of
the estate which is in the hands of an heir or transferee to the payment of the tax due, the estate.
This second remedy is the very avenue the Government took in this case to collect the tax. The
Bureau of Internal Revenue should be given, in instances like the case at bar, the necessary
discretion to avail itself of the most expeditious way to collect the tax as may be envisioned in the
particular provision of the Tax Code above quoted, because taxes are the lifeblood of government
and their prompt and certain availability is an imperious need.7 And as afore-stated in this case the
suit seeks to achieve only one objective: payment of the tax. The adjustment of the respective
shares due to the heirs from the inheritance, as lessened by the tax, is left to await the suit for
contribution by the heir from whom the Government recovered said tax.

WHEREFORE, the decision appealed from is modified. Manuel B. Pineda is hereby ordered to pay
to the Commissioner of Internal Revenue the sum of P760.28 as deficiency income tax for 1945 and
1946, and real estate dealer's fixed tax for the fourth quarter of 1946 and for the whole year 1947,
without prejudice to his right of contribution for his co-heirs. No costs. So ordered.

Bull v. United States

No. 649

Argued April 9, 1935

Decided April 29, 1935

295 U.S. 247

Syllabus

1. Moneys received by a deceased partner's estate as his share of profits earned by the
firm before he died, are taxable as his income and also are to be included as part of his
estate in computing the federal estate tax. P. 295 U. S. 254.

2. Where the articles of a personal service partnership having no invested capital

provide that, in the event of a partner's death, the survivors, if his representative does
not object, shall be at liberty to continue the business for a year, the estate in that case
to share the profits or losses as the deceased partner would if living, the profits coming
to the estate from such continuation of the business are not to be regarded as the fruits
of a sale of any interest of the deceased to the survivors, but are income of the estate,
taxable as such; they are no part of the corpus of the estate left by the decedent upon
which the federal estate tax is to be computed. P. 295 U. S. 255.

3. Retention by the Government of money wrongfully exacted as taxes is immoral, and

amounts in law to a fraud on the taxpayer's rights. P. 295 U. S. 261.

4. A claim for recovery of money so held may not only be the subject of a suit in the
Court of Claims, but may be used by way of recoupment and credit in an action by the
United States arising out of the same transaction, and this even though an independent
suit against the Government to enforce the claim would be barred by the statute of
limitations. P. 295 U. S. 261.

5. Recoupment is in the nature of a defense arising out of some feature of the

transaction upon which the plaintiff's action is grounded. Such a defense is never barred
by the statute of limitations so long as the main action itself is timely. P. 295 U. S. 262.

Page 295 U. S. 248

6. The Government wrongfully collected and retained an estate tax on moneys earned
for and paid to an estate in partnership transactions after the decedent's death, and
which were not part of the corpus of the estate and were properly taxable only as
income of the estate. Before the time allowed for claiming reimbursement had elapsed,
the Government proceeded to assess and collect an income tax on the identical
moneys.

Held:

(1) That the taxpayer was entitled to recoup from the amount of the income tax the
amount of the unlawful estate tax by suit for the difference in the Court of Claims,
although suit to recover the unlawful tax independently had become barred. Pp. 295 U.
S. 261-262.
(2) A complaint by which the taxpayer prayed judgment in the alternative, either for the
amount of the income tax or for what should have been credited against it on account of
the estate tax, was sufficient to put in suit the right to recoupment. P. 295 U. S. 263.

7. The Court of Claims is not bound by any special rules of pleading; all that is required
is that the petition shall contain a plain and concise statement of the fact relied on and
give the United States reasonable notice of the matters it is called upon to meet. P. 295
U. S. 263.

79 Ct.Cls. 133, 6 F.Supp. 141, reversed.

Certiorari, 294 U.S. 704, to review a judgment rejecting a claim for money unlawfully
exacted as taxes.

Page 295 U. S. 251

G.R. No. L-25289 June 28, 1974

SURIGAO ELECTRIC CO., INC., petitioner, 

vs.
THE HONORABLE COURT OF TAX APPEALS and COMMISSIONER OF INTERNAL
REVENUE, respondents.

David G. Nitafan for petitioner.

Office of the Solicitor General Antonio P. Barredo, Assistant Solicitor General Felicisimo R. Rosete
and Special Attorney Franciso J. Malate, Jr. for respondents.

CASTRO, J.:p

The Court denies the present petition for review of the decision of the Court of Appeals dated October 1, 1965 in its CTA Case No. 1438,
which dismissed the appeal filed by the petitioner Surigao Electric Company, Inc. with the tax court on August 1, 1963 on the ground that it
was time-barred.

In November 1961 the petitioner Surigao Electric Co., Inc., grantee of a legislative electric franchise,
received a warrant of distraint and levy to enforce the collection from "Mainit Electric" of a deficiency
franchise tax plus surcharge in the total amount of P718.59. In a letter to the Commissioner of
Internal Revenue, the petitioner contested this warrant, stating that it did not have a franchise in
Mainit, Surigao.

Thereafter the Commissioner, by letter dated April 2, 1961, advised the petitioner to take up the
matter with the General Auditing Office, enclosing a copy of the 4th Indorsement of the Auditor
General dated November 23, 1960. This indorsement indicated that the petitioner's liability for
deficiency franchise tax for the period from September 1947 to June 1959 was P21,156.06,
excluding surcharge. Subsequently, in a letter to the Auditor General dated August 2, 1962, the
petitioner asked for reconsideration of the assessment, admitting liability only for the 2% franchise
tax in accordance with its legislative franchise and not at the higher rate of 5% imposed by section
259 of the National Internal Revenue Code, as amended, which latter rate the Auditor General used
as basis in computing the petitioner's deficiency franchise tax.

An exchange of correspondence between the petitioner, on the one hand, and the Commissioner
and the Auditor General, on the other, ensued, all on the matter of the petitioner's liability for
deficiency franchise tax.

The controversy culminated in a revised assessment dated April 29, 1963 (received by the petitioner
on May 8, 1963) in the amount of P11,533.53, representing the petitioner's deficiency franchise-tax
and surcharges thereon for the period from April 1, 1956 to June 30, 1959. The petitioner then
requested a recomputation of the revised assessment in a letter to the Commissioner dated June 6,
1963 (sent by registered mail on June 7, 1963). The Commissioner, however, in a letter dated June
28, 1963 (received by the petitioner on July 16, 1963), denied the request for recomputation.

On August 1, 1963 the petitioner appealed to the Court of Tax Appeals. The tax court dismissed the
appeal on October 1, 1965 on the ground that the appeal was filed beyond the thirty-day period of
appeal provided by section 11 of Republic Act 1125.

Hence, the present recourse.

The case at bar raises only one issue: whether or not the petitioner's appeal to the Court of Tax
Appeals was time-barred. The parties disagree on which letter of the Commissioner embodies the
decision or ruling appealable to the tax court.

A close reading of the numerous letters exchanged between the petitioner and the Commissioner
clearly discloses that the letter of demand issued by the Commissioner on April 29, 1963 and
received by the petitioner on May 8, 1963 constitutes the definite determination of the petitioner's
deficiency franchise tax liability or the decision on the disputed assessment and, therefore, the
decision appealable to the tax court. This letter of April 29, 1963 was in response to the
communications of the petitioner, particularly the letter of August 2, 1962 wherein it assailed the 4th
Indorsement's data and findings on its deficiency, franchise tax liability computed at 5% (on the
ground that its franchise precludes the imposition of a rate higher than the 2% fixed in its legislative
franchise), and the letter of April 24, 1963 wherein it again questioned the assessment and
requested for a recomputation (on the ground that the Government could make an assessment only
for the period from May 29, 1956 to June 30, 1959). Thus, as early as August 2, 1962, the petitioner
already disputed the assessment made by the Commissioner.

Moreover, the letter of demand dated April 29, 1963 unquestionably constitutes the final action taken
by the Commissioner on the petitioner's several requests for reconsideration and recomputation. In
this letter, the Commissioner not only in effect demanded that the petitioner pay the amount of
P11,533.53 but also gave warning that in the event it failed to pay, the said Commissioner would be
constrained to enforce the collection thereof by means of the remedies provided by law. The tenor of
the letter, specifically, the statement regarding the resort to legal remedies, unmistakably indicates
the final nature of the determination made by the Commissioner of the petitioner's deficiency
franchise tax liability.

The foregoing-view accords with settled jurisprudence — and this despite the fact that nothing in
Republic Act 1125,  as amended, even remotely suggests the element truly determinative of the
1

appealability to the Court of Appeals of a ruling of the Commissioner of Internal Revenue. Thus, this
Court has considered the following communications sent by the Commissioner to taxpayers as
embodying rulings appealable to the tax court: (a) a letter which stated the result of the investigation
requested by the taxpayer and the consequent modification of the assessment;  (b) letter which
2
denied the request of the taxpayer for the reconsideration cancellation, or withdrawal of the original
assessment;  (c) a letter which contained a demand on the taxpayer for the payment of the revised
3

or reduced assessment;  and (d) a letter which notified the taxpayer of a revision of previous
4

assessments. 5

To sustain the petitioner's contention that the Commissioner's letter of June 28, 1963 denying its
request for further amendment of the revised assessment constitutes the ruling appealable to the tax
court and that the thirty-day period should, therefore, be counted from July 16, 1963, the day it
received the June 28, 1963 letter, would, in effect, leave solely to the petitioner's will the
determination of the commencement of the statutory thirty-day period, and place the petitioner —
and for that matter, any taxpayer — in a position, to delay at will and on convenience the finality of a
tax assessment. This absurd interpretation espoused by the petitioner would result in grave
detriment to the interests of the Government, considering that taxes constitute its life-blood and their
prompt and certain availability is an imperative need. 6

The revised assessment embodied in the Commissioner's letter dated April 29, 1963 being, in legal
contemplation, the final ruling reviewable by the tax court, the thirty-day appeal period should be
counted from May 8, 1963 (the day the petitioner received a copy of the said letter). From May 8,
1963 to June 7, 1963 (the day the petitioner, by registered mail, sent to the Commissioner its letter
of June 6, 1963 requesting for further recomputation of the amount demanded from it) saw the lapse
of thirty days. The June 6, 1963 request for further recomputation, partaking of a motion for
reconsideration, tolled the running of the thirty-day period from June 7, 1963 (the day the petitioner
sent its letter by registered mail) to July 16, 1963 (the day the petitioner received the letter of the
Commissioner dated June 28, 1963 turning down its request). The prescriptive period commenced
to run again on July 16, 1963. The petitioner filed its petition for review with the tax court on August
1, 1963 — after the lapse of an additional sixteen days. The petition for review having been filed
beyond the thirty-day period, we rule that the Court of Tax Appeals correctly dismissed the same.

The thirty-day period prescribed by section 11 of Republic Act 1125, as amended, within which a
taxpayer adversely affected by a decision of the Commissioner of Internal Revenue should file his
appeal with the tax court, is a jurisdictional requirement,  and the failure of a taxpayer to lodge his
7

appeal within the prescribed period bars his appeal and renders the questioned decision final and
executory. 8

Prescinding from all the foregoing, we deem it appropriate to state that the Commissioner of Internal
Revenue should always indicate to the taxpayer in clear and unequivocal language whenever his
action on an assessment questioned by a taxpayer constitutes his final determination on the
disputed assessment, as contemplated by sections 7 and 11 of Republic Act 1125, as amended. On
the basis of this indicium indubitably showing that the Commissioner's communicated action is his
final decision on the contested assessment, the aggrieved taxpayer would then be able to take
recourse to the tax court at the opportune time. Without needless difficulty, the taxpayer would be
able to determine when his right to appeal to the tax court accrues. This rule of conduct would also
obviate all desire and opportunity on the part of the taxpayer to continually delay the finality of the
assessment — and, consequently, the collection of the amount demanded as taxes — by repeated
requests for recomputation and reconsideration. On the part of the Commissioner, this would
encourage his office to conduct a careful and thorough study of every questioned assessment and
render a correct and definite decision thereon in the first instance. This would also deter the
Commissioner from unfairly making the taxpayer grope in the dark and speculate as to which action
constitutes the decision appealable to the tax court. Of greater import, this rule of conduct would
meet a pressing need for fair play, regularity, and orderliness in administrative action.
ACCORDINGLY, the decision of the Court of Tax Appeals dated October 1, 1965 is affirmed, at
petitioner's cost.

Makalintal, C.J, Makasiar, Esguerra and Muñoz Palma, JJ., concur.

Separate Opinions

TEEHANKEE, J., concurring:

I concur in the disposition of the case affirming the tax court's dismissal of the appeal on the ground
of its having been filed beyond the statutory thirty-day period  and in the main opinion's admonition
1

that the internal revenue commissioner (and other officials concerned ) should clearly and
2

unequivocably state in their letter-decision — or ruling that the same constitutes his final
determination on the disputed assessment and that the tax-payer's next recourse (if he wishes to
avail thereof) is to file an appeal with the tax court "within thirty days after the receipt of such
decision or ruling"  ) as provided by law.
3

Ordinarily, since petitioner's representation prior to the revised assessment dated April 29, 1963 had
resulted in the revision and reduction of the original assessment from P21,156.06 to P11,533.53,
petitioner would have been entitled to further request a reconsideration or revision of such revised
assessment based on new facts or arguments arising therefrom or calling attention to such facts or
arguments, which although not new, might have been wrongly appreciated or disregarded in the
revised assessment and the thirty-day period for appeal would be counted only from the receipt of
the commissioner's denial dated June 28, 1963 (and received on July 16, 1963).

But since it appears that petitioner's request for recomputation dated June 6, 1963 of the revised
assessment was but a pro forma request of the revised assessment of April 9, 1963, I concur with
the main opinion's affirmance of the dismissal of the appeal on the strength of Filipinas Investment
and Finance Corp. vs. Commissioner of Internal Revenue  wherein the Court likewise upheld a
4

similar dismissal by the tax court on the ground that the request for reconsideration of the disputed
revised assessment was "a mere pro-forma request for reconsideration .... and did not adduce new
facts or arguments" and that "a taxpayer may not delay indefinitely a tax assessment by reiterating
his original defenses over and over again, without substantial variation."

Separate Opinions

TEEHANKEE, J., concurring:
I concur in the disposition of the case affirming the tax court's dismissal of the appeal on the ground
of its having been filed beyond the statutory thirty-day period  and in the main opinion's admonition
1

that the internal revenue commissioner (and other officials concerned ) should clearly and
2

unequivocably state in their letter-decision — or ruling that the same constitutes his final
determination on the disputed assessment and that the tax-payer's next recourse (if he wishes to
avail thereof) is to file an appeal with the tax court "within thirty days after the receipt of such
decision or ruling"  ) as provided by law.
3

Ordinarily, since petitioner's representation prior to the revised assessment dated April 29, 1963 had
resulted in the revision and reduction of the original assessment from P21,156.06 to P11,533.53,
petitioner would have been entitled to further request a reconsideration or revision of such revised
assessment based on new facts or arguments arising therefrom or calling attention to such facts or
arguments, which although not new, might have been wrongly appreciated or disregarded in the
revised assessment and the thirty-day period for appeal would be counted only from the receipt of
the commissioner's denial dated June 28, 1963 (and received on July 16, 1963).

But since it appears that petitioner's request for recomputation dated June 6, 1963 of the revised
assessment was but a pro forma request of the revised assessment of April 9, 1963, I concur with
the main opinion's affirmance of the dismissal of the appeal on the strength of Filipinas Investment
and Finance Corp. vs. Commissioner of Internal Revenue  wherein the Court likewise upheld a
4

similar dismissal by the tax court on the ground that the request for reconsideration of the disputed
revised assessment was "a mere pro-forma request for reconsideration .... and did not adduce new
facts or arguments" and that "a taxpayer may not delay indefinitely a tax assessment by reiterating
his original defenses over and over again, without substantial variation."

G.R. No. L-13188             November 15, 1918

THE HONGKONG & SHANGHAI BANKING CORPORATION, plaintiff-appellant, 

vs.
JAMES J. RAFFERTY, as Collector of Internal Revenue of the Philippine Islands, defendant-
appellant.

Cohn & Fisher for plaintiff-appellant.

Acting Attorney-General Paredes for defendant-appellant.

MALCOLM, J.:

The important subject of tax liens is to be discussed on this appeal.

FACTS

During the years 1912-1915 inclusive, Pujalte & Co., a general mercantile partnership, was engaged
in the business of lumbering in Mindanao. The company removed from the forest and milled at its
say mills during this period, a total of 6,087.54 cubic meters of timber. The forest charges amounted
to P8,328.93. Upon the execution of bonds in the aggregate sum of P2,000 to secure the payment of
the forest charges due the government, the Collector of Internal Revenue permitted Pujalte & Co. to
remove this timber from the public forests for shipment by sea on saw mill invoices without prior
payment of the forest charges. From the timber so removed by Pujalte & Co., railroad ties were
manufactured in its saw mills at Manila for the Manila Railroad Co. Six thousand three hundred and
five railroad ties so manufactured were rejected by the Manila Railroad Co.

In February, 1915, the firm of Pujalte & Co. was indebted to the Hongkong and Shanghai Banking
Corporation in a large sum of money. Being unable to pay its debt in specie, the company assigned
to the bank, among other things, a large quantity of the railroad ties manufactured at its mills. The
bank sold and disposed of these ties at various times until in May, 1916, there remained with it some
2,000 railroads ties of the lot acquired.

The internal revenue charges on the forest products removed from the public forests of Mindanao by
Pujalte & Co. not having been paid, on May 2, 1916, the Collector of Internal Revenue caused
delinquency proceedings to be commenced and had issued a distress warrant. Later, on May 15,
1916, the Collector of Internal Revenue caused an additional distress levy to be made upon the
6,305 ties, which it will be remembered, had been assigned by Pujalte & Co. to the Hongkong &
Shanghai Banking Corporation. Proceeding in accordance with this action, the Collector of Internal
Revenue seized the 2,000 ties in the possession of the bank. Until the date last mentioned, the bank
had no notice of the tax.

Payment under protest, institution of complaint to recover back the sum paid, answer by the
Government, trial, and judgment followed in due course. In this judgment, handed down by the
Honorable James A. Ostrand, it was declared that a lien for taxes existed on the 2,000 railroad ties
levied upon by the Collector of Internal Revenue and claimed as its property by the Hongkong &
Shanghai Banking Corporation, not for the full sum of P8,328.93 due as forest charges on the timber
removed from the forests of Mindanao by Pujalte & Co., but only for the sum of P316.43, which is
the tax upon the timber used for the manufacture of the ties. The court ordered the Collector of
Internal Revenue to refund to the Hongkong and Shanghai Banking Corporation the sum of
P8,012.50, with interest at 6 per cent per annum from February 1, 1917. No costs were allowed.
Following timely motions for a new trial, denial, and exceptions thereto, both parties have appealed.

This brings us to a statement of the

L A W.

Among the sources of taxes, fees; and charges, in the nature of internal revenue taxes, the Internal
Revenue Law enumerates charges for forest products. (Sec. 21 ( f ), Act 2339, now sec. 1438 ( f ),
Administrative Code of 1917.) The Internal Revenue Law of 1914 also contains the following
provisions relative to the nature and extent of tax liens:

Every internal-revenue tax on property or on any business or occupation and every tax on
resources and receipts, and any increment to any of them incident to delinquency, shall
constitute a lien superior to all other charges or liens not only on the property itself upon
which such tax may be imposed but also upon the property used in any business or
occupation upon which the tax is imposed and upon all property rights therein.

The lien of the tax on inheritances, legacies and other acquisitions mortis causa shall have
preference over any real right created thereon subsequent to the death of the predecessor,
but this preference will be extinguished at the end of five years from the date when the tax
becomes payable upon real property, and three years upon any other kind of property. (Sec.
149, Act No. 2339, now section 1588, Administrative Code of 1917.)

The succeeding section of the same law authorizes two civil remedies for the collection of internal
revenue taxes: (a) by distraint of personal property and upon exhaustion thereof by levy upon real
property, and (b) by legal action. (Sec. 150, Act No. 2339, now section 1589, Administrative Code of
1917.) Relative to the first remedy by distraint of personal property, the same law in section 151
provides:

The remedy by distraint shall proceed as follows: Upon the failure of the person owing any
delinquent tax or delinquent revenue to pay the same, at the time required, the Collector of
Internal Revenue or his deputy may seize and distrain any personal property belonging to
such person or any property subject to the tax lien, in sufficient quantity to satisfy the tax, or
charge, together with any increment thereto incident to delinquency, and the expenses of the
distraint. (Now section 1590, Administrative Code of 1917.)

One fact stands out prominently on examination of these provisions of the Internal Revenue Law —
the internal revenue tax constitutes a paramount lien either on the property upon which the tax is
imposed or on any other property used in any business or occupation upon which the tax is
imposed. The government has here chosen to levy on the property itself — in the hands of a
purchaser for value.lawphil.net

This brings us to a statement of the

I S S U E S.

Does the lien follow the property subject to the tax into the hands of a third party when at the time of
transfer, no demand for payment had been made and when the purchaser had no notice of the
existence of the lien? Counsel for plaintiff argues that it does not. Or, does the lien follow the
property subject to the tax even though transferred to a third party who had no notice of the
existence of the lien so as to make this property respond for the specific unpaid internal revenue
taxes due on it? The trial court so found. Or, does the lien follow the property subject to the tax even
though transferred to a third party who had no notice of the existence of the lien so as to make this
property respondent for all the unpaid internal revenue taxes due from the vendor? The government
so opines.

This brings us to a statement of the following

O P I N I O N.

1. Major Issue; Tax Liens. — Taxation is an attribute of sovereignty. The power to tax is the
strongest of all the powers of government. If approximate equality in taxation is to be attained, all
property subject to a tax must respond, or there is resultant inequality. Under the most favorable
circumstances, an enormous amount of property escapes taxation altogether. To prevent such a
lamentable situation, the law ordains that the claim of the State upon the property of the tax debtor
shall be superior to that of any other creditor.

A lien in its modern-acceptation is understood to denote a legal claim or charge on property, either
real or personal, as security for the payment of some debt or obligation. Its meaning is more
extensive than the jus retentionis (derecho de retencion) of the civil law. (2 Giorgi, Teoria de las
Obligaciones, 419; Ames vs. Dyer, 41 Me., 397.) Unless the statute is otherwise, the rule is that a
valid lien created on real or personal estate is enforceable against property in the hands of any
person, other than a bona fide purchaser for value without notice, who subsequently acquires the
estate. (25 Cyc., 680, citing cases.)
The general rule of the Civil Law may be different. Possession of movables is not necessary to the
validity of a lien, whether created by contract or by act of law. Such lien will attach upon movable
property, even in the hands of a bona fide purchaser without notice. (Tatham vs. Andree [1863], 1
Moore, P.C. [N. S.], 386; The Bold Buccleugh[1850], 7 Moore, P.C., 267.)

The law of taxation establishes principles which generally, although not exactly, conform to the law
of liens. The tax lien does not establish itself upon property which has been transferred to an
innocent purchaser prior to demand. In a decision relating to the United States Internal Revenue
Law, Mr. Justice Miller held that a demand is necessary to create and bring the lien into operation.
(U. S. vs. Pacific Railroad Co. [1877], Fed. Cas. No. 15,984; U. S. vs.Pacific Railroad Co. [1880], 1
Fed., 97.) Where a statute makes taxes on personal property a lien thereon, a purchaser of such
property takes the same free from any lien for taxes if the title passes before such a lien attaches by
levy, distraint, or otherwise. (Shelby vs. Tiddy [1896], 118 N. C., 792.)

In order that the lien may follow the property into the hands of a third party, it is further essential that
the latter should have notice, either actual or constructive. The reason is the benevolence of our
Constitution which prohibits the taking of property without due process of law. In the case of real
estate or special assessment taxation a man cannot get rid of his liability to a tax by buying without
notice. (City of Seattle vs. Kelleher [1904], 195 U. S., 351.) The rule, however, is different where the
vendee has no knowledge of the taxes on personality existing at the time, or had no means of
knowing from the public records that such taxes had accrued.

The authorities relied upon by the Government will be found on examination to concern real estate
taxation.

Internal revenue laws are to be construed fairly for the government and justly for the citizen. They
should receive a liberal construction to carry out the purposes of their enactment; they should not
receive so loose a construction as to permit evasions on merely fanciful and insubstantial
distinctions. "The internal revenue laws cannot be so construed as to extend their meaning beyond
the clear import of the words used." (U. S. vs. Watts [1865], Fed. Cas. No. 16653. See also U.
S. vs. Hodson [1870], 10 Wall., 395; U. S. vs. Kallstrom [1887], 30 Fed., 184; Hubbard vs.Brainard
[1869], Conn., 563, and Muñoz & Co. vs. Hord [1909], 12 Phil., 624.)

With such general principles in mind, we should first ascertain the legislative intention. One detail
indicative of such intent is noted in the more limited scope of the law pertaining to liens for internal
revenue taxes as contrasted with the law pertaining to liens for real estate taxes. The municipal law
in part provides that liens for real property taxes "shall be enforceable against the property whether
in the possession of the delinquent or any subsequent owner." (Now section 364, Administrative
Code of 1917.) No mention of the subsequent owner is found in the Internal Revenue Law. Nor does
this law provide that the lien shall not be divested by alienation.

Again, we can very well look to the policy of the law in respect to liens. Liens, it has well been said,
are of too sacred character to be impaired by vague and uncertain implications. The lien which the
law favors is the specific or particular lien and not the general lien. However, the policy of the law is
against upholding secret liens and charges against the property of innocent purchasers or
encumbrances for value. (See Palmer vs. Howard [1887], 72 Cal., 293; 17 R. C. L., 599.)

Keeping the foregoing statement of facts, issues, and law before us, the present case offers no
serious difficulty. The plaintiff was not of course personally liable for any part of the internal revenue
taxes due the Government from Pujalte & Co. On the date the railroad ties were transferred from
Pujalte & Co. to the Hongkong & Shanghai Banking Corporation no demand for payment of the tax
had been made. The bonds in favor of the Government were still presumably subsisting. No demand
in fact was made until over a year later when distraint proceedings were initiated. When the
Hongkong & Shanghai Banking Corporation purchased and acquired these 2,000 ties in February,
1915, there was nothing to show that Pujalte & Co. were delinquent tax payers. No public record
could be consulted to protect the purchaser from loss by reason of the existence of a secret lien. A
businessman of ordinary prudence could not be expected to foresee that the personal property
which he had taken in satisfaction of a debt was burdened by a tax. On this date, because no
demand had been made and because the plaintiff had no notice of the tax, there was no valid
subsisting lien upon the ties.

2. Minor Issue; Interest upon Judgments to Recover Taxes. — Plaintiff-appellant in assignment of

error No. 4 also claims interest upon the amount of the judgment from the 3d day of June, 1916, in
place and instead of allowing interest thereon from the first day of February, 1917. The first date is
that of the illegal exaction; the second date is that of the commencement of the action. Interest
should be allowed from the day when the taxpayer lost the income from the funds by payment under
protest, or not at all. (Viuda e Hijos De Pedro P. Roxas vs. Rafferty [1918], 37 Phil., 957; H. E.
Heacock Co. vs. Collector of Customs [1918], 37 Phil., 970.)

On the other hand, the second assignment of error of the defendant-appellant is to the effect that no
interest at all should have been allowed by the trial court because of section 1579 of the present
Administrative Code. Plaintiff-appellant in answer challenges the validity of this section.

Section 1579 of the Administrative Code of 1917 in part authorizes the taxpayer who has paid an
internal revenue tax under protest, at any time within two years after the payment of the tax, "to bring
an action against the Collector of Internal Revenue for the recovery without interest of the sum
alleged to have been illegally collected." As this provision was enacted by the Philippine Legislature
subsequent to the institution of the present action in the lower court, and subsequent to the judgment
therein rendered, we do not feel that the law should be given a retroactive effect. Whether section
1579 of the Administrative Code is valid or not is left for decision when a case arises after the Code
became effective. In this instance, we allow interest at the legal rate from the date of payment.

3. Minor Issue; Costs against the Government. — Plaintiff-appellant further claims that the trial court
erred in declining to allow the recovery of costs.

The right to recover costs is governed by statute. In the United States, the rule is that unless
expressly authorized by statute, a judgment for costs, either in a civil or criminal case, cannot be
rendered against the United States or a State. The principle is that the sovereign power is not
amenable to judgments for damages or costs without its consent. (U. S. vs. Barker [1817], 2 Wheat.,
395; Stanley vs. Schwalby [1896], 162 U. S., 255; State vs. Williams [1905], 101 Md., 529; 4 A. & E.
Ann. Cas., 970; Deneen vs. Unverzagt [1907], 225 Ill., 378; 8 A. & E. Ann. Cas., 396 and note;
Townsend's Succession [1888], 40 La. Ann., 66.)

The Code of Civil Procedure of the Philippine Islands provides that costs shall ordinarily follow the
result of the suit. They are to be recovered by "the prevailing party." (Code of Civil Procedure,
chapter 21.) In the ordinary case between private individuals or entities, or where the government is
successful, no particular difficulty is experienced applying the Code provisions. The practice has,
however, been not to allow costs in cases in which the Government of the Philippine Islands or a
nominal representative of the Government is the unsuccessful party. And this is right — for the
Government of the Philippine Islands is sovereign in the sense that a State of the American Union or
Porto Rico is sovereign, and this paramount power has not by statute permitted itself to be taxed
with costs.

No costs should be allowed plaintiff in either instance.

This brings us to a statement of the

J U D G M E N T.

Judgment is reversed and the plaintiff shall have and recover from defendant the full amount sued
for, P8,328.93, with interest at the legal rate from June 3, 1916, until paid, and without costs in either
instance. So ordered.

Torres, Johnson, Carson and Araullo, JJ., concur.

Separate Opinions

STREET, J., dissenting and concurring:

The lien created by law for the enforcement of the tax on land is expressly declared to be enforcible
against the property in the hands of any person, whether the delinquent or any subsequent owner.
(See sec. 364, Administrative Code, 1917; section 2497, id., for city of Manila.) On the other hand,
that section of the Internal Revenue Law which declared a lien for internal-revenue taxes merely
says that such lien shall be superior to all other charges or liens. (Sec. 1588, Administrative Code,
1917.) From this it can be fairly, though not, I think, conclusively argued that the lien for the
enforcement of internal revenue taxes was not intended to be effective against subsequent owners.
Acceding to the force of this argument, I should perhaps have yielded my own views and expressed
my conformity with the decision upon this as upon other points involved in the case. Nevertheless I
cannot refrain from expressing my regret that the court should have reached the conclusion it has
announced with respect to the lien declared in section 1588 of the Code, and it is my opinion that the
lien created in this section has the same effect and range as the lien which is created in support of
the land tax.

The obvious effect of the decision on the point in question is to destroy the practical utility of the lien
created by section 1588; because so long as the property subject to the tax is in the hands of the
person primarily liable for the tax, it can be seized by the Collector of Internal Revenue under
process of distraint and thus subjected to the payment of the tax (section 1690, Administrative Code,
1916). No lien is therefore necessary to enable the government to take the property and enforce its
rights as against him. It is only when the property passes into the hands of some other person than
the one primarily liable that the existence of a lien becomes of any importance.

It is inherent in the nature of a lien, as a real obligation fixed on the property, that it should remain as
a burden thereon regardless of mutations in the ownership; and a lien, like this, created by express
provision of law and made superior to all other charges and liens, necessarily continues to subsist
regardless of whether the subsequent owner or purchaser of the property has notice of the lien or
not. I am not convinced by the citation of the American authorities, referred to in the opinion of the
Court, and I think that the deductions drawn by the Court from those cases is unwarranted. It is well
known that mere equitable liens, as recognized in American jurisprudence, are not enforcible against
purchasers without notice; but this doctrine I consider to be inapplicable to a statutory lien, such as is
involved in this case.

The possibility of the existence of some hidden lien like this was recognized by the Hongkong &
Shanghai Bank at the time it bought these rails, for the very contract of transfer, or assignment, by
which it acquired the property contains a provision whereby Pujalte & Company warranted that, at
the date of the transfer, the rails were the absolute property of that company and were "free and
clear of any liens, charges, and encumbrances," and warranted the title against all lawful claims of
all persons whomsoever. It is obvious that Pujalte & Company would be liable upon this warranty, if
the lien should be enforced; and I think this the simplest solution that can be made of the case.

I am, therefore, constrained to express my disagreement with the conclusion of the court with
respect to the liability of the rails in question for the tax upon them; and I think that the trial court
committed no error in refusing a refund of the amount thereof (P316.43). Upon other points I concur.

EN BANC

G.R. No. L-43142 August 26, 1937

WEE POCO & CO., INC., Plaintiff-Appellant, vs. JUAN POSADAS,

JR., Collector of Internal Revenue, Defendant-Appellee.

Pablo Lorenzo, Delfin Joven, and Hilado, Lorenzo and Hilado for
appellant.
Office of the Solicitor-General Hilado for appellee.

CONCEPCION, J.:  chanrobles virtual law library

This is an appeal taken from the judgment rendered by the court of

First Instance of Zamboanga, dismissing the complaint filed therein
by the herein appellant Wee Poco & Co., Inc., otherwise known in
said locality by the name of Chin Tay & Company.   chanroblesvirtualawlibrary chanrobles virtual law library

The complaint contained three causes of action. Under the first

cause of action, the plaintiff sought of the defendant-appellee
Collector of Internal Revenue the refund of the sum of P705
collected by way of execution, which represented the proceeds of
the sale of certain properties belonging to the plaintiff to enforce
payment of the sum of P2,155.14 demanded of it as merchant's tax
on alleged shipments of goods made from Zamboanga to Hoc Chuan
Tay in Cotabato, from January, 1925, to August, 1926. In said first
cause of action, said plaintiff likewise demanded payment of the
sum of P1,295 as damages from the sale of its distrained properties
of the plaintiff had been sold for P705. In the third cause of action,
the plaintiff demanded the refund of the sums of P1,996.97 and
P485.20 paid by it under protest as merchant's tax and additional
tax, respectively, asking later for the return of both sums
amounting to P2,482.17. Said taxes had been demanded of the
plaintiff for alleged sales of merchandise worth P59,169.35 which,
according to the defendant, had been sent by the former from
Zamboanga to Hoc Chuan Tay in Cotabato in the year 1924.   chanroblesvirtualawlibrary chanrobles virtual law library

The appellant assigns in its brief seven alleged errors claimed by it

to have been committed by the court a quo, and the defendant-
appellee, in refuting them, first raises the question that the
appellant is not entitled to demand the refund of the sum of P705
(1st cause of action), nor that of P1,450.14 (2nd cause of action),
for the reason that the former sum was not paid under protest and
the refund of both sums was not requested of the defendant before
the filing of the complaint.  
chanroblesvirtualawlibrary chanrobles virtual law library

Section 1579 of the Administrative Code, as amended by Act No.

3685, provides as follows:

When the validity of any tax is questioned, or its amount disputed,

or other question raised as to liability therefor, the person against
whom or against whose property the same is sought to be enforced
shall pay the tax under instant protest, or upon protest within thirty
days, and shall thereupon request the decision of the Collector of
Internal Revenue. If the decision of the Collector of Internal
Revenue is adverse, or if no decision is made by him within six
months from the date when his decision was requested, the
taxpayer may proceed, at any time within two years after the
payment of the tax to bring an action against the Collector of
Internal Revenue for the recovery without interest of the sum
alleged to have collected, the process to be served upon him, upon
the officer collecting the tax.

From the foregoing quotation it is inferred that the fulfillment of two

conditions is required before a complaint may be filed for the
recovery of the amount paid for the tax in question, to wit: (1) that
the protest be made at the time the tax is paid, or within thirty days
subsequent thereto, and (2) that the taxpayer request the decision
of the Collector of Internal Revenue.

PROTEST. - The spontaneous declaration made to acquire or keep

some right or to prevent an impending damage. (9
Alcubilla, Diccionario de la Administracion Espa�olo, page 95.) chanrobles virtual law library

PAYMENT UNDER PROTEST. - One who is called upon to pay an

import duty, a tax, subscription, or the like, which he thinks he
ought not to be required to pay, but is unwilling to encounter the
delay and expense of a law suit at that time, pays the sum
demanded under protest; . . . . (6 Words & Phrases Judicially
Defined, page 5745.)

Well then: as to the first cause of action, this court is of the opinion
that the requisite of protest can not be demanded with respect to
the payment of the sum of P705 on the ground that said sum was
not paid directly by the plaintiff attachment and sale at public
auction of some properties belonging to the corporation. It should
be noted, however, that the attachment was protested by the
plaintiff. Furthermore, inasmuch as the sum of P1,450.14 referred
to in the second cause of action, which together with the sum of
P705, completes that of P2,115.14, the total amount of the tax
charged and levied on the value of the merchandise allegedly
shipped by the plaintiff to Hoc Chuan Tay in Cotobato from January,
1925, to August, 1926, was paid under protest, the protest under
these circumstances should be considered to have been made
against the payment of the total amount of P2,115.14.   chanroblesvirtualawlibrary chanrobles virtual law library

However, the Collector of Internal Revenue contends that the

plaintiff not only should have made the payment under protest but
should have also demanded of him the refund of the sums referred
to in the first and second causes of action, including that as it had
failed to do so, the present action does not lie.  
chanroblesvirtualawlibrary chanrobles virtual law library

This court is of the opinion that the contention of the Collector of

Internal Revenue is fundamentally supported by law. It has already
been seen above that according to section 1579 of the
Administrative Code, the law requires two conditions precedent to
the filing of an action for the recovery of a tax paid, to wit: the
protest and the request to the Collector of Internal Revenue to
render his decision. The law has not prescribed theses requisites
giving the taxpayer the right to choose one or any of the two for
compliance therewith, it being presumed that the legislator in
requiring them had some purpose in mind, and in fact each of said
requisites serves a purpose. The protest is to notify the collector of
the taxpayer's nonconformity to the payment of the tax would have
no right to demand the refund of the tax paid, as he would be
understood to have paid it voluntarily (Fernandez vs. Shearer, 19
Phil., 75). However, the protest is not sufficient. The law requires
the taxpayer to request the decision of the collector, and such
requirement is not merely directory but clearly mandatory, as may
be inferred from the words: "and shall thereupon request the
decision of the Collector of Internal Revenue." One objection might
be interposed herein if we take into consideration what this court
stated in the case of Zaragoza vs. Alfonso  (46 Phil., 159, 161), to
wit:

Inasmuch as a rule has been established for years in this

jurisdiction that a mere protest of record against the payment of an
illegal demand, is sufficient to constitute an involuntary payment,
and justices an action for its recovery we find for invoking the
doctrine announced in other jurisdictions.

However, it is not inferred from the above-quoted doctrine that the

protest is the only requisite to be complied with in order to place the
taxpayer in a position to bring an action against the government.
The question whether or not the taxpayer, before filing his
complaint, should request the decision of the Collector of Internal
Revenue, has neither been raised nor expressly discussed in said
case. Neither is it inferable therefrom that said second requisite is
unnecessary because it has been held therein that a mere protest is
sufficient, for we should not lose sight of the fact that the above-
quoted ruling of this court is the conclusion arrived at by it after
passing upon the question raised by the appellant, to wit: "whether
or not the payment of same license fees under a mere protest of
record is equivalent to an involuntary payment in this jurisdiction,
and justifies the bringing of an action for recovery thereof." That
was the only question decided by this court, that is, whether or not
a mere protest of record is sufficient to constitute an involuntary
payment.  
chanroblesvirtualawlibrary chanrobles virtual law library

Taking now into consideration that the protest is entered for the
sole purpose of preserving the taxpayer's right to question the
legality of the tax, hence the necessity of later requesting the
decision of the Collector of Internal Revenue, and in order that said
official may have an opportunity to render a decision with
knowledge of the facts of the case, the taxpayer must have state in
his petition his reasons for questioning the legality of the tax and for
demanding the refund of the amount paid by him. Otherwise, if the
protest were the only legal condition required by the law, or were
sufficient to require the Collector of Internal Revenue to decide the
question, we would be imposing upon him a duty impossible to
comply with, inasmuch as, with the mere protest which does not
specify the grounds thereof, the collector would not know what the
taxpayer had in mind when he formulated the same.   chanroblesvirtualawlibrary chanrobles virtual law library

The Collector of Internal Revenue, however, does not claim that the
appellant should have requested his decision but, according to him,
he should have asked for the refund of the sums paid by him under
protest. In the last analysis and by their purpose, both requisites
are one and the same thing. Section 1579 of the Administrative
Code does not require the taxpayer to request the refund of the
amount paid as tax but the decision of the collector. The petition for
refund is a necessary prerequisite in the United States. There,
before the taxpayer can institute a suit for the recovery of a tax, he
must appeal to the Commissioner of Internal Revenue so that the
latter may decide the question of refund (Rev. Stats., sec. 3226;
New York Mail & Newspaper Transp. Co. vs. Anderson [1916], 228
Fed., 590; State Line & S. R. Co. vs. Davis [1915], 228 Fed., 246;
Merck vs. Treast [1009], 1704 Fed., 388; and others). The
requirement of the decision of the Collector of Internal Revenue,
demanded in the Philippines, is patterned after the requisite
demanded in section 3226 of the Revised Statutes of the United
States relative to the appeal or claim for refund addressed to the
Commissioner of Internal Revenue, as the decision of the Collector
of Internal Revenue required herein in the end has to refer
necessarily to the refund of the amount paid by the taxpayer under
protest.   chanroblesvirtualawlibrary chanrobles virtual law library

In the present case, there is no evidence of record to the effect that

before the filing of the complaint, the appellant had requested of the
defendant the refund of the sums stated in the first and second
causes of action, or the defendant's decision, after it had made its
protest. Failure to comply with this requisite is fatal because it has
been repeatedly held that the no action for the recovery of a tax
paid can be maintained without strictly complying with each and
every one of the conditions required by the law to the effect.

It is settled beyond controversy that the State, which in the eye of

the law is required as a sovereign, cannot without its consent be
sued by a citizen. In case the State through its legislative
department, has granted the right or privilege to claimants to
institute actions against it upon certain terms and conditions, all
persons seeking to avail themselves of the privilege so granted
must accept it subject to the terms and conditions attached thereto
or forming part of the right as granted by the State. (Emphasis
ours.) (State vs. Mutual Life Ins. Co., 175 Ind., 59, 71.) chanrobles virtual law library

Statutes permitting the state to be sued are in derogation of its

sovereignty and will be strictly construed. (Emphasis ours.)
(Miller vs.Pillsbury, 128 Pac., 327; and Western & Atlantic R.
Co. vs. State of Georgia, 14 L. R. A., 438.) chanrobles virtual law library

Before a suit can be commenced to recover taxes erroneously or

illegally assessed or collected, . . . an appeal must be made to and
a decision rendered by the Commissioner of Internal Revenue.
(Emphasis ours.) (Holmes, Federal Taxes, p. 615; Id., 6th ed., p.
1531.) chanrobles virtual law library

In a recent case the Supreme Court has decided that a claim for
refund is necessary as a prerequisite to recovery in the courts, . . . .
(Emphasis ours.) (Holmes, Fed. Taxes, 1921 Supplement, p. 333.)

In this jurisdiction, this court has declared:

It appears from the record that the plaintiffs not only neglected and
failed to take the proceedings required by law for the protection of
their interests but also without protest or objection of any kind paid
the taxes which they now seek to recover. . . . Not having taken the
steps required by law  for the protection of their interests, the action
can not be maintained. (Emphasis ours.) (Fernandez vs. Shearer,
19 Phil., 75, 78.) chanrobles virtual law library

The power to tax necessarily carries with it the power to collect the
taxes. This being true, the weight of authority supports the
proposition that the government may fix the conditions upon which
it will consent to litigate  the validity of its original taxes. (Emphasis
ours.) (Churchill and Tait vs.Rafferty, 32 Phil., 580, 592.) chanrobles virtual law library

In its final analysis, the letter of April first should be construed as a

polite and courteous demand and request for the refund of the
tax  in question, to be paid at such time as the correct amount was
ascertain and determined. (Emphasis ours.) (Asiatic Petroleum
Co. vs. Posadas, 52 Phil., 728, 743.)

Inasmuch as the plaintiff has not strictly complied with the

provisions of section 1579 of the Administrative Code, as amended,
it is not entitled to recover the sums paid as merchant's tax referred
to in the first and second causes of action of its amended
complaint.  
chanroblesvirtualawlibrary chanrobles virtual law library

With respect to the sum of P1295, claimed as damages in the first

cause of action no evidence has been adduced by the plaintiff in
support of said claim. The court, in its judgment, has made no
reference thereto and the plaintiff itself has made no assignment of
error on this point.   chanroblesvirtualawlibrary chanrobles virtual law library

With respect to the third cause of action, it has been established

and the appellee admits that the plaintiff paid under protest the
sum of P2,482.17, and asked of the defendant-appellee for the
refund thereof.   chanroblesvirtualawlibrary chanrobles virtual law library

The defendant demanded payment and collected the sum of

P1,996.97, together with P485.20, or a total amount of P2,482.17,
as merchant's tax on merchandise claimed by him to have been sold
and shipped by the plaintiff to Hoc Chuan Tay in Cotobato in the
year 1924. It is admitted by the defendant in his brief that of the
sum of P246.59.   chanroblesvirtualawlibrary chanrobles virtual law library

The evidence shows that Hoc Tay Chan was a branch of the plaintiff
in Cotobato. The license for said branch was obtained and paid for
on April 19, 1924, in the name of the plaintiff because the latter was
the owner of the merchandise sold in the store named Hoc Tay
Chan. The license was renewed in 1925 and the business was
continued until July 31, 1925, when the plaintiff closed said store,
keeping the merchandise left therein in the upper floor of the
building occupied by it in Cotobato up to the time said merchandise
was combined with that of Hoc Chuan Tay, another branch of said
plaintiff. For the sale made by the plaintiff in said branch named Hoc
Tay Chan, it paid the taxes corresponding to the second, third and
fourth quarters of 1924 and to the first and second quarters of
1925.  
chanroblesvirtualawlibrary chanrobles virtual law library

The defendant, in demanding of the plaintiff the payment of the

sum the refund of which is sought in the third cause of action,
mistook the plaintiffs branch Hoc Tay Chan for the firm Hoc Chuan
Tay. The evidence, however, affords no room for doubt that Hoc Tay
Chan is a branch different from Hoc Chuan Tay. Included in the
evidence presented by the plaintiff are Exhibit BBB, page 281, and
exhibit BBB, page 282, of the bundle of exhibits. Exhibit BBB (page
281) is an information dated October 23, 1931, for estafa  through
falsification of merchantile documents, filed in the Court of First
Instance of Zamboanga against Dalmacio Wee Guevarra, manager
of the plaintiff corporation, alleging that said Guevarra had falsified
a book of account by inserting therein the words " Wee Poco & Co.,
Branch" with a view to defrauding the government in the payment
of the tax of P2,155.14 (1st cause of action). Exhibit BBB (page
282) is the judgment rendered on April 19, 1932, that is, after the
complaint in this case had already been filed, acquitting the accused
and making a statement of facts as follows:

That Wee Poco & Co., inc. (the herein plaintiff and appellant) began
to operate in Zamboanga prior to July 11, 1924, and in the course
of its business, it established a branch in the municipality of
Cotobato of the Province of the same name, which branch was
known by the name of Hoc Tay Chan; that about said date, July 11,
1924, another firm Hoc Chuan Tay  was likewise established in
Cotabato, said firm Hoc Chuan Tay having been constituted by the
majority of the partners or capitalists of Wee Poco & Co., Inc. . . . .
(Emphasis ours.)

There is no room for doubt that Hoc Tay Chan was a branch of the
plaintiff-appellant for the transactions of which the latter paid not
only the license but also the merchant's tax.  
chanroblesvirtualawlibrary chanrobles virtual law library

The appellee contends that the judgment rendered in the case

against Guevara is inadmissible as evidence in the present case. But
if is taken into consideration that Guevara was charged in said case
as manager, and for being manager of the herein plaintiff-appellant
Wee Poco & Co., Inc., precisely in connection with the book of
account in which the falsification is alleged to have been committed
for the purpose of deprauding the government in the payment of
the tax the refund of which is the subject matter of the first cause
of action; if it is taken into consideration that the prosecution was
conducted by the government with the continuous collaboration and
help of the agents of the herein defendant, Collector of Internal
Revenue, so that in fact and in truth the real parties in said criminal
case are the same as in this case, the facts involved in both case
being, on the other hand, identical, this court is of the opinion that
the rendered in said other case is perfectly admissible in this case.

A record in a criminal action cannot be admitted in a civil action

except by way of inducement or to show a collateral fact. The rule
might be different if the party in the civil action had control over the
proceedings in the criminal action  as by showing that the party in
the civil action supplied the lawyer for the accused in the civil action
supplied the lawyer for the accused in the criminal action.
(Emphasis ours.) (City of Manila vs. Manila Electric Co., 52 Phil.,
586.)chanrobles virtual law library

It is also a most obvious principle of justice, that no man ought to

be bound by proceedings to which he was a stranger; but the
converse of this rule is equally true, that by proceedings to which
he was not a stranger he may well be held bound. Under the term
parties, in this connection, the law includes all who are directly
interested in the subject matter, and had a right to make defense,
or to control the proceedings, and to appeal from the judgment.
(Emphasis ours.) (1 Greenleaf, 7th ed., p. 656.) chanrobles virtual law library

Judgments, whatever, are conclusive proof, as again all persons, of

the existence of that state of thing which they actually effect, when
the existence of the state of things so effected is a fact in issue, or
is, or is deemed to be, relevant to the issue. (Steph. Ev., art. 40;
Dorrell vs.State, 85 Ind., 357.)

For all the foregoing, the judgment is affirmed as to the first and
second causes of action, and reversed as to the third, and by virtue
thereof, the appellee is ordered to refund to the appellant, without
interest, the sum of P2,235.58. The appealed judgment is likewise
affirmed in so far as it orders the defendant to return to the plaintiff
the sum of P246.59, without special pronouncement as to the costs.
So ordered.

Avance�a, C.J., and Abad Santos, J., concur.

Separate Opinions

LAUREL, J., concurring: chanrobles virtual law library

In view of the sharp conflict of opinions of the members of this court

on the important question presented in this case, I wish to state my
reasons for concurring in the result arrived at by my three assenting
brethren.  
chanroblesvirtualawlibrary chanrobles virtual law library

The facts are related in the preceding opinion and need not be
repeated for the purpose of this concurrence. In the first two causes
of action mentioned, it is admitted that no ruling of the Collector of
Internal Revenue was requested or had on the protest against the
payment of the taxes alleged to have been illegally or improperly
collected. The question, in my opinion, is whether this requirement
of the law is mandatory. Probably the auxiliary verb "shall" is an
indication of the mandatory character of the law, but as this is not
decisive, further inquiry is advisable. Section 1579 of the Revised
Administrative Code provides as follows:

SEC. 1579. Recovery of the tax paid under protest. - When the

validity of any tax is questioned, or its amount disputed or other
question raised as to liability therefor, the person against whom or
against whose property the same is sought to be enforced shall pay
the tax under instant protest, or upon protest within thirty days,
and shall thereupon request the decision of the Collector of Internal
Revenue. If the decision of the Collector of Internal Revenue is
adverse, or if no decision is made by him within six months from
the date when his decision was requested, the taxpayer may
proceed, at any time within two years after the payment of the tax
to bring an action against the Collector of Internal Revenue for the
recovery without interest of the sum alleged to have been illegally
collected, the process to be served upon him, upon the provincial
treasurer, or upon the officer collecting the tax. (Emphasis is mine.)

That the intention of the legislature is what to me appears clearly

stated in section 1579 of the Revised Administrative Code is
apparent from an examination of the sources of this section. The
original Internal Revenue Law is Act No. 1189 of the Philippine
Commission, enacted on July 2, 1904, and which took effect on
August first of that same year. It was known as "The Internal
Revenue Law of 1904." It was intended to supplant the old Spanish
laws on the subject and, in the language of the Philippine
Commissions, "it abolished the great majority of the Spanish
industrial taxes, which were so adjusted as to fall most heavily upon
the poorer classes and permitted the larger merchants,
manufacturers, and business men to escape with comparatively
little taxation" (Sixth Annual Report of the Philippine Commission
[1905], p. 64). Act No. 1189 was patterned after the Internal
Revenue Law then in force in the United States and which at the
time was the Act of Congress of July 13, 1866 (14 Stat. at L., ch.
184, p. 152) as amended by the Act of June 6, 1872 (17 Stat. at L.,
ch. 315, p. 257).  
chanroblesvirtualawlibrary chanrobles virtual law library

Section 19 of the first Act (July 13, 1866) is as follows:

SEC. 19. And be it further enacted, That no suit shall be maintained
in any court for the recovery of any tax alleged to have been
erroneously or illegally assessed or collected, until appeal shall have
been duly made to the commissioner of internal revenue  according
to the provisions of law in that regard, and the regulations of the
Secretary of the Treasury established in pursuance thereof, and a
decision of said commissioner shall be had thereon, unless such suit
shall be brought within six months from the time of said decisions,
or within six months from the time this act takes effect: Provided,
That if said decision shall be delayed more than six months from the
date of such appeal, then said suit may be brought at any time
within twelve months from the date of such appeal. (14 U. S. Stat.
at L., ch. 184, p. 152.) (Emphasis is mine.)

Section 44 of the Act of Congress of June 6, 1872, amendatory to

section 19 above-quoted of the Act of Congress of July 13, 1866, is
as follows:

SEC. 44. That all suits and proceedings for the recovery of any
internal tax alleged to have been erroneously assessed or collected,
or any penalty claimed to have been collected without authority, or
for any sum which it is alleged was excessive, or in any manner
wrongfully collected, shall be brought within two years next after
the cause of action accrued and not after; and all claims for the
refunding of any internal tax or penalty shall be presented to the
commissioner of internal revenue  within two years next after the
cause of action accrued and not after: Provided, That actions for
claims, which have accrued prior to the passage of this act, shall be
commenced in the courts or presented to the commissioner of
internal revenue within one year from the date of said passage: And
provided further, That where a claim shall be pending before said
commissioner the claimant may bring his action one year after such
decision and not after: And provided further, That no right of action
barred by any statute now in force shall be revived by any thing
herein contained. (17 U. S. Stat. at L., ch. 315, pp. 257, 258.)
(Emphasis is mine.).
It should be observed that section 44 of the Act of Congress of June
6, 1872 was finally amended by section 1103 of the Act of June 6,
1932, thus:

SEC. 1103. Limitations on Suits by Taxpayers.   chanroblesvirtualawlibrary chanrobles virtual law library

( a) Section 3226 of the Revised Statutes, as amended, is amended

to read as follows:chanrobles virtual law library

SEC. 3226. No suit or proceeding shall be maintained in any court

for the recovery of any internal-revenue tax alleged to have been
erroneously or illegally assessed or collected, or of any penalty
claimed to have been collected without authority, or of any sum
alleged to have been excessive or in any manner wrongfully
collected until a claim for refund or credit has been duly filed with
the Commissioner of Internal Revenue, according to the provisions
of law in that regard, and the regulations of the Secretary of the
Treasury established in pursuance thereof; but such suit or
proceeding may be maintained, whether or not such tax, penalty, or
sum has been paid under protest or duress. No such suit or
proceeding shall be begun before the expiration of six months from
the date of filing such claim unless the Commissioner renders a
decision thereon within that time, nor after the expiration of two
years from the date of mailing by registered mail by the
Commissioner to the taxpayer of a notice of the disallowance of the
part of the claim to which such suit or proceeding relates.   chanroblesvirtualawlibrary chanrobles virtual law library

( b) Suits or proceedings instituted before the date of the

enactment of this Act not be affected by the amendment made by
subsection ( a) of the section to section 3226 of the Revised
Statutes. In the case of suits or proceedings instituted on or later
the date of the enactment of this Act where the part of the claim to
which such suit or proceeding relates was disallowed before the
date of the enactment of this Act, the statute of limitations shall be
the same as provided by such section 3226 before its amendment
by subsection ( a) of this section. ( 47 U. S. Stat. at L., ch. 209, p.
286.) (Emphasis is mine.)
Section 52 of Act No. 1189 of the Philippine Commission, taken
from section 19 of the Act of Congress of July 13, 1866, as
amended, reads:

SEC. 52. No suit shall be maintained in any court for the recovery of
any internal revenue tax alleged to be excessive or collected without
authority or of any sum alleged to be excessive or in any manner
wrongfully collected, unless protest against such tax was made at
the time of the payment thereof or within ten days thereafter nor
until appeal shall have been duly made to the Collector of Internal
Revenue and his decision has been had thereon: Provided, That if
such decision is delayed six months from the date of appeal then
the suit may be brought without first having the decision of the
Collector of Internal Revenue: And provided further, That no suit
shall be maintained in any court for such recovery unless the same
is brought within two years next after the cause of action
accrued: And provided further, That no courts shall have authority
to grant an injunction restraining the collection of any taxes
imposed by virtue of the provisions of this Act, but the remedy of
the taxpayer who claims that he is unjustly assessed or taxed shall
be by payment under protest of the sum claimed from him by the
Collector of Internal Revenue and by action to recover back the sum
claimed to have been illegally collected. (Emphasis is mine.).

About ten years after the approval of Act No. 1189, said Act and its
amendments were raised and compiled and the result was the
enactment of Act No. 2339, otherwise known as "The Internal
Revenue Act of 1914." Section 140 of this Act is as follows:

SEC. 140. Recovery of tax paid under protest. - When the validity of

any tax is questioned, or its amount disputed, or their question
raised as to liability therefor, the person against whom or against
whose property the same is sought to be enforced shall pay the tax
under instant protest, or upon protest within ten days, and shall
thereupon request the decision of the Collector of Internal Revenue.
If the decision of the Collector of Internal Revenue is adverse, or if
no decision is made by him within six months from the date when
his decision requested, the taxpayer may proceed, at nay time
within two years after the payment of the tax, to bring an action
against the Collector of Internal Revenue for the recovery of the
sum alleged to have been illegally collected, the process to the
served upon him, upon the provincial treasurer, or upon the officer
collecting the tax. (Emphasis is mine.)

Upon the codification of the political laws of the Philippines, section

140 quoted was incorporated as section 1721 of the Administrative
Code of 1916 and finally as section 1579 of the administrative Code
of 1917 which section, as amended by Act No. 3685 (approved
November 6, 1930), is inserted in the beginning of this opinion.   chanroblesvirtualawlibrary chanrobles virtual law library

It should be observed that under the provisions of section 52 of the

original Act No. 1189 of the Philippine Commission, no suit for the
recovery of any internal-revenue tax was permitted "unless protest
against such tax was made at the time of the payment thereof or
within ten days thereafter nor until appeal shall have been duly
made to the Collector of Internal Revenue and his decision has been
had thereon." The requirement in the original section 52 of Act No.
1189 pertaining to appeal and the decision thereon of the Collector
of Internal Revenue is the same requirement found in the original
section of the Act of Congress of July 13, 1986. As incorporated in
section 140 of Act No. 2339, section 52 of Act No. 1189 has
remained substantially the same, except in so far as it refers to the
appeal. The change was more in phraseology than in substance, at
least on the point that presently concerns us. Whereas section 52
(Act No. 1189) requires "protest against such tax . . . at the time of
the payment thereof," section 140 (Act No. 2339) requires payment
"under instant protest"; and, whereas the former section and law
provide that no "suit shall be maintained . . . until appeal shall have
been duly made to the Collector of Internal Revenue and his
decision has been had thereon," the latter section and law provide
that the taxpayer "shall thereupon request the decision of the
Collector of Internal Revenue." As indicated, section 140 of Act No.
2339 was incorporated as section 1721 of the Administrative Code
of 1916 without any change; and section 1721 was afterwards
incorporated as section 1579 of the Revised Administrative Code of
1917 without any change either.   chanroblesvirtualawlibrary chanrobles virtual law library
From the history of section 1579 of the Revised Administrative Code
briefly outlined above, it seems clear that the unequivalent intention
of the legislature was to make the two conditions above-mentioned
conditions precedent to the bringing of a suit by a taxpayer for the
recovery of a tax alleged to have been illegally or improperly
collected. It is true that under section 3226 of the Revised Statutes
of the United States - as now worded - no protest is required, and
to permit the institution of an action thereunder for the recovery of
a tax it is sufficient that "a claim for refund or credit has been duly
filed with the Commissioner of Internal Revenue" - with or without
protest - but this fact is more an argument in support of the view
taken by the majority for it shows that, in the opinion of Congress,
claim for refund, if not equivalent to protest, is more important than
protest itself. As correctly observed in the preceding opinion of the
majority, request for decision on the protest could have no other
purpose than the refund of the tax. It is, indeed, inconceivable that
the taxpayer would ask the Collector of Internal Revenue to reject
his protest and confirm collection. In my opinion, also, when the
internal-revenue system was implanted here, it was thought
advisable to insert the generally accepted principle in the law of
taxation that taxes voluntarily paid cannot be recovered (26 R. C.
L., p. 459 and authorities therein cited) and hence it was deemed
expedient to require - as it has been required since the approval of
the original Philippine Internal Revenue Law of 1904 - payment
under protest and, in addition, the decision thereon by the Collector
of Internal Revenue.  
chanroblesvirtualawlibrary chanrobles virtual law library

Several decisions heretofore rendered by this court might have

given the impressions that to initiate a suit for the recovery of a tax
alleged to have been unduly or illegally collected payment under
protest was sufficient ( See, for instance, Bank of the Philippine
Islands vs. Trinidad, 42 Phil., statement of facts on p. 220; Ayala de
Roxas vs. City of Manila, 27 Phil., 336, 346 [involving real property
tax]; and cases cited in Viuda e Hijos de Pedro P.
Roxas vs. Rafferty, 37 Phil., 957). An examination, however, of
these cases will show that the question presently under
consideration has not been directly presented, was not the lis
mota  there, and that the case were therefore decided silenter  on
the question which is now submitted for the first time for
determination by this court.  
chanroblesvirtualawlibrary chanrobles virtual law library

Coming to the fundamentals, it should be observed that taxation is

an essential attribute of sovereignty. It is said to be the greatest of
all governmental powers, so ever-pervading and insistent that,
according to Chief Justice Marshall of the Supreme Court of the
United States, the power to tax involves the power to destroy
(M'Culloch vs. State of Maryland, 4 Wheat., 316; 4 Law. ed., 579).
So overwhelming is this power that injunction is not available to
restrain the collection of a tax (sec. 1578, Adm. Code
Sarasola vs. Trinidad, 40 Phil., 252); the power to collect taxes is
not barred by a general statute of limitations (26 R. C. L., 388); the
right to collect delinquent taxes is not affected by the passage of an
Act repealing the statute under which said taxes were assessed and
levied, in the absence of legislative intent to the contrary (Cooley,
Taxation, pp. 18, 19, 295); even in case of recovery, interest is not
awarded against the government; and, where the state permits
suits to be brought against it for the recovery of taxes, as in our
case, the remedy provided is exclusive and no other remedy can be
substituted for it (Snyder vs. Marks, 109 U. S., 189. See also,
Churchill and Tait vs. Rafferty, 32 Phil., 580, 587, and
Sarasola vs. Trinidad, 40 Phil., 252, 257). In the exercise of its
power of sovereignty, the State consents to be sued as an
expression of public policy. In such a case, the power of the State
and the remedy of the citizen are made reciprocal and the judiciary
is made the arbitrator of the controversy between State and citizen
(Viuda e Hijos de Pedro P. Roxas vs. Rafferty, 37 Phil., 957). But, in
consenting to be sued and waiving its time-honored immunity to be
sued, it may impose terms and conditions under which it will
consent to be sued (Murray vs.Wilson Distilling Co., 213 U. S., 151;
35 Law. ed., 742; State vs. Mut. Life Ins., Co. 175 Ind., 59).   chanroblesvirtualawlibrary chanrobles virtual law library

Much can be said against the idea of hearing about the freedom of
the citizen to go to the courts with a view to impugning the validity
of the tax sought to be collected. The modern tendency is - and
should perhaps be - towards liberality in permitting the citizens to
appeal to courts to halt what may, not infrequently, be the excesses
of the collecting officers of the government to the end that no
person may be deprived of his property without due process of law
or denied the equal protection of the laws. But it is political
aphorism that courts cannot legislative however much they have
already judicially legislated. When, therefore, the legislative
department imposed ( a) payment under protest and ( b) decision
of the Collector of Internal Revenue thereon as prerequisites to the
bringing or institution of a suit for the refund or recovery of a tax
alleged to have been illegally or improperly collected, it seems to
me clear that this court, if it were to hold its ground and keep itself
within the domain of its constitutional boundaries, cannot say that
payment under protest is sufficient and that the other requirement
is unnecessary. If the law is clear it must be given effect. There is
no other alternative. Our inescapable obligation is to say what the
law is and not what the law should be.  chanroblesvirtualawlibrary chanrobles virtual law library

If, then, the Legislature, in the exercise of its legitimate authority

has required payment under protest and decision of the Collector of
Internal Revenue on that protest as conditions precedent to the
bringing of an action for the recovery of a tax the courts can neither
add to, or eliminate any of, these conditions; and the least that can
be said is, that this Supreme Court owes it to the coordinate branch
of the government to abide by and respect its wisdom and should
enforce the legislative will then called upon to do so in appropriate
cases unless the measure is found to be repugnant to the
fundamental law. It is almost trite to say now that the propriety and
expediency of legislation is not a question for the courts to pass
upon and determine. The power of taxation being legislative, all its
incidents are within the control of the legislature. The remedies to
be afforded the taxpayer, the mode and method to be pursued, and
the conditions to be complied with, are matters within the discretion
of the legislature, and in respect to which its determination should
be and is final. (Genet vs. City of Brooklyn [1885], 99 N. Y., 296,
306; 1 N. E., 77; People ex rel. Hatch vs. Reardon [1906], 184 N.
Y., 431; 77 N. E., 970; 8 L. R. A. [N. S.], 314; 112 Am. St. Rep.,
628; 6 Ann. Cas., 515; People ex rel. Detroit & H. R. Co. vs. Salem
[1870], 20 Mich., 452; 4 Am. Rep., 400.) Under our constitutional
system, the protection against unwise or oppressive legislation,
within constitutional bounds, is by an appeal to the justice and
patriotism of the representatives of the people (Cooley, Const. Lim.,
7th ed., ch. VII, 231). As vehemently expressed by Chief Justice
Marshall, in M'Culloch vs. State of Maryland, supra, the only security
against the abuse of the power of taxation is to be found in the
structure of the government itself. "In imposing a tax, the
Legislative acts upon its constituents. This is, in general, a sufficient
security against erroneous and oppressive taxation. The people of a
state, therefore, give to their government a right of taxing
themselves and their property, and as the exigencies of government
cannot be limited, they prescribed no limits to the exercise of this
right, resting confidently on the interest of the legislator, and on the
influence of the constituents over their representative, to guard
them against its abuse." ( See also, Providence Bank vs. Billings and
Pittman [1830], 4 Pet., 514, 516; 7 Law. ed., 939, 950.) chanrobles virtual law library

Viewed from the practical angle, it should be stated that the

decision of the Collector of Internal Revenue is not necessarily final.
Under our department organization ( Vide  Acts Nos. 2666, 2803,
4007 and 4121), continued in force by paragraph 1 of section 12,
Article VII, of the Constitution, the Secretary of Finance has "direct
control, direction, and supervision" over the Bureau of Internal
Revenue, and "may, any provision of existing law to the contrary
notwithstanding, repeal or modify the decisions" of the Collector of
Internal Revenue "when advisable in the public interest" (sec. 79
[c], Revised Administrative Code). Administrative remedies should
be exhausted before resorting to the courts. This is not saying,
however, that in our case the taxpayer must first appeal to the
Secretary of Finance before going to court, because such action is
not required by section 1 579, but his principle is here mentioned to
indicate the practical consideration which was probably present in
the mind of the legislator where he required the taxpayer's protest
and the as conditions precedent to the valid exercise of the
taxpayer's right of action in a court of justice. The Secretary of
Finance might reverse the action of the Collector of Internal
Revenue, in which case, it would not be necessary to go to the
courts. And, obviously enough, if there is no decision by the
Collector of Internal Revenue no appeal could be taken therefrom to
the department head. The object of the statute evidently is to give
to the Collector of Internal Revenue an opportunity to decide
whether in its judgment the tax is legal or illegal, and to the
taxpayer a chance to recur to the Department of Finance in case of
adverse decision of the collector, and thus save the delay and
expense of litigation ( Vide  Loomis vs. Wattles [C. A. Neb., 1920],
266 Fed., 876).   chanroblesvirtualawlibrary chanrobles virtual law library

With reference to the third cause of action, the evidence clearly

shows that Hoc Chuan Tay was a branch of the plaintiff Wee Poco &
Co., Inc. in Cotobato. My concurrence, however, is based
furthermore on the fact that the Collector of Internal Revenue in
this particular case was not certain of the tax he was collecting as
indicated by his offer to return to the taxpayer the sum of P246.59
out of the total tax collected under items compromised in the third
cause of action.

IMPERIAL, J.,  concurring and dissenting: chanrobles virtual law library

I concur in the majority opinion in so far as it sustains the third

cause of action of the plaintiff and reverses the appealed judgment
with respect to the point in question: but I dissent from that part
thereof dismissing the first two causes of action of the plaintiff,
affirming, as a consequence, the judgment of the Court of First
Instance.  
chanroblesvirtualawlibrary chanrobles virtual law library

I. My dissent is based on the interpretation given to section 1579 of

the Revised Administrative Case, as amended by Act No. 3685,
which reads as follows:

When the validity of any tax is questioned, or its amount disputed,

or other question raised as to liability therefor, the person against
whom or against whose property the same is sought to be enforced
shall pay the tax under instant protest, or upon protest within thirty
days, and shall thereupon request the decision of the Collector of
Internal Revenue. If the decision of the Collector of Internal
Revenue is adverse, or if no decision is made by him with six
months from the date when his decision was requested, the
taxpayer may proceed, at any time within two years after the
payment of the tax to bring an action against the Collector of
Internal Revenue for the recovery without interest of the sum
alleged to have been illegally collected, the process to be served
upon him, upon the provincial treasurer, or upon the officer
collecting the tax.

The majority opinion holds that, in connection with the first two
causes of action, the plaintiff has made payment of the taxes
demanded of him under protest, but conclude that both causes of
action can not be maintained because the plaintiff did not request
the refund or reimbursement of the taxes paid under protest. To
arrive at this conclusions, it admits that section 1579 does not
require such condition, but explains that the provision requiring the
taxpayer to request the decision of the Collector of Internal Revenue
is in effect equivalent to a demand for reimbursement required in
some statutes of some State of the Union. I dissent from such
interpretation. In the intention of the law had been different, the
phraseology used in said provisions would not have been couched
as it appears in the text. On the contrary, the law in prescribing that
the taxpayer should request the decision of the Collector of Internal
Revenue, evidently refer to the protest which is the fact preceeding
the request for a decision. If the protest is of no value and need not
be decided by said official, then what is the thing to be decided by
him according to the law? This reasoning logically leads to the
conclusion that it is the protest that assumes the role of the demand
for refund required by some statutes of some States of the
American Union as condition precedent to the filing of an action for
the return of an illegally collected tax.  
chanroblesvirtualawlibrary chanrobles virtual law library

II. The protest filed by the plaintiff implicitly carried with in the
demand on the Collector of Internal Revenue to decide the same.
For this reason, it should be concluded that the plaintiff, in
formulating his protest substantially complied with the only two
conditions precedent prescribed by section 1579, as amended. As
was stated by the Supreme Court of Colorado in the case by the
Board of Country Commissioners of Arapahoe Country vs. Cutter (3
Colo. Rep., 349, 351): "As the taxes were paid under protest no
demand was necessary before bringing suit. The object of a
demanded is to give the party on whom it is made an opportunity to
refund, without the expense incident to litigation, the taxes that had
been illegally exacted. But where the taxes are paid under protest
to coerce payment, no further demand is required. Payment under
such circumstances cannot be considered voluntary. The protest by
the tax payer is of itself a notice to the treasurer that he regards
the tax as illegal, and that he intends, if needed be, to enforce his
right by an appropriate proceeding." chanrobles virtual law library

II. The statutory provisions on taxes requiring conditions precedent

to the filing of an ordinary civil action for the refund of an illegally
paid tax should be liberally construed by the courts to enable them
to inquire into and determine the merits of the case
(Connelly vs. City and County of San Francisco, 127 P., 834;
Columbia Gaslight Co. vs. Mobley, 137 S. E., 211; 61 C. J., 994,
sed. 1272).   chanroblesvirtualawlibrary chanrobles virtual law library

For the foregoing reasons, I am of the opinion that the first two
causes of action should have been passed upon and not rejected
flatly merely for lack of the requisite referred to in the majority
opinion. After considering the evidence of record, which, in my
opinion, shows that the appellant was not bound to pay the taxes
demanded, said two causes of action should be decided in favor of
the plaintiff and the defendant should refund to it the sums of
money collected illegally.

Diaz and Villa-Ruel, JJ., concur in the dissenting opinion of Justice

Imperial.
REYES v. ALMANZOR
GR Nos. L-49839-46, April 26, 1991
196 SCRA 322

FACTS: Petitioners JBL Reyes et al. owned a parcel of land in Tondo which are leased and occupied as
dwelling
units by tenants who were paying monthly rentals of not exceeding P300. Sometimes in 1971 the Rental
Freezing Law was passed prohibiting for one year from its effectivity, an increase in monthly rentals of
dwelling
units where rentals do not exceed three hundred pesos (P300.00), so that the Reyeses were precluded from
raising the rents and from ejecting the tenants. In 1973, respondent City Assessor of Manila re-classified and
reassessed the value of the subject properties based on the schedule of market values, which entailed an
increase in the corresponding tax rates prompting petitioners to file a Memorandum of Disagreement averring
that the reassessments made were "excessive, unwarranted, inequitable, confiscatory and unconstitutional"
considering that the taxes imposed upon them greatly exceeded the annual income derived from their
properties. They argued that the income approach should have been used in determining the land values instead
of the comparable sales approach which the City Assessor adopted.

ISSUE: Is the approach on tax assessment used by the City Assessor reasonable?
HELD: No. The taxing power has the authority to make a reasonable and natural classification for purposes of
taxation but the government's act must not be prompted by a spirit of hostility, or at the very least
discrimination
that finds no support in reason. It suffices then that the laws operate equally and uniformly on all persons under
similar circumstances or that all persons must be treated in the same manner, the conditions not being different
both in the privileges conferred and the liabilities imposed.
  Consequently, it stands to reason that petitioners who are burdened by the government by its Rental Freezing
Laws (then R.A. No. 6359 and P.D. 20) under the principle of social justice should not now be penalized by
the
same government by the imposition of excessive taxes petitioners can ill afford and eventually result in the
forfeiture of their properties.

G.R. No. L-22074             April 30, 1965

THE PHILIPPINE GUARANTY CO., INC., petitioner, 

vs.
THE COMMISSIONER OF INTERNAL REVENUE and THE COURT OF TAX
APPEALS, respondents.

Josue H. Gustilo and Ramirez and Ortigas for petitioner.

Office of the Solicitor General and Attorney V.G. Saldajena for respondents.

BENGZON, J.P., J.:

The Philippine Guaranty Co., Inc., a domestic insurance company, entered into reinsurance
contracts, on various dates, with foreign insurance companies not doing business in the Philippines
namely: Imperio Compañia de Seguros, La Union y El Fenix Español, Overseas Assurance Corp.,
Ltd., Socieded Anonima de Reaseguros Alianza, Tokio Marino & Fire Insurance Co., Ltd., Union
Assurance Society Ltd., Swiss Reinsurance Company and Tariff Reinsurance Limited. Philippine
Guaranty Co., Inc., thereby agreed to cede to the foreign reinsurers a portion of the premiums on
insurance it has originally underwritten in the Philippines, in consideration for the assumption by the
latter of liability on an equivalent portion of the risks insured. Said reinsurrance contracts were
signed by Philippine Guaranty Co., Inc. in Manila and by the foreign reinsurers outside the
Philippines, except the contract with Swiss Reinsurance Company, which was signed by both parties
in Switzerland.

The reinsurance contracts made the commencement of the reinsurers' liability simultaneous with that
of Philippine Guaranty Co., Inc. under the original insurance. Philippine Guaranty Co., Inc. was
required to keep a register in Manila where the risks ceded to the foreign reinsurers where entered,
and entry therein was binding upon the reinsurers. A proportionate amount of taxes on insurance
premiums not recovered from the original assured were to be paid for by the foreign reinsurers. The
foreign reinsurers further agreed, in consideration for managing or administering their affairs in the
Philippines, to compensate the Philippine Guaranty Co., Inc., in an amount equal to 5% of the
reinsurance premiums. Conflicts and/or differences between the parties under the reinsurance
contracts were to be arbitrated in Manila. Philippine Guaranty Co., Inc. and Swiss Reinsurance
Company stipulated that their contract shall be construed by the laws of the Philippines.

Pursuant to the aforesaid reinsurance contracts, Philippine Guaranty Co., Inc. ceded to the foreign
reinsurers the following premiums:

1953 . . . . . . . . . . . . . . . . . . . . . P842,466.71
 1954 . . . . . . . . . . . . . . . . . . . . . 721,471.85

Said premiums were excluded by Philippine Guaranty Co., Inc. from its gross income when it file its
income tax returns for 1953 and 1954. Furthermore, it did not withhold or pay tax on them.
Consequently, per letter dated April 13, 1959, the Commissioner of Internal Revenue assessed
against Philippine Guaranty Co., Inc. withholding tax on the ceded reinsurance premiums, thus:

1953
Gross premium per investigation . . . . . . . . . . P768,580.00
Withholding tax due thereon at 24% . . . . . . . . P184,459.00
25% surcharge . . . . . . . . . . . . . . . . . . . . . . . . . . 46,114.00
Compromise for non-filing of withholding 
100.00
income tax return . . . . . . . . . . . . . . . . . . . . . . . . .

TOTAL AMOUNT DUE & COLLECTIBLE . . . . P230,673.00

==========
1954
Gross premium per investigation . . . . . . . . . . P780.880.68
Withholding tax due thereon at 24% . . . . . . . . P184,411.00
25% surcharge . . . . . . . . . . . . . . . . . . . . . . . . . . P184,411.00
Compromise for non-filing of withholding 
100.00
income tax return . . . . . . . . . . . . . . . . . . . . . . . . .

TOTAL AMOUNT DUE & COLLECTIBLE . . . . P234,364.00

==========

Philippine Guaranty Co., Inc., protested the assessment on the ground that reinsurance premiums
ceded to foreign reinsurers not doing business in the Philippines are not subject to withholding tax.
Its protest was denied and it appealed to the Court of Tax Appeals.

On July 6, 1963, the Court of Tax Appeals rendered judgment with this dispositive portion:

IN VIEW OF THE FOREGOING CONSIDERATIONS, petitioner Philippine Guaranty Co., Inc.

is hereby ordered to pay to the Commissioner of Internal Revenue the respective sums of
P202,192.00 and P173,153.00 or the total sum of 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.

Bengzon, C.J., Bautista Angelo, Concepcion, Reyes, J.B.L., Barrera, Paredes, Dizon and Regala,
JJ., concur.
Makalintal and Zaldivar, JJ., took no part.

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

COMMISSIONER OF INTERNAL REVENUE, petitioner, 

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

CRUZ, J.:

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

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

We deal first with the procedural question.

The record shows that on January 14, 1965, the private respondent, a domestic corporation
engaged in engineering, construction and other allied activities, received a letter from the petitioner
assessing it in the total amount of P83,183.85 as delinquency income taxes for the years 1958 and
1959.  On January 18, 1965, Algue flied a letter of protest or request for reconsideration, which letter
1

was stamp received on the same day in the office of the petitioner.   On March 12, 1965, a warrant of
2

distraint and levy was presented to the private respondent, through its counsel, Atty. Alberto
Guevara, Jr., who refused to receive it on the ground of the pending protest.   A search of the protest 3

in the dockets of the case proved fruitless. Atty. Guevara produced his file copy and gave a
photostat to BIR agent Ramon Reyes, who deferred service of the warrant.   On April 7, 1965, Atty. 4

Guevara was finally informed that the BIR was not taking any action on the protest and it was only
then that he accepted the warrant of distraint and levy earlier sought to be served.  Sixteen days 5

later, on April 23, 1965, Algue filed a petition for review of the decision of the Commissioner of
Internal Revenue with the Court of Tax Appeals. 6

The above chronology shows that the petition was filed seasonably. According to Rep. Act No. 1125,
the appeal may be made within thirty days after receipt of the decision or ruling challenged.  It is true 7

that as a rule the warrant of distraint and levy is "proof of the finality of the assessment"   and 8

renders hopeless a request for reconsideration,"   being "tantamount to an outright denial thereof
9
and makes the said request deemed rejected."   But there is a special circumstance in the case at
10

bar that prevents application of this accepted doctrine.

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

As the Court of Tax Appeals correctly noted,"   the protest filed by private respondent was not pro
11

forma and was based on strong legal considerations. It thus had the effect of suspending on January
18, 1965, when it was filed, the reglementary period which started on the date the assessment was
received, viz., January 14, 1965. The period started running again only on April 7, 1965, when the
private respondent was definitely informed of the implied rejection of the said protest and the warrant
was finally served on it. Hence, when the appeal was filed on April 23, 1965, only 20 days of the
reglementary period had been consumed.

Now for the substantive question.

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

Parenthetically, it may be observed that the petitioner had Originally claimed these promotional fees
to be personal holding company income   but later conformed to the decision of the respondent
12

court rejecting this assertion.  In fact, as the said court found, the amount was earned through the
13

joint efforts of the persons among whom it was distributed It has been established that the Philippine
Sugar Estate Development Company had earlier appointed Algue as its agent, authorizing it to sell
its land, factories and oil manufacturing process. Pursuant to such authority, Alberto Guevara, Jr.,
Eduardo Guevara, Isabel Guevara, Edith, O'Farell, and Pablo Sanchez, worked for the formation of
the Vegetable Oil Investment Corporation, inducing other persons to invest in it.  Ultimately, after its
14

incorporation largely through the promotion of the said persons, this new corporation purchased the
PSEDC properties.  For this sale, Algue received as agent a commission of P126,000.00, and it was
15

from this commission that the P75,000.00 promotional fees were paid to the aforenamed
individuals.
16

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

examining the evidence, that no distribution of dividends was involved. 18

The petitioner claims that these payments are fictitious because most of the payees are members of
the same family in control of Algue. It is argued that no indication was made as to how such
payments were made, whether by check or in cash, and there is not enough substantiation of such
payments. In short, the petitioner suggests a tax dodge, an attempt to evade a legitimate
assessment by involving an imaginary deduction.
We find that these suspicions were adequately met by the private respondent when its President,
Alberto Guevara, and the accountant, Cecilia V. de Jesus, testified that the payments were not made
in one lump sum but periodically and in different amounts as each payee's need arose.   It should be
19

remembered that this was a family corporation where strict business procedures were not applied
and immediate issuance of receipts was not required. Even so, at the end of the year, when the
books were to be closed, each payee made an accounting of all of the fees received by him or her,
to make up the total of P75,000.00.   Admittedly, everything seemed to be informal. This
20

arrangement was understandable, however, in view of the close relationship among the persons in
the family corporation.

We agree with the respondent court that the amount of the promotional fees was not excessive. The
total commission paid by the Philippine Sugar Estate Development Co. to the private respondent
was P125,000.00.  After deducting the said fees, Algue still had a balance of P50,000.00 as clear
21

profit from the transaction. The amount of P75,000.00 was 60% of the total commission. This was a
reasonable proportion, considering that it was the payees who did practically everything, from the
formation of the Vegetable Oil Investment Corporation to the actual purchase by it of the Sugar
Estate properties. This finding of the respondent court is in accord with the following provision of the
Tax Code:

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

(a) Expenses:

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

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

SEC. 70. Compensation for personal services.--Among the ordinary and necessary

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

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

It is worth noting at this point that most of the payees were not in the regular employ of Algue nor
were they its controlling stockholders.  23
The Solicitor General is correct when he says that the burden is on the taxpayer to prove the validity
of the claimed deduction. In the present case, however, we find that the onus has been discharged
satisfactorily. The private respondent has proved that the payment of the fees was necessary and
reasonable in the light of the efforts exerted by the payees in inducing investors and prominent
businessmen to venture in an experimental enterprise and involve themselves in a new business
requiring millions of pesos. This was no mean feat and should be, as it was, sufficiently
recompensed.

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

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

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

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

SO ORDERED.

G.R. No. 120880 June 5, 1997

FERDINAND R. MARCOS II, petitioner, 

vs.
COURT OF APPEALS, THE COMMISSIONER OF THE BUREAU OF INTERNAL REVENUE and
HERMINIA D. DE GUZMAN, respondents.

TORRES, JR., J.:

In this Petition for Review on Certiorari, Government action is once again assailed as precipitate and
unfair, suffering the basic and oftly implored requisites of due process of law. Specifically, the
petition assails the Decision  of the Court of Appeals dated November 29, 1994 in CA-G.R. SP No.
1

31363, where the said court held:

In view of all the foregoing, we rule that the deficiency income tax assessments and
estate tax assessment, are already final and (u)nappealable-and-the subsequent
 levy of real properties is a tax remedy resorted to by the government, sanctioned by
Section 213 and 218 of the National Internal Revenue Code. This summary tax
remedy is distinct and separate from the other tax remedies (such as Judicial Civil
actions and Criminal actions), and is not affected or precluded by the pendency of
any other tax remedies instituted by the government.

WHEREFORE, premises considered, judgment is hereby rendered DISMISSING the

petition for certiorari with prayer for Restraining Order and Injunction.

No pronouncements as to costs.

SO ORDERED.

More than seven years since the demise of the late Ferdinand E. Marcos, the former President of
the Republic of the Philippines, the matter of the settlement of his estate, and its dues to the
government in estate taxes, are still unresolved, the latter issue being now before this Court for
resolution. Specifically, petitioner Ferdinand R. Marcos II, the eldest son of the decedent, questions
the actuations of the respondent Commissioner of Internal Revenue in assessing, and collecting
through the summary remedy of Levy on Real Properties, estate and income tax delinquencies upon
the estate and properties of his father, despite the pendency of the proceedings on probate of the
will of the late president, which is docketed as Sp. Proc. No. 10279 in the Regional Trial Court of
Pasig, Branch 156.

Petitioner had filed with the respondent Court of Appeals a Petition for Certiorari and Prohibition with
an application for writ of preliminary injunction and/or temporary restraining order on June 28, 1993,
seeking to —

I. Annul and set aside the Notices of Levy on real property dated February 22, 1993
and May 20, 1993, issued by respondent Commissioner of Internal Revenue;

II. Annul and set aside the Notices of Sale dated May 26, 1993;

III. Enjoin the Head Revenue Executive Assistant Director II (Collection Service),
from proceeding with the Auction of the real properties covered by Notices of Sale.

After the parties had pleaded their case, the Court of Appeals rendered its Decision   on November
2

29, 1994, ruling that the deficiency assessments for estate and income tax made upon the petitioner
and the estate of the deceased President Marcos have already become final and unappealable, and
may thus be enforced by the summary remedy of levying upon the properties of the late President,
as was done by the respondent Commissioner of Internal Revenue.

WHEREFORE, premises considered judgment is hereby rendered DISMISSING the

petition for Certiorari with prayer for Restraining Order and Injunction.

No pronouncements as to cost.

SO ORDERED.

Unperturbed, petitioner is now before us assailing the validity of the appellate court's decision,
assigning the following as errors:
 A. RESPONDENT COURT MANIFESTLY ERRED IN RULING THAT THE
SUMMARY TAX REMEDIES RESORTED TO BY THE GOVERNMENT ARE NOT
AFFECTED AND PRECLUDED BY THE PENDENCY OF THE SPECIAL
PROCEEDING FOR THE ALLOWANCE OF THE LATE PRESIDENT'S ALLEGED
WILL. TO THE CONTRARY, THIS PROBATE PROCEEDING PRECISELY PLACED
ALL PROPERTIES WHICH FORM PART OF THE LATE PRESIDENT'S ESTATE IN
CUSTODIA LEGIS OF THE PROBATE COURT TO THE EXCLUSION OF ALL
OTHER COURTS AND ADMINISTRATIVE AGENCIES.

B. RESPONDENT COURT ARBITRARILY ERRED IN SWEEPINGLY DECIDING

THAT SINCE THE TAX ASSESSMENTS OF PETITIONER AND HIS PARENTS
HAD ALREADY BECOME FINAL AND UNAPPEALABLE, THERE WAS NO NEED
TO GO INTO THE MERITS OF THE GROUNDS CITED IN THE PETITION.
INDEPENDENT OF WHETHER THE TAX ASSESSMENTS HAD ALREADY
BECOME FINAL, HOWEVER, PETITIONER HAS THE RIGHT TO QUESTION THE
UNLAWFUL MANNER AND METHOD IN WHICH TAX COLLECTION IS SOUGHT
TO BE ENFORCED BY RESPONDENTS COMMISSIONER AND DE GUZMAN.
THUS, RESPONDENT COURT SHOULD HAVE FAVORABLY CONSIDERED THE
MERITS OF THE FOLLOWING GROUNDS IN THE PETITION:

(1) The Notices of Levy on Real Property were issued beyond the
period provided in the Revenue Memorandum Circular No. 38-68.

(2) [a] The numerous pending court cases questioning the late
President's ownership or interests in several properties (both
personal and real) make the total value of his estate, and the
consequent estate tax due, incapable of exact pecuniary
determination at this time. Thus, respondents' assessment of the
estate tax and their issuance of the Notices of Levy and Sale are
premature, confiscatory and oppressive.

[b] Petitioner, as one of the late President's compulsory heirs, was

never notified, much less served with copies of the Notices of Levy,
contrary to the mandate of Section 213 of the NIRC. As such,
petitioner was never given an opportunity to contest the Notices in
violation of his right to due process of law.

C. ON ACCOUNT OF THE CLEAR MERIT OF THE PETITION, RESPONDENT

COURT MANIFESTLY ERRED IN RULING THAT IT HAD NO POWER TO GRANT
INJUNCTIVE RELIEF TO PETITIONER. SECTION 219 OF THE NIRC
NOTWITHSTANDING, COURTS POSSESS THE POWER TO ISSUE A WRIT OF
PRELIMINARY INJUNCTION TO RESTRAIN RESPONDENTS COMMISSIONER'S
AND DE GUZMAN'S ARBITRARY METHOD OF COLLECTING THE ALLEGED
DEFICIENCY ESTATE AND INCOME TAXES BY MEANS OF LEVY.

The facts as found by the appellate court are undisputed, and are hereby adopted:

On September 29, 1989, former President Ferdinand Marcos died in Honolulu,

Hawaii, USA.

On June 27, 1990, a Special Tax Audit Team was created to conduct investigations
and examinations of the tax liabilities and obligations of the late president, as well as
that of his family, associates and "cronies". Said audit team concluded its
investigation with a Memorandum dated July 26, 1991. The investigation disclosed
that the Marcoses failed to file a written notice of the death of the decedent, an estate
tax returns [sic], as well as several income tax returns covering the years 1982 to
1986, — all in violation of the National Internal Revenue Code (NIRC).

