Gen Principles Compiled Cases

809 Phil.
315
EN BANC
[ G.R. No. 199669, April 25, 2017 ]
SOUTHERN LUZON DRUG CORPORATION, PETITIONER, V. THE
DEPARTMENT OF SOCIAL WELFARE AND DEVELOPMENT, THE
NATIONAL COUNCIL FOR THE WELFARE OF DISABLED PERSONS,
THE DEPARTMENT OF FINANCE, AND THE BUREAU OF INTERNAL
REVENUE, RESPONDENTS.
DECISION
REYES, J.:
Before the Court is a Petition for Review on Certiorari[1] under Rule 45 of the Rules of Court,
assailing the Decision[2] dated June 17, 2011, and Resolution[3] dated November 25, 2011 of the
Court of Appeals (CA) in CA-G.R. SP No. 102486, which dismissed the petition for prohibition
filed by Southern Luzon Drug Corporation (petitioner) against the Department of Social Welfare
and Development (DSWD), the National Council for the Welfare of Disabled Persons
(NCWDP) (now National Council on Disability Affairs or NCDA), the Department of Finance
(DOF) and the Bureau of Internal Revenue (collectively, the respondents), which sought to
prohibit the implementation of Section 4(a) of Republic Act (R.A.) No. 9257, otherwise known
as the "Expanded Senior Citizens Act of 2003" and Section 32 of R.A. No. 9442, which amends
the "Magna Carta for Disabled Persons," particularly the granting of 20% discount on the
purchase of medicines by senior citizens and persons with disability (PWD), respectively, and
treating them as tax deduction.
The petitioner is a domestic corporation engaged in the business of drugstore operation in the
Philippines while the respondents are government agencies, office and bureau tasked to monitor
compliance with R.A. Nos. 9257 and 9442, promulgate implementing rules and regulations for
their effective implementation, as well as prosecute and revoke licenses of erring
establishments.
Factual Antecedents
On April 23, 1992, R.A. No. 7432, entitled "An Act to Maximize the Contribution of Senior
Citizens to Nation-Building, Grant Benefits and Special Privileges and For Other Purposes,"
was enacted. Under the said law, a senior citizen, who must be at least 60 years old and has an
annual income of not more than P60,000.00,[4] may avail of the privileges provided in Section 4
thereof, one of which is 20% discount on the purchase of medicines. The said provision states:
Sec. 4. Privileges for the Senior Citizen. – x x x:

a) the grant of twenty percent (20%) discount from all establishments relative to
utilization of transportation services, hotels and similar lodging establishment,
restaurants and recreation centers and purchase of medicine anywhere in the country:
Provided, That private establishments may claim the cost as tax credit[.]
x x x x (Emphasis ours)
To recoup the amount given as discount to qualified senior citizens, covered establishments can
claim an equal amount as tax credit which can be applied against the income tax due from them.
On February 26, 2004, then President Gloria Macapagal-Arroyo signed R.A. No. 9257,
amending some provisions of R.A. No. 7432. The new law retained the 20% discount on the
purchase of medicines but removed the annual income ceiling thereby qualifying all senior
citizens to the privileges under the law. Further, R.A. No. 9257 modified the tax treatment of the
discount granted to senior citizens, from tax credit to tax deduction from gross income,
computed based on the net cost of goods sold or services rendered. The pertinent provision, as
amended by R.A. No. 9257, reads as follows:
SEC. 4. Privileges for the Senior Citizens. – The senior citizens shall be entitled to
the following:
(a) the grant of twenty percent (20%) discount from all establishments
relative to the utilization of services in hotels and similar lodging
establishments, restaurants and recreation centers, and purchase of
medicines in all establishments for the exclusive use or enjoyment of
senior citizens, including funeral and burial services for the death of
senior citizens;
xxxx
The establishment may claim the discounts granted under (a), (f), (g) and (h) as
tax deduction based on the net cost of the goods sold or services rendered:
Provided, That the cost of the discount shall be allowed as deduction from gross
income for the same taxable year that the discount is granted. Provided, further, That
the total amount of the claimed tax deduction net of value added tax if applicable,
shall be included in their gross sales receipts for tax purposes and shall be subject to
proper documentation and to the provisions of the National Internal Revenue Code,
as amended. (Emphasis ours)
On May 28, 2004, the DSWD issued the Implementing Rules and Regulations (IRR) of R.A.
No. 9257. Article 8 of Rule VI of the said IRR provides:
Article 8. Tax Deduction of Establishments. - The establishment may claim the

discounts granted under Rule V, Section 4 – Discounts for Establishments; Section 9,
Medical and Dental Services in Private Facilities and Sections 10 and 11 – Air, Sea
and Land Transportation as tax deduction based on the net cost of the goods sold or
services rendered. Provided, That the cost of the discount shall be allowed as
deduction from gross income for the same taxable year that the discount is
granted; Provided, further, That the total amount of the claimed tax deduction net of
value-added tax if applicable, shall be included in their gross sales receipts for tax
purposes and shall be subject to proper documentation and to the provisions of the
National Internal Revenue Code, as amended; Provided, finally, that the
implementation of the tax deduction shall be subject to the Revenue Regulations to
be issued by the Bureau of Internal Revenue (BIR) and approved by the Department
of Finance (DOF). (Emphasis ours)
The change in the tax treatment of the discount given to senior citizens did not sit well with
some drug store owners and corporations, claiming it affected the profitability of their business.
Thus, on January 13, 2005, Carlos Superdrug Corporation (Carlos Superdrug), together with
other corporation and proprietors operating drugstores in the Philippines, filed a Petition for
Prohibition with Prayer for Temporary Restraining Order (TRO) and/or Preliminary Injunction
before this Court, entitled Carlos Superdrug Corporation v. DSWD,[5] docketed as G.R. No.
166494, assailing the constitutionality of Section 4(a) of R.A. No. 9257 primarily on the ground
that it amounts to taking of private property without payment of just compensation. In a
Decision dated June 29, 2007, the Court upheld the constitutionality of the assailed provision,
holding that the same is a legitimate exercise of police power. The relevant portions of the
decision read, thus:
The law is a legitimate exercise of police power which, similar to the power of
eminent domain, has general welfare for its object. Police power is not capable of an
exact definition, but has been purposely veiled in general terms to underscore its
comprehensiveness to meet all exigencies and provide enough room for an efficient
and flexible response to conditions and circumstances, thus assuring the greatest
benefits. Accordingly, it has been described as "the most essential, insistent and the
least limitable of powers, extending as it does to all the great public needs." It is "
[t]he power vested in the legislature by the constitution to make, ordain, and
establish all manner of wholesome and reasonable laws, statutes, and ordinances,
either with penalties or without, not repugnant to the constitution, as they shall judge
to be for the good and welfare of the commonwealth, and of the subjects of the
same."
For this reason, when the conditions so demand as determined by the legislature,
property rights must bow to the primacy of police power because property rights,
though sheltered by due process, must yield to general welfare.
xxxx
Moreover, the right to property has a social dimension. While Article XIII of the
Constitution provides the precept for the protection of property, various laws and
jurisprudence, particularly on agrarian reform and the regulation of contracts and
public utilities, continuously serve as a reminder that the right to property can be
relinquished upon the command of the State for the promotion of public good.
Undeniably, the success of the senior citizens program rests largely on the support
imparted by petitioners and the other private establishments concerned. This being
the case, the means employed in invoking the active participation of the private
sector, in order to achieve the purpose or objective of the law, is reasonably and
directly related. Without sufficient proof that Section 4(a) of R.A. No. 9257 is
arbitrary, and that the continued implementation of the same would be
unconscionably detrimental to petitioners, the Court will refrain from quashing a
legislative act.
WHEREFORE, the petition is DISMISSED for lack of merit.[6] (Citations omitted)
On August 1, 2007, Carlos Superdrug filed a motion for reconsideration of the foregoing
decision. Subsequently, the Court issued Resolution dated August 21, 2007, denying the said
motion with finality.[7]
Meanwhile, on March 24, 1992, R.A. No. 7277 pertaining to the "Magna Carta for Disabled
Persons" was enacted, codifying the rights and privileges of PWDs. Thereafter, on April 30,
2007, R.A. No. 9442 was enacted, amending R.A. No. 7277. One of the salient amendments in
the law is the insertion of Chapter 8 in Title 2 thereof, which enumerates the other privileges
and incentives of PWDs, including the grant of 20% discount on the purchase of medicines.
Similar to R.A. No. 9257, covered establishments shall claim the discounts given to PWDs as
tax deductions from the gross income, based on the net cost of goods sold or services rendered.
Section 32 of R.A. No. 9442 reads:
CHAPTER 8. Other Privileges and Incentives
SEC. 32. Persons with disability shall be entitled to the following:
xxxx
(c) At least twenty percent (20%) discount for the purchase of medicines in all
drugstores for the exclusive use or enjoyment of persons with disability;
xxxx
The establishments may claim the discounts granted in sub-sections (a), (b), (c),
(e), (f) and (g) as tax deductions based on the net cost of the goods sold or
services rendered: Provided, however, That the cost of the discount shall be allowed
as deduction from gross income for the same taxable year that the discount is
granted: Provided, further, That the total amount of the claimed tax deduction net of
value-added tax if applicable, shall be included in their gross sales receipts for tax
National Internal Revenue Code (NIRC), as amended. (Emphasis ours)
Pursuant to the foregoing, the IRR of R.A. No. 9442 was promulgated by the DSWD,
Department of Education, DOF, Department of Tourism and the Department of Transportation
and Communications.[8] Sections 5.1 and 6.1.d thereof provide:
Sec. 5. Definition of Terms. For purposes of these Rules and Regulations, these terms
are defined as follows:
5.1. Persons with Disability are those individuals defined under Section
4 of RA 7277, "An Act Providing for the Rehabilitation, Self-
Development and Self-Reliance of Persons with Disability as amended
and their integration into the Mainstream of Society and for Other
Purposes." This is defined as a person suffering from restriction or
different abilities, as a result of a mental, physical or sensory impairment,
to perform an activity in a manner or within the range considered normal
for human being. Disability shall mean: (1) a physical or mental
impairment that substantially limits one or more psychological,
physiological or anatomical function of an individual or activities of such
individual; (2) a record of such an impairment; or (3) being regarded as
having such an impairment.
xxxx
6.1.d Purchase of Medicine – At least twenty percent (20%) discount on

the purchase of medicine for the exclusive use and enjoyment of persons
with disability. All drug stores, hospital, pharmacies, clinics and other
similar establishments selling medicines are required to provide at least
twenty percent (20%) discount subject to the guidelines issued by DOH
and PHILHEALTH.
On February 26, 2008, the petitioner filed a Petition for Prohibition with Application for TRO
and/or Writ of Preliminary Injunction[9] with the CA, seeking to declare as unconstitutional (a)
Section 4(a) of R.A. No. 9257, and (b) Section 32 of R.A. No. 9442 and Section 5.1 of its IRR,
insofar as these provisions only allow tax deduction on the gross income based on the net cost
of goods sold or services rendered as compensation to private establishments for the 20%
discount that they are required to grant to senior citizens and PWDs. Further, the petitioner
prayed that the respondents be permanently enjoined from implementing the assailed
provisions.
Ruling of the CA
On June 17, 2011, the CA dismissed the petition, reiterating the ruling of the Court in Carlos
Superdrug[10] particularly that Section 4(a) of R.A. No. 9257 was a valid exercise of police
power. Moreover, the CA held that considering that the same question had been raised by
parties similarly situated and was resolved in Carlos Superdrug, the rule of stare decisis stood
as a hindrance to any further attempt to relitigate the same issue. It further noted that
jurisdictional considerations also compel the dismissal of the action. It particularly emphasized
that it has no original or appellate jurisdiction to pass upon the constitutionality of the assailed
laws,[11] the same pertaining to the Regional Trial Court (RTC). Even assuming that it had
concurrent jurisdiction with the RTC, the principle of hierarchy of courts mandates that the case
be commenced and heard by the lower court.[12] The CA further ruled that the petitioner
resorted to the wrong remedy as a petition for prohibition will not lie to restrain the actions of
the respondents for the simple reason that they do not exercise judicial, quasi-judicial or
ministerial duties relative to the issuance or implementation of the questioned provisions. Also,
the petition was wanting of the allegations of the specific acts committed by the respondents
that demonstrate the exercise of these powers which may be properly challenged in a petition
for prohibition.[13]
The petitioner filed its Motion for Reconsideration[14] of the Decision dated June 17, 2011 of
the CA, but the same was denied in a Resolution[15] dated November 25, 2011.
Unyielding, the petitioner filed the instant petition, raising the following assignment of errors, to
wit:
THE CA SERIOUSLY ERRED WHEN IT RULED THAT A PETITION FOR

PROHIBITION FILED WITH THE CA IS AN IMPROPER REMEDY TO
ASSAIL THE CONSTITUTIONALITY OF THE 20% SALES DISCOUNT
FOR SENIOR CITIZENS AND PWDs;
II
THE CA SERIOUSLY ERRED WHEN IT HELD THAT THE SUPREME

COURT'S RULING IN CARLOS SUPERDRUG CONSTITUTES STARE
DECISIS;
III
THE CA SERIOUSLY ERRED ON A QUESTION OF SUBSTANCE WHEN

IT RULED THAT THE 20% SALES DISCOUNT FOR SENIOR CITIZENS
AND PWDs IS A VALID EXERCISE OF POLICE POWER. ON THE
CONTRARY, IT IS AN INVALID EXERCISE OF THE POWER OF
EMINENT DOMAIN BECAUSE IT FAILS TO PROVIDE JUST
COMPENSATION TO THE PETITIONER AND OTHER SIMILARLY
SITUATED DRUGSTORES;
IV

IT RULED THAT THE 20% SALES DISCOUNT FOR SENIOR CITIZENS
AND PWDs DOES NOT VIOLATE THE PETITIONER'S RIGHT TO
EQUAL PROTECTION OF THE LAW; and

IT RULED THAT THE DEFINITIONS OF DISABILITIES AND PWDs ARE
NOT VAGUE AND DO NOT VIOLATE THE PETITIONER'S RIGHT TO
DUE PROCESS OF LAW.[16]
Ruling of the Court
Prohibition may be filed to question

the constitutionality of a law
In the assailed decision, the CA noted that the action, although denominated as one for
prohibition, seeks the declaration of the unconstitutionality of Section 4(a) of R.A. No. 9257
and Section 32 of R.A. No. 9442. It held that in such a case, the proper remedy is not a special
civil action but a petition for declaratory relief, which falls under the exclusive original
jurisdiction of the RTC, in the first instance, and of the Supreme Court, on appeal.[17]
The Court clarifies.
Generally, the office of prohibition is to prevent the unlawful and oppressive exercise of
authority and is directed against proceedings that are done without or in excess of jurisdiction,
or with grave abuse of discretion, there being no appeal or other plain, speedy, and adequate
remedy in the ordinary course of law. It is the remedy to prevent inferior courts, corporations,
boards, or persons from usurping or exercising a jurisdiction or power with which they have not
been vested by law.[18] This is, however, not the lone office of an action for prohibition. In
Diaz, et al. v. The Secretary of Finance, et al.,[19] prohibition was also recognized as a proper
remedy to prohibit or nullify acts of executive officials that amount to usurpation of legislative
authority.[20] And, in a number of jurisprudence, prohibition was allowed as a proper action to
assail the constitutionality of a law or prohibit its implementation.
In Social Weather Stations, Inc. v. Commission on Elections,[21] therein petitioner filed a

petition for prohibition to assail the constitutionality of Section 5.4 of R.A. No. 9006, or the
"Fair Elections Act," which prohibited the publication of surveys within 15 days before an
election for national candidates, and seven days for local candidates. Included in the petition is a
prayer to prohibit the Commission on Elections from enforcing the said provision. The Court
granted the petition and struck down the assailed provision for being unconstitutional.[22]
In Social Justice Society (SJS) v. Dangerous Drugs Board, et al.,[23] therein petitioner assailed
the constitutionality of paragraphs (c), (d), (f) and (g) of Section 36 of R.A. No. 9165, otherwise
known as the "Comprehensive Dangerous Drugs Act of 2002," on the ground that they
constitute undue delegation of legislative power for granting unbridled discretion to schools and
private employers in determining the manner of drug testing of their employees, and that the
law constitutes a violation of the right against unreasonable searches and seizures. It also sought
to enjoin the Dangerous Drugs Board and the Philippine Drug Enforcement Agency from
enforcing the challenged provision.[24] The Court partially granted the petition by declaring
Section 36(f) and (g) of R.A. No. 9165 unconstitutional, and permanently enjoined the
concerned agencies from implementing them.[25]
In another instance, consolidated petitions for prohibitions[26] questioning the constitutionality

of the Priority Development Assistance Fund were deliberated upon by this Court which
ultimately granted the same.
Clearly, prohibition has been found an appropriate remedy to challenge the constitutionality of
various laws, rules, and regulations.
There is also no question regarding the jurisdiction of the CA to hear and decide a petition for
prohibition. By express provision of the law, particularly Section 9(1) of Batas Pambansa Bilang
129,[27] the CA was granted "original jurisdiction to issue writs of mandamus, prohibition,
certiorari, habeas corpus, and quo warranto, and auxiliary writs or processes, whether or not in
aid of its appellate jurisdiction." This authority the CA enjoys concurrently with RTCs and this
Court.
In the same manner, the supposed violation of the principle of the hierarchy of courts does not
pose any hindrance to the full deliberation of the issues at hand. It is well to remember that "the
judicial hierarchy of courts is not an iron-clad rule. It generally applies to cases involving
warring factual allegations. For this reason, litigants are required to [refer] to the trial courts at
the first instance to determine the truth or falsity of these contending allegations on the basis of
the evidence of the parties. Cases which depend on disputed facts for decision cannot be
brought immediately before appellate courts as they are not triers of facts. Therefore, a strict
application of the rule of hierarchy of courts is not necessary when the cases brought before the
appellate courts do not involve factual but legal questions."[28]
Moreover, the principle of hierarchy of courts may be set aside for special and important
reasons, such as when dictated by public welfare and the advancement of public policy, or
demanded by the broader interest of justice.[29] Thus, when based on the good judgment of the
court, the urgency and significance of the issues presented calls for its intervention, it should not
hesitate to exercise its duty to resolve.
The instant petition presents an exception to the principle as it basically raises a legal question
on the constitutionality of the mandatory discount and the breadth of its rightful beneficiaries.
More importantly, the resolution of the issues will redound to the benefit of the public as it will
put to rest the questions on the propriety of the granting of discounts to senior citizens and
PWDs amid the fervent insistence of affected establishments that the measure transgresses their
property rights. The Court, therefore, finds it to the best interest of justice that the instant
petition be resolved.
The instant case is not barred by

stare decisis
The petitioner contends that the CA erred in holding that the ruling in Carlos Superdrug
constitutes as stare decisis or law of the case which bars the relitigation of the issues that had
been resolved therein and had been raised anew in the instant petition. It argues that there are
substantial differences between Carlos Superdrug and the circumstances in the instant case
which take it out from the operation of the doctrine of stare decisis. It cites that in Carlos
Superdrug, the Court denied the petition because the petitioner therein failed to prove the
confiscatory effect of the tax deduction scheme as no proof of actual loss was submitted. It
believes that its submission of financial statements for the years 2006 and 2007 to prove the
confiscatory effect of the law is a material fact that distinguishes the instant case from that of
Carlos Superdrug.[30]
The Court agrees that the ruling in Carlos Superdrug does not constitute stare decisis to the
instant case, not because of the petitioner's submission of financial statements which were
wanting in the first case, but because it had the good sense of including questions that had not
been raised or deliberated in the former case of Carlos Superdrug, i.e., validity of the 20%
discount granted to PWDs, the supposed vagueness of the provisions of R.A. No. 9442 and
violation of the equal protection clause.
Nonetheless, the Court finds nothing in the instant case that merits a reversal of the earlier
ruling of the Court in Carlos Superdrug. Contrary to the petitioner's claim, there is a very slim
difference between the issues in Carlos Superdrug and the instant case with respect to the nature
of the senior citizen discount. A perfunctory reading of the circumstances of the two cases
easily discloses marked similarities in the issues and the arguments raised by the petitioners in
both cases that semantics nor careful play of words can hardly obscure.
In both cases, it is apparent that what the petitioners are ultimately questioning is not the grant
of the senior citizen discount per se, but the manner by which they were allowed to recoup the
said discount. In particular, they are protesting the change in the tax treatment of the senior
citizen discount from tax credit to being merely a deduction from gross income which they
claimed to have significantly reduced their profits.
This question had been settled in Carlos Superdrug, where the Court ruled that the change in the
tax treatment of the discount was a valid exercise of police power, thus:
Theoretically, the treatment of the discount as a deduction reduces the net income of
the private establishments concerned. The discounts given would have entered the
coffers and formed part of the gross sales of the private establishments, were it not
for R.A. No. 9257.
xxxx
A tax deduction does not offer full reimbursement of the senior citizen discount. As
such, it would not meet the definition of just compensation.
Having said that, this raises the question of whether the State, in promoting the
health and welfare of a special group of citizens, can impose upon private
establishments the burden of partly subsidizing a government program.
The Court believes so.
The Senior Citizens Act was enacted primarily to maximize the contribution of
senior citizens to nation-building, and to grant benefits and privileges to them for
their improvement and well-being as the State considers them an integral part of our
society.
The priority given to senior citizens finds its basis in the Constitution as set forth in
the law itself. Thus, the Act provides:
SEC. 2. [R.A.] No. 7432 is hereby amended to read as follows:
SEC. 1. Declaration of Policies and Objectives.— Pursuant to Article

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

the improvement of the welfare of senior citizens and to
actively seek their partnership.
To implement the above policy, the law grants a twenty percent discount to senior
citizens for medical and dental services, and diagnostic and laboratory fees;
admission fees charged by theaters, concert halls, circuses, carnivals, and other
similar places of culture, leisure and amusement; fares for domestic land, air and sea
travel; utilization of services in hotels and similar lodging establishments, restaurants
and recreation centers; and purchases of medicines for the exclusive use or
enjoyment of senior citizens. As a form of reimbursement, the law provides that
business establishments extending the twenty percent discount to senior citizens may
claim the discount as a tax deduction.
benefits. Accordingly, it has been described as "the most essential, insistent and the
least limitable of powers, extending as it does to all the great public needs." It is "
[t]he power vested in the legislature by the constitution to make, ordain, and
same."
though sheltered by due process, must yield to general welfare.[31] (Citations
omitted and emphasis in the original)
Verily, it is the bounden duty of the State to care for the elderly as they reach the point in their
lives when the vigor of their youth has diminished and resources have become scarce. Not much
because of choice, they become needing of support from the society for whom they presumably
spent their productive days and for whose betterment they exhausted their energy, know-how
and experience to make our days better to live.
In the same way, providing aid for the disabled persons is an equally important State
responsibility. Thus, the State is obliged to give full support to the improvement of the total
well-being of disabled persons and their integration into the mainstream of society.[32] This
entails the creation of opportunities for them and according them privileges if only to balance
the playing field which had been unduly tilted against them because of their limitations.
The duty to care for the elderly and the disabled lies not only upon the State, but also on the
community and even private entities. As to the State, the duty emanates from its role as parens
patriae which holds it under obligation to provide protection and look after the welfare of its
people especially those who cannot tend to themselves. Parens patriae means parent of his or
her country, and refers to the State in its role as "sovereign", or the State in its capacity as a
provider of protection to those unable to care for themselves.[33] In fulfilling this duty, the State
may resort to the exercise of its inherent powers: police power, eminent domain and power of
taxation.
In Gerochi v. Department of Energy,[34] the Court passed upon one of the inherent powers of the
state, the police power, where it emphasized, thus:
[P]olice power is the power of the state to promote public welfare by restraining and
regulating the use of liberty and property. It is the most pervasive, the least limitable,
and the most demanding of the three fundamental powers of the State. The
justification is found in the Latin maxim salus populi est suprema lex (the welfare of
the people is the supreme law) and sic utere tuo ut alienum non laedas (so use your
property as not to injure the property of others). As an inherent attribute of
sovereignty which virtually extends to all public needs, police power grants a wide
panoply of instruments through which the State, as parens patriae, gives effect to a
host of its regulatory powers. We have held that the power to "regulate" means the
power to protect, foster, promote, preserve, and control, with due regard for the
interests, first and foremost, of the public, then of the utility and of its patrons.[35]
(Citations omitted)
It is in the exercise of its police power that the Congress enacted R.A. Nos. 9257 and 9442, the
laws mandating a 20% discount on purchases of medicines made by senior citizens and PWDs.
It is also in further exercise of this power that the legislature opted that the said discount be
claimed as tax deduction, rather than tax credit, by covered establishments.
The petitioner, however, claims that the change in the tax treatment of the discount is illegal as
it constitutes taking without just compensation. It even submitted financial statements for the
years 2006 and 2007 to support its claim of declining profits when the change in the policy was
implemented.
The Court is not swayed.
To begin with, the issue of just compensation finds no relevance in the instant case as it had
already been made clear in Carlos Superdrug that the power being exercised by the State in the
imposition of senior citizen discount was its police power. Unlike in the exercise of the power of
eminent domain, just compensation is not required in wielding police power. This is precisely
because there is no taking involved, but only an imposition of burden.
In Manila Memorial Park, Inc., et al. v. Secretary of the DSWD, et al.,[36] the Court ruled that
by examining the nature and the effects of R.A. No. 9257, it becomes apparent that the
challenged governmental act was an exercise of police power. It was held, thus:
[W]e now look at the nature and effects of the 20% discount to determine if it
constitutes an exercise of police power or eminent domain.
The 20% discount is intended to improve the welfare of senior citizens who, at their
age, are less likely to be gainfully employed, more prone to illnesses and other
disabilities, and, thus, in need of subsidy in purchasing basic commodities. It may
not be amiss to mention also that the discount serves to honor senior citizens who
presumably spent the productive years of their lives on contributing to the
development and progress of the nation. This distinct cultural Filipino practice of
honoring the elderly is an integral part of this law.
As to its nature and effects, the 20% discount is a regulation affecting the ability of
private establishments to price their products and services relative to a special class
of individuals, senior citizens, for which the Constitution affords preferential
concern. In turn, this affects the amount of profits or income/gross sales that a
private establishment can derive from senior citizens. In other words, the subject
regulation affects the pricing, and, hence, the profitability of a private establishment.
However, it does not purport to appropriate or burden specific properties, used in the
operation or conduct of the business of private establishments, for the use or benefit
of the public, or senior citizens for that matter, but merely regulates the pricing of
goods and services relative to, and the amount of profits or income/gross sales that
such private establishments may derive from, senior citizens.
The subject regulation may be said to be similar to, but with substantial distinctions
from, price control or rate of return on investment control laws which are
traditionally regarded as police power measures. x x x.[37] (Citations omitted)
In the exercise of police power, "property rights of private individuals are subjected to restraints
and burdens in order to secure the general comfort, health, and prosperity of the State."[38] Even
then, the State's claim of police power cannot be arbitrary or unreasonable. After all, the
overriding purpose of the exercise of the power is to promote general welfare, public health and
safety, among others. It is a measure, which by sheer necessity, the State exercises, even to the
point of interfering with personal liberties or property rights in order to advance common good.
To warrant such interference, two requisites must concur: (a) the interests of the public
generally, as distinguished from those of a particular class, require the interference of the State;
and (b) the means employed are reasonably necessary to the attainment of the object sought to
be accomplished and not unduly oppressive upon individuals. In other words, the proper
exercise of the police power requires the concurrence of a lawful subject and a lawful method.
[39]
The subjects of R.A. Nos. 9257 and 9442, i.e., senior citizens and PWDs, are individuals whose
well-being is a recognized public duty. As a public duty, the responsibility for their care
devolves upon the concerted efforts of the State, the family and the community. In Article XIII,
Section 1 of the Constitution, the State is mandated to give highest priority to the enactment of
measures that protect and enhance the right of all the people to human dignity, reduce social,
economic, and political inequalities, and remove cultural inequities by equitably diffusing
wealth and political power for the common good. The more apparent manifestation of these
social inequities is the unequal distribution or access to healthcare services. To abet in
alleviating this concern, the State is committed to 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, with priority for the needs of the
underprivileged sick, elderly, disabled, women, and children.[40]
In the same manner, the family and the community have equally significant duties to perform in
reducing social inequality. The family as the basic social institution has the foremost duty to
care for its elderly members.[41] On the other hand, the community, which include the private
sector, is recognized as an active partner of the State in pursuing greater causes. The private
sector, being recipients of the privilege to engage business in our land, utilize our goods as well
as the services of our people for proprietary purposes, it is only fitting to expect their support in
measures that contribute to common good. Moreover, their right to own, establish and operate
economic enterprises is always subject to the duty of the State to promote distributive justice
and to intervene when the common good so demands.[42]
The Court also entertains no doubt on the legality of the method taken by the legislature to
implement the declared policies of the subject laws, that is, to impose discounts on the medical
services and purchases of senior citizens and PWDs and to treat the said discounts as tax
deduction rather than tax credit. The measure is fair and reasonable and no credible proof was
presented to prove the claim that it was confiscatory. To be considered confiscatory, there must
be taking of property without just compensation.
Illuminating on this point is the discussion of the Court on the concept of taking in City of
Manila v. Hon. Laguio, Jr.,[43] viz.:
There are two different types of taking that can be identified. A "possessory" taking
occurs when the government confiscates or physically occupies property. A
"regulatory" taking occurs when the government's regulation leaves no reasonable
economically viable use of the property.
xxxx
No formula or rule can be devised to answer the questions of what is too far and
when regulation becomes a taking. In Mahon, Justice Holmes recognized that it was
"a question of degree and therefore cannot be disposed of by general propositions."
On many other occasions as well, the U.S. Supreme Court has said that the issue of
when regulation constitutes a taking is a matter of considering the facts in each case.
x x x.
What is crucial in judicial consideration of regulatory takings is that government

regulation is a taking if it leaves no reasonable economically viable use of property
in a manner that interferes with reasonable expectations for use. A regulation that
permanently denies all economically beneficial or productive use of land is, from the
owner's point of view, equivalent to a "taking" unless principles of nuisance or
property law that existed when the owner acquired the land make the use
prohibitable. When the owner of real property has been called upon to sacrifice all
economically beneficial uses in the name of the common good, that is, to leave his
property economically idle, he has suffered a taking.
xxxx
A restriction on use of property may also constitute a 'taking" if not reasonably

necessary to the effectuation of a substantial public purpose or if it has an unduly
harsh impact on the distinct investment-backed expectations of the owner.[44]
(Citations omitted)
The petitioner herein attempts to prove its claim that the pertinent provisions of R.A. Nos. 9257
and 9442 amount to taking by presenting financial statements purportedly showing financial
losses incurred by them due to the adoption of the tax deduction scheme.
For the petitioner's clarification, the presentation of the financial statement is not of compelling
significance in justifying its claim for just compensation. What is imperative is for it to establish
that there was taking in the constitutional sense or that, in the imposition of the mandatory
discount, the power exercised by the state was eminent domain.
According to Republic of the Philippines v. Vda. de Castellvi,[45] five circumstances must be

present in order to qualify "taking" as an exercise of eminent domain. First, the expropriator
must enter a private property. Second, the entrance into private property must be for more than a
momentary period. Third, the entry into the property should be under warrant or color of legal
authority. Fourth, the property must be devoted to a public use or otherwise informally
appropriated or injuriously affected. Fifth, the utilization of the property for public use must be
in such a way as to oust the owner and deprive him of all beneficial enjoyment of the property.
[46]
The first requirement speaks of entry into a private property which clearly does not obtain in
this case. There is no private property that is invaded or appropriated by the State. As it is, the
petitioner precipitately deemed future profits as private property and then proceeded to argue
that the State took it away without full compensation. This seemed preposterous considering
that the subject of what the petitioner supposed as taking was not even earned profits but merely
an expectation of profits, which may not even occur. For obvious reasons, there cannot be
taking of a contingency or of a mere possibility because it lacks physical existence that is
necessary before there could be any taking. Further, it is impossible to quantify the
compensation for the loss of supposed profits before it is earned.
The supposed taking also lacked the characteristics of permanence[47] and consistency. The
presence of these characteristics is significant because they can establish that the effect of the
questioned provisions is the same on all establishments and those losses are indeed its
unavoidable consequence. But apparently these indications are wanting in this case. The reason
is that the impact on the establishments varies depending on their response to the changes
brought about by the subject provisions. To be clear, establishments are not prevented from
adjusting their prices to accommodate the effects of the granting of the discount and retain their
profitability while being fully compliant to the laws. It follows that losses are not inevitable
because establishments are free to take business measures to accommodate the contingency.
Lacking in permanence and consistency, there can be no taking in the constitutional sense.
There cannot be taking in one establishment and none in another, such that the former can claim
compensation but the other may not. Simply told, there is no taking to justify compensation;
there is only poor business decision to blame.
There is also no ousting of the owner or deprivation of ownership. Establishments are neither
divested of ownership of any of their properties nor is anything forcibly taken from them. They
remain the owner of their goods and their profit or loss still depends on the performance of their
sales.
Apart from the foregoing, covered establishments are also provided with a mechanism to recoup
the amount of discounts they grant the senior citizens and PWDs. It is provided in Section 4(a)
of R.A. No. 9257 and Section 32 of R.A. No. 9442 that establishments may claim the discounts
as "tax deduction based on the net cost of the goods sold or services rendered." Basically,
whatever amount was given as discount, covered establishments may claim an equal amount as
an expense or tax deduction. The trouble is that the petitioner, in protesting the change in the tax
treatment of the discounts, apparently seeks tax incentive and not merely a return of the amount
given as discounts. It premised its interpretation of financial losses in terms of the effect of the
change in the tax treatment of the discount on its tax liability; hence, the claim that the measure
was confiscatory. However, as mentioned earlier in the discussion, loss of profits is not the
inevitable result of the change in tax treatment of the discounts; it is more appropriately a
consequence of poor business decision.
It bears emphasizing that the law does not place a cap on the amount of mark up that covered
establishments may impose on their items. This rests on the discretion of the establishment
which, of course, is expected to put in the price of the overhead costs, expectation of profits and
other considerations into the selling price of an item. In a simple illustration, here is Drug A,
with acquisition cost of P8.00, and selling price of P10.00. Then comes a law that imposes 20%
on senior citizens and PWDs, which affected Establishments 1, 2 and 3. Let us suppose that the
approximate number of patrons who purchases Drug A is 100, half of which are senior citizens
and PWDs. Before the passage of the law, all of the establishments are earning the same amount
from profit from the sale of Drug A, viz.:
Before the passage of the law:
Drug A
Acquisition cost P8.00
Selling price P10.00

Number of Patrons 100

Sales:
100 x P10.00 = P1,000.00

Profit: P200.00
After the passage of the law, the three establishments reacted differently. Establishment 1 was
passive and maintained the price of Drug A at P8.00 which understandably resulted in
diminution of profits.
Establishment 1
Drug A

Senior
50
Citizens/PWD

Sale:
100 x P10.00 = P1,000.00

Deduction: P100.00

Profit: P100.00
On the other hand, Establishment 2, mindful that the new law will affect the profitability of the
business, made a calculated decision by increasing the mark up of Drug A to P3.20, instead of
only P2.00. This brought a positive result to the earnings of the company.
Establishment 2
Drug A

Senior
50
Citizens/PWD

Sale:
100 x P11.20 = P1,120.00

Deduction: P112.00

Profit: P208.00
For its part, Establishment 3 raised the mark up on Drug A to only P3.00 just to even out the
effect of the law. This measure left a negligible effect on its profit, but Establishment 3 took it as
a social duty to share in the cause being promoted by the government while still maintaining
profitability.
Establishment 3
Drug A

Senior
50
Citizens/PWD

Sale:
100 x P11.00 = P1,100.00

Deduction: P110.00

Profit: P190.00
The foregoing demonstrates that it is not the law per se which occasioned the losses in the
covered establishments but bad business judgment. One of the main considerations in making
business decisions is the law because its effect is widespread and inevitable. Literally, anything
can be a subject of legislation. It is therefore incumbent upon business managers to cover this
contingency and consider it in making business strategies. As shown in the illustration, the
better responses were exemplified by Establishments 2 and 3 which promptly put in the
additional costs brought about by the law into the price of Drug A. In doing so, they were able
to maintain the profitability of the business, even earning some more, while at the same time
being fully compliant with the law. This is not to mention that the illustration is even too
simplistic and not the most ideal since it dealt only with a single drug being purchased by both
regular patrons and senior citizens and PWDs. It did not consider the accumulated profits from
the other medical and non-medical products being sold by the establishments which are
expected to further curb the effect of the granting of the discounts in the business.
It is therefore unthinkable how the petitioner could have suffered losses due to the mandated
discounts in R.A. Nos. 9257 and 9442, when a fractional increase in the prices of items could
bring the business standing at a balance even with the introduction of the subject laws. A level
adjustment in the pricing of items is a reasonable business measure to take in order to adapt to
the contingency. This could even make establishments earn more, as shown in the illustration,
since every fractional increase n the price of covered items translates to a wider cushion to taper
off the effect of the granting of discounts and ultimately results to additional profits gained from
the purchases of the same items by regular patrons who are not entitled to the discount. Clearly,
the effect of the subject laws in the financial standing of covered companies depends largely on
how they respond and forge a balance between profitability and their sense of social
responsibility. The adaptation is entirely up to them and they are not powerless to make
adjustments to accommodate the subject legislations.
Still, the petitioner argues that the law is confiscatory in the sense that the State takes away a
portion of its supposed profits which could have gone into its coffers and utilizes it for public
purpose. The petitioner claims that the action of the State amounts to taking for which it should
be compensated.
To reiterate, the subject provisions only affect the petitioner's right to profit, and not earned
profits. Unfortunately for the petitioner, the right to profit is not a vested right or an entitlement
that has accrued on the person or entity such that its invasion or deprivation warrants
compensation. Vested rights are "fixed, unalterable, or irrevocable."[48] More extensively, they
are depicted as follows:
Rights which have so completely and definitely accrued to or settled in a person that
they are not subject to be defeated or cancelled by the act of any other private
person, and which it is right and equitable that the government should recognize and
protect, as being lawful in themselves, and settled according to the then current rules
of law, and of which the individual could not be deprived arbitrarily without
injustice, or of which he could not justly be deprived otherwise than by the
established methods of procedure and for the public welfare. x x x A right is not
'vested' unless it is more than a mere expectation based on the anticipated
continuance of present laws; it must be an established interest in property, not open
to doubt. x x x To be vested in its accurate legal sense, a right must be complete and
consummated, and one of which the person to whom it belongs cannot be divested
without his consent. x x x.[49] (Emphasis ours)
Right to profits does not give the petitioner the cause of action to ask for just compensation, it
being only an inchoate right or one that has not fully developed[50] and therefore cannot be
claimed as one's own. An inchoate right is a mere expectation, which may or may not come into
existence. It is contingent as it only comes "into existence on an event or condition which may
not happen or be performed until some other event may prevent their vesting."[51] Certainly, the
petitioner cannot claim confiscation or taking of something that has yet to exist. It cannot claim
deprivation of profit before the consummation of a sale and the purchase by a senior citizen or
PWD.
Right to profit is not an accrued right; it is not fixed, absolute nor indefeasible. It does not come
into being until the occurrence or realization of a condition precedent. It is a mere "contingency
that might never eventuate into a right. It stands for a mere possibility of profit but nothing
might ever be payable under it."[52]
The inchoate nature of the right to profit precludes the possibility of compensation because it
lacks the quality or characteristic which is necessary before any act of taking or expropriation
can be effected. Moreover, there is no yardstick fitting to quantify a contingency or to determine
compensation for a mere possibility. Certainly, "taking" presupposes the existence of a subject
that has a quantifiable or determinable value, characteristics which a mere contingency does not
possess.
Anent the question regarding the shift from tax credit to tax deduction, suffice it is to say that it
is within the province of Congress to do so in the exercise of its legislative power. It has the
authority to choose the subject of legislation, outline the effective measures to achieve its
declared policies and even impose penalties in case of non-compliance. It has the sole discretion
to decide which policies to pursue and devise means to achieve them, and courts often do not
interfere in this exercise for as long as it does not transcend constitutional limitations. "In
performing this duty, the legislature has no guide but its judgment and discretion and the
wisdom of experience."[53] In Carter v. Carter Coal Co.,[54] legislative discretion has been
described as follows:
Legislative congressional discretion begins with the choice of means, and ends with
the adoption of methods and details to carry the delegated powers into effect. x x x
[W]hile the powers are rigidly limited to the enumerations of the Constitution, the
means which may be employed to carry the powers into effect are not restricted,
save that they must be appropriate, plainly adapted to the end, and not prohibited by,
but consistent with, the letter and spirit of the Constitution. x x x.[55] (Emphasis
ours)
Corollary, whether to treat the discount as a tax deduction or tax credit is a matter addressed to
the wisdom of the legislature. After all, it is within its prerogative to enact laws which it deems
sufficient to address a specific public concern. And, in the process of legislation, a bill goes
through rigorous tests of validity, necessity and sufficiency in both houses of Congress before
enrolment. It undergoes close scrutiny of the members of Congress and necessarily had to
surpass the arguments hurled against its passage. Thus, the presumption of validity that goes
with every law as a form of deference to the process it had gone through and also to the
legislature's exercise of discretion. Thus, in Ichong, etc., et al. v. Hernandez, etc., and
Sarmiento,[56] the Court emphasized, thus:
It must not be overlooked, in the first place, that the legislature, which is the
constitutional repository of police power and exercises the prerogative of
determining the policy of the State, is by force of circumstances primarily the judge
of necessity, adequacy or reasonableness and wisdom, of any law promulgated
in the exercise of the police power, or of the measures adopted to implement the
public policy or to achieve public interest. x x x.[57] (Emphasis ours)
The legislature may also grant rights and impose additional burdens. It may also regulate
industries, in the exercise of police power, for the protection of the public. R.A. Nos. 9257 and
9442 are akin to regulatory laws, the issuance of which is within the ambit of police power. The
minimum wage law, zoning ordinances, price control laws, laws regulating the operation of
motels and hotels, laws limiting the working hours to eight, and the like fall under this category.
[58]
Indeed, regulatory laws are within the category of police power measures from which affected
persons or entities cannot claim exclusion or compensation. For instance, private establishments
cannot protest that the imposition of the minimum wage is confiscatory since it eats up a
considerable chunk of its profits or that the mandated remuneration is not commensurate for the
work done. The compulsory nature of the provision for minimum wages underlies the effort of
the State, as R.A. No. 6727[59] expresses it, to promote productivity-improvement and gain-
sharing measures to ensure a decent standard of living for the workers and their families; to
guarantee the rights of labor to its just share in the fruits of production; to enhance employment
generation in the countryside through industry dispersal; and to allow business and industry
reasonable returns on investment, expansion and growth, and as the Constitution expresses it, to
affirm labor as a primary social economic force.[60]
Similarly, the imposition of price control on staple goods in R.A. No. 7581[61] is likewise a
valid exercise of police power and affected establishments cannot argue that the law was
depriving them of supposed gains. The law seeks to ensure the availability of basic necessities
and prime commodities at reasonable prices at all times without denying legitimate business a
fair return on investment. It likewise aims to provide effective and sufficient protection to
consumers against hoarding, profiteering and cartels with respect to the supply, distribution,
marketing and pricing of said goods, especially during periods of calamity, emergency,
widespread illegal price manipulation and other similar situations.[62]
More relevantly, in Manila Memorial Park, Inc.,[63] it was ruled that it is within the bounds of
the police power of the state to impose burden on private entities, even if it may affect their
profits, such as in the imposition of price control measures. There is no compensable taking but
only a recognition of the fact that they are subject to the regulation of the State and that all
personal or private interests must bow down to the more paramount interest of the State.
This notwithstanding, the regulatory power of the State does not authorize the destruction of the
business. While a business may be regulated, such regulation must be within the bounds of
reason, i.e., the regulatory ordinance must be reasonable, and its provision cannot be oppressive
amounting to an arbitrary interference with the business or calling subject of regulation. A
lawful business or calling may not, under the guise of regulation, be unreasonably interfered
with even by the exercise of police power.[64] After all, regulation only signifies control or
restraint, it does not mean suppression or absolute prohibition. Thus, in Philippine
Communications Satellite Corporation v. Alcuaz,[65] the Court emphasized:
The power to regulate is not the power to destroy useful and harmless enterprises,
but is the power to protect, foster, promote, preserve, and control with due regard for
the interest, first and foremost, of the public, then of the utility and of its patrons.
Any regulation, therefore, which operates as an effective confiscation of private
property or constitutes an arbitrary or unreasonable infringement of property rights is
void, because it is repugnant to the constitutional guaranties of due process and
equal protection of the laws.[66] (Citation omitted)
Here, the petitioner failed to show that R.A. Nos. 9257 and 9442, under the guise of regulation,
allow undue interference in an otherwise legitimate business. On the contrary, it was shown that
the questioned laws do not meddle in the business or take anything from it but only regulate its
realization of profits.
The subject laws do not violate the

equal protection clause
The petitioner argues that R.A. Nos. 9257 and 9442 are violative of the equal protection clause
in that it failed to distinguish between those who have the capacity to pay and those who do not,
in granting the 20% discount. R.A. No. 9257, in particular, removed the income qualification in
R.A. No. 7432 of P60,000.00 per annum before a senior citizen may be entitled to the 20%
discount.
The contention lacks merit.
The petitioner's argument is dismissive of the reasonable qualification on which the subject laws
were based. In City of Manila v. Hon. Laguio Jr.,[67] the Court emphasized:
Equal protection requires that all persons or things similarly situated should be
treated alike, both as to rights conferred and responsibilities imposed. Similar
subjects, in other words, should not be treated differently, so as to give undue favor
to some and unjustly discriminate against others. The guarantee means that no
person or class of persons shall be denied the same protection of laws which is
enjoyed by other persons or other classes in like circumstances.[68] (Citations
omitted)
"The equal protection clause is not infringed by legislation which applies only to those persons
falling within a specified class. If the groupings are characterized by substantial distinctions that
make real differences, one class may be treated and regulated differently from another."[69] For
a classification to be valid, (1) it must be based upon substantial distinctions, (2) it must be
germane to the purposes of the law, (3) it must not be limited to existing conditions only, and (4)
it must apply equally to all members of the same class.[70]
To recognize all senior citizens as a group, without distinction as to income, is a valid

classification. The Constitution itself considered the elderly as a class of their own and deemed
it a priority to address their needs. When the Constitution declared its intention to prioritize the
predicament of the underprivileged sick, elderly, disabled, women, and children,[71] it did not
make any reservation as to income, race, religion or any other personal circumstances. It was a
blanket privilege afforded the group of citizens in the enumeration in view of the vulnerability
of their class.
R.A. No. 9257 is an implementation of the avowed policy of the Constitution to enact measures
that protect and enhance the right of all the people to human dignity, reduce social, economic,
and political inequalities.[72] Specifically, it caters to the welfare of all senior citizens. The
classification is based on age and therefore qualifies all who have attained the age of 60. Senior
citizens are a class of their own, who are in need and should be entitled to government support,
and the fact that they may still be earning for their own sustenance should not disqualify them
from the privilege.
It is well to consider that our senior citizens have already reached the age when work
opportunities have dwindled concurrently as their physical health. They are no longer expected
to work, but there are still those who continue to work and contribute what they can to the
country. Thus, to single them out and take them out of the privileges of the law for continuing to
strive and earn income to fend for themselves is inimical to a welfare state that the Constitution
envisions. It is tantamount to penalizing them for their persistence. It is commending indolence
rather than rewarding diligence. It encourages them to become wards of the State rather than
productive partners.
Our senior citizens were the laborers, professionals and overseas contract workers of the past.
While some may be well to do or may have the capacity to support their sustenance, the
discretion to avail of the privileges of the law is up to them. But to instantly tag them as
undeserving of the privilege would be the height of ingratitude; it is an outright discrimination.
The same ratiocination may be said of the recognition of PWDs as a class in R.A. No. 9442 and
in granting them discounts. It needs no further explanation that PWDs have special needs
which, for most, last their entire lifetime. They constitute a class of their own, equally deserving
of government support as our elderlies. While some of them maybe willing to work and earn
income for themselves, their disability deters them from living their full potential. Thus, the
need for assistance from the government to augment the reduced income or productivity brought
about by their physical or intellectual limitations.
There is also no question that the grant of mandatory discount is germane to the purpose of R.A.
Nos. 9257 and 9442, that is, to adopt an integrated and comprehensive approach to health
development and make essential goods and other social services available to all the people at
affordable cost, with special priority given to the elderlies and the disabled, among others. The
privileges granted by the laws ease their concerns and allow them to live more comfortably.
The subject laws also address a continuing concern of the government for the welfare of the
senior citizens and PWDs. It is not some random predicament but an actual, continuing and
pressing concern that requires preferential attention. Also, the laws apply to all senior citizens
and PWDs, respectively, without further distinction or reservation. Without a doubt, all the
elements for a valid classification were met.
The definitions of "disabilities" and

"PWDs" are clear and unequivocal
Undeterred, the petitioner claims that R.A. No. 9442 is ambiguous particularly in defining the
terms "disability" and "PWDs," such that it lack comprehensible standards that men of common
intelligence must guess at its meaning. It likewise bewails the futility of the given safeguards to
prevent abuse since government officials who are neither experts nor practitioners of medicine
are given the authority to issue identification cards that authorizes the granting of the privileges
under the law.
The Court disagrees.
Section 4(a) of R.A. No. 7277, the precursor of R.A. No. 9442, defines "disabled persons" as
follows:
(a) Disabled persons are those suffering from restriction or different abilities, as a
result of a mental, physical or sensory impairment, to perform an activity in the
manner or within the range considered normal for a human being[.]
On the other hand, the term "PWDs" is defined in Section 5.1 of the IRR of R.A. No. 9442 as
follows;
5.1. Persons with Disability are those individuals defined under Section 4 of [R.A.
No.] 7277 [or] An Act Providing for the Rehabilitation, Self-Development and Self-
Reliance of Persons with Disability as amended and their integration into the
Mainstream of Society and for Other Purposes. This is defined as a person suffering
from restriction or different abilities, as a result of a mental, physical or sensory
impairment, to perform an activity in a manner or within the range considered
normal for human being. Disability shall mean (1) a physical or mental impairment
that substantially limits one or more psychological, physiological or anatomical
function of an individual or activities of such individual; (2) a record of such an
impairment; or (3) being regarded as having such an impairment.
The foregoing definitions have a striking conformity with the definition of "PWDs" in Article 1
of the United Nations Convention on the Rights of Persons with Disabilities which reads:
Persons with disabilities include those who have long-term physical, mental,
intellectual or sensory impairments which in interaction with various barriers may
hinder their full and effective participation in society on an equal basis with others.
(Emphasis and italics ours)
The seemingly broad definition of the terms was not without good reasons. It recognizes that
"disability is an evolving concept"[73] and appreciates the "diversity of PWDs."[74] The terms
were given comprehensive definitions so as to accommodate the various forms of disabilities,
and not confine it to a particular case as this would effectively exclude other forms of physical,
intellectual or psychological impairments.
Moreover, in Estrada v. Sandiganbayan,[75] it was declared, thus:
A statute is not rendered uncertain and void merely because general terms are used
therein, or because of the employment of terms without defining them; much less do
we have to define every word we use. Besides, there is no positive constitutional or
statutory command requiring the legislature to define each and every word in an
enactment. Congress is not restricted in the form of expression of its will, and its
inability to so define the words employed in a statute will not necessarily result in
the vagueness or ambiguity of the law so long as the legislative will is clear, or at
least, can be gathered from the whole act x x x.[76] (Citation omitted)
At any rate, the Court gathers no ambiguity in the provisions of R.A. No. 9442. As regards the
petitioner's claim that the law lacked reasonable standards in determining the persons entitled to
the discount, Section 32 thereof is on point as it identifies who may avail of the privilege and
the manner of its availment. It states:
Sec. 32. x x x
The abovementioned privileges are available only to persons with disability who are
Filipino citizens upon submission of any of the following as proof of his/her
entitlement thereto:
(I) An identification card issued by the city or municipal mayor or the barangay
captain of the place where the persons with disability resides;
(II) The passport of the persons with disability concerned; or

(III) Transportation discount fare Identification Card (ID) issued by the National
Council for the Welfare of Disabled Persons (NCWDP).
It is, however, the petitioner's contention that the foregoing authorizes government officials who
had no medical background to exercise discretion in issuing identification cards to those
claiming to be PWDs. It argues that the provision lends to the indiscriminate availment of the
privileges even by those who are not qualified.
The petitioner's apprehension demonstrates a superficial understanding of the law and its
implementing rules. To be clear, the issuance of identification cards to PWDs does not depend
on the authority of the city or municipal mayor, the DSWD or officials of the NCDA (formerly
NCWDP). It is well to remember that what entitles a person to the privileges of the law is his
disability, the fact of which he must prove to qualify. Thus, in NCDA Administrative Order
(A.O.) No. 001, series of 2008,[77] it is required that the person claiming disability must submit
the following requirements before he shall be issued a PWD Identification Card:
1. Two "1x 1" recent ID pictures with the names, and signatures or thumb marks at the back
of the picture.
2. One (1) Valid ID
3. Document to confirm the medical or disability condition[78]
To confirm his disability, the person must obtain a medical certificate or assessment, as the case
maybe, issued by a licensed private or government physician, licensed teacher or head of a
business establishment attesting to his impairment. The issuing entity depends on whether the
disability is apparent or non-apparent. NCDA A.O. No. 001 further provides:[79]
DISABILITY DOCUMENT ISSUING ENTITY

Apparent Medical Certificate Licensed Private or
Disability Government Physician
School Assessment Licensed Teacher duly signed
by the School Principal

Head of the Business
Establishment
Certificate of Disability Head of Non-
Government
Organization
Non-Apparent Medical Certificate Licensed Private or

Disability Government Physician
To provide further safeguard, the Department of Health issued A.O. No. 2009-0011, providing
guidelines for the availment of the 20% discount on the purchase of medicines by PWDs. In
making a purchase, the individual must present the documents enumerated in Section VI(4)(b),
to wit:
i. PWD identification card x x x

ii. Doctor's prescription stating the name of the PWD, age, sex, address, date, generic name
of the medicine, dosage form, dosage strength, quantity, signature over printed name of
physician, physician's address, contact number of physician or dentist, professional license
number, professional tax receipt number and narcotic license number, if applicable. To
safeguard the health of PWDs and to prevent abuse of [R.A. No.] 9257, a doctor's
prescription is required in the purchase of over-the-counter medicines. x x x.
iii. Purchase booklet issued by the local social/health office to PWDs for free containing the
following basic information:
a) PWD ID number

b) Booklet control number

c) Name of PWD
d) Sex
e) Address

f) Date of Birth
g) Picture

of PWD
h) Signature

i) Information of medicine purchased:
i.1 Name of medicine

i.2 Quantity

Physician
i.3 Attending
i.4 License Number
i.5 Servicing drug store name

i.6 Name of dispensing pharmacist
j) Authorization letter of the PWD x x x in case the medicine is bought by the

representative or caregiver of the PWD.
The PWD identification card also has a validity period of only three years which facilitate in the
monitoring of those who may need continued support and who have been relieved of their
disability, and therefore may be taken out of the coverage of the law.
At any rate, the law has penal provisions which give concerned establishments the option to file
a case against those abusing the privilege. Section 46(b) of R.A. No. 9442 provides that "[a]ny
person who abuses the privileges granted herein shall be punished with imprisonment of not less
than six months or a fine of not less than Five Thousand pesos (P5,000.00), but not more than
Fifty Thousand pesos (P50,000.00), or both, at the discretion of the court." Thus, concerned
establishments, together with the proper government agencies, must actively participate in
monitoring compliance with the law so that only the intended beneficiaries of the law can avail
of the privileges.
Indubitably, the law is clear and unequivocal, and the petitioner's claim of vagueness to cast
uncertainty in the validity of the law does not stand.
WHEREFORE, in view of the foregoing disquisition, Section 4(a) of Republic Act No. 9257
and Section 32 of Republic Act No. 9442 are hereby declared CONSTITUTIONAL.
SO ORDERED.
Sereno, C.J., Velasco, Jr., Leonardo-De Castro, Peralta, Bersamin, Mendoza, Caguioa, Martires
and Tijam, JJ., concur.
Carpio, J., see dissenting opinion.
Del Castillo, Perlas-Bernabe, and Jardeleza, JJ., no part.
Leonen, J., see separate opinion.
NOTICE OF JUDGMENT
Sirs/Mesdames:
Please take notice that on April 25, 2017 a Decision/Resolution, copy attached herewith, was
rendered by the Supreme Court in the above-entitled administrative matter, the original of which
was received by this Office on June 7, 2017 at 9:35 a.m.
Very truly yours,

(SGD.) FELIPA G. BORLONGAN-
ANAMA

Clerk of Court
[1] Rollo, pp. 11-78.
[2]
Penned by Associate Justice Amy C. Lazaro-Javier, with Associate Justices Estela M. Perlas-
Bernabe (now a member of this Court) and Sesinando E. Villon concurring; id. at 79-93.
[3] Id. at 94.
[4] R.A. No. 7432, Section 2.
[5] 553 Phil. 120 (2007).
[6] Id. at 132-135.
[7] Rollo, p. 433.
[8] Id. at 434-435.
[9] Id. at 100-158.
[10] Supra note 5.
[11] Rollo, p. 87.

[12] Id. at 89.
[13] Id. at 91.
[14] Id. at 335-383.
[15] Id. at 94.
[16] Id. at 25.
[17] Id. at 89.
[18] Lt. Gonzales v. Gen. Abaya, 530 Phil. 189, 215 (2006).
[19] 669 Phil. 371 (2011).
[20] Id. at 383.
[21] 409 Phil. 571 (2001).
[22] Id. at 592.
[23] 591 Phil. 393 (2008).
[24] Id. at 403.
[25] Id. at 419.
[26] Belgica, et al. v. Honorable Executive Secretary Ochoa, Jr., et al., 721 Phil. 416 (2013).
[27] THE JUDICIARY REORGANIZATION ACT OF 1980. Approved on August 14, 1981.
[28] Mangaliag v. Judge Catubig-Pastoral, 510 Phil. 637, 646-647 (2005).
[29] Congressman Chong, et al. v. Hon. Dela Cruz, et al., 610 Phil. 725, 728 (2009).
[30] Rollo, pp. 33-38.
[31] Carlos Superdrug Corp. v. DSWD, supra note 5, at 129-132.
[32] R.A. No. 7277, Section 2(a).
[33] Oliver v. Feldner, 149 Ohio App. 3d 114, 2002 Ohio 3209, 776 N.E.2d 499 (Ct. App. 2002).
[34] 554 Phil. 563 (2007).
[35] Id. at 579-580.
[36] 722 Phil. 538 (2013).
[37] Id. at 578-579.
[38]Didipio Earth-Savers' Multi-Purpose Association, Inc. v. Sec. Gozun, 520 Phil. 457, 476
(2006).
[39] Department of Education, Culture and Sports v. San Diego, 259 Phil. 1016, 1021 (1989).
[40] 1987 CONSTITUTION, Article XIII, Section 11.
[41] 1987 CONSTITUTION, Article XV, Section 4.
[42] 1987 CONSTITUTION, Article XII, Section 6.
[43] 495 Phil. 289 (2005).
[44] Id. at 320-321.
[45] 157 Phil. 329 (1974).
[46] Id. at 345-346.
[47] See Concurring Opinion of Associate Justice Lucas P. Bersamin in Manila Memorial Park,
Inc. et al. v. Secretary of the DSWD, et al., supra note 36, at 614.
[48] Luque, et al. v. Hon. Villegas, etc., et al., 141 Phil. 108, 118 (1969).
[49]
Cartwright v. Public Serv. Co., 66 N.M. 64, 1958-NMSC-134, 343 P.2d 654, 1959 N.M.
LEXIS 944 (N.M. 1959).
[50]
Concurring and Dissenting Opinion of Associate Justice Marvic M.V.F. Leonen, Manila
Memorial Park, Inc., et al. v. Secretary of the DSWD, et al., supra note 36, at 641.
[51] Cartwright v. Public Serv. Co., supra note 49.
[52] Fredrick v. Chicago, 221 A.D. 588, 224 N.Y.S. 629, 1927 N.Y. App. Div. LEXIS 6510.
[53] United States v. Borromeo, 23 Phil. 279, 288 (1912).
[54] 298 U.S. 238, 56 S. Ct. 855, 80 L. Ed. 1160, 1936 U.S. LEXIS 950 (U.S. 1936).
[55] Id.
[56] 101 Phil. 1155 (1957).
[57] Id. at 1165-1166.
[58] Manila Memorial Park, Inc., et al. v. Secretary of the DSWD, et al., supra note 36, at 586.
[59] Wage Rationalization Act, approved on June 9, 1989.
[60]
Employees Confederation of the Philippines v. National Wages and Productivity
Commission, 278 Phil. 747, 755 (1991).
[61] The Price Act, approved on May 27, 1992.
[62] R.A. No. 7581 (1992), Section 2.
[63] Supra note 36.
[64]Acebedo Optical Company, Inc. v. Court of Appeals, 385 Phil. 956, 970 (2000), citing
Balacuit v. Court of First Instance of Agusan del Norte and Butuan City, Branch II, 246 Phil.
189, 204 (1988).
[65] 259 Phil. 707 (1989).
[66] Id. at 721-722.
[67] 495 Phil. 289 (2005).
[68] Id. at 326.
[69]Central Bank Employees Association, Inc. v. Bangko Sentral ng Pilipinas, 487 Phil. 531,
560-561 (2004).
[70] People v. Cayat, 68 Phil. 12, 18 (1939).
[73]Preamble of the United Nations Convention on the Rights of Persons with Disabilities,
Section (e).
[74]Preamble of the United Nations Convention on the Rights of Persons with Disabilities,
Section (i).
[75] 421 Phil. 290 (2001).
[76] Id. at 347-348.
[77] Guidelines on the Issuance of Identification Card Relative to R.A. No. 9442.
[78] NCDA A.O. No. 001, series of2 008, V(A).
[79] NCDA A.O. No. 001, series of 2008, IV(D).

DISSENTING OPINION
CARPIO, J.:
The provisions in contention in the case before the Court are Section 4(a) of Republic Act No.
9257[1] (R.A. 9257) and Section 32 of Republic Act No. 9442[2] (R.A. 9442) which grant a 20%
discount on the purchase of medicines, respectively, to senior citizens and persons with
disability. Southern Luzon Drug Corporation (Southern Luzon Drug) assails the
constitutionality of the provisions and the tax treatment of the 20% discount as tax deduction
from gross income computed from the net cost of the goods sold or services rendered. Southern
Luzon Drug alleges, among other things, that the 20% discount is an invalid exercise of the
power of eminent domain insofar as it fails to provide just compensation to establishments that
grant the discount.
The majority opinion affirms the constitutionality of the assailed provisions and reiterated the
rulings in Carlos Superdrug Corporation v. Department of Social Welfare and Development[3]
and Manila Memorial Park, Inc. v. Secretary of the Department of Social Welfare and
Development[4] that the challenged provisions constitute a valid exercise of police power.
I maintain my dissent in the Manila Memorial Park case. I assert that Carlos Superdrug
Corporation barely distinguished between police power and eminent domain. While it is true
that police power is similar to the power of eminent domain because both have the general
welfare of the people for their object, we need to clarify the concept of taking in eminent
domain as against taking in police power to prevent any claim of police power when the power
actually exercised is eminent domain. When police power is exercised, there is no just
compensation to the citizen who loses his private property. When eminent domain is
exercised, there must be just compensation. Thus, the Court must distinguish and clarify
taking in police power and taking in eminent domain. Government officials cannot just
invoke police power when the act constitutes eminent domain.
In People v. Pomar,[5] the Court acknowledged that "[b]y reason of the constant growth of
public opinion in a developing civilization, the term 'police power' has never been, and we do
not believe can be, clearly and definitely defined and circumscribed."[6] The Court stated that
the "definition of the police power of the [S]tate must depend upon the particular law and the
particular facts to which it is to be applied."[7] However, it was considered even then that
police power, when applied to taking of property without compensation, refers to property
that is destroyed or placed outside the commerce of man. The Court declared in Pomar:
It is believed and confidently asserted that no case can be found, in civilized

society and well-organized governments, where individuals have been deprived
of their property, under the police power of the state, without compensation,
except in cases where the property in question was used for the purpose of
violating some law legally adopted, or constitutes a nuisance. Among such cases
may be mentioned: Apparatus used in counterfeiting the money of the state; firearms
illegally possessed; opium possessed in violation of law; apparatus used for
gambling in violation of law; buildings and property used for the purpose of
violating laws prohibiting the manufacture and sale of intoxicating liquors; and all
cases in which the property itself has become a nuisance and dangerous and
detrimental to the public health, morals and general welfare of the state. In all of
such cases, and in many more which might be cited, the destruction of the property
is permitted in the exercise of the police power of the state. But it must first be
established that such property was used as the instrument for the violation of a valid
existing law. (Mugler vs. Kansan, 123 U.S. 623; Slaughter-House Cases, 16 Wall.
[U.S.] 36; Butchers' Union, etc., Co. vs. Crescent City, etc., Co., 111 U.S. 746; John
Stuart Mill - "On Liberty," 28, 29)
Without further attempting to define what are the peculiar subjects or limits of the
police power, it may safely be affirmed, that every law for the restraint and
punishment of crimes, for the preservation of the public peace, health, and morals,
must come within this category. But the state, when providing by legislation for the
protection of the public health, the public morals, or the public safety, is subject to
and is controlled by the paramount authority of the constitution of the state, and will
not be permitted to violate rights secured or guaranteed by that instrument or
interfere with the execution of the powers and rights guaranteed to the people under
their law - the constitution. (Mugler vs. Kansas, 123 U.S. 623)[8] (Emphasis
supplied)
In City Government of Quezon City v. Hon. Judge Ericta,[9] the Court quoted with approval the
trial court's decision declaring null and void Section 9 of Ordinance No. 6118, S-64, of the
Quezon City Council, thus:
We start the discussion with a restatement of certain basic principles. Occupying the
forefront in the bill of rights is the provision which states that 'no person shall be
deprived of life, liberty or property without due process of law. (Art. III, Section 1
subparagraph 1, Constitution)
On the other hand, there are three inherent powers of government by which the state
interferes with the property rights, namely- (1) police power, (2) eminent domain,
[and] (3) taxation. These are said to exist independently of the Constitution as
necessary attributes of sovereignty.
Police power is defined by Freund as 'the power of promoting the public
welfare by restraining and regulating the use of liberty and property' (Quoted
in Political Law by Tañada and Carreon, V-II, p. 50). It is usually exerted in
order to merely regulate the use and enjoyment of property of the owner. If he
is deprived of his property outright, it is not taken for public use but rather to
destroy in order to promote the general welfare. In police power, the owner does
not recover from the government for injury sustained in consequence thereof
(12 C.J. 623). It has been said that police power is the most essential of government
powers, at times the most insistent, and always one of the least limitable of the
powers of government (Ruby vs. Provincial Board, 39 Phil. 660; Ichong vs.
Hernandez, L-7995, May 31, 1957). This power embraces the whole system of
public regulation (U.S. vs. Linsuya Fan, 10 Phil. 104). The Supreme Court has said
that police power is so far-reaching in scope that it has almost become impossible to
limit its sweep. As it derives its existence from the very existence of the state itself,
it does not need to be expressed or defined in its scope. Being coextensive with self-
preservation and survival itself, it is the most positive and active of all governmental
processes, the most essential, insistent and illimitable. Especially it is so under the
modern democratic framework where the demands of society and nations have
multiplied to almost unimaginable proportions. The field and scope of police power
have become almost boundless, just as the fields of public interest and public
welfare have become almost all embracing and have transcended human foresight.
Since the Court cannot foresee the needs and demands of public interest and welfare,
they cannot delimit beforehand the extent or scope of the police power by which and
through which the state seeks to attain or achieve public interest and welfare.
(Ichong vs. Hernandez, L-7995, May 31, 1957).
The police power being the most active power of the government and the due
process clause being the broadest limitation on governmental power, the conflict
between this power of government and the due process clause of the Constitution is
oftentimes inevitable.
It will be seen from the foregoing authorities that police power is usually
exercised in the form of mere regulation or restriction in the use of liberty or
property for the promotion of the general welfare. It does not involve the taking
or confiscation of property with the exception of a few cases where there is a
necessity to confiscate private property in order to destroy it for the purpose of
protecting the peace and order and of promoting the general welfare as for
instance, the confiscation of an illegally possessed article, such as opium and
firearms.[10] (Boldfacing and italicization supplied)
It is very clear that taking under the exercise of police power does not require any
compensation because the property taken is either destroyed or placed outside the
commerce of man.
On the other hand, the power of eminent domain has been described as –
x x x 'the highest and most exact idea of property remaining in the government' that
may be acquired for some public purpose through a method in the nature of a forced
purchase by the State. It is a right to take or reassert dominion over property within
the state for public use or to meet public exigency. It is said to be an essential part of
governance even in its most primitive form and thus inseparable from sovereignty.
The only direct constitutional qualification is that 'private property should not be
taken for public use without just compensation.' This proscription is intended to
provide a safeguard against possible abuse and so to protect as well the individual
against whose property the power is sought to be enforced.[11]
In order to be valid, the taking of private property by the government under eminent domain has
to be for public use and there must be just compensation.[12]
Fr. Joaquin G. Bernas, S.J., expounded:
Both police power and the power of eminent domain have the general welfare for
their object. The former achieves its object by regulation while the latter by "taking".
When property right is impaired by regulation, compensation is not required;
whereas, when property is taken, the Constitution prescribes just compensation.
Hence, a sharp distinction must be made between regulation and taking.
When title to property is transferred to the expropriating authority, there is a clear

case of compensable taking. However, as will be seen, it is a settled rule that neither
acquisition of title nor total destruction of value is essential to taking. It is in cases
where title remains with the private owner that inquiry must be made whether the
impairment of property right is merely regulation or already amounts to
compensable taking.
An analysis of existing jurisprudence yields the rule that when a property

interest is appropriated and applied to some public purpose, there is
compensable taking. Where, however, a property interest is merely restricted
because continued unrestricted use would be injurious to public welfare or
where property is destroyed because continued existence of the property would
be injurious to public interest, there is no compensable taking.[13] (Emphasis
supplied)
Both Section 4(a) of R.A. 9257 and Section 32 of R.A. 9442 undeniably contemplate taking of
property for public use. Private property is anything that is subject to private ownership. The
property taken for public use applies not only to land but also to other proprietary property,
including the mandatory discounts given to senior citizens and persons with disability which
form part of the gross sales of the private establishments that are forced to give them. The
amount of mandatory discount is money that belongs to the private establishment. For
sure, money or cash is private property because it is something of value that is subject to
private ownership. The taking of property under Section 4(a) of R.A. 9257 and Section 32 of
R.A. 9442 is an exercise of the power of eminent domain and not an exercise of the police
power of the State. A clear and sharp distinction should be made because private property
owners will be left at the mercy of government officials if these officials are allowed to
invoke police power when what is actually exercised is the power of eminent domain.
Section 9, Article III of the 1987 Constitution speaks of private property without any
distinction. It does not state that there should be profit before the taking of property is subject to
just compensation. The private property referred to for purposes of taking could be inherited,
donated, purchased, mortgaged, or as in this case, part of the gross sales of private
establishments. They are all private property and any taking should be attended by a
corresponding payment of just compensation. The 20% discount granted to senior citizens and
persons with disability belongs to private establishments, whether these establishments make a
profit or suffer a loss.
Just compensation is "the full and fair equivalent of the property taken from its owner by
the expropriator."[14] The Court explained:
x x x. The measure is not the taker's gain, but the owner's loss. The word 'just' is
used to qualify the meaning of the word 'compensation' and to convey thereby the
idea that the amount to be tendered for the property to be taken shall be real,
substantial, full and ample. x x x.[15] (Emphasis supplied)
The 32% of the discount that the private establishments could recover under the tax deduction
scheme cannot be considered real, substantial, full, and ample compensation. In Carlos
Superdrug Corporation, the Court conceded that "[t]he permanent reduction in [private
establishments'] total revenue is a forced subsidy corresponding to the taking of private
property for public use or benefit."[16] The Court ruled that "[t]his constitutes compensable
taking for which petitioners would ordinarily become entitled to a just compensation."[17]
Despite these pronouncements admitting there was compensable taking, the Court still
proceeded to rule that "the State, in promoting the health and welfare of a special group of
citizens, can impose upon private establishments the burden of partly subsidizing a
government program."
There may be valid instances when the State can impose burdens on private establishments that
effectively subsidize a government program. However, the moment a constitutional threshold is
crossed - when the burden constitutes a taking of private property for public use - then the
burden becomes an exercise of eminent domain for which just compensation is required.
An example of a burden that can be validly imposed on private establishments is the

requirement under Article 157 of the Labor Code that employers with a certain number of
employees should maintain a clinic and employ a registered nurse, a physician, and a dentist,
depending on the number of employees. Article 157 of the Labor Code provides:
Art. 157. Emergency medical and dental services.- It shall be the duty of every
employer to furnish his employees in any locality with free medical and dental
attendance and facilities consisting of:
a. The services of a full-time registered nurse when the number of employees

exceeds fifty (50) but not more than two hundred (200) except when the
employer does not maintain hazardous workplaces, in which case, the services
of a graduate first-aider shall be provided for the protection of workers, where
no registered nurse is available. The Secretary of Labor and Employment shall
provide by appropriate regulations, the services that shall be required where
the number of employees does not exceed fifty (50) and shall determine by
appropriate order, hazardous workplaces for purposes of this Article;
b. The services of a full-time registered nurse, a part-time physician and dentist,
and an emergency clinic, when the number of employees exceeds two hundred
(200) but not more than three hundred (300); and
c. The services of a full-time physician, dentist and a full-time registered nurse as
well as a dental clinic and an infirmary or emergency hospital with one bed
capacity for every one hundred (100) employees when the number of
employees exceeds three hundred (300). x x x.
xxxx
Article 157 of the Labor Code is a burden imposed by the State on private employers to
complement a government program of promoting a healthy workplace. The employer itself,
however, benefits fully from this burden because the health of its workers while in the
workplace is a legitimate concern of the private employer. Moreover, the cost of maintaining the
clinic and staff is part of the legislated wages for which the private employer is fully
compensated by the services of the employees. In the case of discounts to senior citizens and
persons with disability, private establishments are compensated only in the equivalent amount of
32% of the mandatory discount. There are no services rendered by the senior citizens, or any
other form of payment, that could make up for the 68% balance of the mandatory discount.
Clearly, private establishments cannot recover the full amount of the discount they give and thus
there is taking to the extent of the amount that cannot be recovered.
Another example of a burden that can be validly imposed on private establishments is the
requirement under Section 19 in relation to Section 18 of the Social Security Law[18] and
Section 7 of the Pag-IBIG Fund[19] for the employer to contribute a certain amount to fund the
benefits of its employees. The amounts contributed by private employers form part of the
legislated wages of employees. The private employers are deemed fully compensated for these
amounts by the services rendered by the employees.
Here, the private establishments are only compensated about 32% of the 20% discount granted
to senior citizens and persons with disability. They shoulder 68% of the discount they are forced
to give to senior citizens. The Court should correct this situation as it clearly violates Section 9,
Article III of the Constitution which provides that "[p]rivate property shall not be taken for
public use without just compensation." I reiterate that Carlos Superdrug Corporation should be
abandoned by this Court and Commissioner of Internal Revenue v. Central Luzon Drug
Corporation,[20] holding that "the tax credit benefit granted to these establishments can be
deemed as their just compensation for private property taken by the State for public use" should
be reaffirmed.
Carlos Superdrug Corporation admitted that the permanent reduction in the total revenues of
private establishments is a "compensable taking for which petitioners would ordinarily
become entitled to a just compensation."[21] However, Carlos Superdrug Corporation
considered that there was sufficient basis for taking without compensation by invoking the
exercise of police power of the State. In doing so, the Court failed to consider that a permanent
taking of property for public use is an exercise of eminent domain for which the government
must pay compensation. Eminent domain is distinct from police power and its exercise is
subject to certain conditions, that is, the taking of property for public use and payment of just
compensation.
It is incorrect to say that private establishments only suffer a minimal loss when they give a
20% discount to senior citizens and persons with disability. Under R.A. 9257, the 20% discount
applies to "all establishments relative to the utilization of services in hotels and similar lodging
establishments, restaurants and recreation centers, and purchase of medicines in all
establishments for the exclusive use or enjoyment of senior citizens, including funeral and
burial services for the death of senior citizens;"[22] "admission fees charged by theaters, cinema
houses and concert halls, circuses, carnivals, and other similar places of culture, leisure and
amusement for the exclusive use or enjoyment of senior citizens;"[23] "medical and dental
services, and diagnostic and laboratory fees provided under Section 4(e) including professional
fees of attending doctors in all private hospitals and medical facilities, in accordance with the
rules and regulations to be issued by the Department of Health, in coordination with the
Philippine Health Insurance Corporation;"[24] "fare for domestic air and sea travel for the
exclusive use or enjoyment of senior citizens;"[25] and "public railways, skyways and bus fare
for the exclusive use and enjoyment of senior citizens."[26]
Likewise, the 20% discount under R.A. 9442 applies to "all establishments relative to the
utilization of all services in hotels and similar lodging establishments; restaurants and recreation
centers for the exclusive use or enjoyment of persons with disability;"[27] admission fees
charged by theaters, cinema houses, concert halls, circuses, carnivals and other similar places of
culture, leisure and amusement for the exclusive use or enjoyment of persons with disability;"
[28] "purchase of medicines in all drugstores for the exclusive use or enjoyment of persons with
disability;"[29] "medical and dental services including diagnostic and laboratory fees such as,
but not limited to, x-rays, computerized tomography scans and blood tests in all government
facilities, in accordance with the rules and regulations to be issued by the Department of Health
(DOH), in coordination with the Philippine Health Insurance Corporation (PHILHEALTH);"[30]
"medical and dental services including diagnostic and laboratory fees, and professional fees of
attending doctors in all private hospitals and medical facilities, in accordance with the rules and
regulations issued by the DOH, in coordination with the PHILHEALTH;[31] "fare for domestic
air and sea travel for the exclusive use or enjoyment of persons with disability,"[32] and "public
railways, skyways and bus fare for the exclusive use or enjoyment of persons with disability."
[33] The 20%, discount cannot be considered minimal because not all private
establishments make a 20%, margin of profit. Besides, on its face alone, a 20% mandatory
discount based on the gross selling price is huge. The 20% mandatory discount is more
than the 12% Value Added Tax, itself not an insignificant amount.
According to the majority opinion, R.A. Nos. 9257 and 9442 are akin to regulatory laws which
are within the ambit of police power, such as the minimum wage law, zoning ordinances, price
control laws, laws regulating the operation of motels or hotels, law limiting the working hours
to eight, and similar laws falling under the same category.[34] The majority opinion states that
private establishments cannot protest that the imposition of the minimum wage law is
confiscatory, or that the imposition of the price control law deprives the affected establishments
of their supposed gains.[35]
There are instances when the State can regulate the profits of establishments but only in specific
cases. For instance, the profits of public utilities can be regulated because they operate under
franchises granted by the State. Only those who are granted franchises by the State can operate
public utilities, and these franchisees have agreed to limit their profits as condition for the grant
of the franchises. The profits of industries imbued with public interest, but which do not enjoy
franchises from the State, can also be regulated but only temporarily during emergencies like
calamities. There has to be an emergency to trigger price control on businesses and only for the
duration of the emergency. The profits of private establishments which are non-franchisees
cannot be regulated permanently, and there is no such law regulating their profits permanently.
The State can take over private property without compensation in times of war or other national
emergency under Section 23(2), Article VI of the Constitution but only for a limited period
and subject to such restrictions as Congress may provide. Under its police power, the State may
also temporarily limit or suspend business activities. One example is the two-day liquor ban
during elections under Article 261 of the Omnibus Election Code but this, again, is only for a
limited period. This is a valid exercise of police power of the State.
However, any form of permanent taking of private property is an exercise of eminent domain
that requires the State to pay just compensation. The police power to regulate business cannot
negate another provision of the Constitution like the eminent domain clause, which
requires just compensation to be paid for the taking of private property for public use.
The State has the power to regulate the conduct of the business of private establishments
as long as the regulation is reasonable, but when the regulation amounts to permanent
taking of private property for public use, there must be just compensation because the
regulation now reaches the level of eminent domain.
The majority opinion states that the laws do not place a cap on the amount of markup that
private establishments may impose on their prices.[36] Hence, according to the majority opinion,
the laws per se do not cause the losses but bad business judgment on the part of the
establishments.[37] The majority opinion adds that a level adjustment in the pricing of items is a
reasonable business measure and could even make establishments earn more.[38] However, such
an economic justification is self-defeating, for more consumers will suffer from the price
increase than will benefit from the 20% discount. Even then, such ability to increase prices
cannot legally validate a violation of the eminent domain clause.
I maintain that while the 20% discount granted to senior citizens an persons with disability is
not per se unreasonable, the tax treatment of the 20% discount as tax deduction from gross
income computed from the net cost of the goods sold or services rendered is oppressive and
confiscatory. Section 4(a) of R.A. 9257, providing that private establishments may claim the
20% discount to senior citizens as tax deduction, is patently unconstitutional. As such, Section 4
of R.A. 7432, the old law prior to the amendment by R.A. No. 9257, which allows the 20%
discount as tax credit, should be automatically reinstated. I reiterate that where amendments to a
statute are declared unconstitutional, the original statute as it existed before the amendment
remains in force.[39] An amendatory law, if declared null and void, in legal contemplation does
not exist.[40] The private establishments should therefore be allowed to claim the 20% discount
granted to senior citizens as tax credit. Likewise, Section 32 of R.A. 9442, providing that the
establishments may claim the discounts given as tax deductions based on the net cost of the
goods sold or services rendered, is also , unconstitutional. Instead, establishments should be
allowed to claim the 20% discount given to persons with disability as tax credit.
ACCORDINGLY, I vote to GRANT the petition.
[1]An Act Granting Additional Benefits and Privileges to Senior Citizens Amending for the
Purpose Republic Act No. 7432, Otherwise Known as "An Act to Maximize the Contribution of
Senior Citizens to Nation Building, Grant Benefits and Special Privileges and For Other
Purposes." It was further amended by R.A. No. 9994, the "Expanded Senior Citizens Act of
2010."
[2]An Act Amending Republic Act No. 7277, Otherwise Known as the "Magna Carta for
Disabled Persons, and For Other Purposes."
[3] 553 Phil. 120 (2007).
[4] 722 Phil. 538 (2013).
[5] 46 Phil. 440 (1924).
[6] Id. at 445.
[7] Id.
[8] Id. at 454-455.
[9] 207 Phil. 648 (1983).
[10] Id. at 654-655.
[11] Manosca v. CA, 322 Phil. 442, 448 (1996).
[12] Moday v. CA, 335 Phil. 1057 (1997).
[13] J. Bernas, S.J., The 1987 Constitution of the Philippines, A Commentary 379 (1996 ed.)
[14] National Power Corporation v. Spouses Zabala, 702 Phil. 491 (2013).
[15] Id. at 499-500.
[16] Supra note 3, at 129-130.
[17] Id. at 130.
[18]
Republic Act No. 8282, otherwise known as the Social Security Act of 1997, which
amended Republic Act No. 1161.
[19]
Republic Act No. 9679, otherwise known as the Home Development Mutual Fund Law of
2009.
[20] 496 Phil. 307 (2005).
[21] Supra note 3, at 130.
[22] Section 4(a).
[23] Section 4(b).
[24] Section 4(f).
[25] Section 4(g).
[26] Section 4(h).
[27] Section 32(a),
[28] Section 32(b).
[29] Section 32(c).
[30] Section 32(d).
[31] Section 32(e).
[32] Section 32(f).
[33] Section 32(g).
[34] Decision, p. 24.
[35] Id.
[36] Id. at 19.
[37] Id. at 20.
[38] Id. at 21.
[39]
See Government of the Philippine Islands v. Agoncillo, 50 Phil. 348 (1927), citing Eberle v.
Michigan, 232 U.S. 700 [1914], People v. Mensching, 187 N.Y.S., 8, 10 L.R.A., 625 [1907].
[40] See Coca-Cola Bottlers Phils., Inc. v. City of Manila, 526 Phil. 249 (2006).
CONCURRING AND DISSENTING OPINION
LEONEN, J.:
This case involves a Petition for Review on Certiorari questioning the constitutionality of
Section 4(a) of Republic Act No. 9257 (Expanded Senior Citizens Act of 2003), Section 32 of
Republic Act No. 9442 (Magna Carta of Persons with Disability), and Sections 5.1 and 6.1.d of
the Implementing Rules and Regulations of Republic Act No. 9442.
I concur in the ponencia 's finding that the subject provisions are constitutional.
In Manila Memorial Park, Inc. et al. vs. Secretary of Department of Social Welfare and
Development, et al.,[1] this Court has ruled on the constitutionality of Republic Act No. 9257,
and the validity of the 20% discount granted to senior citizens and of the Tax Deduction
Scheme, in which the cost of the discount is allowed as a deduction from the establishment's
gross income.[2]
This case presents the same questions, except it includes as an issue the grant of the same
benefits to persons with disability.
Thus, I restate my opinion in Manila Memorial Park.[3] I concur that the subject provisions are
constitutional. The grant of the 20% discount to senior citizens and persons with disability is a
valid exercise of police power. However, I opine that the Tax Deduction Scheme is an exercise
of the State's power of taxation. Moreover, I insist that establishments are not entitled to just
compensation, whether there is proof of loss of profits or "oppressive taking," as the subject of
the taking is not property, but a mere inchoate right.
The subject provisions grant senior citizens and persons with disability a 20% discount on
medicine purchases.[4] Establishments giving the discount may claim the costs of the discount
as tax deductions from their gross income.[5]
For senior citizens, Section 4(a) of Republic Act No. 9257[6] provides:
SECTION 4. Privileges for the Senior Citizens. — The senior citizens shall be
entitled to the following:
(a) the grant of twenty percent (20%) discount from all establishments relative to the
utilization of services in hotels and similar lodging establishments, restaurants and
recreation centers, and purchase of medicines in all establishments for the exclusive
use or enjoyment of senior citizens, including funeral and burial services for the
death of senior citizens;
....
The establishment may claim the discounts granted under (a), (f), (g) and (h) as tax
deduction based on the net cost of the goods sold or services rendered: Provided,
That the cost of the discount shall be allowed as deduction from gross income for the
same taxable year that the discount is granted. Provided, further, That the total
amount of the claimed tax deduction net of value added tax if applicable, shall be
included in their gross sales receipts for tax purposes and shall be subject to proper
documentation and to the provisions of the National Internal Revenue Code, as
amended. (Emphasis supplied)
For persons with disability, Republic Act No. 9442[7] amended Republic Act No. 7277 (Magna
Carta for Disabled Persons) to grant persons with disability a 20% discount on the purchase of
medicines. It also allowed establishments to deduct the cost of the discount from their gross
income:
SECTION 32. Persons with disability shall be entitled to the following:
....
(c) At least twenty percent (20%) discount for the purchase of medicines in all
....
The establishments may claim the discounts granted in sub-sections (a), (b), (c), (e),
(f) and (g) as tax deductions based on the net cost of the goods sold or services
rendered: Provided, however, That the cost of the discount shall be allowed as
deduction from gross income for the same taxable year that the discount is granted:
Provided, further, That the total amount of the claimed tax deduction net of value-
added tax if applicable, shall be included in their gross sales receipts for tax purposes
and shall be subject to proper documentation and to the provisions of the National
Internal Revenue Code (NIRC), as amended. (Emphasis supplied)
Thus, the Department of Social Welfare and Development, the Department of Education, the
Department of Finance, the Department of Tourism, and the Department of Transportation
promulgated the Implementing Rules and Regulations of Republic Act No. 9442 (Implementing
Rules). Sections 5.1 and 6.1.d of the Implementing Rules state:
5.1 Persons with Disability—are those individuals defined under Section 4 of RA

