TAX 1 CASES

Part A.
GENERAL PRINCIPLES OF TAXATION
I. INTRODUCTION TO TAXATION
A. Taxation, Taxes Defined
• Pepsi vs Municipality of Tanauan, 69 SCRA 460

[G.R. No. L-31156. February 27, 1976.]

PEPSI-COLA BOTTLING COMPANY OF THE PHILIPPINES, INC., Plaintiff-

Appellant, v. MUNICIPALITY OF TANAUAN, LEYTE, THE MUNICIPAL MAYOR, ET
AL., Defendants-Appellees.

Sabido, Sabido & Associates, for Plaintiff-Appellant.

Assistant Solicitor General Conrado T . Limcaoco and Solicitor Enrique M.

Reyes for Defendants-Appellees.

SYNOPSIS

Pepsi-Cola Bottling Company of the Philippines, Inc., filed a complaint with preliminary
injunction before the Court of First Instance of Leyte to declare Section 2 of R.A. No.
2264, (known as the Local Autonomy Act) unconstitutional as an undue delegation of
the taxing authority and declare null and void Municipal Ordinance No. 23, which levies
and collects from soft drinks producers and manufactures a tax of 1/16 of a centavo for
every bottle of soft drinks corked, and Municipal Ordinance No. 27 which levies and
collects on soft drinks produced or manufactured within the territorial jurisdiction a tax
of one centavo on each gallon of volume capacity. The plaintiff-appellant submits that
Ordinance Nos. 23 and 27 constitute double taxation, because these two ordinances
cover the same subject matter and impose practically the same tax rate.
irtua1aw library

The Court of First Instance of Leyte rendered judgment "dismissing the complaint and
upholding the constitutionality of [Section 2, Republic Act No. 2264]; declaring
Ordinances Nos. 23 and 27 valid, legal and constitutional; ordering the plaintiff to pay
the taxes due under the oft-said Ordinances; and to pay the costs." cralaw virtua1aw library

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: chanrob1es virtual 1aw library

1. Is Section 2, Republic Act No. 2264 an undue delegation of power, confiscatory and
oppressive?

NO. 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 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. Under the
New Constitution, local 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."

In delegating the authority, the State is not limited to the exact measure of that which
is exercised by itself. 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 constitutional injunction against deprivation of
property without due process of law may be passed over under the guise of the taxing
TAX 1 CASES

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. 11 Due process is usually violated where the tax imposed is for a
private as distinguished from a public purpose; a tax is imposed on property outside the
State, i.e., extra-territorial 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.
DOUBLE TAXATION

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. 13 The reason is that the State has exclusively reserved
the same for its own prerogative. Moreover, double taxation, in general, is not
forbidden by our fundamental law. Double taxation becomes obnoxious only where the
taxpayer is taxed twice for the benefit of the same governmental entity or by the same
jurisdiction for the same purpose, but not in a case where one tax is imposed by the
State and the other by the city or municipality.

2. Do Ordinances Nos. 23 and 27 constitute double taxation and impose percentage or

specific taxes?

No. 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 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 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 to
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."
cralaw virtua1aw library

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, excepting those which are mentioned therein." As long as the tax
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 expresio unius est exclusio alterius, and exceptio firmat
regulum in casibus non excepti. The limitation applies, particularly, to the prohibition
against municipalities and municipal districts to impose "any percentage tax on sales or
TAX 1 CASES

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 sales of the taxpayer imposes a sales
tax and is null and void for being outside the power of the municipality to enact. 20 But,
the imposition of "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 taxpayers production of soft drinks is considered
solely for purposes of determining the tax rate on the products, but there is no set ratio
between the volume of sales and the amount of the tax.

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. 22 Soft drink is not one of those
specified.
chanrobles virtual lawlibrary

3.Are Ordinances Nos. 23 and 27 unjust and unfair?

No. 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 rates of imposable taxes. This is in line with the constitutional 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). Unless the amount is so excessive as to be prohibitive, courts will go slow in
writing off an ordinance as unreasonable. 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.

SYLLABUS

1. TAXATION; NATURE; NON-DELEGATION OF POWER, EXCEPTION. — 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 power that is purely legislative and which the central legislative body
cannot delegate either to the executive or judicial department of 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. By necessary implication, the legislative power to create
political corporations for purpose of local self-government carries with it the power to
confer on such local government agencies the power to tax.

2. ID.; ID.; ID.; SCOPE OF LOCAL GOVERNMENT’S POWER TO TAX. — The taxing
authority conferred on local governments under Section 2, Republic Act No. 2264, is
broad enough as to extend to almost "everything, excepting those which are mentioned
therein." As long as the tax 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 expresio unius est exclusio alterius, and
exceptio firmat regulum in casibus non excepti. Municipalities 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.

3. ID.; ID.; ID.; LIMITATION. — Municipalities and municipal districts are prohibited to
impose "any percentage tax on sales or other in any form based thereon nor impose
taxes on articles subject to specific tax, except gasoline, under the provisions of the
TAX 1 CASES

National Internal Revenue Code." For purposes of this particular limitation, a municipal
ordinance which prescribes a set of radio between the amount of the tax and the
volume of sales of the taxpayer imposes a sales tax and is null and void for being
outside the power of the municipality to enact.

4. ID.; ID.; ID.; DELEGATION OF POWER TO TAX UNDER NEW CONSTITUTION. —

Under the New Constitution, local governments are granted 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.

5. ID.; ID.; ID.; VALIDITY THEREOF. — The plenary nature of the delegated power of
local governments under Section 2, of R.A. No. 2264 would not suffice to invalidate the
law as confiscatory and oppressive. In delegating the authority, the State is not limited
to the 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 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.

6. ID.; REQUISITES FOR LAWFUL EXERCISE OF TAXING POWER. — Constitutional

injunction against deprivation of property without due process of law may not 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 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.

7. ID.; ID.; INSTANCES WHERE DUE PROCESS IS VIOLATED. — Due process is usually
violated where the tax imposed is for a private as distinguished from the public
purposes; a tax a imposed on property outside the State, i.e., extra-territorial 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 tax and the manner in which it shall be apportioned are
generally not necessary to due process of law.

8. ID.; DOUBLE TAXATION; GENERALLY NOT FORBIDDEN. — The delegated authority

under Section 2 of the Local Autonomy Act cannot 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 local taxation may not be exercised. The
reason is that the State has exclusively reversed the same for its own prerogative.
Moreover, double taxation, in general, is not forbidden by the fundamental law, since
the injunction against double taxation found in the Constitution of the United States and
some states of the Union has not been adopted as part thereof.

9. ID.; ID.; ID.; EXCEPTION. — Double taxation becomes obnoxious only where the
taxpayer is taxed twice for the benefit of the same governmental entity or by the same
jurisdiction for the same purpose, but not in a case where one tax is imposed by the
State and the other by the city or municipality.

10. ID.; ID.; ID.; INSTANT CASE. — Where, as in the case at bar, the municipality of
Tanauan enacted Ordinance No. 27 imposing a tax of one centavo on each gallon of
volume capacity while in the previous Ordinance No. 23, it was 1/16 of a centavo for
every bottle corked, it is clear that the intention of the municipal council was to
substitute Ordinance No. 27 to that of Ordinance No. 23, repealing the latter.
TAX 1 CASES

11. ID.; TAX LEVIED ON PRODUCE, NOT PERCENTAGE TAX. — The imposition of "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 a
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 no set ratio between the volume
of sales and the amount of tax.

12. ID.; ID.; ID.; MUNICIPALITY ALLOWED TO INCREASE TAX AS LONG AS AMOUNT IS
REASONABLE. — The tax of one centavo (P0.01) on each gallon (128 fluid ounces,
U.S.) of volume capacity of all soft drinks, produced or manufactured or an equivalent
of 1-1/2 centavos per case, cannot be considered unjust and unfair. 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
rates of impossible taxes. This is in line with the constitutional policy of according the
widest possible autonomy to local government in matters of taxation, an aspect that is
given expression in the Local Tax Code (PD No. 231, July 1, 1973).

13. ID.; SPECIFIC TAXES; ARTICLES SUBJECT TO 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 cinematographic films, playing
cards, saccharine, opium and other habit forming drugs.

FERNANDO, J., concurring: chanrob1es virtual 1aw library

1. CONSTITUTIONAL LAW; TAXATION; POWER OF MUNICIPAL CORPORATION TO TAX

UNDER THE NEW CONSTITUTION. — 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 to
revenue and to levy taxes, subject to such limitations as may be provided by law." cralaw virtua1aw library

2. ID.; ID.; LIMITATION ON POWER TO TAX UNDER THE 1935 CONSTITUTION. — The
only limitation on the authority to tax under the 1935 Constitution 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 "exercise general supervision over all
local governments as may be provided by law." As far as legislative power over local
government was concerned, no restriction whatsoever was placed in the Congress of
the Philippines. It would appear therefore that the extent of the taxing power was solely
for the legislative body to decide.

3. ID.; ID.; MUNICIPAL CORPORATION’S POWER TO TAX MUST BE CLEARLY SHOWN. —

Although the scope of municipal taxing power had been enlarged by subsequent
legislations, the Court, in Golden Ribbon Lumber Co. v. City of Butuan, L-18534,
December 24, 1964, reaffirmed the traditional concept, thus: "The rule is well-settled
that municipal corporations, unlike sovereign states, are clothed with no power of
taxation; that its charter or a statute must clearly show an intent to confer that power
of 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." cralaw virtua1aw library

4. ID.; ID.; DOUBLE TAXATION. — 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 grounds.
TAX 1 CASES

• Tio vs Videogram Regulatory Board, GR L-75697

G.R. No. L-75697

VALENTIN TIO doing business under the name and style of OMI ENTERPRISES, petitioner,
vs.
VIDEOGRAM REGULATORY BOARD, MINISTER OF FINANCE, METRO MANILA COMMISSION,
CITY MAYOR and CITY TREASURER OF MANILA, respondents.

Nelson Y. Ng for petitioner.

The City Legal Officer for respondents City Mayor and City Treasurer.

MELENCIO-HERRERA, J.:

This petition was filed by petitioner on his own behalf and purportedly on behalf of other videogram
operators adversely affected. It assails the constitutionality of Presidential Decree No. 1987 entitled
"An Act Creating the Videogram Regulatory Board" with broad powers to regulate and supervise the
videogram industry (hereinafter briefly referred to as the BOARD).

A month after the promulgation of the abovementioned decree, Presidential Decree No. 1994
amended the National Internal Revenue Code providing, inter alia:

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

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

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

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

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

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

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

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

Government to create an environment conducive to growth and development of all business
industries, including the movie industry which has an accumulated investment of about P3
Billion;
TAX 1 CASES

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

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

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

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

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

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

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

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

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

4. There is undue delegation of power and authority;

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

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

We shall consider the foregoing objections in seriatim.

1. The Constitutional requirement that "every bill shall embrace only one subject which shall be
expressed in the title thereof"   is sufficiently complied with if the title be comprehensive enough to
1

include the general purpose which a statute seeks to achieve. It is not necessary that the title
express each and every end that the statute wishes to accomplish. The requirement is satisfied if all
the parts of the statute are related, and are germane to the subject matter expressed in the title, or
as long as they are not inconsistent with or foreign to the general subject and title.   An act having a
2

single general subject, indicated in the title, may contain any number of provisions, no matter how
diverse they may be, so long as they are not inconsistent with or foreign to the general subject, and
may be considered in furtherance of such subject by providing for the method and means of carrying
out the general object."   The rule also is that the constitutional requirement as to the title of a bill
3

should not be so narrowly construed as to cripple or impede the power of legislation.   It should be
4

given practical rather than technical construction. 5

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

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

provision of law to the contrary, the province shall collect a tax of thirty percent (30%) of the
purchase price or rental rate, as the case may be, for every sale, lease or disposition of a
videogram containing a reproduction of any motion picture or audiovisual program. Fifty
percent (50%) of the proceeds of the tax collected shall accrue to the province, and the other
fifty percent (50%) shall acrrue to the municipality where the tax is collected; PROVIDED,
That in Metropolitan Manila, the tax shall be shared equally by the City/Municipality and the
Metropolitan Manila Commission.
TAX 1 CASES

x x x           x x x          x x x

The foregoing provision is allied and germane to, and is reasonably necessary for the
accomplishment of, the general object of the DECREE, which is the regulation of the video industry
through the Videogram Regulatory Board as expressed in its title. The tax provision is not
inconsistent with, nor foreign to that general subject and title. As a tool for regulation   it is simply one
6

of the regulatory and control mechanisms scattered throughout the DECREE. The express purpose
of the DECREE to include taxation of the video industry in order to regulate and rationalize the
heretofore uncontrolled distribution of videograms is evident from Preambles 2 and 5, supra. Those
preambles explain the motives of the lawmaker in presenting the measure. The title of the DECREE,
which is the creation of the Videogram Regulatory Board, is comprehensive enough to include the
purposes expressed in its Preamble and reasonably covers all its provisions. It is unnecessary to
express all those objectives in the title or that the latter be an index to the body of the DECREE.  7

2. Petitioner also submits that the thirty percent (30%) tax imposed is harsh and oppressive,
confiscatory, and in restraint of trade. However, it is beyond serious question that a tax does not
cease to be valid merely because it regulates, discourages, or even definitely deters the activities
taxed.   The power to impose taxes is one so unlimited in force and so searching in extent, that the
8

courts scarcely venture to declare that it is subject to any restrictions whatever, except such as rest
in the discretion of the authority which exercises it.   In imposing a tax, the legislature acts upon its
9

constituents. This is, in general, a sufficient security against erroneous and oppressive taxation.  10

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

The levy of the 30% tax is for a public purpose. It was imposed primarily to answer the need for
regulating the video industry, particularly because of the rampant film piracy, the flagrant violation of
intellectual property rights, and the proliferation of pornographic video tapes. And while it was also
an objective of the DECREE to protect the movie industry, the tax remains a valid imposition.

The public purpose of a tax may legally exist even if the motive which impelled the legislature
to impose the tax was to favor one industry over another.  11

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

made the implement of the state's police power. 13

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

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

In refutation, the Intervenors and the Solicitor General's Office aver that the 8th "whereas" clause
sufficiently summarizes the justification in that grave emergencies corroding the moral values of the
people and betraying the national economic recovery program necessitated bold emergency
measures to be adopted with dispatch. Whatever the reasons "in the judgment" of the then
President, considering that the issue of the validity of the exercise of legislative power under the said
Amendment still pends resolution in several other cases, we reserve resolution of the question
raised at the proper time.
TAX 1 CASES

4. Neither can it be successfully argued that the DECREE contains an undue delegation of
legislative power. The grant in Section 11 of the DECREE of authority to the BOARD to "solicit the
direct assistance of other agencies and units of the government and deputize, for a fixed and limited
period, the heads or personnel of such agencies and units to perform enforcement functions for the
Board" is not a delegation of the power to legislate but merely a conferment of authority or discretion
as to its execution, enforcement, and implementation. "The true distinction is between the delegation
of power to make the law, which necessarily involves a discretion as to what it shall be, and
conferring authority or discretion as to its execution to be exercised under and in pursuance of the
law. The first cannot be done; to the latter, no valid objection can be made."   Besides, in the very
14

language of the decree, the authority of the BOARD to solicit such assistance is for a "fixed and
limited period" with the deputized agencies concerned being "subject to the direction and control of
the BOARD." That the grant of such authority might be the source of graft and corruption would not
stigmatize the DECREE as unconstitutional. Should the eventuality occur, the aggrieved parties will
not be without adequate remedy in law.

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

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

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

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

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

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

6. We do not share petitioner's fears that the video industry is being over-regulated and being eased
out of existence as if it were a nuisance. Being a relatively new industry, the need for its regulation
was apparent. While the underlying objective of the DECREE is to protect the moribund movie
industry, there is no question that public welfare is at bottom of its enactment, considering "the unfair
competition posed by rampant film piracy; the erosion of the moral fiber of the viewing public brought
about by the availability of unclassified and unreviewed video tapes containing pornographic films
and films with brutally violent sequences; and losses in government revenues due to the drop in
theatrical attendance, not to mention the fact that the activities of video establishments are virtually
TAX 1 CASES

untaxed since mere payment of Mayor's permit and municipal license fees are required to engage in
business.  17

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

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

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

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

WHEREFORE, the instant Petition is hereby dismissed.

No costs.

SO ORDERED.

• Philippine Health Care vs CIR GR 167330, 18 Sept 2009

G.R. No. 167330               September 18, 2009

PHILIPPINE HEALTH CARE PROVIDERS, INC., Petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.

RESOLUTION

CORONA, J.:

ARTICLE II
Declaration of Principles and State Policies

Section 15. The State shall protect and promote the right to health of the people and instill health
consciousness among them.