Subsequently, criminal charges were filed against Mrs. Imelda R. Marcos before the
Regional Trial of Quezon City for violations of Sections 82, 83 and 84 (has penalized
under Sections 253 and 254 in relation to Section 252 — a & b) of the National
Internal Revenue Code (NIRC).

The Commissioner of Internal Revenue thereby caused the preparation and filing of
the Estate Tax Return for the estate of the late president, the Income Tax Returns of
the Spouses Marcos for the years 1985 to 1986, and the Income Tax Returns of
petitioner Ferdinand "Bongbong" Marcos II for the years 1982 to 1985.

On July 26, 1991, the BIR issued the following: (1) Deficiency estate tax assessment
no. FAC-2-89-91-002464 (against the estate of the late president Ferdinand Marcos
in the amount of P23,293,607,638.00 Pesos); (2) Deficiency income tax assessment
no. FAC-1-85-91-002452 and Deficiency income tax assessment no. FAC-1-86-91-
002451 (against the Spouses Ferdinand and Imelda Marcos in the amounts of
P149,551.70 and P184,009,737.40 representing deficiency income tax for the years
1985 and 1986); (3) Deficiency income tax assessment nos. FAC-1-82-91-002460 to
FAC-1-85-91-002463 (against petitioner Ferdinand "Bongbong" Marcos II in the
amounts of P258.70 pesos; P9,386.40 Pesos; P4,388.30 Pesos; and P6,376.60
Pesos representing his deficiency income taxes for the years 1982 to 1985).

The Commissioner of Internal Revenue avers that copies of the deficiency estate and
income tax assessments were all personally and constructively served on August 26,
1991 and September 12, 1991 upon Mrs. Imelda Marcos (through her caretaker Mr.
Martinez) at her last known address at No. 204 Ortega St., San Juan, M.M. (Annexes
"D" and "E" of the Petition). Likewise, copies of the deficiency tax assessments
issued against petitioner Ferdinand "Bongbong" Marcos II were also personally and
constructively served upon him (through his caretaker) on September 12, 1991, at
his last known address at Don Mariano Marcos St. corner P. Guevarra St., San Juan,
M.M. (Annexes "J" and "J-1" of the Petition). Thereafter, Formal Assessment notices
were served on October 20, 1992, upon Mrs. Marcos c/o petitioner, at his office,
House of Representatives, Batasan Pambansa, Quezon City. Moreover, a notice to
Taxpayer inviting Mrs. Marcos (or her duly authorized representative or counsel), to a
conference, was furnished the counsel of Mrs. Marcos, Dean Antonio Coronel — but
to no avail.

The deficiency tax assessments were not protested administratively, by Mrs. Marcos
and the other heirs of the late president, within 30 days from service of said
assessments.

On February 22, 1993, the BIR Commissioner issued twenty-two notices of levy on
real property against certain parcels of land owned by the Marcoses — to satisfy the
alleged estate tax and deficiency income taxes of Spouses Marcos.

On May 20, 1993, four more Notices of Levy on real property were issued for the
purpose of satisfying the deficiency income taxes.
 On May 26, 1993, additional four (4) notices of Levy on real property were again
issued. The foregoing tax remedies were resorted to pursuant to Sections 205 and
213 of the National Internal Revenue Code (NIRC).

In response to a letter dated March 12, 1993 sent by Atty. Loreto Ata (counsel of
herein petitioner) calling the attention of the BIR and requesting that they be duly
notified of any action taken by the BIR affecting the interest of their client Ferdinand
"Bongbong" Marcos II, as well as the interest of the late president — copies of the
aforesaid notices were, served on April 7, 1993 and on June 10, 1993, upon Mrs.
Imelda Marcos, the petitioner, and their counsel of record, "De Borja, Medialdea, Ata,
Bello, Guevarra and Serapio Law Office".

Notices of sale at public auction were posted on May 26, 1993, at the lobby of the
City Hall of Tacloban City. The public auction for the sale of the eleven (11) parcels
of land took place on July 5, 1993. There being no bidder, the lots were declared
forfeited in favor of the government.

On June 25, 1993, petitioner Ferdinand "Bongbong" Marcos II filed the instant
petition for certiorari and prohibition under Rule 65 of the Rules of Court, with prayer
for temporary restraining order and/or writ of preliminary injunction.

It has been repeatedly observed, and not without merit, that the enforcement of tax laws and the
collection of taxes, is of paramount importance for the sustenance of government. Taxes are the
lifeblood of the government and should be collected without unnecessary hindrance. However, such
collection should be made in accordance with law as any arbitrariness will negate the very reason for
government itself. It is therefore necessary to reconcile the apparently conflicting interests of the
authorities and the taxpayers so that the real purpose of taxation, which is the promotion of the
common good, may be achieved.  3

Whether or not the proper avenues of assessment and collection of the said tax obligations were
taken by the respondent Bureau is now the subject of the Court's inquiry.

Petitioner posits that notices of levy, notices of sale, and subsequent sale of properties of the late
President Marcos effected by the BIR are null and void for disregarding the established procedure
for the enforcement of taxes due upon the estate of the deceased. The case of Domingo
vs. Garlitos   is specifically cited to bolster the argument that "the ordinary procedure by which to
4

settle claims of indebtedness against the estate of a deceased, person, as in an inheritance (estate)
tax, is for the claimant to present a claim before the probate court so that said court may order the
administrator to pay the amount therefor." This remedy is allegedly, exclusive, and cannot be
effected through any other means.

Petitioner goes further, submitting that the probate court is not precluded from denying a request by
the government for the immediate payment of taxes, and should order the payment of the same only
within the period fixed by the probate court for the payment of all the debts of the decedent. In this
regard, petitioner cites the case of Collector of Internal Revenue vs. The Administratrix of the Estate
of Echarri (67 Phil 502), where it was held that:

The case of Pineda vs. Court of First Instance of Tayabas and Collector of Internal
Revenue (52 Phil 803), relied upon by the petitioner-appellant is good authority on
the proposition that the court having control over the administration proceedings has
jurisdiction to entertain the claim presented by the government for taxes due and to
order the administrator to pay the tax should it find that the assessment was proper,
 and that the tax was legal, due and collectible. And the rule laid down in that case
must be understood in relation to the case of Collector of Customs
vs. Haygood, supra., as to the procedure to be followed in a given case by the
government to effectuate the collection of the tax. Categorically stated, where during
the pendency of judicial administration over the estate of a deceased person a claim
for taxes is presented by the government, the court has the authority to order
payment by the administrator; but, in the same way that it has authority to order
payment or satisfaction, it also has the negative authority to deny the same. While
there are cases where courts are required to perform certain duties mandatory and
ministerial in character, the function of the court in a case of the present character is
not one of them; and here, the court cannot be an organism endowed with latitude of
judgment in one direction, and converted into a mere mechanical contrivance in
another direction.

On the other hand, it is argued by the BIR, that the state's authority to collect internal revenue taxes
is paramount. Thus, the pendency of probate proceedings over the estate of the deceased does not
preclude the assessment and collection, through summary remedies, of estate taxes over the same.
According to the respondent, claims for payment of estate and income taxes due and assessed after
the death of the decedent need not be presented in the form of a claim against the estate. These
can and should be paid immediately. The probate court is not the government agency to decide
whether an estate is liable for payment of estate of income taxes. Well-settled is the rule that the
probate court is a court with special and limited jurisdiction.

Concededly, the authority of the Regional Trial Court, sitting, albeit with limited jurisdiction, as a
probate court over estate of deceased individual, is not a trifling thing. The court's jurisdiction, once
invoked, and made effective, cannot be treated with indifference nor should it be ignored with
impunity by the very parties invoking its authority.

In testament to this, it has been held that it is within the jurisdiction of the probate court to approve
the sale of properties of a deceased person by his prospective heirs before final adjudication;   to5

determine who are the heirs of the decedent;   the recognition of a natural child;   the status of a
6 7

woman claiming to be the legal wife of the decedent;   the legality of disinheritance of an heir by the
8

testator;   and to pass upon the validity of a waiver of hereditary rights. 

9 10

The pivotal question the court is tasked to resolve refers to the authority of the Bureau of Internal
Revenue to collect by the summary remedy of levying upon, and sale of real properties of the
decedent, estate tax deficiencies, without the cognition and authority of the court sitting in probate
over the supposed will of the deceased.

The nature of the process of estate tax collection has been described as follows:

Strictly speaking, the assessment of an inheritance tax does not directly involve the
administration of a decedent's estate, although it may be viewed as an incident to the
complete settlement of an estate, and, under some statutes, it is made the duty of
the probate court to make the amount of the inheritance tax a part of the final decree
of distribution of the estate. It is not against the property of decedent, nor is it a claim
against the estate as such, but it is against the interest or property right which the
heir, legatee, devisee, etc., has in the property formerly held by decedent. Further,
under some statutes, it has been held that it is not a suit or controversy between the
parties, nor is it an adversary proceeding between the state and the person who
owes the tax on the inheritance. However, under other statutes it has been held that
the hearing and determination of the cash value of the assets and the determination
 of the tax are adversary proceedings. The proceeding has been held to be
necessarily a proceeding in rem.  11

In the Philippine experience, the enforcement and collection of estate tax, is executive in character,
as the legislature has seen it fit to ascribe this task to the Bureau of Internal Revenue. Section 3 of
the National Internal Revenue Code attests to this:

Sec. 3. Powers and duties of the Bureau. — The powers and duties of the Bureau of
Internal Revenue shall comprehend the assessment and collection of all national
internal revenue taxes, fees, and charges, and the enforcement of all forfeitures,
penalties, and fines connected therewith, including the execution of judgments in all
cases decided in its favor by the Court of Tax Appeals and the ordinary courts. Said
Bureau shall also give effect to and administer the supervisory and police power
conferred to it by this Code or other laws.

Thus, it was in Vera vs. Fernandez   that the court recognized the liberal treatment of claims for
12

taxes charged against the estate of the decedent. Such taxes, we said, were exempted from the
application of the statute of non-claims, and this is justified by the necessity of government funding,
immortalized in the maxim that taxes are the lifeblood of the government. Vectigalia nervi sunt rei
publicae — taxes are the sinews of the state.

Taxes assessed against the estate of a deceased person, after administration is

opened, need not be submitted to the committee on claims in the ordinary course of
administration. In the exercise of its control over the administrator, the court may
direct the payment of such taxes upon motion showing that the taxes have been
assessed against the estate.

Such liberal treatment of internal revenue taxes in the probate proceedings extends so far, even to
allowing the enforcement of tax obligations against the heirs of the decedent, even after distribution
of the estate's properties.

Claims for taxes, whether assessed before or after the death of the deceased, can
be collected from the heirs even after the distribution of the properties of the
decedent. They are exempted from the application of the statute of non-claims. The
heirs shall be liable therefor, in proportion to their share in the inheritance. 
13

Thus, the Government has two ways of collecting the taxes in question. One, by
going after all the heirs and collecting from each one of them the amount of the tax
proportionate to the inheritance received. Another remedy, pursuant to the lien
created by Section 315 of the Tax Code upon all property and rights to property
belong to the taxpayer for unpaid income tax, is by subjecting said property of the
estate which is in the hands of an heir or transferee to the payment of the tax due the
estate. (Commissioner of Internal Revenue vs. Pineda, 21 SCRA 105, September
15, 1967.)

From the foregoing, it is discernible that the approval of the court, sitting in probate, or as a
settlement tribunal over the deceased is not a mandatory requirement in the collection of estate
taxes. It cannot therefore be argued that the Tax Bureau erred in proceeding with the levying and
sale of the properties allegedly owned by the late President, on the ground that it was required to
seek first the probate court's sanction. There is nothing in the Tax Code, and in the pertinent
remedial laws that implies the necessity of the probate or estate settlement court's approval of the
state's claim for estate taxes, before the same can be enforced and collected.
On the contrary, under Section 87 of the NIRC, it is the probate or settlement court which is bidden
not to authorize the executor or judicial administrator of the decedent's estate to deliver any
distributive share to any party interested in the estate, unless it is shown a Certification by the
Commissioner of Internal Revenue that the estate taxes have been paid. This provision disproves
the petitioner's contention that it is the probate court which approves the assessment and collection
of the estate tax.

If there is any issue as to the validity of the BIR's decision to assess the estate taxes, this should
have been pursued through the proper administrative and judicial avenues provided for by law.

Section 229 of the NIRC tells us how:

Sec. 229. Protesting of assessment. — When the Commissioner of Internal Revenue

or his duly authorized representative finds that proper taxes should be assessed, he
shall first notify the taxpayer of his findings. Within a period to be prescribed by
implementing regulations, the taxpayer shall be required to respond to said notice. If
the taxpayer fails to respond, the Commissioner shall issue an assessment based on
his findings.

Such assessment may be protested administratively by filing a request for

reconsideration or reinvestigation in such form and manner as may be prescribed by
implementing regulations within (30) days from receipt of the assessment; otherwise,
the assessment shall become final and unappealable.

If the protest is denied in whole or in part, the individual, association or corporation

adversely affected by the decision on the protest may appeal to the Court of Tax
Appeals within thirty (30) days from receipt of said decision; otherwise, the decision
shall become final, executory and demandable. (As inserted by P.D. 1773)

Apart from failing to file the required estate tax return within the time required for the filing of the
same, petitioner, and the other heirs never questioned the assessments served upon them, allowing
the same to lapse into finality, and prompting the BIR to collect the said taxes by levying upon the
properties left by President Marcos.

Petitioner submits, however, that "while the assessment of taxes may have been validly undertaken
by the Government, collection thereof may have been done in violation of the law. Thus, the manner
and method in which the latter is enforced may be questioned separately, and irrespective of the
finality of the former, because the Government does not have the unbridled discretion to enforce
collection without regard to the clear provision of law." 
14

Petitioner specifically points out that applying Memorandum Circular No. 38-68, implementing
Sections 318 and 324 of the old tax code (Republic Act 5203), the BIR's Notices of Levy on the
Marcos properties, were issued beyond the allowed period, and are therefore null and void:

. . . the Notices of Levy on Real Property (Annexes O to NN of Annex C of this

Petition) in satisfaction of said assessments were still issued by respondents well
beyond the period mandated in Revenue Memorandum Circular No. 38-68. These
Notices of Levy were issued only on 22 February 1993 and 20 May 1993 when at
least seventeen (17) months had already lapsed from the last service of tax
assessment on 12 September 1991. As no notices of distraint of personal property
were first issued by respondents, the latter should have complied with Revenue
Memorandum Circular No. 38-68 and issued these Notices of Levy not earlier than
 three (3) months nor later than six (6) months from 12 September 1991. In
accordance with the Circular, respondents only had until 12 March 1992 (the last day
of the sixth month) within which to issue these Notices of Levy. The Notices of Levy,
having been issued beyond the period allowed by law, are thus void and of no
effect. 
15

We hold otherwise. The Notices of Levy upon real property were issued within the prescriptive
period and in accordance with the provisions of the present Tax Code. The deficiency tax
assessment, having already become final, executory, and demandable, the same can now be
collected through the summary remedy of distraint or levy pursuant to Section 205 of the NIRC.

The applicable provision in regard to the prescriptive period for the assessment and collection of tax
deficiency in this instance is Article 223 of the NIRC, which pertinently provides:

Sec. 223. Exceptions as to a period of limitation of assessment and collection of

taxes. — (a) In the case of a false or fraudulent return with intent to evade tax or of a
failure to file a return, the tax may be assessed, or a proceeding in court for the
collection of such tax may be begun without assessment, at any time within ten (10)
years after the discovery of the falsity, fraud, or omission: Provided, That, in a fraud
assessment which has become final and executory, the fact of fraud shall be
judicially taken cognizance of in the civil or criminal action for the collection thereof.

xxx xxx xxx

(c) Any internal revenue tax which has been assessed within the period of limitation
above prescribed, may be collected by distraint or levy or by a proceeding in court
within three years following the assessment of the tax.

xxx xxx xxx

The omission to file an estate tax return, and the subsequent failure to contest or appeal the
assessment made by the BIR is fatal to the petitioner's cause, as under the above-cited provision, in
case of failure to file a return, the tax may be assessed at any time within ten years after the
omission, and any tax so assessed may be collected by levy upon real property within three years
following the assessment of the tax. Since the estate tax assessment had become final and
unappealable by the petitioner's default as regards protesting the validity of the said assessment,
there is now no reason why the BIR cannot continue with the collection of the said tax. Any objection
against the assessment should have been pursued following the avenue paved in Section 229 of the
NIRC on protests on assessments of internal revenue taxes.

Petitioner further argues that "the numerous pending court cases questioning the late president's
ownership or interests in several properties (both real and personal) make the total value of his
estate, and the consequent estate tax due, incapable of exact pecuniary determination at this time.
Thus, respondents' assessment of the estate tax and their issuance of the Notices of Levy and sale
are premature and oppressive." He points out the pendency of Sandiganbayan Civil Case Nos.
0001-0034 and 0141, which were filed by the government to question the ownership and interests of
the late President in real and personal properties located within and outside the Philippines.
Petitioner, however, omits to allege whether the properties levied upon by the BIR in the collection of
estate taxes upon the decedent's estate were among those involved in the said cases pending in the
Sandiganbayan. Indeed, the court is at a loss as to how these cases are relevant to the matter at
issue. The mere fact that the decedent has pending cases involving ill-gotten wealth does not affect
the enforcement of tax assessments over the properties indubitably included in his estate.
Petitioner also expresses his reservation as to the propriety of the BIR's total assessment of
P23,292,607,638.00, stating that this amount deviates from the findings of the Department of
Justice's Panel of Prosecutors as per its resolution of 20 September 1991. Allegedly, this is clear
evidence of the uncertainty on the part of the Government as to the total value of the estate of the
late President.

This is, to our mind, the petitioner's last ditch effort to assail the assessment of estate tax which had
already become final and unappealable.

It is not the Department of Justice which is the government agency tasked to determine the amount
of taxes due upon the subject estate, but the Bureau of Internal Revenue,   whose determinations
16

and assessments are presumed correct and made in good faith.   The taxpayer has the duty of
17

proving otherwise. In the absence of proof of any irregularities in the performance of official duties,
an assessment will not be disturbed. Even an assessment based on estimates is prima facie valid
and lawful where it does not appear to have been arrived at arbitrarily or capriciously. The burden of
proof is upon the complaining party to show clearly that the assessment is erroneous. Failure to
present proof of error in the assessment will justify the judicial affirmance of said assessment.   In
18

this instance, petitioner has not pointed out one single provision in the Memorandum of the Special
Audit Team which gave rise to the questioned assessment, which bears a trace of falsity. Indeed,
the petitioner's attack on the assessment bears mainly on the alleged improbable and
unconscionable amount of the taxes charged. But mere rhetoric cannot supply the basis for the
charge of impropriety of the assessments made.

Moreover, these objections to the assessments should have been raised, considering the ample
remedies afforded the taxpayer by the Tax Code, with the Bureau of Internal Revenue and the Court
of Tax Appeals, as described earlier, and cannot be raised now via Petition for Certiorari, under the
pretext of grave abuse of discretion. The course of action taken by the petitioner reflects his
disregard or even repugnance of the established institutions for governance in the scheme of a well-
ordered society. The subject tax assessments having become final, executory and enforceable, the
same can no longer be contested by means of a disguised protest. In the main, Certiorari may not
be used as a substitute for a lost appeal or remedy.   This judicial policy becomes more pronounced
19

in view of the absence of sufficient attack against the actuations of government.

On the matter of sufficiency of service of Notices of Assessment to the petitioner, we find the
respondent appellate court's pronouncements sound and resilient to petitioner's attacks.

Anent grounds 3(b) and (B) — both alleging/claiming lack of notice — We find, after
considering the facts and circumstances, as well as evidences, that there was
sufficient, constructive and/or actual notice of assessments, levy and sale, sent to
herein petitioner Ferdinand "Bongbong" Marcos as well as to his mother Mrs. Imelda
Marcos.

Even if we are to rule out the notices of assessments personally given to the
caretaker of Mrs. Marcos at the latter's last known address, on August 26, 1991 and
September 12, 1991, as well as the notices of assessment personally given to the
caretaker of petitioner also at his last known address on September 12, 1991 — the
subsequent notices given thereafter could no longer be ignored as they were sent at
a time when petitioner was already here in the Philippines, and at a place where said
notices would surely be called to petitioner's attention, and received by responsible
persons of sufficient age and discretion.
 Thus, on October 20, 1992, formal assessment notices were served upon Mrs.
Marcos c/o the petitioner, at his office, House of Representatives, Batasan
Pambansa, Q.C. (Annexes "A", "A-1", "A-2", "A-3"; pp. 207-210,
Comment/Memorandum of OSG). Moreover, a notice to taxpayer dated October 8,
1992 inviting Mrs. Marcos to a conference relative to her tax liabilities, was furnished
the counsel of Mrs. Marcos — Dean Antonio Coronel (Annex "B", p. 211, ibid).
Thereafter, copies of Notices were also served upon Mrs. Imelda Marcos, the
petitioner and their counsel "De Borja, Medialdea, Ata, Bello, Guevarra and Serapio
Law Office", on April 7, 1993 and June 10, 1993. Despite all of these Notices,
petitioner never lifted a finger to protest the assessments, (upon which the Levy and
sale of properties were based), nor appealed the same to the Court of Tax Appeals.

There being sufficient service of Notices to herein petitioner (and his mother) and it
appearing that petitioner continuously ignored said Notices despite several
opportunities given him to file a protest and to thereafter appeal to the Court of Tax
Appeals, — the tax assessments subject of this case, upon which the levy and sale
of properties were based, could no longer be contested (directly or indirectly) via this
instant petition for certiorari. 
20

Petitioner argues that all the questioned Notices of Levy, however, must be nullified for having been
issued without validly serving copies thereof to the petitioner. As a mandatory heir of the decedent,
petitioner avers that he has an interest in the subject estate, and notices of levy upon its properties
should have been served upon him.

We do not agree. In the case of notices of levy issued to satisfy the delinquent estate tax, the
delinquent taxpayer is the Estate of the decedent, and not necessarily, and exclusively, the petitioner
as heir of the deceased. In the same vein, in the matter of income tax delinquency of the late
president and his spouse, petitioner is not the taxpayer liable. Thus, it follows that service of notices
of levy in satisfaction of these tax delinquencies upon the petitioner is not required by law, as under
Section 213 of the NIRC, which pertinently states:

xxx xxx xxx

. . . Levy shall be effected by writing upon said certificate a description of the property
upon which levy is made. At the same time, written notice of the levy shall be mailed
to or served upon the Register of Deeds of the province or city where the property is
located and upon the delinquent taxpayer, or if he be absent from the Philippines, to
his agent or the manager of the business in respect to which the liability arose, or if
there be none, to the occupant of the property in question.

xxx xxx xxx

The foregoing notwithstanding, the record shows that notices of warrants of distraint and levy of sale
were furnished the counsel of petitioner on April 7, 1993, and June 10, 1993, and the petitioner
himself on April 12, 1993 at his office at the Batasang Pambansa.   We cannot therefore,
21

countenance petitioner's insistence that he was denied due process. Where there was an
opportunity to raise objections to government action, and such opportunity was disregarded, for no
justifiable reason, the party claiming oppression then becomes the oppressor of the orderly functions
of government. He who comes to court must come with clean hands. Otherwise, he not only taints
his name, but ridicules the very structure of established authority.
IN VIEW WHEREOF, the Court RESOLVED to DENY the present petition. The Decision of the Court
of Appeals dated November 29, 1994 is hereby AFFIRMED in all respects.

SO ORDERED.

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 where the
irregularities alleged by the petitioners mostly involved the internal rules of Congress, e.g.,
creation of the 2nd or 3rd Bicameral Conference Committee by the House. This Court is not the
proper forum for the enforcement of these internal rules of Congress, whether House or
Senate. Parliamentary rules are merely procedural and with their observance the courts have
no concern. Whatever doubts there may be as to the formal validity of Rep. Act No. 9006
must be resolved in its favor.The Court reiterates its ruling in Arroyo vs. De Venecia, viz.:

But the cases, both here and abroad, in varying forms of expression, all deny to the courts the
power to inquire into allegations that, in enacting a law, a House of Congress failed to comply
with its own rules, in the absence of showing that there was a violation of a constitutional
provision or the rights of private individuals. In Osmeña v. Pendatun, it was held: "At any rate,
courts have declared that ‘the rules adopted by deliberative bodies are subject to revocation,
modification or waiver at the pleasure of the body adopting them.’ And it has been said that
"Parliamentary rules are merely procedural, and with their observance, the courts have no
concern. They may be waived or disregarded by the legislative body." Consequently, "mere
failure to conform to parliamentary usage will not invalidate the action (taken by a
deliberative body) when the requisite number of members have agreed to a particular
measure."21 (Emphasis supplied)

The foregoing declaration is exactly in point with the present cases, where petitioners allege
irregularities committed by the conference committee in introducing changes or deleting provisions in
the House and Senate bills. Akin to the Fariñas case,22 the present petitions also raise an issue
regarding the actions taken by the conference committee on matters regarding Congress’
compliance with its own internal rules. As stated earlier, one of the most basic and inherent power of
the legislature is the power to formulate rules for its proceedings and the discipline of its members.
Congress is the best judge of how it should conduct its own business expeditiously and in the most
orderly manner. It is also the sole

concern of Congress to instill discipline among the members of its conference committee if it
believes that said members violated any of its rules of proceedings. Even the expanded jurisdiction
of this Court cannot apply to questions regarding only the internal operation of Congress, thus, the
Court is wont to deny a review of the internal proceedings of a co-equal branch of government.

Moreover, as far back as 1994 or more than ten years ago, in the case of Tolentino vs. Secretary of
Finance,23 the Court already made the pronouncement that "[i]f a change is desired in the
practice [of the Bicameral Conference Committee] it must be sought in Congress since this
question is not covered by any constitutional provision but is only an internal rule of each
house." 24 To date, Congress has not seen it fit to make such changes adverted to by the Court. It
seems, therefore, that Congress finds the practices of the bicameral conference committee to be
very useful for purposes of prompt and efficient legislative action.

Nevertheless, just to put minds at ease that no blatant irregularities tainted the proceedings of the
bicameral conference committees, the Court deems it necessary to dwell on the issue. The Court
observes that there was a necessity for a conference committee because a comparison of the
provisions of House Bill Nos. 3555 and 3705 on one hand, and Senate Bill No. 1950 on the other,
reveals that there were indeed disagreements. As pointed out in the petitions, said disagreements
were as follows:
House Bill No. 3555  
With regard to "Stand-By Authority" in favor of President
Provides for 12% VAT on  
every sale of goods or
properties (amending Sec.
106 of NIRC); 12% VAT on
importation of goods
(amending Sec. 107 of
NIRC); and 12% VAT on
sale of services and use or
lease of properties
(amending Sec. 108 of
NIRC)
With regard to the "no pass-on" provision
No similar provision  
With regard to 70% limit on input tax credit
Provides that the input tax   No similar provision
credit for capital goods on
which a VAT has been paid
shall be equally distributed
over 5 years or the
depreciable life of such
capital goods; the input tax
credit for goods and services
other than capital goods
shall not exceed 5% of the
total amount of such goods
and services; and for
persons engaged in retail
trading of goods, the
allowable input tax credit
House Bill No.3705  
Provides for 12% VAT in general   Provides for a single rate of
on sales of goods or properties
and reduced rates for sale of
certain locally manufactured
goods and petroleum products
and raw materials to be used in
the manufacture thereof
(amending Sec. 106 of NIRC);
12% VAT on importation of
goods and reduced rates for
certain imported products
including petroleum products
(amending Sec. 107 of NIRC);
and 12% VAT on sale of
services and use or lease of
properties and a reduced rate for
certain services including power
generation (amending Sec. 108
of NIRC)
Provides that the VAT imposed   Provides that the VAT
on power generation and on the
sale of petroleum products shall
be absorbed by generation
companies or sellers,
respectively, and shall not be
passed on to consumers
 
Senate Bill No. 1950
10% VAT on sale of goods or
properties (amending Sec.
106 of NIRC), 10% VAT on
sale of services including sale
of electricity by generation
companies, transmission and
distribution companies, and
use or lease of properties
(amending Sec. 108 of NIRC)
imposed on sales of
electricity by generation
companies and services of
transmission companies and
distribution companies, as
well as those of franchise
grantees of electric utilities
shall not apply to residential
end-users. VAT shall be
absorbed by generation,
transmission, and distribution
companies.
Provides that the input tax
credit for capital goods on
which a VAT has been paid
shall be equally distributed
over 5 years or the
depreciable life of such
capital goods; the input tax
credit for goods and services
other than capital goods shall
not exceed 90% of the output
VAT.
shall not exceed 11% of the
total amount of goods
purchased.
With regard to amendments to be made to NIRC provisions regarding
income and excise taxes
No similar provision   No similar provision   Provided for
amendments to several
NIRC provisions
regarding corporate
income, percentage,
franchise and excise
taxes

The disagreements between the provisions in the House bills and the Senate bill were with regard to
(1) what rate of VAT is to be imposed; (2) whether only the VAT imposed on electricity generation,
transmission and distribution companies should not be passed on to consumers, as proposed in the
Senate bill, or both the VAT imposed on electricity generation, transmission and distribution
companies and the VAT imposed on sale of petroleum products should not be passed on to
consumers, as proposed in the House bill; (3) in what manner input tax credits should be limited; (4)
and whether the NIRC provisions on corporate income taxes, percentage, franchise and excise
taxes should be amended.

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.

…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 will result to significant expenditure
savings have been identified 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 24/5 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 ₱1,500,000.00.88Also, 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.

ABAKADA Guro Party List vs Executive

Secretary
Bills Must Originate EXCLUSIVELY from the House of
Representatives; Undue Delegation of Legislative Power; Equal
Protection Clause
 

ABAKADA GURO PARTY LIST VS EXECUTIVE SECRETARY

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.

 
 

Facts:

Petitioners ABAKADA GURO Party List challenged the constitutionality of R.A. No. 9337 particularly
Sections 4, 5 and 6, amending Sections 106, 107 and 108, respectively, of the National Internal
Revenue Code (NIRC). 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. They further argue that VAT is a tax levied on the sale or exchange of goods and
services and cannot be included within the purview of tariffs under the exemption delegation since
this refers to customs duties, tolls or tribute payable upon merchandise to the government and
usually imposed on imported/exported goods. They also said that the President has powers to cause,
influence or create the conditions provided by law to bring about the conditions precedent. Moreover,
they allege that no guiding standards are made by law as to how the Secretary of Finance will make
the 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.

Issues:

1. Whether or not R.A. No. 9337 has violated the provisions in Article VI, Section 24, and Article
VI, Section 26 (2) of the Constitution.
2. Whether or not there was an undue delegation of legislative power in violation of Article VI
Sec 28 Par 1 and 2 of the Constitution.
3. Whether or not there was a violation of the due process and equal protection under Article III
Sec. 1 of the Constitution.

Discussions:

1. Basing from the ruling of Tolentino case, it is not the law, but the revenue bill which is
required by the Constitution to “originate exclusively” in the House of Representatives, but
Senate has the power not only to propose amendments, but also to propose its own version
even with respect to bills which are required by the Constitution to originate in the House. 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.
2. 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.
3. 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.”

 
 

Rulings:

1. R.A. No. 9337 has not violated the provisions. 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.
2. There is no undue delegation of legislative power but only of the discretion as to the
execution of a law. This is constitutionally permissible. 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.
3. Supreme Court held no decision on this matter. 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.
4. RENATO V. DIAZ and G.R. No. 193007
5. AURORA MA. F. TIMBOL,
6. Petitioners, Present:
7. CORONA, C.J.,
8. CARPIO,
9. VELASCO, JR.,
10. LEONARDO-DE CASTRO,
11. BRION,
12. - versus - PERALTA,
*
13. BERSAMIN,
14. DEL CASTILLO,
15. ABAD,
16. VILLARAMA, JR.,
17. PEREZ,
18. MENDOZA, and
**
19. SERENO,  JJ.
20. THE SECRETARY OF FINANCE
21. and THE COMMISSIONER OF Promulgated:
22. INTERNAL REVENUE,
23. Respondents. July 19, 2011
24.  
25. x ---------------------------------------------------------------------------------------- x

26.  
27. 

28. DECISION
29. 
30. ABAD, J.:
31.  
32.  
33. May toll fees collected by tollway operators be subjected to value- added
tax?
34.  
35.  
36. The Facts and the Case
37.  
38. Petitioners Renato V. Diaz and Aurora Ma. F. Timbol (petitioners) filed this
petition for declaratory relief[1] 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.
39.  
40. 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.
41.  
42. 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 IIIs 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.
43.  
44. 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 users 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.
45.  
46. 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]
47.  
48. On August 23, 2010 the Office of the Solicitor General filed the
governments 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]
49.  
50. 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 States sovereign taxing power which is generally read into
contracts.
51. 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.
52.  
[6]
53. In their reply  to the governments 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.
54. The Issues Presented
55.  
56. The case presents two procedural issues:
57.  
58. 1. Whether or not the Court may treat the petition for declaratory relief as
one for prohibition; and
59.  
60. 2. Whether or not petitioners Diaz and Timbol have legal standing to file
the action.
61.  
62. The case also presents two substantive issues:
63.  
64. 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
65.  
66. 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.
67.  
68. The Courts Rulings
69.  
70. A. On the Procedural Issues:
71.  
72. 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 Courts 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.
73.  
74. 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]
75.  
76. 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 governments effort to
raise revenue for funding various projects and for reducing budgetary
deficits.
77.  
78. 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.
79.  
80. 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]
81.  
82. B. On the Substantive Issues:
83. 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:
84.  
85.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)
86.  
87. 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 VATs 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.
88.  
89. 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.
90.  
91. When a tollway operator takes a toll fee from a motorist, the fee is in effect
for the latters use of the tollway facilities over which the operator enjoys
private proprietary rights[12] 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:
92.  
93. 1. Lessors of property, whether personal or real;
94. 2. Warehousing service operators;
95. 3. Lessors or distributors of cinematographic films;
96. 4. Proprietors, operators or keepers of hotels, motels, resthouses,
pension houses, inns, resorts;
97. 5. Lending investors (for use of money);
98. 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
99. 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.
100.  
101. 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.
102.  
103. 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.
104.  
105. 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 P10 million and gas and
water utilities) that Section 119[13] 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]
106.  
107. 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]
108.  
109. 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]
110.  
111. 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]
112.  
113. 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.
114.  
115. Two. Petitioners argue that a toll fee is a users 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]
116.  
117. 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.
118.  
119. 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.
120.  
121. 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.
122.  
123. 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 users 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 users tax is more equitable a principle of taxation mandated in the
1987 Constitution.[23] (Underscoring supplied)
124.  
125. Petitioners assume that what the Court said above, equating terminal
fees to a users tax must also pertain to tollway fees. But the main issue in
the MIAA case was whether or not Paraaque Citycould 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.
126.  
127. 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 users 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.
128. It would of course be another matter if Congress enacts a law
imposing a users 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.
129.  
130. 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]
131.  
132. 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 sellers liability but merely the burden of the VAT. [29]
133.  
134. 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
tax[30] and simply becomes part of the cost that the buyer must pay in order
to purchase the good, property or service.
135.  
136. 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.
137. For this reason, VAT on tollway operations cannot be a tax on tax
even if toll fees were deemed as a users tax. VAT is assessed against the
tollway operators 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]
138.  
139. 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.
140.  
141. 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.
142.  
143. 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]
144.  
145. 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.
146.  
147. 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 BIRs discretion on the matter, absent any clear
violation of law or the Constitution.
148.  
149. 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.
150.  
151. In this connection, the BIR explained that BIR RMC 63-2010 is actually
the product of negotiations with tollway operators who have been assessed
VAT as early as 2005, but failed to charge VAT-inclusive toll fees which by
now can no longer be collected. The tollway operators agreed to waive the
2% transitional input VAT, in exchange for cancellation of their past due
VAT liabilities. Notably, the right to claim the 2% transitional input VAT
belongs to the tollway operators who have not questioned the circulars
validity. They are thus the ones who have a right to challenge the circular in
a direct and proper action brought for the purpose.
152.  
153. Conclusion
154.  
155. In fine, the Commissioner of Internal Revenue did not usurp
legislative prerogative or expand the VAT laws 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.
156.  
157. 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.
158.  
159. Lastly, the grant of tax exemption is a matter of legislative policy that
is within the exclusive prerogative of Congress. The Courts 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.
160.  
161. 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.
162.  
163. WHEREFORE, the Court DENIES respondents Secretary of Finance
and Commissioner of Internal Revenues motion for reconsideration of its
August 24, 2010 resolution, DISMISSES the petitioners Renato V. Diaz and
Aurora Ma. F. Timbols petition for lack of merit, and SETS ASIDE the Courts
temporary restraining order dated August 13, 2010.
164. SO ORDERED.
165.  
166. PLANTERS PRODUCTS, INC., G.R. No. 166006
167. Petitioner,
168. Present:
169. YNARES-SANTIAGO, J.,
170. Chairperson,
171. AUSTRIA-MARTINEZ,
172. - versus - CHICO-NAZARIO,
173. NACHURA, and
174. REYES, JJ.
175.  
176.  
177. Promulgated:
178. FERTIPHIL CORPORATION,
179. Respondent. March 14, 2008
180.  
181. x-----------------------------------------------
---x
182.  
183. DECISION
184.  
185.  
186. REYES, R.T., J.:
187.  
188.  
189. 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.
190.  
191. The principle is relevant in this petition for review on certiorari of the
Decision[1] 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.
192.  
193. The Facts
194.  
195. 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.
196.  
197. 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:
198.  
199. 3. The Administrator of the Fertilizer Pesticide Authority to
include in its fertilizer pricing formula a capital contribution component
of not less than P10 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)
200.  
201. Pursuant to the LOI, Fertiphil paid P10 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 P6,689,144 to FPA
from July 8, 1985 to January 24, 1986.[6]
202.  
203. After the 1986 Edsa Revolution, FPA voluntarily stopped the
imposition of the P10 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]
204.  
205. Fertiphil filed a complaint for collection and damages[8] 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.
206.  
207. 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.
208.  
209. RTC Disposition
210.  
211. On November 20, 1991, the RTC rendered judgment in favor
of Fertiphil, disposing as follows:
212.  
213. 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:
214.  
215. 1) the sum of P6,698,144.00 with interest at 12% from the
time of judicial demand;
216. 2) the sum of P100,000 as attorneys fees;
217. 3) the cost of suit.
218.  
219. SO ORDERED.[11]
220.  
221.  
222.  
223.  
224. Ruling that the imposition of the P10 CRC was an exercise of the
States inherent power of taxation, the RTC invalidated the levy for violating
the basic principle that taxes can only be levied for public purpose, viz.:
225.  
226. It is apparent that the imposition of P10 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.
227.  
228. One of the inherent limitations is that a tax may be levied only
for public purposes:
229.  
230. 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)
231.  
232. In the case at bar, the plaintiff paid the amount of P6,698,144.00
to the Fertilizer and Pesticide Authority pursuant to the P10 per bag of
fertilizer sold imposition under LOI 1465 which, in turn, remitted the
amount to the defendant Planters Products, Inc. thru the latters
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 P6,698,144.00 and the
defendant, Planters Product, Inc., another private domestic
corporation, became richer by the amount of P6,698,144.00.
233.  
234. 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 P10 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]
235.  
236. 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 Court[14] allowed the
appeal of PPI and remanded the case to the CA for proper disposition.
237.  
238. CA Decision
239.  
240. On November 28, 2003, the CA handed down its decision affirming
with modification that of the RTC, with the following fallo:
241.  
242. IN VIEW OF ALL THE FOREGOING, the decision appealed from is
hereby AFFIRMED, subject to the MODIFICATION that the award of
attorneys fees is hereby DELETED.[15]
243.  
244. 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:
245.  
246. 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.
247.  
248. 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.
249.  
250. 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]).
251.  
252. 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]
253.  
254. 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:
255.  
256. In declaring LOI 1465 unconstitutional, the trial court held that
the levy imposed under the said law was an invalid exercise of the
States 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.
257.  
258. On the other hand, appellant submits that the subject statutes
passage was a valid exercise of police power. In addition, it disputes the
 court a quos 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.
259.  
260. 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).
261.  
262. 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]).
263.  
264. It is upon applying this established tests that We sustain the trial
courts 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 governments commitment to
support the successful rehabilitation and continued viability of PPI, a
private corporation, is an unmistakable attempt to mask the subject
statutes impartiality. There is no way to treat the self-interest of a
favored entity, 
like PPI, as identical with the general interest of the countrys 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 statutes 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]
265.  
266. The CA did not accept PPIs 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:
267.  
268. 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:
269.  
270. 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 P206 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.
271.  
272. The capital recovery component shall be in the minimum
amount of P10 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.
273.  
274.  
275.  
276. 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)
277.  
278. Appellants proposition is open to question, to say the least. The
LOU issued by then Prime Minister Virata taken together with the
Justice Secretarys 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]
279.  
280. PPI moved for reconsideration but its motion was denied.[19] It then
filed the present petition with this Court.
281.  
282. Issues
283.  
284. Petitioner PPI raises four issues for Our consideration, viz.:
285.  
286. I
287. 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.
288.  
289. II
290. 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.
291.  
292. III
293. 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.
294.  
295. IV
296. THE PRINCIPLE OF UNJUST VEXATION (SHOULD BE ENRICHMENT)
FINDS NO APPLICATION IN THE INSTANT CASE.[20] (Underscoring
supplied)
297.  
298. Our Ruling
299.  
300. We shall first tackle the procedural issues of locus standi and the
jurisdiction of the RTC to resolve constitutional issues.
301.  
302. Fertiphil has locus standi
because it suffered direct injury;
doctrine of standing is a mere
procedural technicality which may
be waived.
303.  
304. 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]

305.  
306. 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]
307.  
308. 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.
309.  
310. 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]
311.  
312. 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]
313.  
314.  
315.  
316.  
317. 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 P10 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.
318.  
319. 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.
320.  
321. 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.
322.  
323. 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.
324.  
325. RTC  may resolve
constitutional issues; the
constitutional issue was adequately
raised in the complaint; it is the lis
mota of the case.
326.  
327. 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]
328.  
329. 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]
330.  
331. 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:
332.  
333.  
334.  
335.  
336. SECTION 5. The Supreme Court shall have the following powers:
337.  
338. xxxx
339.  
340. (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:
341.  
342. (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)
343.  
344. In Mirasol v. Court of Appeals,[31] this Court recognized the power of
the RTC to resolve constitutional issues, thus:
345.  
346. 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]
347.  
348. In the recent case of Equi-Asia Placement, Inc. v. Department of
Foreign Affairs,[33] this Court reiterated:
349.  
350. 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]
351.  
352. 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. Ferrer[35] involving the
constitutionality of the now defunct Anti-Subversion law, or in ordinary
actions, as in Krivenko v. Register of Deeds[36] 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]
353.  
354. Contrary to PPIs 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:
355.  
356. 6. The CRC of P10 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:
357. xxxx
358.  
359. (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;
360.  
361. xxxx
362.  
363. (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;
364.  

365. 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)

366.  
367. 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.
368.  
369. The  P10 levy under LOI No.
1465 is an exercise of the power of
taxation.
370.  
371. At any rate, the Court holds that the RTC and the CA did not err in
ruling against the constitutionality of the LOI.
372.  
373. 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.
374.  
375. 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.
376.  
377. 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.
378.  
379. 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]
380.  
381. 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:
382.  
383. 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.
384.  
385. 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)
386.  
387. The P10 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.
388.  
389. Taxes are exacted only for a
public purpose. The P10 levy is
unconstitutional because it was not
for a public purpose. The levy was
imposed to give undue benefit to
PPI.
390.  
391. 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]
392.  
393. 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.
394.  
395. 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.
396.  
397. 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.
398.  
399. 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:
400.  
401. 3. The Administrator of the Fertilizer Pesticide Authority to
include in its fertilizer pricing formula a capital contribution component
 of not less than P10 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)
402.  
403.  
404.  
405. 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.
406.  
407. Second, the LOI provides that the imposition of the P10 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.
408.  
409. 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.
410.  
411. Fourth, the levy was used to pay the corporate debts of PPI. A
reading of the Letter of Understanding[50] 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 PPIs debts to its
foreign creditors. To fund the payment, President Marcos issued LOI No.
1465. The pertinent portions of the letter of understanding read:
412.  
413. Republic of the Philippines
414. Office of the Prime Minister
415. Manila
416.  
417. LETTER OF UNDERTAKING
418.  
419. May 18, 1985
420.  
421. TO: THE BANKING AND FINANCIAL INSTITUTIONS
422. LISTED IN ANNEX A HERETO WHICH ARE
423. CREDITORS (COLLECTIVELY, THE CREDITORS)
424. OF PLANTERS PRODUCTS, INC. (PLANTERS)
425.  
426. Gentlemen:
427.  
428. 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.
429.  
430. 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:
431.  
432. xxxx
433.  
434. 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 P206 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.
435.  
436. xxxx
437.  
438. 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.
439.  
440. REPUBLIC OF THE PHILIPPINES
441. By:
442. (signed)
443. CESAR E. A. VIRATA
444. Prime Minister and Minister of Finance[51]
445.  
446. 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.
447.  
448. 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.
449.  
450. The LOI is still unconstitutional
even if enacted under the police
power; it did not promote public
interest.
451.  
452. 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]
453. 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:
454.  
455. It is upon applying this established tests that We sustain the trial
courts 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 governments commitment to
support the successful rehabilitation and continued viability of PPI, a
private corporation, is an unmistakable attempt to mask the subject
statutes impartiality. There is no way to treat the self-interest of a
favored entity, like PPI, as identical with the general interest of the
countrys 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 statutes 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)
456.  
457. The general rule is that an
unconstitutional law is void; the
doctrine of operative fact is
inapplicable.
458.  
459. 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.
460.  
461. 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.
462.  
463. 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:
464.  
465. 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.
466.  
467. When the courts declare a law to be inconsistent with the
Constitution, the former shall be void and the latter shall govern.
468.  
469. 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]
470.  
471. 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 jeopardy[57] or would
put in limbo the acts done by a municipality in reliance upon a law creating
it.[58]
472.  
473. 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.
474.  
475. WHEREFORE, the petition is DENIED. The Court of Appeals Decision
dated November 28, 2003 is AFFIRMED.
476.  
477. SO ORDERED.

G.R. No. L-31156 February 27, 1976

PEPSI-COLA BOTTLING COMPANY OF THE PHILIPPINES, INC., plaintiff-appellant, 

vs.
MUNICIPALITY OF TANAUAN, LEYTE, THE MUNICIPAL MAYOR, ET AL., defendant appellees.

Sabido, Sabido & Associates for appellant.

Provincial Fiscal Zoila M. Redona & Assistant Provincial Fiscal Bonifacio R Matol and Assistant
Solicitor General Conrado T. Limcaoco & Solicitor Enrique M. Reyes for appellees.

MARTIN, J.:

This is an appeal from the decision of the Court of First Instance of Leyte in its Civil Case No. 3294,
which was certified to Us by the Court of Appeals on October 6, 1969, as involving only pure
questions of law, challenging the power of taxation delegated to municipalities under the Local
Autonomy Act (Republic Act No. 2264, as amended, June 19, 1959).

On February 14, 1963, the plaintiff-appellant, Pepsi-Cola Bottling Company of the Philippines, Inc.,
commenced a complaint with preliminary injunction before the Court of First Instance of Leyte for
that court to declare Section 2 of Republic Act No. 2264.  otherwise known as the Local Autonomy
1

Act, unconstitutional as an undue delegation of taxing authority as well as to declare Ordinances

Nos. 23 and 27, series of 1962, of the municipality of Tanauan, Leyte, null and void.

On July 23, 1963, the parties entered into a Stipulation of Facts, the material portions of which state
that, first, both Ordinances Nos. 23 and 27 embrace or cover the same subject matter and the
production tax rates imposed therein are practically the same, and second, that on January 17,
1963, the acting Municipal Treasurer of Tanauan, Leyte, as per his letter addressed to the Manager
of the Pepsi-Cola Bottling Plant in said municipality, sought to enforce compliance by the latter of the
provisions of said Ordinance No. 27, series of 1962.

Municipal Ordinance No. 23, of Tanauan, Leyte, which was approved on September 25, 1962, levies
and collects "from soft drinks producers and manufacturers a tai of one-sixteenth (1/16) of a centavo
for every bottle of soft drink corked."   For the purpose of computing the taxes due, the person, firm,
2

company or corporation producing soft drinks shall submit to the Municipal Treasurer a monthly
report, of the total number of bottles produced and corked during the month.  3

On the other hand, Municipal Ordinance No. 27, which was approved on October 28, 1962, levies
and collects "on soft drinks produced or manufactured within the territorial jurisdiction of this
municipality a tax of ONE CENTAVO (P0.01) on each gallon (128 fluid ounces, U.S.) of volume
capacity."   For the purpose of computing the taxes due, the person, fun company, partnership,
4

corporation or plant producing soft drinks shall submit to the Municipal Treasurer a monthly report of
the total number of gallons produced or manufactured during the month.  5

The tax imposed in both Ordinances Nos. 23 and 27 is denominated as "municipal production tax.'

On October 7, 1963, the Court of First Instance of Leyte rendered judgment "dismissing the
complaint and upholding the constitutionality of [Section 2, Republic Act No. 2264] declaring
Ordinance Nos. 23 and 27 legal and constitutional; ordering the plaintiff to pay the taxes due under
the oft the said Ordinances; and to pay the costs."

From this judgment, the plaintiff Pepsi-Cola Bottling Company appealed to the Court of Appeals,
which, in turn, elevated the case to Us pursuant to Section 31 of the Judiciary Act of 1948, as
amended.

There are three capital questions raised in this appeal:

1. — Is Section 2, Republic Act No. 2264 an undue delegation of power, confiscatory

and oppressive?

2. — Do Ordinances Nos. 23 and 27 constitute double taxation and impose

percentage or specific taxes?

3. — Are Ordinances Nos. 23 and 27 unjust and unfair?

1. The power of taxation is an essential and inherent attribute of sovereignty, belonging as a matter
of right to every independent government, without being expressly conferred by the people.   It is a
6

power that is purely legislative and which the central legislative body cannot delegate either to the
executive or judicial department of the government without infringing upon the theory of separation
of powers. The exception, however, lies in the case of municipal corporations, to which, said theory
does not apply. Legislative powers may be delegated to local governments in respect of matters of
local concern.   This is sanctioned by immemorial practice.   By necessary implication, the legislative
7 8

power to create political corporations for purposes of local self-government carries with it the power
to confer on such local governmental agencies the power to tax.   Under the New Constitution, local
9

governments are granted the autonomous authority to create their own sources of revenue and to
levy taxes. Section 5, Article XI provides: "Each local government unit shall have the power to create
its sources of revenue and to levy taxes, subject to such limitations as may be provided by law."
Withal, it cannot be said that Section 2 of Republic Act No. 2264 emanated from beyond the sphere
of the legislative power to enact and vest in local governments the power of local taxation.
The plenary nature of the taxing power thus delegated, contrary to plaintiff-appellant's pretense,
would not suffice to invalidate the said law as confiscatory and oppressive. In delegating the
authority, the State is not limited 6 the exact measure of that which is exercised by itself. When it is
said that the taxing power may be delegated to municipalities and the like, it is meant that there may
be delegated such measure of power to impose and collect taxes as the legislature may deem
expedient. Thus, municipalities may be permitted to tax subjects which for reasons of public policy
the State has not deemed wise to tax for more general purposes.   This is not to say though that the
10

constitutional injunction against deprivation of property without due process of law may be passed
over under the guise of the taxing power, except when the taking of the property is in the lawful
exercise of the taxing power, as when (1) the tax is for a public purpose; (2) the rule on uniformity of
taxation is observed; (3) either the person or property taxed is within the jurisdiction of the
government levying the tax; and (4) in the assessment and collection of certain kinds of taxes notice
and opportunity for hearing are provided.   Due process is usually violated where the tax imposed is
11

for a private as distinguished from a public purpose; a tax is imposed on property outside the State,
i.e., extraterritorial taxation; and arbitrary or oppressive methods are used in assessing and
collecting taxes. But, a tax does not violate the due process clause, as applied to a particular
taxpayer, although the purpose of the tax will result in an injury rather than a benefit to such
taxpayer. Due process does not require that the property subject to the tax or the amount of tax to
be raised should be determined by judicial inquiry, and a notice and hearing as to the amount of the
tax and the manner in which it shall be apportioned are generally not necessary to due process of
law. 
12

There is no validity to the assertion that the delegated authority can be declared unconstitutional on
the theory of double taxation. It must be observed that the delegating authority specifies the
limitations and enumerates the taxes over which local taxation may not be exercised.   The reason is
13

that the State has exclusively reserved the same for its own prerogative. Moreover, double taxation,
in general, is not forbidden by our fundamental law, since We have not adopted as part thereof the
injunction against double taxation found in the Constitution of the United States and some states of
the Union.  Double taxation becomes obnoxious only where the taxpayer is taxed twice for the
14

benefit of the same governmental entity   or by the same jurisdiction for the same purpose,   but not
15 16

in a case where one tax is imposed by the State and the other by the city or municipality.  17

2. The plaintiff-appellant submits that Ordinance No. 23 and 27 constitute double taxation, because
these two ordinances cover the same subject matter and impose practically the same tax rate. The
thesis proceeds from its assumption that both ordinances are valid and legally enforceable. This is
not so. As earlier quoted, Ordinance No. 23, which was approved on September 25, 1962, levies or
collects from soft drinks producers or manufacturers a tax of one-sixteen (1/16) of a centavo for
.every bottle corked, irrespective of the volume contents of the bottle used. When it was discovered
that the producer or manufacturer could increase the volume contents of the bottle and still pay the
same tax rate, the Municipality of Tanauan enacted Ordinance No. 27, approved on October 28,
1962, imposing a tax of one centavo (P0.01) on each gallon (128 fluid ounces, U.S.) of volume
capacity. The difference between the two ordinances clearly lies in the tax rate of the soft drinks
produced: in Ordinance No. 23, it was 1/16 of a centavo for every bottle corked; in Ordinance No.
27, it is one centavo (P0.01) on each gallon (128 fluid ounces, U.S.) of volume capacity. The
intention of the Municipal Council of Tanauan in enacting Ordinance No. 27 is thus clear: it was
intended as a plain substitute for the prior Ordinance No. 23, and operates as a repeal of the latter,
even without words to that effect.   Plaintiff-appellant in its brief admitted that defendants-appellees
18

are only seeking to enforce Ordinance No. 27, series of 1962. Even the stipulation of facts confirms
the fact that the Acting Municipal Treasurer of Tanauan, Leyte sought t6 compel compliance by the
plaintiff-appellant of the provisions of said Ordinance No. 27, series of 1962. The aforementioned
admission shows that only Ordinance No. 27, series of 1962 is being enforced by defendants-
appellees. Even the Provincial Fiscal, counsel for defendants-appellees admits in his brief "that
Section 7 of Ordinance No. 27, series of 1962 clearly repeals Ordinance No. 23 as the provisions of
the latter are inconsistent with the provisions of the former."

That brings Us to the question of whether the remaining Ordinance No. 27 imposes a percentage or
a specific tax. Undoubtedly, the taxing authority conferred on local governments under Section 2,
Republic Act No. 2264, is broad enough as to extend to almost "everything, accepting those which
are mentioned therein." As long as the text levied under the authority of a city or municipal ordinance
is not within the exceptions and limitations in the law, the same comes within the ambit of the
general rule, pursuant to the rules of exclucion attehus and exceptio firmat regulum in cabisus non
excepti   The limitation applies, particularly, to the prohibition against municipalities and municipal
19

districts to impose "any percentage tax or other taxes in any form based thereon nor impose taxes
on articles subject to specific tax except gasoline, under the provisions of the National Internal
Revenue Code." For purposes of this particular limitation, a municipal ordinance which prescribes a
set ratio between the amount of the tax and the volume of sale of the taxpayer imposes a sales tax
and is null and void for being outside the power of the municipality to enact.   But, the imposition of
20

"a tax of one centavo (P0.01) on each gallon (128 fluid ounces, U.S.) of volume capacity" on all soft
drinks produced or manufactured under Ordinance No. 27 does not partake of the nature of a
percentage tax on sales, or other taxes in any form based thereon. The tax is levied on the produce
(whether sold or not) and not on the sales. The volume capacity of the taxpayer's production of soft
drinks is considered solely for purposes of determining the tax rate on the products, but there is not
set ratio between the volume of sales and the amount of the tax. 21

Nor can the tax levied be treated as a specific tax. Specific taxes are those imposed on specified
articles, such as distilled spirits, wines, fermented liquors, products of tobacco other than cigars and
cigarettes, matches firecrackers, manufactured oils and other fuels, coal, bunker fuel oil, diesel fuel
oil, cinematographic films, playing cards, saccharine, opium and other habit-forming drugs.   Soft
22

drink is not one of those specified.

3. The tax of one (P0.01) on each gallon (128 fluid ounces, U.S.) of volume capacity on all
softdrinks, produced or manufactured, or an equivalent of 1-½ centavos per case,   cannot be
23

considered unjust and unfair. 24 an increase in the tax alone would not support the claim that the tax
is oppressive, unjust and confiscatory. Municipal corporations are allowed much discretion in
determining the reates of imposable taxes. 25 This is in line with the constutional policy of according
the widest possible autonomy to local governments in matters of local taxation, an aspect that is
given expression in the Local Tax Code (PD No. 231, July 1, 1973). 26 Unless the amount is so
excessive as to be prohibitive, courts will go slow in writing off an ordinance as unreasonable. 27
Reluctance should not deter compliance with an ordinance such as Ordinance No. 27 if the purpose
of the law to further strengthen local autonomy were to be realized. 28

Finally, the municipal license tax of P1,000.00 per corking machine with five but not more than ten
crowners or P2,000.00 with ten but not more than twenty crowners imposed on manufacturers,
producers, importers and dealers of soft drinks and/or mineral waters under Ordinance No. 54,
series of 1964, as amended by Ordinance No. 41, series of 1968, of defendant
Municipality,   appears not to affect the resolution of the validity of Ordinance No. 27. Municipalities
29

are empowered to impose, not only municipal license taxes upon persons engaged in any business
or occupation but also to levy for public purposes, just and uniform taxes. The ordinance in question
(Ordinance No. 27) comes within the second power of a municipality.

ACCORDINGLY, the constitutionality of Section 2 of Republic Act No. 2264, otherwise known as the
Local Autonomy Act, as amended, is hereby upheld and Municipal Ordinance No. 27 of the
Municipality of Tanauan, Leyte, series of 1962, re-pealing Municipal Ordinance No. 23, same series,
is hereby declared of valid and legal effect. Costs against petitioner-appellant.
SO ORDERED.

Castro, C.J., Teehankee, Barredo, Makasiar, Antonio, Esguerra, Muñoz Palma, Aquino and
Concepcion, Jr., JJ., concur.

Separate Opinions

 
FERNANDO, J., concurring:

The opinion of the Court penned by Justice Martin is impressed with a scholarly and comprehensive
character. Insofar as it shows adherence to tried and tested concepts of the law of municipal
taxation, I am only in agreement. If I limit myself to concurrence in the result, it is primarily because
with the article on Local Autonomy found in the present Constitution, I feel a sense of reluctance in
restating doctrines that arose from a different basic premise as to the scope of such power in
accordance with the 1935 Charter. Nonetheless it is well-nigh unavoidable that I do so as I am
unable to share fully what for me are the nuances and implications that could arise from the
approach taken by my brethren. Likewise as to the constitutional aspect of the thorny question of
double taxation, I would limit myself to what has been set forth in City of Baguio v. De Leon. 1

1. The present Constitution is quite explicit as to the power of taxation vested in local and municipal
corporations. It is therein specifically provided: "Each local government unit shall have the power to
create its own sources of revenue and to levy taxes subject to such limitations as may be provided
by law.   That was not the case under the 1935 Charter. The only limitation then on the authority,
2

plenary in character of the national government, was that while the President of the Philippines was
vested with the power of control over all executive departments, bureaus, or offices, he could only . It
exercise general supervision over all local governments as may be provided by law ...  As far as
3

legislative power over local government was concerned, no restriction whatsoever was placed on the
Congress of the Philippines. It would appear therefore that the extent of the taxing power was solely
for the legislative body to decide. It is true that in 1939, there was a statute that enlarged the scope
of the municipal taxing power.   Thereafter, in 1959 such competence was further expanded in the
4

Local Autonomy Act.   Nevertheless, as late as December of 1964, five years after its enactment of
5

the Local Autonomy Act, this Court, through Justice Dizon, in Golden Ribbon Lumber Co. v. City of
Butuan,   reaffirmed the traditional concept in these words: "The rule is well-settled that municipal
6

corporations, unlike sovereign states, after clothed with no power of taxation; that its charter or a
statute must clearly show an intent to confer that power or the municipal corporation cannot assume
and exercise it, and that any such power granted must be construed strictly, any doubt or ambiguity
arising from the terms of the grant to be resolved against the municipality." 7

Taxation, according to Justice Parades in the earlier case of Tan v. Municipality of Pagbilao,  "is an
8

attribute of sovereignty which municipal corporations do not enjoy."   That case left no doubt either
9

as to weakness of a claim "based merely by inferences, implications and deductions, [as they have
no place in the interpretation of the power to tax of a municipal corporation."   As the conclusion
10

reached by the Court finds support in such grant of the municipal taxing power, I concur in the result.
2. As to any possible infirmity based on an alleged double taxation, I would prefer to rely on the
doctrine announced by this Court in City of Baguio v. De Leon.   Thus: "As to why double taxation is
11
not violative of due process, Justice Holmes made clear in this language: 'The objection to the
taxation as double may be laid down on one side. ... The 14th Amendment [the due process clause)
no more forbids double taxation than it does doubling the amount of a tax, short of (confiscation or
proceedings unconstitutional on other grouse With that decision rendered at a time when American
sovereignty in the Philippines was recognized, it possesses more than just a persuasive effect. To
some, it delivered the coup justice to the bogey of double taxation as a constitutional bar to the
exercise of the taxing power. It would seem though that in the United States, as with us, its ghost, as
noted by an eminent critic, still stalks the juridical stage. 'In a 1947 decision, however, we quoted
with approval this excerpt from a leading American decision: 'Where, as here, Congress has clearly
expressed its intention, the statute must be sustained even though double taxation results.  12

So I would view the issues in this suit and accordingly concur in the result.

Separate Opinions
FERNANDO, J., concurring:

The opinion of the Court penned by Justice Martin is impressed with a scholarly and comprehensive
character. Insofar as it shows adherence to tried and tested concepts of the law of municipal
taxation, I am only in agreement. If I limit myself to concurrence in the result, it is primarily because
with the article on Local Autonomy found in the present Constitution, I feel a sense of reluctance in
restating doctrines that arose from a different basic premise as to the scope of such power in
accordance with the 1935 Charter. Nonetheless it is well-nigh unavoidable that I do so as I am
unable to share fully what for me are the nuances and implications that could arise from the
approach taken by my brethren. Likewise as to the constitutional aspect of the thorny question of
double taxation, I would limit myself to what has been set forth in City of Baguio v. De Leon. 1

1. The present Constitution is quite explicit as to the power of taxation vested in local and municipal
corporations. It is therein specifically provided: "Each local government unit shall have the power to
create its own sources of revenue and to levy taxes subject to such limitations as may be provided
by law.   That was not the case under the 1935 Charter. The only limitation then on the authority,
2

plenary in character of the national government, was that while the President of the Philippines was
vested with the power of control over all executive departments, bureaus, or offices, he could only . It
exercise general supervision over all local governments as may be provided by law ...  As far as
3

legislative power over local government was concerned, no restriction whatsoever was placed on the
Congress of the Philippines. It would appear therefore that the extent of the taxing power was solely
for the legislative body to decide. It is true that in 1939, there was a statute that enlarged the scope
of the municipal taxing power.   Thereafter, in 1959 such competence was further expanded in the
4

Local Autonomy Act.   Nevertheless, as late as December of 1964, five years after its enactment of
5

the Local Autonomy Act, this Court, through Justice Dizon, in Golden Ribbon Lumber Co. v. City of
Butuan,   reaffirmed the traditional concept in these words: "The rule is well-settled that municipal
6

corporations, unlike sovereign states, after clothed with no power of taxation; that its charter or a
statute must clearly show an intent to confer that power or the municipal corporation cannot assume
and exercise it, and that any such power granted must be construed strictly, any doubt or ambiguity
arising from the terms of the grant to be resolved against the municipality." 7
Taxation, according to Justice Parades in the earlier case of Tan v. Municipality of Pagbilao,  "is an
8

attribute of sovereignty which municipal corporations do not enjoy."   That case left no doubt either
9

as to weakness of a claim "based merely by inferences, implications and deductions, [as they have
no place in the interpretation of the power to tax of a municipal corporation."   As the conclusion
10

reached by the Court finds support in such grant of the municipal taxing power, I concur in the result.
2. As to any possible infirmity based on an alleged double taxation, I would prefer to rely on the
doctrine announced by this Court in City of Baguio v. De Leon.   Thus: "As to why double taxation is
11

not violative of due process, Justice Holmes made clear in this language: 'The objection to the
taxation as double may be laid down on one side. ... The 14th Amendment [the due process clause)
no more forbids double taxation than it does doubling the amount of a tax, short of (confiscation or
proceedings unconstitutional on other grouse With that decision rendered at a time when American
sovereignty in the Philippines was recognized, it possesses more than just a persuasive effect. To
some, it delivered the coup justice to the bogey of double taxation as a constitutional bar to the
exercise of the taxing power. It would seem though that in the United States, as with us, its ghost, as
noted by an eminent critic, still stalks the juridical stage. 'In a 1947 decision, however, we quoted
with approval this excerpt from a leading American decision: 'Where, as here, Congress has clearly
expressed its intention, the statute must be sustained even though double taxation results.  12

So I would view the issues in this suit and accordingly concur in the result.

[G.R. No. 120082. September 11, 1996]

MACTAN CEBU INTERNATIONAL AIRPORT AUTHORITY, petitioner,

vs. HON. FERDINAND J. MARCOS, in his capacity as the
Presiding Judge of the Regional Trial Court, Branch 20, Cebu
City, THE CITY OF CEBU, represented by its Mayor, HON.
TOMAS R. OSMEA, and EUSTAQUIO B. CESA, respondents.

DECISION
DAVIDE, JR., J.:

For review under Rule 45 of the Rules of Court on a pure question of law
are the decision of 22 March 1995[1] of the Regional Trial Court (RTC)
of Cebu City, Branch 20, dismissing the petition for declaratory relief in Civil
Case No. CEB-16900, entitled Mactan Cebu International Airport Authority vs.
City of Cebu, and its order of 4 May 1995[2]denying the motion to reconsider
the decision.
We resolved to give due course to this petition for it raises issues dwelling
on the scope of the taxing power of local government units and the limits of
tax exemption privileges of government-owned and controlled corporations.
 The uncontradicted factual antecedents are summarized in the instant
petition as follows:

Petitioner Mactan Cebu International Airport Authority (MCIAA) was created by

virtue of Republic Act No. 6958, mandated to principally undertake the economical,
efficient and effective control, management and supervision of the Mactan
International Airport in the Province of Cebu and the Lahug Airport in Cebu City, x x
x and such other airports as may be established in the Province of Cebu x x x (Sec. 3,
RA 6958). It is also mandated to:

a) encourage, promote and develop international and domestic air traffic in the Central
Visayas and Mindanao regions as a means of making the regions centers of
international trade and tourism, and accelerating the development of the means of
transportation and communication in the country; and,

b) upgrade the services and facilities of the airports and to formulate internationally
acceptable standards of airport accommodation and service.

Since the time of its creation, petitioner MCIAA enjoyed the privilege of exemption
from payment of realty taxes in accordance with Section 14 of its Charter:

Sec. 14. Tax Exemptions. -- The Authority shall be exempt from realty taxes imposed
by the National Government or any of its political subdivisions, agencies and
instrumentalities x x x.

On October 11, 1994, however, Mr. Eustaquio B. Cesa, Officer-in-Charge, Office of

the Treasurer of the City of Cebu, demanded payment for realty taxes on several
parcels of land belonging to the petitioner (Lot Nos. 913-G, 743, 88 SWO, 948-A,
989-A, 474, 109(931), I-M, 918, 919, 913-F, 941, 942, 947, 77 Psd., 746 and 991-A),
located at Barrio Apas and Barrio Kasambagan, Lahug, Cebu City, in the total amount
of P2,229,078.79.

Petitioner objected to such demand for payment as baseless and unjustified, claiming
in its favor the aforecited Section 14 of RA 6958 which exempts it from payment of
realty taxes. It was also asserted that it is an instrumentality of the government
performing governmental functions, citing Section 133 of the Local Government
Code of 1991 which puts limitations on the taxing powers of local government units:

Section 133. Common Limitations on the Taxing Powers of Local Government Units.

-- Unless otherwise provided herein, the exercise of the taxing powers of provinces,
cities, municipalities, and barangays shall not extend to the levy of the following:
a) x x x

xxx

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

Respondent City refused to cancel and set aside petitioners realty tax account,

insisting that the MCIAA is a government-controlled corporation whose tax
exemption privilege has been withdrawn by virtue of Sections 193 and 234 of the
Local Government Code that took effect on January 1, 1992:

Section 193. Withdrawal of Tax Exemption Privilege. Unless otherwise provided in

this Code, tax exemptions or incentives granted to, or presently enjoyed by all persons
whether natural or juridical, including government-owned or controlled corporations,
except local water districts, cooperatives duly registered under RA No. 6938, non-
stock and non-profit hospitals and educational institutions, are hereby withdrawn upon
the effectivity of this Code.(underscoring supplied)

xxx

Section 234. Exemptions from Real Property Taxes. x x x

(a) x x x

xxx

(e) x x x

Except as provided herein, any exemption from payment of real property tax
previously granted to, or presently enjoyed by all persons, whether natural or juridical,
including government-owned or controlled corporations are hereby withdrawn upon
the effectivity of this Code.

As the City of Cebu was about to issue a warrant of levy against the properties of
petitioner, the latter was compelled to pay its tax account under protest and thereafter
filed a Petition for Declaratory Relief with the Regional Trial Court of Cebu, Branch
20, on December 29, 1994. MCIAA basically contended that the taxing powers of
local government units do not extend to the levy of taxes or fees of any kind on
an instrumentality of the national government. Petitioner insisted that while it is
indeed a government-owned corporation, it nonetheless stands on the same footing as
an agency or instrumentality of the national government by the very nature of its
powers and functions.

Respondent City, however, asserted that MCIAA is not an instrumentality of the

government but merely a government-owned corporation performing proprietary
functions. As such, all exemptions previously granted to it were deemed withdrawn by
operation of law, as provided under Sections 193 and 234 of the Local Government
Code when it took effect on January 1, 1992.[3]

The petition for declaratory relief was docketed as Civil Case No. CEB-
16900.
In its decision of 22 March 1995,[4] the trial court dismissed the petition in
light of its findings, to wit:

A close reading of the New Local Government Code of 1991 or RA 7160 provides the
express cancellation and withdrawal of exemption of taxes by government-owned and
controlled corporation per Sections after the effectivity of said Code on January 1,
1992, to wit: [proceeds to quote Sections 193 and 234]

Petitioners claimed that its real properties assessed by respondent City Government of
Cebu are exempted from paying realty taxes in view of the exemption granted under
RA 6958 to pay the same (citing Section 14 of RA 6958).

However, RA 7160 expressly provides that All general and special laws, acts, city
charters, decrees [sic], executive orders, proclamations and administrative regulations,
or part of parts thereof which are inconsistent with any of the provisions of this Code
are hereby repealed or modified accordingly. (/f/, Section 534, RA 7160).

With that repealing clause in RA 7160, it is safe to infer and state that the tax
exemption provided for in RA 6958 creating petitioner had been expressly repealed by
the provisions of the New Local Government Code of 1991.

So that petitioner in this case has to pay the assessed realty tax of its properties
effective after January 1, 1992 until the present.

This Courts ruling finds expression to give impetus and meaning to the overall
objectives of the New Local Government Code of 1991, RA 7160. It is hereby
declared the policy of the State that the territorial and political subdivisions of the
State shall enjoy genuine and meaningful local autonomy to enable them to attain
their fullest development as self-reliant communities and make them more effective
partners in the attainment of national goals. Toward this end, the State shall provide
for a more responsive and accountable local government structure instituted through a
system of decentralization whereby local government units shall be given more
powers, authority, responsibilities, and resources. The process of decentralization
shall proceed from the national government to the local government units. x x x[5]

Its motion for reconsideration having been denied by the trial court in its 4
May 1995 order, the petitioner filed the instant petition based on the following
assignment of errors:
I. RESPONDENT JUDGE ERRED IN FAILING TO RULE THAT THE PETITIONER IS
VESTED WITH GOVERNMENT POWERS AND FUNCTIONS WHICH PLACE IT IN
THE SAME CATEGORY AS AN INSTRUMENTALITY OR AGENCY OF THE
GOVERNMENT.
II. RESPONDENT JUDGE ERRED IN RULING THAT PETITIONER IS LIABLE TO
PAY REAL PROPERTY TAXES TO THE CITY OF CEBU.

Anent the first assigned error, the petitioner asserts that although it is a
government-owned or controlled corporation, it is mandated to perform
functions in the same category as an instrumentality of Government. An
instrumentality of Government is one created to perform governmental
functions primarily to promote certain aspects of the economic life of the
people.[6] Considering its task not merely to efficiently operate and manage the
Mactan-Cebu International Airport, but more importantly, to carry out the
Government policies of promoting and developing the Central Visayas and
Mindanao regions as centers of international trade and tourism, and
accelerating the development of the means of transportation and
communication in the country,[7] and that it is an attached agency of the
Department of Transportation and Communication (DOTC),[8] the petitioner
may stand in [sic] the same footing as an agency or instrumentality of the
national government. Hence, its tax exemption privilege under Section 14 of
its Charter cannot be considered withdrawn with the passage of the Local
Government Code of 1991 (hereinafter LGC) because Section 133 thereof
specifically states that the `taxing powers of local government units shall not
extend to the levy of taxes or fees or charges of any kind on the national
government, its agencies and instrumentalities.
As to the second assigned error, the petitioner contends that being an
instrumentality of the National Government, respondent City of Cebu has no
power nor authority to impose realty taxes upon it in accordance with the
aforesaid Section 133 of the LGC, as explained in Basco vs. Philippine
Amusement and Gaming Corporation:[9]

Local governments have no power to tax instrumentalities of the National

Government. PAGCOR is a government owned or controlled corporation with an
original charter, PD 1869. All of its shares of stock are owned by the National
Government. . . .

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

The states have no power by taxation or otherwise, to retard, impede, burden or in any
manner control the operation of constitutional laws enacted by Congress to carry into
execution the powers vested in the federal government.(McCulloch v. Maryland, 4
Wheat 316, 4 L Ed. 579)

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

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

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. (underscoring supplied)

It then concludes that the respondent Judge cannot therefore correctly say
that the questioned provisions of the Code do not contain any distinction
between a government corporation performing governmental functions as
against one performing merely proprietary ones such that the exemption
privilege withdrawn under the said Code would apply to all government
corporations. For it is clear from Section 133, in relation to Section 234, of the
LGC that the legislature meant to exclude instrumentalities of the national
government from the taxing powers of the local government units.
 In its comment, respondent City of Cebu alleges that as a local
government unit and a political subdivision, it has the power to impose, levy,
assess, and collect taxes within its jurisdiction. Such power is guaranteed by
the Constitution[10] and enhanced further by the LGC. While it may be true that
under its Charter the petitioner was exempt from the payment of realty taxes,
[11]
 this exemption was withdrawn by Section 234 of the LGC. In response to
the petitioners claim that such exemption was not repealed because being an
instrumentality of the National Government, Section 133 of the LGC prohibits
local government units from imposing taxes, fees, or charges of any kind on it,
respondent City of Cebu points out that the petitioner is likewise a
government-owned corporation, and Section 234 thereof does not distinguish
between government-owned or controlled corporations performing
governmental and purely proprietary functions. Respondent City of Cebu
urges this Court to apply by analogy its ruling that the Manila International
Airport Authority is a government-owned corporation,[12] and to reject the
application of Basco because it was promulgated . . . before the enactment
and the signing into law of R.A. No. 7160, and was not, therefore, decided in
the light of the spirit and intention of the framers of the said law.
As a general rule, the power to tax is an incident of sovereignty and is
unlimited in its range, acknowledging in its very nature no limits, so that
security against its abuse is to be found only in the responsibility of the
legislature which imposes the tax on the constituency who are to pay it.
Nevertheless, effective limitations thereon may be imposed by the people
through their Constitutions.[13] Our Constitution, for instance, provides that the
rule of taxation shall be uniform and equitable and Congress shall evolve a
progressive system of taxation.[14] So potent indeed is the power that it was
once opined that the power to tax involves the power to destroy.[15] Verily,
taxation is a destructive power which interferes with the personal and property
rights of the people and takes from them a portion of their property for the
support of the government. Accordingly, tax statutes must be construed
strictly against the government and liberally in favor of the taxpayer.[16] But
since taxes are what we pay for civilized society,[17] or are the lifeblood of the
nation, the law frowns against exemptions from taxation and statutes granting
tax exemptions are thus construed strictissimi juris against the taxpayer and
liberally in favor of the taxing authority.[18] A claim of exemption from tax
payments must be clearly shown and based on language in the law too plain
to be mistaken.[19] Elsewise stated, taxation is the rule, exemption therefrom is
the exception.[20] However, if the grantee of the exemption is a political
subdivision or instrumentality, the rigid rule of construction does not apply
because the practical effect of the exemption is merely to reduce the amount
of money that has to be handled by the government in the course of its
operations.[21]
The power to tax is primarily vested in the Congress; however, in our
jurisdiction, it may be exercised by local legislative bodies, no longer merely
by virtue of a valid delegation as before, but pursuant to direct authority
conferred by Section 5, Article X of the Constitution.[22] Under the latter, the
exercise of the power may be subject to such guidelines and limitations as the
Congress may provide which, however, must be consistent with the basic
policy of local autonomy.
There can be no question that under Section 14 of R.A. No. 6958 the
petitioner is exempt from the payment of realty taxes imposed by the National
Government or any of its political subdivisions, agencies, and
instrumentalities. Nevertheless, since taxation is the rule and exemption
therefrom the exception, the exemption may thus be withdrawn at the
pleasure of the taxing authority. The only exception to this rule is where the
exemption was granted to private parties based on material consideration of a
mutual nature, which then becomes contractual and is thus covered by the
non-impairment clause of the Constitution.[23]
The LGC, enacted pursuant to Section 3, Article X of the Constitution,
provides for the exercise by local government units of their power to tax, the
scope thereof or its limitations, and the exemptions from taxation.
Section 133 of the LGC prescribes the common limitations on the taxing
powers of local government units as follows:

SEC. 133. Common Limitations on the Taxing Power of Local Government Units.

Unless otherwise provided herein, the exercise of the taxing powers of provinces,
cities, municipalities, and barangays shall not extend to the levy of the following:

(a) Income tax, except when levied on banks and other financial institutions;
(b) Documentary stamp tax;
(c) Taxes on estates, inheritance, gifts, legacies and other acquisitions mortis causa,
except as otherwise provided herein;
(d) Customs duties, registration fees of vessel and wharfage on wharves, tonnage
dues, and all other kinds of customs fees, charges and dues except wharfage on
wharves constructed and maintained by the local government unit concerned;
(e) Taxes, fees and charges and other impositions upon goods carried into or out of, or
passing through, the territorial jurisdictions of local government units in the guise of
charges for wharfage, tolls for bridges or otherwise, or other taxes, fees or charges
in any form whatsoever upon such goods or merchandise;
 (f) Taxes, fees or charges on agricultural and aquatic products when sold by marginal
farmers or fishermen;
(g) Taxes on business enterprises certified to by the Board of Investments as pioneer
or non-pioneer for a period of six (6) and four (4) years, respectively from the date of
registration;
(h) Excise taxes on articles enumerated under the National Internal Revenue Code, as
amended, and taxes, fees or charges on petroleum products;
(i) Percentage or value-added tax (VAT) on sales, barters or exchanges or similar
transactions on goods or services except as otherwise provided herein;
(j) Taxes on the gross receipts of transportation contractors and persons engaged in
the transportation of passengers or freight by hire and common carriers by air, land
or water, except as provided in this Code;
(k) Taxes on premiums paid by way of reinsurance or retrocession;
(l) Taxes, fees or charges for the registration of motor vehicles and for the issuance of
all kinds of licenses or permits for the driving thereof, except, tricycles;
(m) Taxes, fees, or other charges on Philippine products actually exported, except as
otherwise provided herein;
(n) Taxes, fees, or charges, on Countryside and Barangay Business Enterprises and
cooperatives duly registered under R.A. No. 6810 and Republic Act Numbered
Sixty-nine hundred thirty-eight (R.A. No. 6938) otherwise known as the
Cooperatives Code of the Philippines respectively; and
(o) TAXES, FEES OR CHARGES OF ANY KIND ON THE NATIONAL
GOVERNMENT, ITS AGENCIES AND INSTRUMENTALITIES, AND LOCAL
GOVERNMENT UNITS. (emphasis supplied)

Needless to say, the last item (item o) is pertinent to this case. The taxes, fees
or charges referred to are of any kind; hence, they include all of these, unless
otherwise provided by the LGC. The term taxes is well understood so as to
need no further elaboration, especially in light of the above enumeration. The
term fees means charges fixed by law or ordinance for the regulation or
inspection of business or activity,[24] while charges are pecuniary liabilities such
as rents or fees against persons or property.[25]
Among the taxes enumerated in the LGC is real property tax, which is
governed by Section 232. It reads as follows:

SEC. 232. Power to Levy Real Property Tax. A province or city or a municipality

within the Metropolitan Manila Area may levy an annual ad valorem tax on real
property such as land, building, machinery, and other improvements not hereafter
specifically exempted.

Section 234 of the LGC provides for the exemptions from payment of real
property taxes and withdraws previous exemptions therefrom granted to
natural and juridical persons, including government-owned and controlled
corporations, except as provided therein. It provides:

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

(a) Real property owned by the Republic of the Philippines or any of its political
subdivisions except when the beneficial use thereof had been granted, for
consideration or otherwise, to a taxable person;
(b) Charitable institutions, churches, parsonages or convents appurtenant thereto,
mosques, nonprofit or religious cemeteries and all lands, buildings and
improvements actually, directly, and exclusively used for religious, charitable or
educational purposes;
(c) All machineries and equipment that are actually, directly and exclusively used by
local water districts and government-owned or controlled corporations engaged in
the supply and distribution of water and/or generation and transmission of electric
power;
(d) All real property owned by duly registered cooperatives as provided for under R.A.
No. 6938; and
(e) Machinery and equipment used for pollution control and environmental protection.

Except as provided herein, any exemption from payment of real property tax
previously granted to, or presently enjoyed by, all persons, whether natural or
juridical, including all government-owned or controlled corporations are hereby
withdrawn upon the effectivity of this Code.

These exemptions are based on the ownership, character, and use of the
property. Thus:
(a) Ownership Exemptions. Exemptions from real property taxes on the basis
of ownership are real properties owned by: (i) the Republic, (ii) a province, (iii) a city,
(iv) a municipality, (v) a barangay, and (vi) registered cooperatives.
(b) Character Exemptions. Exempted from real property taxes on the basis of their
character are: (i) charitable institutions, (ii) houses and temples of prayer like
churches, parsonages or convents appurtenant thereto, mosques, and (iii) non-profit
or religious cemeteries.
(c) Usage exemptions. Exempted from real property taxes on the basis of the actual,
direct and exclusive use to which they are devoted are: (i) all lands, buildings and
improvements which are actually directly and exclusively used for religious,
charitable or educational purposes; (ii) all machineries and equipment actually,
directly and exclusively used by local water districts or by government-owned or
controlled corporations engaged in the supply and distribution of water and/or
generation and transmission of electric power; and (iii) all machinery and equipment
used for pollution control and environmental protection.
To help provide a healthy environment in the midst of the modernization of the
country, all machinery and equipment for pollution control and environmental
protection may not be taxed by local governments.

2. Other Exemptions Withdrawn. All other exemptions previously granted to natural

or juridical persons including government-owned or controlled corporations are
withdrawn upon the effectivity of the Code.[26]

Section 193 of the LGC is the general provision on withdrawal of tax

exemption privileges. It provides:

SEC. 193. Withdrawal of Tax Exemption Privileges. Unless otherwise provided in this

Code, tax exemptions or incentives granted to, or presently enjoyed by all persons,
whether natural or juridical, including government-owned or controlled corporations,
except local water districts, cooperatives duly registered under R.A. 6938, non-stock
and non-profit hospitals and educational institutions, are hereby withdrawn upon the
effectivity of this Code.

On the other hand, the LGC authorizes local government units to grant tax
exemption privileges. Thus, Section 192 thereof provides:

SEC. 192. Authority to Grant Tax Exemption Privileges.-- Local government units

may, through ordinances duly approved, grant tax exemptions, incentives or reliefs
under such terms and conditions as they may deem necessary.

The foregoing sections of the LGC speak of: (a) the limitations on the
taxing powers of local government units and the exceptions to such
limitations; and (b) the rule on tax exemptions and the exceptions thereto. The
use of exceptions or provisos in these sections, as shown by the following
clauses:
(1) unless otherwise provided herein in the opening paragraph of Section 133;
(2) Unless otherwise provided in this Code in Section 193;
(3) not hereafter specifically exempted in Section 232; and
(4) Except as provided herein in the last paragraph of Section 234

initially hampers a ready understanding of the sections. Note, too, that the

aforementioned clause in Section 133 seems to be inaccurately worded.
Instead of the clause unless otherwise provided herein, with the herein to
mean, of course, the section, it should have used the clause unless otherwise
provided in this Code. The former results in absurdity since the section itself
enumerates what are beyond the taxing powers of local government units
and, where exceptions were intended, the exceptions are explicitly indicated
in the next. For instance, in item (a) which excepts income taxes when levied
on banks and other financial institutions; item (d) which excepts wharfage on
wharves constructed and maintained by the local government unit concerned;
and item (1) which excepts taxes, fees and charges for the registration and
issuance of licenses or permits for the driving of tricycles. It may also be
observed that within the body itself of the section, there are exceptions which
can be found only in other parts of the LGC, but the section interchangeably
uses therein the clause except as otherwise provided herein as in items (c)
and (i), or the clause except as provided in this Code in item (j). These
clauses would be obviously unnecessary or mere surplusages if the opening
clause of the section were Unless otherwise provided in this Code instead of
Unless otherwise provided herein. In any event, even if the latter is used,
since under Section 232 local government units have the power to levy real
property tax, except those exempted therefrom under Section 234, then
Section 232 must be deemed to qualify Section 133.
Thus, reading together Sections 133, 232, and 234 of the LGC, we
conclude that as a general rule, as laid down in Section 133, the taxing
powers of local government units cannot extend to the levy of, inter alia,
taxes, fees and charges of any kind on the National Government, its agencies
and instrumentalities, and local government units; however, pursuant to
Section 232, provinces, cities, and municipalities in the Metropolitan Manila
Area may impose the real property tax except on, inter alia, real property
owned by the Republic of the Philippines or any of its political subdivisions
except when the beneficial use thereof has been granted, for consideration or
otherwise, to a taxable person, as provided in item (a) of the first paragraph of
Section 234.
As to tax exemptions or incentives granted to or presently enjoyed by
natural or juridical persons, including government-owned and controlled
corporations, Section 193 of the LGC prescribes the general rule, viz., they
are withdrawn upon the effectivity of the LGC, except those granted to local
water districts, cooperatives duly registered under R.A. No. 6938, non-stock
and non-profit hospitals and educational institutions, and unless otherwise
provided in the LGC. The latter proviso could refer to Section 234 which
enumerates the properties exempt from real property tax. But the last
paragraph of Section 234 further qualifies the retention of the exemption
insofar as real property taxes are concerned by limiting the retention only to
those enumerated therein; all others not included in the enumeration lost the
privilege upon the effectivity of the LGC. Moreover, even as to real property
owned by the Republic of the Philippines or any of its political subdivisions
covered by item (a) of the first paragraph of Section 234, the exemption is
withdrawn if the beneficial use of such property has been granted to a taxable
person for consideration or otherwise.
Since the last paragraph of Section 234 unequivocally withdrew, upon the
effectivity of the LGC, exemptions from payment of real property taxes
granted to natural or juridical persons, including government-owned or
controlled corporations, except as provided in the said section, and the
petitioner is, undoubtedly, a government-owned corporation, it necessarily
follows that its exemption from such tax granted it in Section 14 of its Charter,
R.A. No. 6958, has been withdrawn. Any claim to the contrary can only be
justified if the petitioner can seek refuge under any of the exceptions provided
in Section 234, but not under Section 133, as it now asserts, since, as shown
above, the said section is qualified by Sections 232 and 234.
In short, the petitioner can no longer invoke the general rule in Section 133
that the taxing powers of the local government units cannot extend to the levy
of:

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

It must show that the parcels of land in question, which are real property, are
any one of those enumerated in Section 234, either by virtue of ownership,
character, or use of the property. Most likely, it could only be the first, but not
under any explicit provision of the said section, for none exists. In light of the
petitioners theory that it is an instrumentality of the Government, it could only
be within the first item of the first paragraph of the section by expanding the
scope of the term Republic of the Philippines to embrace its instrumentalities
and agencies. For expediency, we quote:

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

This view does not persuade us. In the first place, the petitioners claim
that it is an instrumentality of the Government is based on Section 133(o),
which expressly mentions the word instrumentalities; and, in the second
place, it fails to consider the fact that the legislature used the phrase National
Government, its agencies and instrumentalities in Section 133(o), but only the
phrase Republic of the Philippines or any of its political subdivisions in Section
234(a).
 The terms Republic of the Philippines and National Government are not
interchangeable. The former is broader and synonymous with Government of
the Republic of the Philippines which the Administrative Code of 1987 defines
as the corporate governmental entity through which the functions of
government are exercised throughout the Philippines, including, save as the
contrary appears from the context, the various arms through which political
authority is made affective in the Philippines, whether pertaining to the
autonomous regions, the provincial, city, municipal or barangay subdivisions
or other forms of local government.[27] These autonomous regions, provincial,
city, municipal or barangay subdivisions are the political subdivisions.[28]
On the other hand, National Government refers to the entire machinery of
the central government, as distinguished from the different forms of local
governments.[29] The National Government then is composed of the three great
departments: the executive, the legislative and the judicial.[30]
An agency of the Government refers to any of the various units of the
Government, including a department, bureau, office, instrumentality, or
government-owned or controlled corporation, or a local government or a
distinct unit therein;[31] while an instrumentality refers to any agency of the
National Government, not integrated within the department framework, vested
with special functions or jurisdiction by law, endowed with some if not all
corporate powers, administering special funds, and enjoying operational
autonomy, usually through a charter. This term includes regulatory agencies,
chartered institutions and government-owned and controlled corporations.[32]
If Section 234(a) intended to extend the exception therein to the
withdrawal of the exemption from payment of real property taxes under the
last sentence of the said section to the agencies and instrumentalities of the
National Government mentioned in Section 133(o), then it should have
restated the wording of the latter. Yet, it did not. Moreover, that Congress did
not wish to expand the scope of the exemption in Section 234(a) to include
real property owned by other instrumentalities or agencies of the government
including government-owned and controlled corporations is further borne out
by the fact that the source of this exemption is Section 40(a) of P.D. No. 464,
otherwise known as The Real Property Tax Code, which reads:

SEC. 40. Exemptions from Real Property Tax. The exemption shall be as follows:

(a) Real property owned by the Republic of the Philippines or any of its political
subdivisions and any government-owned or controlled corporation so exempt by its
charter: Provided, however, That this exemption shall not apply to real property of the
above-mentioned entities the beneficial use of which has been granted, for
consideration or otherwise, to a taxable person.