7277 "An Act Providing for the Rehabilitation, Self-Development and Self-Reliance
of Persons with Disability as amended and Their Integration into the Mainstream of
Society and for Other Purposes". This is defined as a person suffering from
restriction or different abilities, as a result of a mental, physical or sensory
SECTION 6. Other Privileges and Incentives. — Persons with disability shall be

entitled to the following:
6.1 Discounts from All Establishments — At least twenty percent (20%) discount
from all establishments relative to the utilization of all services in hotels and similar
lodging establishments, restaurants and recreation centers for the exclusive use or
enjoyment of persons with disability.
....
6.1.d Purchase of Medicine — at least twenty percent (20%) discount on the

purchase of medicine for the exclusive use and enjoyment of persons with disability.
All drug stores, hospitals, pharmacies, clinics and other similar establishments
selling medicines are required to provide at least twenty percent (20%) discount
subject to the guidelines issued by DOH and PHILHEALTH. (Emphasis supplied)
II
In Manila Memorial Park,[8] this Court already upheld the constitutionality of Republic Act No.
9257 and of the Tax Deduction Scheme. It strengthened its ruling in Carlos Superdrug
Corporation v. Department of Social Welfare and Development.[9] It has held that the tax
treatment is a valid exercise of police power:
The 20% discount is intended to improve the welfare of senior citizens who, at their
age, are less likely to be gainfully employed, more prone to illnesses and other
disabilities, and, thus, in need of subsidy in purchasing basic commodities. It may
not be amiss to mention also that the discount serves to honor senior citizens who
presumably spent the productive years of their lives on contributing to the
development and progress of the nation. This distinct cultural Filipino practice of
honoring the elderly is an integral part of this law.
As to its nature and effects, the 20% discount is a regulation affecting the ability of
private establishments to price their products and services relative to a special class
of individuals, senior citizens, for which the Constitution affords preferential
concern. In turn, this affects the amount of profits or income/gross sales that a
private establishment can derive from senior citizens. In other words, the subject
regulation affects the pricing, and, hence, the profitability of a private establishment.
However, it does not purport to appropriate or burden specific properties, used in the
operation or conduct of the business of private establishments, for the use or benefit
of the public, or senior citizens for that matter, but merely regulates the pricing of
goods and services relative to, and the amount of profits or income/gross sales that
such private establishments may derive from, senior citizens.
....
On its face, therefore, the subject regulation is a police power measure.[10]
I agree with the ponencia in reiterating this ruling in the present case. The imposition of the
20% discount to senior citizens and persons with disability is a valid exercise of police power. It
is a regulatory function to improve the public welfare, which imposes a differentiated pricing
system for two (2) types of customers: (1) those who are subject to the regular price, and (2)
those who are senior citizens and persons with disability. The public purpose in granting this
discount to the two (2) classifications cannot be denied.
However, as I maintained in my separate opinion in Manila Memorial Park, the Tax Deduction
Scheme is an exercise of the State's power to tax.[11]
The power of taxation is an inherent and indispensable power of the State.[12] As taxes are the
"lifeblood of the government", the power of the legislature is unlimited and plenary.[13] The
legislature is given a wide range of discretion in determining what to tax, the purpose of the tax,
how much the tax will be, who will be taxed, and where the tax will be imposed.[14]
Included in this discretion is the power to determine the method of collection of the taxes
imposed.[15] In Abakada Guro Party List v. Ermita:[16]
The power of the State to make reasonable and natural classifications for the
purposes of taxation has long been established. Whether it relates to the subject of
taxation, the kind of property, the rates to be levied, or the amounts to be raised, the
methods of assessment, valuation and collection, the State's power is entitled to
presumption of validity. As a rule, the judiciary will not interfere with such power
absent a clear showing of unreasonableness, discrimination, or arbitrariness.[17]
The State's power to tax is limited by the Constitution.[18] Taxes must be uniform and equitable,
[19] and must not be confiscatory or arbitrary.[20] It must be "exercised reasonably and in
accordance with the prescribed procedure."[21]
Nonetheless, the exercise of the power to tax is presumed valid absent any proof of violation of
these limitations.[22] In Chamber of Real Estate and Builders' Association, Inc. v. Romulo:[23]
The principal check against its abuse is to be found only in the responsibility of the
legislature (which imposes the tax) to its constituency who are to pay it.
Nevertheless, it is circumscribed by constitutional limitations. At the same time, like
any other statute, tax legislation carries a presumption of constitutionality.
The constitutional safeguard of due process is embodied in the fiat "[no] person shall
be deprived of life, liberty or property without due process of law." In Sison, Jr. v.
Ancheta, et al., we held that the due process clause may properly be invoked to
invalidate, in appropriate cases, a revenue measure when it amounts to a confiscation
of property. But in the same case, we also explained that we will not strike down a
revenue measure as unconstitutional (for being violative of the due process clause)
on the mere allegation of arbitrariness by the taxpayer. There must be a factual
foundation to such an unconstitutional taint. This merely adheres to the authoritative
doctrine that, where the due process clause is invoked, considering that it is not a
fixed rule but rather a broad standard, there is a need for proof of such persuasive
character.[24] (Emphasis supplied)
The determination that the cost of the 20% discount will be recovered as a tax deduction instead
of a tax credit is within the legislative's power to tax.[25] It is a determination of the method of
collection of taxes.[26] The legislative has the power to determine if particular costs should be
treated as deductions or if it entitles taxpayers to credits.[27]
In this case, the Congress deemed the tax deduction as the better option. There is no showing
that this option is violative of any of the constitutional limitations on the power to tax.
The Tax Deduction Scheme is uniform and equitable. Uniformity of taxation means that all
subjects of taxation similarly situated are to be treated alike both in privileges and liabilities.[28]
The taxes are uniform if: (1) the standards used are substantial and not arbitrary, (2) the
categorization is germane to the purpose of the law, (3) the law applies, all things being equal,
to both present and future conditions, and (4) the classification applies equally well to all those
belonging to the same class.[29] Since the 20% discount applies to all senior citizens and
persons with disability equally, and the tax deduction scheme applies to all establishments
granting the discounts, there is no issue on the uniformity of the tax measure.
Likewise, the tax deduction is not confiscatory or arbitrary. While the establishments cannot
recover the full cost of the granted discount, they are still not at a full loss as they may claim the
cost as a tax deduction from their gross income, and they are free to adjust prices and costs of
their products.
III
There is no merit in the contention that the State deprived them of their profits. Establishments
can always increase their price to recover their costs and increase their profitability. They can
avoid losses altogether such that it can be said that the State took nothing from them.
My opinion in Manila Memorial Park discussed the impact of the senior citizen's discount to an
establishment's revenue for the sale of memorial lots.[30]
This same principle applies to the sale of medicine to senior citizens and persons with disability.
Revenue still depends on the price, quantity, and costs of the items sold.[31]
To illustrate, if Company XYZ sells medicine, and for the sake of argument, we assume that the
medicine is acquired at zero cost, revenue is acquired multiplying the price and the quantity
sold.[32] Thus:
R= P x Q
Where:

R=Revenue

P= Price per unit

Q= Quantity sold
Before the discounts are granted to senior citizens and persons with disability, let us assume that
Company XYZ sells 16,000 bottles of antibiotic syrup at the price of P100.00. Its profit is thus
P1,600,000.00:
R=PxQ

x 16,000
R = P100.00
R = P1,600,000.00
Assuming that out of the 16,000 bottles sold, 2,200 bottles are bought by senior citizens and
1,000 bottles are purchased by persons with disability. Thus, 12,800 bottles are bought by
ordinary customers.
The subject provisions require that a 20% discount be given to senior citizens and persons with
disability. Necessarily, there will be two (2) types of revenue received by Company XYZ: (1)
revenue from ordinary customers, and (2) revenue from senior citizens and persons with
disability. Thus, a bottle of antibiotic syrup will be sold to ordinary customers at P100.00, and to
senior citizens and persons with disability at only P80.00.
The formula of the revenue of Company XYZ then becomes:
RT = RSD+ RC

RSD = PSD x QSD

RC = PC x QC

RT = (PSD x QSD) + (PC x QC)
Where RT = Total Revenue

RSD = Revenue from Senior Citizens and Persons with Disability
RC = Revenue from Ordinary Customers
PSD = Price per Unit for Senior Citizens and Persons with Disability
QSD = Quantity Sold to Senior Citizens and Persons with Disability
PC = Price for Ordinary Customers per Unit
QC = Quantity Sold to Ordinary Customers
Given this equation, the total revenue of Company XYZ becomes P1,536,000.00:
RT1 = RSD + RC

RT1 = (PSD x QSD ) + (PC x QC)

RT1 = (80 x 3,200) + (100 x 12,800)

RT1 = 256,000 + 1,280,000

RT1 = P1,536,000.00
Naturally, the revenue decreases after applying the discounts. However, the subject provisions
do not prevent Company XYZ from increasing its price to maintain its profitability.[33] Thus,
assuming it increases its price by P10.00, the revenue becomes P1,689,600, computed as
follows:
RT2 = (PSD x QSD) + (PC x QC)

RT2 = (88 x 3,200) + (110 x 12,800)

RT2 = 281,600 + 1,408,000

RT2 = P1,689,600.00
Clearly, an increase in the item's price results to an increase in the establishment's profitability,
even after the implementation of the 20% discount. As shown in the example, the price increase
may even be less than the discount given to the senior citizens and persons with disability.
The change in the price also augments the tax implications of the subject provisions. If we treat
the discount as a tax credit after the implementation of the subject provisions, Company XYZ
will have the net income of P1,335,480.00:
Gross Income (RT1) P 1,536,000

Less: Deductions (600,000)
Taxable Income 936,000
Income Tax Rate P125,000 + 32% of
excess over
P500,000
______________
Income Tax Liability 264,520
Less: Discount for (64,000)
Senior
Citizens/Persons
with Disability (Tax
Credit)
______________
Final Income Tax 200,520
Liability
______________
Net Income P1,335,480
Without the adjustments, the net income in the Tax Deduction Scheme is less than the net
income if the discounts are treated as tax credits. Thus, if the discount is treated as a tax
deduction, its income is P1,291,960.00:

Senior Citizens and
Persons with
Disability
Taxable Income 872,000
excess over
P500,000
______________
Less: Discount for 0
Senior
Citizens/Persons
with Disability (Tax
Credit)
______________
Liability
______________
However, if the price is adjusted as discussed in the earlier example, the net income becomes:

Senior Citizens and
Persons with
Disability
______________
Taxable Income 1,019,200
excess over
P500,000
______________
Less: Discount for 0
Senior
Citizen/Person with
Disability (Tax
Credit)
______________
Liability
______________
Thus, the tax deduction scheme can still allow the improvement of net income in case of a price
increase. Losses are not unavoidable. By increasing the price of the items, establishments may
be able to gain more. Moreover, bettering the efficiency of the business by minimizing costs
may maintain or improve profits.[34] In such cases, there is no confiscatory taking that justifies
the payment of just compensation.
IV
In any case, I reiterate that whether or not there is proof of loss of profits, establishments are
still not entitled to just compensation under the power of eminent domain.
Petitioners submitted financial statements to prove that they incurred losses because of the
imposition of the subject provisions. They thus claim they are entitled to just compensation.
In Manila Memorial Park, it was held that Republic Act No. 9257 was not shown to have been
unreasonable, oppressive or confiscatory enough as to amount to a "taking" of private property
subject to just compensation.[35] It emphasized that there was no proof of the losses incurred,
and that petitioners merely relied on a hypothetical computation:
The impact or effect of a regulation, such as the one under consideration, must, thus,
be determined on a case-to-case basis. Whether that line between permissible
regulation under police power and "taking" under eminent domain has been crossed
must, under the specific circumstances of this case, be subject to proof and the one
assailing the constitutionality of the regulation carries the heavy burden of proving
that the measure is unreasonable, oppressive or confiscatory. The time-honored rule
is that the burden of proving the unconstitutionality of a law rests upon the one
assailing it and "the burden becomes heavier when police power is at issue."
....
We adopted a similar line of reasoning in Carlos Superdrug Corporation when we

ruled that petitioners therein failed to prove that the 20% discount is arbitrary,
oppressive or confiscatory. We noted that no evidence, such as a financial report, to
establish the impact of the 20% discount on the overall profitability of petitioners
was presented in order to show that they would be operating at a loss due to the
subject regulation or that the continued implementation of the law would be
unconscionably detrimental to the business operations of petitioners. In the case at
bar, petitioners proceeded with a hypothetical computation of the alleged loss that
they will suffer similar to what the petitioners in Carlos Superdrug Corporation did.
Petitioners went directly to this Court without first establishing the factual bases of
their claims. Hence, the present recourse must, likewise, fail.
....
In sum, we sustain our ruling in Carlos Superdrug Corporation that the 20% senior
citizen discount and tax deduction scheme are valid exercises of police power of the
State absent a clear showing that it is arbitrary, oppressive or confiscatory.[36]
The ponencia reiterated this rule in this case. It found that it must be proven that the State
regulation is so oppressive as to amount to a compensable taking. In applying this principle to
the case at bar, it held that petitioners failed to prove the oppressive and confiscatory nature of
the subject provisions. The financial statements were deemed not enough to show the
confiscatory taking warranting just compensation.[37]
I maintain my opinion in Manila Memorial Park. I disagree insofar as the rule is premised on
the insufficient proof of the losses caused by the discount.
I opine that whether or not there is sufficient proof of actual losses, there is no compensable
taking. The provisions are still not an exercise of the power of eminent domain that requires the
payment of just compensation.
The power of eminent domain is found in the Constitution under Article III, Section 9 of the
Constitution: "Private property shall not be taken for public use without just compensation."
The requisites for the exercise of eminent domain are: (1) there must be a genuine necessity for
its exercise;[38] (2) what is taken must be private property; (3) there is taking in the
constitutional sense; [39] (4) the taking is for public use;[40] and (5) there must be payment of
just compensation.[41]
The difference between police power and eminent domain was discussed in Didipio Earth-
Savers' Multi-Purpose Association, Inc. v. Gozun:[42]
The power of eminent domain is the inherent right of the state (and of those entities
to which the power has been lawfully delegated) to condemn private property to
public use upon payment of just compensation. On the other hand, police power is
the power of the state to promote public welfare by restraining and regulating the use
of liberty and property. Although both police power and the power of eminent
domain have the general welfare for their object, and recent trends show a mingling
of the two with the latter being used as an implement of the former, there are still
traditional distinctions between the two.
Property condemned under police power is usually noxious or intended for a noxious
purpose; hence, no compensation shall be paid. Likewise, in the exercise of police
power, property rights of private individuals are subjected to restraints and burdens
in order to secure the general comfort, health, and prosperity of the state. Thus, an
ordinance prohibiting theaters from selling tickets in excess of their seating capacity
(which would result in the diminution of profits of the theater-owners) was upheld
valid as this would promote the comfort, convenience and safety of the customers. In
US. v. Toribio, the court upheld the provisions of Act No. 1147, a statute regulating
the slaughter of carabao for the purpose of conserving an adequate supply of draft
animals, as a valid exercise of police power, notwithstanding the property rights
impairment that the ordinance imposed on cattle owners.
....
According to noted constitutionalist, Fr. Joaquin Bernas, SJ, in the exercise of its
police power regulation, the state restricts the use of private property, but none of the
property interests in the bundle of rights which constitute ownership is appropriated
for use by or for the benefit of the public. Use of the property by the owner was
limited, but no aspect of the property is used by or for the public. The deprivation of
use can in fact be total and it will not constitute compensable taking if nobody else
acquires use of the property or any interest therein.
If, however, in the regulation of the use of the property, somebody else acquires the
use or interest thereof, such restriction constitutes compensable taking.[43]
(Emphasis supplied, citations omitted)
The exercise of the power of eminent domain requires that there is property that is taken from
the owner. In this case, there is no private property that may be the subject of a constitutional
taking. The subject of the alleged "taking" is the establishments' possible profits. Possible
profits cannot be acquired by the State through the exercise of the power of eminent domain.
Possible profits are yet to be earned; hence, they are yet to be owned. They are intangible
property for which establishments do not have a vested right.
A vested right is a fixed or established interest in a property that can no longer be doubted or
questioned.[44] It is an "immediate fixed right of present or future enjoyment."[45] It is the
opposite of an expectant or contingent right.[46]
In Benguet Consolidated Mining Co. v. Pineda,[47] this Court, citing Corpus Juris Secundum,
elaborated:
Rights are vested when the right to enjoyment, present or prospective, has become
the property of some particular person or persons as a present interest. The right
must be absolute, complete, and unconditional, independent of a contingency, and a
mere expectancy of future benefit, or a contingent interest in property founded on
anticipated continuance of existing laws, does not constitute a vested right. So,
inchoate rights which have not been acted on are not vested. (16 C. J. S. 214-215.)
[48]
Establishments do not have a vested right on possible profits. Their right is not yet absolute,
complete, and unconditional. Profits are earned only after the sale of their products, and after
deducting costs. These sales may or may not occur. The existence of the profit or the loss is not
certain. It cannot be assumed that the profits will be earned or that losses will be incurred.
Assuming there are profits or losses, its amount is undeterminable.
Thus, for purposes of eminent domain, there is still no property that can be taken. There is no
property owned. There is nothing to compensate.
The ponencia shares the same view. However, I maintain that to be consistent with this view,
the proof of losses (or the lack of profits) must be irrelevant. No matter the evidence,
petitioners cannot be entitled to just compensation.
Assuming there was a "taking," what was taken is not property contemplated by the exercise of
eminent domain. Eminent domain pertains to physical property. In my opinion in Manila
Memorial Park:[49]
Most if not all jurisprudence on eminent domain involves real property, specifically
that of land. Although Rule 67 of the Rules of Court, the rules governing
expropriation proceedings, requires the complaint to "describe the real or personal
property sought to be expropriated," this refers to tangible personal property for
which the court will deliberate as to its value for purposes of just compensation.
In a sense, the forced nature of a sale under eminent domain is more justified for real
property such as land. The common situation is that the government needs a specific
plot, for the construction of a public highway for example, and the private owner
cannot move his land to avoid being part of the project. On the other hand, most
tangible personal or movable property need not be subject of a forced sale when the
government can procure these items in a public bidding with several able and willing
private sellers.
In Republic of the Philippines v. Vda. de Castellvi, this Court also laid down five (5)
''circumstances [that] must be present in the 'taking' of property for purposes of
eminent domain" as follows:
First, the expropriator must enter a private property[.]
Second, the entrance into private property must be for more than a
momentary period[.]
Third, the entry into the property should be under warrant or color of
legal authority[.]
Fourth, the property must be devoted to a public use or otherwise

informally appropriated or injuriously affected[.]
Fifth, the utilization of the property for public use must be in such a way
as to oust the owner and deprive him of all beneficial enjoyment of the
property[.]
The requirement for "entry" or the element of "oust[ing] the owner" is not possible
for intangible personal property such as profits.
....
At most, profits can materialize in the form of cash, but even then, this is not the
private property contemplated by the Constitution and whose value will be
deliberated by courts for purposes of just compensation. We cannot compensate cash
for cash.[50]
The right to profit is an intangible right, which cannot be appropriated for public use. In fact, it
is a right and not property in itself. Moreover, the right was merely restricted, not taken. The
establishment still is given a wide discretion on how to address the changes caused by the
subject provisions, and how to ensure their profits. As shown in the above example, they may
adjust their pricing, and improve on the costs of goods or their efficiency to manage potential
outcomes. Profits may thus still be earned.
Losses and profits are still highly dependent on business judgments based on the economic
environment. Whether or not losses are incurred cannot be attributable to the law alone. In fact,
the law is one (1) of the givens that businesses must adjust to. It is not the law that must adjust
for businesses. Businesses cannot claim compensation for a regulatory measure which caused
dips in their profit. Pricing and costs may be adjusted accordingly, and it cannot be the law that
will be limited by business decisions, which establishments refuse to change.
Thus, in the exercise of its police power, the State may make variances in the pricing of goods
to accommodate public policy, and to promote social justice. The State's determination of how
establishments can recover the cost of the discounted prices is also a valid exercise of its power
to tax. In this instance, the legislative chose to allow establishments a partial recovery of the
granted discount through a tax deduction instead of a tax credit.
Both tax deductions and tax credits are valid options for the Congress, although the impacts of
the two (2) are different.
As shown above, a tax deduction will naturally cause establishments to increase their prices to
fully recover the cost of the discounts, and prevent losses. The burden of the cost is thus passed
on to ordinary customers to non-senior citizens with no disability.
However, the Philippine market is not homogenous. The impact of prices on ordinary customers
from various sectors in society is different. It is possible that the poorer sectors in society are
denied options because they can no longer afford the items that used to be available to them
before the price increase caused by the granting of the discounts.
In the example above, a bottle of antibiotic syrup costs P100.00 prior to the grant of the
discount. When the discount was imposed, Company XYZ adjusted its price by increasing it to
P110.00. Under the subject provisions, a 78-year-old business tycoon earning billions every year
is entitled to a 20% senior citizen discount. Thus, the business tycoon will be charged with only
P88.00. On the other hand, an ordinary customer will have to allot a bigger portion of his wage
to buy antibiotics. This 10-peso difference may be a bigger burden for the ordinary customer
belonging t the poorer sectors of society. It may not be felt by some ordinary customers, but it
may cause budgetary strains or may make it completely unaffordable for others.
Another example is the grant of free admissions in cinemas to senior citizens. Again, the cost of
this discount is passed on to the ordinary consumer. While there may be those who do not feel
the impact of the price increase, those who are living on small wages, who used to be able to
watch films in the theatres, may no longer have enough in their budgets to pay for the difference
in the price.
Necessarily, the public good is affected. The subject provisions seek the betterment of public
welfare by improving the lives of its senior citizens and persons with disability. However, the
practical effect of the Tax Deduction Scheme may be prejudicial to those ordinary customers
who cannot keep up with the price increase. As a consequence, citizens may be denied certain
goods and services because the burden falls on all ordinary customers, without considering their
resources or their ability to pay. There may be thus an issue on equitability and progressiveness
in terms of its effects.
A tax credit, on the other hand, allows the cost to be shouldered completely by the government.
In such a case, establishments will not need to adjust its prices to recover the cost of the
discount. Moreover, when it is the government who shoulders the cost through taxes paid by its
people, the issue on equitability and progressiveness is better addressed. Taxes are
constitutionally mandated to be equitable.[51] Congress is directed to evolve a progressive
system of taxation.[52] Thus, when the government carries the burden of the discount through
taxes collected in an equitable and progressive manner, the objective of improving the public
welfare may still be achieved without much prejudice to the poorer sectors of society.
Nonetheless, this is a question of policy, and one which pertains to the wisdom of the
legislative.
ACCORDINGLY, I vote to DENY the Petition, and to declare that Section 4(a) of Republic
Act No. 9257 and Section 32 of Republic Act No. 9442 are CONSTITUTIONAL.

[1] 722 Phil. 538 (2013) [Per J. Del Castillo, En Banc].
[2] Id. at 602.
[3]Dissenting Opinion of J. Leonen in Manila Memorial Park, Inc. v. Secretary of Social

Welfare and Development, 722 Phil. 538, 621-644 (2013) [Per J. Del Castillo, En Banc].
[4]Rep. Act No. 9257, sec. 4(a) or the Expanded Senior Citizens Act of 2003, Rep. Act No.
9442, sec. 32 or the Magna Carta of Persons with Disability, and Implementing Rules and
Regulations of Rep. Act No. 9442, sec. 5.1 and 6.1.d.
[5]Rep. Act No. 9257, sec. 4(a), Rep. Act No. 9442, sec. 32, and Implementing Rules and
Regulations of Rep. Act No. 9442, sec. 5.1 and 6.1.d.
[6] Republic Act No. 9257 amended Republic Act No. 7432 (Senior Citizens Act) which had an
income ceiling for the grant of the discount to senior citizens and which allowed establishments
to claim the cost of the discount as a tax credit.
Rep. Act No. 7432, sec. 4 provides:
Section 4. Privileges for the Senior

Citizens. -The senior citizens shall be entitled to the
following: a) the grant of twenty percent (20%) discount from all establishments relative to
utilization of transportation services, hotels and similar lodging establishment, restaurants and
recreation centers and purchase of medicine anywhere in the country: Provided, That private
establishments may claim the cost as tax credit[.]
[7] An Act Amending Republic Act No. 7277 (2007).

[8] 722 Phil. 538 (2013) [Per J. Del Castillo, En Banc].
[9] 553 Phil. 120 (2007) [Per J. Azcuna, En Banc].
[10] Id. at 578-579.

[12]Chamber of Real Estate and Builders' Association, Inc. v. Romulo, 628 Phil. 508, 529-530
(2010) [Per J. Corona, En Banc].
[13] Id.
[14] Id.
[15]
Abakada Guro Party List v. Ermita, 506 Phil. 1, 306 (2005) [Per J. Austria-Martinez, En
Banc].
[16] 506 Phil. 1 (2005) [Per J. Austria-Martinez, En Banc].
[17]
Abakada Guro Party List v Ermita, 506 Phil. 1, 306 (2005) [Per J. Austria-Martinez, En
Banc].
[18]Chamber of Real Estate and Builders' Association, Inc. v. Romulo, 628 Phil. 508, 529-530
[19]CONST. (1987), art. VI, sec. 28 provides:

Section 28. (1) The rule of taxation shall be uniform and equitable. The Congress shall evolve a
progressive system of taxation.n...
[20] Commissioner v. Algue, Inc., 241 Phil. 829, 836 (1988) [Per J. Cruz, First Division].
[21] Id.
[22]Chamber of Real Estate and Builders' Association, Inc. v. Romulo, 628 Phil. 508, 530
[23] Id.
[24] Id.

Welfare and Development, 722 Phil. 538, 633 (2013) [Per J. Del Castillo, En Banc].
[26] Id.
[27] Id.
[28] Tan v. Del Rosario, Jr., 307 Phil. 342, 349-350 (1994) (Per J. Vitug, En Banc].
[29] Id.

[31] Id.
[32]Id.
Footnote
23: Revenue in the economic sense is not usually subject to such simplistic treatment.
Costs must be taken into consideration. In economics, to evaluate the combination of factors to
be used by a profit-maximizing firm, an analysis of the marginal product of inputs is compared
to the marginal revenue. Economists usually compare if an additional unit of labor will
contribute to additional productivity. For a more comprehensive explanation, refer to P.A.
SAMUELSON AND W.D. NORDHAUS, ECONOMICS 225-239 (Eighteenth Edition, 2005).
[33] Dissenting Opinion of Manila Memorial Park, Inc. v. Secretary of Social Welfare and
Development, 722 Phil. 538, 627-632 (2013) [Per J. Del Castillo, En Banc].
Footnote 24: To determine the price for both ordinary customers and senior
citizens and persons
with disability that will retain the same level of profitability, the formula for the price for
ordinary customers is PC = R0/(0.8QS + QC) where R0 is the total revenue before the senior
citizen discount was given.
[34] Dissenting Opinion of J. Leonen in Manila Memorial Park, Inc. v. Secretary of Social
Welfare and Development, 722 Phil. 538, 627-632 (20 13) [Per J. Del Castillo, En Banc].
Footnote 26: Another algebraic formula will show us how costs should be minimized to
retain
the same level of profitability. The formula is C1 = C0 -[(20% x PC) x QS] where:

C1 =Cost of producing all quantities after the discount policy

C0 =Cost of producing all quantities before the discount policy

PC =Price per unit for Ordinary Citizens

QS =Quantity Sold to Senior Citizens
[35] ManilaMemorial Park, Inc. v. Secretary of Social Welfare and Development, 722 Phil. 538,
581 (2013) [Per J. Del Castillo, En Banc].
[36] Id. at 581-583.
[37]Ponencia, pp. 17-18; The ponencia found that the financial statements of the petitioners do
not show that their incurred losses were due to the discounts. It noted that what depeleted the
income of the company was its direct costs and operating expenses. It also observed that the
records did not show the percentage of regular customers vis-a-vis the senior citizens and
persons with disability. Additionally, it found that the entire sales and other services offered to
the public must be considered. A singular transaction or the purchases made by senior citizens
and persons with disability alone cannot be the sole basis of the law's effect on the profitability
of the business. It likewise pointed out that the petitioners did not show how it adjusted to the
changes brought by the provisions. It noted the admission that the losses were due to its failure
take measures to address the new circumstances brought by the provisions. It asserted that it is
inaccurate that the petitioners are not provided a means to recoup their losses. It is not automatic
that the change in tax treatment will result in loss of profits considering the law does not place a
limit on the amount that they may charge for their items. It also failed to note that business
decisions must consider laws in effect.
[38] Lagcao vs. Judge Labra, 483 Phil. 303, 312 (2004) [Per J. Corona, En Banc].
[39] Republic v. Vda. de Castellvi, 157 Phil. 329, 344-347 [Per J. Zaldivar, En Banc].
[40]Reyes vs. National Housing Authority, 443 Phil. 603, 610-611 (2003) [Per J. Puno, Third
Division].
[41] CONST. (1987), art. III, sec. 9.
[42] 520 Phil. 457 (2006) [Per J. Chico-Nazario, First Division].
[43] Id. at 476-478.
[44]Benguet Consolidated Mining Co. v. Pineda, 98 Phil. 711-739, 722 (1956) [Per J. J.B.L.
Reyes, Second Division]; See also Heirs of Zari v. Santos, 137 Phil. 79 (1969) [Per J. Sanchez,
En Banc].
[45] Id.; See also Heirs of Zari v. Santos, 137 Phil. 79 (1969) [Per J. Sanchez, En Banc].
[46] Id.; See also Heirs of Zari v. Santos, 137 Phil. 79 (1969) [Per J. Sanchez, En Banc].
[47]Benguet Consolidated Mining Co. v. Pineda, 98 Phil. 711-739 (1956) [Per J. J.B.L. Reyes,
Second Division].
[48] Id. at 722.
[49] Manila Memorial Park, Inc. v. Secretary of Social Welfare and Development, 722 Phil. 538
(2013) [Per J. Del Castillo, En Banc].
[50] Id. at 640-642.

progressive system of taxation.n ...
progressive system of taxation.
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795 Phil. 166
THIRD DIVISION
[ G.R. No. 194561, September 14, 2016 ]
DRUGSTORES ASSOCIATION OF THE PHILIPPINES, INC. AND
NORTHERN LUZON DRUG CORPORATION, PETITIONERS, VS.
NATIONAL COUNCIL ON DISABILITY AFFAIRS; DEPARTMENT OF
HEALTH; DEPARTMENT OF FINANCE; BUREAU OF INTERNAL
REVENUE; DEPARTMENT OF THE INTERIOR AND LOCAL
GOVERNMENT; AND DEPARTMENT OF SOCIAL WELFARE AND
DEVELOPMENT, RESPONDENTS.

DECISION
PERALTA, J.:
Before us is a Petition for Review on Certiorari[1] with a Prayer for a Temporary Restraining
Order and/or Writ of Preliminary Injunction which seeks to annul and set aside the Decision[2]
dated July 26, 2010, and the Resolution[3] dated November 19, 2010 of the Court of Appeals
(CA) in CA-G.R. SP No. 109903. The CA dismissed petitioners' Petition for Prohibition[4] and
upheld the constitutionality of the mandatory twenty percent (20%) discount on the purchase of
medicine by persons with disability (PWD).

The antecedents are as follows:

On March 24, 1992, Republic Act (R.A.) No. 7277, entitled "An Act Providing for the
Rehabilitation, Self-Development and Self-Reliance of Disabled Persons and their Integration
into the Mainstream of Society and for Other Purposes," otherwise known as the "Magna Carta
for Disabled Persons," was passed into law.[5] The law defines "disabled persons",
"impairment" and "disability" as follows:

SECTION 4. Definition of Terms. - For purposes of this Act, these terms are defined
as follows:

(a) Disabled Persons are those suffering from restriction of different abilities, as a
result of a mental, physical or sensory impairment, to perform an activity in the
manner or within the range considered normal for a human being;

(b) Impairment is any loss, diminution or aberration of psychological, physiological,

or anatomical structure of function;

(c) Disability shall mean (1) a physical or mental impairment that substantially limits
one or more psychological, physiological or anatomical function of an individual or
activities of such individual; (2) a record of such an impairment; or (3) being
regarded as having such an impairment.[6]
On April 30, 2007, Republic Act No. 9442[7] was enacted amending R.A. No. 7277. The Title
of R.A. No. 7277 was amended to read as "Magna Carta for Persons with Disability" and all
references on the law to "disabled persons" were amended to read as "persons with disability"
(PWD).[8] Specifically, R.A. No. 9442 granted the PWDs a twenty (20) percent discount on the
purchase of medicine, and a tax deduction scheme was adopted wherein covered establishments
may deduct the discount granted from gross income based on the net cost of goods sold or
services rendered:

CHAPTER 8. Other Privileges and Incentives. SEC. 32. Persons with disability shall
be entitled to the following:

xxxx

At least twenty percent (20%) discount for the purchase of medicines in all
(d)
xxxx

The abovementioned privileges are available only to persons with disability who are
Filipino citizens upon submission of any of the following as proof of his/her
entitlement thereto:

(i) An identification card issued by the city or municipal mayor or the barangay
captain of the place where the person with disability resides;
(ii) The passport of the person with disability concerned; or
(ii) Transportation discount fare Identification Card (ID) issued by the National
Council for the Welfare of Disabled Persons (NCWDP).

xxxx

The establishments may claim the discounts granted in subsections (a), (b), (c), (f)
and (g) as tax deductions based on the net cost of the goods sold or services
rendered: Provided, however, That the cost of the discount shall be allowed as
deduction from gross income for the same taxable year that the discount is granted:
Provided, further, That the total amount of the claimed tax deduction net of value-
added tax if applicable, shall be included in their gross sales receipts for tax purposes
and shall be subject to proper documentation and to the provisions of the National
Internal Revenue Code (NIRC), as amended.[9]

The Implementing Rules and Regulations (IRR) of R.A. No. 9442[10] was jointly promulgated
by the Department of Social Welfare and Development (DSWD), Department of Education,
Department of Finance (DOF), Department of Tourism, Department of Transportation and
Communication, Department of the Interior and Local Government (DILG) and Department of
Agriculture. Insofar as pertinent to this petition, the salient portions of the IRR are hereunder
quoted:[11]
RULE III. DEFINITION OF TERMS

Section 5. Definition of Terms. For purposes of these Rules and Regulations, these
terms are defined as follows:

5.1. Persons with Disability - are those individuals defined under Section 4 of RA
7277 "An Act Providing for the Rehabilitation, Self-Development and Self-Reliance
of Persons with Disability as amended and their integration into the Mainstream of
Society and for Other Purposes". This is defined as a person suffering from
restriction or different abilities, as a result of a mental, physical or sensory

xxxx

RULE IV. PRIVILEGES AND INCENTIVES FOR THE PERSONS WITH

DISABILITY

Section 6. Other Privileges and Incentives. Persons with disability shall be entitled
to the following:

xxxx

6.1.d. Purchase of Medicine - at least twenty percent (20%) discount on the purchase
of medicine for the exclusive use and enjoyment of persons with disability. All
drugstores, hospital, pharmacies, clinics and other similar establishments selling
medicines are required to provide at least twenty percent (20%) discount subject to
the guidelines issued by DOH and PHILHEALTH.[12]

xxxx

6.11 The abovementioned privileges are available only to persons with disability
who are Filipino citizens upon submission of any of the following as proof of his/her
entitlement thereto subject to the guidelines issued by the NCWDP in coordination
with DSWD, DOH and DILG.

6.11.1 An identification card issued by the city or municipal mayor or the

barangay captain of the place where the person with disability resides;

6.11.2 The passport of the persons with disability concerned; or

6.11.3 Transportation discount fare Identification Card (ID) issued by the

National Council for the Welfare of Disabled Persons (NCWDP).
However, upon effectivity of this Implementing Rules and Regulations,
NCWDP will already adopt the Identification Card issued by the Local
Government Unit for purposes of uniformity in the implementation.
NCWDP will provide the design and specification of the identification
card that will be issued by the Local Government Units.[13]
6.14. Availmenl of Tax Deductions by Establishment Granting Twenty Percent. 20%

Discount - The establishments may claim the discounts granted in sub-sections (6.1),
(6.2), (6.4), (6.5) and (6.6) as tax deductions based on the net cost of the goods sold
or services rendered: Provided, however, that the cost of the discount shall be
allowed as deduction from gross income for the same taxable year that the discount
is granted: Provided, further, That the total amount of the claimed tax deduction net
of value-added tax if applicable, shall be included in their gross sales receipts for tax
National Internal Revenue Code, as amended.

On April 23, 2008, the National Council on Disability Affairs (NCDA)[14] issued
Administrative Order (A.O.) No. 1, Series of 2008,[15] prescribing guidelines which should
serve as a mechanism for the issuance of a PWD Identification Card (IDC) which shall be the
basis for providing privileges and discounts to bona fide PWDs in accordance with R.A. 9442:

IV. INSTITUTIONAL ARRANGEMENTS

A. The Local Government Unit of the City or Municipal Office shall implement
these guidelines in the issuance of the PWD-IDC

xxxx

D. Issuance of the appropriate document to confirm the medical condition of the

applicant is as follows:

Disability Document Issuing Entity

Licensed Private or
Apparent Disability Medical Certificate
Government Physician
Licensed Teacher duly
School Assessment signed by the School
Principal
Certificate of Head of the Business
Disability Establishment or Head

of Non-Government
Organization
Licensed Private or
Non-Apparent Disability Medical Certificate
Government Physician
E. PWD Registration Forms and ID Cards shall be issued and signed by the City or
Municipal Mayor, or Barangay Captain.

xxxx
V. IMPLEMENTING GUIDELINES AND PROCEDURES

Any bonafide person with permanent disability can apply for the issuance of the
PWD-IDC. His/her caregiver can assist in the application process. Procedures for the
issuance of the ID Cards are as follows:

A. Completion of the Requirements. Complete and/or make available the following

requirements:

1. Two "1x1" recent ID pictures with the names, and signatures or

thumbmarks at the back of the picture

2. One (1) Valid ID

3. Document to confirm the medical or disability condition (See

Section IV, D for the required document).

On December 9, 2008, the DOF issued Revenue Regulations No. 1-2009[16] prescribing rules
and regulations to implement R.A. 9442 relative to the tax privileges of PWDs and tax
incentives for establishments granting the discount. Section 4 of Revenue Regulations No. 001-
09 states that drugstores can only deduct the 20% discount from their gross income subject to
some conditions.[17]

On May 20, 2009, the DOH issued A.O. No. 2009-0011[18] specifically stating that the grant of
20% discount shall be provided in the purchase of branded medicines and unbranded generic
medicines from all establishments dispensing medicines for the exclusive use of the PWDs.[19]
It also detailed the guidelines for the provision of medical and related discounts and special
privileges to PWDs pursuant to R.A. 9442.[20]

On July 28, 2009, petitioners filed a Petition for Prohibition with application for a Temporary
Restraining Order and/or a Writ of Preliminary Injunction[21] before the Court of Appeals to
annul and enjoin the implementation of the following laws:

1) Section 32 of R.A. No. 7277 as amended by R.A. No. 9442;

2) Section 6, Rule IV of the Implementing Rules and Regulations of R.A. No. 9442;

3) NCDA A.O. No. 1;

4) DOF Revenue Regulation No. 1-2009;

5) DOH A.O. No. 2009-0011.

On July 26, 2010, the CA rendered a Decision upholding the constitutionality of R.A. 7277 as
amended, as well as the assailed administrative issuances. However, the CA suspended the
effectivity of NCDA A.O. No. 1 pending proof of respondent NCDA's compliance with filing of
said administrative order with the Office of the National Administrative Register (ONAR) and
its publication in a newspaper of general circulation. The dispositive portion of the Decision
states:
WHEREFORE, the petition is PARTLY GRANTED. The effectivity of NCDA

Administrative Order No. 1 is hereby SUSPENDED pending Respondent's
compliance with the proof of filing of NCDA Administrative Order No. 1 with the
Office of the National Administrative Register and its publication in a newspaper of
general circulation.

Respondent NCDA filed a motion for reconsideration before the CA to lift the suspension of the
implementation of NCDA A.O. No. 1 attaching thereto proof of its publication in the Philippine
Star and Daily Tribune on August 12, 2010, as well as a certification from the ONAR showing
that the same was filed with the said office on October 22, 2009.[22] Likewise, petitioners filed a
motion for reconsideration of the CA Decision.

In a Resolution dated November 19, 2010, the CA dismissed petitioners' motion for
reconsideration and lifted the suspension of the effectivity of NCDA A.O. No. 1 considering the
filing of the same with ONAR and its publication in a newspaper of general circulation.

Hence, the instant petition raising the following issues:

I. THE CA SERIOUSLY ERRED ON A QUESTION OF SUBSTANCE WHEN IT

RULED THAT THE MANDATED PWD DISCOUNT IS A VALID EXERCISE OF
POLICE POWER. ON THE CONTRARY, IT IS AN INVALID EXERCISE OF
THE POWER OF EMINENT DOMAIN BECAUSE IT FAILS TO PROVIDE JUST
COMPENSATION TO PETITIONERS AND OTHER SIMILARLY SITUATED
DRUGSTORES;

II. THE CA SERIOUSLY ERRED WHEN IT RULED THAT SECTION 32 OF RA

7277 AS AMENDED BY RA 9442, NCDA AO 1 AND THE OTHER
IMPLEMENTING REGULATIONS DID NOT VIOLATE THE DUE PROCESS
CLAUSE;

III. THE CA SERIOUSLY ERRED WHEN IT RULED THAT THE DEFINITIONS

OF DISABILITIES UNDER SECTION 4(A), SECTION 4(B) AND SECTION 4(C)
OF RA 7277 AS AMENDED BY RA 9442, RULE 1 OF THE IMPLEMENTING
RULES AND REGULATIONS[23] OF RA 7277, SECTION 5.1 OF THE
IMPLEMENTING RULES AND REGULATIONS OF RA 9442, NCDA AO 1
AND DOH AO 2009-11 ARE NOT VAGUE, AMBIGUOUS AND
UNCONSTITUTIONAL;

IV. THE CA SERIOUSLY ERRED WHEN IT RULED THAT THE MANDATED

PWD DISCOUNT DOES NOT VIOLATE THE EQUAL PROTECTION CLAUSE.

We deny the petition.
The CA is correct when it applied by analogy the case of Carlos Superdrug Corporation et al. v.
DSWD, et al.[24] wherein We pronouced that Section 4 of R.A. No. 9257 which grants 20%
discount on the purchase of medicine of senior citizens is a legitimate exercise of police power:
benefits.[25] Accordingly, it has been described as the most essential, insistent and
the least limitable of powers, extending as it does to all the great public needs.[26] It
is [t]he power vested in the legislature by the constitution to make, ordain, and
same.[27]

though sheltered by due process, must yield to general welfare.[28]

Police power as an attribute to promote the common good would be diluted

considerably if on the mere plea of petitioners that they will suffer loss of earnings
and capital, the questioned provision is invalidated. Moreover, in the absence of
evidence demonstrating the alleged confiscatory effect of the provision in question,
there is no basis for its nullification in view of the presumption of validity which
every law has in its favor.[29]

Police power is the power of the state to promote public welfare by restraining and regulating
the use of liberty and property. On the other hand, the power of eminent domain is the inherent
right of the state (and of those entities to which the power has been lawfully delegated) to
condemn private property to public use upon payment of just compensation. In the exercise of
police power, property rights of private individuals are subjected to restraints and burdens in
order to secure the general comfort, health, and prosperity of the state.[30] A legislative act
based on the police power requires the concurrence of a lawful subject and a lawful method. In
more familiar words, (a) the interests of the public generally, as distinguished from those of a
particular class, should justify the interference of the state; and (b) the means employed are
reasonably necessary for the accomplishment of the purpose and not unduly oppressive upon
individuals.[31]

R.A. No. 7277 was enacted primarily to provide full support to the improvement of the total
well-being of PWDs and their integration into the mainstream of society. The priority given to
PWDs finds its basis in the Constitution:

ARTICLE XII
NATIONAL ECONOMY AND PATRIMONY
xxxx
Section 6. The use of property bears a social function, and all economic agents shall
contribute to the common good. Individuals and private groups, including
corporations, cooperatives, and similar collective organizations, shall have the right
to own, establish, and operate economic enterprises, subject to the duty of the State
to promote distributive justice and to intervene when the common good so demands.
[32]
ARTICLE XIII
SOCIAL JUSTICE AND HUMAN RIGHTS
xxxx
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.[33]
Thus, R.A. No. 7277 provides:

SECTION 2. Declaration of Policy. The grant of the rights and privileges for
disabled persons shall be guided by the following principles:

(a). Disabled persons are part of the Philippine society, thus the Senate shall give full
support to the improvement of the total well-being of disabled persons and their
integration into the mainstream of society.

Toward this end, the State shall adopt policies ensuring the rehabilitation, self-
development and self-reliance of disabled persons.

It shall develop their skills and potentials to enable them to compete favorably for
available opportunities.

(b). Disabled persons have the same rights as other people to take their proper place
in society. They should be able to live freely and as independently as possible. This
must be the concern of everyone - the family, community and all government and
non-government organizations.

Disabled person's rights must never be perceived as welfare services by the

Government.

xxxx
(d). The State also recognizes the role of the private sector in promoting
the welfare of disabled persons and shall encourage partnership in
programs that address their needs and concerns.[34]
To implement the above policies, R.A. No. 9442 which amended R.A. No. 7277 grants
incentives and benefits including a twenty percent (20%) discount to PWDs in the purchase of
medicines; fares for domestic air, sea and land travels including public railways and skyways;
recreation and amusement centers including theaters, food chains and restaurants.[35] This is
specifically stated in Section 4 of the IRR of R.A. No. 9442:

Section 4. Policies and Objectives - It is the objective of Republic Act No. 9442 to
provide persons with disability, the opportunity to participate fully into the
mainstream of society by granting them at least twenty percent (20%) discount
in all basic services. It is a declared policy of RA 7277 that persons with disability
are part of Philippine society, and thus the State shall give full support to the
improvement of their total wellbeing and their integration into the mainstream
of society. They have the same rights as other people to take their proper place in
society. They should be able to live freely and as independently as possible. This
must be the concern of everyone the family, community and all government and non-
government organizations. Rights of persons with disability must never be perceived
as welfare services. Prohibitions on verbal, non-verbal ridicule and vilification
against persons with disability shall always be observed at all times.[36]

Hence, the PWD mandatory discount on the purchase of medicine is supported by a valid
objective or purpose as aforementioned. It has a valid subject considering that the concept of
public use is no longer confined to the traditional notion of use by the public, but held
synonymous with public interest, public benefit, public welfare, and public convenience. As in
the case of senior citizens,[37] the discount privilege to which the PWDs are entitled is actually a
benefit enjoyed by the general public to which these citizens belong. The means employed in
invoking the active participation of the private sector, in order to achieve the purpose or
objective of the law, is reasonably and directly related.[38] Also, the means employed to provide
a fair, just and quality health care to PWDs are reasonably related to its accomplishment, and
are not oppressive, considering that as a form of reimbursement, the discount extended to PWDs
in the purchase of medicine can be claimed by the establishments as allowable tax deductions
pursuant to Section 32 of R.A. No. 9442 as implemented in Section 4 of DOF Revenue
Regulations No. 1-2009. Otherwise stated, the discount reduces taxable income upon which the
tax liability of the establishments is computed.

Further, petitioners aver that Section 32 of R.A. No. 7277 as amended by R.A. No. 9442 is
unconstitutional and void for violating the due process clause of the Constitution since
entitlement to the 20% discount is allegedly merely based on any of the three documents
mentioned in the provision, namely: (i) an identification card issued by the city or municipal
mayor or the barangay captain of the place where the PWD resides; (ii) the passport of the
PWD; or (iii) transportation discount fare identification card issued by NCDA. Petitioners, thus,
maintain that none of the said documents has any relation to a medical finding of disability, and
the grant of the discount is allegedly without any process for the determination of a PWD in
accordance with law.
Section 32 of R.A. No. 7277, as amended by R.A. No. 9442, must be read with its IRR which
stated that upon its effectivity, NCWDP (which is the government agency tasked to ensure the
implementation of RA 7277), would adopt the IDC issued by the local government units for
purposes of uniformity in the implementation.[39] Thus, NCDA A.O. No. 1 provides the
reasonable guidelines in the issuance of IDCs to PWDs as proof of their entitlement to the
privileges and incentives under the law[40] and fills the details in the implementation of the law.
As stated in NCDA A.O. No. 1, before an IDC is issued by the city or municipal mayor or the
barangay captain,[41] or the Chairman of the NCDA,[42] the applicant must first secure a
medical certificate issued by a licensed private or government physician that will confirm his
medical or disability condition. If an applicant is an employee with apparent disability, a
"certificate of disability" issued by the head of the business establishment or the head of the
non-governmental organization is needed for him to be issued a PWD-IDC. For a student with
apparent disability, the "school assessment" issued by the teacher and signed by the school
principal should be presented to avail of a PWD-ID.
Petitioners' insistence that Part IV (D) of NCDA Administrative Order No. 1 is void because it
allows allegedly non-competent persons like teachers, head of establishments and heads of Non-
Governmental Organizations (NGOs) to confirm the medical condition of the applicant is
misplaced. It must be stressed that only for apparent disabilities can the teacher or head of a
business establishment validly issue the mentioned required document because, obviously, the
disability is easily seen or clearly visible. It is, therefore, not an unqualified grant of authority
for the said non-medical persons as it is simply limited to apparent disabilities. For a non-
apparent disability or a disability condition that is not easily seen or clearly visible, the
disability can only be validated by a licensed private or government physician, and a medical
certificate has to be presented in the procurement of an IDC. Relative to this issue, the CA
validly ruled, thus:
We agree with the Office of the Solicitor General's (OSG) ratiocination that teachers,
heads of business establishments and heads of NGOs can validly confirm the
medical condition of their students/employees with apparent disability for obvious
reasons as compared to non-apparent disability which can only be determined by
licensed physicians. Under the Labor Code, disabled persons are eligible as
apprentices or learners provided that their handicap are not as much as to
effectively impede the performance of their job. We find that heads of business
establishments can validly issue certificates of disability of their employees because
aside from the fact that they can obviously validate the disability, they also have
medical records of the employees as a pre-requisite in the hiring of employees.
Hence, Part IV (D) of NCDA AO No. 1 is logical and valid.[43]

Furthermore, DOH A.O. No. 2009-11 prescribes additional guidelines for the 20% discount in
the purchase of all medicines for the exclusive use of PWD.[44] To avail of the discount, the
PWD must not only present his I.D. but also the doctor's prescription stating, among others, the
generic name of the medicine, the physician's address, contact number and professional license
number, professional tax receipt number and narcotic license number, if applicable. A purchase
booklet issued by the local social/health office is also required in the purchase of over-the-
counter medicines. Likewise, any single dispensing of medicine must be in accordance with the
prescription issued by the physician and should not exceed a one (1) month supply. Therefore,
as correctly argued by the respondents, Section 32 of R.A. No. 7277 as amended by R.A. No.
9442 complies with the standards of substantive due process.
We are likewise not persuaded by the argument of petitioners that the definition of "disabilities"
under the subject laws is vague and ambiguous because it is allegedly so general and broad that
the person tasked with implementing the law will undoubtedly arrive at different interpretations
and applications of the law. Aside from the definitions of a "person with disability" or "disabled
persons" under Section 4 of R.A. No. 7277 as amended by R.A. No. 9442 and in the IRR of RA
9442, NCDA A.O. No. 1 also provides:
4. Identification Cards shall be issued to any bonafide PWD with permanent

disabilities due to any one or more of the following conditions: psychosocial,
chronic illness, learning, mental, visual, orthopedic, speech and hearing
conditions. This includes persons suffering from disabling diseases resulting to
the person's limitations to do day to day activities as normally as possible such
as but not limited to those undergoing dialysis, heart disorders, severe cancer
cases and such other similar cases resulting to temporary or permanent
disability.[45]

Similarly, DOH A.O. No. 2009-0011 defines the different categories of disability as follows:

Rule IV, Section 4, Paragraph B of the Implementing Rules and Regulations (IRR)
of this Act required the Department of Health to address the health concerns of
seven (7) different categories of disability, which include the following: (1)
Psychological and behavioral disabilities (2) Chronic illness with disabilities
(3)Learning(cognitive or intellectual) disabilities (4) Mental disabilities (5)
Visual/seeing disabilities (6) Orthopedic/moving, and (7) communication deficits.
[46]

Elementary is the rule that when laws or rules are clear, when the law is unambiguous and
unequivocal, application not interpretation thereof is imperative. However, where the language
of a statute is vague and ambiguous, an interpretation thereof is resorted to. A law is deemed
ambiguous when it is capable of being understood by reasonably well-informed persons in
either of two or more senses. The fact that a law admits of different interpretations is the best
evidence that it is vague and ambiguous.[47]

In the instant case, We do not find the aforestated definition of terms as vague and ambiguous.
Settled is the rule that courts will not interfere in matters which are addressed to the sound
discretion of the government agency entrusted with the regulation of activities coming under the
special and technical training and knowledge of such agency.[48] As a matter of policy, We
accord great respect to the decisions and/or actions of administrative authorities not only
because of the doctrine of separation of powers but also for their presumed knowledge, ability,
and expertise in the enforcement of laws and regulations entrusted to their jurisdiction. 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.[49]
Lastly, petitioners contend that R.A. No. 7227, as amended by R.A. No. 9442, violates the equal
protection clause of the Constitution because it fairly singles out drugstores to bear the burden
of the discount, and that it can hardly be said to "rationally" meet a legitimate government
objective which is the purpose of the law. The law allegedly targets only retailers such as
petitioners, and that the other enterprises in the drug industry are not imposed with similar
burden. This same argument had been raised in the case of Carlos Superdrug Corp., et al. v.
DSWD, et al.,[50] and We reaffirm and apply the ruling therein in the case at bar:
The Court is not oblivious of the retail side of the pharmaceutical industry and the
competitive pricing component of the business. While the Constitution protects
property rights, petitioners must accept the realities of business and the State, in the
exercise of police power, can intervene in the operations of a business which may
result in an impairment of property rights in the process.

Moreover, the right to property has a social dimension. While Article XIII of the
Constitution provides the precept for the protection of property, various laws and
jurisprudence, particularly on agrarian reform and the regulation of contracts and
public utilities, continuously serve as a reminder that the right to property can be
relinquished upon the command of the State for the promotion of public good.[51]

Under the equal protection clause, all persons or things similarly situated must be treated alike,
both in the privileges conferred and the obligations imposed. Conversely, all persons or things
differently situated should be treated differently.[52] In the case of ABAKADA Guro Party List,
et al. v. Hon. Purisima, et al.,[53] We held:

Equality guaranteed under the equal protection clause is equality under the same
conditions and among persons similarly situated; it is equality among equals, not
similarity of treatment of persons who are classified based on substantial differences
in relation to the object to be accomplished. When things or persons are different in
fact or circumstance, they may be treated in law differently. In Victoriano v. Elizalde
Rope Workers' Union, this Court declared:

The guaranty of equal protection of the laws is not a guaranty of equality

in the application of the laws upon all citizens of the State. It is not,
therefore, a requirement, in order to avoid the constitutional prohibition
against inequality, that every man, woman and child should be affected
alike by a statute. Equality of operation of statutes does not mean
indiscriminate operation on persons merely as such, but on persons
according to the circumstances surrounding them. It guarantees equality,
not identity of rights. The Constitution does not require that things
which are different in fact be treated in law as though they were the
same. The equal protection clause does not forbid discrimination as
to things that are different. It does not prohibit legislation which is
limited either in the object to which it is directed or by the territory
within which it is to operate.
The equal protection of the laws clause of the Constitution allows

classification. Classification in law, as in the other departments of
knowledge or practice, is the grouping of things in speculation or practice
because they agree with one another in certain particulars. A law is not
invalid because of simple inequality. The very idea of classification is
that of inequality, so that it goes without saying that the mere fact of
inequality in no manner determines the matter of constitutionality. All
that is required of a valid classification is that it be reasonable, which
means that the classification should be based on substantial
distinctions which make for real differences, that it must be germane
to the purpose of the law; that it must not be limited to existing
conditions only; and that it must apply equally to each member of
the class. This Court has held that the standard is satisfied if the
classification or distinction is based on a reasonable foundation or
rational basis and is not palpably arbitrary.
In the exercise of its power to make classifications for the purpose of

enacting laws over matters within its jurisdiction, the state is recognized
as enjoying a wide range of discretion. It is not necessary that the
classification be based on scientific or marked differences of things or in
their relation. Neither is it necessary that the classification be made with
mathematical nicety. Hence, legislative classification may in many cases
properly rest on narrow distinctions, for the equal protection guaranty
does not preclude the legislature from recognizing degrees of evil or
harm, and legislation is addressed to evils as they may appear.
The equal protection clause recognizes a valid classification, that is, a classification that has a
reasonable foundation or rational basis and not arbitrary.[54] With respect to R.A. No. 9442, its
expressed public policy is the rehabilitation, self-development and self-reliance of PWDs.
Persons with disability form a class separate and distinct from the other citizens of the country.
Indubitably, such substantial distinction is germane and intimately related to the purpose of the
law. Hence, the classification and treatment accorded to the PWDs fully satisfy the demands of
equal protection. Thus, Congress may pass a law providing for a different treatment to persons
with disability apart from the other citizens of the country.

Subject to the determination of the courts as to what is a proper exercise of police power using
the due process clause and the equal protection clause as yardsticks, the State may interfere
wherever the public interests demand it, and in this particular, a large discretion is necessarily
vested in the legislature to determine, not only what interests of the public require, but what
measures are necessary for the protection of such interests.[55] Thus, We are mindful of the
fundamental criteria in cases of this nature that all reasonable doubts should be resolved in favor
of the constitutionality of a statute.[56] The burden of proof is on him who claims that a statute
is unconstitutional. Petitioners failed to discharge such burden of proof.

WHEREFORE, the petition is DENIED. The Decision of the Court of Appeals dated July 26,
2010, and the Resolution dated November 19, 2010, in CA-G.R. SP No. 109903 are
AFFIRMED.
SO ORDERED.
Velasco, Jr., (Chairperson), Perez, Reyes, and Jardeleza, JJ., concur.
October 10, 2016
NOTICE OF JUDGMENT

Sirs / Mesdames:

Please take notice that on September 14, 2016 a Decision, copy attached hereto, was rendered
by the Supreme Court in the above-entitled case, the original of which was received by this
Office on October 10, 2016 at 3:50 p.m.

Very truly yours,

(SGD)
WILFREDO V.
LAPITAN
Division Clerk of Court
[1] Rollo, pp. 11-86.

[2]Penned by Associate Justice Noel G. Tijam, with Associate Justices Marlene Gonzales-Sison
and Danton Q. Bueser, concurring; id. at 88-107.

[3] Rollo, pp. 109-112.

[4] Id. at 144-204.

[5] Id. at 90.

[6] Id. at 17 and 979.

[7]An Act Amending Republic Act No. 7277, Otherwise known as the Magna Carta for
Persons with Disability as Amended, and For Other Purposes; rollo, p. 90.

[8] Section 4 of R.A. No. 9442.

[9] Rollo, pp. 20 and 980.

[10]Published on January 21, 2009 in the Manila Standard Today, and filed with the Office of
the National Administration Register, U.P. Law Center on January 31, 2008; id. at 90 and 982.
[11] Rollo, p. 981.
[12] Underscoring supplied.
[14] Formerly National Councilfor the Welfare of Disabled Persons (NCWDP).
[15]Guidelines on the Issuance of Identification Card Relative to Republic Act 9442; rollo, pp.
117-119.
[16]Rules and Regulations Implementing Republic Act No. 9442, entitled "An Act Amending
Republic Acl 7227, Otherwise Known as the Magna Cart a for Persons with Disability"
Relative to the Tax Privileges of Persons with Disability and Tax Incentives for Establishments
Granting Sales Discounts; Rollo, pp. 120-126.
[17]Section 4. Availment by Establishments of Sales Discounts as Deduction from Gross Income

- Establishments granting sales discounts to persons with disability on their sale of goods and/or
services specified under Section 3 above shall be entitled to deduct the said sales discount from
their gross income subject to the following conditions:
1. The sales discounts shall be deducted from gross income after deducting the
cost of goods sold or the cost of service;

2. The cost of the sales discount shall be allowed as deduction from gross income
for the same taxable year that the discount is granted;

3. Only that portion of the gross sales exclusively used, consumed or enjoyed by
the person with disability shall be eligible for the deductible sales discount;

4. The gross selling price and the sales discount must be separately indicated in
the sales invoice or official receipt issued by the establishment for the sale of
goods or services to the person with disability;

5. Only the actual amount of the sales discount granted or a sales discount not
exceeding 20% of the gross selling price or gross receipt can be deducted from
the gross income, net of value added tax, if applicable, for income tax
purposes, and from gross sales or gross receipts of the business enterprise
concerned, for VAT or other percentage tax purposes; and shall be subject to
proper documentation under pertinent provisions of the Tax Code of 1997, as
amended;

6. The business establishment giving sales discount to qualified person with

disability is required to keep separate and accurate record of sales, which shall
include the name of the person with disability, ID Number, gross sales/receipts,
sales discount granted, date of transactions and invoice number for every sale
transaction to person with disability; and
7. All establishments mentioned in Section 3 above which granted sales discount

to persons with disability on their sale of goods and/or services may claim the
said discount as deduction from gross income.
[18] Guidelines to Implement the Provisions of Republic Act 9442, Otherwise known as "An Act
Amending Republic Act No. 7227, otherwise known as the "Magna Carta for Disabled Persons,
and for Other Purposes" for the provision of medical and related discounts and special
privileges; Published in the Philippine Daily Inquirer on May 13, 2009, and filed in the Office
of the National Administrative Register, U.P. Law Center on July 9, 2009; rollo, pp. 127-142.

[19] Title V, No. 3, DOH A.O. No. 2009-0011.

[20] Number 4 of DOH issued Administrative Order No. 2009-0011.

[21] Rollo, pp. 144-204.

[22] Id. at 110-111 and 988.

[23] Rule I. Title, Purpose, and Construction

[24] 553 Phil. 120, 132-133 (2007).

[25] Sangalang v. Intermediate Appellate Court, 257 Phil. 930 (1989).

[26]Ermita-Malate Hotel and Motel Operators Association, Inc. v. City Mayor of Manila, L-
24693, July 31, 1967, 20 SCRA 849, citing Noble State Bank v. Haskell, 219 U.S. 412 (1911).

[27]U.S. v. Toribio, 15 Phil. 85 (1910), citing Commonwealth v. Alger, 7 Cush., 53 (Mass.

1851); U.S. v. Pompeya, 31 Phil. 245, 253-254 (1915).

[28] Alalayan v. National Power Corporation, 24 Phil. 172 (1968).

[29] Id.

[30] DidipioEarth-Savers' Multi-Purpose Association, Inc., et al. v. Sec. Gozun, et al., 520 Phil.
457, 476 (2006).

[31] National Development Company v. Philippine Veterans Bank, et al., 270 Phil. 349, 356
(1990); Association of Small Landowners in the Philippines, Inc., et al. v. Honorable Secretary
of Agrarian Reform, 256 Phil. 777, 810 (1989).
[34] Underscoring supplied
[35] SEC. 32. Persons with disability shall be entitled to the following:
(a) At least twenty percent (20%) discount from all establishments relative to the utilization of
all services in hotels and similar lodging establishments; restaurants and recreation centers for
the exclusive use or enjoyment of persons with disability;
(b) A minimum of twenty percent (20%) discount on admission fees charged by theaters,
cinema houses, concert halls, circuses, carnivals and other similar places of culture, leisure and
amusement for the exclusive use of enjoyment of persons with disability;
(c) At least twenty percent (20%) discount for the purchase of medicines in all drugstores for
the exclusive use or enjoyment of persons with disability;
(d) At least twenty percent (20%) discount on medical and dental services including diagnostic
and laboratory fees such as, but not limited to, x-rays, computerized tomography scans and
blood tests, in all government facilities, subject to guidelines to be issued by the Department of
Health (DOH), in coordination with the Philippine Health Insurance Corporation
(PHILHEALTH);
(e) At least twenty percent (20%) discount on medical and dental services including diagnostic
and laboratory fees, and professional fees of attending doctors in all private hospitals and
medical facilities, in accordance with the rules and regulations to be issued by the DOH, in
coordination with the PHILHEALTH;
(f) At least twenty percent (20%) discount on fare for domestic air and sea travel for the
exclusive use or enjoyment of persons with disability;
(g) At least twenty percent (20%) discount in public railways, skyways and bus fare for the
exclusive use and enjoyment of person with disability;
(h) Educational assistance to persons with disability, for them to pursue primary, secondary,
tertiary, post tertiary, as well as vocational or technical education, in both public and private
schools, through the provision of scholarships, grants, financial aids, subsidies and other
incentives to qualified persons with disability, including support for books, learning material,
and uniform allowance to the extent feasible: Provided, That persons with disability shall meet
minimum admission requirements;
(i) To the extent practicable and feasible, the continuance of the same benefits and privileges
given by the Government Service Insurance System (GSIS), Social Security System (SSS), and
PAG-IBIG, as the case may be, as are enjoyed by those in actual service;
(j) To the extent possible, the government may grant special discounts in special programs for
persons with disability on purchase of basic commodities, subject to guidelines to be issued for
the purpose by the Department of Trade and Industry (DTI) and the Department of Agricultural
(DA); and
(k) Provision of express lanes for persons with disability in all commercial and government
establishments; in the absence thereof, priority shall be given to them.
[36] Emphasis supplied.
[37]Commissioner of Internal Revenue v. Central Luzon Drug Corporation, 496 Phil. 307, 335
(2005).
[38] Carlos Superdrug Corporation, et al. v. DSWD, et al., supra note 24, at 135.
[39] Section 6.11.3 of IRR of R.A. No. 9442.
[40] Part I, Nos. 4 and 5, NCDA Administrative Order No. 1; rollo, p. 111.
[41] Only for the first three (3) years as provided in DOH Administrative Order No. 2009-001;
id. at 131.
[42]After three (3) years, the signatory to the IDC shall be the Chairperson of the NCDA as
provided in DOH Administrative Order No. 2009-001; id.
[43] Emphasis supplied.
[44]Guidelines for the twenty percent (20%) discount in the purchase of all medicines for the
exclusive use of PWD:
a) All establishments through their registered pharmacist must have full disclosure and
responsibility in dispensing all medicines for exclusive use of PWD.
b) Discounts shall be granted to PWDs on all the purchase of all medicines provided that it is
supported by the following:
i. PWD Identification Card as stated in the Definition of Terms;
ii. Doctor's prescription stating the name of the PWD, age, sex, address, date, generic name of
the medicine, dosage form, dosage strength, quantity, signature over printed name of physician,
physician's address, contact number of physician or dentist, professional license number,
professional tax receipt number and narcotic license number, if applicable. To safeguard the
health of PWDs and to prevent abuse of RA 9257, a doctor's prescription is required in the
purchase of over-the counter medicines. Only prescriptions that contain the above information
shall be honored.
iii. Purchase booklet issued by the local social/health office to PWDs for free containing the
following basic information:
a) PWD ID Number
b) Booklet control number
c) Name of PWD
d) Sex
e) Address
f) Date of Birth
g) Picture
h) Signature of PWD
i) Information of medicine purchased:
i.1 Name of medicine

i.2 Quantity

i.3 Attending Physician

i.4 License Number

i.5 Servicing drug store name

i.6 Name of dispensing pharmacist

j) Authorization letter of the PWD who is residing in the Philippines at the time of purchase,
currently dated and the identification card of the authorized person or representative, in case the
medicine is bought by the representative or care giver of the PWD. (Emphasis supplied)

c) As a general rule, any single dispensing of medicine must be in accordance with the
prescription issued by a physician and should not exceed a one (1) month supply.

Drug stores are required to maintain a special record book for PWD subject to inspection by the
BFAD and BIR.

d) For partial filling, the establishment's pharmacists will indicate the quantity partially filled in
the special record book and the unfilled balance on the prescription. The PWD shall retain the
partially tilled prescription and present the same later to complete the prescribed quantity.
e) Drugstores offering special discounted prices less than 20% of the regular retail price can
deduct the percentage discount on their promotional campaign from the total of 20% discount as
required by RA 9442. Thus, a total discount of 20% for PWD will still be observed.
These discount privileges shall be non-transferable and exclusive for the benefits of the PWD.
All establishments as defined above are enjoined to comply with above-cited guidelines.
xxxx
[45] No. 3, Part I of NCDA AO 1.
[46] Rollo, pp. 102-103.
Disability Types - the 7 types of disabilities mentioned in RA No. 7277 are psychosocial
disability, disability due to chronic illness, learning disability, mental disability, visual disability,
orthopaedic disability, and communication disability.
Communication Disability - an impairment in the process of speech, language or hearing: a)

hearing impairment is a total or partial loss of hearing function which impede the
communication process essential to language, educational, social and/or cultural interaction;
Speech and Language Impairment means one or more speech/language disorders of voice,
articulation, rhythm and/or the receptive or and expressive processes of language.
Learning Disability - any disorder in one or more of the basic psychological processes
(perception, comprehension, thinking, etc.) involved in understanding or in using spoken or
written language.
Mental Disability - disability resulting from organic brain syndrome (i.e. Mental retardation,
acquired lesions of the central nervous system, or dementia) and/or mental illness (psychotic or
non-psychotic disorder)
Orthopedic Disability - disability in the normal functioning of the joints, muscles or limbs.
Psychosocial Disability - any acquired behavioural, cognitive, emotional, social impairment

that limits one or more activities necessary for effective interpersonal transactions and other
civilizing process or activities for daily living such as but not limited to deviancy or anti-social
behaviour.
Visual Disability - a person with visual disability (impairment) is one who has impairment of
visual functioning even after treatment and/or standard refractive correction, and has visual
acuity in the better eye of less than (6/18 for low vision and 3/60 for blind, or a visual field of
less than 10 degrees from the point of fixation. A certain level of visual impairment is defined
as legal blindness. One is legally blind when your best corrected central visual acuity in your
better eye is 6/60 or worse or your side vision is 20 degrees or less in the better eye.
Chronic Illness — words to describe a group of health conditions that last a long time. It may
get slowly worse over time or may become permanent or it may lead to death. It may cause
permanent change to the body and it will certainly affect the person's quality of life.
[47] Garcia v. Social Security Commission Legal and Collection, SSS, 565 Phil. 193, 208 (2007).
[48]
PEZA v. Pearl City Manufacturing Corporation, 623 Phil. 191, 207 (2009); Department of
Agrarian Reform vs. Samson, et al., 577 Phil. 370, 381 (2008).
[49] The
Public Schools District Supervisors Association, et al. v. Hon. De Jesus, 524 Phil. 366,
386-387 (2006).
[50] Supra note 24, at 146-147.
[51] By the general police power of the State, persons and property are subjected to all kinds of
restraints and burdens, in order to secure the general comfort, health, and prosperity of the State;
of the perfect right in the legislature to do which, no question ever was, or, upon acknowledged
and general principles, ever can be made, so far as natural persons are concerned. (U.S. v.
Toribio, supra note 27, at 98-99, citing Thorpe v. Rutland & Burlington R.R. Co. [27 Vt., 140,
149]).
[52] National Development Company v. Philippine Veterans Bank, et al., supra note 31, at 357.
[53] 584 Phil. 246, 269-270 (2008). (Emphasis in the original)
[54] ABAKADA Guro Parly List v. Hon. Purisima, et al., supra, at 270.
[55] U.S.
v. Toribio, supra note 27, at 98, citing Lawton v. Steele, 152 U.S. 133, 136; Barbier v.
Connoly, 113 U.S. 27; Kidd v. Pearson, 128 U.S. 1.
[56] People v. Vera, 65 Phil. 199 (1937).
Source: Supreme Court E-Library | Date created: November 22, 2018

496 Phil. 307
THIRD DIVISION
[ G.R. NO. 159647, April 15, 2005 ]
COMMISSIONER OF INTERNAL REVENUE, PETITIONER, VS.
CENTRAL LUZON DRUG CORPORATION, RESPONDENT.

DECISION
PANGANIBAN, J.:
The 20 percent discount required by the law to be given to senior citizens is a tax credit, not
merely a tax deduction from the gross income or gross sale of the establishment concerned. A
tax credit is used by a private establishment only after the tax has been computed; a tax
deduction, before the tax is computed. RA 7432 unconditionally grants a tax credit to all
covered entities. Thus, the provisions of the revenue regulation that withdraw or modify such
grant are void. Basic is the rule that administrative regulations cannot amend or revoke the law.

The Case

Before us is a Petition for Review[1] under Rule 45 of the Rules of Court, seeking to set aside
the August 29, 2002 Decision[2] and the August 11, 2003 Resolution[3] of the Court of Appeals
(CA) in CA-GR SP No. 67439. The assailed Decision reads as follows:

“WHEREFORE, premises considered, the Resolution appealed from is

AFFIRMED in toto. No costs.”[4]

The assailed Resolution denied petitioner’s Motion for Reconsideration.
The Facts

The CA narrated the antecedent facts as follows:

“Respondent is a domestic corporation primarily engaged in retailing of medicines

and other pharmaceutical products. In 1996, it operated six (6) drugstores under the
business name and style ‘Mercury Drug.’

“From January to December 1996, respondent granted twenty (20%) percent sales
discount to qualified senior citizens on their purchases of medicines pursuant to
Republic Act No. [R.A.] 7432 and its Implementing Rules and Regulations. For the
said period, the amount allegedly representing the 20% sales discount granted by
respondent to qualified senior citizens totaled P904,769.00.

“On April 15, 1997, respondent filed its Annual Income Tax Return for taxable year
1996 declaring therein that it incurred net losses from its operations.
“On January 16, 1998, respondent filed with petitioner a claim for tax refund/credit
in the amount of P904,769.00 allegedly arising from the 20% sales discount granted
by respondent to qualified senior citizens in compliance with [R.A.] 7432. Unable
to obtain affirmative response from petitioner, respondent elevated its claim to the
Court of Tax Appeals [(CTA or Tax Court)] via a Petition for Review.
“On February 12, 2001, the Tax Court rendered a Decision[5] dismissing
respondent’s Petition for lack of merit. In said decision, the [CTA] justified its
ruling with the following ratiocination:
‘x x x, if no tax has been paid to the government, erroneously or illegally,

or if no amount is due and collectible from the taxpayer, tax refund or tax
credit is unavailing. Moreover, whether the recovery of the tax is made
by means of a claim for refund or tax credit, before recovery is allowed[,]
it must be first established that there was an actual collection and receipt
by the government of the tax sought to be recovered. x x x.

‘x x x x x x x x x

‘Prescinding from the above, it could logically be deduced that tax credit
is premised on the existence of tax liability on the part of taxpayer. In
other words, if there is no tax liability, tax credit is not available.’

“Respondent lodged a Motion for Reconsideration. The [CTA], in its assailed

resolution,[6] granted respondent’s motion for reconsideration and ordered herein
petitioner to issue a Tax Credit Certificate in favor of respondent citing the decision
of the then Special Fourth Division of [the CA] in CA G.R. SP No. 60057 entitled
‘Central [Luzon] Drug Corporation vs. Commissioner of Internal Revenue’
promulgated on May 31, 2001, to wit:

‘However, Sec. 229 clearly does not apply in the instant case because the
tax sought to be refunded or credited by petitioner was not erroneously
paid or illegally collected. We take exception to the CTA’s sweeping but
unfounded statement that ‘both tax refund and tax credit are modes of
recovering taxes which are either erroneously or illegally paid to the
government.’ Tax refunds or credits do not exclusively pertain to
illegally collected or erroneously paid taxes as they may be other
circumstances where a refund is warranted. The tax refund provided
under Section 229 deals exclusively with illegally collected or
erroneously paid taxes but there are other possible situations, such as the
refund of excess estimated corporate quarterly income tax paid, or that of
excess input tax paid by a VAT-registered person, or that of excise tax
paid on goods locally produced or manufactured but actually exported.
The standards and mechanics for the grant of a refund or credit under
these situations are different from that under Sec. 229. Sec. 4[.a)] of
R.A. 7432, is yet another instance of a tax credit and it does not in any
way refer to illegally collected or erroneously paid taxes, x x x.’”[7]
Ruling of the Court of Appeals

The CA affirmed in toto the Resolution of the Court of Tax Appeals (CTA) ordering petitioner
to issue a tax credit certificate in favor of respondent in the reduced amount of P903,038.39. It
reasoned that Republic Act No. (RA) 7432 required neither a tax liability nor a payment of taxes
by private establishments prior to the availment of a tax credit. Moreover, such credit is not
tantamount to an unintended benefit from the law, but rather a just compensation for the taking
of private property for public use.

Hence this Petition.[8]
The Issues

Petitioner raises the following issues for our consideration:

“Whether the Court of Appeals erred in holding that respondent may claim the 20%
sales discount as a tax credit instead of as a deduction from gross income or gross
sales.

“Whether the Court of Appeals erred in holding that respondent is entitled to a

refund.”[9]

These two issues may be summed up in only one: whether respondent, despite incurring a net
loss, may still claim the 20 percent sales discount as a tax credit.

The Court’s Ruling

The Petition is not meritorious.

Sole Issue:
Claim of 20 Percent Sales
Discount
as Tax Credit Despite Net Loss
Section 4a) of RA 7432[10] grants to senior citizens the privilege of obtaining a 20 percent
discount on their purchase of medicine from any private establishment in the country.[11] The
latter may then claim the cost of the discount as a tax credit.[12] But can such credit be claimed,
even though an establishment operates at a loss?

We answer in the affirmative.