ARTICLE XIII
Social Justice and Human Rights
TAX 1 CASES

Section 11. 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. The State shall endeavor to provide free medical care to paupers.1

For resolution are a motion for reconsideration and supplemental motion for reconsideration dated
July 10, 2008 and July 14, 2008, respectively, filed by petitioner Philippine Health Care Providers,
Inc.2

We recall the facts of this case, as follows:

Petitioner is a domestic corporation whose primary purpose is "[t]o establish, maintain, conduct and
operate a prepaid group practice health care delivery system or a health maintenance organization
to take care of the sick and disabled persons enrolled in the health care plan and to provide for the
administrative, legal, and financial responsibilities of the organization." Individuals enrolled in its
health care programs pay an annual membership fee and are entitled to various preventive,
diagnostic and curative medical services provided by its duly licensed physicians, specialists and
other professional technical staff participating in the group practice health delivery system at a
hospital or clinic owned, operated or accredited by it.

x x x           x x x          x x x

On January 27, 2000, respondent Commissioner of Internal Revenue [CIR] sent petitioner a formal
demand letter and the corresponding assessment notices demanding the payment of deficiency
taxes, including surcharges and interest, for the taxable years 1996 and 1997 in the total amount of
₱224,702,641.18. xxxx

The deficiency [documentary stamp tax (DST)] assessment was imposed on petitioner’s health care
agreement with the members of its health care program pursuant to Section 185 of the 1997 Tax
Code xxxx

x x x           x x x          x x x

Petitioner protested the assessment in a letter dated February 23, 2000. As respondent did not act
on the protest, petitioner filed a petition for review in the Court of Tax Appeals (CTA) seeking the
cancellation of the deficiency VAT and DST assessments.

On April 5, 2002, the CTA rendered a decision, the dispositive portion of which read:

WHEREFORE, in view of the foregoing, the instant Petition for Review is PARTIALLY GRANTED.
Petitioner is hereby ORDERED to PAY the deficiency VAT amounting to ₱22,054,831.75 inclusive of
25% surcharge plus 20% interest from January 20, 1997 until fully paid for the 1996 VAT deficiency
and ₱31,094,163.87 inclusive of 25% surcharge plus 20% interest from January 20, 1998 until fully
paid for the 1997 VAT deficiency. Accordingly, VAT Ruling No. [231]-88 is declared void and without
force and effect. The 1996 and 1997 deficiency DST assessment against petitioner is hereby
CANCELLED AND SET ASIDE. Respondent is ORDERED to DESIST from collecting the said DST
deficiency tax.

SO ORDERED.

Respondent appealed the CTA decision to the [Court of Appeals (CA)] insofar as it cancelled the
DST assessment. He claimed that petitioner’s health care agreement was a contract of insurance
subject to DST under Section 185 of the 1997 Tax Code.

On August 16, 2004, the CA rendered its decision. It held that petitioner’s health care agreement
was in the nature of a non-life insurance contract subject to DST.

WHEREFORE, the petition for review is GRANTED. The Decision of the Court of Tax Appeals,
insofar as it cancelled and set aside the 1996 and 1997 deficiency documentary stamp tax
assessment and ordered petitioner to desist from collecting the same is REVERSED and SET
ASIDE.
TAX 1 CASES

Respondent is ordered to pay the amounts of ₱55,746,352.19 and ₱68,450,258.73 as deficiency

Documentary Stamp Tax for 1996 and 1997, respectively, plus 25% surcharge for late payment and
20% interest per annum from January 27, 2000, pursuant to Sections 248 and 249 of the Tax Code,
until the same shall have been fully paid.

SO ORDERED.

Petitioner moved for reconsideration but the CA denied it. Hence, petitioner filed this case.

x x x           x x x          x x x

In a decision dated June 12, 2008, the Court denied the petition and affirmed the CA’s decision. We
held that petitioner’s health care agreement during the pertinent period was in the nature of non-life
insurance which is a contract of indemnity, citing Blue Cross Healthcare, Inc. v.
Olivares3 and Philamcare Health Systems, Inc. v. CA.4 We also ruled that petitioner’s contention that
it is a health maintenance organization (HMO) and not an insurance company is irrelevant because
contracts between companies like petitioner and the beneficiaries under their plans are treated as
insurance contracts. Moreover, DST is not a tax on the business transacted but an excise on the
privilege, opportunity or facility offered at exchanges for the transaction of the business.

Unable to accept our verdict, petitioner filed the present motion for reconsideration and supplemental
motion for reconsideration, asserting the following arguments:

(a) The DST under Section 185 of the National Internal Revenue of 1997 is imposed only on
a company engaged in the business of fidelity bonds and other insurance policies. Petitioner,
as an HMO, is a service provider, not an insurance company.

(b) The Court, in dismissing the appeal in CIR v. Philippine National Bank, affirmed in effect
the CA’s disposition that health care services are not in the nature of an insurance business.

(c) Section 185 should be strictly construed.

(d) Legislative intent to exclude health care agreements from items subject to DST is clear,
especially in the light of the amendments made in the DST law in 2002.

(e) Assuming arguendo that petitioner’s agreements are contracts of indemnity, they are not
those contemplated under Section 185.

(f) Assuming arguendo that petitioner’s agreements are akin to health insurance, health

insurance is not covered by Section 185.

(g) The agreements do not fall under the phrase "other branch of insurance" mentioned in
Section 185.

(h) The June 12, 2008 decision should only apply prospectively.

(i) Petitioner availed of the tax amnesty benefits under RA 5 9480 for the taxable year 2005
and all prior years. Therefore, the questioned assessments on the DST are now rendered
moot and academic.6

Oral arguments were held in Baguio City on April 22, 2009. The parties submitted their memoranda
on June 8, 2009.

In its motion for reconsideration, petitioner reveals for the first time that it availed of a tax amnesty
under RA 94807 (also known as the "Tax Amnesty Act of 2007") by fully paying the amount of
₱5,127,149.08 representing 5% of its net worth as of the year ending December 31, 2005.8

We find merit in petitioner’s motion for reconsideration.

Petitioner was formally registered and incorporated with the Securities and Exchange Commission
on June 30, 1987.9 It is engaged in the dispensation of the following medical services to individuals
who enter into health care agreements with it:
TAX 1 CASES

Preventive medical services such as periodic monitoring of health problems, family planning

counseling, consultation and advices on diet, exercise and other healthy habits, and immunization;

Diagnostic medical services such as routine physical examinations, x-rays, urinalysis, fecalysis,

complete blood count, and the like and

Curative medical services which pertain to the performing of other remedial and therapeutic
processes in the event of an injury or sickness on the part of the enrolled member.10

Individuals enrolled in its health care program pay an annual membership fee. Membership is on a
year-to-year basis. The medical services are dispensed to enrolled members in a hospital or clinic
owned, operated or accredited by petitioner, through physicians, medical and dental practitioners
under contract with it. It negotiates with such health care practitioners regarding payment schemes,
financing and other procedures for the delivery of health services. Except in cases of emergency, the
professional services are to be provided only by petitioner's physicians, i.e. those directly employed
by it11 or whose services are contracted by it.12 Petitioner also provides hospital services such as
room and board accommodation, laboratory services, operating rooms, x-ray facilities and general
nursing care.13 If and when a member avails of the benefits under the agreement, petitioner pays the
participating physicians and other health care providers for the services rendered, at pre-agreed
rates.14

To avail of petitioner’s health care programs, the individual members are required to sign and
execute a standard health care agreement embodying the terms and conditions for the provision of
the health care services. The same agreement contains the various health care services that can be
engaged by the enrolled member, i.e., preventive, diagnostic and curative medical services. Except
for the curative aspect of the medical service offered, the enrolled member may actually make use of
the health care services being offered by petitioner at any time.

Health Maintenance Organizations Are Not Engaged In The Insurance Business

We said in our June 12, 2008 decision that it is irrelevant that petitioner is an HMO and not an
insurer because its agreements are treated as insurance contracts and the DST is not a tax on the
business but an excise on the privilege, opportunity or facility used in the transaction of the
business.15

Petitioner, however, submits that it is of critical importance to characterize the business it is engaged
in, that is, to determine whether it is an HMO or an insurance company, as this distinction is
indispensable in turn to the issue of whether or not it is liable for DST on its health care
agreements.16

A second hard look at the relevant law and jurisprudence convinces the Court that the arguments of
petitioner are meritorious.

Section 185 of the National Internal Revenue Code of 1997 (NIRC of 1997) provides:

Section 185. Stamp tax on fidelity bonds and other insurance policies. – On all policies of
insurance or bonds or obligations of the nature of indemnity for loss, damage, or liability made
or renewed by any person, association or company or corporation transacting the business
of accident, fidelity, employer’s liability, plate, glass, steam boiler, burglar, elevator, automatic
sprinkler, or other branch of insurance (except life, marine, inland, and fire insurance), and all
bonds, undertakings, or recognizances, conditioned for the performance of the duties of any office or
position, for the doing or not doing of anything therein specified, and on all obligations guaranteeing
the validity or legality of any bond or other obligations issued by any province, city, municipality, or
other public body or organization, and on all obligations guaranteeing the title to any real estate, or
guaranteeing any mercantile credits, which may be made or renewed by any such person, company
or corporation, there shall be collected a documentary stamp tax of fifty centavos (₱0.50) on each
four pesos (₱4.00), or fractional part thereof, of the premium charged. (Emphasis supplied)

It is a cardinal rule in statutory construction that no word, clause, sentence, provision or part of a
statute shall be considered surplusage or superfluous, meaningless, void and insignificant. To this
end, a construction which renders every word operative is preferred over that which makes some
words idle and nugatory. 17 This principle is expressed in the maxim Ut magis valeat quam
TAX 1 CASES

pereat, that is, we choose the interpretation which gives effect to the whole of the statute – its every
word.18

From the language of Section 185, it is evident that two requisites must concur before the DST can
apply, namely: (1) the document must be a policy of insurance or an obligation in the nature of
indemnity and (2) the maker should be transacting the business of accident, fidelity, employer’s
liability, plate, glass, steam boiler, burglar, elevator, automatic sprinkler, or other branch
of insurance (except life, marine, inland, and fire insurance).

Petitioner is admittedly an HMO. Under RA 7875 (or "The National Health Insurance Act of 1995"),
an HMO is "an entity that provides, offers or arranges for coverage of designated health services
needed by plan members for a fixed prepaid premium."19 The payments do not vary with the extent,
frequency or type of services provided.

The question is: was petitioner, as an HMO, engaged in the business of insurance during the
pertinent taxable years? We rule that it was not.

Section 2 (2) of PD20 1460 (otherwise known as the Insurance Code) enumerates what constitutes
"doing an insurance business" or "transacting an insurance business:"

a) making or proposing to make, as insurer, any insurance contract;

b) making or proposing to make, as surety, any contract of suretyship as a vocation and not
as merely incidental to any other legitimate business or activity of the surety;

c) doing any kind of business, including a reinsurance business, specifically recognized as

constituting the doing of an insurance business within the meaning of this Code;

d) doing or proposing to do any business in substance equivalent to any of the foregoing in a

manner designed to evade the provisions of this Code.

In the application of the provisions of this Code, the fact that no profit is derived from the making of
insurance contracts, agreements or transactions or that no separate or direct consideration is
received therefore, shall not be deemed conclusive to show that the making thereof does not
constitute the doing or transacting of an insurance business.

Various courts in the United States, whose jurisprudence has a persuasive effect on our
decisions,21 have determined that HMOs are not in the insurance business. One test that they have
applied is whether the assumption of risk and indemnification of loss (which are elements of an
insurance business) are the principal object and purpose of the organization or whether they are
merely incidental to its business. If these are the principal objectives, the business is that of
insurance. But if they are merely incidental and service is the principal purpose, then the business is
not insurance.

Applying the "principal object and purpose test,"22 there is significant American case law supporting
the argument that a corporation (such as an HMO, whether or not organized for profit), whose main
object is to provide the members of a group with health services, is not engaged in the insurance
business.

The rule was enunciated in Jordan v. Group Health Association 23 wherein the Court of Appeals of the
District of Columbia Circuit held that Group Health Association should not be considered as engaged
in insurance activities since it was created primarily for the distribution of health care services rather
than the assumption of insurance risk.

xxx Although Group Health’s activities may be considered in one aspect as creating security against
loss from illness or accident more truly they constitute the quantity purchase of well-rounded,
continuous medical service by its members. xxx The functions of such an organization are not
identical with those of insurance or indemnity companies. The latter are concerned primarily, if
not exclusively, with risk and the consequences of its descent, not with service, or its extension in
kind, quantity or distribution; with the unusual occurrence, not the daily routine of living. Hazard is
predominant. On the other hand, the cooperative is concerned principally with getting service
rendered to its members and doing so at lower prices made possible by quantity purchasing
and economies in operation. Its primary purpose is to reduce the cost rather than the risk of
TAX 1 CASES

medical care; to broaden the service to the individual in kind and quantity; to enlarge the
number receiving it; to regularize it as an everyday incident of living, like purchasing food
and clothing or oil and gas, rather than merely protecting against the financial loss caused by
extraordinary and unusual occurrences, such as death, disaster at sea, fire and tornado. It is,
in this instance, to take care of colds, ordinary aches and pains, minor ills and all the temporary
bodily discomforts as well as the more serious and unusual illness. To summarize, the distinctive
features of the cooperative are the rendering of service, its extension, the bringing of
physician and patient together, the preventive features, the regularization of service as well
as payment, the substantial reduction in cost by quantity purchasing in short, getting the
medical job done and paid for; not, except incidentally to these features, the indemnification
for cost after the services is rendered. Except the last, these are not distinctive or generally
characteristic of the insurance arrangement. There is, therefore, a substantial difference between
contracting in this way for the rendering of service, even on the contingency that it be needed, and
contracting merely to stand its cost when or after it is rendered.

That an incidental element of risk distribution or assumption may be present should not outweigh all
other factors. If attention is focused only on that feature, the line between insurance or indemnity and
other types of legal arrangement and economic function becomes faint, if not extinct. This is
especially true when the contract is for the sale of goods or services on contingency. But obviously it
was not the purpose of the insurance statutes to regulate all arrangements for assumption or
distribution of risk. That view would cause them to engulf practically all contracts, particularly
conditional sales and contingent service agreements. The fallacy is in looking only at the risk
element, to the exclusion of all others present or their subordination to it. The question turns,
not on whether risk is involved or assumed, but on whether that or something else to which it
is related in the particular plan is its principal object purpose.24 (Emphasis supplied)

In California Physicians’ Service v. Garrison,25 the California court felt that, after scrutinizing the plan
of operation as a whole of the corporation, it was service rather than indemnity which stood as its
principal purpose.

There is another and more compelling reason for holding that the service is not engaged in the
insurance business. Absence or presence of assumption of risk or peril is not the sole test to
be applied in determining its status. The question, more broadly, is whether, looking at the
plan of operation as a whole, ‘service’ rather than ‘indemnity’ is its principal object and
purpose. Certainly the objects and purposes of the corporation organized and maintained by the
California physicians have a wide scope in the field of social service. Probably there is no more
impelling need than that of adequate medical care on a voluntary, low-cost basis for persons
of small income. The medical profession unitedly is endeavoring to meet that need.
Unquestionably this is ‘service’ of a high order and not ‘indemnity.’ 26 (Emphasis supplied)

American courts have pointed out that the main difference between an HMO and an insurance
company is that HMOs undertake to provide or arrange for the provision of medical services through
participating physicians while insurance companies simply undertake to indemnify the insured for
medical expenses incurred up to a pre-agreed limit. Somerset Orthopedic Associates, P.A. v.
Horizon Blue Cross and Blue Shield of New Jersey27 is clear on this point:

The basic distinction between medical service corporations and ordinary health and accident
insurers is that the former undertake to provide prepaid medical services through participating
physicians, thus relieving subscribers of any further financial burden, while the latter only undertake
to indemnify an insured for medical expenses up to, but not beyond, the schedule of rates contained
in the policy.

x x x           x x x          x x x

The primary purpose of a medical service corporation, however, is an undertaking to provide

physicians who will render services to subscribers on a prepaid basis. Hence, if there are no
physicians participating in the medical service corporation’s plan, not only will the
subscribers be deprived of the protection which they might reasonably have expected would
be provided, but the corporation will, in effect, be doing business solely as a health and
accident indemnity insurer without having qualified as such and rendering itself subject to the
more stringent financial requirements of the General Insurance Laws….

A participating provider of health care services is one who agrees in writing to render health care
services to or for persons covered by a contract issued by health service corporation in return for
TAX 1 CASES

which the health service corporation agrees to make payment directly to the participating
provider.28 (Emphasis supplied)

Consequently, the mere presence of risk would be insufficient to override the primary purpose of the
business to provide medical services as needed, with payment made directly to the provider of these
services.29 In short, even if petitioner assumes the risk of paying the cost of these services even if
significantly more than what the member has prepaid, it nevertheless cannot be considered as being
engaged in the insurance business.

By the same token, any indemnification resulting from the payment for services rendered in case of
emergency by non-participating health providers would still be incidental to petitioner’s purpose of
providing and arranging for health care services and does not transform it into an insurer. To fulfill its
obligations to its members under the agreements, petitioner is required to set up a system and the
facilities for the delivery of such medical services. This indubitably shows that indemnification is not
its sole object.