Note that as reproduced in Section 234(a), the phrase and any government-
owned or controlled corporation so exempt by its charter was excluded. The
justification for this restricted exemption in Section 234(a) seems obvious: to
limit further tax exemption privileges, especially in light of the general
provision on withdrawal of tax exemption privileges in Section 193 and the
special provision on withdrawal of exemption from payment of real property
taxes in the last paragraph of Section 234. These policy considerations are
consistent with the State policy to ensure autonomy to local
governments[33] and the objective of the LGC that they enjoy genuine and
meaningful local autonomy to enable them to attain their fullest development
as self-reliant communities and make them effective partners in the attainment
of national goals.[34] The power to tax is the most effective instrument to raise
needed revenues to finance and support myriad activities of local government
units for the delivery of basic services essential to the promotion of the
general welfare and the enhancement of peace, progress, and prosperity of
the people. It may also be relevant to recall that the original reasons for the
withdrawal of tax exemption privileges granted to government-owned and
controlled corporations and all other units of government were that such
privilege resulted in serious tax base erosion and distortions in the tax
treatment of similarly situated enterprises, and there was a need for these
entities to share in the requirements of development, fiscal or otherwise, by
paying the taxes and other charges due from them.[35]
The crucial issues then to be addressed are: (a) whether the parcels of
land in question belong to the Republic of the Philippines whose beneficial
use has been granted to the petitioner, and (b) whether the petitioner is a
taxable person.
Section 15 of the petitioners Charter provides:

Sec. 15. Transfer of Existing Facilities and Intangible Assets. All existing public
airport facilities, runways, lands, buildings and other properties, movable or
immovable, belonging to or presently administered by the airports, and all assets,
powers, rights, interests and privileges relating on airport works or air operations,
including all equipment which are necessary for the operations of air navigation,
aerodrome control towers, crash, fire, and rescue facilities are hereby transferred to
the Authority: Provided, however, that the operations control of all equipment
necessary for the operation of radio aids to air navigation, airways communication, the
approach control office, and the area control center shall be retained by the Air
Transportation Office. No equipment, however, shall be removed by the Air
Transportation Office from Mactan without the concurrence of the Authority. The
Authority may assist in the maintenance of the Air Transportation Office equipment.

The airports referred to are the Lahug Air Port in Cebu City and the
Mactan International Airport in the Province of Cebu,[36] which belonged to the
Republic of the Philippines, then under the Air Transportation Office (ATO).[37]
It may be reasonable to assume that the term lands refer to lands in Cebu
City then administered by the Lahug Air Port and includes the parcels of land
the respondent City of Cebu seeks to levy on for real property taxes. This
section involves a transfer of the lands, among other things, to the petitioner
and not just the transfer of the beneficial use thereof, with the ownership being
retained by the Republic of the Philippines.
This transfer is actually an absolute conveyance of the ownership thereof
because the petitioners authorized capital stock consists of, inter alia, the
value of such real estate owned and/or administered by the airports.[38] Hence,
the petitioner is now the owner of the land in question and the exception in
Section 234(c) of the LGC is inapplicable.
Moreover, the petitioner cannot claim that it was never a taxable person
under its Charter. It was only exempted from the payment of real property
taxes. The grant of the privilege only in respect of this tax is conclusive proof
of the legislative intent to make it a taxable person subject to all taxes, except
real property tax.
Finally, even if the petitioner was originally not a taxable person for
purposes of real property tax, in light of the foregoing disquisitions, it had
already become, even if it be conceded to be an agency or instrumentality of
the Government, a taxable person for such purpose in view of the withdrawal
in the last paragraph of Section 234 of exemptions from the payment of real
property taxes, which, as earlier adverted to, applies to the petitioner.
Accordingly, the position taken by the petitioner is untenable. Reliance
on Basco vs. Philippine Amusement and Gaming Corporation[39] is unavailing
since it was decided before the effectivity of the LGC.Besides, nothing can
prevent Congress from decreeing that even instrumentalities or agencies of
the Government performing governmental functions may be subject to
tax. Where it is done precisely to fulfill a constitutional mandate and national
policy, no one can doubt its wisdom.
 WHEREFORE, the instant petition is DENIED. The challenged decision
and order of the Regional Trial Court of Cebu, Branch 20, in Civil Case No.
CEB-16900 are AFFIRMED.
No pronouncement as to costs.
SO ORDERED.
Facts:
 The City of Quezon passed two ordinances namely.
 The first one was the Socialized Housing Tax of QC allowing the imposition of
special assessment (1/2 of the assessed valued of land in excess of P100k)
 The second one was Ordinance No. SP-2235, S-2013 on Garbage Collection
Fees imposing fees depending on the amount of the land or floor area).
 Jose Ferrer, as a property in Quezon City questioned the validity of the city
ordinances.
 According to Ferrer:
 The city has no power to impose the tax.
 The SHT violates the rule on equality because it burdens real property
owners with expenses to provide funds for the housing of informal settlers.
 The SHT is confiscatory or oppressive.
 Also, he assails the validity of the garbage fees imposition because:
 It violates the rule on double taxation.
 It violates the rule on equality because the fees are collected from only
domestic households and not from restaurants, food courts, fast food chains,
and other commercial dining places that spew garbage much more than
residential property owners.

Issue: WON the ordinances were valid.

Held: 

1st ordinance: Socialized Housing Tax of Quezon City is valid.

Cities have the power to tax

It must be noted that local government units such as cities has the power to tax. The
collection for the socialized housing tax is valid. It must be noted that the collections
were made to accrue to the socialized housing programs and projects of the city. 

The imposition was for a public purpose (exercise of power of taxation + police
power)
In this case, there was both an exercise of the power to tax (primary) and police power
(incidental). Removing slum areas in Quezon City is not only beneficial to the
underprivileged and homeless constituents but advantageous to the real property
owners as well. 
The situation will improve the value of the their property investments, fully enjoying the
same in view of an orderly, secure, and safe community, and will enhance the quality of
life of the poor, making them law-abiding constituents and better consumers of business
products.

There is no violation of the rule on equality

Note: There is a substantial distinction between: real property owner and an informal
settler. In fact, the Supreme Court said that the disparity is so obvious. It is inherent in
the power to tax that a State is free to select the subjects of taxation. Inequities which
result from a singling out of one particular class for taxation or exemption infringe no
constitutional limitation.

All these requisites are complied with: An ordinance based on reasonable classification
does not violate the constitutional guaranty of the equal protection of the law. The
requirements for a valid and reasonable classification are: (1) it must rest on substantial
distinctions; (2) it must be germane to the purpose of the law; (3) it must not be limited
to existing conditions only; and (4) it must apply equally to all members of the same
class.

The ordinance is not oppressive or confiscatory

The ordinance is also not oppressive since the tax rate being imposed is consistent with
the UDHA (Urban Development and Housing Act of 1992). While the law authorizes
LGUs to collect SHT on properties with an assessed value of more than P50,000.00,
the questioned ordinance only covers properties with an assessed value exceeding
P100,000.00. As well, the ordinance provides for a tax credit equivalent to the total
amount of the special assessment paid by the property owner beginning in the sixth
(6th) year of the effectivity of the ordinance.

2nd ordinance: The imposition of garbage fee is invalid.

Note: There was no violation of double taxation but there was a violation of the rule on
equity.

There is no violation of double taxation: the garbage fees are not taxes
In Progressive Development Corporation v. Quezon City, the Court declared that:
"if the generating of revenue is the primary purpose and regulation is merely incidental,
the imposition is a tax; but if regulation is the primary purpose, the fact that incidentally
revenue is also obtained does not make the imposition a tax."

Contention of Ferrer: that the imposition of garbage fee is tantamount to double taxation
because garbage collection is a basic and essential public service that should be paid
out from property tax, business tax, transfer tax, amusement tax, community tax
certificate, other taxes, and the IRA of the Quezon City Government. All these are valid
taxes. The garbage fees are license fees
Footnote: In order to constitute double taxation in the objectionable or prohibited sense
the same property must be taxed twice when it should be taxed but once; both taxes
must be imposed on the same property or subject-matter, for the same purpose, by the
same State, Government, or taxing authority, within the same jurisdiction or taxing
district, during the same taxing period, and they must be the same kind or character of
tax.

There is a violation of the rule on equality: no substantial distinction

There is no substantial distinction between an occupant of a lot, on one hand, and an
occupant of a unit in a condominium, socialized housing project or apartment, on the
other hand. 
Most likely, garbage output produced by these types of occupants is uniform and does
not vary to a large degree; thus, a similar schedule of fee is both just and equitable.

The garbage fees or rates are unjust and inequitable

A resident of a 200 sq. m. unit in a condominium or socialized housing project has to
pay twice the amount than a resident of a lot similar in size; unlike unit occupants, all
occupants of a lot with an area of 200 sq. m. and less have to pay a fixed rate of
Php100.00; and the same amount of garbage fee is imposed regardless of whether the
resident is from a condominium or from a socialized housing project.

The classifications are not germane to the purpose of the ordinance

The declared purpose is: "promoting shared responsibility with the residents to attack
their common mindless attitude in over-consuming the present resources and in
generating waste."

Instead of simplistically categorizing the payee into land or floor occupant of a lot or unit
of a condominium, socialized housing project or apartment, respondent City Council
should have considered factors that could truly measure the amount of wastes
generated and the appropriate fee for its collection. Factors include, among others,
household age and size, accessibility to waste collection, population density of the
barangay or district, capacity to pay, and actual occupancy of the property.

SC: 
→ Validity of Socialized Housing Tax of Quezon City is upheld. 
→ Ordinance No. SP-2235, S-2013, which collects an annual garbage fee on all
domestic households in Quezon City, is unconstitutional and illegal.

G.R. No. 210551               June 30, 2015

JOSE J. FERRER, JR., Petitioner, 

vs.
CITY MAYOR HERBERT BAUTISTA, CITY COUNCIL OF QUEZON CITY, CITY TREASURER OF
QUEZON CITY, and CITY ASSESSOR OF QUEZON CITY, Respondents.

DECISION
PERALTA, J.:

Before this Court is a petition for certiorari under Rule 65 of the Rules of Court with prayer for the
issuance of a temporary restraining order (TRO) seeking to declare unconstitutional and illegal
Ordinance Nos. SP-2095, S-2011 and SP-2235, S-2013 on the Socialized Housing Tax and
Garbage Fee, respectively, which are being imposed by the respondents.

The Case

On October 17, 2011,  respondent Quezon City Council enacted Ordinance No. SP-2095, S-
1

2011,  or the Socialized Housing Tax of Quezon City, Section 3 of which provides:
2

SECTION 3. IMPOSITION. A special assessment equivalent to one-half percent (0.5%) on the

assessed value of land in excess of One Hundred Thousand Pesos (Php100,000.00) shall be
collected by the City Treasurer which shall accrue to the Socialized Housing Programs of the
Quezon City Government. The special assessment shall accrue to the General Fund under a special
account to be established for the purpose.

Effective for five (5) years, the Socialized Housing Tax ( SHT ) shall be utilized by the Quezon City
Government for the following projects: (a) land purchase/land banking; (b) improvement of
current/existing socialized housing facilities; (c) land development; (d) construction of core houses,
sanitary cores, medium-rise buildings and other similar structures; and (e) financing of public-private
partners hip agreement of the Quezon City Government and National Housing Authority ( NHA ) with
the private sector.3

Under certain conditions, a tax credit shall be enjoyed by taxpayers regularly paying the special
assessment:

SECTION 7. TAX CREDIT. Taxpayers dutifully paying the special assessment tax as imposed by
this ordinance shall enjoy a tax credit. The tax credit may be availed of only after five (5) years of
continue[d] payment. Further, the taxpayer availing this tax credit must be a taxpayer in good
standing as certified by the City Treasurer and City Assessor.

The tax credit to be granted shall be equivalent to the total amount of the special assessment paid
by the property owner, which shall be given as follows:

1. 6th year - 20%

2. 7th year - 20%

3. 8th year - 20%

4. 9th year - 20%

5. 10th year - 20%

Furthermore, only the registered owners may avail of the tax credit and may not be continued by the
subsequent property owners even if they are buyers in good faith, heirs or possessor of a right in
whatever legal capacity over the subject property. 4
On the other hand, Ordinance No. SP-2235, S-2013  was enacted on December 16, 2013 and took
5

effect ten days after when it was approved by respondent City Mayor.  The proceeds collected from
6

the garbage fees on residential properties shall be deposited solely and exclusively in an earmarked
special account under the general fund to be utilized for garbage collections.  Section 1 of the
7

Ordinance se t forth the schedule and manner for the collection of garbage fees:

SECTION 1. The City Government of Quezon City in conformity with and in relation to Republic Act
No. 7160, otherwise known as the Local Government Code of 1991 HEREBY IMPOSES THE
FOLLOWING SCHEDULE AND MANNER FOR THE ANNUAL COLLECTION OF GARBAGE FEES,
AS FOLLOWS: On all domestic households in Quezon City;

LAND AREA IMPOSABLE FEE

Less than 200 sq. m. PHP 100.00
201 sq. m. – 500 sq. m. PHP 200.00
501 sq. m. – 1,000 sq. m. PHP 300.00
1,001 sq. m. – 1,500 sq. m. PHP 400.00
1,501 sq. m. – 2,000 sq. m. or more PHP 500.00

On all condominium unit and socialized housing projects/units in Quezon City;

FLOOR AREA IMPOSABLE FEE

Less than 40 sq. m. PHP 25.00
41 sq. m. – 60 sq. m. PHP 50.00
61 sq. m. – 100 sq. m. PHP 75.00
101 sq. m. – 150 sq. m. PHP 100.00
151 sq. m. – 200 sq. [m.] or more PHP 200.00

On high-rise Condominium Units

a) High-rise Condominium – The Homeowners Association of high- rise condominiums shall

pay the annual garbage fee on the total size of the entire condominium and socialized
Housing Unit and an additional garbage fee shall be collected based on area occupied for
every unit already so ld or being amortized.

b) High-rise apartment units – Owners of high-rise apartment units shall pay the annual
garbage fee on the total lot size of the entire apartment and an additional garbage fee based
on the schedule prescribed herein for every unit occupied.

The collection of the garbage fee shall accrue on the first day of January and shall be paid
simultaneously with the payment of the real property tax, but not later than the first quarter
installment.  In case a household owner refuses to pay, a penalty of 25% of the garbage fee due,
8

plus an interest of 2% per month or a fraction thereof, shall be charged.9

Petitioner alleges that he is a registered co-owner of a 371-square-meter residential property in
Quezon City which is covered by Transfer Certificate of Title (TCT ) No. 216288, and that, on
January 7, 2014, he paid his realty tax which already included the garbage fee in the sum of

Php100.00. 10

The instant petition was filed on January 17, 2014. We issued a TRO on February 5, 2014, which
enjoined the enforcement of Ordinance Nos. SP-2095 and SP-2235 and required respondents to
comment on the petition without necessarily giving due course thereto. 11

Respondents filed their Comment  with urgent motion to dissolve the TRO on February 17, 2014.
12

Thereafter, petitioner filed a Reply and a Memorandum on March 3, 2014 and September 8, 2014,
respectively.

Procedural Matters

A. Propriety of a Petition for Certiorari

Respondents are of the view that this petition for certiorari is improper since they are not tribunals,
boards or officers exercising judicial or quasi-judicial functions. Petitioner, however, counters that in
enacting Ordinance Nos. SP-2095 and SP-2235, the Quezon City Council exercised quasi-judicial
function because the ordinances ruled against the property owners who must pay the SHT and the
garbage fee, exacting from them funds for basic essential public services that they should not be
held liable. Even if a Rule 65 petition is improper, petitioner still asserts that this Court, in a number
of cases like in Rosario v. Court of Appeals,  has taken cognizance of an improper remedy in the
13

interest of justice.

We agree that respondents neither acted in any judicial or quasi-judicial capacity nor arrogated unto
themselves any judicial or quasi-judicial prerogatives.

A respondent is said to be exercising judicial function where he has the power to determine what the
law is and what the legal rights of the parties are, and then undertakes to determine these questions
and adjudicate upon the rights of the parties.

Quasi-judicial function, on the other hand, is "a term which applies to the actions, discretion, etc., of
public administrative officers or bodies … required to investigate facts or ascertain the existence of
facts, hold hearings, and draw conclusions from them as a basis for their official action and to
exercise discretion of a judicial nature."

Before a tribunal, board, or officer may exercise judicial or quasi-judicial acts, it is necessary that
there be a law that gives rise to some specific rights of person s or property under which adverse
claims to such rights are made, and the controversy en suing therefrom is brought before a tribunal,
board, or officer clothed with power and authority to determine the law and adjudicate the respective
rights of the contending parties. 14

For a writ of certiorari to issue, the following requisites must concur: (1) it must be directed against a
tribunal, board, or officer exercising judicial or quasi-judicial functions; (2) the tribunal, board, or
officer must have acted without or in excess of jurisdiction or with grave abuse of discretion
amounting to lack or excess of jurisdiction; and (3) there is no appeal or any plain, speedy, and
adequate remedy in the ordinary course of law. The enactment by the Quezon City Council of the
assailed ordinances was done in the exercise of its legislative, not judicial or quasi-judicial, function.
Under Republic Act (R.A.) No.7160, or the Local Government Code of 1991 (LGC), local legislative
power shall be exercised by the Sangguniang Panlungsod for the city. Said law likewise is specific in
15

providing that the power to impose a tax, fee, or charge , or to generate revenue shall be exercised
by the sanggunian of the local government unit concerned through an appropriate ordinance. 16

Also, although the instant petition is styled as a petition for certiorari, it essentially seeks to declare
the unconstitutionality and illegality of the questioned ordinances. It, thus, partakes of the nature of a
petition for declaratory relief, over which this Court has only appellate, not original, jurisdiction. 17

Despite these, a petition for declaratory relief may be treated as one for prohibition or mandamus,
over which we exercise original jurisdiction, in cases with far-reaching implications or one which
raises transcendental issues or questions that need to be resolved for the public good. The judicial
18

policy is that this Court will entertain direct resort to it when the redress sought cannot be obtained in
the proper courts or when exceptional and compelling circumstances warrant availment of a remedy
within and calling for the exercise of Our primary jurisdiction.19

Section 2, Rule 65 of the Rules of Court lay down under what circumstances a petition for prohibition
may be filed:

SEC. 2. Petition for prohibition. - When the proceedings of any tribunal, corporation, board, officer or
person, whether exercising judicial, quasi-judicial or ministerial functions, 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
proceeding in the action or matter specified therein, or otherwise granting such incidental reliefs as
law and justice may require.

In a petition for prohibition against any tribunal, corporation, board, or person – whether exercising
judicial, quasi-judicial, or ministerial functions – who has acted without or in excess of jurisdiction or
with grave abuse of discretion, the petitioner prays that judgment be rendered, commanding the
respondents to desist from further proceeding in the action or matter specified in the petition. In this
case, petitioner's primary intention is to prevent respondents from implementing Ordinance Nos. SP-
2095 and SP-2235. Obviously, the writ being sought is in the nature of a prohibition, commanding
desistance.

We consider that respondents City Mayor, City Treasurer, and City Assessor are performing
ministerial functions. A ministerial function is one that an officer or tribunal performs in the context of
a given set of facts, in a prescribed manner and without regard for the exercise of his or its own
judgment, upon the propriety or impropriety of the act done.  Respondent Mayor, as chief executive
20

of the city government, exercises such powers and performs such duties and functions as provided
for by the LGC and other laws.  Particularly, he has the duty to ensure that all taxes and other
21

revenues of the city are collected, and that city funds are applied to the payment of expenses and
settlement of obligations of the city, in accordance with law or ordinance.  On the other hand, under
22

the LGC, all local taxes, fees, and charges shall be collected by the provincial, city, municipal, or
barangay treasurer, or their duly-authorized deputies, while the assessor shall take charge, among
others, of ensuring that all laws and policies governing the appraisal and assessment of real
properties for taxation purposes are properly executed.  Anent the SHT, the Department of Finance
23

(DOF) Local Finance Circular No. 1-97, dated April 16, 1997, is more specific:

6.3 The Assessor’s office of the Identified LGU shall:

 a. immediately undertake an inventory of lands within its jurisdiction which
shall be subject to the levy of the Social Housing Tax (SHT) by the local
sanggunian concerned;

b. inform the affected registered owners of the effectivity of the SHT; a list of
the lands and registered owners shall also be posted in 3 conspicuous places
in the city/municipality;

c. furnish the Treasurer’s office and the local sanggunian concerned of the
list of lands affected;

6.4 The Treasurer’s office shall:

a. collect the Social Housing Tax on top of the Real Property Tax, SEF Tax
and other special assessments;

b. report to the DOF, thru the Bureau of Local Government Finance, and the
Mayor’s office the monthly collections on Social Housing Tax (SHT). An
annual report should likewise be submitted to the HUDCC on the total
revenues raised during the year pursuant to Sec. 43, R.A. 7279 and the
manner in which the same was disbursed.

Petitioner has adduced special and important reasons as to why direct recourse to us should be
allowed. Aside from presenting a novel question of law, this case calls for immediate resolution since
the challenged ordinances adversely affect the property interests of all paying constituents of
Quezon City. As well, this petition serves as a test case for the guidance of other local government
units (LGUs).Indeed, the petition at bar is of transcendental importance warranting a relaxation of
the doctrine of hierarchy of courts. In Social Justice Society (SJS) Officers, et al. v. Lim , the Court
24

cited the case of Senator Jaworski v. Phil. Amusement & Gaming Corp.,  where We ratiocinated:
25

Granting arguendo that the present action cannot be properly treated as a petition for prohibition, the
transcendental importance of the issues involved in this case warrants that we set aside the
technical defects and take primary jurisdiction over the petition at bar . x x x This is in accordance
with the well entrenched principle that rules of procedure are not inflexible tools designed to hinder
or delay, but to facilitate and promote the administration of justice. Their strict and rigid application,
which would result in technicalities that tend to frustrate, rather than promote substantial justice,
must always be eschewed. 26

B. Locus Standi of Petitioner

Respondents challenge petitioner’s legal standing to file this case on the ground that, in relation to
Section 3 of Ordinance No. SP-2095, petitioner failed to allege his ownership of a property that has
an assessed value of more than Php100,000.00 and, with respect to Ordinance No. SP-2335, by
what standing or personality he filed the case to nullify the same. According to respondents, the
petition is not a class suit, and that, for not having specifically alleged that petitioner filed the case as
a taxpayer, it could only be surmised whether he is a party-in-interest who stands to be directly
benefited or injured by the judgment in this case.

It is a general rule that every action must be prosecuted or defended in the name of the real party-in-
interest, who stands to be benefited or injured by the judgment in the suit, or the party entitled to the
avails of the suit.
Jurisprudence defines interest as "material interest, an interest in issue and to be affected by the
decree, as distinguished from mere interest in the question involved, or a mere incidental interest. By
real interest is meant a present substantial interest, as distinguished from a mere expectancy or a
future, contingent, subordinate, or consequential interest." "To qualify a person to be a real party-in-
interest in whose name an action must be prosecuted, he must appear to be the present real owner
of the right sought to be enforced."27

"Legal standing" or locus standi calls for more than just a generalized grievance.  The concept has
28

been define d as a personal and substantial interest in the case such that the party has sustained or
will sustain direct injury as a result of the government al act that is being challenged.  The gist of the
29

question of standing is whether a party alleges such personal stake in the outcome of the
controversy as to assure that concrete adverseness which sharpens the presentation of issues upon
which the court depends for illumination of difficult constitutional questions. 30

A party challenging the constitutionality of a law, act, or statute must show "not only that the law is
invalid, but also that he has sustained or is in immediate, or imminent danger of sustaining some
direct injury as a result of its enforcement, and not merely that he suffers thereby in some indefinite
way." It must be shown that he has been, or is about to be, denied some right or privilege to which
he is lawfully entitled, or that he is about to be subjected to some burdens or penalties by reason of
the statute complained of. 31

Tested by the foregoing, petitioner in this case clearly has legal standing to file the petition. He is a
real party-in-interest to assail the constitutionality and legality of Ordinance Nos. SP-2095 and SP-
2235 because respondents did not dispute that he is a registered co-owner of a residential property
in Quezon City an d that he paid property tax which already included the SHT and the garbage fee.
He has substantial right to seek a refund of the payments he made and to stop future imposition.
While he is a lone petitioner, his cause of action to declare the validity of the subject ordinances is
substantial and of paramount interest to similarly situated property owners in Quezon City.

C. Litis Pendentia

Respondents move for the dismissal of this petition on the ground of litis pendentia. They claim that,
as early as February 22, 2012, a case entitled Alliance of Quezon City Homeowners, Inc., et al., v.
Hon. Herbert Bautista, et al. , docketed as Civil Case No. Q-12- 7-820, has been pending in the
Quezon City Regional Trial Court, Branch 104, which assails the legality of Ordinance No. SP-2095.
Relying on City of Makati, et al. v. Municipality (now City) of Taguig, et al.,  respondents assert that
32

there is substantial identity of parties between the two cases because petitioner herein and plaintiffs
in the civil case filed their respective cases as taxpayers of Quezon City.

For petitioner, however, respondents’ contention is untenable since he is not a party in Alliance and
does not even have the remotest identity or association with the plaintiffs in said civil case.
Moreover, respondents’ arguments would deprive this Court of its jurisdiction to determine the
constitutionality of laws under Section 5, Article VIII of the 1987 Constitution. 33

Litis pendentia is a Latin term which literally means "a pending suit" and is variously referred to in
some decisions as lis pendens and auter action pendant.  While it is normally connected with the
34

control which the court has on a property involved in a suit during the continuance proceedings, it is
more interposed as a ground for the dismissal of a civil action pending in court.  In Film 35

Development Council of the Philippines v. SM Prime Holdings, Inc.,36 We elucidated:

Litis pendentia, as a ground for the dismissal of a civil action, refers to a situation where two actions
are pending between the same parties for the same cause of action, so that one of them becomes
unnecessary and vexatious. It is based on the policy against multiplicity of suit and authorizes a
court to dismiss a case motu proprio.

xxxx

The requisites in order that an action may be dismissed on the ground of litis pendentia are: (a) the
identity of parties, or at least such as representing the same interest in both actions; (b) the identity
of rights asserted and relief prayed for, the relief being founded on the same facts, and (c) the
identity of the two cases such that judgment in one, regardless of which party is successful, would
amount to res judicata in the other.

The underlying principle of litis pendentia is the theory that a party is not allowed to vex another
more than once regarding the same subject matter and for the same cause of action. This theory is
founded on the public policy that the same subject matter should not be the subject of controversy in
courts more than once, in order that possible conflicting judgments may be avoided for the sake of
the stability of the rights and status of persons, and also to avoid the costs and expenses incident to
numerous suits.

Among the several tests resorted to in ascertaining whether two suits relate to a single or common
cause of action are: (1) whether the same evidence would support and sustain both the first and
second causes of action; and (2) whether the defenses in one case may be used to substantiate the
complaint in the other.

The determination of whether there is an identity of causes of action for purposes of litis pendentia is
inextricably linked with that of res judicata , each constituting an element of the other. In either case,
both relate to the sound practice of including, in a single litigation, the disposition of all issues
relating to a cause of action that is before a court.
37

There is substantial identity of the parties when there is a community of interest between a party in
the first case and a party in the second case albeit the latter was not impleaded in the first
case. Moreover, the fact that the positions of the parties are reversed, i.e., the plaintiffs in the first
38

case are the defendants in the second case or vice-versa, does not negate the identity of parties for
purposes of determining whether the case is dismissible on the ground of litis pendentia . 39

In this case, it is notable that respondents failed to attach any pleading connected with the alleged
civil case pending before the Quezon City trial court.  Granting that there is substantial identity of
1âwphi1

parties between said case and this petition, dismissal on the ground of litis pendentia still cannot be
had in view of the absence of the second and third requisites. There is no way for us to determine
whether both cases are based on the same set of facts that require the presentation of the same
evidence. Even if founded on the same set of facts, the rights asserted and reliefs prayed for could
be different. Moreover, there is no basis to rule that the two cases are intimately related and/or
intertwined with one another such that the judgment that may be rendered in one, regardless of
which party would be successful, would amount to res judicata in the other.

D. Failure to Exhaust Administrative Remedies

Respondents contend that petitioner failed to exhaust administrative remedies for his non-
compliance with Section 187 of the LGC, which mandates:

Section 187. Procedure for Approval and Effectivity of Tax Ordinances and Revenue Measures;
Mandatory Public Hearings. – The procedure for approval of local tax ordinances and revenue
measures shall be in accordance with the provisions of this Code: Provided, That public hearings
shall be conducted for the purpose prior to the enactment thereof: Provided, further, That any
question on the constitutionality or legality of tax ordinances or revenue measures may be raised on
appeal within thirty (30) days from the effectivity thereof to the Secretary of Justice who shall render
a decision within sixty (60) days from the date of receipt of the appeal: Provided, however, That such
appeal shall not have the effect of suspending the effectivity of the ordinance and the accrual and
payment of the tax, fee, or charge levied therein: Provided, finally, That within thirty (30) days after
receipt of the decision or the lapse of the sixty-day period without the Secretary of Justice acting
upon the appeal, the aggrieved party may file appropriate proceedings with a court of competent
jurisdiction.

The provision, the constitutionality of which was sustained in Drilon v. Lim ,  has been construed as
40

mandatory  considering that –

41

A municipal tax ordinance empowers a local government unit to impose taxes. The power to tax is
the most effective instrument to raise needed revenues to finance and support the myriad activities
of local government units for the delivery of basic services essential to the promotion of the general
welfare and enhancement of peace, progress, and prosperity of the people. Consequently, any delay
in implementing tax measures would be to the detriment of the public. It is for this reason that
protests over tax ordinances are required to be done within certain time frames. x x x. 42

The obligatory nature of Section 187 was underscored in Hagonoy Market Vendor Asso. v.
Municipality of Hagonoy: 43

x x x [T]he timeframe fixed by law fo r parties to avail of their legal remedies before competent courts
is not a "mere technicality" that can be easily brushed aside. The periods stated in Section 187 of
the Local Government Code are mandatory. x x x Being its lifeblood, collection of revenues by the
government is of paramount importance. The funds for the operation of its agencies and provision of
basic services to its inhabitants are largely derived from its revenues and collections. Thus, it is
essential that the validity of revenue measures is not left uncertain for a considerable length of time.
Hence, the law provided a time limit for an aggrieved party to assail the legality of revenue measures
and tax ordinances." 44

Despite these cases, the Court, in Ongsuco, et al. v. Hon. Malones, held that there was no need for
45

petitioners therein to exhaust administrative remedies before resorting to the courts, considering that
there was only a pure question of law, the parties did not dispute any factual matter on which they
had to present evidence. Likewise, in Cagayan Electric Power and Light Co., Inc. v. City of Cagayan
de Oro,  We relaxed the application of the rules in view of the more substantive matters. For the
46

same reasons, this petition is an exception to the general rule.

Substantive Issues

Petitioner asserts that the protection of real properties from informal settlers and the collection of
garbage are basic and essential duties and functions of the Quezon City Government. By imposing
the SHT and the garbage fee, the latter has shown a penchant and pattern to collect taxes to pay for
public services that could be covered by its revenues from taxes imposed on property, idle land,
business, transfer, amusement, etc., as well as the Internal Revenue Allotment (IRA ) from the
National Government. For petitioner, it is noteworthy that respondents did not raise the issue that the
Quezon City Government is in dire financial state and desperately needs money to fund housing for
informal settlers and to pay for garbage collection. In fact, it has not denied that its revenue
collection in 2012 is in the sum of ₱13.69 billion.
Moreover, the imposition of the SHT and the garbage fee cannot be justified by the Quezon City
Government as an exercise of its power to create sources of income under Section 5, Article X of the
1987 Constitution.  According to petitioner, the constitutional provision is not a carte blanche for the
47

LGU to tax everything under its territorial and political jurisdiction as the provision itself admits of
guidelines and limitations.

Petitioner further claims that the annual property tax is an ad valorem tax, a percentage of the
assessed value of the property, which is subject to revision every three (3) years in order to reflect
an increase in the market value of the property. The SHT and the garbage fee are actually increases
in the property tax which are not based on the assessed value of the property or its reassessment
every three years; hence, in violation of Sections 232 and 233 of the LGC. 48

For their part, respondents relied on the presumption in favor of the constitutionality of Ordinance
Nos. SP-2095 and SP-2235, invoking Victorias Milling Co., Inc. v. Municipality of Victorias,
etc.,  People v. Siton, et al.,  and Hon. Ermita v. Hon. Aldecoa-Delorino .  They argue that the
49 50 51

burden of establishing the invalidity of an ordinance rests heavily upon the party challenging its
constitutionality. They insist that the questioned ordinances are proper exercises of police power
similar to Telecom. & Broadcast Attys. of the Phils., Inc. v. COMELEC52 and Social Justice Society
(SJS), et al. v. Hon. Atienza, Jr.  and that their enactment finds basis in the social justice principle
53

enshrined in Section 9,  Article II of the 1987 Constitution.

54

As to the issue of publication, respondents argue that where the law provides for its own effectivity,
publication in the Official Gazette is not necessary so long as it is not punitive in character, citing
Balbuna, et al. v. Hon. Secretary of Education, et al.  and Askay v. Cosalan .[56]] Thus, Ordinance
55

No. SP-2095 took effect after its publication, while Ordinance No. SP-2235 became effective after its
approval on December 26, 2013.

Additionally, the parties articulate the following positions:

On the Socialized Housing Tax

Respondents emphasize that the SHT is pursuant to the social justice principle found in Sections 1
and 2, Article XIII  of the 1987 Constitution and Sections 2 (a)  and 43  of R.A. No. 7279, or the
57 58 59

"Urban Development and Housing Act of 1992 ( UDHA ).

Relying on Manila Race Horse Trainers Assn., Inc. v. De La Fuente, and Victorias Milling Co., Inc. v.
60

Municipality of Victorias, etc., respondents assert that Ordinance No. SP-2095 applies equally to all
61

real property owners without discrimination. There is no way that the ordinance could violate the
equal protection clause because real property owners and informal settlers do not belong to the
same class.

Ordinance No. SP-2095 is also not oppressive since the tax rate being imposed is consistent with
the UDHA. While the law authorizes LGUs to collect SHT on properties with an assessed value of
more than ₱50,000.00, the questioned ordinance only covers properties with an assessed value
exceeding ₱100,000.00. As well, the ordinance provides for a tax credit equivalent to the total
amount of the special assessment paid by the property owner beginning in the sixth (6th) year of the
effectivity of the ordinance.

On the contrary, petitioner claims that the collection of the SHT is tantamount to a penalty imposed
on real property owners due to the failure of respondent Quezon City Mayor and Council to perform
their duty to secure and protect real property owners from informal settlers, thereby burdening them
with the expenses to provide funds for housing. For petitioner, the SHT cannot be viewed as a
"charity" from real property owners since it is forced, not voluntary.

Also, petitioner argues that the collection of the SHT is a kind of class legislation that violates the
right of property owners to equal protection of the laws since it favors informal settlers who occupy
property not their own and pay no taxes over law-abiding real property owners w ho pay income and
realty taxes.

Petitioner further contends that respondents’ characterization of the SHT as "nothing more than an
advance payment on the real property tax" has no statutory basis. Allegedly, property tax cannot be
collected before it is due because, under the LGC, chartered cities are authorized to impose property
tax based on the assessed value and the general revision of assessment that is made every three
(3) years.

As to the rationale of SHT stated in Ordinance No. SP-2095, which, in turn, was based on Section
43 of the UDHA, petitioner asserts that there is no specific provision in the 1987 Constitution stating
that the ownership and enjoyment of property bear a social function. And even if there is, it is
seriously doubtful and far-fetched that the principle means that property owners should provide
funds for the housing of informal settlers and for home site development. Social justice and police
power, petitioner believes, does not mean imposing a tax on one, or that one has to give up
something, for the benefit of another. At best, the principle that property ownership and enjoyment
bear a social function is but a reiteration of the Civil Law principle that property should not be
enjoyed and abused to the injury of other properties and the community, and that the use of the
property may be restricted by police power, the exercise of which is not involved in this case.

Finally, petitioner alleges that 6 Bistekvilles will be constructed out of the SHT collected. Bistek is the
monicker of respondent City Mayor. The Bistekvilles makes it clear, therefore, that politicians will
take the credit for the tax imposed on real property owners.

On the Garbage Fee

Respondents claim that Ordinance No. S-2235, which is an exercise of police power, collects on the
average from every household a garbage fee in the meager amount of thirty-three (33) centavos per
day compared with the sum of ₱1,659.83 that the Quezon City Government annually spends for
every household for garbage collection and waste management. 62

In addition, there is no double taxation because the ordinance involves a fee. Even assuming that
the garbage fee is a tax, the same cannot be a direct duplicate tax as it is imposed on a different
subject matter and is of a different kind or character. Based on Villanueva, et al. v. City of Iloilo  and
63

Victorias Milling Co., Inc. v. Municipality of Victorias, etc.,  there is no "taxing twice" because the real
64

property tax is imposed on ownership based on its assessed value, while the garbage fee is required
on the domestic household. The only reference to the property is the determination of the applicable
rate and the facility of collection.

Petitioner argues, however, that Ordinance No. S-2235 cannot be justified as an exercise of police
power. The cases of Calalang v. Williams,  Patalinghug v. Court of Appeals,  and Social Justice
65 66

Society (SJS), et al. v. Hon. Atienza, Jr.,  which were cited by respondents, are inapplicable since
67

the assailed ordinance is a revenue measure and does not regulate the disposal or other aspect of
garbage.
The subject ordinance, for petitioner, is discriminatory as it collects garbage fee only from domestic
households and not from restaurants, food courts, fast food chains, and other commercial dining
places that spew garbage much more than residential property owners.

Petitioner likewise contends that the imposition of garbage fee is tantamount to double taxation
because garbage collection is a basic and essential public service that should be paid out from
property tax, business tax, transfer tax, amusement tax, community tax certificate, other taxes, and
the IRA of the Quezon City Government. To bolster the claim, he states that the revenue collection
of the Quezon City Government reached Php13.69 billion in 2012. A small portion of said amount
could be spent for garbage collection and other essential services.

It is further noted that the Quezon City Government already collects garbage fee under Section
47  of R.A. No. 9003, or the Ecological Solid Waste Management Act of 2000, which authorizes
68

LGUs to impose fees in amounts sufficient to pay the costs of preparing, adopting, and implementing
a solid waste management plan, and that LGUs have access to the Solid Waste Management
(SWM) Fund created under Section 46  of the same law. Also, according to petitioner, it is evident
69

that Ordinance No. S2235 is inconsistent with R.A. No. 9003 for whil e the law encourages
segregation, composting, and recycling of waste, the ordinance only emphasizes the collection and
payment of garbage fee; while the law calls for an active involvement of the barangay in the
collection, segregation, and recycling of garbage, the ordinance skips such mandate. Lastly, in
challenging the ordinance, petitioner avers that the garbage fee was collected even if the required
publication of its approval had not yet elapsed. He notes that on January 7, 2014, he paid his realty
tax which already included the garbage fee.

The Court's Ruling

Respondents correctly argued that an ordinance, as in every law, is presumed valid.

An ordinance carries with it the presumption of validity. The question of reasonableness though is
open to judicial inquiry. Much should be left thus to the discretion of municipal authorities. Courts will
go slow in writing off an ordinance as unreasonable unless the amount is so excessive as to be
prohibitive, arbitrary, unreasonable, oppressive, or confiscatory. A rule which has gained acceptance
is that factors relevant to such an inquiry are the municipal conditions as a whole and the nature of
the business made subject to imposition. 70

For an ordinance to be valid though, it must not only be within the corporate powers of the LGU to
enact and must be passed according to the procedure prescribed by law, it should also conform to
the following requirements: (1) not contrary to the Constitution or any statute; (2) not unfair or
oppressive; (3) not partial or discriminatory; (4) not prohibit but may regulate trade; (5) general and
consistent with public policy; and (6) not unreasonable.  As jurisprudence indicates, the tests are
71

divided into the formal (i.e., whether the ordinance was enacted within the corporate powers of the
LGU and whether it was passed in accordance with the procedure prescribed by law), and the
substantive ( i.e., involving inherent merit, like the conformity of the ordinance with the limitations
under the Constitution and the statutes, as well as with the requirements of fairness and reason, and
its consistency with public policy). 72

An ordinance must pass muster under the test of constitutionality and the test of consistency with the
prevailing laws.  If not, it is void.
73 74

Ordinance should uphold the principle of the supremacy of the Constitution.  As to conformity with
75

existing statutes,
Batangas CATV, Inc. v. Court of Appeals  has this to say:
76

It is a fundamental principle that municipal ordinances are inferior in status and subordinate to the
laws of the state. An ordinance in conflict with a state law of general character and statewide
application is universally held to be invalid. The principle is frequently expressed in the declaration
that municipal authorities, under a general grant of power, cannot adopt ordinances which infringe
the spirit of a state law or repugnant to the general policy of the state. In every power to pass
ordinances given to a municipality, there is an implied restriction that the ordinances shall be
consistent with the general law. In the language of Justice Isagani Cruz (ret.), this Court, in Magtajas
vs. Pryce Properties Corp., Inc., ruled that:

The rationale of the requirement that the ordinances should not contravene a statute is obvious.
Municipal governments are only agents of the national government. Local councils exercise only
delegated legislative powers conferred on them by Congress as the national lawmaking body. The
delegate cannot be superior to the principal or exercise powers higher than those of the latter. It is a
heresy to suggest that the local government units can undo the acts of Congress, from which they
have derived their power in the first place, and negate by mere ordinance the mandate of the statute.

Municipal corporations owe their origin to, and derive their powers and rights wholly from the
legislature. It breathes into them the breath of life, without which they cannot exist. As it creates, so it
may destroy. As it may destroy, it may abridge and control. Unless there is some constitutional
limitation on the right, the legislature might, by a single act, and if we can suppose it capable of so
great a folly and so great a wrong, sweep from existence all of the municipal corporations in the
State, and the corporation could not prevent it. We know of no limitation on the right so far as to the
corporation themselves are concerned. They are so to phrase it, the mere tenants at will of the
legislature.

This basic relationship between the national legislature and the local government units has not been
enfeebled by the new provisions in the Constitution strengthening the policy of local autonomy.
Without meaning to detract from that policy, we here confirm that Congress retains control of the
local government units although in significantly reduced degree now than under our previous
Constitutions. The power to create still includes the power to destroy. The power to grant still
includes the power to withhold or recall. True, there are certain notable innovations in the
Constitution, like the direct conferment on the local government units of the power to tax, which
cannot now be withdrawn by mere statute. By and large, however, the national legislature is still the
principal of the local government units, which cannot defy its will or modify or violate it.77

LGUs must be reminded that they merely form part of the whole; that the policy of ensuring the
autonomy of local governments was never intended by the drafters of the 1987 Constitution to create
an imperium in imperio and install an intra-sovereign political subdivision independent of a single
sovereign state. 78

"[M]unicipal corporations are bodies politic and corporate, created not only as local units of local self-
government, but as governmental agencies of the state. The legislature, by establishing a municipal
corporation, does not divest the State of any of its sovereignty; absolve itself from its right and duty
to administer the public affairs of the entire state; or divest itself of any power over the inhabitants of
the district which it possesses before the charter was granted." 79

LGUs are able to legislate only by virtue of a valid delegation of legislative power from the national
legislature; they are mere agents vested with what is called the power of subordinate
legislation.  "Congress enacted the LGC as the implementing law for the delegation to the various
80

LGUs of the State’s great powers, namely: the police power, the power of eminent domain, and the
power of taxation. The LGC was fashioned to delineate the specific parameters and limitations to be
complied with by each LGU in the exercise of these delegated powers with the view of making each
LGU a fully functioning subdivision of the State subject to the constitutional and statutory
limitations."
81

Specifically, with regard to the power of taxation, it is indubitably the most effective instrument to
raise needed revenues in financing and supporting myriad activities of the LGUs for the delivery of
basic services essential to the promotion of the general welfare and the enhancement of peace,
progress, and prosperity of the people.  As this Court opined in National Power Corp. v. City of
82

Cabanatuan: 83

In recent years, the increasing social challenges of the times expanded the scope of state activity,
and taxation has become a tool to realize social justice and the equitable distribution of wealth,
economic progress and the protection of local industries as well as public welfare and similar
objectives. Taxation assume s even greater significance with the ratification of the 1987 Constitution.
Thenceforth, the power to tax is no longer vested exclusively on Congress; local legislative bodies
are now given direct authority to levy taxes, fees and other charges pursuant to Article X, Section 5
of the 1987 Constitution, viz: "Section 5. Each Local Government unit shall have the power to create
its own sources of revenue, to levy taxes, fees and charges subject to such guidelines and
limitations as the Congress may provide, consistent with the basic policy of local autonomy. Such
taxes, fees and charges shall accrue exclusively to the local governments."

This paradigm shift results from the realization that genuine development can be achieved only by
strengthening local autonomy and promoting decentralization of governance. For a long time, the
country’s highly centralized government structure has bred a culture of dependence among local
government leaders upon the national leadership. It has also "dampened the spirit of initiative,
innovation and imaginative resilience in matters of local development on the part of local government
leaders." The only way to shatter this culture of dependence is to give the LGUs a wider role in the
delivery of basic services, and confer them sufficient powers to generate their own sources for the
purpose. To achieve this goal, Section 3 of Article X of the 1987 Constitution mandates Congress to
enact a local government code that will, consistent with the basic policy of local autonomy , set the
guidelines and limitations to this grant of taxing powers x x x
84

Fairly recently, We also stated in Pelizloy Realty Corporation v. Province of Benguet  that:
85

The rule governing the taxing power of provinces, cities, municipalities and barangays is
summarized in Icard v. City Council of Baguio :

It is settled that a municipal corporation unlike a sovereign state is clothed with no inherent power of
taxation. The charter or statute must plainly show an intent to confer that power or the municipality,
cannot assume it. And the power when granted is to be construed in strictissimi juris . Any doubt or
ambiguity arising out of the term used in granting that power must be resolved against the
municipality. Inferences, implications, deductions – all these – have no place in the interpretation of
the taxing power of a municipal corporation. [Underscoring supplied]

xxxx

Per Section 5, Article X of the 1987 Constitution, "the power to tax is no longer vested exclusively on
Congress; local legislative bodies are now given direct authority to levy taxes, fees and other
charges." Nevertheless, such authority is "subject to such guidelines and limitations as the Congress
may provide."
In conformity with Section 3, Article X of the 1987 Constitution, Congress enacted Republic Act No.
7160, otherwise known as the Local Government Code of 1991. Book II of the LGC governs local
taxation and fiscal matters.86

Indeed, LGUs have no inherent power to tax except to the extent that such power might be
delegated to them either by the basic law or by the statute.  "Under the now prevailing Constitution ,
87

where there is neither a grant nor a prohibition by statute , the tax power must be deemed to exist
although Congress may provide statutory limitations and guidelines. The basic rationale for the
current rule is to safeguard the viability and self-sufficiency of local government units by directly
granting them general and broad tax powers. Nevertheless, the fundamental law did not intend the
delegation to be absolute and unconditional; the constitutional objective obviously is to ensure that,
while the local government units are being strengthened and made more autonomous , the
legislature must still see to it that (a) the taxpayer will not be over-burdened or saddled with multiple
and unreasonable impositions; (b) each local government unit will have its fair share of available
resources; (c) the resources of the national government will not be unduly disturbed; and (d) local
taxation will be fair, uniform, and just."
88

Subject to the provisions of the LGC and consistent with the basic policy of local autonomy, every
LGU is now empowered and authorized to create its own sources of revenue and to levy taxes, fees,
and charges which shall accrue exclusively to the local government unit as well as to apply its
resources and assets for productive, developmental, or welfare purposes, in the exercise or
furtherance of their governmental or proprietary powers and functions.  The relevant provisions of
89

the LGC which establish the parameters of the taxing power of the LGUs are as follows:

SECTION 130. Fundamental Principles. – The following fundamental principles shall govern th e
exercise of the taxing and other revenue-raising powers of local government units:

(a) Taxation shall be uniform in each local government unit;

(b) Taxes, fees, charges and other impositions shall:

(1) be equitable and based as far as practicable on the taxpayer’s ability to pay;

(2) be levied and collected only for public purposes;

(3) not be unjust, excessive, oppressive, or confiscatory;

(4) not be contrary to law, public policy, national economic policy, or in restraint of
trade;

(c) The collection of local taxes, fees, charges and other impositions shall in no case be left
to any private person;

(d) The revenue collected pursuant to the provisions of this Code shall inure solely to the
benefit of, and be subject to the disposition by, the local government unit levying the tax, fee,
charge or other imposition unless otherwise specifically provided herein; and,

(e) Each local government unit shall, as far as practicable, evolve a progressive system of
taxation.
SECTION 133. Common Limitations on the Taxing Powers of Local Government Units. – Unless
otherwise provided herein, the exercise of the taxing powers of provinces, cities, municipalities, and
barangays shall not extend to the levy of the following:

(a) Income tax, except when levied on banks and other financial institutions;

(b) Documentary stamp tax;

(c) Taxes on estates, inheritance, gifts, legacies and other acquisitions mortis causa, except
as otherwise provided herein;

(d) Customs duties, registration fees of vessel and wharage on wharves, tonnage dues, and
all other kinds of customs fees, charges and dues except wharfage on wharves constructed
and maintained by the local government unit concerned;

(e) Taxes, fees, and charges and other impositions upon goods carried into or out of, or
passing through, the territorial jurisdictions of local government units in the guise of charges
for wharfage, tolls for bridges or otherwise, or other taxes, fees, or charges in any form
whatsoever upon such goods or merchandise;

(f) Taxes, fees or charges on agricultural and aquatic products when sold by marginal
farmers or fishermen;

(g) Taxes on business enterprises certified to by the Board of Investments as pioneer or non-
pioneer for a period of six (6) and four (4) years, respectively from the date of registration;

(h) Excise taxes on articles enumerated under the National Internal Revenue Code, as
amended, and taxes, fees or charges on petroleum products;

(i) Percentage or value-added tax (VAT) on sales, barters or exchanges or similar

transactions on goods or services except as otherwise provided herein;

(j) Taxes on the gross receipts of transportation contractors and persons engaged in the
transportation of passengers or freight by hire and common carriers by air, land or water,
except as provided in this Code;

(k) Taxes on premiums paid by way of reinsurance or retrocession;

(l) Taxes, fees or charges for the registration of motor vehicles and for the issuance of all
kinds of licenses or permits for the driving thereof, except tricycles;

(m) Taxes, fees, or other charges on Philippine products actually exported, except as
otherwise provided herein;

(n) Taxes, fees, or charges, on Countryside and Barangay Business Enterprises and
cooperatives duly registered under R.A. No. 6810 and Republic Act Numbered Sixty-nine
hundred thirty-eight (R.A. No. 6938) otherwise known as the "Cooperative Code of the
Philippines" respectively; and

(o) Taxes, fees or charges of any kind on the National Government, its agencies and
instrumentalities, and local government units.
SECTION 151. Scope of Taxing Powers. – Except as otherwise provided in this Code, the city, may
levy the taxes, fees, and charges which the province or municipality may impose: Provided,
however, That the taxes, fees and charges levied and collected by highly urbanized and
independent component cities shall accrue to them and distributed in accordance with the provisions
of this Code.

The rates of taxes that the city may levy may exceed the maximum rates allowed for the province or
municipality by not more than fifty percent (50%) except the rates of professional and amusement
taxes.

SECTION 186. Power to Levy Other Taxes, Fees or Charges. – Local government units may
exercise the power to levy taxes, fees or charges on any base or subject not otherwise specifically
enumerated herein or taxed under the provisions of the National Internal Revenue Code, as
amended, or other applicable laws: Provided, That the taxes, fees, or charges shall not be unjust,
excessive, oppressive, confiscatory or contrary to declared national policy: Provided, further, That
the ordinance levying such taxes, fees or charges shall not be enacted without any prior public
hearing conducted for the purpose.

On the Socialized Housing Tax

Contrary to petitioner’s submission, the 1987 Constitution explicitly espouses the view that the use of
property bears a social function and that all economic agents shall contribute to the common
good.  The Court already recognized this in Social Justice Society (SJS), et al. v. Hon. Atienza, Jr.:
90 91

Property has not only an individual function, insofar as it has to provide for the needs of the owner,
but also a social function insofar as it has to provide for the needs of the other members of society.
The principle is this:

Police power proceeds from the principle that every holder of property, however absolute and
unqualified may be his title, holds it under the implied liability that his use of it shall not be injurious to
the equal enjoyment of others having an equal right to the enjoyment of their property, no r injurious
to the right of the community. Rights of property, like all other social and conventional rights, are
subject to reasonable limitations in their enjoyment as shall prevent them from being injurious, and to
such reasonable restraints and regulations established by law as the legislature, under the
governing an d controlling power vested in them by the constitution, may think necessary and
expedient. 92

Police power, which flows from the recognition that salus populi est suprema lex (the welfare of the
people is the supreme law), is the plenary power vested in the legislature to make statutes and
ordinances to promote the health, morals, peace, education, good order or safety and general
welfare of the people.  Property rights of individuals may be subjected to restraints and burdens in
93

order to fulfill the objectives of the government in the exercise of police power.   In this jurisdiction, it
94

is well-entrenched that taxation may be made the implement of the state’s police power. 95

Ordinance No. SP-2095 imposes a Socialized Housing Tax equivalent to 0.5% on the assessed
value of land in excess of Php100,000.00. This special assessment is the same tax referred to in
R.A. No. 7279 or the UDHA.  The SHT is one of the sources of funds for urban development and
96

housing program.  Section 43 of the law provides:

97

Sec. 43. Socialized Housing Tax . – Consistent with the constitutional principle that the ownership
and enjoyment of property bear a social function and to raise funds for the Program, all local
government units are hereby authorized to impose an additional one-half percent (0.5%) tax on the
assessed value of all lands in urban areas in excess of Fifty thousand pesos (₱50,000.00).

The rationale of the SHT is found in the preambular clauses of the subject ordinance, to wit:

WHEREAS, the imposition of additional tax is intended to provide the City Government with
sufficient funds to initiate, implement and undertake Socialized Housing Projects and other related
preliminary activities;

WHEREAS, the imposition of 0.5% tax will benefit the Socialized Housing Programs and Projects of
the City Government, specifically the marginalized sector through the acquisition of properties for
human settlements;

WHEREAS, the removal of the urban blight will definitely increase fair market value of properties in
the city[.]

The above-quoted are consistent with the UDHA, which the LGUs are charged to implement in their
respective localities in coordination with the Housing and Urban Development Coordinating Council,
the national housing agencies, the Presidential Commission for the Urban Poor, the private sector,
and other non-government organizations.  It is the declared policy of the State to undertake a
98

comprehensive and continuing urban development and housing program that shall, among others,
uplift the conditions of the underprivileged and homeless citizens in urban areas and in resettlement
areas, and provide for the rational use and development of urban land in order to bring a bout,
among others, reduction in urban dysfunctions, particularly those that adversely affect public health,
safety and ecology, and access to land and housing by the underprivileged and homeless
citizens.  Urban renewal and resettlement shall include the rehabilitation and development of
99

blighted and slum areas  and the resettlement of program beneficiaries in accordance with the
100

provisions of the UDHA.  Under the UDHA, socialized housing  shall be the primary strategy in
101 102

providing shelter for the underprivileged and homeless.  The LGU or the NHA, in cooperation with
103

the private developers and concerned agencies, shall provide socialized housing or re settlement
areas with basic services and facilities such as potable water, power and electricity, and an
adequate power distribution system, sewerage facilities, and an efficient and adequate solid waste
disposal system; and access to primary roads and transportation facilities.  The provisions for
104

health, education, communications, security, recreation, relief and welfare shall also be planned and
be given priority for implementation by the LGU and concerned agencies in cooperation with the
private sector and the beneficiaries themselves. 105

Moreover, within two years from the effectivity of the UDHA, the LGUs, in coordination with the NHA,
are directed to implement the relocation and resettlement of persons living in danger areas such as
esteros , railroad tracks, garbage dumps, riverbanks, shorelines, waterways, and other public places
like sidewalks, roads, parks, and playgrounds.  In coordination with the NHA, the LG Us shall
106

provide relocation or resettlement sites with basic services and facilities and access to employment
and livelihood opportunities sufficient to meet the basic needs of the affected families.
107

Clearly, the SHT charged by the Quezon City Government is a tax which is within its power to
impose. Aside from the specific authority vested by Section 43 of the UDHA, cities are allowed to
exercise such other powers and discharge such other functions and responsibilities as are
necessary, appropriate, or incidental to efficient and effective provision of the basic services and
facilities which include, among others, programs and projects for low-cost housing and other mass
dwellings.  The collections made accrue to its socialized housing programs and projects.
108
The tax is not a pure exercise of taxing power or merely to raise revenue; it is levied with a
regulatory purpose. The levy is primarily in the exercise of the police power for the general welfare of
the entire city. It is greatly imbued with public interest. Removing slum areas in Quezon City is not
only beneficial to the underprivileged and homeless constituents but advantageous to the real
property owners as well. The situation will improve the value of the their property investments, fully
enjoying the same in view of an orderly, secure, and safe community, and will enhance the quality of
life of the poor, making them law-abiding constituents and better consumers of business products.

Though broad and far-reaching, police power is subordinate to constitutional limitations and is
subject to the requirement that its exercise must be reasonable and for the public good.  In the
109

words of City of Manila v. Hon. Laguio, Jr.: 110

The police power granted to local government units must always be exercised with utmost
observance of the rights of the people to due process and equal protection of the law. Such power
cannot be exercised whimsically, arbitrarily or despotically as its exercise is subject to a qualification,
limitation or restriction demanded by the respect and regard due to the prescription of the
fundamental law, particularly those forming part of the Bill of Rights. Individual rights, it bears
emphasis, may be adversely affected only to the extent that may fairly be required by the legitimate
demands of public interest or public welfare. Due process requires the intrinsic validity of the law in
interfering with the rights of the person to his life, liberty and property.

xxxx

To successfully invoke the exercise of police power as the rationale for the enactment of the
Ordinance, and to free it from the imputation of constitutional infirmity, not only must it appear that
the interests of the public generally, as distinguished from those of a particular class, require an
interference with private rights, but the means adopted must be reasonably necessary for the
accomplishment of the purpose and not unduly oppressive upon individuals. It must be evident that
no other alternative for the accomplishment of the purpose less intrusive of private rights can work. A
reasonable relation must exist between the purposes of the police measure and the means
employed for its accomplishment, for even under the guise of protecting the public interest, personal
rights and those pertaining to private property will not be permitted to be arbitrarily invaded.

Lacking a concurrence of these two requisites, the police measure shall be struck down as an
arbitrary intrusion into private rights – a violation of the due process clause.
111

As with the State, LGUs may be considered as having properly exercised their police power only if
there is a lawful subject and a lawful method or, to be precise, if the following requisites are met: (1)
the interests of the public generally, as distinguished from those of a particular class, require its
exercise and (2) the mean s employed are reasonably necessary for the accomplishment of the
purpose and not unduly oppressive upon individuals. 112

In this case, petitioner argues that the SHT is a penalty imposed on real property owners because it
burdens them with expenses to provide funds for the housing of informal settlers, and that it is a
class legislation since it favors the latter who occupy properties which is not their own and pay no
taxes.

We disagree.

Equal protection requires that all persons or things similarly situated should be treated alike, both as
to rights conferred and responsibilities imposed.  The guarantee means that no person or class of
113

persons shall be denied the same protection of laws which is enjoyed by other persons or other
classes in like circumstances.  Similar subjects should not be treated differently so as to give undue
114

favor to some and unjustly discriminate against others.  The law may, therefore, treat and regulate
115

one class differently from another class provided there are real and substantial differences to
distinguish one class from another. 116

An ordinance based on reasonable classification does not violate the constitutional guaranty of the
equal protection of the law. The requirements for a valid and reasonable classification are: (1) it must
rest on substantial distinctions; (2) it must be germane to the purpose of the law; (3) it must not be
limited to existing conditions only; and (4) it must apply equally to all members of the same
class. For the purpose of undertaking a comprehensive and continuing urban development and
117

housing program, the disparities between a real property owner and an informal settler as two
distinct classes are too obvious and need not be discussed at length. The differentiation conforms to
the practical dictates of justice and equity and is not discriminatory within the meaning of the
Constitution. Notably, the public purpose of a tax may legally exist even if the motive which impelled
the legislature to impose the tax was to favor one over another.  It is inherent in the power to tax
118

that a State is free to select the subjects of taxation. Inequities which result from a singling out of
119

one particular class for taxation or exemption infringe no constitutional limitation.

120

Further, the reasonableness of Ordinance No. SP-2095 cannot be disputed. It is not confiscatory or
oppressive since the tax being imposed therein is below what the UDHA actually allows. As pointed
out by respondents, while the law authorizes LGUs to collect SHT on lands with an assessed value
of more than ₱50,000.00, the questioned ordinance only covers lands with an assessed value
exceeding ₱100,000.00. Even better, on certain conditions, the ordinance grants a tax credit
equivalent to the total amount of the special assessment paid beginning in the sixth (6th) year of its
effectivity. Far from being obnoxious, the provisions of the subject ordinance are fair and just.

On the Garbage Fee

In the United States of America, it has been held that the authority of a municipality to regulate
garbage falls within its police power to protect public health, safety, and welfare.  As opined, the
121

purposes and policy underpinnings of the police power to regulate the collection and disposal of
solid waste are: (1) to preserve and protect the public health and welfare as well as the environment
by minimizing or eliminating a source of disease and preventing and abating nuisances; and (2) to
defray costs and ensure financial stability of the system for the benefit of the entire community, with
the sum of all charges marshalled and designed to pay for the expense of a systemic refuse disposal
scheme. 122

Ordinances regulating waste removal carry a strong presumption of

validity.  Not surprisingly, the overwhelming majority of U.S. cases addressing a city's authority to
123

impose mandatory garbage service and fees have upheld the ordinances against constitutional and
statutory challenges. 124

A municipality has an affirmative duty to supervise and control the collection of garbage within its
corporate limits. The LGC specifically assigns the responsibility of regulation and oversight of solid
125

waste to local governing bodies because the Legislature determined that such bodies were in the
best position to develop efficient waste management programs.  To impose on local governments
126

the responsibility to regulate solid waste but not grant them the authority necessary to fulfill the same
would lead to an absurd result."  As held in one U.S. case:
127

x x x When a municipality has general authority to regulate a particular subject matter, the manner
and means of exercising those powers, where not specifically prescribed by the legislature, are left
to the discretion of the municipal authorities. x x x Leaving the manner of exercising municipal
powers to the discretion of municipal authorities "implies a range of reasonableness within which a
municipality's exercise of discretion will not be interfered with or upset by the judiciary." 128

In this jurisdiction, pursuant to Section 16 of the LGC and in the proper exercise of its corporate
powers under Section 22 of the same, the Sangguniang Panlungsod of Quezon City, like other local
legislative bodies, is empowered to enact ordinances, approve resolutions, and appropriate funds for
the genera l welfare of the city and its inhabitants. Section 16 of the LGC provides:
129

SECTION 16. General Welfare . – Every local government unit shall exercise the powers expressly
granted, those necessarily implied therefrom, as well as powers necessary, appropriate, or incidental
for its efficient and effective governance, and those which are essential to the promotion of the
general welfare. Within their respective territorial jurisdictions, local government units shall ensure
and support, among other things, the preservation and enrichment of culture, promote health and
safety, enhance the right of the people to a balanced ecology, encourage and support the
development of appropriate and self-reliant scientific and technological capabilities, improve public
morals, enhance economic prosperity and social justice, promote full employment among their
residents, maintain peace and order, and preserve the comfort and convenience of their inhabitants.

The general welfare clause is the delegation in statutory form of the police power of the State to
LGUs.  The provisions related thereto are liberally interpreted to give more powers to LGUs in
130

accelerating economic development and upgrading the quality of life for the people in the
community.  Wide discretion is vested on the legislative authority to determine not only what the
131

interests of the public require but also what measures are necessary for the protection of such
interests since the Sanggunian is in the best position to determine the needs of its constituents. 132

One of the operative principles of decentralization is that, subject to the provisions of the LGC and
national policies, the LGUs shall share with the national government the responsibility in the
management and maintenance of ecological balance within their territorial jurisdiction.  In this
133

regard, cities are allowed to exercise such other powers and discharge such other functions and
responsibilities as are necessary, appropriate, or incidental to efficient and effective provision of the
basic services and facilities which include, among others, solid waste disposal system or
environmental management system and services or facilities related to general hygiene and
sanitation. R.A. No. 9003, or the Ecological Solid Waste Management Act of 2000,  affirms this
134 135

authority as it expresses that the LGUs shall be primarily responsible for the implementation and
enforcement of its provisions within their respective jurisdictions while establishing a cooperative
effort among the national government, other local government units, non-government organizations,
and the private sector.136

Necessarily, LGUs are statutorily sanctioned to impose and collect such reasonable fees and
charges for services rendered.  "Charges" refer to pecuniary liability, as rents or fees against
137

persons or property, while "Fee" means a charge fixed by law or ordinance for the regulation or
inspection of a business or activity. 138

The fee imposed for garbage collections under Ordinance No. SP-2235 is a charge fixed for the
regulation of an activity. The basis for this could be discerned from the foreword of said Ordinance,
to wit:

WHEREAS, Quezon City being the largest and premiere city in the Philippines in terms of population
and urban geographical areas, apart from being competent and efficient in the delivery of public
service, apparently requires a big budgetary allocation in order to address the problems relative and
connected to the prompt and efficient delivery of basic services such as the effective system of
waste management, public information programs on proper garb age and proper waste disposal,
including the imposition of waste regulatory measures;

WHEREAS, to help augment the funds to be spent for the city’s waste management system, the City
Government through the Sangguniang Panlungsod deems it necessary to impose a schedule of
reasonable fees or charges for the garbage collection services for residential (domestic household)
that it renders to the public.

Certainly, as opposed to petitioner’s opinion, the garbage fee is not a tax. In Smart Communications,
Inc. v. Municipality of Malvar, Batangas , the Court had the occasion to distinguish these two
139

concepts:

In Progressive Development Corporation v. Quezon City, the Court declared that "if the generating of
revenue is the primary purpose and regulation is merely incidental, the imposition is a tax; but if
regulation is the primary purpose, the fact that incidentally revenue is also obtained does not make
the imposition a tax."

In Victorias Milling Co., Inc. v. Municipality of Victorias, the Court reiterated that the purpose and
effect of the imposition determine whether it is a tax or a fee, and that the lack of any standards for
such imposition gives the presumption that the same is a tax.

We accordingly say that the designation given by the municipal authorities does not decide whether
the imposition is properly a license tax or a license fee.  The determining factors are the purpose
1awp++i1

and effect of the imposition as may be apparent from the provisions of the ordinance. Thus, "[w]hen
no police inspection, supervision, or regulation is provided, nor any standard set for the applicant to
establish, or that he agrees to attain or maintain, but any and all persons engaged in the business
designated, without qualification or hindrance, may come, and a license on payment of the stipulated
sum will issue, to do business, subject to no prescribed rule of conduct and under no guardian eye,
but according to the unrestrained judgment or fancy of the applicant and licensee, the presumption is
strong that the power of taxation, and not the police power, is being exercised."

In Georgia, U.S.A., assessments for garbage collection services have been consistently treated as a
fee and not a tax.140

In another U.S. case,  the garbage fee was considered as a "service charge" rather than a tax as it
141

was actually a fee for a service given by the city which had previously been provided at no cost to its
citizens.

Hence, not being a tax, the contention that the garbage fee under Ordinance No. SP-2235 violates
the rule on double taxation  must necessarily fail.
142

Nonetheless, although a special charge, tax, or assessment may be imposed by a municipal

corporation, it must be reasonably commensurate to the cost of providing the garbage service.  To 143

pass judicial scrutiny, a regulatory fee must not produce revenue in excess of the cost of the
regulation because such fee will be construed as an illegal tax when the revenue generated by the
regulation exceeds the cost of the regulation. 144

Petitioner argues that the Quezon City Government already collects garbage fee under Section 47 of
R.A. No. 9003, which authorizes LGUs to impose fees in amounts sufficient to pay the costs of
preparing, adopting, and implementing a solid waste management plan, and that it has access to the
SWM Fund under Section 46 of the same law. Moreover, Ordinance No. S-2235 is inconsistent with
R.A. No. 9003, because the ordinance emphasizes the collection and payment of garbage fee with
no concern for segregation, composting and recycling of wastes. It also skips the mandate of the law
calling for the active involvement of the barangay in the collection, segregation, and recycling of
garbage.

We now turn to the pertinent provisions of R.A. No. 9003.

Under R.A. No. 9003, it is the declared policy of the State to adopt a systematic, comprehensive and
ecological solid waste management program which shall, among others, ensure the proper
segregation, collection, transport, storage, treatment and disposal of solid waste through the
formulation and adoption of the best environmental practices in ecological waste management.  The
145

law provides that segregation and collection of solid waste shall be conducted at the barangay level,
specifically for biodegradable, compostable and reusable wastes, while the collection of non-
recyclable materials and special wastes shall be the responsibility of the municipality or
city. Mandatory segregation of solid wastes shall primarily be conducted at the source, to include
146

household, institutional, industrial, commercial and agricultural sources.  Segregation at source

147

refers to a solid waste management practice of separating, at the point of origin, different materials
found in soli d waste in order to promote recycling and re-use of resources and to reduce the volume
of waste for collection and disposal.  Based on Rule XVII of the Department of Environment and
148

Natural Resources (DENR) Administrative Order No. 2001-34, Series of 2001, which is the
149

Implementing Rules and Regulations ( IRR ) of R.A. No. 9003, barangays shall be responsible for
the collection, segregation, and recycling of biodegradable, recyclable , compostable and reusable
wastes. 150

For the purpose, a Materials Recovery Facility (MRF), which shall receive biodegradable wastes for
composting and mixed non-biodegradable wastes for final segregation, re-use and recycling, is to be
established in every barangay or cluster of barangays. 151

According to R.A. 9003, an LGU, through its local solid waste management board, is mandated by
law to prepare a 10-year solid waste management plan consistent with the National Solid Waste
Management Framework.  The plan shall be for the re-use, recycling and composting of wastes
152

generated in its jurisdiction; ensure the efficient management of solid waste generated within its
jurisdiction; and place primary emphasis on implementation of all feasible re-use, recycling, and
composting programs while identifying the amount of landfill and transformation capacity that will be
needed for solid waste which cannot be re-used, recycled, or composted.  One of the components
153

of the so lid waste management plan is source reduction:

(e) Source reduction – The source reduction component shall include a program and implementation
schedule which shows the methods by which the LGU will, in combination with the recycling and
composting components, reduce a sufficient amount of solid waste disposed of in accordance with
the diversion requirements of Section 20.

The source reduction component shall describe the following:

(1) strategies in reducing the volume of solid waste generated at source;

(2) measures for implementing such strategies and the resources necessary to carry out
such activities;

(3) other appropriate waste reduction technologies that may also be considered, provide d
that such technologies conform with the standards set pursuant to this Act;
 (4) the types of wastes to be reduced pursuant to Section 15 of this Act;

(5) the methods that the LGU will use to determine the categories of solid wastes to be
diverted from disposal at a disposal facility through re-use , recycling and composting; and

(6) new facilities and of expansion of existing facilities which will be needed to implement re-
use, recycling and composting.

The LGU source reduction component shall include the evaluation and identification of rate
structures and fees for the purpose of reducing the amount of waste generated, and other source
reduction strategies, including but not limited to, program s and economic incentives provided under
Sec. 45 of this Act to reduce the use of non-recyclable materials, replace disposable materials and
products with reusable materials and products, reduce packaging, and increase the efficiency of the
use of paper, cardboard, glass, metal, and other materials. The waste reduction activities of the
community shall al so take into account, among others, local capability, economic viability, technical
requirements, social concerns, disposition of residual waste and environmental impact: Provided ,
That, projection of future facilities needed and estimated cost shall be incorporated in the plan. x x
x154

The solid waste management pl an shall also include an implementation schedule for solid waste
diversion:

SEC. 20. Establishing Mandatory Solid Waste Diversion. – Each LGU plan shall include an
implementation schedule which shows that within five (5) years after the effectivity of this Act, the
LGU shall divert at least 25% of all solid waste from waste disposal facilities through re-use,
recycling, and composting activities and other resource recovery activities: Provided , That the waste
diversion goals shall be increased every three (3) years thereafter: Provided , further, That nothing in
this Section prohibits a local government unit from implementing re-use, recycling, and composting
activities designed to exceed the goal.

The baseline for the twenty-five percent (25%) shall be derived from the waste characterization
result  that each LGU is mandated to undertake. In accordance with Section 46 of R.A. No. 9003,
155 156

the LGUs are entitled to avail of the SWM Fund on the basis of their approved solid waste
management plan. Aside from this, they may also impose SWM Fees under Section 47 of the law,
which states:

SEC. 47. Authority to Collect Solid Waste Management Fees – The local government unit shall
impose fees in amounts sufficient to pay the costs of preparing, adopting, and implementing a solid
waste management plan prepared pursuant to this Act. The fees shall be based on the following
minimum factors:

(a) types of solid waste;

(b) amount/volume of waste; and

(c) distance of the transfer station to the waste management facility.

The fees shall be used to pay the actual costs incurred by the LGU in collecting the local fees. In
determining the amounts of the fees, an LGU shall include only those costs directly related to the
adoption and implementation of the plan and the setting and collection of the local fees.
Rule XVII of the IRR of R.A. No. 9003 sets forth the details:

Section 1. Power to Collect Solid Waste Management Fees . – The Local SWM Board/Local SWM
Cluster Board shall impose fees on the SWM services provided for by the LGU and/or any
authorized organization or unit. In determining the amounts of the fees, a Local SWM Board/Local
SWM Cluster Board shall include only those costs directly related to the adoption and
implementation of the SWM Plan and the setting and collection of the local fees. This power to
impose fees may be ceded to the private sector and civil society groups which have been duly
accredited by the Local SWM Boar d/Local SWM Cluster Board; provided, the SWM fees shall be
covered by a Contract or Memorandum of Agreement between the respective boa rd and the private
sector or civil society group.

The fees shall pay for the costs of preparing, adopting and implementing a SWM Plan prepared
pursuant to the Act. Further, the fees shall also be used to pay the actual costs incurred in collecting
the local fees and for project sustainability.

Section 2. Basis of SWM Service Fees

Reasonable SWM service fees shall be computed based on but not limited to the following minimum
factors:

a) Types of solid waste to include special waste

b) amount/volume of waste

c) distance of the transfer station to the waste management facility

d) capacity or type of LGU constituency

e) cost of construction

f) cost of management

g) type of technology

Section 3. Collection of Fees. – Fees may be collected corresponding to the following levels:

a) Barangay – The Barangay may impose fees for collection and segregation of
biodegradable, compostable and reusable wastes from households, commerce, other
sources of domestic wastes, and for the use of Barangay MRFs. The computation of the fees
shall be established by the respective SWM boards. The manner of collection of the fees
shall be dependent on the style of administration of respective Barangay Councils. However,
all transactions shall follow the Commission on Audit rules on collection of fees.

b) Municipality – The municipal and city councils may impose fees on the barangay MRFs for
the collection and transport of non-recyclable and special wastes and for the disposal of
these into the sanitary landfill. The level and procedure for exacting fees shall be defined by
the Local SWM Board/Local SWM Cluster Board and supported by LGU ordinances;
however, payments shall be consistent with the accounting system of government.
 c) Private Sector/Civil Society Group – On the basis of the stipulations of contract or
Memorandum of Agreement, the private sector or civil society group shall impose fees for
collection, transport and tipping in their SLFs. Receipts and invoices shall be issued to the
paying public or to the government.

From the afore-quoted provisions, it is clear that the authority of a municipality or city to impose fees
is limited to the collection and transport of non-recyclable and special wastes and for the disposal of
these into the sanitary landfill. Barangays, on the other hand, have the authority to impose fees for
the collection and segregation of biodegradable, compostable and reusable wastes from
households, commerce, other sources of domestic wastes, and for the use of barangay MRFs. This
is but consistent with

Section 10 of R.A. No. 9003 directing that segregation and collection of biodegradable, compostable
and reusable wastes shall be conducted at the barangay level, while the collection of non-recyclable
materials and special wastes shall be the responsibility of the municipality or city.

In this case, the alleged bases of Ordinance No. S-2235 in imposing the garbage fee is the volume
of waste currently generated by each person in Quezon City, which purportedly stands at 0.66
kilogram per day, and the increasing trend of waste generation for the past three
years.  Respondents
157

did not elaborate any further. The figure presented does not reflect the specific types of wastes
generated – whether residential, market, commercial, industrial, construction/demolition, street
waste, agricultural, agro-industrial, institutional, etc. It is reasonable, therefore, for the Court to
presume that such amount pertains to the totality of wastes, without any distinction, generated by
Quezon City constituents. To reiterate, however, the authority of a municipality or city to impose fees
extends only to those related to the collection and transport of non-recyclable and special wastes.

Granting, for the sake of argument, that the 0.66 kilogram of solid waste per day refers only to non-
recyclable and special wastes, still, We cannot sustain the validity of Ordinance No. S-2235. It
violates the equal protection clause of the Constitution and the provisions of the LGC that an
ordinance must be equitable and based as far as practicable on the taxpayer’s ability to pay, and not
unjust, excessive, oppressive, confiscatory. 158

In the subject ordinance, the rates of the imposable fee depend on land or floor area and whether
the payee is an occupant of a lot, condominium, social housing project or apartment. For easy
reference, the relevant provision is again quoted below:

On all domestic households in Quezon City;

LAND AREA IMPOSABLE FEE

Less than 200 sq. m. PHP 100.00
201 sq. m. – 500 sq. m. PHP 200.00
501 sq. m. – 1,000 sq. m. PHP 300.00
1,001 sq. m. – 1,500 sq. m. PHP 400.00
1,501 sq. m. – 2,000 sq. m. or more PHP 500.00

On all condominium unit and socialized housing projects/units in Quezon City;

 FLOOR AREA IMPOSABLE FEE
Less than 40 sq. m. PHP 25.00
41 sq. m. – 60 sq. m. PHP 50.00
61 sq. m. – 100 sq. m. PHP 75.00
101 sq. m. – 150 sq. m. PH₱100.00
151 sq. m. – 200 sq. [m.] or more PHP 200.00

On high-rise Condominium Units

a) High-rise Condominium – The Homeowners Association of high rise condominiums shall

pay the annual garbage fee on the total size of the entire condominium and socialized
Housing Unit and an additional garbage fee shall be collected based on area occupied for
every unit already so ld or being amortized.

b) High-rise apartment units – Owners of high-rise apartment units shall pay the annual
garbage fee on the total lot size of the entire apartment and an additional garbage fee based
on the schedule prescribed herein for every unit occupied.

For the purpose of garbage collection, there is, in fact, no substantial distinction between an
occupant of a lot, on one hand, and an occupant of a unit in a condominium, socialized housing
project or apartment, on the other hand. Most likely, garbage output produced by these types of
occupants is uniform and does not vary to a large degree; thus, a similar schedule of fee is both just
and equitable. 159

The rates being charged by the ordinance are unjust and inequitable: a resident of a 200 sq. m. unit
in a condominium or socialized housing project has to pay twice the amount than a resident of a lot
similar in size; unlike unit occupants, all occupants of a lot with an area of 200 sq. m. and less have
to pay a fixed rate of Php100.00; and the same amount of garbage fee is imposed regardless of
whether the resident is from a condominium or from a socialized housing project.

Indeed, the classifications under Ordinance No. S-2235 are not germane to its declared purpose of
"promoting shared responsibility with the residents to attack their common mindless attitude in over-
consuming the present resources and in generating waste."  Instead of simplistically categorizing
160

the payee into land or floor occupant of a lot or unit of a condominium, socialized housing project or
apartment, respondent City Council should have considered factors that could truly measure the
amount of wastes generated and the appropriate fee for its collection. Factors include, among
others, household age and size, accessibility to waste collection, population density of the barangay
or district, capacity to pay, and actual occupancy of the property. R.A. No. 9003 may also be looked
into for guidance. Under said law, WM service fees may be computed based on minimum factors
such as type s of solid waste to include special waste, amount/volume of waste, distance of the
transfer station to the waste management facility, capacity or type of LGU constituency, cost of
construction, cost of management, and type of technology. With respect to utility rates set by
municipalities, a municipality has the right to classify consumers under reasonable classifications
based upon factors such as the cost of service, the purpose for which the service or the product is
received, the quantity or the amount received, the different character of the service furnished, the
time of its use or any other matter which presents a substantial difference as a ground of
distinction. [A] lack of uniformity in the rate charged is not necessarily unlawful discrimination. The
161

establishment of classifications and the charging of different rates for the several classes is not
unreasonable and does not violate the requirements of equality and uniformity. Discrimination to be
unlawful must draw an unfair line or strike an unfair balance between those in like circumstances
having equal rights and privileges. Discrimination with respect to rates charged does not vitiate
unless it is arbitrary and without a reasonable fact basis or justification.
162

On top of an unreasonable classification, the penalty clause of Ordinance No. SP-2235, which
states:

SECTION 3. Penalty Clause – A penalty of 25% of the garbage fee due plus an interest of 2% per
month or a fraction thereof (interest) shall be charged against a household owner who refuses to pay
the garbage fee herein imposed. lacks the limitation required by Section 168 of the LGC, which
provides:

SECTION 168. Surcharges and Penalties on Unpaid Taxes, Fees, or Charges. – The sanggunian
may impose a surcharge not exceeding twenty-five (25%) of the amount of taxes, fees or charges
not paid on time and an interest at the rate not exceeding two percent (2%) per month of the unpaid
taxes, fees or charges including surcharges, until such amount is fully paid but in no case shall the
total interest on the unpaid amount or portion thereof exceed thirty-six (36) months. (Emphasis
supplied)

Finally, on the issue of publication of the two challenged ordinances.

Petitioner argues that the garbage fee was collected even if the required publication of its approval
had not yet elapsed. He notes that he paid his realty tax on January 7, 2014 which already included
the garbage fee. Respondents counter that if the law provides for its own effectivity, publication in
the Official Gazette is not necessary so long as it is not penal in nature. Allegedly, Ordinance No.
SP-2095 took effect after its publication while Ordinance No. SP-2235 became effective after its
approval on December 26, 2013.

The pertinent provisions of the LGC state:

SECTION 59. Effectivity of Ordinances or Resolutions. – (a) Unless otherwise stated in the
ordinance or the resolution approving the local development plan and public investment program,
the same shall take effect after ten (10) days from the date a copy thereof is posted in a bulletin
board at the entrance of the provincial capital or city, municipal, or barangay hall, as the case may
be, and in at least two (2) other conspicuous places in the local government unit concerned.

(b) The secretary to the sanggunian concerned shall cause the posting of an ordinance or
resolution in the bulletin board at the entrance of the provincial capital and the city,
municipal, or barangay hall in at least two

(2) conspicuous places in the local government unit concerned not later than five (5) days
after approval thereof.

The text of the ordinance or resolution shall be disseminated and posted in Filipino or
English and in the language or dialect understood by the majority of the people in the local
government unit concerned, and the secretary to the sanggunian shall record such fact in a
book kept for the purpose, stating the dates of approval and posting.

(c) The gist of all ordinances with penal sanctions shall be published in a newspaper of
general circulation within the province where the local legislative body concerned belongs. In
the absence of any newspaper of general circulation within the province, posting of such
 ordinances shall be made in all municipalities and cities of the province where the
sanggunian of origin is situated.

(d) In the case of highly urbanized and independent component cities, the main features of
the ordinance or resolution duly enacted or adopted shall, in addition to being posted, be
published once in a local newspaper of general circulation within the city: Provided, That in
the absence thereof the ordinance or resolution shall be published in any newspaper of
general circulation.

SECTION 188. Publication of Tax Ordinances and Revenue Measures. – Within ten (10) days after
their approval, certified true copies of all provincial, city, and municipal tax ordinances or revenue
measures shall be published in full for three (3) consecutive days in a newspaper of local circulation:
Provided, however, That in provinces, cities and municipalities where there are no newspapers of
local circulation, the same may be posted in at least two (2) conspicuous and publicly accessible
places. (Emphasis supplied)

On October 17, 2011, respondent Quezon City Council enacted Ordinance No. SP-2095, which
provides that it would take effect after its publication in a newspaper of general circulation.  On the
163

other hand, Ordinance No. SP-2235, which was passed by the City Council on December 16, 2013,
provides that it would be effective upon its approval. 164

Ten (10) days after its enactment, or on December 26, 2013, respondent City Mayor approved the
same. 165

The case records are bereft of any evidence to prove petitioner’s negative allegation that
respondents did not comply with the posting and publication requirements of the law. Thus, We are
constrained not to give credit to his unsupported claim.

WHEREFORE, the petition is PARTIALLY GRANTED. The constitutionality and legality of Ordinance
No. SP-2095, S-2011, or the "Socialized Housing Tax of Quezon City," is· SUSTAINED for being
consistent ·with Section·43 of Republic Act No. ·7279. On the other hand, Ordinance No. SP-2235,
S-2013, which collects an annual garbage fee on all domestic households in Quezon City, is hereby
declared as UNCONSTITUTIONAL AND ILLEGAL. Respondents are DIRECTED to REFUND with
reasonable dispatch the sums of money collected relative to its enforcement. The temporary
restraining order issued by the Court on February 5, 2014 is LIFTED with respect to Ordinance No.
SP-2095. In contrast, respondents are PERMANENTLY ENJOINED from taking any further action to
enforce Ordinance No. SP. 2235.

SO ORDERED.

G.R. No. 127249. February 27, 1998]

CAMARINES NORTE ELECTRIC COOPERATIVE, INC. (CANORE-CO);

RUBEN N. BARRAMEDA; ELVIS L. ESPIRITU; MERARDO G.
ENERO, JR.; MARCELITO B. ABAS; and REYNALDO V.
ABUNDO, petitioners, vs. HON. RUBEN D. TORRES, in his
 capacity as Executive Secretary; REX TANTIONGCO; HONESTO
DE JESUS; ANDRES IBASCO; TEODULO M. MEA; and VICENTE
LUKBAN, respondent.

DECISION
DAVIDE, JR., J.:

May the Office of the President validly constitute an ad hoc committee to take over
and manage the affairs of an electric cooperative?
This is the key issue in this original action for certiorari and prohibition under Rule
65 of the Rules of Court wherein the petitioners seek to (a) annul and set aside
Memorandum Order No. 409 of the Office of the President dated 3 December 1996
constituting an Ad Hoc Committee to take over and manage the affairs of
the Camarines Norte Electric Cooperative, Inc., (hereafter CANORECO) until such time
as a general membership meeting can be called to decide the serious issues affecting
the said cooperative and normalcy in operations is restored"; and (b) prohibit the
respondents from performing acts or continuing proceedings pursuant to the
Memorandum Order.
The factual backdrop of this case is not complicated.
Petitioner CANORECO is an electric cooperative organized under the provisions of
P.D. No. 269, otherwise known as the National Electrification Administration Decree, as
amended by P.D. No. 1645.
On 10 March 1990, then President Corazon C. Aquino signed into law R.A. No.
6938 and R.A. No. 6939. The former is the Cooperative Code of the Philippines, while
the latter created the Cooperative Development Authority (CDA) and vested solely upon
the CDA the power to register cooperatives.
Article 122 of the Cooperative Code expressly provides that electric cooperatives
shall be covered by the Code. Article 128 of the said Code and Section 17 of R.A. No.
6939 similarly provide that cooperatives created under P.D. No. 269, as amended by
P.D. No. 1645, shall have three years within which to qualify and register with the CDA
and that after they shall have so qualified and registered, the provisions of Sections 3
and 5 of P.D. No. 1645 shall no longer be applicable to them. These Sections 3 and 5
read as follows:

SEC. 3. Section 5(a), Chapter II of Presidential Decree No. 269 is hereby

amended by adding sub-paragraph (6) to read as follows:

(6) To authorize the NEA Administrator to designate, subject to the

confirmation of the Board Administrators, an Acting General Manager and/or
Project Supervisor for a Cooperative where vacancies in the said positions
occur and/or when the interest of the Cooperative and the program so
requires, and to prescribe the functions of said Acting General Manager
and/or Project Supervisor, which powers shall not be nullified, altered or
diminished by any policy or resolution of the Board of Directors of the
Cooperative concerned.

...

SEC. 5. Section 10, Chapter II of Presidential Decree No. 269 is hereby

amended to read as follows:

Section 10. Enforcement Powers and Remedies. -- In the exercise of its

power of supervision and control over electric cooperatives and other
borrower, supervised or controlled entities, the NEA is empowered to issue
orders, rules and regulations and motu proprio or upon petition of third parties,
to conduct investigations, referenda and other similar actions in all matters
affecting said electric cooperatives and other borrower, or supervised or
controlled entities.

...
Finally, the repealing clause (Article 127) of the Cooperative Code provides:

Provided, however, That nothing in this Code shall be interpreted to mean the
amendment or repeal of any provision of Presidential Decree No.
269: Provided, further, That the electric cooperatives which qualify as such
under this Code shall fall under the coverage thereof.