Tax Credit versus

Tax Deduction
Although the term is not specifically defined in our Tax Code,[13] tax credit generally refers to
an amount that is “subtracted directly from one’s total tax liability.”[14] It is an “allowance
against the tax itself”[15] or “a deduction from what is owed”[16] by a taxpayer to the
government. Examples of tax credits are withheld taxes, payments of estimated tax, and
investment tax credits.[17]
Tax credit should be understood in relation to other tax concepts. One of these is tax deduction -
- defined as a subtraction “from income for tax purposes,”[18] or an amount that is “allowed by
law to reduce income prior to [the] application of the tax rate to compute the amount of tax
which is due.”[19] An example of a tax deduction is any of the allowable deductions
enumerated in Section 34[20] of the Tax Code.
A tax credit differs from a tax deduction. On the one hand, a tax credit reduces the tax due,
including -- whenever applicable -- the income tax that is determined after applying the
corresponding tax rates to taxable income.[21] A tax deduction, on the other, reduces the
income that is subject to tax[22] in order to arrive at taxable income.[23] To think of the former
as the latter is to avoid, if not entirely confuse, the issue. A tax credit is used only after the tax
has been computed; a tax deduction, before.
Tax Liability Required

for Tax Credit
Since a tax credit is used to reduce directly the tax that is due, there ought to be a tax liability
before the tax credit can be applied. Without that liability, any tax credit application will be
useless. There will be no reason for deducting the latter when there is, to begin with, no
existing obligation to the government. However, as will be presented shortly, the existence of a
tax credit or its grant by law is not the same as the availment or use of such credit. While the
grant is mandatory, the availment or use is not.
If a net loss is reported by, and no other taxes are currently due from, a business establishment,
there will obviously be no tax liability against which any tax credit can be applied.[24] For the
establishment to choose the immediate availment of a tax credit will be premature and
impracticable. Nevertheless, the irrefutable fact remains that, under RA 7432, Congress has
granted without conditions a tax credit benefit to all covered establishments.
Although this tax credit benefit is available, it need not be used by losing ventures, since there is
no tax liability that calls for its application. Neither can it be reduced to nil by the quick yet
callow stroke of an administrative pen, simply because no reduction of taxes can instantly be
effected. By its nature, the tax credit may still be deducted from a future, not a present, tax
liability, without which it does not have any use. In the meantime, it need not move. But it
breathes.
Prior Tax Payments Not

Required for Tax Credit
While a tax liability is essential to the availment or use of any tax credit, prior tax payments are
not. On the contrary, for the existence or grant solely of such credit, neither a tax liability nor a
prior tax payment is needed. The Tax Code is in fact replete with provisions granting or
allowing tax credits, even though no taxes have been previously paid.
For example, in computing the estate tax due, Section 86(E) allows a tax credit -- subject to
certain limitations -- for estate taxes paid to a foreign country. Also found in Section 101(C) is
a similar provision for donor’s taxes -- again when paid to a foreign country -- in computing for
the donor’s tax due. The tax credits in both instances allude to the prior payment of taxes, even
if not made to our government.
Under Section 110, a VAT (Value-Added Tax)- registered person engaging in transactions --
whether or not subject to the VAT -- is also allowed a tax credit that includes a ratable portion of
any input tax not directly attributable to either activity. This input tax may either be the VAT on
the purchase or importation of goods or services that is merely due from -- not necessarily paid
by -- such VAT-registered person in the course of trade or business; or the transitional input tax
determined in accordance with Section 111(A). The latter type may in fact be an amount
equivalent to only eight percent of the value of a VAT-registered person’s beginning inventory
of goods, materials and supplies, when such amount -- as computed -- is higher than the actual
VAT paid on the said items.[25] Clearly from this provision, the tax credit refers to an input tax
that is either due only or given a value by mere comparison with the VAT actually paid -- then
later prorated. No tax is actually paid prior to the availment of such credit.
In Section 111(B), a one and a half percent input tax credit that is merely presumptive is
allowed. For the purchase of primary agricultural products used as inputs --either in the
processing of sardines, mackerel and milk, or in the manufacture of refined sugar and cooking
oil -- and for the contract price of public work contracts entered into with the government,
again, no prior tax payments are needed for the use of the tax credit.
More important, a VAT-registered person whose sales are zero-rated or effectively zero-rated
may, under Section 112(A), apply for the issuance of a tax credit certificate for the amount of
creditable input taxes merely due -- again not necessarily paid to -- the government and
attributable to such sales, to the extent that the input taxes have not been applied against output
taxes.[26] Where a taxpayer is engaged in zero-rated or effectively zero-rated sales and also in
taxable or exempt sales, the amount of creditable input taxes due that are not directly and
entirely attributable to any one of these transactions shall be proportionately allocated on the
basis of the volume of sales. Indeed, in availing of such tax credit for VAT purposes, this
provision -- as well as the one earlier mentioned -- shows that the prior payment of taxes is not a
requisite.
It may be argued that Section 28(B)(5)(b) of the Tax Code is another illustration of a tax credit
allowed, even though no prior tax payments are not required. Specifically, in this provision, the
imposition of a final withholding tax rate on cash and/or property dividends received by a
nonresident foreign corporation from a domestic corporation is subjected to the condition that a
foreign tax credit will be given by the domiciliary country in an amount equivalent to taxes that
are merely deemed paid.[27] Although true, this provision actually refers to the tax credit as a
condition only for the imposition of a lower tax rate, not as a deduction from the corresponding
tax liability. Besides, it is not our government but the domiciliary country that credits against
the income tax payable to the latter by the foreign corporation, the tax to be foregone or spared.
[28]
In contrast, Section 34(C)(3), in relation to Section 34(C)(7)(b), categorically allows as credits,
against the income tax imposable under Title II, the amount of income taxes merely incurred --
not necessarily paid -- by a domestic corporation during a taxable year in any foreign country.
Moreover, Section 34(C)(5) provides that for such taxes incurred but not paid, a tax credit may
be allowed, subject to the condition precedent that the taxpayer shall simply give a bond with
sureties satisfactory to and approved by petitioner, in such sum as may be required; and further
conditioned upon payment by the taxpayer of any tax found due, upon petitioner’s
redetermination of it.
In addition to the above-cited provisions in the Tax Code, there are also tax treaties and special
laws that grant or allow tax credits, even though no prior tax payments have been made.
Under the treaties in which the tax credit method is used as a relief to avoid double taxation,
income that is taxed in the state of source is also taxable in the state of residence, but the tax
paid in the former is merely allowed as a credit against the tax levied in the latter.[29]
Apparently, payment is made to the state of source, not the state of residence. No tax, therefore,
has been previously paid to the latter.
Under special laws that particularly affect businesses, there can also be tax credit incentives. To
illustrate, the incentives provided for in Article 48 of Presidential Decree No. (PD) 1789, as
amended by Batas Pambansa Blg. (BP) 391, include tax credits equivalent to either five percent
of the net value earned, or five or ten percent of the net local content of exports.[30] In order to
avail of such credits under the said law and still achieve its objectives, no prior tax payments are
necessary.
From all the foregoing instances, it is evident that prior tax payments are not indispensable to
the availment of a tax credit. Thus, the CA correctly held that the availment under RA 7432 did
not require prior tax payments by private establishments concerned.[31] However, we do not
agree with its finding[32] that the carry-over of tax credits under the said special law to
succeeding taxable periods, and even their application against internal revenue taxes, did not
necessitate the existence of a tax liability.
The examples above show that a tax liability is certainly important in the availment or use, not
the existence or grant, of a tax credit. Regarding this matter, a private establishment reporting a
net loss in its financial statements is no different from another that presents a net income. Both
are entitled to the tax credit provided for under RA 7432, since the law itself accords that
unconditional benefit. However, for the losing establishment to immediately apply such credit,
where no tax is due, will be an improvident usance.
Sections 2.i and 4 of Revenue

Regulations No. 2-94 Erroneous
RA 7432 specifically allows private establishments to claim as tax credit the amount of
discounts they grant.[33] In turn, the Implementing Rules and Regulations, issued pursuant
thereto, provide the procedures for its availment.[34] To deny such credit, despite the plain
mandate of the law and the regulations carrying out that mandate, is indefensible.
First, the definition given by petitioner is erroneous. It refers to tax credit as the amount
representing the 20 percent discount that “shall be deducted by the said establishments from
their gross income for income tax purposes and from their gross sales for value-added tax or
other percentage tax purposes.”[35] In ordinary business language, the tax credit represents the
amount of such discount. However, the manner by which the discount shall be credited against
taxes has not been clarified by the revenue regulations.
By ordinary acceptation, a discount is an “abatement or reduction made from the gross amount
or value of anything.”[36] To be more precise, it is in business parlance “a deduction or
lowering of an amount of money;”[37] or “a reduction from the full amount or value of
something, especially a price.”[38] In business there are many kinds of discount, the most
common of which is that affecting the income statement[39] or financial report upon which the
income tax is based.
Business Discounts
Deducted from Gross Sales
A cash discount, for example, is one granted by business establishments to credit customers for
their prompt payment.[40] It is a “reduction in price offered to the purchaser if payment is made
within a shorter period of time than the maximum time specified.”[41] Also referred to as a
sales discount on the part of the seller and a purchase discount on the part of the buyer, it may
be expressed in such terms as “5/10, n/30.”[42]
A quantity discount, however, is a “reduction in price allowed for purchases made in large
quantities, justified by savings in packaging, shipping, and handling.”[43] It is also called a
volume or bulk discount.[44]
A “percentage reduction from the list price x x x allowed by manufacturers to wholesalers and
by wholesalers to retailers”[45] is known as a trade discount. No entry for it need be made in
the manual or computerized books of accounts, since the purchase or sale is already valued at
the net price actually charged the buyer.[46] The purpose for the discount is to encourage
trading or increase sales, and the prices at which the purchased goods may be resold are also
suggested.[47] Even a chain discount -- a series of discounts from one list price -- is recorded at
net.[48]
Finally, akin to a trade discount is a functional discount. It is “a supplier’s price discount given
to a purchaser based on the [latter’s] role in the [former’s] distribution system.”[49] This role
usually involves warehousing or advertising.
Based on this discussion, we find that the nature of a sales discount is peculiar. Applying
generally accepted accounting principles (GAAP) in the country, this type of discount is
reflected in the income statement[50] as a line item deducted -- along with returns, allowances,
rebates and other similar expenses -- from gross sales to arrive at net sales.[51] This type of
presentation is resorted to, because the accounts receivable and sales figures that arise from
sales discounts, -- as well as from quantity, volume or bulk discounts -- are recorded in the
manual and computerized books of accounts and reflected in the financial statements at the
gross amounts of the invoices.[52] This manner of recording credit sales -- known as the gross
method -- is most widely used, because it is simple, more convenient to apply than the net
method, and produces no material errors over time.[53]
However, under the net method used in recording trade, chain or functional discounts, only the
net amounts of the invoices -- after the discounts have been deducted -- are recorded in the
books of accounts[54] and reflected in the financial statements. A separate line item cannot be
shown,[55] because the transactions themselves involving both accounts receivable and sales
have already been entered into, net of the said discounts.
The term sales discounts is not expressly defined in the Tax Code, but one provision adverts to
amounts whose sum -- along with sales returns, allowances and cost of goods sold[56] -- is
deducted from gross sales to come up with the gross income, profit or margin[57] derived from
business.[58] In another provision therein, sales discounts that are granted and indicated in the
invoices at the time of sale -- and that do not depend upon the happening of any future event --
may be excluded from the gross sales within the same quarter they were given.[59] While
determinative only of the VAT, the latter provision also appears as a suitable reference point for
income tax purposes already embraced in the former. After all, these two provisions affirm that
sales discounts are amounts that are always deductible from gross sales.
Reason for the Senior Citizen Discount:

The Law, Not Prompt Payment
A distinguishing feature of the implementing rules of RA 7432 is the private establishment’s

outright deduction of the discount from the invoice price of the medicine sold to the senior
citizen.[60] It is, therefore, expected that for each retail sale made under this law, the discount
period lasts no more than a day, because such discount is given -- and the net amount thereof
collected -- immediately upon perfection of the sale.[61] Although prompt payment is made for
an arm’s-length transaction by the senior citizen, the real and compelling reason for the private
establishment giving the discount is that the law itself makes it mandatory.
What RA 7432 grants the senior citizen is a mere discount privilege, not a sales discount or any
of the above discounts in particular. Prompt payment is not the reason for (although a necessary
consequence of) such grant. To be sure, the privilege enjoyed by the senior citizen must be
equivalent to the tax credit benefit enjoyed by the private establishment granting the discount.
Yet, under the revenue regulations promulgated by our tax authorities, this benefit has been
erroneously likened and confined to a sales discount.
To a senior citizen, the monetary effect of the privilege may be the same as that resulting from a
sales discount. However, to a private establishment, the effect is different from a simple
reduction in price that results from such discount. In other words, the tax credit benefit is not
the same as a sales discount. To repeat from our earlier discourse, this benefit cannot and
should not be treated as a tax deduction.
To stress, the effect of a sales discount on the income statement and income tax return of an
establishment covered by RA 7432 is different from that resulting from the availment or use of
its tax credit benefit. While the former is a deduction before, the latter is a deduction after, the
income tax is computed. As mentioned earlier, a discount is not necessarily a sales discount,
and a tax credit for a simple discount privilege should not be automatically treated like a sales
discount. Ubi lex non distinguit, nec nos distinguere debemus. Where the law does not
distinguish, we ought not to distinguish.
Sections 2.i and 4 of Revenue Regulations No. (RR) 2-94 define tax credit as the 20 percent
discount deductible from gross income for income tax purposes, or from gross sales for VAT or
other percentage tax purposes. In effect, the tax credit benefit under RA 7432 is related to a
sales discount. This contrived definition is improper, considering that the latter has to be
deducted from gross sales in order to compute the gross income in the income statement and
cannot be deducted again, even for purposes of computing the income tax.
When the law says that the cost of the discount may be claimed as a tax credit, it means that the
amount -- when claimed -- shall be treated as a reduction from any tax liability, plain and
simple. The option to avail of the tax credit benefit depends upon the existence of a tax liability,
but to limit the benefit to a sales discount -- which is not even identical to the discount privilege
that is granted by law -- does not define it at all and serves no useful purpose. The definition
must, therefore, be stricken down.
Laws Not Amended

by Regulations
Second, the law cannot be amended by a mere regulation. In fact, a regulation that “operates to
create a rule out of harmony with the statute is a mere nullity”;[62] it cannot prevail.
It is a cardinal rule that courts “will and should respect the contemporaneous construction
placed upon a statute by the executive officers whose duty it is to enforce it x x x.”[63] In the
scheme of judicial tax administration, the need for certainty and predictability in the
implementation of tax laws is crucial.[64] Our tax authorities fill in the details that “Congress
may not have the opportunity or competence to provide.”[65] The regulations these authorities
issue are relied upon by taxpayers, who are certain that these will be followed by the courts.[66]
Courts, however, will not uphold these authorities’ interpretations when clearly absurd,
erroneous or improper.
In the present case, the tax authorities have given the term tax credit in Sections 2.i and 4 of RR
2-94 a meaning utterly in contrast to what RA 7432 provides. Their interpretation has muddled
up the intent of Congress in granting a mere discount privilege, not a sales discount. The
administrative agency issuing these regulations may not enlarge, alter or restrict the provisions
of the law it administers; it cannot engraft additional requirements not contemplated by the
legislature.[67]
In case of conflict, the law must prevail.[68] A “regulation adopted pursuant to law is law.”[69]
Conversely, a regulation or any portion thereof not adopted pursuant to law is no law and has
neither the force nor the effect of law.[70]
Availment of Tax
Credit Voluntary
Third, the word may in the text of the statute[71] implies that the availability of the tax credit
benefit is neither unrestricted nor mandatory.[72] There is no absolute right conferred upon
respondent, or any similar taxpayer, to avail itself of the tax credit remedy whenever it chooses;
“neither does it impose a duty on the part of the government to sit back and allow an important
facet of tax collection to be at the sole control and discretion of the taxpayer.”[73] For the tax
authorities to compel respondent to deduct the 20 percent discount from either its gross income
or its gross sales[74] is, therefore, not only to make an imposition without basis in law, but also
to blatantly contravene the law itself.
What Section 4.a of RA 7432 means is that the tax credit benefit is merely permissive, not
imperative. Respondent is given two options -- either to claim or not to claim the cost of the
discounts as a tax credit. In fact, it may even ignore the credit and simply consider the gesture
as an act of beneficence, an expression of its social conscience.
Granting that there is a tax liability and respondent claims such cost as a tax credit, then the tax
credit can easily be applied. If there is none, the credit cannot be used and will just have to be
carried over and revalidated[75] accordingly. If, however, the business continues to operate at a
loss and no other taxes are due, thus compelling it to close shop, the credit can never be applied
and will be lost altogether.
In other words, it is the existence or the lack of a tax liability that determines whether the cost of
the discounts can be used as a tax credit. RA 7432 does not give respondent the unfettered right
to avail itself of the credit whenever it pleases. Neither does it allow our tax administrators to
expand or contract the legislative mandate. “The ‘plain meaning rule’ or verba legis in statutory
construction is thus applicable x x x. Where the words of a statute are clear, plain and free from
ambiguity, it must be given its literal meaning and applied without attempted interpretation.”[76]
Tax Credit Benefit

Deemed Just Compensation
Fourth, Sections 2.i and 4 of RR 2-94 deny the exercise by the State of its power of eminent
domain. Be it stressed that the privilege enjoyed by senior citizens does not come directly from
the State, but rather from the private establishments concerned. Accordingly, the tax credit
benefit granted to these establishments can be deemed as their just compensation for private
property taken by the State for public use.[77]
The concept of public use is no longer confined to the traditional notion of use by the public, but
held synonymous with public interest, public benefit, public welfare, and public convenience.
[78] The discount privilege to which our senior citizens are entitled is actually a benefit enjoyed
by the general public to which these citizens belong. The discounts given would have entered
the coffers and formed part of the gross sales of the private establishments concerned, were it
not for RA 7432. The permanent reduction in their total revenues is a forced subsidy
corresponding to the taking of private property for public use or benefit.
As a result of the 20 percent discount imposed by RA 7432, respondent becomes entitled to a

just compensation. This term refers not only to the issuance of a tax credit certificate indicating
the correct amount of the discounts given, but also to the promptness in its release. Equivalent
to the payment of property taken by the State, such issuance -- when not done within a
reasonable time from the grant of the discounts -- cannot be considered as just compensation.
In effect, respondent is made to suffer the consequences of being immediately deprived of its
revenues while awaiting actual receipt, through the certificate, of the equivalent amount it needs
to cope with the reduction in its revenues.[79]
Besides, the taxation power can also be used as an implement for the exercise of the power of
eminent domain.[80] Tax measures are but “enforced contributions exacted on pain of penal
sanctions”[81] and “clearly imposed for a public purpose.”[82] In recent years, the power to tax
has indeed become a most effective tool to realize social justice, public welfare, and the
equitable distribution of wealth.[83]
While it is a declared commitment under Section 1 of RA 7432, social justice “cannot be

invoked to trample on the rights of property owners who under our Constitution and laws are
also entitled to protection. The social justice consecrated in our [C]onstitution [is] not intended
to take away rights from a person and give them to another who is not entitled thereto.”[84] For
this reason, a just compensation for income that is taken away from respondent becomes
necessary. It is in the tax credit that our legislators find support to realize social justice, and no
administrative body can alter that fact.
To put it differently, a private establishment that merely breaks even[85] --without the discounts
yet -- will surely start to incur losses because of such discounts. The same effect is expected if
its mark-up is less than 20 percent, and if all its sales come from retail purchases by senior
citizens. Aside from the observation we have already raised earlier, it will also be grossly unfair
to an establishment if the discounts will be treated merely as deductions from either its gross
income or its gross sales. Operating at a loss through no fault of its own, it will realize that the
tax credit limitation under RR 2-94 is inutile, if not improper. Worse, profit-generating
businesses will be put in a better position if they avail themselves of tax credits denied those
that are losing, because no taxes are due from the latter.
Grant of Tax Credit

Intended by the Legislature
Fifth, RA 7432 itself seeks to adopt measures whereby senior citizens are assisted by the
community as a whole and to establish a program beneficial to them.[86] These objectives are
consonant with the constitutional policy of making “health x x x services available to all the
people at affordable cost”[87] and of giving “priority for the needs of the x x x elderly.”[88]
Sections 2.i and 4 of RR 2-94, however, contradict these constitutional policies and statutory
objectives.
Furthermore, Congress has allowed all private establishments a simple tax credit, not a
deduction. In fact, no cash outlay is required from the government for the availment or use of
such credit. The deliberations on February 5, 1992 of the Bicameral Conference Committee
Meeting on Social Justice, which finalized RA 7432, disclose the true intent of our legislators to
treat the sales discounts as a tax credit, rather than as a deduction from gross income. We quote
from those deliberations as follows:
"THE CHAIRMAN (Rep. Unico). By the way, before that ano, about deductions
from taxable income. I think we incorporated there a provision na - on the
responsibility of the private hospitals and drugstores, hindi ba?

SEN. ANGARA. Oo.

THE CHAIRMAN. (Rep. Unico), So, I think we have to put in also a provision here
about the deductions from taxable income of that private hospitals, di ba ganon 'yan?

MS. ADVENTO. Kaya lang po sir, and mga discounts po nila affecting government
and public institutions, so, puwede na po nating hindi isama yung mga less
deductions ng taxable income.

THE CHAIRMAN. (Rep. Unico). Puwede na. Yung about the private hospitals.
Yung isiningit natin?

MS. ADVENTO. Singit na po ba yung 15% on credit. (inaudible/did not use the
microphone).

SEN. ANGARA. Hindi pa, hindi pa.

THE CHAIRMAN. (Rep. Unico) Ah, 'di pa ba naisama natin?

SEN. ANGARA. Oo. You want to insert that?

THE CHAIRMAN (Rep. Unico). Yung ang proposal ni Senator Shahani, e.

SEN. ANGARA. In the case of private hospitals they got the grant of 15% discount,
provided that, the private hospitals can claim the expense as a tax credit.

REP. AQUINO. Yah could be allowed as deductions in the perpetrations of

(inaudible) income.

SEN. ANGARA. I-tax credit na lang natin para walang cash-out ano?

REP. AQUINO. Oo, tax credit. Tama, Okay. Hospitals ba o lahat ng establishments
na covered.

THE CHAIRMAN. (Rep. Unico). Sa kuwan lang yon, as private hospitals lang.

REP. AQUINO. Ano ba yung establishments na covered?
SEN. ANGARA. Restaurant lodging houses, recreation centers.
REP. AQUINO. All establishments covered siguro?
SEN. ANGARA. From all establishments. Alisin na natin 'Yung kuwan kung ganon.
Can we go back to Section 4 ha?
REP. AQUINO. Oho.
SEN. ANGARA. Letter A. To capture that thought, we'll say the grant of 20%
discount from all establishments et cetera, et cetera, provided that said
establishments - provided that private establishments may claim the cost as a tax
credit. Ganon ba 'yon?
REP. AQUINO. Yah.
SEN. ANGARA. Dahil kung government, they don't need to claim it.
THE CHAIRMAN. (Rep. Unico). Tax credit.
SEN. ANGARA. As a tax credit [rather] than a kuwan - deduction, Okay.
REP. AQUINO Okay.
SEN. ANGARA. Sige Okay. Di subject to style na lang sa Letter A".[89]
Special Law
Over General
Law

Sixth and last, RA 7432 is a special law that should prevail over the Tax Code -- a general law.
“x x x [T]he rule is that on a specific matter the special law shall prevail over the general law,
which shall be resorted to only to supply deficiencies in the former.”[90] In addition, “[w]here
there are two statutes, the earlier special and the later general -- the terms of the general broad
enough to include the matter provided for in the special -- the fact that one is special and the
other is general creates a presumption that the special is to be considered as remaining an
exception to the general,[91] one as a general law of the land, the other as the law of a particular
case.”[92] “It is a canon of statutory construction that a later statute, general in its terms and not
expressly repealing a prior special statute, will ordinarily not affect the special provisions of
such earlier statute.”[93]

RA 7432 is an earlier law not expressly repealed by, and therefore remains an exception to, the
Tax Code -- a later law. When the former states that a tax credit may be claimed, then the
requirement of prior tax payments under certain provisions of the latter, as discussed above,
cannot be made to apply. Neither can the instances of or references to a tax deduction under the
Tax Code[94] be made to restrict RA 7432. No provision of any revenue regulation can supplant
or modify the acts of Congress.
WHEREFORE, the Petition is hereby DENIED. The assailed Decision and Resolution of the
Court of Appeals AFFIRMED. No pronouncement as to costs.
SO ORDERED.
Sandoval-Gutierrez, Corona, Carpio-Morales, and Garcia, JJ., concur.
[1] Rollo, pp. 9-31.

[2] Id.,
pp. 33-41. Penned by Justice Rebecca de Guia-Salvador, with the concurrence of Justices
Godardo A. Jacinto (Fourth Division chair) and Eloy R. Bello Jr. (member, now retired).

[3] Id., p. 43.

[4] CA Decision, p. 9; rollo, p. 41.

[5]Penned by Judge Ramon O. De Veyra with the concurrence of Judge Amancio Q. Saga.
Presiding Judge (now Presiding Justice) Ernesto D. Acosta dissented.

[6] Penned by Presiding Judge (now Presiding Justice) Ernesto D. Acosta with the concurrence
of Judge (now Justice) Juanito C. Castañeda, Jr. Judge Amancio Q. Saga dissented.

[7] Id., pp. 2-4 & 34-36.

[8]The Petition was deemed submitted for decision on June 10, 2004, upon receipt by the Court
of respondent’s Memorandum, signed by Atty. Joy Ann Marie G. Nolasco. Petitioner’s
Memorandum -- signed by Solicitor General Alfredo L. Benipayo, Assistant Solicitor General
Ma. Antonia Edita C. Dizon, and Solicitor Magtanggol M. Castro -- was filed on June 2, 2004.

[9] Petitioner’s Memorandum, p. 5; rollo, p. 96. Original in upper case.

[10]Entitled “An Act to Maximize the Contribution of Senior Citizens to Nation Building, Grant
Benefits and Special Privileges and for other purposes,” this law took effect in 1992. See
Santos, Jr. v. Llamas, 379 Phil. 569, 577, January 20, 2000.

[11] §4.a of RA 7432.

[12] Ibid.

[13] Republic Act No. (RA) 8424 as amended by RAs 8761 and 9010.
Likewise, the term tax credit is not defined in Presidential Decree No. (PD) 1158, otherwise
known as the National Internal Revenue Code of 1977 as amended.
[14] Garner (ed.), Black’s Law Dictionary (8th ed., 1999), p. 1501.
[15] Smith, West’s Tax Law Dictionary (1993), pp. 177-178.
[16] Oran and Tosti, Oran’s Dictionary of the Law (3rd ed., 2000), p. 124.
[17] Malapo-Agato and San Andres-Francisco, Dictionary of Accounting Terms (2003), p. 258.
[18] Oran and Tosti, supra, p. 135.
[19] Smith, supra, p. 196.
[20]The itemized deductions considered as allowable deductions from gross income include
ordinary and necessary expenses, interest, taxes, losses, bad debts, depreciation, depletion of oil
and gas wells and mines, charitable and other contributions, research and development
expenditures, and pension trust contributions.
[21] “While taxable income is based on the method of accounting used by the taxpayer, it will
almost always differ from accounting income. This is so because of a fundamental difference in
the ends the two concepts serve. Accounting attempts to match cost against revenue. Tax law is
aimed at collecting revenue. It is quick to treat an item as income, slow to recognize deductions
or losses. Thus, the tax law will not recognize deductions for contingent future losses except in
very limited situations. Good accounting, on the other hand, requires their recognition. Once
this fundamental difference in approach is accepted, income tax accounting methods can be
understood more easily.” Consolidated Mines, Inc. v. CTA, 157 Phil. 608, August 29, 1974, per
Makalintal, CJ. Underscoring supplied.
[22] Smith, supra, pp. 177-178.
[23] Id., p. 196.
[24] BPI-Family Savings Bank, Inc. v. CA, 386 Phil. 719, 727, April 12, 2000.
[25] §4.105-1 of BIR Revenue Regulations No. (RR) 7-95.
[26]Commissioner of Internal Revenue v. Seagate Technology (Phils.), Inc., GR No. 153866,

February 11, 2005, pp. 13-15.
[27]Commissioner of Internal Revenue v. Procter & Gamble Philippine Manufacturing Corp.,

204 SCRA 377, 388, December 2, 1991.
[28]Deoferio Jr. and Tan Torres, Know Your CTRP: Comments on the Amendments to the
National Internal Revenue Code under Republic Act No. 8424 (2nd printing, 1999), p. 61.
[29]Commissioner of Internal Revenue v. S.C. Johnson and Son, Inc., 368 Phil. 388, 405-406,
June 25, 1999.
[30] Pilipinas Kao, Inc. v. CA, 423 Phil. 834, 838-839, 851, December 18, 2001.
[31] CA Decision, p. 9; rollo, pp. 40-41.
[32] Id., pp. 7-8; id., pp. 39-40.
[33] §4.a of RA 7432.
[34]D. and E. of Rule V of the “Rules And Regulations in the Implementation of RA 7432, The
Act to Maximize the Contribution of Senior Citizens to Nation Building, Grant Benefits and
Special Privileges and for other purposes,” approved per Resolution No. 1 (Series 1993) issued
by the National Economic and Development Authority (NEDA) Social Development
Committee.
[35] §2.i of RR 2-94, issued August 23, 1993. See also §4 thereof.
[36]Gove (Ed. in Chief), Webster’s Third New International Dictionary of the English
Language, Unabridged (1976), p. 646.
[37] Oran and Tosti, supra, p. 149.
[38] Garner (ed.), supra, p. 498.
[39]An income statement, profit and loss statement, or statement of income and expenses is a
“financial statement prepared from accounts and designed to show the several elements entering
into the computation of net income for a given period.” Malapo-Agato and San Andres-
Francisco, Dictionary of Accounting Terms (2003), p. 136.
[40] Valix and Peralta, Financial Accounting, Volume One (2002), p. 347.
[41] Editorial Staff of Prentice-Hall, Inc., Encyclopedic Dictionary of Business Finance (2nd
printing, 1962), pp. 117-118. See Malapo-Agato and San Andres-Francisco, supra, p. 49.
[42]This means that the customer is entitled to a 5% discount, if payment is made within 10
days from the invoice date. Beyond that, but within 30 days from the invoice date, the gross
amount of the invoice price is due. Valix and Peralta, supra, p. 347.
[43] Editorial Staff of Prentice-Hall, Inc., supra, pp. 503-504.
[44] Garner (Ed.), supra, p. 498.
[46]Valix and Peralta, supra, p. 453. See Malapo-Agato and San Andres-Francisco, supra, p.
263.
[47] Id., p. 453.
[49] Garner (Ed.), supra, p. 498.
[50] Functional, as opposed to the natural, presentation is the traditional and common form of
the income statement. Functional presentation classifies expenses according to their function --
whether as part of cost of sales, selling activities, administrative activities, or other operating
activities. The Accounting Standards Council (ASC) in the Philippines does not prescribe any
format, the choice being based on that which “fairly presents the elements of the enterprise
performance.” If the functional format is used, an additional disclosure of the nature of the
expenses is necessary. Valix and Peralta, supra, pp. 155 & 162.
[51] Garner (Ed.), supra, p. 1365. See Valix and Peralta, supra, pp. 156-160 & 453.
On the other hand, purchase discounts are deducted -- also along with returns, allowances,
rebates and other similar revenues -- from gross purchases to arrive at net purchases.
[52] Valix and Peralta, supra, p. 347.
[53] Id., pp. 347 & 456.
[54] Id., p. 347.
[55] Except when presented for managerial or cost accounting reports, these items are chiefly
internal and are neither disseminated to the general public nor attested to by the external
auditors.
[56]Cost of goods sold is the most commonly used term referring to a particular section in the
financial statements, reports, or notes to financial statements of trading or merchandising
concerns. For a manufacturing business, however, the term used is cost of goods manufactured
and sold or cost of goods produced and sold; for a service enterprise, cost of services; and, in
general, cost of sales of a business. See Malapo-Agato and San Andres-Francisco, supra, p. 73.
[57] Gross income, profit or margin is the “difference between sales revenues and manufacturing
costs as an intermediate step in the computation of operating profits or net income.” It is also
the “excess of sales over the cost of goods sold.” Malapo-Agato and San Andres-Francisco,
supra, p. 129.
More simply, gross sales less sales discounts, returns, allowances, rebates, and other similar
expenses equal net sales; and net sales less cost of sales equal gross income.
[58] Paragraphs 7 to 10 of §27(A), Chapter IV, Title II of RA 8424 as amended.
[59] §106(D)(2), Chapter I, Title IV of RA 8424 as amended.
[60]See D. of Rule V of the “Rules And Regulations in the Implementation of RA 7432, The
Act to Maximize the Contribution of Senior Citizens to Nation Building, Grant Benefits and
Special Privileges and for other purposes,” approved per Resolution No. 1 (Series 1993) issued
by the National Economic and Development Authority (NEDA) Social Development
Committee.
[61]Theoretically, an allowance for sales discount account can also be set up by a business
establishment in its books of account at the end of its accounting period to reflect its estimates
of cash discounts on open accounts based on past experience. The accounting entry for this
account is then reversed at the beginning of the next accounting period, so that such discounts
can again be normally charged to the sales discount account. Valix and Peralta, supra, p. 348.
[62] Commissioner of Internal Revenue v. Vda. de Prieto, 109 Phil. 592, 597, September 30,
1960, per Gutierrez David, J. (citing Miller v. US, 294 US 435, 439-441, 55 S.Ct. 440,442,
March 4, 1935; and Lynch v. Tilden Produce Co., 265 US 315, 321-322, 44 S.Ct. 488, 490, May
26, 1924).
[63]Molina v. Rafferty, 37 Phil. 545, 555, February 1, 1918, per Malcolm, J. (citing Government
ex rel. Municipality of Cardona v. Municipality of Binangonan, 34 Phil. 518, 520-521, March
29, 1916; In re Allen, 2 Phil. 630, 640, October 29, 1903; and Pennoyer v. McConnaughy, 11
S.Ct. 699, 706, April 20, 1891).
[64] Lim Hoa Ting v. Central Bank of the Philippines, 104 Phil. 573, 580, September 24, 1958
(citing Griswold, A Summary of the Regulations Problem, 54 Harvard Law Review 3, 398, 406,
January 1941).
[65]Eastern Shipping Lines, Inc. v. Philippine Overseas Employment Administration, 166 SCRA
533, 544, October 18, 1988, per Cruz, J.
[66] Lim Hoa Ting v. Central Bank of the Philippines, supra, p. 580.
[67] Pilipinas Kao, Inc. v. CA, supra, p. 858.

[68] Wise & Co., Inc. v. Meer, 78 Phil. 655, 676, June 30, 1947.
[69] Macailing v. Andrada, 31 SCRA 126, 139, January 30, 1970, per Sanchez, J.
[70]See Banco Filipino Savings and Mortgage Bank v. Hon. Navarro, 158 SCRA 346, 354, July
28, 1987; and Valerio v. Secretary of Agriculture & Natural Resources, 117 Phil. 729, 733, April
23, 1963.
[71] §4.a of RA 7432.
[72]See also Manufacturers Hanover Trust Co. and/or Chemical Bank v. Guerrero, 445 Phil.
770, 782, February 19, 2003 (citing Shauf v. CA, 191 SCRA 713, 738, November 27, 1990;
Ayala Land, Inc. v. Spouses Carpo, 345 SCRA 579, 585, November 22, 2000; and In re
Guariña, 24 Phil. 37, 41, January 8, 1913).
[73]
San Carlos Milling Co., Inc. v. Commissioner of Internal Revenue, 228 SCRA 135, 142,
November 23, 1993, per Padilla, J.
[74] §§2.i & 4 of RR 2-94.
[75] §230(B), Chapter III, Title VIII of RA 8424 as amended.
[76] National Federation of Labor v. NLRC, 383 Phil. 910, 918, March 2, 2000, per De Leon Jr.,
J. (quoting Fianza v. People’s Law Enforcement Board, 243 SCRA 165, 178, March 31, 1995,
per Romero, J.).
[77] See City of Cebu v. Spouses Dedamo, 431 Phil. 524, 532, May 7, 2002.
[78]Reyes v. National Housing Authority, 443 Phil. 603, 610-611, January 20, 2003 (citing Heirs
of Juancho Ardona v. Hon. Reyes, 210 Phil. 187, 197-201, October 26, 1983).
[79] See Land Bank of the Philippines v. De Leon, 437 Phil. 347, 359, September 10, 2002
(citing Estate of Salud Jimenez v. Philippine Export Processing Zone, 349 SCRA 240, 264,
January 16, 2001).
[80]See Association of Small Landowners in the Philippines, Inc. v. Secretary of Agrarian

Reform, 175 SCRA 343, 371, July 14, 1989 (citing Powell v. Pennsylvania, 127 US 678, 683, 8
S.Ct. 992, 995, April 9, 1888).
[81] Republic v. COCOFED, 423 Phil. 735, 764, December 14, 2001, per Panganiban, J.
[82] Id. at 765.
[83] National Power Corp. v. City of Cabanatuan, 449 Phil. 233, 248, April 9, 2003 (citing Vitug
and Acosta, Tax Law and Jurisprudence [2nd ed., 2000], pp.1-2).
[84] Salonga v. Farrales, 192 Phil. 614, 624, July 10, 1981, per Fernandez, J.
[85]Break-even is the point at which a business neither generates an income nor incurs a loss
from its operations.
[86] Items 1 & 2, 2nd paragraph of §1 of RA 7432.
[87] 1st paragraph of §1 of RA 7432 and §11 of Article XIII of the 1987 Constitution.
[88]Ibid. The constitutional references are reiterated in the sponsorship speech delivered on
January 23, 1992 by Representative Dionisio S. Ojeda, regarding House Bill No. (HB) 35335,
per Committee Report No. 01730, pp 38-39 (jointly submitted by the Committee on Revision of
Laws, the Committee on Family Relations and Population, and the Committee on Ways and
Means). HB 35335 was approved on second reading without any amendment.
[89]Deliberations of the Bicameral Conference Committee Meeting on Social Justice, February

5, 1992, pp. 22-24. Italics supplied.
[90]
Leyte Asphalt & Mineral Oil Co., Ltd. v. Block, Johnston & Greenbaum, 52 Phil. 429, 432,
December 14, 1928, per Romualdez, J.
[91] City Mayor v. The Chief Police Constabulary, 128 Phil. 674, 687, October 31, 1967.
[92] Manila Railroad Co. v. Rafferty, 40 Phil. 224, 229, September 30, 1919, per Johnson, J.
(citing State v. Stoll, 84 US 425, 431, 436, 17 Wall. 425, 431, 436, October term, 1873).
[93]Ibid, per Johnson, J. (citing Minnesota v. Hitchcock, 185 US, 373, 396-397, 22 S.Ct. 650,
659, May 5, 1902, Cass County v. Gillett, 100 US 585, 593, 10 Otto 585, 593, October term,
1879; and New Jersey Steamboat Co. v. Collector, 85 US 478, 490-491, 18 Wall 478, 490-491,
October term, 1873).
[94]Not even the provisions of PD 1158 -- reiterated later in RA 8424 as amended --change the
Court’s observations on tax liability, prior tax payments, sales discount, tax deduction, and tax
credit. PD 1158 was a general law that preceded RA 7432, a special law; thus, the latter
prevails over the former. With all the more reason should the rules on statutory construction
apply.
Source: Supreme Court E-Library | Date created: October 14, 2014
241 Phil. 829
FIRST DIVISION
[ G.R. No. L-28896, February 17, 1988 ]
ALGUE, INC., AND THE COURT OF TAX APPEALS, RESPONDENTS.
DECISION
CRUZ, J.:
Taxes are the lifeblood of the government and so should be collected without unnecessary
hindrance. On the other hand, such collection should be made in accordance with law as any
arbitrariness will negate the very reason for government itself. It is therefore necessary to
reconcile the apparently conflicting interests of the authorities and the taxpayers so that the real
purpose of taxation, which is the promotion of the common good, may be achieved.

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

We deal first with the procedural question.

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

The above chronology shows that the petition was filed seasonably. According to Rep. Act No.
1125, the appeal may be made within thirty days after receipt of the decision or ruling
challenged.[7] It is true that as a rule the warrant of distraint and levy is "proof of the finality of
the assessment"[8] and "renders hopeless a request for reconsideration,"[9] being "tantamount to
an outright denial thereof and makes the said request deemed rejected."[10] But there is a special
circumstance in the case at bar that prevents application of this accepted doctrine.
The proven fact is that four days after the private respondent received the petitioner's notice of
assessment, it filed its letter of protest. This was apparently not taken into account before the
warrant of distraint and levy was issued; indeed, such protest could not be located in the office
off the petitioner. It was only after Atty. Guevara gave the BIR a copy of the protest that it was,
if at all, considered by the tax authorities. During the intervening period, the warrant was
premature and could therefore not be served.
As the Court of Tax Appeals correctly noted,[11] the protest filed by private respondent was not
pro forma and was based on strong legal considerations. It thus had the effect of suspending on
January 18, 1965, when it was filed, the reglementary period which started on the date the
assessment was received, viz., January 14, 1965. The period started running again only on April
7, 1965, when the private respondent was definitely informed of the implied rejection of the said
protest and the warrant was finally served on it. Hence, when the appeal was filed on April 23,
1965, only 20 days of the reglementary period had been consumed.
Now for the substantive question.
The petitioner contends that the claimed deduction of P75,000.00 was properly disallowed
because it was not an ordinary, reasonable or necessary business expense. The Court of Tax
Appeals had seen it differently. Agreeing with Algue, it held that the said amount had been
legitimately paid by the private respondent for actual services rendered. The payment was in the
form of promotional fees. These were collected by the payees for their work in the creation of
the Vegetable Oil Investment Corporation of the Philippines and its subsequent purchase of the
properties of the Philippine Sugar Estate Development Company.
Parenthetically, it may be observed that the petitioner had originally claimed these promotional
fees to be personal holding company income[12] but later conformed to the decision of the
respondent court rejecting this assertion.[13] In fact, as the said court found, the amount was
earned through the joint efforts of the persons among whom it was distributed. It has been
established that the Philippine Sugar Estate Development Company had earlier appointed Algue
as its agent, authorizing it to sell its land, factories and oil manufacturing process. Pursuant to
such authority, Alberto Guevara, Jr., Eduardo Guevara, Isabel Guevara, Edith O’ Farell, and
Pablo Sanchez worked for the formation of the Vegetable Oil Investment Corporation, inducing
other persons to invest in it.[14] Ultimately, after its incorporation largely through the promotion
of the said persons, this new corporation purchased the PSEDC properties.[15] For this sale,
Algue received as agent a commission of P125,000.00, and it was from this commission that the
P75,000.00 promotional fees were paid to the aforenamed individuals.[16]
There is no dispute that the payees duly reported their respective shares of the fees in their
income tax returns and paid the corresponding taxes thereon.[17] The Court of Tax Appeals also
found, after examining the evidence, that no distribution of dividends was involved.[18]
The petitioner claims that these payments are fictitious because most of the payees are members
of the same family in control of Algue. It is argued that no indication was made as to how such
payments were made, whether by check or in cash, and there is not enough substantiation of
such payments. In short, the petitioner suggests a tax dodge, an attempt to evade a legitimate
assessment by invoking an imaginary deduction.
We find that these suspicions were adequately met by the private respondent when its President,
Alberto Guevara, and the accountant, Cecilia V. de Jesus, testified that the payments were not
made in one lump sum but periodically and in different amounts as each payee's need arose.[19]
It should be remembered that this was a family corporation where strict business procedures
were not applied and immediate issuance of receipts was not required. Even so, at the end of the
year, when the books were to be closed, each payee made an accounting of all of the fees
received by him or her, to make up the total of P75,000.00.[20] Admittedly, everything seemed
to be informal. This arrangement was understandable, however, in view of the close relationship
among the persons in the family corporation.
We agree with the respondent court that the amount of the promotional fees was not excessive.
The total commission paid by the Philippine Sugar Estate Development Co. to the private
respondent was P125,000.00.[21] After deducting the said fees, Algue still had a balance of
P50,000.00 as clear profit from the transaction. The amount of P75,000.00 was 60% of the total
commission. This was a reasonable proportion, considering that it was the payees who did
practically everything, from the formation of the Vegetable Oil Investment Corporation to the
actual purchase by it of the Sugar Estate properties.
This finding of the respondent court is in accord with the following provision of the Tax Code:
"SEC. 30. Deductions from gross income. - In computing net income there shall be
allowed as deductions -

(a) Expenses:

(1) In general.- All the ordinary and necessary expenses paid or incurred during the
taxable year in carrying on any trade or business, including a reasonable allowance
for salaries or other compensation for personal services actually rendered; x x x"[22]
and Revenue Regulations No. 2, Section 70 (1), reading as follows:

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

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

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

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

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

But even as we concede the inevitability and indispensability of taxation, it is a requirement in

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

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

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

SO ORDERED.

Teehankee, C.J., Narvasa, Gancayco, and Griño-Aquino, JJ., concur.
[1] Rollo, pp. 28-29.

[2] Ibid., pp. 29; 42.

[3] Id., p. 29.

[4] Respondent's Brief, p. 11.

[5] Id., p. 29.

[6] Id.

[7] Sec. 11.

[8] Phil.
Planters Investment Co. Inc. v. Acting Comm. of Internal Revenue, CTA Case No. 1266,
Nov. 11, 1962; Rollo, p. 30.

[9] Vicente Hilado v. Comm. of Internal Revenue, CTA Case No. 1256, Oct. 22, 1962; Rollo, p.
30.

[10] Ibid.

[11]
Penned by Associate Judge Estanislao R. Alvarez, concurred by Presiding Judge Ramon M.
Umali and Associate Judge Ramon L. Avancena.

[12] Rollo, p. 33.

[13] Ibid., pp. 7-8; Petition, pp. 2-3.

[14] Id., p. 37.

[15] Id.

[16] Id.

[17] Id.

[18] Id.

[19] Respondent's Brief, pp. 25-32.
[20] Ibid., pp. 30-32.
[21] Rollo, p. 37.
[22] Now Sec. 30, (a) (1) - (A.), National Internal Revenue Code.
[23] Respondent's Brief, p. 35.
Source: Supreme Court E-Library | Date created: June 22, 2017

121 Phil. 755
[ G.R. No. L-22074, April 30, 1965 ]

THE PHILIPPINE GUARANTY CO., INC., PETITIONER, VS. THE
COMMISSIONER OF INTERNAL REVENUE AND THE COURT OF TAX
APPEALS, RESPONDENTS.

DECISION
REYES, J.B.L., J.:
The Philippine Guaranty Co., Inc., a domestic insurance company, entered into reinsurance contracts, on
various dates, with foreign insurance companies not doing business in the Philippines, namely: Imperio
Compania de Seguros, La Union y El Fenix Espafiol, Overseas Assurances Corp., Ltd., Sociedad Anonima
de Reaseguros Alianza, Tokio Marine & Fire Insurance Co., Ltd., Union Assurance Society Ltd., Swiss
Reinsurance Company and Tariff Reinsurance Limited. Philippine Guaranty Co., Inc., thereby agreed to
cede to the foreign reinsurers a portion of the premiums on insurances it has originally underwritten in
the Philippines, in consideration for the assumption by the latter of liability on an equivalent portion of the
risks insured. Said reinsurance contracts were signed by Philippine Guaranty Co., Inc. in Manila and by
the foreign reinsurers outside the Philippines, except the contract with Swiss Reinsurance Company, which
was signed by both parties in Switzerland.
The reinsurance contracts made the commencement o the reinsurers' liability simultaneous with that of
Philippine Guaranty Co., Inc. under the original insurance. Philippine Guaranty Co., Inc. was required to
keep a register in Manila where the risks ceded to the foreign reinsurers were entered, and entry therein
was binding upon the reinsurers. A proportionate amount of taxes on insurance premiums not recovered
from the original assured were to be paid for by the foreign reinsurers. The foreign reinsurers further
agreed, in consideration for managing or administering their affairs in the Philippines, to compensate the
Philippine Guaranty Co., Inc. in an amount equal to 5% of the reinsurance premiums. Conflicts and or
differences between the parties under the reinsurance contracts were to be arbitrated in Manila. Philippine
Guaranty Co., Inc. and Swiss Reinsurance Company stipulated that their contract shall be construed by
the laws of the Philippines.
Pursuant to the aforesaid reinsurance contracts Philippine Guaranty Co., Inc. ceded to the foreign
reinsurers the following premiums:
1953 P842,466.71
1954 721,471.85

Said premiums were excluded by Philippine Guaranty Co., Inc. from its gross income when it filed its
income tax returns for 1953 and 1951. Furthermore, it did not withhold or pay tax on them.
Consequently, per letter dated April 13, 1959, the Commissioner of Internal Revenue assessed against
Philippine Guaranty Co., Inc. withholding tax on the ceded reinsurance premiums, thus:
1953
Gross
premium per P768,580.00
investigation
____________
Withholding
tax due
P184,459.00
thereon at
24%
25%
46,114.00
surcharge
Compromise
for non-filing
of
100.00
withholding
income tax
return
____________
TOTAL
AMOUNT
P230,673.00
DUE &
COLLECTIBLE
1954
Gross
premium per P780,880.68
investigation
____________
Withholding
tax due
P187,411.00
thereon at
24%
25%
46,853.00
surcharge
Compromise
for non-filing
of
100.00
withholding
income tax
return
TOTAL
AMOUNT
P234,364.00
DUE &
COLLECTIBLE
============
Philippine Guaranty Co., Inc. protested the assessment on the ground that reinsurance premiums ceded
to foreign reinsurers not doing business in the Philippines are not subject to withholding tax. Its protest
was denied and it appealed to the Court of Tax Appeals.
On July 6, 1963, the Court of Tax Appeals rendered judgment with this dispositive portion:
"In view of the foregoing considerations, petitioner Philippine Guaranty Co., Inc. is hereby
ordered to pay to the Commissioner of Internal Revenue the respective sums of P202,192.00
and P173,153.00 for the total sum of P375,345.00 as withholding income taxes for the years
1953 and 1954, plus the statutory delinquency penalties thereon. With costs against
petitioner."
Philippine Guaranty Co., Inc., has appealed, questioning the legality of the Commissioner of Internal
Revenue's assessment for withholding tax on the reinsurance premiums ceded in 1953 and 1954 to the
foreign reinsurers.
Petitioner maintains that the reinsurance premiums in question did not constitute income from sources
within the Philippines because the foreign reinsurers did not engage in business in the Philippines, nor did
they have office here.
The reinsurance contracts however show that the transactions or activities that constituted the
undertaking to reinsure Philippine Guaranty Co., Inc. against losses arising from the original insurances in
the Philippines were performed in the Philippines. The liability of the foreign reinsurers commenced
simultaneously with the liability of Philippine Guaranty Co., Inc. under the original insurances. Philippine
Guaranty Co., lnc, kept in Manila a register of the risks ceded to the foreign reinsurers. Entries made in
such register bound the foreign reinsurers, localizing in the Philippines the actual cession of the risks and
premiums and assumption of the reinsurance undertaking by the foreign reinsurers. Taxes on premiums
imposed by Section 255 of the Tax Code for the privilege of doing insurance business in the Philippines
were payable by the foreign reinsurers when the same were not recoverable from the original assured.
The foreign reinsurers paid Philippine Guaranty Co., Inc. an amount equivalent to 5% of the ceded
premiums, in consideration for administration and management by the latter of the affairs of the former
in the Philippines in regard to their reinsurance activities here. Disputes and differences between the
parties were subject to arbitration in the City of Manila. AH the reinsurance contracts, except that with
Swiss Reinsurance Company, were signed by Philippine Guaranty Co., Inc. in the Philippines and later
signed by the foreign reinsurers abroad. Although the contract between Philippine Guaranty Co., Inc. and
Swiss Reinsurance Company was signed by both parties in Switzerland, the same specifically provided
that its provision shall be construed according to the laws of the Philippines, thereby manifesting a clear
intention of the parties lo subject themselves to Philippine laws.
Section 24 of the Tax Code subjects foreign corporations to tax on their income from sources within the
Philippines. The word "sources" has been interpreted as the activity, property or service giving rise to the
income.[1] The reinsurance premiums were income created from the undertaking of the foreign
reinsurance companies to reinsure Philippine Guaranty Co., Inc. against liability for loss under original
insurances. Such undertaking, as explained above, took place in the Philippines. These insurance
premiums therefore came from sources within the Philippines and, hence, are subject to corporate income
tax.
The foreign insurers place of business should not be confused with their place of activity. Business implies
continuity and progression of transactions[2] while activity may consist of only a single transaction. An
activity may occur outside the place of business. Section 24 of the Tax Code does not require a foreign
corporation to engage in business in the Philippines in subjecting its income to tax. It suffices that the
activity creating the income is performed or done in the Philippines. What is controlling, therefore, is not
the place of business but the place of activity that created an income.
Petitioner further contends that the reinsurance premiums are not income from sources within the
Philippines because they are not specifically mentioned in Section 37 of the Tax Cede. Section 37 is not an
all inclusive enumeration, for it merely directs that the kinds of income mentioned therein should be
treated as income from sources within the Philippines but it does not require that other kinds of income
should not be considered likewise.
The power to lax is an attribute of sovereignty. It is a power emanating from necessity. It is a necessary
burden to preserve the State's sovereignty and a means to give the citizenry an army to resist an
aggression, a navy to defend its shores from invasion, a corps of civil servants to serve, public
improvements designed for the enjoyment of the citizenry and those which come within the State's
territory, and facilities and protection which a government is supposed to provide. Considering that the
reinsurance premiums in question were afforded protection by the government and the recipient foreign
reinsurers exercised rights and privileges guaranteed by our laws, such reinsurance premiums and
reinsurers should share the burden of maintaining the state.
Petitioner would wish to stress that its reliance in good faith on the rulings of the Commissioner of
Internal Revenue requiring no withholding of the tax due on the reinsurance premiums in question
relieved it of the duty to pay the corresponding withholding tax thereon. This defense of petitioner may
free it from the payment of surcharges or penalties imposed for failure to pay the corresponding
withholding tax, but it certainly would not exculpate it from liability to pay such withholding tax. The
Government is not estopped from collecting taxes by the mistakes or errors of its agents.[3]
In respect to the question of whether or not reinsurance premiums ceded to foreign reinsurers not doing
business in the Philippines are subject to withholding tax under Sections 53 and 54 of the Tax Code,
suffice it to state that this question has already been answered in the affirmative in Alexander Howden &
Co., Ltd. vs. Collector of Internal Revenue, L-19392, April 11, 1965.
Finally, petitioner contends that the withholding tax should be computed from the amount actually
remitted to the foreign reinsurers instead of from the total amount ceded. And since it did not remit any
amount to its foreign insurers in 1953 and 1954, no withholding tax was due.
The pertinent section of the Tax Code states:
"Sec. 54. Payment of corporation income tax at source .—In the case of foreign corporation
subject to taxation under this Title not engaged in trade or business within the Philippines
and not having any office or place of business therein, there shall be deducted and withheld
at the source in the same manner and upon the same items as is provided in section fifty-
three a tax equal to twenty-four per centum thereof, and such tax shall be returned and paid
in the same manner and subject to the same conditions as provided in that Action."
The applicable portion of Section 53 provides:
"(b) Non-resident aliens.—All persons, corporations and general copartnerships (companias

colectivas), in whatever capacity acting, including lessees or mortgagors of real or personal
property, trustees acting in any trust capacity, executors, administrators receivers,
conservators, fiduciaries, employers, and all officers and employees of the Government of the
Philippines having the control, receipt, custody, disposal, or payment of interest, dividends,
rents, salaries, wages, premiums, annuities, compensation, remunerations, emoluments, or
other fixed or determinable annual or periodical gains, profits, and income of any non-
resident alien individual, not engaged in trade or business within the Philippines and not
having any office or place of business therein, shall (except) in the cases provided for in
subsection (a) of this section) deduct and withhold from such annual or periodical gains,
profits, and income a tax equal to twelve per centum hereof: Provided, That no such
deduction or withholding shall be required in the case of dividends paid by a foreign
corporation unless (1) such corporation is engaged in trade or business within the Philippines
or has an office or place of business therein, and (2) more than eighty-five per centum of the
gross income of such corporation for the three-year period ending with the lose of its taxable
year preceding the declaration of such dividends (or for such part of such period as the
corporation has been in existence) was derived from sources within the Philippines as
determined under the provisions of section thirty-seven: Provided, further. That the Collector
of Internal Revenue may authorize such tax to be deducted and withheld from the interest
upon any securities the owners of which are not known to the withholding agent."
The above-quoted provisions allow no deduction from the income therein enumerated in determining the
amount to be withheld. Accordingly, in computing the withholding tax due on the reinsurance premiums in
question, no deduction shall be recognized.
WHEREFORE, in affirming the decision appealed from, the Philippine Guaranty Co., Inc. is hereby
ordered to pay to the Commissioner of Internal Revenue the sums of P202.192.00 and P173.153.00, or a
total amount of P375 345.00, as withholding tax for the years 1953 and 1954, respectively. If the amount
of P375.345.00 is not paid within 30 days from the date this judgment becomes final there shall be
collected a surcharge of 5% on the amount unpaid, plus interest at the rate of 1% a month from the date
of delinquency to the date of payment, provided that the maximum amount that may be collected as
interest shall not exceed the amount corresponding to a period of three (3) years. With costs against
petitioner.
SO ORDERED.
Bengzon, C. J., Bautista Angelo, Concepcion, Reyes, J.B.L., Barrera, Paredes, Dizon and Regala, JJ.,
concur.

[1]
Mertens, Jr., Jacob. Law On Federal Income Taxation, Vol. 8, Section 45.27.
[2]
Imperial vs. Collector of Internal Revenue, L-7924, September 30, 1955.
[3]
Hilado vs. Collector of Internal Revenue, 100 Phil, 288; 53 Off. Gaz., 241; Koppel (Philippines), Inc.
vs. Collector of Internal Revenue, L-10550, September 19, 1961; Compañia General de Tobacos de
Filipinas vs. City of Manila, L-161619, June 29, 1963.
RESOLUTION
BENGZON, J.P., J.:
The Philippine Guaranty Company, Inc. moves for the reconsideration of our decision, promulgated on
April 30, 1965, holding it liable for the payment of income tax which it should have withheld and remitted
to the Bureau of Internal Revenue in the total sum of P375,345.00.
The grounds raised in the instant motion all spring from movant's view that the Court of Tax Appeals as
well as this Court found it "innocent of the charges of violating, wilfully or negligently, sub-section (c) of
Section 53 and Section 51 of the National Internal Revenue Code." Hence, it cannot subsequently be held
liable for the assessment of P375.315.00 based on said sections.
The premise of movant's reasoning cannot be accepted. The Court of Tax Appeals and this Court did not
find that it did not violate Section r>3(c) and 54 of the Tax Code. On the contrary, movant was found to
have violated Section 53 violation was due to a reasonable cause—namely, reliance on the advice of its
auditors and opinion of the Commissioner of Internal Revenue—no surcharge to the 764 PHILIPPINE
REPORTS Phil. Guaranty Co., Inc. vs. Comm. of Int. Rev. and CTA tax was imposed. Section 72 of the Tax
Code provides:
"Sec. 72. Surcharges for failure to render returns and for rendering false and fraudulent
returns.—The Commissioner of Internal Revenue shall assess all income taxes. In case of
willful neglect to file the return or list within the time prescribed by law, or in case a false or
fraudulent return or list is willfully made, the Commissioner of Internal Revenue shall add to
the tax or to the deficiency tax, in case any payment has been made on the basis of such
return before the discovery of the falsity or fraud, a surcharge of fifty per centum of the
amount of such tax or deficiency tax. In case of any failure to make and file a return or list
within the time prescribed by law or by the Commissioner or other internal revenue officer,
not due to willful neglect, the Commissioner of Internal Revenue shall add to the tax twenty-
five per centum of its amount, except that, when a return is voluntarily and without notice
from the Commissioner or other officer filed after such time, and it is shown that the failure
to file it was due to a reasonable cause, no such addition shall be made to the tax. * * *"
It will be noted that the first half of the above-quoted section covers failure to file a return, willingly
and/or due to negligence, in which case the surcharge is 50%. In the second part of the law it covers
failure to make and file a return "not due to willful neglect", in which case only 25% surcharge should be
added. As a further concession to the taxpayer the above-quoted section provides that if "it is shown that
the failure to, file it was due to a reasonable cause, no such addition shall be made to the tax".
It would, therefore, be incorrect for movant to state that it was found "innocent of the charges of
violating, willfully or negligently, sub-section (c) of Section 53 and Section 54". For, precisely, the mere
fact that it was exempted from paying the penalty necessarily implies violation of Section 53(c). Violating
Section 53(c) is one thing; imposing the penalty for such violation under Section 72[*] is another. If it is
found that the failure to file is due to a reasonable cause, then exemption from surcharge sets in but
never exemption from payment o the tax due.
Since movant failed to pay the tax due, in the sum of P375,345.00, this Court ordered it to pay the same.
Simply because movant was relieved from paying the surcharge for failure to file the necessary returns, it
now wants us to absolve it from paying even the tax. This, we cannot do. The non-imposition of the 25%
surcharge does not carry with it remission of the tax.
Movant argues that it could not be expected to withhold the tax, for as early as August 18, 1953 the
Board of Tax Appeals held in the case of Franklin Baker[1] that the reinsurance premiums in question were
not subject to withholding. On top of that, movant maintains, the Commissioner of Internal Revenue, in
reply to the query of its accountants and auditors, issued on September 5, 1953 an opinion subscribing to
the ruling in the Franklin Baker case. As already explained in our decision a mistake committed by
Government agents is not binding on the Government.
Inasmuch as movant insists on this point in its motion for reconsideration, we shall further elaborate on
the same. Section 200 of the Income Tax Regulations expressly grants protection to him only if and when
he follows strictly what has been provided therein.
Section 53 (c) makes the withholding agent personally liable for the income tax withheld under Section
54. It states:
"Sec. 53 (c) Return and payment.—Every person required to deduct and withhold any tax
under this section shall make return thereof, in duplicate, on or before the fifteenth day of
April of each year, and, on or before the time fixed by law for the payment of the tax, shall
pay the amount withheld to the officer of the Government of the Philippines authorized to
receive it. Every such person is made personally liable for such tax, and is indemnified
against the claims and demands of any person for the amount of any payments made in
accordance with the provisions of this section."
The law sets no condition for the personal liability of the withholding agent to attach. The reason is to
compel the withholding agent to withhold the tax under all circumstances. In effect, the responsibility for
the collection of the tax as well as the payment thereof is concentrated upon the person over whom the
Government has jurisdiction. Thus, the withholding agent is constituted the agent of both the Government
and the taxpayer. With respect to the collection and/or withholding of the tax, he is the Government's
agent. In regard to the filing of the necessary income tax return and the payment of the tax to the
Government, he is the agent of the taxpayer. The withholding agent, therefore, is no ordinary government
agent especially because under Section 53 (c) he is held personally liable for the tax he is duty bound to
withhold; whereas, the Commissioner of Internal Revenue and his deputies are not made liable by law.
Movant then further contends that as agent of the Government it was released from liability for the tax
after it was advised by the Commissioner of Internal Revenue that the reinsurance premiums involved
were not subject to withholding. It relies on the provisions of the second paragraph of Section 200 of the
Income Tax Regulations, which states:
"In case of doubt, a withholding agent may always protect himself by withholding the tax due, and
promptly causing a query to be addressed to the Commissioner of Internal Revenue for the determination
of whether or not the income paid to an individual is not subject to withholding. In case the Commissioner
of Internal Revenue decides that the income paid to an individual is not subject to withholding. The
withholding agent may thereupon remit the amount of tax withheld."
The section above-quoted relaxes the application of the stringent provisions of Section 63 of the Tax
Code. Accordingly, it grants exemption from tax liability, and in so doing, it lays down steps to be taken
by the withholding agent, namely, (1) that he withholds the tax due, (2) that he promptly addresses a
query to the Commissioner of Internal Revenue for determination whether or not the income paid to an
individual is subject to withholding; and (3) that the Commissioner of Internal Revenue decides that such
income is not subject to withholding. Strict observance of said steps is required of a withholding agent
before he could be released from liability. Generally, the law frowns upon exemption from taxation, hence,
an exempting provision should be construed strictissimi juris.[2]
It may be illuminating to mention here however that the Income Tax Regulations was issued by the
Secretary of Finance upon his authority, "to promulgate all needful rules and regulations of the effective
enforcement" of the provisions of the Tax Code.[3] The mission therefore of Section 200, quoted above, is
to implement Section 53 of the Tax Code for no other purpose than to enforce its provisions effectively. It
should also be noted, that Section 53 provides for no exemption from the duty to withhold except in the
cases of tax-free covenant bonds and dividends.
The facts in this case do not support a finding that movant complied with Section 200. For, it has not been
shown that it withheld the amount of tax due before it inquired from the Bureau of Internal Revenue as to
the taxability of the reinsurance premiums involved. As a matter of fact, the Court of Tax Appeals found
that "upon advice of its accountants and auditors, * * * petitioner did not collect and remit to the
Commissioner of Internal Revenue the withholding tax". This finding of fact of the lower court,
unchallenged as it is, may not be disturbed.[4]
The requirement in Section 200 that the withholding agent should first withhold the tax before addressing
a query to the Commissioner of Internal Revenue is not without a meaning for it is in keeping with the
general operation of our tax laws: payment precedes defense. Prior to the creation of the Court of Tax
Appeals, the remedy of a taxpayer was to pay an internal revenue tax first and file a claim for refund
later.[5] This remedy has not been abrogated, for the law creating the Court of Tax Appeals merely gives
to the taxpayer an additional remedy. With respect to customs duties the consignee or importer
concerned is required to pay them under protest, before he is allowed to question legality of the
imposition.[6] Likewise, validity of a realty tax cannot be assailed until after the taxpayer has paid the tax
under protest.[7] The legislature, in adopting such measures in our tax laws, only wanted to be assured
that taxes are paid and collected without delay. For taxes are the lifeblood of government. Also, such
measures tend to prevent collusion between the taxpayer and the tax collector. By questioning a tax's
legality without first paying it, a taxpayer, in collusion with B.l.R. officials, can unduly delay, if not totally
evade, the payment of such tax.
Ofcourse, in this case there was absolutely no such collusion. Precisely, the Philippine Guaranty Company,
Inc. was absolved from the payment of the 25% surcharge for non-filing of income tax returns inasmuch
as the Tax Court as well as this Court believes that its omission was due to a reasonable cause.
WHEREFORE, the motion for reconsideration is denied.
SO ORDERED.
BengzonC.J., Bautista Angelo, Concepcion, Reyes, J.B.L., Dizon, Regala, Makalintal, and Zaldivar,
JJ., concur.

[*] Not Section 256 of the Tax Code as claimed by movant.
[1] Umali, Roman N., Decisions of the Board of Tax Appeals, Vol. 2, pp. 303-307.
2] La Carlota Sugar Central vs. Jimenez, L-12436, May 31, 1961.
[3] Section 338, National Internal Revenue Code.
[4] This case was appealed upon questions of law.

[5] Section 306, Revised Administrative Code.
[6] Section 1370, Revised Administrative Code.
[7] Section 54, Commonwealth Act 470.

EN BANC
[ G.R. NO. 168056, October 18, 2005 ]
ABAKADA GURO PARTY LIST OFFICER SAMSON S. ALCANTARA,
ET AL. VS. THE HON. EXECUTIVE SECRETARY EDUARDO R.
ERMITA.
Sirs/Mesdames:
Quoted hereunder, for your information, is a resolution of this Court dated OCT 18 2005.

G.R. No. 168056 (ABAKADA Guro Party List Officer Samson S. Alcantara, et al. vs. The Hon.
Executive Secretary Eduardo R. Ermita.)

G.R. No. 168207 (Aquilino Q. Pimentel, Jr., et al. vs. Executive Secretary Eduardo R. Ermita, et
al.)

G.R. No. 168461 (Association of Pilipinas Shell Dealers, Inc., et al. vs. Cesar V. Purisima, et
al.)

G.R. No. 168463 (Francis Joseph G. Escudero vs. Cesar V. Purisima, et al.)

G.R. No. 168730 (Bataan Governor Enrique T. Garcia, Jr. vs. Hon. Eduardo R. Ermita, et al.)

For resolution are the following motions for reconsideration of the Court's Decision dated
September 1, 2005 upholding the constitutionality of Republic Act No. 9337 or the VAT Reform
Act[1]:

1) Motion for Reconsideration filed by petitioners in G.R. No. 168463, Escudero, et al., on the
following grounds:

A. THE DELETION OF THE "NO PASS ON PROVISIONS" FOR THE SALE OF

PETROLEUM PRODUCTS AND POWER GENERATION SERVICES CONSTITUTED
GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK OR EXCESS OF
JURISDICTION ON THE PART OF THE BICAMERAL CONFERENCE COMMITTEE.

B. REPUBLIC ACT NO. 9337 GROSSLY VIOLATES THE CONSTITUTIONAL

IMPERATIVE ON EXCLUSIVE ORIGINATION OF REVENUE BILLS UNDER §24,
ARTICLE VI, 1987 PHILIPPINE CONSTITUTION.

C. REPUBLIC ACT NO. 9337'S STAND-BY AUTHORITY TO THE EXECUTIVE TO

INCREASE THE VAT RATE, ESPECIALLY ON ACCOUNT OF THE EFFECTIVE
RECOMMENDATORY POWER GRANTED TO THE SECRETARY OF FINANCE,
CONSTITUTES UNDUE DELEGATION OF LEGISLATIVE AUTHORITY.
2) Motion for Reconsideration of petitioner in G.R. No. 168730, Bataan Governor Enrique T.
Garcia, Jr., with the argument that burdening the consumers with significantly higher prices
under a VAT regime vis-a-vis a 3% gross tax renders the law unconstitutional for being
arbitrary, oppressive and inequitable.
and
3) Motion for Reconsideration by petitioners Association of Pilipinas Shell Dealers, Inc. in G.R.
No. 168461, on the grounds that:
I. This Honorable Court erred in upholding the constitutionality of Section 110(A)(2)

and Section 110(B) of the NIRC, as am ended by the EVAT Law, imposing
limitations on the amount of input VAT that may be claimed as a credit against
output VAT, as well as Section 114(C) of the NIRC, as amended by the EVAT Law,
requiring the government or any of its instrumentalities to withhold a 5% final
withholding VAT on their gross payments on purchases of goods and services, and
finding that the questioned provisions:

A. are not arbitrary, oppressive and consfiscatory as to amount to a deprivation of

property without due process of law in violation of Article III, Section 1 of the 1987
Philippine Constitution;

B. do not violate the equal protection clause prescribed under Article III, Section 1
of the 1987 Philippine Constitution; and

C. apply uniformly to all those belonging to the same class and do not violate Article
VI, Section 28(1) of the 1987 Philippine Constitution.

II. This Honorable Court erred in upholding the constitutionality of Section 110(B)
of the NIRC, as amended by the EVAT Law, imposing a limitation on the amount of
input VAT that may be claimed as a credit against output VAT notwithstanding the
finding that the tax is not progressive as exhorted by Article VI, Section 28(1) of the
1987 Philippine Constitution.
Respondents filed their Consolidated Comment. Petitioner Garcia filed his Reply.

Petitioners Escudero, et al., insist that the bicameral conference committee should not even have
acted on the no pass-on provisions since there is no disagreement between House Bill Nos. 3705
and 3555 on the one hand, and Senate Bill No. 1950 on the other, with regard to the no pass-on
provision for the sale of service for power generation because both the Senate and the House
were in agreement that the VAT burden for the sale of such service shall not be passed on to the
end-consumer. As to the no pass-on provision for sale of petroleum products, petitioners argue
that the fact that the presence of such a no pass-on provision in the House version and the
absence thereof in the Senate Bill means there is no conflict because "a House provision cannot
be in conflict with something that does not exist."

Such argument is flawed. Note that the rules of both houses of Congress provide that a
conference committee shall settle the "differences" in the respective bills of each house. Verily,
the fact that a no pass-on provision is present in one version but absent in the other, and one
version intends two industries, i.e., power generation companies and petroleum sellers, to bear
the burden of the tax, while the other version intended only the industry of power generation,
transmission and distribution to be saddled with such burden, clearly shows that there are indeed
differences between the bills coming from each house, which differences should be acted upon
by the bicameral conference committee. It is incorrect to conclude that there is no clash between
two opposing forces with regard to the no pass-on provision for VAT on the sale of petroleum
products merely because such provision exists in the House version while it is absent in the
Senate version. It is precisely the absence of such provision in the Senate bill and the presence
thereof in the House bills that causes the conflict. The absence of the provision in the Senate bill
shows the Senate's disagreement to the intention of the House of Representatives make the
sellers of petroleum bear the burden of the VAT. Thus, there are indeed two opposing forces: on
one side, the House of Representatives which wants petroleum dealers to be saddled with the
burden of paying VAT and on the other, the Senate which does not see it proper to make that
particular industry bear said burden. Clearly, such conflicts and differences between the no pass-
on provisions in the Senate and House bills had to be acted upon by the bicameral conference
committee as mandated by the rules of both houses of Congress.
Moreover, the deletion of the no pass-on provision made the present VAT law more in
consonance with the very nature of VAT which, as stated in the Decision promulgated on
September 1, 2005, is a tax on spending or consumption, thus, the burden thereof is ultimately
borne by the end-consumer.
Escudero, et al., then claim that there had been changes introduced in the Rules of the House of
Representatives regarding the conduct of the House panel in a bicameral conference committee,
since the time of Tolentino vs. Secretary of Finance[2] to act as safeguards against possible
abuse of authority by the House members of the bicameral conference committee. Even
assuming that the rule requiring the House panel to report back to the House if there are
substantial differences in the House and Senate bills had indeed been introduced after Tolentino,
the Court stands by its ruling that the issue of whether or not the House panel in the bicameral
conference committee complied with said internal rule cannot be inquired into by the Court. To
reiterate, "mere failure to conform to parliamentary usage will not invalidate the action (taken
by a deliberative body) when the requisite number of members have agreed to a particular
measure."[3]
Escudero, et. al., also contend that Republic Act No. 9337 grossly violates the constitutional
imperative on exclusive origination of revenue bills under Section 24 of Article VI of the
Constitution when the Senate introduced amendments not connected with VAT.
The Court is not persuaded.
Article VI, Section 24 of the Constitution provides:
Sec. 24 All appropriation, revenue or tariff bills, bills authorizing increase of the
public debt, bills of local application, and private bills shall- originate exclusively in
the House of Representatives, but the Senate may propose or concur with
amendments.
Section 24 speaks of origination of certain bills from the House of Representatives which has
been interpreted in the Tolentino case as follows:
... To begin with, it is not the law — but the revenue bill — which is required by the
Constitution to "originate exclusively" in he House of Representatives. It is
important to emphasize this, because a bill originating in the House may undergo
such extensive changes in the Senate that the result may be a rewriting of the whole
... At this point, what is important to note is that, as a result of the Senate action, a
distinct bill may be; produced. To insist that a revenue statute — and not only the
bill which initiated the legislative process culminating in the enactment of the law —
must substantially be the same as the House bill would be to deny the Senate's power
not only to "concur with amendments" but also to " propose amendments." It would
be to violate the coequality of legislative power of the two houses of Congress and in
fact make the House superior to the Senate.

... Given, then, the power of the Senate to propose amendments, the Senate can
propose its own version even with respect to bills which are required by the
Constitution to originate in the House.
...
Indeed, what the Constitution simply means is that the initiative for filing revenue,
tariff, or tax bills, bills authorizing an increase of the public debt, private bills and
bills of local application must come from the House of Representatives on the theory
that, elected as they are from the districts, the members of the House can be expected
to be more sensitive to the local needs and problems. On the other hand, the
senators, who are elected at large, are expected to approach the same problems from
the national perspective. Both views are thereby made to bear on the enactment of
such laws.[4]
Clearly, after the House bills as approved on third reading are duly transmitted to the Senate, the
Constitution states that the latter can propose or concur with amendments. The Court finds that
the subject provisions found in the Senate bill are within the purview of such constitutional
provision as declared in the Tolentino case.

The intent of the House of Representatives in initiating House Bill Nos. 3555 and 3705 was to
solve the country's serious financial problems. It was stated in the respective explanatory notes
that there is a need for the government to make significant expenditure savings and a credible
package of revenue measures. These measures include improvement of tax administration and
control and leakages in revenues from income taxes and value added tax. It is also stated that
one opportunity that could be beneficial to the overall status of our economy is to review
existing tax rates, evaluating the relevance given our present conditions. Thus, with these
purposes in mind and to accomplish these purposes for which the house bills were filed, i.e., to
raise revenues for the government, the Senate introduced amendments on income taxes, which
as admitted by Senator Ralph Recto, would yield about P10.5 billion a year.

Moreover, since the objective of these house bills is to raise revenues, the increase in corporate
income taxes would be a great help and would also soften the impact of VAT measure on the
consumers by distributing the burden across all sectors instead of putting it entirely on the
shoulders of the consumers.
As to the other National Internal Revenue Code (NIRC) provisions found in Senate Bill No.
1950, i.e., percentage taxes, franchise taxes, amusement and excise taxes, these provisions are
needed so as to cushion the effects of VAT on consumers. As we said in our decision, certain
goods and services which were subject to percentage tax and excise tax would no longer be VAT
exempt, thus, the consumer would be burdened more as they would be paying the VAT in
addition to these taxes. Thus, there is a need to amend these sections to soften the impact of
VAT. The Court finds no reason to reverse the earlier ruling that the Senate introduced
amendments that are germane to the subject matter and purposes of the house bills.
Petitioners Escudero, et al., also reiterate that R.A. No. 9337's stand-by authority to the
Executive to increase the VAT rate, especially on account of the recommendatory power granted
to the Secretary of Finance, constitutes undue delegation of legislative power. They submit that
the recommendatory power given to the Secretary of Finance in regard to the occurrence of
either of two events using the Gross Domestic Product (GDP) as a benchmark necessarily and
inherently required extended analysis and evaluation, as well as policy making.
There is no merit in this contention. The Court reiterates that in making his recommendation to
the President on the existence of either of the two conditions, the Secretary of Finance is not
acting as the alter ego of the President or even her subordinate. He is acting as the agent of the
legislative department, to determine and declare the event upon which its expressed will is to
take effect. The Secretary of Finance becomes the means or tool by which legislative policy is
determined and implemented, considering that he possesses all the facilities to gather data and
information and has a much broader perspective to properly evaluate them. His function is to
gather and collate statistical data and other pertinent information and verify if any of the two
conditions laid out by Congress is present. Congress granted the Secretary of Finance the
authority to ascertain the existence of a fact, namely, whether by December 31, 2005, the value-
added tax collection as a percentage of GDP of the previous year exceeds two and four-fifth
percent (24/5%) or the national government deficit as a percentage of GDP of the previous year
exceeds one and one-half percent (11/2%). If either of these two instances has occurred, the
Secretary of Finance, by legislative mandate, must submit such information to the President.
Then the 12% VAT rate must be imposed by the President effective January 1, 2006. Congress
does not abdicate its functions or unduly delegate power when it describes what job must be
done, who must do it, and what is the scope of his authority; in our complex economy that is
frequently the only way in which the legislative process can go forward. There is no undue
delegation of legislative power but only of the discretion as to the execution of a law. This is
constitutionally permissible. Congress did not delegate the power to tax but the mere
implementation of the law. The intent and will to increase the VAT rate to 12% came from
Congress and the task of the President is to simply execute the legislative policy. That Congress
chose to use the GDP as a benchmark to determine economic growth is not within the province
of the Court to inquire into, its task being to interpret the law.
With regard to petitioner Garcia's arguments, the Court also finds the same to be without merit.
As stated in the assailed Decision, the Court recognizes the burden that the consumers will be
bearing with the passage of R.A. No. 9337. But as was also stated by the Court, it cannot strike
down the law as unconstitutional simply because of its yokes. The legislature has spoken and
the only role that the Court plays in the picture is to determine whether the law was passed with
due regard to the mandates of the Constitution, Inasmuch as the Court finds that there are no
constitutional infirmities with its passage, the validity of the law must therefore be upheld.
Finally, petitioners Association of Pilipinas Shell Dealers, Inc. reiterated their arguments in the
petition, citing this time, the dissertation of Associate Justice Dante O. Tinga in his Dissenting
Opinion.
The glitch in petitioners' arguments is that it presents figures based on an event that is yet to
happen. Their illustration of the possible effects of the 70% limitation, while seemingly
concrete, still remains theoretical. Theories have no place in this case as the Court must only
deal with an existing case or controversy that is appropriate or ripe for judicial
determination, not one that is conjectural or merely anticipatory.[5] The Court will not
intervene absent an actual and substantial controversy admitting of specific relief through a
decree conclusive in nature, as distinguished from an opinion advising what the law would be
upon a hypothetical state of facts.[6]
The impact of the 70% limitation on the creditable input tax will ultimately depend on how one
manages and operates its business. Market forces, strategy and acumen will dictate their moves.
With or without these VAT provisions, an entrepreneur who does not have the ken to adapt to
economic variables will surely perish in the competition. The arguments posed are within the
realm of business, and the solution lies also in business.
Petitioners also reiterate their argument that the input tax is a property or a property right. In the
same breath, the Court reiterates its finding that it is not a property or a property right, and a
VAT-registered person's entitlement to the creditable input tax is a mere statutory privilege.
Petitioners also contend that even if the right to credit the input VAT is merely a statutory
privilege, it has already evolved into a vested right that the State cannot remove.
As the Court stated in its Decision, the right to credit the input tax is a mere creation of law.
Prior to the enactment of multi-stage sales taxation, the sales taxes paid at every level of
distribution are not recoverable from the taxes payable. With the advent of Executive Order No.
273 imposing a 10% multi-stage tax on all sales, it was only then that the crediting of the input
tax paid on purchase or importation of goods and services by VAT-registered persons against the
output tax was established. This continued with the Expanded VAT Law (R.A. No. 7716), and
The Tax Reform Act of 1997 (R.A. No. 8424). The right to credit input tax as against the output
tax is clearly a privilege created by law, a privilege that also the law can limit. It should be
stressed that a person has no vested right in statutory privileges.[7]
The concept of "vested right" is a consequence of the constitutional guaranty of due process that
expresses a present fixed interest which in right reason and natural justice is protected against
arbitrary state action; it includes not only legal or equitable title to the enforcement of a demand
but also exemptions from new obligations created after the right has become vested. Rights are
considered vested when the right to enjoyment is a present interest, absolute, unconditional, and
perfect or fixed and irrefutable.[8] As adeptly stated by Associate Justice Minita V. Chico-
Nazario in her Concurring Opinion, which the Court adopts, petitioners' right to the input VAT
credits has not yet vested, thus -
It should be remembered that prior to Rep. Act No. 9337, the petroleum dealers'
input VAT credits were inexistent - they were unrecognized and disallowed by law.
The petroleum dealers had no such property called input VAT credits. It is only
rational, therefore, that they cannot acquire vested rights to the use of such input
VAT credits when they were never entitled to such credits in the first place, at least,
not until Rep. Act No. 9337.
My view, at this point, when Rep. Act No. 9337 has not yet even been implemented,
is that petroleum dealers' right to use their input VAT as credit against their output
VAT unlimitedly has not vested, being a mere expectancy of a future benefit and
being contingent on the continuance of Section 110 of the National Internal Revenue
Code of 1997, prior to its amendment by Rep. Act No. 9337.
The elucidation of Associate Justice Artemio V. Panganiban is likewise worthy of note, to wit:

Moreover, there is no vested right in generally accepted accounting principles. These

refer to accounting concepts, measurement techniques, and standards of presentation
in a company's financial statements, and are not rooted in laws of nature, as are the
laws of physical science, for these are merely developed and continually modified by
local and international regulatory accounting bodies. To state otherwise and
recognize such asset account as a vested right is to limit the taxing power of the
State. Unlimited, plenary, comprehensive and supreme, this power cannot be unduly
restricted by mere creations of the State.
More importantly, the assailed provisions of R.A. No. 9337 already involve legislative policy
and wisdom. So long as there is a public end for which R.A. No. 9337 was passed, the means
through which such end shall be accomplished is for the legislature to choose so long as it is
within constitutional bounds. As stated in Carmichael vs. Southern Coal & Coke Co.:

If the question were ours to decide, we could not say that the legislature, in adopting
the present scheme rather than another, had no basis for its choice, or was arbitrary
or unreasonable in its action. But, as the state is free to distribute the burden of a tax
without regard to the particular purpose for which it is to be used, there is no warrant
in the Constitution for setting the tax aside because a court thinks that it could have
distributed the burden more wisely. Those are functions reserved for the legislature.
[9]
WHEREFORE, the Motions for Reconsideration are hereby DENIED WITH FINALITY. The
temporary restraining order issued by the Court is LIFTED.

SO ORDERED.

(The Justices who filed their respective concurring and dissenting opinions maintain their
respective positions. Justice Dante O. Tinga filed a dissenting opinion to the present Resolution;
while Justice Consuelo Ynares-Santiago joins him in his dissenting opinion.)