In fact, a substantial portion of petitioner’s services covers preventive and diagnostic medical
services intended to keep members from developing medical conditions or diseases. 30 As an HMO, it
is its obligation to maintain the good health of its members. Accordingly, its health care programs
are designed to prevent or to minimize the possibility of any assumption of risk on its
part. Thus, its undertaking under its agreements is not to indemnify its members against any loss or
damage arising from a medical condition but, on the contrary, to provide the health and medical
services needed to prevent such loss or damage.31

Overall, petitioner appears to provide insurance-type benefits to its members (with respect to
its curative medical services), but these are incidental to the principal activity of providing them
medical care. The "insurance-like" aspect of petitioner’s business is miniscule compared to its
noninsurance activities. Therefore, since it substantially provides health care services rather than
insurance services, it cannot be considered as being in the insurance business.

It is important to emphasize that, in adopting the "principal purpose test" used in the above-quoted
U.S. cases, we are not saying that petitioner’s operations are identical in every respect to those of
the HMOs or health providers which were parties to those cases. What we are stating is that, for the
purpose of determining what "doing an insurance business" means, we have to scrutinize the
operations of the business as a whole and not its mere components. This is of course only prudent
and appropriate, taking into account the burdensome and strict laws, rules and regulations
applicable to insurers and other entities engaged in the insurance business. Moreover, we are also
not unmindful that there are other American authorities who have found particular HMOs to be
actually engaged in insurance activities.32

Lastly, it is significant that petitioner, as an HMO, is not part of the insurance industry. This is evident
from the fact that it is not supervised by the Insurance Commission but by the Department of
Health.33 In fact, in a letter dated September 3, 2000, the Insurance Commissioner confirmed that
petitioner is not engaged in the insurance business. This determination of the commissioner must be
accorded great weight. It is well-settled that the interpretation of an administrative agency which is
tasked to implement a statute is accorded great respect and ordinarily controls the interpretation of
laws by the courts. The reason behind this rule was explained in Nestle Philippines, Inc. v. Court of
Appeals:34

The rationale for this rule relates not only to the emergence of the multifarious needs of a modern or
modernizing society and the establishment of diverse administrative agencies for addressing and
satisfying those needs; it also relates to the accumulation of experience and growth of specialized
capabilities by the administrative agency charged with implementing a particular statute. In Asturias
Sugar Central, Inc. vs. Commissioner of Customs,35 the Court stressed that executive officials are
presumed to have familiarized themselves with all the considerations pertinent to the meaning and
purpose of the law, and to have formed an independent, conscientious and competent expert
opinion thereon. The courts give much weight to the government agency officials charged with the
implementation of the law, their competence, expertness, experience and informed judgment, and
the fact that they frequently are the drafters of the law they interpret.36

A Health Care Agreement Is Not An Insurance Contract Contemplated Under Section 185 Of
The NIRC of 1997
TAX 1 CASES

Section 185 states that DST is imposed on "all policies of insurance… or obligations of the nature of
indemnity for loss, damage, or liability…." In our decision dated June 12, 2008, we ruled that
petitioner’s health care agreements are contracts of indemnity and are therefore insurance contracts:

It is … incorrect to say that the health care agreement is not based on loss or damage because,
under the said agreement, petitioner assumes the liability and indemnifies its member for hospital,
medical and related expenses (such as professional fees of physicians). The term "loss or damage"
is broad enough to cover the monetary expense or liability a member will incur in case of illness or
injury.

Under the health care agreement, the rendition of hospital, medical and professional services to the
member in case of sickness, injury or emergency or his availment of so-called "out-patient services"
(including physical examination, x-ray and laboratory tests, medical consultations, vaccine
administration and family planning counseling) is the contingent event which gives rise to liability on
the part of the member. In case of exposure of the member to liability, he would be entitled to
indemnification by petitioner.

Furthermore, the fact that petitioner must relieve its member from liability by paying for expenses
arising from the stipulated contingencies belies its claim that its services are prepaid. The expenses
to be incurred by each member cannot be predicted beforehand, if they can be predicted at all.
Petitioner assumes the risk of paying for the costs of the services even if they are significantly and
substantially more than what the member has "prepaid." Petitioner does not bear the costs alone but
distributes or spreads them out among a large group of persons bearing a similar risk, that is, among
all the other members of the health care program. This is insurance.37

We reconsider. We shall quote once again the pertinent portion of Section 185:

Section 185. Stamp tax on fidelity bonds and other insurance policies. – On all policies of
insurance or bonds or obligations of the nature of indemnity for loss, damage, or
liability made or renewed by any person, association or company or corporation transacting the
business of accident, fidelity, employer’s liability, plate, glass, steam boiler, burglar, elevator,
automatic sprinkler, or other branch of insurance (except life, marine, inland, and fire insurance),
xxxx (Emphasis supplied)

In construing this provision, we should be guided by the principle that tax statutes are strictly
construed against the taxing authority.38 This is because 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. 39 Hence, tax laws may not be extended by implication
beyond the clear import of their language, nor their operation enlarged so as to embrace matters not
specifically provided.40

We are aware that, in Blue Cross and Philamcare, the Court pronounced that a health care
agreement is in the nature of non-life insurance, which is primarily a contract of indemnity. However,
those cases did not involve the interpretation of a tax provision. Instead, they dealt with the liability of
a health service provider to a member under the terms of their health care agreement. Such
contracts, as contracts of adhesion, are liberally interpreted in favor of the member and strictly
against the HMO. For this reason, we reconsider our ruling that Blue Cross and Philamcare are
applicable here.

Section 2 (1) of the Insurance Code defines a contract of insurance as an agreement whereby one
undertakes for a consideration to indemnify another against loss, damage or liability arising from an
unknown or contingent event. An insurance contract exists where the following elements concur:

1. The insured has an insurable interest;

2. The insured is subject to a risk of loss by the happening of the designed peril;

3. The insurer assumes the risk;

4. Such assumption of risk is part of a general scheme to distribute actual losses among a
large group of persons bearing a similar risk and

5. In consideration of the insurer’s promise, the insured pays a premium.41

TAX 1 CASES

Do the agreements between petitioner and its members possess all these elements? They do not.

First. In our jurisdiction, a commentator of our insurance laws has pointed out that, even if a contract
contains all the elements of an insurance contract, if its primary purpose is the rendering of service,
it is not a contract of insurance:

It does not necessarily follow however, that a contract containing all the four elements mentioned
above would be an insurance contract. The primary purpose of the parties in making the
contract may negate the existence of an insurance contract. For example, a law firm which
enters into contracts with clients whereby in consideration of periodical payments, it promises to
represent such clients in all suits for or against them, is not engaged in the insurance business. Its
contracts are simply for the purpose of rendering personal services. On the other hand, a contract by
which a corporation, in consideration of a stipulated amount, agrees at its own expense to defend a
physician against all suits for damages for malpractice is one of insurance, and the corporation will
be deemed as engaged in the business of insurance. Unlike the lawyer’s retainer contract, the
essential purpose of such a contract is not to render personal services, but to indemnify against loss
and damage resulting from the defense of actions for malpractice.42 (Emphasis supplied)

Second. Not all the necessary elements of a contract of insurance are present in petitioner’s
agreements. To begin with, there is no loss, damage or liability on the part of the member that
should be indemnified by petitioner as an HMO. Under the agreement, the member pays petitioner a
predetermined consideration in exchange for the hospital, medical and professional services
rendered by the petitioner’s physician or affiliated physician to him. In case of availment by a
member of the benefits under the agreement, petitioner does not reimburse or indemnify the
member as the latter does not pay any third party. Instead, it is the petitioner who pays the
participating physicians and other health care providers for the services rendered at pre-agreed
rates. The member does not make any such payment.

In other words, there is nothing in petitioner's agreements that gives rise to a monetary liability on
the part of the member to any third party-provider of medical services which might in turn necessitate
indemnification from petitioner. The terms "indemnify" or "indemnity" presuppose that a liability or
claim has already been incurred. There is no indemnity precisely because the member merely avails
of medical services to be paid or already paid in advance at a pre-agreed price under the
agreements.

Third. According to the agreement, a member can take advantage of the bulk of the benefits
anytime, e.g. laboratory services, x-ray, routine annual physical examination and consultations,
vaccine administration as well as family planning counseling, even in the absence of any peril, loss
or damage on his or her part.

Fourth. In case of emergency, petitioner is obliged to reimburse the member who receives care from
a non-participating physician or hospital. However, this is only a very minor part of the list of services
available. The assumption of the expense by petitioner is not confined to the happening of a
contingency but includes incidents even in the absence of illness or injury.

In Michigan Podiatric Medical Association v. National Foot Care Program, Inc.,43 although the health
care contracts called for the defendant to partially reimburse a subscriber for treatment received
from a non-designated doctor, this did not make defendant an insurer. Citing Jordan, the Court
determined that "the primary activity of the defendant (was) the provision of podiatric services to
subscribers in consideration of prepayment for such services."44 Since indemnity of the insured was
not the focal point of the agreement but the extension of medical services to the member at an
affordable cost, it did not partake of the nature of a contract of insurance.

Fifth. Although risk is a primary element of an insurance contract, it is not necessarily true that risk
alone is sufficient to establish it. Almost anyone who undertakes a contractual obligation always
bears a certain degree of financial risk. Consequently, there is a need to distinguish prepaid service
contracts (like those of petitioner) from the usual insurance contracts.

Indeed, petitioner, as an HMO, undertakes a business risk when it offers to provide health services:
the risk that it might fail to earn a reasonable return on its investment. But it is not the risk of the type
peculiar only to insurance companies. Insurance risk, also known as actuarial risk, is the risk that the
cost of insurance claims might be higher than the premiums paid. The amount of premium is
calculated on the basis of assumptions made relative to the insured.45
TAX 1 CASES

However, assuming that petitioner’s commitment to provide medical services to its members can be
construed as an acceptance of the risk that it will shell out more than the prepaid fees, it still will not
qualify as an insurance contract because petitioner’s objective is to provide medical services at
reduced cost, not to distribute risk like an insurer.

In sum, an examination of petitioner’s agreements with its members leads us to conclude that it is
not an insurance contract within the context of our Insurance Code.

There Was No Legislative Intent To Impose DST On Health Care Agreements Of HMOs

Furthermore, militating in convincing fashion against the imposition of DST on petitioner’s health
care agreements under Section 185 of the NIRC of 1997 is the provision’s legislative history. The
text of Section 185 came into U.S. law as early as 1904 when HMOs and health care agreements
were not even in existence in this jurisdiction. It was imposed under Section 116, Article XI of Act
No. 1189 (otherwise known as the "Internal Revenue Law of 1904") 46 enacted on July 2, 1904 and
became effective on August 1, 1904. Except for the rate of tax, Section 185 of the NIRC of 1997 is a
verbatim reproduction of the pertinent portion of Section 116, to wit:

ARTICLE XI
Stamp Taxes on Specified Objects

Section 116. There shall be levied, collected, and paid for and in respect to the several bonds,
debentures, or certificates of stock and indebtedness, and other documents, instruments, matters,
and things mentioned and described in this section, or for or in respect to the vellum, parchment, or
paper upon which such instrument, matters, or things or any of them shall be written or printed by
any person or persons who shall make, sign, or issue the same, on and after January first, nineteen
hundred and five, the several taxes following:

x x x           x x x          x x x

Third xxx (c) on all policies of insurance or bond or obligation of the nature of indemnity for
loss, damage, or liability made or renewed by any person, association, company, or
corporation transacting the business of accident, fidelity, employer’s liability, plate glass,
steam boiler, burglar, elevator, automatic sprinkle, or other branch of insurance (except life,
marine, inland, and fire insurance) xxxx (Emphasis supplied)

On February 27, 1914, Act No. 2339 (the Internal Revenue Law of 1914) was enacted revising and
consolidating the laws relating to internal revenue. The aforecited pertinent portion of Section 116,
Article XI of Act No. 1189 was completely reproduced as Section 30 (l), Article III of Act No.
2339. The very detailed and exclusive enumeration of items subject to DST was thus retained.

On December 31, 1916, Section 30 (l), Article III of Act No. 2339 was again reproduced as Section
1604 (l), Article IV of Act No. 2657 (Administrative Code). Upon its amendment on March 10, 1917,
the pertinent DST provision became Section 1449 (l) of Act No. 2711, otherwise known as the
Administrative Code of 1917.

Section 1449 (1) eventually became Sec. 222 of Commonwealth Act No. 466 (the NIRC of 1939),
which codified all the internal revenue laws of the Philippines. In an amendment introduced by RA 40
on October 1, 1946, the DST rate was increased but the provision remained substantially the same.

Thereafter, on June 3, 1977, the same provision with the same DST rate was reproduced in PD
1158 (NIRC of 1977) as Section 234. Under PDs 1457 and 1959, enacted on June 11, 1978 and
October 10, 1984 respectively, the DST rate was again increased. 1avvphi1

Effective January 1, 1986, pursuant to Section 45 of PD 1994, Section 234 of the NIRC of 1977 was
renumbered as Section 198. And under Section 23 of EO47 273 dated July 25, 1987, it was again
renumbered and became Section 185.

On December 23, 1993, under RA 7660, Section 185 was amended but, again, only with respect to
the rate of tax.
TAX 1 CASES

Notwithstanding the comprehensive amendment of the NIRC of 1977 by RA 8424 (or the NIRC of
1997), the subject legal provision was retained as the present Section 185. In 2004, amendments to
the DST provisions were introduced by RA 924348 but Section 185 was untouched.

On the other hand, the concept of an HMO was introduced in the Philippines with the formation of
Bancom Health Care Corporation in 1974. The same pioneer HMO was later reorganized and
renamed Integrated Health Care Services, Inc. (or Intercare). However, there are those who claim
that Health Maintenance, Inc. is the HMO industry pioneer, having set foot in the Philippines as early
as 1965 and having been formally incorporated in 1991. Afterwards, HMOs proliferated quickly and
currently, there are 36 registered HMOs with a total enrollment of more than 2 million.49

We can clearly see from these two histories (of the DST on the one hand and HMOs on the other)
that when the law imposing the DST was first passed, HMOs were yet unknown in the Philippines.
However, when the various amendments to the DST law were enacted, they were already in
existence in the Philippines and the term had in fact already been defined by RA 7875. If it had been
the intent of the legislature to impose DST on health care agreements, it could have done so in clear
and categorical terms. It had many opportunities to do so. But it did not. The fact that the NIRC
contained no specific provision on the DST liability of health care agreements of HMOs at a time
they were already known as such, belies any legislative intent to impose it on them. As a matter of
fact, petitioner was assessed its DST liability only on January 27, 2000, after more than a
decade in the business as an HMO.50

Considering that Section 185 did not change since 1904 (except for the rate of tax), it would be safe
to say that health care agreements were never, at any time, recognized as insurance contracts or
deemed engaged in the business of insurance within the context of the provision.

The Power To Tax Is Not The Power To Destroy

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 is to pay it.51 So
potent indeed is the power that it was once opined that "the power to tax involves the power to
destroy."52

Petitioner claims that the assessed DST to date which amounts to ₱376 million 53 is way beyond its
net worth of ₱259 million.54 Respondent never disputed these assertions. Given the realities on the
ground, imposing the DST on petitioner would be highly oppressive. It is not the purpose of the
government to throttle private business. On the contrary, the government ought to encourage private
enterprise.55 Petitioner, just like any concern organized for a lawful economic activity, has a right to
maintain a legitimate business.56 As aptly held in Roxas, et al. v. CTA, et al.:57

The power of taxation is sometimes called also the power to destroy. Therefore it should be
exercised with caution to minimize injury to the proprietary rights of a taxpayer. It must be exercised
fairly, equally and uniformly, lest the tax collector kill the "hen that lays the golden egg."58

Legitimate enterprises enjoy the constitutional protection not to be taxed out of existence. Incurring
losses because of a tax imposition may be an acceptable consequence but killing the business of an
entity is another matter and should not be allowed. It is counter-productive and ultimately subversive
of the nation’s thrust towards a better economy which will ultimately benefit the majority of our
people.59

Petitioner’s Tax Liability Was Extinguished Under The Provisions Of RA 9840

Petitioner asserts that, regardless of the arguments, the DST assessment for taxable years 1996
and 1997 became moot and academic 60 when it availed of the tax amnesty under RA 9480 on
December 10, 2007. It paid ₱5,127,149.08 representing 5% of its net worth as of the year ended
December 31, 2005 and complied with all requirements of the tax amnesty. Under Section 6(a) of
RA 9480, it is entitled to immunity from payment of taxes as well as additions thereto, and the
appurtenant civil, criminal or administrative penalties under the 1997 NIRC, as amended, arising
from the failure to pay any and all internal revenue taxes for taxable year 2005 and prior years.61

Far from disagreeing with petitioner, respondent manifested in its memorandum:

TAX 1 CASES

Section 6 of [RA 9840] provides that availment of tax amnesty entitles a taxpayer to immunity from
payment of the tax involved, including the civil, criminal, or administrative penalties provided under
the 1997 [NIRC], for tax liabilities arising in 2005 and the preceding years.

In view of petitioner’s availment of the benefits of [RA 9840], and without conceding the merits of this
case as discussed above, respondent concedes that such tax amnesty extinguishes the tax
liabilities of petitioner. This admission, however, is not meant to preclude a revocation of the
amnesty granted in case it is found to have been granted under circumstances amounting to tax
fraud under Section 10 of said amnesty law.62 (Emphasis supplied)

Furthermore, we held in a recent case that DST is one of the taxes covered by the tax amnesty
program under RA 9480.63 There is no other conclusion to draw than that petitioner’s liability for DST
for the taxable years 1996 and 1997 was totally extinguished by its availment of the tax amnesty
under RA 9480.