CANORECO registered with the CDA pursuant to R.A. No. 6938 and R.A. No.
6939. On 8 March 1993, the CDA issued a Certificate of Provisional Registration (T-
003-93) to CANORECO effective for two years.  On 1 March 1995, the CDA extended
[1]

this provisional registration until 4 May 1997.  However, on 10 July 1996, CANORECO
[2]

filed with the CDA its approved amendments to its Articles of Cooperation converting
itself from a non-stock to a stock cooperative pursuant to the provisions of R.A. No.
6938 and the Omnibus Implementing Rules and Regulations on Electric
Cooperatives. On the same date the CDA issued a Certificate of Registration  of the
[3]

amendments to CANORECO Articles of Cooperation certifying that CANORECO is

registered as a full-[f]ledged cooperative under and by virtue of R.A. 6938.
Previously, on 11 March 1995, the Board of Directors of CANORECO  approved
[4]

Resolution No. 22 appointing petitioner Reynaldo V. Abundo as permanent General

Manager. The Board was composed of

Ruben N. Barrameda -- President

Elvis L. Espiritu -- Vice president

Merardo G. Enero, Jr. -- Secretary

Marcelito B. Abas -- Treasurer

Antonio R. Obias -- Director

Luis A. Pascua -- Director

Norberto Z. Ochoa -- Director

Leonida Z. Manalo -- OIC GM/Ex-Officio

On 28 May 1995, Antonio Obias, Norberto Ochoa, Luis Pascua, and Felicito Ilan
held a special meeting of the Board of Directors of CANORECO. The minutes of the
meeting  showed that President Ruben Barrameda, Vice-President Elvis Espiritu, and
[5]

Treasurer Marcelito Abas were absent; that Obias acted as temporary chairman; that
the latter informed those present that it was the responsibility of the Board after the
annual meeting to meet and elect the new set of officers, but that despite the fact that
he had called the attention of President Barrameda and Directors Abas and Espiritu for
the holding thereof, the three chose not to appear; and that those present in the special
meeting declared all positions in the board vacant and thereafter proceeded to hold
elections by secret balloting with all the directors present considered candidates for the
positions. The following won and were declared as the newly elected officers of the
CANORECO:

President . . . . . . . . Norberto Ochoa

Vice President . . . . Antonio Obias

Secretary . . . . . . . . Felicito Ilan

Treasurer. . . . . . . . Luis Pascua

Thereupon, these newly elected officers approved the following resolutions:

1) Resolution No. 27, c.s. -- confirming the election of the new set of
officers of the Board of Directors of CANORECO

2) Resolution No. 28, c.s. -- recalling Resolution No. 22, c.s. appointing
Mr. Reynaldo V. Abundo as permanent General Manager in view of the
fact that such appointment was in violation of the provisions of R.A.
6713; declaring the position of General Manager as vacant; and
designating Mr. Oscar Acobera as Officer-in-Charge
 3) Resolution No. 29, c.s. -- authorizing the Board President, or in his
absence, the Vice-President, countersigned by the Treasurer, or in his
absence, the Secretary, to be the only officers who can transfer funds
from savings to current accounts; and authorizing the Officer-in-Charge,
Mr. Acobera, to issue checks without countersignature in an amount not
to exceed P3,000.00 and in excess thereof, to be countersigned by the
President and/or the Treasurer

4) Resolution No. 30, c.s. -- hiring the services of Atty. Juanito Subia as
retainer-lawyer for CANORECO. [6]

The petitioners challenged the above resolutions and the election of officers by filing
with the CDA a Petition for Declaration of Nullity of Board Resolutions and Election of
Officers with Prayer for Issuance of Injunction/Temporary Restraining Order, which the
CDA docketed as CDA-CO Case No. 95-010.
In its Resolution of 15 February 1996,  the CDA resolved the petition in favor of the
[7]

petitioners and decreed as follows:

WHEREFORE, premises considered, the Board Meeting of May 28, 1995,

participated by the respondents, and all the Resolutions issued on such
occasion, are hereby declared NULL AND VOID AB INITIO.

Likewise, the election of respondents Norberto Ochoa, Antonio Obias, Felicito

Ilan, and Luis Pascua, as President, Vice-President, Secretary, and
Treasurer, respectively, of CANORECO is hereby declared NULL AND
VOID AB INITIO.

Hence, respondents Norberto Ochoa, Antonio Obias, Felicito Ilan, and Luis
Pascua are hereby ordered to refrain from representing themselves as
President, Vice-President, Secretary, and Treasurer, respectively, of
CANORECO. The same respondents are further ordered to refrain from acting
as authorized signatories to the bank accounts of CANORECO.

Further respondent Felicito Ilan is hereby ordered to refrain from exercising

the duties and functions of a member of the Board of CANORECO until the
election protest is resolved with finality by the proper forum.In the meantime,
the incumbency of petitioner Merardo Enero, Jr. as Director of the
CANORECO Board is hereby recognized.

A status quo is hereby ordered as regards the position of General Manager,

being held by Mr. Reynaldo Abundo, considering that the recall of his
appointment was done under a void Resolution, and that the designation of
Mr. Oscar Acodera as Officer-in-Charge, under the same void Resolution, has
no force and effect.

Finally, respondents Antonio Obias, Norberto Ochoa, Luisito Pascua, and

petitioners Ruben Barrameda, Elvis Espiritu, Marcelito Abas and Merardo
Enero, Jr. are hereby ordered to work together, as Board of Directors, for the
common good of CANORECO and its consumer-members, and to maintain
an atmosphere of sincere cooperation among the officers and members of
CANORECO.

On 28 June 1996, in defiance of the abovementioned Resolution of the CDA and

with the active participation of some officials of the National Electrification
Administration (NEA), the group of Norberto Ochoa, Antonio Obias, Felicito Ilan, and
Luis Pascua forcibly took possession of the offices of CANORECO and assumed the
duties as officers thereof.
[8]

On 26 September 1996, pursuant to the writ of execution and order to vacate issued
by the CDA, the petitioners were able to reassume control of the CANORECO and to
perform their respective functions.
[9]

On 3 December 1996, the President of the Philippines issued Memorandum Order

No. 409  onstituting an Ad Hoc Committee to temporarily take over and manage the
[10]

affairs of CANORECO. It reads as follows:

To efficiently and effectively address the worsening problem of the Camarines

Norte Electric Cooperative, Inc. (CANORECO) and in order not to prejudice
and endanger the interest of the people who rely on the said cooperative for
their supply of electricity, an AD HOC Committee is hereby constituted to take
over and manage the affairs of CANORECO until such time as a general
membership meeting can be called to decide the serious issues affecting the
said cooperative and normalcy in operations is restored. Further, if and when
warranted, the present Board of Directors may be called upon by the
Committee for advisory services without prejudice to the receipt of their per
diems as may be authorized by existing rules and regulations.

The AD HOC Committee shall be composed of the following:

REX TANTIONGCO -- Chairman

Presidential Assistant on Energy Affairs

HONESTO DE JESUS -- Member

Cooperative Development Authority Nominee

ANDRES IBASCO -- Member

Cooperative Development Authority Nominee

TEODULO M. MEA -- Member

National Electrification Administration Nominee

VICENTE LUKBAN -- Member

National Electrification Administration Nominee

The said Committee shall have the following functions:

1. Designate the following upon the recommendation of the Chairman:

1.1 an Acting General Manager who shall handle the day-to-day

operations of the Cooperative. In the meantime, the General
Manager shall be deemed to be on leave without prejudice to
the payment of his salaries legally due him; and

1.2 a Comptroller who shall handle the financial affairs of

the Cooperative.

2. Ensure that:

The AD HOC Committee shall submit a written report to the President,

through the Office of the Executive Secretary, every two (2) weeks from the
effectivity of this Order.

A General Membership Meeting shall be called by the AD HOC Committee to

determine whether or not there is a need to change the composition of the
membership of the Cooperatives Board of Directors. If the need exists, the AD
HOC Committee shall call for elections. Once the composition of the Board of
Directors is finally settled, it shall decide on the appointment of a General
Manager in accordance with prescribed laws, rules and regulations. Upon the
appointment of a General Manager, the Committee shall become functus
officio.

This Memorandum Order shall take effect immediately.

On 11 December 1996, the petitioners filed this petition wherein they claim that
 I. THE PRESIDENT HAS NO POWER TO TAKE OVER AND MANAGE OR TO
ORDER THE TAKE-OVER OR MANAGEMENT OF CANORECO.
II. [THE] TAKE-OVER OF CANORECO BY THE AD HOC COMMITTEE IS
UNLAWFUL DESPITE DESIGNATION OF CANORECO CONSUMERS AS
MEMBERS OF AD HOC COMMITTEE.
III. [THE] RELEGATION OF PETITIONERS AS MERE ADVISERS TO THE AD HOC
COMMITTEE AMOUNTS TO REMOVAL FROM OFFICE WHICH THE PRESIDENT
HAS NO POWER TO DO. MOREOVER, PETITIONERS REMOVAL VIOLATES
PETITIONERS RIGHT TO DUE PROCESS OF LAW.
IV. THE PRESIDENT IS LIKEWISE WITHOUT POWER TO DESIGNATE OR ORDER
THE DESIGNATION OF AN ACTING GENERAL MANAGER FOR CANORECO
AND TO CONSIDER THE INCUMBENT REYNALDO V. ABUNDO TO BE ON
LEAVE.
The petitioners assert that there is no provision in the Constitution or in a statute
expressly, or even impliedly, authorizing the President or his representatives to take
over or order the take-over of electric cooperatives. Although conceding that while the
State, through its police power, has the right to interfere with private business or
commerce, they maintain that the exercise thereof is generally limited to the regulation
of the business or commerce and that the power to regulate does not include the power
to take over, control, manage, or direct the operation of the business. Accordingly, the
creation of the Ad HocCommittee for the purpose of take-over was illegal and void.
The petitioners further claim that Memorandum Order No. 409 removed them from
their positions as members of the Board of Directors of CANORECO. The President
does not have the authority to appoint, much less to remove, members of the board of
directors of a private enterprise including electric cooperatives. He cannot rely on his
power of supervision over the NEA to justify the designation of an acting general
manager for CANORECO under P.D. No. 269 as amended by P.D. No. 1645, for
CANORECO had already registered with the CDA pursuant to R.A. No. 6938 and R.A.
No. 6939; hence, the latter laws now govern the internal affairs of CANORECO.
On 3 January 1997, the petitioners filed an Urgent Motion for Issuance of a
Temporary Restraining Order.
On 9 January 1997, the petitioners filed a Manifestation and Motion informing the
Court that on 8 January 1997 respondent Rex Tantiongco notified the petitioners that
the Ad Hoc Committee was taking over the affairs and management of CANORECO
effective as of that date.  They reiterated their plea for the issuance of a temporary
[11]

restraining order because the Ad Hoc Committee has taken control of CANORECO and
usurped the functions of the individual petitioners.
In the Resolution dated 13 January 1997, we required respondents to comment on
the petition.
Despite four extensions granted it, the Office of the Solicitor General (OSG) failed to
file its Comment. Hence, in the resolution of 16 July 1997 we deemed the OSG to have
waived the filing of its Comment and declared this case submitted for decision. The
OSGs motion to admit its Comment, as well as the attached Comment, belatedly filed
on 24 July 1997 was merely noted without action in the resolution of 13 August
1997. We also subsequently denied for lack of merit its motion for reconsideration.
We find the instant petition impressed with merit.
Having registered itself with the CDA pursuant to Section 128 of R.A. No. 6938 and
Section 17 of R.A. No. 6939, CANORECO was brought under the coverage of said
laws. Article 38 of R.A. No. 6938 vests upon the board of directors the conduct and
management of the affairs of cooperatives, and Article 39 provides for the powers of the
board of directors. These sections read:

Article 38. Composition of the Board of Directors. -- The conduct and

management of the affairs of a cooperative shall be vested in a board of
directors which shall be composed of not less than five (5) nor more than
fifteen (15) members elected by the general assembly for a term fixed in the
by-laws but not exceeding a term of two (2) years and shall hold office until
their successors are duly elected and qualified, or until duly
removed. However, no director shall serve for more than three (3) consecutive
terms.

Article 39. Powers of the Board of Directors. -- The board of directors shall

direct and supervise the business, manage the property of the cooperative
and may, by resolution, exercise all such powers of the cooperative as are not
reserved for the general assembly under this Code and the by-laws.

As to the officers of cooperatives, Article 43 of the Code provides:

ART. 43. Officers of the Cooperatives. The board of directors shall elect from

among themselves only the chairman and vice-chairman, and elect or appoint
other officers of the cooperative from outside of the board in accordance with
their by-laws. All officers shall serve during good behavior and shall not be
removed except for cause and after due hearing. Loss of confidence shall not
be a valid ground for removal unless evidenced by acts or omissions causing
loss of confidence in the honesty and integrity of such officer. No two (2) or
more persons with relationship up to the third degree of consanguinity or
affinity shall serve as elective or appointive officers in the same board. [12]

Under Article 34 of the Code, the general assembly of cooperatives has the exclusive
power, which cannot be delegated, to elect or appoint the members of the board of
directors and to remove them for cause.Article 51 thereof provides for removal of
directors and officers as follows:

ART. 51. Removal. -- An elective officer, director, or committee member may

be removed by a vote of two-thirds (2/3) of the voting members present and
constituting a quorum, in a regular or special general assembly meeting called
for the purpose. The person involved shall be given an opportunity to be heard
at said assembly.

Memorandum Order No. 409 clearly removed from the Board of Directors of
CANORECO the power to manage the affairs of CANORECO and transferred such
power to the Ad Hoc Committee, albeit temporarily. Considering that (1) the take-over
will be until such time that a general membership meeting can be called to decide the
serious issues affecting the said cooperative and normalcy in operations is restored,
and (2) the date such meeting shall be called and the determination of whether there is
a need to change the composition of the membership of CANORECOs Board of
Directors are exclusively left to the Ad Hoc Committee, it necessarily follows that the
incumbent directors were, for all intents and purposes, suspended at the least, and
removed, at the most, from their office. The said Memorandum did no less to the
lawfully appointed General Manager by directing that upon the settlement of the issue
concerning the composition of the board of directors the Committee shall decide on the
appointment of a general manager.In the meantime, it authorized the Committee to
designate upon the recommendation of the Chairman an Acting Manager, with the
lawfully appointed Manager considered on leave, but who is, however, entitled to the
payment of his salaries.
Nothing in law supported the take-over of the management of the affairs of
CANORECO, and the suspension, if not removal, of the Board of Directors and the
officers thereof.
It must be pointed out that the controversy which resulted in the issuance of the
Memorandum Order stemmed from a struggle between two groups vying for control of
the management of CANORECO. One faction was led by the group of Norberto Ochoa,
while the other was petitioners group whose members were, at that time, the incumbent
directors and officers. It was the action of Ochoa and his cohorts in holding a special
meeting on 28 May 1995 and then declaring vacant the positions of cooperative officers
and thereafter electing themselves to the positions of president, vice-president,
treasurer, and secretary of CANORECO which compelled the petitioners to file a
petition with the CDA. The CDA thereafter came out with a decision favorable to the
petitioners.
Obviously there was a clear case of intra-cooperative dispute. Article 121 of the
Cooperative Code is explicit on how the dispute should be resolved; thus:

ART. 121. Settlement of Disputes. -- Disputes among members, officers,

directors, and committee members, and intra-cooperative disputes shall, as
far as practicable, be settled amicably in accordance with the conciliation or
mediation mechanisms embodied in the by-laws of the cooperative, and in
applicable laws.

Should such a conciliation/mediation proceeding fail, the matter shall be

settled in a court of competent jurisdiction.
 Complementing this Article is Section 8 of R.A. No. 6939, which provides:

SEC. 8. Mediation and Conciliation. Upon request of either or both or both

parties, the [CDA] shall mediate and conciliate disputes with the cooperative
or between cooperatives: Provided, That if no mediation or conciliation
succeeds within three (3) months from request thereof, a certificate of non-
resolution shall be issued by the commission prior to the filing of appropriate
action before the proper courts.

Even granting for the sake of argument that the party aggrieved by a decision of the
CDA could pursue an administrative appeal to the Office of the President on the theory
that the CDA is an agency under its direct supervision and control, still the Office of the
President could not in this case, motu proprio or upon request of a party, supplant or
overturn the decision of the CDA. The record does not disclose that the group of
Norberto Ochoa appealed from the decision of the CDA in CDA-CO Case No. 95-010 to
the Office of the President as the head of the Executive Department exercising
supervision and control over said agency. In fact the CDA had already issued a Cease
and Desist Order dated 14 August 1996 ordering Antonio Obias, Norberto Ochoa, Luis
Pascua, Felicito Ilan and their followers to cease and desist from acting as the Board of
Directors and Officers of Camarines Norte Electric Cooperative (CANORECO) and to
refrain from implementing their Resolution calling for the District V Election on August
17 and 24, 1996. Consequently, the said decision of the CDA had long become final
[13]

and executory when Memorandum Order No. 409 was issued on 3 December
1996. That Memorandum cannot then be considered as one reversing the decision of
the CDA which had attained finality.
Under Section 15, Chapter III of Book VII of the Administrative Code of 1987
(Executive Order No. 292), decisions of administrative agencies become final and
executory fifteen days after receipt of a copy thereof by the party adversely affected
unless within that period an administrative appeal or judicial review, if proper, has been
perfected. One motion for reconsideration is allowed. A final resolution or decision of an
administrative agency also binds the Office of the President even if such agency is
under the administrative supervision and control of the latter.
We have stated before, and reiterate it now, that administrative decisions must end
sometime, as fully as public policy demands that finality be written on judicial
controversies. Public interest requires that proceedings already terminated should not
be altered at every step, for the rule of non quieta movere prescribes that what had
already been terminated should not be disturbed. A disregard of this principle does not
commend itself to sound public policy. [14]

Neither can police power be invoked to clothe with validity the assailed
Memorandum Order No. 409. Police power is the power inherent in a government to
enact laws, within constitutional limits, to promote the order, safety, health, morals, and
general welfare of society.  It is lodged primarily in the legislature. By virtue of a valid
[15]

delegation of legislative power, it may also be exercised by the President and

administrative boards, as well as the lawmaking bodies on all municipal levels, including
the barangay.  Delegation of legislative powers to the President is permitted in
[16]

Sections 23(2) and 28(2) of Article VI of the Constitution.  The pertinent laws on
[17]

cooperatives, namely, R.A. No. 6938, R.A. No. 6939, and P.D. No. 269 as amended by
P.D. No. 1645 do not provide for the President or any other administrative body to take
over the internal management of a cooperative. Article 98 of R.A. 6938 instead
provides:

ART. 98. Regulation of Public Service Cooperatives. -- (1) The internal affairs

of public service cooperatives such as the rights and privileges of members,
the rules and procedures for meetings of the general assembly, board of
directors and committees; for the election and qualification of officers,
directors, and committee members; allocation and distribution of surpluses,
and all other matters relating to their internal affairs shall be governed by this
Code.

We do not then hesitate to rule that Memorandum Order No. 409 has no
constitutional and statutory basis. It violates the basic underlying principle enshrined in
Article 4(2) of R.A. No. 6938 that cooperatives are democratic organizations and that
their affairs shall be administered by persons elected or appointed in a manner agreed
upon by the members. Likewise, it runs counter to the policy set forth in Section 1 of
R.A. No. 6939 that the State shall, except as provided in said Act, maintain a policy of
non-interference in the management and operation of cooperatives.
WHEREFORE, the instant petition is GRANTED and Memorandum Order No. 409
of the President is hereby declared INVALID.
SO ORDERED.

G.R. No. 158540             July 8, 2004

SOUTHERN CROSS CEMENT CORPORATION, petitioner, 

vs.
THE PHILIPPINE CEMENT MANUFACTURERS CORP., THE SECRETARY OF THE
DEPARTMENT OF TRADE & INDUSTRY, THE SECRETARY OF THE DEPARTMENT OF
FINANCE, and THE COMMISSIONER OF THE BUREAU OF CUSTOMS, respondents.

DECISION

TINGA, J.:

"Good fences make good neighbors," so observed Robert Frost, the archetype of traditional New
England detachment. The Frost ethos has been heeded by nations adjusting to the effects of the
liberalized global market. The Philippines, for one, enacted Republic Act (Rep. Act) No. 8751 (on the
1

imposition of countervailing duties), Rep. Act No. 8752 (on the imposition of anti-dumping duties)
and, finally, Rep. Act No. 8800, also known as the Safeguard Measures Act ("SMA") soon after it
2 

joined the General Agreement on Tariff and Trade (GATT) and the World Trade Organization (WTO)
Agreement. 3

The SMA provides the structure and mechanics for the imposition of emergency measures, including
tariffs, to protect domestic industries and producers from increased imports which inflict or could
inflict serious injury on them. The wisdom of the policies behind the SMA, however, is not put into
4 

question by the petition at bar. The questions submitted to the Court relate to the means and the
procedures ordained in the law to ensure that the determination of the imposition or non-imposition
of a safeguard measure is proper.

Antecedent Facts

Petitioner Southern Cross Cement Corporation ("Southern Cross") is a domestic corporation

engaged in the business of cement manufacturing, production, importation and exportation. Its
principal stockholders are Taiheiyo Cement Corporation and Tokuyama Corporation, purportedly the
largest cement manufacturers in Japan. 5

Private respondent Philippine Cement Manufacturers Corporation ("Philcemcor") is an association of

6 

domestic cement manufacturers. It has eighteen (18) members, per Record. While Philcemcor

7 

heralds itself to be an association of domestic cement manufacturers, it appears that considerable

equity holdings, if not controlling interests in at least twelve (12) of its member-corporations, were
acquired by the three largest cement manufacturers in the world, namely Financiere Lafarge S.A. of
France, Cemex S.A. de C.V. of Mexico, and Holcim Ltd. of Switzerland (formerly Holderbank
Financiere Glaris, Ltd., then Holderfin B.V.).
8

On 22 May 2001, respondent Department of Trade and Industry ("DTI") accepted an application
from Philcemcor, alleging that the importation of gray Portland cement in increased quantities has
9 

caused declines in domestic production, capacity utilization, market share, sales and employment;
as well as caused depressed local prices. Accordingly, Philcemcor sought the imposition at first of
provisional, then later, definitive safeguard measures on the import of cement pursuant to the SMA.
Philcemcor filed the application in behalf of twelve (12) of its member-companies. 10

After preliminary investigation, the Bureau of Import Services of the DTI, determined that critical
circumstances existed justifying the imposition of provisional measures. On 7 November 2001, the
11 

DTI issued an Order, imposing a provisional measure equivalent to Twenty Pesos and Sixty
Centavos (P20.60) per forty (40) kilogram bag on all importations of gray Portland cement for a
period not exceeding two hundred (200) days from the date of issuance by the Bureau of Customs
(BOC) of the implementing Customs Memorandum Order. The corresponding Customs
12 

Memorandum Order was issued on 10 December 2001, to take effect that same day and to remain
in force for two hundred (200) days.13

In the meantime, the Tariff Commission, on 19 November 2001, received a request from the DTI for
a formal investigation to determine whether or not to impose a definitive safeguard measure on
imports of gray Portland cement, pursuant to Section 9 of the SMA and its Implementing Rules and
Regulations. A notice of commencement of formal investigation was published in the newspapers on
21 November 2001. Individual notices were likewise sent to concerned parties, such as Philcemcor,
various importers and exporters, the Embassies of Indonesia, Japan and Taiwan,
contractors/builders associations, industry associations, cement workers' groups, consumer groups,
non-government organizations and concerned government agencies. A preliminary conference was
14 
held on 27 November 2001, attended by several concerned parties, including Southern
Cross. Subsequently, the Tariff Commission received several position papers both in support and
15 

against Philcemcor's application. The Tariff Commission also visited the corporate offices and
16 

manufacturing facilities of each of the applicant companies, as well as that of Southern Cross and
two other cement importers. 17

On 13 March 2002, the Tariff Commission issued its Formal Investigation Report ("Report"). Among
the factors studied by the Tariff Commission in its Report were the market share of the domestic
industry, production and sales, capacity utilization, financial performance and profitability, and
18  19  20  21 

return on sales. The Tariff Commission arrived at the following conclusions:

22 

1. The circumstances provided in Article XIX of GATT 1994 need not be demonstrated since
the product under consideration (gray Portland cement) is not the subject of any Philippine
obligation or tariff concession under the WTO Agreement. Nonetheless, such inquiry is
governed by the national legislation (R.A. 8800) and the terms and conditions of the
Agreement on Safeguards.

2. The collective output of the twelve (12) applicant companies constitutes a major proportion
of the total domestic production of gray Portland cement and blended Portland cement.

3. Locally produced gray Portland cement and blended Portland cement (Pozzolan) are "like"
to imported gray Portland cement.

4. Gray Portland cement is being imported into the Philippines in increased quantities, both
in absolute terms and relative to domestic production, starting in 2000. The increase in
volume of imports is recent, sudden, sharp and significant.

5. The industry has not suffered and is not suffering significant overall impairment in its
condition, i.e., serious injury.

6. There is no threat of serious injury that is imminent from imports of gray Portland cement.

7. Causation has become moot and academic in view of the negative determination of the
elements of serious injury and imminent threat of serious injury. 23

Accordingly, the Tariff Commission made the following recommendation, to wit:

The elements of serious injury and imminent threat of serious injury not having been
established, it is hereby recommended that no definitive general safeguard measure be
imposed on the importation of gray Portland cement. 24

The DTI received the Report on 14 March 2002. After reviewing the report, then DTI Secretary
Manuel Roxas II ("DTI Secretary") disagreed with the conclusion of the Tariff Commission that there
was no serious injury to the local cement industry caused by the surge of imports. In view of this
25 

disagreement, the DTI requested an opinion from the Department of Justice ("DOJ") on the DTI
Secretary's scope of options in acting on the Commission's recommendations. Subsequently, then
DOJ Secretary Hernando Perez rendered an opinion stating that Section 13 of the SMA precluded a
review by the DTI Secretary of the Tariff Commission's negative finding, or finding that a definitive
safeguard measure should not be imposed. 26
On 5 April 2002, the DTI Secretary promulgated a Decision. After quoting the conclusions of the
Tariff Commission, the DTI Secretary noted the DTI's disagreement with the conclusions. However,
he also cited the DOJ Opinion advising the DTI that it was bound by the negative finding of the Tariff
Commission. Thus, he ruled as follows:

The DTI has no alternative but to abide by the [Tariff] Commission's recommendations.

IN VIEW OF THE FOREGOING, and in accordance with Section 13 of RA 8800 which

states:

"In the event of a negative final determination; or if the cash bond is in excess
of the definitive safeguard duty assessed, the Secretary shall immediately
issue, through the Secretary of Finance, a written instruction to the
Commissioner of Customs, authorizing the return of the cash bond or the
remainder thereof, as the case may be, previously collected as provisional
general safeguard measure within ten (10) days from the date a final decision
has been made; Provided, that the government shall not be liable for any
interest on the amount to be returned. The Secretary shall not accept for
consideration another petition from the same industry, with respect to the
same imports of the product under consideration within one (1) year after the
date of rendering such a decision."

The DTI hereby issues the following:

The application for safeguard measures against the importation of gray Portland cement filed
by PHILCEMCOR (Case No. 02-2001) is hereby denied. (Emphasis in the original)
27 

Philcemcor received a copy of the DTI Decision on 12 April 2002. Ten days later, it filed with the
Court of Appeals a Petition for Certiorari, Prohibition and Mandamus seeking to set aside the
28 

DTI Decision, as well as the Tariff Commission's Report. Philcemcor likewise applied for
a Temporary Restraining Order/Injunction to enjoin the DTI and the BOC from implementing the
questioned Decision and Report. It prayed that the Court of Appeals direct the DTI Secretary to
disregard the Report and to render judgment independently of the Report. Philcemcor argued that
the DTI Secretary, vested as he is under the law with the power of review, is not bound to adopt the
recommendations of the Tariff Commission; and, that the Report is void, as it is predicated on a
flawed framework, inconsistent inferences and erroneous methodology. 29

On 10 June 2002, Southern Cross filed its Comment. It argued that the Court of Appeals had no
30 

jurisdiction over Philcemcor's Petition, for it is on the Court of Tax Appeals ("CTA") that the SMA
conferred jurisdiction to review rulings of the Secretary in connection with the imposition of a
safeguard measure. It likewise argued that Philcemcor's resort to the special civil action of certiorari
is improper, considering that what Philcemcor sought to rectify is an error of judgment and not an
error of jurisdiction or grave abuse of discretion, and that a petition for review with the CTA was
available as a plain, speedy and adequate remedy. Finally, Southern Cross echoed the DOJ Opinion
that Section 13 of the SMA precludes a review by the DTI Secretary of a negative finding of the Tariff
Commission.

After conducting a hearing on 19 June 2002 on Philcemcor's application for preliminary injunction,
the Court of Appeals' Twelfth Division granted the writ sought in its Resolution dated 21 June
31 

2002. Seven days later, on 28 June 2002, the two-hundred (200)-day period for the imposition of
32 

the provisional measure expired. Despite the lapse of the period, the BOC continued to impose the
provisional measure on all importations of Portland cement made by Southern Cross. The
uninterrupted assessment of the tariff, according to Southern Cross, worked to its detriment to the
point that the continued imposition would eventually lead to its closure. 33

Southern Cross timely filed a Motion for Reconsideration of the Resolution on 9 September 2002.
Alleging that Philcemcor was not entitled to provisional relief, Southern Cross likewise sought a
clarificatory order as to whether the grant of the writ of preliminary injunction could extend the earlier
imposition of the provisional measure beyond the two hundred (200)-day limit imposed by law. The
appeals' court failed to take immediate action on Southern Cross's motion despite the four (4)
motions for early resolution the latter filed between September of 2002 and February of 2003. After
six (6) months, on 19 February 2003, the Court of Appeals directed Philcemcor to comment on
Southern Cross's Motion for Reconsideration. After Philcemcor filed its Opposition on 13 March
34  35 

2003, Southern Cross filed another set of four (4) motions for early resolution.

Despite the efforts of Southern Cross, the Court of Appeals failed to directly resolve the Motion for
Reconsideration. Instead, on 5 June 2003, it rendered a Decision, granting in part Philcemcor's
36 

petition. The appellate court ruled that it had jurisdiction over the petition for certiorari since it alleged
grave abuse of discretion. It refused to annul the findings of the Tariff Commission, citing the rule
that factual findings of administrative agencies are binding upon the courts and its corollary, that
courts should not interfere in matters addressed to the sound discretion and coming under the
special technical knowledge and training of such agencies. Nevertheless, it held that the DTI
37 

Secretary is not bound by the factual findings of the Tariff Commission since such findings are
merely recommendatory and they fall within the ambit of the Secretary's discretionary review. It
determined that the legislative intent is to grant the DTI Secretary the power to make a final decision
on the Tariff Commission's recommendation. The dispositive portion of the Decision reads:
38 

WHEREFORE, based on the foregoing premises, petitioner's prayer to set aside the findings
of the Tariff Commission in its assailed Report dated March 13, 2002 is DENIED. On the
other hand, the assailed April 5, 2002 Decision of the Secretary of the Department of Trade
and Industry is hereby SET ASIDE. Consequently, the case is REMANDED to the public
respondent Secretary of Department of Trade and Industry for a final decision in accordance
with RA 8800 and its Implementing Rules and Regulations.

SO ORDERED. 39

On 23 June 2003, Southern Cross filed the present petition, assailing the appellate
court's Decision for departing from the accepted and usual course of judicial proceedings, and not
deciding the substantial questions in accordance with law and jurisprudence. The petition argues in
the main that the Court of Appeals has no jurisdiction over Philcemcor's petition, the proper remedy
being a petition for review with the CTA conformably with the SMA, and; that the factual findings of
the Tariff Commission on the existence or non-existence conditions warranting the imposition of
general safeguard measures are binding upon the DTI Secretary.

The timely filing of Southern Cross's petition before this Court necessarily prevented the Court of
Appeals Decisionfrom becoming final. Yet on 25 June 2003, the DTI Secretary issued a
40 

new Decision, ruling this time that that in light of the appellate court's Decision there was no longer
any legal impediment to his deciding Philcemcor's application for definitive safeguard measures. He 41 

made a determination that, contrary to the findings of the Tariff Commission, the local cement
industry had suffered serious injury as a result of the import surges. Accordingly, he imposed a
42 

definitive safeguard measure on the importation of gray Portland cement, in the form of a definitive
safeguard duty in the amount of P20.60/40 kg. bag for three years on imported gray Portland
Cement. 43
On 7 July 2003, Southern Cross filed with the Court a "Very Urgent Application for a Temporary
Restraining Order and/or A Writ of Preliminary Injunction" ("TRO Application"), seeking to enjoin the
DTI Secretary from enforcing his Decision of 25 June 2003 in view of the pending petition before this
Court. Philcemcor filed an opposition, claiming, among others, that it is not this Court but the CTA
that has jurisdiction over the application under the law.

On 1 August 2003, Southern Cross filed with the CTA a Petition for Review, assailing the DTI
Secretary's 25 June 2003 Decision which imposed the definite safeguard measure. Prescinding from
this action, Philcemcor filed with this Court a Manifestation and Motion to Dismiss in regard to
Southern Cross's petition, alleging that it deliberately and willfully resorted to forum-shopping. It
points out that Southern Cross's TRO Application seeks to enjoin the DTI Secretary's second
decision, while its Petition before the CTA prays for the annulment of the same decision. 44

Reiterating its Comment on Southern Cross's Petition for Review, Philcemcor also argues that the
CTA, being a special court of limited jurisdiction, could only review the ruling of the DTI Secretary
when a safeguard measure is imposed, and that the factual findings of the Tariff Commission are not
binding on the DTI Secretary. 45

After giving due course to Southern Cross's Petition, the Court called the case for oral argument on
18 February 2004. At the oral argument, attended by the counsel for Philcemcor and Southern
46 

Cross and the Office of the Solicitor General, the Court simplified the issues in this wise: (i) whether
the Decision of the DTI Secretary is appealable to the CTA or the Court of Appeals; (ii) assuming
that the Court of Appeals has jurisdiction, whether its Decision is in accordance with law; and, (iii)
whether a Temporary Restraining Order is warranted. 47

During the oral arguments, counsel for Southern Cross manifested that due to the imposition of the
general safeguard measures, Southern Cross was forced to cease operations in the Philippines in
November of 2003. 48

Propriety of the Temporary Restraining Order

Before the merits of the Petition, a brief comment on Southern Cross's application for provisional
relief. It sought to enjoin the DTI Secretary from enforcing the definitive safeguard measure he
imposed in his 25 June 2003 Decision. The Court did not grant the provisional relief for it would be
tantamount to enjoining the collection of taxes, a peremptory judicial act which is traditionally
frowned upon, unless there is a clear statutory basis for it. In that regard, Section 218 of the Tax
49  50 

Reform Act of 1997 prohibits any court from granting an injunction to restrain the collection of any
national internal revenue tax, fee or charge imposed by the internal revenue code. A similar
51 

philosophy is expressed by Section 29 of the SMA, which states that the filing of a petition for review
before the CTA does not stop, suspend, or otherwise toll the imposition or collection of the
appropriate tariff duties or the adoption of other appropriate safeguard measures. This evinces a
52 

clear legislative intent that the imposition of safeguard measures, despite the availability of judicial
review, should not be enjoined notwithstanding any timely appeal of the imposition.

The Forum-Shopping Issue

In the same breath, we are not convinced that the allegation of forum-shopping has been duly
proven, or that sanction should befall upon Southern Cross and its counsel. The standard by Section
5, Rule 7 of the 1997 Rules of Civil Procedure in order that sanction may be had is that "the acts of
the party or his counsel clearly constitute willful and deliberate forum shopping." The standard
53 

implies a malicious intent to subvert procedural rules, and such state of mind is not evident in this
case.
The Jurisdictional Issue

On to the merits of the present petition.

In its assailed Decision, the Court of Appeals, after asserting only in brief that it had jurisdiction over
Philcemcor's Petition, discussed the issue of whether or not the DTI Secretary is bound to adopt the
negative recommendation of the Tariff Commission on the application for safeguard measure. The
Court of Appeals maintained that it had jurisdiction over the petition, as it alleged grave abuse of
discretion on the part of the DTI Secretary, thus:

A perusal of the instant petition reveals allegations of grave abuse of discretion on the part of
the DTI Secretary in rendering the assailed April 5, 2002 Decision wherein it was ruled that
he had no alternative but to abide by the findings of the Commission on the matter of
safeguard measures for the local cement industry. Abuse of discretion is admittedly within
the ambit of certiorari.

Grave abuse of discretion implies such capricious and whimsical exercise of judgment as is
equivalent to lack of jurisdiction. It is alleged that, in the assailed Decision, the DTI Secretary
gravely abused his discretion in wantonly evading to discharge his duty to render an
independent determination or decision in imposing a definitive safeguard measure. 54

We do not doubt that the Court of Appeals' certiorari powers extend to correcting grave abuse of
discretion on the part of an officer exercising judicial or quasi-judicial functions. However, the special
55 

civil action of certiorari is available only when there is no plain, speedy and adequate remedy in the
ordinary course of law. Southern Cross relies on this limitation, stressing that Section 29 of the SMA
56 

is a plain, speedy and adequate remedy in the ordinary course of law which Philcemcor did not avail
of. The Section reads:

Section 29. Judicial Review. – Any interested party who is adversely affected by the ruling
of the Secretary in connection with the imposition of a safeguard measure may file with
the CTA, a petition for review of such ruling within thirty (30) days from receipt thereof.
Provided, however, that the filing of such petition for review shall not in any way stop,
suspend or otherwise toll the imposition or collection of the appropriate tariff duties or the
adoption of other appropriate safeguard measures, as the case may be.

The petition for review shall comply with the same requirements and shall follow the same
rules of procedure and shall be subject to the same disposition as in appeals in connection
with adverse rulings on tax matters to the Court of Appeals. (Emphasis supplied)
57 

It is not difficult to divine why the legislature singled out the CTA as the court with jurisdiction to
review the ruling of the DTI Secretary in connection with the imposition of a safeguard measure. The
Court has long recognized the legislative determination to vest sole and exclusive jurisdiction on
matters involving internal revenue and customs duties to such a specialized court. By the very
58 

nature of its function, the CTA is dedicated exclusively to the study and consideration of tax
problems and has necessarily developed an expertise on the subject. 59

At the same time, since the CTA is a court of limited jurisdiction, its jurisdiction to take cognizance of
a case should be clearly conferred and should not be deemed to exist on mere
implication. Concededly, Rep. Act No. 1125, the statute creating the CTA, does not extend to it the
60 

power to review decisions of the DTI Secretary in connection with the imposition of safeguard
measures. Of course, at that time which was before the advent of trade liberalization the notion of
61 

safeguard measures or safety nets was not yet in vogue.

Undeniably, however, the SMA expanded the jurisdiction of the CTA by including review of the
rulings of the DTI Secretary in connection with the imposition of safeguard measures. However,
Philcemcor and the public respondents agree that the CTA has appellate jurisdiction over a decision
of the DTI Secretary imposing a safeguard measure, but not when his ruling is not to impose such
measure.

In a related development, Rep. Act No. 9282, enacted on 30 March 2004, expressly vests unto the
CTA jurisdiction over "[d]ecisions of the Secretary of Trade and Industry, in case of nonagricultural
product, commodity or article xxx involving xxx safeguard measures under Republic Act No.
8800, where either party may appeal the decision to impose or not to impose said
duties." Had Rep. Act No. 9282 already been in force at the beginning of the incidents subject of
62 

this case, there would have been no need to make any deeper inquiry as to the extent of the CTA's
jurisdiction. But as Rep. Act No. 9282 cannot be applied retroactively to the present case, the
question of whether such jurisdiction extends to a decision not to impose a safeguard measure will
have to be settled principally on the basis of the SMA.

Under Section 29 of the SMA, there are three requisites to enable the CTA to acquire jurisdiction
over the petition for review contemplated therein: (i) there must be a ruling by the DTI Secretary; (ii)
the petition must be filed by an interested party adversely affected by the ruling; and (iii) such ruling
must be in connection with the imposition of a safeguard measure. The first two requisites are clearly
present. The third requisite deserves closer scrutiny.

Contrary to the stance of the public respondents and Philcemcor, in this case where the DTI
Secretary decides not to impose a safeguard measure, it is the CTA which has jurisdiction to review
his decision. The reasons are as follows:

First. Split jurisdiction is abhorred.

Essentially, respondents' position is that judicial review of the DTI Secretary's ruling is exercised by
two different courts, depending on whether or not it imposes a safeguard measure, and in either
case the court exercising jurisdiction does so to the exclusion of the other. Thus, if the DTI decision
involves the imposition of a safeguard measure it is the CTA which has appellate jurisdiction;
otherwise, it is the Court of Appeals. Such setup is as novel and unusual as it is cumbersome and
unwise. Essentially, respondents advocate that Section 29 of the SMA has established split
appellate jurisdiction over rulings of the DTI Secretary on the imposition of safeguard measure.

This interpretation cannot be favored, as the Court has consistently refused to sanction split
jurisdiction. The power of the DTI Secretary to adopt or withhold a safeguard measure emanates
63 

from the same statutory source, and it boggles the mind why the appeal modality would be such that
one appellate court is qualified if what is to be reviewed is a positive determination, and it is not if
what is appealed is a negative determination. In deciding whether or not to impose a safeguard
measure, provisional or general, the DTI Secretary would be evaluating only one body of facts and
applying them to one set of laws. The reviewing tribunal will be called upon to examine the same
facts and the same laws, whether or not the determination is positive or negative.

In short, if we were to rule for respondents we would be confirming the exercise by two judicial
bodies of jurisdiction over basically the same subject matter¾precisely the split-jurisdiction situation
which is anathema to the orderly administration of justice. The Court cannot accept that such was
64 

the legislative motive especially considering that the law expressly confers on the CTA, the tribunal
with the specialized competence over tax and tariff matters, the role of judicial review without
mention of any other court that may exercise corollary or ancillary jurisdiction in relation to the SMA.
The provision refers to the Court of Appeals but only in regard to procedural rules and dispositions of
appeals from the CTA to the Court of Appeals. 65

The principle enunciated in Tejada v. Homestead Property Corporation is applicable to the case at
66 

bar:

The Court agrees with the observation of the [that] when an administrative agency or body is
conferred quasi-judicial functions, all controversies relating to the subject matter
pertaining to its specialization are deemed to be included within the jurisdiction of
said administrative agency or body. Split jurisdiction is not favored. 67

Second. The interpretation of the provisions of the SMA favors vesting untrammeled appellate
jurisdiction on the CTA.

A plain reading of Section 29 of the SMA reveals that Congress did not expressly bar the CTA from
reviewing a negative determination by the DTI Secretary nor conferred on the Court of Appeals such
review authority. Respondents note, on the other hand, that neither did the law expressly grant to the
CTA the power to review a negative determination. However, under the clear text of the law, the
CTA is vested with jurisdiction to review the ruling of the DTI Secretary "in connection with the
imposition of a safeguard measure." Had the law been couched instead to incorporate the phrase
"the ruling imposing a safeguard measure," then respondent's claim would have indisputable merit.
Undoubtedly, the phrase "in connection with" not only qualifies but clarifies the succeeding phrase
"imposition of a safeguard measure." As expounded later, the phrase also encompasses the
opposite or converse ruling which is the non-imposition of a safeguard measure.

In the American case of Shaw v. Delta Air Lines, Inc., the United States Supreme Court, in
68 

interpreting a key provision of the Employee Retirement Security Act of 1974, construed the phrase
"relates to" in its normal sense which is the same as "if it has connection with or reference to." There
69 

is no serious dispute that the phrase "in connection with" is synonymous to "relates to" or "reference
to," and that all three phrases are broadly expansive. This is affirmed not just by jurisprudential fiat,
but also the acquired connotative meaning of "in connection with" in common parlance.
Consequently, with the use of the phrase "in connection with," Section 29 allows the CTA to review
not only the ruling imposing a safeguard measure, but all other rulings related or have reference
to the application for such measure.

Now, let us determine the maximum scope and reach of the phrase "in connection with" as used in
Section 29 of the SMA. A literalist reading or linguistic survey may not satisfy. Even the US Supreme
Court in New York State Blue Cross Plans v. Travelers Ins. conceded that the phrases "relate to" or
70 

"in connection with" may be extended to the farthest stretch of indeterminacy for, universally,
relations or connections are infinite and stop nowhere. Thus, in the case the US High Court,
71 

examining the same phrase of the same provision of law involved in Shaw, resorted to looking at the
statute and its objectives as the alternative to an "uncritical literalism." A similar inquiry into the other
72 

provisions of the SMA is in order to determine the scope of review accorded therein to the CTA. 73

The authority to decide on the safeguard measure is vested in the DTI Secretary in the case of non-
agricultural products, and in the Secretary of the Department of Agriculture in the case of agricultural
products. Section 29 is likewise explicit that only the rulings of the DTI Secretary or the Agriculture
74 

Secretary may be reviewed by the CTA. Thus, the acts of other bodies that were granted some
75 

powers by the SMA, such as the Tariff Commission, are not subject to direct review by the CTA.

Under the SMA, the Department Secretary concerned is authorized to decide on several matters.
Within thirty (30) days from receipt of a petition seeking the imposition of a safeguard measure, or
from the date he made motu proprio initiation, the Secretary shall make a preliminary determination
on whether the increased imports of the product under consideration substantially cause or threaten
to cause serious injury to the domestic industry. Such ruling is crucial since only upon the
76 

Secretary's positive preliminary determination that a threat to the domestic industry exists shall the
matter be referred to the Tariff Commission for formal investigation, this time, to determine whether
the general safeguard measure should be imposed or not. Pursuant to a positive preliminary
77 

determination, the Secretary may also decide that the imposition of a provisional safeguard measure
would be warranted under Section 8 of the SMA. The Secretary is also authorized to decide, after
78 

receipt of the report of the Tariff Commission, whether or not to impose the general safeguard
measure, and if in the affirmative, what general safeguard measures should be applied. Even after
79 

the general safeguard measure is imposed, the Secretary is empowered to extend the safeguard
measure, or terminate, reduce or modify his previous rulings on the general safeguard measure.
80  81

With the explicit grant of certain powers involving safeguard measures by the SMA on the DTI
Secretary, it follows that he is empowered to rule on several issues. These are the issues which
arise in connection with, or in relation to, the imposition of a safeguard measure. They may arise at
different stages – the preliminary investigation stage, the post-formal investigation stage, or the post-
safeguard measure stage – yet all these issues do become ripe for resolution because an initiatory
action has been taken seeking the imposition of a safeguard measure. It is the initiatory action for
the imposition of a safeguard measure that sets the wheels in motion, allowing the Secretary to
make successive rulings, beginning with the preliminary determination.

Clearly, therefore, the scope and reach of the phrase "in connection with," as intended by Congress,
pertain to all rulings of the DTI Secretary or Agriculture Secretary which arise from the time an
application or motu proprioinitiation for the imposition of a safeguard measure is taken. Indeed, the
incidents which require resolution come to the fore only because there is an initial application or
action seeking the imposition of a safeguard measure. From the legislative standpoint, it was a
matter of sense and practicality to lump up the questions related to the initiatory application or action
for safeguard measure and to assign only one court and; that is the CTA to initially review all the
rulings related to such initiatory application or action. Both directions Congress put in place by
employing the phrase "in connection with" in the law.

Given the relative expanse of decisions subject to judicial review by the CTA under Section 29, we
do not doubt that a negative ruling refusing to impose a safeguard measure falls within the scope of
its jurisdiction. On a literal level, such negative ruling is "a ruling of the Secretary in connection with
the imposition of a safeguard measure," as it is one of the possible outcomes that may result from
the initial application or action for a safeguard measure. On a more critical level, the rulings of the
DTI Secretary in connection with a safeguard measure, however diverse the outcome may be, arise
from the same grant of jurisdiction on the DTI Secretary by the SMA. The refusal by the DTI
82 

Secretary to grant a safeguard measure involves the same grant of authority, the same statutory
prescriptions, and the same degree of discretion as the imposition by the DTI Secretary of a
safeguard measure.

The position of the respondents is one of "uncritical literalism" incongruent with the animus of the
83 

law. Moreover, a fundamentalist approach to Section 29 is not warranted, considering the absurdity
of the consequences.

Third. Interpretatio Talis In Ambiguis Semper Fienda Est, Ut Evitur Inconveniens Et Absurdum. 84

Even assuming arguendo that Section 29 has not expressly granted the CTA jurisdiction to review a
negative ruling of the DTI Secretary, the Court is precluded from favoring an interpretation that would
cause inconvenience and absurdity. Adopting the respondents' position favoring the CTA's minimal
85 

jurisdiction would unnecessarily lead to illogical and onerous results.

Indeed, it is illiberal to assume that Congress had intended to provide appellate relief to rulings
imposing a safeguard measure but not to those declining to impose the measure. Respondents
might argue that the right to relief from a negative ruling is not lost since the applicant could, as
Philcemcor did, question such ruling through a special civil action for certiorari under Rule 65 of the
1997 Rules of Civil Procedure, in lieu of an appeal to the CTA. Yet these two reliefs are of differing
natures and gravamen. While an appeal may be predicated on errors of fact or errors of law, a
special civil action for certiorari is grounded on grave abuse of discretion or lack of or excess of
jurisdiction on the part of the decider. For a special civil action for certiorari to succeed, it is not
enough that the questioned act of the respondent is wrong. As the Court clarified in Sempio v. Court
of Appeals:

A tribunal, board or officer acts without jurisdiction if it/he does not have the legal power to
determine the case. There is excess of jurisdiction where, being clothed with the power to
determine the case, the tribunal, board or officer oversteps its/his authority as determined by
law. And there is grave abuse of discretion where the tribunal, board or officer acts in a
capricious, whimsical, arbitrary or despotic manner in the exercise of his judgment as to be
said to be equivalent to lack of jurisdiction. Certiorari is often resorted to in order to correct
errors of jurisdiction. Where the error is one of law or of fact, which is a mistake of judgment,
appeal is the remedy. 86

It is very conceivable that the DTI Secretary, after deliberate thought and careful evaluation of the
evidence, may either make a negative preliminary determination as he is so empowered under
Section 7 of the SMA, or refuse to adopt the definitive safeguard measure under Section 13 of the
same law. Adopting the respondents' theory, this negative ruling is susceptible to reversal only
through a special civil action for certiorari, thus depriving the affected party the chance to elevate the
ruling on appeal on the rudimentary grounds of errors in fact or in law. Instead, and despite whatever
indications that the DTI Secretary acted with measure and within the bounds of his jurisdiction are,
the aggrieved party will be forced to resort to a gymnastic exercise, contorting the straight and
narrow in an effort to discombobulate the courts into believing that what was within was actually
beyond and what was studied and deliberate actually whimsical and capricious. What then would be
the remedy of the party aggrieved by a negative ruling that simply erred in interpreting the facts or
the law? It certainly cannot be the special civil action for certiorari, for as the Court held in Silverio v.
Court of Appeals: "Certiorari is a remedy narrow in its scope and inflexible in its character. It is not a
general utility tool in the legal workshop."87

Fortunately, this theoretical quandary need not come to pass. Section 29 of the SMA is worded in
such a way that it places under the CTA's judicial review all rulings of the DTI Secretary, which are
connected with the imposition of a safeguard measure. This is sound and proper in light of the
specialized jurisdiction of the CTA over tax matters. In the same way that a question of whether to
tax or not to tax is properly a tax matter, so is the question of whether to impose or not to impose a
definitive safeguard measure.

On another note, the second paragraph of Section 29 similarly reveals the legislative intent that
rulings of the DTI Secretary over safeguard measures should first be reviewed by the CTA and not
the Court of Appeals. It reads:

The petition for review shall comply with the same requirements and shall follow the same
rules of procedure and shall be subject to the same disposition as in appeals in connection
with adverse rulings on tax matters to the Court of Appeals.
This is the only passage in the SMA in which the Court of Appeals is mentioned. The express wish
of Congress is that the petition conform to the requirements and procedure under Rule 43 of the
Rules of Civil Procedure. Since Congress mandated that the form and procedure adopted be
analogous to a review of a CTA ruling by the Court of Appeals, the legislative contemplation could
not have been that the appeal be directly taken to the Court of Appeals.

Issue of Binding Effect of Tariff

Commission's Factual Determination
on DTI Secretary.

The next issue for resolution is whether the factual determination made by the Tariff Commission
under the SMA is binding on the DTI Secretary. Otherwise stated, the question is whether the DTI
Secretary may impose general safeguard measures in the absence of a positive final determination
by the Tariff Commission.

The Court of Appeals relied upon Section 13 of the SMA in ruling that the findings of the Tariff
Commission do not necessarily constitute a final decision. Section 13 details the procedure for the
adoption of a safeguard measure, as well as the steps to be taken in case there is a negative final
determination. The implication of the Court of Appeals' holding is that the DTI Secretary may adopt a
definitive safeguard measure, notwithstanding a negative determination made by the Tariff
Commission.

Undoubtedly, Section 13 prescribes certain limitations and restrictions before general safeguard
measures may be imposed. However, the most fundamental restriction on the DTI Secretary's
power in that respect is contained in Section 5 of the SMA¾that there should first be a
positive final determination of the Tariff Commission¾which the Court of Appeals curiously all
but ignored. Section 5 reads:

Sec. 5. Conditions for the Application of General Safeguard Measures. – The

Secretary shall apply a general safeguard measure upon a positive final determination
of the [Tariff] Commission that a product is being imported into the country in increased
quantities, whether absolute or relative to the domestic production, as to be a substantial
cause of serious injury or threat thereof to the domestic industry; however, in the case of
non-agricultural products, the Secretary shall first establish that the application of such
safeguard measures will be in the public interest. (emphasis supplied)

The plain meaning of Section 5 shows that it is the Tariff Commission that has the power to make a
"positive final determination." This power lodged in the Tariff Commission, must be distinguished
from the power to impose the general safeguard measure which is properly vested on the DTI
Secretary. 88

All in all, there are two condition precedents that must be satisfied before the DTI Secretary may
impose a general safeguard measure on grey Portland cement. First, there must be a positive final
determination by the Tariff Commission that a product is being imported into the country in increased
quantities (whether absolute or relative to domestic production), as to be a substantial cause of
serious injury or threat to the domestic industry. Second, in the case of non-agricultural products the
Secretary must establish that the application of such safeguard measures is in the public
interest. As Southern Cross argues, Section 5 is quite clear-cut, and it is impossible to finagle a
89 

different conclusion even through overarching methods of statutory construction. There is no safer
nor better settled canon of interpretation that when language is clear and unambiguous it must be
held to mean what it plainly expresses: In the quotable words of an illustrious member of this Court,
90 

thus:
 [I]f a statute is clear, plain and free from ambiguity, it must be given its literal meaning and
applied without attempted interpretation. The verba legis or plain meaning rule rests on the
valid presumption that the words employed by the legislature in a statute correctly express its
intent or will and preclude the court from construing it differently. The legislature is presumed
to know the meaning of the words, to have used words advisedly, and to have expressed its
intent by the use of such words as are found in the statute. 91

Moreover, Rule 5 of the Implementing Rules and Regulations of the SMA, which interprets Section 5
92 

of the law, likewise requires a positive final determination on the part of the Tariff Commission before
the application of the general safeguard measure.

The SMA establishes a distinct allocation of functions between the Tariff Commission and the DTI
Secretary. The plain meaning of Section 5 shows that it is the Tariff Commission that has the power
to make a "positive final determination." This power, which belongs to the Tariff Commission, must
be distinguished from the power to impose general safeguard measure properly vested on the DTI
Secretary. The distinction is vital, as a "positive final determination" clearly antecedes, as a condition
precedent, the imposition of a general safeguard measure. At the same time, a positive final
determination does not necessarily result in the imposition of a general safeguard measure. Under
Section 5, notwithstanding the positive final determination of the Tariff Commission, the DTI
Secretary is tasked to decide whether or not that the application of the safeguard measures is in the
public interest.

It is also clear from Section 5 of the SMA that the positive final determination to be undertaken by
the Tariff Commission does not entail a mere gathering of statistical data. In order to arrive at such
determination, it has to establish causal linkages from the statistics that it compiles and evaluates:
after finding there is an importation in increased quantities of the product in question, that such
importation is a substantial cause of serious threat or injury to the domestic industry.

The Court of Appeals relies heavily on the legislative record of a congressional debate during
deliberations on the SMA to assert a purported legislative intent that the findings of the Tariff
Commission do not bind the DTI Secretary. Yet as explained earlier, the plain meaning of Section 5
93 

emphasizes that only if the Tariff Commission renders a positive determination could the DTI
Secretary impose a safeguard measure. Resort to the congressional records to ascertain legislative
intent is not warranted if a statute is clear, plain and free from ambiguity. The legislature is presumed
to know the meaning of the words, to have used words advisedly, and to have expressed its intent
by the use of such words as are found in the statute. 94

Indeed, the legislative record, if at all to be availed of, should be approached with extreme caution,
as legislative debates and proceedings are powerless to vary the terms of the statute when the
meaning is clear. Our holding in Civil Liberties Union v. Executive Secretary on the resort to
95  96 

deliberations of the constitutional convention to interpret the Constitution is likewise appropriate in

ascertaining statutory intent:

While it is permissible in this jurisdiction to consult the debates and proceedings of the
constitutional convention in order to arrive at the reason and purpose of the resulting
Constitution, resort thereto may be had only when other guides fail as said proceedings are
powerless to vary the terms of the Constitution when the meaning is clear. Debates in the
constitutional convention "are of value as showing the views of the individual members, and
as indicating the reasons for their votes, but they give us no light as to the views of the large
majority who did not talk xxx. We think it safer to construe the constitution from what appears
upon its face." 97
Moreover, it is easy to selectively cite passages, sometimes out of their proper context, in order to
assert a misleading interpretation. The effect can be dangerous. Minority or solitary views, anecdotal
ruminations, or even the occasional crude witticisms, may improperly acquire the mantle of
legislative intent by the sole virtue of their publication in the authoritative congressional record.
Hence, resort to legislative deliberations is allowable when the statute is crafted in such a manner as
to leave room for doubt on the real intent of the legislature.

Section 5 plainly evinces legislative intent to restrict the DTI Secretary's power to impose a general
safeguard measure by preconditioning such imposition on a positive determination by the Tariff
Commission. Such legislative intent should be given full force and effect, as the executive power to
impose definitive safeguard measures is but a delegated power¾the power of taxation, by nature
and by command of the fundamental law, being a preserve of the legislature. Section 28(2), Article
98 

VI of the 1987 Constitution confirms the delegation of legislative power, yet ensures that the
prerogative of Congress to impose limitations and restrictions on the executive exercise of this
power:

The Congress may, by law, authorize the President to fix within specified limits, and subject
to such limitations and restrictions as it may impose, tariff rates, import and export quotas,
tonnage and wharfage dues, and other duties or imposts within the framework of the national
development program of the Government. 99

The safeguard measures which the DTI Secretary may impose under the SMA may take the
following variations, to wit: (a) an increase in, or imposition of any duty on the imported product; (b) a
decrease in or the imposition of a tariff-rate quota on the product; (c) a modification or imposition of
any quantitative restriction on the importation of the product into the Philippines; (d) one or more
appropriate adjustment measures, including the provision of trade adjustment assistance; and (e)
any combination of the above-described actions. Except for the provision of trade adjustment
assistance, the measures enumerated by the SMA are essentially imposts, which precisely are the
subject of delegation under Section 28(2), Article VI of the 1987 Constitution. 100

This delegation of the taxation power by the legislative to the executive is authorized by the
Constitution itself. At the same time, the Constitution also grants the delegating authority
101 

(Congress) the right to impose restrictions and limitations on the taxation power delegated to the
President. The restrictions and limitations imposed by Congress take on the mantle of a
102 

constitutional command, which the executive branch is obliged to observe.

The SMA empowered the DTI Secretary, as alter ego of the President, to impose definitive general
103 

safeguard measures, which basically are tariff imposts of the type spoken of in the Constitution.
However, the law did not grant him full, uninhibited discretion to impose such measures. The DTI
Secretary authority is derived from the SMA; it does not flow from any inherent executive power.
Thus, the limitations imposed by Section 5 are absolute, warranted as they are by a constitutional
fiat.
104

Philcemcor cites our 1912 ruling in Lamb v. Phipps to assert that the DTI Secretary, having the final
105 

decision on the safeguard measure, has the power to evaluate the findings of the Tariff Commission
and make an independent judgment thereon. Given the constitutional and statutory limitations
governing the present case, the citation is misplaced. Lamb pertained to the discretion of the Insular
Auditor of the Philippine Islands, whom, as the Court recognized, "[t]he statutes of the United States
require[d] xxx to exercise his judgment upon the legality xxx [of] provisions of law and resolutions of
Congress providing for the payment of money, the means of procuring testimony upon which he may
act."
106
Thus in Lamb, while the Court recognized the wide latitude of discretion that may have been vested
on the Insular Auditor, it also recognized that such latitude flowed from, and is consequently limited
by, statutory grant. However, in this case, the provision of the Constitution in point expressly
recognizes the authority of Congress to prescribe limitations in the case of tariffs, export/import
quotas and other such safeguard measures. Thus, the broad discretion granted to the Insular
Auditor of the Philippine Islands cannot be analogous to the discretion of the DTI Secretary which is
circumscribed by Section 5 of the SMA.

For that matter, Cariño v. Commissioner on Human Rights, likewise cited by Philcemcor, is also
107 

inapplicable owing to the different statutory regimes prevailing over that case and the present
petition. In Cariño, the Court ruled that the constitutional power of the Commission on Human Rights
(CHR) to investigate human rights' violations did not extend to adjudicating claims on the
merits. Philcemcor claims that the functions of the Tariff Commission being "only investigatory," it
108 

could neither decide nor adjudicate. 109

The applicable law governing the issue in Cariño is Section 18, Article XIII of the Constitution, which
delineates the powers and functions of the CHR. The provision does not vest on the CHR the power
to adjudicate cases, but only to investigate all forms of human rights violations. Yet, without
110 

modifying the thorough disquisition of the Court in Cariño on the general limitations on the
investigatory power, the precedent is inapplicable because of the difference in the involved statutory
frameworks. The Constitution does not repose binding effect on the results of the CHR's
investigation. On the other hand, through Section 5 of the SMA and under the authority of Section
111 

28(2), Article VI of the Constitution, Congress did intend to bind the DTI Secretary to the
determination made by the Tariff Commission. It is of no consequence that such determination
112 

results from the exercise of investigatory powers by the Tariff Commission since Congress is well
within its constitutional mandate to limit the authority of the DTI Secretary to impose safeguard
measures in the manner that it sees fit.

The Court of Appeals and Philcemcor also rely on Section 13 of the SMA and Rule 13 of the SMA's
Implementing Rules in support of the view that the DTI Secretary may decide independently of the
determination made by the Tariff Commission. Admittedly, there are certain infelicities in the
language of Section 13 and Rule 13. But reliance should not be placed on the textual imprecisions.
Rather, Section 13 and Rule 13 must be viewed in light of the fundamental prescription imposed by
Section 5.  113

Section 13 of the SMA lays down the procedure to be followed after the Tariff Commission renders
its report. The provision reads in full:

SEC. 13. Adoption of Definitive Measures. — Upon its positive determination, the

Commission shall recommend to the Secretary an appropriate definitive measure, in the form
of:

(a) An increase in, or imposition of, any duty on the imported product;

(b) A decrease in or the imposition of a tariff-rate quota (MAV) on the product;

(c) A modification or imposition of any quantitative restriction on the importation of the

product into the Philippines;

(d) One or more appropriate adjustment measures, including the provision of trade
adjustment assistance;
 (e) Any combination of actions described in subparagraphs (a) to (d).

The Commission may also recommend other actions, including the initiation of international
negotiations to address the underlying cause of the increase of imports of the product, to
alleviate the injury or threat thereof to the domestic industry, and to facilitate positive
adjustment to import competition.

The general safeguard measure shall be limited to the extent of redressing or preventing the
injury and to facilitate adjustment by the domestic industry from the adverse effects directly
attributed to the increased imports: Provided, however, That when quantitative import
restrictions are used, such measures shall not reduce the quantity of imports below the
average imports for the three (3) preceding representative years, unless clear justification is
given that a different level is necessary to prevent or remedy a serious injury.

A general safeguard measure shall not be applied to a product originating from a developing
country if its share of total imports of the product is less than three percent (3%): Provided,
however, That developing countries with less than three percent (3%) share collectively
account for not more than nine percent (9%) of the total imports.

The decision imposing a general safeguard measure, the duration of which is more than one
(1) year, shall be reviewed at regular intervals for purposes of liberalizing or reducing its
intensity. The industry benefiting from the application of a general safeguard measure shall
be required to show positive adjustment within the allowable period. A general safeguard
measure shall be terminated where the benefiting industry fails to show any improvement, as
may be determined by the Secretary.

The Secretary shall issue a written instruction to the heads of the concerned government
agencies to implement the appropriate general safeguard measure as determined by the
Secretary within fifteen (15) days from receipt of the report.

In the event of a negative final determination, or if the cash bond is in excess of the definitive
safeguard duty assessed, the Secretary shall immediately issue, through the Secretary of
Finance, a written instruction to the Commissioner of Customs, authorizing the return of the
cash bond or the remainder thereof, as the case may be, previously collected as provisional
general safeguard measure within ten (10) days from the date a final decision has been
made: Provided, That the government shall not be liable for any interest on the amount to be
returned. The Secretary shall not accept for consideration another petition from the same
industry, with respect to the same imports of the product under consideration within one (1)
year after the date of rendering such a decision.

When the definitive safeguard measure is in the form of a tariff increase, such increase shall
not be subject or limited to the maximum levels of tariff as set forth in Section 401(a) of the
Tariff and Customs Code of the Philippines.

To better comprehend Section 13, note must be taken of the distinction between the investigatory
and recommendatory functions of the Tariff Commission under the SMA.

The word "determination," as used in the SMA, pertains to the factual findings on whether there are
increased imports into the country of the product under consideration, and on whether such
increased imports are a substantial cause of serious injury or threaten to substantially cause serious
injury to the domestic industry. The SMA explicitly authorizes the DTI Secretary to make a
114 

preliminary determination, and the Tariff Commission to make the final determination. The
115  116 
distinction is fundamental, as these functions are not interchangeable. The Tariff Commission makes
its determination only after a formal investigation process, with such investigation initiated only if
there is a positive preliminary determination by the DTI Secretary under Section 7 of the SMA. On117 

the other hand, the DTI Secretary may impose definitive safeguard measure only if there is a
positive final determination made by the Tariff Commission. 118

In contrast, a "recommendation" is a suggested remedial measure submitted by the Tariff

Commission under Section 13 after making a positive final determination in accordance with Section
5. The Tariff Commission is not empowered to make a recommendation absent a positive final
determination on its part. Under Section 13, the Tariff Commission is required to recommend to the
119 

[DTI] Secretary an "appropriate definitive measure." The Tariff Commission "may also recommend
120 

other actions, including the initiation of international negotiations to address the underlying cause of
the increase of imports of the products, to alleviate the injury or threat thereof to the domestic
industry and to facilitate positive adjustment to import competition."
121

The recommendations of the Tariff Commission, as rendered under Section 13, are not obligatory on
the DTI Secretary. Nothing in the SMA mandates the DTI Secretary to adopt the recommendations
made by the Tariff Commission. In fact, the SMA requires that the DTI Secretary establish that the
application of such safeguard measures is in the public interest, notwithstanding the Tariff
Commission's recommendation on the appropriate safeguard measure based on its positive final
determination. The non-binding force of the Tariff Commission's recommendations is congruent
122 

with the command of Section 28(2), Article VI of the 1987 Constitution that only the President may
be empowered by the Congress to impose appropriate tariff rates, import/export quotas and other
similar measures. It is the DTI Secretary, as alter ego of the President, who under the SMA may
123 

impose such safeguard measures subject to the limitations imposed therein. A contrary conclusion
would in essence unduly arrogate to the Tariff Commission the executive power to impose the
appropriate tariff measures. That is why the SMA empowers the DTI Secretary to adopt safeguard
measures other than those recommended by the Tariff Commission.

Unlike the recommendations of the Tariff Commission, its determination has a different effect on the
DTI Secretary. Only on the basis of a positive final determination made by the Tariff Commission
under Section 5 can the DTI Secretary impose a general safeguard measure. Clearly, then the DTI
Secretary is bound by the determinationmade by the Tariff Commission.

Some confusion may arise because the sixth paragraph of Section 13 uses the variant word
124 

"determined" in a different context, as it contemplates "the appropriate general safeguard measure

as determined by the Secretary within fifteen (15) days from receipt of the report." Quite plainly, the
word "determined" in this context pertains to the DTI Secretary's power of choice of the appropriate
safeguard measure, as opposed to the Tariff Commission's power to determine the existence of
conditions necessary for the imposition of any safeguard measure. In relation to Section 5, such
choice also relates to the mandate of the DTI Secretary to establish that the application of safeguard
measures is in the public interest, also within the fifteen (15) day period. Nothing in Section 13
contradicts the instruction in Section 5 that the DTI Secretary is allowed to impose the general
safeguard measures only if there is a positive determination made by the Tariff Commission.

Unfortunately, Rule 13.2 of the Implementing Rules of the SMA is captioned "Final Determination by
the Secretary." The assailed Decision and Philcemcor latch on this phraseology to imply that the
factual determination rendered by the Tariff Commission under Section 5 may be amended or
reversed by the DTI Secretary. Of course, implementing rules should conform, not clash, with the
law that they seek to implement, for a regulation which operates to create a rule out of harmony with
the statute is a nullity. Yet imperfect draftsmanship aside, nothing in Rule 13.2 implies that the DTI
125 
Secretary can set aside the determination made by the Tariff Commission under the aegis of Section
5. This can be seen by examining the specific provisions of Rule 13.2, thus:

RULE 13.2. Final Determination by the Secretary

RULE 13.2.a. Within fifteen (15) calendar days from receipt of the Report of the
Commission, the Secretary shall make a decision, taking into consideration the
measures recommended by the Commission.

RULE 13.2.b. If the determination is affirmative, the Secretary shall issue, within two
(2) calendar days after making his decision, a written instruction to the heads of the
concerned government agencies to immediately implement the appropriate general
safeguard measure as determined by him. Provided, however, that in the case of
non-agricultural products, the Secretary shall first establish that the imposition of the
safeguard measure will be in the public interest.

RULE 13.2.c. Within two (2) calendar days after making his decision, the Secretary
shall also order its publication in two (2) newspapers of general circulation. He shall
also furnish a copy of his Order to the petitioner and other interested parties, whether
affirmative or negative. (Emphasis supplied.)

Moreover, the DTI Secretary does not have the power to review the findings of the Tariff
Commission for it is not subordinate to the Department of Trade and Industry ("DTI"). It falls under
the supervision, not of the DTI nor of the Department of Finance (as mistakenly asserted by
Southern Cross), but of the National Economic Development Authority, an independent
126 

planning agency of the government of co-equal rank as the DTI. As the supervision and control
127 

of a Department Secretary is limited to the bureaus, offices, and agencies under him, the DTI
128 

Secretary generally cannot exercise review authority over actions of the Tariff Commission. Neither
does the SMA specifically authorize the DTI Secretary to alter, amend or modify in any way the
determination made by the Tariff Commission. The most that the DTI Secretary could do to express
displeasure over the Tariff Commission's actions is to ignore its recommendation, but not its
determination.

The word "determination" as used in Rule 13.2 of the Implementing Rules is dissonant with the same
word as employed in the SMA, which in the latter case is undeviatingly in reference to the
determination made by the Tariff Commission. Beyond the resulting confusion, however, the
divergent use in Rule 13.2 is explicable as the Rule textually pertains to the power of the DTI
Secretary to review the recommendations of the Tariff Commission, not the latter's determination.
Indeed, an examination of the specific provisions show that there is no real conflict to reconcile. Rule
13.2 respects the logical order imposed by the SMA. The Rule does not remove the essential
requirement under Section 5 that a positive final determination be made by the Tariff Commission
before a definitive safeguard measure may be imposed by the DTI Secretary.

The assailed Decision characterizes the findings of the Tariff Commission as merely

recommendatory and points to the DTI Secretary as the authority who renders the final decision. At 129 

the same time, Philcemcor asserts that the Tariff Commission's functions are merely investigatory,
and as such do not include the power to decide or adjudicate. These contentions, viewed in the
context of the fundamental requisite set forth by Section 5, are untenable. They run counter to the
statutory prescription that a positive final determination made by the Tariff Commission should first
be obtained before the definitive safeguard measures may be laid down.
Was it anomalous for Congress to have provided for a system whereby the Tariff Commission may
preclude the DTI, an office of higher rank, from imposing a safeguard measure? Of course, this
Court does not inquire into the wisdom of the legislature but only charts the boundaries of powers
and functions set in its enactments. But then, it is not difficult to see the internal logic of this statutory
framework.

For one, as earlier stated, the DTI cannot exercise review powers over the Tariff Commission which
is not its subordinate office.

Moreover, the mechanism established by Congress establishes a measure of check and balance
involving two different governmental agencies with disparate specializations. The matter of
safeguard measures is of such national importance that a decision either to impose or not to impose
then could have ruinous effects on companies doing business in the Philippines. Thus, it is ideal to
put in place a system which affords all due deliberation and calls to fore various governmental
agencies exercising their particular specializations.

Finally, if this arrangement drawn up by Congress makes it difficult to obtain a general safeguard
measure, it is because such safeguard measure is the exception, rather than the rule. The
Philippines is obliged to observe its obligations under the GATT, under whose framework trade
liberalization, not protectionism, is laid down. Verily, the GATT actually prescribes conditions before
a member-country may impose a safeguard measure. The pertinent portion of the GATT Agreement
on Safeguards reads:

2. A Member may only apply a safeguard measure to a product only if that member has
determined, pursuant to the provisions set out below, that such product is being imported
into its territory in such increased quantities, absolute or relative to domestic production, and
under such conditions as to cause or threaten to cause serious injury to the domestic
industry that produces like or directly competitive products. 130

3. (a) A Member may apply a safeguard measure only following an investigation by the
competent authorities of that Member pursuant to procedures previously established and
made public in consonance with Article X of the GATT 1994. This investigation shall include
reasonable public notice to all interested parties and public hearings or other appropriate
means in which importers, exporters and other interested parties could present evidence and
their views, including the opportunity to respond to the presentations of other parties and to
submit their views, inter alia, as to whether or not the application of a safeguard measure
would be in the public interest. The competent authorities shall publish a report setting forth
their findings and reasoned conclusions reached on all pertinent issues of fact and law. 131

The SMA was designed not to contradict the GATT, but to complement it. The two requisites laid
down in Section 5 for a positive final determination are the same conditions provided under the
GATT Agreement on Safeguards for the application of safeguard measures by a member country.
Moreover, the investigatory procedure laid down by the SMA conforms to the procedure required by
the GATT Agreement on Safeguards. Congress has chosen the Tariff Commission as the competent
authority to conduct such investigation. Southern Cross stresses that applying the provision of the
GATT Agreement on Safeguards, the Tariff Commission is clearly empowered to arrive at binding
conclusions. We agree: binding on the DTI Secretary is the Tariff Commission's determinations on
132 

whether a product is imported in increased quantities, absolute or relative to domestic production

and whether any such increase is a substantial cause of serious injury or threat thereof to the
domestic industry. 133
Satisfied as we are with the proper statutory paradigm within which the SMA should be analyzed, the
flaws in the reasoning of the Court of Appeals and in the arguments of the respondents become
apparent. To better understand the dynamics of the procedure set up by the law leading to the
imposition of definitive safeguard measures, a brief step-by-step recount thereof is in order.

1. After the initiation of an action involving a general safeguard measure, the DTI Secretary makes
134 

a preliminary determination whether the increased imports of the product under consideration
substantially cause or threaten to substantially cause serious injury to the domestic industry, and 135 

whether the imposition of a provisional measure is warranted under Section 8 of the SMA. If the 136 

preliminary determination is negative, it is implied that no further action will be taken on the
application.

2. When his preliminary determination is positive, the Secretary immediately transmits the records
covering the application to the Tariff Commission for immediate formal investigation. 137

3. The Tariff Commission conducts its formal investigation, keyed towards making a final
determination. In the process, it holds public hearings, providing interested parties the opportunity to
present evidence or otherwise be heard. To repeat, Section 5 enumerates what the Tariff
138 

Commission is tasked to determine: (a) whether a product is being imported into the country in
increased quantities, irrespective of whether the product is absolute or relative to the domestic
production; and (b) whether the importation in increased quantities is such that it causes serious
injury or threat to the domestic industry. The findings of the Tariff Commission as to these matters
139 

constitute the final determination, which may be either positive or negative.

4. Under Section 13 of the SMA, if the Tariff Commission makes a positive determination, the Tariff
Commission "recommends to the [DTI] Secretary an appropriate definitive measure." The Tariff
Commission "may also recommend other actions, including the initiation of international negotiations
to address the underlying cause of the increase of imports of the products, to alleviate the injury or
threat thereof to the domestic industry, and to facilitate positive adjustment to import competition." 140

5. If the Tariff Commission makes a positive final determination, the DTI Secretary is then to decide,
within fifteen (15) days from receipt of the report, as to what appropriate safeguard measures should
he impose.

6. However, if the Tariff Commission makes a negative final determination, the DTI Secretary cannot
impose any definitive safeguard measure. Under Section 13, he is instructed instead to return
whatever cash bond was paid by the applicant upon the initiation of the action for safeguard
measure.

The Effect of the Court's Decision

The Court of Appeals erred in remanding the case back to the DTI Secretary, with the instruction
that the DTI Secretary may impose a general safeguard measure even if there is no positive final
determination from the Tariff Commission. More crucially, the Court of Appeals could not have
acquired jurisdiction over Philcemcor's petition for certiorari in the first place, as Section 29 of the
SMA properly vests jurisdiction on the CTA. Consequently, the assailed Decision is an absolute
nullity, and we declare it as such.

What is the effect of the nullity of the assailed Decision on the 5 June 2003 Decision of the DTI
Secretary imposing the general safeguard measure? We have recognized that any initial judicial
review of a DTI ruling in connection with the imposition of a safeguard measure belongs to the CTA.
At the same time, the Court also recognizes the fundamental principle that a null and void judgment
cannot produce any legal effect. There is sufficient cause to establish that the 5 June
2003 Decision of the DTI Secretary resulted from the assailed Court of Appeals Decision, even if the
latter had not yet become final. Conversely, it can be concluded that it was because of the putative
imprimatur of the Court of Appeals' Decision that the DTI Secretary issued his ruling imposing the
safeguard measure. Since the 5 June 2003 Decision derives its legal effect from the void Decision of
the Court of Appeals, this ruling of the DTI Secretary is consequently void. The spring cannot rise
higher than the source.

The DTI Secretary himself acknowledged that he drew stimulating force from the appellate
court's Decision for in his own 5 June 2003 Decision, he declared:

From the aforementioned ruling, the CA has remanded the case to the DTI Secretary for a
final decision. Thus, there is no legal impediment for the Secretary to decide on the
application.
141

The inescapable conclusion is that the DTI Secretary needed the assailed Decision of the Court of
Appeals to justify his rendering a second Decision. He explicitly invoked the Court of
Appeals' Decision as basis for rendering his 5 June 2003 ruling, and implicitly recognized that
without such Decision he would not have the authority to revoke his previous ruling and render a
new, obverse ruling.

It is clear then that the 25 June 2003 Decision of the DTI Secretary is a product of the void Decision,
it being an attempt to carry out such null judgment. There is therefore no choice but to declare it void
as well, lest we sanction the perverse existence of a fruit from a non-existent tree. It does not even
matter what the disposition of the 25 June 2003 Decision was, its nullity would be warranted even if
the DTI Secretary chose to uphold his earlier ruling denying the application for safeguard measures.

It is also an unfortunate spectacle to behold the DTI Secretary, seeking to enforce a judicial decision
which is not yet final and actually pending review on appeal. Had it been a judge who attempted to
enforce a decision that is not yet final and executory, he or she would have readily been subjected to
sanction by this Court. The DTI Secretary may be beyond the ambit of administrative review by this
Court, but we are capacitated to allocate the boundaries set by the law of the land and to exact fealty
to the legal order, especially from the instrumentalities and officials of government.

WHEREFORE, the petition is GRANTED. The assailed Decision of the Court of Appeals is

DECLARED NULL AND VOID and SET ASIDE. The Decision of the DTI Secretary dated 25 June
2003 is also DECLARED NULL AND VOID and SET ASIDE. No Costs.

SO ORDERED.

COMMISSIONER OF G.R. No. 153793

INTERNAL REVENUE,

Petitioner, Present:
Panganiban, C.J. (Chairperson),
- versus - Ynares-Santiago,

Austria-Martinez,
 Callejo, Sr., and

Chico-Nazario, JJ.

JULIANE BAIER-NICKEL, as

represented by Marina Q. Guzman Promulgated:

(Attorney-in-fact)

Respondent. August 29, 2006

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

DECISION
 

YNARES-SANTIAGO, J.:
 

Petitioner Commissioner of Internal Revenue (CIR) appeals from the January 18,
2002 Decision[1] 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
Decision[2] of the Court of Tax Appeals (CTA) in C.T.A. Case No. 5633. Petitioner
also assails the May 8, 2002 Resolution[3] 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 JUBANITEXs 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
courts 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 respondents 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 incomes
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 x[21]

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 petitioners 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 respondents evidence was even noted by Atty. Minerva

Pacheco, petitioners 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 respondents 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 petitioners
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 conclusion[31] 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 respondents
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 respondents claim for refund of
income tax paid for the year 1995 is REINSTATED.

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.   "In order that a foreign
2

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."   Those activities were in exercise of the functions
4

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.   For the
8

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 2-½ per cent on
their cross Philippine billings. (Sec. 24[b] [21, Tax Code).

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) years in
accordance with the Tax Code. The BOAC claim for refund in the amount of P858,307.79 is hereby
denied. Without costs.

SO ORDERED.

Paras, Gancayco, Padilla, Bidin, Sarmiento and Cortes, JJ., concur.

Fernan, J., took no part.

Separate Opinions

 
TEEHANKEE, C.J., concurring:

I concur with the Court's majority judgment upholding the assessments of deficiency income taxes
against respondent BOAC for the fiscal years 1959-1969 to 1970-1971 and therefore setting aside
the appealed joint decision of respondent Court of Tax Appeals. I just wish to point out that the
conflict between the majority opinion penned by Mr. Justice Feliciano as to the proper
characterization of the taxable income derived by respondent BOAC from the sales in the Philippines
of tickets foe BOAC form the issued by its general sales agent in the Philippines gas become moot
after November 24, 1972. Booth opinions state that by amendment through P.D. No.69, promulgated
on November 24, 1972, of section 24(b) (2) of the Tax Code providing dor the rate of income tax on
foreign corporations, international carriers such as respondent BOAC, have since then been taxed at
a reduced rate of 2-½% on their gross Philippine billings. There is, therefore, no longer ant source of
substantial conflict between the two opinions as to the present 2-½% tax on their gross Philippine
billings charged against such international carriers as herein respondent foreign corporation.

FELICIANO, J., dissenting:
With great respect and reluctance, i record my dissent from the opinion of Mme. Justice A.A.
Melencio-Herrera speaking for the majority . In my opinion, the joint decision of the Court of Tax
Appeals in CTA Cases Nos. 2373 and 2561, dated 26 January 1983, is correct and should be
affirmed.

The fundamental issue raised in this petition for review is whether the British Overseas Airways
Corporation (BOAC), a foreign airline company which does not maintain any flight operations 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.

1. The Solicitor General has defined as one of the issue in this case the question of:

2. Whether or not during the fiscal years in question 1 BOAC [was] a resident foreign corporation
doing business in the Philippines or [had] an office or place of business in the Philippines.

It is important to note at the outset that the answer to the above-quoted issue is not determinative of
the lialibity of the BOAC to Philippine income taxation in respect of the income here involved. The
liability of BOAC to Philippine income taxation in respect of such income depends, not on BOAC's
status as a "resident foreign corporation" or alternatively, as a "non-resident foreign corporation," but
rather on whether or not such income is derived from "source within the Philippines."

A "resident foreign corporation" or foreign corporation engaged in trade or business in the

Philippines or having an office or place of business in the Philippines is subject to Philippine income
taxation only in respect of income derived from sources within the Philippines. Section 24 (b) (2) of
the National Internal Revenue CODE ("Tax Code"), as amended by Republic Act No. 2343,
approved 20 June 1959, as it existed up to 3 August 1969, read as follows:

(2) Resident corporations. — A foreign corporation engaged in trade or business with

in the Philippines (expect foreign life insurance companies) shall be taxable as
provided in subsection (a) of this section.

Section 24 (a) of the Tax Code in turn provides:

Rate of tax on corporations. — (a) Tax on domestic corporations. — ... and a like tax
shall be livied, collected, and paid annually upon the total net income received in the
preceeding taxable year from all sources within the Philippines by every corporation
organized, authorized, or existing under the laws of any foreign country: ... .
(Emphasis supplied)

Republic Act No. 6110, which took effect on 4 August 1969, made this even clearer when it
amended once more Section 24 (b) (2) of the Tax Code so as to read as follows:

(2) Resident Corporations. — A corporation, organized, authorized or existing under

the laws of any foreign counrty, except foreign life 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)

Exactly the same rule is provided by Section 24 (b) (1) of the Tax Code upon non-resident foreign
corporations. Section 24 (b) (1) as amended by Republic Act No. 3825 approved 22 June 1963, read
as follows:
 (b) Tax on foreign corporations. — (1) Non-resident corporations. — There shall be
levied, collected and paid for each taxable year, in lieu of the tax imposed by the
preceding paragraph upon the amount received by every foreign corporation not
engaged in trade or business within the Philippines, from all sources within the
Philippines, as interest, dividends, rents, salaries, wages, premium, annuities,
compensations, remunerations, emoluments, or other fixed or determinative annual
or periodical gains, profits and income a tax equal to thirty per centum of such
amount: provided, however, that premiums shall not include reinsurance premiums.  2

Clearly, whether the foreign corporate taxpayer is doing business in the Philippines and therefore a
resident foreign corporation, or not doing business in the Philippines and therefore a non-resident
foreign corporation, it is liable to income tax only to the extent that it derives income from sources
within the Philippines. The circumtances that a foreign corporation is resident in the Philippines
yields no inference that all or any part of its income is Philippine source income. Similarly, the non-
resident status of a foreign corporation does not imply that it has no Philippine source income.
Conversely, the receipt of Philippine source income creates no presumption that the recipient foreign
corporation is a resident of the Philippines. The critical issue, for present purposes, is
therefore whether of not BOAC is deriving income from sources within the Philippines.

2. For purposes of income taxation, it is well to bear in mind that the "source of income" relates not
to the physical sourcing of a flow of money or the physical situs of payment but rather to the
"property, activity or service which produced the income." In Howden and Co., Ltd. vs. Collector of
Internal Revenue,   the court dealt with the issue of the applicable source rule relating to reinsurance
3

premiums paid by a local insurance company to a foreign reinsurance company in respect of risks
located in the Philippines. The Court said:

The source of an income is the property, activity or services that produced the
income. The reinsurance premiums remitted to appellants by virtue of the
reinsurance contract, 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. —
[T]he reinsurance, 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. — 4

The Court may be seen to be saying that it is the underlying prestation which is properly regarded as
the activity giving rise to the income that is sought to be taxed. In the Howden case, that underlying
prestation was theindemnification of the local insurance company. Such indemnification could take
place only in the Philippines where the risks were located and where payment from the foreign
reinsurance (in case the casualty insured against occurs) would be received in Philippine pesos
under the reinsurance premiums paid by the local insurance companies constituted Philippine
source income of the foreign reinsurances.

The concept of "source of income" for purposes of income taxation originated in the United States
income tax system. The phrase "sources within the United States" was first introduced into the U.S.
tax system in 1916, and was subsequently embodied in the 1939 U.S. Tax Code. As is commonly
known, our Tax Code (Commonwealth Act 466, as amended) was patterned after the 1939 U.S. Tax
Code. It therefore seems useful to refer to a standard U.S. text on federal income taxation:

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 "source 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 (services) the place
where the labor is done should be decisive; if it is done in this counrty, the income
should be from "source 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 "source 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 . . . . Thus, if income is to taxed, the recipient thereof must be resident within
the jurisdiction, or the property or activities out of which the income issue 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 propertyand 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.  5

3. We turn now to the question what is the source of income rule applicable in the instant case.
There are two possibly relevant source of income rules that must be confronted; (a) the source rule
applicable in respect of contracts of service; and (b) the source rule applicable in respect of sales of
personal property.

Where a contract for the rendition of service is involved, the applicable source rule may be simply
stated as follows: the income is sourced in the place where the service contracted for is rendered.
Section 37 (a) (3) of our Tax Code reads as follows:

Section 37. Income for sources within the Philippines.

(a) Gross income from sources within the Philippines. — The following items of gross
income shall be treated as gross income from sources within the Philippines:

xxx xxx xxx

(3) Services. — Compensation for labor or personal

services performed in the Philippines;... (Emphasis supplied)

Section 37 (c) (3) of the Tax Code, on the other hand, deals with income from sources without the
Philippines in the following manner:

(c) Gross income from sources without the Philippines. — The following items of
gross income shall be treated as income from sources without the Philippines:

(3) Compensation for labor or personal services performed without the Philippines; ...

(Emphasis supplied)
It should not be supposed that Section 37 (a) (3) and (c) (3) of the Tax Code apply only in respect of
services rendered by individual natural persons; they also apply to services rendered by or through
the medium of a juridical person.   Further, a contract of carriage or of transportation is assimilated in
6

our Tax Code and Revenue Regulations to a contract for services. Thus, Section 37 (e) of the Tax
Code provides as follows:

(e) Income form sources partly within and partly without the Philippines. — Items of
gross income, expenses, losses and deductions, other than those specified in
subsections (a) and (c) of this section shall be allocated or apportioned to sources
within or without the Philippines, under the rules and regulations prescribed by the
Secretary of Finance. ... Gains, profits, and income from (1) transportation or other
services rendered partly within and partly without the Philippines, or (2) from the sale
of personnel property produced (in whole or in part) by the taxpayer within and sold
without the Philippines, or produced (in whole or in part) by the taxpayer without and
sold within the Philippines, shall be treated as derived partly from sources within and
partly from sources without the Philippines. ... (Emphasis supplied)

It should be noted that the above underscored portion of Section 37 (e) was derived from the 1939
U.S. Tax Code which "was based upon a recognition that transportation was a service and that the
source of the income derived therefrom was to be treated as being the place where the service of
transportation was rendered.  7

Section 37 (e) of the Tax Code quoted above carries a strong well-nigh irresistible, implication that
income derived from transportation or other services rendered entirely outside the Philippines must
be treated as derived entirely from sources without the Philippines. This implication is reinforced by a
consideration of certain provisions of Revenue Regulations No. 2 entitled "Income Tax Regulations"
as amended, first promulgated by the Department of Finance on 10 February 1940. Section 155 of
Revenue Regulations No. 2 (implementing Section 37 of the Tax Code) provides in part as follows:

Section 155. Compensation for labor or personnel services. — Gross income from
sources within the Philippines includes compensation for labor or personal services
within the Philippines regardless of the residence of the payer, of the place in which
the contract for services was made, or of the place of payment — (Emphasis
supplied)

Section 163 of Revenue Regulations No. 2 (still relating to Section 37 of the Tax Code) deals with a
particular species of foreign transportation companies — i.e., foreign steamship companies deriving
income from sources partly within and partly without the Philippines:

Section 163 Foreign steamship companies. — The return of foreign steamship

companies whose vessels touch parts of the Philippines should include as gross
income, the total receipts of all out-going business whether freight or passengers.
With the gross income thus ascertained, the ratio existing between it and the gross
income from all ports, both within and without the Philippines of all vessels, whether
touching of the Philippines or not, should be determined as the basis upon which
allowable deductions may be computed, — . (Emphasis supplied)

Another type of utility or service enterprise is dealt with in Section 164 of Revenue Regulations No. 2
(again implementing Section 37 of the Tax Code) with provides as follows:

Section 164. Telegraph and cable services. — A foreign corporation carrying on the
business of transmission of telegraph or cable messages between points in the
 Philippines and points outside the Philippines derives income partly form source
within and partly from sources without the Philippines.