[1] Also referred to as the EVAT Law.
[2]
G.R. Nos. 115455, 115525, 115543, 115544, 115754, 115781, 115852, 115873 and 115931,
August 25, 1994, 235 SCRA 630.
[3]Fariñas vs. The Executive Secretary, G.R. No. 147387, December 10, 2003, 417 SCRA 503,
530.
[4] Supra, note no. 2, pp. 661-663.
[5] Velarde vs. Social Justice Society, G.R. No. 159357, April 28, 2004, 428 SCRA 283.
[6]Information Technology Foundation of the Phils, vs. COMELEC, G.R.No.159139, June 15,
2005.
[7] Lahom vs. Sibulo, G.R. No. 143989, July 14, 2003, 406 SCRA 135.
[8] Ibid.
[9] 301 U.S. 495.
DISSENTING OPINION

TINGA, J.:

Once again, the majority has refused to engage and refute in any meaningful fashion the
arguments raised by the petitioners in G.R. No. 168461. The de minimis appreciation exhibited
by the majority of the issues of 70% cap, the 60-month amortization period, and 5%
withholding VAT on transactions made with the national government is regrettable, with ruinous
consequences for the nation. I see no reason to turn back from any of the views expressed in my
Dissenting Opinion, and I accordingly dissent from the denial of the Motion for Reconsideration
filed by the petitioners in G.R. No. 168461.1

The reasons for my vote have been comprehensively discussed in my previous Dissenting
Opinion, and I do not see the need to replicate them herein. However, I wish to stress a few
points.

Tax Statutes May Be Invalidated

If They Pose a Clear and Present
Danger
To the Deprivation of Life, Liberty and
Property Without Due Process of Law
The majority again dismisses the arguments of the petitioners as "theoretical", "conjectural" or
merely "anticipatory," notwithstanding that the injury to the taxpayers resulting from Section 8
and 12 of the E-VAT Law is ascertainable with mathematical certainty. In support of this view,
the majority cites the Court's Resolution dated 15 June 2005 in Information Technology
Foundation v. COMELEC,2 one of the rulings issued in that case subsequent to the main
Decision rendered on 13 January 2004. The reference is grievously ironic, considering that in
the 13 January 2004 Decision, the Court, over vigorous dissents, chose anyway to intervene and
grant the petition despite the fact that the petitioners therein did not allege any violation of any
constitutional provision or letter of statute.3 In this case, the petitioners have squarely invoked
the violation of the Bill of Rights of the Constitution, and yet the majority is suddenly timid,
unlike in Infotech.
Still, the formulation of the majority unfortunately leaves the impression that any statute, taxing
or otherwise, is beyond judicial attack prior to its implementation. If the tax measure in question
provided that the taxpayer shall remit all income earned to the government beginning 1 January
2008, would this mean that the Court can take cognizance of the legal challenge only starting 2
January 2008?
I do not share the majority's penchant for awaiting the blood spurts before taking action even
when the knife's edge already dangles. As I maintained in my Dissenting Opinion, a tax
measure may be validly challenged and stricken down even before its implementation if it poses
a clear and present danger to the deprivation of life, liberty or property of the taxpayer without
due process of law. This is the expectation of every citizen who wishes to maintain trust in all
the branches of government. In the enforcement of the constitutional rights of all persons, the
commonsense expectation is that the Court, as guardian of these rights, is empowered to step in
even before the prospective violation takes place. Hence, the evolution of the "clear and present
danger" doctrine and other analogous principles, without which, the Court would be seen as
inutile in the face of constitutional violation.
Of course, not every anticipatory threat to constitutional liberties can be assailed prior to
implementation, hence the employment of the "clear and present danger" standard to separate
the wheat from the chaff. Still, the Court should not be so readily dismissive of the petitioners'
posture herein merely because it is anticipatory. There should have been a meaningful
engagement by the majority of the facts and formulae presented by the petitioners before the
reasonable conclusion could have been reached on the maturity of the claim. That the majority
has not bothered to do so is ultimately of tragic consequence.
70% Input VAT Credit

An Impaired Asset
The ponencia, joined by Justices Panganiban and Chico-Nazario, express the belief that no
property rights attach to the input VAT paid by the taxpayer. This is a bizarre view that assumes
that all income earned by private persons preternaturally belongs to the government, and
whatever is retained by the person after taxes is acquired as a matter of privilege. This is the sort
of thinking that has fermented revolutions throughout history, such as the American Revolution
of 1776.
I pointed out in my Dissenting Opinion that under current accepted international accounting
standards, the 30% prepaid input VAT would be recorded as a loss in the accounting books,
since the possibility of its recovery is improbable, considering that the E-VAT Law allows its
recovery only after the business has ceased to exist. Even the Bureau of Internal Revenue itself
has long recognized the unutilized input VAT as an asset.
The majority fails to realize that even under the new E-VAT Law, the State recognizes that the
persons who pre-pay that input VAT, usually the dealers or retailers, are not the persons who are
liable to pay for the tax. The VAT system, as implemented through the previous VAT law and
the new E-VAT Law, squarely holds the end consumer as the taxpayer liable to shoulder the
input VAT. Nonetheless, under the mechanism foisted in the new E-VAT Law, the dealer or
retailer who pre-pays the input VAT is virtually precluded from recovering the pre-paid input
VAT, since the law only allows such recovery upon the cessation of the business. Indeed, the
only way said class of taxpayers can recover this pre-paid input VAT was if it were to cease
operations at the end of every quarter.
The illusion that blinds the majority to this state of affairs is the claim that the pre-paid input
VAT may anyway be carried over into the succeeding quarter, a chimera enhanced by the
grossly misleading presentation of the Office of the Solicitor General. What this deception
fosters, and what the majority fails to realize, is that since the taxpayer is perpetually obliged to
remit the 30% input VAT every quarter, there would be a continuous accumulation of excess
input VAT. It is not true then that the input VAT prepaid for the first quarter can be recovered in
the second, third or fourth quarter of that year, or at any time in the next year for that matter
since the amount of prepaid input VAT accumulates with every succeeding prepayment of input
VAT. Moreover, the accumulation of the prepaid input VAT diminishes the actual value of the
refundable amounts, considering the established principle of "time-value of money", as
explained in my Dissenting Opinion.
Thus, the pre-paid input VAT, for which the petitioners and other similarly situated taxpayers are
not even ultimately liable in the first place, represents in tangible terms an actual loss. To put it
more succinctly, when the taxpayer prepays the 30% input VAT, there is no chance for its
recovery except until after the taxpayer ceases to be such. This point is crucial, as it goes in the
heart of the constitutional challenge raised by the petitioners. A recognition that the input VAT
is a property asset places it squarely in the ambit of the due process clause.
The majority now stresses that prior to Executive Order No. 273 sales taxes paid by the retailer
or dealers were not recoverable. The nature of a sales tax precisely is that it is shouldered by the
seller, not the consumer. In that case, the clear legislative intent is to encumber the retailer with
the end tax. Under the VAT system, as enshrined under Rep. Act No. 9337, the new E-VAT Law,
there is precisely a legislative recognition that it is the end user, not the seller, who shoulders the
E-VAT. The problem with the new E-VAT law is that it correspondingly imposes a defeatist
mechanism that obviates this entitlement of the seller by forcibly withholding in perpetua this
pre-paid input VAT.
The majority cites with approval Justice Chico-Nazario's argument, as expressed in her
concurring opinion, that prior to the new E-VAT Law, the petroleum dealers in particular had no
input VAT credits to speak of, and therefore, could not assert any property rights to the input
VAT credits under the new law. Of course the petroleum dealers had no input VAT credits prior
to the E-VAT Law because precisely they were not covered by the VAT system in the first place.
What would now be classified as "input VAT credits" was, in real terms, profit obtainable by the
petroleum dealers prior to the new E-VAT Law. The E-VAT Law stands to diminish such profit,
not by outright taking perhaps, but by ad infinitum confiscation with the illusory promise of
eventual return. Obviously, there is a deprivation of property in such case; yet is it seriously
contended that such deprivation is ipso facto sheltered if it is not classified as a taking, but
instead reclassified as a "credit"?
It is highly distressful that the Court, in its haste to decree petitioners as bereft of any vested
property rights, rejects the notion that a person has a vested right to the earnings and profits
incurred in business. Before, no legal basis could be found to prop up such a palpably
outlandish claim; but the Decision, as affirmed by the majority's Resolution, now enshrines a
temerarious proposition with doctrinal status.
In the Decision, and also in Justice Panganiban's Separate Opinion therein, the case of United
Paracale Mining Co. v. De la Rosa4 was cited in support of the proposition that there is no
vested right to the input VAT credit. Justice Panganiban went as far as to cite that case to
support the contention that "[t]here is no vested right in a deferred input tax account; it is a mere
statutory privilege." Reliance on the case is quite misplaced. First, as pointed out in my
Dissenting Opinion, it does not even pertain to tax credits involving as it does, questions on the
jurisdiction of the Bureau of Mines.5 Second, the putative vested rights therein pertained to
mining claims, yet all mineral resources indisputably belong to the State. Herein, the rights
pertain to profit incurred by private enterprise, and certainly the majority cannot contend that
such profits actually belong to the State.
As stated in my Dissenting Opinion, the Constitution itself recognizes a right to income and
profit when it recognizes "the right of enterprises to reasonable returns on investments, and to
expansion and growth."6 Section 20, Article II of the Constitution further mandates that the
State recognize the indispensable role of the private sector, the encouragement of private
enterprise, and the provision of incentives to needed investments.7 Indeed, there is a
fundamental recognition in any form of democratic government that recognizes a capitalist
economy that the enterprise has a right to its profits. Today, the Court instead affirms that there
is no such right. Should capital flight ensue, the phenomenon should not be blamed on investors
in view of our judicial system's rejection of capitalism's fundamental precept.
Mainstream Denunciation of 70% Cap
The fact that petitioners are dealers of petroleum products may have left the impression that the
70% cap singularly affects the petroleum industry; or that other classes of dealers or retailers do
not pose the same objections to these "innovations" in the E-VAT law. This is far from the truth.
In fact, the clamor against the 70% cap has been widespread among the players and components
in the financial mainstream. Denunciations have been registered by the Philippine Chamber of
Commerce and Industry8, the Joint Foreign Chambers of the Philippines (comprising of the
American Chamber of Commerce in the Philippines, the Australian-New Zealand Chamber
Commerce of the Philippines, Inc., the Canadian Chamber of Commerce of the Philippines,
Inc., the European Chamber of Commerce of the Philippines, Inc., the Japanese Chamber of
Commerce of the Philippines, Inc., the Korean Chamber of Commerce and Industry of the
Philippines, and the Philippine Association of Multinational Companies Regional Headquarters,
Inc.),9 the Filipino-Chinese Chamber of Commerce and Industry,10 the Federation of Philippine
Industries,11 the Consumer and Oil Price Watch,12 the Association of Certified Public
Accountants in Public Practice,13 the Philippine Tobacco Institute,14 and the auditing firm of
PricewaterhouseCooper.15
Even newly installed Finance Secretary Margarito Teves has expressed concern that the 70%
input VAT "may not work across all industries because of varying profit margins". 16 Other
experts who have voiced concerns on the 70% input VAT are former NEDA Directors Cielito
Habito17 and Solita Monsod,18 Peter Wallace of the Wallace Business Forum,19 and Paul R.
Cooper, director of PricewaterhouseCooper.
In fact, Mr. Cooper published in the Philippine Daily Inquirer a lengthy disquisition on the
problems surrounding the 70% cap, portions of which I replicate below:
Policy concerns on the cap

When the idea of putting a cap was originally introduced on the floor of the Senate.
The idea was to address to some extent the under-reporting of output VAT by non-
complaint taxpayers. The original suggestion was a 90 percent cap, or effectively a
1-percent minimum VAT. At that level, the rule should not impact adversely on
complaint taxpayers, but would result in non-complaint taxpayers having to account
for closer to their true tax liability.

As a general policy consideration, one should question why our legislators are
penalizing complaint taxpayers when the fundamental issue is at the apparent
inability of the Bureau of Internal Revenue (BIR) to implement tax law effectively.

At a 90-percent cap, the measure might still have been defensible as a rough proxy
for VAT. However, somewhere in the bicameral process, the rule has become even
more punitive with a 70-percent cap. As with most amendments introduced at the
bicameral stage, there is no public indication about what lawmakers were thinking
when they put the travesty in place.

xxx

One of the arguments in Senate debates for taxing the power and petroleum sectors
was that if it was good enough for mom-and-pop stores to have to account for the
VAT, it was good enough for the biggest companies in the country to do the same. A
similar argument here is that if small businesses have to pay a minimum 3-percent
tax, why should larger VAT-registered persons get away with paying less?

The problem with this thinking is threefold:

The percentage tax applies to small businesses in the hard-to-tax sector and a
few believe the BIR collects close to what it should from this. Nor should we
be overly concerned if this is the case—the revenues are small, and the BIR's
efforts would be a lot better focused on larger taxpayers where more significant
revenues will be at issue.
VAT-registered persons incur compliance costs. The 3-percent tax might be

better conceived as a slightly more expensive option to allow taxpayers to opt
out of the VAT, rather than a punitive rule for small businesses. (If the
percentage tax is considered unduly punitive, why is it not just repealed?)
Ironically, one of the new measures in the Senate bill was to allow taxpayers
with turnovers below, the registration threshold to register voluntarily for VAT
if they believe the 3-percent tax imposition to be excessive. Without the
minimum VAT, smaller taxpayers might have been encouraged to enter the
more formalized VAT sector.
Potential consequences of the cap

The minimum VAT will distort the way taxpayers conduct business. A 3-percent
minimum VAT is more likely to impact on sellers of goods than on sellers of
services, as their proportion of taxable inputs are lower (there is no VAT paid when
using labor, but there is VAT on the purchase of goods). Consequently, there will be
a bias toward consuming services over goods. Businesses may have an incentive to
obtain goods from the informal (and potentially tax-evading) sector as there will be
no input tax paid for the purchase—in other words, the bill may actively encourage
less tax complaint behavior. Business structures may change; expect buy-sell
distributors to convent into commission agents, as this reduces the risk that they will
need to pay more than should be paid under a VAT system to cover the 3-percent
minimum VAT.20
These objections are voiced by members of the sensible center, and not those reflexively against
VAT or any tax imposition of the current administration. These objections are raised by the
people who stand to be directly affected on a daily punitive basis by the imposition of the 70%
cap, the 60-month amortization period and the 5% withholding VAT. Indeed, Justice Chico-
Nazario has expressed her disbelief over, or at least has asserted as unproven, the claimed
impact of the input VAT on the petroleum dealers.21 Of course there can be no tangible gauge as
of yet on the impact of these changes in the VAT law, since they have yet to be implemented.
However, the prevalent adverse reaction within the business sector should be sufficiently
expressive of the actual fears of the people who should know better. It is sad that the majority,
by maintaining a blithely naive view of the input VAT, perpetuates the disconnect between the
Court and the business sector, unnecessarily considering that in this instance, the concerns of the
financial community can be translated into a viable constitutional challenge.

Reliance on Legislative Amendments

An Abdication of the Court's Constitutional Duty
Justice Panganiban has already expressed the view that the remedy to the inequities caused by
the new input VAT system would be amending the law, and not an outright declaration of
unconstitutionality. I can only hazard a guess on how many members of the Court or the legal
community are similarly reliant on that remedy as a means of assuaging their fears on the
impact of the input VAT innovations.

As I stated in my Dissenting Opinion, it is this Court, and not the legislature, which has the duty
to strike down unconstitutional laws. Congress may amend unconstitutional laws to remedy
such legal infirmities, but it is under no constitutional or legal obligation to do so. The same
does not hold true with this Court. The essence of judicial review mandates that the Court strike
down unconstitutional laws.
Another corollary prospect has also arisen, that the Executive Department itself will mitigate the
implementation of the 70% cap by not fully implementing the law.
This prospect of course is speculative, the sort of speculation that is wholly dependent on the
whim of the officials of the executive branch and one that cannot be quantified by mathematical
formula. This cannot be the basis for any judicial action or vote. Moreover, such resort may
actually be illegal.
For one, Article 239 of the Revised Penal Code imposes the penalty of prision correctional on
public officers "who shall encroach upon the powers of the legislative branch of the
Government, either by making general rules or regulations beyond the scope of his authority, or
by attempting to repeal a law or suspending the execution thereof." Certainly, the remedy to the
inequities of the E-VAT Law cannot be left to administrative pussy-footing, considering that
these officials may be jailed for refusing to implement the law, or obfuscating the legislative
will.
Second, it is a cardinal rule that an administrative agency such as the Bureau of Internal
Revenue or even the Department of Finance cannot amend an act of Congress. Whatever
administrative regulations they may adopt under legislative authority must be in harmony with
the provisions of the law they are intended to carry into effect. They cannot widen or diminish
its scope.22
Finally, it must be remembered that one of the central doctrines enforced in the disposition of
the joint petitions is that the power to tax belongs solely to the legislative branch of government.
If the legislative will were to be frustrated by haphazard implementation by the executive
branch, all our disquisitions on this matter, as well as the key constitutional principle on the
inherent, non-delegable nature of the legislative power of taxation, will be for naught.
Indeed, I truly fear the scenario when, after the deluge, the executive branch of government
suspends the implementation of the 70% cap, or increases the cap to a higher amount such as
90%. Any taxpayer will have standing to attack such remedial measure, considering that the net
effect would be to diminish the government's collection of cash at hand. Following the law, the
proper judicial action would be to uphold the clear legislative intent over the reengineering of
the taxing provisions by the executive branch of government. Yet if the courts instead uphold
the power of the executive branch of government to reinvent the tax statute, then the end
concession would be that the power to enact tax laws ultimately belongs to the executive branch
of government.
I hesitate to say this, but there will be confusion, instability, and multiple fatalities within the
business sector with the enforcement of the amendments of Section 8 and 12 of the E-VAT Law.
It could have been stopped through the allowance of the petition in G.R. No. 168461, but
regrettably the Court did not act.
I respectfully dissent.
Very truly yours,
(Sgd.) MA. LUISA D. VILLARAMA

Clerk of Court
1 I similarly maintain my earlier vote, explained in my previous Dissenting Opinion, that

Section 21 of the E-VAT law, assailed by the petitioners in G.R. No. 168463, is likewise
unconstitutional.

2 G.R. No. 159139.

3See J. Tinga, dissenting, Information Technology Foundation of the Phils. V. COMELEC,

G.R. No. 159139, 13 January 2004.

4 G.R. Nos. 63786-87, 7 April 1993, 221 SCRA 108.

5 Id. at 115.

6 See Section 3, Article XII, Constitution.

7 See Section 20, Article II, Constitution.

8 See Manila Bulletin, 7 July 2005, pp. B-1 and B-2.

9 See Philippine Star, 23 June 2005, pp. B-1 and B-5.

10 See BusinessWorld, 28 July 2005, p. 2/S1.

11 See Philippine Star, 28 June 2005.

12 See Malaya, 21 September 2005, p. B-10.

13 See Manila Standard Today, 7 October 2005, p. B3.

14 Ibid.

15 Ibid.

16 See BusinessWorld, 14 July 2005, p. S1/9.
17 See Philippine Daily Inquirer, 11 July 2005, p. B6.
18 See Philippine Daily Inquirer, 16 July 2005.
19 Supra note 8.
20 See Philippine Daily Inquirer, 7 June 2005.
21 Indeed, it is rather curious that while Justice Chico-Nazario would belittle the factual
presentation of the petroleum dealers as "unsubstantiated", she would seem to accept the
counter-presentation made by the Solicitor-General which is outright misleading, as pointed out
in my Dissenting Opinion.
22 See Boie-Takeda Chemicals Inc. v. De la Serna, G.R. No. 92174. December 10, 1993.

110 Phil. 331
[ G.R. No. L-10405, December 29, 1960 ]

WENCESLAO PASCUAL, IN HIS OFFICIAL CAPACITY AS
PROVINCIAL GOVERNOR OF RIZAL, PETITIONER AND
APPELLANT VS. THE SECRETARY OF PUBLIC WORKS AND
COMMUNICATIONS, ET AL., RESPONDENTS AND APPELLEES.

DECISION
CONCEPCION, J.:
Appeal, by petitioner Wenceslao Pascual, from a decision of the Court of First Instance of Rizal,
dismissing the above entitled case and dissolving the writ of preliminary injunction therein
issued, without costs.
On August 31, 1954, petitioner Wenceslao Pascual, as Provincial Governor of Rizal, instituted
this action for declaratory relief, with injunction, upon the ground that Republic Act No. 920,
entitled "An Act Appropriating Funds for Public Works", approved on June 20, 1953, contained,
in section 1-C (a) thereof, an item (43 [h]) of P85,000.00, "for the construction, reconstruction,
repair, extension and improvement" of "Pasig feeder road terminals (Gen. Roxas—Gen. Araneta
—Gen. Lucban—Gen. Capinpin—Gen. Segundo—Gen. Delgado—Gen. Malvar— Gen. Lim)";
that, at the time of the passage and approval of said Act, the aforementioned feeder roads were
"nothing but projected and planned subdivision roads, not yet constructed, * * * within the
Antonio Subdivision * * * situated at * * * Pasig, Rizal" (according- to the tracings attached to
the petition as Annexes A and B, near Shaw Boulevard, not far away from the intersection
between the latter and Highway 54), which projected feeder roads "do not connect any
government property or any important premises to the main highway"; that the aforementioned
Antonio Subdivision (as well as the lands on which said feeder roads were to be constructed)
were private properties of respondent Jose C. Zulueta, who, at the time of the passage and
approval of said Act, was a member of the Senate of the Philippines; that on May 29, 195S,
respondent Zulueta, addressed a letter to the Municipal Council of Pasig, Rizal, offering to
donate said projected feeder roads to the municipality of Pasig, Rizal; that, on June 13, 1953,
the offer was accepted by the council, subject to the condition "that the donor would submit a
plan of the said roads and agree to change the names of two of them"; that no deed of donation
in favor of the municipality of Pasig was, however, executed; that on July 10, 1953, respondent
Zulueta wrote another letter to said council, calling attention to the approval of Republic Act
No. 920, and the sum of P85.000.00 appropriated therein for the construction of the projected
feeder roads in question; that the municipal council of Pasig endorsed said letter of respondent
Zulueta to the District Engineer of Rizal, who, up to the present "has not made any endorsement
thereon"; that inasmuch as the projected feeder roads in question were private property at the
time of the passage and approval of Republic Act No. 920, the appropriation of P85.000.00
therein made, for the construction, reconstruction, repair, extension and improvement of said
projected feeder roads, was "illegal and, therefore, void ab initio"; that said appropriation of
P85,000.00 was made by Congress because its members were made to believe that the projected
feeder roads in question were "public roads and not private streets of a private subdivision"' ;
that, "in order to give a semblance of legality, where there is absolutely none, to the
aforementioned appropriation", respondent Zulueta executed, on December 12, 1953, while he
was a member of the Senate of the Philippines, an alleged deed of donation—copy of which is
annexed to the petition—of the four (4) parcels of land constituting said projected feeder roads,
in favor of the Government of the Republic of the Philippines; that said alleged deed of
donation was, on the same date, accepted by the then Executive Secretary; that being-subject to
an onerous condition, said donation partook of the nature of a contract; that, as such, said
donation violated the provision of our fundamental law prohibiting members of Congress from
being directly or indirectly financially interested in any contract with the Government, and,
hence, is unconstitutional, as well as null and void ab initio, for the construction of the projected
feeder roads in question with public funds would greatly enhance or increase the value of the
aforementioned subdivision of respondent Zulueta, "aside from relieving him from the burden
of constructing his subdivision streets or roads at his own expense"; that the construction of said
projected feeder roads was then being undertaken by the Bureau of Public Highways; and that,
unless restrained by the court, the respondents would continue to execute, comply with, follow
and implement the aforementioned illegal provision of law, "to the irreparable damage,
detriment and prejudice not only to the petitioner but to the Filipino nation."
Petitioner prayed, therefore, that the contested item of Republic Act No. 920 be declared null
and void; that the alleged deed of donation of the feeder roads in question be "declared
unconstitutional and, therefore, illegal"; that a writ of injunction be issued enjoining the
Secretary of Public Works and Communications, the Director of the Bureau of Public Works,
the Commissioner of the Bureau of Public Highways and Jose C. Zulueta from ordering or
allowing the continuance of the above-mentioned feeder roads project, and from making and
securing any new and further releases on the aforementioned item of Republic Act No. 920, and
the disbursing officers of the Department of Public Works and Communications, the Bureau of
Public Works and the Bureau of Public Highways from making any further payments out of said
funds provided for in Republic Act No. 920; and that pending final hearing on the merits, a writ
of preliminary injunction be issued enjoining the aforementioned parties respondent from
making and securing any new and further releases on the aforesaid item of Republic Act No.
920 and from making any further payments out of said illegally appropriated funds.
Respondents moved to dismiss the petition upon the ground that petitioner had "no legal
capacity to sue", and that the petition did "not state a cause of action". In support to this motion,
respondent Zulueta alleged that the Provincial Fiscal of Rizal, not its provincial governor,
should represent the Province of Rizal, pursuant to section 1683 of the Revised Administrative
Code; that said respondent is "not aware of any law which makes illegal the appropriation of
public funds for the improvement of * * * private property"; and that,, the constitutional
provision invoked by petitioner is inapplicable to the donation in question, the same being a
pure act of liberality, not a contract. The other respondents, in turn, maintained that petitioner
could not assail the appropriation in question because "there is no actual bona fide case * * * in
which the validity of Republic Act No. 920 is necessarily involved" and petitioner "has not
shown that he has a personal and substantial interest" in said Act "and that its enforcement has
caused or will cause him a direct injury".
Acting upon said motions to dismiss, the lower court rendered the aforementioned decision,
dated October 29, 1953, holding that, since public interest is involved in this case, the Provincial
Governor of Rizal and the provincial fiscal thereof who represents him therein, "have the
requisite personalities" to question the constitutionality of the disputed item of Republic Act No.
920; that "the legislature is without power to appropriate public revenues for anything but a
public purpose", that the construction and improvement of the feeder roads in question, if such
roads were private property, would not be a public purpose; that, being subject to the following
condition:
"The within donation is hereby made upon the condition that the Government of the
Republic of the Philippines will use the parcels of land liereby donated for street
purposes only and for no other purposes whatsoever; it being expressly understood
that should the Government of the Kepuhlic of the Philippines violate the condition
hereby imposed upon it, the title to the land hereby donated shall, upon such
violation, ipso facto revert to the Donor, Jose C. Zulueta." (Italics supplied.)
which is onerous, the donation in question is a contract; that said donation or contract is
"absolutely forbidden by the Constitution" and consequently "illegal", for Article 1409 of the
Civil Code of the Philippines, declares inexistent and void from the very beginning contracts
"whose cause, object or purpose is contrary to law, morals * * * or public policy"; that the
legality of said donation may not be contested, however, by petitioner herein because his
"interests are not directly affected" thereby and that, accordingly, the appropriation in question
"should be upheld" and the case dismissed.
At the outset, it should be noted that we are concerned with a decision granting the
aforementioned motions to dismiss, which as such, are deemed to have admitted hypothetically
the allegations of fact made in the petition of appellant herein. According to said petition,
respondent Zulueta is the owner of several parcels of residential land, situated in Pasig, Rizal,
and known as the Antonio Subdivision, certain portions of which had been reserved for the
projected feeder roads aforementioned, which, admittedly, were private property of said
respondent when Republic Act No. 920, appropriating P85.000.00 for the "construction,
reconstruction, repair, extension and improvement" of said roads, was passed by Congress, as
well as when it was approved by the President on June 20, 1953. The petition further alleges
that the construction of said feeder roads, to be undertaken with the aforementioned
appropriation of P85,000.00, would have the effect of relieving respondent Zulueta of the
burden of constructing his subdivision streets or roads at his own expenses,[1] and would
"greatly enhance or increase the value of the subdivision" of said respondent. The lower court
held that under these circumstances, the appropriation in question was "clearly for a private, not
a public purpose."
Respondents do not deny the accuracy of this conclusion, which is self-evident.[2] However,
respondent Zulueta contended, in his motion to dismiss that:
"A law passed by Congress and approved by the President can never be illegal
because Congress is the source of all laws * * *. Aside from the fact that the movant
is not aware of any law which makes illegal the appropriatoin of public funds for the
improvement of what we, in the meantime, may assume as private property * * *."
(Record on Appeal, p. 33.)
The first proposition must be rejected most emphatically, it being inconsistent with the nature of
the Government established under the Constitution of the Philippines and the system of checks
and balances underlying our political structure. Moreover, it is refuted by the decisions of this
Court invalidating legislative enactments deemed violative of the Constitution or organic laws.
[3]
As regards the legal feasibility of appropriating public funds for a private purpose, the principle
according to Ruling Case Law, is this:
"It is a general rule that the legislature is without power to appropriate public
revenue for anything but a public purpose. * * * It is the essential character of the
direct object of the expenditure which must determine its validity as justifying a tax,
and not the magnitude of the interests to be affected nor the degree to which the
general advantage of the community, and thus the public welfare, may be ultimately
benefited by their promotion. Incidental advantage to the public or to the state,
which results from the promotion of private interests and the prosperity of private
enterprises or business, does not justify their aid by the use of public money." (25
R.L.C. pp. 398-400; Italics supplied.)
The rule is set forth in Corpus Juris Secundum in the following language:
"In accordance with the rule that the taxing power must be exercised for public
purposes only, discussed supra sec. 14, money raised by taxation can be expended
only for public purposes and not for the advantage of private individuals." (85 C.J.S.
pp. 645-646; italics supplied.)
Explaining the reason underlying said rule, Corpus Juris Secundum states:
"Generally, under the express or implied provisions of the constitution, public funds
may be used only for a public purpose. The right of the legislature to appropriate
funds is correlative with its right to tax, and, under constitutional provisions against
taxation except for public purposes and prohibiting: the collection of a tax for one
purpose and the devotion thereof to another purpose, no appropriation of state funds
can be made for other than a public purpose. * * *
*******
"The test of the constitutionality of a statute requiring the use of public funds is
whether the statute is designed to promote the public interests, as opposed to the
furtherance of the advantage of individuals, although each advantage to individuals
might incidentally serve the public. * * * ." (81 C.J.S. p. 1147; italics supplied.)
Needless to say, this Court is fully in accord with the foregoing views which, apart from being
patently sound, are a necessary corollary to our democratic system of government, which, as
such,, exists primarily for the promotion of the general welfare. Besides, reflecting as they do,
the established jurisprudence in the United States, after whose constitutional system ours has
been patterned, said views and jurisprudence are, likewise, part and parcel of our own
constitutional law.
This notwithstanding, the lower court felt constrained to uphold the appropriation in question,
upon the ground that petitioner may not contest the legality of the donation above referred to
because the same does not affect him directly. This conclusion is, presumably, based upon the
following premises, namely: (1) that, if valid, said donation cured the constitutional infirmity of
the aforementioned appropriation; (2) that the latter may not be annulled without a previous
declaration of unconstitutionality of the said donation; and (3) that the rule set forth in Article
1421 of the Civil Code is absolute, and admits of no exception. We do not agree with these
premises.
The validity of a statute depends upon the powers of Congress at the time of its passage or
approval, not upon events occurring, or acts performed, subsequently thereto, unless the latter
consist of an amendment of the organic law, removing, with retrospective operation, the
constitutional limitation infringed by said statute. Referring to the P85,000.00 appropriation for
the projected feeder roads in question, the legality thereof depended upon whether said roads
were public or private property when the bill, which, later on, became Republic Act No. 920,
was passed by Congress, or, when said bill was approved by the President and the disbursement
of said sum became effective, or on June 20, 1953 (see section 13 of said Act). Inasmuch as the
land on which the projected feeder roads were to be constructed belonged then to respondent
Zulueta, the result is that said appropriation sought a private purpose, and, hence, was null and
void.[4] The donation to the Government, over five (5) months after the approval and effectivity
of said Act, made, according to the petition, for the purpose of giving a "semblance of legality",
or legalizing, the appropriation in question, did not cure its aforementioned basic defect.
Consequently, a judicial nullification of said donation need not precede the declaration of
unconstitutionality of said appropriation.
Again, Article 1421 of our Civil Code, like many other statutory enactments, is subject to
exceptions. For instance, the creditors of a party to an illegal contract may, under the conditions
set forth in Article 1177 of said Code, exercise the rights and actions of the latter, except only
those which are inherent in his person, including, therefore, his right to the annulment of said
contract, even though such creditors are not affected by the same, except indirectly, in the
manner indicated in said legal provision
Again, it is well settled that the validity of a statuia may be contested only by one who will
sustain a direct injury in consequence of its enforcement. Yet, there are many decisions
nullifying, at the instance of taxpayers, laws providing for the disbursement of public funds,[5]
upon the theory that "the expenditure of public funds by an officer of the State for the purpose
of administering an unconstitutional act constitutes a misapplication of such funds," which may
be enjoined at the request of a taxpayer.[6] Although there are some decisions to the contrary,[7]
the prevailing view in the United States is stated in the American Jurisprudence as follows:
"In the determination of the degree of interest essential to give the requisite standing
to attack the constitutionality of a statute the general rule is that not only persons
individually affected, but also taxpayers, have sufficient interest in preventing the
illegal expenditure of moneys raised by taxation and may therefore question llw
constitutionality of statutes requiring expenditure of public moneys." (11 Am. Jur.
761; italics supplied.)
However, this view was not favored by the Supreme Court of the U.S. in Frothingham vs.
Mellon (262 U.S. 447), insofar as federal laws are concerned, upon the ground that the
relationship of a taxpayer of the U.S. to its Federal Government is different from that of a
taxpayer of a municipal corporation to its government. Indeed, under the composite system of
government existing in the U.S., the states of the Union are integral part of the Federation from
an international viewpoint, but, each state enjoys internally a substantial measure of
sovereignty, subject to the limitations imposed by the Federal Constitution. In fact, the same
was made by representatives of each state of the Union, not of the people of the U.S., except
insofar as the former represented the people of the respective States, and the people of each
State has, independently of that of the others, ratified said Constitution. In other words, the
Federal Constitution and the Federal statutes have become binding upon the people of the U.S.
in consequence of an act of, and, in this sense, through the respective states of the Union of
which they are citizens. The peculiar nature of the relation between said people and the Federal
Government of the U.S. is reflected in the election of its President, who is chosen directly, not
by the people of the U.S., but by electors chosen by each State, in such manner as the legislature
thereof may direct (Article II, section 2, of the Federal Constitution).
The relation between the people of the Philippines and its taxpayers, on the one hand, and the
Republic of the Philippines, on the other, is not identical to that obtaining between the people
and taxpayers of the U.S. and its Federal Government. It is closer, from a domestic viewpoint,
to that existing between the people and taxpayers of each state and the government thereof,
except that the authority of the Republic of the Philippines over the people of the Philippines is
more fully direct than that of the states of the Union, insofar as the simple and unitary type of
our national government is not subject to limitations analogous to those imposed by the Federal
Constitution upon the states of the Union, and those imposed upon the Federal Government in
the interest of the states of the Union. For this reason, the rule recognizing the right of taxpayers
to assail the constitutionality of a legislation appropriating local or state public funds—which
has been upheld by the Federal Supreme Court (Crampton vs. Zabriskie, 101 U.S. 601) — has
greater application in the Philippines than that adopted with respect to acts of Congress of the
United States appropriating federal funds.
Indeed, in the Province of Tayabas vs. Perez (56 Phil., 257), involving the expropriation of a
land by the Province of Tayabas, two (2) taxpayers thereof were allowed to intervene for the
purpose of contesting the price being paid to the owner thereof, as unduly exhorbitant. It is true
that in Custodio vs. President of the Senate (42 Off. Gaz., 1243), a taxpayer and employee of the
Government was not permitted to question the constitutionality of an appropriation for backpay
of members of Congress. However, in Rodriguez vs. Treasurer of the Philippines and Barredo
vs. Commission on Elections (84 Phil., 368; 45 Off. Gaz., 4411), we entertained the action of
taxpayers impugning the validity of certain appropriations of public funds, and invalidated the
same. Moreover, the reason that impelled this Court to take such position in said two (2) cases
—the importance of the issues therein raised—is present in the case at bar. Again, like the
petitioners in the Rodriguez and Barredo cases, petitioner herein is not merely a taxpayer. The
Province of Rizal, which he represents officially as its Provincial Governor, is our most
populated political subdivision,[7] and, the taxpayers therein bear a substantial portion of the
burden of taxation, in the Philippines.
Hence, it is our considered opinion that the circumstances surrounding this case sufficiently
justify petitioner's action in contesting the appropriation and donation in question; that this
action should not have been dismissed by the lower court; and that the writ of preliminary
injunction should have been maintained.
Wherefore, the decision appealed from is hereby reversed, and the records are remanded to the
lower court for further proceedings not inconsistent with this decision, with the costs of this
instance against respondent Jose C. Zulueta. It is so ordered.
Paras, C.J., Bengzon, Padilla, Bautista Angelo, Labrador, Reyes, J.B.L., Barrera, Gutierrez
David, Paredes, and Dizon, JJ., concur.
Judgment reversed, records remanded to lower court for further proceedings.
[1] For, pursuant to section 19 (h.) of the existing rules and regulations of the Urban Planning
Commission, the owner of a subdivision is under obligation "to improve, repair and maintain all
streets, highways and other ways in his subdivision until their dedication to public use is
accepted by the government."
[2]Ex parte Bagwell, 79 P. 2d. 395; Road District No. 4 Shelby County vs. Allred. 68 S-W 2d
164; State ex rel Thomson vs. Giessel, 53-N.W. 2d. 726, Attorney General vs. City of Eau
Claire, 37 Wis. 400; State ex rel. Smith vs. Annuity Pension Board, 241 Wis. G2C, 6 N.W. 2d.
676; State vs. Smith, 293 N.W. 161; State t'fl. Dammann 280 N.W. 698; Sjostrum vs. State
Highway Commission 228 P. 2d. 238; Hutton vs. Webb, 126 N.C. 897, 36 S.E. 341; Michigan
Sugar Co. vs. Auditor General, 124 Mich. 674, 83 N.W. 625 Omard Beet Sugar Co. vs. State,
105 N.W. 716.
[3]Casanovas vs. Hord. 8 Phil., 12o; McGirr vs. Hamilton, 30 Phil., 063; Compafiia General de
Tabacos vs. Board of Public Utility, 34 Phil., 136; Central Capiz vs. Ramirez, 40 Phil., 883;
Concepcion vs. Paredes, 42 Phil., 599; U.S. vs. Ang Tang Ho, 43 Phil. 6; McDaniel vs.
Apacible, 44 Phil., 248; People vs. Pomar, 46 Phil., 440; Agcaoili vs. Suguitan, 48 Phil., 676;
Government of P.I. vs. Springer 50 Phil., 259; Manila Electric Co. vs. Pasay Transp. Co., 57
Phil., 600; People vs. Linsangan, 62 Phil., 464; People and Hongkong & Shanghai Banking
Corp. vs. Jose O. Vera, 65 Phil. 56; People vs. Carlos, 78 Phil., 535; 44 Off. Gaz. 428; In re
Cunanan, 94 Phil., 534; 50 Off. Gaz., 1602; City of Baguio vs. Nawasa 106 Phil., 144; City of
Cebu vs. Nawasa, 107 Phil., 11l2; Rutter vs. Esteban, 93 Phil. 68; 49 Off. Gaz., [5] 1807.
[4]In the language of the Supreme Court of Nebraska, "An unconstitutional statute is a legal still
birth, which neither moves, nor breathes, nor holds out any sign of life. It is a form without one
vital spark. It is wholly dead from the trmment of conception, and, no right, either legal or
equitable, arises from such inanimate thing." (Oxnartd Beat Sugar Co. vs. State, 102 N.W. 80.)
[5]See, among others, Livermore, vs. Waite, 102 Cal. 113, 25 L.K.A. 312, 36 P. 424; Crawford
vs. Gilchrist, 64 Fla. 41, 59 So. 063; Lucas vs. American-Hawaiian Engineering & Constr. Co.,
16 Haw. 80; Castle vs. Capena, 5 Haw. 27; Littler vs. Jayne, 124 III. 123, 16 N.E. 374; Burlce
vs. Snively, 208 111. 328, 70 N.B. 327; Ellingham vs. Dye, 178 Ind. 336, 99 N.E. 1; Christmas
vs. Warfield, 105 Md. 536; Sears vs. Steel, 55 Or. 544, 107 Pac. 3; State ex rel. Taylor vs.
Pennoyer, 26 Or. 205, 37 Pac. 906; Carman vs. Woodruf, 10 Or. 123; MacKinney vs. Watson,
145 Pac. 266; Scars vs. James, 47 Or. 50, 82 Pac. 14; Mott vs. Pennsylvania R. Co., 30 Pa. 9, 72
Am. Dec. 664; Bradley vs. Power County, 37 Am. Dec. 563; Frost vs. Thomas, 26 Colo. 227, 77
Am- St. Rep. 259, 56 Pac. 899; Martin vs. Ingham, 38 Kan. 641, 17 Pac. 162; Martin vs. Lacy,
39 Kan. 703, 18 Pac 951; Smith vs. Mageurieh. 44 Ga. 163; Giddings vs. Blacker, 93 Mich. 1,
18 L.R.A. 402, 52 N.W. 944; Eippe vs. Becker, 56 Minn. 100, 57 N.W. 331; Auditor vs.
Treasurer, i S.C. 311; McCulloug-h vs. Urown, 31 S.C. 220, 19 S.E. 458; State ex rel. Lamb vs.
CumminR-ham, 83 Wis. 90, 53 N.W. 35; State ex rel. Eosenhian vs. Frear, 138 Wis. 173. 119
N.W. 894.
[6]Rubs vs. Tompson, 56 N.E. 2d. 761; Reid vs. Smith, 375 111. 347, 30 N.E. 2d. 908; Fergus
vs. Russel, 270 111. 304, 110 N.E-130; Burke vs. Snively, 208 111. 328; Jones vs. Connell, 266
111. 443, 107 N.E. 731; Dudick vs. Baumann, 349 111. 46, 181 N.E. 690.
[7]Thompson vs. Canal Fund Comps., 2 Abb. Pr. 248; Shieffelin vs. Komfort, 212 N.Y. 520,
106 N.E. 675; Hutchison vs. Skinnier, 21 Misc. 729, 49 N.Y. Supp. 360; Long- vs. Johnson, 70
Misc. 308; 127 N.Y. Supp. 756; Whiteback vs. Hooker, 73 Misc. 573, 133 X.Y. Supp. 534; State
ex rel. Cranmer vs. Thorson, 9 S.D. 149, 88 N.W. 202; Davenport vs. Elrod, 20 S.D. 567, 107
N-W. 833; Jones vs. Reed, 3 Wash. 57, 27 Pac. 1067; Birmingham vs. Cheetham, 19 Wash. 657,
54 Pac. 37; Tacoma vs. Bridges, 25 Wash. 221, 65 Pac. 186; Hilg-er us. State, 63 Wash. 457,
116 Pac. 19.
[7] It has 1,463,530 inhabitants.

EN BANC
[ G.R. No. 203754, October 15, 2019 ]
FILM DEVELOPMENT COUNCIL OF THE PHILIPPINES,
PETITIONER, VS. COLON HERITAGE REALTY CORPORATION,
OPERATOR OF ORIENTE GROUP OF THEATERS, REPRESENTED BY
ISIDORO A. CANIZARES, RESPONDENT.

[G.R. No. 204418]

FILM DEVELOPMENT COUNCIL OF THE PHILIPPINES,

PETITIONER, VS. CITY OF CEBU AND SM PRIME HOLDINGS, INC.,
RESPONDENTS.

RESOLUTION
PERLAS-BERNABE, J.:
For resolution are: (a) the motion for reconsideration[1] filed by petitioner Film Development
Council of the Philippines (FDCP); (b) the motion for partial reconsideration[2] filed by
respondent Colon Heritage Realty Corporation (CHRC); and (c) the motion for partial
reconsideration[3] filed by respondent City of Cebu (Cebu City), all relative to the Court's
Decision[4] dated June 16, 2015 (Main Decision). In the Main Decision, the Court affirmed with
modification the Judgment[5] of the Regional Trial Court (RTC) of Cebu City, Branch 5 in Civil
Case No. CEB-35601 dated September 25, 2012, and the Decision[6] of the RTC of Cebu City,
Branch 14 in Civil Case No. CEB-35529 dated October 24, 2012, and thereby, declared
Sections 13 and 14 of Republic Act No. (RA) 9167[7] invalid and unconstitutional.

The Facts
Sometime in 1993, respondent Cebu City passed City Ordinance No. LXIX, otherwise known
as the "Revised Omnibus Tax Ordinance of the City of Cebu."[8] Sections 42[9] and 43,[10]
Chapter XI of the Ordinance required proprietors, lessees or operators of theaters, cinemas,
concert halls, circuses, boxing stadia, and other places of amusement to pay amusement tax
equivalent to thirty percent (30%) of the gross receipts of the admission fees to the Office of the
City Treasurer of Cebu City.

On June 7, 2002, Congress passed RA 9167, creating petitioner FDCP. Sections 13[11] and
14[12] thereof provide that the amusement tax on certain graded films which would
otherwise accrue to the cities and municipalities in Metropolitan Manila and highly
urbanized and independent component cities in the Philippines during the period the graded film
is exhibited, should be deducted and withheld by the proprietors, operators or lessees of
theaters or cinemas and remitted to the FDCP, which shall reward the same to the producers
of the graded films.
According to FDCP, since the effectivity of RA 9167, all cities and municipalities in Metro
Manila, as well as highly urbanized and independent component cities, have complied with the
mandate of the said law, with the sole exception of Cebu City[13] which adamantly insisted on
its entitlement to the amusement taxes and hence, prompted cinema proprietors and operators
within the city to remit the same to it.[14] Consequently, FDCP sent demand letters for unpaid
amusement taxes with surcharge to these proprietors and operators, including respondents
CHRC and SM Prime Holdings, Inc. (SMPHI).[15]
As a result of the demand letters, Cebu City filed a Petition for Declaratory Relief[16] before the
RTC of Cebu City, Branch 14, docketed as Civil Case No. CEB-35529, and respondent CHRC
filed a similar petition[17] before the RTC of Cebu City, Branch 5, docketed as Civil Case No.
CEB-35601. Both petitions sought to declare Sections 13 and 14 of RA 9167 invalid and
unconstitutional. On August 13, 2010, SMPHI moved to intervene[18] in Civil Case No. CEB-
35529.
On September 25, 2012, the RTC of Cebu City, Branch 5 issued a Judgment[19] in Civil Case
No. CEB-35601 which declared Sections 13 and 14 of RA 9167 as invalid and unconstitutional.
[20] On October 24, 2012, the RTC of Cebu City, Branch 14 rendered a similar Decision[21] in
Civil Case No. CEB-35529 also ruling against the constitutionality of Sections 13 and 14 of RA
9167.[22]
Aggrieved, FDCP filed two (2) separate petitions for review on certiorari[23] before the Court,
presenting the singular issue as to whether or not the RTCs of Cebu City gravely erred in
declaring Sections 13 and 14 of RA 9167 unconstitutional. The petitions were later consolidated
in the Court's Resolution[24] dated March 4, 2013.
The Proceedings and Issues Before the Court
On June 16, 2015, the Court rendered the Main Decision[25] in this case, affirming the assailed
RTC Decisions and thereby, declaring Sections 13 and 14 of RA 9167 invalid and
unconstitutional. It ruled that these provisions violated the principle of local fiscal autonomy
because they authorized FDCP to earmark, and hence, effectively confiscate the amusement
taxes which should have otherwise inured to the benefit of the local government units (LGUs).
[26] In this relation, the Court further found that the grant of amusement tax reward does not
partake the nature of a tax exemption since the burden and incidence of the tax still fall on the
cinema proprietors.[27]
However, as a matter of equity and fair play, the Court applied the doctrine of operative fact and
rendered, among others, the following dispositions which are subject of the present motions:
Disposition 1: FDCP and the producers of graded films need not return the amounts already
received from LGUs because they merely complied with the provisions of RA 9167 which were
in effect at that time;[28]
Disposition 2: Any amounts retained by cinema proprietors and operators due to FDCP at that
time should be remitted to the latter since Sections 13 and 14 of RA 9167 produced legal effects
prior to their being declared unconstitutional;[29] in this regard, Cebu City was ordered to turn
over to FDCP the amount of P76,836,807.08, which represented the amount that should have
been remitted by SMPHI to FDCP at that time;[30] and
Disposition 3: Cinema proprietors and operators within Cebu City should not be held liable for
any surcharge since they did not know whether or not it was proper for them to remit the
amusement taxes to either FDCP or Cebu City at that time.[31]
Dissatisfied, FDCP, CHRC, and Cebu City filed their respective motions for reconsideration[32]
before the Court. The issues in the motions are summarized as follows:
(a) In reference to the Court's Disposition 3 above, FDCP, in its motion, seeks the imposition
of surcharges to the delinquent taxpayers who failed to remit the proper taxes at the time
Sections 13 and 14 of RA 9167 were not yet declared unconstitutional. In this accord, FDCP
argues that in applying the operative fact doctrine, "all parts of the questioned provisions
including the payment of surcharges should be given effect prior to [their] being declared
unconstitutional."[33]
(b) For its part, CHRC, in reference to the Court's Disposition 2 above, admits, in its motion,
that it did not "withhold" the remittance of amusement taxes on graded films to FDCP.
However, it claims that notwithstanding the effectivity of Sections 13 and 14 of RA 9167 at that
time, it had already "paid and remitted all due taxes to the right authority: the City of Cebu."[34]
Hence, it should not remit any more taxes in favor of FDCP because to do so would amount to
double taxation. In this regard, CHRC prays that it be declared relieved from any obligation to
remit amusement taxes to FDCP. In the alternative, CHRC manifests that it is willing to go
through a factual determination before the trial court to prove that it had indeed fully paid and
fully remitted said taxes to Cebu City and as such, fully complied with its tax obligations under
the law; hence, it asks the Court to remand the case for such purpose.[35]
(c) And lastly, Cebu City, in reference to the Court's Dispositions 1 and 2 above, argues, in its
motion, against the application of the operative fact doctrine in the present case. Accordingly, it
claims that Sections 13 and 14 of RA 9167 should not have produced any legal effects in favor
of FDCP because they have been declared unconstitutional and hence, null and void.[36] In any
event, Cebu City posits that, assuming that the operative fact doctrine is applicable, it should not
be asked to remit the P76,836,807.08 it received from SMPHI to FDCP as it would be violative
of equity and fair play.[37] It reasons that it had already utilized the same for public services, and
to order it to pay the same would involve disbursement of public funds which must be met with
the proper procedural requirements.[38]
The Court's Ruling
At the center of all three (3) motions is the proper application of the doctrine of operative fact in
relation to the Court's declaration of Sections 13 and 14 of RA 9167 as unconstitutional. In the
Main Decision, the Court observed that:
It is a well-settled rule that an unconstitutional act is not a law; it confers no rights; it

imposes no duties; it affords no protection; it creates no office; it is inoperative as if
it has not been passed at all. Applying this principle, the logical conclusion would be
to order the return of all the amounts remitted to FDCP and given to the producers of
graded films, by all of the covered cities, which actually amounts to hundreds of
millions, if not billions. In fact, just for Cebu City, the aggregate deficiency claimed
by FDCP is ONE HUNDRED [FIFTY-NINE] MILLION THREE HUNDRED
[SEVENTY-SEVEN] THOUSAND NINE HUNDRED EIGHTY-EIGHT PESOS
AND [FIFTY-FOUR] CENTAVOS (P159,377,988.54). Again, this amount
represents the unpaid amounts to FDCP by eight cinema operators or proprietors in
only one covered city.

An exception to the above rule, however, is the doctrine of operative fact, which
applies as a matter of equity and fair play. This doctrine nullifies the effects of an
unconstitutional law or an executive act by recognizing that the existence of a statute
prior to a determination of unconstitutionality is an operative fact and may have
consequences that cannot always be ignored. It applies when a declaration of
unconstitutionality will impose an undue burden on those who have relied on
the invalid law.[39] (Emphases supplied)
In Commissioner of Internal Revenue v. San Roque Power Corporation,[40] citing Serrano de

Agbayani v. Philippine National Bank,[41] the Court had the opportunity to extensively discuss
the operative fact doctrine, explaining the "realistic" consequences whenever an act of Congress
is declared as unconstitutional by the proper court. Furthermore, the operative fact doctrine has
been discussed within the context of fair play such that "[i]t would be to deprive the law of its
quality of fairness and justice then, if there be no recognition of what had transpired prior to
[its] adjudication [by the Court as unconstitutional],"[42] viz.:

The decision now on appeal reflects the orthodox view that an unconstitutional act,
for that matter an executive order or a municipal ordinance likewise suffering from
that infirmity, cannot be the source of any legal rights or duties. Nor can it justify
any official act taken under it. Its repugnancy to the fundamental law once judicially
declared results in its being to all intents and purposes a mere scrap of paper. As the
new Civil Code puts it: "When the courts declare a law to be inconsistent with the
Constitution, the former shall be void and the latter shall govern. Administrative or
executive acts, orders and regulations shall be valid only when they are not contrary
to the laws of the Constitution." It is understandable why it should be so, the
Constitution being supreme and paramount. Any legislative or executive act contrary
to its terms cannot survive.
Such a view has support in logic and possesses the merit of simplicity. It may not
however be sufficiently realistic. It does not admit of doubt that prior to the
declaration of nullity such challenged legislative or executive act must have
been in force and had to be complied with. This is so as until after the judiciary, in
an appropriate case, declares its invalidity, it is entitled to obedience and respect.
Parties may have acted under it and may have changed their positions. What could
be more fitting than that in a subsequent litigation regard be had to what has been
done while such legislative or executive act was in operation and presumed to be
valid in all respects. It is now accepted as a doctrine that prior to its being
nullified, its existence as a fact must be reckoned with. This is merely to reflect
awareness that precisely because the judiciary is the governmental organ which has
the final say on whether or not a legislative or executive measure is valid, a period of
time may have elapsed before it can exercise the power of judicial review that may
lead to a declaration of nullity. It would be to deprive the law of its quality of
fairness and justice then, if there be no recognition of what had transpired prior
to such adjudication.
In the language of an American Supreme Court decision: "The actual existence of a

statute, prior to such a determination [of unconstitutionality], is an operative
fact and may have consequences which cannot justly be ignored. The past cannot
always be erased by a new judicial declaration. The effect of the subsequent ruling
as to invalidity may have to be considered in various aspects, with respect to
particular relations, individual and corporate, and particular conduct, private and
official." x x x.
x x x x[43] (Emphases supplied)
The operative fact doctrine recognizes the existence and validity of a legal provision prior to its
being declared as unconstitutional and hence, legitimizes otherwise invalid acts done pursuant
thereto because of considerations of practicality and fairness. In this regard, certain acts done
pursuant to a legal provision which was just recently declared as unconstitutional by the Court
cannot be anymore undone because not only would it be highly impractical to do so, but more
so, unfair to those who have relied on the said legal provision prior to the time it was struck
down.

However, in the fairly recent case of Mandanas v. Ochoa, Jr.,[44] citing Araullo v. Aquino III,[45]
the Court stated that the doctrine of operative fact "applies only to cases where extraordinary
circumstances exist, and only when the extraordinary circumstances have met the stringent
conditions that will permit its application."[46] The doctrine of operative fact "nullifies the
effects of an unconstitutional law or an executive act by recognizing that the existence of a
statute prior to a determination of unconstitutionality is an operative fact and may have
consequences that cannot always be ignored. It applies when a declaration of unconstitutionality
will impose an undue burden on those who have relied on the invalid law."[47] To reiterate the
Court's pronouncement, "[i]t would be to deprive the law of its quality of fairness and justice
then, if there be no recognition of what had transpired prior to such adjudication."[48]
Therefore, in applying the doctrine of operative fact, courts ought to examine with
particularity the effects of the already accomplished acts arising from the unconstitutional
statute, and determine, on the basis of equity and fair play, if such effects should be
allowed to stand.[49] It should not operate to give any unwarranted advantage to parties, but
merely seeks to protect those who, in good faith, relied on the invalid law.
In the Main Decision, the Court, in applying the doctrine of operative fact, held that FDCP and
the producers of graded films need not return the amounts already received from LGUs because
they merely complied with the provisions of RA 9167 which were in effect at that time[50]
(Disposition 1 above). Clearly, this disposition squarely hews with the practicality and fairness
thrust of the operative fact doctrine because, as observed by the Court, to command the return of
the amounts received pursuant to Sections 13 and 14 of RA 9167 which were then existing
"would certainly impose a heavy, and possibly crippling, financial burden upon them who
merely, and presumably in good faith, complied with the legislative fiat subject of this case."[51]
Accordingly, contrary to Cebu City's position,[52] the Court's holding on this score must stand.
Similarly, the same rationale must apply to the Court's directive ordering cinema proprietors and
operators to remit to FDCP any amusement taxes they have retained prior to Sections 13 and 14
of RA 9167 being declared unconstitutional. As enunciated in the Main Decision, prior to the
striking down of the said provisions, FDCP has a right to receive the amusement taxes withheld
by the cinema proprietors and operators during such time.[53] This right to receive the
amusement taxes accrued the moment the taxes were deemed payable under the provisions of
the Omnibus Tax Ordinance of Cebu City. Taxes, once due, must be paid without delay to the
taxing authority; as the Court has repeatedly stated, "taxes are the lifeblood of Government and
their prompt and certain availability is an [imperious] need."[54] This flows from the truism
that "[w]ithout taxes, the government would be paralyzed for lack of the motive power to
activate and operate it. Hence, despite the natural reluctance to surrender part of one's hard-
earned income to the taxing authorities, every person who is able to must contribute his share in
the running of the government."[55] Consequently, the prompt payment of taxes to the then
recognized rightful authority, which in this case is FDCP, cannot be left to the whims of
taxpayers. To rule otherwise would be to acquiesce to the norm allowing taxpayers to reject
payment of taxes under the supposition that the law imposing the same is illegal or
unconstitutional. This would unduly hamper government operations. As the Court held in the
Main Decision, "[o]beisance to the rule of law must always be protected and preserved at
all times and the unjustified refusal of said proprietors cannot be tolerated. The operative
fact doctrine equally applies to the non-remittance by said proprietors since the law produced
legal effects prior to the declaration of the nullity of [Sections] 13 and 14 [of RA 9167] in these
instant petitions."[56]
Accordingly, Cebu City's motion seeking the non-application operative fact doctrine in favor of
FDCP to retain the subject amusement taxes it had withheld, as well as to collect payments
accruing to it during the covered period within which Sections 13 and 14 of RA 9167 had
yet to be declared unconstitutional, i.e., from the effectivity of RA 9167 up until the finality
of the Main Decision,[57] is denied. In this regard, the Court's directive (Disposition 2 above) to
Cebu City to turn over to FDCP the amount of P76,836,807.08, which represented the amount
that should have been remitted by SMPHI to FDCP at that time, remains. To be sure, the
operative fact doctrine cannot be used to give any unwarranted advantage to parties, but merely
seeks to protect those who, in good faith, relied on the invalid law. Consequently, Cebu City
cannot be allowed to retain the amusement taxes it received during the period when Sections 13
and 14 of RA 9167 were operative. The Court cannot condone Cebu City's apparent disregard
for what was, at that time, a valid legislative mandate, regardless of the fact that its position on
the unconstitutionality of said provisions is ultimately correct. Respect for a presumably valid
tax provision prior to its being declared unconstitutional must be observed; otherwise, not only
would unscrupulous taxpayers be emboldened to undercut the ability of the State to timely
collect taxes needed for important public services based on theoretical suppositions anent their
legal status, it would likewise run afoul of the principle of separation of powers which accords
laws enacted by Congress the presumption of constitutionality up until they are declared
otherwise by the Court.
However, in relation to CHRC's motion, the Court clarifies that cinema proprietors and
operators who had already remitted the withheld amusement taxes to LGUs (such as Cebu City)
for the covered period, should no longer have to pay the same amount to FDCP, provided that
they are able to prove the fact of due payment. As such, they need not make another
remittance for the same tax liability to FDCP. This must necessarily so since the obligation
under the law, i.e., the Local Government Code, and the corresponding provision in Cebu City's
Ordinance No. LXIX, is singular: the payment of amusement taxes for the covered period.
Otherwise, to have these cinema proprietors and operators once more pay FDCP the same
amount of taxes they had paid to the LGUs would, as CHRC points out, clearly amount to
double taxation.[58]
Accordingly, the Court grants CHRC's motion insofar as it seeks the remand of the case to the
trial court, with the participation of Cebu City, in order to determine the fact of payment of
amusement taxes to the latter during the covered period within which Sections 13 and 14 of RA
9167 were yet to be declared unconstitutional. Should it be determined that it did indeed pay the
correct taxes to Cebu City, the said LGU must remit to FDCP these amusement taxes accruing
to the latter during the covered period. On the other hand, should CHRC fail to prove payment,
any deficiency must be paid by it to FDCP, without prejudice to any valid defenses, if any.
And finally, in response to FDCP's motion, the Court's holding regarding the unconstitutionality
of Sections 13 and 14 of RA 9167, as well as the non-payment of surcharges, remains. On the
constitutionality issue, FDCP's arguments in its motion are a mere rehash of its position in the
main and hence, cannot be sustained. Meanwhile, anent the payment of surcharges, it must be
borne in mind that surcharges are generally paid when the taxpayer is in bad faith.[59] This
situation, because of the confusion as regards the proper payee of taxes, does not obtain in this
case. Accordingly, the motion of FDCP is denied for these reasons.
WHEREFORE, the motion for reconsideration dated August 5, 2015 of petitioner Film
Development Council of the Philippines and the motion for partial reconsideration dated
September 16, 2015 of respondent City of Cebu are DENIED with FINALITY for lack of
merit.
On the other hand, the Manifestation (with a Motion for Partial Reconsideration or Motion to
Remand Trial Proceedings to determine Respondent's Full Payment and Compliance with the
Decision) dated August 24, 2015 of respondent Colon Heritage Realty Corporation (CHRC) is
PARTLY GRANTED. Accordingly, Civil Case No. CEB-35601 is hereby REMANDED to the
Regional Trial Court of Cebu City, Branch 5 to determine whether the amusement taxes for the
covered period have been paid by CHRC in accordance with this Resolution.
SO ORDERED.
Bersamin, C.J., Carpio, Peralta, Leonen, Caguioa, A. Reyes, Jr., Gesmundo, Hernando,
Carandang, Lazaro-Javier, Inting, and Zalameda, JJ., concur.
J. Reyes, Jr., J., on leave.
[1] Dated August 5, 2015. Rollo (G.R. No. 203754), pp. 287-299.

[2]Captioned as "Manifestation (with a Motion for Partial Reconsideration or Motion to

Remand Trial Proceedings to determine Respondent's Full Payment and Compliance with the
Decision)" dated August 24, 2015; id. at 300-306.

[3]Captioned as "Motion for Partial Reconsideration (To the Decision of this Honorable Court
promulgated on June 16, 2015) for Respondent City of Cebu" dated September 16, 2015; id. at
314-334.

[4] Id. at 255-281. See FDCP v. CHRC, 760 Phil. 519 (2015).

[5] Rollo (G.R. No. 203754), pp. 48-53. Penned by Judge Douglas A.C. Marigomen.

[6] Rollo (G.R. No. 204418), pp. 58-70. Penned by Presiding Judge Raphael B. Yrastorza, Sr.
[7]Entitled "AN ACT CREATING THE FILM DEVELOPMENT COUNCIL OF THE

PHILIPPINES, DEFINING ITS POWERS AND FUNCTIONS, APPROPRIATING FUNDS
THEREFOR, AND FOR OTHER PURPOSES," approved on June 7, 2002.

[8] See rollo (G.R. No. 204418), p. 21.

[9]Section 42. Rate of Tax. — There shall be paid to the Office of the City Treasurer by the
proprietors, lessees, or operators of theaters, cinemas, concert halls, circuses, boxing stadia and
other places of amusement, an amusement tax at the rate of thirty percent (30%) of the gross
receipts from admission fees.

To note, the rate was later reduced to ten percent (10%) pursuant to an amendatory ordinance.
(See rollo [G.R. No. 203754], p. 257.)
[10] Section 43. Manner of Payment. — 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 city treasurer
before the gross receipts are divided between said proprietor, lessees, operators, and the
distributors of the cinematographic films. (See id.)
[11] Section 13. Privileges of Graded Films. — Films which have obtained an "A" or "B"
grading from the Council pursuant to Sections 11 and 12 of this Act shall be entitled to the
following privileges:
a. Amusement tax reward. — A grade "A" or "B" film shall entitle its producer to an
incentive equivalent to the amusement tax imposed and collected on the graded films by
cities and municipalities in Metro Manila and other highly urbanized and independent
component cities in the Philippines pursuant to Sections 140 and 151 of Republic Act No.
7160 at the following rates:
1. For grade "A" films —
100% of the amusement tax collected on such films; and
2. For grade "B" films — 65% of the amusement tax collected on such films.
The
remaining thirty-five (35%) shall accrue to the funds of the Council.
[12] Section 14. Amusement Tax Deduction and Remittances. — All revenue from the
amusement tax on the graded film which may otherwise accrue to the cities and municipalities
in Metropolitan Manila and highly urbanized and independent component cities in the
Philippines pursuant to Section 140 of Republic Act No. 7160 during the period the graded film
is exhibited, shall be deducted and withheld by the proprietors, operators or lessees of theaters
or cinemas and remitted within thirty (30) days from the termination of the exhibition to the
Council which shall reward the corresponding amusement tax to the producers of the graded
film within fifteen (15) days from receipt thereof.
Proprietors, operators and lessees of theaters or
cinemas who fail to remit the amusement tax
proceeds within the prescribed period shall be liable to a surcharge equivalent to five percent
(5%) of the amount due for each month of delinquency which shall be paid to the Council.

[13] See rollo (G.R. No. 203754), pp. 8 and 258.

[14] See id. at 258-259.

[15]See id. at 258. In the proceedings before the trial court, SMPHI entered as Intervenor in
Civil Case No. CEB-33529 (see rollo [G.R. No. 204418]. p. 58).

[16]Under Rule 63 With Application for a Writ of Preliminary Injunction dated May 18,2009.
Rollo (G.R. No. 204418), pp. 71-88. It appears from the records that the said petition was
erroneously docketed as "Civil Case No. CEB-85529" (see id. at 71).

[17]For Declaratory Relief, Prohibition, & Permanent Injunction with Prayer for a Temporary
Restraining Order and a Writ of Preliminary Injunction dated June 2, 2009. Rollo (G.R. No.
203754), pp. 54-69.
[18]See Motion for Leave to File and Admit Attached Comment-In-Intervention dated August
13, 2010; rollo (G.R. No. 204418), pp. 153-160.
[19] Rollo (G.R. No. 203754), pp. 48-53.
[20] Id. at 52.
[21] Rollo (G.R. No. 204418), pp. 58-70.
[22] Id. at 69.
[23] Rollo (G.R. No. 203754), pp. 2-45; and rollo (G.R. No. 204418), pp. 13-55.
[24]Id. at 335-336. See also Court's Resolution dated April 11, 2013; rollo (G.R. No. 203754),
pp. 210-211.
[25] See FDCP v. CHRC, supra note 4.
[26] See id. at 541-548.
[27] See id. at 548-549.
[28] See id. at 552-555.
[29] Id. at 555-556.
[30] See id. at 557.
[31] See id at 557-558.
[32] Rollo (G.R. No. 203754), pp. 287-299, 300-306, and 314-334.
[33] Id. at 290.
[34] Id. at 301; emphasis supplied.
[35] See id. at 302.
[36] See id. at 323-326.
[37] See id. at 326.

[38] See id. at 326-331.
[39] FDCP v. CHRC, supra note 4, at 552-553.
[40] 719 Phil. 137 (2013).
[41] 148 Phil. 443 (1971).
[42]Commissioner Internal Revenue (CIR) v. San Roque Power Corporation, supra note 40, at
158, citing Serrano de Agbayani v. Philippine National Bank, id. at 448.
[43] CIR v. San Roque Power Corporation, id. at 157-158, citing Serrano de Agbayani v.
Philippine National Bank, id. at 447-448.
[44] See G.R. Nos. 199802 and 208488, July 3, 2018.
[45] 737 Phil. 457 (2014).
[46] See Mandanas v. Ochoa, Jr., supra note 44, citing Araullo v. Aquino III, id. at 621.
[47] See Mandanas v. Ochoa, Jr., id.
[48] CIR v. San Roque Power Corporation, supra note 40, at 158, citing Serrano de Agbayani v.
Philippine National Bank, supra note 41, at 448.
[49]
See The Municipality of Malabang v. Benito, 137 Phil. 358, (1969), citing Chicot County
Drainage District v. Baxter State Bank, 308 U.S. 371, 374 (1940).
[50] See FDCP v. CHRC, supra note 4, at 555-556.
[51] Id. at 555.
[52] See motion for partial reconsideration of Cebu City; rollo (G.R. No. 203754), pp. 323-331.
[53] FDCP v. CHRC, supra note 4, at 555.
[54] CIR v. Pineda, 128 Phil. 146, 150 (1967); emphases supplied.
[55] CIR v. Algue, Inc., 241 Phil. 829, 836 (1988); emphasis supplied.
[56] FDCP v. CHRC, supra note 4, at 555; emphases supplied.

[57] See rollo (G.R. No. 203754), pp. 323-326.
[58] See id. at 303.
[59]It is settled that surcharges, in the context of tax laws, is in the nature of a penalty which
may be mitigated or dispensed with by the taxpayer's "good faith and honest belief that [it] is
not subject to tax x x x." See CIR v. St. Luke's Medical Center, Inc., 695 Phil. 867, 895 (2012).
See also Quimpo v. Mendoza, 194 Phil. 66 (1981); Imus Electric Co., Inc. v. Court of Tax
Appeals, 125 Phil. 1024 (1967); and Gutierrez v. Court of Tax Appeals, 101 Phil. 713 (1957).
Source: Supreme Court E-Library | Date created: December 10, 2020

264 Phil. 572
EN BANC
[ G.R. No. 87479, June 04, 1990 ]
NATIONAL POWER CORPORATION, PETITIONER, VS. THE
PROVINCE OF ALBAY, ALBAY GOVERNOR ROMEO R. SALALIMA,
AND ALBAY PROVINCIAL TREASURER ABUNDIO M. NUÑEZ,
RESPONDENTS.

DECISION
SARMIENTO, J.:
The National Power Corporation (NAPOCOR) questions the power of

the provincial
government of Albay to collect real
property taxes on its properties located at Tiwi, Albay,
amassed between June 11, 1984 up to March 10, 1987.
It appears that on March 14 and 15, 1989, the respondents caused

the publication of a notice of
auction sale
involving the properties of NAPOCOR and the Philippine Geothermal Inc.
consisting of buildings, machines, and similar improvements standing on their
offices at Tiwi,
Albay. The amounts to be realized from this
advertised auction sale are supposed to be applied
to the tax delinquencies
claimed, as and for, as we said, real property taxes. The back taxes
NAPOCOR has supposedly
accumulated were computed at P214,845,184.76.
NAPOCOR opposed the sale,

interposing in support of its non-liability Resolution No. 17-87, of
the Fiscal
Incentives Review Board (FIRB), which provides as follows:
BE IT RESOLVED, AS IT IS HEREBY RESOLVED. That the tax and duty exemption

privileges of
the National Power Corporation, including those pertaining to its domestic
purchases of petroleum and petroleum products, granted under the terms and
conditions of
Commonwealth Act No. 120 (Creating the National Power
Corporation, defining its powers,
objectives and functions, and for other
purposes), as amended, are restored effective March 10,
1987, subject to the
following conditions:[1]
as
well as the Memorandum of Executive Secretary Catalino
Macaraig, which also states thus:
Pursuant to Sections 1(f) and 2(e) of Executive Order No. 93,

series of 1986, FIRB Resolution
No. 17-87, series of 1987, restoring, subject to certain conditions
prescribed therein, the tax and
duty exemption privileges of NPC as provided
under Commonwealth Act No. 120, as amended,
effective March 10, 1987, is hereby
confirmed and approved.[2]
On March 10, 1989,

the Court resolved to issue a temporary restraining order directing the
Albay provincial government “to CEASE AND DESIST from
selling and disposing of the
NAPOCOR properties subject matter of this
petition.”[3]
It appears, however, that “the temporary
restraining order failed to reach
respondents before the scheduled bidding at 10:00
a.m. on
March 30, 1989...[h]ence, the respondents proceeded with the bidding wherein
the Province of
Albay was the highest
bidder.”[4]
The Court gathers from the records that:
(1) Under Section

13, of Republic Act No. 6395, amending Commonwealth Act No. 120
(charter of
NAPOCOR):
Section 13. - Non-profit Character of the Corporation; Exemption

from All Taxes, Duties, Fees,
Imposts and Other Charges by the Government and
Government Instrumentalities. The
Corporation shall be non-profit and shall devote all its returns from its
capital investment as
well as excess revenues from its operation, for
expansion. To enable the Corporation to
pay its
indebtedness and obligations and in furtherance and effective
implementation of the policy
enunciated in Section One of this Act, the
Corporation, including its subsidiaries, is hereby
declared exempt from the
payment of all forms of taxes, duties, fees, imposts as well as costs
and
service fees including filing fees, appeal bonds, supersedeas
bonds, in any court or
administrative proceedings.[5]
(2) On August 24, 1975, Presidential Decree

No. 776 was promulgated, creating the
Fiscal Incentives Review Board
(FIRB). Among other things, the Board
was tasked as follows:
Section 2. A Fiscal

Incentives Review Board is hereby
created for the purpose of determining
what subsidies and tax exemptions should
be modified, withdrawn, revoked or suspended,
which shall be composed of the
following officials:
Chairman - Secretary

of Finance
Members - Secretary
of Industry
- Director General
of the National Economic and Development
Authority
- Commissioner of
Internal Revenue
- Commissioner of
Customs
The Board may recommend to the President of the Philippines

and for reasons of compatibility
with the declared economic policy, the
withdrawal, modification, revocation or suspension of
the enforceability of any
of the above-cited statutory subsidies or tax exemption grants, except
those
granted by the Constitution. To attain
its objectives, the Board may require the assistance
of any appropriate
government agency or entity. The Board
shall meet once a month, or oftener
at the call of the Secretary of Finance.[6]
(3) On June 11, 1984, Presidential Decree

No. 1931 was promulgated, prescribing,
among other things, that:
Section 1. The provisions of

special or general law to the contrary notwithstanding, all
exemptions from the
payment of duties, taxes, fees, impost and other charges heretofore granted
in
favor of government-owned or controlled corporations including their
subsidiaries are hereby
withdrawn.[7]
(4) Meanwhile, FIRB

Resolution No. 10-85 was issued, “restoring” NAPOCOR’s
tax
exemption effective June 11, 1984
to June 30, 1985;
(5) Thereafter,
FIRB Resolution No. 1-86 was issued, granting tax exemption privileges
to
NAPOCOR from July 1, 1985
and indefinitely thereafter;
(6) Likewise,
FIRB Resolution No. 17-87 was promulgated, giving NAPOCOR tax
exemption
privileges effective until March 10,
1987;[8]
(7) On December 17, 1986, Executive Order

No. 93 was promulgated by President
Corazon Aquino,
providing, among other things, as follows:
SECTION 1. The provisions of

any general or special law to the
contrary notwithstanding, all
tax and duty incentives granted to government and
private entities are hereby withdrawn,
except:[9]
and
SECTION 2. The Fiscal

Incentives Review Board created under Presidential Decree No. 776,
as amended,
is hereby authorized to:
a) restore tax and/or duty exemptions withdrawn

hereunder in whole or in part;
b) revise the scope and coverage of tax and/or

duty exemption that may be
restored;
c) impose conditions for the restoration of tax

and/or duty exemption;
d) prescribe the date or period of effectivity of the restoration of tax and/or duty
exemption;
e) formulate and submit to the President for

approval, a complete system for the
grant of subsidies to deserving
beneficiaries, in lieu of or in combination with
the restoration of tax and
duty exemptions or preferential treatment in taxation,
indicating the source of
funding therefor, eligible beneficiaries and the
terms and
conditions for the grant thereof taking into consideration the
international
commitments of the Philippines and the necessary precautions such
that the
grant of subsidies does
not become the basis for countervailing action.[10]
(8) On October 5, 1987, the Office of the

President issued the Memorandum, confirming
NAPOCOR’s
tax exemption aforesaid.[11]
The provincial government of Albay now

defends the auction sale in question on the theory that
the various FIRB
issuances constitute an undue delegation of the taxing power and hence, null
and void, under the Constitution. It is
also contended that, insofar as Executive Order No. 93
authorizes the FIRB to
grant tax exemptions, the same is of no
force and effect under the
constitutional provision allowing the legislature
alone to accord tax exemption privileges.
It is to be pointed out that under Presidential Decree No. 776,
the power of the FIRB was
merely to “recommend to the President of the
Philippines and for reasons of compatibility with
the declared ecomomic policy, the withdrawal, modification, revocation
or suspension of the
enforceability of any of the above-cited statutory
subsidies or tax exemption grants, except
those granted by the Constitution.”
It has no authority to impose taxes or revoke existing ones,
which, after all,
under the Constitution, only the legislature may accomplish.[12]
The question
therefore is whether or not the various tax exemptions granted by
virtue of FIRB Resolutions
Nos. 10-85, 1-86, and 17-87 are valid and
constitutional.
We shall deal with FIRB No. 17-87 later, but with respect to FIRB
Resolutions Nos. 10-85 and
1-86, we sustain the provincial government of Albay.
As we said, the FIRB, under its charter, Presidential Decree No.

776, had been empowered
merely to “recommend” tax exemptions. By itself, it could not have validly
prescribed
exemptions or restore taxability.
Hence, as of June 11, 1984
(promulgation of Presidential
Decree No. 1931), NAPOCOR had ceased to enjoy tax
exemption privileges.
The fact that under

Executive Order No. 93, the FIRB has been given the prerogative to “restore
tax
and/or duty exemptions withdrawn hereunder in whole or in part,”[13] and “impose conditions
for...tax and/or duty
exemption”[14] is of no moment. These provisions are prospective in
character
and can not affect the Board’s past acts.
The Court is aware that

in its preamble, Executive Order No. 93 states:
WHEREAS, a number of affected entities, government and private were

able to get
back their tax and duty exemption privileges through the review
mechanism
implemented by the Fiscal Incentives Review Board (FIRB);[15]
but
by no means can we say that it has “ratified” the acts of FIRB. It is to misinterpret the scope
of FIRB’s powers under Presidential Decree No. 776 to say that
it has. Apart from that, Section
2 of
the Executive Order was clearly intended to amend Presidential Decree No. 776,
which
means, mutatis mutandis, that FIRB did not have the right, in the first
place, to grant tax
exemptions or withdraw existing ones.
Does Executive Order No. 93 constitute an unlawful delegation of legislative power? It is to be

stressed that the provincial
government of Albay admits that as of March
10, 1987 (the date
Resolution No. 17-87 was affirmed by the Memorandum of the Office of the
President, dated
October 5, 1987), NAPOCOR’s tax
exemption had been validly restored.
What it questions is
NAPOCOR’s liability in
the interregnum between June 11, 1984, the date its tax privileges were
withdrawn,
and March 10, 1987,
the date they were purportedly restored.
To be sure, it objects
to Executive Order No. 93 as allegedly a
delegation of legislative power, but only insofar as its
(NAPOCOR’s)
June 11, 1984
to March 10, 1987
tax accumulation is concerned. We therefor
leave the issue of “delegation” to the future and its
constitutionality when the proper case
arises.
For the nonce, we leave Executive Order No. 93 alone, and so also, its
validity as far as
it grants tax exemptions (through the FIRB) beginning
December 17, 1986, the date of its
promulgation.
NAPOCOR must then be held

liable for the intervening years aforesaid.
So it has been held:
xxx xxx xxx
The last issue to be resolved is whether or not the

private-respondent is liable for the fixed and
deficiency percentage taxes in
the amount of P3,025.96 (i.e. for the period from January 1, 1946
to February
29, 1948) before the approval of its municipal franchises. As aforestated, the
franchises were approved by the President only on February 24, 1948.
Therefore, before the
said date, the private respondent was liable for
the payment of percentage and fixed taxes as
seller of light, heat, and
power--which, as the petitioner claims, amounted to P3,025.96. The
legislative franchise (R.A. No. 3843)
exempted the grantee from all kinds of taxes other than the
2% tax from the date the original franchise was
granted. The exemption, therefore, did
not
cover the period before the franchise was granted, i.e. before February 24, 1948. x x x[16]
Actually, the State has no reason to decry the taxation of NAPOCOR’s properties, as and by
way of real property
taxes. Real roperty
taxes, after all, form part and parcel of the financing
apparatus of the
Government in development and nation-building, particularly in the local
government level. Thus:
SEC. 86. Distribution of proceeds.

- (a) The proceeds of the real property tax, except as
otherwise provided in
this Code, shall accrue to the province, city or municipality where the
property subject to the tax is situated and shall be applied by the respective
local government
unit for its own use and benefit.
(b) Barrio shares in real property tax collections. - The annual

shares of the barrios in real
property tax collections shall be as follows:
(1) Five per cent of the

real property tax collections of the province and another five percent of
the
collections of the municipality shall accrue to the barrio where the property
subject to the
tax is situated.
(2) In the case of the city,

ten per cent of the collections of the tax shall likewise accrue to the
barrio
where the property is situated.
Thirty per cent of the barrio shares herein referred to may be

spent for salaries or per diems of
the barrio officials and other
administrative expenses, while the remaining seventy per cent shall
be utilized
for development projects approved by the Secretary of Local Government and
Community Development or by such committee created, or representatives
designated, by him.
SEC. 87. Application of proceeds.

- (a) The proceeds of the real property tax pertaining to the
city and to the
municipality shall accrue entirely to their respective general funds. In the case of
the province, one-fourth
thereof shall accrue to its road and bridge fund and the remaining
three-fourths, to its general fund.
(b) The entire

proceeds of the additional one per cent real property tax levied for the
Special Education Fund created under R.A. No. 5447 collected in the province or
city on real
property situated in their respective territorial jurisdictions
shall be distributed as follows:
(1) Collections in the

provinces: Fifty per cent shall accrue
to the municipality where the
property subject to the tax is situated; twenty
per cent shall accrue to the province; and thirty per
cent shall be remitted to
the Treasurer of the Philippines to be expended exclusively for
stabilizing the
Special Education Fund in municipalities, cities and provinces in accordance
with
the provisions of Section seven of R.A. No. 5447.
(2) Collections in the

cities: Sixty per cent shall be retained
by the city; and forty per cent
shall be remitted to the Treasurer of the Philippines
to be expended exclusively for stabilizing
the special education fund in
municipalities, cities and provinces as provided under Section 7 of
R.A. No.
5447.
However, any increase in the shares of provinces, cities and

municipalities from said additional
tax accruing to their respective local
school boards commencing with fiscal year 1973-74 over
what has been actually
realized during the fiscal year 1971-72 which, for purposes of this Code,
shall
remain as the base year, shall be divided equally between the general fund and
the special
education fund of the local government units concerned. The Secretary of Finance may,
however, at his
discretion, increase to not more than seventy-five per cent the amount that
shall
accrue annually to the local general fund.
(c) The proceeds of

all delinquent taxes and penalties, as well as the income realized from
the
use, lease or other disposition of real property acquired by the province or
city at a public
auction in accordance with the provisions of this Code, and
the proceeds of the sale of the
delinquent real property or of the redemption
thereof, shall accrue to the province, city or
municipality in the same manner
and proportion as if the tax or taxes had been paid in regular
course.
(d) The proceeds of

the additional real property tax on idle private lands shall accrue to the
respective general funds of the province, city and municipality where the land
subject to the tax
is situated.[17]
To all intents and purposes,

real property taxes are funds taken by the State with one hand and
given to the
other. In no measure can the Government
be said to have lost anything.
As a rule finally, claims

of tax exemption are construed strongly against the claimant.[18] They
must also be shown to exist clearly and
categorically, and supported by clear legal provisions.[19]
Taxes are the lifeblood

of the nation.[20] Their primary purpose is to generate funds
for the State
to finance the needs of the citizenry and to advance the common
weal.
WHEREFORE, the petition is DENIED. No costs.