Is The Court Bound By A Minute Resolution In Another Case?

Petitioner raises another interesting issue in its motion for reconsideration: whether this Court is
bound by the ruling of the CA64 in CIR v. Philippine National Bank65 that a health care agreement of
Philamcare Health Systems is not an insurance contract for purposes of the DST.

In support of its argument, petitioner cites the August 29, 2001 minute resolution of this Court
dismissing the appeal in Philippine National Bank (G.R. No. 148680).66 Petitioner argues that the
dismissal of G.R. No. 148680 by minute resolution was a judgment on the merits; hence, the Court
should apply the CA ruling there that a health care agreement is not an insurance contract.

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.67 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.68 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.69 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,70 the Court noted that a previous case, CIR v. Baier-Nickel71 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.72

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. 73 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.

Accordingly, since petitioner was not a party in G.R. No. 148680 and since petitioner’s liability for
DST on its health care agreement was not the subject matter of G.R. No. 148680, petitioner cannot
successfully invoke the minute resolution in that case (which is not even binding precedent) in its
favor. Nonetheless, in view of the reasons already discussed, this does not detract in any way from
the fact that petitioner’s health care agreements are not subject to DST.

A Final Note

Taking into account that health care agreements are clearly not within the ambit of Section 185 of
the NIRC and there was never any legislative intent to impose the same on HMOs like petitioner, the
same should not be arbitrarily and unjustly included in its coverage.
TAX 1 CASES

It is a matter of common knowledge that there is a great social need for adequate medical services
at a cost which the average wage earner can afford. HMOs arrange, organize and manage health
care treatment in the furtherance of the goal of providing a more efficient and inexpensive health
care system made possible by quantity purchasing of services and economies of scale. They offer
advantages over the pay-for-service system (wherein individuals are charged a fee each time they
receive medical services), including the ability to control costs. They protect their members from
exposure to the high cost of hospitalization and other medical expenses brought about by a
fluctuating economy. Accordingly, they play an important role in society as partners of the State in
achieving its constitutional mandate of providing its citizens with affordable health services.

The rate of DST under Section 185 is equivalent to 12.5% of the premium charged.74 Its imposition
will elevate the cost of health care services. This will in turn necessitate an increase in the
membership fees, resulting in either placing health services beyond the reach of the ordinary wage
earner or driving the industry to the ground. At the end of the day, neither side wins, considering the
indispensability of the services offered by HMOs.

WHEREFORE, the motion for reconsideration is GRANTED. The August 16, 2004 decision of the
Court of Appeals in CA-G.R. SP No. 70479 is REVERSED and SET ASIDE. The 1996 and 1997
deficiency DST assessment against petitioner is hereby CANCELLED and SET ASIDE. Respondent
is ordered to desist from collecting the said tax.

No costs.

SO ORDERED.

• CIR vs SM Prime Holdings GR 183505, Feb 26, 2010

G.R. No. 183505               February 26, 2010

COMMISSIONER OF INTERNAL REVENUE, Petitioner,

vs.
SM PRIME HOLDINGS, INC. and FIRST ASIA REALTY DEVELOPMENT
CORPORATION, Respondents.

DECISION

DEL CASTILLO, J.:

When the intent of the law is not apparent as worded, or when the application of the law would lead
to absurdity or injustice, legislative history is all important. In such cases, courts may take judicial
notice of the origin and history of the law,1 the deliberations during the enactment,2 as well as prior
laws on the same subject matter3 to ascertain the true intent or spirit of the law.

This Petition for Review on Certiorari under Rule 45 of the Rules of Court, in relation to Republic Act
(RA) No. 9282,4 seeks to set aside the April 30, 2008 Decision5 and the June 24, 2008 Resolution6 of
the Court of Tax Appeals (CTA).
TAX 1 CASES

Factual Antecedents

Respondents SM Prime Holdings, Inc. (SM Prime) and First Asia Realty Development Corporation
(First Asia) are domestic corporations duly organized and existing under the laws of the Republic of
the Philippines. Both are engaged in the business of operating cinema houses, among others.7

CTA Case No. 7079

On September 26, 2003, the Bureau of Internal Revenue (BIR) sent SM Prime a Preliminary
Assessment Notice (PAN) for value added tax (VAT) deficiency on cinema ticket sales in the amount
of ₱119,276,047.40 for taxable year 2000.8 In response, SM Prime filed a letter-protest dated
December 15, 2003.9

On December 12, 2003, the BIR sent SM Prime a Formal Letter of Demand for the alleged VAT
deficiency, which the latter protested in a letter dated January 14, 2004.10

On September 6, 2004, the BIR denied the protest filed by SM Prime and ordered it to pay the VAT
deficiency for taxable year 2000 in the amount of ₱124,035,874.12.11

On October 15, 2004, SM Prime filed a Petition for Review before the CTA docketed as CTA Case
No. 7079.12

CTA Case No. 7085

On May 15, 2002, the BIR sent First Asia a PAN for VAT deficiency on

cinema ticket sales for taxable year 1999 in the total amount of ₱35,823,680.93.13 First Asia
protested the PAN in a letter dated July 9, 2002.14

Subsequently, the BIR issued a Formal Letter of Demand for the alleged VAT deficiency which was
protested by First Asia in a letter dated December 12, 2002.15

On September 6, 2004, the BIR rendered a Decision denying the protest and ordering First Asia to
pay the amount of ₱35,823,680.93 for VAT deficiency for taxable year 1999.16

Accordingly, on October 20, 2004, First Asia filed a Petition for Review before the CTA, docketed as
CTA Case No. 7085.17

CTA Case No. 7111

On April 16, 2004, the BIR sent a PAN to First Asia for VAT deficiency on cinema ticket sales for
taxable year 2000 in the amount of ₱35,840,895.78. First Asia protested the PAN through a letter
dated April 22, 2004.18

Thereafter, the BIR issued a Formal Letter of Demand for alleged VAT deficiency. 19 First Asia
protested the same in a letter dated July 9, 2004.20

On October 5, 2004, the BIR denied the protest and ordered First Asia to pay the VAT deficiency in
the amount of ₱35,840,895.78 for taxable year 2000.21

This prompted First Asia to file a Petition for Review before the CTA on December 16, 2004. The
case was docketed as CTA Case No. 7111.22

CTA Case No. 7272

Re: Assessment Notice No. 008-02

A PAN for VAT deficiency on cinema ticket sales for the taxable year 2002 in the total amount of
₱32,802,912.21 was issued against First Asia by the BIR. In response, First Asia filed a protest-letter
dated November 11, 2004. The BIR then sent a Formal Letter of Demand, which was protested by
First Asia on December 14, 2004.23
TAX 1 CASES

Re: Assessment Notice No. 003-03

A PAN for VAT deficiency on cinema ticket sales in the total amount of ₱28,196,376.46 for the
taxable year 2003 was issued by the BIR against First Asia. In a letter dated September 23, 2004,
First Asia protested the PAN. A Formal Letter of Demand was thereafter issued by the BIR to First
Asia, which the latter protested through a letter dated November 11, 2004. 24

On May 11, 2005, the BIR rendered a Decision denying the protests. It ordered First Asia to pay the
amounts of ₱33,610,202.91 and ₱28,590,826.50 for VAT deficiency for taxable years 2002 and
2003, respectively.25

Thus, on June 22, 2005, First Asia filed a Petition for Review before the CTA, docketed as CTA
Case No. 7272.26

Consolidated Petitions

The Commissioner of Internal Revenue (CIR) filed his Answers to the Petitions filed by SM Prime
and First Asia.27

On July 1, 2005, SM Prime filed a Motion to Consolidate CTA Case Nos. 7085, 7111 and 7272 with
CTA Case No. 7079 on the grounds that the issues raised therein are identical and that SM Prime is
a majority shareholder of First Asia. The motion was granted.28

Upon submission of the parties’ respective memoranda, the consolidated cases were submitted for
decision on the sole issue of whether gross receipts derived from admission tickets by
cinema/theater operators or proprietors are subject to VAT.29

Ruling of the CTA First Division

On September 22, 2006, the First Division of the CTA rendered a Decision granting the Petition for
Review. Resorting to the language used and the legislative history of the law, it ruled that the activity
of showing cinematographic films is not a service covered by VAT under the National Internal
Revenue Code (NIRC) of 1997, as amended, but an activity subject to amusement tax under RA
7160, otherwise known as the Local Government Code (LGC) of 1991. Citing House Joint
Resolution No. 13, entitled "Joint Resolution Expressing the True Intent of Congress with Respect to
the Prevailing Tax Regime in the Theater and Local Film Industry Consistent with the State’s Policy
to Have a Viable, Sustainable and Competitive Theater and Film Industry as One of its Partners in
National Development,"30 the CTA First Division held that the House of Representatives resolved that
there should only be one business tax applicable to theaters and movie houses, which is the 30%
amusement tax imposed by cities and provinces under the LGC of 1991. Further, it held that
consistent with the State’s policy to have a viable, sustainable and competitive theater and film
industry, the national government should be precluded from imposing its own business tax in
addition to that already imposed and collected by local government units. The CTA First Division
likewise found that Revenue Memorandum Circular (RMC) No. 28-2001, which imposes VAT on
gross receipts from admission to cinema houses, cannot be given force and effect because it failed
to comply with the procedural due process for tax issuances under RMC No. 20-86.31 Thus, it
disposed of the case as follows:

IN VIEW OF ALL THE FOREGOING, this Court hereby GRANTS the Petitions for Review.
Respondent’s Decisions denying petitioners’ protests against deficiency value-added taxes are
hereby REVERSED. Accordingly, Assessment Notices Nos. VT-00-000098, VT-99-000057, VT-00-
000122, 003-03 and 008-02 are ORDERED cancelled and set aside.

SO ORDERED.32

Aggrieved, the CIR moved for reconsideration which was denied by the First Division in its
Resolution dated December 14, 2006.33

Ruling of the CTA En Banc

Thus, the CIR appealed to the CTA En Banc.34 The case was docketed as CTA EB No. 244.35 The
CTA En Banc however denied36 the Petition for Review and dismissed37 as well petitioner’s Motion
for Reconsideration.
TAX 1 CASES

The CTA En Banc held that Section 108 of the NIRC actually sets forth an exhaustive enumeration
of what services are intended to be subject to VAT. And since the showing or exhibition of motion
pictures, films or movies by cinema operators or proprietors is not among the enumerated activities
contemplated in the phrase "sale or exchange of services," then gross receipts derived by cinema/
theater operators or proprietors from admission tickets in showing motion pictures, film or movie are
not subject to VAT. It reiterated that the exhibition or showing of motion pictures, films, or movies is
instead subject to amusement tax under the LGC of 1991. As regards the validity of RMC No. 28-
2001, the CTA En Banc agreed with its First Division that the same cannot be given force and effect
for failure to comply with RMC No. 20-86.

Issue

Hence, the present recourse, where petitioner alleges that the CTA En Banc seriously erred:

(1) In not finding/holding that the gross receipts derived by operators/proprietors of cinema houses
from admission tickets [are] subject to the 10% VAT because:

(a) THE EXHIBITION OF MOVIES BY CINEMA OPERATORS/PROPRIETORS TO THE

PAYING PUBLIC IS A SALE OF SERVICE;

(b) UNLESS EXEMPTED BY LAW, ALL SALES OF SERVICES ARE EXPRESSLY

SUBJECT TO VAT UNDER SECTION 108 OF THE NIRC OF 1997;

(c) SECTION 108 OF THE NIRC OF 1997 IS A CLEAR PROVISION OF LAW AND THE
APPLICATION OF RULES OF STATUTORY CONSTRUCTION AND EXTRINSIC AIDS IS
UNWARRANTED;

(d) GRANTING WITHOUT CONCEDING THAT RULES OF CONSTRUCTION ARE

APPLICABLE HEREIN, STILL THE HONORABLE COURT ERRONEOUSLY APPLIED THE
SAME AND PROMULGATED DANGEROUS PRECEDENTS;

(e) THERE IS NO VALID, EXISTING PROVISION OF LAW EXEMPTING RESPONDENTS’

SERVICES FROM THE VAT IMPOSED UNDER SECTION 108 OF THE NIRC OF 1997;

(f) QUESTIONS ON THE WISDOM OF THE LAW ARE NOT PROPER ISSUES TO BE
TRIED BY THE HONORABLE COURT; and

(g) RESPONDENTS WERE TAXED BASED ON THE PROVISION OF SECTION 108 OF

THE NIRC.

(2) In ruling that the enumeration in Section 108 of the NIRC of 1997 is exhaustive in coverage;

(3) In misconstruing the NIRC of 1997 to conclude that the showing of motion pictures is merely
subject to the amusement tax imposed by the Local Government Code; and

(4) In invalidating Revenue Memorandum Circular (RMC) No. 28-2001.38

Simply put, the issue in this case is whether the gross receipts derived by operators or proprietors of
cinema/theater houses from admission tickets are subject to VAT.

Petitioner’s Arguments

Petitioner argues that the enumeration of services subject to VAT in Section 108 of the NIRC is not
exhaustive because it covers all sales of services unless exempted by law. He claims that the CTA
erred in applying the rules on statutory construction and in using extrinsic aids in interpreting Section
108 because the provision is clear and unambiguous. Thus, he maintains that the exhibition of
movies by cinema operators or proprietors to the paying public, being a sale of service, is subject to
VAT.

Respondents’ Arguments
TAX 1 CASES

Respondents, on the other hand, argue that a plain reading of Section 108 of the NIRC of 1997
shows that the gross receipts of proprietors or operators of cinemas/theaters derived from public
admission are not among the services subject to VAT. Respondents insist that gross receipts from
cinema/theater admission tickets were never intended to be subject to any tax imposed by the
national government. According to them, the absence of gross receipts from cinema/theater
admission tickets from the list of services which are subject to the national amusement tax under
Section 125 of the NIRC of 1997 reinforces this legislative intent. Respondents also highlight the fact
that RMC No. 28-2001 on which the deficiency assessments were based is an unpublished
administrative ruling.

Our Ruling

The petition is bereft of merit.

The enumeration of services subject to VAT under Section 108 of the NIRC is not exhaustive

Section 108 of the NIRC of the 1997 reads:

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,
including the use or lease of properties.

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, rest houses, 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, air and water relative to their transport
of goods or cargoes; services of franchise grantees of telephone and telegraph, radio and television
broadcasting and all other franchise grantees except those under Section 119 of this Code; services
of banks, non-bank financial intermediaries and finance companies; 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. The phrase "sale or exchange of services" shall
likewise include:

(1) The lease or the use of or the right or privilege to use any copyright, patent, design or model,
plan, secret formula or process, goodwill, trademark, trade brand or other like property or right;

xxxx

(7) The lease of motion picture films, films, tapes and discs; and

(8) The lease or the use of or the right to use radio, television, satellite transmission and cable
television time.

x x x x (Emphasis supplied)

A cursory reading of the foregoing provision clearly shows that the enumeration of the "sale or
exchange of services" subject to VAT is not exhaustive. The words, "including," "similar services,"
and "shall likewise include," indicate that the enumeration is by way of example only.39

Among those included in the enumeration is the "lease of motion picture films, films, tapes and
discs." This, however, is not the same as the showing or exhibition of motion pictures or films. As
pointed out by the CTA En Banc:
TAX 1 CASES

"Exhibition" in Black’s Law Dictionary is defined as "To show or display. x x x To produce anything in
public so that it may be taken into possession" (6th ed., p. 573). While the word "lease" is defined as
"a contract by which one owning such property grants to another the right to possess, use and enjoy
it on specified period of time in exchange for periodic payment of a stipulated price, referred to as
rent (Black’s Law Dictionary, 6th ed., p. 889). x x x40

Since the activity of showing motion pictures, films or movies by cinema/ theater operators or
proprietors is not included in the enumeration, it is incumbent upon the court to the determine
whether such activity falls under the phrase "similar services." The intent of the legislature must
therefore be ascertained.