... (Emphasis supplied)

Once more, a very strong inference arises under Sections 163 and 164 of Revenue Regulations No.
2 that steamship and telegraph and cable services rendered between points both outside the
Philippines give rise to income wholly from sources outside the Philippines, and therefore not subject
to Philippine income taxation.

We turn to the "source of income" rules relating to the sale of personal property, upon the one hand,
and to the purchase and sale of personal property, upon the other hand.

We consider first sales of personal property. Income from the sale of personal property by the
producer or manufacturer of such personal property will be regarded as sourced entirely within or
entirely without the Philippines or as sourced partly within and partly without the Philippines,
depending upon two factors: (a) the place where the sale of such personal property occurs; and (b)
the place where such personal property was produced or manufactured. If the personal property
involved was both produced or manufactured and sold outside the Philippines, the income derived
therefrom will be regarded as sourced entirely outside the Philippines, although the personal
property had been produced outside the Philippines, or if the sale of the property takes place outside
the Philippines and the personal was produced in the Philippines, then, the income derived from the
sale will be deemed partly as income sourced without the Philippines. In other words, the income
(and the related expenses, losses and deductions) will be allocated between sources within and
sources without the Philippines. Thus, Section 37 (e) of the Tax Code, although already quoted
above, may be usefully quoted again:

(e) Income from sources partly within and partly without the Philippines. ... Gains,
profits and income from (1) transportation or other services rendered partly within
and partly without the Philippines; or (2) from the sale of personal property produced
(in whole or in part) by the taxpayer within and sold without the Philippines, or
produced (in whole or in part) by the taxpayer without and sold within the
Philippines, shall be treated as derived partly from sources within and partly from
sources without the Philippines. ... (Emphasis supplied)

In contrast, income derived from the purchase and sale of personal property — i. e., trading — is,
under the Tax Code, regarded as sourced wholly in the place where the personal property is
sold. Section 37 (e) of the Tax Code provides in part as follows:

(e) Income from sources partly within and partly without the Philippines ... Gains,
profits and income derived from the purchase of personal property within and its sale
without the Philippines or from the purchase of personal property without and its sale
within the Philippines, shall be treated as derived entirely from sources within the
country in which sold. (Emphasis supplied)

Section 159 of Revenue Regulations No. 2 puts the applicable rule succinctly:

Section 159. Sale of personal property. Income derived from the purchase and sale
of personal property shall be treated as derived entirely from the country in which
sold. The word "sold" includes "exchange." The "country" in which "sold" ordinarily
means the place where the property is marketed. This Section does not apply to
income from the sale personal property produced (in whole or in part) by the
 taxpayer within and sold without the Philippines or produced (in whole or in part) by
the taxpayer without and sold within the Philippines. (See Section 162 of these
regulations). (Emphasis supplied)

4. It will be seen that the basic problem is one of characterization of the transactions entered into by
BOAC in the Philippines. Those transactions may be characterized either as sales of personal
property (i. e., "sales of airline tickets") or as entering into a lease of services or a contract of service
or carriage. The applicable "source of income" rules differ depending upon which characterization is
given to the BOAC transactions.

The appropriate characterization, in my opinion, of the BOAC transactions is that of entering into
contracts of service, i.e., carriage of passengers or cargo between points located outside the
Philippines.

The phrase "sale of airline tickets," while widely used in popular parlance, does not appear to be
correct as a matter of tax law. The airline ticket in and of itself has no monetary value, even as scrap
paper. The value of the ticket lies wholly in the right acquired by the "purchaser" — the passenger —
to demand a prestation from BOAC, which prestation consists of the carriage of the "purchaser" or
passenger from the one point to another outside the Philippines. The ticket is really the evidence of
the contract of carriage entered into between BOAC and the passenger. The money paid by the
passenger changes hands in the Philippines. But the passenger does not receive undertaken to be
delivered by BOAC. The "purchase price of the airline ticket" is quite different from the purchase
price of a physical good or commodity such as a pair of shoes of a refrigerator or an automobile; it is
really the compensation paid for the undertaking of BOAC to transport the passenger or cargo
outside the Philippines.

The characterization of the BOAC transactions either as sales of personal property or as purchases
and sales of personal property, appear entirely inappropriate from other viewpoint. Consider first
purchases and sales: is BOAC properly regarded as engaged in trading — in the purchase and sale
of personal property? Certainly, BOAC was not purchasing tickets outside the Philippines and selling
them in the Philippines. Consider next sales: can BOAC be regarded as "selling" personal property
produced or manufactured by it? In a popular or journalistic sense, BOAC might be described as
"selling" "a product" — its service. However, for the technical purposes of the law on income
taxation, BOAC is in fact entering into contracts of service or carriage. The very existance of "source
rules" specifically and precisely applicable to the rendition of services must preclude the application
here of "source rules" applying generally to sales, and purchases and sales, of personal property
which can be invoked only by the grace of popular language. On a slighty more abstract level,
BOAC's income is more appropriately characterized as derived from a "service", rather than from an
"activity" (a broader term than service and including the activity of selling) or from the here involved
is income taxation, and not a sales tax or an excise or privilege tax.

5. The taxation of international carriers is today effected under Section 24 (b) (2) of the Tax Code, as
amended by Presidential Decree No. 69, promulgated on 24 November 1972 and by Presidential
Decree No. 1355, promulgated on 21 April 1978, in the following manner:

(2) Resident corporations. — A corporation organized, authorized, or existing under

the laws of any foreign country, 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 preceeding taxable year from all sources within the
Philippines: Provided, however, That international carriers shall pay a tax of two and
one-half per cent on their gross Philippine billings. "Gross Philippines of passage
documents sold therein, whether for passenger, excess baggege or mail, provide the
 cargo or mail originates from the Philippines. The gross revenue realized from the
said cargo or mail shall include the gross freight charge up to final destination. Gross
revenues from chartered flights originating from the Philippines shall likewise form
part of "gross Philippine billings" regardless of the place of sale or payment of the
passage documents. For purposes of determining the taxability to revenues from
chartered flights, the term "originating from the Philippines" shall include flight of
passsengers who stay in the Philippines for more than forty-eight (48) hours prior to
embarkation. (Emphasis supplied)

Under the above-quoted proviso international carriers issuing for compensation passage
documentation in the Philippines for uplifts from any point in the world to any other point in the world,
are not charged any Philippine income tax on their Philippine billings (i.e., billings in respect of
passenger or cargo originating from the Philippines). Under this new approach, international carriers
who service port or points in the Philippines are treated in exactly the same way as international
carriers not serving any port or point in the Philippines. Thus, the source of income rule applicable,
as above discussed, to transportation or other services rendered partly within and partly without the
Philippines, or wholly without the Philippines, has been set aside. in place of Philippine income
taxation, the Tax Code now imposes this 2½ per cent tax computed on the basis of billings in
respect of passengers and cargo originating from the Philippines regardless of where embarkation
and debarkation would be taking place. This 2-½ per cent tax is effectively a tax on gross receipts or
an excise or privilege tax and not a tax on income. Thereby, the Government has done away with
the difficulties attending the allocation of income and related expenses, losses and deductions.
Because taxes are the very lifeblood of government, the resulting potential "loss" or "gain" in the
amount of taxes collectible by the state is sometimes, with varying degrees of consciousness,
considered in choosing from among competing possible characterizations under or interpretation of
tax statutes. It is hence perhaps useful to point out that the determination of the appropriate
characterization here — that of contracts of air carriage rather than sales of airline tickets — entails
no down-the-road loss of income tax revenues to the Government. In lieu thereof, the Government
takes in revenues generated by the 2-½ per cent tax on the gross Philippine billings or receipts of
international carriers.

I would vote to affirm the decision of the Court of Tax Appeals.

Separate Opinions

TEEHANKEE, C.J., concurring:

I concur with the Court's majority judgment upholding the assessments of deficiency income taxes
against respondent BOAC for the fiscal years 1959-1969 to 1970-1971 and therefore setting aside
the appealed joint decision of respondent Court of Tax Appeals. I just wish to point out that the
conflict between the majority opinion penned by Mr. Justice Feliciano as to the proper
characterization of the taxable income derived by respondent BOAC from the sales in the Philippines
of tickets foe BOAC form the issued by its general sales agent in the Philippines gas become moot
after November 24, 1972. Booth opinions state that by amendment through P.D. No.69, promulgated
on November 24, 1972, of section 24(b) (2) of the Tax Code providing dor the rate of income tax on
foreign corporations, international carriers such as respondent BOAC, have since then been taxed at
a reduced rate of 2-½% on their gross Philippine billings. There is, therefore, no longer ant source of
substantial conflict between the two opinions as to the present 2-½% tax on their gross Philippine
billings charged against such international carriers as herein respondent foreign corporation.

FELICIANO, J., dissenting:

With great respect and reluctance, i record my dissent from the opinion of Mme. Justice A.A.
Melencio-Herrera speaking for the majority . In my opinion, the joint decision of the Court of Tax
Appeals in CTA Cases Nos. 2373 and 2561, dated 26 January 1983, is correct and should be
affirmed.

The fundamental issue raised in this petition for review is whether the British Overseas Airways
Corporation (BOAC), a foreign airline company which does not maintain any flight operations 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.

1. The Solicitor General has defined as one of the issue in this case the question of:

2. Whether or not during the fiscal years in question 1 BOAC [was] a resident foreign corporation
doing business in the Philippines or [had] an office or place of business in the Philippines.

It is important to note at the outset that the answer to the above-quoted issue is not determinative of
the lialibity of the BOAC to Philippine income taxation in respect of the income here involved. The
liability of BOAC to Philippine income taxation in respect of such income depends, not on BOAC's
status as a "resident foreign corporation" or alternatively, as a "non-resident foreign corporation," but
rather on whether or not such income is derived from "source within the Philippines."

A "resident foreign corporation" or foreign corporation engaged in trade or business in the

Philippines or having an office or place of business in the Philippines is subject to Philippine income
taxation only in respect of income derived from sources within the Philippines. Section 24 (b) (2) of
the National Internal Revenue CODE ("Tax Code"), as amended by Republic Act No. 2343,
approved 20 June 1959, as it existed up to 3 August 1969, read as follows:

(2) Resident corporations. — A foreign corporation engaged in trade or business with

in the Philippines (expect foreign life insurance companies) shall be taxable as
provided in subsection (a) of this section.

Section 24 (a) of the Tax Code in turn provides:

Rate of tax on corporations. — (a) Tax on domestic corporations. — ... and a like tax
shall be livied, collected, and paid annually upon the total net income received in the
preceeding taxable year from all sources within the Philippines by every corporation
organized, authorized, or existing under the laws of any foreign country: ... .
(Emphasis supplied)

Republic Act No. 6110, which took effect on 4 August 1969, made this even clearer when it
amended once more Section 24 (b) (2) of the Tax Code so as to read as follows:

(2) Resident Corporations. — A corporation, organized, authorized or existing under

the laws of any foreign counrty, except foreign life 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)

Exactly the same rule is provided by Section 24 (b) (1) of the Tax Code upon non-resident foreign
corporations. Section 24 (b) (1) as amended by Republic Act No. 3825 approved 22 June 1963, read
as follows:

(b) Tax on foreign corporations. — (1) Non-resident corporations. — There shall be

levied, collected and paid for each taxable year, in lieu of the tax imposed by the
preceding paragraph upon the amount received by every foreign corporation not
engaged in trade or business within the Philippines, from all sources within the
Philippines, as interest, dividends, rents, salaries, wages, premium, annuities,
compensations, remunerations, emoluments, or other fixed or determinative annual
or periodical gains, profits and income a tax equal to thirty per centum of such
amount: provided, however, that premiums shall not include reinsurance premiums.  2

Clearly, whether the foreign corporate taxpayer is doing business in the Philippines and therefore a
resident foreign corporation, or not doing business in the Philippines and therefore a non-resident
foreign corporation, it is liable to income tax only to the extent that it derives income from sources
within the Philippines. The circumtances that a foreign corporation is resident in the Philippines
yields no inference that all or any part of its income is Philippine source income. Similarly, the non-
resident status of a foreign corporation does not imply that it has no Philippine source income.
Conversely, the receipt of Philippine source income creates no presumption that the recipient foreign
corporation is a resident of the Philippines. The critical issue, for present purposes, is
therefore whether of not BOAC is deriving income from sources within the Philippines.

2. For purposes of income taxation, it is well to bear in mind that the "source of income" relates not
to the physical sourcing of a flow of money or the physical situs of payment but rather to the
"property, activity or service which produced the income." In Howden and Co., Ltd. vs. Collector of
Internal Revenue,   the court dealt with the issue of the applicable source rule relating to reinsurance
3

premiums paid by a local insurance company to a foreign reinsurance company in respect of risks
located in the Philippines. The Court said:

The source of an income is the property, activity or services that produced the
income. The reinsurance premiums remitted to appellants by virtue of the
reinsurance contract, 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. —
[T]he reinsurance, 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. — 4

The Court may be seen to be saying that it is the underlying prestation which is properly regarded as
the activity giving rise to the income that is sought to be taxed. In the Howden case, that underlying
prestation was theindemnification of the local insurance company. Such indemnification could take
place only in the Philippines where the risks were located and where payment from the foreign
reinsurance (in case the casualty insured against occurs) would be received in Philippine pesos
under the reinsurance premiums paid by the local insurance companies constituted Philippine
source income of the foreign reinsurances.
The concept of "source of income" for purposes of income taxation originated in the United States
income tax system. The phrase "sources within the United States" was first introduced into the U.S.
tax system in 1916, and was subsequently embodied in the 1939 U.S. Tax Code. As is commonly
known, our Tax Code (Commonwealth Act 466, as amended) was patterned after the 1939 U.S. Tax
Code. It therefore seems useful to refer to a standard U.S. text on federal income taxation:

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 "source 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 (services) the place
where the labor is done should be decisive; if it is done in this counrty, the income
should be from "source 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 "source 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 . . . . Thus, if income is to taxed, the recipient thereof must be resident within
the jurisdiction, or the property or activities out of which the income issue 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 propertyand 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.  5

3. We turn now to the question what is the source of income rule applicable in the instant case.
There are two possibly relevant source of income rules that must be confronted; (a) the source rule
applicable in respect of contracts of service; and (b) the source rule applicable in respect of sales of
personal property.

Where a contract for the rendition of service is involved, the applicable source rule may be simply
stated as follows: the income is sourced in the place where the service contracted for is rendered.
Section 37 (a) (3) of our Tax Code reads as follows:

Section 37. Income for sources within the Philippines.

(a) Gross income from sources within the Philippines. — The following items of gross
income shall be treated as gross income from sources within the Philippines:

x x x           x x x          x x x

(3) Services. — Compensation for labor or personal

services performed in the Philippines;... (Emphasis supplied)
Section 37 (c) (3) of the Tax Code, on the other hand, deals with income from sources without the
Philippines in the following manner:

(c) Gross income from sources without the Philippines. — The following items of
gross income shall be treated as income from sources without the Philippines:

(3) Compensation for labor or personal services performed without the Philippines; ...
(Emphasis supplied)

It should not be supposed that Section 37 (a) (3) and (c) (3) of the Tax Code apply only in respect of
services rendered by individual natural persons; they also apply to services rendered by or through
the medium of a juridical person.   Further, a contract of carriage or of transportation is assimilated in
6

our Tax Code and Revenue Regulations to a contract for services. Thus, Section 37 (e) of the Tax
Code provides as follows:

(e) Income form sources partly within and partly without the Philippines. — Items of
gross income, expenses, losses and deductions, other than those specified in
subsections (a) and (c) of this section shall be allocated or apportioned to sources
within or without the Philippines, under the rules and regulations prescribed by the
Secretary of Finance. ... Gains, profits, and income from (1) transportation or other
services rendered partly within and partly without the Philippines, or (2) from the sale
of personnel property produced (in whole or in part) by the taxpayer within and sold
without the Philippines, or produced (in whole or in part) by the taxpayer without and
sold within the Philippines, shall be treated as derived partly from sources within and
partly from sources without the Philippines. ... (Emphasis supplied)

It should be noted that the above underscored portion of Section 37 (e) was derived from the 1939
U.S. Tax Code which "was based upon a recognition that transportation was a service and that the
source of the income derived therefrom was to be treated as being the place where the service of
transportation was rendered.  7

Section 37 (e) of the Tax Code quoted above carries a strong well-nigh irresistible, implication that
income derived from transportation or other services rendered entirely outside the Philippines must
be treated as derived entirely from sources without the Philippines. This implication is reinforced by a
consideration of certain provisions of Revenue Regulations No. 2 entitled "Income Tax Regulations"
as amended, first promulgated by the Department of Finance on 10 February 1940. Section 155 of
Revenue Regulations No. 2 (implementing Section 37 of the Tax Code) provides in part as follows:

Section 155. Compensation for labor or personnel services. — Gross income from
sources within the Philippines includes compensation for labor or personal services
within the Philippines regardless of the residence of the payer, of the place in which
the contract for services was made, or of the place of payment — (Emphasis
supplied)

Section 163 of Revenue Regulations No. 2 (still relating to Section 37 of the Tax Code) deals with a
particular species of foreign transportation companies — i.e., foreign steamship companies deriving
income from sources partly within and partly without the Philippines:

Section 163 Foreign steamship companies. — The return of foreign steamship

companies whose vessels touch parts of the Philippines should include as gross
income, the total receipts of all out-going business whether freight or passengers.
With the gross income thus ascertained, the ratio existing between it and the gross
 income from all ports, both within and without the Philippines of all vessels, whether
touching of the Philippines or not, should be determined as the basis upon which
allowable deductions may be computed, — . (Emphasis supplied)

Another type of utility or service enterprise is dealt with in Section 164 of Revenue Regulations No. 2
(again implementing Section 37 of the Tax Code) with provides as follows:

Section 164. Telegraph and cable services. — A foreign corporation carrying on the
business of transmission of telegraph or cable messages between points in the
Philippines and points outside the Philippines derives income partly form source
within and partly from sources without the Philippines.

... (Emphasis supplied)

Once more, a very strong inference arises under Sections 163 and 164 of Revenue Regulations No.
2 that steamship and telegraph and cable services rendered between points both outside the
Philippines give rise to income wholly from sources outside the Philippines, and therefore not subject
to Philippine income taxation.

We turn to the "source of income" rules relating to the sale of personal property, upon the one hand,
and to the purchase and sale of personal property, upon the other hand.

We consider first sales of personal property. Income from the sale of personal property by the
producer or manufacturer of such personal property will be regarded as sourced entirely within or
entirely without the Philippines or as sourced partly within and partly without the Philippines,
depending upon two factors: (a) the place where the sale of such personal property occurs; and (b)
the place where such personal property was produced or manufactured. If the personal property
involved was both produced or manufactured and sold outside the Philippines, the income derived
therefrom will be regarded as sourced entirely outside the Philippines, although the personal
property had been produced outside the Philippines, or if the sale of the property takes place outside
the Philippines and the personal was produced in the Philippines, then, the income derived from the
sale will be deemed partly as income sourced without the Philippines. In other words, the income
(and the related expenses, losses and deductions) will be allocated between sources within and
sources without the Philippines. Thus, Section 37 (e) of the Tax Code, although already quoted
above, may be usefully quoted again:

(e) Income from sources partly within and partly without the Philippines. ... Gains,
profits and income from (1) transportation or other services rendered partly within
and partly without the Philippines; or (2) from the sale of personal property produced
(in whole or in part) by the taxpayer within and sold without the Philippines, or
produced (in whole or in part) by the taxpayer without and sold within the
Philippines, shall be treated as derived partly from sources within and partly from
sources without the Philippines. ... (Emphasis supplied)

In contrast, income derived from the purchase and sale of personal property — i. e., trading — is,
under the Tax Code, regarded as sourced wholly in the place where the personal property is
sold. Section 37 (e) of the Tax Code provides in part as follows:

(e) Income from sources partly within and partly without the Philippines ... Gains,
profits and income derived from the purchase of personal property within and its sale
without the Philippines or from the purchase of personal property without and its sale
 within the Philippines, shall be treated as derived entirely from sources within the
country in which sold. (Emphasis supplied)

Section 159 of Revenue Regulations No. 2 puts the applicable rule succinctly:

Section 159. Sale of personal property. Income derived from the purchase and sale
of personal property shall be treated as derived entirely from the country in which
sold. The word "sold" includes "exchange." The "country" in which "sold" ordinarily
means the place where the property is marketed. This Section does not apply to
income from the sale personal property produced (in whole or in part) by the
taxpayer within and sold without the Philippines or produced (in whole or in part) by
the taxpayer without and sold within the Philippines. (See Section 162 of these
regulations). (Emphasis supplied)

4. It will be seen that the basic problem is one of characterization of the transactions entered into by
BOAC in the Philippines. Those transactions may be characterized either as sales of personal
property (i. e., "sales of airline tickets") or as entering into a lease of services or a contract of service
or carriage. The applicable "source of income" rules differ depending upon which characterization is
given to the BOAC transactions.

The appropriate characterization, in my opinion, of the BOAC transactions is that of entering into
contracts of service, i.e., carriage of passengers or cargo between points located outside the
Philippines.

The phrase "sale of airline tickets," while widely used in popular parlance, does not appear to be
correct as a matter of tax law. The airline ticket in and of itself has no monetary value, even as scrap
paper. The value of the ticket lies wholly in the right acquired by the "purchaser" — the passenger —
to demand a prestation from BOAC, which prestation consists of the carriage of the "purchaser" or
passenger from the one point to another outside the Philippines. The ticket is really the evidence of
the contract of carriage entered into between BOAC and the passenger. The money paid by the
passenger changes hands in the Philippines. But the passenger does not receive undertaken to be
delivered by BOAC. The "purchase price of the airline ticket" is quite different from the purchase
price of a physical good or commodity such as a pair of shoes of a refrigerator or an automobile; it is
really the compensation paid for the undertaking of BOAC to transport the passenger or cargo
outside the Philippines.

The characterization of the BOAC transactions either as sales of personal property or as purchases
and sales of personal property, appear entirely inappropriate from other viewpoint. Consider first
purchases and sales: is BOAC properly regarded as engaged in trading — in the purchase and sale
of personal property? Certainly, BOAC was not purchasing tickets outside the Philippines and selling
them in the Philippines. Consider next sales: can BOAC be regarded as "selling" personal property
produced or manufactured by it? In a popular or journalistic sense, BOAC might be described as
"selling" "a product" — its service. However, for the technical purposes of the law on income
taxation, BOAC is in fact entering into contracts of service or carriage. The very existance of "source
rules" specifically and precisely applicable to the rendition of services must preclude the application
here of "source rules" applying generally to sales, and purchases and sales, of personal property
which can be invoked only by the grace of popular language. On a slighty more abstract level,
BOAC's income is more appropriately characterized as derived from a "service", rather than from an
"activity" (a broader term than service and including the activity of selling) or from the here involved
is income taxation, and not a sales tax or an excise or privilege tax.
5. The taxation of international carriers is today effected under Section 24 (b) (2) of the Tax Code, as
amended by Presidential Decree No. 69, promulgated on 24 November 1972 and by Presidential
Decree No. 1355, promulgated on 21 April 1978, in the following manner:

(2) Resident corporations. — A corporation organized, authorized, or existing under

the laws of any foreign country, 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 preceeding taxable year from all sources within the
Philippines: Provided, however, That international carriers shall pay a tax of two and
one-half per cent on their gross Philippine billings. "Gross Philippines of passage
documents sold therein, whether for passenger, excess baggege or mail, provide the
cargo or mail originates from the Philippines. The gross revenue realized from the
said cargo or mail shall include the gross freight charge up to final destination. Gross
revenues from chartered flights originating from the Philippines shall likewise form
part of "gross Philippine billings" regardless of the place of sale or payment of the
passage documents. For purposes of determining the taxability to revenues from
chartered flights, the term "originating from the Philippines" shall include flight of
passsengers who stay in the Philippines for more than forty-eight (48) hours prior to
embarkation. (Emphasis supplied)

Under the above-quoted proviso international carriers issuing for compensation passage
documentation in the Philippines for uplifts from any point in the world to any other point in the world,
are not charged any Philippine income tax on their Philippine billings (i.e., billings in respect of
passenger or cargo originating from the Philippines). Under this new approach, international carriers
who service port or points in the Philippines are treated in exactly the same way as international
carriers not serving any port or point in the Philippines. Thus, the source of income rule applicable,
as above discussed, to transportation or other services rendered partly within and partly without the
Philippines, or wholly without the Philippines, has been set aside. in place of Philippine income
taxation, the Tax Code now imposes this 2½ per cent tax computed on the basis of billings in
respect of passengers and cargo originating from the Philippines regardless of where embarkation
and debarkation would be taking place. This 2-½ per cent tax is effectively a tax on gross receipts or
an excise or privilege tax and not a tax on income. Thereby, the Government has done away with
the difficulties attending the allocation of income and related expenses, losses and deductions.
Because taxes are the very lifeblood of government, the resulting potential "loss" or "gain" in the
amount of taxes collectible by the state is sometimes, with varying degrees of consciousness,
considered in choosing from among competing possible characterizations under or interpretation of
tax statutes. It is hence perhaps useful to point out that the determination of the appropriate
characterization here — that of contracts of air carriage rather than sales of airline tickets — entails
no down-the-road loss of income tax revenues to the Government. In lieu thereof, the Government
takes in revenues generated by the 2-½ per cent tax on the gross Philippine billings or receipts of
international carriers.

I would vote to affirm the decision of the Court of Tax Appeals.

Narvasa, Gutierrez, Jr., and Cruz, JJ., dissent.

COMMISSIONER OF G.R. No. 188497

INTERNAL  
REVENUE, Petitioner, Present:
   
  CORONA, C.J.,
   Chairperson,
- versus - LEONARDO-DE CASTRO,
BERSAMIN,
DEL CASTILLO, and
VILLARAMA, JR., JJ.
PILIPINAS SHELL PETROLEUM  
CORPORATION, Promulgated:
Respondent.  
April 25, 2012
x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - x
 
DECISION
 
VILLARAMA, JR., J.:

Petitioner Commissioner of Internal Revenue appeals the Decision[1] dated March

25, 2009 and Resolution[2] dated June 24, 2009 of the Court of Tax Appeals
(CTA) En Banc in CTA EB No. 415.The CTA dismissed the petition for review
filed by petitioner assailing the CTA First Divisions Decision[3] dated April 25,
2008 and Resolution[4] dated July 10, 2008 which ordered petitioner to refund the
excise taxes paid by respondent Pilipinas Shell Petroleum Corporation on
petroleum products it sold to international carriers.

The facts are not disputed.

Respondent is engaged in the business of processing, treating and refining

petroleum for the purpose of producing marketable products and the subsequent
sale thereof.[5]

On July 18, 2002, respondent filed with the Large Taxpayers Audit & Investigation
Division II of the Bureau of Internal Revenue (BIR) a formal claim for refund or
tax credit in the total amount of P28,064,925.15, representing excise taxes it
allegedly paid on sales and deliveries of gas and fuel oils to various international
carriers during the period October to December 2001. Subsequently, on October
21, 2002, a similar claim for refund or tax credit was filed by respondent with the
BIR covering the period January to March 2002 in the amount
of P41,614,827.99. Again, on July 3, 2003, respondent filed another formal claim
for refund or tax credit in the amount of P30,652,890.55 covering deliveries from
April to June 2002.[6]

Since no action was taken by the petitioner on its claims, respondent filed petitions
for review before the CTA on September 19, 2003 and December 23, 2003,
docketed as CTA Case Nos. 6775 and 6839, respectively.

In its decision on the consolidated cases, the CTAs First Division ruled that
respondent is entitled to the refund of excise taxes in the reduced amount
of P95,014,283.00. The CTA First Division relied on a previous ruling rendered by
the CTA En Banc in the case of Pilipinas Shell Petroleum Corporation v.
Commissioner of Internal Revenue[7] where the CTA also granted respondents
claim for refund on the basis of excise tax exemption for petroleum products sold
to international carriers of foreign registry for their use or consumption outside the
Philippines. Petitioners motion for reconsideration was denied by the CTA First
Division.

Petitioner elevated the case to the CTA En Banc which upheld the ruling of the
First Division. The CTA pointed out the specific exemption mentioned under
Section 135 of the National Internal Revenue Code of 1997 (NIRC) of petroleum
products sold to international carriers such as respondents clients. It said that this
Courts ruling in Maceda v. Macaraig, Jr.[8] is inapplicable because said case only
put to rest the issue of whether or not the National Power Corporation (NPC) is
subject to tax considering that NPC is a tax-exempt entity mentioned in Sec. 135
(c) of the NIRC (1997), whereas the present case involves the tax exemption of the
sale of petroleum under Sec. 135 (a) of the same Code. Further, the CTA said that
the ruling in Philippine Acetylene Co., Inc. v. Commissioner of Internal
Revenue[9] likewise finds no application because the party asking for the refund in
said case was the seller-producer based on the exemption granted under the law to
the tax-exempt buyers, NPC and Voice of America (VOA), whereas in this case it
is the article or product which is exempt from tax and not the international carrier.

Petitioner filed a motion for reconsideration which the CTA likewise denied.

Hence, this petition anchored on the following grounds:

 I

SECTION 148 OF THE NATIONAL INTERNAL REVENUE CODE

EXPRESSLY SUBJECTS THE PETROLEUM PRODUCTS TO AN
EXCISE TAX BEFORE THEY ARE REMOVED FROM THE PLACE
OF PRODUCTION.

II

THE ONLY SPECIFIC PROVISION OF THE LAW WHICH GRANTS

TAX CREDIT OR TAX REFUND OF THE EXCISE TAXES PAID
REFERS TO THOSE CASES WHERE GOODS LOCALLY
PRODUCED OR MANUFACTURED ARE ACTUALLY EXPORTED
WHICH IS NOT SO IN THIS CASE.

III

THE PRINCIPLES LAID DOWN IN MACEDA VS. MACARAIG,

JR. AND PHILIPPINE ACETYLENE CO. VS. CIR ARE APPLICABLE
TO THIS CASE.[10]

The Solicitor General argues that the obvious intent of the law is to grant excise tax
exemption to international carriers and exempt entities as buyers of petroleum
products and not to the manufacturers or producers of said goods. Since the excise
taxes are collected from manufacturers or producers before removal of the
domestic products from the place of production, respondent paid the subject excise
taxes as manufacturer or producer of the petroleum products pursuant to Sec. 148
of the NIRC. Thus, regardless of who the buyer/purchaser is, the excise tax on
petroleum products attached to the said goods before their sale or delivery to
international carriers, as in fact respondent averred that it paid the excise tax on its
petroleum products when it withdrew petroleum products from its place of
production for eventual sale and delivery to various international carriers as well as
to other customers.[11] Sec. 135 (a) and (c) granting exemption from the payment of
excise tax on petroleum products can only be interpreted to mean that the
respondent cannot pass on to international carriers and exempt agencies the excise
taxes it paid as a manufacturer or producer.
As to whether respondent has the right to file a claim for refund or tax credit for
the excise taxes it paid for the petroleum products sold to international carriers, the
Solicitor General contends that Sec. 130 (D) is explicit on the circumstances under
which a taxpayer may claim for a refund of excise taxes paid on manufactured
products, which express enumeration did not include those excise taxes paid on
petroleum products which were eventually sold to international carriers (expressio
unius est exclusio alterius). Further, the Solicitor General asserts that contrary to
the conclusion made by the CTA, the principles laid down by this Court in Maceda
v. Macaraig, Jr.[12] and Philippine Acetylene Co. v. Commissioner of Internal
Revenue[13] are applicable to this case. Respondent must shoulder the excise taxes it
previously paid on petroleum products which it later sold to international carriers
because it cannot pass on the tax burden to the said international carriers which
have been granted exemption under Sec. 135 (a) of the NIRC. Considering that
respondent failed to prove an express grant of a right to a tax refund, such claim
cannot be implied; hence, it must be denied.

On the other hand, respondent maintains that since petroleum products sold to
qualified international carriers are exempt from excise tax, no taxes should be
imposed on the article, to which goods the tax attaches, whether in the hands of the
said international carriers or the petroleum manufacturer or producer. As these
excise taxes have been erroneously paid taxes, they can be recovered under Sec.
229 of the NIRC. Respondent contends that contrary to petitioners assertion,
Sections 204 and 229 authorizes respondent to maintain a suit or proceeding to
recover such erroneously paid taxes on the petroleum products sold to tax-exempt
international carriers.

As to the jurisprudence cited by the petitioner, respondent argues that they are not
applicable to the case at bar. It points out that Maceda v. Macaraig, Jr. is an
adjudication on the issue of tax exemption of NPC from direct and indirect taxes
given the passage of various laws relating thereto. What was put in issue in said
case was NPCs right to claim for refund of indirect taxes. Here, respondents claim
for refund is not anchored on the exemption of the buyer from direct and indirect
taxes but on the tax exemption of the goods themselves under Sec.
135. Respondent further stressed that in Maceda v. Macaraig, Jr., this Court
recognized that if NPC purchases oil from oil companies, NPC is entitled to claim
reimbursement from the BIR for that part of the purchase price that represents
excise taxes paid by the oil company to the BIR. Philippine Acetylene Co. v. CIR,
on the other hand, involved sales tax, which is a tax on the transaction, which this
Court held as due from the seller even if such tax cannot be passed on to the buyers
who are tax-exempt entities. In this case, the excise tax is a tax on the goods
themselves. While indeed it is the manufacturer who has the duty to pay the said
tax, by specific provision of law, Sec. 135, the goods are stripped of such tax under
the circumstances provided therein. Philippine Acetylene Co., Inc. v. CIR was thus
not anchored on an exempting provision of law but merely on the argument that
the tax burden cannot be passed on to someone.

Respondent further contends that requiring it to shoulder the burden of

excise taxes on petroleum products sold to international carriers would effectively
defeat the principle of international comity upon which the grant of tax exemption
on aviation fuel used in international flights was founded. If the excise taxes paid
by respondent are not allowed to be refunded or credited based on the exemption
provided in Sec. 135 (a), respondent avers that the manufacturers or oil companies
would then be constrained to shift the tax burden to international carriers in the
form of addition to the selling price.

Respondent cites as an analogous case Commissioner of International

Revenue v. Tours Specialists, Inc.[14] which involved the inclusion of hotel room
charges remitted by partner foreign tour agents in respondent TSIs gross receipts
for purposes of computing the 3% contractors tax. TSI opposed the deficiency
assessment invoking, among others, Presidential Decree No. 31, which exempts
foreign tourists from paying hotel room tax. This Court upheld the CTA in ruling
that while CIR may claim that the 3% contractors tax is imposed upon a different
incidence, i.e., the gross receipts of the tourist agency which he asserts includes the
hotel room charges entrusted to it, the effect would be to impose a tax, and though
different, it nonetheless imposes a tax actually on room charges. One way or the
other, said the CTA, it would not have the effect of promoting tourism in the
Philippines as that would increase the costs or expenses by the addition of a hotel
room tax in the overall expenses of said tourists.

The instant petition squarely raised the issue of whether respondent as

manufacturer or producer of petroleum products is exempt from the payment of
excise tax on such petroleum products it sold to international carriers.
 In the previous cases[15] decided by this Court involving excise taxes on
petroleum products sold to international carriers, what was only resolved is the
question of who is the proper party to claim the refund of excise taxes paid on
petroleum products if such tax was either paid by the international carriers
themselves or incorporated into the selling price of the petroleum products sold to
them. We have ruled in the said cases that the statutory taxpayer, the local
manufacturer of the petroleum products who is directly liable for the payment of
excise tax on the said goods, is the proper party to seek a tax refund. Thus, a
foreign airline company who purchased locally manufactured petroleum products
for use in its international flights, as well as a foreign oil company who likewise
bought petroleum products from local manufacturers and later sold these to
international carriers, have no legal personality to file a claim for tax refund or
credit of excise taxes previously paid by the local manufacturers even if the latter
passed on to the said buyers the tax burden in the form of additional amount in the
price.

Excise taxes, as the term is used in the NIRC, refer to taxes applicable to
certain specified goods or articles manufactured or produced in the Philippines for
domestic sales or consumption or for any other disposition and to things imported
into the Philippines. These taxes are imposed in addition to the value-added tax
(VAT).[16]

As to petroleum products, Sec. 148 provides that excise taxes attach to the
following refined and manufactured mineral oils and motor fuels as soon as they
are in existence as such:

(a) Lubricating oils and greases;

(b) Processed gas;
(c) Waxes and petrolatum;
(d) Denatured alcohol to be used for motive power;
(e) Naphtha, regular gasoline and other similar products of
distillation;
(f) Leaded premium gasoline;
 (g) Aviation turbo jet fuel;
(h) Kerosene;
(i) Diesel fuel oil, and similar fuel oils having more or less the
same generating power;
(j) Liquefied petroleum gas;
(k) Asphalts; and
(l) Bunker fuel oil and similar fuel oils having more or less the
same generating capacity.

Beginning January 1, 1999, excise taxes levied on locally manufactured

petroleum products and indigenous petroleum are required to be paid before their
removal from the place of production.[17] However, Sec. 135 provides:
SEC. 135. Petroleum Products Sold to International Carriers and
Exempt Entities or Agencies. Petroleum products sold to the following
are exempt from excise tax:

(a) International carriers of Philippine or foreign registry on their

use or consumption outside the Philippines: Provided, That the
petroleum products sold to these international carriers shall be stored in a
bonded storage tank and may be disposed of only in accordance with the
rules and regulations to be prescribed by the Secretary of Finance, upon
recommendation of the Commissioner;

(b) Exempt entities or agencies covered by tax treaties,

conventions and other international agreements for their use or
consumption: Provided, however, That the country of said foreign
international carrier or exempt entities or agencies exempts from similar
taxes petroleum products sold to Philippine carriers, entities or agencies;
and

(c) Entities which are by law exempt from direct and indirect

taxes.

Respondent claims it is entitled to a tax refund because those petroleum products it

sold to international carriers are not subject to excise tax, hence the excise taxes it
paid upon withdrawal of those products were erroneously or illegally collected and
should not have been paid in the first place. Since the excise tax exemption
attached to the petroleum products themselves, the manufacturer or producer is
under no duty to pay the excise tax thereon.

We disagree.

Under Chapter II Exemption or Conditional Tax-Free Removal of Certain Goods

of Title VI, Sections 133, 137, 138, 139 and 140 cover conditional tax-free
removal of specified goods or articles, whereas Sections 134 and 135 provide for
tax exemptions. While the exemption found in Sec. 134 makes reference to the
nature and quality of the goods manufactured (domestic denatured alcohol) without
regard to the tax status of the buyer of the said goods, Sec. 135 deals with the tax
treatment of a specified article (petroleum products) in relation to its buyer or
consumer. Respondents failure to make this important distinction apparently led it
to mistakenly assume that the tax exemption under Sec. 135 (a) attaches to the
goods themselves such that the excise tax should not have been paid in the first
place.

On July 26, 1996, petitioner Commissioner issued Revenue Regulations 8-

[18]
96  (Excise Taxation of Petroleum Products) which provides:
SEC. 4. Time and Manner of Payment of Excise Tax on
Petroleum Products, Non-Metallic Minerals and Indigenous
Petroleum

I. Petroleum Products

xxxx

a) On locally manufactured petroleum products

The specific tax on petroleum products locally manufactured or
produced in the Philippines shall be paid by the manufacturer,
producer, owner or person having possession of the same, and
such tax shall be paid within fifteen (15) days from date of
removal from the place of production. (Underscoring supplied.)

Thus, if an airline company purchased jet fuel from an unregistered supplier

who could not present proof of payment of specific tax, the company is liable to
pay the specific tax on the date of purchase.[19] Since the excise tax must be paid
upon withdrawal from the place of production, respondent cannot anchor its claim
for refund on the theory that the excise taxes due thereon should not have been
collected or paid in the first place.

Sec. 229 of the NIRC allows the recovery of taxes erroneously or illegally
collected. An erroneous or illegal tax is defined as one levied without statutory
authority, or upon property not subject to taxation or by some officer having no
authority to levy the tax, or one which is some other similar respect is illegal.[20]

Respondents locally manufactured petroleum products are clearly subject to excise

tax under Sec. 148. Hence, its claim for tax refund may not be predicated on Sec.
229 of the NIRC allowing a refund of erroneous or excess payment of tax.
Respondents claim is premised on what it determined as a tax exemption attaching
to the goods themselves, which must be based on a statute granting tax exemption,
or the result of legislative grace. Such a claim is to be construed strictissimi
juris against the taxpayer, meaning that the claim cannot be made to rest on vague
inference. Where the rule of strict interpretation against the taxpayer is applicable
as the claim for refund partakes of the nature of an exemption, the claimant must
show that he clearly falls under the exempting statute.[21]

The exemption from excise tax payment on petroleum products under Sec.
135 (a) is conferred on international carriers who purchased the same for their use
or consumption outside the Philippines. The only condition set by law is for these
petroleum products to be stored in a bonded storage tank and may be disposed of
only in accordance with the rules and regulations to be prescribed by the Secretary
of Finance, upon recommendation of the Commissioner.

On January 22, 2008, or five years after the sale by respondent of the subject
petroleum products, then Secretary of Finance Margarito B. Teves issued Revenue
Regulations No. 3-2008 Amending Certain Provisions of Existing Revenue
Regulations on the Granting of Outright Excise Tax Exemption on Removal of
Excisable Articles Intended for Export or Sale/Delivery to International Carriers or
to Tax-Exempt Entities/Agencies and Prescribing the Provisions for Availing
Claims for Product Replenishment. Said issuance recognized the tax relief to
which the taxpayers are entitled by availing of the following remedies: (a) a claim
for excise tax exemption pursuant to Sections 204 and 229 of the NIRC; or (2) a
product replenishment.
SEC. 2. IMPOSITION OF EXCISE TAX ON REMOVAL OF
EXCISABLE ARTICLES FOR EXPORT OR SALE/DELIVERY TO
INTERNATIONAL CARRIERS AND OTHER TAX-EXEMPT
ENTITIES/AGENCIES. Subject to the subsequent filing of a claim
for excise tax credit/refund or product replenishment, all
manufacturers of articles subject to excise tax under Title VI of the
NIRC of 1997, as amended, shall pay the excise tax that is otherwise due
on every removal thereof from the place of production that is intended
for exportation or sale/delivery to international carriers or to tax-exempt
entities/agencies: Provided, That in case the said articles are likewise
being sold in the domestic market, the applicable excise tax rate shall be
the same as the excise tax rate imposed on the domestically sold articles.

In the absence of a similar article that is being sold in the

domestic market, the applicable excise tax shall be computed based on
the value appearing in the manufacturers sworn statement converted to
Philippine currency, as may be applicable.

x x x x (Emphasis supplied.)

In this case, however, the Solicitor General has adopted a position contrary to
existing BIR regulations and rulings recognizing the right of oil companies to seek
a refund of excise taxes paid on petroleum products they sold to international
carriers. It is argued that there is nothing in Sec. 135 (a) which explicitly grants
exemption from the payment of excise tax in favor of oil companies selling their
petroleum products to international carriers and that the only claim for refund of
excise taxes authorized by the NIRC is the payment of excise tax on exported
goods, as explicitly provided in Sec. 130 (D), Chapter I under the same Title VI:
(D) Credit for Excise Tax on Goods Actually Exported. -- When
goods locally produced or manufactured are removed and actually
exported without returning to the Philippines, whether so exported in
their original state or as ingredients or parts of any manufactured goods
or products, any excise tax paid thereon shall be credited or refunded
upon submission of the proof of actual exportation and upon receipt of
the corresponding foreign exchange payment: Provided, That the excise
tax on mineral products, except coal and coke, imposed under Section
 151 shall not be creditable or refundable even if the mineral products are
actually exported.

According to the Solicitor General, Sec. 135 (a) in relation to the other provisions
on excise tax and from the nature of indirect taxation, may only be construed as
prohibiting the manufacturers-sellers of petroleum products from passing on the
tax to international carriers by incorporating previously paid excise taxes into the
selling price. In other words, respondent cannot shift the tax burden to international
carriers who are allowed to purchase its petroleum products without having to pay
the added cost of the excise tax.

We agree with the Solicitor General.

In Philippine Acetylene Co., Inc. v. Commissioner of Internal Revenue[22] this Court

held that petitioner manufacturer who sold its oxygen and acetylene gases to NPC,
a tax-exempt entity, cannot claim exemption from the payment of sales tax simply
because its buyer NPC is exempt from taxation. The Court explained that the
percentage tax on sales of merchandise imposed by the Tax Code is due from the
manufacturer and not from the buyer.

Respondent attempts to distinguish this case from Philippine Acetylene Co., Inc. on

grounds that what was involved in the latter is a tax on the transaction (sales) and
not excise tax which is a tax on the goods themselves, and that the exemption
sought therein was anchored merely on the tax-exempt status of the buyer and not
a specific provision of law exempting the goods sold from the excise tax.But as
already stated, the language of Sec. 135 indicates that the tax exemption mentioned
therein is conferred on specified buyers or consumers of the excisable articles or
goods (petroleum products).Unlike Sec. 134 which explicitly exempted the article
or goods itself (domestic denatured alcohol) without due regard to the tax status of
the buyer or purchaser, Sec. 135 exempts from excise tax petroleum products
which were sold to international carriers and other tax-exempt agencies and
entities.

Considering that the excise taxes attaches to petroleum products as soon as

they are in existence as such,[23] there can be no outright exemption from the
payment of excise tax on petroleum products sold to international carriers. The sole
basis then of respondents claim for refund is the express grant of excise tax
exemption in favor of international carriers under Sec. 135 (a) for their purchases
of locally manufactured petroleum products. Pursuant to our ruling in Philippine
Acetylene, a tax exemption being enjoyed by the buyer cannot be the basis of a
claim for tax exemption by the manufacturer or seller of the goods for any tax due
to it as the manufacturer or seller. The excise tax imposed on petroleum products
under Sec. 148 is the direct liability of the manufacturer who cannot thus invoke
the excise tax exemption granted to its buyers who are international carriers.

In Maceda v. Macaraig, Jr.,[24] the Court specifically mentioned excise tax

as an example of an indirect tax where the tax burden can be shifted to the buyer:
On the other hand, indirect taxes are taxes primarily paid by persons who
can shift the burden upon someone else. For example, the excise and ad
valorem taxes that the 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.

An excise tax is basically an indirect tax. Indirect taxes are those that are
demanded, in the first instance, from, or are paid by, one person in the expectation
and intention that he can shift the burden to someone else. Stated elsewise, indirect
taxes are taxes wherein the liability for the payment of the tax falls on one person
but the burden thereof can be shifted or passed on to another person, such as when
the tax is imposed upon goods before reaching the consumer who ultimately pays
for it. When the seller passes on the tax to his buyer, he, in effect, shifts the tax
burden, not the liability to pay it, to the purchaser as part of the price of goods sold
or services rendered.[25]

Further, in Maceda v. Macaraig, Jr., the Court ruled that because of the tax
exemptions privileges being enjoyed by NPC under existing laws, the tax burden
may not be shifted to it by the oil companies who shall pay for fuel oil taxes on oil
they supplied to NPC. Thus:
In view of all the foregoing, the Court rules and declares that the
oil companies which supply bunker fuel oil to NPC have to pay the taxes
imposed upon said bunker fuel oil sold to NPC. By the very nature of
 indirect taxation, the economic burden of such taxation is expected to be
passed on through the channels of commerce to the user or consumer of
the goods sold. Because, however, the NPC has been exempted from
both direct and indirect taxation, the NPC must be held exempted
from absorbing the economic burden of indirect taxation. This
means, on the one hand, that the oil companies which wish to sell to
NPC absorb all or part of the economic burden of the taxes
previously paid to BIR, which they could shift to NPC if NPC did
not enjoy exemption from indirect taxes. This means also, on the other
hand, that the NPC may refuse to pay that part of the normal purchase
price of bunker fuel oil which represents all or part of the taxes
previously paid by the oil companies to BIR. If NPC nonetheless
purchases such oil from the oil companies because to do so may be more
convenient and ultimately less costly for NPC than NPC itself importing
and hauling and storing the oil from overseas NPC is entitled to be
reimbursed by the BIR for that part of the buying price of NPC which
verifiably represents the tax already paid by the oil company-vendor to
the BIR.[26] (Emphasis supplied.)

In the case of international air carriers, the tax exemption granted under Sec. 135
(a) is based on a long-standing international consensus that fuel used for
international air services should be tax-exempt. The provisions of the 1944
Convention of International Civil Aviation or the Chicago Convention, which form
binding international law, requires the contracting parties not to charge duty on
aviation fuel already on board any aircraft that has arrived in their territory from
another contracting state. Between individual countries, the exemption of airlines
from national taxes and customs duties on a range of aviation-related goods,
including parts, stores and fuel is a standard element of the network of bilateral Air
Service Agreements.[27] Later, a Resolution issued by the International Civil
Aviation Organization (ICAO) expanded the provision as to similarly exempt from
taxes all kinds of fuel taken on board for consumption by an aircraft from a
contracting state in the territory of another contracting State departing for the
territory of any other State.[28] Though initially aimed at establishing uniformity of
taxation among parties to the treaty to prevent double taxation, the tax exemption
now generally applies to fuel used in international travel by both domestic and
foreign carriers.
On April 21, 1978, then President Ferdinand E. Marcos issued Presidential Decree
(P.D.) No. 1359:

PRESIDENTIAL DECREE No. 1359

AMENDING SECTION 134 OF THE NATIONAL INTERNAL

REVENUE CODE OF 1977.
WHEREAS, under the present law oil products sold to international
carriers are subject to the specific tax;
WHEREAS, some countries allow the sale of petroleum products to
Philippine Carriers without payment of taxes thereon;
WHEREAS, to foster goodwill and better relationship with foreign
countries, there is a need to grant similar tax exemption in favor of foreign
international carriers;
NOW, THEREFORE, I, FERDINAND E. MARCOS, President of
the Philippines, by virtue of the powers vested in me by the Constitution, do
hereby order and decree the following:
Section 1. Section 134 of the National Internal Revenue Code of 1977 is
hereby amended to read as follows:

Sec. 134. Articles subject to specific tax. Specific internal

revenue taxes apply to things manufactured or produced in the
Philippines for domestic sale or consumption and to things
imported, but not to anything produced or manufactured here
which shall be removed for exportation and is actually exported
without returning to the Philippines, whether so exported in its
original state or as an ingredient or part of any manufactured
article or product.

HOWEVER, PETROLEUM PRODUCTS SOLD TO AN

INTERNATIONAL CARRIER FOR ITS USE OR
CONSUMPTION OUTSIDE OF THE PHILIPPINES SHALL
NOT BE SUBJECT TO SPECIFIC TAX, PROVIDED, THAT
THE COUNTRY OF SAID CARRIER EXEMPTS FROM TAX
PETROLEUM PRODUCTS SOLD TO PHILIPPINE CARRIERS.

In case of importations the internal revenue tax shall be in

addition to the customs duties, if any.

Section 2. This Decree shall take effect immediately.

 Contrary to respondents assertion that the above amendment to the former
provision of the 1977 Tax Code supports its position that it was not liable for
excise tax on the petroleum products sold to international carriers, we find that no
such inference can be drawn from the words used in the amended provision or its
introductory part. Founded on the principles of international comity and
reciprocity, P.D. No. 1359 granted exemption from payment of excise tax but only
to foreign international carriers who are allowed to purchase petroleum products
free of specific tax provided the country of said carrier also grants tax
exemption to Philippine carriers. Both the earlier amendment in the 1977 Tax
Code and the present Sec. 135 of the 1997 NIRC did not exempt the oil companies
from the payment of excise tax on petroleum products manufactured and sold by
them to international carriers.

Because an excise tax is a tax on the manufacturer and not on the purchaser, and
there being no express grant under the NIRC of exemption from payment of excise
tax to local manufacturers of petroleum products sold to international carriers,
and absent any provision in the Code authorizing the refund or crediting of such
excise taxes paid, the Court holds that Sec. 135 (a) should be construed as
prohibiting the shifting of the burden of the excise tax to the international carriers
who buys petroleum products from the local manufacturers. Said provision thus
merely allows the international carriers to purchase petroleum products without the
excise tax component as an added cost in the price fixed by the manufacturers or
distributors/sellers. Consequently, the oil companies which sold such petroleum
products to international carriers are not entitled to a refund of excise taxes
previously paid on the goods.

Time and again, we have held that tax refunds are in the nature of tax
exemptions which result to loss of revenue for the government. Upon the person
claiming an exemption from tax payments rests the burden of justifying
the exemption by words too plain to be mistaken and too categorical to be
misinterpreted,[29] it is never presumed[30] nor be allowed solely on the ground of
equity.[31]These exemptions, therefore, must not rest on vague, uncertain or
indefinite inference, but should be granted only by a clear and unequivocal
provision of law on the basis of language too plain to be mistaken. Such
exemptions must be strictly construed against the taxpayer, as taxes are the
lifeblood of the government.[32]
 WHEREFORE, the petition for review on certiorari is GRANTED. The
Decision dated March 25, 2009 and Resolution dated June 24, 2009 of the Court of
Tax Appeals En Banc in CTA EB No. 415 are hereby REVERSED and SET
ASIDE. The claims for tax refund or credit filed by respondent Pilipinas Shell
Petroleum Corporation are DENIED for lack of basis.

No pronouncement as to costs.

SO ORDERED.
G.R. No. 188550               August 19, 2013

DEUTSCHE BANK AG MANILA BRANCH, PETITIONER, 

vs.
COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

DECISION

SERENO, CJ.:

This is a Petition for Review1 filed by Deutsche Bank AG Manila Branch (petitioner) under Rule 45 of
the 1997 Rules of Civil Procedure assailing the Court of Tax Appeals En Banc (CTA En Banc)
Decision2 dated 29 May 2009 and Resolution3 dated 1 July 2009 in C.T.A. EB No. 456.

THE FACTS

In accordance with Section 28(A)(5)4 of the National Internal Revenue Code (NIRC) of 1997,
petitioner withheld and remitted to respondent on 21 October 2003 the amount of PHP
67,688,553.51, which represented the fifteen percent (15%) branch profit remittance tax (BPRT) on
its regular banking unit (RBU) net income remitted to Deutsche Bank Germany (DB Germany) for
2002 and prior taxable years.5

Believing that it made an overpayment of the BPRT, petitioner filed with the BIR Large Taxpayers
Assessment and Investigation Division on 4 October 2005 an administrative claim for refund or
issuance of its tax credit certificate in the total amount of PHP 22,562,851.17. On the same date,
petitioner requested from the International Tax Affairs Division (ITAD) a confirmation of its
entitlement to the preferential tax rate of 10% under the RP-Germany Tax Treaty.6

Alleging the inaction of the BIR on its administrative claim, petitioner filed a Petition for Review7 with
the CTA on 18 October 2005. Petitioner reiterated its claim for the refund or issuance of its tax credit
certificate for the amount of PHP 22,562,851.17 representing the alleged excess BPRT paid on
branch profits remittance to DB Germany.

THE CTA SECOND DIVISION RULING8

After trial on the merits, the CTA Second Division found that petitioner indeed paid the total amount
of PHP 67,688,553.51 representing the 15% BPRT on its RBU profits amounting to PHP
451,257,023.29 for 2002 and prior taxable years. Records also disclose that for the year 2003,
petitioner remitted to DB Germany the amount of EURO 5,174,847.38 (or PHP 330,175,961.88 at
the exchange rate of PHP 63.804:1 EURO), which is net of the 15% BPRT.

However, the claim of petitioner for a refund was denied on the ground that the application for a tax
treaty relief was not filed with ITAD prior to the payment by the former of its BPRT and actual
remittance of its branch profits to DB Germany, or prior to its availment of the preferential rate of ten
percent (10%) under the RP-Germany Tax Treaty provision. The court a quo held that petitioner
violated the fifteen (15) day period mandated under Section III paragraph (2) of Revenue
Memorandum Order (RMO) No. 1-2000.

Further, the CTA Second Division relied on Mirant (Philippines) Operations Corporation (formerly
Southern Energy Asia-Pacific Operations [Phils.], Inc.) v. Commissioner of Internal
Revenue9 (Mirant) where the CTA En Banc ruled that before the benefits of the tax treaty may be
extended to a foreign corporation wishing to avail itself thereof, the latter should first invoke the
provisions of the tax treaty and prove that they indeed apply to the corporation.

THE CTA EN BANC RULING10

The CTA En Banc affirmed the CTA Second Division’s Decision dated 29 August 2008 and
Resolution dated 14 January 2009. Citing Mirant, the CTA En Banc held that a ruling from the ITAD
of the BIR must be secured prior to the availment of a preferential tax rate under a tax treaty.
Applying the principle of stare decisis et non quieta movere, the CTA En Banc took into
consideration that this Court had denied the Petition in G.R. No. 168531 filed by Mirant for failure to
sufficiently show any reversible error in the assailed judgment.11 The CTA En Banc ruled that once a
case has been decided in one way, any other case involving exactly the same point at issue should
be decided in the same manner.

The court likewise ruled that the 15-day rule for tax treaty relief application under RMO No. 1-2000
cannot be relaxed for petitioner, unlike in CBK Power Company Limited v. Commissioner of Internal
Revenue.12 In that case, the rule was relaxed and the claim for refund of excess final withholding
taxes was partially granted. While it issued a ruling to CBK Power Company Limited after the
payment of withholding taxes, the ITAD did not issue any ruling to petitioner even if it filed a request
for confirmation on 4 October 2005 that the remittance of branch profits to DB Germany is subject to
a preferential tax rate of 10% pursuant to Article 10 of the RP-Germany Tax Treaty.

ISSUE

This Court is now confronted with the issue of whether the failure to strictly comply with RMO No. 1-
2000 will deprive persons or corporations of the benefit of a tax treaty.

THE COURT’S RULING

The Petition is meritorious.

Under Section 28(A)(5) of the NIRC, any profit remitted to its head office shall be subject to a tax of
15% based on the total profits applied for or earmarked for remittance without any deduction of the
tax component. However, petitioner invokes paragraph 6, Article 10 of the RP-Germany Tax Treaty,
which provides that where a resident of the Federal Republic of Germany has a branch in the
Republic of the Philippines, this branch may be subjected to the branch profits remittance tax
withheld at source in accordance with Philippine law but shall not exceed 10% of the gross amount
of the profits remitted by that branch to the head office.

By virtue of the RP-Germany Tax Treaty, we are bound to extend to a branch in the Philippines,
remitting to its head office in Germany, the benefit of a preferential rate equivalent to 10% BPRT.

On the other hand, the BIR issued RMO No. 1-2000, which requires that any availment of the tax
treaty relief must be preceded by an application with ITAD at least 15 days before the transaction.
The Order was issued to streamline the processing of the application of tax treaty relief in order to
improve efficiency and service to the taxpayers. Further, it also aims to prevent the consequences of
an erroneous interpretation and/or application of the treaty provisions (i.e., filing a claim for a tax
refund/credit for the overpayment of taxes or for deficiency tax liabilities for underpayment).13

The crux of the controversy lies in the implementation of RMO No. 1-2000.

Petitioner argues that, considering that it has met all the conditions under Article 10 of the RP-
Germany Tax Treaty, the CTA erred in denying its claim solely on the basis of RMO No. 1-2000. The
filing of a tax treaty relief application is not a condition precedent to the availment of a preferential
tax rate. Further, petitioner posits that, contrary to the ruling of the CTA, Mirant is not a binding
judicial precedent to deny a claim for refund solely on the basis of noncompliance with RMO No. 1-
2000.

Respondent counters that the requirement of prior application under RMO No. 1-2000 is mandatory
in character. RMO No. 1-2000 was issued pursuant to the unquestioned authority of the Secretary of
Finance to promulgate rules and regulations for the effective implementation of the NIRC. Thus,
courts cannot ignore administrative issuances which partakes the nature of a statute and have in
their favor a presumption of legality.

The CTA ruled that prior application for a tax treaty relief is mandatory, and noncompliance with this
prerequisite is fatal to the taxpayer’s availment of the preferential tax rate.

We disagree.

A minute resolution is not a binding precedent

At the outset, this Court’s minute resolution on Mirant is not a binding precedent. The Court has
clarified this matter in Philippine Health Care Providers, Inc. v. Commissioner of Internal
Revenue14 as follows:

It is true that, although contained in a minute resolution, our dismissal of the petition was a
disposition of the merits of the case. When we dismissed the petition, we effectively affirmed the CA
ruling being questioned. As a result, our ruling in that case has already become final. When a minute
resolution denies or dismisses a petition for failure to comply with formal and substantive
requirements, the challenged decision, together with its findings of fact and legal conclusions, are
deemed sustained. But what is its effect on other cases?

With respect to the same subject matter and the same issues concerning the same parties, it
constitutes res judicata. However, if other parties or another subject matter (even with the same
parties and issues) is involved, the minute resolution is not binding precedent. Thus, in CIR v. Baier-
Nickel, the Court noted that a previous case, CIR v. Baier-Nickel involving the same parties and the
same issues, was previously disposed of by the Court thru a minute resolution dated February 17,
2003 sustaining the ruling of the CA. Nonetheless, the Court ruled that the previous case "ha(d) no
bearing" on the latter case because the two cases involved different subject matters as they were
concerned with the taxable income of different taxable years.

Besides, there are substantial, not simply formal, distinctions between a minute resolution and a
decision. The constitutional requirement under the first paragraph of Section 14, Article VIII of the
Constitution that the facts and the law on which the judgment is based must be expressed clearly
and distinctly applies only to decisions, not to minute resolutions. A minute resolution is signed only
by the clerk of court by authority of the justices, unlike a decision. It does not require the certification
of the Chief Justice. Moreover, unlike decisions, minute resolutions are not published in the
Philippine Reports. Finally, the proviso of Section 4(3) of Article VIII speaks of a decision. Indeed, as
a rule, this Court lays down doctrines or principles of law which constitute binding precedent in a
decision duly signed by the members of the Court and certified by the Chief Justice. (Emphasis
supplied)

Even if we had affirmed the CTA in Mirant, the doctrine laid down in that Decision cannot bind this
Court in cases of a similar nature. There are differences in parties, taxes, taxable periods, and
treaties involved; more importantly, the disposition of that case was made only through a minute
resolution.

Tax Treaty vs. RMO No. 1-2000

Our Constitution provides for adherence to the general principles of international law as part of the
law of the land.15The time-honored international principle of pacta sunt servanda demands the
performance in good faith of treaty obligations on the part of the states that enter into the agreement.
Every treaty in force is binding upon the parties, and obligations under the treaty must be performed
by them in good faith.16 More importantly, treaties have the force and effect of law in this
jurisdiction.17

Tax treaties are entered into "to reconcile the national fiscal legislations of the contracting parties
and, in turn, help the taxpayer avoid simultaneous taxations in two different jurisdictions."18 CIR v.
S.C. Johnson and Son, Inc. further clarifies that "tax conventions are drafted with a view towards the
elimination of international juridical double taxation, which is defined as the imposition of comparable
taxes in two or more states on the same taxpayer in respect of the same subject matter and for
identical periods. The apparent rationale for doing away with double taxation is to encourage the free
flow of goods and services and the movement of capital, technology and persons between countries,
conditions deemed vital in creating robust and dynamic economies. Foreign investments will only
thrive in a fairly predictable and reasonable international investment climate and the protection
against double taxation is crucial in creating such a climate."19

Simply put, tax treaties are entered into to minimize, if not eliminate the harshness of international
juridical double taxation, which is why they are also known as double tax treaty or double tax
agreements.

"A state that has contracted valid international obligations is bound to make in its legislations those
modifications that may be necessary to ensure the fulfillment of the obligations undertaken."20 Thus,
laws and issuances must ensure that the reliefs granted under tax treaties are accorded to the
parties entitled thereto. The BIR must not impose additional requirements that would negate the
availment of the reliefs provided for under international agreements. More so, when the RP-
Germany Tax Treaty does not provide for any pre-requisite for the availment of the benefits under
said agreement.
Likewise, it must be stressed that there is nothing in RMO No. 1-2000 which would indicate a
deprivation of entitlement to a tax treaty relief for failure to comply with the 15-day period. We
recognize the clear intention of the BIR in implementing RMO No. 1-2000, but the CTA’s outright
denial of a tax treaty relief for failure to strictly comply with the prescribed period is not in harmony
with the objectives of the contracting state to ensure that the benefits granted under tax treaties are
enjoyed by duly entitled persons or corporations.

Bearing in mind the rationale of tax treaties, the period of application for the availment of tax treaty
relief as required by RMO No. 1-2000 should not operate to divest entitlement to the relief as it
would constitute a violation of the duty required by good faith in complying with a tax treaty. The
denial of the availment of tax relief for the failure of a taxpayer to apply within the prescribed period
under the administrative issuance would impair the value of the tax treaty. At most, the application
for a tax treaty relief from the BIR should merely operate to confirm the entitlement of the taxpayer to
the relief.

The obligation to comply with a tax treaty must take precedence over the objective of RMO No. 1-
2000.  Logically, noncompliance with tax treaties has negative implications on international relations,
1âwphi1

and unduly discourages foreign investors. While the consequences sought to be prevented by RMO
No. 1-2000 involve an administrative procedure, these may be remedied through other system
management processes, e.g., the imposition of a fine or penalty. But we cannot totally deprive those
who are entitled to the benefit of a treaty for failure to strictly comply with an administrative issuance
requiring prior application for tax treaty relief.

Prior Application vs. Claim for Refund

Again, RMO No. 1-2000 was implemented to obviate any erroneous interpretation and/or application
of the treaty provisions. The objective of the BIR is to forestall assessments against corporations
who erroneously availed themselves of the benefits of the tax treaty but are not legally entitled
thereto, as well as to save such investors from the tedious process of claims for a refund due to an
inaccurate application of the tax treaty provisions. However, as earlier discussed, noncompliance
with the 15-day period for prior application should not operate to automatically divest entitlement to
the tax treaty relief especially in claims for refund.

The underlying principle of prior application with the BIR becomes moot in refund cases, such as the
present case, where the very basis of the claim is erroneous or there is excessive payment arising
from non-availment of a tax treaty relief at the first instance. In this case, petitioner should not be
faulted for not complying with RMO No. 1-2000 prior to the transaction. It could not have applied for
a tax treaty relief within the period prescribed, or 15 days prior to the payment of its BPRT, precisely
because it erroneously paid the BPRT not on the basis of the preferential tax rate under

the RP-Germany Tax Treaty, but on the regular rate as prescribed by the NIRC. Hence, the prior
application requirement becomes illogical. Therefore, the fact that petitioner invoked the provisions
of the RP-Germany Tax Treaty when it requested for a confirmation from the ITAD before filing an
administrative claim for a refund should be deemed substantial compliance with RMO No. 1-2000.

Corollary thereto, Section 22921 of the NIRC provides the taxpayer a remedy for tax recovery when
there has been an erroneous payment of tax.  The outright denial of petitioner’s claim for a refund,
1âwphi1

on the sole ground of failure to apply for a tax treaty relief prior to the payment of the BPRT, would
defeat the purpose of Section 229.

Petitioner is entitled to a refund

It is significant to emphasize that petitioner applied – though belatedly – for a tax treaty relief, in
substantial compliance with RMO No. 1-2000. A ruling by the BIR would have confirmed whether
petitioner was entitled to the lower rate of 10% BPRT pursuant to the RP-Germany Tax Treaty.

Nevertheless, even without the BIR ruling, the CTA Second Division found as follows:

Based on the evidence presented, both documentary and testimonial, petitioner was able to
establish the following facts:

a. That petitioner is a branch office in the Philippines of Deutsche Bank AG, a corporation
organized and existing under the laws of the Federal Republic of Germany;

b. That on October 21, 2003, it filed its Monthly Remittance Return of Final Income Taxes
Withheld under BIR Form No. 1601-F and remitted the amount of ₱67,688,553.51 as branch
profits remittance tax with the BIR; and

c. That on October 29, 2003, the Bangko Sentral ng Pilipinas having issued a clearance,
petitioner remitted to Frankfurt Head Office the amount of EUR5,174,847.38 (or
₱330,175,961.88 at 63.804 Peso/Euro) representing its 2002 profits remittance.22

The amount of PHP 67,688,553.51 paid by petitioner represented the 15% BPRT on its RBU net
income, due for remittance to DB Germany amounting to PHP 451,257,023.29 for 2002 and prior
taxable years.23

Likewise, both the administrative and the judicial actions were filed within the two-year prescriptive
period pursuant to Section 229 of the NIRC.24

Clearly, there is no reason to deprive petitioner of the benefit of a preferential tax rate of 10% BPRT
in accordance with the RP-Germany Tax Treaty.

Petitioner is liable to pay only the amount of PHP 45,125,702.34 on its RBU net income amounting
to PHP 451,257,023.29 for 2002 and prior taxable years, applying the 10% BPRT. Thus, it is proper
to grant petitioner a refund ofthe difference between the PHP 67,688,553.51 (15% BPRT) and PHP
45,125,702.34 (10% BPRT) or a total of PHP 22,562,851.17.

WHEREFORE, premises considered, the instant Petition is GRANTED. Accordingly, the Court of
Tax Appeals En Banc Decision dated 29 May 2009 and Resolution dated 1 July 2009 are
REVERSED and SET ASIDE. A new one is hereby entered ordering respondent Commissioner of
Internal Revenue to refund or issue a tax credit certificate in favor of petitioner Deutsche Bank AG
Manila Branch the amount of TWENTY TWO MILLION FIVE HUNDRED SIXTY TWO THOUSAND
EIGHT HUNDRED FIFTY ONE PESOS AND SEVENTEEN CENTAVOS (PHP 22,562,851.17),
Philippine currency, representing the erroneously paid BPRT for 2002 and prior taxable years.

SO ORDERED.

G.R. No. 169507

AIR CANADA, Petitioner, 
vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.
DECISION

LEONEN, J.:

An offline international air carrier selling passage tickets in the Philippines, through a general sales
agent, is a resident foreign corporation doing business in the Philippines. As such, it is taxable under
Section 28(A)(l), and not Section 28(A)(3) of the 1997 National Internal Revenue Code, subject to
any applicable tax treaty to which the Philippines is a signatory. Pursuant to Article 8 of the Republic
of the Philippines-Canada Tax Treaty, Air Canada may only be imposed a maximum tax of 1 ½% of
its gross revenues earned from the sale of its tickets in the Philippines.

This is a Petition for Review  appealing the August 26, 2005 Decision  of the Court of Tax Appeals
1 2

En Banc, which in turn affirmed the December 22, 2004 Decision  and April 8, 2005 Resolution  of
3 4

the Court of Tax Appeals First Division denying Air Canada’s claim for refund.

Air Canada is a "foreign corporation organized and existing under the laws of Canada[.]"  On April 5

24, 2000, it was granted an authority to operate as an offline carrier by the Civil Aeronautics Board,
subject to certain conditions, which authority would expire on April 24, 2005.  "As an off-line carrier,
6

[Air Canada] does not have flights originating from or coming to the Philippines [and does not]
operate any airplane [in] the Philippines[.]"
7

On July 1, 1999, Air Canada engaged the services of Aerotel Ltd., Corp. (Aerotel) as its general
sales agent in the Philippines.  Aerotel "sells [Air Canada’s] passage documents in the Philippines."
8 9

For the period ranging from the third quarter of 2000 to the second quarter of 2002, Air Canada,
through Aerotel, filed quarterly and annual income tax returns and paid the income tax on Gross
Philippine Billings in the total amount of ₱5,185,676.77,  detailed as follows:
10

1âwphi1

Applicable Quarter[/]Year Date Filed/Paid Amount of Tax

3rd Qtr 2000 November 29, 2000 P 395,165.00
Annual ITR 2000 April 16, 2001 381,893.59
1st Qtr 2001 May 30, 2001 522,465.39
2nd Qtr 2001 August 29, 2001 1,033,423.34
3rd Qtr 2001 November 29, 2001 765,021.28
Annual ITR 2001 April 15, 2002 328,193.93
1st Qtr 2002 May 30, 2002 594,850.13
2nd Qtr 2002 August 29, 2002 1,164,664.11
11
TOTAL   P 5,185,676.77

On November 28, 2002, Air Canada filed a written claim for refund of alleged erroneously paid
income taxes amounting to ₱5,185,676.77 before the Bureau of Internal Revenue,  Revenue District
12

Office No. 47-East Makati. It found basis from the revised definition  of Gross Philippine Billings
13 14

under Section 28(A)(3)(a) of the 1997 National Internal Revenue Code:

SEC. 28. Rates of Income Tax on Foreign Corporations. -

 (A) Tax on Resident Foreign Corporations. -

....

(3) International Carrier. - An international carrier doing business in the Philippines

shall pay a tax of two and onehalf percent (2 1/2%) on its ‘Gross Philippine Billings’
as defined hereunder:

(a) International Air Carrier. - ‘Gross Philippine Billings’ refers to the amount of gross
revenue derived from carriage of persons, excess baggage, cargo and
mail originating from the Philippines in a continuous and uninterrupted
flight, irrespective of the place of sale or issue and the place of payment of the
ticket or passage document: Provided, That tickets revalidated, exchanged and/or
indorsed to another international airline form part of the Gross Philippine Billings if
the passenger boards a plane in a port or point in the Philippines: Provided, further,
That for a flight which originates from the Philippines, but transshipment of
passenger takes place at any port outside the Philippines on another airline, only the
aliquot portion of the cost of the ticket corresponding to the leg flown from the
Philippines to the point of transshipment shall form part of Gross Philippine Billings.
(Emphasis supplied)

To prevent the running of the prescriptive period, Air Canada filed a Petition for Review before the
Court of Tax Appeals on November 29, 2002.  The case was docketed as C.T.A. Case No. 6572.
15 16

On December 22, 2004, the Court of Tax Appeals First Division rendered its Decision denying the
Petition for Review and, hence, the claim for refund.  It found that Air Canada was engaged in
17

business in the Philippines through a local agent that sells airline tickets on its behalf. As such, it
should be taxed as a resident foreign corporation at the regular rate of 32%.  Further, according to
18

the Court of Tax Appeals First Division, Air Canada was deemed to have established a "permanent
establishment"  in the Philippines under Article V(2)(i) of the Republic of the Philippines-Canada Tax
19

Treaty  by the appointment of the local sales agent, "in which [the] petitioner uses its premises as an
20

outlet where sales of [airline] tickets are made[.]" 21

Air Canada seasonably filed a Motion for Reconsideration, but the Motion was denied in the Court of
Tax Appeals First Division’s Resolution dated April 8, 2005 for lack of merit.  The First Division held
22

that while Air Canada was not liable for tax on its Gross Philippine Billings under Section 28(A)(3), it
was nevertheless liable to pay the 32% corporate income tax on income derived from the sale of
airline tickets within the Philippines pursuant to Section 28(A)(1).
23

On May 9, 2005, Air Canada appealed to the Court of Tax Appeals En Banc.  The appeal was
24

docketed as CTA EB No. 86. 25

In the Decision dated August 26, 2005, the Court of Tax Appeals En Banc affirmed the findings of
the First Division.  The En Banc ruled that Air Canada is subject to tax as a resident foreign
26

corporation doing business in the Philippines since it sold airline tickets in the Philippines.  The
27

Court of Tax Appeals En Banc disposed thus:

WHEREFORE, premises considered, the instant petition is hereby DENIED DUE COURSE, and
accordingly, DISMISSED for lack of merit. 28

Hence, this Petition for Review  was filed.

29
The issues for our consideration are:

First, whether petitioner Air Canada, as an offline international carrier selling passage documents
through a general sales agent in the Philippines, is a resident foreign corporation within the meaning
of Section 28(A)(1) of the 1997 National Internal Revenue Code;

Second, whether petitioner Air Canada is subject to the 2½% tax on Gross Philippine Billings
pursuant to Section 28(A)(3). If not, whether an offline international carrier selling passage
documents through a general sales agent can be subject to the regular corporate income tax of
32%  on taxable income pursuant to Section 28(A)(1);
30

Third, whether the Republic of the Philippines-Canada Tax Treaty applies, specifically:

a. Whether the Republic of the Philippines-Canada Tax Treaty is enforceable;

b. Whether the appointment of a local general sales agent in the Philippines falls under the
definition of "permanent establishment" under Article V(2)(i) of the Republic of the
Philippines-Canada Tax Treaty; and

Lastly, whether petitioner Air Canada is entitled to the refund of ₱5,185,676.77 pertaining allegedly
to erroneously paid tax on Gross Philippine Billings from the third quarter of 2000 to the second
quarter of 2002.

Petitioner claims that the general provision imposing the regular corporate income tax on resident
foreign corporations provided under Section 28(A)(1) of the 1997 National Internal Revenue Code
does not apply to "international carriers,"  which are especially classified and taxed under Section
31

28(A)(3).  It adds that the fact that it is no longer subject to Gross Philippine Billings tax as ruled in
32

the assailed Court of Tax Appeals Decision "does not render it ipso facto subject to 32% income tax
on taxable income as a resident foreign corporation."  Petitioner argues that to impose the 32%
33

regular corporate income tax on its income would violate the Philippine government’s covenant
under Article VIII of the Republic of the Philippines-Canada Tax Treaty not to impose a tax higher
than 1½% of the carrier’s gross revenue derived from sources within the Philippines.  It would also
34

allegedly result in "inequitable tax treatment of on-line and off-line international air carriers[.]"
35

Also, petitioner states that the income it derived from the sale of airline tickets in the Philippines was
income from services and not income from sales of personal property.  Petitioner cites the
36

deliberations of the Bicameral Conference Committee on House Bill No. 9077 (which eventually
became the 1997 National Internal Revenue Code), particularly Senator Juan Ponce Enrile’s
statement,  to reveal the "legislative intent to treat the revenue derived from air carriage as income
37

from services, and that the carriage of passenger or cargo as the activity that generates the
income."  Accordingly, applying the principle on the situs of taxation in taxation of services, petitioner
38

claims that its income derived "from services rendered outside the Philippines [was] not subject to
Philippine income taxation." 39

Petitioner further contends that by the appointment of Aerotel as its general sales agent, petitioner
cannot be considered to have a "permanent establishment"  in the Philippines pursuant to Article
40

V(6) of the Republic of the Philippines-Canada Tax Treaty.  It points out that Aerotel is an
41

"independent general sales agent that acts as such for . . . other international airline companies in
the ordinary course of its business."  Aerotel sells passage tickets on behalf of petitioner and
42

receives a commission for its services.  Petitioner states that even the Bureau of Internal Revenue—
43

through VAT Ruling No. 003-04 dated February 14, 2004—has conceded that an offline international
air carrier, having no flight operations to and from the Philippines, is not deemed engaged in
business in the Philippines by merely appointing a general sales agent.  Finally, petitioner maintains
44

that its "claim for refund of erroneously paid Gross Philippine Billings cannot be denied on the
ground that [it] is subject to income tax under Section 28 (A) (1)"  since it has not been assessed at
45

all by the Bureau of Internal Revenue for any income tax liability. 46

On the other hand, respondent maintains that petitioner is subject to the 32% corporate income tax
as a resident foreign corporation doing business in the Philippines. Petitioner’s total payment of
₱5,185,676.77 allegedly shows that petitioner was earning a sizable income from the sale of its
plane tickets within the Philippines during the relevant period.  Respondent further points out that
47

this court in Commissioner of Internal Revenue v. American Airlines, Inc.,  which in turn cited the
48

cases involving the British Overseas Airways Corporation and Air India, had already settled that
"foreign airline companies which sold tickets in the Philippines through their local agents . . . [are]
considered resident foreign corporations engaged in trade or business in the country."  It also cites
49

Revenue Regulations No. 6-78 dated April 25, 1978, which defined the phrase "doing business in
the Philippines" as including "regular sale of tickets in the Philippines by offline international airlines
either by themselves or through their agents." 50

Respondent further contends that petitioner is not entitled to its claim for refund because the amount
of ₱5,185,676.77 it paid as tax from the third quarter of 2000 to the second quarter of 2001 was still
short of the 32% income tax due for the period.  Petitioner cannot allegedly claim good faith in its
51

failure to pay the right amount of tax since the National Internal Revenue Code became operative on
January 1, 1998 and by 2000, petitioner should have already been aware of the implications of
Section 28(A)(3) and the decided cases of this court’s ruling on the taxability of offline international
carriers selling passage tickets in the Philippines. 52

At the outset, we affirm the Court of Tax Appeals’ ruling that petitioner, as an offline international
carrier with no landing rights in the Philippines, is not liable to tax on Gross Philippine Billings under
Section 28(A)(3) of the 1997 National Internal Revenue Code:

SEC. 28. Rates of Income Tax on Foreign Corporations. –

(A) Tax on Resident Foreign Corporations. -

....

(3) International Carrier. - An international carrier doing business in the Philippines shall pay a tax of
two and one-half percent (2 1/2%) on its ‘Gross Philippine Billings’ as defined hereunder:

(a) International Air Carrier. - 'Gross Philippine Billings' refers to the amount of gross
revenue derived from carriage of persons, excess baggage, cargo and mail
originating from the Philippines in a continuous and uninterrupted flight, irrespective
of the place of sale or issue and the place of payment of the ticket or passage
document: Provided, That tickets revalidated, exchanged and/or indorsed to another
international airline form part of the Gross Philippine Billings if the passenger boards
a plane in a port or point in the Philippines: Provided, further, That for a flight which
originates from the Philippines, but transshipment of passenger takes place at any
port outside the Philippines on another airline, only the aliquot portion of the cost of
the ticket corresponding to the leg flown from the Philippines to the point of
transshipment shall form part of Gross Philippine Billings. (Emphasis supplied)
Under the foregoing provision, the tax attaches only when the carriage of persons, excess baggage,
cargo, and mail originated from the Philippines in a continuous and uninterrupted flight, regardless of
where the passage documents were sold.

Not having flights to and from the Philippines, petitioner is clearly not liable for the Gross Philippine
Billings tax.

II

Petitioner, an offline carrier, is a resident foreign corporation for income tax purposes. Petitioner falls
within the definition of resident foreign corporation under Section 28(A)(1) of the 1997 National
Internal Revenue Code, thus, it may be subject to 32%  tax on its taxable income:
53

SEC. 28. Rates of Income Tax on Foreign Corporations. -

(A) Tax on Resident Foreign Corporations. -

(1) In General. - Except as otherwise provided in this Code, a corporation organized, authorized,
or existing under the laws of any foreign country, engaged in trade or business within the
Philippines, shall be subject to an income tax equivalent to thirty-five percent (35%) of the
taxable income derived in the preceding taxable year from all sources within the Philippines:
Provided, That effective January 1, 1998, the rate of income tax shall be thirty-four percent (34%);
effective January 1, 1999, the rate shall be thirty-three percent (33%); and effective January 1, 2000
and thereafter, the rate shall be thirty-two percent (32% ). (Emphasis supplied)
54

The definition of "resident foreign corporation" has not substantially changed throughout the
amendments of the National Internal Revenue Code. All versions refer to "a foreign corporation
engaged in trade or business within the Philippines."

Commonwealth Act No. 466, known as the National Internal Revenue Code and approved on June
15, 1939, defined "resident foreign corporation" as applying to "a foreign corporation engaged in
trade or business within the Philippines or having an office or place of business therein." 55

Section 24(b)(2) of the National Internal Revenue Code, as amended by Republic Act No. 6110,
approved on August 4, 1969, reads:

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 life 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)
56

Presidential Decree No. 1158-A took effect on June 3, 1977 amending certain sections of the 1939
National Internal Revenue Code. Section 24(b)(2) on foreign resident corporations was amended,
but it still provides that "[a] corporation organized, authorized, or existing under the laws of any
foreign country, 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[.]"
57
As early as 1987, this court in Commissioner of Internal Revenue v. British Overseas Airways
Corporation declared British Overseas Airways Corporation, an international air carrier with no
58

landing rights in the Philippines, as a resident foreign corporation engaged in business in the
Philippines through its local sales agent that sold and issued tickets for the airline company.  This59

court discussed that:

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. "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.["]

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. 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.  (Emphasis supplied, citations omitted)
60

Republic Act No. 7042 or the Foreign Investments Act of 1991 also provides guidance with its
definition of "doing business" with regard to foreign corporations. Section 3(d) of the law enumerates
the activities that constitute doing business:

d. the phrase "doing business" shall include soliciting orders, service contracts, opening offices,
whether called "liaison" offices or branches; appointing representatives or distributors domiciled in
the Philippines or who in any calendar year stay in the country for a period or periods totalling one
hundred eighty (180) days or more; participating in the management, supervision or control of any
domestic business, firm, entity or corporation in the Philippines; and any other act or acts that
imply a continuity of commercial dealings or arrangements, and contemplate 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 of the purpose and object of the
business organization: Provided, however, That the phrase "doing business" shall not be deemed
to include mere investment as a shareholder by a foreign entity in domestic corporations duly
registered to do business, and/or the exercise of rights as such investor; nor having a nominee
director or officer to represent its interests in such corporation; nor appointing a representative or
distributor domiciled in the Philippines which transacts business in its own name and for its own
account[.]  (Emphasis supplied)
61

While Section 3(d) above states that "appointing a representative or distributor domiciled in the
Philippines which transacts business in its own name and for its own account" is not considered as
"doing business," the Implementing Rules and Regulations of Republic Act No. 7042 clarifies that
"doing business" includes "appointing representatives or distributors, operating under full control
of the foreign corporation, domiciled in the Philippines or who in any calendar year stay in the
country for a period or periods totaling one hundred eighty (180) days or more[.]" 62

An offline carrier is "any foreign air carrier not certificated by the [Civil Aeronautics] Board, but who
maintains office or who has designated or appointed agents or employees in the Philippines, who
sells or offers for sale any air transportation in behalf of said foreign air carrier and/or others, or
negotiate for, or holds itself out by solicitation, advertisement, or otherwise sells, provides, furnishes,
contracts, or arranges for such transportation." 63

"Anyone desiring to engage in the activities of an off-line carrier [must] apply to the [Civil
Aeronautics] Board for such authority."  Each offline carrier must file with the Civil Aeronautics Board
64

a monthly report containing information on the tickets sold, such as the origin and destination of the
passengers, carriers involved, and commissions received. 65

Petitioner is undoubtedly "doing business" or "engaged in trade or business" in the Philippines.

Aerotel performs acts or works or exercises functions that are incidental and beneficial to the
purpose of petitioner’s business. The activities of Aerotel bring direct receipts or profits to
petitioner.  There is nothing on record to show that Aerotel solicited orders alone and for its own
66

account and without interference from, let alone direction of, petitioner. On the contrary, Aerotel
cannot "enter into any contract on behalf of [petitioner Air Canada] without the express written
consent of [the latter,]"  and it must perform its functions according to the standards required by
67

petitioner.  Through Aerotel, petitioner is able to engage in an economic activity in the Philippines.
68

Further, petitioner was issued by the Civil Aeronautics Board an authority to operate as an offline
carrier in the Philippines for a period of five years, or from April 24, 2000 until April 24, 2005. 69

Petitioner is, therefore, a resident foreign corporation that is taxable on its income derived from
sources within the Philippines. Petitioner’s income from sale of airline tickets, through Aerotel, is
income realized from the pursuit of its business activities in the Philippines.

III

However, the application of the regular 32% tax rate under Section 28(A)(1) of the 1997 National
Internal Revenue Code must consider the existence of an effective tax treaty between the
Philippines and the home country of the foreign air carrier.

In the earlier case of South African Airways v. Commissioner of Internal Revenue,  this court held
70

that Section 28(A)(3)(a) does not categorically exempt all international air carriers from the coverage
of Section 28(A)(1). Thus, if Section 28(A)(3)(a) is applicable to a taxpayer, then the general rule
under Section 28(A)(1) does not apply. If, however, Section 28(A)(3)(a) does not apply, an
international air carrier would be liable for the tax under Section 28(A)(1). 71

This court in South African Airways declared that the correct interpretation of these provisions is
that: "international air carrier[s] maintain[ing] flights to and from the Philippines . . . shall be taxed at
the rate of 2½% of its Gross Philippine Billings[;] while international air carriers that do not have
flights to and from the Philippines but nonetheless earn income from other activities in the country
[like sale of airline tickets] will be taxed at the rate of 32% of such [taxable] income." 72
In this case, there is a tax treaty that must be taken into consideration to determine the proper tax
rate.

A tax treaty is an agreement entered into between sovereign states "for purposes of eliminating
double taxation on income and capital, preventing fiscal evasion, promoting mutual trade and
investment, and according fair and equitable tax treatment to foreign residents or
nationals."  Commissioner of Internal Revenue v. S.C. Johnson and Son, Inc.  explained the
73 74

purpose of a tax treaty:

The purpose of these international agreements is to reconcile the national fiscal legislations of the
contracting parties in order to help the taxpayer avoid simultaneous taxation in two different
jurisdictions. More precisely, the tax conventions are drafted with a view towards the elimination
of international juridical double taxation, which is defined as the imposition of comparable taxes in
two or more states on the same taxpayer in respect of the same subject matter and for identical
periods.

The apparent rationale for doing away with double taxation is to encourage the free flow of goods
and services and the movement of capital, technology and persons between countries, conditions
deemed vital in creating robust and dynamic economies. Foreign investments will only thrive in a
fairly predictable and reasonable international investment climate and the protection against double
taxation is crucial in creating such a climate.  (Emphasis in the original, citations omitted)
75

Observance of any treaty obligation binding upon the government of the Philippines is anchored on
the constitutional provision that the Philippines "adopts the generally accepted principles of
international law as part of the law of the land[.]"  Pacta sunt servanda is a fundamental international
76

law principle that requires agreeing parties to comply with their treaty obligations in good faith.
77

Hence, the application of the provisions of the National Internal Revenue Code must be subject to
the provisions of tax treaties entered into by the Philippines with foreign countries.

In Deutsche Bank AG Manila Branch v. Commissioner of Internal Revenue,  this court stressed the
78

binding effects of tax treaties. It dealt with the issue of "whether the failure to strictly comply with
[Revenue Memorandum Order] RMO No. 1-2000  will deprive persons or corporations of the benefit
79

of a tax treaty."  Upholding the tax treaty over the administrative issuance, this court reasoned thus:
80

Our Constitution provides for adherence to the general principles of international law as part of the
law of the land. The time-honored international principle of pacta sunt servanda demands the
performance in good faith of treaty obligations on the part of the states that enter into the
agreement. Every treaty in force is binding upon the parties, and obligations under the treaty must
be performed by them in good faith. More importantly, treaties have the force and effect of law in
this jurisdiction.