The auction sale of the petitioner’s
properties to answer for real
estate taxes accumulated between June 11, 1984 through March 10,
1987 is hereby declared valid.
SO ORDERED.

Fernan, C.J., Narvasa,

Melencio-Herrera, Gutierrez, Jr., Cruz, Paras, Padilla, Bidin, Cortes,
and Medialdea, JJ., concur.
Feliciano, J., in the result.
Gancayco and Griño-Aquino,

JJ., on leave.

counsel.
Regalado, J., no part; related to respondent’s

Rollo, 9.
[1]

Id., 10.
[2]

Id., 31.
[3]

Id., 79.
[4]

Id., 28.
[5]

Pres. Decree No. 776 (1975).
[6]

Id., 43.
[7]

Rollo, id., 67.
[8]

Id., 64.
[9]
[10]
Id., 65.
[11]
See above, 2.
[12]
CONST. (1973), art. VIII, sec. 17, par.
(4); also CONST. (1987), art. VI, sec. 28, par. (4).
[13]
Exec. Order No. 93, sec. 2, Par. (a)
[14]
Supra, par. (c).
[15]
Rollo, id., 63.

Commission of Internal Revenue v. Lingayen
Gulf Electric Power Co. Inc., No. L-23771,
[16]
August 4, 1988, 164 SCRA 27.

[17]
Pres. Decree No. 464, secs. 86, 87.

Commissioner of Internal Revenue v.
Guerrero, No. L-20942, September 22, 1967, 21 SCRA
[18]
180.
[19]
Supra.

Commissioner of Internal Revenue v.
Pineda, No. L-22734, September 15, 1967, 21 SCRA
[20]
105.
528 Phil. 181
EN BANC
[ G.R. NO. 155650, July 20, 2006 ]
MANILA INTERNATIONAL AIRPORT AUTHORITY, PETITIONER, VS.
COURT OF APPEALS, CITY OF PARAÑAQUE, CITY MAYOR OF
PARAÑAQUE, SANGGUNIANG PANGLUNGSOD NG PARAÑAQUE,
CITY ASSESSOR OF PARAÑAQUE, AND CITY TREASURER OF
PARAÑAQUE, RESPONDENTS.

DECISION
CARPIO, J.:
The Antecedents

Petitioner Manila International Airport Authority (MIAA) operates the Ninoy Aquino
International Airport (NAIA) Complex in Parañaque City under Executive Order No. 903,
otherwise known as the Revised Charter of the Manila International Airport Authority ("MIAA
Charter"). Executive Order No. 903 was issued on 21 July 1983 by then President Ferdinand E.
Marcos. Subsequently, Executive Order Nos. 909[1] and 298[2] amended the MIAA Charter.

As operator of the international airport, MIAA administers the land, improvements and
equipment within the NAIA Complex. The MIAA Charter transferred to MIAA approximately
600 hectares of land,[3] including the runways and buildings ("Airport Lands and Buildings")
then under the Bureau of Air Transportation.[4] The MIAA Charter further provides that no
portion of the land transferred to MIAA shall be disposed of through sale or any other mode
unless specifically approved by the President of the Philippines.[5]

On 21 March 1997, the Office of the Government Corporate Counsel (OGCC) issued Opinion
No. 061. The OGCC opined that the Local Government Code of 1991 withdrew the exemption
from real estate tax granted to MIAA under Section 21 of the MIAA Charter. Thus, MIAA
negotiated with respondent City of Parañaque to pay the real estate tax imposed by the City.
MIAA then paid some of the real estate tax already due.

On 28 June 2001, MIAA received Final Notices of Real Estate Tax Delinquency from the City
of Parañaque for the taxable years 1992 to 2001. MIAA's real estate tax delinquency is broken
down as follows:

TAX TAXABLE TAX DUE PENALTY TOTAL

DECLARATION YEAR

E-016-01370 1992-2001 19,558,160.00 11,201,083.20 30,789,243.20

E-016-01374 1992-2001 111,689,424.90 68,149,479.59 179,838,904.49
E-016-01375 1992-2001 20,276,058.00 12,371,832.00 32,647,890.00
E-016-01376 1992-2001 58,144,028.00 35,477,712.00 93,621,740.00
E-016-01377 1992-2001 18,134,614.65 11,065,188.59 29,199,803.24
E-016-01378 1992-2001 111,107,950.40 67,794,681.59 178,902,631.99
E-016-01379 1992-2001 4,322,340.00 2,637,360.00 6,959,700.00
E-016-01380 1992-2001 7,776,436.00 4,744,944.00 12,521,380.00
*E-016-013-85 1998-2001 6,444,810.00 2,900,164.50 9,344,974.50
*E-016-01387 1998-2001 34,876,800.00 5,694,560.00 50,571,360.00
*E-016-01396 1998-2001 75,240.00 33,858.00 109,098.00
GRAND TOTAL
P392,435,861.95 P232,070,863.47 P624,506,725.42
1992-1997 RPT was paid on Dec. 24, 1997 as per O.R.#9476102 for P4,207,028.75
#9476101 for P28,676,480.00
#9476103 for P49,115.00[6]

On 17 July 2001, the City of Parañaque, through its City Treasurer, issued notices of levy and
warrants of levy on the Airport Lands and Buildings. The Mayor of the City of Parañaque
threatened to sell at public auction the Airport Lands and Buildings should MIAA fail to pay the
real estate tax delinquency. MIAA thus sought a clarification of OGCC Opinion No. 061.

On 9 August 2001, the OGCC issued Opinion No. 147 clarifying OGCC Opinion No. 061. The
OGCC pointed out that Section 206 of the Local Government Code requires persons exempt
from real estate tax to show proof of exemption. The OGCC opined that Section 21 of the
MIAA Charter is the proof that MIAA is exempt from real estate tax.

On 1 October 2001, MIAA filed with the Court of Appeals an original petition for prohibition
and injunction, with prayer for preliminary injunction or temporary restraining order. The
petition sought to restrain the City of Parañaque from imposing real estate tax on, levying
against, and auctioning for public sale the Airport Lands and Buildings. The petition was
docketed as CA-G.R. SP No. 66878.

On 5 October 2001, the Court of Appeals dismissed the petition because MIAA filed it beyond
the 60-day reglementary period. The Court of Appeals also denied on 27 September 2002
MIAA's motion for reconsideration and supplemental motion for reconsideration. Hence, MIAA
filed on 5 December 2002 the present petition for review.[7]

Meanwhile, in January 2003, the City of Parañaque posted notices of auction sale at the
Barangay Halls of Barangays Vitalez, Sto. Niño, and Tambo, Parañaque City; in the public
market of Barangay La Huerta; and in the main lobby of the Parañaque City Hall. The City of
Parañaque published the notices in the 3 and 10 January 2003 issues of the Philippine Daily
Inquirer, a newspaper of general circulation in the Philippines. The notices announced the
public auction sale of the Airport Lands and Buildings to the highest bidder on 7 February 2003,
10:00 a.m., at the Legislative Session Hall Building of Parañaque City.

A day before the public auction, or on 6 February 2003, at 5:10 p.m., MIAA filed before this
Court an Urgent Ex-Parte and Reiteratory Motion for the Issuance of a Temporary Restraining
Order. The motion sought to restrain respondents - the City of Parañaque, City Mayor of
Parañaque, Sangguniang Panglungsod ng Parañaque, City Treasurer of Parañaque, and the City
Assessor of Parañaque ("respondents") - from auctioning the Airport Lands and Buildings.
On 7 February 2003, this Court issued a temporary restraining order (TRO) effective
immediately. The Court ordered respondents to cease and desist from selling at public auction
the Airport Lands and Buildings. Respondents received the TRO on the same day that the Court
issued it. However, respondents received the TRO only at 1:25 p.m. or three hours after the
conclusion of the public auction.
On 10 February 2003, this Court issued a Resolution confirming nunc pro tunc the TRO.
On 29 March 2005, the Court heard the parties in oral arguments. In compliance with the
directive issued during the hearing, MIAA, respondent City of Parañaque, and the Solicitor
General subsequently submitted their respective Memoranda.
MIAA admits that the MIAA Charter has placed the title to the Airport Lands and Buildings in
the name of MIAA. However, MIAA points out that it cannot claim ownership over these
properties since the real owner of the Airport Lands and Buildings is the Republic of the
Philippines. The MIAA Charter mandates MIAA to devote the Airport Lands and Buildings for
the benefit of the general public. Since the Airport Lands and Buildings are devoted to public
use and public service, the ownership of these properties remains with the State. The Airport
Lands and Buildings are thus inalienable and are not subject to real estate tax by local
governments.
MIAA also points out that Section 21 of the MIAA Charter specifically exempts MIAA from
the payment of real estate tax. MIAA insists that it is also exempt from real estate tax under
Section 234 of the Local Government Code because the Airport Lands and Buildings are owned
by the Republic. To justify the exemption, MIAA invokes the principle that the government
cannot tax itself. MIAA points out that the reason for tax exemption of public property is that its
taxation would not inure to any public advantage, since in such a case the tax debtor is also the
tax creditor.
Respondents invoke Section 193 of the Local Government Code, which expressly withdrew
the tax exemption privileges of "government-owned and-controlled corporations" upon the
effectivity of the Local Government Code. Respondents also argue that a basic rule of statutory
construction is that the express mention of one person, thing, or act excludes all others. An
international airport is not among the exceptions mentioned in Section 193 of the Local
Government Code. Thus, respondents assert that MIAA cannot claim that the Airport Lands and
Buildings are exempt from real estate tax.
Respondents also cite the ruling of this Court in Mactan International Airport v. Marcos[8]
where we held that the Local Government Code has withdrawn the exemption from real estate
tax granted to international airports. Respondents further argue that since MIAA has already
paid some of the real estate tax assessments, it is now estopped from claiming that the Airport
Lands and Buildings are exempt from real estate tax.
The Issue
This petition raises the threshold issue of whether the Airport Lands and Buildings of MIAA are
exempt from real estate tax under existing laws. If so exempt, then the real estate tax
assessments issued by the City of Parañaque, and all proceedings taken pursuant to such
assessments, are void. In such event, the other issues raised in this petition become moot.
The Court's Ruling
We rule that MIAA's Airport Lands and Buildings are exempt from real estate tax imposed by
local governments.
First, MIAA is not a government-owned or controlled corporation but an instrumentality of

the National Government and thus exempt from local taxation. Second, the real properties of
MIAA are owned by the Republic of the Philippines and thus exempt from real estate tax.
1. MIAA is Not a Government-Owned or Controlled Corporation

Respondents argue that MIAA, being a government-owned or controlled corporation, is not

exempt from real estate tax. Respondents claim that the deletion of the phrase "any government-
owned or controlled so exempt by its charter" in Section 234(e) of the Local Government Code
withdrew the real estate tax exemption of government-owned or controlled corporations. The
deleted phrase appeared in Section 40(a) of the 1974 Real Property Tax Code enumerating the
entities exempt from real estate tax.

There is no dispute that a government-owned or controlled corporation is not exempt from real
estate tax. However, MIAA is not a government-owned or controlled corporation. Section 2(13)
of the Introductory Provisions of the Administrative Code of 1987 defines a government-owned
or controlled corporation as follows:

SEC. 2. General Terms Defined. - x x x x

(13) Government-owned or controlled corporation refers to any agency organized

as a stock or non-stock corporation, vested with functions relating to public needs
whether governmental or proprietary in nature, and owned by the Government
directly or through its instrumentalities either wholly, or, where applicable as in the
case of stock corporations, to the extent of at least fifty-one (51) percent of its capital
stock: x x x. (Emphasis supplied)

A government-owned or controlled corporation must be "organized as a stock or non-stock

corporation." MIAA is not organized as a stock or non-stock corporation. MIAA is not a stock
corporation because it has no capital stock divided into shares. MIAA has no stockholders or
voting shares. Section 10 of the MIAA Charter[9] provides:

SECTION 10. Capital. - The capital of the Authority to be contributed by the

National Government shall be increased from Two and One-half Billion
(P2,500,000,000.00) Pesos to Ten Billion (P10,000,000,000.00) Pesos to consist of:
(a) The value of fixed assets including airport facilities, runways and equipment and
such other properties, movable and immovable[,] which may be contributed by the
National Government or transferred by it from any of its agencies, the valuation of
which shall be determined jointly with the Department of Budget and Management
and the Commission on Audit on the date of such contribution or transfer after
making due allowances for depreciation and other deductions taking into account the
loans and other liabilities of the Authority at the time of the takeover of the assets
and other properties;
(b) That the amount of P605 million as of December 31, 1986 representing about
seventy percentum (70%) of the unremitted share of the National Government from
1983 to 1986 to be remitted to the National Treasury as provided for in Section 11 of
E. O. No. 903 as amended, shall be converted into the equity of the National
Government in the Authority. Thereafter, the Government contribution to the capital
of the Authority shall be provided in the General Appropriations Act.
Clearly, under its Charter, MIAA does not have capital stock that is divided into shares.

Section 3 of the Corporation Code[10] defines a stock corporation as one whose "capital stock
is divided into shares and x x x authorized to distribute to the holders of such shares
dividends x x x." MIAA has capital but it is not divided into shares of stock. MIAA has no
stockholders or voting shares. Hence, MIAA is not a stock corporation.

MIAA is also not a non-stock corporation because it has no members. Section 87 of the
Corporation Code defines a non-stock corporation as "one where no part of its income is
distributable as dividends to its members, trustees or officers." A non-stock corporation must
have members. Even if we assume that the Government is considered as the sole member of
MIAA, this will not make MIAA a non-stock corporation. Non-stock corporations cannot
distribute any part of their income to their members. Section 11 of the MIAA Charter mandates
MIAA to remit 20% of its annual gross operating income to the National Treasury.[11] This
prevents MIAA from qualifying as a non-stock corporation.

Section 88 of the Corporation Code provides that non-stock corporations are "organized for
charitable, religious, educational, professional, cultural, recreational, fraternal, literary,
scientific, social, civil service, or similar purposes, like trade, industry, agriculture and like
chambers." MIAA is not organized for any of these purposes. MIAA, a public utility, is
organized to operate an international and domestic airport for public use.

Since MIAA is neither a stock nor a non-stock corporation, MIAA does not qualify as a
government-owned or controlled corporation. What then is the legal status of MIAA within the
National Government?

MIAA is a government instrumentality vested with corporate powers to perform efficiently its
governmental functions. MIAA is like any other government instrumentality, the only difference
is that MIAA is vested with corporate powers. Section 2(10) of the Introductory Provisions of
the Administrative Code defines a government "instrumentality" as follows:

(10) Instrumentality refers to any agency of the National Government, not integrated
within the department framework, vested with special functions or jurisdiction by
law, endowed with some if not all corporate powers, administering special funds,
and enjoying operational autonomy, usually through a charter. x x x (Emphasis
supplied)
When the law vests in a government instrumentality corporate powers, the instrumentality does
not become a corporation. Unless the government instrumentality is organized as a stock or non-
stock corporation, it remains a government instrumentality exercising not only governmental
but also corporate powers. Thus, MIAA exercises the governmental powers of eminent domain,
[12] police authority[13] and the levying of fees and charges.[14] At the same time, MIAA
exercises "all the powers of a corporation under the Corporation Law, insofar as these powers
are not inconsistent with the provisions of this Executive Order."[15]

Likewise, when the law makes a government instrumentality operationally autonomous, the
instrumentality remains part of the National Government machinery although not integrated
with the department framework. The MIAA Charter expressly states that transforming MIAA
into a "separate and autonomous body"[16] will make its operation more "financially viable."[17]

Many government instrumentalities are vested with corporate powers but they do not become
stock or non-stock corporations, which is a necessary condition before an agency or
instrumentality is deemed a government-owned or controlled corporation. Examples are the
Mactan International Airport Authority, the Philippine Ports Authority, the University of the
Philippines and Bangko Sentral ng Pilipinas. All these government instrumentalities exercise
corporate powers but they are not organized as stock or non-stock corporations as required by
Section 2(13) of the Introductory Provisions of the Administrative Code. These government
instrumentalities are sometimes loosely called government corporate entities. However, they are
not government-owned or controlled corporations in the strict sense as understood under the
Administrative Code, which is the governing law defining the legal relationship and status of
government entities.

A government instrumentality like MIAA falls under Section 133(o) of the Local Government
Code, which states:

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

xxxx

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

Section 133(o) recognizes the basic principle that local governments cannot tax the national
government, which historically merely delegated to local governments the power to tax. While
the 1987 Constitution now includes taxation as one of the powers of local governments, local
governments may only exercise such power "subject to such guidelines and limitations as the
Congress may provide."[18]
When local governments invoke the power to tax on national government instrumentalities,
such power is construed strictly against local governments. The rule is that a tax is never
presumed and there must be clear language in the law imposing the tax. Any doubt whether a
person, article or activity is taxable is resolved against taxation. This rule applies with greater
force when local governments seek to tax national government instrumentalities.
Another rule is that a tax exemption is strictly construed against the taxpayer claiming the
exemption. However, when Congress grants an exemption to a national government
instrumentality from local taxation, such exemption is construed liberally in favor of the
national government instrumentality. As this Court declared in Maceda v. Macaraig, Jr.:
The reason for the rule does not apply in the case of exemptions running to the
benefit of the government itself or its agencies. In such case the practical effect of an
exemption is merely to reduce the amount of money that has to be handled by
government in the course of its operations. For these reasons, provisions granting
exemptions to government agencies may be construed liberally, in favor of non tax-
liability of such agencies.[19]

There is, moreover, no point in national and local governments taxing each other, unless a sound
and compelling policy requires such transfer of public funds from one government pocket to
another.

There is also no reason for local governments to tax national government instrumentalities for
rendering essential public services to inhabitants of local governments. The only exception is
when the legislature clearly intended to tax government instrumentalities for the delivery
of essential public services for sound and compelling policy considerations. There must be
express language in the law empowering local governments to tax national government
instrumentalities. Any doubt whether such power exists is resolved against local governments.

Thus, Section 133 of the Local Government Code states that "unless otherwise provided" in
the Code, local governments cannot tax national government instrumentalities. As this Court
held in Basco v. Philippine Amusements and Gaming Corporation:

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

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

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

"Justice Holmes, speaking for the Supreme Court, made reference to the entire
absence of power on the part of the States to touch, in that way (taxation) at least, the
instrumentalities of the United States (Johnson v. Maryland, 254 US 51) and it can
be agreed that no state or political subdivision can regulate a federal instrumentality
in such a way as to prevent it from consummating its federal responsibilities, or even
to seriously burden it in the accomplishment of them." (Antieau, Modern
Constitutional Law, Vol. 2, p. 140, emphasis supplied)
Otherwise, mere creatures of theState can defeat National policies thru extermination
of what local authorities may perceive to be undesirable activities or enterprise using
the power to tax as "a tool for regulation" (U.S. v. Sanchez, 340 US 42).
The power to tax which was called by Justice Marshall as the "power to destroy"
(Mc Culloch v. Maryland, supra) cannot be allowed to defeat an instrumentality or
creation of the very entity which has the inherent power to wield it. [20]
2. Airport Lands and Buildings of MIAA are Owned by the Republic

a. Airport Lands and Buildings are of Public Dominion

The Airport Lands and Buildings of MIAA are property of public dominion and therefore
owned by the State or the Republic of the Philippines. The Civil Code provides:

ARTICLE 419. Property is either of public dominion or of private ownership.

ARTICLE 420. The following things are property of public dominion:

(1) Those intended for public use, such as roads, canals, rivers, torrents, ports and
bridges constructed by the State, banks, shores, roadsteads, and others of similar
character;

(2) Those which belong to the State, without being for public use, and are intended
for some public service or for the development of the national wealth. (Emphasis
supplied)

ARTICLE 421. All other property of the State, which is not of the character stated in
the preceding article, is patrimonial property.
ARTICLE 422. Property of public dominion, when no longer intended for public use
or for public service, shall form part of the patrimonial property of the State.

No one can dispute that properties of public dominion mentioned in Article 420 of the Civil
Code, like "roads, canals, rivers, torrents, ports and bridges constructed by the State," are
owned by the State. The term "ports" includes seaports and airports. The MIAA Airport
Lands and Buildings constitute a "port" constructed by the State. Under Article 420 of the Civil
Code, the MIAA Airport Lands and Buildings are properties of public dominion and thus owned
by the State or the Republic of the Philippines.

The Airport Lands and Buildings are devoted to public use because they are used by the public
for international and domestic travel and transportation. The fact that the MIAA collects
terminal fees and other charges from the public does not remove the character of the Airport
Lands and Buildings as properties for public use. The operation by the government of a tollway
does not change the character of the road as one for public use. Someone must pay for the
maintenance of the road, either the public indirectly through the taxes they pay the government,
or only those among the public who actually use the road through the toll fees they pay upon
using the road. The tollway system is even a more efficient and equitable manner of taxing the
public for the maintenance of public roads.
The charging of fees to the public does not determine the character of the property whether it is
of public dominion or not. Article 420 of the Civil Code defines property of public dominion as
one "intended for public use." Even if the government collects toll fees, the road is still
"intended for public use" if anyone can use the road under the same terms and conditions as the
rest of the public. The charging of fees, the limitation on the kind of vehicles that can use the
road, the speed restrictions and other conditions for the use of the road do not affect the public
character of the road.
The terminal fees MIAA charges to passengers, as well as the landing fees MIAA charges to
airlines, constitute the bulk of the income that maintains the operations of MIAA. The collection
of such fees does not change the character of MIAA as an airport for public use. Such fees are
often termed user's tax. This means taxing those among the public who actually use a public
facility instead of taxing all the public including those who never use the particular public
facility. A user's tax is more equitable " a principle of taxation mandated in the 1987
Constitution.[21]
The Airport Lands and Buildings of MIAA, which its Charter calls the "principal airport of the
Philippines for both international and domestic air traffic,"[22] are properties of public dominion
because they are intended for public use. As properties of public dominion, they indisputably
belong to the State or the Republic of the Philippines.
b. Airport Lands and Buildings are Outside the Commerce of Man
The Airport Lands and Buildings of MIAA are devoted to public use and thus are properties of
public dominion. As properties of public dominion, the Airport Lands and Buildings are
outside the commerce of man. The Court has ruled repeatedly that properties of public
dominion are outside the commerce of man. As early as 1915, this Court already ruled in
Municipality of Cavite v. Rojas that properties devoted to public use are outside the commerce
of man, thus:
According to article 344 of the Civil Code: "Property for public use in provinces and
in towns comprises the provincial and town roads, the squares, streets, fountains, and
public waters, the promenades, and public works of general service supported by
said towns or provinces."

The said Plaza Soledad being a promenade for public use, the municipal council of
Cavite could not in 1907 withdraw or exclude from public use a portion thereof in
order to lease it for the sole benefit of the defendant Hilaria Rojas. In leasing a
portion of said plaza or public place to the defendant for private use the plaintiff
municipality exceeded its authority in the exercise of its powers by executing a
contract over a thing of which it could not dispose, nor is it empowered so to do.
The Civil Code, article 1271, prescribes that everything which is not outside the
commerce of man may be the object of a contract, and plazas and streets are outside
of this commerce, as was decided by the supreme court of Spain in its decision of
February 12, 1895, which says: "Communal things that cannot be sold because
they are by their very nature outside of commerce are those for public use, such
as the plazas, streets, common lands, rivers, fountains, etc." (Emphasis supplied)
[23]
Again in Espiritu v. Municipal Council, the Court declared that properties of public dominion
are outside the commerce of man:

xxx Town plazas are properties of public dominion, to be devoted to public use
and to be made available to the public in general. They are outside the commerce of
man and cannot be disposed of or even leased by the municipality to private parties.
While in case of war or during an emergency, town plazas may be occupied
temporarily by private individuals, as was done and as was tolerated by the
Municipality of Pozorrubio, when the emergency has ceased, said temporary
occupation or use must also cease, and the town officials should see to it that the
town plazas should ever be kept open to the public and free from encumbrances or
illegal private constructions.[24] (Emphasis supplied)
The Court has also ruled that property of public dominion, being outside the commerce of man,
cannot be the subject of an auction sale.[25]

Properties of public dominion, being for public use, are not subject to levy, encumbrance or
disposition through public or private sale. Any encumbrance, levy on execution or auction sale
of any property of public dominion is void for being contrary to public policy. Essential public
services will stop if properties of public dominion are subject to encumbrances, foreclosures and
auction sale. This will happen if the City of Parañaque can foreclose and compel the auction
sale of the 600-hectare runway of the MIAA for non-payment of real estate tax.

Before MIAA can encumber[26] the Airport Lands and Buildings, the President must first
withdraw from public use the Airport Lands and Buildings. Sections 83 and 88 of the Public
Land Law or Commonwealth Act No. 141, which "remains to this day the existing general law
governing the classification and disposition of lands of the public domain other than timber and
mineral lands,"[27] provide:

SECTION 83. Upon the recommendation of the Secretary of Agriculture and

Natural Resources, the President may designate by proclamation any tract or tracts
of land of the public domain as reservations for the use of the Republic of the
Philippines or of any of its branches, or of the inhabitants thereof, in accordance
with regulations prescribed for this purposes, or for quasi-public uses or purposes
when the public interest requires it, including reservations for highways, rights of
way for railroads, hydraulic power sites, irrigation systems, communal pastures or
lequas communales, public parks, public quarries, public fishponds, working men's
village and other improvements for the public benefit.
SECTION 88. The tract or tracts of land reserved under the provisions of
Section eighty-three shall be non-alienable and shall not be subject to
occupation, entry, sale, lease, or other disposition until again declared alienable
under the provisions of this Act or by proclamation of the President. (Emphasis
and underscoring supplied)
Thus, unless the President issues a proclamation withdrawing the Airport Lands and Buildings
from public use, these properties remain properties of public dominion and are inalienable.
Since the Airport Lands and Buildings are inalienable in their present status as properties of
public dominion, they are not subject to levy on execution or foreclosure sale. As long as the
Airport Lands and Buildings are reserved for public use, their ownership remains with the State
or the Republic of the Philippines.

The authority of the President to reserve lands of the public domain for public use, and to
withdraw such public use, is reiterated in Section 14, Chapter 4, Title I, Book III of the
Administrative Code of 1987, which states:

SEC. 14. Power to Reserve Lands of the Public and Private Domain of the
Government. - (1) The President shall have the power to reserve for settlement
or public use, and for specific public purposes, any of the lands of the public
domain, the use of which is not otherwise directed by law. The reserved land
shall thereafter remain subject to the specific public purpose indicated until
otherwise provided by law or proclamation;

x x x x. (Emphasis supplied)

There is no question, therefore, that unless the Airport Lands and Buildings are withdrawn by
law or presidential proclamation from public use, they are properties of public dominion, owned
by the Republic and outside the commerce of man.

c. MIAA is a Mere Trustee of the Republic

MIAA is merely holding title to the Airport Lands and Buildings in trust for the Republic.
Section 48, Chapter 12, Book I of the Administrative Code allows instrumentalities like
MIAA to hold title to real properties owned by the Republic, thus:

SEC. 48. Official Authorized to Convey Real Property. - Whenever real property of
the Government is authorized by law to be conveyed, the deed of conveyance shall
be executed in behalf of the government by the following:

(1) For property belonging to and titled in the name of the Republic of the
Philippines, by the President, unless the authority therefor is expressly vested by law
in another officer.

(2) For property belonging to the Republic of the Philippines but titled in the
name of any political subdivision or of any corporate agency or instrumentality,
by the executive head of the agency or instrumentality. (Emphasis supplied)

In MIAA's case, its status as a mere trustee of the Airport Lands and Buildings is clearer
because even its executive head cannot sign the deed of conveyance on behalf of the Republic.
Only the President of the Republic can sign such deed of conveyance.[28]
d. Transfer to MIAA was Meant to Implement a Reorganization
The MIAA Charter, which is a law, transferred to MIAA the title to the Airport Lands and
Buildings from the Bureau of Air Transportation of the Department of Transportation and
Communications. The MIAA Charter provides:
SECTION 3. Creation of the Manila International Airport Authority. - x x x x

The land where the Airport is presently located as well as the surrounding land
area of approximately six hundred hectares, are hereby transferred, conveyed
and assigned to the ownership and administration of the Authority, subject to
existing rights, if any. The Bureau of Lands and other appropriate government
agencies shall undertake an actual survey of the area transferred within one year
from the promulgation of this Executive Order and the corresponding title to be
issued in the name of the Authority. Any portion thereof shall not be disposed
through sale or through any other mode unless specifically approved by the
President of the Philippines. (Emphasis supplied)

SECTION 22. Transfer of Existing Facilities and Intangible Assets. - All existing
public airport facilities, runways, lands, buildings and other property, movable
or immovable, belonging to the Airport, and all assets, powers, rights, interests and
privileges belonging to the Bureau of Air Transportation relating to airport works
or air operations, including all equipment which are necessary for the operation of
crash fire and rescue facilities, are hereby transferred to the Authority. (Emphasis
supplied)

SECTION 25. Abolition of the Manila International Airport as a Division in the

Bureau of Air Transportation and Transitory Provisions. - The Manila International
Airport including the Manila Domestic Airport as a division under the Bureau of Air
Transportation is hereby abolished.

x x x x.

The MIAA Charter transferred the Airport Lands and Buildings to MIAA without the Republic
receiving cash, promissory notes or even stock since MIAA is not a stock corporation.

The whereas clauses of the MIAA Charter explain the rationale for the transfer of the Airport
Lands and Buildings to MIAA, thus:

WHEREAS, the Manila International Airport as the principal airport of the

Philippines for both international and domestic air traffic, is required to provide
standards of airport accommodation and service comparable with the best airports in
the world;

WHEREAS, domestic and other terminals, general aviation and other facilities, have
to be upgraded to meet the current and future air traffic and other demands of
aviation in Metro Manila;
WHEREAS, a management and organization study has indicated that the objectives
of providing high standards of accommodation and service within the context of
a financially viable operation, will best be achieved by a separate and
autonomous body; and
WHEREAS, under Presidential Decree No. 1416, as amended by Presidential

Decree No. 1772, the President of the Philippines is given continuing authority to
reorganize the National Government, which authority includes the creation of
new entities, agencies and instrumentalities of the Government[.] (Emphasis
supplied)
The transfer of the Airport Lands and Buildings from the Bureau of Air Transportation to
MIAA was not meant to transfer beneficial ownership of these assets from the Republic to
MIAA. The purpose was merely to reorganize a division in the Bureau of Air
Transportation into a separate and autonomous body. The Republic remains the beneficial
owner of the Airport Lands and Buildings. MIAA itself is owned solely by the Republic. No
party claims any ownership rights over MIAA's assets adverse to the Republic.

The MIAA Charter expressly provides that the Airport Lands and Buildings "shall not be
disposed through sale or through any other mode unless specifically approved by the
President of the Philippines." This only means that the Republic retained the beneficial
ownership of the Airport Lands and Buildings because under Article 428 of the Civil Code, only
the "owner has the right to x x x dispose of a thing." Since MIAA cannot dispose of the Airport
Lands and Buildings, MIAA does not own the Airport Lands and Buildings.

At any time, the President can transfer back to the Republic title to the Airport Lands and
Buildings without the Republic paying MIAA any consideration. Under Section 3 of the MIAA
Charter, the President is the only one who can authorize the sale or disposition of the Airport
Lands and Buildings. This only confirms that the Airport Lands and Buildings belong to the
Republic.

e. Real Property Owned by the Republic is Not Taxable

Section 234(a) of the Local Government Code exempts from real estate tax any "[r]eal property
owned by the Republic of the Philippines." Section 234(a) provides:

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

(a) Real property owned by the Republic of the Philippines or any of its political
subdivisions except when the beneficial use thereof has been granted, for
consideration or otherwise, to a taxable person;

x x x. (Emphasis supplied)

This exemption should be read in relation with Section 133(o) of the same Code, which
prohibits local governments from imposing "[t]axes, fees or charges of any kind on the National
Government, its agencies and instrumentalities x x x." The real properties owned by the
Republic are titled either in the name of the Republic itself or in the name of agencies or
instrumentalities of the National Government. The Administrative Code allows real property
owned by the Republic to be titled in the name of agencies or instrumentalities of the national
government. Such real properties remain owned by the Republic and continue to be exempt
from real estate tax.
The Republic may grant the beneficial use of its real property to an agency or instrumentality of
the national government. This happens when title of the real property is transferred to an agency
or instrumentality even as the Republic remains the owner of the real property. Such
arrangement does not result in the loss of the tax exemption. Section 234(a) of the Local
Government Code states that real property owned by the Republic loses its tax exemption only
if the "beneficial use thereof has been granted, for consideration or otherwise, to a taxable
person." MIAA, as a government instrumentality, is not a taxable person under Section 133(o)
of the Local Government Code. Thus, even if we assume that the Republic has granted to
MIAA the beneficial use of the Airport Lands and Buildings, such fact does not make these real
properties subject to real estate tax.
However, portions of the Airport Lands and Buildings that MIAA leases to private entities are
not exempt from real estate tax. For example, the land area occupied by hangars that MIAA
leases to private corporations is subject to real estate tax. In such a case, MIAA has granted the
beneficial use of such land area for a consideration to a taxable person and therefore such land
area is subject to real estate tax. In Lung Center of the Philippines v. Quezon City, the Court
ruled:
Accordingly, we hold that the portions of the land leased to private entities as well as
those parts of the hospital leased to private individuals are not exempt from such
taxes. On the other hand, the portions of the land occupied by the hospital and
portions of the hospital used for its patients, whether paying or non-paying, are
exempt from real property taxes.[29]

3. Refutation of Arguments of Minority

The minority asserts that the MIAA is not exempt from real estate tax because Section 193 of
the Local Government Code of 1991 withdrew the tax exemption of "all persons, whether
natural or juridical" upon the effectivity of the Code. Section 193 provides:

SEC. 193. Withdrawal of Tax Exemption Privileges - Unless otherwise provided in

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

The minority states that MIAA is indisputably a juridical person. The minority argues that
since the Local Government Code withdrew the tax exemption of all juridical persons, then
MIAA is not exempt from real estate tax. Thus, the minority declares:
It is evident from the quoted provisions of the Local Government Code that the
withdrawn exemptions from realty tax cover not just GOCCs, but all persons.
To repeat, the provisions lay down the explicit proposition that the withdrawal of
realty tax exemption applies to all persons. The reference to or the inclusion of
GOCCs is only clarificatory or illustrative of the explicit provision.
The term "All persons" encompasses the two classes of persons recognized
under our laws, natural and juridical persons. Obviously, MIAA is not a
natural person. Thus, the determinative test is not just whether MIAA is a
GOCC, but whether MIAA is a juridical person at all. (Emphasis and
underscoring in the original)
The minority posits that the "determinative test" whether MIAA is exempt from local taxation
is its status - whether MIAA is a juridical person or not. The minority also insists that
"Sections 193 and 234 may be examined in isolation from Section 133(o) to ascertain
MIAA's claim of exemption."

The argument of the minority is fatally flawed. Section 193 of the Local Government Code
expressly withdrew the tax exemption of all juridical persons "[u]nless otherwise provided in
this Code." Now, Section 133(o) of the Local Government Code expressly provides otherwise,
specifically prohibiting local governments from imposing any kind of tax on national
government instrumentalities. Section 133(o) states:

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

xxxx

(o) Taxes, fees or charges of any kinds on the National Government, its agencies
and instrumentalities, and local government units. (Emphasis and underscoring
supplied)

By express mandate of the Local Government Code, local governments cannot impose any
kind of tax on national government instrumentalities like the MIAA. Local governments are
devoid of power to tax the national government, its agencies and instrumentalities. The
taxing powers of local governments do not extend to the national government, its agencies and
instrumentalities, "[u]nless otherwise provided in this Code" as stated in the saving clause of
Section 133. The saving clause refers to Section 234(a) on the exception to the exemption from
real estate tax of real property owned by the Republic.

The minority, however, theorizes that unless exempted in Section 193 itself, all juridical
persons are subject to tax by local governments. The minority insists that the juridical
persons exempt from local taxation are limited to the three classes of entities specifically
enumerated as exempt in Section 193. Thus, the minority states:

x x x Under Section 193, the exemption is limited to (a) local water districts; (b)
cooperatives duly registered under Republic Act No. 6938; and (c) non-stock
and non-profit hospitals and educational institutions. It would be belaboring the
obvious why the MIAA does not fall within any of the exempt entities under Section
193. (Emphasis supplied)
The minority's theory directly contradicts and completely negates Section 133(o) of the Local
Government Code. This theory will result in gross absurdities. It will make the national
government, which itself is a juridical person, subject to tax by local governments since the
national government is not included in the enumeration of exempt entities in Section 193. Under
this theory, local governments can impose any kind of local tax, and not only real estate tax,
on the national government.

Under the minority's theory, many national government instrumentalities with juridical
personalities will also be subject to any kind of local tax, and not only real estate tax. Some
of the national government instrumentalities vested by law with juridical personalities are:
Bangko Sentral ng Pilipinas,[30] Philippine Rice Research Institute,[31] Laguna Lake

Development Authority,[32] Fisheries Development Authority,[33] Bases Conversion

Development Authority,[34] Philippine Ports Authority,[35] Cagayan de Oro Port Authority,[36]
San Fernando Port Authority,[37] Cebu Port Authority,[38] and Philippine National Railways.[39]

The minority's theory violates Section 133(o) of the Local Government Code which expressly
prohibits local governments from imposing any kind of tax on national government
instrumentalities. Section 133(o) does not distinguish between national government
instrumentalities with or without juridical personalities. Where the law does not distinguish,
courts should not distinguish. Thus, Section 133(o) applies to all national government
instrumentalities, with or without juridical personalities. The determinative test whether MIAA
is exempt from local taxation is not whether MIAA is a juridical person, but whether it is a
national government instrumentality under Section 133(o) of the Local Government Code.
Section 133(o) is the specific provision of law prohibiting local governments from imposing any
kind of tax on the national government, its agencies and instrumentalities.

Section 133 of the Local Government Code starts with the saving clause "[u]nless otherwise
provided in this Code." This means that unless the Local Government Code grants an express
authorization, local governments have no power to tax the national government, its agencies and
instrumentalities. Clearly, the rule is local governments have no power to tax the national
government, its agencies and instrumentalities. As an exception to this rule, local governments
may tax the national government, its agencies and instrumentalities only if the Local
Government Code expressly so provides.

The saving clause in Section 133 refers to the exception to the exemption in Section 234(a) of
the Code, which makes the national government subject to real estate tax when it gives the
beneficial use of its real properties to a taxable entity. Section 234(a) of the Local
Government Code provides:

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

consideration or otherwise, to a taxable person.
x x x. (Emphasis supplied)
Under Section 234(a), real property owned by the Republic is exempt from real estate tax. The
exception to this exemption is when the government gives the beneficial use of the real property
to a taxable entity.

The exception to the exemption in Section 234(a) is the only instance when the national
government, its agencies and instrumentalities are subject to any kind of tax by local
governments. The exception to the exemption applies only to real estate tax and not to any
other tax. The justification for the exception to the exemption is that the real property, although
owned by the Republic, is not devoted to public use or public service but devoted to the private
gain of a taxable person.

The minority also argues that since Section 133 precedes Section 193 and 234 of the Local
Government Code, the later provisions prevail over Section 133. Thus, the minority asserts:

x x x Moreover, sequentially Section 133 antecedes Section 193 and 234. Following
an accepted rule of construction, in case of conflict the subsequent provisions
should prevail. Therefore, MIAA, as a juridical person, is subject to real property
taxes, the general exemptions attaching to instrumentalities under Section 133(o) of
the Local Government Code being qualified by Sections 193 and 234 of the same
law. (Emphasis supplied)

The minority assumes that there is an irreconcilable conflict between Section 133 on one hand,
and Sections 193 and 234 on the other. No one has urged that there is such a conflict, much less
has any one presented a persuasive argument that there is such a conflict. The minority's
assumption of an irreconcilable conflict in the statutory provisions is an egregious error for two
reasons.

First, there is no conflict whatsoever between Sections 133 and 193 because Section 193
expressly admits its subordination to other provisions of the Code when Section 193 states "
[u]nless otherwise provided in this Code." By its own words, Section 193 admits the
superiority of other provisions of the Local Government Code that limit the exercise of the
taxing power in Section 193. When a provision of law grants a power but withholds such power
on certain matters, there is no conflict between the grant of power and the withholding of power.
The grantee of the power simply cannot exercise the power on matters withheld from its power.

Second, Section 133 is entitled "Common Limitations on the Taxing Powers of Local
Government Units." Section 133 limits the grant to local governments of the power to tax, and
not merely the exercise of a delegated power to tax. Section 133 states that the taxing powers of
local governments "shall not extend to the levy" of any kind of tax on the national government,
its agencies and instrumentalities. There is no clearer limitation on the taxing power than this.

Since Section 133 prescribes the "common limitations" on the taxing powers of local
governments, Section 133 logically prevails over Section 193 which grants local governments
such taxing powers. By their very meaning and purpose, the "common limitations" on the
taxing power prevail over the grant or exercise of the taxing power. If the taxing power of
local governments in Section 193 prevails over the limitations on such taxing power in Section
133, then local governments can impose any kind of tax on the national government, its
agencies and instrumentalities - a gross absurdity.
Local governments have no power to tax the national government, its agencies and
instrumentalities, except as otherwise provided in the Local Government Code pursuant to the
saving clause in Section 133 stating "[u]nless otherwise provided in this Code." This exception "
which is an exception to the exemption of the Republic from real estate tax imposed by local
governments - refers to Section 234(a) of the Code. The exception to the exemption in Section
234(a) subjects real property owned by the Republic, whether titled in the name of the national
government, its agencies or instrumentalities, to real estate tax if the beneficial use of such
property is given to a taxable entity.
The minority also claims that the definition in the Administrative Code of the phrase
"government-owned or controlled corporation" is not controlling. The minority points out that
Section 2 of the Introductory Provisions of the Administrative Code admits that its definitions
are not controlling when it provides:
SEC. 2. General Terms Defined. - Unless the specific words of the text, or the
context as a whole, or a particular statute, shall require a different meaning:

xxxx

The minority then concludes that reliance on the Administrative Code definition is "flawed."

The minority's argument is a non sequitur. True, Section 2 of the Administrative Code
recognizes that a statute may require a different meaning than that defined in the Administrative
Code. However, this does not automatically mean that the definition in the Administrative Code
does not apply to the Local Government Code. Section 2 of the Administrative Code clearly
states that "unless the specific words x x x of a particular statute shall require a different
meaning," the definition in Section 2 of the Administrative Code shall apply. Thus, unless there
is specific language in the Local Government Code defining the phrase "government-owned or
controlled corporation" differently from the definition in the Administrative Code, the definition
in the Administrative Code prevails.

The minority does not point to any provision in the Local Government Code defining the phrase
"government-owned or controlled corporation" differently from the definition in the
Administrative Code. Indeed, there is none. The Local Government Code is silent on the
definition of the phrase "government-owned or controlled corporation." The
Administrative Code, however, expressly defines the phrase "government-owned or controlled
corporation." The inescapable conclusion is that the Administrative Code definition of the
phrase "government-owned or controlled corporation" applies to the Local Government Code.

The third whereas clause of the Administrative Code states that the Code "incorporates in a
unified document the major structural, functional and procedural principles and rules of
governance." Thus, the Administrative Code is the governing law defining the status and
relationship of government departments, bureaus, offices, agencies and instrumentalities. Unless
a statute expressly provides for a different status and relationship for a specific government unit
or entity, the provisions of the Administrative Code prevail.
The minority also contends that the phrase "government-owned or controlled corporation"
should apply only to corporations organized under the Corporation Code, the general
incorporation law, and not to corporations created by special charters. The minority sees no
reason why government corporations with special charters should have a capital stock. Thus, the
minority declares:
I submit that the definition of "government-owned or controlled corporations" under

the Administrative Code refer to those corporations owned by the government or its
instrumentalities which are created not by legislative enactment, but formed and
organized under the Corporation Code through registration with the Securities and
Exchange Commission. In short, these are GOCCs without original charters.

xxxx

It might as well be worth pointing out that there is no point in requiring a capital
structure for GOCCs whose full ownership is limited by its charter to the State or
Republic. Such GOCCs are not empowered to declare dividends or alienate their
capital shares.

The contention of the minority is seriously flawed. It is not in accord with the Constitution and
existing legislations. It will also result in gross absurdities.

First, the Administrative Code definition of the phrase "government-owned or controlled

corporation" does not distinguish between one incorporated under the Corporation Code or
under a special charter. Where the law does not distinguish, courts should not distinguish.

Second, Congress has created through special charters several government-owned corporations
organized as stock corporations. Prime examples are the Land Bank of the Philippines and the
Development Bank of the Philippines. The special charter[40] of the Land Bank of the
Philippines provides:

SECTION 81. Capital. - The authorized capital stock of the Bank shall be nine
billion pesos, divided into seven hundred and eighty million common shares
with a par value of ten pesos each, which shall be fully subscribed by the
Government, and one hundred and twenty million preferred shares with a par value
of ten pesos each, which shall be issued in accordance with the provisions of
Sections seventy-seven and eighty-three of this Code. (Emphasis supplied)

Likewise, the special charter[41] of the Development Bank of the Philippines provides:

SECTION 7. Authorized Capital Stock " Par value. " The capital stock of the Bank
shall be Five Billion Pesos to be divided into Fifty Million common shares with
par value of P100 per share. These shares are available for subscription by the
National Government. Upon the effectivity of this Charter, the National Government
shall subscribe to Twenty-Five Million common shares of stock worth Two Billion
Five Hundred Million which shall be deemed paid for by the Government with the
net asset values of the Bank remaining after the transfer of assets and liabilities as
provided in Section 30 hereof. (Emphasis supplied)
Other government-owned corporations organized as stock corporations under their special

charters are the Philippine Crop Insurance Corporation,[42] Philippine International Trading
Corporation,[43] and the Philippine National Bank[44] before it was reorganized as a stock
corporation under the Corporation Code. All these government-owned corporations organized
under special charters as stock corporations are subject to real estate tax on real properties
owned by them. To rule that they are not government-owned or controlled corporations because
they are not registered with the Securities and Exchange Commission would remove them from
the reach of Section 234 of the Local Government Code, thus exempting them from real estate
tax.

Third, the government-owned or controlled corporations created through special charters are
those that meet the two conditions prescribed in Section 16, Article XII of the Constitution. The
first condition is that the government-owned or controlled corporation must be established for
the common good. The second condition is that the government-owned or controlled
corporation must meet the test of economic viability. Section 16, Article XII of the 1987
Constitution provides:

SEC. 16. The Congress shall not, except by general law, provide for the formation,
organization, or regulation of private corporations. Government-owned or
controlled corporations may be created or established by special charters in the
interest of the common good and subject to the test of economic viability.
(Emphasis and underscoring supplied)

The Constitution expressly authorizes the legislature to create "government-owned or controlled

corporations" through special charters only if these entities are required to meet the twin
conditions of common good and economic viability. In other words, Congress has no power
to create government-owned or controlled corporations with special charters unless they
are made to comply with the two conditions of common good and economic viability. The
test of economic viability applies only to government-owned or controlled corporations that
perform economic or commercial activities and need to compete in the market place. Being
essentially economic vehicles of the State for the common good " meaning for economic
development purposes " these government-owned or controlled corporations with special
charters are usually organized as stock corporations just like ordinary private corporations.

In contrast, government instrumentalities vested with corporate powers and performing

governmental or public functions need not meet the test of economic viability. These
instrumentalities perform essential public services for the common good, services that every
modern State must provide its citizens. These instrumentalities need not be economically viable
since the government may even subsidize their entire operations. These instrumentalities are not
the "government-owned or controlled corporations" referred to in Section 16, Article XII of the
1987 Constitution.

Thus, the Constitution imposes no limitation when the legislature creates government
instrumentalities vested with corporate powers but performing essential governmental or public
functions. Congress has plenary authority to create government instrumentalities vested
with corporate powers provided these instrumentalities perform essential government
functions or public services. However, when the legislature creates through special charters
corporations that perform economic or commercial activities, such entities " known as
"government-owned or controlled corporations" " must meet the test of economic viability
because they compete in the market place.
This is the situation of the Land Bank of the Philippines and the Development Bank of the
Philippines and similar government-owned or controlled corporations, which derive their
income to meet operating expenses solely from commercial transactions in competition with the
private sector. The intent of the Constitution is to prevent the creation of government-owned or
controlled corporations that cannot survive on their own in the market place and thus merely
drain the public coffers.
Commissioner Blas F. Ople, proponent of the test of economic viability, explained to the
Constitutional Commission the purpose of this test, as follows:
MR. OPLE: Madam President, the reason for this concern is really that when the
government creates a corporation, there is a sense in which this corporation becomes
exempt from the test of economic performance. We know what happened in the past.
If a government corporation loses, then it makes its claim upon the taxpayers"
money through new equity infusions from the government and what is always
invoked is the common good. That is the reason why this year, out of a budget of
P115 billion for the entire government, about P28 billion of this will go into equity
infusions to support a few government financial institutions. And this is all
taxpayers" money which could have been relocated to agrarian reform, to social
services like health and education, to augment the salaries of grossly underpaid
public employees. And yet this is all going down the drain.

Therefore, when we insert the phrase "ECONOMIC VIABILITY" together with the
"common good," this becomes a restraint on future enthusiasts for state capitalism to
excuse themselves from the responsibility of meeting the market test so that they
become viable. And so, Madam President, I reiterate, for the committee's
consideration and I am glad that I am joined in this proposal by Commissioner Foz,
the insertion of the standard of "ECONOMIC VIABILITY OR THE ECONOMIC
TEST," together with the common good.[45]

Father Joaquin G. Bernas, a leading member of the Constitutional Commission, explains in his
textbook The 1987 Constitution of the Republic of the Philippines: A Commentary:

The second sentence was added by the 1986 Constitutional Commission. The
significant addition, however, is the phrase "in the interest of the common good
and subject to the test of economic viability." The addition includes the ideas that
they must show capacity to function efficiently in business and that they should
not go into activities which the private sector can do better. Moreover, economic
viability is more than financial viability but also includes capability to make profit
and generate benefits not quantifiable in financial terms.[46] (Emphasis supplied)

Clearly, the test of economic viability does not apply to government entities vested with
corporate powers and performing essential public services. The State is obligated to render
essential public services regardless of the economic viability of providing such service. The
non-economic viability of rendering such essential public service does not excuse the State from
withholding such essential services from the public.
However, government-owned or controlled corporations with special charters, organized

essentially for economic or commercial objectives, must meet the test of economic viability.
These are the government-owned or controlled corporations that are usually organized under
their special charters as stock corporations, like the Land Bank of the Philippines and the
Development Bank of the Philippines. These are the government-owned or controlled
corporations, along with government-owned or controlled corporations organized under the
Corporation Code, that fall under the definition of "government-owned or controlled
corporations" in Section 2(10) of the Administrative Code.
The MIAA need not meet the test of economic viability because the legislature did not create
MIAA to compete in the market place. MIAA does not compete in the market place because
there is no competing international airport operated by the private sector. MIAA performs an
essential public service as the primary domestic and international airport of the Philippines. The
operation of an international airport requires the presence of personnel from the following
government agencies:
1. The Bureau of Immigration and Deportation, to document the arrival and departure of
passengers, screening out those without visas or travel documents, or those with hold
departure orders;

2. The Bureau of Customs, to collect import duties or enforce the ban on prohibited
importations;

3. The quarantine office of the Department of Health, to enforce health measures against the
spread of infectious diseases into the country;

4. The Department of Agriculture, to enforce measures against the spread of plant and
animal diseases into the country;

5. The Aviation Security Command of the Philippine National Police, to prevent the entry of
terrorists and the escape of criminals, as well as to secure the airport premises from
terrorist attack or seizure;

6. The Air Traffic Office of the Department of Transportation and Communications, to

authorize aircraft to enter or leave Philippine airspace, as well as to land on, or take off
from, the airport; and

7. The MIAA, to provide the proper premises - such as runway and buildings - for the
government personnel, passengers, and airlines, and to manage the airport operations.

All these agencies of government perform government functions essential to the operation of an
international airport.

MIAA performs an essential public service that every modern State must provide its citizens.
MIAA derives its revenues principally from the mandatory fees and charges MIAA imposes on
passengers and airlines. The terminal fees that MIAA charges every passenger are regulatory or
administrative fees[47] and not income from commercial transactions.
MIAA falls under the definition of a government instrumentality under Section 2(10) of the
Introductory Provisions of the Administrative Code, which provides:

(10) Instrumentality refers to any agency of the National Government, not integrated
and enjoying operational autonomy, usually through a charter. x x x (Emphasis
supplied)

The fact alone that MIAA is endowed with corporate powers does not make MIAA a
government-owned or controlled corporation. Without a change in its capital structure, MIAA
remains a government instrumentality under Section 2(10) of the Introductory Provisions of the
Administrative Code. More importantly, as long as MIAA renders essential public services, it
need not comply with the test of economic viability. Thus, MIAA is outside the scope of the
phrase "government-owned or controlled corporations" under Section 16, Article XII of the
1987 Constitution.

The minority belittles the use in the Local Government Code of the phrase "government-owned
or controlled corporation" as merely "clarificatory or illustrative." This is fatal. The 1987
Constitution prescribes explicit conditions for the creation of "government-owned or controlled
corporations." The Administrative Code defines what constitutes a "government-owned or
controlled corporation." To belittle this phrase as "clarificatory or illustrative" is grave error.

To summarize, MIAA is not a government-owned or controlled corporation under Section 2(13)

of the Introductory Provisions of the Administrative Code because it is not organized as a stock
or non-stock corporation. Neither is MIAA a government-owned or controlled corporation
under Section 16, Article XII of the 1987 Constitution because MIAA is not required to meet
the test of economic viability. MIAA is a government instrumentality vested with corporate
powers and performing essential public services pursuant to Section 2(10) of the Introductory
Provisions of the Administrative Code. As a government instrumentality, MIAA is not subject
to any kind of tax by local governments under Section 133(o) of the Local Government Code.
The exception to the exemption in Section 234(a) does not apply to MIAA because MIAA is not
a taxable entity under the Local Government Code. Such exception applies only if the beneficial
use of real property owned by the Republic is given to a taxable entity.

Finally, the Airport Lands and Buildings of MIAA are properties devoted to public use and thus
are properties of public dominion. Properties of public dominion are owned by the State or
the Republic. Article 420 of the Civil Code provides:

Art. 420. The following things are property of public dominion:

(1) Those intended for public use, such as roads, canals, rivers, torrents, ports and
bridges constructed by the State, banks, shores, roadsteads, and others of similar
character;
(2) Those which belong to the State, without being for public use, and are intended
for some public service or for the development of the national wealth. (Emphasis
supplied)
The term "ports x x x constructed by the State" includes airports and seaports. The Airport
Lands and Buildings of MIAA are intended for public use, and at the very least intended for
public service. Whether intended for public use or public service, the Airport Lands and
Buildings are properties of public dominion. As properties of public dominion, the Airport
Lands and Buildings are owned by the Republic and thus exempt from real estate tax under
Section 234(a) of the Local Government Code.

4. Conclusion

Under Section 2(10) and (13) of the Introductory Provisions of the Administrative Code, which
governs the legal relation and status of government units, agencies and offices within the entire
government machinery, MIAA is a government instrumentality and not a government-owned
or controlled corporation. Under Section 133(o) of the Local Government Code, MIAA as a
government instrumentality is not a taxable person because it is not subject to "[t]axes, fees or
charges of any kind" by local governments. The only exception is when MIAA leases its real
property to a "taxable person" as provided in Section 234(a) of the Local Government Code, in
which case the specific real property leased becomes subject to real estate tax. Thus, only
portions of the Airport Lands and Buildings leased to taxable persons like private parties are
subject to real estate tax by the City of Parañaque.

Under Article 420 of the Civil Code, the Airport Lands and Buildings of MIAA, being devoted
to public use, are properties of public dominion and thus owned by the State or the Republic of
the Philippines. Article 420 specifically mentions "ports x x x constructed by the State," which
includes public airports and seaports, as properties of public dominion and owned by the
Republic. As properties of public dominion owned by the Republic, there is no doubt
whatsoever that the Airport Lands and Buildings are expressly exempt from real estate tax
under Section 234(a) of the Local Government Code. This Court has also repeatedly ruled that
properties of public dominion are not subject to execution or foreclosure sale.

WHEREFORE, we GRANT the petition. We SET ASIDE the assailed Resolutions of the
Court of Appeals of 5 October 2001 and 27 September 2002 in CA-G.R. SP No. 66878. We
DECLARE the Airport Lands and Buildings of the Manila International Airport Authority
EXEMPT from the real estate tax imposed by the City of Parañaque. We declare VOID all the
real estate tax assessments, including the final notices of real estate tax delinquencies, issued by
the City of Parañaque on the Airport Lands and Buildings of the Manila International Airport
Authority, except for the portions that the Manila International Airport Authority has leased to
private parties. We also declare VOID the assailed auction sale, and all its effects, of the Airport
Lands and Buildings of the Manila International Airport Authority.

No costs.

SO ORDERED.
Panganiban, C.J., Puno, Quisumbing, Ynares-Santiago, Sandoval-Gutierrez, Corona, Carpio-
Morales, Chico-Nazario, Garcia, and Velasco, Jr. JJ., concur.
Austria-Martinez, Callejo, Sr., JJ., separate opinion.
Azcuna, J., on leave.
Tinga, J., dissenting opinion.
[1] Dated 16 September 1983.

[2] Dated 26 July 1987.

[3] Section 3, MIAA Charter.



[6] Rollo, pp. 22-23.

[7] Under Rule 45 of the 1997 Rules of Civil Procedure.

[8] 330 Phil. 392 (1996).

[9] MIAA Charter as amended by Executive Order No. 298. See note 2.

[10] Batas Pambansa Blg. 68.

[11] Section 11 of the MIAA Charter provides:

Contribution to the General Fund for the Maintenance and Operation of other Airports. -
Within thirty (30) days after the close of each quarter, twenty percentum (20%) of the gross
operating income, excluding payments for utilities of tenants and concessionaires and terminal
fee collections, shall be remitted to the General Fund in the National Treasury to be used for the
maintenance and operation of other international and domestic airports in the country.
Adjustments in the amount paid by the Authority to the National Treasury under this Section
shall be made at the end of each year based on the audited financial statements of the Authority.

[12] Section 5(j), MIAA Charter.


[14] Section 5(k), MIAA Charter.

[15] Section 5(o), MIAA Charter.
[16] Third Whereas Clause, MIAA Charter.
[17] Id.
[18] Constitution, Art. X, Sec. 5.
[19]274 Phil. 1060, 1100 (1991) quoting C. Dallas Sands, 3 Statutes and Statutory Construction
207.
[20] 274 Phil. 323, 339-340 (1991).
[21] Constitution, Art. VI, Sec. 28(1).
[22] First Whereas Clause, MIAA Charter.
[23] 30 Phil. 602, 606-607 (1915).
[24] 102 Phil. 866, 869-870 (1958).
[25] PNB v. Puruganan, 130 Phil. 498 (1968). See also Martinez v. CA, 155 Phil. 591 (1974).
[26] MIAA Charter, Sec.16.
[27] Chavez v. Public Estates Authority, 433 Phil. 506 (2002).
[29] G.R. No. 144104, 29 June 2004, 433 SCRA 119, 138.
[30] Republic Act No. 7653, 14 June 1993, Sec. 5.
[31] Executive Order No. 1061, 5 November 1985, Sec. 3(p).
[32] Republic Act No. 4850, 18 July 1966, Sec. 5.
[33] Presidential Decree No. 977, 11 August 1976, Section 4(j).
[34] Republic Act No. 7227, 13 March 1992, Sec. 3.

[35] Presidential Decree No. 857, 23 December 1975, Sec. 6(b)(xvi).
[36] Republic Act No. 4663, 18 June 1966, Sec. 7(m).
[39] Republic Act No. 4156, 20 June 1964. Section 4(b).
[40] Republic Act No. 3844, 8 August 1963, as amended by Republic Act No. 7907, 23 February
1995.
[41] Executive Order No. 81, 3 December 1986.
[42] Republic Act No. 8175, 29 December 1995.
[43]Presidential Decree No. 252, 21 July 1973, as amended by Presidential Decree No. 1071, 25
January 1977 and Executive Order No. 1067, 25 November 1985.
[44] Executive Order No. 80, 3 December 1986.
[45] III Records, Constitutional Commission 63 (22 August 1986).
[46] 2003 ed., 1181.
[47]Manila International Airport Authority v. Airspan Corporation, G.R. No. 157581, 1

December 2004, 445 SCRA 471.
DISSENTING OPINION

TINGA, J. :
The legally correct resolution of this petition would have had the added benefit of an utterly fair
and equitable result - a recognition of the constitutional and statutory power of the City of
Parañaque to impose real property taxes on the Manila International Airport Authority (MIAA),
but at the same time, upholding a statutory limitation that prevents the City of Parañaque from
seizing and conducting an execution sale over the real properties of MIAA. In the end, all that
the City of Parañaque would hold over the MIAA is a limited lien, unenforceable as it is
through the sale or disposition of MIAA properties. Not only is this the legal effect of all the
relevant constitutional and statutory provisions applied to this case, it also leaves the room for
negotiation for a mutually acceptable resolution between the City of Parañaque and MIAA.
Instead, with blind but measured rage, the majority today veers wildly off-course, shattering
statutes and judicial precedents left and right in order to protect the precious Ming vase that is
the Manila International Airport Authority (MIAA). While the MIAA is left unscathed, it is
surrounded by the wreckage that once was the constitutional policy, duly enacted into law, that
was local autonomy. Make no mistake, the majority has virtually declared war on the seventy
nine (79) provinces, one hundred seventeen (117) cities, and one thousand five hundred (1,500)
municipalities of the Philippines.[1]
The icing on this inedible cake is the strained and purposely vague rationale used to justify the
majority opinion. Decisions of the Supreme Court are expected to provide clarity to the parties
and to students of jurisprudence, as to what the law of the case is, especially when the doctrines
of long standing are modified or clarified. With all due respect, the decision in this case is
plainly so, so wrong on many levels. More egregious, in the majority's resolve to spare the
Manila International Airport Authority (MIAA) from liability for real estate taxes, no clear-cut
rule emerges on the important question of the power of local government units (LGUs) to tax
government corporations, instrumentalities or agencies.
The majority would overturn sub silencio, among others, at least one dozen precedents
enumerated below:
1) Mactan-Cebu International Airport Authority v. Hon. Marcos,[2] the leading case

penned in 1997 by recently retired Chief Justice Davide, which held that the express
withdrawal by the Local Government Code of previously granted exemptions from
realty taxes applied to instrumentalities and government-owned or controlled
corporations (GOCCs) such as the Mactan-Cebu International Airport Authority
(MCIAA). The majority invokes the ruling in Basco v. Pagcor,[3] a precedent
discredited in Mactan, and a vanguard of a doctrine so noxious to the concept of
local government rule that the Local Government Code was drafted precisely to
counter such philosophy. The efficacy of several rulings that expressly rely on
Mactan, such as PHILRECA v. DILG Secretary,[4] City Government of San Pablo v.
Hon. Reyes[5] is now put in question.

2) The rulings in National Power Corporation v. City of Cabanatuan,[6] wherein the

Court, through Justice Puno, declared that the National Power Corporation, a GOCC,
is liable for franchise taxes under the Local Government Code, and succeeding cases
that have relied on it such as Batangas Power Corp. v. Batangas City[7] The
majority now states that deems instrumentalities as defined under the Administrative
Code of 1987 as purportedly beyond the reach of any form of taxation by LGUs,
stating "[l]ocal governments are devoid of power to tax the national government, its
agencies and instrumentalities."[8] Unfortunately, using the definition employed by
the majority, as provided by Section 2(d) of the Administrative Code, GOCCs are
also considered as instrumentalities, thus leading to the astounding conclusion that
GOCCs may not be taxed by LGUs under the Local Government Code.

3) Lung Center of the Philippines v. Quezon City,[9] wherein a unanimous en banc

Court held that the Lung Center of the Philippines may be liable for real property
taxes. Using the majority's reasoning, the Lung Center would be properly classified
as an instrumentality which the majority now holds as exempt from all forms of
local taxation.[10]
4) City of Davao v. RTC,[11] where the Court held that the Government Service
Insurance System (GSIS) was liable for real property taxes for the years 1992 to
1994, its previous exemption having been withdrawn by the enactment of the Local
Government Code.[12] This decision, which expressly relied on Mactan, would be
directly though silently overruled by the majority.
5) The common essence of the Court's rulings in the two Philippine Ports Authority
v. City of Iloilo,[13] cases penned by Justices Callejo and Azcuna respectively, which
relied in part on Mactan in holding the Philippine Ports Authority (PPA) liable for
realty taxes, notwithstanding the fact that it is a GOCC. Based on the reasoning of
the majority, the PPA cannot be considered a GOCC. The reliance of these cases on
Mactan, and its rationale for holding governmental entities like the PPA liable for
local government taxation is mooted by the majority.
6) The 1963 precedent of Social Security System Employees Association v. Soriano,

[14] which declared the Social Security Commission (SSC) as a GOCC performing
proprietary functions. Based on the rationale employed by the majority, the Social
Security System is not a GOCC. Or perhaps more accurately, "no longer" a GOCC.
7) The decision penned by Justice (now Chief Justice) Panganiban, Light Rail
Transit Authority v. Central Board of Assessment.[15] The characterization therein of
the Light Rail Transit Authority (LRTA) as a "service-oriented commercial
endeavor" whose patrimonial property is subject to local taxation is now rendered
inconsequential, owing to the majority's thinking that an entity such as the LRTA is
itself exempt from local government taxation[16], irrespective of the functions it
performs. Moreover, based on the majority's criteria, LRTA is not a GOCC.
8) The cases of Teodoro v. National Airports Corporation[17] and Civil Aeronautics

Administration v. Court of Appeals.[18] wherein the Court held that the predecessor
agency of the MIAA, which was similarly engaged in the operation, administration
and management of the Manila International Agency, was engaged in the exercise of
proprietary, as opposed to sovereign functions. The majority would hold otherwise
that the property maintained by MIAA is actually patrimonial, thus implying that
MIAA is actually engaged in sovereign functions.
9) My own majority in Phividec Industrial Authority v. Capitol Steel,[19] wherein the

Court held that the Phividec Industrial Authority, a GOCC, was required to secure
the services of the Office of the Government Corporate Counsel for legal
representation.[20] Based on the reasoning of the majority, Phividec would not be a
GOCC, and the mandate of the Office of the Government Corporate Counsel extends
only to GOCCs.
10) Two decisions promulgated by the Court just last month (June 2006), National
Power Corporation v. Province of Isabela[21] and GSIS v. City Assessor of Iloilo
City.[22] In the former, the Court pronounced that "[a]lthough as a general rule,
LGUs cannot impose taxes, fees, or charges of any kind on the National
Government, its agencies and instrumentalities, this rule admits of an exception, i.e.,
when specific provisions of the LGC authorize the LGUs to impose taxes, fees or
charges on the aforementioned entities." Yet the majority now rules that the
exceptions in the LGC no longer hold, since "local governments are devoid of power
to tax the national government, its agencies and instrumentalities."[23] The ruling in
the latter case, which held the GSIS as liable for real property taxes, is now put in
jeopardy by the majority's ruling.
There are certainly many other precedents affected, perhaps all previous jurisprudence regarding
local government taxation vis-a-vis government entities, as well as any previous definitions of
GOCCs, and previous distinctions between the exercise of governmental and proprietary
functions (a distinction laid down by this Court as far back as 1916[24]). What is the reason
offered by the majority for overturning or modifying all these precedents and doctrines? None is
given, for the majority takes comfort instead in the pretense that these precedents never existed.
Only children should be permitted to subscribe to the theory that something bad will go away if
you pretend hard enough that it does not exist.

I.
Case Should Have
Been Decided
Following Mactan Precedent
The core issue in this case, whether the MIAA is liable to the City of Parañaque for real
property taxes under the Local Government Code, has already been decided by this Court in the
Mactan case, and should have been resolved by simply applying precedent.

Mactan Explained

A brief recall of the Mactan case is in order. The Mactan-Cebu International Airport Authority
(MCIAA) claimed that it was exempt from payment of real property taxes to the City of Cebu,
invoking the specific exemption granted in Section 14 of its charter, Republic Act No. 6958, and
its status as an instrumentality of the government performing governmental functions.[25]
Particularly, MCIAA invoked Section 133 of the Local Government Code, precisely the same
provision utilized by the majority as the basis for MIAA's exemption. Section 133 reads:

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

xxx

(o) Taxes, fees or charges of any kind on the National Government, its agencies
and instrumentalities and local government units. (emphasis and underscoring
supplied).
However, the Court in Mactan noted that Section 133 qualified the exemption of the National
Government, its agencies and instrumentalities from local taxation with the phrase "unless
otherwise provided herein." It then considered the other relevant provisions of the Local
Government Code, particularly the following:

SEC. 193. Withdrawal of Tax Exemption Privileges. - Unless otherwise provided in

this Code, tax exemption or incentives granted to, or enjoyed by all persons,
whether natural or juridical, including government-owned and controlled
corporations, except local water districts, cooperatives duly registered under R.A.
No. 6938, non-stock and non-profit hospitals and educational institutions, are hereby
withdrawn upon the effectivity of this Code.[26]
SECTION 232. Power to Levy Real Property Tax. - A province or city or a

municipality within the Metropolitan Manila area may levy an annual ad valorem tax
on real property such as land, building, machinery, and other improvements not
hereafter specifically exempted.[27]

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

consideration or otherwise, to a taxable person:

or convents appurtenant thereto,
(b) Charitable institutions, churches, parsonages
mosques, non-profit or religious cemeteries and all lands, buildings, and
improvements actually, directly, and exclusively used for religious charitable or
educational purposes;
(c) All machineries and
equipment that are actually, directly and exclusively used by
local water districts and government-owned and controlled corporations engaged in
the distribution of water and/or generation and transmission of electric power;
(d) All real property owned by duly registered cooperatives as provided for
under
R.A. No. 6938; and
(e) Machinery and
equipment used for pollution control and environmental
protection.

Except as provided herein, any exemption from payment of real property tax
previously granted to, or presently enjoyed by, all persons, whether natural or
juridical, including all government-owned or controlled corporations are hereby
withdrawn upon the effectivity of this Code.[28]
Clearly, Section 133 was not intended to be so absolute a prohibition on the power of LGUs to
tax the National Government, its agencies and instrumentalities, as evidenced by these cited
provisions which "otherwise provided." But what was the extent of the limitation under Section
133? This is how the Court, correctly to my mind, defined the parameters in Mactan:

The foregoing sections of the LGC speak of: (a) the limitations on the taxing powers
of local government units and the exceptions to such limitations; and (b) the rule on
tax exemptions and the exceptions thereto. The use of exceptions or provisos in
these sections, as shown by the following clauses:
(1) "unless otherwise provided herein" in the opening paragraph of Section 133;
(2) "Unless otherwise provided in this Code" in Section 193;
(3) "not hereafter specifically exempted" in Section 232; and
(4) "Except as provided herein" in the last paragraph of Section 234
initially hampers a ready understanding of the sections. Note, too, that the
aforementioned clause in Section 133 seems to be inaccurately worded. Instead of
the clause "unless otherwise provided herein," with the "herein" to mean, of course,
the section, it should have used the clause "unless otherwise provided in this Code."
The former results in absurdity since the section itself enumerates what are beyond
the taxing powers of local government units and, where exceptions were intended,
the exceptions are explicitly indicated in the next. For instance, in item (a) which
excepts income taxes "when levied on banks and other financial institutions"; item
(d) which excepts "wharfage on wharves constructed and maintained by the local
government unit concerned"; and item (1) which excepts taxes, fees and charges for
the registration and issuance of licenses or permits for the driving of "tricycles." It
may also be observed that within the body itself of the section, there are exceptions
which can be found only in other parts of the LGC, but the section interchangeably
uses therein the clause, "except as otherwise provided herein" as in items (c) and (i),
or the clause "except as provided in this Code" in item (j). These clauses would be
obviously unnecessary or mere surplusages if the opening clause of the section were
"Unless otherwise provided in this Code" instead of "Unless otherwise provided
herein." In any event, even if the latter is used, since under Section 232 local
government units have the power to levy real property tax, except those exempted
therefrom under Section 234, then Section 232 must be deemed to qualify Section
133.
Thus, reading together Sections 133, 232, and 234 of the LGC, we conclude that
as a general rule, as laid down in Section 133, the taxing powers of local
government units cannot extend to the levy of, inter alia, "taxes, fees and
charges of any kind on the National Government, its agencies and
instrumentalities, and local government units"; however, pursuant to Section
232, provinces, cities, and municipalities in the Metropolitan Manila Area may
impose the real property tax except on, inter alia, "real property owned by the
Republic of the Philippines or any of its political subdivisions except when the
beneficial use thereof has been granted, for consideration or otherwise, to a
taxable person," as provided in item (a) of the first paragraph of Section 234.
As to tax exemptions or incentives granted to or presently enjoyed by natural or

judicial persons, including government-owned and controlled corporations,
Section 193 of the LGC prescribes the general rule, viz., they are withdrawn
upon the effectivity of the LGC, except those granted to local water districts,
cooperatives duly registered under R.A. No. 6938, non-stock and non-profit
hospitals and educational institutions, and unless otherwise provided in the
LGC. The latter proviso could refer to Section 234 which enumerates the
properties exempt from real property tax. But the last paragraph of Section 234
further qualifies the retention of the exemption insofar as real property taxes
are concerned by limiting the retention only to those enumerated therein; all
others not included in the enumeration lost the privilege upon the effectivity of
the LGC. Moreover, even as to real property owned by the Republic of the
Philippines or any of its political subdivisions covered by item (a) of the first
paragraph of Section 234, the exemption is withdrawn if the beneficial use of
such property has been granted to a taxable person for consideration or
otherwise.
Since the last paragraph of Section 234 unequivocally withdrew, upon the
effectivity of the LGC, exemptions from payment of real property taxes granted
to natural or juridical persons, including government-owned or controlled
corporations, except as provided in the said section, and the petitioner is,
undoubtedly, a government-owned corporation, it necessarily follows that its
exemption from such tax granted it in Section 14 of its Charter, R.A. No. 6958,
has been withdrawn. Any claim to the contrary can only be justified if the
petitioner can seek refuge under any of the exceptions provided in Section 234,
but not under Section 133, as it now asserts, since, as shown above, the said
section is qualified by Sections 232 and 234.[29]
The Court in Mactan acknowledged that under Section 133, instrumentalities were generally
exempt from all forms of local government taxation, unless otherwise provided in the Code. On
the other hand, Section 232 "otherwise provided" insofar as it allowed LGUs to levy an ad
valorem real property tax, irrespective of who owned the property. At the same time, the
imposition of real property taxes under Section 232 is in turn qualified by the phrase "not
hereinafter specifically exempted." The exemptions from real property taxes are enumerated in
Section 234, which specifically states that only real properties owned "by the Republic of the
Philippines or any of its political subdivisions" are exempted from the payment of the tax.
Clearly, instrumentalities or GOCCs do not fall within the exceptions under Section 234.[30]

Mactan Overturned the

Precedents Now Relied
Upon by the Majority
But the petitioners in Mactan also raised the Court's ruling in Basco v. PAGCOR,[31] decided
before the enactment of the Local Government Code. The Court in Basco declared the
PAGCOR as exempt from local taxes, justifying the exemption in this wise:

Local governments have no power to tax instrumentalities of the National

Government. PAGCOR is a government owned or controlled corporation with an
original charter, PD 1869. All of its shares of stocks are owned by the National
Government. In addition to its corporate powers (Sec. 3, Title II, PD 1869) it also
exercises regulatory powers xxx

PAGCOR has a dual role, to operate and to regulate gambling casinos. The latter role
is governmental, which places it in the category of an agency or instrumentality of
the Government. Being an instrumentality of the Government, PAGCOR should be
and actually is exempt from local taxes. Otherwise, its operation might be burdened,
impeded or subjected to control by a mere Local government.
"The states have no power by taxation or otherwise, to retard impede, burden or in

any manner control the operation of constitutional laws enacted by Congress to carry
into execution the powers vested in the federal government." (McCulloch v.
Marland, 4 Wheat 316, 4 L Ed. 579)
This doctrine emanates from the "supremacy" of the National Government over local
governments.
"Justice Holmes, speaking for the Supreme Court, made reference to the entire
absence of power on the part of the States to touch, in that way (taxation) at least, the
instrumentalities of the United States (Johnson v. Maryland, 254 US 51) and it can
be agreed that no state or political subdivision can regulate a federal instrumentality
in such a way as to prevent it from consummating its federal responsibilities, or even
to seriously burden it in the accomplishment of them." (Antieau, Modern
Constitutional Law, Vol. 2, p. 140, emphasis supplied)
Otherwise, mere creatures of the State can defeat National policies thru
extermination of what local authorities may perceive to be undesirable activates or
enterprise using the power to tax as "a tool for regulation" (U.S. v. Sanchez, 340 US
42).
The power to tax which was called by Justice Marshall as the "power to destroy"
(McCulloch v. Maryland, supra) cannot be allowed to defeat an instrumentality or
creation of the very entity which has the inherent power to wield it.[32]
Basco is as strident a reiteration of the old guard view that frowned on the principle of local
autonomy, especially as it interfered with the prerogatives and privileges of the national
government. Also consider the following citation from Maceda v. Macaraig,[33] decided the
same year as Basco. Discussing the rule of construction of tax exemptions on government
instrumentalities, the sentiments are of a similar vein.

Moreover, it is a recognized principle that the rule on strict interpretation does not
apply in the case of exemptions in favor of a government political subdivision or
instrumentality.

The basis for applying the rule of the strict construction to statutory
provisions granting tax exemptions of deductions, even more obvious
than with reference to the affirmative or levying provisions of tax
statutes, is to minimize differential treatment and foster impartiality,
fairness, and equality of treatment among tax payers.

The reason for the rule does not apply in the case of exemptions running
to the benefit of the government itself or its agencies. In such case the
practical effect of an exemption is merely to reduce the amount of money
that has to be handled by government in the course of its operations. For
these reasons, provisions granting exemptions to government agencies
may be construed liberally, in favor of non tax-liability of such agencies.
In the case of property owned by the state or a city or other public corporations, the
express exemption should not be construed with the same degree of strictness that
applies to exemptions contrary to the policy of the state, since as to such property
"exemption is the rule and taxation the exception."[34]

Strikingly, the majority cites these two very cases and the stodgy rationale provided therein.
This evinces the perspective from which the majority is coming from. It is admittedly a
viewpoint once shared by this Court, and en vogue prior to the enactment of the Local
Government Code of 1991.

However, the Local Government Code of 1991 ushered in a new ethos on how the art of
governance should be practiced in the Philippines, conceding greater powers once held in the
private reserve of the national government to LGUs. The majority might have private qualms
about the wisdom of the policy of local autonomy, but the members of the Court are not
expected to substitute their personal biases for the legislative will, especially when the 1987
Constitution itself promotes the principle of local autonomy.

Article II. Declaration of Principles and State Policies

xxx

Sec. 25. The State shall ensure the autonomy of local governments.

Article X. Local Government

xxx
Sec. 2. The territorial and political subdivisions shall enjoy local autonomy.

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

xxx

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

xxx

The Court in Mactan recognized that a new day had dawned with the enactment of the 1987
Constitution and the Local Government Code of 1991. Thus, it expressly rejected the contention
of the MCIAA that Basco was applicable to them. In doing so, the language of the Court was
dramatic, if only to emphasize how monumental the shift in philosophy was with the enactment
of the Local Government Code:
Accordingly, the position taken by the [MCIAA] is untenable. Reliance on Basco v.

Philippine Amusement and Gaming Corporation is unavailing since it was
decided before the effectivity of the [Local Government Code]. Besides, nothing
can prevent Congress from decreeing that even instrumentalities or agencies of
the Government performing governmental functions may be subject to tax.
Where it is done precisely to fulfill a constitutional mandate and national policy,
no one can doubt its wisdom.[35] (emphasis supplied)

The Court Has Repeatedly

Reaffirmed Mactan Over the
Precedents Now Relied Upon
By the Majority
Since then and until today, the Court has been emphatic in declaring the Basco doctrine as dead.
The notion that instrumentalities may be subjected to local taxation by LGUs was again
affirmed in National Power Corporation v. City of Cabanatuan,[36] which was penned by
Justice Puno. NPC or Napocor, invoking its continued exemption from payment of franchise
taxes to the City of Cabanatuan, alleged that it was an instrumentality of the National
Government which could not be taxed by a city government. To that end, Basco was cited by
NPC. The Court had this to say about Basco.

xxx[T]he doctrine in Basco vs. Philippine Amusement and Gaming Corporation

relied upon by the petitioner to support its claim no longer applies. To
emphasize, the Basco case was decided prior to the effectivity of the LGC, when
no law empowering the local government units to tax instrumentalities of the
National Government was in effect. However, as this Court ruled in the case of
Mactan Cebu International Airport Authority (MCIAA) vs. Marcos, nothing
prevents Congress from decreeing that even instrumentalities or agencies of the
government performing governmental functions may be subject to tax. In
enacting the LGC, Congress exercised its prerogative to tax instrumentalities
and agencies of government as it sees fit. Thus, after reviewing the specific
provisions of the LGC, this Court held that MCIAA, although an instrumentality of
the national government, was subject to real property tax.[37]

In the 2003 case of Philippine Ports Authority v. City of Iloilo,[38] the Court, in the able
ponencia of Justice Azcuna, affirmed the levy of realty taxes on the PPA. Although the taxes
were assessed under the old Real Property Tax Code and not the Local Government Code, the
Court again cited Mactan to refute PPA's invocation of Basco as the basis of its exemption.