The legislature never intended operators

or proprietors of cinema/theater houses to be covered by VAT

Under the NIRC of 1939,41 the national government imposed amusement tax on proprietors, lessees,
or operators of theaters, cinematographs, concert halls, circuses, boxing exhibitions, and other
places of amusement, including cockpits, race tracks, and cabaret. 42 In the case of theaters or
cinematographs, the taxes were first deducted, withheld, and paid by the proprietors, lessees, or
operators of such theaters or cinematographs before the gross receipts were divided between the
proprietors, lessees, or operators of the theaters or cinematographs and the distributors of the
cinematographic films. Section 1143 of the Local Tax Code,44 however, amended this provision by
transferring the power to impose amusement tax45 on admission from theaters, cinematographs,
concert halls, circuses and other places of amusements exclusively to the local government. Thus,
when the NIRC of 197746 was enacted, the national government imposed amusement tax only on
proprietors, lessees or operators of cabarets, day and night clubs, Jai-Alai and race tracks.47

On January 1, 1988, the VAT Law48 was promulgated. It amended certain provisions of the NIRC of
1977 by imposing a multi-stage VAT to replace the tax on original and subsequent sales tax and
percentage tax on certain services. It imposed VAT on sales of services under Section 102 thereof,
which provides:

SECTION 102. Value-added tax on sale of services. — (a) Rate and base of tax. — There shall be
levied, assessed and collected, a value-added tax equivalent to 10% percent of gross receipts
derived by any person engaged in the sale of services. The phrase "sale of services" means the
performance of all kinds of services for others for a fee, remuneration or consideration, including
those performed or rendered by construction and service contractors; stock, real estate, commercial,
customs and immigration brokers; lessors of personal property; lessors or distributors of
cinematographic films; persons engaged in milling, processing, manufacturing or repacking goods
for others; and similar services regardless of whether or not the performance thereof calls for the
exercise or use of the physical or mental faculties: Provided That the following services performed in
the Philippines by VAT-registered persons shall be subject to 0%:

(1) Processing manufacturing or repacking goods for other persons doing business outside
the Philippines which goods are subsequently exported, x x x

xxxx

"Gross receipts" means the total amount of money or its equivalent representing the
contract price, compensation or service fee, including the amount charged for
materials supplied with the services and deposits or advance payments actually or
constructively received during the taxable quarter for the service performed or to be
performed for another person, excluding value-added tax.

(b) Determination of the tax. — (1) Tax billed as a separate item in the invoice. — If
the tax is billed as a separate item in the invoice, the tax shall be based on the gross
receipts, excluding the tax.

(2) Tax not billed separately or is billed erroneously in the invoice. — If the tax is not billed
separately or is billed erroneously in the invoice, the tax shall be determined by multiplying
the gross receipts (including the amount intended to cover the tax or the tax billed
erroneously) by 1/11. (Emphasis supplied)
TAX 1 CASES

Persons subject to amusement tax under the NIRC of 1977, as amended, however, were exempted
from the coverage of VAT.49

On February 19, 1988, then Commissioner Bienvenido A. Tan, Jr. issued RMC 8-88, which clarified
that the power to impose amusement tax on gross receipts derived from admission tickets was
exclusive with the local government units and that only the gross receipts of amusement places
derived from sources other than from admission tickets were subject to amusement tax under the
NIRC of 1977, as amended. Pertinent portions of RMC 8-88 read:

Under the Local Tax Code (P.D. 231, as amended), the jurisdiction to levy amusement tax on gross
receipts arising from admission to places of amusement has been transferred to the local
governments to the exclusion of the national government.

xxxx

Since the promulgation of the Local Tax Code which took effect on June 28, 1973 none of the
amendatory laws which amended the National Internal Revenue Code, including the value added tax
law under Executive Order No. 273, has amended the provisions of Section 11 of the Local Tax
Code. Accordingly, the sole jurisdiction for collection of amusement tax on admission receipts in
places of amusement rests exclusively on the local government, to the exclusion of the national
government. Since the Bureau of Internal Revenue is an agency of the national government, then it
follows that it has no legal mandate to levy amusement tax on admission receipts in the said places
of amusement.

Considering the foregoing legal background, the provisions under Section 123 of the National
Internal Revenue Code as renumbered by Executive Order No. 273 (Sec. 228, old NIRC) pertaining
to amusement taxes on places of amusement shall be implemented in accordance with BIR
RULING, dated December 4, 1973 and BIR RULING NO. 231-86 dated November 5, 1986 to wit:

"x x x Accordingly, only the gross receipts of the amusement places derived from sources
other than from admission tickets shall be subject to x x x amusement tax prescribed under
Section 228 of the Tax Code, as amended (now Section 123, NIRC, as amended by E.O.
273). The tax on gross receipts derived from admission tickets shall be levied and collected
by the city government pursuant to Section 23 of Presidential Decree No. 231, as amended x
x x" or by the provincial government, pursuant to Section 11 of P.D. 231, otherwise known as
the Local Tax Code. (Emphasis supplied)

On October 10, 1991, the LGC of 1991 was passed into law. The local government retained the
power to impose amusement tax on proprietors, lessees, or operators of theaters, cinemas, concert
halls, circuses, boxing stadia, and other places of amusement at a rate of not more than thirty
percent (30%) of the gross receipts from admission fees under Section 140 thereof.50 In the case of
theaters or cinemas, the tax shall first be deducted and withheld by their proprietors, lessees, or
operators and paid to the local government before the gross receipts are divided between said
proprietors, lessees, or operators and the distributors of the cinematographic films. However, the
provision in the Local Tax Code expressly excluding the national government from collecting tax
from the proprietors, lessees, or operators of theaters, cinematographs, concert halls, circuses and
other places of amusements was no longer included.

In 1994, RA 7716 restructured the VAT system by widening its tax base and enhancing its
administration. Three years later, RA 7716 was amended by RA 8241. Shortly thereafter, the NIRC
of 199751 was signed into law. Several amendments 52 were made to expand the coverage of VAT.
However, none pertain to cinema/theater operators or proprietors. At present, only lessors or
distributors of cinematographic films are subject to VAT. While persons subject to amusement
tax53 under the NIRC of 1997 are exempt from the coverage of VAT.54

Based on the foregoing, the following facts can be established:

(1) Historically, the activity of showing motion pictures, films or movies by cinema/theater
operators or proprietors has always been considered as a form of entertainment subject to
amusement tax.

(2) Prior to the Local Tax Code, all forms of amusement tax were imposed by the national
government.
TAX 1 CASES

(3) When the Local Tax Code was enacted, amusement tax on admission tickets from
theaters, cinematographs, concert halls, circuses and other places of amusements were
transferred to the local government.

(4) Under the NIRC of 1977, the national government imposed amusement tax only on
proprietors, lessees or operators of cabarets, day and night clubs, Jai-Alai and race tracks.

(5) The VAT law was enacted to replace the tax on original and subsequent sales tax and
percentage tax on certain services.

(6) When the VAT law was implemented, it exempted persons subject to amusement tax
under the NIRC from the coverage of VAT. 1auuphil

(7) When the Local Tax Code was repealed by the LGC of 1991, the local government
continued to impose amusement tax on admission tickets from theaters, cinematographs,
concert halls, circuses and other places of amusements.

(8) Amendments to the VAT law have been consistent in exempting persons subject to
amusement tax under the NIRC from the coverage of VAT.

(9) Only lessors or distributors of cinematographic films are included in the coverage of VAT.

These reveal the legislative intent not to impose VAT on persons already covered by the amusement
tax. This holds true even in the case of cinema/theater operators taxed under the LGC of 1991
precisely because the VAT law was intended to replace the percentage tax on certain services. The
mere fact that they are taxed by the local government unit and not by the national government is
immaterial. The Local Tax Code, in transferring the power to tax gross receipts derived by
cinema/theater operators or proprietor from admission tickets to the local government, did not intend
to treat cinema/theater houses as a separate class. No distinction must, therefore, be made between
the places of amusement taxed by the national government and those taxed by the local
government.

To hold otherwise would impose an unreasonable burden on cinema/theater houses operators or

proprietors, who would be paying an additional 10%55 VAT on top of the 30% amusement tax
imposed by Section 140 of the LGC of 1991, or a total of 40% tax. Such imposition would result in
injustice, as persons taxed under the NIRC of 1997 would be in a better position than those taxed
under the LGC of 1991. We need not belabor that a literal application of a law must be rejected if it
will operate unjustly or lead to absurd results.56 Thus, we are convinced that the legislature never
intended to include cinema/theater operators or proprietors in the coverage of VAT.

On this point, it is apropos to quote the case of Roxas v. Court of Tax Appeals,57 to wit:

The power of taxation is sometimes called also the power to destroy. Therefore, it should be
exercised with caution to minimize injury to the proprietary rights of a taxpayer. It must be exercised
fairly, equally and uniformly, lest the tax collector kill the "hen that lays the golden egg." And, in order
to maintain the general public's trust and confidence in the Government this power must be used
justly and not treacherously.

The repeal of the Local Tax Code by the LGC of 1991 is not a legal basis for the imposition of VAT

Petitioner, in issuing the assessment notices for deficiency VAT against respondents, ratiocinated
that:

Basically, it was acknowledged that a cinema/theater operator was then subject to amusement tax
under Section 260 of Commonwealth Act No. 466, otherwise known as the National Internal
Revenue Code of 1939, computed on the amount paid for admission. With the enactment of the
Local Tax Code under Presidential Decree (PD) No. 231, dated June 28, 1973, the power of
imposing taxes on gross receipts from admission of persons to cinema/theater and other places of
amusement had, thereafter, been transferred to the provincial government, to the exclusion of the
national or municipal government (Sections 11 & 13, Local Tax Code). However, the said provision
containing the exclusive power of the provincial government to impose amusement tax, had also
been repealed and/or deleted by Republic Act (RA) No. 7160, otherwise known as the Local
Government Code of 1991, enacted into law on October 10, 1991. Accordingly, the enactment of RA
TAX 1 CASES

No. 7160, thus, eliminating the statutory prohibition on the national government to impose business
tax on gross receipts from admission of persons to places of amusement, led the way to the valid
imposition of the VAT pursuant to Section 102 (now Section 108) of the old Tax Code, as amended
by the Expanded VAT Law (RA No. 7716) and which was implemented beginning January 1,
1996.58 (Emphasis supplied)

We disagree.

The repeal of the Local Tax Code by the LGC of 1991 is not a legal basis for the imposition of VAT
on the gross receipts of cinema/theater operators or proprietors derived from admission tickets. The
removal of the prohibition under the Local Tax Code did not grant nor restore to the national
government the power to impose amusement tax on cinema/theater operators or proprietors. Neither
did it expand the coverage of VAT. Since the imposition of a tax is a burden on the taxpayer, it
cannot be presumed nor can it be extended by implication. A law will not be construed as imposing a
tax unless it does so clearly, expressly, and unambiguously. 59 As it is, the power to impose
amusement tax on cinema/theater operators or proprietors remains with the local government.

Revenue Memorandum Circular No. 28-2001 is invalid

Considering that there is no provision of law imposing VAT on the gross receipts of cinema/theater
operators or proprietors derived from admission tickets, RMC No. 28-2001 which imposes VAT on
the gross receipts from admission to cinema houses must be struck down. We cannot
overemphasize that RMCs must not override, supplant, or modify the law, but must remain
consistent and in harmony with, the law they seek to apply and implement.60

In view of the foregoing, there is no need to discuss whether RMC No. 28-2001 complied with the
procedural due process for tax issuances as prescribed under RMC No. 20-86.

Rule on tax exemption does not apply

Moreover, contrary to the view of petitioner, respondents need not prove their entitlement to an
exemption from the coverage of VAT. The rule that tax exemptions should be construed strictly
against the taxpayer presupposes that the taxpayer is clearly subject to the tax being levied against
him.61 The reason is obvious: it is both illogical and impractical to determine who are exempted
without first determining who are covered by the provision. 62 Thus, unless a statute imposes a tax
clearly, expressly and unambiguously, what applies is the equally well-settled rule that the imposition
of a tax cannot be presumed.63 In fact, in case of doubt, tax laws must be construed strictly against
the government and in favor of the taxpayer.64

WHEREFORE, the Petition is hereby DENIED. The assailed April 30, 2008 Decision of the Court of
Tax Appeals En Banc holding that gross receipts derived by respondents from admission tickets in
showing motion pictures, films or movies are not subject to value-added tax under Section 108 of the
National Internal Revenue Code of 1997, as amended, and its June 24, 2008 Resolution denying the
motion for reconsideration are AFFIRMED.

SO ORDERED.

• Republic vs Caguioa October 15, 2007

G.R. No. 168584             October 15, 2007

REPUBLIC OF THE PHILIPPINES, represented by THE HONORABLE SECRETARY OF

FINANCE, THE HONORABLE COMMISSIONER OF BUREAU OF INTERNAL REVENUE, THE
HONORABLE COMMISSIONER OF CUSTOMS, and THE COLLECTOR OF CUSTOMS OF THE
PORT OF SUBIC, petitioners,
vs.
HON. RAMON S. CAGUIOA, Presiding Judge, Branch 74, RTC, Third Judicial Region,
Olongapo City, INDIGO DISTRIBUTION CORP., herein represented by ARIEL G.
CONSOLACION, W STAR TRADING AND WAREHOUSING CORP., herein represented by
HIERYN R. ECLARINAL, FREEDOM BRANDS PHILS., CORP., herein represented by ANA LISA
RAMAT, BRANDED WAREHOUSE, INC., herein represented by MARY AILEEN S. GOZUN,
ALTASIA INC., herein represented by ALAN HARROW, TAINAN TRADE (TAIWAN), INC.,
herein represented by ELENA RANULLO, SUBIC PARK N’ SHOP, herein represented by
TAX 1 CASES

NORMA MANGALINO DIZON, TRADING GATEWAYS INTERNATIONAL PHILS., herein

represented by MA. CHARINA FE C. RODOLFO, DUTY FREE SUPERSTORE (DFS), herein
represented by RAJESH R. SADHWANI, CHJIMES TRADING INC., herein represented by
ANGELO MARK M. PICARDAL, PREMIER FREEPORT, INC., herein represented by ROMMEL
P. GABALDON, FUTURE TRADE SUBIC FREEPORT, INC., herein represented by WILLIE S.
VERIDIANO, GRAND COMTRADE INTERNATIONAL CORP., herein represented by JULIUS
MOLINDA, and FIRST PLATINUM INTERNATIONAL, INC., herein represented by ISIDRO M.
MUÑOZ, respondents.

DECISION

CARPIO MORALES, J.:

Petitioners seek via petition for certiorari and prohibition to annul (1) the May 4, 2005 Order 1 issued
by public respondent Judge Ramon S. Caguioa of the Regional Trial Court (RTC), Branch 74,
Olongapo City, granting private respondents’ application for the issuance of a writ of preliminary
injunction and (2) the Writ of Preliminary Injunction2 that was issued pursuant to such Order, which
stayed the implementation of Republic Act (R.A.) No. 9334, AN ACT INCREASING THE EXCISE
TAX RATES IMPOSED ON ALCOHOL AND TOBACCO PRODUCTS, AMENDING FOR THE
PURPOSE SECTIONS 131, 141, 142, 143, 144, 145 AND 288 OF THE NATIONAL INTERNAL
REVENUE CODE OF 1997, AS AMENDED.

Petitioners likewise seek to enjoin, restrain and inhibit public respondent from enforcing the
impugned issuances and from further proceeding with the trial of Civil Case No. 102-0-05.

The relevant facts are as follows:

In 1992, Congress enacted Republic Act (R.A) No. 7227 3 or the Bases Conversion and Development
Act of 1992 which, among other things, created the Subic Special Economic and Freeport Zone
(SBF4) and the Subic Bay Metropolitan Authority (SBMA).

R.A. No. 7227 envisioned the SBF to be developed into a "self-sustaining, industrial, commercial,
financial and investment center to generate employment opportunities in and around the zone and to
attract and promote productive foreign investments."5 In line with this vision, Section 12 of the law
provided:

(b) The Subic Special Economic Zone shall be operated and managed as a separate
customs territory ensuring free flow or movement of goods and capital within, into
and exported out of the Subic Special Economic Zone, as well as provide incentives
such as tax and duty-free importations of raw materials, capital and equipment.
However, exportation or removal of goods from the territory of the Subic Special
Economic Zone to the other parts of the Philippine territory shall be subject to
customs duties and taxes under the Customs and Tariff Code and other relevant tax
laws of the Philippines;

(c) The provisions of existing laws, rules and regulations to the contrary

notwithstanding, no taxes, local and national, shall be imposed within the Subic
Special Economic Zone. In lieu of paying taxes, three percent (3%) of the gross income
earned by all businesses and enterprises within the Subic Special Economic Zone shall be
remitted to the National Government, one percent (1%) each to the local government units
affected by the declaration of the zone in proportion to their population area, and other
factors. In addition, there is hereby established a development fund of one percent (1%) of
the gross income earned by all businesses and enterprises within the Subic Special
Economic Zone to be utilized for the development of municipalities outside the City of
Olongapo and the Municipality of Subic, and other municipalities contiguous to be base
areas.

In case of conflict between national and local laws with respect to tax exemption privileges in
the Subic Special Economic Zone, the same shall be resolved in favor of the latter;

(d) No exchange control policy shall be applied and free markets for foreign exchange, gold,
securities and future shall be allowed and maintained in the Subic Special Economic Zone;
TAX 1 CASES

(e) The Central Bank, through the Monetary Board, shall supervise and regulate the
operations of banks and other financial institutions within the Subic Special Economic Zone;

(f) Banking and finance shall be liberalized with the establishment of foreign currency
depository units of local commercial banks and offshore banking units of foreign banks with
minimum Central Bank regulation;

(g) Any investor within the Subic Special Economic Zone whose continuing investment shall
not be less than Two hundred fifty thousand dollars ($250,000), his/her spouse and
dependent children under twenty-one (21) years of age, shall be granted permanent resident
status within the Subic Special Economic Zone. They shall have freedom of ingress and
egress to and from the Subic Special Economic Zone without any need of special
authorization from the Bureau of Immigration and Deportation. The Subic Bay Metropolitan
Authority referred to in Section 13 of this Act may also issue working visas renewal every two
(2) years to foreign executives and other aliens possessing highly-technical skills which no
Filipino within the Subic Special Economic Zone possesses, as certified by the Department
of Labor and Employment. The names of aliens granted permanent residence status and
working visas by the Subic Bay Metropolitan Authority shall be reported to the Bureau of
Immigration and Deportation within thirty (30) days after issuance thereof;

x x x x. (Emphasis supplied)

Pursuant to the law, private respondents Indigo Distribution Corporation, W Star Trading and
Warehousing Corporation, Freedom Brands Philippines Corporation, Branded Warehouse, Inc.,
Altasia, Inc., Tainan Trade (Taiwan) Inc., Subic Park ‘N Shop, Incorporated, Trading Gateways
International Philipines, Inc., Duty Free Superstore (DFS) Inc., Chijmes Trading, Inc., Premier
Freeport, Inc., Future Trade Subic Freeport, Inc., Grand Comtrade Int’l., Corp., and First Platinum
International, Inc., which are all domestic corporations doing business at the SBF, applied for and
were granted Certificates of Registration and Tax Exemption6 by the SBMA.