Tax treaties are entered into "to reconcile the national fiscal legislations of the contracting parties
and, in turn, help the taxpayer avoid simultaneous taxations in two different jurisdictions." CIR v.
S.C. Johnson and Son, Inc. further clarifies that "tax conventions are drafted with a view towards the
elimination of international juridical double taxation, which is defined as the imposition of comparable
taxes in two or more states on the same taxpayer in respect of the same subject matter and for
identical periods. The apparent rationale for doing away with double taxation is to encourage the free
flow of goods and services and the movement of capital, technology and persons between countries,
conditions deemed vital in creating robust and dynamic economies. Foreign investments will only
thrive in a fairly predictable and reasonable international investment climate and the protection
against double taxation is crucial in creating such a climate." Simply put, tax treaties are entered into
to minimize, if not eliminate the harshness of international juridical double taxation, which is why they
are also known as double tax treaty or double tax agreements.

"A state that has contracted valid international obligations is bound to make in its legislations those
modifications that may be necessary to ensure the fulfillment of the obligations undertaken." Thus,
laws and issuances must ensure that the reliefs granted under tax treaties are accorded to the
parties entitled thereto. The BIR must not impose additional requirements that would negate the
availment of the reliefs provided for under international agreements. More so, when the RPGermany
Tax Treaty does not provide for any pre-requisite for the availment of the benefits under said
agreement.

....

Bearing in mind the rationale of tax treaties, the period of application for the availment of tax treaty
relief as required by RMO No. 1-2000 should not operate to divest entitlement to the relief as it
would constitute a violation of the duty required by good faith in complying with a tax treaty. The
denial of the availment of tax relief for the failure of a taxpayer to apply within the prescribed period
under the administrative issuance would impair the value of the tax treaty. At most, the application
for a tax treaty relief from the BIR should merely operate to confirm the entitlement of the taxpayer to
the relief.

The obligation to comply with a tax treaty must take precedence over the objective of RMO No. 1-
2000. Logically, noncompliance with tax treaties has negative implications on international relations,
and unduly discourages foreign investors. While the consequences sought to be prevented by RMO
No. 1-2000 involve an administrative procedure, these may be remedied through other system
management processes, e.g., the imposition of a fine or penalty. But we cannot totally deprive those
who are entitled to the benefit of a treaty for failure to strictly comply with an administrative issuance
requiring prior application for tax treaty relief.  (Emphasis supplied, citations omitted)
81

On March 11, 1976, the representatives  for the government of the Republic of the Philippines and
82

for the government of Canada signed the Convention between the Philippines and Canada for the
Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on
Income (Republic of the Philippines-Canada Tax Treaty). This treaty entered into force on December
21, 1977.

Article V  of the Republic of the Philippines-Canada Tax Treaty defines "permanent establishment"
83

as a "fixed place of business in which the business of the enterprise is wholly or partly carried on." 84

Even though there is no fixed place of business, an enterprise of a Contracting State is deemed to
have a permanent establishment in the other Contracting State if under certain conditions there is a
person acting for it.

Specifically, Article V(4) of the Republic of the Philippines-Canada Tax Treaty states that "[a] person
acting in a Contracting State on behalf of an enterprise of the other Contracting State (other than an
agent of independent status to whom paragraph 6 applies) shall be deemed to be a permanent
establishment in the first-mentioned State if . . . he has and habitually exercises in that State an
authority to conclude contracts on behalf of the enterprise, unless his activities are limited to the
purchase of goods or merchandise for that enterprise[.]" The provision seems to refer to one who
would be considered an agent under Article 1868  of the Civil Code of the Philippines.
85

On the other hand, Article V(6) provides that "[a]n enterprise of a Contracting State shall not be
deemed to have a permanent establishment in the other Contracting State merely because it carries
on business in that other State through a broker, general commission agent or any other agent of
an independent status, where such persons are acting in the ordinary course of their business."

Considering Article XV  of the same Treaty, which covers dependent personal services, the term
86

"dependent" would imply a relationship between the principal and the agent that is akin to an
employer-employee relationship.

Thus, an agent may be considered to be dependent on the principal where the latter exercises
comprehensive control and detailed instructions over the means and results of the activities of the
agent. 87

Section 3 of Republic Act No. 776, as amended, also known as The Civil Aeronautics Act of the
Philippines, defines a general sales agent as "a person, not a bonafide employee of an air carrier,
who pursuant to an authority from an airline, by itself or through an agent, sells or offers for sale any
air transportation, or negotiates for, or holds himself out by solicitation, advertisement or otherwise
as one who sells, provides, furnishes, contracts or arranges for, such air transportation."  General
88

sales agents and their property, property rights, equipment, facilities, and franchise are subject to the
regulation and control of the Civil Aeronautics Board.  A permit or authorization issued by the Civil
89

Aeronautics Board is required before a general sales agent may engage in such an activity. 90

Through the appointment of Aerotel as its local sales agent, petitioner is deemed to have created a
"permanent establishment" in the Philippines as defined under the Republic of the Philippines-
Canada Tax Treaty.

Petitioner appointed Aerotel as its passenger general sales agent to perform the sale of
transportation on petitioner and handle reservations, appointment, and supervision of International
Air Transport Associationapproved and petitioner-approved sales agents, including the following
services:

ARTICLE 7
GSA SERVICES

The GSA [Aerotel Ltd., Corp.] shall perform on behalf of AC [Air Canada] the following services:

a) Be the fiduciary of AC and in such capacity act solely and entirely for the benefit of AC in every
matter relating to this Agreement;

....

c) Promotion of passenger transportation on AC;

....

e) Without the need for endorsement by AC, arrange for the reissuance, in the Territory of the GSA
[Philippines], of traffic documents issued by AC outside the said territory of the GSA [Philippines], as
required by the passenger(s);

....

h) Distribution among passenger sales agents and display of timetables, fare sheets, tariffs and
publicity material provided by AC in accordance with the reasonable requirements of AC;
....

j) Distribution of official press releases provided by AC to media and reference of any press or public
relations inquiries to AC;

....

o) Submission for AC’s approval, of an annual written sales plan on or before a date to be
determined by AC and in a form acceptable to AC;

....

q) Submission of proposals for AC’s approval of passenger sales agent incentive plans at a
reasonable time in advance of proposed implementation.

r) Provision of assistance on request, in its relations with Governmental and other authorities, offices
and agencies in the Territory [Philippines].

....

u) Follow AC guidelines for the handling of baggage claims and customer complaints and, unless
otherwise stated in the guidelines, refer all such claims and complaints to AC. 91

Under the terms of the Passenger General Sales Agency Agreement, Aerotel will "provide at its own
expense and acceptable to [petitioner Air Canada], adequate and suitable premises, qualified staff,
equipment, documentation, facilities and supervision and in consideration of the remuneration and
expenses payable[,] [will] defray all costs and expenses of and incidental to the Agency."  "[I]t is the
92

sole employer of its employees and . . . is responsible for [their] actions . . . or those of any
subcontractor."  In remuneration for its services, Aerotel would be paid by petitioner a commission
93

on sales of transportation plus override commission on flown revenues.  Aerotel would also be
94

reimbursed "for all authorized expenses supported by original supplier invoices." 95

Aerotel is required to keep "separate books and records of account, including supporting documents,
regarding all transactions at, through or in any way connected with [petitioner Air Canada]
business." 96

"If representing more than one carrier, [Aerotel must] represent all carriers in an unbiased
way."  Aerotel cannot "accept additional appointments as General Sales Agent of any other carrier
97

without the prior written consent of [petitioner Air Canada]."98

The Passenger General Sales Agency Agreement "may be terminated by either party without cause
upon [no] less than 60 days’ prior notice in writing[.]"  In case of breach of any provisions of the
99

Agreement, petitioner may require Aerotel "to cure the breach in 30 days failing which [petitioner Air
Canada] may terminate [the] Agreement[.]" 100

The following terms are indicative of Aerotel’s dependent status:

First, Aerotel must give petitioner written notice "within 7 days of the date [it] acquires or takes
control of another entity or merges with or is acquired or controlled by another person or
entity[.]"  Except with the written consent of petitioner, Aerotel must not acquire a substantial
101

interest in the ownership, management, or profits of a passenger sales agent affiliated with the
International Air Transport Association or a non-affiliated passenger sales agent nor shall an
affiliated passenger sales agent acquire a substantial interest in Aerotel as to influence its
commercial policy and/or management decisions.  Aerotel must also provide petitioner "with a
102

report on any interests held by [it], its owners, directors, officers, employees and their immediate
families in companies and other entities in the aviation industry or . . . industries related to
it[.]"  Petitioner may require that any interest be divested within a set period of time.
103 104

Second, in carrying out the services, Aerotel cannot enter into any contract on behalf of petitioner
without the express written consent of the latter;  it must act according to the standards required by
105

petitioner;  "follow the terms and provisions of the [petitioner Air Canada] GSA Manual [and all]
106

written instructions of [petitioner Air Canada;]"  and "[i]n the absence of an applicable provision in
107

the Manual or instructions, [Aerotel must] carry out its functions in accordance with [its own]
standard practices and procedures[.]" 108

Third, Aerotel must only "issue traffic documents approved by [petitioner Air Canada] for all
transportation over [its] services[.]"  All use of petitioner’s name, logo, and marks must be with the
109

written consent of petitioner and according to petitioner’s corporate standards and guidelines set out
in the Manual. 110

Fourth, all claims, liabilities, fines, and expenses arising from or in connection with the transportation
sold by Aerotel are for the account of petitioner, except in the case of negligence of Aerotel. 111

Aerotel is a dependent agent of petitioner pursuant to the terms of the Passenger General Sales
Agency Agreement executed between the parties. It has the authority or power to conclude contracts
or bind petitioner to contracts entered into in the Philippines. A third-party liability on contracts of
Aerotel is to petitioner as the principal, and not to Aerotel, and liability to such third party is
enforceable against petitioner. While Aerotel maintains a certain independence and its activities may
not be devoted wholly to petitioner, nonetheless, when representing petitioner pursuant to the
Agreement, it must carry out its functions solely for the benefit of petitioner and according to the
latter’s Manual and written instructions. Aerotel is required to submit its annual sales plan for
petitioner’s approval.

In essence, Aerotel extends to the Philippines the transportation business of petitioner. It is a conduit
or outlet through which petitioner’s airline tickets are sold. 112

Under Article VII (Business Profits) of the Republic of the Philippines-Canada Tax Treaty, the
"business profits" of an enterprise of a Contracting State is "taxable only in that State[,] unless the
enterprise carries on business in the other Contracting State through a permanent
establishment[.]"  Thus, income attributable to Aerotel or from business activities effected by
113

petitioner through Aerotel may be taxed in the Philippines. However, pursuant to the last
paragraph  of Article VII in relation to Article VIII  (Shipping and Air Transport) of the same Treaty,
114 115

the tax imposed on income derived from the operation of ships or aircraft in international traffic
should not exceed 1½% of gross revenues derived from Philippine sources.

IV

While petitioner is taxable as a resident foreign corporation under Section 28(A)(1) of the 1997
National Internal Revenue Code on its taxable income  from sale of airline tickets in the
116

Philippines, it could only be taxed at a maximum of 1½% of gross revenues, pursuant to Article VIII
of the Republic of the Philippines-Canada Tax Treaty that applies to petitioner as a "foreign
corporation organized and existing under the laws of Canada[.]" 117
Tax treaties form part of the law of the land,  and jurisprudence has applied the statutory
118

construction principle that specific laws prevail over general ones.119

The Republic of the Philippines-Canada Tax Treaty was ratified on December 21, 1977 and became
valid and effective on that date. On the other hand, the applicable provisions  relating to the
120

taxability of resident foreign corporations and the rate of such tax found in the National Internal
Revenue Code became effective on January 1, 1998.  Ordinarily, the later provision governs over
121

the earlier one.  In this case, however, the provisions of the Republic of the Philippines-Canada Tax
122

Treaty are more specific than the provisions found in the National Internal Revenue Code.

These rules of interpretation apply even though one of the sources is a treaty and not simply a
statute.

Article VII, Section 21 of the Constitution provides:

SECTION 21. No treaty or international agreement shall be valid and effective unless concurred in
by at least two-thirds of all the Members of the Senate.

This provision states the second of two ways through which international obligations become
binding. Article II, Section 2 of the Constitution deals with international obligations that are
incorporated, while Article VII, Section 21 deals with international obligations that become binding
through ratification.

"Valid and effective" means that treaty provisions that define rights and duties as well as definite
prestations have effects equivalent to a statute. Thus, these specific treaty provisions may amend
statutory provisions. Statutory provisions may also amend these types of treaty obligations.

We only deal here with bilateral treaty state obligations that are not international obligations erga
omnes. We are also not required to rule in this case on the effect of international customary norms
especially those with jus cogens character.

The second paragraph of Article VIII states that "profits from sources within a Contracting State
derived by an enterprise of the other Contracting State from the operation of ships or aircraft in
international traffic may be taxed in the first-mentioned State but the tax so charged shall not
exceed the lesser of a) one and one-half per cent of the gross revenues derived from sources in that
State; and b) the lowest rate of Philippine tax imposed on such profits derived by an enterprise of a
third State."

The Agreement between the government of the Republic of the Philippines and the government of
Canada on Air Transport, entered into on January 14, 1997, reiterates the effectivity of Article VIII of
the Republic of the Philippines-Canada Tax Treaty:

ARTICLE XVI
(Taxation)

The Contracting Parties shall act in accordance with the provisions of Article VIII of the Convention
between the Philippines and Canada for the Avoidance of Double Taxation and the Prevention of
Fiscal Evasion with Respect to Taxes on Income, signed at Manila on March 31, 1976 and entered
into force on December 21, 1977, and any amendments thereto, in respect of the operation of
aircraft in international traffic.
123
Petitioner’s income from sale of ticket for international carriage of passenger is income derived from
international operation of aircraft. The sale of tickets is closely related to the international operation
of aircraft that it is considered incidental thereto.

"[B]y reason of our bilateral negotiations with [Canada], we have agreed to have our right to tax
limited to a certain extent[.]"  Thus, we are bound to extend to a Canadian air carrier doing business
124

in the Philippines through a local sales agent the benefit of a lower tax equivalent to 1½% on
business profits derived from sale of international air transportation.

Finally, we reject petitioner’s contention that the Court of Tax Appeals erred in denying its claim for
refund of erroneously paid Gross Philippine Billings tax on the ground that it is subject to income tax
under Section 28(A)(1) of the National Internal Revenue Code because (a) it has not been assessed
at all by the Bureau of Internal Revenue for any income tax liability;  and (b) internal revenue taxes
125

cannot be the subject of set-off or compensation, citing Republic v. Mambulao Lumber Co., et

126

al.  and Francia v. Intermediate Appellate Court.

127 128

In SMI-ED Philippines Technology, Inc. v. Commissioner of Internal Revenue,  we have ruled that
129

"[i]n an action for the refund of taxes allegedly erroneously paid, the Court of Tax Appeals may
determine whether there are taxes that should have been paid in lieu of the taxes paid."  The130

determination of the proper category of tax that should have been paid is incidental and necessary to
resolve the issue of whether a refund should be granted.  Thus:
131

Petitioner argued that the Court of Tax Appeals had no jurisdiction to subject it to 6% capital gains
tax or other taxes at the first instance. The Court of Tax Appeals has no power to make an
assessment.

As earlier established, the Court of Tax Appeals has no assessment powers. In stating that
petitioner’s transactions are subject to capital gains tax, however, the Court of Tax Appeals was not
making an assessment. It was merely determining the proper category of tax that petitioner should
have paid, in view of its claim that it erroneously imposed upon itself and paid the 5% final tax
imposed upon PEZA-registered enterprises.

The determination of the proper category of tax that petitioner should have paid is an incidental
matter necessary for the resolution of the principal issue, which is whether petitioner was entitled to
a refund.

The issue of petitioner’s claim for tax refund is intertwined with the issue of the proper taxes that are
due from petitioner. A claim for tax refund carries the assumption that the tax returns filed were
correct. If the tax return filed was not proper, the correctness of the amount paid and, therefore, the
claim for refund become questionable. In that case, the court must determine if a taxpayer claiming
refund of erroneously paid taxes is more properly liable for taxes other than that paid.

In South African Airways v. Commissioner of Internal Revenue, South African Airways claimed for
refund of its erroneously paid 2½% taxes on its gross Philippine billings. This court did not
immediately grant South African’s claim for refund. This is because although this court found that
South African Airways was not subject to the 2½% tax on its gross Philippine billings, this court also
found that it was subject to 32% tax on its taxable income.
In this case, petitioner’s claim that it erroneously paid the 5% final tax is an admission that the
quarterly tax return it filed in 2000 was improper. Hence, to determine if petitioner was entitled to the
refund being claimed, the Court of Tax Appeals has the duty to determine if petitioner was indeed
not liable for the 5% final tax and, instead, liable for taxes other than the 5% final tax. As in South
African Airways, petitioner’s request for refund can neither be granted nor denied outright without
such determination.

If the taxpayer is found liable for taxes other than the erroneously paid 5% final tax, the amount of
the taxpayer’s liability should be computed and deducted from the refundable amount.

Any liability in excess of the refundable amount, however, may not be collected in a case involving
solely the issue of the taxpayer’s entitlement to refund. The question of tax deficiency is distinct and
unrelated to the question of petitioner’s entitlement to refund. Tax deficiencies should be subject to
assessment procedures and the rules of prescription. The court cannot be expected to perform the
BIR’s duties whenever it fails to do so either through neglect or oversight. Neither can court
processes be used as a tool to circumvent laws protecting the rights of taxpayers. 132

Hence, the Court of Tax Appeals properly denied petitioner’s claim for refund of allegedly
erroneously paid tax on its Gross Philippine Billings, on the ground that it was liable instead for the
regular 32% tax on its taxable income received from sources within the Philippines. Its determination
of petitioner’s liability for the 32% regular income tax was made merely for the purpose of
ascertaining petitioner’s entitlement to a tax refund and not for imposing any deficiency tax.

In this regard, the matter of set-off raised by petitioner is not an issue. Besides, the cases cited are
based on different circumstances. In both cited cases,  the taxpayer claimed that his (its) tax liability
133

was off-set by his (its) claim against the government.

Specifically, in Republic v. Mambulao Lumber Co., et al., Mambulao Lumber contended that the
amounts it paid to the government as reforestation charges from 1947 to 1956, not having been
used in the reforestation of the area covered by its license, may be set off or applied to the payment
of forest charges still due and owing from it. Rejecting Mambulao’s claim of legal compensation, this
134

court ruled:

[A]ppellant and appellee are not mutually creditors and debtors of each other. Consequently, the law
on compensation is inapplicable. On this point, the trial court correctly observed:

Under Article 1278, NCC, compensation should take place when two persons in their own right are
creditors and debtors of each other. With respect to the forest charges which the defendant
Mambulao Lumber Company has paid to the government, they are in the coffers of the government
as taxes collected, and the government does not owe anything to defendant Mambulao Lumber
Company. So, it is crystal clear that the Republic of the Philippines and the Mambulao Lumber
Company are not creditors and debtors of each other, because compensation refers to mutual debts.
* * *.

And the weight of authority is to the effect that internal revenue taxes, such as the forest charges in
question, can not be the subject of set-off or compensation.

A claim for taxes is not such a debt, demand, contract or judgment as is allowed to be set-off under
the statutes of set-off, which are construed uniformly, in the light of public policy, to exclude the
remedy in an action or any indebtedness of the state or municipality to one who is liable to the state
or municipality for taxes. Neither are they a proper subject of recoupment since they do not arise out
of the contract or transaction sued on. * * *. (80 C.J.S. 73–74.)
The general rule, based on grounds of public policy is well-settled that no set-off is admissible
against demands for taxes levied for general or local governmental purposes. The reason on which
the general rule is based, is that taxes are not in the nature of contracts between the party and party
but grow out of a duty to, and are the positive acts of the government, to the making and enforcing of
which, the personal consent of individual taxpayers is not required. * * * If the taxpayer can properly
refuse to pay his tax when called upon by the Collector, because he has a claim against the
governmental body which is not included in the tax levy, it is plain that some legitimate and
necessary expenditure must be curtailed. If the taxpayer’s claim is disputed, the collection of the tax
must await and abide the result of a lawsuit, and meanwhile the financial affairs of the government
will be thrown into great confusion. (47 Am. Jur. 766–767.)  (Emphasis supplied)
135

In Francia, this court did not allow legal compensation since not all requisites of legal compensation
provided under Article 1279 were present.  In that case, a portion of Francia’s property in Pasay
136

was expropriated by the national government,  which did not immediately pay Francia. In the
137

meantime, he failed to pay the real property tax due on his remaining property to the local
government of Pasay, which later on would auction the property on account of such
delinquency.  He then moved to set aside the auction sale and argued, among others, that his real
138

property tax delinquency was extinguished by legal compensation on account of his unpaid claim
against the national government.  This court ruled against Francia:
139

There is no legal basis for the contention. By legal compensation, obligations of persons, who in
their own right are reciprocally debtors and creditors of each other, are extinguished (Art. 1278, Civil
Code). The circumstances of the case do not satisfy the requirements provided by Article 1279, to
wit:

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

x x x           x x x          x x x

(3) that the two debts be due.

x x x           x x x          x x x

This principal contention of the petitioner has no merit. We have consistently ruled that there can be
no off-setting of taxes against the claims that the taxpayer may have against the government. A
person cannot refuse to pay a tax on the ground that the government owes him an amount equal to
or greater than the tax being collected. The collection of a tax cannot await the results of a lawsuit
against the government.

....

There are other factors which compel us to rule against the petitioner. The tax was due to the city
government while the expropriation was effected by the national government. Moreover, the amount
of ₱4,116.00 paid by the national government for the 125 square meter portion of his lot was
deposited with the Philippine National Bank long before the sale at public auction of his remaining
property. Notice of the deposit dated September 28, 1977 was received by the petitioner on
September 30, 1977. The petitioner admitted in his testimony that he knew about the ₱4,116.00
deposited with the bank but he did not withdraw it. It would have been an easy matter to withdraw
₱2,400.00 from the deposit so that he could pay the tax obligation thus aborting the sale at public
auction.140
The ruling in Francia was applied to the subsequent cases of Caltex Philippines, Inc. v. Commission
on Audit  and Philex Mining Corporation v. Commissioner of Internal Revenue.  In Caltex, this court
141 142

reiterated:

[A] taxpayer may not offset taxes due from the claims that he may have against the government.
Taxes cannot be the subject of compensation because the government and taxpayer are not
mutually creditors and debtors of each other and a claim for taxes is not such a debt, demand,
contract or judgment as is allowed to be set-off.  (Citations omitted)
143

Philex Mining ruled that "[t]here is a material distinction between a tax and debt. Debts are due to
the Government in its corporate capacity, while taxes are due to the Government in its sovereign
capacity."  Rejecting Philex Mining’s assertion that the imposition of surcharge and interest was
144

unjustified because it had no obligation to pay the excise tax liabilities within the prescribed period
since, after all, it still had pending claims for VAT input credit/refund with the Bureau of Internal
Revenue, this court explained:

To be sure, we cannot allow Philex to refuse the payment of its tax liabilities on the ground that it has
a pending tax claim for refund or credit against the government which has not yet been granted. It
must be noted that a distinguishing feature of a tax is that it is compulsory rather than a matter of
bargain. Hence, a tax does not depend upon the consent of the taxpayer. If any tax payer can defer
the payment of taxes by raising the defense that it still has a pending claim for refund or credit, this
would adversely affect the government revenue system. A taxpayer cannot refuse to pay his taxes
when they fall due simply because he has a claim against the government or that the collection of
the tax is contingent on the result of the lawsuit it filed against the government. Moreover, Philex’s
theory that would automatically apply its VAT input credit/refund against its tax liabilities can easily
give rise to confusion and abuse, depriving the government of authority over the manner by which
taxpayers credit and offset their tax liabilities.  (Citations omitted)
145

In sum, the rulings in those cases were to the effect that the taxpayer cannot simply refuse to pay
tax on the ground that the tax liabilities were off-set against any alleged claim the taxpayer may have
against the government. Such would merely be in keeping with the basic policy on prompt collection
of taxes as the lifeblood of the government. 1âwphi1

Here, what is involved is a denial of a taxpayer’s refund claim on account of the Court of Tax
Appeals’ finding of its liability for another tax in lieu of the Gross Philippine Billings tax that was
allegedly erroneously paid.

Squarely applicable is South African Airways where this court rejected similar arguments on the
denial of claim for tax refund:

Commissioner of Internal Revenue v. Court of Tax Appeals, however, granted the offsetting of a tax
refund with a tax deficiency in this wise:

Further, it is also worth noting that the Court of Tax Appeals erred in denying petitioner’s
supplemental motion for reconsideration alleging bringing to said court’s attention the existence of
the deficiency income and business tax assessment against Citytrust. The fact of such deficiency
assessment is intimately related to and inextricably intertwined with the right of respondent bank to
claim for a tax refund for the same year. To award such refund despite the existence of that
deficiency assessment is an absurdity and a polarity in conceptual effects. Herein private respondent
cannot be entitled to refund and at the same time be liable for a tax deficiency assessment for the
same year.
The grant of a refund is founded on the assumption that the tax return is valid, that is, the facts
stated therein are true and correct. The deficiency assessment, although not yet final, created a
doubt as to and constitutes a challenge against the truth and accuracy of the facts stated in said
return which, by itself and without unquestionable evidence, cannot be the basis for the grant of the
refund.

Section 82, Chapter IX of the National Internal Revenue Code of 1977, which was the applicable law
when the claim of Citytrust was filed, provides that "(w)hen an assessment is made in case of any
list, statement, or return, which in the opinion of the Commissioner of Internal Revenue was false or
fraudulent or contained any understatement or undervaluation, no tax collected under such
assessment shall be recovered by any suits unless it is proved that the said list, statement, or return
was not false nor fraudulent and did not contain any understatement or undervaluation; but this
provision shall not apply to statements or returns made or to be made in good faith regarding annual
depreciation of oil or gas wells and mines."

Moreover, to grant the refund without determination of the proper assessment and the tax due would
inevitably result in multiplicity of proceedings or suits. If the deficiency assessment should
subsequently be upheld, the Government will be forced to institute anew a proceeding for the
recovery of erroneously refunded taxes which recourse must be filed within the prescriptive period of
ten years after discovery of the falsity, fraud or omission in the false or fraudulent return involved.
This would necessarily require and entail additional efforts and expenses on the part of the
Government, impose a burden on and a drain of government funds, and impede or delay the
collection of much-needed revenue for governmental operations.

Thus, to avoid multiplicity of suits and unnecessary difficulties or expenses, it is both logically
necessary and legally appropriate that the issue of the deficiency tax assessment against Citytrust
be resolved jointly with its claim for tax refund, to determine once and for all in a single proceeding
the true and correct amount of tax due or refundable.

In fact, as the Court of Tax Appeals itself has heretofore conceded, it would be only just and fair that
the taxpayer and the Government alike be given equal opportunities to avail of remedies under the
law to defeat each other’s claim and to determine all matters of dispute between them in one single
case. It is important to note that in determining whether or not petitioner is entitled to the refund of
the amount paid, it would [be] necessary to determine how much the Government is entitled to
collect as taxes. This would necessarily include the determination of the correct liability of the
taxpayer and, certainly, a determination of this case would constitute res judicata on both parties as
to all the matters subject thereof or necessarily involved therein.

Sec. 82, Chapter IX of the 1977 Tax Code is now Sec. 72, Chapter XI of the 1997 NIRC. The above
pronouncements are, therefore, still applicable today.

Here, petitioner's similar tax refund claim assumes that the tax return that it filed was correct. Given,
however, the finding of the CTA that petitioner, although not liable under Sec. 28(A)(3)(a) of the
1997 NIRC, is liable under Sec. 28(A)(l), the correctness of the return filed by petitioner is now put in
doubt. As such, we cannot grant the prayer for a refund.  (Emphasis supplied, citation omitted)
146

In the subsequent case of United Airlines, Inc. v. Commissioner of Internal Revenue,   this court
147

upheld the denial of the claim for refund based on the Court of Tax Appeals' finding that the taxpayer
had, through erroneous deductions on its gross income, underpaid its Gross Philippine Billing tax on
cargo revenues for 1999, and the amount of underpayment was even greater than the refund sought
for erroneously paid Gross Philippine Billings tax on passenger revenues for the same taxable
period.148
In this case, the P5,185,676.77 Gross Philippine Billings tax paid by petitioner was computed at the
rate of 1 ½% of its gross revenues amounting to P345,711,806.08  from the third quarter of 2000 to
149

the second quarter of 2002. It is quite apparent that the tax imposable under Section 28(A)(l) of the
1997 National Internal Revenue Code [32% of t.axable income, that is, gross income less
deductions] will exceed the maximum ceiling of 1 ½% of gross revenues as decreed in Article VIII of
the Republic of the Philippines-Canada Tax Treaty. Hence, no refund is forthcoming.

WHEREFORE, the Petition is DENIED. The Decision dated August 26, 2005 and Resolution dated
April 8, 2005 of the Court of Tax Appeals En Banc are AFFIRMED.

SO ORDERED.

G.R. No. 191109               July 18, 2012

REPUBLIC OF THE PHILIPPINES, represented by the PHILIPPINE RECLAMATION

AUTHORITY (PRA),Petitioner,
vs.
CITY OF PARANAQUE, Respondent.

DECISION

MENDOZA, J.:

This is a petition for review on certiorari under Rule 45 of the 1997 Rules of Civil Procedure, on pure
questions of law, assailing the January 8, 2010 Order of the Regional Trial Court, Branch 195,
1 

Parafiaque City (RTC), which ruled that petitioner Philippine Reclamation Authority (PRA) is a
government-owned and controlled corporation (GOCC), a taxable entity, and, therefore, . not exempt
from payment of real property taxes. The pertinent portion of the said order reads:

In view of the finding of this court that petitioner is not exempt from payment of real property taxes,
respondent Parañaque City Treasurer Liberato M. Carabeo did not act xxx without or in excess of
jurisdiction, or with grave abuse of discretion amounting to lack or in excess of jurisdiction in issuing
the warrants of levy on the subject properties.

WHEREFORE, the instant petition is dismissed. The Motion for Leave to File and Admit Attached
Supplemental Petition is denied and the supplemental petition attached thereto is not admitted.

The Public Estates Authority (PEA) is a government corporation created by virtue of Presidential
Decree (P.D.) No. 1084 (Creating the Public Estates Authority, Defining its Powers and Functions,
Providing Funds Therefor and For Other Purposes) which took effect on February 4,

1977 to provide a coordinated, economical and efficient reclamation of lands, and the administration
and operation of lands belonging to, managed and/or operated by, the government with the object of
maximizing their utilization and hastening their development consistent with public interest.

On February 14, 1979, by virtue of Executive Order (E.O.) No. 525 issued by then President
Ferdinand Marcos, PEA was designated as the agency primarily responsible for integrating, directing
and coordinating all reclamation projects for and on behalf of the National Government.
On October 26, 2004, then President Gloria Macapagal-Arroyo issued E.O. No. 380 transforming
PEA into PRA, which shall perform all the powers and functions of the PEA relating to reclamation
activities.

By virtue of its mandate, PRA reclaimed several portions of the foreshore and offshore areas of
Manila Bay, including those located in Parañaque City, and was issued Original Certificates of Title
(OCT Nos. 180, 202, 206, 207, 289, 557, and 559) and Transfer Certificates of Title (TCT Nos.
104628, 7312, 7309, 7311, 9685, and 9686) over the reclaimed lands.

On February 19, 2003, then Parañaque City Treasurer Liberato M. Carabeo (Carabeo) issued
Warrants of Levy on PRA’s reclaimed properties (Central Business Park and Barangay San
Dionisio) located in Parañaque City based on the assessment for delinquent real property taxes
made by then Parañaque City Assessor Soledad Medina Cue for tax years 2001 and 2002.

On March 26, 2003, PRA filed a petition for prohibition with prayer for temporary restraining order
(TRO) and/or writ of preliminary injunction against Carabeo before the RTC.

On April 3, 2003, after due hearing, the RTC issued an order denying PRA’s petition for the issuance
of a temporary restraining order.

On April 4, 2003, PRA sent a letter to Carabeo requesting the latter not to proceed with the public
auction of the subject reclaimed properties on April 7, 2003. In response, Carabeo sent a letter
stating that the public auction could not be deferred because the RTC had already denied PRA’s
TRO application.

On April 25, 2003, the RTC denied PRA’s prayer for the issuance of a writ of preliminary injunction
for being moot and academic considering that the auction sale of the subject properties on April 7,
2003 had already been consummated.

On August 3, 2009, after an exchange of several pleadings and the failure of both parties to arrive at
a compromise agreement, PRA filed a Motion for Leave to File and Admit Attached Supplemental
Petition which sought to declare as null and void the assessment for real property taxes, the levy
based on the said assessment, the public auction sale conducted on April 7, 2003, and the
Certificates of Sale issued pursuant to the auction sale.

On January 8, 2010, the RTC rendered its decision dismissing PRA’s petition. In ruling that PRA was
not exempt from payment of real property taxes, the RTC reasoned out that it was a GOCC under
Section 3 of P.D. No. 1084. It was organized as a stock corporation because it had an authorized
capital stock divided into no par value shares. In fact, PRA admitted its corporate personality and
that said properties were registered in its name as shown by the certificates of title. Therefore, as a
GOCC, local tax exemption is withdrawn by virtue of Section 193 of Republic Act (R.A.) No. 7160
Local Government Code (LGC) which was the prevailing law in 2001 and 2002 with respect to real
property taxation. The RTC also ruled that the tax exemption claimed by PRA under E.O. No. 654
had already been expressly repealed by R.A. No. 7160 and that PRA failed to comply with the
procedural requirements in Section 206 thereof.

Not in conformity, PRA filed this petition for certiorari assailing the January 8, 2010 RTC Order
based on the following GROUNDS

I
THE TRIAL COURT GRAVELY ERRED IN FINDING THAT PETITIONER IS LIABLE TO PAY REAL
PROPERTY TAX ON THE SUBJECT RECLAIMED LANDS CONSIDERING

THAT PETITIONER IS AN INCORPORATED INSTRUMENTALITY OF THE NATIONAL

GOVERNMENT AND IS, THEREFORE, EXEMPT FROM PAYMENT OF REAL PROPERTY TAX
UNDER SECTIONS 234(A) AND 133(O) OF REPUBLIC ACT 7160 OR THE LOCAL
GOVERNMENT CODE VIS-À-VIS MANILA INTERNATIONAL AIRPORT AUTHORITY V. COURT
OF APPEALS.

II

THE TRIAL COURT GRAVELY ERRED IN FAILING TO CONSIDER THAT RECLAIMED LANDS
ARE PART OF THE PUBLIC DOMAIN AND, HENCE, EXEMPT FROM REAL PROPERTY TAX.

PRA asserts that it is not a GOCC under Section 2(13) of the Introductory Provisions of the
Administrative Code. Neither is it a GOCC under Section 16, Article XII of the 1987 Constitution
because it is not required to meet the test of economic viability. Instead, PRA is a government
instrumentality vested with corporate powers and performing an essential public service pursuant to
Section 2(10) of the Introductory Provisions of the Administrative Code. Although it has a capital
stock divided into shares, it is not authorized to distribute dividends and allotment of surplus and
profits to its stockholders. Therefore, it may not be classified as a stock corporation because it lacks
the second requisite of a stock corporation which is the distribution of dividends and allotment of
surplus and profits to the stockholders.

It insists that it may not be classified as a non-stock corporation because it has no members and it is
not organized for charitable, religious, educational, professional, cultural, recreational, fraternal,
literary, scientific, social, civil service, or similar purposes, like trade, industry, agriculture and like
chambers as provided in Section 88 of the Corporation Code.

Moreover, PRA points out that it was not created to compete in the market place as there was no
competing reclamation company operated by the private sector. Also, while PRA is vested with
corporate powers under P.D. No. 1084, such circumstance does not make it a corporation but
merely an incorporated instrumentality and that the mere fact that an incorporated instrumentality of
the National Government holds title to real property does not make said instrumentality a GOCC.
Section 48, Chapter 12, Book I of the Administrative Code of 1987 recognizes a scenario where a
piece of land owned by the Republic is titled in the name of a department, agency or instrumentality.

Thus, PRA insists that, as an incorporated instrumentality of the National Government, it is exempt
from payment of real property tax except when the beneficial use of the real property is granted to a
taxable person. PRA claims that based on Section 133(o) of the LGC, local governments cannot tax
the national government which delegate to local governments the power to tax.

It explains that reclaimed lands are part of the public domain, owned by the State, thus, exempt from
the payment of real estate taxes. Reclaimed lands retain their inherent potential as areas for public
use or public service. While the subject reclaimed lands are still in its hands, these lands remain
public lands and form part of the public domain. Hence, the assessment of real property taxes made
on said lands, as well as the levy thereon, and the public sale thereof on April 7, 2003, including the
issuance of the certificates of sale in favor of the respondent Parañaque City, are invalid and of no
force and effect.

On the other hand, the City of Parañaque (respondent) argues that PRA since its creation
consistently represented itself to be a GOCC. PRA’s very own charter (P.D. No. 1084) declared it to
be a GOCC and that it has entered into several thousands of contracts where it represented itself to
be a GOCC. In fact, PRA admitted in its original and amended petitions and pre-trial brief filed with
the RTC of Parañaque City that it was a GOCC.

Respondent further argues that PRA is a stock corporation with an authorized capital stock divided
into 3 million no par value shares, out of which 2 million shares have been subscribed and fully paid
up. Section 193 of the LGC of 1991 has withdrawn tax exemption privileges granted to or presently
enjoyed by all persons, whether natural or juridical, including GOCCs.

Hence, since PRA is a GOCC, it is not exempt from the payment of real property tax.

THE COURT’S RULING

The Court finds merit in the petition.

Section 2(13) of the Introductory Provisions of the Administrative Code of 1987 defines a GOCC as
follows:

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

(13) Government-owned or controlled corporation refers to any agency organized as a stock or non-
stock corporation, vested with functions relating to public needs whether governmental or proprietary
in nature, and owned by the Government directly or through its instrumentalities either wholly, or,
where applicable as in the case of stock corporations, to the extent of at least fifty-one

(51) percent of its capital stock: x x x.

On the other hand, Section 2(10) of the Introductory Provisions of the Administrative Code defines a
government "instrumentality" as follows:

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

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

From the above definitions, it is clear that a GOCC must be "organized as a stock or non-stock
corporation" while an instrumentality is vested by law with corporate powers. Likewise, when the law
makes a government instrumentality operationally autonomous, the instrumentality remains part of
the National Government machinery although not integrated with the department framework.

When the law vests in a government instrumentality corporate powers, the instrumentality does not
necessarily become a corporation. Unless the government instrumentality is organized as a stock or
non-stock corporation, it remains a government instrumentality exercising not only governmental but
also corporate powers.

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

Correlatively, Section 3 of the Corporation Code defines a stock corporation as one whose "capital
stock is divided into shares and x x x authorized to distribute to the holders of such shares dividends
x x x." Section 87 thereof defines a non-stock corporation as "one where no part of its income is
distributable as dividends to its members, trustees or officers." Further, Section 88 provides that non-
stock corporations are "organized for charitable, religious, educational, professional, cultural,
recreational, fraternal, literary, scientific, social, civil service, or similar purposes, like trade, industry,
agriculture and like chambers."

Two requisites must concur before one may be classified as a stock corporation, namely: (1) that it
has capital stock divided into shares; and (2) that it is authorized to distribute dividends and
allotments of surplus and profits to its stockholders. If only one requisite is present, it cannot be
properly classified as a stock corporation. As for non-stock corporations, they must have members
and must not distribute any part of their income to said members. 3

In the case at bench, PRA is not a GOCC because it is neither a stock nor a non-stock corporation.
It cannot be considered as a stock corporation because although it has a capital stock divided into
no par value shares as provided in Section 7 of P.D. No. 1084, it is not authorized to distribute
4 

dividends, surplus allotments or profits to stockholders. There is no provision whatsoever in P.D. No.
1084 or in any of the subsequent executive issuances pertaining to PRA, particularly, E.O. No.
525, E.O. No. 654 and EO No. 798 that authorizes PRA to distribute dividends, surplus allotments or
5  6  7 

profits to its stockholders.

PRA cannot be considered a non-stock corporation either because it does not have members. A
non-stock corporation must have members. Moreover, it was not organized for any of the purposes
8 

mentioned in Section 88 of the Corporation Code. Specifically, it was created to manage all
government reclamation projects.

Furthermore, there is another reason why the PRA cannot be classified as a GOCC. Section 16,
Article XII of the 1987 Constitution provides as follows:

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

The fundamental provision above authorizes Congress to create GOCCs through special charters on
two conditions: 1) the GOCC must be established for the common good; and 2) the GOCC must
meet the test of economic viability. In this case, PRA may have passed the first condition of common
good but failed the second one - economic viability. Undoubtedly, the purpose behind the creation of
PRA was not for economic or commercial activities. Neither was it created to compete in the market
place considering that there were no other competing reclamation companies being operated by the
private sector. As mentioned earlier, PRA was created essentially to perform a public service
considering that it was primarily responsible for a coordinated, economical and efficient reclamation,
administration and operation of lands belonging to the government with the object of maximizing
their utilization and hastening their development consistent with the public interest. Sections 2 and 4
of P.D. No. 1084 reads, as follows:
Section 2. Declaration of policy. It is the declared policy of the State to provide for a coordinated,
economical and efficient reclamation of lands, and the administration and operation of lands
belonging to, managed and/or operated by the government, with the object of maximizing their
utilization and hastening their development consistent with the public interest.

Section 4. Purposes. The Authority is hereby created for the following purposes:

(a) To reclaim land, including foreshore and submerged areas, by dredging, filling or other
means, or to acquire reclaimed land;

(b) To develop, improve, acquire, administer, deal in, subdivide, dispose, lease and sell any
and all kinds of lands, buildings, estates and other forms of real property, owned, managed,
controlled and/or operated by the government.

(c) To provide for, operate or administer such services as may be necessary for the efficient,
economical and beneficial utilization of the above properties.

The twin requirement of common good and economic viability was lengthily discussed in the case of
Manila International Airport Authority v. Court of Appeals, the pertinent portion of which reads:
9 

Third, the government-owned or controlled corporations created through special charters are those
that meet the two conditions prescribed in Section 16, Article XII of the Constitution.

The first condition is that the government-owned or controlled corporation must be established for
the common good. The second condition is that the government-owned or controlled corporation
must meet the test of economic viability. Section 16, Article XII of the 1987 Constitution provides:

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

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

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

In contrast, government instrumentalities vested with corporate powers and performing

governmental or public functions need not meet the test of economic viability. These
instrumentalities perform essential public services for the common good, services that every modern
State must provide its citizens. These instrumentalities need not be economically viable since the
government may even subsidize their entire operations. These instrumentalities are not the
"government-owned or controlled corporations" referred to in Section 16, Article XII of the 1987
Constitution.
Thus, the Constitution imposes no limitation when the legislature creates government
instrumentalities vested with corporate powers but performing essential governmental or public
functions. Congress has plenary authority to create government instrumentalities vested with
corporate powers provided these instrumentalities perform essential government functions or public
services. However, when the legislature creates through special charters corporations that perform
economic or commercial activities, such entities — known as "government-owned or controlled
corporations" — must meet the test of economic viability because they compete in the market place.

This is the situation of the Land Bank of the Philippines and the Development Bank of the Philippines
and similar government-owned or controlled corporations, which derive their incometo meet
operating expenses solely from commercial transactions in competition with the private sector. The
intent of the Constitution is to prevent the creation of government-owned or controlled corporations
that cannot survive on their own in the market place and thus merely drain the public coffers.

Commissioner Blas F. Ople, proponent of the test of economic viability, explained to the
Constitutional Commission the purpose of this test, as follows:

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

Therefore, when we insert the phrase "ECONOMIC VIABILITY" together with the "common good,"
this becomes a restraint on future enthusiasts for state capitalism to excuse themselves from the
responsibility of meeting the market test so that they become viable. And so, Madam President, I
reiterate, for the committee's consideration and I am glad that I am joined in this proposal by
Commissioner Foz, the insertion of the standard of "ECONOMIC VIABILITY OR THE ECONOMIC
TEST," together with the common good. 1âwphi1

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

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

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

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

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

This Court is convinced that PRA is not a GOCC either under Section 2(3) of the Introductory
Provisions of the Administrative Code or under Section 16, Article XII of the 1987 Constitution. The
facts, the evidence on record and jurisprudence on the issue support the position that PRA was not
organized either as a stock or a non-stock corporation. Neither was it created by Congress to
operate commercially and compete in the private market. Instead, PRA is a government
instrumentality vested with corporate powers and performing an essential public service pursuant to
Section 2(10) of the Introductory Provisions of the Administrative Code. Being an incorporated
government instrumentality, it is exempt from payment of real property tax.

Clearly, respondent has no valid or legal basis in taxing the subject reclaimed lands managed by
PRA. On the other hand, Section 234(a) of the LGC, in relation to its Section 133(o), exempts PRA
from paying realty taxes and protects it from the taxing powers of local government units.

Sections 234(a) and 133(o) of the LGC provide, as follows:

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

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

xxxx

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

xxxx

(o) Taxes, fees or charges of any kinds on the National Government, its agencies and
instrumentalities, and local government units. [Emphasis supplied]

It is clear from Section 234 that real property owned by the Republic of the Philippines (the Republic)
is exempt from real property tax unless the beneficial use thereof has been granted to a taxable
person. In this case, there is no proof that PRA granted the beneficial use of the subject reclaimed
lands to a taxable entity. There is no showing on record either that PRA leased the subject reclaimed
properties to a private taxable entity.

This exemption should be read in relation to Section 133(o) of the same Code, which prohibits local
governments from imposing "taxes, fees or charges of any kind on the National Government, its
agencies and instrumentalities x x x." The Administrative Code allows real property owned by the
Republic to be titled in the name of agencies or instrumentalities of the national government. Such
real properties remain owned by the Republic and continue to be exempt from real estate tax.
Indeed, the Republic grants the beneficial use of its real property to an agency or instrumentality of
the national government. This happens when the title of the real property is transferred to an agency
or instrumentality even as the Republic remains the owner of the real property. Such arrangement
does not result in the loss of the tax exemption, unless "the beneficial use thereof has been granted,
for consideration or otherwise, to a taxable person." 10

The rationale behind Section 133(o) has also been explained in the case of the Manila International
Airport Authority, to wit:
11 

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

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

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

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

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

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

Thus, Section 133 of the Local Government Code states that "unless otherwise provided" in the
Code, local governments cannot tax national government instrumentalities. As this Court held in
Basco v. Philippine Amusements and Gaming Corporation:

The states have no power by taxation or otherwise, to retard, impede, burden or in any manner
control the operation of constitutional laws enacted by Congress to carry into execution the powers
vested in the federal government. (MC Culloch v. Maryland, 4 Wheat 316, 4 L Ed. 579)

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

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

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

The Court agrees with PRA that the subject reclaimed lands are still part of the public domain,
owned by the State and, therefore, exempt from payment of real estate taxes.

Section 2, Article XII of the 1987 Constitution reads in part, as follows:

Section 2. All lands of the public domain, waters, minerals, coal, petroleum, and other mineral oils,
all forces of potential energy, fisheries, forests or timber, wildlife, flora and fauna, and other natural
resources are owned by the State. With the exception of agricultural lands, all other natural
resources shall not be alienated. The exploration, development, and utilization of natural resources
shall be under the full control and supervision of the State. The State may directly undertake such
activities, or it may enter into co-production, joint venture, or production-sharing agreements with
Filipino citizens, or corporations or associations at least 60 per centum of whose capital is owned by
such citizens. Such agreements may be for a period not exceeding twenty-five years, renewable for
not more than twenty-five years, and under such terms and conditions as may provided by law. In
cases of water rights for irrigation, water supply, fisheries, or industrial uses other than the
development of waterpower, beneficial use may be the measure and limit of the grant.

Similarly, Article 420 of the Civil Code enumerates properties belonging to the State:

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

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

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

Here, the subject lands are reclaimed lands, specifically portions of the foreshore and offshore areas
of Manila Bay. As such, these lands remain public lands and form part of the public domain. In the
case of Chavez v. Public Estates Authority and AMARI Coastal Development Corporation, the Court12 

held that foreshore and submerged areas irrefutably belonged to the public domain and were
inalienable unless reclaimed, classified as alienable lands open to disposition and further declared
no longer needed for public service. The fact that alienable lands of the public domain were
transferred to the PEA (now PRA) and issued land patents or certificates of title in PEA’s name did
not automatically make such lands private. This Court also held therein that reclaimed lands retained
their inherent potential as areas for public use or public service.
As the central implementing agency tasked to undertake reclamation projects nationwide, with
authority to sell reclaimed lands, PEA took the place of DENR as the government agency charged
with leasing or selling reclaimed lands of the public domain. The reclaimed lands being leased or
sold by PEA are not private lands, in the same manner that DENR, when it disposes of other
alienable lands, does not dispose of private lands but alienable lands of the public domain. Only
when qualified private parties acquire these lands will the lands become private lands. In the hands
of the government agency tasked and authorized to dispose of alienable of disposable lands of the
public domain, these lands are still public, not private lands.

Furthermore, PEA's charter expressly states that PEA "shall hold lands of the public domain" as well
as "any and all kinds of lands." PEA can hold both lands of the public domain and private lands.
Thus, the mere fact that alienable lands of the public domain like the Freedom Islands are
transferred to PEA and issued land patents or certificates of title in PEA's name does not
automatically make such lands private. 13

Likewise, it is worthy to mention Section 14, Chapter 4, Title I, Book III of the Administrative Code of
1987, thus:

SEC 14. Power to Reserve Lands of the Public and Private Dominion of the Government.-

(1)The President shall have the power to reserve for settlement or public use, and for specific public
purposes, any of the lands of the public domain, the use of which is not otherwise directed by law.
The reserved land shall thereafter remain subject to the specific public purpose indicated until
otherwise provided by law or proclamation.

Reclaimed lands such as the subject lands in issue are reserved lands for public use. They are
properties of public dominion. The ownership of such lands remains with the State unless they are
withdrawn by law or presidential proclamation from public use.

Under Section 2, Article XII of the 1987 Constitution, the foreshore and submerged areas of Manila
Bay are part of the "lands of the public domain, waters x x x and other natural resources" and
consequently "owned by the State." As such, foreshore and submerged areas "shall not be
alienated," unless they are classified as "agricultural lands" of the public domain. The mere
reclamation of these areas by PEA does not convert these inalienable natural resources of the State
into alienable or disposable lands of the public domain. There must be a law or presidential
proclamation officially classifying these reclaimed lands as alienable or disposable and open to
disposition or concession. Moreover, these reclaimed lands cannot be classified as alienable or
disposable if the law has reserved them for some public or quasi-public use.

As the Court has repeatedly ruled, properties of public dominion are not subject to execution or
foreclosure sale. Thus, the assessment, levy and foreclosure made on the subject reclaimed lands
14

by respondent, as well as the issuances of certificates of title in favor of respondent, are without
basis.

WHEREFORE, the petition is GRANTED. The January 8, 2010 Order of the Regional Trial Court,
Branch 195, Parañaque City, is REVERSED and SET ASIDE. All reclaimed properties owned by the
Philippine Reclamation Authority are hereby declared EXEMPT from real estate taxes. All real estate
tax assessments, including the final notices of real estate tax delinquencies, issued by the City of
Parañaque on the subject reclaimed properties; the assailed auction sale, dated April 7, 2003; and
the Certificates of Sale subsequently issued by the Parañaque City Treasurer in favor of the City of
Parañaque, are all declared VOID.
SO ORDERED.

G.R. No. 196596

COMMISSIONER OF INTERNAL REVENUE, Petitioner 

vs.
DE LA SALLE UNIVERSITY, INC., Respondent

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

G.R. No. 198841

DE LA SALLE UNIVERSITY INC., Petitioner, 

vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.

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

G.R. No. 198941

COMMISSIONER OF INTERNAL REVENUE, Petitioner, 

vs.
DE LA SALLE UNIVERSITY, INC., Respondent.

DECISION

BRION, J.:

Before the Court are consolidated petitions for review on certiorari: 1

1. G.R. No. 196596 filed by the Commissioner of Internal Revenue (Commissioner) to assail the

December 10, 2010 decision and March 29, 2011 resolution of the Court of Tax Appeals
(CTA) in En Banc Case No. 622; 2

2. G.R. No. 198841 filed by De La Salle University, Inc. (DLSU) to assail the June 8, 2011 decision
and October 4, 2011 resolution in CTA En Banc Case No. 671;  and 3

3. G.R. No. 198941 filed by the Commissioner to assail the June 8, 2011 decision and October 4,
2011 resolution in CTA En Banc Case No. 671. 4

G.R. Nos. 196596, 198841 and 198941 all originated from CTA Special First Division (CTA
Division) Case No. 7303. G.R. No. 196596 stemmed from CTA En Banc Case No. 622 filed by the
Commissioner to challenge CTA Case No. 7303. G.R. No. 198841 and 198941 both stemmed
from CTA En Banc Case No. 671 filed by DLSU to also challenge CTA Case No. 7303.

The Factual Antecedents

Sometime in 2004, the Bureau of Internal Revenue (BIR) issued to DLSU Letter of Authority (LOA)
No. 2794 authorizing its revenue officers to examine the latter's books of accounts and other
accounting records for all internal revenue taxes for the period Fiscal Year Ending 2003 and
Unverified Prior Years. 5

On May 19, 2004, BIR issued a Preliminary Assessment Notice to DLSU. 6

Subsequently on August 18, 2004, the BIR through a Formal Letter of Demand assessed DLSU the
following deficiency taxes: (1) income tax on rental earnings from restaurants/canteens and
bookstores operating within the campus; (2) value-added tax (VAI) on business income; and
(3) documentary stamp tax (DSI) on loans and lease contracts. The BIR demanded the payment
of ₱17,303,001.12, inclusive of surcharge, interest and penalty for taxable years 2001, 2002 and
2003.7

DLSU protested the assessment. The Commissioner failed to act on the protest; thus, DLSU filed on
August 3, 2005 a petition for review with the CTA Division. 8

DLSU, a non-stock, non-profit educational institution, principally anchored its petition on Article XIV,
Section 4 (3)of the Constitution, which reads:

(3) All revenues and assets of non-stock, non-profit educational institutions used actually, directly,
and exclusively for educational purposes shall be exempt from taxes and duties. xxx.

On January 5, 2010, the CTA Division partially granted DLSU's petition for review. The dispositive
portion of the decision reads:

WHEREFORE, the Petition for Review is PARTIALLY GRANTED. The DST assessment on the loan
transactions of [DLSU] in the amount of ₱1,1681,774.00 is hereby CANCELLED. However, [DLSU]
is ORDERED TO PAY deficiency income tax, VAT and DST on its lease contracts, plus 25%
surcharge for the fiscal years 2001, 2002 and 2003 in the total amount of ₱18,421,363.53 ... xxx.

In addition, [DLSU] is hereby held liable to pay 20% delinquency interest on the total amount due
computed from September 30, 2004 until full payment thereof pursuant to Section 249(C)(3) of the
[National Internal Revenue Code]. Further, the compromise penalties imposed by [the
Commissioner] were excluded, there being no compromise agreement between the parties.

SO ORDERED. 9

Both the Commissioner and DLSU moved for the reconsideration of the January 5, 2010
decision.  On April 6, 2010, the CTA Division denied the Commissioner's motion for reconsideration
10

while it held in abeyance the resolution on DLSU's motion for reconsideration. 11

On May 13, 2010, the Commissioner appealed to the CTA En Banc (CTA En Banc Case No. 622)
arguing that DLSU's use of its revenues and assets for non-educational or commercial purposes
removed these items from the exemption coverage under the Constitution. 12

On May 18, 2010, DLSU formally offered to the CTA Division supplemental pieces of documentary
evidence to prove that its rental income was used actually, directly and exclusively for educational
purposes.  The Commissioner did not promptly object to the formal offer of supplemental evidence
13

despite notice. 14

On July 29, 2010, the CTA Division, in view of the supplemental evidence submitted, reduced the
amount of DLSU's tax deficiencies. The dispositive portion of the amended decision reads:
WHEREFORE, [DLSU]'s Motion for Partial Reconsideration is hereby PARTIALLY GRANTED.
[DLSU] is hereby ORDERED TO PAY for deficiency income tax, VAT and DST plus 25% surcharge
for the fiscal years 2001, 2002 and 2003 in the total adjusted amount of ₱5,506,456.71 ... xxx.

In addition, [DLSU] is hereby held liable to pay 20% per annum deficiency interest on the ... basic
deficiency taxes ... until full payment thereof pursuant to Section 249(B) of the [National Internal
Revenue Code] ... xxx.

Further, [DLSU] is hereby held liable to pay 20% per annum delinquency interest on the deficiency
taxes, surcharge and deficiency interest which have accrued ... from September 30, 2004 until fully
paid.15

Consequently, the Commissioner supplemented its petition with the CTA En Banc and argued that
the CTA Division erred in admitting DLSU's additional evidence. 16

Dissatisfied with the partial reduction of its tax liabilities, DLSU filed a separate petition for review
with the CTA En Banc (CTA En Banc Case No. 671) on the following grounds: (1) the entire
assessment should have been cancelled because it was based on an invalid LOA; (2) assuming the
LOA was valid, the CTA Division should still have cancelled the entire assessment because DLSU
submitted evidence similar to those submitted by Ateneo De Manila University (Ateneo) in
a separate case where the CTA cancelled Ateneo's tax assessment;  and (3) the CTA Division erred
17

in finding that a portion of DLSU's rental income was not proved to have been used actually, directly
and exclusively for educational purposes. 18

The CTA En Banc Rulings

CTA En Banc Case No. 622

The CTA En Banc dismissed the Commissioner's petition for review and sustained the findings of
the CTA Division. 19

Tax on rental income

Relying on the findings of the court-commissioned Independent Certified Public Accountant

(Independent CPA), the CTA En Banc found that DLSU was able to prove that a portion of the
assessed rental income was used actually, directly and exclusively for educational purposes; hence,
exempt from tax.  The CTA En Banc was satisfied with DLSU's supporting evidence confirming that
20

part of its rental income had indeed been used to pay the loan it obtained to build the university's
Physical Education – Sports Complex. 21

Parenthetically, DLSU's unsubstantiated claim for exemption, i.e., the part of its income that was not
shown by supporting documents to have been actually, directly and exclusively used for educational
purposes, must be subjected to income tax and VAT. 22

DST on loan and mortgage transactions

Contrary to the Commissioner's contention, DLSU froved its remittance of the DST due on its loan
and mortgage documents.  The CTA En Banc found that DLSU's DST payments had been remitted
23

to the BIR, evidenced by the stamp on the documents made by a DST imprinting machine, which is
allowed under Section 200 (D) of the National Internal Revenue Code (Tax Code)  and Section 2 of
24

Revenue Regulations (RR) No. 15-2001. 25

Admissibility of DLSU's supplemental evidence

The CTA En Banc held that the supplemental pieces of documentary evidence were admissible
even if DLSU formally offered them only when it moved for reconsideration of the CTA Division's
original decision. Notably, the law creating the CTA provides that proceedings before it shall not be
governed strictly by the technical rules of evidence.26

The Commissioner moved but failed to obtain a reconsideration of the CTA En Banc's December 10,
2010 decision.  Thus, she came to this court for relief through a petition for review on certiorari (G.R.
27

No. 196596).

CTA En Banc Case No. 671

The CTA En Banc partially granted DLSU's petition for review and further reduced its tax liabilities
to ₱2,554,825.47inclusive of surcharge. 28

On the validity of the Letter of Authority

The issue of the LOA' s validity was raised during trial;  hence, the issue was deemed properly
29

submitted for decision and reviewable on appeal.

Citing jurisprudence, the CTA En Banc held that a LOA should cover only one taxable period and
that the practice of issuing a LOA covering audit of unverified prior years is prohibited.  The
30

prohibition is consistent with Revenue Memorandum Order (RMO) No. 43-90, which provides that if
the audit includes more than one taxable period, the other periods or years shall be specifically
indicated in the LOA. 31

In the present case, the LOA issued to DLSU is for Fiscal Year Ending 2003 and Unverified Prior
Years. Hence, the assessments for deficiency income tax, VAT and DST for taxable years 2001 and
2002 are void, but the assessment for taxable year 2003 is valid. 32

On the applicability of the Ateneo case

The CTA En Banc held that the Ateneo case is not a valid precedent because it involved different
parties, factual settings, bases of assessments, sets of evidence, and defenses. 33

On the CTA Division's appreciation of the evidence

The CTA En Banc affirmed the CTA Division's appreciation of DLSU' s evidence. It held that while
DLSU successfully proved that a portion of its rental income was transmitted and used to pay the
loan obtained to fund the construction of the Sports Complex, the rental income from other sources
were not shown to have been actually, directly and exclusively used for educational purposes. 34

Not pleased with the CTA En Banc's ruling, both DLSU (G.R. No. 198841) and the Commissioner
(G.R. No. 198941) came to this Court for relief.

The Consolidated Petitions

G.R. No. 196596

The Commissioner submits the following arguments:

First, DLSU's rental income is taxable regardless of how such income is derived, used or disposed
of.  DLSU's operations of canteens and bookstores within its campus even though exclusively
35

serving the university community do not negate income tax liability. 36

The Commissioner contends that Article XIV, Section 4 (3) of the Constitution must be harmonized
with Section 30 (H) of the Tax Code, which states among others, that the income of whatever kind
and character of [a non-stock and non-profit educational institution] from any of [its] properties, real
or personal, or from any of [its] activities conducted for profit regardless of the disposition made of
such income, shall be subject to tax imposed by this Code. 37

The Commissioner argues that the CTA En Banc misread and misapplied the case
of Commissioner of Internal Revenue v. YMCA  to support its conclusion that revenues however
38

generated are covered by the constitutional exemption, provided that, the revenues will be used for
educational purposes or will be held in reserve for such purposes. 39

On the contrary, the Commissioner posits that a tax-exempt organization like DLSU is exempt only
from property tax but not from income tax on the rentals earned from property.  Thus, DLSU's
40

income from the leases of its real properties is not exempt from taxation even if the income would be
used for educational purposes. 41

Second, the Commissioner insists that DLSU did not prove the fact of DST payment  and that it is
42

not qualified to use the On-Line Electronic DST Imprinting Machine, which is available only to certain
classes of taxpayers under RR No. 9-2000. 43

Finally, the Commissioner objects to the admission of DLSU's supplemental offer of evidence. The
belated submission of supplemental evidence reopened the case for trial, and worse, DLSU offered
the supplemental evidence only after it received the unfavorable CTA Division's original decision.  In44

any case, DLSU's submission of supplemental documentary evidence was unnecessary since its
rental income was taxable regardless of its disposition. 45

G.R. No. 198841

DLSU argues as that:

First, RMO No. 43-90 prohibits the practice of issuing a LOA with any indication of unverified prior
years. A LOA issued contrary to RMO No. 43-90 is void, thus, an assessment issued based on such
defective LOA must also be void. 46

DLSU points out that the LOA issued to it covered the Fiscal Year Ending 2003 and Unverified Prior
Years. On the basis of this defective LOA, the Commissioner assessed DLSU for deficiency income
tax, VAT and DST for taxable years 2001, 2002 and 2003.  DLSU objects to the CTA En
47

Banc's conclusion that the LOA is valid for taxable year 2003. According to DLSU, when RMO No.
43-90 provides that:

The practice of issuing [LOAs] covering audit of 'unverified prior years' is hereby prohibited.

it refers to the LOA which has the format "Base Year + Unverified Prior Years." Since the LOA
issued to DLSU follows this format, then any assessment arising from it must be entirely voided. 48

Second, DLSU invokes the principle of uniformity in taxation, which mandates that for similarly
situated parties, the same set of evidence should be appreciated and weighed in the same
manner.  The CTA En Banc erred when it did not similarly appreciate DLSU' s evidence as it did to
49

the pieces of evidence submitted by Ateneo, also a non-stock, non-profit educational institution. 50

G.R. No. 198941

The issues and arguments raised by the Commissioner in G.R. No. 198941 petition are exactly the
same as those she raised in her: (1) petition docketed as G.R. No. 196596 and (2) comment on
DLSU's petition docketed as G.R. No. 198841. 51

Counter-arguments

DLSU's Comment on G.R. No. 196596

First, DLSU questions the defective verification attached to the petition. 52

Second, DLSU stresses that Article XIV, Section 4 (3) of the Constitution is clear that all assets and
revenues of non-stock, non-profit educational institutions used actually, directly and exclusively for
educational purposes are exempt from taxes and duties. 53

On this point, DLSU explains that: (1) the tax exemption of non-stock, non-profit educational
institutions is novel to the 1987 Constitution and that Section 30 (H) of the 1997 Tax Code cannot
amend the 1987 Constitution;  (2) Section 30 of the 1997 Tax Code is almost an exact replica of
54

Section 26 of the 1977 Tax Code -with the addition of non-stock, non-profit educational institutions
to the list of tax-exempt entities; and (3) that the 1977 Tax Code was promulgated when the 1973
Constitution was still in place.

DLSU elaborates that the tax exemption granted to a private educational institution under the 1973
Constitution was only for real property tax. Back then, the special tax treatment on income of private
educational institutions only emanates from statute, i.e., the 1977 Tax Code. Only under the 1987
Constitution that exemption from tax of all the assets and revenues of non-stock, non-profit
educational institutions used actually, directly and exclusively for educational purposes, was
expressly and categorically enshrined. 55

DLSU thus invokes the doctrine of constitutional supremacy, which renders any subsequent law that
is contrary to the Constitution void and without any force and effect.  Section 30 (H) of the 1997 Tax
56

Code insofar as it subjects to tax the income of whatever kind and character of a non-stock and non-
profit educational institution from any of its properties, real or personal, or from any of its activities
conducted for profit regardless of the disposition made of such income, should be declared without
force and effect in view of the constitutionally granted tax exemption on "all revenues and assets of
non-stock, non-profit educational institutions used actually, directly, and exclusively for educational
purposes." 57

DLSU further submits that it complies with the requirements enunciated in the YMCA case, that for
an exemption to be granted under Article XIV, Section 4 (3) of the Constitution, the taxpayer must
prove that: (1) it falls under the classification non-stock, non-profit educational institution; and (2) the
income it seeks to be exempted from taxation is used actually, directly and exclusively for
educational purposes.  Unlike YMCA, which is not an educational institution, DLSU is undisputedly a
58

non-stock, non-profit educational institution. It had also submitted evidence to prove that it actually,
directly and exclusively used its income for educational purposes. 59
DLSU also cites the deliberations of the 1986 Constitutional Commission where they recognized that
the tax exemption was granted "to incentivize private educational institutions to share with the State
the responsibility of educating the youth." 60

Third, DLSU highlights that both the CTA En Banc and Division found that the bank that handled
DLSU' s loan and mortgage transactions had remitted to the BIR the DST through an imprinting
machine, a method allowed under RR No. 15-2001.  In any case, DLSU argues that it cannot be
61

held liable for DST owing to the exemption granted under the Constitution. 62

Finally, DLSU underscores that the Commissioner, despite notice, did not oppose the formal offer of
supplemental evidence. Because of the Commissioner's failure to timely object, she became bound
by the results of the submission of such supplemental evidence. 63

The CIR's Comment on G.R. No. 198841

The Commissioner submits that DLSU is estopped from questioning the LOA's validity because it
failed to raise this issue in both the administrative and judicial proceedings.  That it was asked on
64

cross-examination during the trial does not make it an issue that the CTA could resolve.  The
65

Commissioner also maintains that DLSU's rental income is not tax-exempt because an educational
institution is only exempt from property tax but not from tax on the income earned from the property. 66

DLSU's Comment on G.R. No. 198941

DLSU puts forward the same counter-arguments discussed above.  In addition, DLSU prays that the
67

Court award attorney's fees in its favor because it was constrained to unnecessarily retain the
services of counsel in this separate petition. 68

Issues

Although the parties raised a number of issues, the Court shall decide only the pivotal issues, which
we summarize as follows:

I. Whether DLSU' s income and revenues proved to have been used actually, directly and
exclusively for educational purposes are exempt from duties and taxes;

II. Whether the entire assessment should be voided because of the defective LOA;

III. Whether the CTA correctly admitted DLSU's supplemental pieces of evidence; and

IV. Whether the CTA's appreciation of the sufficiency of DLSU's evidence may be disturbed
by the Court.

Our Ruling

As we explain in full below, we rule that:

I. The income, revenues and assets of non-stock, non-profit educational institutions proved
to have been used actually, directly and exclusively for educational purposes are exempt
from duties and taxes.
 II. The LOA issued to DLSU is not entirely void. The assessment for taxable year 2003 is
valid.

III. The CTA correctly admitted DLSU's formal offer of supplemental evidence; and

IV. The CTA's appreciation of evidence is conclusive unless the CTA is shown to have
manifestly overlooked certain relevant facts not disputed by the parties and which, if properly
considered, would justify a different conclusion.

The parties failed to convince the Court that the CTA overlooked or failed to consider relevant facts.
We thus sustain the CTA En Banc's findings that:

a. DLSU proved that a portion of its rental income was used actually, directly and exclusively
for educational purposes; and

b. DLSU proved the payment of the DST through its bank's on-line imprinting machine.

I. The revenues and assets of non-stock,

non-profit educational institutions
proved to have been used actually,
directly, and exclusively for educational
purposes are exempt from duties and
taxes.

DLSU rests it case on Article XIV, Section 4 (3) of the 1987 Constitution, which reads:

(3) All revenues and assets of non-stock, non-profit educational institutions used actually,

directly, and exclusively for educational purposes shall
be exempt from taxes and duties. Upon the dissolution or cessation of the corporate existence of
such institutions, their assets shall be disposed of in the manner provided by law.

Proprietary educational institutions, including those cooperatively owned, may likewise be

entitled to such exemptions subject to the limitations provided by law including restrictions on
dividends and provisions for reinvestment. [underscoring and emphasis supplied]

Before fully discussing the merits of the case, we observe that:

First, the constitutional provision refers to two kinds of educational institutions: (1) non-stock, non-
profit educational institutions and (2) proprietary educational institutions.
69

Second, DLSU falls under the first category. Even the Commissioner admits the status of DLSU as a
non-stock, non-profit educational institution.70

Third, while DLSU's claim for tax exemption arises from and is based on the Constitution, the
Constitution, in the same provision, also imposes certain conditions to avail of the exemption. We
discuss below the import of the constitutional text vis-a-vis the Commissioner's counter-arguments.

Fourth, there is a marked distinction between the treatment of non-stock, non-profit educational

institutions and proprietary educational institutions. The tax exemption granted to non-stock, non-
profit educational institutions is conditioned only on the actual, direct and exclusive use of their
revenues and assets for educational purposes. While tax exemptions may also be granted to
proprietary educational institutions, these exemptions may be subject to limitations imposed by
Congress.

As we explain below, the marked distinction between a non-stock, non-profit and a proprietary
educational institution is crucial in determining the nature and extent of the tax exemption granted to
non-stock, non-profit educational institutions.

The Commissioner opposes DLSU's claim for tax exemption on the basis of Section 30 (H) of the
Tax Code. The relevant text reads:

The following organizations shall not be taxed under this Title [Tax on

Income] in respect to income received by them as such:

xxxx

(H) A non-stock and non-profit educational institution

xxxx

Notwithstanding the provisions in the preceding paragraphs, the income of whatever kind and
character of the foregoing organizations from any of their properties, real or personal, or from
any of their activities conducted for
profit regardless of the disposition made of such income shall be subject to tax imposed
under this Code. [underscoring and emphasis supplied]

The Commissioner posits that the 1997 Tax Code qualified the tax exemption granted to non-stock,
non-profit educational institutions such that the revenues and income they derived from their assets,
or from any of their activities conducted for profit, are taxable even if these revenues and income are
used for educational purposes.

Did the 1997 Tax Code qualify the tax exemption constitutionally-granted to non-stock, non-profit
educational institutions?

We answer in the negative.

While the present petition appears to be a case of first impression,  the Court in the YMCA case had
71

in fact already analyzed and explained the meaning of Article XIV, Section 4 (3) of the Constitution.
The Court in that case made doctrinal pronouncements that are relevant to the present case.

The issue in YMCA was whether the income derived from rentals of real property owned by the
YMCA, established as a "welfare, educational and charitable non-profit corporation," was subject to
income tax under the Tax Code and the Constitution. 72

The Court denied YMCA's claim for exemption on the ground that as a charitable institution falling
under Article VI, Section 28 (3) of the Constitution,  the YMCA is not tax-exempt per se; " what is
73

exempted is not the institution itself... those exempted from real estate taxes are lands, buildings
and improvements actually, directly and exclusively used for religious, charitable or educational
purposes." 74
The Court held that the exemption claimed by the YMCA is expressly disallowed by the last
paragraph of then Section 27 (now Section 30) of the Tax Code, which mandates that the income of
exempt organizations from any of their properties, real or personal, are subject to the same tax
imposed by the Tax Code, regardless of how that income is used. The Court ruled that the last
paragraph of Section 27 unequivocally subjects to tax the rent income of the YMCA from its
property.75

In short, the YMCA is exempt only from property tax but not from income tax.

As a last ditch effort to avoid paying the taxes on its rental income, the YMCA invoked the tax
privilege granted under Article XIV, Section 4 (3) of the Constitution.

The Court denied YMCA's claim that it falls under Article XIV, Section 4 (3) of the Constitution
holding that the term educational institution, when used in laws granting tax exemptions, refers to
the school system (synonymous with formal education); it includes a college or an educational
establishment; it refers to the hierarchically structured and chronologically graded learnings
organized and provided by the formal school system. 76

The Court then significantly laid down the requisites for availing the tax exemption under Article XIV,
Section 4 (3), namely: (1) the taxpayer falls under the classification non-stock, non-profit
educational institution; and (2) the income it seeks to be exempted from taxation is used
actually, directly and exclusively for educational purposes. 77

We now adopt YMCA as precedent and hold that:

1. The last paragraph of Section 30 of the Tax Code is without force and effect with respect to non-
stock, non-profit educational institutions, provided, that the non-stock, non-profit educational
institutions prove that its assets and revenues are used actually, directly and exclusively for
educational purposes.

2. The tax-exemption constitutionally-granted to non-stock, non-profit educational institutions, is not

subject to limitations imposed by law.

The tax exemption granted by the

Constitution to non-stock, non-profit
educational institutions is conditioned only
on the actual, direct and exclusive use of
their assets, revenues and income  for 78

educational purposes.

We find that unlike Article VI, Section 28 (3) of the Constitution (pertaining to charitable institutions,
churches, parsonages or convents, mosques, and non-profit cemeteries), which exempts from
tax only the assets, i.e., "all lands, buildings, and improvements, actually, directly, and
exclusively used for religious, charitable, or educational purposes ... ," Article XIV, Section 4
(3) categorically states that "[a]ll revenues and assets ... used actually, directly, and exclusively for
educational purposes shall be exempt from taxes and duties."

The addition and express use of the word revenues in Article XIV, Section 4 (3) of the Constitution is
not without significance.
We find that the text demonstrates the policy of the 1987 Constitution, discernible from the records
of the 1986 Constitutional Commission  to provide broader tax privilege to non-stock, non-profit
79

educational institutions as recognition of their role in assisting the State provide a public good. The
tax exemption was seen as beneficial to students who may otherwise be charged unreasonable
tuition fees if not for the tax exemption extended to all revenues and assets of non-stock, non-profit
educational institutions.80

Further, a plain reading of the Constitution would show that Article XIV, Section 4 (3) does not
require that the revenues and income must have also been sourced from educational activities or
activities related to the purposes of an educational institution. The phrase all revenues is unqualified
by any reference to the source of revenues. Thus, so long as the revenues and income are used
actually, directly and exclusively for educational purposes, then said revenues and income shall be
exempt from taxes and duties. 81

We find it helpful to discuss at this point the taxation of revenues versus the taxation of assets.

Revenues consist of the amounts earned by a person or entity from the conduct of business
operations.  It may refer to the sale of goods, rendition of services, or the return of an investment.
82

Revenue is a component of the tax base in income tax,  VAT,  and local business tax (LBT).
83 84 85

Assets, on the other hand, are the tangible and intangible properties owned by a person or entity.  It 86

may refer to real estate, cash deposit in a bank, investment in the stocks of a corporation, inventory
of goods, or any property from which the person or entity may derive income or use to generate the
same. In Philippine taxation, the fair market value of real property is a component of the tax base in
real property tax (RPT).  Also, the landed cost of imported goods is a component of the tax base in
87

VAT on importation  and tariff duties.

88 89

Thus, when a non-stock, non-profit educational institution proves that it uses its revenues actually,
directly, and exclusively for educational purposes, it shall be exempted from income tax, VAT, and
LBT. On the other hand, when it also shows that it uses its assets in the form of real property for
educational purposes, it shall be exempted from RPT.

To be clear, proving the actual use of the taxable item will result in an exemption, but the specific tax
from which the entity shall be exempted from shall depend on whether the item is an item of revenue
or asset.

To illustrate, if a university leases a portion of its school building to a bookstore or cafeteria, the
leased portion is not actually, directly and exclusively used for educational purposes, even if the
bookstore or canteen caters only to university students, faculty and staff.

The leased portion of the building may be subject to real property tax, as held in Abra Valley
College, Inc. v. Aquino.  We ruled in that case that the test of exemption from taxation is the use of
90

the property for purposes mentioned in the Constitution. We also held that the exemption extends to
facilities which are incidental to and reasonably necessary for the accomplishment of the main
purposes.

In concrete terms, the lease of a portion of a school building for commercial purposes, removes
such asset from the property tax exemption granted under the Constitution.  There is no exemption
91

because the asset is not used actually, directly and exclusively for educational purposes. The
commercial use of the property is also not incidental to and reasonably necessary for the
accomplishment of the main purpose of a university, which is to educate its students.
However, if the university actually, directly and exclusively uses for educational
purposes the revenues earned from the lease of its school building, such revenues shall be exempt
from taxes and duties. The tax exemption no longer hinges on the use of the asset from which the
revenues were earned, but on the actual, direct and exclusive use of the revenues for educational
purposes.

Parenthetically, income and revenues of non-stock, non-profit educational institution not used

actually, directly and exclusively for educational purposes are not exempt from duties and taxes. To
avail of the exemption, the taxpayer must factually prove that it used actually, directly and
exclusively for educational purposes the revenues or income sought to be exempted.

The crucial point of inquiry then is on the use of the assets or on the use of the revenues. These
are two things that must be viewed and treated separately. But so long as the assets or revenues
are used actually, directly and exclusively for educational purposes, they are exempt from duties
and taxes.

The tax exemption granted by the

Constitution to non-stock, non-profit
educational institutions, unlike the exemption
that may be availed of by proprietary
educational institutions, is not subject to
limitations imposed by law.

That the Constitution treats non-stock, non-profit educational institutions differently from proprietary
educational institutions cannot be doubted. As discussed, the privilege granted to the former is
conditioned only on the actual, direct and exclusive use of their revenues and assets for educational
purposes. In clear contrast, the tax privilege granted to the latter may be subject to limitations
imposed by law.

We spell out below the difference in treatment if only to highlight the privileged status of non-stock,
non-profit educational institutions compared with their proprietary counterparts.

While a non-stock, non-profit educational institution is classified as a tax-exempt entity under Section
30 (Exemptions from Tax on Corporations) of the Tax Code, a proprietary educational institution is
covered by Section 27 (Rates of Income Tax on Domestic Corporations).

To be specific, Section 30 provides that exempt organizations like non-stock, non-profit educational
institutions shall not be taxed on income received by them as such.

Section 27 (B), on the other hand, states that "[p]roprietary educational institutions ... which are
nonprofit shall pay a tax of ten percent (10%) on their taxable income .. . Provided, that if the gross
income from unrelated trade, business or other activity exceeds fifty percent (50%) of the total gross
income derived by such educational institutions ... [the regular corporate income tax of 30%] shall be
imposed on the entire taxable income ... " 92

By the Tax Code's clear terms, a proprietary educational institution is entitled only to the reduced
rate of 10% corporate income tax. The reduced rate is applicable only if: (1) the proprietary
educational institution is nonprofit and (2) its gross income from unrelated trade, business or activity
does not exceed 50% of its total gross income.
Consistent with Article XIV, Section 4 (3) of the Constitution, these limitations do not apply to non-
stock, non-profit educational institutions.

Thus, we declare the last paragraph of Section 30 of the Tax Code without force and effect for being
contrary to the Constitution insofar as it subjects to tax the income and revenues of non-stock, non-
profit educational institutions used actually, directly and exclusively for educational purpose. We
make this declaration in the exercise of and consistent with our duty  to uphold the primacy of the
93

Constitution.94

Finally, we stress that our holding here pertains only to non-stock, non-profit educational institutions
and does not cover the other exempt organizations under Section 30 of the Tax Code.

For all these reasons, we hold that the income and revenues of DLSU proven to have been used
actually, directly and exclusively for educational purposes are exempt from duties and taxes.

II. The LOA issued to DLSU is

not entirely void. The
assessment for taxable year
2003 is valid.

DLSU objects to the CTA En Banc 's conclusion that the LOA is valid for taxable year 2003 and
insists that the entire LOA should be voided for being contrary to RMO No. 43-90, which provides
that if tax audit includes more than one taxable period, the other periods or years shall be specifically
indicated in the LOA.

A LOA is the authority given to the appropriate revenue officer to examine the books of account and
other accounting records of the taxpayer in order to determine the taxpayer's correct internal
revenue liabilities  and for the purpose of collecting the correct amount of tax,  in accordance with
95 96

Section 5 of the Tax Code, which gives the CIR the power to obtain information, to
summon/examine, and take testimony of persons. The LOA commences the audit process  and 97

informs the taxpayer that it is under audit for possible deficiency tax assessment.

Given the purposes of a LOA, is there basis to completely nullify the LOA issued to DLSU, and
consequently, disregard the BIR and the CTA's findings of tax deficiency for taxable year 2003?

We answer in the negative.

The relevant provision is Section C of RMO No. 43-90, the pertinent portion of which reads:

3. A Letter of Authority [LOA] should cover a taxable period not exceeding one taxable year. The
practice of issuing [LO As] covering audit of unverified prior years is hereby prohibited. If the audit of
a taxpayer shall include more than one taxable period, the other periods or years shall be specifically
indicated in the [LOA].98

What this provision clearly prohibits is the practice of issuing LOAs covering audit of unverified prior
years. RMO 43-90 does not say that a LOA which contains unverified prior years is void. It merely
prescribes that if the audit includes more than one taxable period, the other periods or years must be
specified. The provision read as a whole requires that if a taxpayer is audited for more than one
taxable year, the BIR must specify each taxable year or taxable period on separate LOAs.
Read in this light, the requirement to specify the taxable period covered by the LOA is simply to
inform the taxpayer of the extent of the audit and the scope of the revenue officer's authority. Without
this rule, a revenue officer can unduly burden the taxpayer by demanding random accounting
records from random unverified years, which may include documents from as far back as ten years
in cases of fraud audit.99

In the present case, the LOA issued to DLSU is for Fiscal Year Ending 2003 and Unverified Prior
Years. The LOA does not strictly comply with RMO 43-90 because it includes unverified prior years.
This does not mean, however, that the entire LOA is void.

As the CTA correctly held, the assessment for taxable year 2003 is valid because this taxable period
is specified in the LOA. DLSU was fully apprised that it was being audited for taxable year 2003.
Corollarily, the assessments for taxable years 2001 and 2002 are void for having
been unspecified on separate LOAs as required under RMO No. 43-90.

Lastly, the Commissioner's claim that DLSU failed to raise the issue of the LOA' s validity at the CTA
Division, and thus, should not have been entertained on appeal, is not accurate.

On the contrary, the CTA En Banc found that the issue of the LOA's validity came up during the
trial.  DLSU then raised the issue in its memorandum and motion for partial reconsideration with the
100

CTA Division. DLSU raised it again on appeal to the CTA En Banc. Thus, the CTA En Banc could,
as it did, pass upon the validity of the LOA. Besides, the Commissioner had the opportunity to argue
101

for the validity of the LOA at the CTA En Banc but she chose not to file her comment and
memorandum despite notice. 102

III.The CTA correctly admitted

the supplemental evidence
formally offered by DLSU.

The Commissioner objects to the CTA Division's admission of DLSU's supplemental pieces of
documentary evidence.

To recall, DLSU formally offered its supplemental evidence upon filing its motion for reconsideration
with the CTA Division.  The CTA Division admitted the supplemental evidence, which proved that a
103

portion of DLSU's rental income was used actually, directly and exclusively for educational purposes.
Consequently, the CTA Division reduced DLSU's tax liabilities.

We uphold the CTA Division's admission of the supplemental evidence on distinct but mutually
reinforcing grounds, to wit: (1) the Commissioner failed to timely object to the formal offer of
supplemental evidence; and (2) the CTA is not governed strictly by the technical rules of evidence.

First, the failure to object to the offered evidence renders it admissible, and the court cannot, on its
own, disregard such evidence. 104

The Court has held that if a party desires the court to reject the evidence offered, it must so state in
the form of a timely objection and it cannot raise the objection to the evidence for the first time on
appeal.  Because of a party's failure to timely object, the evidence offered becomes part of the
105

evidence in the case. As a consequence, all the parties are considered bound by any outcome
arising from the offer of evidence properly presented. 106
As disclosed by DLSU, the Commissioner did not oppose the supplemental formal offer of evidence
despite notice.  The Commissioner objected to the admission of the supplemental evidence only
107

when the case was on appeal to the CTA En Banc. By the time the Commissioner raised her
objection, it was too late; the formal offer, admission and evaluation of the supplemental
evidence were all fait accompli.

We clarify that while the Commissioner's failure to promptly object had no bearing on the materiality
or sufficiency of the supplemental evidence admitted, she was bound by the outcome of the CTA
Division's assessment of the evidence. 108

Second, the CTA is not governed strictly by the technical rules of evidence. The CTA Division's
admission of the formal offer of supplemental evidence, without prompt objection from the
Commissioner, was thus justified.

Notably, this Court had in the past admitted and considered evidence attached to the taxpayers'
motion for reconsideration.1âwphi1

In the case of BPI-Family Savings Bank v. Court of Appeals,  the tax refund claimant attached to its
109

motion for reconsideration with the CT A its Final Adjustment Return. The Commissioner, as in the
present case, did not oppose the taxpayer's motion for reconsideration and the admission of
the Final Adjustment Return.  We thus admitted and gave weight to the Final Adjustment
110

Return although it was only submitted upon motion for reconsideration.

We held that while it is true that strict procedural rules generally frown upon the submission of
documents after the trial, the law creating the CTA specifically provides that proceedings before it
shall not be governed strictly by the technical rules of evidence  and that the paramount
111

consideration remains the ascertainment of truth. We ruled that procedural rules should not bar
courts from considering undisputed facts to arrive at a just determination of a controversy.112

We applied the same reasoning in the subsequent cases of Filinvest Development Corporation v.
Commissioner of Internal Revenue  and Commissioner of Internal Revenue v. PERF Realty
113

Corporation,  where the taxpayers also submitted the supplemental supporting document only upon
114

filing their motions for reconsideration.

Although the cited cases involved claims for tax refunds, we also dispense with the strict application
of the technical rules of evidence in the present tax assessment case. If anything, the liberal
application of the rules assumes greater force and significance in the case of a taxpayer who claims
a constitutionally granted tax exemption. While the taxpayers in the cited cases claimed refund of
excess tax payments based on the Tax Code,  DLSU is claiming tax exemption based on the
115

Constitution. If liberality is afforded to taxpayers who paid more than they should have under a
statute, then with more reason that we should allow a taxpayer to prove its exemption from tax
based on the Constitution.

Hence, we sustain the CTA's admission of DLSU's supplemental offer of evidence not only because
the Commissioner failed to promptly object, but more so because the strict application of the
technical rules of evidence may defeat the intent of the Constitution.

IV. The CTA's appreciation of

evidence is generally binding on
the Court unless compelling
reasons justify otherwise.
It is doctrinal that the Court will not lightly set aside the conclusions reached by the CTA which, by
the very nature of its function of being dedicated exclusively to the resolution of tax problems, has
developed an expertise on the subject, unless there has been an abuse or improvident exercise of
authority.  We thus accord the findings of fact by the CTA with the highest respect. These findings
116

of facts can only be disturbed on appeal if they are not supported by substantial evidence or there is
a showing of gross error or abuse on the part of the CTA. In the absence of any clear and convincing
proof to the contrary, this Court must presume that the CTA rendered a decision which is valid in
every respect. 117

We sustain the factual findings of the CTA.

The parties failed to raise credible basis for us to disturb the CTA's findings that DLSU had used
actually, directly and exclusively for educational purposes a portion of its assessed income and that
it had remitted the DST payments though an online imprinting machine.

a. DLSU used actually, directly, and exclusively for educational purposes a portion of its assessed
income.

To see how the CTA arrived at its factual findings, we review the process undertaken, from which it
deduced that DLSU successfully proved that it used actually, directly and exclusively for educational
purposes a portion of its rental income.

The CTA reduced DLSU' s deficiency income tax and VAT liabilities in view of the submission of the
supplemental evidence, which consisted of statement of receipts, statement of disbursement and
fund balance and statement of fund changes. 118

These documents showed that DLSU borrowed ₱93.86 Million,  which was used to build the
119

university's Sports Complex. Based on these pieces of evidence, the CTA found that DLSU' s rental
income from its concessionaires were indeed transmitted and used for the payment of this loan. The
CTA held that the degree of preponderance of evidence was sufficiently met to prove actual, direct
and exclusive use for educational purposes.

The CTA also found that DLSU's rental income from other concessionaires, which were allegedly
deposited to a fund (CF-CPA Account),  intended for the university's capital projects, was not
120

proved to have been used actually, directly and exclusively for educational purposes. The
CTA observed that "[DLSU] ... failed to fully account for and substantiate all the disbursements from
the [fund]." Thus, the CTA "cannot ascertain whether rental income from the [other] concessionaires
was indeed used for educational purposes." 121

To stress, the CTA's factual findings were based on and supported by the report of the Independent
CPA who reviewed, audited and examined the voluminous documents submitted by DLSU.

Under the CTA Revised Rules, an Independent CPA's functions include: (a) examination and
verification of receipts, invoices, vouchers and other long accounts; (b) reproduction of, and
comparison of such reproduction with, and certification that the same are faithful copies of original
documents, and pre-marking of documentary exhibits consisting of voluminous documents; (c)
preparation of schedules or summaries containing a chronological listing of the numbers, dates and
amounts covered by receipts or invoices or other relevant documents and the amount(s) of taxes
paid; (d) making findings as to compliance with substantiation requirements under pertinent
tax laws, regulations and jurisprudence; (e) submission of a formal report with certification of
authenticity and veracity of findings and conclusions in the performance of the audit; (f) testifying on
such formal report; and (g) performing such other functions as the CTA may direct. 122
Based on the Independent CPA's report and on its own appreciation of the evidence, the CTA held
that only the portion of the rental income pertaining to the substantiated disbursements (i.e., proved
by receipts, vouchers, etc.) from the CF-CPA Account was considered as used actually, directly and
exclusively for educational purposes. Consequently, the unaccounted and unsubstantiated
disbursements must be subjected to income tax and VAT. 123

The CTA then further reduced DLSU's tax liabilities by cancelling the assessments for taxable years
2001 and 2002 due to the defective LOA. 124

The Court finds that the above fact-finding process undertaken by the CTA shows that it based its
ruling on the evidence on record, which we reiterate, were examined and verified by the Independent
CPA. Thus, we see no persuasive reason to deviate from these factual findings.