[Basco] did not absolutely prohibit local governments from taxing government
instrumentalities. In fact we stated therein:
The power of local government to "impose taxes and fees" is always subject to
"limitations" which Congress may provide by law. Since P.D. 1869 remains an
"operative" law until "amended, repealed or revoked". . . its "exemption clause"
remains an exemption to the exercise of the power of local governments to impose
taxes and fees.
Furthermore, in the more recent case of Mactan Cebu International Airport

Authority v. Marcos, where the Basco case was similarly invoked for tax exemption,
we stated: "[N]othing can prevent Congress from decreeing that even
instrumentalities or agencies of the Government performing governmental functions
may be subject to tax. Where it is done precisely to fulfill a constitutional mandate
and national policy, no one can doubt its wisdom." The fact that tax exemptions of
government-owned or controlled corporations have been expressly withdrawn by the
present Local Government Code clearly attests against petitioner's claim of absolute
exemption of government instrumentalities from local taxation.[39]
Just last month, the Court in National Power Corporation v. Province of Isabela[40] again
rejected Basco in emphatic terms. Held the Court, through Justice Callejo, Sr.:

Thus, the doctrine laid down in the Basco case is no longer true. In the Cabanatuan
case, the Court noted primarily that the Basco case was decided prior to the
effectivity of the LGC, when no law empowering the local government units to tax
instrumentalities of the National Government was in effect. It further explained that
in enacting the LGC, Congress empowered the LGUs to impose certain taxes even
on instrumentalities of the National Government.[41]

The taxability of the PPA recently came to fore in Philippine Ports Authority v. City of Iloilo[42]
case, a decision also penned by Justice Callejo, Sr., wherein the Court affirmed the sale of PPA's
properties at public auction for failure to pay realty taxes. The Court again reiterated that "it was
the intention of Congress to withdraw the tax exemptions granted to or presently enjoyed by all
persons, including government-owned or controlled corporations, upon the effectivity" of the
Code.[43] The Court in the second Public Ports Authority case likewise cited Mactan as
providing the "raison d'etre for the withdrawal of the exemption," namely, "the State policy to
ensure autonomy to local governments and the objective of the [Local Government Code] that
they enjoy genuine and meaningful local autonomy to enable them to attain their fullest
development as self-reliant communities. . . . "[44]

Last year, the Court, in City of Davao v. RTC,[45] affirmed that the legislated exemption from
real property taxes of the Government Service Insurance System (GSIS) was removed under the
Local Government Code. Again, Mactan was relied upon as the governing precedent. The
removal of the tax exemption stood even though the then GSIS law[46] prohibited the removal
of GSIS" tax exemptions unless the exemption was specifically repealed, "and a provision is
enacted to substitute the declared policy of exemption from any and all taxes as an essential
factor for the solvency of the fund."[47] The Court, citing established doctrines in statutory
construction and Duarte v. Dade[48] ruled that such proscription on future legislation was itself
prohibited, as "the legislature cannot bind a future legislature to a particular mode of repeal."[49]
And most recently, just less than one month ago, the Court, through Justice Corona in
Government Service Insurance System v. City Assessor of Iloilo[50] again affirmed that the
Local Government Code removed the previous exemption from real property taxes of the GSIS.
Again Mactan was cited as having "expressly withdrawn the [tax] exemption of the [GOCC].
[51]
Clearly then, Mactan is not a stray or unique precedent, but the basis of a jurisprudential rule
employed by the Court since its adoption, the doctrine therein consistent with the Local
Government Code. Corollarily, Basco, the polar opposite of Mactan has been emphatically
rejected and declared inconsistent with the Local Government Code.
II.
Majority, in Effectively Overturning Mactan,
Refuses to Say Why Mactan Is Wrong
The majority cites Basco in support. It does not cite Mactan, other than an incidental reference
that it is relied upon by the respondents.[52] However, the ineluctable conclusion is that the
majority rejects the rationale and ruling in Mactan. The majority provides for a wildly different
interpretation of Section 133, 193 and 234 of the Local Government Code than that employed
by the Court in Mactan. Moreover, the parties in Mactan and in this case are similarly situated,
as can be obviously deducted from the fact that both petitioners are airport authorities operating
under similarly worded charters. And the fact that the majority cites doctrines contrapuntal to
the Local Government Code as in Basco and Maceda evinces an intent to go against the Court's
jurisprudential trend adopting the philosophy of expanded local government rule under the
Local Government Code.
Before I dwell upon the numerous flaws of the majority, a brief comment is necessitated on the
majority's studied murkiness vis-á-vis the Mactan precedent. The majority is obviously
inconsistent with Mactan and there is no way these two rulings can stand together. Following
basic principles in statutory construction, Mactan will be deemed as giving way to this new
ruling.
However, the majority does not bother to explain why Mactan is wrong. The interpretation in
Mactan of the relevant provisions of the Local Government Code is elegant and rational, yet the
majority refuses to explain why this reasoning of the Court in Mactan is erroneous. In fact, the
majority does not even engage Mactan in any meaningful way. If the majority believes that
Mactan may still stand despite this ruling, it remains silent as to the viable distinctions between
these two cases.
The majority's silence on Mactan is baffling, considering how different this new ruling is with
the ostensible precedent. Perhaps the majority does not simply know how to dispense with the
ruling in Mactan. If Mactan truly deserves to be discarded as precedent, it deserves a more
honorable end than death by amnesia or ignonominous disregard. The majority could have
devoted its discussion in explaining why it thinks Mactan is wrong, instead of pretending that
Mactan never existed at all. Such an approach might not have won the votes of the minority, but
at least it would provide some degree of intellectual clarity for the parties, LGUs and the
national government, students of jurisprudence and practitioners. A more meaningful debate on
the matter would have been possible, enriching the study of law and the intellectual dynamic of
this Court.
There is no way the majority can be justified unless Mactan is overturned. The MCIAA and the
MIAA are similarly situated. They are both, as will be demonstrated, GOCCs, commonly
engaged in the business of operating an airport. They are the owners of airport properties they
respectively maintain and hold title over these properties in their name.[53] These entities are
both owned by the State, and denied by their respective charters the absolute right to dispose of
their properties without prior approval elsewhere.[54] Both of them are
not empowered to obtain loans or encumber their properties without prior approval the prior
approval of the President.[55]
III.
Instrumentalities, Agencies
And GOCCs Generally
Liable for Real Property Tax
I shall now proceed to demonstrate the errors in reasoning of the majority. A bulwark of my
position lies with Mactan, which will further demonstrate why the majority has found it
inconvenient to even grapple with the precedent that is Mactan in the first place.
Mactan held that the prohibition on taxing the national government, its agencies and
instrumentalities under Section 133 is qualified by Section 232 and Section 234, and
accordingly, the only relevant exemption now applicable to these bodies is as provided under
Section 234(o), or on "real property owned by the Republic of the Philippines or any of its
political subdivisions except when the beneficial use thereof has been granted, for consideration
or otherwise, to a taxable person."
It should be noted that the express withdrawal of previously granted exemptions by the Local
Government Code do not even make any distinction as to whether the exempt person is a
governmental entity or not. As Sections 193 and 234 both state, the withdrawal applies to "all
persons, including [GOCCs]", thus encompassing the two classes of persons recognized under
our laws, natural persons[56] and juridical persons.[57]
The fact that the Local Government Code mandates the withdrawal of previously granted
exemptions evinces certain key points. If an entity was previously granted an express exemption
from real property taxes in the first place, the obvious conclusion would be that such entity
would ordinarily be liable for such taxes without the exemption. If such entities were already
deemed exempt due to some overarching principle of law, then it would be a redundancy or
surplusage to grant an exemption to an already exempt entity. This fact militates against the
claim that MIAA is preternaturally exempt from realty taxes, since it required the enactment of
an express exemption from such taxes in its charter.
Amazingly, the majority all but ignores the disquisition in Mactan and asserts that government
instrumentalities are not taxable persons unless they lease their properties to a taxable person.
The general rule laid down in Section 232 is given short shrift. In arriving at this conclusion,
several leaps in reasoning are committed.
Majority's Flawed Definition

of GOCCs.
The majority takes pains to assert that the MIAA is not a GOCC, but rather an
instrumentality. However, and quite grievously, the supposed foundation of this assertion
is an adulteration.
The majority gives the impression that a government instrumentality is a distinct concept from a
government corporation.[58] Most tellingly, the majority selectively cites a portion of Section
2(10) of the Administrative Code of 1987, as follows:
Instrumentality refers to any agency of the National Government not integrated

and enjoying operational autonomy, usually through a charter. xxx[59] (emphasis
omitted)

However, Section 2(10) of the Administrative Code, when read in full, makes an important
clarification which the majority does not show. The portions omitted by the majority are
highlighted below:

(10) Instrumentality refers to any agency of the National Government not integrated
and enjoying operational autonomy, usually through a charter. This term includes
regulatory agencies, chartered institutions and government-owned or controlled
corporations.[60]

Since Section 2(10) makes reference to "agency of the National Government," Section 2(4) is
also worth citing in full:

(4) Agency of the Government refers to any of the various units of the Government,
including a department, bureau, office, instrumentality, or government-owned or
controlled corporation, or a local government or a distinct unit therein. (emphasis
supplied)[61]

Clearly then, based on the Administrative Code, a GOCC may be an instrumentality or an

agency of the National Government. Thus, there actually is no point in the majority's assertion
that MIAA is not a GOCC, since based on the majority's premise of Section 133 as the key
provision, the material question is whether MIAA is either an instrumentality, an agency, or the
National Government itself. The very provisions of the Administrative Code provide that a
GOCC can be either an instrumentality or an agency, so why even bother to extensively discuss
whether or not MIAA is a GOCC?

Indeed as far back as the 1927 case of Government of the Philippine Islands v. Springer,[62] the
Supreme Court already noted that a corporation of which the government is the majority
stockholder "remains an agency or instrumentality of government."[63]
Ordinarily, the inconsequential verbiage stewing in judicial opinions deserve little rebuttal.
However, the entire discussion of the majority on the definition of a GOCC, obiter as it may
ultimately be, deserves emphatic refutation. The views of the majority on this matter are very
dangerous, and would lead to absurdities, perhaps unforeseen by the majority. For in fact,
the majority effectively declassifies many entities created and recognized as GOCCs and
would give primacy to the Administrative Code of 1987 rather than their respective
charters as to the definition of these entities.
Majority Ignores the Power

Of Congress to Legislate and
Define Chartered Corporations
First, the majority declares that, citing Section 2(13) of the Administrative Code, a GOCC must
be "organized as a stock or non-stock corporation," as defined under the Corporation Code. To
insist on this as an absolute rule fails on bare theory. Congress has the undeniable power to
create a corporation by legislative charter, and has been doing so throughout legislative history.
There is no constitutional prohibition on Congress as to what structure these chartered
corporations should take on. Clearly, Congress has the prerogative to create a corporation in
whatever form it chooses, and it is not bound by any traditional format. Even if there is a
definition of what a corporation is under the Corporation Code or the Administrative Code,
these laws are by no means sacrosanct. It should be remembered that these two statutes fall
within the same level of hierarchy as a congressional charter, since they all are legislative
enactments. Certainly, Congress can choose to disregard either the Corporation Code or the
Administrative Code in defining the corporate structure of a GOCC, utilizing the same extent of
legislative powers similarly vesting it the putative ability to amend or abolish the Corporation
Code or the Administrative Code.
These principles are actually recognized by both the Administrative Code and the Corporation
Code. The definition of GOCCs, agencies and instrumentalities under the Administrative Code
are laid down in the section entitled "General Terms Defined," which qualifies:
Sec. 2. General Terms Defined. - Unless the specific words of the text, or the
context as a whole, or a particular statute, shall require a different meaning:
(emphasis supplied)

xxx

Similar in vein is Section 6 of the Corporation Code which provides:

SEC. 4. Corporations created by special laws or charters.- Corporations created by

special laws or charters shall be governed primarily by the provisions of the special
law or charter creating them or applicable to them, supplemented by the provisions
of this Code, insofar as they are applicable. (emphasis supplied)

Thus, the clear doctrine emerges - the law that governs the definition of a corporation or
entity created by Congress is its legislative charter. If the legislative enactment defines an
entity as a corporation, then it is a corporation, no matter if the Corporation Code or the
Administrative Code seemingly provides otherwise. In case of conflict between the
legislative charter of a government corporation, on one hand, and the Corporate Code and
the Administrative Code, on the other, the former always prevails.
Majority, in Ignoring the

Legislative Charters, Effectively
Classifies Duly Established GOCCs,
With Disastrous and Far Reaching
Legal Consequences
Second, the majority claims that MIAA does not qualify either as a stock or non-stock
corporation, as defined under the Corporation Code. It explains that the MIAA is not a stock
corporation because it does not have any capital stock divided into shares. Neither can it be
considered as a non-stock corporation because it has no members, and under Section 87, a non-
stock corporation is one where no part of its income is distributable as dividends to its members,
trustees or officers.
This formulation of course ignores Section 4 of the Corporation Code, which again provides
that corporations created by special laws or charters shall be governed primarily by the
provisions of the special law or charter, and not the Corporation Code.
That the MIAA cannot be considered a stock corporation if only because it does not have a
stock structure is hardly a plausible proposition. Indeed, there is no point in requiring a capital
stock structure for GOCCs whose full ownership is limited by its charter to the State or
Republic. Such GOCCs are not empowered to declare dividends or alienate their capital shares.
Admittedly, there are GOCCs established in such a manner, such as the National Power
Corporation (NPC), which is provided with authorized capital stock wholly subscribed and paid
for by the Government of the Philippines, divided into shares but at the same time, is prohibited
from transferring, negotiating, pledging, mortgaging or otherwise giving these shares as security
for payment of any obligation.[64] However, based on the Corporation Code definition relied
upon by the majority, even the NPC cannot be considered as a stock corporation. Under Section
3 of the Corporation Code, stock corporations are defined as being "authorized to distribute to
the holders of its shares dividends or allotments of the surplus profits on the basis of the shares
held."[65] On the other hand, Section 13 of the NPC's charter states that "the Corporation shall
be non-profit and shall devote all its returns from its capital investment, as well as excess
revenues from its operation, for expansion."[66] Can the holder of the shares of NPC, the
National Government, receive its surplus profits on the basis of its shares held? It cannot,
according to the NPC charter, and hence, following Section 3 of the Corporation Code, the NPC
is not a stock corporation, if the majority is to be believed.
The majority likewise claims that corporations without members cannot be deemed non-stock
corporations. This would seemingly exclude entities such as the NPC, which like MIAA, has no
ostensible members. Moreover, non-stock corporations cannot distribute any part of its income
as dividends to its members, trustees or officers. The majority faults MIAA for remitting 20% of
its gross operating income to the national government. How about the Philippine Health
Insurance Corporation, created with the "status of a tax-exempt government corporation
attached to the Department of Health" under Rep. Act No. 7875.[67] It too cannot be considered
as a stock corporation because it has no capital stock structure. But using the criteria of the
majority, it is doubtful if it would pass muster as a non-stock corporation, since the PHIC or
Philhealth, as it is commonly known, is expressly empowered "to collect, deposit, invest,
administer and disburse" the National Health Insurance Fund.[68] Or how about the Social
Security System, which under its revised charter, Republic Act No. 8282, is denominated as a
"corporate body."[69] The SSS has no capital stock structure, but has capital comprised of
contributions by its members, which are eventually remitted back to its members. Does this
disqualify the SSS from classification as a GOCC, notwithstanding this Court's previous
pronouncement in Social Security System Employees Association v. Soriano?[70]
In fact, Republic Act No. 7656, enacted in 1993, requires that all GOCCs, whether stock or non-
stock,[71] declare and remit at least fifty percent (50%) of their annual net earnings as cash,
stock or property dividends to the National Government.[72] But according to the majority, non-
stock corporations are prohibited from declaring any part of its income as dividends. But if
Republic Act No. 7656 requires even non-stock corporations to declare dividends from income,
should it not follow that the prohibition against declaration of dividends by non-stock
corporations under the Corporation Code does not apply to government-owned or controlled
corporations? For if not, and the majority's illogic is pursued, Republic Act No. 7656, passed in
1993, would be fatally flawed, as it would contravene the Administrative Code of 1987 and the
Corporation Code.
In fact, the ruinous effects of the majority's hypothesis on the nature of GOCCs can be
illustrated by Republic Act No. 7656. Following the majority's definition of a GOCC and in
accordance with Republic Act No. 7656, here are but a few entities which are not obliged to
remit fifty (50%) of its annual net earnings to the National Government as they are excluded
from the scope of Republic Act No. 7656:
1) Philippine Ports Authority[73] " has no capital stock[74], no members, and obliged
to apply the balance of its income or revenue at the end of each year in a general
reserve.[75]

2) Bases Conversion Development Authority[76] - has no capital stock,[77] no

members.

3) Philippine Economic Zone Authority[78] - no capital stock,[79] no members.

4) Light Rail Transit Authority[80] - no capital stock,[81] no members.

5) Bangko Sentral ng Pilipinas[82] - no capital stock,[83] no members, required to

remit fifty percent (50%) of its net profits to the National Treasury.[84]

6) National Power Corporation[85] - has capital stock but is prohibited from

"distributing to the holders of its shares dividends or allotments of the surplus profits
on the basis of the shares held;"[86] no members.
7) Manila International Airport Authority - no capital stock[87], no members[88],

mandated to remit twenty percent (20%) of its annual gross operating income to the
National Treasury.[89]
Thus, for the majority, the MIAA, among many others, cannot be considered as within the
coverage of Republic Act No. 7656. Apparently, President Fidel V. Ramos disagreed. How else
then could Executive Order No. 483, signed in 1998 by President Ramos, be explained? The
issuance provides:

WHEREAS, Section 1 of Republic Act No. 7656 provides that:

"Section 1. Declaration of Policy. - It is hereby declared the policy of the

State that in order for the National Government to realize additional
revenues, government-owned and/or controlled corporations, without
impairing their viability and the purposes for which they have been
established, shall share a substantial amount of their net earnings to the
National Government."

WHEREAS, to support the viability and mandate of government-owned and/or

controlled corporations [GOCCs], the liquidity, retained earnings position and
medium-term plans and programs of these GOCCs were considered in the
determination of the reasonable dividend rates of such corporations on their 1997 net
earnings.

WHEREAS, pursuant to Section 5 of RA 7656, the Secretary of Finance

recommended the adjustment on the percentage of annual net earnings that
shall be declared by the Manila International Airport Authority [MIAA] and
Phividec Industrial Authority [PIA] in the interest of national economy and
general welfare.

NOW, THEREFORE, I, FIDEL V. RAMOS, President of the Philippines, by virtue

of the powers vested in me by law, do hereby order:

SECTION 1. The percentage of net earnings to be declared and remitted by the

MIAA and PIA as dividends to the National Government as provided for under
Section 3 of Republic Act No. 7656 is adjusted from at least fifty percent [50%]
to the rates specified hereunder:

1. Manila International Airport Authority - 35% [cash]

2. 2. Phividec Industrial Authority - 25% [cash]

SECTION 2. The adjusted dividend rates provided for under Section 1 are only
applicable on 1997 net earnings of the concerned government-owned and/or
controlled corporations.

Obviously, it was the opinion of President Ramos and the Secretary of Finance that MIAA is a
GOCC, for how else could it have come under the coverage of Republic Act No. 7656, a law
applicable only to GOCCs? But, the majority apparently disagrees, and resultantly holds that
MIAA is not obliged to remit even the reduced rate of thirty five percent (35%) of its net
earnings to the national government, since it cannot be covered by Republic Act No. 7656.
All this mischief because the majority would declare the Administrative Code of 1987 and the
Corporation Code as the sole sources of law defining what a government corporation is. As I
stated earlier, I find it illogical that chartered corporations are compelled to comply with the
templates of the Corporation Code, especially when the Corporation Code itself states that these
corporations are to be governed by their own charters. This is especially true considering that
the very provision cited by the majority, Section 87 of the Corporation Code, expressly says that
the definition provided therein is laid down "for the purposes of this [Corporation] Code." Read
in conjunction with Section 4 of the Corporation Code which mandates that corporations created
by charter be governed by the law creating them, it is clear that contrary to the majority, MIAA
is not disqualified from classification as a non-stock corporation by reason of Section 87, the
provision not being applicable to corporations created by special laws or charters. In fact, I see
no real impediment why the MIAA and similarly situated corporations such as the PHIC, the
SSS, the Philippine Deposit Insurance Commission, or maybe even the NPC could at the very
least, be deemed as no stock corporations (as differentiated from non-stock corporations).
The point, stripped to bare simplicity, is that entity created by legislative enactment is a
corporation if the legislature says so. After all, it is the legislature that dictates what a
corporation is in the first place. This is better illustrated by another set of entities created before
martial law. These include the Mindanao Development Authority,[90] the Northern Samar
Development Authority,[91] the Ilocos Sur Development Authority,[92] the Southeastern Samar
Development Authority[93] and the Mountain Province Development Authority.[94] An
examination of the first section of the statutes creating these entities reveal that they were
established "to foster accelerated and balanced growth" of their respective regions, and towards
such end, the charters commonly provide that "it is recognized that a government
corporation should be created for the purpose," and accordingly, these charters "hereby
created a body corporate."[95] However, these corporations do not have capital stock nor
members, and are obliged to return the unexpended balances of their appropriations and
earnings to a revolving fund in the National Treasury. The majority effectively declassifies these
entities as GOCCs, never mind the fact that their very charters declare them to be GOCCs.
I mention these entities not to bring an element of obscurantism into the fray. I cite them
as examples to emphasize my fundamental point-that it is the legislative charters of these
entities, and not the Administrative Code, which define the class of personality of these
entities created by Congress. To adopt the view of the majority would be, in effect, to
sanction an implied repeal of numerous congressional charters for the purpose of
declassifying GOCCs. Certainly, this could not have been the intent of the crafters of the
Administrative Code when they drafted the "Definition of Terms" incorporated therein.
MIAA Is Without
Doubt, A GOCC
Following the charters of government corporations, there are two kinds of GOCCs, namely:
GOCCs which are stock corporations and GOCCs which are no stock corporations (as
distinguished from non-stock corporation). Stock GOCCs are simply those which have
capital stock while no stock GOCCs are those which have no capital stock. Obviously these
definitions are different from the definitions of the terms in the Corporation Code. Verily,
GOCCs which are not incorporated with the Securities and Exchange Commission are not
governed by the Corporation Code but by their respective charters.
For the MIAA's part, its charter is replete with provisions that indubitably classify it as a
GOCC. Observe the following provisions from MIAA's charter:
SECTION 3. Creation of the Manila International Airport Authority.-There is

hereby established a body corporate to be known as the Manila International
Airport Authority which shall be attached to the Ministry of Transportation and
Communications. The principal office of the Authority shall be located at the New
Manila International Airport. The Authority may establish such offices, branches,
agencies or subsidiaries as it may deem proper and necessary; Provided, That any
subsidiary that may be organized shall have the prior approval of the President.

existing rights, if any. The Bureau of Lands and other appropriate government
agencies shall undertake an actual survey of the area transferred within one year
from the promulgation of this Executive Order and the corresponding title to be
issued in the name of the Authority. Any portion thereof shall not be disposed
through sale or through any other mode unless specifically approved by the
President of the Philippines.

xxx

SECTION 5. Functions, Powers, and Duties. - The Authority shall have the
following functions, powers and duties:

xxx

(d) To sue and be sued in its corporate name;

(e) To adopt and use a corporate seal;
(f) To succeed by its corporate name;
(g) To adopt its by-laws, and to amend

or repeal the same from time to time;
(h) To execute or enter into contracts of any kind or nature;
(i) To acquire, purchase, own, administer, lease, mortgage, sell or otherwise

dispose of any land, building, airport facility, or property of whatever kind and
nature, whether movable or immovable, or any interest therein;
(j) To exercise the power of eminent domain in the pursuit of
its purposes and
objectives;

xxx

(o) To exercise all the powers of a corporation under the Corporation Law,
insofar as these powers are not inconsistent with the provisions of this Executive
Order.
xxx
SECTION 16. Borrowing Power. - The Authority may, after consultation with the
Minister of Finance and with the approval of the President of the Philippines, as
recommended by the Minister of Transportation and Communications, raise
funds, either from local or international sources, by way of loans, credits or
securities, and other borrowing instruments, with the power to create pledges,
mortgages and other voluntary liens or encumbrances on any of its assets or
properties.
All loans contracted by the Authority under this Section, together with all interests
and other sums payable in respect thereof, shall constitute a charge upon all the
revenues and assets of the Authority and shall rank equally with one another, but
shall have priority over any other claim or charge on the revenue and assets of the
Authority: Provided, That this provision shall not be construed as a prohibition or
restriction on the power of the Authority to create pledges, mortgages, and other
voluntary liens or encumbrances on any assets or property of the Authority.
Except as expressly authorized by the President of the Philippines the total

outstanding indebtedness of the Authority in the principal amount, in local and
foreign currency, shall not at any time exceed the net worth of the Authority at any
given time.
xxx
The President or his duly authorized representative after consultation with the
Minister of Finance may guarantee, in the name and on behalf of the Republic of the
Philippines, the payment of the loans or other indebtedness of the Authority up to the
amount herein authorized.
These cited provisions establish the fitness of MIAA to be the subject of legal relations.[96]
MIAA under its charter may acquire and possess property, incur obligations, and bring civil or
criminal actions. It has the power to contract in its own name, and to acquire title to real or
personal property. It likewise may exercise a panoply of corporate powers and possesses all the
trappings of corporate personality, such as a corporate name, a corporate seal and by-laws. All
these are contained in MIAA's charter which, as conceded by the Corporation Code and even
the Administrative Code, is the primary law that governs the definition and organization of the
MIAA.

In fact, MIAA itself believes that it is a GOCC represents itself as such. It said so itself in
the very first paragraph of the present petition before this Court.[97] So does, apparently,
the Department of Budget and Management, which classifies MIAA as a "government owned &
controlled corporation" on its internet website.[98] There is also the matter of Executive Order
No. 483, which evinces the belief of the then-president of the Philippines that MIAA is a
GOCC. And the Court before had similarly characterized MIAA as a government-owned and
controlled corporation in the earlier MIAA case, Manila International Airport Authority v.
Commission on Audit.[99]
Why then the hesitance to declare MIAA a GOCC? As the majority repeatedly asserts, it is
because MIAA is actually an instrumentality. But the very definition relied upon by the majority
of an instrumentality under the Administrative Code clearly states that a GOCC is likewise an
instrumentality or an agency. The question of whether MIAA is a GOCC might not even be
determinative of this Petition, but the effect of the majority's disquisition on that matter
may even be more destructive than the ruling that MIAA is exempt from realty taxes. Is
the majority ready to live up to the momentous consequences of its flawed reasoning?
Novel Proviso in 1987 Constitution

Prescribing Standards in the
Creation of GOCCs Necessarily
Applies only to GOCCs Created
After 1987.
One last point on this matter on whether MIAA is a GOCC. The majority triumphantly points to
Section 16, Article XII of the 1987 Constitution, which mandates that the creation of GOCCs
through special charters be "in the interest of the common good and subject to the test of
economic viability." For the majority, the test of economic viability does not apply to
government entities vested with corporate powers and performing essential public services. But
this test of "economic viability" is new to the constitutional framework. No such test was
imposed in previous Constitutions, including the 1973 Constitution which was the fundamental
law in force when the MIAA was created. How then could the MIAA, or any GOCC created
before 1987 be expected to meet this new precondition to the creation of a GOCC? Does the
dissent seriously suggest that GOCCs created before 1987 may be declassified on account of
their failure to meet this "economic viability test"?
Instrumentalities and Agencies

Also Generally Liable For
Real Property Taxes
Next, the majority, having bludgeoned its way into asserting that MIAA is not a GOCC, then
argues that MIAA is an instrumentality. It cites incompletely, as earlier stated, the provision of
Section 2(10) of the Administrative Code. A more convincing view offered during
deliberations, but which was not adopted by the ponencia, argued that MIAA is not an
instrumentality but an agency, considering the fact that under the Administrative Code, the
MIAA is attached within the department framework of the Department of Transportation and
Communications.[100] Interestingly, Executive Order No. 341, enacted by President Arroyo in
2004, similarly calls MIAA an agency. Since instrumentalities are expressly defined as "an
agency not integrated within the department framework," that view concluded that MIAA
cannot be deemed an instrumentality.
Still, that distinction is ultimately irrelevant. Of course, as stated earlier, the Administrative
Code considers GOCCs as agencies,[101] so the fact that MIAA is an agency does not exclude it
from classification as a GOCC. On the other hand, the majority justifies MIAA's purported
exemption on Section 133 of the Local Government Code, which similarly situates "agencies
and instrumentalities" as generally exempt from the taxation powers of LGUs. And on this
point, the majority again evades Mactan and somehow concludes that Section 133 is the general
rule, notwithstanding Sections 232 and 234(a) of the Local Government Code. And the
majority's ultimate conclusion? "By express mandate of the Local Government Code, local
governments cannot impose any kind of tax on national government instrumentalities like
the MIAA. Local governments are devoid of power to tax the national government, its
agencies and instrumentalities."[102]
The Court's interpretation of the Local Government Code in Mactan renders the law integrally
harmonious and gives due accord to the respective prerogatives of the national government and
LGUs. Sections 133 and 234(a) ensure that the Republic of the Philippines or its political
subdivisions shall not be subjected to any form of local government taxation, except realty taxes
if the beneficial use of the property owned has been granted for consideration to a taxable entity
or person. On the other hand, Section 133 likewise assures that government instrumentalities
such as GOCCs may not be arbitrarily taxed by LGUs, since they could be subjected to local
taxation if there is a specific proviso thereon in the Code. One such proviso is Section 137,
which as the Court found in National Power Corporation,[103] permits the imposition of a
franchise tax on businesses enjoying a franchise, even if it be a GOCC such as NPC. And, as the
Court acknowledged in Mactan, Section 232 provides another exception on the taxability of
instrumentalities.
The majority abjectly refuses to engage Section 232 of the Local Government Code although it
provides the indubitable general rule that LGUs "may levy an annual ad valorem tax on real
property such as land, building, machinery, and other improvements not hereafter specifically
exempted." The specific exemptions are provided by Section 234. Section 232 comes
sequentially after Section 133(o),[104] and even if the sequencing is irrelevant, Section 232
would fall under the qualifying phrase of Section 133, "Unless otherwise provided herein." It is
sad, but not surprising that the majority is not willing to consider or even discuss the general
rule, but only the exemptions under Section 133 and Section 234. After all, if the majority is
dead set in ruling for MIAA no matter what the law says, why bother citing what the law does
say.
Constitution, Laws and

Jurisprudence Have Long
Explained the Rationale
Behind the Local Taxation
Of GOCCs.
This blithe disregard of precedents, almost all of them unanimously decided, is nowhere more
evident than in the succeeding discussion of the majority, which asserts that the power of local
governments to tax national government instrumentalities be construed strictly against local
governments. The Maceda case, decided before the Local Government Code, is cited, as is
Basco. This section of the majority employs deliberate pretense that the Code never existed, or
that the fundamentals of local autonomy are of limited effect in our country. Why is it that the
Local Government Code is barely mentioned in this section of the majority? Because Section 5
of the Code, purposely omitted by the majority provides for a different rule of interpretation
than that asserted:
Section 5. Rules of Interpretation. - In the interpretation of the provisions of this

Code, the following rules shall apply:

(a) Any provision on a power of a local government unit shall be liberally

interpreted in its favor, and in case of doubt, any question thereon shall be
resolved in favor of devolution of powers and of the lower local government
unit. Any fair and reasonable doubt as to the existence of the power shall be
interpreted in favor of the local government unit concerned;

(b) In case of doubt, any tax ordinance or revenue measure shall be construed strictly
against the local government unit enacting it, and liberally in favor of the taxpayer.
Any tax exemption, incentive or relief granted by any local government unit
pursuant to the provisions of this Code shall be construed strictly against the
person claiming it; xxx

Yet the majority insists that -there is no point in national and local governments taxing each
other, unless a sound and compelling policy requires such transfer of public funds from
one government pocket to another."[105] I wonder whether the Constitution satisfies the
majority's desire for "a sound and compelling policy." To repeat:
Article II. Declaration of Principles and State Policies

xxx

Sec. 25. The State shall ensure the autonomy of local governments.

Article X. Local Government

xxx

Sec. 2. The territorial and political subdivisions shall enjoy local autonomy.

xxx

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

Or how about the Local Government Code, presumably an expression of sound and compelling
policy considering that it was enacted by the legislature, that veritable source of all statutes:

SEC. 129. Power to Create Sources of Revenue. - Each local government unit shall
exercise its power to create its own sources of revenue and to levy taxes, fees, and
charges subject to the provisions herein, consistent with the basic policy of local
autonomy. Such taxes, fees, and charges shall accrue exclusively to the local
government units.
Justice Puno, in National Power Corporation v. City of Cabanatuan,[106] provides a more

"sound and compelling policy considerations" that would warrant sustaining the taxability of
government-owned entities by local government units under the Local Government Code.

Doubtless, the power to tax is the most effective instrument to raise needed revenues
to finance and support myriad activities of the local government units for the
delivery of basic services essential to the promotion of the general welfare and the
enhancement of peace, progress, and prosperity of the people. As this Court
observed in the Mactan case, "the original reasons for the withdrawal of tax
exemption privileges granted to government-owned or controlled corporations and
all other units of government were that such privilege resulted in serious tax base
erosion and distortions in the tax treatment of similarly situated enterprises." With
the added burden of devolution, it is even more imperative for government entities to
share in the requirements of development, fiscal or otherwise, by paying taxes or
other charges due from them.[107]
I dare not improve on Justice Puno's exhaustive disquisition on the statutory and jurisprudential
shift brought about the acceptance of the principles of local autonomy:

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

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

This paradigm shift results from the realization that genuine development can be
achieved only by strengthening local autonomy and promoting decentralization of
governance. For a long time, the country's highly centralized government structure
has bred a culture of dependence among local government leaders upon the national
leadership. It has also "dampened the spirit of initiative, innovation and imaginative
resilience in matters of local development on the part of local government leaders."
35 The only way to shatter this culture of dependence is to give the LGUs a wider
role in the delivery of basic services, and confer them sufficient powers to generate
their own sources for the purpose. To achieve this goal, section 3 of Article X of the
1987 Constitution mandates Congress to enact a local government code that will,
consistent with the basic policy of local autonomy, set the guidelines and limitations
to this grant of taxing powers, viz:
"Section 3. The Congress shall enact a local government code which
shall provide for a more responsive and accountable local government
structure instituted through a system of decentralization with effective
mechanisms of recall, initiative, and referendum, allocate among the
different local government units their powers, responsibilities, and
resources, and provide for the qualifications, election, appointment and
removal, term, salaries, powers and functions and duties of local officials,
and all other matters relating to the organization and operation of the
local units."
To recall, prior to the enactment of the Rep. Act No. 7160, also known as the Local
Government Code of 1991 (LGC), various measures have been enacted to promote
local autonomy. These include the Barrio Charter of 1959, the Local Autonomy Act
of 1959, the Decentralization Act of 1967 and the Local Government Code of 1983.
Despite these initiatives, however, the shackles of dependence on the national
government remained. Local government units were faced with the same problems
that hamper their capabilities to participate effectively in the national development
efforts, among which are: (a) inadequate tax base, (b) lack of fiscal control over
external sources of income, (c) limited authority to prioritize and approve
development projects, (d) heavy dependence on external sources of income, and (e)
limited supervisory control over personnel of national line agencies.

Considered as the most revolutionary piece of legislation on local autonomy, the

LGC effectively deals with the fiscal constraints faced by LGUs. It widens the tax
base of LGUs to include taxes which were prohibited by previous laws such as the
imposition of taxes on forest products, forest concessionaires, mineral products,
mining operations, and the like. The LGC likewise provides enough flexibility to
impose tax rates in accordance with their needs and capabilities. It does not prescribe
graduated fixed rates but merely specifies the minimum and maximum tax rates and
leaves the determination of the actual rates to the respective sanggunian.[108]
And the Court's ruling through Justice Azcuna in Philippine Ports Authority v. City of
Iloilo[109], provides especially clear and emphatic rationale:

In closing, we reiterate that in taxing government-owned or controlled

corporations, the State ultimately suffers no loss. In National Power Corp. v.
Presiding Judge, RTC, Br. XXV, 38 we elucidated:

Actually, the State has no reason to decry the taxation of NPC's

properties, as and by way of real property taxes. Real property taxes,
after all, form part and parcel of the financing apparatus of the
Government in development and nation-building, particularly in the
local government level.

xxx xxx xxx

To all intents and purposes, real property taxes are funds taken by the
State with one hand and given to the other. In no measure can the
government be said to have lost anything.
Finally, we find it appropriate to restate that the primary reason for the withdrawal of
tax exemption privileges granted to government-owned and controlled corporations
and all other units of government was that such privilege resulted in serious tax base
erosion and distortions in the tax treatment of similarly situated enterprises, hence
resulting in the need for these entities to share in the requirements of development,
fiscal or otherwise, by paying the taxes and other charges due from them.[110]
How does the majority counter these seemingly valid rationales which establish the soundness
of a policy consideration subjecting national instrumentalities to local taxation? Again, by
simply ignoring that these doctrines exist. It is unfortunate if the majority deems these cases or
the principles of devolution and local autonomy as simply too inconvenient, and relies instead
on discredited precedents. Of course, if the majority faces the issues squarely, and expressly
discusses why Basco was right and Mactan was wrong, then this entire endeavor of the Court
would be more intellectually satisfying. But, this is not a game the majority wants to play.

Mischaracterization of this Writer's

Views on the Tax Exemption
Enjoyed by the National Government

Instead, the majority engages in an extended attack pertaining to Section 193, mischaracterizing
my views on that provision as if I had been interpreting the provision as making "the national
government, which itself is a juridical person, subject to tax by local governments since the
national government is not included in the enumeration of exempt entities in Section 193."[111]

Nothing is farther from the truth. I have never advanced any theory of the sort imputed in the
majority. My main thesis on the matter merely echoes the explicit provision of Section 193 that
unless otherwise provided in the Local Government Code (LGC) all tax exemptions enjoyed by
all persons, whether natural or juridical, including GOCCs, were withdrawn upon the effectivity
of the Code. Since the provision speaks of withdrawal of tax exemptions of persons, it follows
that the exemptions theretofore enjoyed by MIAA which is definitely a person are deemed
withdrawn upon the advent of the Code.
On the other hand, the provision does not address the question of who are beyond the reach of
the taxing power of LGUs. In fine, the grant of tax exemption or the withdrawal thereof
assumes that the person or entity involved is subject to tax. Thus, Section 193 does not apply to
entities which were never given any tax exemption. This would include the national government
and its political subdivisions which, as a general rule, are not subjected to tax in the first place.
[112] Corollarily, the national government and its political subdivisions do not need tax
exemptions. And Section 193 which ordains the withdrawal of tax exemptions is obviously
irrelevant to them.

Section 193 is in point for the disposition of this case as it forecloses dependence for the grant
of tax exemption to MIAA on Section 21 of its charter. Even the majority should concede that
the charter section is now ineffectual, as Section 193 withdraws the tax exemptions previously
enjoyed by all juridical persons.
With Section 193 mandating the withdrawal of tax exemptions granted to all persons upon the
effectivity of the LGC, for MIAA to continue enjoying exemption from realty tax, it will have
to rely on a basis other than Section 21 of its charter.
Lung Center of the Philippines v. Quezon City[113] provides another illustrative example of the
jurisprudential havoc wrought about by the majority. Pursuant to its charter, the Lung Center
was organized as a trust administered by an eponymous GOCC organized with the SEC.[114]
There is no doubt it is a GOCC, even by the majority's reckoning. Applying the Administrative
Code, it is also considered as an agency, the term encompassing even GOCCs. Yet since the
Administrative Code definition of "instrumentalities" encompasses agencies, especially those
not attached to a line department such as the Lung Center, it also follows that the Lung Center is
an instrumentality, which for the majority is exempt from all local government taxes, especially
real estate taxes. Yet just in 2004, the Court unanimously held that the Lung Center was not
exempt from real property taxes. Can the majority and Lung Center be reconciled? I do not see
how, and no attempt is made to demonstrate otherwise.
Another key point. The last paragraph of Section 234 specifically asserts that any previous
exemptions from realty taxes granted to or enjoyed by all persons, including all GOCCs, are
thereby withdrawn. The majority's interpretation of Sections 133 and 234(a) however
necessarily implies that all instrumentalities, including GOCCs, can never be subjected to real
property taxation under the Code. If that is so, what then is the sense of the last paragraph
specifically withdrawing previous tax exemptions to all persons, including GOCCs when
juridical persons such as MIAA are anyway, to his view, already exempt from such taxes under
Section 133? The majority's interpretation would effectively render the express and emphatic
withdrawal of previous exemptions to GOCCs inutile. Ut magis valeat quam pereat. Hence,
where a statute is susceptible of more than one interpretation, the court should adopt such
reasonable and beneficial construction which will render the provision thereof operative and
effective, as well as harmonious with each other.[115]
But, the majority seems content rendering as absurd the Local Government Code, since it does
not have much use anyway for the Code's general philosophy of fiscal autonomy, as evidently
seen by the continued reliance on Basco or Maceda. Local government rule has never been a
grant of emancipation from the national government. This is the favorite bugaboo of the
opponents of local autonomy-the fallacy that autonomy equates to independence.
Thus, the conclusion of the majority is that under Section 133(o), MIAA as a government
instrumentality is beyond the reach of local taxation because it is not subject to taxes, fees or
charges of any kind. Moreover, the taxation of national instrumentalities and agencies by LGUs
should be strictly construed against the LGUs, citing Maceda and Basco. No mention is made of
the subsequent rejection of these cases in jurisprudence following the Local Government Code,
including Mactan. The majority is similarly silent on the general rule under Section 232 on real
property taxation or Section 5 on the rules of construction of the Local Government Code.
V.
MIAA, and not the National Government
Is the Owner of the Subject Taxable Properties
Section 232 of the Local Government Code explicitly provides that there are exceptions to the
general rule on rule property taxation, as "hereafter specifically exempted." Section 234,
certainly "hereafter," provides indubitable basis for exempting entities from real property
taxation. It provides the most viable legal support for any claim that an governmental entity
such as the MIAA is exempt from real property taxes. To repeat:
SECTION 234. Exemptions from Real Property Tax. -- The following are exempted

xxx

(f) Real property owned by the Republic of the Philippines or any of its political
consideration or otherwise, to a taxable person:

The majority asserts that the properties owned by MIAA are owned by the Republic of the
Philippines, thus placing them under the exemption under Section 234. To arrive at this
conclusion, the majority employs four main arguments.

MIAA Property Is Patrimonial

And Not Part of Public Dominion
The majority claims that the Airport Lands and Buildings are property of public dominion as
defined by the Civil Code, and therefore owned by the State or the Republic of the Philippines.
But as pointed out by Justice Azcuna in the first PPA case, if indeed a property is considered
part of the public dominion, such property is "owned by the general public and cannot be
declared to be owned by a public corporation, such as [the PPA]."

Relevant on this point are the following provisions of the MIAA charter:

Section 3. Creation of the Manila International Airport Authority. - xxx

existing rights, if any. xxx Any portion thereof shall not be disposed through sale or
through any other mode unless specifically approved by the President of the
Philippines.

Section 22. Transfer of Existing Facilities and Intangible Assets. - All existing
public airport facilities, runways, lands, buildings and other property, movable
or immovable, belonging to the Airport, and all assets, powers rights, interests and
privileges belonging to the Bureau of Air Transportation relating to airport works or
air operations, including all equipment which are necessary for the operation of
crash fire and rescue facilities, are hereby transferred to the Authority.
Clearly, it is the MIAA, and not either the State, the Republic of the Philippines or the national
government that asserts legal title over the Airport Lands and Buildings. There was an express
transfer of ownership between the MIAA and the national government. If the distinction is to be
blurred, as the majority does, between the State/Republic/Government and a body corporate
such as the MIAA, then the MIAA charter showcases the remarkable absurdity of an entity
transferring property to itself.
Nothing in the Civil Code or the Constitution prohibits the State from transferring ownership
over property of public dominion to an entity that it similarly owns. It is just like a family
transferring ownership over the properties its members own into a family corporation. The
family exercises effective control over the administration and disposition of these properties.
Yet for several purposes under the law, such as taxation, it is the corporation that is deemed to
own those properties. A similar situation obtains with MIAA, the State, and the Airport Lands
and Buildings.
The second Public Ports Authority case, penned by Justice Callejo, likewise lays down useful
doctrines in this regard. The Court refuted the claim that the properties of the PPA were owned
by the Republic of the Philippines, noting that PPA's charter expressly transferred ownership
over these properties to the PPA, a situation which similarly obtains with MIAA. The Court
even went as far as saying that the fact that the PPA "had not been issued any torrens title over
the port and port facilities and appurtenances is of no legal consequence. A torrens title does
not, by itself, vest ownership; it is merely an evidence of title over properties. xxx It has never
been recognized as a mode of acquiring ownership over real properties."[116]
The Court further added:
xxx The bare fact that the port and its facilities and appurtenances are accessible to
the general public does not exempt it from the payment of real property taxes. It
must be stressed that the said port facilities and appurtenances are the petitioner's
corporate patrimonial properties, not for public use, and that the operation of the port
and its facilities and the administration of its buildings are in the nature of ordinary
business. The petitioner is clothed, under P.D. No. 857, with corporate status and
corporate powers in the furtherance of its proprietary interests xxx The petitioner is
even empowered to invest its funds in such government securities approved by the
Board of Directors, and derives its income from rates, charges or fees for the use by
vessels of the port premises, appliances or equipment. xxx Clearly then, the
petitioner is a profit-earning corporation; hence, its patrimonial properties are subject
to tax.[117]
There is no doubt that the properties of the MIAA, as with the PPA, are in a sense, for public
use. A similar argument was propounded by the Light Rail Transit Authority in Light Rail
Transit Authority v. Central Board of Assessment,[118] which was cited in Philippine Ports
Authority and deserves renewed emphasis. The Light Rail Transit Authority (LRTA), a body
corporate, "provides valuable transportation facilities to the paying public."[119] It claimed that
its carriage-ways and terminal stations are immovably attached to government-owned national
roads, and to impose real property taxes thereupon would be to impose taxes on public roads.
This view did not persuade the Court, whose decision was penned by Justice (now Chief
Justice) Panganiban. It was noted:

Though the creation of the LRTA was impelled by public service " to provide mass
transportation to alleviate the traffic and transportation situation in Metro Manila "
its operation undeniably partakes of ordinary business. Petitioner is clothed with
corporate status and corporate powers in the furtherance of its proprietary objectives.
Indeed, it operates much like any private corporation engaged in the mass transport
industry. Given that it is engaged in a service-oriented commercial endeavor, its
carriageways and terminal stations are patrimonial property subject to tax,
notwithstanding its claim of being a government-owned or controlled corporation.
xxx
Petitioner argues that it merely operates and maintains the LRT system, and that the
actual users of the carriageways and terminal stations are the commuting public. It
adds that the public use character of the LRT is not negated by the fact that revenue
is obtained from the latter's operations.
We do not agree. Unlike public roads which are open for use by everyone, the LRT
is accessible only to those who pay the required fare. It is thus apparent that
petitioner does not exist solely for public service, and that the LRT carriageways and
terminal stations are not exclusively for public use. Although petitioner is a public
utility, it is nonetheless profit-earning. It actually uses those carriageways and
terminal stations in its public utility business and earns money therefrom.[120]
xxx
Even granting that the national government indeed owns the carriageways and
terminal stations, the exemption would not apply because their beneficial use has
been granted to petitioner, a taxable entity.[121]
There is no substantial distinction between the properties held by the PPA, the LRTA, and the
MIAA. These three entities are in the business of operating facilities that promote public
transportation.

The majority further asserts that MIAA's properties, being part of the public dominion, are
outside the commerce of man. But if this is so, then why does Section 3 of MIAA's charter
authorize the President of the Philippines to approve the sale of any of these properties? In fact,
why does MIAA's charter in the first place authorize the transfer of these airport properties,
assuming that indeed these are beyond the commerce of man?

No Trust Has Been Created

Over MIAA Properties For
The Benefit of the Republic
The majority posits that while MIAA might be holding title over the Airport Lands and
Buildings, it is holding it in trust for the Republic. A provision of the Administrative Code is
cited, but said provision does not expressly provide that the property is held in trust. Trusts are
either express or implied, and only those situations enumerated under the Civil Code would
constitute an implied trust. MIAA does not fall within this enumeration, and neither is there a
provision in MIAA's charter expressly stating that these properties are being held in trust. In
fact, under its charter, MIAA is obligated to retain up to eighty percent (80%) of its gross
operating income, not an inconsequential sum assuming that the beneficial owner of MIAA's
properties is actually the Republic, and not the MIAA.
Also, the claim that beneficial ownership over the MIAA remains with the government and not
MIAA is ultimately irrelevant. Section 234(a) of the Local Government Code provides among
those exempted from paying real property taxes are "[r]eal property owned by the [Republic]"
except when the beneficial use thereof has been granted, for consideration or otherwise, to a
taxable person." In the context of Section 234(a), the identity of the beneficial owner over the
properties is not determinative as to whether the exemption avails. It is the identity of the
beneficial user of the property owned by the Republic or its political subdivisions that is
crucial, for if said beneficial user is a taxable person, then the exemption does not lie.
I fear the majority confuses the notion of what might be construed as "beneficial ownership" of
the Republic over the properties of MIAA as nothing more than what arises as a consequence of
the fact that the capital of MIAA is contributed by the National Government.[122] If so, then
there is no difference between the State's ownership rights over MIAA properties than those of a
majority stockholder over the properties of a corporation. Even if such shareholder effectively
owns the corporation and controls the disposition of its assets, the personality of the stockholder
remains separately distinct from that of the corporation. A brief recall of the entrenched rule in
corporate law is in order:
The first consequence of the doctrine of legal entity regarding the separate identity
of the corporation and its stockholders insofar as their obligations and liabilities are
concerned, is spelled out in this general rule deeply entrenched in American
jurisprudence:

Unless the liability is expressly imposed by constitutional or statutory

provisions, or by the charter, or by special agreement of the stockholders,
stockholders are not personally liable for debts of the corporation either
at law or equity. The reason is that the corporation is a legal entity or
artificial person, distinct from the members who compose it, in their
individual capacity; and when it contracts a debt, it is the debt of the legal
entity or artificial person " the corporation " and not the debt of the
individual members. (13A Fletcher Cyc. Corp. Sec. 6213)

The entirely separate identity of the rights and remedies of a corporation itself and
its individual stockholders have been given definite recognition for a long time.
Applying said principle, the Supreme Court declared that a corporation may not be
made to answer for acts or liabilities of its stockholders or those of legal entities to
which it may be connected, or vice versa. (Palay Inc. v. Clave et. al. 124 SCRA 638)
It was likewise declared in a similar case that a bonafide corporation should alone be
liable for corporate acts duly authorized by its officers and directors. (Caram Jr. v.
Court of Appeals et.al. 151 SCRA, p. 372)[123]
It bears repeating that MIAA under its charter, is expressly conferred the right to exercise all the
powers of a corporation under the Corporation Law, including the right to corporate succession,
and the right to sue and be sued in its corporate name.[124] The national government made a
particular choice to divest ownership and operation of the Manila International Airport and
transfer the same to such an empowered entity due to perceived advantages. Yet such transfer
cannot be deemed consequence free merely because it was the State which contributed the
operating capital of this body corporate.
The majority claims that the transfer the assets of MIAA was meant merely to effect a
reorganization. The imputed rationale for such transfer does not serve to militate against the
legal consequences of such assignment. Certainly, if it was intended that the transfer should be
free of consequence, then why was it effected to a body corporate, with a distinct legal
personality from that of the State or Republic? The stated aims of the MIAA could have very
well been accomplished by creating an agency without independent juridical personality.
VI.
MIAA Performs Proprietary Functions
Nonetheless, Section 234(f) exempts properties owned by the Republic of the Philippines or its
political subdivisions from realty taxation. The obvious question is what comprises "the
Republic of the Philippines." I think the key to understanding the scope of "the Republic" is the
phrase "political subdivisions." Under the Constitution, political subdivisions are defined as "the
provinces, cities, municipalities and barangays."[125] In correlation, the Administrative Code of
1987 defines "local government" as referring to "the political subdivisions established by or in
accordance with the Constitution."
Clearly then, these political subdivisions are engaged in the exercise of sovereign functions and
are accordingly exempt. The same could be said generally of the national government, which
would be similarly exempt. After all, even with the principle of local autonomy, it is inherently
noxious and self-defeatist for local taxation to interfere with the sovereign exercise of functions.
However, the exercise of proprietary functions is a different matter altogether.
Sovereign and Proprietary

Functions Distinguished
Sovereign or constituent functions are those which constitute the very bonds of society and are
compulsory in nature, while ministrant or proprietary functions are those undertaken by way of
advancing the general interests of society and are merely optional.[126] An exhaustive
discussion on the matter was provided by the Court in Bacani v. NACOCO:[127]
xxx This institution, when referring to the national government, has reference to
what our Constitution has established composed of three great departments, the
legislative, executive, and the judicial, through which the powers and functions of
government are exercised. These functions are twofold: constituent and ministrant.
The former are those which constitute the very bonds of society and are compulsory
in nature; the latter are those that are undertaken only by way of advancing the
general interests of society, and are merely optional. President Wilson enumerates
the constituent functions as follows:

"'(1) The keeping of order and providing for the protection of persons and
property from violence and robbery.
'(2) The fixing of the legal relations between man and wife and between
parents and children.
'(3) The regulation of the holding, transmission, and interchange of
property, and the determination of its liabilities for debt or for crime.
'(4) The determination of contract rights between individuals.
'(5) The definition and punishment of crime.
'(6) The administration of justice in civil cases.
'(7) The determination of the political duties, privileges, and relations of
citizens.
'(8) Dealings of the state with foreign powers: the preservation of the
state from external danger or encroachment and the advancement of its
international interests.'" (Malcolm, The Government of the Philippine
Islands, p. 19.)
The most important of the ministrant functions are: public works, public education,
public charity, health and safety regulations, and regulations of trade and industry.
The principles determining whether or not a government shall exercise certain of
these optional functions are: (1) that a government should do for the public welfare
those things which private capital would not naturally undertake and (2) that a
government should do these things which by its very nature it is better equipped to
administer for the public welfare than is any private individual or group of
individuals. (Malcolm, The Government of the Philippine Islands, pp. 19-20.)

From the above we may infer that, strictly speaking, there are functions which
our government is required to exercise to promote its objectives as expressed in
our Constitution and which are exercised by it as an attribute of sovereignty,
and those which it may exercise to promote merely the welfare, progress and
prosperity of the people. To this latter class belongs the organization of those
corporations owned or controlled by the government to promote certain aspects
of the economic life of our people such as the National Coconut Corporation. These
are what we call government-owned or controlled corporations which may take on
the form of a private enterprise or one organized with powers and formal
characteristics of a private corporations under the Corporation Law.[128]
The Court in Bacani rejected the proposition that the National Coconut Corporation exercised
sovereign functions:

Does the fact that these corporations perform certain functions of government make
them a part of the Government of the Philippines?

The answer is simple: they do not acquire that status for the simple reason that they
do not come under the classification of municipal or public corporation. Take for
instance the National Coconut Corporation. While it was organized with the
purpose of "adjusting the coconut industry to a position independent of trade
preferences in the United States" and of providing "Facilities for the better
curing of copra products and the proper utilization of coconut by-products," a
function which our government has chosen to exercise to promote the coconut
industry, however, it was given a corporate power separate and distinct from
our government, for it was made subject to the provisions of our Corporation
Law in so far as its corporate existence and the powers that it may exercise are
concerned (sections 2 and 4, Commonwealth Act No. 518). It may sue and be
sued in the same manner as any other private corporations, and in this sense it
is an entity different from our government. As this Court has aptly said, "The
mere fact that the Government happens to be a majority stockholder does not make it
a public corporation" (National Coal Co. vs. Collector of Internal Revenue, 46 Phil.,
586-587). "By becoming a stockholder in the National Coal Company, the
Government divested itself of its sovereign character so far as respects the
transactions of the corporation. . . . Unlike the Government, the corporation
may be sued without its consent, and is subject to taxation. Yet the National
Coal Company remains an agency or instrumentality of government."
(Government of the Philippine Islands vs. Springer, 50 Phil., 288.)
The following restatement of the entrenched rule by former SEC Chairperson Rosario Lopez
bears noting:

The fact that government corporations are instrumentalities of the State does not
divest them with immunity from suit. (Malong v. PNR, 138 SCRA p. 63) It is
settled that when the government engages in a particular business through the
instrumentality of a corporation, it divests itself pro hoc vice of its sovereign
character so as to subject itself to the rules governing private corporations,
(PNB v. Pabolan 82 SCRA 595) and is to be treated like any other corporation.
(PNR v. Union de Maquinistas Fogonero y Motormen, 84 SCRA 223)

In the same vein, when the government becomes a stockholder in a corporation, it

does not exercise sovereignty as such. It acts merely as a corporator and exercises no
other power in the management of the affairs of the corporation than are expressly
given by the incorporating act. Nor does the fact that the government may own all or
a majority of the capital stock take from the corporation its character as such, or
make the government the real party in interest. (Amtorg Trading Corp. v. US 71 F2d
524, 528)[129]
MIAA Performs Proprietary

Functions No Matter How
Vital to the Public Interest
The simple truth is that, based on these accepted doctrinal tests, MIAA performs proprietary
functions. The operation of an airport facility by the State may be imbued with public interest,
but it is by no means indispensable or obligatory on the national government. In fact, as
demonstrated in other countries, it makes a lot of economic sense to leave the operation of
airports to the private sector.

The majority tries to becloud this issue by pointing out that the MIAA does not compete in the
marketplace as there is no competing international airport operated by the private sector; and
that MIAA performs an essential public service as the primary domestic and international
airport of the Philippines. This premise is false, for one. On a local scale, MIAA competes with
other international airports situated in the Philippines, such as Davao International Airport and
MCIAA. More pertinently, MIAA also competes with other international airports in Asia, at
least. International airlines take into account the quality and conditions of various international
airports in determining the number of flights it would assign to a particular airport, or even in
choosing a hub through which destinations necessitating connecting flights would pass through.
Even if it could be conceded that MIAA does not compete in the market place, the example of
the Philippine National Railways should be taken into account. The PNR does not compete in
the marketplace, and performs an essential public service as the operator of the railway system
in the Philippines. Is the PNR engaged in sovereign functions? The Court, in Malong v.
Philippine National Railways,[130] held that it was not.[131]
Even more relevant to this particular case is Teodoro v. National Airports Corporation,[132]
concerning the proper appreciation of the functions performed by the Civil Aeronautics
Administration (CAA), which had succeeded the defunction National Airports Corporation. The
CAA claimed that as an unincorporated agency of the Republic of the Philippines, it was
incapable of suing and being sued. The Court noted:
Among the general powers of the Civil Aeronautics Administration are, under
Section 3, to execute contracts of any kind, to purchase property, and to grant
concession rights, and under Section 4, to charge landing fees, royalties on sales to
aircraft of aviation gasoline, accessories and supplies, and rentals for the use of any
property under its management.

These provisions confer upon the Civil Aeronautics Administration, in our opinion,
the power to sue and be sued. The power to sue and be sued is implied from the
power to transact private business. And if it has the power to sue and be sued on its
behalf, the Civil Aeronautics Administration with greater reason should have the
power to prosecute and defend suits for and against the National Airports
Corporation, having acquired all the properties, funds and choses in action and
assumed all the liabilities of the latter. To deny the National Airports Corporation's
creditors access to the courts of justice against the Civil Aeronautics Administration
is to say that the government could impair the obligation of its corporations by the
simple expedient of converting them into unincorporated agencies. [133]

xxx

Eventually, the charter of the CAA was revised, and it among its expanded functions was "[t]o
administer, operate, manage, control, maintain and develop the Manila International Airport."
[134] Notwithstanding this expansion, in the 1988 case of CAA v. Court of Appeals[135] the
Court reaffirmed the ruling that the CAA was engaged in "private or non-governmental
functions."[136] Thus, the Court had already ruled that the predecessor agency of MIAA, the
CAA was engaged in private or non-governmental functions. These are more precedents
ignored by the majority. The following observation from the Teodoro case very well applies to
MIAA.

The Civil Aeronautics Administration comes under the category of a private

entity. Although not a body corporate it was created, like the National Airports
Corporation, not to maintain a necessary function of government, but to run
what is essentially a business, even if revenues be not its prime objective but
rather the promotion of travel and the convenience of the traveling public. It is
engaged in an enterprise which, far from being the exclusive prerogative of
state, may, more than the construction of public roads, be undertaken by
private concerns.[137]
If the determinative point in distinguishing between sovereign functions and proprietary

functions is the vitality of the public service being performed, then it should be noted that there
is no more important public service performed than that engaged in by public utilities. But
notably, the Constitution itself authorizes private persons to exercise these functions as it allows
them to operate public utilities in this country[138] If indeed such functions are actually
sovereign and belonging properly to the government, shouldn't it follow that the exercise of
these tasks remain within the exclusive preserve of the State?

There really is no prohibition against the government taxing itself,[139] and nothing obscene
with allowing government entities exercising proprietary functions to be taxed for the purpose
of raising the coffers of LGUs. On the other hand, it would be an even more noxious proposition
that the government or the instrumentalities that it owns are above the law and may refuse to
pay a validly imposed tax. MIAA, or any similar entity engaged in the exercise of proprietary,
and not sovereign functions, cannot avoid the adverse-effects of tax evasion simply on the claim
that it is imbued with some of the attributes of government.

VII.
MIAA Property Not
Subject to
Execution Sale Without Consent
Of the President.
Despite the fact that the City of Parañaque ineluctably has the power to impose real property
taxes over the MIAA, there is an equally relevant statutory limitation on this power that must be
fully upheld. Section 3 of the MIAA charter states that "[a]ny portion [of the [lands transferred,
conveyed and assigned to the ownership and administration of the MIAA] shall not be
disposed through sale or through any other mode unless specifically approved by the
President of the Philippines."[140]

Nothing in the Local Government Code, even with its wide grant of powers to LGUs, can be
deemed as repealing this prohibition under Section 3, even if it effectively forecloses one
possible remedy of the LGU in the collection of delinquent real property taxes. While the Local
Government Code withdrew all previous local tax exemptions of the MIAA and other natural
and juridical persons, it did not similarly withdraw any previously enacted prohibitions on
properties owned by GOCCs, agencies or instrumentalities. Moreover, the resulting legal effect,
subjecting on one hand the MIAA to local taxes but on the other hand shielding its properties
from any form of sale or disposition, is not contradictory or paradoxical, onerous as its effect
may be on the LGU. It simply means that the LGU has to find another way to collect the taxes
due from MIAA, thus paving the way for a mutually acceptable negotiated solution.[141]

There are several other reasons this statutory limitation should be upheld and applied to this
case. It is at this juncture that the importance of the Manila Airport to our national life and
commerce may be accorded proper consideration. The closure of the airport, even by reason of
MIAA's legal omission to pay its taxes, will have an injurious effect to our national economy,
which is ever reliant on air travel and traffic. The same effect would obtain if ownership and
administration of the airport were to be transferred to an LGU or some other entity which were
not specifically chartered or tasked to perform such vital function. It is for this reason that the
MIAA charter specifically forbids the sale or disposition of MIAA properties without the
consent of the President. The prohibition prevents the peremptory closure of the MIAA or the
hampering of its operations on account of the demands of its creditors. The airport is important
enough to be sheltered by legislation from ordinary legal processes.
Section 3 of the MIAA charter may also be appreciated as within the proper exercise of
executive control by the President over the MIAA, a GOCC which despite its separate legal
personality, is still subsumed within the executive branch of government. The power of
executive control by the President should be upheld so long as such exercise does not
contravene the Constitution or the law, the President having the corollary duty to faithfully
execute the Constitution and the laws of the land.[142] In this case, the exercise of executive
control is precisely recognized and authorized by the legislature, and it should be upheld even if
it comes at the expense of limiting the power of local government units to collect real property
taxes.
Had this petition been denied instead with Mactan as basis, but with the caveat that the MIAA
properties could not be subject of execution sale without the consent of the President, I suspect
that the parties would feel little distress. Through such action, both the Local Government Code
and the MIAA charter would have been upheld. The prerogatives of LGUs in real property
taxation, as guaranteed by the Local Government Code, would have been preserved, yet the
concerns about the ruinous effects of having to close the Manila International Airport would
have been averted. The parties would then be compelled to try harder at working out a
compromise, a task, if I might add, they are all too willing to engage in.[143] Unfortunately, the
majority will cause precisely the opposite result of unremitting hostility, not only to the City of
Parañaque, but to the thousands of LGUs in the country.
VIII.
Summary of Points
My points may be summarized as follows:
1) Mactan and a long line of succeeding cases have already settled the rule that
under the Local Government Code, enacted pursuant to the constitutional mandate of
local autonomy, all natural and juridical persons, even those GOCCs,
instrumentalities and agencies, are no longer exempt from local taxes even if
previously granted an exemption. The only exemptions from local taxes are those
specifically provided under the Local Government Code itself, or those enacted
through subsequent legislation.

2) Under the Local Government Code, particularly Section 232, instrumentalities,

agencies and GOCCs are generally liable for real property taxes. The only
exemptions therefrom under the same Code are provided in Section 234, which
include real property owned by the Republic of the Philippines or any of its political
subdivisions.
3) The subject properties are owned by MIAA, a GOCC, holding title in its own
name. MIAA, a separate legal entity from the Republic of the Philippines, is the
legal owner of the properties, and is thus liable for real property taxes, as it does not
fall within the exemptions under Section 234 of the Local Government Code.
4) The MIAA charter expressly bars the sale or disposition of MIAA properties. As a
result, the City of Parañaque is prohibited from seizing or selling these properties by
public auction in order to satisfy MIAA's tax liability. In the end, MIAA is
encumbered only by a limited lien possessed by the City of Parañaque.
On the other hand, the majority's flaws are summarized as follows:

1) The majority deliberately ignores all precedents which run counter to its
hypothesis, including Mactan. Instead, it relies and directly cites those doctrines and
precedents which were overturned by Mactan. By imposing a different result than
that warranted by the precedents without explaining why Mactan or the other
precedents are wrong, the majority attempts to overturn all these ruling sub silencio
and without legal justification, in a manner that is not sanctioned by the practices
and traditions of this Court.

2) The majority deliberately ignores the policy and philosophy of local fiscal
autonomy, as mandated by the Constitution, enacted under the Local Government
Code, and affirmed by precedents. Instead, the majority asserts that there is no sound
rationale for local governments to tax national government instrumentalities, despite
the blunt existence of such rationales in the Constitution, the Local Government
Code, and precedents.

3) The majority, in a needless effort to justify itself, adopts an extremely strained

exaltation of the Administrative Code above and beyond the Corporation Code and
the various legislative charters, in order to impose a wholly absurd definition of
GOCCs that effectively declassifies innumerable existing GOCCs, to catastrophic
legal consequences.

4) The majority asserts that by virtue of Section 133(o) of the Local Government
Code, all national government agencies and instrumentalities are exempt from any
form of local taxation, in contravention of several precedents to the contrary and the
proviso under Section 133, "unless otherwise provided herein [the Local
Government Code]."

5) The majority erroneously argues that MIAA holds its properties in trust for the
Republic of the Philippines, and that such properties are patrimonial in character. No
express or implied trust has been created to benefit the national government. The
legal distinction between sovereign and proprietary functions, as affirmed by
jurisprudence, likewise preclude the classification of MIAA properties as
patrimonial.

IX.
Epilogue
If my previous discussion still fails to convince on how wrong the majority is, then the
following points are well-worth considering. The majority cites the Bangko Sentral ng Pilipinas
(Bangko Sentral) as a government instrumentality that exercises corporate powers but not
organized as a stock or non-stock corporation. Correspondingly for the majority, the Bangko ng
Sentral is exempt from all forms of local taxation by LGUs by virtue of the Local Government
Code.
Section 125 of Rep. Act No. 7653, The New Central Bank Act, states:
SECTION 125. Tax Exemptions. - The Bangko Sentral shall be exempt for a period
of five (5) years from the approval of this Act from all national, provincial,
municipal and city taxes, fees, charges and assessments.

The New Central Bank Act was promulgated after the Local Government Code if the BSP is
already preternaturally exempt from local taxation owing to its personality as an "government
instrumentality," why then the need to make a new grant of exemption, which if the majority is
to be believed, is actually a redundancy. But even more tellingly, does not this provision evince
a clear intent that after the lapse of five (5) years, that the Bangko Sentral will be liable for
provincial, municipal and city taxes? This is the clear congressional intent, and it is Congress,
not this Court which dictates which entities are subject to taxation and which are exempt.

Perhaps this notion will offend the majority, because the Bangko Sentral is not even a
government owned corporation, but a government instrumentality, or perhaps "loosely", a
"government corporate entity." How could such an entity like the Bangko Sentral , which is not
even a government owned corporation, be subjected to local taxation like any mere mortal? But
then, see Section 1 of the New Central Bank Act:
SECTION 1. Declaration of Policy. - The State shall maintain a central monetary

authority that shall function and operate as an independent and accountable body
corporate in the discharge of its mandated responsibilities concerning money,
banking and credit. In line with this policy, and considering its unique functions and
responsibilities, the central monetary authority established under this Act, while
being a government-owned corporation, shall enjoy fiscal and administrative
autonomy.

Apparently, the clear legislative intent was to create a government corporation known as the
Bangko Sentral ng Pilipinas. But this legislative intent, the sort that is evident from the text of
the provision and not the one that needs to be unearthed from the bowels of the archival offices
of the House and the Senate, is for naught to the majority, as it contravenes the Administrative
Code of 1987, which after all, is "the governing law defining the status and relationship of
government agencies and instrumentalities" and thus superior to the legislative charter in
determining the personality of a chartered entity. Its like saying that the architect who designed
a school building is better equipped to teach than the professor because at least the architect is
familiar with the geometry of the classroom.

Consider further the example of the Philippine Institute of Traditional and Alternative Health
Care (PITAHC), created by Republic Act No. 8243 in 1997. It has similar characteristics as
MIAA in that it is established as a body corporate,[144] and empowered with the attributes of a
corporation,[145] including the power to purchase or acquire real properties.[146] However the
PITAHC has no capital stock and no members, thus following the majority, it is not a GOCC.
The state policy that guides PITAHC is the development of traditional and alternative health
care,[147] and its objectives include the promotion and advocacy of alternative, preventive and
curative health care modalities that have been proven safe, effective and cost effective.[148]
"Alternative health care modalities" include "other forms of non-allophatic, occasionally non-
indigenous or imported healing methods" which include, among others "reflexology,
acupuncture, massage, acupressure" and chiropractics.[149]
Given these premises, there is no impediment for the PITAHC to purchase land and construct
thereupon a massage parlor that would provide a cheaper alternative to the opulent spas that
have proliferated around the metropolis. Such activity is in line with the purpose of the PITAHC
and with state policy. Is such massage parlor exempt from realty taxes? For the majority, it is,
for PITAHC is an instrumentality or agency exempt from local government taxation, which does
not fall under the exceptions under Section 234 of the Local Government Code. Hence, this
massage parlor would not just be a shelter for frazzled nerves, but for taxes as well.
Ridiculous? One might say, certainly a decision of the Supreme Court cannot be construed to
promote an absurdity. But precisely the majority, and the faulty reasoning it utilizes, opens itself
up to all sorts of mischief, and certainly, a tax-exempt massage parlor is one of the lesser evils
that could arise from the majority ruling. This is indeed a very strange and very wrong decision.
I dissent.
[1]Per Department of Interior and Local Government. See also "Summary" from the National
Statistical Coordination Board, http://www.nscb.gov.ph/activestats
/psgc/NSCB_PSGC_SUMMARY_DEC04.pdf.

[2] 330 Phil. 392 (1996).

[3] G.R. No. 91649, 14 May 1991, 197 SCRA 52.

[4] 451 Phil. 683, 698 (2003).

[5] 364 Phil. 843, 855 (1999).

[6] 449 Phil. 233 (2003).

[7] G.R. No. 152675 & 152771, 28 April 2004.

[9] G.R. No. 144104, 29 June 2004, 433 SCRA 119.
[10] Supra note 8.
[11]G.R. No. 127383, 18 August 2005, 467 SCRA 280. Per the author of this Dissenting
Opinion.
[12]Nonetheless, the Court noted therein GSIS's exemption from real property taxes was
reenacted in 1997, and the GSIS at present is exempt from such taxes under the GSIS Act of
1997. Id., at 299.
[13]G.R. No. 109791, 14 July 2003, 406 SCRA 88, and G.R. No. 143214, 11 November 2004,
442 SCRA 175, respectively.
[14] 118 Phil. 1354 (1963).
[15] 396 Phil. 860 (2000).
[16] Supra note 8.
[17]91 Phil 203 (1952).
[18] G.R. No. L-51806, 8 November 1988, 167 SCRA 28.
[19] G.R. No. 155692, 23 October 2003, 414 SCRA 327.
[20] Id. at 333, citing Section 10, Book IV, Title III, Chapter 3, Administrative Code of 1987.
[21] G.R. No. 165827, 16 June 2006.
[22] G.R. No. 147192, 27 June 2006.
[23] Supra note 8.
[24] See Mendoza v. De Leon, 33 Phil. 508 (1916).
[25] Mactan, supra note 2, at 397-398.
[26] Section 193, Rep. Act No. 7160.
[27] Section 232, Rep. Act No. 7160.

[28] Section 234, Rep. Act No. 7160. Emphasis supplied.
[29] Id. at 411-413.
[30] See City of Davao v. RTC, supra note 11, at 293.
[31]Supra note 3.
[32] Id. at 63-65.
[33] G.R. No. 88921, 31 May 1991, 197 SCRA 771.
[34] Id. at 799.
[35] Mactan, supra note 2, at 419-420.
[36] Supra note 6.
[37] Id. at 250-251.
[38] G.R. No. 109791, 14 July 2003, 406 SCRA 88.
[39] Id. at 99-100.
[40] Supra note 21.
[41] Id.
[42] G.R. No. 143214, 11 November 2004, 442 SCRA 175.
[43] Id., at 184.
[44] Id. at 185-186, citing MCIAA v. Marcos, supra note 2.
[45] Supra note 11.
[46] P.D. No. 1981. See City of Davao v. RTC, supra note 40, at 289.
[47] Id. at 287-288.
[48] 32 Phil. 36, 49; cited in City of Davao v. RTC, supra note 40 at 296-297.
[49] Id.
[50] Supra note 22.
[51] Id.
[53] MIAA's Charter (E.O No. 903, as amended) provides:
Section 3. Creation of the Manila International Airport Authority. - xxx
The land where the Airport is presently located as well as the surrounding land area of
approximately six hundred hectares, are hereby transferred, conveyed and assigned to the
ownership and administration of the Authority, subject to existing rights, if any. xxx Any
portion thereof shall not be disposed through sale or through any other mode unless specifically
approved by the President of the Philippines.
Section 22. Transfer of Existing Facilities and Intangible Assets. - All existing public airport
facilities, runways, lands, buildings and other property, movable or immovable, belonging to the
Airport, and all assets, powers rights, interests and privileges belonging to the Bureau of Air
Transportation relating to airport works or air operations, including all equipment which are
necessary for the operation of crash fire and rescue facilities, are hereby transferred to the
Authority.
On the other hand, MCIAA's charter (Rep. Act No. 6958) provides:
Section 15. Transfer of Existing Facilities and Intangible Assets. - All existing public airport
facilities, runways, lands, buildings and other properties, movable or immovable, belonging to
or presently administered by the airports, and all assets, powers, rights, interest and privileges
relating to airport works or air operations, including all equipment which are necessary for the
operation of air navigation, aerodrome control towers, crash, fire, and rescue facilities are
hereby transferred to the Authority: Provided, however, That the operational control of all
equipment necessary for the operation of radio aids to air navigation, airways communication,
the approach control office and the area control center shall be retained by the Air
Transportation Office. xxx
[54]See Section 3, E.O. 903 (as amended), infra note 140; and Section Section 4(c), Rep. Act
No. 6958, which qualifies the power of the MCIAA to sell its properties, providing that "any
asset located in the Mactan International Airport important to national security shall not be
subject to alienation or mortgage by the Authority nor to transfer to any entity other than the
National Government."
[55] See Section 16, E.O. 903 (as amended) and Section 13, Rep. Act No. 6958.
[56] See Articles 40 to 43, Civil Code.
[57] See Articles 44 to 47, Civil Code.
[58] This is apparent from such assertions as "When the law vests in a government
instrumentality corporate powers, the instrumentality does not become a corporation. Unless the
government instrumentality is organized as a stock or non-stock corporation, it remains a
government instrumentality exercising not only governmental but also corporate powers." See
Decision, p. 9-10.
[60] See Section 2(10), E.O. 292.
[61] See Section 2(4), E.O No. 292.
[62] 50 Phil. 259 (1927).
[63] Id., at 288.
[64] See Sec. 5, Rep. Act No. 6395.
[65] Section 3, Corporation Code.
[66] See Section 13, Rep. Act No. 6395.
[68] See Section 16(i), Rep. Act No. 7875.
[69]See Section 3, Rep. Act 8282.
[70] Supra note 14.
[71]See Section 2(b), Rep. Act No. 7656, which defines GOCCs as "corporations organized as a
stock or non-stock corporation xxx"
[72] See Rep. Act No. 7656, the pertinent provisions of which read:
c. 3. Dividends.-All government-owned or -controlled corporations shall declare and

remit at least fifty percent (50%) of their annual net earnings as cash, stock or
property dividends to the National Government. This section shall also apply to
those government-owned or -controlled corporations whose profit distribution is
provided by their respective charters or by special law, but shall exclude those
enumerated in Section 4 hereof: Provided, That such dividends accruing to the
National Government shall be received by the National Treasury and recorded as
income of the General Fund.
Sec. 4. Exemptions.-The provisions of the preceding section notwithstanding,

government-owned or -controlled corporations created or organized by law to
administer real or personal properties or funds held in trust for the use and the
benefit of its members, shall not be covered by this Act such as, but not limited to:
the Government Service Insurance System, the Home Development Mutual Fund,
the Employees Compensation Commission, the Overseas Workers Welfare
Administration, and the Philippine Medical Care Commission.
[73] See Pres. Decree No. 857 (as amended).

[74] See Section 10, Pres. Decree No. 857.

[75] See Section 11, Pres. Decree No. 857.

[76] See Rep. Act No. 7227.



[79] See Section 47, Rep. Act No. 7916 in relation to Section 5, Pres. Decree No. 66.

[80] See Executive Order No. 603, as amended.

[81] See Article 6, Section 15 of Executive Order No. 603, as amended.

[82] See Rep. Act No. 7653. If there is any doubt whether the BSP was intended to be covered
by Rep. Act No. 7656, see Section 2(b), Rep. Act No. 7656, which states that "This term
[GOCCs] shall also include financial institutions, owned or controlled by the National
Government, but shall exclude acquired asset corporations, as defined in the next paragraphs,
state universities, and colleges."


[84] See Sections 43 & 44, Rep. Act No. 7653.


[86] Supra note 35.

[87] See Decision, p. 10.
[88] Id. at 10-11.
[89] Id.
[95]See e.g., Sections 1 & 2, Rep. Act No. 6070.
Section 1. Declaration of Policy. - It is hereby declared to be the policy of the Congress to foster
the accelerated and balanced growth of the Province of Ilocos Sur, within the context of national
plans and policies for social and economic development, through the leadership, guidance, and
support of the government. To achieve this end, it is recognized that a government corporation
should be created for the purpose of drawing up the necessary plans of provincial development;
xxx
Sec. 2. Ilocos Sur Development Authority created. - There is hereby created a body corporate to
be known as the Ilocos Sur Development Authority xxx. The Authority shall execute the powers
and functions herein vested and conferred upon it in such manner as will in its judgment, aid to
the fullest possible extent in carrying out the aims and purposes set forth below."
[96]See Art. 37, Civil Code, which provides in part, "Juridical capacity, which is the fitness to
be the subject of legal relations""
[97]See rollo, p. 18. -Petitioner [MIAA] is a government-owned and controlled corporation

with original charter as it was created by virtue of Executive Order No. 903 issued by then
President Ferdinand E. Marcos on July 21, 1983, as amended by Executive Order No. 298
issued by President Corazon C. Aquino on July 26, 1987, and with office address at the MIAA
Administration Bldg Complex, MIAA Road, Pasay City." (emphasis supplied).
[98] See "Department of Budget and Management - Web Linkages," http://www.dbm.

gov.ph/web_linkages.htm (Last visited 25 February 2005).
[99]G.R. No. 104217, 5 December 1994, 238 SCRA 714; per Quiazon, J.. "Petitioner MIAA is a
government-owned and controlled corporation for the purpose, among others, of encouraging
and promoting international and domestic air traffic in the Philippines as a means of making the
Philippines a center of international trade and tourism and accelerating the development of the
means of transportation and communications in the country". Id. at 716.
[100] See Section 23, Chapter 6, Title XV, Book IV, Administrative Code of 1987.
[101] Supra note 60.
[102] Supra note 8.
[103] Supra note 6.
[104] Assuming that there is conflict between Section 133(o), Section 193, Section 232 and
Section 234 of the Local Government Code, the rule in statutory construction is, "If there be no
such ground for choice between inharmonious provisions or sections, the latter provision or
section, being the last expression of the legislative will, must, in construction, vacate the former
to the extent of the repugnancy. It has been held that in case of irreconcilable conflict between
two provisions of the same statute, the last in order of position is frequently held to prevail,
unless it clearly appears that the intent of the legislature is otherwise." R. Agpalo, Statutory
Construction (3rd ed., 1995), p. 201; citing Lichauco & Co. v. Apostol, 44 Phil. 138 (1922);
Cuyegkeng v. Cruz, 108 Phil. 1147 (1960); Montenegro v. Castañeda, 91 Phil. 882 (1952).
[106] Supra note 6.
[107] Id. at 261-262.
[108] Id., at 248-250.
[110] Id, at 102; citing National Power Corp. v. Presiding Judge, RTC, Br. XXV, 190 SCRA 477
(1990).
[112]"Unless otherwise expressed in the tax law, the government and its political subdivisions
are exempt therefrom." J. VITUG AND E. ACOSTA, TAX LAW AND JURISPRUDENCE
(2nd ed., 2000), at 36.
[113] Supra note 9.
[114] See P.D. No. 1423.

[115]
R. Agpalo, Statutory Construction (3rd ed., 1995), at 199; citing Javellana v. Tayo, G.R.
No. 18919, 29 December 1982, 6 SCRA 1042 (1962); Radiola-Toshiba Phil., Inc. v. IAC, 199
SCRA 373 (1991).
[116] PPA v. City of Iloilo, supra note 42.
[117] Id., at 186-187.
[119] Id. at 869.
[120] Id. at 871.
[121] Id. at 872.
[122] See Section 10, E.O. No. 903.
[123] R. Lopez, I The Corporation Code of the Philippines Annotated, pp. 15-16 (1994).
[124] See Section 5, E.O. No. 903.
[125]See Section 1, Article X of the Constitution, which reads: "The territorial and political
subdivisions of the Republic of the Philippines are the provinces, cities, municipalities and
barangays xxx"
[126] Romualdez-Yap v. CSC, G.R. No. 104226, 12 August 1993, 225 SCRA 285, 294.
[127] 100 Phil. 468. (1956)
[128] Id., at 471-473.
[129] Lopez, supra note 123 at 67.
[130] G.R. No. L-49930, 7 August 1985, 138 SCRA 63.
[131]"Did the State act in a sovereign capacity or in a corporate capacity when it organized the
PNR for the purpose of engaging in transportation? Did it act differently when it organized the
PNR as successor of the Manila Railroad Company? xxx We hold that in the instant case the
State divested itself of its sovereign capacity when it organized the PNR which is no different
from its predecessor, the Manila Railroad Company." Id, at 66.

[133] Id., at 206.
[134] Section 32(24), Rep. Act No. 776. See CAA v. Court of Appeals, supra note 18, at 36.
[136] Id., at 36.
[137] Teodoro v. National Airports Commission, supra note 17, at 207.
[138] See Article XII, Section 11, Const.
[139]Vitug & Acosta, supra note 112, at 35; citing Bisaya Land Transportation Co., Inc. v.
Collector of Internal Revenue, L-11812, 29 May 1959, 105 Phil. 1338.
[140] See Section 3, E.O. 903, as amended.
[141] Indeed, last 4 February 2005, the MIAA filed a Manifestation before this Court stating that
its new General Manager had been conferring with the newly elected local government of
Parañaque with the end of settling the case at mutually acceptable terms. See rollo, pp. 315-316.
While this Manifestation was withdrawn a few weeks later, see rollo, pp. 320-322, it still stands
as proof that the parties are nevertheless willing to explore an extrajudicial settlement of this
case.
[142]See Section 17, Article VII, Constitution. "The President shall have control of all the
executive departments. He shall ensure that the laws be faithfully executed."
[143] See note 141.
[145] See Section 6(s), Rep. Act No. 8423.
[146] See Section 6(r), Rep. Act No. 8423.
[148] See Section 3(b), Rep. Act No. 8423.
[149] See Section 4(d), Rep. Act No. 8423.