These certificates allowed them to engage in the business either of trading, retailing or wholesaling,
import and export, warehousing, distribution and/or transshipment of general merchandise, including
alcohol and tobacco products, and uniformly granted them tax exemptions for such importations as
contained in the following provision of their respective Certificates:

ARTICLE IV. The Company shall be entitled to tax and duty-free importation of raw
materials, capital equipment, and household and personal items for use solely within
the Subic Bay Freeport Zone pursuant to Sections 12(b) and 12(c) of the Act and Sections
43, 45, 46 and 49 of the Implementing Rules. All importations by the Company are exempt
from inspection by the Societe Generale de Surveillance if such importations are delivered
immediately to and for use solely within the Subic Bay Freeport Zone. (Emphasis supplied)

Congress subsequently passed R.A. No. 9334, however, effective on January 1, 2005, 7 Section 6 of
which provides:

Sec. 6. Section 131 of the National Internal Revenue Code of 1977, as amended, is hereby
amended to read as follows:

Sec. 131. Payment of Excise Taxes on Imported Articles. –

(A) Persons Liable. – Excise taxes on imported articles shall be paid by the owner or
importer to the Customs Officers, conformably with the regulations of the Department of
Finance and before the release of such articles from the customshouse or by the person who
is found in possession of articles which are exempt from excise taxes other than those
legally entitled to exemption.

In the case of tax-free articles brought or imported into the Philippines by persons, entities or
agencies exempt from tax which are subsequently sold, transferred or exchanged in the
Philippines to non-exempt persons or entities, the purchasers or recipients shall be
considered the importers thereof, and shall be liable for the duty and internal revenue tax
due on such importation.
TAX 1 CASES

The provision of any special or general law to the contrary notwithstanding, the
importation of cigars and cigarettes, distilled spirits, fermented liquors and wines into
the Philippines, even if destined for tax and duty free shops, shall be subject to all
applicable taxes, duties, charges, including excise taxes due thereon. This shall apply
to cigars and cigarettes, distilled spirits, fermented liquors and wines brought directly
into the duly chartered or legislated freeports of the Subic Economic Freeport Zone,
created under Republic Act No. 7227; x x x and such other freeports as may hereafter be
established or created by law: Provided, further, That importations of cigars and cigarettes,
distilled spirits, fermented liquors and wines made directly by a government-owned and
operated duty-free shop, like the Duty Free Philippines (DFP), shall be exempted from all
applicable duties only: x x x Provided, finally, That the removal and transfer of tax and duty-
free goods, products, machinery, equipment and other similar articles other than cigars and
cigarettes, distilled spirits, fermented liquors and wines, from one Freeport to another
Freeport, shall not be deemed an introduction into the Philippine customs territory. x x x.
(Emphasis and underscoring supplied)

On the basis of Section 6 of R.A. No. 9334, SBMA issued on January 10, 2005 a
Memorandum8 declaring that effective January 1, 2005, all importations of cigars, cigarettes, distilled
spirits, fermented liquors and wines into the SBF, including those intended to be transshipped to
other free ports in the Philippines, shall be treated as ordinary importations subject to all applicable
taxes, duties and charges, including excise taxes.

Meanwhile, on February 3, 2005, former Bureau of Internal Revenue (BIR) Commissioner Guillermo
L. Parayno, Jr. requested then Customs Commissioner George M. Jereos to immediately collect the
excise tax due on imported alcohol and tobacco products brought to the Duty Free Philippines (DFP)
and Freeport zones.9

Accordingly, the Collector of Customs of the port of Subic directed the SBMA Administrator to
require payment of all appropriate duties and taxes on all importations of cigars and cigarettes,
distilled spirits, fermented liquors and wines; and for all transactions involving the said items to be
covered from then on by a consumption entry and no longer by a warehousing entry.10

On February 7, 2005, SBMA issued a Memorandum11 directing the departments concerned to

require locators/importers in the SBF to pay the corresponding duties and taxes on their importations
of cigars, cigarettes, liquors and wines before said items are cleared and released from the freeport.
However, certain SBF locators which were "exclusively engaged in the transshipment of cigarette
products for foreign destinations" were allowed by the SBMA to process their import documents
subject to their submission of an Undertaking with the Bureau of Customs.12

On February 15, 2005, private respondents wrote the offices of respondent Collector of Customs
and the SBMA Administrator requesting for a reconsideration of the directives on the imposition of
duties and taxes, particularly excise taxes, on their shipments of cigars, cigarettes, wines and
liquors.13 Despite these letters, however, they were not allowed to file any warehousing entry for their
shipments.

Thus, private respondent enterprises, through their representatives, brought before the RTC of
Olongapo City a special civil action for declaratory relief14 to have certain provisions of R.A. No. 9334
declared as unconstitutional, which case was docketed as Civil Case No. 102-0-05.

In the main, private respondents submitted that (1) R.A. No. 9334 should not be interpreted as
altering, modifying or amending the provisions of R.A. No. 7227 because repeals by implication are
not favored; (2) a general law like R.A. No. 9334 cannot amend R.A. No. 7727, which is a special
law; and (3) the assailed law violates the one bill-one subject rule embodied in Section 26(1), Article
VI15 of the Constitution as well as the constitutional proscription against the impairment of the
obligation of contracts.16

Alleging that great and irreparable loss and injury would befall them as a consequence of the
imposition of taxes on alcohol and tobacco products brought into the SBF, private respondents
prayed for the issuance of a writ of preliminary injunction and/or Temporary Restraining Order (TRO)
and preliminary mandatory injunction to enjoin the directives of herein petitioners.

Petitioners duly opposed the private respondents’ prayer for the issuance of a writ of preliminary
injunction and/or TRO, arguing that (1) tax exemptions are not presumed and even when granted,
are strictly construed against the grantee; (2) an increase in business expense is not the injury
TAX 1 CASES

contemplated by law, it being a case of damnum absque injuria; and (3) the drawback mechanism
established in the law clearly negates the possibility of the feared injury.17

Petitioners moreover pointed out that courts are enjoined from issuing a writ of injunction and/or
TRO on the grounds of an alleged nullity of a law, ordinance or administrative regulation or circular
or in a manner that would effectively dispose of the main case. Taxes, they stressed, are the
lifeblood of the government and their prompt and certain availability is an imperious need. They
maintained that greater injury would be inflicted on the public should the writ be granted.

On May 4, 2005, the court a quo granted private respondents’ application for the issuance of a writ
of preliminary injunction, after it found that the essential requisites for the issuance of a preliminary
injunction were present.

As investors duly licensed to operate inside the SBF, the trial court declared that private respondents
were entitled to enjoy the benefits of tax incentives under R.A. No. 7227, particularly the exemption
from local and national taxes under Section 12(c); the aforecited provision of R.A. No. 7227, coupled
with private respondents’ Certificates of Registration and Tax Exemption from the SBMA, vested in
them a clear and unmistakable right or right in esse that would be violated should R.A. No. 9334 be
implemented; and the invasion of such right is substantial and material as private respondents would
be compelled to pay more than what they should by way of taxes to the national government.

The trial court thereafter ruled that the prima facie presumption of validity of R.A. No. 9334 had been
overcome by private respondents, it holding that as a partial amendment of the National Internal
Revenue Code (NIRC) of 1997,18 as amended, R.A. No. 9334 is a general law that could not prevail
over a special statute like R.A. No. 7227 notwithstanding the fact that the assailed law is of later
effectivity.

The trial court went on to hold that the repealing provision of Section 10 of R.A. No. 9334 does not
expressly mention the repeal of R. A. No. 7227, hence, its repeal can only be an implied repeal,
which is not favored; and since R.A. No. 9334 imposes new tax burdens, whatever doubts arising
therefrom should be resolved against the taxing authority and in favor of the taxpayer.

The trial court furthermore held that R.A. No. 9334 violates the terms and conditions of private
respondents’ subsisting contracts with SBMA, which are embodied in their Certificates of
Registration and Exemptions in contravention of the constitutional guarantee against the impairment
of contractual obligations; that greater damage would be inflicted on private respondents if the writ of
injunction is not issued as compared to the injury that the government and the general public would
suffer from its issuance; and that the damage that private respondents are bound to suffer once the
assailed statute is implemented – including the loss of confidence of their foreign principals, loss of
business opportunity and unrealized income, and the danger of closing down their businesses due to
uncertainty of continued viability – cannot be measured accurately by any standard.

With regard to the rule that injunction is improper to restrain the collection of taxes under Section
21819 of the NIRC, the trial court held that what is sought to be enjoined is not per se the collection of
taxes, but the implementation of a statute that has been found preliminarily to be unconstitutional.

Additionally, the trial court pointed out that private respondents’ taxes have not yet been assessed,
as they have not filed consumption entries on all their imported tobacco and alcohol products,
hence, their duty to pay the corresponding excise taxes and the concomitant right of the government
to collect the same have not yet materialized.

On May 11, 2005, the trial court issued a Writ of Preliminary Injunction directing petitioners and the
SBMA Administrator as well as all persons assisting or acting for and in their behalf "1) to allow the
operations of [private respondents] in accordance with R.A. No. 7227; 2) to allow [them] to file
warehousing entries instead of consumption entries as regards their importation of tobacco and
alcohol products; and 3) to cease and desist from implementing the pertinent provisions of R.A. No.
9334 by not compelling [private respondents] to immediately pay duties and taxes on said alcohol
and tobacco products as a condition to their removal from the port area for transfer to the
warehouses of [private respondents]."20

The injunction bond was approved at One Million pesos (P1,000,000).21

TAX 1 CASES

Without moving for reconsideration, petitioners have come directly to this Court to question the May
4, 2005 Order and the Writ of Preliminary Injunction which, they submit, were issued by public
respondent with grave abuse of discretion amounting to lack or excess of jurisdiction.

In particular, petitioners contend that public respondent peremptorily and unjustly issued the
injunctive writ despite the absence of the legal requisites for its issuance, resulting in heavy
government revenue losses.22 They emphatically argue that since the tax exemption previously
enjoyed by private respondents has clearly been withdrawn by R.A. No. 9334, private respondents
do not have any right in esse nor can they invoke legal injury to stymie the enforcement of R.A. No.
9334.

Furthermore, petitioners maintain that in issuing the injunctive writ, public respondent showed
manifest bias and prejudice and prejudged the merits of the case in utter disregard of the caveat
issued by this Court in Searth Commodities Corporation, et al. v. Court of Appeals 23 and Vera v.
Arca.24

Regarding the P1 million injunction bond fixed by public respondent, petitioners argue that the same
is grossly disproportionate to the damages that have been and continue to be sustained by the
Republic.

In their Reply25 to private respondents’ Comment, petitioners additionally plead public respondent’s
bias and partiality in allowing the motions for intervention of a number of corporations 26 without notice
to them and in disregard of their present pending petition for certiorari and prohibition before this
Court. The injunction bond filed by private respondent Indigo Distribution Corporation, they stress, is
not even sufficient to cover all the original private respondents, much less, intervenor-corporations.

The petition is partly meritorious.

At the outset, it bears emphasis that only questions relating to the propriety of the issuance of the
May 4, 2005 Order and the Writ of Preliminary Injunction are properly within the scope of the present
petition and shall be so addressed in order to determine if public respondent committed grave abuse
of discretion. The arguments raised by private respondents which pertain to the constitutionality of
R.A. No. 9334 subject matter of the case pending litigation before the trial court have no bearing in
resolving the present petition.

Section 3 of Rule 58 of the Revised Rules of Court provides:

SEC. 3. Grounds for issuance of preliminary injunction. – A preliminary injunction may be

granted when it is established.

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

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

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

For a writ of preliminary injunction to issue, the plaintiff must be able to establish that (1) there is a
clear and unmistakable right to be protected, (2) the invasion of the right sought to be protected is
material and substantial, and (3) there is an urgent and paramount necessity for the writ to prevent
serious damage.27

Conversely, failure to establish either the existence of a clear and positive right which should be
judicially protected through the writ of injunction, or of the acts or attempts to commit any act which
endangers or tends to endanger the existence of said right, or of the urgent need to prevent serious
damage, is a sufficient ground for denying the preliminary injunction.28
TAX 1 CASES

It is beyond cavil that R.A. No. 7227 granted private respondents exemption from local and national
taxes, including excise taxes, on their importations of general merchandise, for which reason they
enjoyed tax-exempt status until the effectivity of R.A. No. 9334.

By subsequently enacting R.A. No. 9334, however, Congress expressed its intention to withdraw
private respondents’ tax exemption privilege on their importations of cigars, cigarettes, distilled
spirits, fermented liquors and wines. Juxtaposed to show this intention are the respective provisions
of Section 131 of the NIRC before and after its amendment by R.A. No. 9334:

x x x x.

Sec. 131 of NIRC before R.A. No. 9334 Sec. 131, as amended by R.A. No. 9334
Sec. 131. Payment of Excise Taxes on Sec. 131. Payment of Excise Taxes on
Imported Articles. – Imported Articles. –

(A) Persons Liable. – Excise taxes on (A) Persons Liable. – Excise taxes on
imported articles shall be paid by the imported articles shall be paid by the
owner or importer to the Customs owner or importer to the Customs
Officers, conformably with the Officers, conformably with the
regulations of the Department of Finance regulations of the Department of Finance
and before the release of such articles and before the release of such articles
from the customs house or by the person from the customs house or by the person
who is found in possession of articles who is found in possession of articles
which are exempt from excise taxes which are exempt from excise taxes
other than those legally entitled to other than those legally entitled to
exemption. exemption.

In the case of tax-free articles brought or In the case of tax-free articles brought or
imported into the Philippines by persons, imported into the Philippines by persons,
entities or agencies exempt from tax entities or agencies exempt from tax
which are subsequently sold, transferred which are subsequently sold, transferred
or exchanged in the Philippines to non- or exchanged in the Philippines to non-
exempt persons or entities, the exempt persons or entities, the
purchasers or recipients shall be purchasers or recipients shall be
considered the importers thereof, and considered the importers thereof, and
shall be liable for the duty and internal shall be liable for the duty and internal
revenue tax due on such importation. revenue tax due on such importation.

The provision of any special or general The provision of any special or

law to the contrary notwithstanding, the general law to the contrary
importation of cigars and cigarettes, notwithstanding, the importation of
distilled spirits, fermented liquors and cigars and cigarettes, distilled spirits,
wines into the Philippines, even if fermented liquors and wines into the
destined for tax and duty free shops, Philippines, even if destined for tax
shall be subject to all applicable taxes, and duty free shops, shall be subject
duties, charges, including excise taxes to all applicable taxes, duties,
due thereon. Provided, charges, including excise taxes due
however, That this shall not apply to thereon. This shall apply to cigars and
cigars and cigarettes, fermented cigarettes, distilled spirits, fermented
spirits and wines brought directly into liquors and wines brought directly
the duly chartered or legislated into the duly chartered or legislated
freeports of the Subic Economic freeports of the Subic Economic
Freeport Zone, created under Freeport Zone, created under
Republic Act No. 7227; the Cagayan Republic Act No. 7227; the Cagayan
Special Economic Zone and Freeport, Special Economic Zone and Freeport,
created under Republic Act No. 7922; created under Republic Act No. 7922;
and the Zamboanga City Special and the Zamboanga City Special
Economic Zone, created under Republic Economic Zone, created under Republic
Act No. 7903, and are not transshipped Act No. 7903, and such other freeports
to any other port in the as may hereafter be established or
Philippines: Provided, further, That created by law: Provided, further, That
importations of cigars and cigarettes, importations of cigars and cigarettes,
distilled spirits, fermented liquors and distilled spirits, fermented liquors and
wines made directly by a government- wines made directly by a government-
TAX 1 CASES

owned and operated duty-free shop, like owned and operated duty-free shop, like
the Duty Free Philippines (DFP), shall be the Duty Free Philippines (DFP), shall be
exempted from all applicable duties, exempted from all applicable duties
charges, including excise tax due only: Provided still further, That such
thereon; Provided still further, That such articles directly imported by a
articles directly imported by a government-owned and operated duty-
government-owned and operated duty- free shop, like the Duty-Free Philippines,
free shop, like the Duty-Free Philippines, shall be labeled "tax and duty-free" and
shall be labeled "tax and duty-free" and "not for resale": Provided, finally, That
"not for resale": Provided, still further, the removal and transfer of tax and duty-
That if such articles brought into the duly free goods, products, machinery,
chartered or legislated freeports under equipment and other similar articles
Republic Acts Nos. 7227, 7922 and 7903 other than cigars and cigarettes, distilled
are subsequently introduced into the spirits, fermented liquors and wines, from
Philippine customs territory, then such one Freeport to another Freeport, shall
articles shall, upon such introduction, be not be deemed an introduction into the
deemed imported into the Philippines Philippine customs territory.
and shall be subject to all imposts and
excise taxes provided herein and other x x x x.
statutes: Provided, finally, That the
removal and transfer of tax and duty-free
goods, products, machinery, equipment
and other similar articles, from one
freeport to another freeport, shall not be
deemed an introduction into the
Philippine customs territory.

x x x x.