However, while we generally respect the factual findings of the CTA, it does not mean that we are
bound by its conclusions. In the present case, we do not agree with the method used by the CTA to
arrive at DLSU' s unsubstantiated rental income (i.e., income not proved to have been actually,
directly and exclusively used for educational purposes).

To recall, the CTA found that DLSU earned a rental income of ₱l0,610,379.00 in taxable year
2003.  DLSU earned this income from leasing a portion of its premises to: 1) MTG-Sports Complex,
125

2) La Casita, 3) Alarey, Inc., 4) Zaide Food Corp., 5) Capri International, and 6) MTO Bookstore. 126

To prove that its rental income was used for educational purposes, DLSU identified the transactions
where the rental income was expended, viz.: 1) ₱4,007,724.00  used to pay the loan obtained by
127

DLSU to build the Sports Complex; and 2) ₱6,602,655.00 transferred to the CF-CPA Account. 128

DLSU also submitted documents to the Independent CPA to prove that the ₱6,602,655.00
transferred to the CF-CPA Account was used actually, directly and exclusively for educational
purposes. According to the Independent CPA' findings, DLSU was able to substantiate
disbursements from the CF-CPA Account amounting to ₱6,259,078.30.

Contradicting the findings of the Independent CPA, the CTA concluded that out of
the ₱l0,610,379.00 rental income, ₱4,841,066.65 was unsubstantiated, and thus, subject to income
tax and VAT. 129

The CTA then concluded that the ratio of substantiated disbursements to the total disbursements
from the CF-CPA Account for taxable year 2003 is only 26.68%.  The CTA held as follows:
130

However, as regards petitioner's rental income from Alarey, Inc., Zaide Food Corp., Capri
International and MTO Bookstore, which were transmitted to the CF-CPA Account, petitioner again
failed to fully account for and substantiate all the disbursements from the CF-CPA Account; thus
failing to prove that the rental income derived therein were actually, directly and exclusively used for
educational purposes. Likewise, the findings of the Court-Commissioned Independent CPA show
that the disbursements from the CF-CPA Account for fiscal year 2003 amounts to ₱6,259,078.30
only. Hence, this portion of the rental income, being the substantiated disbursements of the CF-CPA
Account, was considered by the Special First Division as used actually, directly and exclusively for
educational purposes. Since for fiscal year 2003, the total disbursements per voucher is
₱6,259,078.3 (Exhibit "LL-25-C"), and the total disbursements per subsidiary ledger amounts to
₱23,463,543.02 (Exhibit "LL-29-C"), the ratio of substantiated disbursements for fiscal year 2003 is
26.68% (₱6,259,078.30/₱23,463,543.02). Thus, the substantiated portion of CF-CPA Disbursements
for fiscal year 2003, arrived at by multiplying the ratio of 26.68% with the total rent income added to
and used in the CF-CPA Account in the amount of ₱6,602,655.00 is ₱1,761,588.35.  (emphasis
131

supplied)

For better understanding, we summarize the CTA's computation as follows:

1. The CTA subtracted the rent income used in the construction of the Sports Complex
(₱4,007,724.00) from the rental income (₱10,610,379.00) earned from the abovementioned
concessionaries. The difference (₱6,602,655.00) was the portion claimed to have been deposited to
the CF-CPA Account.

2. The CTA then subtracted the supposed substantiated portion of CF-CPA disbursements

(₱1,761,308.37) from the ₱6,602,655.00 to arrive at the supposed unsubstantiated portion of the
rental income (₱4,841,066.65). 132

3. The substantiated portion of CF-CPA disbursements (₱l,761,308.37)  was derived by multiplying

133

the rental income claimed to have been added to the CF-CPA Account (₱6,602,655.00) by 26.68%
or the ratio of substantiated disbursements to total disbursements (₱23,463,543.02).

4. The 26.68% ratio  was the result of dividing the substantiated disbursements from the CF-CPA
134

Account as found by the Independent CPA (₱6,259,078.30) by the total disbursements

(₱23,463,543.02) from the same account.

We find that this system of calculation is incorrect and does not truly give effect to the constitutional
grant of tax exemption to non-stock, non-profit educational institutions. The CTA's reasoning is
flawed because it required DLSU to substantiate an amount that is greater than the rental income
deposited in the CF-CPA Account in 2003.

To reiterate, to be exempt from tax, DLSU has the burden of proving that the proceeds of its rental
income (which amounted to a total of ₱10.61 million)  were used for educational purposes. This
135

amount was divided into two parts: (a) the ₱4.0l million, which was used to pay the loan obtained for
the construction of the Sports Complex; and (b) the ₱6.60 million,  which was transferred to the CF-
136

CPA account.

For year 2003, the total disbursement from the CF-CPA account amounted to ₱23 .46
million.  These figures, read in light of the constitutional exemption, raises the question: does DLSU
137

claim that the whole total CF-CPA disbursement of ₱23.46 million is tax-exempt so that it is
required to prove that all these disbursements had been made for educational purposes?

We answer in the negative.

The records show that DLSU never claimed that the total CF-CPA disbursements of ₱23.46 million
had been for educational purposes and should thus be tax-exempt; DLSU only claimed ₱10.61
million for tax-exemption and should thus be required to prove that this amount had been used as
claimed.

Of this amount, ₱4.01 had been proven to have been used for educational purposes, as confirmed
by the Independent CPA. The amount in issue is therefore the balance of ₱6.60 million which was
transferred to the CF-CPA which in turn made disbursements of ₱23.46 million for various general
purposes, among them the ₱6.60 million transferred by DLSU.
Significantly, the Independent CPA confirmed that the CF-CPA made disbursements for educational
purposes in year 2003 in the amount ₱6.26 million. Based on these given figures, the CT A
concluded that the expenses for educational purposes that had been coursed through the CF-CPA
should be prorated so that only the portion that ₱6.26 million bears to the total CF-CPA
disbursements should be credited to DLSU for tax exemption.

This approach, in our view, is flawed given the constitutional requirement that revenues actually and
directly used for educational purposes should be tax-exempt. As already mentioned above, DLSU is
not claiming that the whole ₱23.46 million CF-CPA disbursement had been used for educational
purposes; it only claims that ₱6.60 million transferred to CF-CPA had been used for educational
purposes. This was what DLSU needed to prove to have actually and directly used for educational
purposes.

That this fund had been first deposited into a separate fund (the CF -CPA established to fund capital
projects) lends peculiarity to the facts of this case, but does not detract from the fact that the
deposited funds were DLSU revenue funds that had been confirmed and proven to have been
actually and directly used for educational purposes via the CF-CPA. That the CF-CPA might have
had other sources of funding is irrelevant because the assessment in the present case pertains only
to the rental income which DLSU indisputably earned as revenue in 2003. That the proven CF-CPA
funds used for educational purposes should not be prorated as part of its total CF-CPA
disbursements for purposes of crediting to DLSU is also logical because no claim whatsoever had
been made that the totality of the CF-CPA disbursements had been for educational purposes. No
prorating is necessary; to state the obvious, exemption is based on actual and direct use and this
DLSU has indisputably proven.

Based on these considerations, DLSU should therefore be liable only for the difference between
what it claimed and what it has proven. In more concrete terms, DLSU only had to prove that its
rental income for taxable year 2003 (₱10,610,379.00) was used for educational purposes. Hence,
while the total disbursements from the CF-CPA Account amounted to ₱23,463,543.02, DLSU only
had to substantiate its Pl0.6 million rental income, part of which was the ₱6,602,655.00 transferred
to the CF-CPA account. Of this latter amount, ₱6.259 million was substantiated to have been used
for educational purposes.

To summarize, we thus revise the tax base for deficiency income tax and VAT for taxable year 2003
as follows:

  CTA
Decision 138
Revised
Rental income 10,610,379.00 10,610,379.00

Less: Rent income used in construction of 4,007,724.00 4,007,724.00

the Sports Complex

     
Rental income deposited to the CF-CPA
6,602,655.00 6,602,655.00
Account
     

Less: Substantiated portion of CF-CPA 1,761,588.35 6,259,078.30

disbursements
      
Tax base for deficiency income tax and
4,841,066.65 343.576.70
VAT

On DLSU' s argument that the CTA should have appreciated its evidence in the same way as it did
with the evidence submitted by Ateneo in another separate case, the CTA explained that the issue in
the Ateneo case was not the same as the issue in the present case.

The issue in the Ateneo case was whether or not Ateneo could be held liable to pay income taxes
and VAT under certain BIR and Department of Finance issuances  that required the educational
139

institution to own and operate the canteens, or other commercial enterprises within its campus, as
condition for tax exemption. The CTA held that the Constitution does not require the educational
institution to own or operate these commercial establishments to avail of the exemption. 140

Given the lack of complete identity of the issues involved, the CTA held that it had to evaluate the
separate sets of evidence differently. The CTA likewise stressed that DLSU and Ateneo gave distinct
defenses and that its wisdom "cannot be equated on its decision on two different cases with two
different issues."141

DLSU disagrees with the CTA and argues that the entire assessment must be cancelled because it
submitted similar, if not stronger sets of evidence, as Ateneo. We reject DLSU's argument for
being non sequitur. Its reliance on the concept of uniformity of taxation is also incorrect.

First, even granting that Ateneo and DLSU submitted similar evidence, the sufficiency and

materiality of the evidence supporting their respective claims for tax exemption would necessarily
differ because their attendant issues and facts differ.

To state the obvious, the amount of income received by DLSU and by Ateneo during the taxable
years they were assessed varied. The amount of tax assessment also varied. The amount of
income proven to have been used for educational purposes
also varied because the amount substantiated varied.  Thus, the amount of tax assessment
142

cancelled by the CTA varied.

On the one hand, the BIR assessed DLSU a total tax deficiency of ₱17,303,001.12 for taxable years
2001, 2002 and 2003. On the other hand, the BIR assessed Ateneo a total deficiency tax
of ₱8,864,042.35 for the same period. Notably, DLSU was assessed deficiency DST, while Ateneo
was not.143

Thus, although both Ateneo and DLSU claimed that they used their rental income actually, directly
and exclusively for educational purposes by submitting similar evidence, e.g., the testimony of their
employees on the use of university revenues, the report of the Independent CPA, their income
summaries, financial statements, vouchers, etc., the fact remains that DLSU failed to prove that a
portion of its income and revenues had indeed been used for educational purposes.

The CTA significantly found that some documents that could have fully supported DLSU's claim
were not produced in court. Indeed, the Independent CPA testified that some disbursements had not
been proven to have been used actually, directly and exclusively for educational purposes. 144

The final nail on the question of evidence is DLSU's own admission that the original of these
documents had not in fact been produced before the CTA although it claimed that there was no bad
faith on its part.  To our mind, this admission is a good indicator of how the Ateneo and the DLSU
145

cases varied, resulting in DLSU's failure to substantiate a portion of its claimed exemption.

Further, DLSU's invocation of Section 5, Rule 130 of the Revised

Rules on Evidence, that the contents of the missing supporting documents were proven by its recital
in some other authentic documents on record,  can no longer be entertained at this late stage of the
146

proceeding. The CTA did not rule on this particular claim. The CTA also made no finding on DLSU' s
assertion of lack of bad faith. Besides, it is not our duty to go over these documents to test the
truthfulness of their contents, this Court not being a trier of facts.

Second, DLSU misunderstands the concept of uniformity of taxation.

Equality and uniformity of taxation means that all taxable articles or kinds of property of the same
class shall be taxed at the same rate.  A tax is uniform when it operates with the same force and
147

effect in every place where the subject of it is found.  The concept requires that all subjects of
148

taxation similarly situated should be treated alike and placed in equal footing.149

In our view, the CTA placed Ateneo and DLSU in equal footing. The CTA treated them alike because
their income proved to have been used actually, directly and exclusively for educational purposes
were exempted from taxes. The CTA equally applied the requirements in the YMCA case to test if
they indeed used their revenues for educational purposes.

DLSU can only assert that the CTA violated the rule on uniformity if it can show that,
despite proving that it used actually, directly and exclusively for educational purposes its income and
revenues, the CTA still affirmed the imposition of taxes. That the DLSU secured a different result
happened because it failed to fully prove that it used actually, directly and exclusively for educational
purposes its revenues and income.

On this point, we remind DLSU that the rule on uniformity of taxation does not mean that subjects of
taxation similarly situated are treated in literally the same way in all and every occasion. The fact
that the Ateneo and DLSU are both non-stock, non-profit educational institutions, does not mean that
the CTA or this Court would similarly decide every case for (or against) both universities. Success in
tax litigation, like in any other litigation, depends to a large extent on the sufficiency of evidence.
DLSU's evidence was wanting, thus, the CTA was correct in not fully cancelling its tax liabilities.

b. DLSU proved its payment of the DST

The CTA affirmed DLSU's claim that the DST due on its mortgage and loan transactions were paid
and remitted through its bank's On-Line Electronic DST Imprinting Machine. The Commissioner
argues that DLSU is not allowed to use this method of payment because an educational institution is
excluded from the class of taxpayers who can use the On-Line Electronic DST Imprinting Machine.

We sustain the findings of the CTA. The Commissioner's argument lacks basis in both the Tax Code
and the relevant revenue regulations.

DST on documents, loan agreements, and papers shall be levied, collected and paid for by the
person making, signing, issuing, accepting, or transferring the same.  The Tax Code provides that
150

whenever one party to the document enjoys exemption from DST, the other party not exempt from
DST shall be directly liable for the tax. Thus, it is clear that DST shall be payable by any party to the
document, such that the payment and compliance by one shall mean the full settlement of the DST
due on the document.

In the present case, DLSU entered into mortgage and loan agreements with banks. These
agreements are subject to DST.  For the purpose of showing that the DST on the loan agreement
151

has been paid, DLSU presented its agreements bearing the imprint showing that DST on the
document has been paid by the bank, its counterparty. The imprint should be sufficient proof that
DST has been paid. Thus, DLSU cannot be further assessed for deficiency DST on the said
documents.

Finally, it is true that educational institutions are not included in the class of taxpayers who can pay
and remit DST through the On-Line Electronic DST Imprinting Machine under RR No. 9-2000. As
correctly held by the CTA, this is irrelevant because it was not DLSU who used the On-Line
Electronic DST Imprinting Machine but the bank that handled its mortgage and loan transactions.
RR No. 9-2000 expressly includes banks in the class of taxpayers that can use the On-Line
Electronic DST Imprinting Machine.

Thus, the Court sustains the finding of the CTA that DLSU proved the

payment of the assessed DST deficiency, except for the unpaid balance of

₱13,265.48. 152

WHEREFORE, premises considered, we DENY the petition of the Commissioner of Internal

Revenue in G.R. No. 196596 and AFFIRM the December 10, 2010 decision and March 29, 2011
resolution of the Court of Tax Appeals En Banc in CTA En Banc Case No. 622, except for the total
amount of deficiency tax liabilities of De La Salle University, Inc., which had been reduced.

We also DENY both the petition of De La Salle University, Inc. in G.R. No. 198841 and the petition of
the Commissioner of Internal Revenue in G.R. No. 198941 and thus AFFIRM the June 8, 2011
decision and October 4, 2011 resolution of the Court of Tax Appeals En Banc in CTA En Banc Case
No. 671, with the MODIFICATION that the base for the deficiency income tax and VAT for taxable
year 2003 is ₱343,576.70.

SO ORDERED.

ax Case Digest: Planters Product V. Fertiphil

Corp. (2008)
 Planters Product v. Fertiphil Corp.
G.R. No. 166006  March 14, 2008
REYES, R.T., J.

Lessons Applicable:  Bet. private and public suit, easier to file public suit, Apply real party in interest
test for private suit and direct injury test for public suit, Validity test varies depending on which
inherent power
Laws Applicable:

FACTS:

 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 which resulted in having Fertiphil paying P 10/bag sold to
the Fertilizer and Perticide Authority (FPA).
 FPA remits its collection to Far East Bank and Trust Company who applies to the payment of
corporate debts of Planters Products Inc. (PPI)
 After the Edsa Revolution, FPA voluntarily stopped the imposition of the P10 levy.  Upon
return of democracy, Fertiphil demanded a refund but PPI refused.  Fertiphil filed a complaint for
collection and damages against FPA and PPI with the RTC on the ground that LOI No. 1465 is
unjust, unreaonable oppressive, invalid and unlawful resulting to denial of due process of law.  
 FPA answered that it is a valid exercise of the police power of the state in ensuring the
stability of the fertilizing industry in the country and that Fertiphil did NOT sustain damages since
the burden imposed fell on the ultimate consumers.
 RTC and CA favored Fertiphil holding that it is an exercise of the power of taxation ad is as
such because it  is NOT for public purpose as PPI is a private corporation.
 ISSUE:
1. W/N Fertiphil has locus standi
2. W/N LOI No. 1465 is an invalid exercise of the power of taxation rather the police power

Held:
1. Yes.  In private suits, locus standi requires a litigant to be a "real party in interest" or party who
stands to be benefited or injured by the judgment in the suit.  In public suits, there is the right of the
ordinary citizen to petition the courts to be freed from unlawful government intrusion and illegal
official action subject to the  direct injury test or where there must be personal and substantial
interest in the case such that he has sustained or will sustain direct injury as a result.  Being a mere
procedural technicality, it has also been held that locus standi may be waived in the public interest
such as cases of transcendental importance or with far-reaching implications whether  private or
public suit, Fertiphil has locus standi.

2. As a seller, it bore the ultimate burden of paying the levy which made its products more expensive
and harm its business.  It is also of paramount public importance since it involves the
constitutionality of a tax law and use of taxes for public purpose.

3. Yes. Police power and the power of taxation are inherent powers of the state but distinct and have
different tests for validity.  Police power is the power of the state to enact the legislation that may
interfere with personal liberty on property in order to promote general welfare.  While, the power of
taxation is the power to levy taxes as 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.  The power of taxation, on the other hand, is circumscribed by inherent and constitutional
limitations.

In this case, it is for purpose of revenue.  But it is a robbery for the State to tax the citizen and use
the funds generation for a private purpose.  Public purpose does NOT only pertain to those purpose
which are traditionally viewed as essentially governmental function 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.

COMMISSIONER OF INTERNAL G.R. No. 159647

REVENUE,
Petitioner, Present:
Panganiban, J.,
Chairman,
Sandoval-Gutierrez,
- versus - Corona,
Carpio Morales, and
Garcia, JJ
CENTRAL LUZON DRUG Promulgated:
CORPORATION,
Respondent. April 15, 2005
x -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- x
 
 

DECISION
 
 
PANGANIBAN, J.:
 
 

T
he 20 percent discount required by the law to be given to senior
citizens is a tax credit, not merely a tax deduction from the
gross income or gross sale of the establishment concerned.
A tax credit is used by a private establishment only after the
tax has been computed; a tax deduction, before the tax is computed. RA
7432 unconditionally grants a tax credit to all covered entities. Thus, the
provisions of the revenue regulation that withdraw or modify such grant
are void. Basic is the rule that administrative regulations cannot amend
or revoke the law.
 
The Case
 

Before us is a Petition for Review[1] under Rule 45 of the Rules of

Court, seeking to set aside the August 29, 2002 Decision[2] and the
August 11, 2003 Resolution[3] of the Court of Appeals (CA) in CA-GR
SP No. 67439. The assailed Decision reads as follows:
 

WHEREFORE, premises considered, the Resolution appealed

from is AFFIRMED in toto. No costs.[4]

The assailed Resolution denied petitioners Motion for Reconsideration.

The Facts
 

The CA narrated the antecedent facts as follows:

 

Respondent is a domestic corporation primarily engaged in retailing

of medicines and other pharmaceutical products. In 1996, it
operated six (6) drugstores under the business name and style
Mercury Drug.

From January to December 1996, respondent granted twenty (20%)

percent sales discount to qualified senior citizens on their purchases
of medicines pursuant to Republic Act No. [R.A.] 7432 and its
Implementing Rules and Regulations. For the said period, the
amount allegedly representing the 20% sales discount granted by
respondent to qualified senior citizens totaled P904,769.00.

On April 15, 1997, respondent filed its Annual Income Tax Return for
taxable year 1996 declaring therein that it incurred net losses from
its operations.

On January 16, 1998, respondent filed with petitioner a claim for tax
refund/credit in the amount of P904,769.00 allegedly arising from the
20% sales discount granted by respondent to qualified senior
citizens in compliance with [R.A.] 7432. Unable to obtain affirmative
response from petitioner, respondent elevated its claim to the Court
of Tax Appeals [(CTA or Tax Court)] via a Petition for Review.

On February 12, 2001, the Tax Court rendered

a Decision[5] dismissing respondents Petition for lack of merit. In said
decision, the [CTA] justified its ruling with the following ratiocination:

 
x x x, if no tax has been paid to the government, erroneously or
illegally, or if no amount is due and collectible from the taxpayer,
tax refund or tax credit is unavailing. Moreover, whether the
recovery of the tax is made by means of a claim for refund or tax
credit, before recovery is allowed[,] it must be first established that
there was an actual collection and receipt by the government of
the tax sought to be recovered. x x x.

xxxxxxxxx

Prescinding from the above, it could logically be deduced that tax

credit is premised on the existence of tax liability on the part of
taxpayer. In other words, if there is no tax liability, tax credit is not
available.

 
 Respondent lodged a Motion for Reconsideration. The [CTA], in its
assailed resolution,[6] granted respondents motion for
reconsideration and ordered herein petitioner to issue a Tax Credit
Certificate in favor of respondent citing the decision of the then
Special Fourth Division of [the CA] in CA G.R. SP No. 60057
entitled Central [Luzon] Drug Corporation vs. Commissioner of
Internal Revenue promulgated on May 31, 2001, to wit:

 
However, Sec. 229 clearly does not apply in the instant case
because the tax sought to be refunded or credited by petitioner
was not erroneously paid or illegally collected. We take exception
to the CTAs sweeping but unfounded statement that both tax
refund and tax credit are modes of recovering taxes which are
either erroneously or illegally paid to the government. Tax refunds
or credits do not exclusively pertain to illegally collected or
erroneously paid taxes as they may be other circumstances where
a refund is warranted. The tax refund provided under Section 229
deals exclusively with illegally collected or erroneously paid taxes
but there are other possible situations, such as the refund of
excess estimated corporate quarterly income tax paid, or that of
excess input tax paid by a VAT-registered person, or that of
excise tax paid on goods locally produced or manufactured but
actually exported. The standards and mechanics for the grant of a
refund or credit under these situations are different from that
under Sec. 229. Sec. 4[.a)] of R.A. 7432, is yet another instance of
a tax credit and it does not in any way refer to illegally collected or
erroneously paid taxes, x x x.[7]

Ruling of the Court of Appeals

 
 

The CA affirmed in toto the Resolution of the Court of Tax Appeals

(CTA) ordering petitioner to issue a tax credit certificate in favor of
respondent in the reduced amount of P903,038.39. It reasoned that
Republic Act No. (RA) 7432 required neither a tax liability nor a
payment of taxes by private establishments prior to the availment of a
tax credit. Moreover, such credit is not tantamount to an unintended
benefit from the law, but rather a just compensation for the taking of
private property for public use.

Hence this Petition.[8]

 
The Issues
 

Petitioner raises the following issues for our consideration:

 
Whether the Court of Appeals erred in holding that respondent may
claim the 20% sales discount as a tax credit instead of as a
deduction from gross income or gross sales.

Whether the Court of Appeals erred in holding that respondent is

entitled to a refund.[9]
  

These two issues may be summed up in only one: whether respondent,

despite incurring a net loss, may still claim the 20 percent sales discount
as a tax credit.

The Courts Ruling

 
The Petition is not meritorious.

 
 
Sole Issue:
Claim of 20 Percent Sales Discount
as  Tax Credit  Despite  Net Loss
 

Section 4a) of RA 7432[10] grants to senior citizens the privilege of

obtaining a 20 percent discount on their purchase of medicine from any
private establishment in the country.[11]The latter may then claim the cost
of the discount as a tax credit.[12] But can such credit be claimed, even
though an establishment operates at a loss?
 

We answer in the affirmative.

 
Tax Credit versus
Tax Deduction

Although the term is not specifically defined in our Tax Code,[13] tax

credit generally refers to an amount that is subtracted directly from ones
total tax liability.[14] It is an allowance against the tax itself[15] or a
deduction from what is owed[16] by a taxpayer to the government.
Examples of tax credits are withheld taxes, payments of estimated tax,
and investment tax credits.[17]

Tax credit should be understood in relation to other tax concepts. One of

these is tax deduction -- defined as a subtraction from income for tax
purposes,[18] or an amount that is allowed by law to reduce income prior
to [the] application of the tax rate to compute the amount of tax which is
due.[19] An example of a tax deduction is any of the allowable deductions
enumerated in Section 34[20] of the Tax Code.

 
A tax credit differs from a tax deduction. On the one hand, a tax
credit reduces the tax due, including -- whenever applicable --
the income tax that is determined after applying the corresponding tax
rates to taxable income.[21] A tax deduction, on the other, reduces the
income that is subject to tax[22] in order to arrive at taxable income.[23] To
think of the former as the latter is to avoid, if not entirely confuse, the
issue. A tax credit is used only after the tax has been computed; a tax
deduction, before.

 
Tax Liability Required
for  Tax Credit

Since a tax credit is used to reduce directly the tax that is due, there
ought to be a tax liability before the tax credit can be applied. Without
that liability, any tax credit application will be useless. There will be no
reason for deducting the latter when there is, to begin with, no existing
obligation to the government. However, as will be presented shortly,
the existence of a tax credit or its grant by law is not the same as
the availment or use of such credit. While the grant is mandatory, the
availment or use is not.

 
If a net loss is reported by, and no other taxes are currently due from, a
business establishment, there will obviously be no tax liability against
which any tax credit can be applied.[24]For the establishment to choose
the immediate availment of a tax credit will be premature and
impracticable. Nevertheless, the irrefutable fact remains that, under RA
7432, Congress has granted without conditions a tax credit benefit to all
covered establishments.

Although this tax credit benefit is available, it need not be used by

losing ventures, since there is no tax liability that calls for its
application. Neither can it be reduced to nil by the quick yet callow
stroke of an administrative pen, simply because no reduction of taxes
can instantly be effected. By its nature, the tax credit may still be
deducted from a future, not a present, tax liability, without which it does
not have any use. In the meantime, it need not move. But it breathes.

 
Prior Tax Payments Not
Required for  Tax Credit

While a tax liability is essential to the availment or use of any tax credit,

prior tax payments are not. On the contrary, for the existence or
grant solely of such credit, neither a tax liability nor a prior tax payment
is needed. The Tax Code is in fact replete with provisions granting or
allowing tax credits, even though no taxes have been previously paid.

For example, in computing the estate tax due, Section 86(E) allows a tax
credit -- subject to certain limitations -- for estate taxes paid to a foreign
country. Also found in Section 101(C) is a similar provision for donors
taxes -- again when paid to a foreign country -- in computing for
the donors tax due. The tax credits in both instances allude to the prior
payment of taxes, even if not made to our government.

Under Section 110, a VAT (Value-Added Tax)- registered person

engaging in transactions -- whether or not subject to the VAT -- is also
allowed a tax credit that includes a ratable portion of any input tax not
directly attributable to either activity. This input tax may either be the
VAT on the purchase or importation of goods or services that is merely
due from -- not necessarily paid by -- such VAT-registered person in the
course of trade or business; or the transitional input tax determined in
accordance with Section 111(A). The latter type may in fact be an
amount equivalent to only eight percent of the value of a VAT-registered
persons beginning inventory of goods, materials and supplies, when such
amount -- as computed -- is higher than the actual VAT paid on the said
items.[25] Clearly from this provision, the tax credit refers to an input tax
that is either due only or given a value by mere comparison with the
VAT actually paid -- then later prorated. No tax is actually paid prior to
the availment of such credit.

In Section 111(B), a one and a half percent input tax credit that is merely

presumptive is allowed. For the purchase of primary agricultural
products used as inputs -- either in the processing of sardines, mackerel
and milk, or in the manufacture of refined sugar and cooking oil -- and
for the contract price of public work contracts entered into with the
government, again, no prior tax payments are needed for the use of
the tax credit.

More important, a VAT-registered person whose sales are zero-rated or

effectively zero-rated may, under Section 112(A), apply for the issuance
of a tax credit certificate for the amount of creditable input taxes merely
due -- again not necessarily paid to -- the government and attributable to
such sales, to the extent that the input taxes have not been applied
against output taxes.[26] Where a taxpayer 
is engaged in zero-rated or effectively zero-rated sales and also in
taxable or exempt sales, the amount of creditable input taxes due that are
not directly and entirely attributable to any one of these transactions
shall be proportionately allocated on the basis of the volume of sales.
Indeed, in availing of such tax credit for VAT purposes, this provision --
as well as the one earlier mentioned -- shows that the prior payment of
taxes is not a requisite.

It may be argued that Section 28(B)(5)(b) of the Tax Code is another

illustration of a tax credit allowed, even though no prior tax payments
are not required. Specifically, in this provision, the imposition of a final
withholding tax rate on cash and/or property dividends received by a
nonresident foreign corporation from a domestic corporation is subjected
to the condition that a foreign tax credit will be given by the domiciliary
country in an amount equivalent to taxes that are merely deemed paid.
[27]
 Although true, this provision actually refers to the tax credit as
a condition only for the imposition of a lower tax rate, not as
a deduction from the corresponding tax liability. Besides, it is not our
government but the domiciliary country that credits against the income
tax payable to the latter by the foreign corporation, the tax to be
foregone or spared.[28]

In contrast, Section 34(C)(3), in relation to Section 34(C)(7)(b),

categorically allows as credits, against the income tax imposable under
Title II, the amount of income taxes merely incurred -- not necessarily
paid -- by a domestic corporation during a taxable year in any foreign
country. Moreover, Section 34(C)(5) provides that for such taxes
incurred but not paid, a tax credit may be allowed, subject to the
condition precedent that the taxpayer shall simply give a bond with
sureties satisfactory to and approved by petitioner, in such sum as may
be required; and further conditioned upon payment by the taxpayer of
any tax found due, upon petitioners redetermination of it.

In addition to the above-cited provisions in the Tax Code, there are also
tax treaties and special laws that grant or allow tax credits, even though
no prior tax payments have been made.

Under the treaties in which the tax credit method is used as a relief to

avoid double taxation, income that is taxed in the state of source is also
taxable in the state of residence, but the tax paid in the former is merely
allowed as a credit against the tax levied in the latter.[29] Apparently,
payment is made to the state of source, not the state of residence. No
tax, therefore, has been previously paid to the latter.

Under special laws that particularly affect businesses, there can also
be tax credit incentives. To illustrate, the incentives provided for in
Article 48 of Presidential Decree No. (PD) 1789, as amended by Batas
Pambansa Blg. (BP) 391, include tax credits equivalent to either five
percent of the net value earned, or five or ten percent of the net local
content of exports.[30] In order to avail of such credits under the said law
and still achieve its objectives, no prior tax payments are necessary.

From all the foregoing instances, it is evident that prior tax payments are
not indispensable to the availment of a tax credit. Thus, the CA correctly
held that the availment under RA 7432 did not require prior tax
payments by private establishments concerned.[31] However, we do not
agree with its finding[32] that the carry-over of tax credits under the said
special law to succeeding taxable periods, and even their application
against internal revenue taxes, did not necessitate the existence of a tax
liability.

The examples above show that a tax liability is certainly important in

the availment or use, not the existence or grant, of a tax credit.
Regarding this matter, a private establishment reporting a net loss in its
financial statements is no different from another that presents a net
income. Both are entitled to the tax credit provided for under RA 7432,
since the law itself accords that unconditional benefit. However, for the
losing establishment to immediately apply such credit, where no tax is
due, will be an improvident usance.

 
Sections 2.i and 4 of Revenue
Regulations No. 2-94 Erroneous

RA 7432 specifically allows private establishments to claim as tax

credit the amount of discounts they grant.[33] In turn, the Implementing
Rules and Regulations, issued pursuant thereto, provide the procedures
for its availment.[34] To deny such credit, despite the plain mandate of the
law and the regulations carrying out that mandate, is indefensible.

First, the definition given by petitioner is erroneous. It refers to tax

credit as the amount representing the 20 percent discount that shall be
deducted by the said establishments from their gross income for income
tax purposes and from their gross sales for value-added tax or other
percentage tax purposes.[35] In ordinary business language, the tax
credit represents the amount of such discount. However, the manner by
which the discount shall be credited against taxes has not been clarified
by the revenue regulations.

By ordinary acceptation, a discount is an abatement or reduction made

from the gross amount or value of anything.[36] To be more precise, it is
in business parlance a deduction or lowering of an amount of money;
[37]
 or a reduction from the full amount or value of something, especially
a price.[38] In business there are many kinds of discount, the most
common of which is that affecting the income statement[39] or financial
report upon which the income tax is based.

 
Business Discounts
Deducted from  Gross Sales

A cash discount, for example, is one granted by business establishments

to credit customers for their prompt payment.[40] It is a reduction in price
offered to the purchaser if payment is made within a shorter period of
time than the maximum time specified.[41] Also referred to as a sales
discount on the part of the seller and a purchase discount on the part of
the buyer, it may be expressed in such 
terms as 5/10, n/30.[42]

A quantity discount, however, is a reduction in price allowed for

purchases made in large quantities, justified by savings in packaging,
shipping, and handling.[43] It is also called a volume or bulk discount.[44]

A percentage reduction from the list price x x x allowed by

manufacturers to wholesalers and by wholesalers to retailers[45] is known
as a trade discount. No entry for it need be made in the manual or
computerized books of accounts, since the purchase or sale is already
valued at the net price actually charged the buyer.[46] The purpose for the
discount is to encourage trading or increase sales, and the prices at
which the purchased goods may be resold are also suggested.[47] Even
a chain discount -- a series of discounts from one list price -- is recorded
at net.[48]

Finally, akin to a trade discount is a functional discount. It is a suppliers

price discount given to a purchaser based on the [latters] role in the
[formers] distribution system.[49] This role usually involves warehousing
or advertising.

Based on this discussion, we find that the nature of a sales discount is

peculiar. Applying generally accepted accounting principles (GAAP) in
the country, this type of discount is reflected in the income
statement[50] as a line item deducted -- along with returns, allowances,
rebates and other similar expenses -- from gross sales to arrive at net
sales.[51] This type of presentation is resorted to, because the accounts
receivable and sales figures that arise from sales discounts, -- as well as
from quantity, volume or bulk discounts -- are recorded in the manual
and computerized books of accounts and reflected in the financial
statements at the gross amounts of the invoices.[52] This manner of
recording credit sales -- known as the gross method -- is most widely
used, because it is simple, more convenient to apply than the net method,
and produces no material errors over time.[53]

However, under the net method used in

recording trade, chain or functional discounts, only the net amounts of
the invoices -- after the discounts have been deducted -- are recorded in
the books of accounts[54] and reflected in the financial statements. A
separate line item cannot be shown,[55] because the transactions
themselves involving both accounts receivable and saleshave already
been entered into, net of the said discounts.

The term sales discounts is not expressly defined in the Tax Code, but
one provision adverts to amounts whose sum -- along with sales
returns, allowances and cost of goods sold[56] -- is deducted from gross
sales to come up with the gross income, profit or margin[57] derived from
business.[58] In another provision therein, sales discounts that are granted
and indicated in the invoices at the time of sale -- and that do not depend
upon the happening of any future event -- may be excluded from
the gross sales within the same quarter they were given.[59]While
determinative only of the VAT, the latter provision also appears as a
suitable reference point for income tax purposes already embraced in the
former. After all, these two provisions affirm that sales discounts are
amounts that are always deductible from gross sales.
 

Reason for the Senior Citizen Discount:

The Law, Not Prompt Payment

A distinguishing feature of the implementing rules of RA 7432 is the

private establishments outright deduction of the discount from the
invoice price of the medicine sold to the senior citizen.[60] It is, therefore,
expected that for each retail sale made under this law, the discount
period lasts no more than a day, because such discount is given -- and
the net amount thereof collected -- immediately upon perfection of the
sale.[61] Although prompt payment is made for an arms-length transaction
by the senior citizen, the real and compelling reason for the private
establishment giving the discount is that the law itself makes it
mandatory.

What RA 7432 grants the senior citizen is a mere discount privilege, not
a sales discount or any of the above discounts in particular. Prompt
payment is not the reason for (although a necessary consequence of)
such grant. To be sure, the privilege enjoyed by the senior citizen must
be equivalent to the tax credit benefit enjoyed by the private
establishment granting the discount. Yet, under the revenue regulations
promulgated by our tax authorities, this benefit has been erroneously
likened and confined to a sales discount.

To a senior citizen, the monetary effect of the privilege may be the same
as that resulting from a sales discount. However, to a private
establishment, the effect is different from a simple reduction in price that
results from such discount. In other words, the tax credit benefit is not
the same as a sales discount. To repeat from our earlier discourse, this
benefit cannot and should not be treated as a tax deduction.

To stress, the effect of a sales discount on the income

statement and income tax return of an establishment covered by RA
7432 is different from that resulting from the availment or use of its tax
credit benefit. While the former is a deduction before, the latter is a
deduction after, the income tax is computed. As mentioned earlier, a
discount is not necessarily a sales discount, and a tax credit for a simple
discount privilege should not be automatically treated like a sales
discount. Ubi lex non distinguit, nec nos distinguere debemus. Where the
law does not distinguish, we ought not to distinguish.

Sections 2.i and 4 of Revenue Regulations No. (RR) 2-94 define tax

credit as the 20 percent discount deductible from gross
income for income tax purposes, or from gross sales for VAT or other
percentage tax purposes. In effect, the tax credit benefit under RA 7432
is related to a sales discount. This contrived definition is improper,
considering that the latter has to be deducted from gross sales in order to
compute the gross income in the income statement and cannot be
deducted again, even for purposes of computing the income tax.

When the law says that the cost of the discount may be claimed as a tax
credit, it means that the amount -- when claimed -- shall be treated as a
reduction from any tax liability, plain and simple. The option to avail of
the tax credit benefit depends upon the existence of a tax liability, but to
limit the benefit to a sales discount -- which is not even identical to the
discount privilege that is granted by law -- does not define it at all and
serves no useful purpose. The definition must, therefore, be stricken
down.

 
Laws Not Amended
by Regulations

Second, the law cannot be amended by a mere regulation. In fact,

a regulation that operates to create a rule out of harmony with 
the statute is a mere nullity;[62] it cannot prevail.
 

It is a cardinal rule that courts will and should respect the

contemporaneous construction placed upon a statute by the executive
officers whose duty it is to enforce it x x x.[63] In the scheme of judicial
tax administration, the need for certainty and predictability in the
implementation of tax laws is crucial.[64] Our tax authorities fill in the
details that Congress may not have the opportunity or competence to
provide.[65] The regulations these authorities issue are relied upon by
taxpayers, who are certain that these will be followed by the courts.
[66]
 Courts, however, will not uphold these authorities interpretations
when clearly absurd, erroneous or improper.

In the present case, the tax authorities have given the term tax
credit in Sections 2.i and 4 of RR 2-94 a meaning utterly in contrast to
what RA 7432 provides. Their interpretation has muddled up the intent
of Congress in granting a mere discount privilege, not a sales discount.
The administrative agency issuing these regulations may not enlarge,
alter or restrict the provisions of the law it administers; it cannot engraft
additional requirements not contemplated by the legislature.[67]

In case of conflict, the law must prevail.[68] A regulation adopted

pursuant to law is law.[69] Conversely, a regulation or any portion thereof
not adopted pursuant to law is no law and has neither the force nor the
effect of law.[70]

 
Availment of  Tax
Credit Voluntary

Third, the word may in the text of the statute[71] implies that the 

availability of the tax credit benefit is neither unrestricted nor
mandatory.[72] There is no absolute right conferred upon respondent, or
any similar taxpayer, to avail itself of the tax credit remedy whenever it
chooses; neither does it impose a duty on the part of the government to
sit back and allow an important facet of tax collection to be at the sole
control and discretion of the taxpayer.[73] For the tax authorities to
compel respondent to deduct the 20 percent discount from either
its gross income or its gross sales[74] is, therefore, not only to make an
imposition without basis in law, but also to blatantly contravene the law
itself.

What Section 4.a of RA 7432 means is that the tax credit benefit is

merely permissive, not imperative. Respondent is given two options --
either to claim or not to claim the cost of the discounts as a tax credit. In
fact, it may even ignore the credit and simply consider the gesture as an
act of beneficence, an expression of its social conscience.

Granting that there is a tax liability and respondent claims such cost as
a tax credit, then the tax credit can easily be applied. If there is none, the
credit cannot be used and will just have to be carried over and
revalidated[75] accordingly. If, however, the business continues to operate
at a loss and no other taxes are due, thus compelling it to close shop, the
credit can never be applied and will be lost altogether.

In other words, it is the existence or the lack of a tax liability that

determines whether the cost of the discounts can be used as a tax credit.
RA 7432 does not give respondent the unfettered right to avail itself of
the credit whenever it pleases. Neither does it allow our tax
administrators to expand or contract the legislative mandate. The plain
meaning rule or verba legis in statutory construction is thus applicable x
x x. Where the words of a statute are clear, plain and free from
ambiguity, it must be given its literal meaning and applied without
attempted interpretation.[76]

 
Tax Credit  Benefit
Deemed  Just Compensation

Fourth, Sections 2.i and 4 of RR 2-94 deny the exercise by the State of

its power of eminent domain. Be it stressed that the privilege enjoyed by
senior citizens does not come directlyfrom the State, but rather from the
private establishments concerned. Accordingly, the tax credit benefit
granted to these establishments can be deemed as their just
compensation for private property taken by the State for public use.[77]

The concept of public use is no longer confined to the traditional notion

of use by the public, but held synonymous with public interest, public
benefit, public welfare, and public convenience.[78]The discount privilege
to which our senior citizens are entitled is actually a benefit enjoyed by
the general public to which these citizens belong. The discounts given
would have entered the coffers and formed part of the gross sales of the
private establishments concerned, were it not for RA 7432. The
permanent reduction in their total revenues is a forced subsidy
corresponding to the taking of private property for public use or benefit.

As a result of the 20 percent discount imposed by RA 7432, respondent

becomes entitled to a just compensation. This term refers not only to the
issuance of a tax credit certificate indicating the correct amount of the
discounts given, but also to the promptness in its release. Equivalent to
the payment of property taken by the State, such issuance -- when not
done within a reasonable time from the grant of the discounts -- cannot
be considered as just compensation. In effect, respondent is made to
suffer the consequences of being immediately deprived of its revenues
while awaiting actual receipt, through the certificate, of the equivalent
amount it needs to cope with the reduction in its revenues.[79]

Besides, the taxation power can also be used as an implement for the
exercise of the power of eminent domain.[80] Tax measures are but
enforced contributions exacted on pain of penal sanctions[81] and clearly
imposed for a public purpose.[82] In recent years, the power to tax has
indeed become a most effective tool to realize social justice, public
welfare, and the equitable distribution of wealth.[83]

While it is a declared commitment under Section 1 of RA 7432, social

justice cannot be invoked to trample on the rights of property owners
who under our Constitution and laws are also entitled to protection. The
social justice consecrated in our [C]onstitution [is] not intended to take
away rights from a person and give them to another who is not entitled
thereto.[84] For this reason, a just compensation for income that is taken
away from respondent becomes necessary. It is in the tax credit that our
legislators find support to realize social justice, and no administrative
body can alter that fact.

To put it differently, a private establishment that merely breaks

even[85] -- without the discounts yet -- will surely start to incur losses
because of such discounts. The same effect is expected if its mark-up is
less than 20 percent, and if all its sales come from retail purchases by
senior citizens. Aside from the observation we have already raised
earlier, it will also be grossly unfair to an establishment if the discounts
will be treated merely as deductions from either its gross income or
its gross sales. Operating at a loss through no fault of its own, it will
realize that the tax credit limitation under RR 2-94 is inutile, if not
improper. Worse, profit-generating businesses will be put in a better
position if they avail themselves of tax creditsdenied those that are
losing, because no taxes are due from the latter.

 
Grant of  Tax Credit
Intended by the Legislature

Fifth, RA 7432 itself seeks to adopt measures whereby senior citizens

are assisted by the community as a whole and to establish a program
beneficial to them.[86] These objectives are consonant with the
constitutional policy of making health x x x services available to all the
people at affordable cost[87] and of giving priority for the needs of the x x
x elderly.[88]Sections 2.i and 4 of RR 2-94, however, contradict these
constitutional policies and statutory objectives.

Furthermore, Congress has allowed all private establishments a

simple tax credit, not a deduction. In fact, no cash outlay is required
from the government for the availment or use of such credit. The
deliberations on February 5, 1992 of the Bicameral Conference
Committee Meeting on Social Justice, which finalized RA 7432,
disclose the true intent of our legislators to treat the sales discounts as
a tax credit, rather than as a deduction from gross income. We quote
from those deliberations as follows:
 
"THE CHAIRMAN (Rep. Unico). By the way, before that ano, about
deductions from taxable income. I think we
incorporated there a provision na - on the
responsibility of the private hospitals and
drugstores, hindi ba?

SEN. ANGARA. Oo.

THE CHAIRMAN. (Rep. Unico), So, I think we have to put in also a

provision here about the deductions from taxable
income of that private hospitals, di ba ganon
'yan?
 

MS. ADVENTO. Kaya lang po sir, and mga discounts po nila

affecting government and public institutions, so,
puwede na po nating hindi isama yung mga less
deductions ng taxable income.

THE CHAIRMAN. (Rep. Unico). Puwede na. Yung about the private
hospitals. Yung isiningit natin?

MS. ADVENTO. Singit na po ba yung 15% on credit. (inaudible/did

not use the microphone).

SEN. ANGARA. Hindi pa, hindi pa.

THE CHAIRMAN. (Rep. Unico) Ah, 'di pa ba naisama natin?

SEN. ANGARA. Oo. You want to insert that?

THE CHAIRMAN (Rep. Unico). Yung ang proposal ni Senator

Shahani, e.

SEN. ANGARA. In the case of private hospitals they got the grant of
15% discount, provided that, the private hospitals
can claim the expense as a tax credit.

REP. AQUINO. Yah could be allowed as deductions in the

perpetrations of (inaudible) income.
 

SEN. ANGARA. I-tax credit na lang natin para walang cash-out ano?

REP. AQUINO. Oo, tax credit. Tama, Okay. Hospitals ba o lahat ng

establishments na covered.

THE CHAIRMAN. (Rep. Unico). Sa kuwan lang yon, as private

hospitals lang.

REP. AQUINO. Ano ba yung establishments na covered?

SEN. ANGARA. Restaurant lodging houses, recreation centers.

REP. AQUINO. All establishments covered siguro?

SEN. ANGARA. From all establishments. Alisin na natin 'Yung

kuwan kung ganon. Can we go back to Section 4
ha?

REP. AQUINO. Oho.

SEN. ANGARA. Letter A. To capture that thought, we'll say the grant
of 20% discount from all establishments et cetera,
et cetera, provided that said establishments -
provided that private establishments may claim
the cost as a tax credit. Ganon ba 'yon?

 
 REP. AQUINO. Yah.

SEN. ANGARA. Dahil kung government, they don't need to claim it.

THE CHAIRMAN. (Rep. Unico). Tax credit.

SEN. ANGARA. As a tax credit [rather] than a kuwan - deduction,

Okay.

REP. AQUINO Okay.

SEN. ANGARA. Sige Okay. Di subject to style na lang sa Letter A".

[89]

 
Special Law
Over General Law

Sixth and last, RA 7432 is a special law that should prevail over the Tax
Code -- a general law. x x x [T]he rule is that on a specific matter the
special law shall prevail over the general law, which shall 
be resorted to only to supply deficiencies in the former.[90] In addition,
[w]here there are two statutes, the earlier special and the later general --
the terms of the general broad enough to include the matter provided for
in the special -- the fact that one is special and the other is general
creates a presumption that the special is to be considered as remaining
an exception to the general,[91] one as a general law of the land, the other
as the law of a particular case.[92] It is a canon of statutory construction
that a later statute, general in its termsand not expressly repealing
a prior special statute, will ordinarily not affect the special provisions of
such earlier statute.[93]

RA 7432 is an earlier law not expressly repealed by, and therefore

remains an exception to, the Tax Code -- a later law. When the former
states that a tax credit may be claimed, then the requirement of prior tax
payments under certain provisions of the latter, as discussed above,
cannot be made to apply. Neither can the instances of or references to
a tax deductionunder the Tax Code[94] be made to restrict RA 7432. No
provision of any revenue regulation can supplant or modify the acts of
Congress.

WHEREFORE, the Petition is hereby DENIED. The assailed Decision

and Resolution of the Court of Appeals AFFIRMED. No
pronouncement as to costs.
 
SO ORDERED.
G.R. No. 175356               December 3, 2013

MANILA MEMORIAL PARK, INC. AND LA FUNERARIA PAZ-SUCAT, INC., Petitioners, 

vs.
SECRETARY OF THE DEPARTMENT OF SOCIAL WELFARE AND DEVELOPMENT and THE
SECRETARY OF THE DEPARTMENT OF FINANCE, Respondents.

DECISION

DEL CASTILLO, J.:

When a party challeges the constitutionality of a law, the burden of proof rests upon him.

Before us is a Petition for Prohibition  under Rule 65 of the Rules of Court filed by petitioners Manila
2

Memorial Park, Inc. and La Funeraria Paz-Sucat, Inc., domestic corporations engaged in the
business of providing funeral and burial services, against public respondents Secretaries of the
Department of Social Welfare and Development (DSWD) and the Department of Finance (DOF).

Petitioners assail the constitutionality of Section 4 of Republic Act (RA) No. 7432,  as amended by
3

RA 9257,  and the implementing rules and regulations issued by the DSWD and DOF insofar as
4

these allow business establishments to claim the 20% discount given to senior citizens as a tax
deduction.

Factual Antecedents

On April 23, 1992, RA 7432 was passed into law, granting senior citizens the following privileges:

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

a) the grant of twenty percent (20%) discount from all establishments relative to utilization of
transportation services, hotels and similar lodging establishment[s], restaurants and
recreation centers and purchase of medicine anywhere in the country: Provided, That private
establishments may claim the cost as tax credit;

b) a minimum of twenty percent (20%) discount on admission fees charged by theaters,

cinema houses and concert halls, circuses, carnivals and other similar places of culture,
leisure, and amusement;

c) exemption from the payment of individual income taxes: Provided, That their annual
taxable income does not exceed the property level as determined by the National Economic
and Development Authority (NEDA) for that year;

d) exemption from training fees for socioeconomic programs undertaken by the OSCA as
part of its work;

e) free medical and dental services in government establishment[s] anywhere in the country,
subject to guidelines to be issued by the Department of Health, the Government Service
Insurance System and the Social Security System;
 f) to the extent practicable and feasible, the continuance of the same benefits and privileges
given by the Government Service Insurance System (GSIS), Social Security System (SSS)
and PAG-IBIG, as the case may be, as are enjoyed by those in actual service.

On August 23, 1993, Revenue Regulations (RR) No. 02-94 was issued to implement RA 7432.
Sections 2(i) and 4 of RR No. 02-94 provide:

Sec. 2. DEFINITIONS. – For purposes of these regulations: i. Tax Credit – refers to the amount
representing the 20% discount granted to a qualified senior citizen by all establishments relative to
their utilization of transportation services, hotels and similar lodging establishments, restaurants,
drugstores, recreation centers, theaters, cinema houses, concert halls, circuses, carnivals and other
similar places of culture, leisure and amusement, which discount shall be deducted by the said
establishments from their gross income for income tax purposes and from their gross sales for
value-added tax or other percentage tax purposes. x x x x Sec. 4. RECORDING/BOOKKEEPING
REQUIREMENTS FOR PRIVATE ESTABLISHMENTS. – Private establishments, i.e., transport
services, hotels and similar lodging establishments, restaurants, recreation centers, drugstores,
theaters, cinema houses, concert halls, circuses, carnivals and other similar places of culture[,]
leisure and amusement, giving 20% discounts to qualified senior citizens are required to keep
separate and accurate record[s] of sales made to senior citizens, which shall include the name,
identification number, gross sales/receipts, discounts, dates of transactions and invoice number for
every transaction. The amount of 20% discount shall be deducted from the gross income for income
tax purposes and from gross sales of the business enterprise concerned for purposes of the VAT
and other percentage taxes.

In Commissioner of Internal Revenue v. Central Luzon Drug Corporation,  the Court declared
5

Sections 2(i) and 4 of RR No. 02-94 as erroneous because these contravene RA 7432,  thus:
6

RA 7432 specifically allows private establishments to claim as tax credit the amount of discounts
they grant. In turn, the Implementing Rules and Regulations, issued pursuant thereto, provide the
procedures for its availment. To deny such credit, despite the plain mandate of the law and the
regulations carrying out that mandate, is indefensible. First, the definition given by petitioner is
erroneous. It refers to tax credit as the amount representing the 20 percent discount that "shall be
deducted by the said establishments from their gross income for income tax purposes and from their
gross sales for value-added tax or other percentage tax purposes." In ordinary business language,
the tax credit represents the amount of such discount. However, the manner by which the discount
shall be credited against taxes has not been clarified by the revenue regulations. By ordinary
acceptation, a discount is an "abatement or reduction made from the gross amount or value of
anything." To be more precise, it is in business parlance "a deduction or lowering of an amount of
money;" or "a reduction from the full amount or value of something, especially a price." In business
there are many kinds of discount, the most common of which is that affecting the income statement
or financial report upon which the income tax is based.

xxxx

Sections 2.i and 4 of Revenue Regulations No. (RR) 2-94 define tax credit as the 20 percent
discount deductible from gross income for income tax purposes, or from gross sales for VAT or other
percentage tax purposes. In effect, the tax credit benefit under RA 7432 is related to a sales
discount. This contrived definition is improper, considering that the latter has to be deducted from
gross sales in order to compute the gross income in the income statement and cannot be deducted
again, even for purposes of computing the income tax. When the law says that the cost of the
discount may be claimed as a tax credit, it means that the amount — when claimed — shall be
treated as a reduction from any tax liability, plain and simple. The option to avail of the tax credit
benefit depends upon the existence of a tax liability, but to limit the benefit to a sales discount —
which is not even identical to the discount privilege that is granted by law — does not define it at all
and serves no useful purpose. The definition must, therefore, be stricken down.

Laws Not Amended by Regulations

Second, the law cannot be amended by a mere regulation. In fact, a regulation that "operates to
create a rule out of harmony with the statute is a mere nullity;" it cannot prevail. It is a cardinal rule
that courts "will and should respect the contemporaneous construction placed upon a statute by the
executive officers whose duty it is to enforce it x x x." In the scheme of judicial tax administration, the
need for certainty and predictability in the implementation of tax laws is crucial. Our tax authorities fill
in the details that "Congress may not have the opportunity or competence to provide." The
regulations these authorities issue are relied upon by taxpayers, who are certain that these will be
followed by the courts. Courts, however, will not uphold these authorities’ interpretations when
clearly absurd, erroneous or improper. In the present case, the tax authorities have given the term
tax credit in Sections 2.i and 4 of RR 2-94 a meaning utterly in contrast to what RA 7432 provides.
Their interpretation has muddled x x x the intent of Congress in granting a mere discount privilege,
not a sales discount. The administrative agency issuing these regulations may not enlarge, alter or
restrict the provisions of the law it administers; it cannot engraft additional requirements not
contemplated by the legislature.

In case of conflict, the law must prevail. A "regulation adopted pursuant to law is law." Conversely, a
regulation or any portion thereof not adopted pursuant to law is no law and has neither the force nor
the effect of law.
7

On February 26, 2004, RA 9257  amended certain provisions of RA 7432, to wit:

8

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

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

xxxx

The establishment may claim the discounts granted under (a), (f), (g) and (h) as tax deduction based
on the net cost of the goods sold or services rendered: Provided, That the cost of the discount shall
be allowed as deduction from gross income for the same taxable year that the discount is granted.
Provided, further, That the total amount of the claimed tax deduction net of value added tax if
applicable, shall be included in their gross sales receipts for tax purposes and shall be subject to
proper documentation and to the provisions of the National Internal Revenue Code, as amended.

To implement the tax provisions of RA 9257, the Secretary of Finance issued RR No. 4-2006, the
pertinent provision of which provides:

SEC. 8. AVAILMENT BY ESTABLISHMENTS OF SALES DISCOUNTS AS DEDUCTION FROM

GROSS INCOME. – Establishments enumerated in subparagraph (6) hereunder granting sales
discounts to senior citizens on the sale of goods and/or services specified thereunder are entitled to
deduct the said discount from gross income subject to the following conditions:
 (1) Only that portion of the gross sales EXCLUSIVELY USED, CONSUMED OR ENJOYED
BY THE SENIOR CITIZEN shall be eligible for the deductible sales discount.

(2) The gross selling price and the sales discount MUST BE SEPARATELY INDICATED IN
THE OFFICIAL RECEIPT OR SALES INVOICE issued by the establishment for the sale of
goods or services to the senior citizen.

(3) Only the actual amount of the discount granted or a sales discount not exceeding 20% of
the gross selling price can be deducted from the gross income, net of value added tax, if
applicable, for income tax purposes, and from gross sales or gross receipts of the business
enterprise concerned, for VAT or other percentage tax purposes.

(4) The discount can only be allowed as deduction from gross income for the same taxable
year that the discount is granted.

(5) The business establishment giving sales discounts to qualified senior citizens is required
to keep separate and accurate record[s] of sales, which shall include the name of the senior
citizen, TIN, OSCA ID, gross sales/receipts, sales discount granted, [date] of [transaction]
and invoice number for every sale transaction to senior citizen.

(6) Only the following business establishments which granted sales discount to senior
citizens on their sale of goods and/or services may claim the said discount granted as
deduction from gross income, namely:

xxxx

(i) Funeral parlors and similar establishments – The beneficiary or any person who shall shoulder the
funeral and burial expenses of the deceased senior citizen shall claim the discount, such as casket,
embalmment, cremation cost and other related services for the senior citizen upon payment and
presentation of [his] death certificate.

The DSWD likewise issued its own Rules and Regulations Implementing RA 9257, to wit:

RULE VI DISCOUNTS AS TAX DEDUCTION OF ESTABLISHMENTS

Article 8. Tax Deduction of Establishments. – The establishment may claim the discounts granted
under Rule V, Section 4 – Discounts for Establishments, Section 9, Medical and Dental Services in
Private Facilities and Sections 10 and 11 – Air, Sea and Land Transportation as tax deduction based
on the net cost of the goods sold or services rendered.

Provided, That the cost of the discount shall be allowed as deduction from gross income for the
same taxable year that the discount is granted; Provided, further, That the total amount of the
claimed tax deduction net of value added tax if applicable, shall be included in their gross sales
receipts for tax purposes and shall be subject to proper documentation and to the provisions of the
National Internal Revenue Code, as amended; Provided, finally, that the implementation of the tax
deduction shall be subject to the Revenue Regulations to be issued by the Bureau of Internal
Revenue (BIR) and approved by the Department of Finance (DOF).

Feeling aggrieved by the tax deduction scheme, petitioners filed the present recourse, praying that
Section 4 of RA 7432, as amended by RA 9257, and the implementing rules and regulations issued
by the DSWD and the DOF be declared unconstitutional insofar as these allow business
establishments to claim the 20% discount given to senior citizens as a tax deduction; that the DSWD
and the DOF be prohibited from enforcing the same; and that the tax credit treatment of the 20%
discount under the former Section 4 (a) of RA 7432 be reinstated.

Issues

Petitioners raise the following issues:

A.

WHETHER THE PETITION PRESENTS AN ACTUAL CASE OR CONTROVERSY.

B.

WHETHER SECTION 4 OF REPUBLIC ACT NO. 9257 AND X X X ITS IMPLEMENTING RULES
AND REGULATIONS, INSOFAR AS THEY PROVIDE THAT THE TWENTY PERCENT (20%)
DISCOUNT TO SENIOR CITIZENS MAY BE CLAIMED AS A TAX DEDUCTION BY THE PRIVATE
ESTABLISHMENTS, ARE INVALID AND UNCONSTITUTIONAL. 9

Petitioners’ Arguments

Petitioners emphasize that they are not questioning the 20% discount granted to senior citizens but
are only assailing the constitutionality of the tax deduction scheme prescribed under RA 9257 and
the implementing rules and regulations issued by the DSWD and the DOF. 10

Petitioners posit that the tax deduction scheme contravenes Article III, Section 9 of the Constitution,
which provides that: "[p]rivate property shall not be taken for public use without just compensation." 11

In support of their position, petitioners cite Central Luzon Drug Corporation,  where it was ruled that
12

the 20% discount privilege constitutes taking of private property for public use which requires the
payment of just compensation,  and Carlos Superdrug Corporation v. Department of Social Welfare
13

and Development,  where it was acknowledged that the tax deduction scheme does not meet the
14

definition of just compensation.15

Petitioners likewise seek a reversal of the ruling in Carlos Superdrug Corporation  that the tax
16

deduction scheme adopted by the government is justified by police power. 17

They assert that "[a]lthough both police power and the power of eminent domain have the general
welfare for their object, there are still traditional distinctions between the two"  and that "eminent
18

domain cannot be made less supreme than police power." 19

Petitioners further claim that the legislature, in amending RA 7432, relied on an erroneous
contemporaneous construction that prior payment of taxes is required for tax credit. 20

Petitioners also contend that the tax deduction scheme violates Article XV, Section 4  and Article 21

XIII, Section 11 of the Constitution because it shifts the State’s constitutional mandate or duty of
22

improving the welfare of the elderly to the private sector.

23

Under the tax deduction scheme, the private sector shoulders 65% of the discount because only
35%  of it is actually returned by the government.
24 25
Consequently, the implementation of the tax deduction scheme prescribed under Section 4 of RA
9257 affects the businesses of petitioners. 26

Thus, there exists an actual case or controversy of transcendental importance which deserves
judicious disposition on the merits by the highest court of the land. 27

Respondents’ Arguments

Respondents, on the other hand, question the filing of the instant Petition directly with the Supreme
Court as this disregards the hierarchy of courts. 28

They likewise assert that there is no justiciable controversy as petitioners failed to prove that the tax
deduction treatment is not a "fair and full equivalent of the loss sustained" by them. 29

As to the constitutionality of RA 9257 and its implementing rules and regulations, respondents
contend that petitioners failed to overturn its presumption of constitutionality.30

More important, respondents maintain that the tax deduction scheme is a legitimate exercise of the
State’s police power. 31

Our Ruling

The Petition lacks merit.

There exists an actual case or controversy.

We shall first resolve the procedural issue. When the constitutionality of a law is put in issue, judicial
review may be availed of only if the following requisites concur: "(1) the existence of an actual and
appropriate case; (2) the existence of personal and substantial interest on the part of the party
raising the [question of constitutionality]; (3) recourse to judicial review is made at the earliest
opportunity; and (4) the [question of constitutionality] is the lis mota of the case."32

In this case, petitioners are challenging the constitutionality of the tax deduction scheme provided in
RA 9257 and the implementing rules and regulations issued by the DSWD and the DOF.
Respondents, however, oppose the Petition on the ground that there is no actual case or
controversy. We do not agree with respondents. An actual case or controversy exists when there is
"a conflict of legal rights" or "an assertion of opposite legal claims susceptible of judicial resolution."
33

The Petition must therefore show that "the governmental act being challenged has a direct adverse
effect on the individual challenging it."
34

In this case, the tax deduction scheme challenged by petitioners has a direct adverse effect on them.
Thus, it cannot be denied that there exists an actual case or controversy.

The validity of the 20% senior citizen discount and tax deduction scheme under RA 9257, as
an exercise of police power of the State, has already been settled in Carlos Superdrug
Corporation.

Petitioners posit that the resolution of this case lies in the determination of whether the legally
mandated 20% senior citizen discount is an exercise of police power or eminent domain. If it is
police power, no just compensation is warranted. But if it is eminent domain, the tax deduction
scheme is unconstitutional because it is not a peso for peso reimbursement of the 20% discount
given to senior citizens. Thus, it constitutes taking of private property without payment of just
compensation. At the outset, we note that this question has been settled in Carlos Superdrug
Corporation. 35

In that case, we ruled:

Petitioners assert that Section 4(a) of the law is unconstitutional because it constitutes deprivation of
private property. Compelling drugstore owners and establishments to grant the discount will result in
a loss of profit and capital because 1) drugstores impose a mark-up of only 5% to 10% on branded
medicines; and 2) the law failed to provide a scheme whereby drugstores will be justly compensated
for the discount. Examining petitioners’ arguments, it is apparent that what petitioners are ultimately
questioning is the validity of the tax deduction scheme as a reimbursement mechanism for the
twenty percent (20%) discount that they extend to senior citizens. Based on the afore-stated DOF
Opinion, the tax deduction scheme does not fully reimburse petitioners for the discount privilege
accorded to senior citizens. This is because the discount is treated as a deduction, a tax-deductible
expense that is subtracted from the gross income and results in a lower taxable income. Stated
otherwise, it is an amount that is allowed by law to reduce the income prior to the application of the
tax rate to compute the amount of tax which is due. Being a tax deduction, the discount does not
reduce taxes owed on a peso for peso basis but merely offers a fractional reduction in taxes owed.
Theoretically, the treatment of the discount as a deduction reduces the net income of the private
establishments concerned. The discounts given would have entered the coffers and formed part of
the gross sales of the private establishments, were it not for R.A. No. 9257. The permanent
reduction in their total revenues is a forced subsidy corresponding to the taking of private property
for public use or benefit. This constitutes compensable taking for which petitioners would ordinarily
become entitled to a just compensation. Just compensation is defined as the full and fair equivalent
of the property taken from its owner by the expropriator. The measure is not the taker’s gain but the
owner’s loss. The word just is used to intensify the meaning of the word compensation, and to
convey the idea that the equivalent to be rendered for the property to be taken shall be real,
substantial, full and ample. A tax deduction does not offer full reimbursement of the senior citizen
discount. As such, it would not meet the definition of just compensation. Having said that, this raises
the question of whether the State, in promoting the health and welfare of a special group of citizens,
can impose upon private establishments the burden of partly subsidizing a government program.
The Court believes so. The Senior Citizens Act was enacted primarily to maximize the contribution of
senior citizens to nation-building, and to grant benefits and privileges to them for their improvement
and well-being as the State considers them an integral part of our society. The priority given to
senior citizens finds its basis in the Constitution as set forth in the law itself.  Thus, the Act provides:
1âwphi1

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

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

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

To implement the above policy, the law grants a twenty percent discount to senior citizens for
medical and dental services, and diagnostic and laboratory fees; admission fees charged by
theaters, concert halls, circuses, carnivals, and other similar places of culture, leisure and
amusement; fares for domestic land, air and sea travel; utilization of services in hotels and similar
lodging establishments, restaurants and recreation centers; and purchases of medicines for the
exclusive use or enjoyment of senior citizens. As a form of reimbursement, the law provides that
business establishments extending the twenty percent discount to senior citizens may claim the
discount as a tax deduction. The law is a legitimate exercise of police power which, similar to the
power of eminent domain, has general welfare for its object. Police power is not capable of an exact
definition, but has been purposely veiled in general terms to underscore its comprehensiveness to
meet all exigencies and provide enough room for an efficient and flexible response to conditions and
circumstances, thus assuring the greatest benefits. Accordingly, it has been described as "the most
essential, insistent and the least limitable of powers, extending as it does to all the great public
needs." It is "[t]he power vested in the legislature by the constitution to make, ordain, and establish
all manner of wholesome and reasonable laws, statutes, and ordinances, either with penalties or
without, not repugnant to the constitution, as they shall judge to be for the good and welfare of the
commonwealth, and of the subjects of the same." For this reason, when the conditions so demand
as determined by the legislature, property rights must bow to the primacy of police power because
property rights, though sheltered by due process, must yield to general welfare. Police power as an
attribute to promote the common good would be diluted considerably if on the mere plea of
petitioners that they will suffer loss of earnings and capital, the questioned provision is invalidated.
Moreover, in the absence of evidence demonstrating the alleged confiscatory effect of the provision
in question, there is no basis for its nullification in view of the presumption of validity which every law
has in its favor. Given these, it is incorrect for petitioners to insist that the grant of the senior citizen
discount is unduly oppressive to their business, because petitioners have not taken time to calculate
correctly and come up with a financial report, so that they have not been able to show properly
whether or not the tax deduction scheme really works greatly to their disadvantage. In treating the
discount as a tax deduction, petitioners insist that they will incur losses because, referring to the
DOF Opinion, for every ₱1.00 senior citizen discount that petitioners would give, P0.68 will be
shouldered by them as only P0.32 will be refunded by the government by way of a tax deduction. To
illustrate this point, petitioner Carlos Super Drug cited the anti-hypertensive maintenance drug
Norvasc as an example. According to the latter, it acquires Norvasc from the distributors at ₱37.57
per tablet, and retails it at ₱39.60 (or at a margin of 5%). If it grants a 20% discount to senior citizens
or an amount equivalent to ₱7.92, then it would have to sell Norvasc at ₱31.68 which translates to a
loss from capital of ₱5.89 per tablet. Even if the government will allow a tax deduction, only ₱2.53
per tablet will be refunded and not the full amount of the discount which is ₱7.92. In short, only 32%
of the 20% discount will be reimbursed to the drugstores. Petitioners’ computation is flawed. For
purposes of reimbursement, the law states that the cost of the discount shall be deducted from gross
income, the amount of income derived from all sources before deducting allowable expenses, which
will result in net income. Here, petitioners tried to show a loss on a per transaction basis, which
should not be the case. An income statement, showing an accounting of petitioners' sales,
expenses, and net profit (or loss) for a given period could have accurately reflected the effect of the
discount on their income. Absent any financial statement, petitioners cannot substantiate their claim
that they will be operating at a loss should they give the discount. In addition, the computation was
erroneously based on the assumption that their customers consisted wholly of senior citizens. Lastly,
the 32% tax rate is to be imposed on income, not on the amount of the discount.

Furthermore, it is unfair for petitioners to criticize the law because they cannot raise the prices of
their medicines given the cutthroat nature of the players in the industry. It is a business decision on
the part of petitioners to peg the mark-up at 5%. Selling the medicines below acquisition cost, as
alleged by petitioners, is merely a result of this decision. Inasmuch as pricing is a property right,
petitioners cannot reproach the law for being oppressive, simply because they cannot afford to raise
their prices for fear of losing their customers to competition. The Court is not oblivious of the retail
side of the pharmaceutical industry and the competitive pricing component of the business. While
the Constitution protects property rights, petitioners must accept the realities of business and the
State, in the exercise of police power, can intervene in the operations of a business which may result
in an impairment of property rights in the process.

Moreover, the right to property has a social dimension. While Article XIII of the Constitution provides
the precept for the protection of property, various laws and jurisprudence, particularly on agrarian
reform and the regulation of contracts and public utilities, continuously serve as x x x reminder[s] that
the right to property can be relinquished upon the command of the State for the promotion of public
good. Undeniably, the success of the senior citizens program rests largely on the support imparted
by petitioners and the other private establishments concerned. This being the case, the means
employed in invoking the active participation of the private sector, in order to achieve the purpose or
objective of the law, is reasonably and directly related. Without sufficient proof that Section 4 (a) of
R.A. No. 9257 is arbitrary, and that the continued implementation of the same would be
unconscionably detrimental to petitioners, the Court will refrain from quashing a legislative
act.  (Bold in the original; underline supplied)
36

We, thus, found that the 20% discount as well as the tax deduction scheme is a valid exercise of the
police power of the State.

No compelling reason has been proffered to overturn, modify or abandon the ruling in Carlos
Superdrug Corporation.

Petitioners argue that we have previously ruled in Central Luzon Drug Corporation  that the 20%
37

discount is an exercise of the power of eminent domain, thus, requiring the payment of just
compensation. They urge us to re-examine our ruling in Carlos Superdrug Corporation  which38

allegedly reversed the ruling in Central Luzon Drug Corporation. 39

They also point out that Carlos Superdrug Corporation  recognized that the tax deduction scheme
40

under the assailed law does not provide for sufficient just compensation. We agree with petitioners’
observation that there are statements in Central Luzon Drug Corporation  describing the 20%
41

discount as an exercise of the power of eminent domain, viz.:

[T]he privilege enjoyed by senior citizens does not come directly from the State, but rather from the
private establishments concerned. Accordingly, the tax credit benefit granted to these
establishments can be deemed as their just compensation for private property taken by the State for
public use. The concept of public use is no longer confined to the traditional notion of use by the
public, but held synonymous with public interest, public benefit, public welfare, and public
convenience. The discount privilege to which our senior citizens are entitled is actually a benefit
enjoyed by the general public to which these citizens belong. The discounts given would have
entered the coffers and formed part of the gross sales of the private establishments concerned, were
it not for RA 7432. The permanent reduction in their total revenues is a forced subsidy corresponding
to the taking of private property for public use or benefit. As a result of the 20 percent discount
imposed by RA 7432, respondent becomes entitled to a just compensation. This term refers not only
to the issuance of a tax credit certificate indicating the correct amount of the discounts given, but
also to the promptness in its release. Equivalent to the payment of property taken by the State, such
issuance — when not done within a reasonable time from the grant of the discounts — cannot be
considered as just compensation. In effect, respondent is made to suffer the consequences of being
immediately deprived of its revenues while awaiting actual receipt, through the certificate, of the
equivalent amount it needs to cope with the reduction in its revenues. Besides, the taxation power
can also be used as an implement for the exercise of the power of eminent domain. Tax measures
are but "enforced contributions exacted on pain of penal sanctions" and "clearly imposed for a public
purpose." In recent years, the power to tax has indeed become a most effective tool to realize social
justice, public welfare, and the equitable distribution of wealth. While it is a declared commitment
under Section 1 of RA 7432, social justice "cannot be invoked to trample on the rights of property
owners who under our Constitution and laws are also entitled to protection. The social justice
consecrated in our [C]onstitution [is] not intended to take away rights from a person and give them to
another who is not entitled thereto." For this reason, a just compensation for income that is taken
away from respondent becomes necessary. It is in the tax credit that our legislators find support to
realize social justice, and no administrative body can alter that fact. To put it differently, a private
establishment that merely breaks even — without the discounts yet — will surely start to incur losses
because of such discounts. The same effect is expected if its mark-up is less than 20 percent, and if
all its sales come from retail purchases by senior citizens. Aside from the observation we have
already raised earlier, it will also be grossly unfair to an establishment if the discounts will be treated
merely as deductions from either its gross income or its gross sales.  Operating at a loss through no
1âwphi1

fault of its own, it will realize that the tax credit limitation under RR 2-94 is inutile, if not improper.
Worse, profit-generating businesses will be put in a better position if they avail themselves of tax
credits denied those that are losing, because no taxes are due from the latter.  (Italics in the original;
42

emphasis supplied)

The above was partly incorporated in our ruling in Carlos Superdrug Corporation  when we stated
43

preliminarily that—

Petitioners assert that Section 4(a) of the law is unconstitutional because it constitutes deprivation of
private property. Compelling drugstore owners and establishments to grant the discount will result in
a loss of profit and capital because 1) drugstores impose a mark-up of only 5% to 10% on branded
medicines; and 2) the law failed to provide a scheme whereby drugstores will be justly compensated
for the discount. Examining petitioners’ arguments, it is apparent that what petitioners are ultimately
questioning is the validity of the tax deduction scheme as a reimbursement mechanism for the
twenty percent (20%) discount that they extend to senior citizens. Based on the afore-stated DOF
Opinion, the tax deduction scheme does not fully reimburse petitioners for the discount privilege
accorded to senior citizens. This is because the discount is treated as a deduction, a tax-deductible
expense that is subtracted from the gross income and results in a lower taxable income. Stated
otherwise, it is an amount that is allowed by law to reduce the income prior to the application of the
tax rate to compute the amount of tax which is due. Being a tax deduction, the discount does not
reduce taxes owed on a peso for peso basis but merely offers a fractional reduction in taxes owed.
Theoretically, the treatment of the discount as a deduction reduces the net income of the private
establishments concerned. The discounts given would have entered the coffers and formed part of
the gross sales of the private establishments, were it not for R.A. No. 9257. The permanent
reduction in their total revenues is a forced subsidy corresponding to the taking of private property
for public use or benefit. This constitutes compensable taking for which petitioners would ordinarily
become entitled to a just compensation. Just compensation is defined as the full and fair equivalent
of the property taken from its owner by the expropriator. The measure is not the taker’s gain but the
owner’s loss. The word just is used to intensify the meaning of the word compensation, and to
convey the idea that the equivalent to be rendered for the property to be taken shall be real,
substantial, full and ample. A tax deduction does not offer full reimbursement of the senior citizen
discount. As such, it would not meet the definition of just compensation. Having said that, this raises
the question of whether the State, in promoting the health and welfare of a special group of citizens,
can impose upon private establishments the burden of partly subsidizing a government program.
The Court believes so. 44
This, notwithstanding, we went on to rule in Carlos Superdrug Corporation  that the 20% discount
45

and tax deduction scheme is a valid exercise of the police power of the State. The present case,
thus, affords an opportunity for us to clarify the above-quoted statements in Central Luzon Drug
Corporation  and Carlos Superdrug Corporation.
46 47

First, we note that the above-quoted disquisition on eminent domain in Central Luzon Drug
Corporation  is obiter dicta and, thus, not binding precedent. As stated earlier, in Central Luzon Drug
48

Corporation,  we ruled that the BIR acted ultra vires when it effectively treated the 20% discount as a
49

tax deduction, under Sections 2.i and 4 of RR No. 2-94, despite the clear wording of the previous law
that the same should be treated as a tax credit. We were, therefore, not confronted in that case with
the issue as to whether the 20% discount is an exercise of police power or eminent domain. Second,
although we adverted to Central Luzon Drug Corporation  in our ruling in Carlos Superdrug
50

Corporation,  this referred only to preliminary matters. A fair reading of Carlos Superdrug
51

Corporation would show that we categorically ruled therein that the 20% discount is a valid exercise
52

of police power. Thus, even if the current law, through its tax deduction scheme (which abandoned
the tax credit scheme under the previous law), does not provide for a peso for peso reimbursement
of the 20% discount given by private establishments, no constitutional infirmity obtains because,
being a valid exercise of police power, payment of just compensation is not warranted. We have
carefully reviewed the basis of our ruling in Carlos Superdrug Corporation  and we find no cogent
53

reason to overturn, modify or abandon it. We also note that petitioners’ arguments are a mere
reiteration of those raised and resolved in Carlos Superdrug Corporation.  Thus, we sustain Carlos
54

Superdrug Corporation. 55

Nonetheless, we deem it proper, in what follows, to amplify our explanation in Carlos Superdrug
Corporation  as to why the 20% discount is a valid exercise of police power and why it may not,
56

under the specific circumstances of this case, be considered as an exercise of the power of eminent
domain contrary to the obiter in Central Luzon Drug Corporation. 57

Police power versus eminent domain.

Police power is the inherent power of the State to regulate or to restrain the use of liberty and
property for public welfare. 58

The only limitation is that the restriction imposed should be reasonable, not oppressive. 59

In other words, to be a valid exercise of police power, it must have a lawful subject or objective and a
lawful method of accomplishing the goal. 60

Under the police power of the State, "property rights of individuals may be subjected to restraints
and burdens in order to fulfill the objectives of the government."61

The State "may interfere with personal liberty, property, lawful businesses and occupations to
promote the general welfare [as long as] the interference [is] reasonable and not arbitrary." 62

Eminent domain, on the other hand, is the inherent power of the State to take or appropriate private
property for public use.63

The Constitution, however, requires that private property shall not be taken without due process of
law and the payment of just compensation. 64
Traditional distinctions exist between police power and eminent domain. In the exercise of police
power, a property right is impaired by regulation,  or the use of property is merely prohibited,
65

regulated or restricted  to promote public welfare. In such cases, there is no compensable taking,
66

hence, payment of just compensation is not required. Examples of these regulations are property
condemned for being noxious or intended for noxious purposes (e.g., a building on the verge of
collapse to be demolished for public safety, or obscene materials to be destroyed in the interest of
public morals)  as well as zoning ordinances prohibiting the use of property for purposes injurious to
67

the health, morals or safety of the community (e.g., dividing a city’s territory into residential and
industrial areas). 68

It has, thus, been observed that, in the exercise of police power (as distinguished from eminent
domain), although the regulation affects the right of ownership, none of the bundle of rights which
constitute ownership is appropriated for use by or for the benefit of the public. 69

On the other hand, in the exercise of the power of eminent domain, property interests are
appropriated and applied to some public purpose which necessitates the payment of just
compensation therefor. Normally, the title to and possession of the property are transferred to the
expropriating authority. Examples include the acquisition of lands for the construction of public
highways as well as agricultural lands acquired by the government under the agrarian reform law for
redistribution to qualified farmer beneficiaries. However, it is a settled rule that the acquisition of title
or total destruction of the property is not essential for "taking" under the power of eminent domain to
be present. 70

Examples of these include establishment of easements such as where the land owner is perpetually
deprived of his proprietary rights because of the hazards posed by electric transmission lines
constructed above his property  or the compelled interconnection of the telephone system between
71

the government and a private company. 72

In these cases, although the private property owner is not divested of ownership or possession,
payment of just compensation is warranted because of the burden placed on the property for the use
or benefit of the public.

The 20% senior citizen discount is an exercise of police power.

It may not always be easy to determine whether a challenged governmental act is an exercise of
police power or eminent domain. The very nature of police power as elastic and responsive to
various social conditions  as well as the evolving meaning and scope of public use  and just
73 74

compensation  in eminent domain evinces that these are not static concepts. Because of the
75

exigencies of rapidly changing times, Congress may be compelled to adopt or experiment with
different measures to promote the general welfare which may not fall squarely within the traditionally
recognized categories of police power and eminent domain. The judicious approach, therefore, is to
look at the nature and effects of the challenged governmental act and decide, on the basis thereof,
whether the act is the exercise of police power or eminent domain. Thus, we now look at the nature
and effects of the 20% discount to determine if it constitutes an exercise of police power or eminent
domain. The 20% discount is intended to improve the welfare of senior citizens who, at their age, are
less likely to be gainfully employed, more prone to illnesses and other disabilities, and, thus, in need
of subsidy in purchasing basic commodities. It may not be amiss to mention also that the discount
serves to honor senior citizens who presumably spent the productive years of their lives on
contributing to the development and progress of the nation. This distinct cultural Filipino practice of
honoring the elderly is an integral part of this law. As to its nature and effects, the 20% discount is a
regulation affecting the ability of private establishments to price their products and services relative
to a special class of individuals, senior citizens, for which the Constitution affords preferential
concern. 76

In turn, this affects the amount of profits or income/gross sales that a private establishment can
derive from senior citizens. In other words, the subject regulation affects the pricing, and, hence, the
profitability of a private establishment. However, it does not purport to appropriate or burden specific
properties, used in the operation or conduct of the business of private establishments, for the use or
benefit of the public, or senior citizens for that matter, but merely regulates the pricing of goods and
services relative to, and the amount of profits or income/gross sales that such private establishments
may derive from, senior citizens. The subject regulation may be said to be similar to, but with
substantial distinctions from, price control or rate of return on investment control laws which are
traditionally regarded as police power measures. 77

These laws generally regulate public utilities or industries/enterprises imbued with public interest in
order to protect consumers from exorbitant or unreasonable pricing as well as temper corporate
greed by controlling the rate of return on investment of these corporations considering that they have
a monopoly over the goods or services that they provide to the general public. The subject regulation
differs therefrom in that (1) the discount does not prevent the establishments from adjusting the level
of prices of their goods and services, and (2) the discount does not apply to all customers of a given
establishment but only to the class of senior citizens. Nonetheless, to the degree material to the
resolution of this case, the 20% discount may be properly viewed as belonging to the category of
price regulatory measures which affect the profitability of establishments subjected thereto. On its
face, therefore, the subject regulation is a police power measure. The obiter in Central Luzon Drug
Corporation,  however, describes the 20% discount as an exercise of the power of eminent domain
78

and the tax credit, under the previous law, equivalent to the amount of discount given as the just
compensation therefor. The reason is that (1) the discount would have formed part of the gross sales
of the establishment were it not for the law prescribing the 20% discount, and (2) the permanent
reduction in total revenues is a forced subsidy corresponding to the taking of private property for
public use or benefit. The flaw in this reasoning is in its premise. It presupposes that the subject
regulation, which impacts the pricing and, hence, the profitability of a private establishment,
automatically amounts to a deprivation of property without due process of law. If this were so, then
all price and rate of return on investment control laws would have to be invalidated because they
impact, at some level, the regulated establishment’s profits or income/gross sales, yet there is no
provision for payment of just compensation. It would also mean that overnment cannot set price or
rate of return on investment limits, which reduce the profits or income/gross sales of private
establishments, if no just compensation is paid even if the measure is not confiscatory. The obiter is,
thus, at odds with the settled octrine that the State can employ police power measures to regulate
the pricing of goods and services, and, hence, the profitability of business establishments in order to
pursue legitimate State objectives for the common good, provided that the regulation does not go too
far as to amount to "taking."79

In City of Manila v. Laguio, Jr.,  we recognized that— x x x a taking also could be found if
80

government regulation of the use of property went "too far." When regulation reaches a certain
magnitude, in most if not in all cases there must be an exercise of eminent domain and
compensation to support the act. While property may be regulated to a certain extent, if regulation
goes too far it will be recognized as a taking. No formula or rule can be devised to answer the
questions of what is too far and when regulation becomes a taking. In Mahon, Justice Holmes
recognized that it was "a question of degree and therefore cannot be disposed of by general
propositions." On many other occasions as well, the U.S. Supreme Court has said that the issue of
when regulation constitutes a taking is a matter of considering the facts in each case. The Court
asks whether justice and fairness require that the economic loss caused by public action must be
compensated by the government and thus borne by the public as a whole, or whether the loss
should remain concentrated on those few persons subject to the public action. 81
The impact or effect of a regulation, such as the one under consideration, must, thus, be determined
on a case-to-case basis. Whether that line between permissible regulation under police power and
"taking" under eminent domain has been crossed must, under the specific circumstances of this
case, be subject to proof and the one assailing the constitutionality of the regulation carries the
heavy burden of proving that the measure is unreasonable, oppressive or confiscatory. The time-
honored rule is that the burden of proving the unconstitutionality of a law rests upon the one
assailing it and "the burden becomes heavier when police power is at issue." 82

The 20% senior citizen discount has not been shown to be unreasonable, oppressive or
confiscatory.

In Alalayan v. National Power Corporation,  petitioners, who were franchise holders of electric
83

plants, challenged the validity of a law limiting their allowable net profits to no more than 12% per
annum of their investments plus two-month operating expenses. In rejecting their plea, we ruled that,
in an earlier case, it was found that 12% is a reasonable rate of return and that petitioners failed to
prove that the aforesaid rate is confiscatory in view of the presumption of constitutionality.
84

We adopted a similar line of reasoning in Carlos Superdrug Corporation  when we ruled that
85

petitioners therein failed to prove that the 20% discount is arbitrary, oppressive or confiscatory. We
noted that no evidence, such as a financial report, to establish the impact of the 20% discount on the
overall profitability of petitioners was presented in order to show that they would be operating at a
loss due to the subject regulation or that the continued implementation of the law would be
unconscionably detrimental to the business operations of petitioners. In the case at bar, petitioners
proceeded with a hypothetical computation of the alleged loss that they will suffer similar to what the
petitioners in Carlos Superdrug Corporation  did. Petitioners went directly to this Court without first
86

establishing the factual bases of their claims. Hence, the present recourse must, likewise, fail.
Because all laws enjoy the presumption of constitutionality, courts will uphold a law’s validity if any
set of facts may be conceived to sustain it.
87

On its face, we find that there are at least two conceivable bases to sustain the subject regulation’s
validity absent clear and convincing proof that it is unreasonable, oppressive or confiscatory.
Congress may have legitimately concluded that business establishments have the capacity to
absorb a decrease in profits or income/gross sales due to the 20% discount without substantially
affecting the reasonable rate of return on their investments considering (1) not all customers of a
business establishment are senior citizens and (2) the level of its profit margins on goods and
services offered to the general public. Concurrently, Congress may have, likewise, legitimately
concluded that the establishments, which will be required to extend the 20% discount, have the
capacity to revise their pricing strategy so that whatever reduction in profits or income/gross sales
that they may sustain because of sales to senior citizens, can be recouped through higher mark-ups
or from other products not subject of discounts. As a result, the discounts resulting from sales to
senior citizens will not be confiscatory or unduly oppressive. In sum, we sustain our ruling in Carlos
Superdrug Corporation  that the 20% senior citizen discount and tax deduction scheme are valid
88

exercises of police power of the State absent a clear showing that it is arbitrary, oppressive or
confiscatory.

Conclusion

In closing, we note that petitioners hypothesize, consistent with our previous ratiocinations, that the
discount will force establishments to raise their prices in order to compensate for its impact on
overall profits or income/gross sales. The general public, or those not belonging to the senior citizen
class, are, thus, made to effectively shoulder the subsidy for senior citizens. This, in petitioners’
view, is unfair.
As already mentioned, Congress may be reasonably assumed to have foreseen this eventuality. But,
more importantly, this goes into the wisdom, efficacy and expediency of the subject law which is not
proper for judicial review. In a way, this law pursues its social equity objective in a non-traditional
manner unlike past and existing direct subsidy programs of the government for the poor and
marginalized sectors of our society. Verily, Congress must be given sufficient leeway in formulating
welfare legislations given the enormous challenges that the government faces relative to, among
others, resource adequacy and administrative capability in implementing social reform measures
which aim to protect and uphold the interests of those most vulnerable in our society. In the process,
the individual, who enjoys the rights, benefits and privileges of living in a democratic polity, must
bear his share in supporting measures intended for the common good. This is only fair. In fine,
without the requisite showing of a clear and unequivocal breach of the Constitution, the validity of the
assailed law must be sustained.