Source: Supreme Court E-Library | Date created: August 05, 2014

759 Phil. 296
FIRST DIVISION
[ G.R. No. 181756, June 15, 2015 ]
MACTAN-CEBU INTERNATIONAL AIRPORT AUTHORITY (MCIAA),
PETITIONER, VS. CITY OF LAPU-LAPU AND ELENA T. PACALDO,
RESPONDENTS.

DECISION
LEONARDO-DE CASTRO, J.:
This is a clear opportunity for this Court to clarify the effects of our two previous decisions,
issued a decade apart, on the power of local government units to collect real property taxes from
airport authorities located within their area, and the nature or the juridical personality of said
airport authorities.

Before us is a Petition for Review on Certiorari under Rule 45 of the 1997 Rules of Civil
Procedure seeking to reverse and set aside the October 8, 2007 Decision[1] of the Court of
Appeals (Cebu City) in CA-G.R. SP No. 01360 and the February 12, 2008 Resolution[2]
denying petitioner’s motion for reconsideration.

THE FACTS

Petitioner Mactan-Cebu International Airport Authority (MCIAA) was created by Congress on

July 31, 1990 under Republic Act No. 6958[3] to “undertake the economical, efficient and
effective control, management and supervision of the Mactan International Airport in the
Province of Cebu and the Lahug Airport in Cebu City x x x and such other airports as may be
established in the Province of Cebu.” It is represented in this case by the Office of the Solicitor
General.

Respondent City of Lapu-Lapu is a local government unit and political subdivision, created and
existing under its own charter with capacity to sue and be sued. Respondent Elena T. Pacaldo
was impleaded in her capacity as the City Treasurer of respondent City.

Upon its creation, petitioner enjoyed exemption from realty taxes under the following provision
of Republic Act No. 6958:

Section 14. Tax Exemptions. – The Authority shall be exempt from realty taxes
imposed by the National Government or any of its political subdivisions, agencies
and instrumentalities: Provided, That no tax exemption herein granted shall extend
to any subsidiary which may be organized by the Authority.

On September 11, 1996, however, this Court rendered a decision in Mactan-Cebu International
Airport Authority v. Marcos[4] (the 1996 MCIAA case) declaring that upon the effectivity of
Republic Act No. 7160 (The Local Government Code of 1991), petitioner was no longer exempt
from real estate taxes. The Court held:
Since the last paragraph of Section 234 unequivocally withdrew, upon the effectivity
of the LGC, exemptions from payment of real property taxes granted to natural or
juridical persons, including government-owned or controlled corporations, except as
provided in the said section, and the petitioner is, undoubtedly, a government-owned
corporation, it necessarily follows that its exemption from such tax granted it in
Section 14 of its Charter, R.A. No. 6958, has been withdrawn. x x x.

On January 7, 1997, respondent City issued to petitioner a Statement of Real Estate Tax
assessing the lots comprising the Mactan International Airport in the amount of
P162,058,959.52. Petitioner complained that there were discrepancies in said Statement of Real
Estate Tax as follows:

(a) [T]he statement included lots and buildings not found in the inventory of
petitioner’s real properties;

(b) [S]ome of the lots were covered by two separate tax declarations which resulted
in double assessment;

(c) [There were] double entries pertaining to the same lots; and

(d) [T]he statement included lots utilized exclusively for governmental purposes.[5]

Respondent City amended its billing and sent a new Statement of Real Estate Tax to petitioner
in the amount of P151,376,134.66. Petitioner averred that this amount covered real estate taxes
on the lots utilized solely and exclusively for public or governmental purposes such as the
airfield, runway and taxiway, and the lots on which they are situated.[6]

Petitioner paid respondent City the amount of four million pesos (P4,000,000.00) monthly,
which was later increased to six million pesos (P6,000,000.00) monthly. As of December 2003,
petitioner had paid respondent City a total of P275,728,313.36.[7]

Upon request of petitioner’s General Manager, the Secretary of the Department of Justice (DOJ)
issued Opinion No. 50, Series of 1998,[8] and we quote the pertinent portions of said Opinion
below:

You further state that among the real properties deemed transferred to MCIAA are
the airfield, runway, taxiway and the lots on which the runway and taxiway are
situated, the tax declarations of which were transferred in the name of the MCIAA.
In 1997, the City of Lapu-Lapu imposed real estate taxes on these properties
invoking the provisions of the Local Government Code.

It is your view that these properties are not subject to real property tax because they
are exclusively used for airport purposes. You said that the runway and taxiway are
not only used by the commercial airlines but also by the Philippine Air Force and
other government agencies. As such and in conjunction with the above interpretation
of Section 15 of R.A. No. 6958, you believe that these properties are considered
owned by the Republic of the Philippines. Hence, this request for opinion.
The query is resolved in the affirmative. The properties used for airport
purposes (i.e. airfield, runway, taxiway and the lots on which the runway and
taxiway are situated) are owned by the Republic of the Philippines.
xxxx
Under the Law on Public Corporations, the legislature has complete control over the
property which a municipal corporation has acquired in its public or governmental
capacity and which is devoted to public or governmental use. The municipality in
dealing with said property is subject to such restrictions and limitations as the
legislature may impose. On the other hand, property which a municipal corporation
acquired in its private or proprietary capacity, is held by it in the same character as a
private individual. Hence, the legislature in dealing with such property, is subject to
the constitutional restrictions concerning property (Martin, Public Corporations
[1997], p. 30; see also Province of Zamboanga del [Norte] v. City of Zamboanga
[131 Phil. 446]). The same may be said of properties transferred to the MCIAA and
used for airport purposes, such as those involved herein. Since such properties are of
public dominion, they are deemed held by the MCIAA in trust for the Government
and can be alienated only as may be provided by law.
Based on the foregoing, it is our considered opinion that the properties used for
airport purposes, such as the airfield, runway and taxiway and the lots on
which the runway and taxiway are located, are owned by the State or by the
Republic of the Philippines and are merely held in trust by the MCIAA,
notwithstanding that certificates of titles thereto may have been issued in the
name of the MCIAA. (Emphases added.)
Based on the above DOJ Opinion, the Department of Finance issued a 2nd Indorsement to the
City Treasurer of Lapu-Lapu dated August 3, 1998,[9] which reads:

The distinction as to which among the MCIAA properties are still considered
“owned by the State or by the Republic of the Philippines,” such as the resolution in
the above-cited DOJ Opinion No. 50, for purposes of real property tax exemption is
hereby deemed tenable considering that the subject “airfield, runway, taxiway and
the lots on which the runway and taxiway are situated” appears to be the subject of
real property tax assessment and collection of the city government of Lapu-Lapu,
hence, the same are definitely located within the jurisdiction of Lapu-Lapu City.

Moreover, then Undersecretary Antonio P. Belicena of the Department of

Finance, in his 1st Indorsement dated May 18, 1998, advanced that “this
Department (DOF) interposes no objection to the request of Mactan Cebu
International Airport Authority for exemption from payment of real property
tax on the property used for airport purposes” mentioned above.
The City Assessor, therefore, is hereby instructed to transfer the assessment of
the subject airfield, runway, taxiway and the lots on which the runway and
taxiway are situated, from the “Taxable Roll” to the “Exempt Roll” of real
properties.
The City Treasurer thereat should be informed on the action taken for his immediate
appropriate action. (Emphases added.)
Respondent City Treasurer Elena T. Pacaldo sent petitioner a Statement of Real Property Tax
Balances up to the year 2002 reflecting the amount of P246,395,477.20. Petitioner claimed that
the statement again included the lots utilized solely and exclusively for public purpose such as
the airfield, runway, and taxiway and the lots on which these are built. Respondent Pacaldo then
issued Notices of Levy on 18 sets of real properties of petitioner.[10]

Petitioner filed a petition for prohibition[11] with the Regional Trial Court (RTC) of Lapu-Lapu
City with prayer for the issuance of a temporary restraining order (TRO) and/or a writ of
preliminary injunction, docketed as SCA No. 6056-L. Branch 53 of RTC Lapu-Lapu City then
issued a 72-hour TRO. The petition for prohibition sought to enjoin respondent City from
issuing a warrant of levy against petitioner’s properties and from selling them at public auction
for delinquency in realty tax obligations. The petition likewise prayed for a declaration that the
airport terminal building, the airfield, runway, taxiway and the lots on which they are situated
are exempted from real estate taxes after due hearing. Petitioner based its claim of exemption on
DOJ Opinion No. 50.

The RTC issued an Order denying the motion for extension of the TRO. Thus, on December 10,
2003, respondent City auctioned 27 of petitioner’s properties. As there was no interested bidder
who participated in the auction sale, respondent City forfeited and purchased said properties.
The corresponding Certificates of Sale of Delinquent Property were issued to respondent City.
[12]

Petitioner claimed before the RTC that it had discovered that respondent City did not pass any
ordinance authorizing the collection of real property tax, a tax for the special education fund
(SEF), and a penalty interest for its nonpayment. Petitioner argued that without the
corresponding tax ordinances, respondent City could not impose and collect real property tax,
an additional tax for the SEF, and penalty interest from petitioner.[13]

The RTC issued an Order[14] on December 28, 2004 granting petitioner’s application for a writ
of preliminary injunction. The pertinent portions of the Order are quoted below:

The supervening legal issue has rendered it imperative that the matter of the
consolidation of the ownership of the auctioned properties be placed on hold.
Furthermore, it is the view of the Court that great prejudice and damage will be
suffered by petitioner if it were to lose its dominion over these properties now when
the most important legal issue has still to be resolved by the Court. Besides, the
respondents and the intervenor have not sufficiently shown cause why petitioner’s
application should not be granted.
WHEREFORE, the foregoing considered, petitioner’s application for a writ of
preliminary injunction is granted. Consequently, upon the approval of a bond in the
amount of one million pesos (P1,000,000.00), let a writ of preliminary injunction
issue enjoining the respondents, the intervenor, their agents or persons acting in
[their] behalf, to desist from consolidating and exercising ownership over the
properties of the petitioner.
However, upon motion of respondents, the RTC lifted the writ of preliminary injunction in an
Order[15] dated December 5, 2005. The RTC reasoned as follows:

The respondent City, in the course of the hearing of its motion, presented to this
Court a certified copy of its Ordinance No. 44 (Omnibus Tax Ordinance of the City
of Lapu-Lapu), Section 25 whereof authorized the collection of a rate of one and
one-half (1 ½) [per centum] from owners, executors or administrators of any real
estate lying within the jurisdiction of the City of Lapu-Lapu, based on the assessed
value as shown in the latest revision.

Though this ordinance was enacted prior to the effectivity of Republic Act No. 7160
(Local Government Code of 1991), to the mind of the Court this ordinance is still a
valid and effective ordinance in view of Sec. 529 of RA 7160 x x x [and the]
Implementing Rules and Regulations of RA 7160 x x x.

xxxx

The tax collected under Ordinance No. 44 is within the rates prescribed by RA 7160,
though the 25% penalty collected is higher than the 2% interest allowed under Sec.
255 of the said law which provides:

In case of failure to pay the basic real property tax or any other tax levied
under this Title upon the expiration of the periods as provided in Section
250, or when due, as the case may be, shall subject the taxpayer to the
payment of interest at the rate of two percent (2%) per month on the
unpaid amount or a fraction thereof, until the delinquent tax shall have
been fully paid: Provided, however, That in no case shall the total interest
on the unpaid tax or portion thereof exceed thirty-six (36) months.

This difference does not however detract from the essential enforceability and
effectivity of Ordinance No. 44 pursuant to Section 529 of RA 7160 and Article 278
of the Implementing Rules and Regulations. The outcome of this disparity is simply
that respondent City can only collect an interest of 2% per month on the unpaid tax.
Consequently, respondent City [has] to recompute the petitioner’s tax liability.

It is also the Court’s perception that respondent City can still collect the additional
1% tax on real property without an ordinance to this effect. It may be recalled that
Republic Act No. 5447 has created the Special Education Fund which is constituted
from the proceeds of the additional tax on real property imposed by the law.
Respondent City has collected this tax as mandated by this law without any
ordinance for the purpose, as there is no need for it. Even when RA 5447 was
amended by PD 464 (Real Property Tax Code), respondent City had continued to
collect the tax, as it used to.
It is true that RA 7160 has repealed RA 5447, but what has been repealed are only
Section 3, a(3) and b(2) which concern the allocation of the additional tax,
considering that under RA 7160, the proceeds of the additional 1% tax on real
property accrue exclusively to the Special Education Fund. Nevertheless, RA 5447
has not been totally repealed; there is only a partial repeal.
It may be observed that there is no requirement in RA 7160 that an ordinance be

enacted to enable the collection of the additional 1% tax. This is so since RA 5447 is
still in force and effect, and the declared policy of the government in enacting the
law, which is to contribute to the financial support of the goals of education as
provided in the Constitution, necessitates the continued and uninterrupted collection
of the tax. Considering that this is a tax of far-reaching importance, to require the
passage of an ordinance in order that the tax may be collected would be to place the
collection of the tax at the option of the local legislature. This would run counter to
the declared policy of the government when the SEF was created and the tax
imposed.
As regards the allegation of respondents that this Court has no jurisdiction to

entertain the instant petition, the Court deems it proper, at this stage of the
proceedings, not to treat this issue, as it involves facts which are yet to be
established.
x x x [T]he Court’s issuance of a writ of preliminary injunction may appear to be a

futile gesture in the light of Section 263 of RA 7160. x x x.
xxxx
It would seem from the foregoing provisions, that once the taxpayer fails to redeem
within the one-year period, ownership fully vests on the local government unit
concerned. Thus, when in the present case petitioner failed to redeem the parcels of
land acquired by respondent City, the ownership thereof became fully vested on
respondent City without the latter having to perform any other acts to perfect its
ownership. Corollary thereto, ownership on the part of respondent City has become a
fait accompli.
WHEREFORE, in the light of the foregoing considerations, respondents’ motion for

reconsideration is granted, and the order of this Court dated December 28, 2004 is
hereby reconsidered. Consequently, the writ of preliminary injunction issued by this
Court is hereby lifted.
Aggrieved, petitioner filed a petition for certiorari[16] with the Court of Appeals (Cebu City),
with urgent prayer for the issuance of a TRO and/or writ of preliminary injunction, docketed as
CA-G.R. SP No. 01360. The Court of Appeals (Cebu City) issued a TRO[17] on January 5, 2006
and shortly thereafter, issued a writ of preliminary injunction[18] on February 17, 2006.

RULING OF THE COURT OF APPEALS
The Court of Appeals (Cebu City) promulgated the questioned Decision on October 8, 2007,
holding that petitioner is a government-owned or controlled corporation and its properties are
subject to realty tax. The dispositive portion of the questioned Decision reads:
WHEREFORE, in view of the foregoing, judgment is hereby rendered by us as

follows:

a. We DECLARE the airport terminal building, the airfield, runway, taxiway and
the lots on which they are situated NOT EXEMPT from the real estate tax
imposed by the respondent City of Lapu-Lapu;

b. We DECLARE the imposition and collection of the real estate tax, the
additional levy for the Special Education Fund and the penalty interest as
VALID and LEGAL. However, pursuant to Section 255 of the Local
Government Code, respondent city can only collect an interest of 2% per
month on the unpaid tax which total interest shall, in no case, exceed thirty-six
(36) months;

c. We DECLARE the sale in public auction of the aforesaid properties and the
eventual forfeiture and purchase of the subject property by the respondent City
of Lapu-Lapu as NULL and VOID. However, petitioner MCIAA’s property is
encumbered only by a limited lien possessed by the respondent City of Lapu-
Lapu in accord with Section 257 of the Local Government Code.[19]

Petitioner filed a Motion for Partial Reconsideration[20] of the questioned Decision covering
only the portion of said decision declaring that petitioner is a GOCC and, therefore, not exempt
from the realty tax and special education fund imposed by respondent City. Petitioner cited
Manila International Airport Authority v. Court of Appeals[21] (the 2006 MIAA case) involving
the City of Parañaque and the Manila International Airport Authority. Petitioner claimed that it
had been described by this Court as a government instrumentality, and that it followed “as a
logical consequence that petitioner is exempt from the taxing powers of respondent City of
Lapu-Lapu.”[22] Petitioner alleged that the 1996 MCIAA case had been overturned by the Court
in the 2006 MIAA case. Petitioner thus prayed that it be declared exempt from paying the realty
tax, special education fund, and interest being collected by respondent City.

On February 12, 2008, the Court of Appeals denied petitioner’s motion for partial
reconsideration in the questioned Resolution.

The Court of Appeals followed and applied the precedent established in the 1996 MCIAA case
and refused to apply the 2006 MIAA case. The Court of Appeals wrote in the questioned
Decision: “We find that our position is in line with the coherent and cohesive interpretation of
the relevant provisions of the Local Government Code on local taxation enunciated in the [1996
MCIAA] case which to our mind is more elegant and rational and provides intellectual clarity
than the one provided by the Supreme Court in the [2006] MIAA case.”[23]

In the questioned Decision, the Court of Appeals held that petitioner’s airport terminal building,
airfield, runway, taxiway, and the lots on which they are situated are not exempt from real estate
tax reasoning as follows:
Under the Local Government Code (LGC for brevity), enacted pursuant to the
constitutional mandate of local autonomy, all natural and juridical persons, including
government-owned or controlled corporations (GOCCs), instrumentalities and
agencies, are no longer exempt from local taxes even if previously granted an
exemption. The only exemptions from local taxes are those specifically provided
under the Code itself, or those enacted through subsequent legislation.

Thus, the LGC, enacted pursuant to Section 3, Article X of the Constitution,

provides for the exercise by local government units of their power to tax, the scope
thereof or its limitations, and the exemptions from local taxation.

Section 133 of the LGC prescribes the common limitations on the taxing powers of
local government units. x x x.

xxxx

The above-stated provision, however, qualified the exemption of the National

Government, its agencies and instrumentalities from local taxation with the phrase
“unless otherwise provided herein.”

Section 232 of the LGC provides for the power of the local government units (LGUs
for brevity) to levy real property tax. x x x.

xxxx

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

xxxx

Section 193 of the LGC is the general provision on withdrawal of tax exemption
privileges. x x x.[24] (Citations omitted.)

The Court of Appeals went on to state that contrary to the ruling of the Supreme Court in the
2006 MIAA case, it finds and rules that:

a) Section 133 of the LGC is not an absolute prohibition on the power of the LGUs
to tax the National Government, its agencies and instrumentalities as the same is
qualified by Sections 193, 232 and 234 which “otherwise provided”; and

b) Petitioner MCIAA is a GOCC.[25] (Emphasis ours.)

The Court of Appeals ratiocinated in the following manner:
Pursuant to the explicit provision of Section 193 of the LGC, exemptions previously
enjoyed by persons, whether natural or juridical, like the petitioner MCIAA, are
deemed withdrawn upon the effectivity of the Code. Further, the last paragraph of
Section 234 of the Code also unequivocally withdrew, upon the Code’s effectivity,
exemptions from payment of real property taxes previously granted to natural or
juridical persons, including government-owned or controlled corporations, except as
provided in the said section. Petitioner MCIAA, undoubtedly a juridical person, it
follows that its exemption from such tax granted under Section 14 of R.A. 6958 has
been withdrawn.

xxxx

From the [1996 MCIAA] ruling, it is acknowledged that, under Section 133 of the
LGC, instrumentalities were generally exempt from all forms of local government
taxation, unless otherwise provided in the Code. On the other hand, Section 232
“otherwise provided” insofar as it allowed local government units to levy an ad
valorem real property tax, irrespective of who owned the property. At the same time,
the imposition of real property taxes under Section 232 is, in turn, qualified by the
phrase “not hereinafter specifically exempted.” The exemptions from real property
taxes are enumerated in Section 234 of the Code which specifically states that only
real properties owned by the Republic of the Philippines or any of its political
subdivisions are exempted from the payment of the tax. Clearly, instrumentalities or
GOCCs do not fall within the exceptions under Section 234 of the LGC.

Thus, as ruled in the [1996 MCIAA] case, the prohibition on taxing the national
government, its agencies and instrumentalities under Section 133 is qualified by
Sections 232 and 234, and accordingly, the only relevant exemption now applicable
to these bodies is what is now provided under Section 234(a) of the Code. It may be
noted that the express withdrawal of previously granted exemptions to persons from
the payment of real property tax by the LGC does not even make any distinction as
to whether the exempt person is a governmental entity or not. As Sections 193 and
234 of the Code both state, the withdrawal applies to “all persons, including
GOCCs,” thus encompassing the two classes of persons recognized under our laws,
natural persons and juridical persons.

xxxx

The question of whether or not petitioner MCIAA is an instrumentality or a GOCC

has already been lengthily but soundly, cogently and lucidly answered in the [1996
MCIAA] case x x x.

xxxx

Based on the foregoing, the claim of the majority of the Supreme Court in the [2006
MIAA] case that MIAA (and also petitioner MCIAA) is not a government-owned or
controlled corporation but an instrumentality based on Section 2(10) of the
Administrative Code of 1987 appears to be unsound. In the [2006 MIAA] case, the
majority justifies MIAA’s purported exemption on Section 133(o) of the Local
Government Code which places agencies and instrumentalities: as generally exempt
from the taxation powers of the LGUs. It further went on to hold that “By express
mandate of the Local Government Code, local governments cannot impose any kind
of tax on national government instrumentalities like the MIAA.” x x x.[26] (Citations
omitted.)
The Court of Appeals further cited Justice Tinga’s dissent in the 2006 MIAA case as well as
provisions from petitioner MCIAA’s charter to show that petitioner is a GOCC.[27] The Court of
Appeals wrote:

These cited provisions establish the fitness of the petitioner MCIAA to be the subject
of legal relations. Under its charter, it has the power to acquire, possess and incur
obligations. It also has the power to contract in its own name and to acquire title to
movable or immovable property. More importantly, it may likewise exercise powers
of a corporation under the Corporation Code. Moreover, based on its own allegation,
it even recognized itself as a GOCC when it alleged in its petition for prohibition
filed before the lower court that it “is a body corporate organized and existing under
Republic Act No. 6958 x x x.”

We also find to be not meritorious the assertion of petitioner MCIAA that the
respondent city can no longer challenge the tax-exempt character of the properties
since it is estopped from doing so when respondent City of Lapu-Lapu, through its
former mayor, Ernest H. Weigel, Jr., had long ago conceded that petitioner’s
properties are exempt from real property tax.

It is not denied by the respondent city that it considered, through its former mayor,
Ernest H. Weigel, Jr., petitioner’s subject properties, specifically the runway and
taxiway, as exempt from taxes. However, as astutely pointed out by the respondent
city it “can never be in estoppel, particularly in matters involving taxes. It is a well-
known rule that erroneous application and enforcement of the law by public officers
do not preclude subsequent correct application of the statute, and that the
Government is never estopped by mistake or error on the part of its agents.”[28]
(Citations omitted.)

The Court of Appeals established the following:

a) [R]espondent City was able to prove and establish that it has a valid and existing
ordinance for the imposition of realty tax against petitioner MCIAA;

b) [T]he imposition and collection of additional levy of 1% Special Education Fund

(SEF) is authorized by law, Republic Act No. 5447; and

c) [T]he collection of penalty interest for delinquent taxes is not only authorized by
law but is likewise [sanctioned] by respondent City’s ordinance.[29]

The Court of Appeals likewise held that respondent City has a valid and existing local tax
ordinance, Ordinance No. 44, or the Omnibus Tax Ordinance of Lapu-Lapu City, which
provided for the imposition of real property tax. The relevant provision reads:
Chapter 5 – Tax on Real Property Ownership

Section 25. RATE OF TAX. - A rate of one and one-half (1 ½) percentum shall be
collected from owners, executors or administrators of any real estate lying within the
territorial jurisdiction of the City of Lapu-Lapu, based on the assessed value as
shown in the latest revision.[30]

The Court of Appeals found that even if Ordinance No. 44 was enacted prior to the effectivity of
the LGC, it remained in force and effect, citing Section 529 of the LGC and Article 278 of the
LGC’s Implementing Rules and Regulations.[31]

As regards the Special Education Fund, the Court of Appeals held that respondent City can still
collect the additional 1% tax on real property even without an ordinance to this effect, as this is
authorized by Republic Act No. 5447, as amended by Presidential Decree No. 464 (the Real
Property Tax Code), which does not require an enabling tax ordinance. The Court of Appeals
affirmed the RTC’s ruling that Republic Act No. 5447 was still in force and effect
notwithstanding the passing of the LGC, as the latter only partially repealed the former law.
What Section 534 of the LGC repealed was Section 3 a(3) and b(2) of Republic Act No. 5447,
and not the entire law that created the Special Education Fund.[32] The repealed provisions
referred to allocation of taxes on Virginia type cigarettes and duties on imported leaf tobacco
and the percentage remittances to the taxing authority concerned. The Court of Appeals, citing
The Commission on Audit of the Province of Cebu v. Province of Cebu,[33] held that “[t]he
failure to add a specific repealing clause particularly mentioning the statute to be repealed
indicates that the intent was not to repeal any existing law on the matter, unless an irreconcilable
inconsistency and repugnancy exists in the terms of the new and the old laws.”[34] The Court of
Appeals quoted the RTC’s discussion on this issue, which we reproduce below:

It may be observed that there is no requirement in RA 7160 that an ordinance be

enacted to enable the collection of the additional 1% tax. This is so since R.A. 5447
is still in force and effect, and the declared policy of the government in enacting the
law, which is to contribute to the financial support of the goals of education as
provided in the Constitution, necessitates the continued and uninterrupted collection
of the tax. Considering that this is a tax of far-reaching importance, to require the
passage of an ordinance in order that the tax may be collected would be to place the
collection of the tax at the option of the local legislature. This would run counter to
the declared policy of the government when the SEF was created and the tax
imposed.[35]

Regarding the penalty interest, the Court of Appeals found that Section 30 of Ordinance No. 44
of respondent City provided for a penalty surcharge of 25% of the tax due for a given year. Said
provision reads:

Section 30. – PENALTY FOR FAILURE TO PAY TAX. – Failure to pay the tax
provided for under this Chapter within the time fixed in Section 27, shall subject the
taxpayer to a surcharge of twenty-five percent (25%), without interest.[36]
The Court of Appeals however declared that after the effectivity of the Local Government Code,
the respondent City could only collect penalty surcharge up to the extent of 72%, covering a
period of three years or 36 months, for the entire delinquent property.[37] This was lower than
the 25% per annum surcharge imposed by Ordinance No. 44.[38] The Court of Appeals affirmed
the findings of the RTC in the decision quoted below:
The tax collected under Ordinance No. 44 is within the rates prescribed by RA 7160,
though the 25% penalty collected is higher than the 2% allowed under Sec. 255 of
the said law which provides:

xxxx

This difference does not however detract from the essential enforceability and
effectivity of Ordinance No. 44 pursuant to Section 529 of RA No. 7160 and Article
278 of the Implementing Rules and Regulations. The outcome of this disparity is
simply that respondent City can only collect an interest of 2% per month on the
unpaid tax. Consequently, respondent city will have to [recompute] the petitioner’s
tax liability.[39]

It is worthy to note that the Court of Appeals nevertheless held that even if it is clear that
respondent City has the power to impose real property taxes over petitioner, “it is also
evident and categorical that, under Republic Act No. 6958, the properties of petitioner
MCIAA may not be conveyed or transferred to any person or entity except to the national
government.”[40] The relevant provisions of the said law are quoted below:

Section 4. Functions, Powers and Duties. – The Authority shall have the following
functions, powers and duties:

xxxx

(e) To acquire, purchase, own, administer, lease, mortgage, sell or otherwise dispose
of any land, building, airport facility, or property of whatever kind and nature,
whether movable or immovable, or any interest therein: Provided, That any asset
located in the Mactan International Airport important to national security shall not
be subject to alienation or mortgage by the Authority nor to transfer to any entity
other than the National Government[.]

Section 13. Borrowing Power. – The Authority may, in accordance with Section 21,
Article XII of the Constitution and other existing laws, rules and regulations on local
or foreign borrowing, raise funds, either from local or international sources, by way
of loans, credit or securities, and other borrowing instruments with the power to
create pledges, mortgages and other voluntary liens or encumbrances on any of its
assets or properties, subject to the prior approval of the President of the Philippines.

All loans contracted by the Authority under this section, together with all interests
and other sums payable in respect thereof, shall constitute a charge upon all the
revenues and assets of the Authority and shall rank equally with one another, but
shall have priority over any other claim or charge on the revenue and assets of the
Authority: Provided, That this provision shall not be construed as a prohibition or
restriction on the power of the Authority to create pledges, mortgages and other
voluntary liens or encumbrances on any asset or property of the Authority.
The payment of the loans or other indebtedness of the Authority may be guaranteed
by the National Government subject to the approval of the President of the
Philippines.
The Court of Appeals concluded that “it is clear that petitioner MCIAA is denied by its charter
the absolute right to dispose of its property to any person or entity except to the national
government and it is not empowered to obtain loans or encumber its property without the
approval of the President.”[41] The questioned Decision contained the following conclusion:

With the advent of RA 7160, the Local Government Code, the power to tax is no
longer vested exclusively on Congress. LGUs, through its local legislative bodies,
are now given direct authority to levy taxes, fees and other charges pursuant to
Article X, Section 5 of the 1987 Constitution. And one of the most significant
provisions of the LGC is the removal of the blanket inclusion of instrumentalities
and agencies of the national government from the coverage of local taxation. The
express withdrawal by the Code of previously granted exemptions from realty taxes
applied to instrumentalities and government-owned or controlled corporations
(GOCCs) such as the petitioner Mactan-Cebu International Airport Authority. Thus,
petitioner MCIAA became a taxable person in view of the withdrawal of the realty
tax exemption that it previously enjoyed under Section 14 of RA No. 6958 of its
charter. As expressed and categorically held in the Mactan case, the removal and
withdrawal of tax exemptions previously enjoyed by persons, natural or juridical, are
consistent with the State policy to ensure autonomy to local governments and the
objective of the Local Government Code that they enjoy genuine and meaningful
local autonomy to enable them to attain their fullest development as self-reliant
communities and make them effective partners in the attainment of national goals.

However, in the case at bench, petitioner MCIAA’s charter expressly bars the
alienation or mortgage of its property to any person or entity except to the national
government. Therefore, while petitioner MCIAA is a taxable person for purposes of
real property taxation, respondent City of Lapu-Lapu is prohibited from seizing,
selling and owning these properties by and through a public auction in order to
satisfy petitioner MCIAA’s tax liability.[42] (Citations omitted.)

In the questioned Resolution that affirmed its questioned Decision, the Court of Appeals denied
petitioner’s motion for reconsideration based on the following grounds:

First, the MCIAA case remains the controlling law on the matter as the same is
the established precedent; not the MIAA case but the MCIAA case since the
former, as keenly pointed out by the respondent City of Lapu-Lapu, has not yet
attained finality as there is still yet a pending motion for reconsideration filed
with the Supreme Court in the aforesaid case.

Second, and more importantly, the ruling of the Supreme Court in the MIAA
case cannot be similarly invoked in the case at bench. The said case cannot be
considered as the “law of the case.” The “law of the case” doctrine has been
defined as that principle under which determinations of questions of law will
generally be held to govern a case throughout all its subsequent stages where such
determination has already been made on a prior appeal to a court of last resort. It is
merely a rule of procedure and does not go to the power of the court, and will not be
adhered to where its application will result in an unjust decision. It relates entirely to
questions of law, and is confined in its operation to subsequent proceedings in the
same case. According to said doctrine, whatever has been irrevocably established
constitutes the law of the case only as to the same parties in the same case and not to
different parties in an entirely different case. Besides, pending resolution of the
aforesaid motion for reconsideration in the MIAA case, the latter case has not
irrevocably established anything.
Thus, after a thorough and judicious review of the allegations in petitioner’s motion
for reconsideration, this Court resolves to deny the same as the matters raised therein
had already been exhaustively discussed in the decision sought to be reconsidered,
and that no new matters were raised which would warrant the modification, much
less reversal, thereof.[43] (Emphasis added, citations omitted.)
PETITIONER’S THEORY

Petitioner is before us now claiming that this Court, in the 2006 MIAA case, had expressly
declared that petitioner, while vested with corporate powers, is not considered a government-
owned or controlled corporation, but is a government instrumentality like the Manila
International Airport Authority (MIAA), Philippine Ports Authority (PPA), University of the
Philippines, and Bangko Sentral ng Pilipinas (BSP). Petitioner alleges that as a government
instrumentality, all its airport lands and buildings are exempt from real estate taxes imposed by
respondent City.[44]

Petitioner alleges that Republic Act No. 6958 placed “a limitation on petitioner’s administration
of its assets and properties” as it provides under Section 4(e) that “any asset in the international
airport important to national security cannot be alienated or mortgaged by petitioner or
transferred to any entity other than the National Government.”[45]

Thus, petitioner claims that the Court of Appeals (Cebu City) gravely erred in disregarding the
following:

PETITIONER IS A GOVERNMENT INSTRUMENTALITY AS EXPRESSLY

DECLARED BY THE HONORABLE COURT IN THE MIAA CASE. AS SUCH,
IT IS EXEMPT FROM PAYING REAL ESTATE TAXES IMPOSED BY
RESPONDENT CITY OF LAPU-LAPU.

II

THE PROPERTIES OF PETITIONER CONSISTING OF THE AIRPORT

TERMINAL BUILDING, AIRFIELD, RUNWAY, TAXIWAY, INCLUDING THE
LOTS ON WHICH THEY ARE SITUATED, ARE EXEMPT FROM REAL
PROPERTY TAXES.
III
RESPONDENT CITY OF LAPU-LAPU CANNOT IMPOSE REAL PROPERTY

TAX WITHOUT ANY APPROPRIATE ORDINANCE.
IV
RESPONDENT CITY OF LAPU-LAPU CANNOT IMPOSE AN ADDITIONAL

1% TAX FOR THE SPECIAL EDUCATION FUND IN THE ABSENCE OF ANY
CORRESPONDING ORDINANCE.
RESPONDENT CITY OF LAPU-LAPU CANNOT IMPOSE ANY INTEREST

SANS ANY ORDINANCE MANDATING ITS IMPOSITION.[46]
Petitioner claims the following similarities with MIAA:

1. MCIAA belongs to the same class and performs identical functions as MIAA;

2. MCIAA is a public utility like MIAA;

3. MIAA was organized to operate the international and domestic airport in Paranaque City
for public use, while MCIAA was organized to operate the international and domestic
airport in Mactan for public use.

4. Both are attached agencies of the Department of Transportation and Communications.[47]

Petitioner compares its charter (Republic Act No. 6958) with that of MIAA (Executive Order
No. 903).

Section 3 of Executive Order No. 903 provides:

Sec. 3. Creation of the Manila International Airport Authority. There is hereby

established a body corporate to be known as the Manila International Airport
Authority which shall be attached to the Ministry of Transportation and
Communications. The principal office of the Authority shall be located at the New
Manila International Airport. The Authority may establish such offices, branches,
agencies or subsidiaries as it may deem proper and necessary; x x x.

Section 2 of Republic Act No. 6958 reads:

Section 2. Creation of the Mactan-Cebu International Airport Authority. – There

is hereby established a body corporate to be known as the Mactan-Cebu
International Airport Authority which shall be attached to the Department of
Transportation and Communications. The principal office of the Authority shall be
located at the Mactan International Airport, Province of Cebu.
The Authority may have such branches, agencies or subsidiaries as it may deem
proper and necessary.
As to MIAA’s purposes and objectives, Section 4 of Executive Order No. 903 reads:

Sec. 4. Purposes and Objectives. The Authority shall have the following purposes
and objectives:

(a) To help encourage and promote international and domestic air traffic in the
Philippines as a means of making the Philippines a center of international trade and
tourism and accelerating the development of the means of transportation and
communications in the country;

(b) To formulate and adopt for application in the Airport internationally acceptable
standards of airport accommodation and service; and

(c) To upgrade and provide safe, efficient, and reliable airport facilities for
international and domestic air travel.

Petitioner claims that the above purposes and objectives are analogous to those enumerated in
its charter, specifically Section 3 of Republic Act No. 6958, which reads:

Section 3. Primary Purposes and Objectives. – The Authority shall principally

undertake the economical, efficient and effective control, management and
supervision of the Mactan International Airport in the Province of Cebu and the
Lahug Airport in Cebu City, hereinafter collectively referred to as the airports, and
such other airports as may be established in the Province of Cebu. In addition, it
shall have the following objectives:

(a) To encourage, promote and develop international and domestic air traffic in the
central Visayas and Mindanao regions as a means of making the regions centers of
international trade and tourism, and accelerating the development of the means of
transportation and communications in the country; and

(b) To upgrade the services and facilities of the airports and to formulate
internationally acceptable standards of airport accommodation and service.

The powers, functions and duties of MIAA under Section 5 of Executive Order No. 903 are:

Sec. 5. Functions, Powers and Duties. The Authority shall have the following functions, powers
and duties:

(a) To formulate, in coordination with the Bureau of Air Transportation and other
appropriate government agencies, a comprehensive and integrated policy and
program for the Airport and to implement, review and update such policy and
program periodically;
(b) To control, supervise, construct, maintain, operate and provide such facilities or
services as shall be necessary for the efficient functioning of the Airport;
(c) To promulgate rules and regulations governing the planning, development,
maintenance, operation and improvement of the Airport, and to control and/or
supervise as may be necessary the construction of any structure or the rendition
of any services within the Airport;
(d) To sue and be sued in its corporate name;
(e) To adopt and use a corporate seal;
(f) To succeed by its corporate name;
(g) To adopt its by-laws, and to amend or repeal the same from time to time;
(h) To execute or enter into contracts of any kind or nature;
(i) To acquire, purchase, own, administer, lease, mortgage, sell or otherwise dispose
whether movable or immovable, or any interest therein;
(j) To exercise the power of eminent domain in the pursuit of its purposes and
objectives;
(k) To levy, and collect dues, charges, fees or assessments for the use of the Airport
premises, works, appliances, facilities or concessions or for any service provided
by the Authority, subject to the approval of the Minister of Transportation and
Communications in consultation with the Minister of Finance, and subject
further to the provisions of Batas Pambansa Blg. 325 where applicable;
(l) To invest its idle funds, as it may deem proper, in government securities and
other evidences of indebtedness of the government;
(m) To provide services, whether on its own or otherwise, within the Airport and the
approaches thereof, which shall include but shall not be limited to, the
following:
(1) Aircraft movement and allocation of parking areas of aircraft on the ground;
(2) Loading or unloading of aircrafts;
(3) Passenger handling and other services directed towards the care,
convenience and security of passengers, visitors and other airport users; and
(4) Sorting, weighing, measuring, warehousing or handling of baggage and
goods.
(n) To perform such other acts and transact such other business, directly or
indirectly necessary, incidental or conducive to the attainment of the purposes
and objectives of the Authority, including the adoption of necessary measures to
remedy congestion in the Airport; and
(o) To exercise all the powers of a corporation under the Corporation Law, insofar
as these powers are not inconsistent with the provisions of this Executive Order.
Petitioner claims that MCIAA has related functions, powers and duties under Section 4 of
Republic Act No. 6958, as shown in the provision quoted below:

Section 4. Functions, Powers and Duties. – The Authority shall have the following
functions, powers and duties:

(a) To formulate a comprehensive and integrated development policy and program

for the airports and to implement, review and update such policy and program
periodically;

(b) To control, supervise, construct, maintain, operate and provide such facilities or
services as shall be necessary for the efficient functioning of the airports;
(c) To promulgate rules and regulations governing the planning, development,

maintenance, operation and improvement of the airports, and to control and
supervise the construction of any structure or the rendition of any service within the
airports;
(d) To exercise all the powers of a corporation under the Corporation Code of the
Philippines, insofar as those powers are not inconsistent with the provisions of this
Act;
(e) To acquire, purchase, own, administer, lease, mortgage, sell or otherwise dispose
whether movable or immovable, or any interest therein: Provided, That any asset
located in the Mactan International Airport important to national security shall not
be subject to alienation or mortgage by the Authority nor to transfer to any entity
other than the National Government;
(f) To exercise the power of eminent domain in the pursuit of its purposes and
objectives;
(g) To levy and collect dues, charges, fees or assessments for the use of airport
premises, works, appliances, facilities or concessions, or for any service provided by
the Authority;
(h) To retain and appropriate dues, fees and charges collected by the Authority
relative to the use of airport premises for such measures as may be necessary to
make the Authority more effective and efficient in the discharge of its assigned
tasks;
(i) To invest its idle funds, as it may deem proper, in government securities and other
evidences of indebtedness; and
(j) To provide services, whether on its own or otherwise, within the airports and the
approaches thereof as may be necessary or in connection with the maintenance and
operation of the airports and their facilities.
Petitioner claims that like MIAA, it has police authority within its premises, as shown in their
respective charters quoted below:

EO 903, Sec. 6. Police Authority. — The Authority shall have the power to exercise
such police authority as may be necessary within its premises to carry out its
functions and attain its purposes and objectives, without prejudice to the exercise of
functions within the same premises by the Ministry of National Defense through the
Aviation Security Command (AVSECOM) as provided in LOI 961: Provided, That
the Authority may request the assistance of law enforcement agencies, including
request for deputization as may be required. x x x.

R.A. No. 6958, Section 5. Police Authority. – The Authority shall have the power to
exercise such police authority as may be necessary within its premises or areas of
operation to carry out its functions and attain its purposes and objectives: Provided,
That the Authority may request the assistance of law enforcement agencies,
including request for deputization as may be required. x x x.
Petitioner pointed out other similarities in the two charters, such as:

1. Both MCIAA and MIAA are covered by the Civil Service Law, rules and regulations (Section
15, Executive Order No. 903; Section 12, Republic Act No. 6958);

2. Both charters contain a proviso on tax exemptions (Section 21, Executive Order No. 903;
Section 14, Republic Act No. 6958);

3. Both MCIAA and MIAA are required to submit to the President an annual report generally
dealing with their activities and operations (Section 14, Executive Order No. 903; Section 11,
Republic Act No. 6958); and

4. Both have borrowing power subject to the approval of the President (Section 16, Executive
Order No. 903; Section 13, Republic Act No. 6958).[48]

Petitioner suggests that it is because of its similarity with MIAA that this Court, in the 2006
MIAA case, placed it in the same class as MIAA and considered it as a government
instrumentality.

Petitioner submits that since it is also a government instrumentality like MIAA, the following
conclusion arrived by the Court in the 2006 MIAA case is also applicable to petitioner:

Under Section 2(10) and (13) of the Introductory Provisions of the

Administrative Code, which governs the legal relation and status of government
units, agencies and offices within the entire government machinery, MIAA is a
government instrumentality and not a government-owned or controlled
corporation. Under Section 133(o) of the Local Government Code, MIAA as a
government instrumentality is not a taxable person because it is not subject to
“[t]axes, fees or charges of any kind” by local governments. The only exception
is when MIAA leases its real property to a “taxable person” as provided in
Section 234(a) of the Local Government Code, in which case the specific real
property leased becomes subject to real estate tax. Thus, only portions of the
Airport Lands and Buildings leased to taxable persons like private parties are
subject to real estate tax by the City of Parañaque.

Under Article 420 of the Civil Code, the Airport Lands and Buildings of MIAA,
being devoted to public use, are properties of public dominion and thus owned
by the State or the Republic of the Philippines. Article 420 specifically mentions
“ports x x x constructed by the State,” which includes public airports and seaports,
as properties of public dominion and owned by the Republic. As properties of
public dominion owned by the Republic, there is no doubt whatsoever that the
Airport Lands and Buildings are expressly exempt from real estate tax under
Section 234(a) of the Local Government Code. This Court has also repeatedly
ruled that properties of public dominion are not subject to execution or
foreclosure sale.[49] (Emphases added.)
Petitioner insists that its properties consisting of the airport terminal building, airfield, runway,
taxiway and the lots on which they are situated are not subject to real property tax because they
are actually, solely and exclusively used for public purposes.[50] They are indispensable to the
operation of the Mactan International Airport and by their very nature, these properties are
exempt from tax. Said properties belong to the State and are merely held by petitioner in trust.
As earlier mentioned, petitioner claims that these properties are important to national security
and cannot be alienated, mortgaged, or transferred to any entity except the National
Government.

Petitioner prays that judgment be rendered:

a) Declaring petitioner exempt from paying real property taxes as it is a

government instrumentality;
b) Declaring respondent City of Lapu-Lapu as bereft of any authority to levy and
collect the basic real property tax, the additional tax for the SEF and the penalty
interest for its failure to pass the corresponding tax ordinances; and
c) Declaring, in the alternative, the airport lands and buildings of petitioner as
exempt from real property taxes as they are used solely and exclusively for
public purpose.[51]

In its Consolidated Reply filed through the OSG, petitioner claims that the 2006 MIAA ruling
has overturned the 1996 MCIAA ruling. Petitioner cites Justice Dante O. Tinga’s dissent in the
MIAA ruling, as follows:

[The] ineluctable conclusion is that the majority rejects the rationale and ruling in
Mactan. The majority provides for a wildly different interpretation of Section 133,
193 and 234 of the Local Government Code than that employed by the Court in
Mactan. Moreover, the parties in Mactan and in this case are similarly situated, as
can be obviously deducted from the fact that both petitioners are airport authorities
operating under similarly worded charters. And the fact that the majority cites
doctrines contrapuntal to the Local Government Code as in Basco and Maceda
evinces an intent to go against the Court’s jurisprudential trend adopting the
philosophy of expanded local government rule under the Local Government Code.

x x x The majority is obviously inconsistent with Mactan and there is no way these
two rulings can stand together. Following basic principles in statutory construction,
Mactan will be deemed as giving way to this new ruling.

xxxx

There is no way the majority can be justified unless Mactan is overturned. The
MCIAA and the MIAA are similarly situated. They are both, as will be
demonstrated, GOCCs, commonly engaged in the business of operating an airport.
They are the owners of airport properties they respectively maintain and hold title
over these properties in their name. These entities are both owned by the State, and
denied by their respective charters the absolute right to dispose of their properties
without prior approval elsewhere. Both of them are not empowered to obtain loans
or encumber their properties without prior approval the prior approval of the
President.[52] (Citations omitted.)
Petitioner likewise claims that the enactment of Ordinance No. 070-2007 is an admission on
respondent City’s part that it must have a tax measure to be able to impose a tax or special
assessment. Petitioner avers that assuming that it is a non-exempt entity or that its airport lands
and buildings are not exempt, it was only upon the effectivity of Ordinance No. 070-2007 on
January 1, 2008 that respondent City could properly impose the basic real property tax, the
additional tax for the SEF, and the interest in case of nonpayment.[53]

Petitioner filed its Memorandum[54] on June 17, 2009.

RESPONDENTS’ THEORY

In their Comment,[55] respondents point out that petitioner partially moved for a reconsideration
of the questioned Decision only as to the issue of whether petitioner is a GOCC or not. Thus,
respondents declare that the other portions of the questioned decision had already attained
finality and ought not to be placed in issue in this petition for certiorari. Thus, respondents
discussed the other issues raised by petitioner with reservation as to this objection.

Respondents summarized the issues and the grounds relied upon as follows:

STATEMENT OF THE ISSUES

WHETHER OR NOT PETITIONER IS A GOVERNMENT INSTRUMENTALITY

EXEMPT FROM PAYING REAL PROPERTY TAXES

WHETHER OR NOT RESPONDENT CITY CAN [IMPOSE] REALTY TAX,

SPECIAL EDUCATION FUND AND PENALTY INTEREST

WHETHER OR NOT THE AIRPORT TERMINAL BUILDING, AIRFIELD,

RUNWAY, TAXIWAY INCLUDING THE LOTS ON WHICH THEY ARE
SITUATED ARE EXEMPT FROM REALTY TAXES

GROUNDS RELIED UPON
1. PETITIONER IS A GOCC HENCE NOT EXEMPT FROM REALTY TAXES

2. TERMINAL BUILDING, RUNWAY, TAXIWAY ARE NOT EXEMPT FROM

REALTY TAXES

3. ESTOPPEL DOES NOT LIE AGAINST GOVERNMENT

4. CITY CAN COLLECT REALTY TAX AND INTEREST

5. CITY CAN COLLECT SEF
6. MCIAA HAS NOT SHOWN ANY IRREPARABLE INJURY

WARRANTING INJUNCTIVE RELIEF
7. MCIAA HAS NOT COMPLIED WITH PROVISION OF THE LGC[56]
Respondents claim that “the mere mention of MCIAA in the MIAA v. [Court of Appeals] case
does not make it the controlling case on the matter.”[57] Respondents further claim that the 1996
MCIAA case where this Court held that petitioner is a GOCC is the controlling jurisprudence.
Respondents point out that petitioner and MIAA are two very different entities. Respondents
argue that petitioner is a GOCC contrary to its assertions, based on its Charter and on DOJ
Opinion No. 50.

Respondents contend that if petitioner is not a GOCC but an instrumentality of the government,
still the following statement in the 1996 MCIAA case applies:

Besides, nothing can prevent Congress from decreeing that even instrumentalities or
agencies of the Government performing governmental functions may be subject to
tax. Where it is done precisely to fulfill a constitutional mandate and national policy,
no one can doubt its wisdom.[58]

Respondents argue that MCIAA properties such as the terminal building, taxiway and runway
are not exempt from real property taxation. As discussed in the 1996 MCIAA case, Section 234
of the LGC omitted GOCCs such as MCIAA from entities enjoying tax exemptions. Said
decision also provides that the transfer of ownership of the land to petitioner was absolute and
petitioner cannot evade payment of taxes.[59]

Even if the following issues were not raised by petitioner in its motion for reconsideration of the
questioned Decision, and thus the ruling pertaining to these issues in the questioned decision
had become final, respondents still discussed its side over its objections as to the propriety of
bringing these up before this Court.

1. Estoppel does not lie against the government.

2. Respondent City can collect realty taxes and interest.

a. Based on the Local Government Code (Sections 232, 233, 255) and its IRR (Sections 241,
247).

b. The City of Lapu-Lapu passed in 1980 Ordinance No. 44, or the Omnibus Tax Ordinance,
wherein the imposition of real property tax was made. This Ordinance was in force and
effect by virtue of Article 278 of the IRR of Republic Act No. 7160.[60]

c. Ordinance No. 070-2007, known as the Revised Lapu-Lapu City Revenue Code, imposed
real property taxes, special education fund and further provided for the payment of interest
and surcharges. Thus, the issue is passé and is moot and academic.

3. Respondent City can collect Special Education Fund.
a. The LGC does not require the enactment of an ordinance for the collection of the SEF.

b. Congress did not entirely repeal the SEF law, hence, its levy, imposition and collection
need not be covered by ordinance. Besides, the City has enacted the Revenue Code
containing provisions for the levy and collection of the SEF.[61]

Furthermore, respondents aver that:

1. Collection of taxes is beyond the ambit of injunction.

a. Respondents contend that the petition only questions the denial of the writ of preliminary
injunction by the RTC and the Court of Appeals. Petitioner failed to show irreparable
injury.

b. Comparing the alleged damage that may be caused petitioner and the direct affront and
challenge against the power to tax, which is an attribute of sovereignty, it is but
appropriate that injunctive relief should be denied.

2. Petitioner did not comply with LGC provisions on payment under protest.

a. Petitioner should have protested the tax imposition as provided in Article 285 of the IRR
of Republic Act No. 7160. Section 252 of Republic Act No. 7160[62] requires that the
taxpayer’s protest can only be entertained if the tax is first paid under protest.[63]

Respondents submitted their Memorandum[64] on June 30, 2009, wherein they allege that the
1996 MCIAA case is still good law, as shown by the following cases wherein it was quoted:

1. National Power Corporation v. Local Board of Assessment Appeals of Batangas [545 Phil.
92 (2007)];

2. Mactan-Cebu International Airport Authority v. Urgello [549 Phil. 302 (2007)];

3. Quezon City v. ABS-CBN Broadcasting Corporation [588 Phil. 785 (2008)]; and

4. The City of Iloilo v. Smart Communications, Inc. [599 Phil. 492 (2009)].

Respondents assert that the constant reference to the 1996 MCIAA case “could hardly mean that
the doctrine has breathed its last” and that the 1996 MCIAA case stands as precedent and is
controlling on petitioner MCIAA.[65]

Respondents allege that the issue for consideration is whether it is proper for petitioner to raise
the issue of whether it is not liable to pay real property taxes, special education fund (SEF),
interests and/or surcharges.[66] Respondents argue that the Court of Appeals was correct in
declaring petitioner liable for realty taxes, etc., on the terminal building, taxiway, and runway.
Respondent City relies on the following grounds:

1. The case of MCIAA v. Marcos, et al., is controlling on petitioner MCIAA;
2. MCIAA is a corporation;
3. Section 133 in relation to Sections 232 and 234 of the Local Government Code
of 1991 authorizes the collection of real property taxes (etc.) from MCIAA;
4. Terminal Building, Runway & Taxiway are not of the Public Dominion and are
not exempt from realty taxes, special education fund and interest;
5. Respondent City can collect realty tax, interest/surcharge, and Special

Education Fund from MCIAA; [and]
6. Estoppel does not lie against the government.[67]
THIS COURT’S RULING

The petition has merit. The petitioner is an instrumentality of the government; thus, its
properties actually, solely and exclusively used for public purposes, consisting of the airport
terminal building, airfield, runway, taxiway and the lots on which they are situated, are not
subject to real property tax and respondent City is not justified in collecting taxes from
petitioner over said properties.

DISCUSSION

The Court of Appeals (Cebu City) erred in declaring that the 1996 MCIAA case still controls
and that petitioner is a GOCC. The 2006 MIAA case governs.

The Court of Appeals’ reliance on the 1996 MCIAA case is misplaced and its staunch refusal to
apply the 2006 MIAA case is patently erroneous. The Court of Appeals, finding for respondents,
refused to apply the ruling in the 2006 MIAA case on the premise that the same had not yet
reached finality, and that as far as MCIAA is concerned, the 1996 MCIAA case is still good law.
[68]

While it is true, as respondents allege, that the 1996 MCIAA case was cited in a long line of
cases,[69] still, in 2006, the Court en banc decided a case that in effect reversed the 1996
Mactan ruling. The 2006 MIAA case had, since the promulgation of the questioned Decision and
Resolution, reached finality and had in fact been either affirmed or cited in numerous cases by
the Court.[70] The decision became final and executory on November 3, 2006.[71] Furthermore,
the 2006 MIAA case was decided by the Court en banc while the 1996 MCIAA case was decided
by a Division. Hence, the 1996 MCIAA case should be read in light of the subsequent and
unequivocal ruling in the 2006 MIAA case.

To recall, in the 2006 MIAA case, we held that MIAA’s airport lands and buildings are exempt
from real estate tax imposed by local governments; that it is not a GOCC but an instrumentality
of the national government, with its real properties being owned by the Republic of the
Philippines, and these are exempt from real estate tax. Specifically referring to petitioner, we
stated as follows:
Many government instrumentalities are vested with corporate powers but they
do not become stock or non-stock corporations, which is a necessary condition
before an agency or instrumentality is deemed a government-owned or
controlled corporation. Examples are the Mactan International Airport
Authority, the Philippine Ports Authority, the University of the Philippines and
Bangko Sentral ng Pilipinas. All these government instrumentalities exercise
corporate powers but they are not organized as stock or non-stock corporations as
required by Section 2(13) of the Introductory Provisions of the Administrative Code.
These government instrumentalities are sometimes loosely called government
corporate entities. However, they are not government-owned or controlled
corporations in the strict sense as understood under the Administrative Code, which
is the governing law defining the legal relationship and status of government entities.
[72] (Emphases ours.)
In the 2006 MIAA case, the issue before the Court was “whether the Airport Lands and
Buildings of MIAA are exempt from real estate tax under existing laws.”[73] We quote the
extensive discussion of the Court that led to its finding that MIAA’s lands and buildings were
exempt from real estate tax imposed by local governments:

First, MIAA is not a government-owned or controlled corporation but an

instrumentality of the National Government and thus exempt from local taxation.
Second, the real properties of MIAA are owned by the Republic of the Philippines
and thus exempt from real estate tax.

1. MIAA is Not a Government-Owned or Controlled Corporation

xxxx

There is no dispute that a government-owned or controlled corporation is not exempt

from real estate tax. However, MIAA is not a government-owned or controlled
corporation. Section 2(13) of the Introductory Provisions of the Administrative Code
of 1987 defines a government-owned or controlled corporation as follows:

SEC. 2. General Terms Defined. - x x x

(13) Government-owned or controlled corporation refers to any agency

organized as a stock or non-stock corporation, vested with functions
relating to public needs whether governmental or proprietary in nature,
and owned by the Government directly or through its instrumentalities
either wholly, or, where applicable as in the case of stock corporations, to
the extent of at least fifty-one (51) percent of its capital stock: x x x.

A government-owned or controlled corporation must be “organized as a stock or

non-stock corporation.” MIAA is not organized as a stock or non-stock corporation.
MIAA is not a stock corporation because it has no capital stock divided into shares.
MIAA has no stockholders or voting shares. x x x

xxxx

Clearly, under its Charter, MIAA does not have capital stock that is divided into
shares.
Section 3 of the Corporation Code defines a stock corporation as one whose “capital
stock is divided into shares and x x x authorized to distribute to the holders of such
shares dividends x x x.” MIAA has capital but it is not divided into shares of stock.
MIAA has no stockholders or voting shares. Hence, MIAA is not a stock
corporation.
MIAA is also not a non-stock corporation because it has no members. Section 87 of

the Corporation Code defines a non-stock corporation as “one where no part of its
income is distributable as dividends to its members, trustees or officers.” A non-
stock corporation must have members. Even if we assume that the Government is
considered as the sole member of MIAA, this will not make MIAA a non-stock
corporation. Non-stock corporations cannot distribute any part of their income to
their members. Section 11 of the MIAA Charter mandates MIAA to remit 20% of its
annual gross operating income to the National Treasury. This prevents MIAA from
qualifying as a non-stock corporation.
Section 88 of the Corporation Code provides that non-stock corporations are

“organized for charitable, religious, educational, professional, cultural, recreational,
fraternal, literary, scientific, social, civil service, or similar purposes, like trade,
industry, agriculture and like chambers.” MIAA is not organized for any of these
purposes. MIAA, a public utility, is organized to operate an international and
domestic airport for public use.
Since MIAA is neither a stock nor a non-stock corporation, MIAA does not
qualify as a government-owned or controlled corporation. What then is the
legal status of MIAA within the National Government?
MIAA is a government instrumentality vested with corporate powers to

perform efficiently its governmental functions. MIAA is like any other
government instrumentality, the only difference is that MIAA is vested with
corporate powers. Section 2(10) of the Introductory Provisions of the
Administrative Code defines a government “instrumentality” as follows:
SEC. 2. General Terms Defined. - x x x

(10) Instrumentality refers to any agency of the National Government,

not integrated within the department framework, vested with special
functions or jurisdiction by law, endowed with some if not all corporate
powers, administering special funds, and enjoying operational autonomy,
usually through a charter. x x x.

When the law vests in a government instrumentality corporate powers, the

instrumentality does not become a corporation. Unless the government
instrumentality is organized as a stock or non-stock corporation, it remains a
government instrumentality exercising not only governmental but also
corporate powers. Thus, MIAA exercises the governmental powers of eminent
domain, police authority and the levying of fees and charges. At the same time,
MIAA exercises “all the powers of a corporation under the Corporation Law,
insofar as these powers are not inconsistent with the provisions of this Executive
Order.”
Likewise, when the law makes a government instrumentality operationally

autonomous, the instrumentality remains part of the National Government
machinery although not integrated with the department framework. The MIAA
Charter expressly states that transforming MIAA into a “separate and autonomous
body” will make its operation more “financially viable.”
Many government instrumentalities are vested with corporate powers but they
do not become stock or non-stock corporations, which is a necessary condition
before an agency or instrumentality is deemed a government-owned or
controlled corporation. Examples are the Mactan International Airport
Authority, the Philippine Ports Authority, the University of the Philippines and
Bangko Sentral ng Pilipinas. All these government instrumentalities exercise
corporate powers but they are not organized as stock or non-stock corporations
as required by Section 2(13) of the Introductory Provisions of the
Administrative Code. These government instrumentalities are sometimes
loosely called government corporate entities. However, they are not
government-owned or controlled corporations in the strict sense as understood
under the Administrative Code, which is the governing law defining the legal
relationship and status of government entities.[74] (Emphases ours, citations
omitted.)
The Court in the 2006 MIAA case went on to discuss the limitation on the taxing power of the
local governments as against the national government or its instrumentality:

A government instrumentality like MIAA falls under Section 133(o) of the Local
Government Code, which states:

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

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

xxxx

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

Section 133(o) recognizes the basic principle that local governments cannot tax the
national government, which historically merely delegated to local governments the
power to tax. While the 1987 Constitution now includes taxation as one of the
powers of local governments, local governments may only exercise such power
“subject to such guidelines and limitations as the Congress may provide.”

When local governments invoke the power to tax on national government

instrumentalities, such power is construed strictly against local governments.
The rule is that a tax is never presumed and there must be clear language in the law
imposing the tax. Any doubt whether a person, article or activity is taxable is
resolved against taxation. This rule applies with greater force when local
governments seek to tax national government instrumentalities.
Another rule is that a tax exemption is strictly construed against the taxpayer
claiming the exemption. However, when Congress grants an exemption to a national
government instrumentality from local taxation, such exemption is construed
liberally in favor of the national government instrumentality. x x x.
xxxx
There is, moreover, no point in national and local governments taxing each
other, unless a sound and compelling policy requires such transfer of public
funds from one government pocket to another.
There is also no reason for local governments to tax national government

instrumentalities for rendering essential public services to inhabitants of local
governments. The only exception is when the legislature clearly intended to tax
government instrumentalities for the delivery of essential public services for sound
and compelling policy considerations. There must be express language in the law
empowering local governments to tax national government instrumentalities. Any
doubt whether such power exists is resolved against local governments.
Thus, Section 133 of the Local Government Code states that “unless otherwise
provided” in the Code, local governments cannot tax national government
instrumentalities. x x x.[75] (Emphases ours, citations omitted.)
The Court emphasized that the airport lands and buildings of MIAA are owned by the Republic
and belong to the public domain. The Court said:

The Airport Lands and Buildings of MIAA are property of public dominion and
therefore owned by the State or the Republic of the Philippines. x x x.

xxxx

No one can dispute that properties of public dominion mentioned in Article 420 of
the Civil Code, like “roads, canals, rivers, torrents, ports and bridges constructed by
the State,” are owned by the State. The term “ports” includes seaports and airports.
The MIAA Airport Lands and Buildings constitute a “port” constructed by the State.
Under Article 420 of the Civil Code, the MIAA Airport Lands and Buildings are
properties of public dominion and thus owned by the State or the Republic of the
Philippines.

The Airport Lands and Buildings are devoted to public use because they are
used by the public for international and domestic travel and transportation.
The fact that the MIAA collects terminal fees and other charges from the public
does not remove the character of the Airport Lands and Buildings as properties
for public use. x x x.
xxxx
The terminal fees MIAA charges to passengers, as well as the landing fees MIAA
charges to airlines, constitute the bulk of the income that maintains the operations of
MIAA. The collection of such fees does not change the character of MIAA as an
airport for public use. Such fees are often termed user’s tax. This means taxing those
among the public who actually use a public facility instead of taxing all the public
including those who never use the particular public facility. A user’s tax is more
equitable - a principle of taxation mandated in the 1987 Constitution.
The Airport Lands and Buildings of MIAA x x x are properties of public

dominion because they are intended for public use. As properties of public
dominion, they indisputably belong to the State or the Republic of the
Philippines.[76] (Emphases supplied, citations omitted.)
The Court also held in the 2006 MIAA case that airport lands and buildings are outside the
commerce of man.

As properties of public dominion, the Airport Lands and Buildings are outside the
commerce of man. The Court has ruled repeatedly that properties of public dominion
are outside the commerce of man. As early as 1915, this Court already ruled in
Municipality of Cavite v. Rojas that properties devoted to public use are outside the
commerce of man, thus:

xxxx

The Civil Code, Article 1271, prescribes that everything which is not outside the
commerce of man may be the object of a contract, x x x.

xxxx

The Court has also ruled that property of public dominion, being outside the
commerce of man, cannot be the subject of an auction sale.

Properties of public dominion, being for public use, are not subject to levy,
encumbrance or disposition through public or private sale. Any encumbrance,
levy on execution or auction sale of any property of public dominion is void for
being contrary to public policy. Essential public services will stop if properties
of public dominion are subject to encumbrances, foreclosures and auction sale.
This will happen if the City of Parañaque can foreclose and compel the auction sale
of the 600-hectare runway of the MIAA for non-payment of real estate tax.

Before MIAA can encumber the Airport Lands and Buildings, the President must
first withdraw from public use the Airport Lands and Buildings. x x x.

xxxx
Thus, unless the President issues a proclamation withdrawing the Airport

Lands and Buildings from public use, these properties remain properties of
public dominion and are inalienable. Since the Airport Lands and Buildings are
inalienable in their present status as properties of public dominion, they are not
subject to levy on execution or foreclosure sale. As long as the Airport Lands
and Buildings are reserved for public use, their ownership remains with the
State or the Republic of the Philippines.
The authority of the President to reserve lands of the public domain for public use,
and to withdraw such public use, is reiterated in Section 14, Chapter 4, Title I, Book
III of the Administrative Code of 1987, which states:
SEC. 14. Power to Reserve Lands of the Public and Private Domain of
the Government. - (1) The President shall have the power to reserve for
settlement or public use, and for specific public purposes, any of the
lands of the public domain, the use of which is not otherwise directed by
law. The reserved land shall thereafter remain subject to the specific
public purpose indicated until otherwise provided by law or
proclamation;

xxxx

There is no question, therefore, that unless the Airport Lands and Buildings are
withdrawn by law or presidential proclamation from public use, they are properties
of public dominion, owned by the Republic and outside the commerce of man.[77]

Thus, the Court held that MIAA is “merely holding title to the Airport Lands and Buildings in
trust for the Republic. [Under] Section 48, Chapter 12, Book I of the Administrative Code
[which] allows instrumentalities like MIAA to hold title to real properties owned by the
Republic.”[78]

The Court in the 2006 MIAA case cited Section 234(a) of the Local Government Code and held
that said provision exempts from real estate tax any “[r]eal property owned by the Republic of
the Philippines.”[79] The Court emphasized, however, that “portions of the Airport Lands and
Buildings that MIAA leases to private entities are not exempt from real estate tax.” The Court
further held:

This exemption should be read in relation with Section 133(o) of the same Code,
which prohibits local governments from imposing “[t]axes, fees or charges of any
kind on the National Government, its agencies and instrumentalities x x x.” The real
properties owned by the Republic are titled either in the name of the Republic itself
or in the name of agencies or instrumentalities of the National Government. The
Administrative Code allows real property owned by the Republic to be titled in the
name of agencies or instrumentalities of the national government. Such real
properties remain owned by the Republic and continue to be exempt from real estate
tax.
The Republic may grant the beneficial use of its real property to an agency or
instrumentality of the national government. This happens when title of the real
property is transferred to an agency or instrumentality even as the Republic remains
the owner of the real property. Such arrangement does not result in the loss of the tax
exemption. Section 234(a) of the Local Government Code states that real property
owned by the Republic loses its tax exemption only if the “beneficial use thereof has
been granted, for consideration or otherwise, to a taxable person.” MIAA, as a
government instrumentality, is not a taxable person under Section 133(o) of the
Local Government Code. Thus, even if we assume that the Republic has granted to
MIAA the beneficial use of the Airport Lands and Buildings, such fact does not
make these real properties subject to real estate tax.
However, portions of the Airport Lands and Buildings that MIAA leases to private
entities are not exempt from real estate tax. For example, the land area occupied by
hangars that MIAA leases to private corporations is subject to real estate tax. In such
a case, MIAA has granted the beneficial use of such land area for a consideration to
a taxable person and therefore such land area is subject to real estate tax. x x x.[80]
Significantly, the Court reiterated the above ruling and applied the same reasoning in Manila
International Airport Authority v. City of Pasay,[81] thus:

The only difference between the 2006 MIAA case and this case is that the 2006
MIAA case involved airport lands and buildings located in Parañaque City
while this case involved airport lands and buildings located in Pasay City. The
2006 MIAA case and this case raised the same threshold issue: whether the local
government can impose real property tax on the airport lands, consisting mostly of
the runways, as well as the airport buildings, of MIAA. x x x.

xxxx

The definition of “instrumentality” under Section 2(10) of the Introductory

Provisions of the Administrative Code of 1987 uses the phrase “includes x x x
government-owned or controlled corporations” which means that a government
“instrumentality” may or may not be a “government-owned or controlled
corporation.” Obviously, the term government “instrumentality” is broader than the
term “government-owned or controlled corporation.” x x x.

xxxx

The fact that two terms have separate definitions means that while a government
“instrumentality” may include a “government-owned or controlled corporation,”
there may be a government “instrumentality” that will not qualify as a “government-
owned or controlled corporation.”

A close scrutiny of the definition of “government-owned or controlled corporation”

in Section 2(13) will show that MIAA would not fall under such definition. MIAA is
a government “instrumentality” that does not qualify as a “government-owned
or controlled corporation.” x x x.
xxxx
Thus, MIAA is not a government-owned or controlled corporation but a government

instrumentality which is exempt from any kind of tax from the local governments.
Indeed, the exercise of the taxing power of local government units is subject to the
limitations enumerated in Section 133 of the Local Government Code. Under
Section 133(o) of the Local Government Code, local government units have no
power to tax instrumentalities of the national government like the MIAA. Hence,
MIAA is not liable to pay real property tax for the NAIA Pasay properties.
Furthermore, the airport lands and buildings of MIAA are properties of public
dominion intended for public use, and as such are exempt from real property tax
under Section 234(a) of the Local Government Code. However, under the same
provision, if MIAA leases its real property to a taxable person, the specific property
leased becomes subject to real property tax. In this case, only those portions of the
NAIA Pasay properties which are leased to taxable persons like private parties are
subject to real property tax by the City of Pasay. (Emphases added, citations
omitted.)
The Court not only mentioned petitioner MCIAA as similarly situated as MIAA. It also
mentioned several other government instrumentalities, among which was the Philippine
Fisheries Development Authority. Thus, applying the 2006 MIAA ruling, the Court, in
Philippine Fisheries Development Authority v. Court of Appeals,[82] held:

On the basis of the parameters set in the MIAA case, the Authority should be
classified as an instrumentality of the national government. As such, it is generally
exempt from payment of real property tax, except those portions which have been
leased to private entities.

In the MIAA case, petitioner Philippine Fisheries Development Authority was cited
as among the instrumentalities of the national government. x x x.

xxxx

Indeed, the Authority is not a GOCC but an instrumentality of the government. The
Authority has a capital stock but it is not divided into shares of stocks. Also, it has
no stockholders or voting shares. Hence, it is not a stock corporation. Neither [is it] a
non-stock corporation because it has no members.

The Authority is actually a national government instrumentality which is defined as

an agency of the national government, not integrated within the department
framework, vested with special functions or jurisdiction by law, endowed with some
if not all corporate powers, administering special funds, and enjoying operational
autonomy, usually through a charter. When the law vests in a government
instrumentality corporate powers, the instrumentality does not become a corporation.
Unless the government instrumentality is organized as a stock or non-stock
corporation, it remains a government instrumentality exercising not only
governmental but also corporate powers.
Thus, the Authority which is tasked with the special public function to carry out the
government’s policy “to promote the development of the country’s fishing industry
and improve the efficiency in handling, preserving, marketing, and distribution of
fish and other aquatic products,” exercises the governmental powers of eminent
domain, and the power to levy fees and charges. At the same time, the Authority
exercises “the general corporate powers conferred by laws upon private and
government-owned or controlled corporations.”
xxxx
In light of the foregoing, the Authority should be classified as an instrumentality of

the national government which is liable to pay taxes only with respect to the portions
of the property, the beneficial use of which were vested in private entities. When
local governments invoke the power to tax on national government instrumentalities,
such power is construed strictly against local governments. The rule is that a tax is
never presumed and there must be clear language in the law imposing the tax. Any
doubt whether a person, article or activity is taxable is resolved against taxation.
This rule applies with greater force when local governments seek to tax national
government instrumentalities.
Thus, the real property tax assessments issued by the City of Iloilo should be upheld
only with respect to the portions leased to private persons. In case the Authority fails
to pay the real property taxes due thereon, said portions cannot be sold at public
auction to satisfy the tax delinquency. x x x.
xxxx
In sum, the Court finds that the Authority is an instrumentality of the national
government, hence, it is liable to pay real property taxes assessed by the City of
Iloilo on the IFPC only with respect to those portions which are leased to private
entities. Notwithstanding said tax delinquency on the leased portions of the IFPC,
the latter or any part thereof, being a property of public domain, cannot be sold at
public auction. This means that the City of Iloilo has to satisfy the tax delinquency
through means other than the sale at public auction of the IFPC. (Citations omitted.)
Another government instrumentality specifically mentioned in the 2006 MIAA case was the
Philippine Ports Authority (PPA). Hence, in Curata v. Philippine Ports Authority,[83] the Court
held that the PPA is similarly situated as MIAA, and ruled in this wise:

This Court’s disquisition in Manila International Airport Authority v. Court of

Appeals – ruling that MIAA is not a government-owned and/or controlled
corporation (GOCC), but an instrumentality of the National Government and thus
exempt from local taxation, and that its real properties are owned by the Republic of
the Philippines –– is instructive. x x x. These findings are squarely applicable to
PPA, as it is similarly situated as MIAA. First, PPA is likewise not a GOCC for not
having shares of stocks or members. Second, the docks, piers and buildings it
administers are likewise owned by the Republic and, thus, outside the commerce of
man. Third, PPA is a mere trustee of these properties. Hence, like MIAA, PPA is
clearly a government instrumentality, an agency of the government vested with
corporate powers to perform efficiently its governmental functions.
Therefore, an undeniable conclusion is that the funds of PPA partake of government

funds, and such may not be garnished absent an allocation by its Board or by
statutory grant. If the PPA funds cannot be garnished and its properties, being
government properties, cannot be levied via a writ of execution pursuant to a final
judgment, then the trial court likewise cannot grant discretionary execution pending
appeal, as it would run afoul of the established jurisprudence that government
properties are exempt from execution. What cannot be done directly cannot be done
indirectly. (Citations omitted.)
In Government Service Insurance System v. City Treasurer and City Assessor of the City of
Manila[84] the Court found that the GSIS was also a government instrumentality and not a
GOCC, applying the 2006 MIAA case even though the GSIS was not among those specifically
mentioned by the Court as similarly situated as MIAA. The Court said:

GSIS an instrumentality of the National Government

Apart from the foregoing consideration, the Court’s fairly recent ruling in Manila
International Airport Authority v. Court of Appeals, a case likewise involving real
estate tax assessments by a Metro Manila city on the real properties administered by
MIAA, argues for the non-tax liability of GSIS for real estate taxes. x x x.

xxxx

While perhaps not of governing sway in all fours inasmuch as what were
involved in Manila International Airport Authority, e.g., airfields and runways,
are properties of the public dominion and, hence, outside the commerce of man,
the rationale underpinning the disposition in that case is squarely applicable to
GSIS, both MIAA and GSIS being similarly situated. First, while created under
CA 186 as a non-stock corporation, a status that has remained unchanged even when
it operated under PD 1146 and RA 8291, GSIS is not, in the context of the
aforequoted Sec. 193 of the LGC, a GOCC following the teaching of Manila
International Airport Authority, for, like MIAA, GSIS’s capital is not divided into
unit shares. Also, GSIS has no members to speak of. And by members, the reference
is to those who, under Sec. 87 of the Corporation Code, make up the non-stock
corporation, and not to the compulsory members of the system who are government
employees. Its management is entrusted to a Board of Trustees whose members are
appointed by the President.

Second, the subject properties under GSIS’s name are likewise owned by the
Republic. The GSIS is but a mere trustee of the subject properties which have either
been ceded to it by the Government or acquired for the enhancement of the system.
This particular property arrangement is clearly shown by the fact that the disposal or
conveyance of said subject properties are either done by or through the authority of
the President of the Philippines. x x x. (Emphasis added, citations omitted.)
All the more do we find that petitioner MCIAA, with its many similarities to the MIAA, should
be classified as a government instrumentality, as its properties are being used for public
purposes, and should be exempt from real estate taxes. This is not to derogate in any way the
delegated authority of local government units to collect realty taxes, but to uphold the
fundamental doctrines of uniformity in taxation and equal protection of the laws, by applying all
the jurisprudence that have exempted from said taxes similar authorities, agencies, and
instrumentalities, whether covered by the 2006 MIAA ruling or not.

To reiterate, petitioner MCIAA is vested with corporate powers but it is not a stock or non-stock
corporation, which is a necessary condition before an agency or instrumentality is deemed a
government-owned or controlled corporation. Like MIAA, petitioner MCIAA has capital under
its charter but it is not divided into shares of stock. It also has no stockholders or voting shares.
Republic Act No. 6958 provides:

Section 9. Capital. – The [Mactan-Cebu International Airport] Authority shall have

an authorized capital stock equal to and consisting of:

(a) The value of fixed assets (including airport facilities, runways and equipment)
and such other properties, movable and immovable, currently administered by or
belonging to the airports as valued on the date of the effectivity of this Act;

(b) The value of such real estate owned and/or administered by the airports; and

(c) Government contribution in such amount as may be deemed an appropriate initial

balance. Such initial amount, as approved by the President of the Philippines, which
shall be more or less equivalent to six (6) months working capital requirement of the
Authority, is hereby authorized to be appropriated in the General Appropriations Act
of the year following its enactment into law.

Thereafter, the government contribution to the capital of the Authority shall be provided for in
the General Appropriations Act.

Like in MIAA, the airport lands and buildings of MCIAA are properties of public dominion
because they are intended for public use. As properties of public dominion, they indisputably
belong to the State or the Republic of the Philippines, and are outside the commerce of man.
This, unless petitioner leases its real property to a taxable person, the specific property leased
becomes subject to real property tax; in which case, only those portions of petitioner’s
properties which are leased to taxable persons like private parties are subject to real property tax
by the City of Lapu-Lapu.

We hereby adopt and apply to petitioner MCIAA the findings and conclusions of the Court in
the 2006 MIAA case, and we quote:

To summarize, MIAA is not a government-owned or controlled corporation under

Section 2(13) of the Introductory Provisions of the Administrative Code because it is
not organized as a stock or non-stock corporation. Neither is MIAA a government-
owned or controlled corporation under Section 16, Article XII of the 1987
Constitution because MIAA is not required to meet the test of economic viability.
MIAA is a government instrumentality vested with corporate powers and performing
essential public services pursuant to Section 2(10) of the Introductory Provisions of
the Administrative Code. As a government instrumentality, MIAA is not subject to
any kind of tax by local governments under Section 133(o) of the Local Government
Code. The exception to the exemption in Section 234(a) does not apply to MIAA
because MIAA is not a taxable entity under the Local Government Code. Such
exception applies only if the beneficial use of real property owned by the Republic is
given to a taxable entity.
Finally, the Airport Lands and Buildings of MIAA are properties devoted to public
use and thus are properties of public dominion. Properties of public dominion are
owned by the State or the Republic. x x x.
xxxx
The term “ports x x x constructed by the State” includes airports and seaports. The
Airport Lands and Buildings of MIAA are intended for public use, and at the
very least intended for public service. Whether intended for public use or
public service, the Airport Lands and Buildings are properties of public
dominion. As properties of public dominion, the Airport Lands and Buildings
are owned by the Republic and thus exempt from real estate tax under Section
234(a) of the Local Government Code.
4. Conclusion
Under Section 2(10) and (13) of the Introductory Provisions of the Administrative
Code, which governs the legal relation and status of government units, agencies and
offices within the entire government machinery, MIAA is a government
instrumentality and not a government-owned or controlled corporation. Under
Section 133(o) of the Local Government Code, MIAA as a government
instrumentality is not a taxable person because it is not subject to “[t]axes, fees or
charges of any kind” by local governments. The only exception is when MIAA
leases its real property to a “taxable person” as provided in Section 234(a) of the
Local Government Code, in which case the specific real property leased becomes
subject to real estate tax. Thus, only portions of the Airport Lands and Buildings
leased to taxable persons like private parties are subject to real estate tax by the
City of Parañaque.
Under Article 420 of the Civil Code, the Airport Lands and Buildings of MIAA,
being devoted to public use, are properties of public dominion and thus owned by
the State or the Republic of the Philippines. Article 420 specifically mentions “ports
x x x constructed by the State,” which includes public airports and seaports, as
properties of public dominion and owned by the Republic. As properties of public
dominion owned by the Republic, there is no doubt whatsoever that the Airport
Lands and Buildings are expressly exempt from real estate tax under Section 234(a)
of the Local Government Code. This Court has also repeatedly ruled that
properties of public dominion are not subject to execution or foreclosure sale.
[85] (Emphases added.)
WHEREFORE, we hereby GRANT the petition. We REVERSE and SET ASIDE the
Decision dated October 8, 2007 and the Resolution dated February 12, 2008 of the Court of
Appeals (Cebu City) in CA-G.R. SP No. 01360. Accordingly, we DECLARE:

1. Petitioner’s properties that are actually, solely and exclusively used for public purpose,
consisting of the airport terminal building, airfield, runway, taxiway and the lots on which
they are situated, EXEMPT from real property tax imposed by the City of Lapu-Lapu.

2. VOID all the real property tax assessments, including the additional tax for the special
education fund and the penalty interest, as well as the final notices of real property tax
delinquencies, issued by the City of Lapu-Lapu on petitioner’s properties, except the
assessment covering the portions that petitioner has leased to private parties.

3. NULL and VOID the sale in public auction of 27 of petitioner’s properties and the
eventual forfeiture and purchase of the said properties by respondent City of Lapu-Lapu.
We likewise declare VOID the corresponding Certificates of Sale of Delinquent Property
issued to respondent City of Lapu-Lapu.

SO ORDERED.

Sereno, C. J., (Chairperson), Bersamin, Perez, and Perlas-Bernabe, JJ., concur.

[1]Rollo, pp. 91-131; penned by Associate Justice Isaias P. Dicdican with Associate Justices
Francisco P. Acosta and Stephen C. Cruz, concurring.

[2] Id. at 132-134.

[3]An Act Creating the Mactan-Cebu International Airport Authority, Transferring Existing
Assets of the Mactan International Airport and the Lahug Airport to the Authority, Vesting the
Authority With Power to Administer and Operate the Mactan International Airport and the
Lahug Airport, And For Other Purposes.

[4] 330 Phil. 392, 414 (1996).

[5] Rollo, p. 59.
[6] Id. at 59-60.

[7] Id. at 60.

[8] Id. at 135-138.

[9] Id. at 139-141.
[10] Id. at 142-162.
[11] Id. at 163-172.
[12] Id. at 201-229.
[13] Id. at 64.
[14] Id. at 280-281.
[15] Id. at 298-301.
[16] Id. at 302-333.
[17] Id. at 334-335.
[18] Id. at 374-376.
[19] Id. at 130.
[20] Id. at 456-466.
[21] 528 Phil. 181 (2006).
[22] Rollo, p. 462.
[23] Id. at 100.
[24] Id. at 101-103.
[25] Id. at 108.
[26] Id. at 108-115.
[27] Id. at 115-118.
[28] Id. at 118-119.
[29] Id. at 119-120.