(Emphasis and underscoring supplied)

To note, the old Section 131 of the NIRC expressly provided that all taxes, duties, charges, including
excise taxes shall not apply to importations of cigars, cigarettes, fermented spirits and wines brought
directly into the duly chartered or legislated freeports of the SBF.

On the other hand, Section 131, as amended by R.A. No. 9334, now provides that such taxes, duties
and charges, including excise taxes, shall apply to importation of cigars and cigarettes, distilled
spirits, fermented liquors and wines into the SBF.

Without necessarily passing upon the validity of the withdrawal of the tax exemption privileges of
private respondents, it behooves this Court to state certain basic principles and observations that
should throw light on the propriety of the issuance of the writ of preliminary injunction in this case.

First. Every presumption must be indulged in favor of the constitutionality of a statute.29 The burden
of proving the unconstitutionality of a law rests on the party assailing the law.30 In passing upon the
validity of an act of a co-equal and coordinate branch of the government, courts must ever be
mindful of the time-honored principle that a statute is presumed to be valid.

Second. There is no vested right in a tax exemption, more so when the latest expression of
legislative intent renders its continuance doubtful. Being a mere statutory privilege, 31 a tax exemption
may be modified or withdrawn at will by the granting authority.32

To state otherwise is to limit the taxing power of the State, which is unlimited, plenary,
comprehensive and supreme. The power to impose taxes is one so unlimited in force and so
searching in extent, it is subject only to restrictions which rest on the discretion of the authority
exercising it.33

Third. As a general rule, tax exemptions are construed strictissimi juris against the taxpayer and
liberally in favor of the taxing authority.34 The burden of proof rests upon the party claiming
exemption to prove that it is in fact covered by the exemption so claimed. 35 In case of doubt, non-
exemption is favored.36
TAX 1 CASES

Fourth. A tax exemption cannot be grounded upon the continued existence of a statute which
precludes its change or repeal. 37 Flowing from the basic precept of constitutional law that no law is
irrepealable, Congress, in the legitimate exercise of its lawmaking powers, can enact a law
withdrawing a tax exemption just as efficaciously as it may grant the same under Section 28(4) of
Article VI38 of the Constitution. There is no gainsaying therefore that Congress can amend Section
131 of the NIRC in a manner it sees fit, as it did when it passed R.A. No. 9334.

Fifth. The rights granted under the Certificates of Registration and Tax Exemption of private
respondents are not absolute and unconditional as to constitute rights in esse – those clearly
founded on or granted by law or is enforceable as a matter of law.39

These certificates granting private respondents a "permit to operate" their respective businesses are
in the nature of licenses, which the bulk of jurisprudence considers as neither a property nor a
property right.40 The licensee takes his license subject to such conditions as the grantor sees fit to
impose, including its revocation at pleasure.41 A license can thus be revoked at any time since it
does not confer an absolute right.42

While the tax exemption contained in the Certificates of Registration of private respondents may
have been part of the inducement for carrying on their businesses in the SBF, this exemption,
nevertheless, is far from being contractual in nature in the sense that the non-impairment clause of
the Constitution can rightly be invoked.43

Sixth. Whatever right may have been acquired on the basis of the Certificates of Registration and
Tax Exemption must yield to the State’s valid exercise of police power. 44 It is well to remember that
taxes may be made the implement of the police power.45

It is not difficult to recognize that public welfare and necessity underlie the enactment of R.A. No.
9334. As petitioners point out, the now assailed provision was passed to curb the pernicious practice
of some unscrupulous business enterprises inside the SBF of using their tax exemption privileges for
smuggling purposes. Smuggling in whatever form is bad enough; it is worse when the same is
allegedly perpetrated, condoned or facilitated by enterprises hiding behind the cloak of their tax
exemption privileges.

Seventh. As a rule, courts should avoid issuing a writ of preliminary injunction which would in effect
dispose of the main case without trial.46 This rule is intended to preclude a prejudgment of the main
case and a reversal of the rule on the burden of proof since by issuing the injunctive writ, the court
would assume the proposition that petitioners are inceptively duty bound to prove.47

Eighth. A court may issue a writ of preliminary injunction only when the petitioner assailing a statute
has made out a case of unconstitutionality or invalidity strong enough, in the mind of the judge, to
overcome the presumption of validity, in addition to a showing of a clear legal right to the remedy
sought.48

Thus, it is not enough that petitioners make out a case of unconstitutionality or invalidity to overcome
the prima facie presumption of validity of a statute; they must also be able to show a clear legal right
that ought to be protected by the court. The issuance of the writ is therefore not proper when the
complainant’s right is doubtful or disputed.49

Ninth. The feared injurious effects of the imposition of duties, charges and taxes on imported cigars,
cigarettes, distilled spirits, fermented liquors and wines on private respondents’ businesses cannot
possibly outweigh the dire consequences that the non-collection of taxes, not to mention the
unabated smuggling inside the SBF, would wreak on the government. Whatever damage would
befall private respondents must perforce take a back seat to the pressing need to curb smuggling
and raise revenues for governmental functions.

All told, while the grant or denial of an injunction generally rests on the sound discretion of the lower
court, this Court may and should intervene in a clear case of abuse.50

One such case of grave abuse obtained in this case when public respondent issued his Order of
May 4, 2005 and the Writ of Preliminary Injunction on May 11, 2005 51 despite the absence of a clear
and unquestioned legal right of private respondents.
TAX 1 CASES

In holding that the presumption of constitutionality and validity of R.A. No. 9334 was overcome by
private respondents for the reasons public respondent cited in his May 4, 2005 Order, he
disregarded the fact that as a condition sine qua non to the issuance of a writ of preliminary
injunction, private respondents needed also to show a clear legal right that ought to be protected.
That requirement is not satisfied in this case.

To stress, the possibility of irreparable damage without proof of an actual existing right would not
justify an injunctive relief.52

Besides, private respondents are not altogether lacking an appropriate relief under the law. As
petitioners point out in their Petition53 before this Court, private respondents may avail themselves of
a tax refund or tax credit should R.A. No. 9334 be finally declared invalid.

Indeed, Sections 20454 and 22955 of the NIRC provide for the recovery of erroneously or illegally
collected taxes which would be the nature of the excise taxes paid by private respondents should
Section 6 of R.A. No. 9334 be declared unconstitutional or invalid.

It may not be amiss to add that private respondents can also opt not to import, or to import less of,
those items which no longer enjoy tax exemption under R.A. No. 9334 to avoid the payment of taxes
thereon.

The Court finds that public respondent had also ventured into the delicate area which courts are
cautioned from taking when deciding applications for the issuance of the writ of preliminary
injunction. Having ruled preliminarily against the prima facie validity of R.A. No. 9334, he assumed in
effect the proposition that private respondents in their petition for declaratory relief were duty bound
to prove, thereby shifting to petitioners the burden of proving that R.A. No. 9334 is not
unconstitutional or invalid.

In the same vein, the Court finds public respondent to have overstepped his discretion when he
arbitrarily fixed the injunction bond of the SBF enterprises at only P1million.

The alleged sparseness of the testimony of Indigo Corporation’s representative56 on the injury to be
suffered by private respondents may be excused because evidence for a preliminary injunction need
not be conclusive or complete. Nonetheless, considering the number of private respondent
enterprises and the volume of their businesses, the injunction bond is undoubtedly not sufficient to
answer for the damages that the government was bound to suffer as a consequence of the
suspension of the implementation of the assailed provisions of R.A. No. 9334.

Rule 58, Section 4(b) provides that a bond is executed in favor of the party enjoined to answer for all
damages which it may sustain by reason of the injunction. The purpose of the injunction bond is to
protect the defendant against loss or damage by reason of the injunction in case the court finally
decides that the plaintiff was not entitled to it, and the bond is usually conditioned accordingly.57

Recalling this Court’s pronouncements in Olalia v. Hizon58 that:

x x x [T]here is no power the exercise of which is more delicate, which requires greater
caution, deliberation and sound discretion, or more dangerous in a doubtful case, than the
issuance of an injunction. It is the strong arm of equity that should never be extended unless
to cases of great injury, where courts of law cannot afford an adequate or commensurate
remedy in damages.

Every court should remember that an injunction is a limitation upon the freedom of action of
the defendant and should not be granted lightly or precipitately. It should be granted only
when the court is fully satisfied that the law permits it and the emergency demands it,

it cannot be overemphasized that any injunction that restrains the collection of taxes, which is the
inevitable result of the suspension of the implementation of the assailed Section 6 of R.A. No. 9334,
is a limitation upon the right of the government to its lifeline and wherewithal.

The power to tax emanates from necessity; without taxes, government cannot fulfill its mandate of
promoting the general welfare and well-being of the people. 59 That the enforcement of tax laws and
the collection of taxes are of paramount importance for the sustenance of government has been
TAX 1 CASES

repeatedly observed. Taxes being the lifeblood of the government that should be collected without
unnecessary hindrance,60 every precaution must be taken not to unduly suppress it.

Whether this Court must issue the writ of prohibition, suffice it to stress that being possessed of the
power to act on the petition for declaratory relief, public respondent can proceed to determine the
merits of the main case. To halt the proceedings at this point may be acting too prematurely and
would not be in keeping with the policy that courts must decide controversies on the merits.

Moreover, lacking the requisite proof of public respondent’s alleged partiality, this Court has no
ground to prohibit him from proceeding with the case for declaratory relief. For these reasons,
prohibition does not lie.

WHEREFORE, the Petition is PARTLY GRANTED. The writ of certiorari to nullify and set aside the
Order of May 4, 2005 as well as the Writ of Preliminary Injunction issued by respondent Judge
Caguioa on May 11, 2005 is GRANTED. The assailed Order and Writ of Preliminary Injunction are
hereby declared NULL AND VOID and accordingly SET ASIDE. The writ of prohibition prayed for is,
however, DENIED.

SO ORDERED

• CIR vs Hon Santos GR 119252, August 18, 1997

G.R. No. 119252 August 18, 1997

COMMISSIONER OF INTERNAL REVENUE and COMMISSIONER OF CUSTOMS, petitioners,

vs.
HON. APOLINARIO B. SANTOS, in his capacity as Presiding Judge of the Regional Trial
Court, Branch 67, Pasig City; ANTONIO M. MARCO; JEWELRY BY MARCO & CO., INC., and
GUILD OF PHILIPPINE JEWELLERS, INC., respondents.

HERMOSISIMA, JR., J.:
TAX 1 CASES

Of grave concern to this Court is the judicial pronouncement of the court a quo that certain
provisions of the Tariff & Customs Code and the National Internal Revenue Code are
unconstitutional. This provokes the issue: Can the Regional Trial Courts declare a law inoperative
and without force and effect or otherwise unconstitutional? If it can, under what circumstances?

In this petition, the Commissioner of Internal Revenue and the Commissioner of Customs jointly
seek the reversal of the Decision,  dated February 16, 1995, of herein public respondent, Hon.
1

Apolinario B. Santos, Presiding Judge of Branch 67 of the Regional Trial Court of Pasig City.

The following facts, concisely related in the petition  of the Office of the Solicitor General, appear to
2

be undisputed:

1. Private respondent Guild of Philippine Jewelers, Inc., is an association of Filipino

jewelers engaged in the manufacture of jewelries (sic) and allied undertakings.
Among its members are Hans Brumann, Inc., Miladay Jewels, Inc., Mercelles, Inc.,
Solid Gold International Traders, Inc., Diagem Trading Corporation, and private
respondent Jewelry by Marco & Co., Inc. Private respondent Antonio M. Marco is the
President of the Guild.

2. On August 5, 1988, Felicidad L. Viray, then Regional Director, Region No. 4-A of
the Bureau of Internal Revenue, acting for and in behalf of the Commissioner of
Internal Revenue, issued Regional Mission Order No. 109-88 to BIR officers, led by
Eliseo Corcega, to conduct surveillance, monitoring, and inventory of all imported
articles of Hans Brumann, Inc., and place the same under preventive embargo. The
duration of the mission was from August 8 to August 20, 1988 (Exhibit "1"; Exhibit
"A").

3. On August 17, 1988, pursuant to the aforementioned Mission Order, the BIR
officers proceeded to the establishment of Hans Brumann, Inc., served the Mission
Order, and informed the establishment that they were going to make an inventory of
the articles involved to see if the proper taxes thereon have been paid. They then
made an inventory of the articles displayed in the cabinets with the assistance of an
employee of the establishment. They listed down the articles, which list was signed
by the assistant employee. They also requested the presentation of proof of
necessary payments for excise tax and value-added tax on said articles (pp. 10-15,
TSN, April 12, 1993, Exhibits "2", "2-A", "3", "3-A").

4. The BIR officers requested the establishment not to sell the articles until it can be
proven that the necessary taxes thereon have been paid. Accordingly, Mr. Hans
Brumann, the owner of the establishment, signed a receipt for Goods, Articles, and
Things Seized under Authority of the National Internal Revenue Code (dated August
17, 1988), acknowledging that the articles inventoried have been seized and left in
his possession, and promising not to dispose of the same without authority of the
Commissioner of Internal Revenue pending investigation. 3

5. Subsequently, BIR officer Eliseo Corcega submitted to his superiors a report of the
inventory conducted and a computation of the value-added tax and ad valorem tax
on the articles for evaluation and disposition.
4

6. Mr. Hans Brumann, the owner of the establishment, never filed a protest with the
BIR on the preventive embargo of the articles. 5

7. On October 17, 1988, Letter of Authority No. 0020596 was issued by Deputy
Commissioner Eufracio D. Santos to BIR officers to examine the books of accounts
and other accounting records of Hans Brumann, Inc., for "stocktaking investigation
for excise tax purposes for the period January 1, 1988 to present" (Exhibit "C"). In a
letter dated October 27, 1988, in connection with the physical count of the inventory
(stocks on hand) pursuant to said Letter of Authority, Hans Brumann, Inc. was
requested to prepare and make available to the BIR the documents indicated therein
(Exhibit "D").

8. Hans Brumann, Inc., did not produce the documents requested by the BIR. 6
TAX 1 CASES

9. Similar Letter of Authority were issued to BIR officers to examine the books of
accounts and other accounting records of Miladay Jewels, Inc., Mercelles, Inc., Solid
Gold International Traders, Inc., (Exhibits "E", "G" and "N") and Diagem Trading
Corporation  for "stocktaking/investigation far excise tax purpose for the period
7

January 1, 1988 to present."

10. In the case of Miladay Jewels, Inc. and Mercelles, Inc., there is no account of
what actually transpired in the implementation of the Letters of Authority.

11. In the case of Solid Gold International Traders Corporation, the BIR officers
made an inventory of the articles in the establishment.  The same is true with respect
8

to Diagem Traders Corporation. 9

12. On November 29, 1988, private respondents Antonio M. Marco and Jewelry By
Marco & Co., Inc. filed with the Regional Trial Court, National Capital Judicial Region,
Pasig City, Metro Manila, a petition for declaratory relief with writ of preliminary
injunction and/or temporary restraining order against herein petitioners and Revenue
Regional Director Felicidad L. Viray (docketed as Civil Case No. 56736) praying that
Sections 126, 127(a) and (b) and 150(a) of the National Internal Revenue Code and
Hdg. No. 71.01, 71.02, 71.03, and 71.04, Chapter 71 of the Tariff and Customs Code
of the Philippines be declared unconstitutional and void, and that the Commissioner
of Internal Revenue and Customs be prevented or enjoined from issuing mission
orders and other orders of similar nature. . . .

13. On February 9, 1989, herein petitioners filed their answer to the petition. . . .

14 On October 16, 1989, private respondents filed a Motion with Leave to Amend
Petition by including as petitioner the Guild of Philippine Jewelers, Inc., which motion
was granted. . . .

15. The case, which was originally assigned to Branch 154, was later reassigned to
Branch 67.

16. On February 16, 1995, public respondents rendered a decision, the dispositive
portion of which reads:

In view of the foregoing reflections, judgment is hereby rendered, as

follows:

1. Declaring Section 104 of the Tariff and the

Customs Code of the Philippines, Hdg. 71.01, 71.02,
71.03, and 71.04, Chapter 71 as amended by
Executive Order No. 470, imposing three to ten (3%
to 10%) percent tariff and customs duty on natural
and cultured pearls and precious or semi-precious
stones, and Section 150 par. (a) the National Internal
Revenue Code of 1977, as amended, renumbered
and rearranged by Executive Order 273, imposing
twenty (20%) percent excise tax on jewelry, pearls
and other precious stones, as INOPERATIVE and
WITHOUT FORCE and EFFECT insofar as
petitioners are concerned.