Refutation of the Dissent

The main points of Justice Carpio’s Dissent may be summarized as follows: (1) the discussion on
eminent domain in Central Luzon Drug Corporation  is not obiter dicta ; (2) allowable taking, in police
89

power, is limited to property that is destroyed or placed outside the commerce of man for public
welfare; (3) the amount of mandatory discount is private property within the ambit of Article III,
Section 9  of the Constitution; and (4) the permanent reduction in a private establishment’s total
90

revenue, arising from the mandatory discount, is a taking of private property for public use or benefit,
hence, an exercise of the power of eminent domain requiring the payment of just compensation. I
We maintain that the discussion on eminent domain in Central Luzon Drug Corporation  is obiter
91

dicta. As previously discussed, in Central Luzon Drug Corporation,  the BIR, pursuant to Sections 2.i
92

and 4 of RR No. 2-94, treated the senior citizen discount in the previous law, RA 7432, as a tax
deduction instead of a tax credit despite the clear provision in that law which stated –

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

a) The grant of twenty percent (20%) discount from all establishments relative to
utilization of transportation services, hotels and similar lodging establishment,
restaurants and recreation centers and purchase of medicines anywhere in the
country: Provided, That private establishments may claim the cost as tax credit;
(Emphasis supplied)

Thus, the Court ruled that the subject revenue regulation violated the law, viz:

The 20 percent discount required by the law to be given to senior citizens is a tax credit, not merely
a tax deduction from the gross income or gross sale of the establishment concerned. A tax credit is
used by a private establishment only after the tax has been computed; a tax deduction, before the
tax is computed. RA 7432 unconditionally grants a tax credit to all covered entities. Thus, the
provisions of the revenue regulation that withdraw or modify such grant are void. Basic is the rule
that administrative regulations cannot amend or revoke the law. 93

As can be readily seen, the discussion on eminent domain was not necessary in order to arrive at
this conclusion. All that was needed was to point out that the revenue regulation contravened the law
which it sought to implement. And, precisely, this was done in Central Luzon Drug Corporation  by94

comparing the wording of the previous law vis-à-vis the revenue regulation; employing the rules of
statutory construction; and applying the settled principle that a regulation cannot amend the law it
seeks to implement. A close reading of Central Luzon Drug Corporation  would show that the Court
95

went on to state that the tax credit "can be deemed" as just compensation only to explain why the
previous law provides for a tax credit instead of a tax deduction. The Court surmised that the tax
credit was a form of just compensation given to the establishments covered by the 20% discount.
However, the reason why the previous law provided for a tax credit and not a tax deduction was not
necessary to resolve the issue as to whether the revenue regulation contravenes the law. Hence, the
discussion on eminent domain is obiter dicta.

A court, in resolving cases before it, may look into the possible purposes or reasons that impelled
the enactment of a particular statute or legal provision. However, statements made relative thereto
are not always necessary in resolving the actual controversies presented before it. This was the
case in Central Luzon Drug Corporation resulting in that unfortunate statement that the tax credit
96

"can be deemed" as just compensation. This, in turn, led to the erroneous conclusion, by deductive
reasoning, that the 20% discount is an exercise of the power of eminent domain. The Dissent
essentially adopts this theory and reasoning which, as will be shown below, is contrary to settled
principles in police power and eminent domain analysis. II The Dissent discusses at length the
doctrine on "taking" in police power which occurs when private property is destroyed or placed
outside the commerce of man. Indeed, there is a whole class of police power measures which justify
the destruction of private property in order to preserve public health, morals, safety or welfare. As
earlier mentioned, these would include a building on the verge of collapse or confiscated obscene
materials as well as those mentioned by the Dissent with regard to property used in violating a
criminal statute or one which constitutes a nuisance. In such cases, no compensation is required.
However, it is equally true that there is another class of police power measures which do not involve
the destruction of private property but merely regulate its use. The minimum wage law, zoning
ordinances, price control laws, laws regulating the operation of motels and hotels, laws limiting the
working hours to eight, and the like would fall under this category. The examples cited by the
Dissent, likewise, fall under this category: Article 157 of the Labor Code, Sections 19 and 18 of the
Social Security Law, and Section 7 of the Pag-IBIG Fund Law. These laws merely regulate or, to use
the term of the Dissent, burden the conduct of the affairs of business establishments. In such cases,
payment of just compensation is not required because they fall within the sphere of permissible
police power measures. The senior citizen discount law falls under this latter category. III The
Dissent proceeds from the theory that the permanent reduction of profits or income/gross sales, due
to the 20% discount, is a "taking" of private property for public purpose without payment of just
compensation. At the outset, it must be emphasized that petitioners never presented any evidence
to establish that they were forced to suffer enormous losses or operate at a loss due to the effects of
the assailed law. They came directly to this Court and provided a hypothetical computation of the
loss they would allegedly suffer due to the operation of the assailed law. The central premise of the
Dissent’s argument that the 20% discount results in a permanent reduction in profits or income/gross
sales, or forces a business establishment to operate at a loss is, thus, wholly unsupported by
competent evidence. To be sure, the Court can invalidate a law which, on its face, is arbitrary,
oppressive or confiscatory. 97

But this is not the case here.

In the case at bar, evidence is indispensable before a determination of a constitutional violation can
be made because of the following reasons. First, the assailed law, by imposing the senior citizen
discount, does not take any of the properties used by a business establishment like, say, the land on
which a manufacturing plant is constructed or the equipment being used to produce goods or
services. Second, rather than taking specific properties of a business establishment, the senior
citizen discount law merely regulates the prices of the goods or services being sold to senior citizens
by mandating a 20% discount. Thus, if a product is sold at ₱10.00 to the general public, then it shall
be sold at ₱8.00 ( i.e., ₱10.00 less 20%) to senior citizens. Note that the law does not impose at
what specific price the product shall be sold, only that a 20% discount shall be given to senior
citizens based on the price set by the business establishment. A business establishment is, thus,
free to adjust the prices of the goods or services it provides to the general public. Accordingly, it can
increase the price of the above product to ₱20.00 but is required to sell it at ₱16.00 (i.e. , ₱20.00
less 20%) to senior citizens. Third, because the law impacts the prices of the goods or services of a
particular establishment relative to its sales to senior citizens, its profits or income/gross sales are
affected. The extent of the impact would, however, depend on the profit margin of the business
establishment on a particular good or service. If a product costs ₱5.00 to produce and is sold at
₱10.00, then the profit  is ₱5.00  or a profit margin  of 50%.
98 99 100 101

Under the assailed law, the aforesaid product would have to be sold at ₱8.00 to senior citizens yet
the business would still earn ₱3.00  or a 30%  profit margin. On the other hand, if the product costs
102 103

₱9.00 to produce and is required to be sold at ₱8.00 to senior citizens, then the business would
experience a loss of ₱1.00. 104

But note that since not all customers of a business establishment are senior citizens, the business
establishment may continue to earn ₱1.00 from non-senior citizens which, in turn, can offset any
loss arising from sales to senior citizens.

Fourth, when the law imposes the 20% discount in favor of senior citizens, it does not prevent the
business establishment from revising its pricing strategy.

By revising its pricing strategy, a business establishment can recoup any reduction of profits or
income/gross sales which would otherwise arise from the giving of the 20% discount. To illustrate,
suppose A has two customers: X, a senior citizen, and Y, a non-senior citizen. Prior to the law, A
sells his products at ₱10.00 a piece to X and Y resulting in income/gross sales of ₱20.00 (₱10.00 +
₱10.00). With the passage of the law, A must now sell his product to X at ₱8.00 (i.e., ₱10.00 less
20%) so that his income/gross sales would be ₱18.00 (₱8.00 + ₱10.00) or lower by ₱2.00. To
prevent this from happening, A decides to increase the price of his products to ₱11.11 per piece.
Thus, he sells his product to X at ₱8.89 (i.e. , ₱11.11 less 20%) and to Y at ₱11.11. As a result, his
income/gross sales would still be ₱20.00  (₱8.89 + ₱11.11). The capacity, then, of business
105

establishments to revise their pricing strategy makes it possible for them not to suffer any reduction
in profits or income/gross sales, or, in the alternative, mitigate the reduction of their profits or
income/gross sales even after the passage of the law. In other words, business establishments have
the capacity to adjust their prices so that they may remain profitable even under the operation of the
assailed law.

The Dissent, however, states that – The explanation by the majority that private establishments can
always increase their prices to recover the mandatory discount will only encourage private
establishments to adjust their prices upwards to the prejudice of customers who do not enjoy the
20% discount. It was likewise suggested that if a company increases its prices, despite the
application of the 20% discount, the establishment becomes more profitable than it was before the
implementation of R.A. 7432. Such an economic justification is self-defeating, for more consumers
will suffer from the price increase than will benefit from the 20% discount. Even then, such ability to
increase prices cannot legally validate a violation of the eminent domain clause. 106

But, if it is possible that the business establishment, by adjusting its prices, will suffer no reduction in
its profits or income/gross sales (or suffer some reduction but continue to operate profitably) despite
giving the discount, what would be the basis to strike down the law? If it is possible that the business
establishment, by adjusting its prices, will not be unduly burdened, how can there be a finding that
the assailed law is an unconstitutional exercise of police power or eminent domain? That there may
be a burden placed on business establishments or the consuming public as a result of the operation
of the assailed law is not, by itself, a ground to declare it unconstitutional for this goes into the
wisdom and expediency of the law.
The cost of most, if not all, regulatory measures of the government on business establishments is
ultimately passed on to the consumers but that, by itself, does not justify the wholesale nullification
of these measures. It is a basic postulate of our democratic system of government that the
Constitution is a social contract whereby the people have surrendered their sovereign powers to the
State for the common good. 107

All persons may be burdened by regulatory measures intended for the common good or to serve
some important governmental interest, such as protecting or improving the welfare of a special class
of people for which the Constitution affords preferential concern. Indubitably, the one assailing the
law has the heavy burden of proving that the regulation is unreasonable, oppressive or confiscatory,
or has gone "too far" as to amount to a "taking." Yet, here, the Dissent would have this Court nullify
the law without any proof of such nature.

Further, this Court is not the proper forum to debate the economic theories or realities that impelled
Congress to shift from the tax credit to the tax deduction scheme. It is not within our power or
competence to judge which scheme is more or less burdensome to business establishments or the
consuming public and, thereafter, to choose which scheme the State should use or pursue. The shift
from the tax credit to tax deduction scheme is a policy determination by Congress and the Court will
respect it for as long as there is no showing, as here, that the subject regulation has transgressed
constitutional limitations. Unavoidably, the lack of evidence constrains the Dissent to rely on
speculative and hypothetical argumentation when it states that the 20% discount is a significant
amount and not a minimal loss (which erroneously assumes that the discount automatically results in
a loss when it is possible that the profit margin is greater than 20% and/or the pricing strategy can be
revised to prevent or mitigate any reduction in profits or income/gross sales as illustrated
above),  and not all private establishments make a 20% profit margin (which conversely implies that
108

there are those who make more and, thus, would not be greatly affected by this regulation). 109

In fine, because of the possible scenarios discussed above, we cannot assume that the 20%
discount results in a permanent reduction in profits or income/gross sales, much less that business
establishments are forced to operate at a loss under the assailed law. And, even if we gratuitously
assume that the 20% discount results in some degree of reduction in profits or income/gross sales,
we cannot assume that such reduction is arbitrary, oppressive or confiscatory. To repeat, there is no
actual proof to back up this claim, and it could be that the loss suffered by a business establishment
was occasioned through its fault or negligence in not adapting to the effects of the assailed law. The
law uniformly applies to all business establishments covered thereunder. There is, therefore, no
unjust discrimination as the aforesaid business establishments are faced with the same constraints.
The necessity of proof is all the more pertinent in this case because, as similarly observed by Justice
Velasco in his Concurring Opinion, the law has been in operation for over nine years now. However,
the grim picture painted by petitioners on the unconscionable losses to be indiscriminately suffered
by business establishments, which should have led to the closure of numerous business
establishments, has not come to pass. Verily, we cannot invalidate the assailed law based on
assumptions and conjectures. Without adequate proof, the presumption of constitutionality must
prevail. IV At this juncture, we note that the Dissent modified its original arguments by including a
new paragraph, to wit:

Section 9, Article III of the 1987 Constitution speaks of private property without any distinction. It
does not state that there should be profit before the taking of property is subject to just
compensation. The private property referred to for purposes of taking could be inherited, donated,
purchased, mortgaged, or as in this case, part of the gross sales of private establishments. They are
all private property and any taking should be attended by corresponding payment of just
compensation. The 20% discount granted to senior citizens belong to private establishments,
whether these establishments make a profit or suffer a loss. In fact, the 20% discount applies to non-
profit establishments like country, social, or golf clubs which are open to the public and not only for
exclusive membership. The issue of profit or loss to the establishments is immaterial. 110

Two things may be said of this argument. First, it contradicts the rest of the arguments of the
Dissent. After it states that the issue of profit or loss is immaterial, the Dissent proceeds to argue that
the 20% discount is not a minimal loss  and that the 20% discount forces business establishments
111

to operate at a loss.112

Even the obiter in Central Luzon Drug Corporation,  which the Dissent essentially adopts and relies
113

on, is premised on the permanent reduction of total revenues and the loss that business
establishments will be forced to suffer in arguing that the 20% discount constitutes a "taking" under
the power of eminent domain. Thus, when the Dissent now argues that the issue of profit or loss is
immaterial, it contradicts itself because it later argues, in order to justify that there is a "taking" under
the power of eminent domain in this case, that the 20% discount forces business establishments to
suffer a significant loss or to operate at a loss. Second, this argument suffers from the same flaw as
the Dissent's original arguments. It is an erroneous characterization of the 20% discount. According
to the Dissent, the 20% discount is part of the gross sales and, hence, private property belonging to
business establishments. However, as previously discussed, the 20% discount is not private
property actually owned and/or used by the business establishment. It should be distinguished from
properties like lands or buildings actually used in the operation of a business establishment which, if
appropriated for public use, would amount to a "taking" under the power of eminent domain. Instead,
the 20% discount is a regulatory measure which impacts the pricing and, hence, the profitability of
business establishments. At the time the discount is imposed, no particular property of the business
establishment can be said to be "taken." That is, the State does not acquire or take anything from
the business establishment in the way that it takes a piece of private land to build a public road.
While the 20% discount may form part of the potential profits or income/gross sales  of the business
114

establishment, as similarly characterized by Justice Bersamin in his Concurring Opinion, potential

profits or income/gross sales are not private property, specifically cash or money, already belonging
to the business establishment. They are a mere expectancy because they are potential fruits of the
successful conduct of the business. Prior to the sale of goods or services, a business establishment
may be subject to State regulations, such as the 20% senior citizen discount, which may impact the
level or amount of profits or income/gross sales that can be generated by such establishment. For
this reason, the validity of the discount is to be determined based on its overall effects on the
operations of the business establishment.

Again, as previously discussed, the 20% discount does not automatically result in a 20% reduction in
profits, or, to align it with the term used by the Dissent, the 20% discount does not mean that a 20%
reduction in gross sales necessarily results. Because (1) the profit margin of a product is not
necessarily less than 20%, (2) not all customers of a business establishment are senior citizens, and
(3) the establishment may revise its pricing strategy, such reduction in profits or income/gross sales
may be prevented or, in the alternative, mitigated so that the business establishment continues to
operate profitably. Thus, even if we gratuitously assume that some degree of reduction in profits or
income/gross sales occurs because of the 20% discount, it does not follow that the regulation is
unreasonable, oppressive or confiscatory because the business establishment may make the
necessary adjustments to continue to operate profitably. No evidence was presented by petitioners
to show otherwise. In fact, no evidence was presented by petitioners at all. Justice Leonen, in his
Concurring and Dissenting Opinion, characterizes "profits" (or income/gross sales) as an inchoate
right. Another way to view it, as stated by Justice Velasco in his Concurring Opinion, is that the
business establishment merely has a right to profits. The Constitution adverts to it as the right of an
enterprise to a reasonable return on investment. 115
Undeniably, this right, like any other right, may be regulated under the police power of the State to
achieve important governmental objectives like protecting the interests and improving the welfare of
senior citizens. It should be noted though that potential profits or income/gross sales are relevant in
police power and eminent domain analyses because they may, in appropriate cases, serve as an
indicia when a regulation has gone "too far" as to amount to a "taking" under the power of eminent
domain. When the deprivation or reduction of profits or income/gross sales is shown to be
unreasonable, oppressive or confiscatory, then the challenged governmental regulation may be
nullified for being a "taking" under the power of eminent domain. In such a case, it is not profits or
income/gross sales which are actually taken and appropriated for public use. Rather, when the
regulation causes an establishment to incur losses in an unreasonable, oppressive or confiscatory
manner, what is actually taken is capital and the right of the business establishment to a reasonable
return on investment. If the business losses are not halted because of the continued operation of the
regulation, this eventually leads to the destruction of the business and the total loss of the capital
invested therein. But, again, petitioners in this case failed to prove that the subject regulation is
unreasonable, oppressive or confiscatory.

V.

The Dissent further argues that we erroneously used price and rate of return on investment control
laws to justify the senior citizen discount law. According to the Dissent, only profits from industries
imbued with public interest may be regulated because this is a condition of their franchises. Profits of
establishments without franchises cannot be regulated permanently because there is no law
regulating their profits. The Dissent concludes that the permanent reduction of total revenues or
gross sales of business establishments without franchises is a taking of private property under the
power of eminent domain. In making this argument, it is unfortunate that the Dissent quotes only a
portion of the ponencia – The subject regulation may be said to be similar to, but with substantial
distinctions from, price control or rate of return on investment control laws which are traditionally
regarded as police power measures. These laws generally regulate public utilities or
industries/enterprises imbued with public interest in order to protect consumers from exorbitant or
unreasonable pricing as well as temper corporate greed by controlling the rate of return on
investment of these corporations considering that they have a monopoly over the goods or services
that they provide to the general public. The subject regulation differs therefrom in that (1) the
discount does not prevent the establishments from adjusting the level of prices of their goods and
services, and (2) the discount does not apply to all customers of a given establishment but only to
the class of senior citizens. x x x
116

The above paragraph, in full, states –

The subject regulation may be said to be similar to, but with substantial distinctions from, price
control or rate of return on investment control laws which are traditionally regarded as police power
measures. These laws generally regulate public utilities or industries/enterprises imbued with public
interest in order to protect consumers from exorbitant or unreasonable pricing as well as temper
corporate greed by controlling the rate of return on investment of these corporations considering that
they have a monopoly over the goods or services that they provide to the general public. The subject
regulation differs therefrom in that (1) the discount does not prevent the establishments from
adjusting the level of prices of their goods and services, and (2) the discount does not apply to all
customers of a given establishment but only to the class of senior citizens.

Nonetheless, to the degree material to the resolution of this case, the 20% discount may be properly
viewed as belonging to the category of price regulatory measures which affects the profitability of
establishments subjected thereto. (Emphasis supplied)
The point of this paragraph is to simply show that the State has, in the past, regulated prices and
profits of business establishments. In other words, this type of regulatory measures is traditionally
recognized as police power measures so that the senior citizen discount may be considered as a
police power measure as well. What is more, the substantial distinctions between price and rate of
return on investment control laws vis-à-vis the senior citizen discount law provide greater reason to
uphold the validity of the senior citizen discount law. As previously discussed, the ability to adjust
prices allows the establishment subject to the senior citizen discount to prevent or mitigate any
reduction of profits or income/gross sales arising from the giving of the discount. In contrast,
establishments subject to price and rate of return on investment control laws cannot adjust prices
accordingly. Certainly, there is no intention to say that price and rate of return on investment control
laws are the justification for the senior citizen discount law. Not at all. The justification for the senior
citizen discount law is the plenary powers of Congress. The legislative power to regulate business
establishments is broad and covers a wide array of areas and subjects. It is well within Congress’
legislative powers to regulate the profits or income/gross sales of industries and enterprises, even
those without franchises. For what are franchises but mere legislative enactments? There is nothing
in the Constitution that prohibits Congress from regulating the profits or income/gross sales of
industries and enterprises without franchises. On the contrary, the social justice provisions of the
Constitution enjoin the State to regulate the "acquisition, ownership, use, and disposition" of property
and its increments. 117

This may cover the regulation of profits or income/gross sales of all businesses, without qualification,
to attain the objective of diffusing wealth in order to protect and enhance the right of all the people to
human dignity. 118

Thus, under the social justice policy of the Constitution, business establishments may be compelled
to contribute to uplifting the plight of vulnerable or marginalized groups in our society provided that
the regulation is not arbitrary, oppressive or confiscatory, or is not in breach of some specific
constitutional limitation. When the Dissent, therefore, states that the "profits of private
establishments which are non-franchisees cannot be regulated permanently, and there is no such
law regulating their profits permanently,"  it is assuming what it ought to prove. First, there are laws
119

which, in effect, permanently regulate profits or income/gross sales of establishments without

franchises, and RA 9257 is one such law. And, second, Congress can regulate such profits or
income/gross sales because, as previously noted, there is nothing in the Constitution to prevent it
from doing so. Here, again, it must be emphasized that petitioners failed to present any proof to
show that the effects of the assailed law on their operations has been unreasonable, oppressive or
confiscatory. The permanent regulation of profits or income/gross sales of business establishments,
even those without franchises, is not as uncommon as the Dissent depicts it to be. For instance, the
minimum wage law allows the State to set the minimum wage of employees in a given region or
geographical area. Because of the added labor costs arising from the minimum wage, a permanent
reduction of profits or income/gross sales would result, assuming that the employer does not
increase the prices of his goods or services. To illustrate, suppose it costs a company ₱5.00 to
produce a product and it sells the same at ₱10.00 with a 50% profit margin. Later, the State
increases the minimum wage. As a result, the company incurs greater labor costs so that it now
costs ₱7.00 to produce the same product. The profit per product of the company would be reduced
to ₱3.00 with a profit margin of 30%. The net effect would be the same as in the earlier example of
granting a 20% senior citizen discount. As can be seen, the minimum wage law could, likewise, lead
to a permanent reduction of profits. Does this mean that the minimum wage law should, likewise, be
declared unconstitutional on the mere plea that it results in a permanent reduction of profits? Taking
it a step further, suppose the company decides to increase the price of its product in order to offset
the effects of the increase in labor cost; does this mean that the minimum wage law, following the
reasoning of the Dissent, is unconstitutional because the consuming public is effectively made to
subsidize the wage of a group of laborers, i.e., minimum wage earners? The same reasoning can be
adopted relative to the examples cited by the Dissent which, according to it, are valid police power
regulations. Article 157 of the Labor Code, Sections 19 and 18 of the Social Security Law, and
Section 7 of the Pag-IBIG Fund Law would effectively increase the labor cost of a business
establishment.  This would, in turn, be integrated as part of the cost of its goods or services. Again, if
1âwphi1

the establishment does not increase its prices, the net effect would be a permanent reduction in its
profits or income/gross sales. Following the reasoning of the Dissent that "any form of permanent
taking of private property (including profits or income/gross sales)  is an exercise of eminent domain
120

that requires the State to pay just compensation,"  then these statutory provisions would, likewise,
121

have to be declared unconstitutional. It does not matter that these benefits are deemed part of the
employees’ legislated wages because the net effect is the same, that is, it leads to higher labor costs
and a permanent reduction in the profits or income/gross sales of the business establishments. 122

The point then is this – most, if not all, regulatory measures imposed by the State on business
establishments impact, at some level, the latter’s prices and/or profits or income/gross sales. 123

If the Court were to sustain the Dissent’s theory, then a wholesale nullification of such measures
would inevitably result. The police power of the State and the social justice provisions of the
Constitution would, thus, be rendered nugatory. There is nothing sacrosanct about profits or
income/gross sales. This, we made clear in Carlos Superdrug Corporation: 124

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

xxxx

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

Moreover, the right to property has a social dimension. While Article XIII of the Constitution provides
the percept for the protection of property, various laws and jurisprudence, particularly on agrarian
reform and the regulation of contracts and public utilities, continously serve as a reminder for the
promotion of public good.

Undeniably, the success of the senior citizens program rests largely on the support imparted by
petitioners and the other private establishments concerned. This being the case, the means
employed in invoking the active participation of the private sector, in order to achieve the purpose or
objective of the law, is reasonably and directly related. Without sufficient proof that Section 4(a) of
R.A. No. 9257 is arbitrary, and that the continued implementation of the same would be
unconscionably detrimental to petitioners, the Court will refrain form quashing a legislative act. 125

In conclusion, we maintain that the correct rule in determining whether the subject regulatory
measure has amounted to a "taking" under the power of eminent domain is the one laid down
in Alalayan v. National Power Corporation  and followed in Carlos Superdurg
126

Corporation  consistent with long standing principles in police power and eminent domain analysis.
127

Thus, the deprivation or reduction of profits or income. Gross sales must be clearly shown to be
unreasonable, oppressive or confiscatory. Under the specific circumstances of this case, such
determination can only be made upon the presentation of competent proof which petitioners failed to
do. A law, which has been in operation for many years and promotes the welfare of a group
accorded special concern by the Constitution, cannot and should not be summarily invalidated on a
mere allegation that it reduces the profits or income/gross sales of business establishments.

WHEREFORE, the Petition is hereby DISMISSED for lack of merit.

SO ORDERED.

[G.R. No. 148191. November 25, 2003]

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. SOLIDBANK

CORPORATION, respondent.

DECISION
PANGANIBAN, J.:

Under the Tax Code, the earnings of banks from passive income are
subject to a twenty percent final withholding tax (20% FWT). This tax is
withheld at source and is thus not actually and physically received by the
banks, because it is paid directly to the government by the entities from which
the banks derived the income. Apart from the 20% FWT, banks are also
subject to a five percent gross receipts tax (5% GRT) which is imposed by the
Tax Code on their gross receipts, including the passive income.
Since the 20% FWT is constructively received by the banks and forms part
of their gross receipts or earnings, it follows that it is subject to the 5%
GRT. After all, the amount withheld is paid to the government on their behalf,
in satisfaction of their withholding taxes. That they do not actually receive the
amount does not alter the fact that it is remitted for their benefit in satisfaction
of their tax obligations.
Stated otherwise, the fact is that if there were no withholding tax system in
place in this country, this 20 percent portion of the passive income of banks
would actually be paid to the banks and then remitted by them to the
government in payment of their income tax. The institution of the withholding
tax system does not alter the fact that the 20 percent portion of their passive
income constitutes part of their actualearnings, except that it is paid directly to
the government on their behalf in satisfaction of the 20 percent final income
tax due on their passive incomes.

The Case
 Before us is a Petition for Review  under Rule 45 of the Rules of Court,
[1]

seeking to annul the July 18, 2000 Decision  and the May 8,

[2]

2001 Resolution  of the Court of Appeals  (CA) in CA-GR SP No. 54599.The

[3] [4]

decretal portion of the assailed Decision reads as follows:

WHEREFORE, we AFFIRM in toto the assailed decision and resolution of the Court

of Tax Appeals. [5]

The challenged Resolution denied petitioners Motion for Reconsideration.

The Facts

Quoting petitioner, the CA  summarized the facts of this case as follows:

[6]

For the calendar year 1995, [respondent] seasonably filed its Quarterly Percentage
Tax Returns reflecting gross receipts (pertaining to 5% [Gross Receipts Tax] rate) in
the total amount of P1,474,691,693.44 with corresponding gross receipts tax payments
in the sum of P73,734,584.60, broken down as follows:

Period Covered Gross Receipts Gross Receipts Tax

January to March 1994 P 188,406,061.95 P 9,420,303.10

April to June 1994 370,913,832.70 18,545,691.63
July to September 1994 481,501,838.98 24,075,091.95
October to December 1994 433,869,959.81 21,693,497.98

Total P 1,474,691,693.44 P 73,734,584.60

[Respondent] alleges that the total gross receipts in the amount of P1,474,691,693.44
included the sum of P350,807,875.15 representing gross receipts from passive income
which was already subjected to 20% final withholding tax.

On January 30, 1996, [the Court of Tax Appeals] rendered a decision in CTA Case
No. 4720 entitled Asian Bank Corporation vs. Commissioner of Internal Revenue[,]
wherein it was held that the 20% final withholding tax on [a] banks interest income
should not form part of its taxable gross receipts for purposes of computing the gross
receipts tax.

On June 19, 1997, on the strength of the aforementioned decision, [respondent] filed
with the Bureau of Internal Revenue [BIR] a letter-request for the refund or issuance
of [a] tax credit certificate in the aggregate amount of P3,508,078.75, representing
allegedly overpaid gross receipts tax for the year 1995, computed as follows:

Gross Receipts Subjected to the Final Tax

Derived from Passive [Income] P 350,807,875.15
Multiply by Final Tax rate 20%
20% Final Tax Withheld at Source P 70,161,575.03
Multiply by [Gross Receipts Tax] rate 5%
Overpaid [Gross Receipts Tax] P 3,508,078.75

Without waiting for an action from the [petitioner], [respondent] on the same day filed
[a] petition for review [with the Court of Tax Appeals] in order to toll the running of
the two-year prescriptive period to judicially claim for the refund of [any] overpaid
internal revenue tax[,] pursuant to Section 230 [now 229] of the Tax Code [also
National Internal Revenue Code] x x x.

x x x x x x x x x

After trial on the merits, the [Court of Tax Appeals], on August 6, 1999, rendered its
decision ordering x x x petitioner to refund in favor of x x x respondent the reduced
amount of P1,555,749.65 as overpaid [gross receipts tax] for the year 1995. The legal
issue x x x was resolved by the [Court of Tax Appeals], with Hon. Amancio Q. Saga
dissenting, on the strength of its earlier pronouncement in x x x Asian Bank
Corporation vs. Commissioner of Internal Revenuex x x, wherein it was held that the
20% [final withholding tax] on [a] banks interest income should not form part of its
taxable gross receipts for purposes of computing the [gross receipts tax].[7]

Ruling of the CA

The CA held that the 20% FWT on a banks interest income did not form
part of the taxable gross receipts in computing the 5% GRT, because the
FWT was not actually received by the bank but was directly remitted to the
government. The appellate court curtly said that while the Tax Code does not
specifically state any exemption, x x x the statute must receive a sensible
construction such as will give effect to the legislative intention, and so as to
avoid an unjust or absurd conclusion. [8]

Hence, this appeal. [9]

Issue
 Petitioner raises this lone issue for our consideration:

Whether or not the 20% final withholding tax on [a] banks interest income forms part
of the taxable gross receipts in computing the 5% gross receipts tax.[10]

The Courts Ruling

The Petition is meritorious.

Sole Issue:
Whether the 20% FWT Forms Part
of the Taxable Gross Receipts

Petitioner claims that although the 20% FWT on respondents interest

income was not actually received by respondent because it was remitted
directly to the government, the fact that the amount redounded to the banks
benefit makes it part of the taxable gross receipts in computing the 5%
GRT. Respondent, on the other hand, maintains that the CA correctly ruled
otherwise.
We agree with petitioner. In fact, the same issue has been raised recently
in China Banking Corporation v. CA,  where this Court held that the amount
[11]

of interest income withheld in payment of the 20% FWT forms part of gross
receipts in computing for the GRT on banks.

The FWT and the GRT:

Two Different Taxes

The 5% GRT is imposed by Section 119  of the Tax Code,  which
[12] [13]

provides:

SEC. 119. Tax on banks and non-bank financial intermediaries. There shall be

collected a tax on gross receipts derived from sources within the Philippines by all
banks and non-bank financial intermediaries in accordance with the following
schedule:
(a) On interest, commissions and discounts from lending activities as well as income
from financial leasing, on the basis of remaining maturities of instruments from which
such receipts are derived.

Short-term maturity not in excess of two (2) years5%

Medium-term maturity over two (2) years
but not exceeding four (4) years....3%
Long-term maturity:
(i) Over four (4) years but not exceeding
seven (7) years1%
(ii) Over seven (7) years..0%
(b) On dividends...0%
(c) On royalties, rentals of property, real or personal, profits from
exchange and all other items treated as gross income under
Section 28  of this [14]

Code....................................................................5%

Provided, however, That in case the maturity period referred to in paragraph (a) is

shortened thru pretermination, then the maturity period shall be reckoned to end as of
the date of pretermination for purposes of classifying the transaction as short, medium
or long term and the correct rate of tax shall be applied accordingly.

Nothing in this Code shall preclude the Commissioner from imposing the same tax
herein provided on persons performing similar banking activities.

The 5% GRT  is included under Title V. Other Percentage Taxes of the
[15]

Tax Code and is not subject to withholding. The banks and non-bank financial
intermediaries liable therefor shall, under Section 125(a)(1),  file quarterly[16]

returns on the amount of gross receipts and pay the taxes due thereon within
twenty (20)  days after the end of each taxable quarter.
[17]

The 20% FWT,  on the other hand, falls under Section 24(e)(1)  of Title II.
[18] [19]

Tax on Income. It is a tax on passive income, deducted and withheld at

source by the payor-corporation and/or person as withholding agent pursuant
to Section 50,  and paid in the same manner and subject to the same
[20]

conditions as provided for in Section 51. [21]

A perusal of these provisions clearly shows that two types of taxes are
involved in the present controversy: (1) the GRT, which is a percentage tax;
and (2) the FWT, which is an income tax. As a bank, petitioner is covered by
both taxes.
 A percentage tax is a national tax measured by a certain percentage of
the gross selling price or gross value in money of goods sold, bartered or
imported; or of the gross receipts or earnings derived by any person engaged
in the sale of services.  It is not subject to withholding.
[22]

An income tax, on the other hand, is a national tax imposed on the net or
the gross income realized in a taxable year.  It is subject to withholding.
[23]

In a withholding tax system, the payee is the taxpayer, the person on

whom the tax is imposed; the payor, a separate entity, acts as no more than
an agent of the government for the collection of the tax in order to ensure its
payment. Obviously, this amount that is used to settle the tax liability is
deemed sourced from the proceeds constitutive of the tax base.  These [24]

proceeds are either actual or constructive. Both parties herein agree that there
is no actual receipt by the bank of the amount withheld. What needs to be
determined is if there is constructive receipt thereof. Since the payee -- not the
payor -- is the real taxpayer, the rule on constructive receipt can be easily
rationalized, if not made clearly manifest. [25]

Constructive Receipt
Versus Actual Receipt

Applying Section 7 of Revenue Regulations (RR) No. 17-84,  petitioner

[26]

contends that there is constructive receipt of the interest on deposits and yield

on deposit substitutes.  Respondent, however, claims that even if there is, it
[27]

is Section 4(e) of RR 12-80  that nevertheless governs the situation.

[28]

Section 7 of RR 17-84 states:

SEC. 7. Nature and Treatment of Interest on Deposits and Yield on Deposit

Substitutes.

(a) The interest earned on Philippine Currency bank deposits and yield from deposit
substitutes subjected to the withholding taxes in accordance with these regulations
need not be included in the gross income in computing the depositors/investors
income tax liability in accordance with the provision of Section 29(b),  (c)  and (d)
[29] [30]

of the National Internal Revenue Code, as amended.

(b) Only interest paid or accrued on bank deposits, or yield from deposit substitutes
declared for purposes of imposing the withholding taxes in accordance with these
regulations shall be allowed as interest expense deductible for purposes of computing
taxable net income of the payor.
(c) If the recipient of the above-mentioned items of income are financial institutions,
the same shall be included as part of the tax base upon which the gross receipt[s] tax
is imposed.

Section 4(e) of RR 12-80, on the other hand, states that the tax rates to be
imposed on the gross receipts of banks, non-bank financial intermediaries,
financing companies, and other non-bank financial intermediaries not
performing quasi-banking activities shall be based on all items of
income actually received. This provision reads:

SEC. 4. x x x x x x x x x

(e) Gross receipts tax on banks, non-bank financial intermediaries, financing

companies, and other non-bank financial intermediaries not performing quasi-banking
activities. The rates of tax to be imposed on the gross receipts of such financial
institutions shall be based on all items of income actually received. Mere accrual shall
not be considered, but once payment is received on such accrual or in cases of
prepayment, then the amount actually received shall be included in the tax base of
such financial institutions, as provided hereunder x x x.

Respondent argues that the above-quoted provision is plain and clear:

since there is no actual receipt, the FWT is not to be included in the tax base
for computing the GRT. There is supposedly no pecuniary benefit or
advantage accruing to the bank from the FWT, because the income is
subjected to a tax burden immediately upon receipt through the withholding
process. Moreover, the earlier RR 12-80 covered matters not falling under
the later RR 17-84. [31]

We are not persuaded.

By analogy, we apply to the receipt of income the rules
on actual and constructive possession provided in Articles 531 and 532 of our
Civil Code.
Under Article 531: [32]

Possession is acquired by the material occupation of a thing or the exercise of a right,

or by the fact that it is subject to the action of our will, or by the proper acts and legal
formalities established for acquiring such right.

Article 532 states:

Possession may be acquired by the same person who is to enjoy it, by his legal
representative, by his agent, or by any person without any power whatever; but in the
last case, the possession shall not be considered as acquired until the person in whose
name the act of possession was executed has ratified the same, without prejudice to
the juridical consequences of negotiorum gestio in a proper case. [33]

The last means of acquiring possession under Article 531 refers to juridical
acts -- the acquisition of possession by sufficient title to which the law gives
the force of acts of possession.  Respondent argues that only items of
[34]

income actually received should be included in its gross receipts. It claims that

since the amount had already been withheld at source, it did not
have actual receipt thereof.
We clarify. Article 531 of the Civil Code clearly provides that the
acquisition of the right of possession is through the proper acts and legal
formalities established therefor. The withholding process is one such
act. There may not be actual receipt of the income withheld; however, as
provided for in Article 532, possession by any person without any power
whatsoever shall be considered as acquired when ratified by the person in
whose name the act of possession is executed.
In our withholding tax system, possession is acquired by the payor as the
withholding agent of the government, because the taxpayer ratifies the very
act of possession for the government. There is thus constructive receipt. The
processes of bookkeeping and accounting for interest on deposits and yield
on deposit substitutes that are subjected to FWT are indeed -- for legal
purposes -- tantamount to delivery, receipt or remittance.  Besides,
[35]

respondent itself admits that its income is subjected to a tax burden

immediately upon receipt, although it claims that it derives no pecuniary
benefit or advantage through the withholding process. There
being constructive receipt of such income -- part of which is withheld -- RR 17-
84 applies, and that income is included as part of the tax base upon which the
GRT is imposed.

RR 12-80 Superseded by RR 17-84

We now come to the effect of the revenue regulations on interest

income constructively received.
In general, rules and regulations issued by administrative or executive
officers pursuant to the procedure or authority conferred by law upon the
administrative agency have the force and effect, or partake of the nature, of a
statute.  The reason is that statutes express the policies, purposes,
[36]

objectives, remedies and sanctions intended by the legislature in general

terms. The details and manner of carrying them out are oftentimes left to the
administrative agency entrusted with their enforcement.
In the present case, it is the finance secretary who promulgates the
revenue regulations, upon recommendation of the BIR commissioner. These
regulations are the consequences of a delegated power to issue legal
provisions that have the effect of law. [37]

A revenue regulation is binding on the courts as long as the procedure

fixed for its promulgation is followed. Even if the courts may not be in
agreement with its stated policy or innate wisdom, it is nonetheless valid,
provided that its scope is within the statutory authority or standard granted by
the legislature.  Specifically, the regulation must (1) be germane to the object
[38]

and purpose of the law;  (2) not contradict, but conform to, the standards the
[39]

law prescribes;  and (3) be issued for the sole purpose of carrying into effect
[40]

the general provisions of our tax laws. [41]

In the present case, there is no question about the regularity in the

performance of official duty. What needs to be determined is whether RR 12-
80 has been repealed by RR 17-84.
A repeal may be express or implied. It is express when there is a
declaration in a regulation -- usually in its repealing clause -- that another
regulation, identified by its number or title, is repealed. All others are implied
repeals.  An example of the latter is a general provision that predicates the
[42]

intended repeal on a substantial conflict between the existing and the prior
regulations. [43]

As stated in Section 11 of RR 17-84, all regulations, rules, orders or

portions thereof that are inconsistent with the provisions of the said RR are
thereby repealed. This declaration proceeds on the premise that RR 17-84
clearly reveals such an intention on the part of the Department of
Finance. Otherwise, later RRs are to be construed as a continuation of, and
not a substitute for, earlier RRs; and will continue to speak, so far as the
subject matter is the same, from the time of the first promulgation. [44]

There are two well-settled categories of implied repeals: (1) in case the
provisions are in irreconcilable conflict, the later regulation, to the extent of the
conflict, constitutes an implied repeal of an earlier one; and (2) if the later
regulation covers the whole subject of an earlier one and is clearly intended as a
substitute, it will similarly operate as a repeal of the earlier one.  There is no
[45]
implied repeal of an earlier RR by the mere fact that its subject matter is related to
a later RR, which may simply be a cumulation or continuation of the earlier one. [46]

Where a part of an earlier regulation embracing the same subject as a

later one may not be enforced without nullifying the pertinent provision of the
latter, the earlier regulation is deemed impliedly amended or modified to the
extent of the repugnancy.  The unaffected provisions or portions of the earlier
[47]

regulation remain in force, while its omitted portions are deemed repealed.
 An exception therein that is amended by its subsequent elimination shall
[48]

now cease to be so and instead be included within the scope of the general
rule. [49]

Section 4(e) of the earlier RR 12-80 provides that only items of

income actually received shall be included in the tax base for computing the
GRT, but Section 7(c) of the later RR 17-84 makes no such distinction and
provides that all interests earned shall be included. The exception having
been eliminated, the clear intent is that the later RR 17-84 includes the
exception within the scope of the general rule.
Repeals by implication are not favored and will not be indulged, unless it is
manifest that the administrative agency intended them. As a regulation is
presumed to have been made with deliberation and full knowledge of all
existing rules on the subject, it may reasonably be concluded that its
promulgation was not intended to interfere with or abrogate any earlier rule
relating to the same subject, unless it is either repugnant to or fully inclusive of
the subject matter of an earlier one, or unless the reason for the earlier one is
beyond peradventure removed.  Every effort must be exerted to make all
[50]

regulations stand -- and a later rule will not operate as a repeal of an earlier
one, if by any reasonable construction, the two can be reconciled. [51]

RR 12-80 imposes the GRT only on all items of income actually received,

as opposed to their mere accrual, while RR 17-84 includes all interest income
in computing the GRT. RR 12-80 is superseded by the later rule, because
Section 4(e) thereof is not restated in RR 17-84. Clearly therefore, as
petitioner correctly states, this particular provision was impliedly repealed
when the later regulations took effect. [52]

Reconciling the Two Regulations

Granting that the two regulations can be reconciled, respondents reliance

on Section 4(e) of RR 12-80 is misplaced and deceptive. The accrual referred
to therein should not be equated with the determination of the amount to be
used as tax base in computing the GRT. Such accrual merely refers to an
accounting method that recognizes income as earned although not received,
and expenses as incurred although not yet paid.
Accrual should not be confused with the concept
of constructive possession or receipt as earlier discussed. Petitioner correctly
points out that income that is merely accrued -- earned, but not yet received --
does not form part of the taxable gross receipts; income that has been
received, albeit constructively, does. [53]

The word actually, used confusingly in Section 4(e), will be clearer if

removed entirely. Besides, if actually is that important, accrual should have
been eliminated for being a mere surplusage. The inclusion
of accrual stresses the fact that Section 4(e) does not distinguish
between actual and constructive receipt. It merely focuses on the method of
accounting known as the accrual system.
Under this system, income is accrued or earned in the year in which the
taxpayers right thereto becomes fixed and definite, even though it may not
be actually received until a later year; while a deduction for a liability is to be
accrued or incurred and taken when the liability becomes fixed and certain,
even though it may not be actually paid until later. [54]

Under any system of accounting, no duty or liability to pay an income tax

upon a transaction arises until the taxable year in which the event constituting
the condition precedent occurs.  The liability to pay a tax may thus arise at a
[55]

certain time and the tax paid within another given time. [56]

In reconciling these two regulations, the earlier one includes in the tax
base for GRT all income, whether actually or constructively received, while the
later one includes specifically interest income. In computing the income tax
liability, the only exception cited in the later regulations is the exclusion from
gross income of interest income, which is already subjected to
withholding. This exception, however, refers to a different tax altogether. To
extend mischievously such exception to the GRT will certainly lead to results
not contemplated by the legislators and the administrative body promulgating
the regulations.

Manila Jockey Club

Inapplicable

In Commissioner of Internal Revenue v. Manila Jockey Club,  we held that

[57]

the term gross receipts shall not include money which, although delivered, has
been especially earmarked by law or regulation for some person other than
the taxpayer. [58]

To begin, we have to nuance the definition of gross receipts  to determine [59]

what it is exactly. In this regard, we note that US cases have persuasive effect
in our jurisdiction, because Philippine income tax law is patterned after
its US counterpart. [60]

[G]ross receipts with respect to any period means the sum of: (a) The total amount
received or accrued during such period from the sale, exchange, or other disposition
of x x x other property of a kind which would properly be included in the inventory of
the taxpayer if on hand at the close of the taxable year, or property held by the
taxpayer primarily for sale to customers in the ordinary course of its trade or business,
and (b) The gross income, attributable to a trade or business, regularly carried on by
the taxpayer, received or accrued during such period x x x. [61]

x x x [B]y gross earnings from operations x x x was intended all operations xxx
including incidental, subordinate, and subsidiary operations, as well as principal
operations. [62]

When we speak of the gross earnings of a person or corporation, we mean the entire
earnings or receipts of such person or corporation from the business or operations to
which we refer. [63]

From these cases, gross receipts  refer to the total, as opposed to the
[64]

net, income.  These are therefore the total receipts before any deduction  for
[65] [66]

the expenses of management.  Websters New International Dictionary, in

[67]

fact, defines gross as whole or entire.

Statutes taxing the gross receipts, earnings, or income of particular
corporations are found in many jurisdictions.  Tax thereon is generally held to
[68]

be within the power of a state to impose; or constitutional, unless it interferes

with interstate commerce or violates the requirement as to uniformity of
taxation. [69]

Moreover, we have emphasized that the BIR has consistently ruled that
gross receipts does not admit of any deduction.  Following the principle of
[70]

legislative approval by reenactment,  this interpretation has been adopted by

[71]

the legislature throughout the various reenactments of then Section 119 of the
Tax Code. [72]

Given that a tax is imposed upon total receipts and not upon net earnings,
[73]
 shall the income withheld be included in the tax base upon which such tax is
imposed? In other words, shall interest income constructively received still be
included in the tax base for computing the GRT?
We rule in the affirmative.
Manila Jockey Club does not apply to this case. Earmarking is not the
same as withholding. Amounts earmarked do not form part of gross receipts,
because, although delivered or received, these are by law or regulation
reserved for some person other than the taxpayer. On the contrary,
amounts withheld form part of gross receipts, because these are
in constructive possession and not subject to any reservation, the withholding
agent being merely a conduit in the collection process.
The Manila Jockey Club had to deliver to the Board on Races, horse
owners and jockeys amounts that never became the property of the race
track.  Unlike these amounts, the interest income that had been withheld for
[74]

the government became property of the financial institutions

upon constructive possession thereof. Possession was indeed acquired, since
it was ratified by the financial institutions in whose name the act of possession
had been executed. The money indeed belonged to the taxpayers; merely
holding it in trust was not enough. [75]

The government subsequently becomes the owner of the money when the
financial institutions pay the FWT to extinguish their obligation to the
government. As this Court has held before, this is the consideration for the
transfer of ownership of the FWT from these institutions to the government.  It [76]

is ownership that determines whether interest income forms part of taxable

gross receipts.  Being originally owned by these financial institutions as part
[77]

of their interest income, the FWT should form part of their taxable gross
receipts.
Besides, these amounts withheld are in payment of an income tax liability,
which is different from a percentage tax liability. Commissioner of Internal
Revenue v. Tours Specialists, Inc. aptly held thus: [78]

x x x [G]ross receipts subject to tax under the Tax Code do not include monies or
receipts entrusted to the taxpayer which do not belong to them and do not redound to
the taxpayers benefit; and it is not necessary that there must be a law or regulation
which would exempt such monies and receipts within the meaning of gross receipts
under the Tax Code. [79]

In the construction and interpretation of tax statutes and of statutes in

general, the primary consideration is to ascertain and give effect to the
intention of the legislature.  We ought to impute to the lawmaking body the
[80]
intent to obey the constitutional mandate, as long as its enactments fairly
admit of such construction.  In fact, x x x no tax can be levied without express
[81]

authority of law, but the statutes are to receive a reasonable construction with
a view to carrying out their purpose and intent. [82]

Looking again into Sections 24(e)(1) and 119 of the Tax Code, we find that
the first imposes an income tax; the second, a percentage tax. The legislature
clearly intended two different taxes. The FWT is a tax on passive income,
while the GRT is on business.  The withholding of one is not equivalent to the
[83]

payment of the other.

Non-Exemption of FWT from GRT:

Neither Unjust nor Absurd

Taxing the people and their property is essential to the very existence of
government. Certainly, one of the highest attributes of sovereignty is the
power of taxation,  which may legitimately be exercised on the objects to
[84]

which it is applicable to the utmost extent as the government may choose.

 Being an incident of sovereignty, such power is coextensive with that to
[85]

which it is an incident.  The interest on deposits and yield on deposit

[86]

substitutes of financial institutions, on the one hand, and their business as

such, on the other, are the two objects over which the State has chosen to
extend its sovereign power. Those not so chosen are, upon the soundest
principles, exempt from taxation. [87]

While courts will not enlarge by construction the governments power of

taxation,  neither will they place upon tax laws so loose a construction as to
[88]

permit evasions, merely on the basis of fanciful and insubstantial distinctions.

 When the legislature imposes a tax on income and another on business, the
[89]

imposition must be respected. The Tax Code should be so construed, if need

be, as to avoid empty declarations or possibilities of crafty tax evasion
schemes. We have consistently ruled thus:

x x x [I]t is upon taxation that the [g]overnment chiefly relies to obtain the means to
carry on its operations, and it is of the utmost importance that the modes adopted to
enforce the collection of the taxes levied should be summary and interfered with as
little as possible. x x x. [90]

Any delay in the proceedings of the officers, upon whom the duty is devolved of
collecting the taxes, may derange the operations of government, and thereby cause
serious detriment to the public. [91]
No government could exist if all litigants were permitted to delay the collection of its
taxes. [92]

A taxing act will be construed, and the intent and meaning of the
legislature ascertained, from its language.  Its clarity and implied intent must
[93]

exist to uphold the taxes as against a taxpayer in whose favor doubts will be
resolved.  No such doubts exist with respect to the Tax Code, because the
[94]

income and percentage taxes we have cited earlier have been imposed in
clear and express language for that purpose. [95]

This Court has steadfastly adhered to the doctrine that its first and
fundamental duty is the application of the law according to its express terms --
construction and interpretation being called for only when such literal
application is impossible or inadequate without them.  In Quijano v. [96]

Development Bank of the Philippines,  we stressed as follows:[97]

No process of interpretation or construction need be resorted to where a provision of

law peremptorily calls for application.  [98]

A literal application of any part of a statute is to be rejected if it will operate

unjustly, lead to absurd results, or contradict the evident meaning of the
statute taken as a whole.  Unlike the CA, we find that the literal application of
[99]

the aforesaid sections of the Tax Code and its implementing regulations does
not operate unjustly or contradict the evident meaning of the statute taken as
a whole. Neither does it lead to absurd results. Indeed, our courts are not to
give words meanings that would lead to absurd or unreasonable
consequences.  We have repeatedly held thus:
[100]

x x x [S]tatutes should receive a sensible construction, such as will give effect to the
legislative intention and so as to avoid an unjust or an absurd conclusion. [101]

While it is true that the contemporaneous construction placed upon a statute by

executive officers whose duty is to enforce it should be given great weight by the
courts, still if such construction is so erroneous, x x x the same must be declared as
null and void. [102]

It does not even matter that the CTA, like in China Banking Corporation,
 relied erroneously on Manila Jockey Club. Under our tax system, the CTA
[103]

acts as a highly specialized body specifically created for the purpose of

reviewing tax cases.  Because of its recognized expertise, its findings of fact
[104]

will ordinarily not be reviewed, absent any showing of gross error or abuse on
its part.  Such findings are binding on the Court and, absent strong reasons
[105]

for us to delve into facts, only questions of law are open for determination. [106]

Respondent claims that it is entitled to a refund on the basis of excess

GRT payments. We disagree.
Tax refunds are in the nature of tax exemptions.  Such exemptions are
[107]

strictly construed against the taxpayer, being highly disfavored  and almost[108]

said to be odious to the law. Hence, those who claim to be exempt from the
payment of a particular tax must do so under clear and unmistakable terms
found in the statute. They must be able to point to some positive provision, not
merely a vague implication,  of the law creating that right.
[109] [110]

The right of taxation will not be surrendered, except in words too plain to
be mistaken. The reason is that the State cannot strip itself of this highest
attribute of sovereignty -- its most essential power of taxation -- by vague or
ambiguous language. Since tax refunds are in the nature of tax exemptions,
these are deemed to be in derogation of sovereign authority and to be
construed strictissimi juris against the person or entity claiming the exemption.
[111]

No less than our 1987 Constitution provides for the mechanism for
granting tax exemptions.  They certainly cannot be granted by implication or
[112]

mere administrative regulation. Thus, when an exemption is claimed, it must

indubitably be shown to exist, for every presumption is against it,  and a well- [113]

founded doubt is fatal to the claim.  In the instant case, respondent has not
[114]

been able to satisfactorily show that its FWT on interest income is exempt
from the GRT. Like China Banking Corporation, its argument creates a tax
exemption where none exists. [115]

No exemptions are normally allowed when a GRT is imposed. It is

precisely designed to maintain simplicity in the tax collection effort of the
government and to assure its steady source of revenue even during an
economic slump. [116]

No Double Taxation

We have repeatedly said that the two taxes, subject of this litigation, are
different from each other. The basis of their imposition may be the same, but
their natures are different, thus leading us to a final point.Is there double
taxation?
The Court finds none.
 Double taxation means taxing the same property twice when it should be
taxed only once; that is, x x x taxing the same person twice by the same
jurisdiction for the same thing.  It is obnoxious when the taxpayer is taxed
[117]

twice, when it should be but once.  Otherwise described as direct duplicate

[118]

taxation,  the two taxes must be imposed on the same subject matter, for the
[119]

same purpose, by the same taxing authority, within the same jurisdiction, during
the same taxing period; and they must be of the same kind or character. [120]

First, the taxes herein are imposed on two different subject matters. The
subject matter of the FWT is the passive income generated in the form of
interest on deposits and yield on deposit substitutes, while the subject matter
of the GRT is the privilege of engaging in the business of banking.
A tax based on receipts is a tax on business rather than on the property;
hence, it is an excise  rather than a property tax.  It is not an income tax,
[121] [122]

unlike the FWT. In fact, we have already held that one can be taxed for
engaging in business and further taxed differently for the income derived
therefrom.  Akin to our ruling in Velilla v. Posadas,  these two taxes are
[123] [124]

entirely distinct and are assessed under different provisions.

Second, although both taxes are national in scope because they are
imposed by the same taxing authority -- the national government under the
Tax Code -- and operate within the same Philippine jurisdiction for the same
purpose of raising revenues, the taxing periods they affect are different. The
FWT is deducted and withheld as soon as the income is earned, and is paid
after every calendar quarter in which it is earned. On the other hand, the GRT
is neither deducted nor withheld, but is paid only after every taxable quarter in
which it is earned.
Third, these two taxes are of different kinds or characters. The FWT is an
income tax subject to withholding, while the GRT is a percentage tax not
subject to withholding.
In short, there is no double taxation, because there is no taxing twice, by
the same taxing authority, within the same jurisdiction, for the same purpose,
in different taxing periods, some of the property in the territory.  Subjecting
[125]

interest income to a 20% FWT and including it in the computation of the 5%

GRT is clearly not double taxation.
WHEREFORE, the Petition is GRANTED. The assailed Decision and
Resolution of the Court of Appeals are
hereby REVERSED and SET ASIDE. No costs.
SO ORDERED.
G.R. No. L-2910             June 29, 1951

THE MANUFACTURERS LIFE INSURANCE CO., plaintiff-appellant, 

vs.
BIBIANO L. MEER, in the capacity as Collector of Internal Revenue, defendant-appellee.

Camus, Zavalla, Bautista and Nueves for appellant.

First Assistant Solicitor General Roberto A. Gianzon, Office of the Solicitor Felix V. Makasiar and
Solicitor Jose P. Alejandro for appellee.

BENGZON, J.:

Appeal from a decision of the Honorable Buenaventura Ocampo, then judge of the Manila court of
first instance, dismissing plaintiff's complaint to recover money paid under protest for taxes. The
case was submitted upon a stipulation of facts, supplemented by documentary evidence.

The plaintiff, the Manufacturer Life Insurance Company in a corporation duly organized in Canada
with head office at Toronto. It is duly registered and licensed to engage in life insurance business in
the Philippines, and maintains a branch office in Manila. It was engaged in such business in the
Philippines for more than five years before and including the year 1941. But due to the exigencies of
the war it closed the branch office at Manila during 1942 up to September 1945.

In the course of its operations before the war, plaintiff issued a number of life insurance policies in
the Philippines containing stipulations referred to as non-forfeiture clauses, as follows:

'8. Automatic Premium Loan. — This Policy shall not lapse for non-payment of any premium
after it has been three full years in force, if, at the due date of such premium, the Cash Value
of this Policy and of any bonus additions and dividends left on accumulation (after deducting
any indebtedness to the Company and the interest accrued thereon) shall exceed the
amount of said premium. In which event the company will, without further request, treat the
premium then due as paid, and the amount of such premium, with interest from its actual due
date at six per cent per annum, compounded yearly, and one per cent, compounded yearly,
for expenses, shall be a first lien on this Policy in the Company's favour in priority to the
claim of any assignee or any other person. The accumulated lien may at any time, while the
Policy is in force, be paid in whole or in part.

"When the premium falls due and is not paid in cash within the month's grace, if the Cash
Value of this policy and of any bonus addition and dividends left on accumulation (after
deducting any accumulated indebtedness) be less than the premium then due, the Company
will, without further requests, continue this insurance in force for a period .. . .

"10. Cash and Paid-Up Insurance Values. — At the end of the third policy year or thereafter,
upon the legal surrender of this Policy to the Company while there is no default in premium
payments or within two months after the due date of the premium in default, the Company
will (1) grant a cash value as specified in Column (A) increased by the cash value of any
bonus additions and dividends left on accumulation, which have been alloted to this
Policy, less all indebtedness to the Company on this Policy on the date of such surrender, or
(2) endorse this Policy as a Non-Participating Paid-up Policy for the amount as specified in
Column (B) of the Table of Guaranteed Values . . ..
 "11. Extended Insurance. — After the premiums for three or more full years have been paid
hereunder in cash, if any subsequent premium is not paid when due, and there is no
indebtness to the Company, on the written request of the Insured . . ..

From January 1, 1942 to December 31, 1946 for failure of the insured under the above policies to
pay the corresponding premiums for one or more years, the plaintiff's head office of Toronto, applied
the provision of the automatic premium loan clauses; and the net amount of premiums so advanced
or loaned totalled P1,069,254.98. On this sum the defendant Collector of Internal Revenue assessed
P17,917.12 — which plaintiff paid supra protest —. The assessment was made pursuant to section
255 of the National Internal Revenue Code as amended. which partly provides:

SEC. 255. Taxes on insurance premiums. — There shall be collected from every person,
company, or corporation (except purely cooperative companies or associations) doing
business of any sort in the Philippines a tax of one per centum of the total premiums
collected .. whether such premiums are paid in money, notes credits, or any substitute for
money but premiums refunded within six months after payment on account of rejection of risk
or returned for other reason to person insured shall not be included in the taxable
receipts . . ..

It is the plaintiff's contention that when it made premium loans or premium advances, as above
stated, by virtue of the non-forfeiture clauses, it did not collect premiums within the meaning of the
above sections of the law, and therefore it is not amendable to the tax therein provided.

The plaintiff conveniently divides that issue into five minor issues, to wit:

(a) Whether or not premium advances made by plaintiff-appellant under the automatic
premium loan clause of its policies are "premium collected" by the Company subject to tax;

(b) Whether or not, in the application of the automatic premium loan clause of plaintiff-
appellant's policies, there is "payment in money, notes, credit, or any substitutes for money";

(c) Whether or not the collection of the alleged deficiency premium taxes constitutes double
taxation;

(d) Whether the making of premium advances, granting for the sake of argument that it
amounted to collection of premiums, were done in Toronto, Canada, or in the Philippines;
and

(e) Whether or not the fact that plaintiff-appellant was not doing business in the Philippines
during the period from January 1, 1942 to September 30, 1945, inclusive, exempts it from
payment of premium taxes corresponding to said period.

These points will be considered in their order. The first two may best taken up together in the light of
a practical illustration offered by appellant:

"Suppose that "A" years of age, secures a 20-years endowment policy for P5,000 from plaintiff-
appellant Company and pays an annual premium of P250. 'A' pays the first ten yearly premiums
amounting to P2,500 and on this amount plaintiff-appellant pays the corresponding taxes under
section 255 of the National Internal Revenue Code. Suppose also that the cash value of said policy
after the payment of the 10th annual premium amounts to P1,000." When on the eleventh year the
annual premium fell due and the insured remitted no money within the months grace, the insurer
treated the premium then over due as paid from the cash value, the amount being loan to the
policyholder1 who could discharged it at anytime with interest at 6 per cent. The insurance contract,
therefore, continued in force for the eleventh year.

Under the circumstances described, did the insurer collect the amount of P250 as the annual
premium for the eleventh year on the said policy? The plaintiff says no; but the defendant and the
lower court say yes. The latter have, in our opinion, the correct view. In effect the Manufacturers Life
Insurance Co. loaned to "A" on the eleventh year, the sum of P250 and the latter in turn paid with
that sum the annual premium on his policy. The Company therefore collected the premium for the
eleventh year.

"How could there be such a collection "plaintiff argues "when as a result thereof, insurer becomes a
creditor, acquires a lien on the policy and is entitled to collect interest on the amount of the unpaid
premiums?".

Wittingly, the "premium" and the "loan" have been interchanged in the argument. The insurer
"became a creditor" of the loan, but not of the premium that had already been paid. And it is entitled
to collect interest on the loan, not on the premium.

In other words, "A" paid the premium for the eleventh; but in turn he became a debtor of the
company for the sum of P250. This debt he could repay either by later remitting the money to the
insurer or by letting the cash value compensate for it. The debt may also be deducted form the
amount of the policy should "A" die thereafter during the continuance of the policy.

Proceeding along the same line of argument counsel for plaintiff observes "that there is no change,
much less an increase, in the amount of the assets of plaintiff-appellant after the application of the
automatic premium loan clause. Its assets remain exactly the same after making the advances in
question. It being so, there could have been no collection of premium . . .. "We cannot assent to this
view, because there was an increase. There was thenew credit for the advances made. True, the
plaintiff could not sue the insured to enforce that credit. But it has means of satisfaction out of the
cash surrender value.

Here again it may be urged that if the credit is paid out of the cash surrender value, there were no
new funds added to the company's assets. Cash surrender value "as applied to life insurance policy,
is the amount of money the company agrees to pay to the holder of the policy if he surrenders it and
releases his claims upon it. The more premiums the insured has paid the greater will be the
surrender value; but the surrender value is always a lesser sum than the total amount of premiums
paid." (Cyclopedia Law Dictionary 3d. ed. 1077.)

The cash value or cash surrender value is therefore an amount which the insurance company holds
in trust2 for the insured to be delivered to him upon demand. It is therefore a liability of the company
to the insured. Now then, when the company's credit for advances is paid out of the cash value or
cash surrender value, that value and the company's liability is thereby dismissed pro tanto.
Consequently, the net assets of the insurance company increasedcorresponding; for it is plain
mathematics that the decrease of a person's liabilities means a corresponding increase in his net
assets.

Nevertheless let us grant for the nonce that the operation of the automatic loan provision contributed
no additional cash to the funds of the insurer. Yet it must be admitted that the insurer agreed to
consider the premium paid on the strength of the automatic loan. The premium was therefore paid
by means of a "note" or "credit" or "other substitute for money" and the taxis due because section
255 above quoted levies taxes according to the total premiums collected by the insurer "whether
such premiums are paid in money, notes, credits or any substitutes for money.

In connection with the third issue, appellant refers to its example about "A" who failed to pay the
premium on the eleventh year and the insurer advanced P250 from the cash value. Then it reasons
out that "if the amount P250 is deducted from the cash value of P1,000 of the policy, then taxing this
P250 anew as premium collected, as was done in the present case, will amount to double taxation
since taxes had already been collected on the cash value of P1,000 as part of the P2,500 collected
as premiums for the first ten years." The trouble with the argument is that it assumes all advances
are necessarily repaid from the cash value. That is true in some cases. In others the insured
subsequently remits the money to repay the advance and to keep unimpaired the cash reserve of
his policy.

As to a matter of fact of the total amount advanced (P1,069,254.998) P158,666.63 had actually been
repaid at the time of assessment notice. Besides, the premiums paid and on which taxes had
already been collected, were those for the ten years. The tax demanded is on the premium for the
eleventh year.

In any event there is no constitutional prohibition against double taxation.

On the fourth issue the appellant takes the position that as advances of premiums were made in
Toronto, such premiums are deemed to have been paid there — not in the Philippines — and
therefore those payments are not subject to local taxation. The thesis overlooks the actual fact that
the loans are made to policyholders in the Philippines, who in turn pay therewith the premium to the
insurer thru the Manila branch. Approval of appellants position will enable foreign insurers to evade
the tax by contriving to require that premium payments shall be made at their head offices. What is
important, the law does not contemplate premiums collected in the Philippines. It is enough that the
insurer is doing insurance business in the Philippines, irrespective of the place of its organization or
establishment.

This brings forth the appellant's last contention that it was "engaged in business" in the Philippines
during the years 1942 to September 1945, and that as section 255 applies only to companies "doing
insurance business in the Philippines" this tax was improperly demanded.

It is our opinion that although during those years the appellant was not open for new business
because its branch office was closed, still it was practically and legally, operating in this country by
collecting premiums on its outstanding policies, incurring the risks and/or enjoying the benefits
consequent thereto, without having previously taken any steps indicating withdrawal in good faith
field of economic activity3.

As a matter of fact, in objecting to the payment of the tax, plaintiff-appellant never insisted, before
the Bureau of Internal Revenue, that it was not engaged in business in this country during those
years.

Wherefore, finding no prejudicial error in the appealed decisions, we hereby affirm it with costs.

Paras, C.J., Feria, Pablo, Padilla, Tuason, Montemayor, Reyes and Jugo, JJ., concur.

G.R. No. 127105 June 25, 1999

COMMISSIONER OF INTERNAL REVENUE, petitioner, 
vs.
S.C. JOHNSON AND SON, INC., and COURT OF APPEALS, respondents.

GONZAGA-REYES, J.:

This is a petition for review on certiorari under Rule 45 of the Rules of Court seeking to set aside the
decision of the Court of Appeals dated November 7, 1996 in CA-GR SP No. 40802 affirming the
decision of the Court of Tax Appeals in CTA Case No. 5136.

The antecedent facts as found by the Court of Tax Appeals are not disputed, to wit:

[Respondent], a domestic corporation organized and operating under the Philippine

laws, entered into a license agreement with SC Johnson and Son, United States of
America (USA), a non-resident foreign corporation based in the U.S.A. pursuant to
which the [respondent] was granted the right to use the trademark, patents and
technology owned by the latter including the right to manufacture, package and
distribute the products covered by the Agreement and secure assistance in
management, marketing and production from SC Johnson and Son, U. S. A.

The said License Agreement was duly registered with the Technology Transfer
Board of the Bureau of Patents, Trade Marks and Technology Transfer under
Certificate of Registration No. 8064 (Exh. "A").

For the use of the trademark or technology, [respondent] was obliged to pay SC
Johnson and Son, USA royalties based on a percentage of net sales and subjected
the same to 25% withholding tax on royalty payments which [respondent] paid for the
period covering July 1992 to May 1993 in the total amount of P1,603,443.00 (Exhs.
"B" to "L" and submarkings).

On October 29, 1993, [respondent] filed with the International Tax Affairs Division
(ITAD) of the BIR a claim for refund of overpaid withholding tax on royalties arguing
that, "the antecedent facts attending [respondent's] case fall squarely within the
same circumstances under which said MacGeorge and Gillete rulings were issued.
Since the agreement was approved by the Technology Transfer Board, the
preferential tax rate of 10% should apply to the [respondent]. We therefore submit
that royalties paid by the [respondent] to SC Johnson and Son, USA is only subject
to 10% withholding tax pursuant to the most-favored nation clause of the RP-US Tax
Treaty [Article 13 Paragraph 2 (b) (iii)] in relation to the RP-West Germany Tax
Treaty [Article 12 (2) (b)]" (Petition for Review [filed with the Court of Appeals], par.
12). [Respondent's] claim for there fund of P963,266.00 was computed as follows:

Gross 25% 10%

Month/ Royalty Withholding Withholding

Year Fee Tax Paid Tax Balance

——— ——— ——— ——— ———

 July 1992 559,878 139,970 55,988 83,982

August 567,935 141,984 56,794 85,190

September 595,956 148,989 59,596 89,393

October 634,405 158,601 63,441 95,161

November 620,885 155,221 62,089 93,133

December 383,276 95,819 36,328 57,491

Jan 1993 602,451 170,630 68,245 102,368

February 565,845 141,461 56,585 84,877

March 547,253 136,813 54,725 82,088

April 660,810 165,203 66,081 99,122

May 603,076 150,769 60,308 90,461

———— ———— ———— ———

P6,421,770 P1,605,443 P642,177 P963,266 1

======== ======== ======== ========

The Commissioner did not act on said claim for refund. Private respondent S.C. Johnson & Son, Inc.
(S.C. Johnson) then filed a petition for review before the Court of Tax Appeals (CTA) where the case
was docketed as CTA Case No. 5136, to claim a refund of the overpaid withholding tax on royalty
payments from July 1992 to May 1993.

On May 7, 1996, the Court of Tax Appeals rendered its decision in favor of S.C. Johnson and
ordered the Commissioner of Internal Revenue to issue a tax credit certificate in the amount of
P963,266.00 representing overpaid withholding tax on royalty payments, beginning July, 1992 to
May, 1993. 2

The Commissioner of Internal Revenue thus filed a petition for review with the Court of Appeals
which rendered the decision subject of this appeal on November 7, 1996 finding no merit in the
petition and affirming in toto the CTA ruling.
3

This petition for review was filed by the Commissioner of Internal Revenue raising the following
issue:

THE COURT OF APPEALS ERRED IN RULING THAT SC JOHNSON AND SON,

USA IS ENTITLED TO THE "MOST FAVORED NATION" TAX RATE OF 10% ON
ROYALTIES AS PROVIDED IN THE RP-US TAX TREATY IN RELATION TO THE
RP-WEST GERMANY TAX TREATY.
Petitioner contends that under Article 13(2) (b) (iii) of the RP-US Tax Treaty, which is known as the
"most favored nation" clause, the lowest rate of the Philippine tax at 10% may be imposed on
royalties derived by a resident of the United States from sources within the Philippines only if the
circumstances of the resident of the United States are similar to those of the resident of West
Germany. Since the RP-US Tax Treaty contains no "matching credit" provision as that provided
under Article 24 of the RP-West Germany Tax Treaty, the tax on royalties under the RP-US Tax
Treaty is not paid under similar circumstances as those obtaining in the RP-West Germany Tax
Treaty. Even assuming that the phrase "paid under similar circumstances" refers to the payment of
royalties, and not taxes, as held by the Court of Appeals, still, the "most favored nation" clause
cannot be invoked for the reason that when a tax treaty contemplates circumstances attendant to the
payment of a tax, or royalty remittances for that matter, these must necessarily refer to
circumstances that are tax-related. Finally, petitioner argues that since S.C. Johnson's invocation of
the "most favored nation" clause is in the nature of a claim for exemption from the application of the
regular tax rate of 25% for royalties, the provisions of the treaty must be construed strictly against it.

In its Comment, private respondent S.C. Johnson avers that the instant petition should be denied (1)
because it contains a defective certification against forum shopping as required under SC Circular
No. 28-91, that is, the certification was not executed by the petitioner herself but by her counsel; and
(2) that the "most favored nation" clause under the RP-US Tax Treaty refers to royalties paid under
similar circumstances as those royalties subject to tax in other treaties; that the phrase "paid under
similar circumstances" does not refer to payment of the tax but to the subject matter of the tax, that
is, royalties, because the "most favored nation" clause is intended to allow the taxpayer in one state
to avail of more liberal provisions contained in another tax treaty wherein the country of residence of
such taxpayer is also a party thereto, subject to the basic condition that the subject matter of taxation
in that other tax treaty is the same as that in the original tax treaty under which the taxpayer is liable;
thus, the RP-US Tax Treaty speaks of "royalties of the same kind paid under similar circumstances".
S.C. Johnson also contends that the Commissioner is estopped from insisting on her interpretation
that the phrase "paid under similar circumstances" refers to the manner in which the tax is paid, for
the reason that said interpretation is embodied in Revenue Memorandum Circular ("RMC") 39-92
which was already abandoned by the Commissioner's predecessor in 1993; and was expressly
revoked in BIR Ruling No. 052-95 which stated that royalties paid to an American licensor are
subject only to 10% withholding tax pursuant to Art 13(2)(b)(iii) of the RP-US Tax Treaty in relation to
the RP-West Germany Tax Treaty. Said ruling should be given retroactive effect except if such is
prejudicial to the taxpayer pursuant to Section 246 of the National Internal Revenue Code.

Petitioner filed Reply alleging that the fact that the certification against forum shopping was signed
by petitioner's counsel is not a fatal defect as to warrant the dismissal of this petition since Circular
No. 28-91 applies only to original actions and not to appeals, as in the instant case. Moreover, the
requirement that the certification should be signed by petitioner and not by counsel does not apply to
petitioner who has only the Office of the Solicitor General as statutory counsel. Petitioner reiterates
that even if the phrase "paid under similar circumstances" embodied in the most favored nation
clause of the RP-US Tax Treaty refers to the payment of royalties and not taxes, still the presence or
absence of a "matching credit" provision in the said RP-US Tax Treaty would constitute a material
circumstance to such payment and would be determinative of the said clause's application. 1âwphi1.nêt

We address first the objection raised by private respondent that the certification against forum
shopping was not executed by the petitioner herself but by her counsel, the Office of the Solicitor
General (O.S.G.) through one of its Solicitors, Atty. Tomas M. Navarro.

SC Circular No. 28-91 provides:

 SUBJECT: ADDITIONAL
REQUISITES FOR PETITIONS FILED
WITH THE SUPREME COURT AND
THE COURT OF APPEALS TO
PREVENT FORUM SHOPPING OR
MULTIPLE FILING OF PETITIONS
AND COMPLAINTS

TO: xxx xxx xxx

The attention of the Court has been called to the filing of multiple petitions and
complaints involving the same issues in the Supreme Court, the Court of Appeals or
other tribunals or agencies, with the result that said courts, tribunals or agencies
have to resolve the same issues.

(1) To avoid the foregoing, in every petition filed with the Supreme Court or the Court
of Appeals, the petitioner aside from complying with pertinent provisions of the Rules
of Court and existing circulars, must certify under oath to all of the following facts or
undertakings: (a) he has not theretofore commenced any other action or proceeding
involving the same issues in the Supreme Court, the Court of Appeals, or any
tribunal or
agency; . . .

(2) Any violation of this revised Circular will entail the following sanctions: (a) it shall
be a cause for the summary dismissal of the multiple petitions or complaints; . . .

The circular expressly requires that a certificate of non-forum shopping should be attached to
petitions filed before this Court and the Court of Appeals. Petitioner's allegation that Circular No. 28-
91 applies only to original actions and not to appeals as in the instant case is not supported by the
text nor by the obvious intent of the Circular which is to prevent multiple petitions that will result in
the same issue being resolved by different courts.

Anent the requirement that the party, not counsel, must certify under oath that he has not
commenced any other action involving the same issues in this Court or the Court of Appeals or any
other tribunal or agency, we are inclined to accept petitioner's submission that since the OSG is the
only lawyer for the petitioner, which is a government agency mandated under Section 35, Chapter
12, title III, Book IV of the 1987 Administrative Code  to be represented only by the Solicitor General,
4

the certification executed by the OSG in this case constitutes substantial compliance with Circular
No. 28-91.

With respect to the merits of this petition, the main point of contention in this appeal is the
interpretation of Article 13 (2) (b) (iii) of the RP-US Tax Treaty regarding the rate of tax to be
imposed by the Philippines upon royalties received by a non-resident foreign corporation. The
provision states insofar as pertinent
that —

1) Royalties derived by a resident of one of the Contracting States

from sources within the other Contracting State may be taxed by both
Contracting States.

2) However, the tax imposed by that Contracting State shall not

exceed.
 a) In the case of the United States, 15 percent of the
gross amount of the royalties, and

b) In the case of the Philippines, the least of:

(i) 25 percent of the gross amount of

the royalties;

(ii) 15 percent of the gross amount of

the royalties, where the royalties are
paid by a corporation registered with
the Philippine Board of Investments
and engaged in preferred areas of
activities; and

(iii) the lowest rate of Philippine tax

that may be imposed on royalties of
the same kind paid under similar
circumstances to a resident of a third
State.

x x x           x x x          x x x

(emphasis supplied)

Respondent S. C. Johnson and Son, Inc. claims that on the basis of the quoted provision, it is
entitled to the concessional tax rate of 10 percent on royalties based on Article 12 (2) (b) of the RP-
Germany Tax Treaty which provides:

(2) However, such royalties may also be taxed in the Contracting

State in which they arise, and according to the law of that State, but
the tax so charged shall not exceed:

x x x           x x x          x x x

b) 10 percent of the gross amount of royalties arising

from the use of, or the right to use, any patent,
trademark, design or model, plan, secret formula or
process, or from the use of or the right to use,
industrial, commercial, or scientific equipment, or for
information concerning industrial, commercial or
scientific experience.

For as long as the transfer of technology, under Philippine law, is subject to approval,
the limitation of the tax rate mentioned under b) shall, in the case of royalties arising
in the Republic of the Philippines, only apply if the contract giving rise to such
royalties has been approved by the Philippine competent authorities.

Unlike the RP-US Tax Treaty, the RP-Germany Tax Treaty allows a tax credit of 20 percent of the
gross amount of such royalties against German income and corporation tax for the taxes payable in
the Philippines on such royalties where the tax rate is reduced to 10 or 15 percent under such treaty.
Article 24 of the RP-Germany Tax Treaty states —

1) Tax shall be determined in the case of a resident of the Federal

Republic of Germany as follows:

x x x           x x x          x x x

b) Subject to the provisions of German tax law

regarding credit for foreign tax, there shall be allowed
as a credit against German income and corporation
tax payable in respect of the following items of income
arising in the Republic of the Philippines, the tax paid
under the laws of the Philippines in accordance with
this Agreement on:

x x x           x x x          x x x

dd) royalties, as defined in paragraph

3 of Article 12;

x x x           x x x          x x x

c) For the purpose of the credit referred in

subparagraph; b) the Philippine tax shall be deemed
to be

x x x           x x x          x x x

cc) in the case of royalties for which

the tax is reduced to 10 or 15 per cent
according to paragraph 2 of Article 12,
20 percent of the gross amount of
such royalties.

x x x           x x x          x x x

According to petitioner, the taxes upon royalties under the RP-US Tax Treaty are not paid under
circumstances similar to those in the RP-West Germany Tax Treaty since there is no provision for a
20 percent matching credit in the former convention and private respondent cannot invoke the
concessional tax rate on the strength of the most favored nation clause in the RP-US Tax Treaty.
Petitioner's position is explained thus:

Under the foregoing provision of the RP-West Germany Tax Treaty, the Philippine
tax paid on income from sources within the Philippines is allowed as a credit against
German income and corporation tax on the same income. In the case of royalties for
which the tax is reduced to 10 or 15 percent according to paragraph 2 of Article 12 of
the RP-West Germany Tax Treaty, the credit shall be 20% of the gross amount of
such royalty. To illustrate, the royalty income of a German resident from sources
within the Philippines arising from the use of, or the right to use, any patent, trade
mark, design or model, plan, secret formula or process, is taxed at 10% of the gross
 amount of said royalty under certain conditions. The rate of 10% is imposed if credit
against the German income and corporation tax on said royalty is allowed in favor of
the German resident. That means the rate of 10% is granted to the German taxpayer
if he is similarly granted a credit against the income and corporation tax of West
Germany. The clear intent of the "matching credit" is to soften the impact of double
taxation by different jurisdictions.

The RP-US Tax Treaty contains no similar "matching credit" as that provided under
the RP-West Germany Tax Treaty. Hence, the tax on royalties under the RP-US Tax
Treaty is not paid under similar circumstances as those obtaining in the RP-West
Germany Tax Treaty. Therefore, the "most favored nation" clause in the RP-West
Germany Tax Treaty cannot be availed of in interpreting the provisions of the RP-US
Tax Treaty. 5

The petition is meritorious.

We are unable to sustain the position of the Court of Tax Appeals, which was upheld by the Court of
Appeals, that the phrase "paid under similar circumstances in Article 13 (2) (b), (iii) of the RP-US Tax
Treaty should be interpreted to refer to payment of royalty, and not to the payment of the tax, for the
reason that the phrase "paid under similar circumstances" is followed by the phrase "to a resident of
a third state". The respondent court held that "Words are to be understood in the context in which
they are used", and since what is paid to a resident of a third state is not a tax but a royalty "logic
instructs" that the treaty provision in question should refer to royalties of the same kind paid under
similar circumstances.

The above construction is based principally on syntax or sentence structure but fails to take into
account the purpose animating the treaty provisions in point. To begin with, we are not aware of any
law or rule pertinent to the payment of royalties, and none has been brought to our attention, which
provides for the payment of royalties under dissimilar circumstances. The tax rates on royalties and
the circumstances of payment thereof are the same for all the recipients of such royalties and there
is no disparity based on nationality in the circumstances of such payment. On the other hand, a
6

cursory reading of the various tax treaties will show that there is no similarity in the provisions on
relief from or avoidance of double taxation  as this is a matter of negotiation between the contracting
7

parties.  As will be shown later, this dissimilarity is true particularly in the treaties between the
8

Philippines and the United States and between the Philippines and West Germany.

The RP-US Tax Treaty is just one of a number of bilateral treaties which the Philippines has entered
into for the avoidance of double taxation.  The purpose of these international agreements is to
9

reconcile the national fiscal legislations of the contracting parties in order to help the taxpayer avoid
simultaneous taxation in two different jurisdictions.   More precisely, the tax conventions are drafted
10

with a view towards the elimination of international juridical double taxation, which is defined as the
imposition of comparable taxes in two or more states on the same taxpayer in respect of the same
subject matter and for identical periods.   The apparent rationale for doing away with double taxation
11

is of encourage the free flow of goods and services and the movement of capital, technology and
persons between countries, conditions deemed vital in creating robust and dynamic
economies.   Foreign investments will only thrive in a fairly predictable and reasonable international
12

investment climate and the protection against double taxation is crucial in creating such a climate.  13

Double taxation usually takes place when a person is resident of a contracting state and derives
income from, or owns capital in, the other contracting state and both states impose tax on that
income or capital. In order to eliminate double taxation, a tax treaty resorts to several methods. First,
it sets out the respective rights to tax of the state of source or situs and of the state of residence with
regard to certain classes of income or capital. In some cases, an exclusive right to tax is conferred
on one of the contracting states; however, for other items of income or capital, both states are given
the right to tax, although the amount of tax that may be imposed by the state of source is limited.  14

The second method for the elimination of double taxation applies whenever the state of source is
given a full or limited right to tax together with the state of residence. In this case, the treaties make it
incumbent upon the state of residence to allow relief in order to avoid double taxation. There are two
methods of relief — the exemption method and the credit method. In the exemption method, the
income or capital which is taxable in the state of source or situs is exempted in the state of
residence, although in some instances it may be taken into account in determining the rate of tax
applicable to the taxpayer's remaining income or capital. On the other hand, in the credit method,
although the income or capital which is taxed in the state of source is still taxable in the state of
residence, the tax paid in the former is credited against the tax levied in the latter. The basic
difference between the two methods is that in the exemption method, the focus is on the income or
capital itself, whereas the credit method focuses upon the tax.  15

In negotiating tax treaties, the underlying rationale for reducing the tax rate is that the Philippines will
give up a part of the tax in the expectation that the tax given up for this particular investment is not
taxed by the other
country.   Thus the petitioner correctly opined that the phrase "royalties paid under similar
16

circumstances" in the most favored nation clause of the US-RP Tax Treaty necessarily contemplated
"circumstances that are tax-related".

In the case at bar, the state of source is the Philippines because the royalties are paid for the right to
use property or rights, i.e. trademarks, patents and technology, located within the Philippines.   The
17

United States is the state of residence since the taxpayer, S. C. Johnson and Son, U. S. A., is based
there. Under the RP-US Tax Treaty, the state of residence and the state of source are both
permitted to tax the royalties, with a restraint on the tax that may be collected by the state of
source.   Furthermore, the method employed to give relief from double taxation is the allowance of a
18

tax credit to citizens or residents of the United States (in an appropriate amount based upon the
taxes paid or accrued to the Philippines) against the United States tax, but such amount shall not
exceed the limitations provided by United States law for the taxable year.   Under Article 13 thereof,
19

the Philippines may impose one of three rates — 25 percent of the gross amount of the royalties; 15
percent when the royalties are paid by a corporation registered with the Philippine Board of
Investments and engaged in preferred areas of activities; or the lowest rate of Philippine tax that
may be imposed on royalties of the same kind paid under similar circumstances to a resident of a
third state.

Given the purpose underlying tax treaties and the rationale for the most favored nation clause, the
concessional tax rate of 10 percent provided for in the RP-Germany Tax Treaty should apply only if
the taxes imposed upon royalties in the RP-US Tax Treaty and in the RP-Germany Tax Treaty are
paid under similar circumstances. This would mean that private respondent must prove that the RP-
US Tax Treaty grants similar tax reliefs to residents of the United States in respect of the taxes
imposable upon royalties earned from sources within the Philippines as those allowed to their
German counterparts under the RP-Germany Tax Treaty.

The RP-US and the RP-West Germany Tax Treaties do not contain similar provisions on tax
crediting. Article 24 of the RP-Germany Tax Treaty, supra, expressly allows crediting against
German income and corporation tax of 20% of the gross amount of royalties paid under the law of
the Philippines. On the other hand, Article 23 of the RP-US Tax Treaty, which is the counterpart
provision with respect to relief for double taxation, does not provide for similar crediting of 20% of the
gross amount of royalties paid. Said Article 23 reads:
 Article 23

Relief from double taxation

Double taxation of income shall be avoided in the following manner:

1) In accordance with the provisions and subject to the limitations of

the law of the United States (as it may be amended from time to time
without changing the general principle thereof), the United States
shall allow to a citizen or resident of the United States as a credit
against the United States tax the appropriate amount of taxes paid or
accrued to the Philippines and, in the case of a United States
corporation owning at least 10 percent of the voting stock of a
Philippine corporation from which it receives dividends in any taxable
year, shall allow credit for the appropriate amount of taxes paid or
accrued to the Philippines by the Philippine corporation paying such
dividends with respect to the profits out of which such dividends are
paid. Such appropriate amount shall be based upon the amount of
tax paid or accrued to the Philippines, but the credit shall not exceed
the limitations (for the purpose of limiting the credit to the United
States tax on income from sources within the Philippines or on
income from sources outside the United States) provided by United
States law for the taxable year. . . .

The reason for construing the phrase "paid under similar circumstances" as used in Article 13 (2) (b)
(iii) of the RP-US Tax Treaty as referring to taxes is anchored upon a logical reading of the text in
the light of the fundamental purpose of such treaty which is to grant an incentive to the foreign
investor by lowering the tax and at the same time crediting against the domestic tax abroad a figure
higher than what was collected in the Philippines.

In one case, the Supreme Court pointed out that laws are not just mere compositions, but have ends
to be achieved and that the general purpose is a more important aid to the meaning of a law than
any rule which grammar may lay down.   It is the duty of the courts to look to the object to be
20

accomplished, the evils to be remedied, or the purpose to be subserved, and should give the law a
reasonable or liberal construction which will best effectuate its purpose.   The Vienna Convention on
21

the Law of Treaties states that a treaty shall be interpreted in good faith in accordance with the
ordinary meaning to be given to the terms of the treaty in their context and in the light of its object
and
purpose. 22

As stated earlier, the ultimate reason for avoiding double taxation is to encourage foreign investors
to invest in the Philippines — a crucial economic goal for developing countries.   The goal of double
23

taxation conventions would be thwarted if such treaties did not provide for effective measures to
minimize, if not completely eliminate, the tax burden laid upon the income or capital of the investor.
Thus, if the rates of tax are lowered by the state of source, in this case, by the Philippines, there
should be a concomitant commitment on the part of the state of residence to grant some form of tax
relief, whether this be in the form of a tax credit or exemption.   Otherwise, the tax which could have
24

been collected by the Philippine government will simply be collected by another state, defeating the
object of the tax treaty since the tax burden imposed upon the investor would remain unrelieved. If
the state of residence does not grant some form of tax relief to the investor, no benefit would
redound to the Philippines, i.e., increased investment resulting from a favorable tax regime, should it
impose a lower tax rate on the royalty earnings of the investor, and it would be better to impose the
regular rate rather than lose much-needed revenues to another country.

At the same time, the intention behind the adoption of the provision on "relief from double taxation"
in the two tax treaties in question should be considered in light of the purpose behind the most
favored nation clause.

The purpose of a most favored nation clause is to grant to the contracting party treatment not less
favorable than that which has been or may be granted to the "most favored" among other
countries.   The most favored nation clause is intended to establish the principle of equality of
25

international treatment by providing that the citizens or subjects of the contracting nations may enjoy
the privileges accorded by either party to those of the most favored nation.   The essence of the
26

principle is to allow the taxpayer in one state to avail of more liberal provisions granted in another tax
treaty to which the country of residence of such taxpayer is also a party provided that the subject
matter of taxation, in this case royalty income, is the same as that in the tax treaty under which the
taxpayer is liable. Both Article 13 of the RP-US Tax Treaty and Article 12 (2) (b) of the RP-West
Germany Tax Treaty, above-quoted, speaks of tax on royalties for the use of trademark, patent, and
technology. The entitlement of the 10% rate by U.S. firms despite the absence of a matching credit
(20% for royalties) would derogate from the design behind the most grant equality of international
treatment since the tax burden laid upon the income of the investor is not the same in the two
countries. The similarity in the circumstances of payment of taxes is a condition for the enjoyment of
most favored nation treatment precisely to underscore the need for equality of treatment.

We accordingly agree with petitioner that since the RP-US Tax Treaty does not give a matching tax
credit of 20 percent for the taxes paid to the Philippines on royalties as allowed under the RP-West
Germany Tax Treaty, private respondent cannot be deemed entitled to the 10 percent rate granted
under the latter treaty for the reason that there is no payment of taxes on royalties under similar
circumstances.

It bears stress that tax refunds are in the nature of tax exemptions. As such they are regarded as in
derogation of sovereign authority and to be construed strictissimi juris against the person or entity
claiming the exemption.   The burden of proof is upon him who claims the exemption in his favor and
27

he must be able to justify his claim by the clearest grant of organic or statute law.   Private
28

respondent is claiming for a refund of the alleged overpayment of tax on royalties; however, there is
nothing on record to support a claim that the tax on royalties under the RP-US Tax Treaty is paid
under similar circumstances as the tax on royalties under the RP-West Germany Tax Treaty.

WHEREFORE, for all the foregoing, the instant petition is GRANTED. The decision dated May 7,
1996 of the Court of Tax Appeals and the decision dated November 7, 1996 of the Court of Appeals
are hereby SET ASIDE.

SO ORDERED.