2. Enforcement of the same is hereby enjoined.

No cost.

SO ORDERED.

Section 150 (a) of Executive Order No. 273 reads:

Sec. 150. Non-essential goods. — There shall be levied, assessed and collected a
tax equivalent to 20% based on the wholesale price or the value of importation used
TAX 1 CASES

by the Bureau of Customs in determining tariff and customs duties; net of the excise
tax and value-added tax, of the following goods:

(a) All goods commonly or commercially known as jewelry, whether

real or imitation, pearls, precious and semi-precious stones and
imitations thereof; goods made of, or ornamented, mounted and fitted
with, precious metals or imitations thereof or ivory (not including
surgical and dental instruments, silver-plated wares, frames or
mountings for spectacles or eyeglasses, and dental gold or gold
alloys and other precious metals used in filling, mounting or fitting of
the teeth); opera glasses and lorgnettes. The term "precious metals"
shall include platinum, gold, silver, and other metals of similar or
greater value. The term "imitations thereof" shall include platings and
alloys of such metals.

Section 150 (a) of Executive Order No. 273, which took effect on January 1, 1988, amended the
then Section 163 (a) of the Tax Code of 1986 which provided that:

Sec. 163. Percentage tax on sales of non-essential articles. — There shall be levied,
assessed and collected, once only on every original sale, barter, exchange or similar
transaction for nominal or valuable consideration intended to transfer ownership of,
or title to, the articles herein below enumerated a tax equivalent to 50% of the gross
value in money of the articles so sold, bartered, exchanged or transferred, such tax
to be paid by the manufacturer or producer:

(a) All articles commonly or commercially known as jewelry, whether

real or imitation, pearls, precious and semi-precious stones, and
imitations thereof, articles made of, or ornamented, mounted or fitted
with, precious metals or imitations thereof or ivory (not including
surgical and dental instruments, silver-plated wares, frames or
mounting for spectacles or eyeglasses, and dental gold or gold alloys
and other precious metal used in filling, mounting or fitting of the
teeth); opera glasses, and lorgnettes. The term "precious metals"
shall include platinum, gold, silver, and other metals of similar or
greater value. The term "imitations thereof" shall include platings and
alloys of such metals;

Section 163 (a) of the 1986 Tax Code was formerly Section 194(a) of the 1977 Tax Code and
Section 184(a) of the Tax code, as amended by Presidential Decree No. 69, which took effect on
January 1, 1974.

It will be noted that, while under the present law, jewelry is subject to a 20% excise tax in addition to
a 10% value-added tax under the old law, it was subjected to 50% percentage tax. It was even
subjected to a 70% percentage tax under then Section 184(a) of the Tax Code, as amended by P.D.
69.

Section 104, Hdg. Nos. 17.01, 17.02, 17.03 and 17.04, Chapter 71 of the Tariff and Customs Code,
as amended by Executive Order No. 470, dated July 20, 1991, imposes import duty on natural or
cultured pearls and precious or semi-precious stones at the rate of 3% to 10% to be applied in
stages from 1991 to 1994 and 30% in 1995.

Prior to the issuance of E.O. 470, the rate of import duty in 1988 was 10% to 50% when the petition
was filed in the court a quo.

In support of their petition before the lower court, the private respondents submitted a position paper
purporting to be an exhaustive study of the tax rates on jewelry prevailing in other Asian countries, in
comparison to tax rates levied on the same in the Philippines.  10

The following issues were thus raised therein:

1. Whether or not the Honorable Court has jurisdiction over the subject matter of the
petition.
TAX 1 CASES

2. Whether the petition states a cause of action or whether the petition alleges a
justiciable controversy between the parties.

3. Whether Section 150, par. (a) of the NIRC and Section 104, Hdg. 71.01, 71.02,
71.03 and 71.04 of the Tariff and Customs Code are unconstitutional.

4. Whether the issuance of the Mission Order and Letters of Authority is valid and
legal.

In the assailed decision, the public respondent held indeed that the Regional Trial Court has
jurisdiction to take cognizance of the petition since "jurisdiction over the nature of the suit is
conferred by law and it is determine[d] through the allegations in the petition," and that the "Court of
Tax Appeals has no jurisdiction to declare a statute unconstitutional much less issue writs
of certiorari and prohibition in order to correct acts of respondents allegedly committed with grave
abuse of discretion amounting to lack of jurisdiction."

As to the second issue, the public respondent, made the holding that there exists a justiciable
controversy between the parties, agreeing with the statements made in the position paper presented
by the private respondents, and considering these statements to be factual evidence, to wit:

Evidence for the petitioners indeed reveals that government taxation policy treats
jewelry, pearls, and other precious stones and metals as non-essential luxury items
and therefore, taxed heavily; that the atmospheric cost of taxation is killing the local
manufacturing jewelry industry because they cannot compete with neighboring and
other countries where importation and manufacturing of jewelry is not taxed heavily,
if not at all; that while government incentives and subsidies exit, local manufacturers
cannot avail of the same because officially many of them are unregistered and are
unable to produce the required official documents because they operate
underground, outside the tariff and tax structure; that local jewelry manufacturing is
under threat of extinction, otherwise discouraged, while domestic trading has
become more attractive; and as a consequence, neighboring countries, such as:
Hongkong, Singapore, Malaysia, Thailand, and other foreign competitors supplying
the Philippine market either through local channels or through the black market for
smuggled goods are the ones who are getting business and making money, while
members of the petitioner Guild of Philippine Jewelers, Inc. are constantly subjected
to bureaucratic harassment instead of being given by the government the necessary
support in order to survive and generate revenue for the government, and most of all
fight competitively not only in the domestic market but in the arena of world market
where the real contest is.

Considering the allegations of fact in the petition which were duly proven during the
trial, the Court holds that the petition states a cause of action and there exists a
justiciable controversy between the parties which would require determination of
constitutionality of the laws imposing excise tax and customs duty on
jewelry.   (emphasis ours)
11

The public respondent, in addressing the third issue, ruled that the laws in question are confiscatory
and oppressive. Again, virtually adopting verbatim the reasons presented by the private respondents
in their position paper, the lower court stated:

The Court finds that indeed government taxation policy trats(sic) hewelry(sic) as non-
essential luxury item and therefore, taxed heavily. Aside from the ten (10%) percent
value added tax (VAT), local jewelry manufacturers contend with the (manufacturing)
excise tax of twenty (20%) percent (to be applied in stages) customs duties on
imported raw materials, the highest in the Asia-Pacific region. In contrast, imported
gemstones and other precious metals are duty free in Hongkong, Thailand, Malaysia
and Singapore.

The Court elaborates further on the experiences of other countries in their treatment
of the jewelry sector.

MALAYSIA
TAX 1 CASES

Duties and taxes on imported gemstones and gold and the sales tax on jewelry were
abolished in Malaysia in 1984. They were removed to encourage the development of
Malaysia's jewelry manufacturing industry and to increase exports of jewelry.

THAILAND

Gems and jewelry are Thailand's ninth most important export earner. In the past, the
industry was overlooked by successive administrations much to the dismay of those
involved in developing trade. Prohibitive import duties and sales tax on precious
gemstones restricted the growht (sic) of the industry, resulting in most of the
business being unofficial. It was indeed difficult for a government or businessman to
promote an industry which did not officially exist.

Despite these circumstances, Thailand's Gem business kept growing up in (sic)

businessmen began to realize it's potential. In 1978, the government quietly removed
the severe duties on precious stones, but imposed a sales tax of 3.5%. Little was
said or done at that time as the government wanted to see if a free trade in
gemstones and jewelry would increase local manufacturing and exports or if it would
mean more foreign made jewelry pouring into Thailand. However, as time
progressed, there were indications that local manufacturing was indeed being
encouraged and the economy was earning mom from exports. The government soon
removed the 3% sales tax too, putting Thailand at par with Hongkong and Singapore.
In these countries, there are no more import duties and sales tax on gems. (Cited in
pages 6 and 7 of Exhibit "M". The Center for Research and Communication in
cooperation with the Guild of Philippine Jewelers, Inc., June 1986).

To illustrate, shown hereunder is the Philippine tariff and tax structure on jewelry and
other precious and semi-precious stones compared to other neighboring countries, to
wit:

Tariff on imported
Jewelry and (Manufacturing) Sales Tax 10% (VAT)
precious stones Excise tax

Philippines 3% to 10% to be 20% 10% VAT

applied in stages

Malaysia None None None

Thailand None None None

Singapore None None None

Hongkong None None None

In this connection, the present tariff and tax structure increases manufacturing costs
and renders the local jewelry manufacturers uncompetitive against other countries
even before they start manufacturing and trading. Because of the prohibitive cast
(sic) of taxation, most manufacturers source from black market for smuggled goods,
and that while manufacturers can avail of tax exemption and/or tax credits from the
(manufacturing) excise tax, they have no documents to present when filing this
exemption because, or pointed out earlier, most of them source their raw materials
from the block market, and since many of them do not legally exist or operate
onofficially (sic), or underground, again they have no records (receipts) to indicate
where and when they will utilize such tax credits. (Cited in Exhibit "M" —
Buencamino Report).

Given these constraints, the local manufacturer has no recourse but to the back door
for smuggled goods if only to be able to compete even ineffectively, or cease
manufacturing activities and instead engage in the tradinf (sic) of smuggled finished
jewelry.
TAX 1 CASES

Worthy of note is the fact that indeed no evidence was adduced by respondents to
disprove the foregoing allegations of fact. Under the foregoing factual circumstances,
the Court finds the questioned statutory provisions confiscatory and destructive of the
proprietary right of the petitioners to engage in business in violation of Section 1,
Article III of the Constitution which states, as follows:

No person shall be deprived of the life, liberty, or property without due process of law
. . . . 
12

Anent the fourth and last issue, the herein public respondent did not find it necessary to rule thereon,
since, in his opinion, "the same has been rendered moot and academic by the aforementioned
pronouncement."  13

The petitioners now assail the decision rendered by the public respondent, contending that the latter
has no authority to pass judgment upon the taxation policy of the government. In addition, the
petitioners impugn the decision in question by asserting that there was no showing that the tax laws
on jewelry are confiscatory and destructive of private respondent's proprietary rights.

We rule in favor of the petitioners.

It is interesting to note that public respondent, in the dispositive portion of his decision, perhaps
keeping in mind his limitations under the law as a trial judge, did not go so far as to declare the laws
in question to be unconstitutional. However, therein he declared the laws to be inoperative and
without force and effect insofar as the private respondents are concerned. But, respondent judge, in
the body of his decision, unequivocally but wrongly declared the said provisions of law to be violative
of Section 1, Article III of the Constitution. In fact, in their Supplemental Comment on the Petition for
Review,   the private respondents insist that Judge Santos, in his capacity as judge of the Regional
14

Trial Court, acted within his authority in passing upon the issues, to wit:

A perusal of the appealed decision would undoubtedly disclose that public

respondent did not pass judgment on the soundness or wisdom of the government's
tax policy on jewelry. True, public respondent, in his questioned decision,
observed, inter alia, that indeed government tax policy treats jewelry as non-essential
item, and therefore, taxed heavily; that the present tariff and tax structure increase
manufacturing cost and renders the local jewelry manufacturers uncompetitive
against other countries even before they start manufacturing and trading; that many
of the local manufacturers do not legally exist or operate unofficially or underground;
and that the manufacturers have no recourse but to the back door for smuggled
goods if only to be able to compete even if ineffectively or cease manufacturing
activities.

BUT, public respondent did not, in any manner, interfere with or encroach upon the
prerogative of the legislature to determine what should be the tax policy on jewelry.
On the other hand, the issue raised before, and passed upon by, the public
respondent was whether or not Section 150, paragraph (a) of the National Internal
Revenue Code (NIRC) and Section 104, Hdg. 71.01, 71.02, 71.03 and 71.04 of the
Tariff and Customs Code are unconstitutional, or differently stated, whether or not
the questioned statutory provisions affect the constitutional right of private
respondents to engage in business.

It is submitted that public respondent confined himself on this issue which is clearly a
judicial question.

We find it incongruous, in the face of the sweeping pronouncements made by Judge Santos in his
decision, that private respondents can still persist in their argument that the former did not overreach
the restrictions dictated upon him by law. There is no doubt in the Court's mind, despite protestations
to the contrary, that respondent judge encroached upon matters properly falling within the province
of legislative functions. In citing as basis for his decision unproven comparative data pertaining to
differences between tax rates of various Asian countries, and concluding that the jewelry industry in
the Philippines suffers as a result, the respondent judge took it upon himself to supplant legislative
policy regarding jewelry taxation. In advocating the abolition of local tax and duty on jewelry simply
because other countries have adopted such policies, the respondent judge overlooked the fact that
such matters are not for him to decide. There are reasons why jewelry, a non-essential item, is taxed
TAX 1 CASES

as it is in this country, and these reasons, deliberated upon by our legislature, are beyond the reach
of judicial questioning. As held in Macasiano vs. National Housing Authority:  15

The policy of the courts is to avoid ruling on constitutional questions and to presume
that the acts of the political departments are valid in the absence of a clear and
unmistakable showing to the contrary. To doubt is to sustain. This presumption is
based on the doctrine of separation of powers which enjoins upon each department a
becoming respect for the acts of the other departments. The theory is that as the
joint act of Congress and the President of the Philippines, a law has been carefully
studied and determined to be in accordance with the fundamental low before it was
finally enacted. (emphasis ours)

What we see here is a debate on the WISDOM of the laws in question. This is a matter on which the
RTC is not competent to rule.   As Cooley observed: "Debatable questions are for the legislature to
16

decide. The courts do not sit to resolve the merits of conflicting issues."   In Angara vs. Electoral
17

Commission,   Justice Laurel made it clear that "the judiciary does not pass upon questions of
18

wisdom, justice or expediency of legislation." And fittingly so, for in the exercise of judicial power, we
are allowed only "to settle actual controversies involving rights which are legally demandable and
enforceable", and may not annul an act of the political departments simply because we feel it is
unwise or impractical.   This is not to say that Regional Trial Courts have no power whatsoever to
19

declare a law unconstitutional. In J.M. Tuason and Co. v. Court of Appeals,   we said that "[p]lainly
20

the Constitution contemplates that the inferior courts should have jurisdiction in cases involving
constitutionality of any treaty or law, for it speaks of appellate review of final judgments of inferior
courts in cases where such constitutionality happens to be in issue." This authority of lower courts to
decide questions of constitutionality in the first instance reaffirmed in Ynos v. Intermediate Court of
Appeals.   But this authority does not extend to deciding questions which pertain to legislative policy.
21

The trial court is not the proper forum for the ventilation of the issues raised by the private
respondents. The arguments they presented focus on the wisdom of the provisions of law which they
seek to nullify. Regional Trial Courts can only look into the validity of a provision, that is, whether or
not it has been passed according to the procedures laid down by law, and thus cannot inquire as to
the reasons for its existence. Granting arguendo that the private respondents may have provided
convincing arguments why the jewelry industry in the Philippines should not be taxed as it is, it is to
the legislature that they must resort to for relief, since with the legislature primarily lies the discretion
to determine the nature (kind), object (purpose), extent (rate), coverage (subjects) and situs (place)
of taxation. This Court cannot freely delve into those matters which, by constitutional fiat, rightly rest
on legislative judgment.  22

As succinctly put in Lim vs. Pacquing:   "Where a controversy may be settled on a platform other
23

than one involving constitutional adjudication, the court should exercise becoming modesty and
avoid the constitutional question." As judges, we can only interpret and apply the law and, despite
our doubts about its wisdom, cannot repeal or amend it.  24

The respondents presented an exhaustive study on the tax rates on jewelry levied by different Asian
countries. This is meant to convince us that compared to other countries, the tax rates imposed on
said industry in the Philippines is oppressive and confiscatory. This Court, however, cannot
subscribe to the theory that the tax rates of other countries should be used as a yardstick in
determining what may be the proper subjects of taxation in our own country. It should be pointed out
that in imposing the aforementioned taxes and duties, the State, acting through the legislative and
executive branches, is exercising its sovereign prerogative. It is inherent in the power to tax that the
State be free to select the subjects of taxation, and it has been repeatedly held that "inequalities
which result from a singling out or one particular class for taxation, or exemption, infringe no
constitutional limitation."  25

WHEREFORE, premises considered, the petition is hereby GRANTED, and the Decision in Civil
Case No. 56736 is hereby REVERSED and SET ASIDE. No costs.

SO ORDERED.
TAX 1 CASES

B. Nature of the Taxing Power

• ABAKADA vs Ermita GR 168056 Sept. 1, 2006
• CIR vs Fortune Tobacco, GR 167274-75 Jul 21, 2008
• Manila Electric vs Province of Laguna GR 131359 May 5, 1999
• Garcia vs Executive Secretary GR 101273 July 3, 1992
• First Development Council vs Colon Heritage GR 203754 Jun 16, 2015
• Secretary of Finance vs Philippine Tobacco Institute GR 210251 April 17, 2017