[30] CA rollo, p. 452.
[31] Section 529. Tax Ordinances or Revenue Measure. – All existing tax ordinances or
revenue measures of local government units shall continue to be in force and effect after the
effectivity of this Code unless amended by the sanggunian concerned, or inconsistent with, or in
violation of, the provisions of this Code.
ARTICLE 278. Existing Tax Ordinances or Revenue Measures. — (a) All existing tax
ordinances or revenue measures of provinces, cities, municipalities, and barangays imposing
taxes, fees, or charges shall continue to be in force and effect after the effectivity of the Code,
except those imposing levies on tax bases or tax subjects which are no longer within the taxing
and revenue-raising powers of the LGU concerned and where the rates levied in the tax
ordinance are higher than the taxes, fees, or charges prescribed in this Rule in which case, the
lower rates shall be collected.
(b) In case of failure of the sanggunian to amend or revoke tax ordinances or revenue measures
inconsistent with, or in violation of the provisions of this Rule, the same shall be deemed
rescinded upon the effectivity of the Code and these Rules.
[32] Rollo, pp. 121-122.
[33] 422 Phil. 519 (2001).
[34] Rollo, p. 123.
[35] Id. at 300.
[36] CA rollo, p. 453.
[37]
This is the Court of Appeals’ interpretation of the following provisions of the LGC and its
IRR:
LGC, Section 255. Interests on Unpaid Real Property Tax. - In case of failure to pay the basic
real property tax or any other tax levied under this Title upon the expiration of the periods as
provided in Section 250, or when due, as the case may be, shall subject the taxpayer to the
payment of interest at the rate of two percent (2%) per month on the unpaid amount or a fraction
thereof, until the delinquent tax shall have been fully paid: Provided, however, That in no case
shall the total interest on the unpaid tax or portion thereof exceed thirty-six (36) months.
IRR of RA 7160, ARTICLE 278. Existing Tax Ordinances or Revenue Measures. — (a) All
existing tax ordinances or revenue measures of provinces, cities, municipalities, and barangays
imposing taxes, fees, or charges shall continue to be in force and effect after the effectivity of
the Code, except those imposing levies on tax bases or tax subjects which are no longer within
the taxing and revenue-raising powers of the LGU concerned and where the rates levied in the
tax ordinance are higher than the taxes, fees, or charges prescribed in this Rule in which case,
the lower rates shall be collected.
(b) In case of failure of the sanggunian to amend or revoke tax ordinances or revenue measures
inconsistent with, or in violation of the provisions of this Rule, the same shall be deemed
rescinded upon the effectivity of the Code and these Rules.
[38] Rollo, pp. 124-125.
[39] Id. at 125-126.
[40] Id. at 126.
[41] Id. at 127.
[42] Id. at 129-130.
[43] Id. at 133-134.
[44] Id. at 55-56.
[45] Id. at 58.
[46] Id. at 68.
[47] Id. at 69.
[48] Id. at 75.
[49] Manila International Airport Authority v. Court of Appeals, supra note 21 at 241.
[50] Rollo, p. 77.
[51] Id. at 86.
[52]Manila International Airport Authority v. Court of Appeals, Tinga, J., Dissent. Supra note
21 at 259-262.
[53] Rollo, p. 556.
[54] Id. at 572-608.
[55] Id. at 508-527.
[56] Id. at 515.

[57] Id. at 516.
[58] Mactan-Cebu International Airport Authority v. Marcos, supra note 4 at 419-420.
[59] Rollo, p. 519.
[60] The respondents further argued:
Hence, assuming arguendo that the provisions of RA 7160 are not self-executory in so far as
realty taxes and its surcharges are concerned, and further granting without admitting that the
City needs an enabling ordinance, the foregoing provision clearly shows that the City has all the
right to impose and collect the taxes sought for payment. (Rollo, p. 522.)
[61] Rollo, pp. 519-524.
[62] Section 252. Payment Under Protest. - (a) No protest shall be entertained unless the
taxpayer first pays the tax. There shall be annotated on the tax receipts the words “paid under
protest.” The protest in writing must be filed within thirty (30) days from payment of the tax to
the provincial, city treasurer or municipal treasurer, in the case of a municipality within
Metropolitan Manila Area, who shall decide the protest within sixty (60) days from receipt.
[Petitioner disregarded the aforesaid provision of law thereby depriving the courts
from exercising jurisdiction over the matter in view of Section 267 of RA 7160
which states:

Section 267. Action Assailing Validity of Tax Sale. - No court shall entertain any
action assailing the validity of any sale at public auction of real property or rights
therein under this Title until the taxpayer shall have deposited with the court the
amount for which the real property was sold, together with interest of two percent
(2%) per month from the date of sale to the time of the institution of the action. The
amount so deposited shall be paid to the purchaser at the auction sale if the deed is
declared invalid but it shall be returned to the depositor if the action fails.]

[63] Rollo, pp. 524-526.

[64] Id. at 614-652.

[65] Id. at 616.

[66] Id. at 622.

[67] Id. at 623.

[68] In the 1996 MCIAA case, the Court held that Section 234 of Republic Act No. 7610, or the
Local Government Code (LGC), “unequivocally withdrew, upon the effectivity of the LGC,
exemptions from payment of real property taxes granted to natural or juridical persons,
including government-owned or controlled corporations, except as provided in the said section,
and the petitioner is, undoubtedly, a government-owned corporation, it necessarily follows that
its exemption from such tax granted it in Section 14 of its Charter, R.A. No. 6958, has been
withdrawn.” (Mactan-Cebu International Airport Authority v. Marcos, supra note 4 at 414.)
[69]See City Government of San Pablo, Laguna v. Reyes, 364 Phil. 842 (1999); Manila Electric
Company v. Province of Laguna, 366 Phil. 428 (1999); National Power Corporation v. City of
Cabanatuan, 449 Phil. 233 (2003); Philippine Ports Authority v. City of Iloilo, 484 Phil. 784
(2004); The City of Davao v. The Regional Trial Court, Branch XII, Davao City, 504 Phil. 542
(2005); The City Government of Quezon City v. Bayan Telecommunications, Inc., 519 Phil. 159
(2006); FELS Energy, Inc. v. The Province of Batangas, 545 Phil. 93 (2007); The Provincial
Assessor of Marinduque v. Court of Appeals, 605 Phil. 357 (2009).
[70]See Philippine Fisheries Development Authority v. Court of Appeals, 555 Phil. 661 (2007);
Manila International Airport Authority v. City of Pasay, 602 Phil. 160 (2009); Curata v.
Philippine Ports Authority, 608 Phil. 9 (2009); Government Service Insurance System v. City
Treasurer and City Assessor of the City of Manila, 623 Phil. 964 (2009); Philippine Fisheries
Development Authority v. Central Board of Assessment Appeals, 653 Phil. 328 (2010); City of
Pasig v. Republic of the Philippines, 671 Phil. 791 (2011); Republic of the Philippines v. City of
Parañaque, G.R. No. 191109, July 18, 2012, 677 SCRA 246; Funa v. Manila Economic and
Cultural Office, G.R. No. 193462, February 4, 2014, 715 SCRA 247.
[71] Philippine Fisheries Development Authority v. Court of Appeals, id. at 667.
[72] Manila International Airport Authority v. Court of Appeals, supra note 21 at 213.
[73] Id. at 209.
[74] Id. at 209-213.
[75] Id. at 213-215.
[76] Id. at 216-218.
[77] Id. at 218-221.
[78] Id. at 221.
[79] SEC. 234. Exemptions from Real Property Tax. - The following are exempted from payment
of the real property tax:
(a) Real property owned by the Republic of the Philippines or any of its political subdivisions
except when the beneficial use thereof has been granted, for consideration or otherwise, to a
taxable person[.]
[80] Manila International Airport Authority v. Court of Appeals, supra note 21 at 224-225.
[81] Supra note 70 at 174-179.
[82] Supra note 70 at 668-674.
[83] Supra note 70 at 87.
[84] Supra note 70 at 978-980.
[85] Manila International Airport Authority v. Court of Appeals, supra note 21 at 240-241.

799 Phil. 141
SECOND DIVISION
[ G.R. No. 196596, November 09, 2016 ]
COMMISSIONER OF INTERNAL REVENUE, PETITIONER, VS. DE LA SALLE UNIVERSITY,
INC., RESPONDENT.

[G.R. No. 198841]

DE LA SALLE UNIVERSITY INC., PETITIONER, VS. COMMISSIONER OF INTERNAL

REVENUE, RESPONDENT.

[G.R. No. 198941]

COMMISSIONER OF INTERNAL REVENUE, PETITIONER, VS. DE LA SALLE UNIVERSITY,

INC., RESPONDENT.

DECISION
BRION, J.:
Before the Court are consolidated petitions for review on certiorari:[1]

1. G.R. No. 196596 filed by the Commissioner of Internal Revenue (Commissioner) to assail the December 10, 2010 decision
and March 29, 2011 resolution of the Court of Tax Appeals (CTA) in En Banc Case No. 622;[2]

2. G.R. No. 198841 filed by De La Salle University, Inc. (DLSU) to assail the June 8, 2011 decision and October 4, 2011
resolution in CTA En Banc Case No. 671;[3] and

3. G.R. No. 198941 filed by the Commissioner to assail the June 8, 2011 decision and October 4, 2011 resolution in CTA En
Banc Case No. 671.[4]

G.R. Nos. 196596, 198841 and 198941 all originated from CTA Special First Division (CTA Division) Case No. 7303. G.R. No.
196596 stemmed from CTA En Banc Case No. 622 filed by the Commissioner to challenge CTA Case No. 7303. G.R. No.
198841 and 198941 both stemmed from CTA En Banc Case No. 671 filed by DLSU to also challenge CTA Case No. 7303.

The Factual Antecedents

Sometime in 2004, the Bureau of Internal Revenue (BIR) issued to DLSU Letter of Authority (LOA) No. 2794 authorizing its
revenue officers to examine the latter's books of accounts and other accounting records for all internal revenue taxes for the
period Fiscal Year Ending 2003 and Unverified Prior Years.[5]

On May 19, 2004, BIR issued a Preliminary Assessment Notice to DLSU.[6]

Subsequently on August 18, 2004, the BIR through a Formal Letter of Demand assessed DLSU the following deficiency taxes:
(1) income tax on rental earnings from restaurants/canteens and bookstores operating within the campus; (2) value-added tax
(VAT) on business income; and (3) documentary stamp tax (DST) on loans and lease contracts. The BIR demanded the payment
of P17,303,001.12, inclusive of surcharge, interest and penalty for taxable years 2001, 2002 and 2003.[7]

DLSU protested the assessment. The Commissioner failed to act on the protest; thus, DLSU filed on August 3, 2005 a petition for
review with the CTA Division.[8]

DLSU, a non-stock, non-profit educational institution, principally anchored its petition on Article XIV, Section 4 (3) of the
Constitution, which reads:

(3) All revenues and assets of non-stock, non-profit educational institutions used actually, directly, and exclusively
for educational purposes shall be exempt from taxes and duties. xxx.
On January 5, 2010, the CTA Division partially granted DLSU's petition for review. The dispositive portion of the decision reads:
WHEREFORE, the Petition for Review is PARTIALLY GRANTED. The DST assessment on the loan transactions
of [DLSU] in the amount of P1,1681,774.00 is hereby CANCELLED. However, [DLSU] is ORDERED TO PAY
deficiency income tax, VAT and DST on its lease contracts, plus 25% surcharge for the fiscal years 2001, 2002 and
2003 in the total amount of P18,421,363.53...xxx.

In addition, [DLSU] is hereby held liable to pay 20% delinquency interest on the total amount due computed from
September 30, 2004 until full payment thereof pursuant to Section 249(C)(3) of the [National Internal Revenue Code].
Further, the compromise penalties imposed by [the Commissioner] were excluded, there. being no compromise
agreement between the parties.

SO ORDERED.[9]

Both the Commissioner and DLSU moved for the reconsideration of the January 5, 2010 decision.[10] On April 6, 2010, the CTA
Division denied the Commissioner's motion for reconsideration while it held in abeyance the resolution on DLSU's motion for
reconsideration.[11]

On May 13, 2010, the Commissioner appealed to the CTA En Banc (CTA En Banc Case No. 622) arguing that DLSU's use of its
revenues and assets for non-educational or commercial purposes removed these items from the exemption coverage under the
Constitution.[12]

On May 18, 2010, DLSU formally offered to the CTA Division supplemental pieces of documentary evidence to prove that its
rental income was used actually, directly and exclusively for educational purposes.[13] The Commissioner did not promptly object
to the formal offer of supplemental evidence despite notice.[14]

On July 29, 2010, the CTA Division, in view of the supplemental evidence submitted, reduced the amount of DLSU's tax
deficiencies. The dispositive portion of the amended decision reads:

WHEREFORE, [DLSU]'s Motion for Partial Reconsideration is hereby PARTIALLY GRANTED. [DLSU] is
hereby ORDERED TO PAY for deficiency income tax, VAT and DST plus 25% surcharge for the fiscal years 2001,
2002 and 2003 in the total adjusted amount of P5,506,456.71...xxx.

In addition, [DLSU] is hereby held liable to pay 20% per annum deficiency interest on the...basic deficiency
taxes...until full payment thereof pursuant to Section 249(B) of the [National Internal Revenue Code]...xxx.

Further, [DLSU] is hereby held liable to pay 20% per annum delinquency interest on the deficiency taxes, surcharge
and deficiency interest which have accrued...from September 30, 2004 until fully paid.[15]

Consequently, the Commissioner supplemented its petition with the CTA En Banc and argued that the CTA Division erred in
admitting DLSU's additional evidence.[16]

Dissatisfied with the partial reduction of its tax liabilities, DLSU filed a separate petition for review with the CTA En Banc (CTA
En Banc Case No. 671) on the following grounds: (1) the entire assessment should have been cancelled because it was based on
an invalid LOA; (2) assuming the LOA was valid, the CTA Division should still have cancelled the entire assessment because
DLSU submitted evidence similar to those submitted by Ateneo De Manila University (Ateneo) in a separate case where the CTA
cancelled Ateneo's tax assessment;[17] and (3) the CTA Division erred in finding that a portion of DLSU's rental income was not
proved to have been used actually, directly and exclusively for educational purposes.[18]

The CTA En Banc Rulings

CTA En Banc Case No. 622

The CTA En Banc dismissed the Commissioner's petition for review and sustained the findings of the CTA Division.[19]

Tax on rental income

Relying on the findings of the court-commissioned Independent Certified Public Accountant (Independent CPA), the CTA En
Banc found that DLSU was able to prove that a portion of the assessed rental income was used actually, directly and exclusively
for educational purposes; hence, exempt from tax.[20] The CTA En Banc was satisfied with DLSU's supporting evidence
confirming that part of its rental income had indeed been used to pay the loan it obtained to build the university's Physical
Education - Sports Complex.[21]
Parenthetically, DLSU's unsubstantiated claim for exemption, i.e., the part of its income that was not shown by supporting
documents to have been actually, directly and exclusively used for educational purposes, must be subjected to income tax and
VAT.[22]
DST on loan and mortgage transactions
Contrary to the Commissioner's contention, DLSU proved its remittance of the DST due on its loan and mortgage documents.[23]
The CTA En Banc found that DLSU's DST payments had been remitted to the BIR, evidenced by the stamp on the documents
made by a DST imprinting machine, which is allowed under Section 200 (D) of the National Internal Revenue Code (Tax Code)
[24] and Section 2 of Revenue Regulations (RR) No. 15-2001.[25]
Admissibility of DLSU's supplemental evidence
The CTA En Banc held that the supplemental pieces of documentary evidence were admissible even if DLSU formally offered
them only when it moved for reconsideration of the CTA Division's original decision. Notably, the law creating the CTA provides
that proceedings before it shall not be governed strictly by the technical rules of evidence.[26]
The Commissioner moved but failed to obtain a reconsideration of the CTA En Banc's December 10, 2010 decision.[27] Thus, she
came to this court for relief through a petition for review on certiorari (G.R. No. 196596).
CTA En Banc Case No. 671
The CTA En Banc partially granted DLSU's petition for review and further reduced its tax liabilities to P2,554,825.47 inclusive
of surcharge.[28]
On the validity of the Letter of Authority
The issue of the LOA's validity was raised during trial;[29] hence, the issue was deemed properly submitted for decision and
reviewable on appeal.
Citing jurisprudence, the CTA En Banc held that a LOA should cover only one taxable period and that the practice of issuing a
LOA covering audit of unverified prior years is prohibited.[30] The prohibition is consistent with Revenue Memorandum Order
(RMO) No. 43-90, which provides that if the audit includes more than one taxable period, the other periods or years shall be
specifically indicated in the LOA.[31]
In the present case, the LOA issued to DLSU is for Fiscal Year Ending 2003 and Unverified Prior Years. Hence, the assessments
for deficiency income tax, VAT and DST for taxable years 2001 and 2002 are void, but the assessment for taxable year 2003 is
valid.[32]
On the applicability of the Ateneo case
The CTA En Banc held that the Ateneo case is not a valid precedent because it involved different parties, factual settings, bases of
assessments, sets of evidence, and defenses.[33]
On the CTA Division's appreciation of the evidence
The CTA En Banc affirmed the CTA Division's appreciation of DLSU's evidence. It held that while DLSU successfully proved
that a portion of its rental income was transmitted and used to pay the loan obtained to fund the construction of the Sports
Complex, the rental income from other sources were not shown to have been actually, directly and exclusively used for
educational purposes.[34]
Not pleased with the CTA En Banc's ruling, both DLSU (G.R. No. 198841) and the Commissioner (G.R. No. 198941) came to
this Court for relief.
The Consolidated Petitions
G.R. No. 196596

The Commissioner submits the following arguments:
First, DLSU's rental income is taxable regardless of how such income is derived, used or disposed of.[35] DLSU's operations of
canteens and bookstores within its campus even though exclusively serving the university community do not negate income tax
liability.[36]
The Commissioner contends that Article XIV, Section 4 (3) of the Constitution must be harmonized with Section 30 (H) of the
Tax Code, which states among others, that the income of whatever kind and character of [a non-stock and non-profit educational
institution] from any of [its] properties, real or personal, or from any of (its] activities conducted for profit regardless of the
disposition made of such income, shall be subject to tax imposed by this Code.[37]
The Commissioner argues that the CTA En Banc misread and misapplied the case of Commissioner of Internal Revenue v.
YMCA[38] to support its conclusion that revenues however generated are covered by the constitutional exemption, provided that,
the revenues will be used for educational purposes or will be held in reserve for such purposes.[39]
On the contrary, the Commissioner posits that a tax-exempt organization like DLSU is exempt only from property tax but not
from income tax on the rentals earned from property.[40] Thus, DLSU's income from the leases of its real properties is not exempt
from taxation even if the income would be used for educational purposes.[41]
Second, the Commissioner insists that DLSU did not prove the fact of DST payment[42] and that it is not qualified to use the On-
Line Electronic DST Imprinting Machine, which is available only to certain classes of taxpayers under RR No. 9-2000.[43]
Finally, the Commissioner objects to the admission of DLSU's supplemental offer of evidence. The belated submission of
supplemental evidence reopened the case for trial, and worse, DLSU offered the supplemental evidence only after it received the
unfavorable CTA Division's original decision.[44] In any case, DLSU's submission of supplemental documentary evidence was
unnecessary since its rental income was taxable regardless of its disposition.[45]
G.R. No. 198841
DLSU argues as that:
First, RMO No. 43-90 prohibits the practice of issuing a LOA with any indication of unverified prior years. A LOA issued
contrary to RMO No. 43-90 is void, thus, an assessment issued based on such defective LOA must also be void.[46]
DLSU points out that the LOA issued to it covered the Fiscal Year Ending 2003 and Unverified Prior Years. On the basis of this
defective LOA, the Commissioner assessed DLSU for deficiency income tax, VAT and DST for taxable years 2001, 2002 and
2003.[47] DLSU objects to the CTA En Banc's conclusion that the LOA is valid for taxable year 2003. According to DLSU, when
RMO No. 43-90 provides that:
The practice of issuing [LOAs] covering audit of 'unverified prior years' is hereby prohibited.

it refers to the LOA which has the format "Base Year + Unverified Prior Years." Since the LOA issued to DLSU follows this
format, then any assessment arising from it must be entirely voided.[48]

Second, DLSU invokes the principle of uniformity in taxation, which mandates that for similarly situated parties, the same set of
evidence should be appreciated and weighed in the same manner.[49] The CTA En Banc erred when it did not similarly appreciate
DLSU's evidence as it did to the pieces of evidence submitted by Ateneo, also a non-stock, non-profit educational institution.[50]

G.R. No. 198941

The issues and arguments raised by the Commissioner in G.R. No. 198941 petition are exactly the same as those she raised in her:
(1) petition docketed as G.R. No. 196596 and (2) comment on DLSU's petition docketed as G.R. No. 198841.[51]

Counter-arguments

DLSU's Comment on G.R. No. 196596

First, DLSU questions the defective verification attached to the petition.[52]

Second, DLSU stresses that Article XIV, Section 4 (3) of the Constitution is clear that all assets and revenues of non-stock, non-
profit educational institutions used actually, directly and exclusively for educational purposes are exempt from taxes and duties.
[53]
On this point, DLSU explains that: (1) the tax exemption of nonstock, non-profit educational institutions is novel to the 1987
Constitution and that Section 30 (H) of the 1997 Tax Code cannot amend the 1987 Constitution;[54] (2) Section 30 of the 1997
Tax Code is almost an exact replica of Section 26 of the 1977 Tax Code - with the addition of non-stock, non-profit educational
institutions to the list of tax-exempt entities; and (3) that the 1977 Tax Code was promulgated when the 1973 Constitution was
still in place.
DLSU elaborates that the tax exemption granted to a private educational institution under the 1973 Constitution was only for real
property tax. Back then, the special tax treatment on income of private educational institutions only emanates from statute, i.e.,
the 1977 Tax Code. Only under the 1987 Constitution that exemption from tax of all the assets and revenues of non-stock, non-
profit educational institutions used actually, directly and exclusively for educational purposes, was expressly and categorically
enshrined.[55]
DLSU thus invokes the doctrine of constitutional supremacy, which renders any subsequent law that is contrary to the
Constitution void and without any force and effect.[56] Section 30 (H) of the 1997 Tax Code insofar as it subjects to tax the
income of whatever kind and character of a nonstock and non-profit educational institution from any of its properties, real or
personal, or from any of its activities conducted for profit regardless of the disposition made of such income, should be declared
without force and effect in view of the constitutionally granted tax exemption on "all revenues and assets of non-stock, non-profit
educational institutions used actually, directly, and exclusively for educational purposes."[57]
DLSU further submits that it complies with the requirements enunciated in the YMCA case, that for an exemption to be granted
under Article XIV, Section 4 (3) of the Constitution, the taxpayer must prove that: (1) it falls under the classification non-stock,
non-profit educational institution; and (2) the income it seeks to be exempted from taxation is used actually, directly and
exclusively for educational purposes.[58] Unlike YMCA, which is not an educational institution, DLSU is undisputedly a non-
stock, non-profit educational institution. It had also submitted evidence to prove that it actually, directly and exclusively used its
income for educational purposes.[59]
DLSU also cites the deliberations of the 1986 Constitutional Commission where they recognized that the tax exemption was
granted "to incentivize private educational institutions to share with the State the responsibility of educating the youth."[60]
Third, DLSU highlights that both the CTA En Banc and Division found that the bank that handled DLSU's loan and mortgage
transactions had remitted to the BIR the DST through an imprinting machine, a method allowed under RR No. 15-2001.[61] In
any case, DLSU argues that it cannot be held liable for DST owmg to the exemption granted under the Constitution.[62]
Finally, DLSU underscores that the Commissioner, despite notice, did not oppose the formal offer of supplemental evidence.
Because of the Commissioner's failure to timely object, she became bound by the results of the submission of such supplemental
evidence.[63]
The CIR's Comment on G.R. No. 198841
The Commissioner submits that DLSU is estopped from questioning the LOA's validity because it failed to raise this issue in both
the administrative and judicial proceedings.[64] That it was asked on crossexamination during the trial does not make it an issue
that the CTA could resolve.[65] The Commissioner also maintains that DLSU's rental income is not tax-exempt because an
educational institution is only exempt from property tax but not from tax on the income earned from the property.[66]
DLSU's Comment on G.R. No. 198941
DLSU puts forward the same counter-arguments discussed above.[67]
In addition, DLSU prays that the Court award attorney's fees in its favor because it was constrained to unnecessarily retain the
services of counsel in this separate petition.[68]
Issues
Although the parties raised a number of issues, the Court shall decide only the pivotal issues, which we summarize as follows:
I. Whether DLSU's income and revenues proved to have been used actually, directly and exclusively for educational purposes
are exempt from duties and taxes;
II. Whether the entire assessment should be voided because of the defective LOA;
III. Whether the CTA correctly admitted DLSU's supplemental pieces of evidence; and
IV. Whether the CTA's appreciation of the sufficiency ofDLSU's evidence may be disturbed by the Court.
Our Ruling

As we explain in full below, we rule that:

I. The income, revenues and assets of non-stock, non-profit educational institutions proved to have been used actually,
directly and exclusively for educational purposes are exempt from duties and taxes.

II. The LOA issued to DLSU is not entirely void. The assessment for taxable year 2003 is valid.

III. The CTA correctly admitted DLSU's formal offer of supplemental evidence; and

IV. The CTA's appreciation of evidence is conclusive unless the CTA is shown to have manifestly overlooked certain relevant
facts not disputed by the parties and which, if properly considered, would justify a different conclusion.

The parties failed to convince the Court that the CTA overlooked or failed to consider relevant facts. We thus sustain the
CTA En Banc's findings that:

a. DLSU proved that a portion of its rental income was used actually, directly and exclusively for educational purposes;
and

b. DLSU proved the payment of the DST through its bank's on-line imprinting machine.

I. The revenues and assets of non-stock, non-profit educational institutions proved to have been used actually, directly,
and exclusively for educational purposes are exempt from duties and taxes.

DLSU rests it case on Article XIV, Section 4 (3) of the 1987 Constitution, which reads:

(3) All revenues and assets of non-stock, non-profit educational institutions used actually, directly, and
exclusively for educational purposes shall be exempt from taxes and duties. Upon the dissolution or
cessation of the corporate existence of such institutions, their assets shall be disposed of in the manner provided
by law. Proprietary educational institutions, including those cooperatively owned, may likewise be entitled to
such exemptions subject to the limitations provided by law including restrictions on dividends and
provisions for reinvestment [underscoring and emphasis supplied]
Before fully discussing the merits of the case, we observe that:

First, the constitutional provision refers to two kinds of educational institutions: (1) non-stock, non-profit educational institutions
and (2) proprietary educational institutions.[69]

Second, DLSU falls under the first category. Even the Commissioner admits the status of DLSU as a non-stock, non-profit
educational institution.[70]

Third, while DLSU's claim for tax exemption arises from and is based on the Constitution, the Constitution, in the same
provision, also imposes certain conditions to avail of the exemption. We discuss below the import of the constitutional text vis-a-
vis the Commissioner's counter-arguments.

Fourth, there is a marked distinction between the treatment of nonstock, non-profit educational institutions and proprietary
educational institutions. The tax exemption granted to non-stock, non-profit educational institutions is conditioned only on the
actual, direct and exclusive use of their revenues and assets for educational purposes. While tax exemptions may also be granted
to proprietary educational institutions, these exemptions may be subject to limitations imposed by Congress.

As we explain below, the marked distinction between a non-stock, non-profit and a proprietary educational institution is crucial in
determining the nature and extent of the tax exemption granted to non-stock, non-profit educational institutions.

The Commissioner opposes DLSU's claim for tax exemption on the basis of Section 30 (H) of the Tax Code. The relevant text
reads:
The following organizations shall not be taxed under this Title [Tax on Income] in respect to income received by
them as such:

xxxx

(H) A non-stock and non-profit educational institution

xxxx

Notwithstanding the provisions in the preceding paragraphs, the income of whatever kind and character of the
foregoing organizations from any of their properties, real or personal, or from any of their activities conducted for
profit regardless of the disposition made of such income shall be subject to tax imposed under this Code.
[underscoring and emphasis supplied]

The Commissioner posits that the 1997 Tax Code qualified the tax exemption granted to non-stock, non-profit educational
institutions such that the revenues and income they derived from their assets, or from any of their activities conducted for profit,
are taxable even if these revenues and income are used for educational purposes.

Did the 1997 Tax Code qualifY the tax exemption constitutionally-granted to non-stock, non-profit educational institutions?

We answer in the negative.

While the present petition appears to be a case of first impression,[71] the Court in the YMCA case had in fact already analyzed
and explained the meaning of Article XIV, Section 4 (3) of the Constitution. The Court in that case made doctrinal
pronouncements that are relevant to the present case.

The issue in YMCA was whether the income derived from rentals of real property owned by the YMCA, established as a "welfare,
educational and charitable non-profit corporation," was subject to income tax under the Tax Code and the Constitution.[72]

The Court denied YMCA's claim for exemption on the ground that as a charitable institution falling under Article VI, Section 28
(3) of the Constitution,[73] the YMCA is not tax-exempt per se; "what is exempted is not the institution itself...those exempted
from real estate taxes are lands, buildings and improvements actually, directly and exclusively used for religious, charitable or
educational purposes."[74]

The Court held that the exemption claimed by the YMCA is expressly disallowed by the last paragraph of then Section 27 (now
Section 30) of the Tax Code, which mandates that the income of exempt organizations from any of their properties, real or
personal, are subject to the same tax imposed by the Tax Code, regardless of how that income is used. The Court ruled that the
last paragraph of Section 27 unequivocally subjects to tax the rent income of the YMCA from its property.[75]

In short, the YMCA is exempt only from property tax but not from income tax.

As a last ditch effort to avoid paying the taxes on its rental income, the YMCA invoked the tax privilege granted under Article
XIV, Section 4 (3) of the Constitution.

The Court denied YMCA's claim that it falls under Article XIV, Section 4 (3) of the Constitution holding that the term
educational institution, when used in laws granting tax exemptions, refers to the school system (synonymous with formal
education); it includes a college or an educational establishment; it refers to the hierarchically structured and chronologically
graded learnings organized and provided by the formal school system.[76]

The Court then significantly laid down the requisites for availing the tax exemption under Article XIV, Section 4 (3), namely: (1)
the taxpayer falls under the classification non-stock, non-profit educational institution; and (2) the income it seeks to be
exempted from taxation is used actually, directly and exclusively for educational purposes.[77]

We now adopt YMCA as precedent and hold that:

1. The last paragraph of Section 30 of the Tax Code is without force and effect with respect to non-stock, non-profit
educational institutions, provided, that the non-stock, non-profit educational institutions prove that its assets and revenues
are used actually, directly and exclusively for educational purposes.

2. The tax-exemption constitutionally-granted to non-stock, non profit educational institutions, is not subject to limitations
imposed by law.
The tax exemption granted by the Constitution to non-stock, non-profit educational institutions is conditioned only on the
actual, direct and exclusive use of their assets, revenues and income[78] for educational purposes.

We find that unlike Article VI, Section 28 (3) of the Constitution (pertaining to charitable institutions, churches, parsonages or
convents, mosques, and non-profit cemeteries), which exempts from tax only the assets, i.e., "all lands, buildings, and
improvements, actually, directly, and exclusively used for religious, charitable, or educational purposes...," Article XIV, Section
4 (3) categorically states that "[a]ll revenues and assets... used actually, directly, and exclusively for educational purposes shall
be exempt from taxes and duties."

The addition and express use of the word revenues in Article XIV, Section 4 (3) of the Constitution is not without significance.

We find that the text demonstrates the policy of the 1987 Constitution, discernible from the records of the 1986 Constitutional
Commission[79] to provide broader tax privilege to non-stock, non-profit educational institutions as recognition of their role in
assisting the State provide a public good. The tax exemption was seen as beneficial to students who may otherwise be charged
unreasonable tuition fees if not for the tax exemption extended to all revenues and assets of non-stock, non-profit educational
institutions.[80]

Further, a plain reading of the Constitution would show that Article XIV, Section 4 (3) does not require that the revenues and
income must have also been sourced from educational activities or activities related to the purposes of an educational institution.
The phrase all revenues is unqualified by any reference to the source of revenues. Thus, so long as the revenues and income are
used actually, directly and exclusively for educational purposes, then said revenues and income shall be exempt from taxes and
duties.[81]

We find it helpful to discuss at this point the taxation of revenues versus the taxation of assets.

Revenues consist of the amounts earned by a person or entity from the conduct of business operations.[82] It may refer to the sale
of goods, rendition of services, or the return of an investment. Revenue is a component of the tax base in income tax,[83] VAT,[84]
and local business tax (LBT).[85]

Assets, on the other hand, are the tangible and intangible properties owned by a person or entity.[86] It may refer to real estate,
cash deposit in a bank, investment in the stocks of a corporation, inventory of goods, or any property from which the person or
entity may derive income or use to generate the same. In Philippine taxation, the fair market value of real property is a component
of the tax base in real property tax (RPT).[87] Also, the landed cost of imported goods is a component of the tax base in VAT on
importation[88] and tariff duties.[89]

Thus, when a non-stock, non-profit educational institution proves that it uses its revenues actually, directly, and exclusively for
educational purposes, it shall be exempted from income tax, VAT, and LBT. On the other hand, when it also shows that it uses its
assets in the form of real property for educational purposes, it shall be exempted from RPT.

To be clear, proving the actual use of the taxable item will result in an exemption, but the specific tax from which the entity shall
be exempted from shall depend on whether the item is an item of revenue or asset.

To illustrate, if a university leases a portion of its school building to a bookstore or cafeteria, the leased portion is not actually,
directly and exclusively used for educational purposes, even if the bookstore or canteen caters only to university students, faculty
and staff.

The leased portion of the building may be subject to real property tax, as held in Abra Valley College, Inc. v. Aquino.[90] We
ruled in that case that the test of exemption from taxation is the use of the property for purposes mentioned in the Constitution.
We also held that the exemption extends to facilities which are incidental to and reasonably necessary for the accomplishment of
the main purposes.

In concrete terms, the lease of a portion of a school building for commercial purposes, removes such asset from the property tax
exemption granted under the Constitution.[91] There is no exemption because the asset is not used actually, directly and
exclusively for educational purposes. The commercial use of the property is also not incidental to and reasonably necessary for
the accomplishment of the main purpose of a university, which is to educate its students.

However, if the university actually, directly and exclusively uses for educational purposes the revenues earned from the lease of
its school building, such revenues shall be exempt from taxes and duties. The tax exemption no longer hinges on the use of the
asset from which the revenues were earned, but on the actual, direct and exclusive use of the revenues for educational purposes.
Parenthetically, income and revenues of non-stock, non-profit educational institution not used actually, directly and exclusively
for educational purposes are not exempt from duties and taxes. To avail of the exemption, the taxpayer must factually prove that
it used actually, directly and exclusively for educational purposes the revenues or income sought to be exempted.
The crucial point of inquiry then is on the use of the assets or on the use of the revenues. These are two things that must be
viewed and treated separately. But so long as the assets or revenues are used actually, directly and exclusively for educational
purposes, they are exempt from duties and taxes.
The tax exemption granted by the Constitution to non-stock, non-profit educational institutions, unlike the exemption that
may be availed of by proprietary educational institutions, is not subject to limitations imposed by law.
That the Constitution treats non-stock, non-profit educational institutions differently from proprietary educational institutions
cannot be doubted. As discussed, the privilege granted to the former is conditioned only on the actual, direct and exclusive use of
their revenues and assets for educational purposes. In clear contrast, the tax privilege granted to the latter may be subject to
limitations imposed by law.
We spell out below the difference in treatment if only to highlight the privileged status of non-stock, non-profit educational
institutions compared with their proprietary counterparts.
While a non-stock, non-profit educational institution is classified as a tax-exempt entity under Section 30 (Exemptions from Tax
on Corporations) of the Tax Code, a proprietary educational institution is covered by Section 27 (Rates of Income Tax on
Domestic Corporations).
To be specific, Section 30 provides that exempt organizations like non-stock, non-profit educational institutions shall not be taxed
on income received by them as such.
Section 27 (B), on the other hand, states that [p]roprietary educational institutions...which are nonprofit shall pay a tax of ten
percent (10%) on their taxable income...Provided, that if the gross income from unrelated trade, business or other activity exceeds
fifty percent (50%) of the total gross income derived by such educational institutions...[the regular corporate income tax of 30%]
shall be imposed on the entire taxable income...[92]
By the Tax Code's clear terms, a proprietary educational institution is entitled only to the reduced rate of 10% corporate income
tax. The reduced rate is applicable only if: (1) the proprietary educational institution is non profit and (2) its gross income from
unrelated trade, business or activity does not exceed 50% of its total gross income.
Consistent with Article XIV, Section 4 (3) of the Constitution, these limitations do not apply to non-stock, non-profit educational
institutions.
Thus, we declare the last paragraph of Section 30 of the Tax Code without force and effect for being contrary to the Constitution
insofar as it subjects to tax the income and revenues of non-stock, non-profit educational institutions used actually, directly and
exclusively for educational purpose. We make this declaration in the exercise of and consistent with our duty[93] to uphold the
primacy of the Constitution.[94]
Finally, we stress that our holding here pertains only to non-stock, non-profit educational institutions and does not cover the other
exempt organizations under Section 30 of the Tax Code.
For all these reasons, we hold that the income and revenues of DLSU proven to have been used actually, directly and exclusively
for educational purposes are exempt from duties and taxes.
II. The LOA issued to DLSU is not entirely void. The assessment for taxable year 2003 is valid.
DLSU objects to the CTA En Banc's conclusion that the LOA is valid for taxable year 2003 and insists that the entire LOA
should be voided for being contrary to RMO No. 43-90, which provides that if tax audit includes more than one taxable period,
the other periods or years shall be specifically indicated in the LOA.
A LOA is the authority given to the appropriate revenue officer to examine the books of account and other accounting records of
the taxpayer in order to determine the taxpayer's correct internal revenue liabilities[95] and for the purpose of collecting the
correct amount oftax,[96] in accordance with Section 5 of the Tax Code, which gives the CIR the power to obtain information, to
summon/examine, and take testimony of persons. The LOA commences the audit process[97] and informs the taxpayer that it is
under audit for possible deficiency tax assessment.
Given the purposes of a LOA, is there basis to completely nullify the LOA issued to DLSU, and consequently, disregard the BIR
and the CTA's findings of tax deficiency for taxable year 2003?
The relevant provision is Section C of RMO No. 43-90, the pertinent portion of which reads:
3. A Letter of Authority [LOA] should cover a taxable period not exceeding one taxable year. The practice of
issuing [LOAs] covering audit of unverified prior years is hereby prohibited. If the audit of a taxpayer shall
include more than one taxable period, the other periods or years shall be specifically indicated in the [LOA].[98]

What this provision clearly prohibits is the practice of issuing LOAs covering audit of unverified prior years. RMO 43-90 does
not say that a LOA which contains unverified prior years is void. It merely prescribes that if the audit includes more than one
taxable period, the other periods or years must be specified. The provision read as a whole requires that if a taxpayer is audited
for more than one taxable year, the BIR must specify each taxable year or taxable period on separate LOAs.

Read in this light, the requirement to specify the taxable period covered by the LOA is simply to inform the taxpayer of the extent
of the audit and the scope of the revenue officer's authority. Without this rule, a revenue officer can unduly burden the taxpayer
by demanding random accounting records from random unverified years, which may include documents from as far back as ten
years in cases of fraud audit.[99]

In the present case, the LOA issued to DLSU is for Fiscal Year Ending 2003 and Unverified Prior Years. The LOA does not
strictly comply with RMO 43-90 because it includes unverified prior years. This does not mean, however, that the entire LOA is
void.

As the CTA correctly held, the assessment for taxable year 2003 is valid because this taxable period is specified in the LOA.
DLSU was fully apprised that it was being audited for taxable year 2003. Corollarily, the assessments for taxable years 2001 and
2002 are void for having been unspecified on separate LOAs as required under RMO No. 43-90.

Lastly, the Commissioner's claim that DLSU failed to raise the issue of the LOA's validity at the CTA Division, and thus, should
not have been entertained on appeal, is not accurate.

On the contrary, the CTA En Banc found that the issue of the LOA's validity came up during the trial.[100] DLSU then raised the
issue in its memorandum and motion for partial reconsideration with the CTA Division. DLSU raised it again on appeal to the
CTA En Banc. Thus, the CTA En Banc could, as it did, pass upon the validity of the LOA.[101] Besides, the Commissioner had
the opportunity to argue for the validity of the LOA at the CTA En Banc but she chose not to file her comment and memorandum
despite notice.[102]

III. The CTA correctly admitted the supplemental evidence formally offered by DLSU.

The Commissioner objects to the CTA Division's admission of DLSU's supplemental pieces of documentary evidence.

To recall, DLSU formally offered its supplemental evidence upon filing its motion for reconsideration with the CTA Division.
[103] The CTA Division admitted the supplemental evidence, which proved that a portion of DLSU's rental income was used
actually, directly and exclusively for educational purposes. Consequently, the CTA Division reduced DLSU's tax liabilities.

We uphold the CTA Division's admission of the supplemental evidence on distinct but mutually reinforcing grounds, to wit: (1)
the Commissioner failed to timely object to the formal offer of supplemental evidence; and (2) the CTA is not governed strictly by
the technical rules of evidence.

First, the failure to object to the offered evidence renders it admissible, and the court cannot, on its own, disregard such evidence.
[104]

The Court has held that if a party desires the court to reject the evidence offered, it must so state in the form of a timely objection
and it cannot raise the objection to the evidence for the first time on appeal.[105]

Because of a party's failure to timely object, the evidence offered becomes part of the evidence in the case. As a consequence, all
the parties are considered bound by any outcome arising from the offer of evidence properly presented.[106]

As disclosed by DLSU, the Commissioner did not oppose the supplemental formal offer of evidence despite notice.[107] The
Commissioner objected to the admission of the supplemental evidence only when the case was on appeal to the CTA En Banc. By
the time the Commissioner raised her objection, it was too late; the formal offer, admission and evaluation of the supplemental
evidence were all fait accompli.
We clarify that while the Commissioner's failure to promptly object had no bearing on the materiality or sufficiency of the
supplemental evidence admitted, she was bound by the outcome of the CTA Division's assessment of the evidence.[108]
Second, the CTA is not governed strictly by the technical rules of evidence. The CTA Division's admission of the formal offer of
supplemental evidence, without prompt objection from the Commissioner, was thus justified.
Notably, this Court had in the past admitted and considered evidence attached to the taxpayers' motion for reconsideration.
In the case of BPI-Family Savings Bank v. Court of Appeals,[109] the tax refund claimant attached to its motion for
reconsideration with the CTA its Final Adjustment Return. The Commissioner, as in the present case, did not oppose the
taxpayer's motion for reconsideration and the admission of the Final Adjustment Return.[110] We thus admitted and gave weight
to the Final Adjustment Return although it was only submitted upon motion for reconsideration.
We held that while it is true that strict procedural rules generally frown upon the submission of documents after the trial, the law
creating the CTA specifically provides that proceedings before it shall not be governed strictly by the technical rules of
evidence[111] and that the paramount consideration remains the ascertainment of truth. We ruled that procedural rules should not
bar courts from considering undisputed facts to arrive at a just determination of a controversy.[112]
We applied the same reasoning in the subsequent cases of Filinvest Development Corporation v. Commissioner of Internal
Revenue[113] and Commissioner of Internal Revenue v. PERF Realty Corporation,[114] where the taxpayers also submitted the
supplemental supporting document only upon filing their motions for reconsideration.
Although the cited cases involved claims for tax refunds, we also dispense with the strict application of the technical rules of
evidence in the present tax assessment case. If anything, the liberal application of the rules assumes greater force and significance
in the case of a taxpayer who claims a constitutionally granted tax exemption. While the taxpayers in the cited cases claimed
refund of excess tax payments based on the Tax Code,[115] DLSU is claiming tax exemption based on the Constitution. If
liberality is afforded to taxpayers who paid more than they should have under a statute, then with more reason that we should
allow a taxpayer to prove its exemption from tax based on the Constitution.
Hence, we sustain the CTA's admission of DLSU's supplemental offer of evidence not only because the Commissioner failed to
promptly object, but more so because the strict application of the technical tules of evidence may defeat the intent of the
Constitution.
IV. The CTA's appreciation of evidence is generally binding on the Court unless compelling reasons justify otherwise.
It is doctrinal that the Court will not lightly set aside the conclusions reached by the CTA which, by the very nature of its function
of being dedicated exclusively to the resolution of tax problems, has developed an expertise on the subject, unless there has been
an abuse or improvident exercise of authority.[116] We thus accord the findings of fact by the CTA with the highest respect. These
findings of facts can only be disturbed on appeal if they are not supported by substantial evidence or there is a showing of gross
error or abuse on the part of the CTA. In the absence of any clear and convincing proof to the contrary, this Court must presume
that the CTA rendered a decision which is valid in every respect.[117]
We sustain the factual findings of the CTA.
The parties failed to raise credible basis for us to disturb the CTA's findings that DLSU had used actually, directly and exclusively
for educational purposes a portion of its assessed income and that it had remitted the DST payments though an online imprinting
machine.
a. DLSU used actually, directly, and exclusively for educational purposes a portion of its assessed income.

To see how the CTA arrived at its factual findings, we review the process undertaken, from which it deduced that DLSU
successfully proved that it used actually, directly and exclusively for educational purposes a portion of its rental income.

The CTA reduced DLSU's deficiency income tax and VAT liabilities in view of the submission of the supplemental evidence,
which consisted of statement of receipts, statement of disbursement and fund balance and statement of fund changes.[118]

These documents showed that DLSU borrowed P93.86 Million,[119] which was used to build the university's Sports Complex.
Based on these pieces of evidence, the CTA found that DLSU's rental income from its concessionaires were indeed transmitted
and used for the payment of this loan. The CTA held that the degree of preponderance of evidence was sufficiently met to prove
actual, direct and exclusive use for educational purposes.
The CTA also found that DLSU's rental income from other concessionaires, which were allegedly deposited to a fund (CF-CPA
Account),[120] intended for the university's capital projects, was not proved to have been used actually, directly and exclusively
for educational purposes. The CTA observed that "[DLSU]...failed to fully account for and substantiate all the disbursements
from the [fund]." Thus, the CTA "cannot ascertain whether rental income from the [other] concessionaires was indeed used for
educational purposes."[121]
To stress, the CTA's factual findings were based on and supported by the report of the Independent CPA who reviewed, audited
and examined the voluminous documents submitted by DLSU.
Under the CTA Revised Rules, an Independent CPA's functions include: (a) examination and verification of receipts, invoices,
vouchers and other long accounts; (b) reproduction of, and comparison of such reproduction with, and certification that the same
are faithful copies of original documents, and pre-marking of documentary exhibits consisting of voluminous documents; (c)
preparation of schedules or summaries containing a chronological listing of the numbers, dates and amounts covered by receipts
or invoices or other relevant documents and the amount(s) of taxes paid; (d) making findings as to compliance with
substantiation requirements under pertinent tax laws, regulations and jurisprudence; (e) submission of a formal report with
certification of authenticity and veracity of findings and conclusions in the performance of the audit; (f) testifying on such formal
report; and (g) performing such other functions as the CTA may direct.[122]
Based on the Independent CPA's report and on its own appreciation of the evidence, the CTA held that only the portion of the
rental income pertaining to the substantiated disbursements (i.e., proved by receipts, vouchers, etc.) from the CF-CPA Account
was considered as used actually, directly and exclusively for educational purposes. Consequently, the unaccounted and
unsubstantiated disbursements must be subjected to income tax and VAT.[123]
The CTA then further reduced DLSU's tax liabilities by cancelling the assessments for taxable years 2001 and 2002 due to the
defective LOA.[124]
The Court finds that the above fact-finding process undertaken by the CTA shows that it based its ruling on the evidence on
record, which we reiterate, were examined and verified by the Independent CPA. Thus, we see no persuasive reason to deviate
from these factual findings.
However, while we generally respect the factual findings of the CTA, it does not mean that we are bound by its conclusions. In
the present case, we do not agree with the method used by the CTA to arrive at DLSU's unsubstantiated rental income (i.e.,
income not proved to have been actually, directly and exclusively used for educational purposes).
To recall, the CTA found that DLSU earned a rental income of P10,610,379.00 in taxable year 2003.[125] DLSU earned this
income from leasing a portion of its premises to: 1) MTO-Sports Complex, 2) La Casita, 3) Alarey, Inc., 4) Zaide Food Corp., 5)
Capri International, and 6) MTO Bookstore.[126]
To prove that its rental income was used for educational purposes, DLSU identified the transactions where the rental income was
expended, viz.: 1) P4,007,724.00[127] used to pay the loan obtained by DLSU to build the Sports Complex; and 2) P6,602,655.00
transferred to the CF-CPA Account.[128]
DLSU also submitted documents to the Independent CPA to prove that the P6,602,655.00 transferred to the CF-CPA Account
was used actually, directly and exclusively for educational purposes. According to the Independent CPA' findings, DLSU was
able to substantiate disbursements from the CF-CPA Account amounting to P6,259,078.30.
Contradicting the findings of the Independent CPA, the CTA concluded that out of the P10,610,379.00 rental income,
P4,841,066.65 was unsubstantiated, and thus, subject to income tax and VAT.[129]
The CTA then concluded that the ratio of substantiated disbursements to the total disbursements from the CF-CPA Account for
taxable year 2003 is only 26.68%.[130] The CTA held as follows:
However, as regards petitioner's rental income from Alarey, Inc., Zaide Food Corp., Capri International and MTO
Bookstore, which were transmitted to the CF-CPA Account, petitioner again failed to fully account for and
substantiate all the disbursements from the CF-CPA Account; thus failing to prove that the rental income derived
therein were actually, directly and exclusively used for educational purposes. Likewise, the findings of the Court-
Commissioned Independent CPA show that the disbursements from the CF-CPA Account for fiscal year 2003
amounts to P-6,259,078.30 only. Hence, this portion of the rental income, being the substantiated disbursements of the
CF-CPA Account, was considered by the Special First Division as used actually, directly and exclusively for
educational purposes. Since for fiscal year 2003, the total disbursements per voucher is P6,259,078.3 (Exhibit "LL-25-
C"), and the total disbursements per subsidiary ledger amounts to P23,463,543.02 (Exhibit "LL-29-C"), the ratio of
substantiated disbursements for fiscal year 2003 is 26.68% (P6,259,078.30/P23,463,543.02). Thus, the substantiated
portion of CF-CPA Disbursements for fiscal year 2003, arrived at by multiplying the ratio of 26.68% with the total
rent income added to and used in the CF-CPA Account in the amount of P6,602,655.00 ts P1,761,588.35.[131]
(emphasis supplied)
For better understanding, we summarize the CTA's computation as follows:

1. The CTA subtracted the rent income used in the construction of the Sports Complex (P4,007,724.00) from the rental income
(P10,610,379.00) earned from the abovementioned concessionaries. The difference (P6,602,655.00) was the portion
claimed to have been deposited to the CF-CPA Account.

2. The CTA then subtracted the supposed substantiated portion of CF-CPA disbursements (P1,761,308.37) from the
P6,602,655.00 to arrive at the supposed unsubstantiated portion of the rental income (P4,841,066.65).[132]

3. The substantiated portion of CF-CPA disbursements (P1,761,308.37)[133] was derived by multiplying the rental income
claimed to have been added to the CF-CPA Account (P6,602,655.00) by 26.68% or the ratio of substantiated disbursements
to total disbursements (P23,463,543.02).

4. The 26.68% ratio[134] was the result of dividing the substantiated disbursements from the CF-CPA Account as found by the
Independent CPA (P6,259,078.30) by the total disbursements (P23,463,543.02) from the same account.

We find that this system of calculation is incorrect and does not truly give effect to the constitutional grant of tax exemption to
non-stock, nonprofit educational institutions. The CTA's reasoning is flawed because it required DLSU to substantiate an amount
that is greater than the rental income deposited in the CF-CPA Account in 2003.

To reiterate, to be exempt from tax, DLSU has the burden of proving that the proceeds of its rental income (which amounted to a
total of P10.61 million)[135] were used for educational purposes. This amount was divided into two parts: (a) the P4.01 million,
which was used to pay the loan obtained for the construction of the Sports Complex; and (b) the P6.60 million,[136] which was
transferred to the CF-CPA account.

For year 2003, the total disbursement from the CF-CPA account amounted to P23.46 million.[137] These figures, read in light of
the constitutional exemption, raises the question: does DLSU claim that the whole total CF-CPA disbursement of P23.46
million is tax-exempt so that it is required to prove that all these disbursements had been made for educational purposes?


The records show that DLSU never claimed that the total CF-CPA disbursements of P23.46 million had been for educational
purposes and should thus be tax-exempt; DLSU only claimed P10.61 million for taxexemption and should thus be required to
prove that this amount had been used as claimed.

Of this amount, P4.01 had been proven to have been used for educational purposes, as confirmed by the Independent CPA. The
amount in issue is therefore the balance of P6.60 million which was transferred to the CF-CPA which in turn made disbursements
of P23.46 million for various general purposes, among them the P6.60 million transferred by DLSU.

Significantly, the Independent CPA confirmed that the CF-CPA made disbursements for educational purposes in year 2003 in the
amount P6.26 million. Based on these given figures, the CTA concluded that the expenses for educational purposes that had been
coursed through the CF-CPA should be prorated so that only the portion that P6.26 million bears to the total CF-CPA
disbursements should be credited to DLSU for tax exemption.

This approach, in our view, is flawed given the constitutional requirement that revenues actually and directly used for educational
purposes should be tax-exempt. As already mentioned above, DLSU is not claiming that the whole P23.46 million CF-CPA
disbursement had been used for educational purposes; it only claims that P6.60 million transferred to CF-CPA had been used for
educational purposes. This was what DLSU needed to prove to have actually and directly used for educational purposes.

That this fund had been first deposited into a separate fund (the CF-CPA established to fund capital projects) lends peculiarity to
the facts of this case, but does not detract from the fact that the deposited funds were DLSU revenue funds that had been
confirmed and proven to have been actually and directly used for educational purposes via the CF-CPA. That the CF-CPA might
have had other sources of funding is irrelevant because the assessment in the present case pertains only to the rental income
which DLSU indisputably earned as revenue in 2003. That the proven CF-CPA funds used for educational purposes should not be
prorated as part of its total CF-CPA disbursements for purposes of crediting to DLSU is also logical because no claim whatsoever
had been made that the totality of the CF-CPA disbursements had been for educational purposes. No prorating is necessary; to
state the obvious, exemption is based on actual and direct use and this DLSU has indisputably proven.
Based on these considerations, DLSU should therefore be liable only for the difference between what it claimed and what it has
proven. In more concrete terms, DLSU only had to prove that its rental income for taxable year 2003 (P10,610,379.00) was used
for educational purposes. Hence, while the total disbursements from the CF-CPA Account amounted to P23,463,543.02, DLSU
only had to substantiate its P10.6 million rental income, part of which was the P6,602,655.00 transferred to the CF-CPA account.
Of this latter amount, P6.259 million was substantiated to have been used for educational purposes.
To summarize, we thus revise the tax base for deficiency income tax and VAT for taxable year 2003 as follows:
CTA Decision[138] Revised

Rental income 10,610,379.00 10,610,379.00
Less: Rent income used in construction of the Sports
4,007,724.00 4,007,724.00
Complex

Rental income deposited to the CF-CPA Account 6,602,655.00 6,602.655.00

Less: Substantiated portion of CF-CPA disbursements 1,761,588.35 6,259,078.30

Tax base for deficiency income tax and VAT 4,841,066.65 343,576.70
On DLSU's argument that the CTA should have appreciated its evidence in the same way as it did with the evidence submitted by
Ateneo in another separate case, the CTA explained that the issue in the Ateneo case was not the same as the issue in the present
case.

The issue in the Ateneo case was whether or not Ateneo could be held liable to pay income taxes and VAT under certain BIR and
Department of Finance issuances[139] that required the educational institution to own and operate the canteens, or other
commercial enterprises within its campus, as condition for tax exemption. The CTA held that the Constitution does not require
the educational institution to own or operate these commercial establishments to avail of the exemption.[140]

Given the lack of complete identity of the issues involved, the CTA held that it had to evaluate the separate sets of evidence
differently. The CTA likewise stressed that DLSU and Ateneo gave distinct defenses and that its wisdom "cannot be equated on
its decision on two different cases with two different issues."[141]

DLSU disagrees with the CTA and argues that the entire assessment must be cancelled because it submitted similar, if not
stronger sets of evidence, as Ateneo. We reject DLSU's argument for being non sequitur. Its reliance on the concept of uniformity
of taxation is also incorrect.

First, even granting that Ateneo and DLSU submitted similar evidence, the sufficiency and materiality of the evidence
supporting their respective claims for tax exemption would necessarily differ because their attendant issues and facts differ.

To state the obvious, the amount of income received by DLSU and by Ateneo during the taxable years they were assessed varied.
The amount of tax assessment also varied. The amount of income proven to have been used for educational purposes also varied
because the amount substantiated varied.[142] Thus, the amount of tax assessment cancelled by the CTA varied.

On the one hand, the BIR assessed DLSU a total tax deficiency of P17,303,001.12 for taxable years 2001, 2002 and 2003. On the
other hand, the BIR assessed Ateneo a total deficiency tax of P8,864,042.35 for the same period. Notably, DLSU was assessed
deficiency DST, while Ateneo was not.[143]

Thus, although both Ateneo and DLSU claimed that they used their rental income actually, directly and exclusively for
educational purposes by submitting similar evidence, e.g., the testimony of their employees on the use of university revenues, the
report of the Independent CPA, their income summaries, financial statements, vouchers, etc., the fact remains that DLSU failed to
prove that a portion of its income and revenues had indeed been used for educational purposes.

The CTA significantly found that some documents that could have fully supported DLSU's claim were not produced in court.
Indeed, the Independent CPA testified that some disbursements had not been proven to have been used actually, directly and
exclusively for educational purposes.[144]

The final nail on the question of evidence is DLSU's own admission that the original of these documents had not in fact been
produced before the CTA although it claimed that there was no bad faith on its part.[145] To our mind, this admission is a good
indicator of how the Ateneo and the DLSU cases varied, resulting in DLSU's failure to substantiate a portion of its claimed
exemption.
Further, DLSU's invocation of Section 5, Rule 130 of the Revised Rules on Evidence, that the contents of the missing supporting
documents were proven by its recital in some other authentic documents on record,[146] can no longer be entertained at this late
stage of the proceeding. The CTA did not rule on this particular claim. The CTA also made no finding on DLSU's assertion of
lack of bad faith. Besides, it is not our duty to go over these documents to test the truthfulness of their contents, this Court not
being a trier of facts.
Second, DLSU misunderstands the concept of uniformity oftaxation. Equality and uniformity of taxation means that all taxable
articles or kinds of property of the same class shall be taxed at the same rate.[147] A tax is uniform when it operates with the same
force and effect in every place where the subject of it is found.[148] The concept requires that all subjects of taxation similarly
situated should be treated alike and placed in equal footing.[149]
In our view, the CTA placed Ateneo and DLSU in equal footing. The CTA treated them alike because their income proved to
have been used actually, directly and exclusively for educational purposes were exempted from taxes. The CTA equally applied
the requirements in the YMCA case to test if they indeed used their revenues for educational purposes.
DLSU can only assert that the CTA violated the rule on uniformity if it can show that, despite proving that it used actually,
directly and exclusively for educational purposes its income and revenues, the CTA still affirmed the imposition of taxes. That the
DLSU secured a different result happened because it failed to fully prove that it used actually, directly and exclusively for
educational purposes its revenues and income.
On this point, we remind DLSU that the rule on uniformity of taxation does not mean that subjects of taxation similarly situated
are treated in literally the same way in all and every occasion. The fact that the Ateneo and DLSU are both non-stock, non-profit
educational institutions, does not mean that the CTA or this Court would similarly decide every case for (or against) both
universities. Success in tax litigation, like in any other litigation, depends to a large extent on the sufficiency of evidence. DLSU's
evidence was wanting, thus, the CTA was correct in not fully cancelling its tax liabilities.
b. DLSU proved its payment of the DST
The CTA affirmed DLSU's claim that the DST due on its mortgage and loan transactions were paid and remitted through its
bank's On-Line Electronic DST Imprinting Machine. The Commissioner argues that DLSU is not allowed to use this method of
payment because an educational institution is excluded from the class of taxpayers who can use the On-Line Electronic DST
Imprinting Machine.
We sustain the findings of the CTA. The Commissioner's argument lacks basis in both the Tax Code and the relevant revenue
regulations.
DST on documents, loan agreements, and papers shall be levied, collected and paid for by the person making, signing, issuing,
accepting, or transferring the same.[150] The Tax Code provides that whenever one party to the document enjoys exemption from
DST, the other party not exempt from DST shall be directly liable for the tax. Thus, it is clear that DST shall be payable by any
party to the document, such that the payment and compliance by one shall mean the full settlement of the DST due on the
document.
In the present case, DLSU entered into mortgage and loan agreements with banks. These agreements are subject to DST.[151] For
the purpose of showing that the DST on the loan agreement has been paid, DLSU presented its agreements bearing the imprint
showing that DST on the document has been paid by the bank, its counterparty. The imprint should be sufficient proof that DST
has been paid. Thus, DLSU cannot be further assessed for deficiency DST on the said documents.
Finally, it is true that educational institutions are not included in the class of taxpayers who can pay and remit DST through the
On-Line Electronic DST Imprinting Machine under RR No. 9-2000. As correctly held by the CTA, this is irrelevant because it
was not DLSU who used the On-Line Electronic DST Imprinting Machine but the bank that handled its mortgage and loan
transactions. RR No. 9-2000 expressly includes banks in the class of taxpayers that can use the On-Line Electronic DST
Imprinting Machine.
Thus, the Court sustains the finding of the CTA that DLSU proved the payment of the assessed DST deficiency, except for the
unpaid balance of P13,265.48.[152]
WHEREFORE, premises considered, we DENY the petition of the Commissioner of Internal Revenue in G.R. No. 196596 and
AFFIRM the December 10, 2010 decision and March 29, 2011 resolution of the Court of Tax Appeals En Banc in CTA En Banc
Case No. 622, except for the total amount of deficiency tax liabilities of De La Salle University, Inc., which had been reduced.
We also DENY both the petition of De La Salle University, Inc. in G.R. No. 198841 and the petition of the Commissioner of
Internal Revenue in G.R. No. 198941 and thus AFFIRM the June 8, 2011 decision and October 4, 2011 resolution of the Court of
Tax Appeals En Banc in CTA En Banc Case No. 671, with the MODIFICATION that the base for the deficiency income tax and
VAT for taxable year 2003 is P343,576.70.
SO ORDERED.
Carpio, (Chairperson), and Del Castillo, JJ., concur.

Mendoza, J., on official leave.
Leonen, J., see Dissenting Opinion.
[1]The petitions are filed under Rule 45 of the Rules of Court in relation to Rule 16 of the Revised CTA Rules (A.M. No. 05-11-
07). On November 28, 2011, the Court resolved to consolidate the petitions to avoid conflicting decisions. Rollo, p. 78 (G.R. No.
198941).

[2] Id. at 34-70 (G.R. No. 196596).

[3] Id. at 14-53 (G.R. No. 198841).

[4] Id. at 9-43 (G.R. No. 198941).

[5] Id. at 85. The date of the issuance of the LOA is not on record.

[6] Id. at 4 (G.R. No. 196596). The PAN was issued by the SIR's Special Large Taxpayers Task Force on educational institutions.

[7] Id. at 151-154.

[8] Id. at 38 and 268.

[9] Id. at 97-128.

[10] Id. at 39 and 268-269.

[11] Id. at 129-137.

[12] Id. at 185-194.

[13] Id. at 155-159, filed on May 18, 2010.

[14]Id. at 302. DLSU quoted the June 9, 2010 resolution of the CTA Division, viz.:

"For resolution is [DLSU's] 'Supplemental Formal Offer of Evidence in Relation to the [CTA Division's] Resolution Dated 06
April 2010' filed on April 23, 2010, sans any Comment/Opposition from the [Commissioner] despite notice." [emphasis and
underscoring ours]

[15] Id. at 149-150.

[16] Id. at 40.

[17] Ateneo de Manila University v. Commissioner of Internal Revenue, CTA Case Nos. 7246 and 7293.
[18] Rollo, p. 73 (G.R. No. 198841).

[19] Id. at 77-96 (G.R. No. 196596), decision dated December 10, 2010.

[20] Id. at 82-88.

[21] Id. at 86.
[22] Id. at 86-87.
[23] Id. at 88-90.
[24] Section 200 (D) of the Tax Code provides:
(D) Exception. - In lieu of the foregoing provisions of this Section, the tax may be paid either through purchase and actual
affixture; or by imprinting the stamps through a documentary stamp metering machine, on the taxable document, in the
manner as may be prescribed by rules and regulations to be promulgated by the Secretary of Finance, upon recommendation of
the Commissioner. [emphasis ours]
[25]Section 2.2 of RR No. 15-2001 provides that: "In lieu of constructive stamping, Section 200 (D) of the [Tax Code], however,
allows the payment of DST ... or by imprinting of stamps through a documentary stamp metering machine (... or on line
electronic DST imprinting machine)." [emphasis ours]
[26] Rollo, pp. 91-94 (G.R. No. 196596).
[27] Id. at 72-76.
[28] Id. at 88-90 (G.R. No. 198841).
[29] Id. at 75-79.
[30] Id. at 80, citing Commissioner of Internal v. Sony Philippines, Inc., 649 Phil. 519 (2010).
[31] Id. at 80.
[32] Id. at 81.
[33] Id. at 82.
[34] These pertain to rental income from Alerey Inc., Zaide Food Corp., Capri International and MTO Bookstore. Id. at 85.
[35] Id. at 43-55 (G.R. No. 196596).
[36] Id. at 48.
[37] Id. at 50.
[38] 358 Phil. 562 (1998).
[39] Rollo, p. 46 (G.R. No. 196596).
[40] Id. at 51-55.
[41] Id. at 50.
[42] Id. at 55-56.
[43]The Commissioner cites Section 4 of RR No. 9-2000 which states that the "on-line electronic DST imprinting machine,"
unless expressly exempted by the Commissioner, will be used in the payment and remittance of the DST by the following class of
taxpayers: a) bank, quasi-bank or non-bank financial intermediary, finance company, insurance, surety, fidelity, or annuity
company; b) the Philippine Stock Exchange (in the case of shares of stock and other securities traded in the local stock
exchange); c) shipping and airline companies; d) pre-need company (on sale of pre-need plans); and e) other industries as may be
required by the Commissioner.
[44] Rollo, pp. 57-65 (G.R. No. 196596).
[45] Id. at 65-66.
[46] Id. at 14-16 (G.R. No. 198841).
[47] Id. at 24, 30.
[48] Id. at 25-26.
[49] Id. at 41-48.
[50] Id. at 34-48.
[51] Id. at 9-43 (G.R. No. 198941).
[52]Id. at 272-276 (G.R. No. 196596). DLSU claims that the Commissioner failed to state that the allegations in the petition are
true and correct of her personal knowledge or based on authentic record. The CIR also allegedly failed to state that she caused the
preparation of the petition and that she has read and understood all the allegations. DLSU notes that a pleading required to be
verified but lacks proper verification is treated as an unsigned pleading.
[53] Id. at 276-279.
[54] Id. at 279-285.
[55] Id. at 282.
[56] Id. at 286-289.
[57] Id. at 287.
[58] Id. at 290.
[59] Id. at 291.
[60] Id. at 283.
[61] Id. at 296-301.
[62] Id. at 297-298.
[63] Id. at 301-302.
[64] Id. at 192-197 (G.R. No. 198841).
[65] Id. at 192-193.
[66] Id. at 197-207.
[67] Id. at 82-93 (G.R. No. 198941).
[68] Id. at 89-90.
[69] In Commissioner v. St. Luke's Medical Center, Inc., 695 Phil. 867, 885 (2012), the Court quoted Section 27 (B) of the Tax
Code and defined proprietary educational institution as "any private school maintained and administered by private individuals
or groups" with a government permit.
[70] Rollo, p. 37 (G.R. No. 196596).
[71]Previous cases construing the nature of the exemption of tax-exempt entities under Section 30 (then Section 27) of the Tax
Code vis-a-vis the exemption granted under the Constitution pertain to nonprofit foundations, churches, charitable hospitals or
social welfare institutions. Some cases involved educational institutions but they tackled local or real property taxation. See:
YMCA, supra note 37, St. Luke's, supra note 68; Angeles University Foundation v. City of Angeles, 689 Phil. 623 (2012); and
Abra Valley College, Inc. v. Aquino, infra note 90.
[72] Supra note 38.
[73]Article VI, Section 28 (3) of the Constitution, provides: "Charitable institutions, churches and parsonages or convents
appurtenant thereto, mosques, non-profit cemeteries, and all lands, buildings, and improvements, actually, directly, and
exclusively used for religious, charitable, or educational purposes shall be exempt from taxation."
[74] Supra note 38, at 579-580.
[75] Id. at 575-578.
[76] Id. at 581-582.
[77] Id. at 580-581.
[78]For purposes of construing Article XIV, Section 4 (3) of the Constitution, we treat income and revenues as synonyms. Black's
Law Dictionary (Fifth Edition, 1979) defines revenues as "return or yield; profit as that which returns or comes back from
investment; the annual or periodical rents, profits, interest or issues of any species of property or personal..." (p. 1185) and
income as "the return in money from one's business, labor, or capital invested; gains, profits, salary, wages, etc ..." (p. 687).
[79] See Record of the Constitutional Commission No. 69, Volume IV, August 29, 1986.
[80] See
IV Record 401, 402, as cited by DLSU, Rollo, p. 283 (G.R. No. 196596). The following comments of the Constitutional
Commission members are illuminating:
MR. GASCON: ... There are many schools which are genuinely non-profit and non-stock but which may have been taxed at the
expense of students. In the long run, these schools oftentimes have to increase tuition fees, which is detrimental to the interest of
the students. So when we encourage non-stock, non-profit institutions be assuring them of tax exemption, we also assure the
students of lower tuition fees. That is the intent.
xxxx
COMM. NOLLEDO: ... So I think, what is important here is the philosophy behind the duty on the part of the State to educate the
Filipino people that duty is being shouldered by private institutions. In order to provide incentive to private institutions to share
with the State the responsibility of educating the youth, I think we should grant tax exemption.
[81]As the Constitution is not primarily a lawyer's document, its language should be understood in the sense that it may have in
common. Its words should be given their ordinary meaning except where technical terms are employed. See: People v. Derilo,
338 Phil. 350, 383 (1997).
[82]Black's Law Dictionary, Fifth Edition, defines "Revenues" as, "Return or yield, as of land; profit as that which returns or
comes back from an investment; the annual or periodical rents, profits, interest or issues of any species of property, real or
personal; income of individual, corporation, government, etc." (citing Willoughby v. Willoughby, 66 R.I. 430, 19 A.2d 857, 860)
[83] Section 32, Tax Code
[84] Sections 106 and 108, Tax Code.
[85] Section 143 cf. Section 131(n), Local Government Code.

[86] Black'sLaw Dictionary, Fifth Edition, defines "Assets" as, "Property of all kinds, real and personal, tangible and intangible,
including, inter alia, for certain purposes, patents and causes of action which belong to any person including a corporation and
the estate of a decedent. The entire property of a rerson, association, corporation, or estate that is applicable or subject to the
payment of his or his debts."
[87] Section 208 cf. Sections 233 and 235, Local Government Code.
[88] Section 107, Tax Code
[89] Section 104, PD 1464, otherwise known as the Tariff and Customs Code of the Philippines.
[90] 245 Phil. 83 (1988).
[91] Id. at 91-92.
[92]Section 27 (B) further provides that the term unrelated trade, business or other activity means any trade, business or activity,
the conduct of which is not substantially related to the exercise or performance by such educational institution ... of its primary
purpose of functions.
[93] CONSTITUTION, Article VIII, Section 5 (2).
[94]In Kida, et al. v. Senate of the Philippines, et al., 675 Phil. 316, 365-366 (2011), we held that the primacy of the Constitution
as the supreme law of the land dictates that where the Constitution has itself made a determination or given its mandate, then the
matters so determined or mandated should be respected until the Constitution itself is changed by amendment or repeal through
the applicable constitutional process.
[95] Revenue Audit Memorandum Order No. 2-95.
[96] Rollo, p. 79 (G.R. No. 198841). See Section 13 of the tax Code.
[97] See the Taxpayers Bill of Rights at http://www.bir.gov.ph/index.P/taxpayer-bill-of-rights.html last accessed on June 1, 2016.
[98] Cited in Commissioner of Internal Revenue v. Sony Philippines, Inc., supra note 30, at 531.
[99] Section 222, Tax Code.
[100] Rollo, p. 78 (G.R. No. 198841).
[101] Id. at 75-79.
[102] Id. at 73-74.
[103] Id. at 155-159 (G.R. No. 196596).
[104]
Asian Construction and Development Corp. v. COMFAC Corp., 535 Phil. 513, 517-518 (2006) citing Tison v. Court of
Appeals, G.R. No. 121027, July 31, 1997, 276 SCRA 582, 596-597.
[105] Id. citing Arwood Industries, Inc. v. D.M Consunji, Inc., G.R. No. 142277, December 11, 2002, 394 SCRA 11, 18.
[106] Id. at 518.
[107] Rollo, p. 302 (G.R. No. 196596), CTA Division Resolution dated June 9, 2010, quoted by DLSU.
[109] 386 Phil. 719 (2000).

[110] Id. at 726.
[111] See Section 8, Republic Act No. 1125, published in Official Gazette, S. No. 175 / 50 OG No. 8, 3458 (August, 1954).
[112] Supra note 91, at 726.
[113] 556 Phil. 439 (2007).
[114] 579 Phil. 442 (2008).
[115] Section 76 in relation to Section 229 of the Tax Code.
[116] Commissioner of Internal Revenue v. Asian Transmission Corporation, 655 Phil. 186, 196 (2011).
[117]
Commissioner of Internal Revenue v. Toledo Power, Inc., G.R. No. 183880, January 20, 2014, 714 SCRA 276, 292, citing
Barcelon, Roxas Securities, Inc. v. Commissioner of Internal Revenue, 529 Phil. 785 (2006).
[118] Rollo, p. 143-144 (G.R. No. 196596).
[119] Id. at 144 (G.R. No. 196596), the amount is rounded-off from P93,860,675.40.
[120] Id. at 143 (G.R. No. 196596). Capital Fund - Capital Projects Account.
[121] Id. at 144 (G.R. No. 196596).
[122] Rule 3, Section 2 of the Revised Rules of the CTA, A.M. No. 05-11-07-CTA, November 22, 2005.
[123] Rollo, pp. 86, 145 (G.R. No. 196596).
[124] Id. at 81 (G.R. No. 198841).
[125] Id. at 101, page 9 of CTA Division Amended Decision.
[126] Id. at 98 (G.R. No. 198841).
[127]Id. at 87. According to the CTA, the income earned from the lease of premises to MTO-Sports Complex and La Casita
amounted to P2,090,880.00 and P1,916,844.00, respectively (Total of P4,007,724.00). These amounts were specifically identified
as part of the proceeds used by DLSU to pay an outstanding loan obligation that was previously obtained for the purpose of
constructing the Sports Complex.
[128] Id.
[129] Id.
[130] Id. at 86.
[131] Id. at 85-86.
[132] The tax base of P4,841,066.65 was computed as follows:
Rental income 10,610,379.00

Less: Rent income used in construction of Sports Complex 4,007,724.00
Rental income allegedly added and used in the CF-CPA
6,602,655.00
Account
Less: Substantiated portion of CF-CPA disbursements 1,761,588.35
Tax base for deficiency income tax and VAT 4,841,066.65
[133] The substantiated portion of CF-CPA disbursements amounting to P1,761,308.37 was computed as follows:
Rental income allegedly added and used in the CF-CPA

6,602,655.00
Account
Multiply by: Ratio of substantiated disbursements (See
26.68%
note 134)
Substantiated portion of CF-CPA disbursements 1,761,588.35
[134] The ratio of 26.68% was computed as follows:

Substantiated disbursements of the CF-CPA Account, per

6,259,078.30
Independent CPA
Divide by: Total disbursements made out of the CF-CPA
23,463,543.02
Account
Ratio 26.68%
[135] For brevity, the exact amount of P10,610,379.00 shall hereinafter be expressed as P10.61 million.




[139]Rollo, pp. 82-83 (G.R. No. 198841). Ateneo was assessed deficiency income tax and VAT under Section 2.2 of DOF
Circular 137-87 and BIR Ruling No. 173-88.

[140] Id. at 83 (G.R. No. 198841).

[141] Id. at 83 (G.R. No. 198841).

[142] See Ateneo case (CTA Case Nos. 7246 & 7293, March 11, 2010). Id. at 140-154 (G.R. No. 198841).

[143] Id. at 145 (G.R. No. 198841).

[144] Id. at 85-90 (G.R. No. 198841).

[145] Id. at 47 (G.R. No. 198841).

[146] Id.

[147]
Churchill v. Concepcion, 34 Phil. 969. 976 (1916); Eastern Theatrical Co. vs. Alfonso, 83 Phil. 852, 862 (1949); Abakada
Guro Party List v. Ermita, 506 Phil. 1, 130-131 (2005).

[148] British American Tobacco v. Camacho, 603 Phil. 38, 48-49 (2009).

[149] Commissioner of Internal Revenue v. Court of Appeals, 329 Phil. 987, 1010 (1996).

[150] Section 173, Tax Code.

[151] Sections 179 and 195, Tax Code.

[152] Rollo, p. 89 (G.R. No. 198841).

DISSENTING OPINION

LEONEN, J.:
I agree with the ponencia that Article IV, Section 4(3) of the 1987 Constitution grants tax exemption on all assets and all
revenues earned by a non-stock, non-profit educational institution, which are actually, directly, and exclusively used for
educational purposes. All revenues, whether or not sourced from educational activities, are covered by the exemption. The
taxpayer needs only to prove that the revenue is actually, directly, and exclusively used for educational purposes to be exempt
from income tax.
I disagree, however, on two (2) points:
First, Letter of Authority No. 2794, which covered the "Fiscal Year Ending 2003 and Unverified Prior Years," is void in its
entirety for being in contravention of Revenue Memorandum Order No. 43-90. Any assessment based on such defective letter of
authority must likewise be void.
Second, the Court of Tax Appeals erred in finding that only a portion of the rental income derived by De La Salle University, Inc.
(DLSU) from its concessionaires was used for educational purposes.
An audit process to which a particular taxpayer may be subjected begins when a letter of authority is issued by the Commissioner
of Internal Revenue or by the Revenue Regional Director. The letter of authority is an official document that empowers a revenue
officer to examine and scrutinize a taxpayer's books of accounts and other accounting records in order to determine the taxpayer's
correct internal revenue tax liabilities.[1]
In this regard, Revenue Audit Memorandum Order No. 1-00 provides that a letter of authority authorizes or empowers a
designated revenue officer to examine, verify, and scrutinize a taxpayer's books and records, in relation to internal revenue tax
liabilities for a particular period.[2]
Revenue Membrandum Order No. 43-90, on policy guidelines for the audit/investigation and issuance of letters of authority to
audit, provides:
C. Other policies for issuance of L/As.

1. All audits/investigations, whether field audit or office audit, should be conducted under a Letter of Authority.

2. The duplicate of each internal revenue tax which is specifically indicated in the L/A shall be attached thereto,
unless a return is not required under the Tax Code to be filed therefor or when the taxpayer has not filed a return
or the Assessment Branch has certified that no return is on file therein or the same cannot be located.

3. A Letter of Authority should cover a taxable period not exceeding one taxable year. The practice of issuing L/As
covering audit of "unverified prior years" is hereby prohibited. If the audit of a taxpayer shall include more than
one taxable period, the other periods or years shall be specifically indicated in the L/A.

....

4. Any re-assignment/transfer of cases to another RO(s), and revalidation of L/As which have already expired,
shall require the issuance of a new L/A, with the corresponding notation thereto, including the previous L/A
number and date of issue of said L/As.

....

D. Preparation and issuance of L/As.

1. All L/As for cases selected and listed pursuant to RMO No. 36-90 to be audited in the revenue regions shall be
prepared and signed by the Regional Director (RD).

2. The Regional Director shall prepare and sign the L/As for returns recommended by the RDO for assignment to
the ROs, indicating therein the name and address of the taxpayer, the name of the RO(s) to whom the L/A is
assigned, the taxable period and kind of tax; after which he shall forward the same to the RDO or Chief,
Assessment Branch, who in tum shall indicate the date of issue of the L/A prior to its issuance.

3. The L/As for investigation of taxpayers by National Office audit offices (including the audit division in the
Sector Operations Service and Excise Tax Service) shall be prepared in accordance with the procedures in the
preceding paragraph, by their respective Assistant Commissioners and signed by the Deputy Commissioner
concerned or the Commissioner. The L/As for investigation of taxpayer by the intelligence and Investigation
Office and any other special audit teams formed by the Commissioner shall be signed by the Commissioner of
Internal Revenue.
4. For the proper monitoring and coordination of the issuance of Letter of Authority, the only BIR officials
authorized to issue and sign Letters of Authority are the Regional Directors, the Deputy Commissioners and the
Commissioner. For the exigencies of the service, other officials may be authorized to issue and sign Letters of
Authority but only upon prior authorization by the Commissioner himself. (Emphasis supplied)
Thus, under Revenue Memorandum Order No. 43-90, both the taxable period and the kind of tax must be specifically stated.

A much earlier Revenue Memorandum Order was even more explicit:

The Letter of Authority must be carefully pr pared and erasures shall be avoided as much as possible, particularly in
the name and address of the taxpayer and the assessment number. A new one should be made if material
erasures.appear on any Letter of Authority. The period covered by the authority must be stated definitely. The use of
such phrases as "last five years," "1962 and up," "1962 and previous years" and all others of similar import shall not
be allowed. In the preparation of the Letter of Authority the Revenue District Officer must not put the date, the same
shall be surplied by the Director immediately before the release thereof by his Office.[3] (Emphasis supplied)

The revenue officer so authorized must not go beyond the authority given; otherwise, the assessment or examination is a nullity.
[4] Corollarily, the extent to which the authority must be exercised by the revenue officer must be clearly specified.

Here, Letter of Authority No. 2794,[5] which was the basis of the Bureau of Internal Revenue to examine DLSU's books of
account, stated that the examination covers the period Fiscal Year Ending 2003 and Unverified Prior Years.

It is my view that the entire Letter of Authority No. 2794 should be struck down as void for being broad, indefinite, and
uncertain, and for being in direct contravention to the policy clearly and explicitly declared in Revenue Memorandum Order No.
43-90 that: (a) a letter of authority should cover one (1) taxable period; and (b) if it covers more than one taxable period, it must
specify all the periods or years covered.

The prescribed procedures under Revenue Memorandum Order No. 43-90, including the requirement of definitely specifying the
taxable year under investigation, were meant to achieve a proper enforcement of tax laws and to minimize, if not eradicate,
taxpayers' concerns on arbitrary assessment, undue harassment from Bureau of Internal Revenue personnel, and unreasonable
delay in the investigation and processing of tax cases.[6]

Inasmuch as tax investigations entail an intrusion into a taxpayer's private affairs, which are protected and guaranteed by the
Constitution, the provisions of Revenue Memorandum Order No. 43-90 must be strictly followed.

Letter of Authority No. 2794 effectively allowed the revenue officers to examine, verity, and scrutinize DLSU's books of account
and other accounting records without limit as to the covered period. This already constituted an undue intrusion into the affairs of
DLSU to its prejudice. DLSU was at the mercy of the revenue officers with no adequate protection or defense.

As early as 1933, this Court in Sy Jong Chuy v. Reyes[7] held that the extraordinary inquisitorial power conferred by law upon
collectors of internal revenue must be strictly construed. The power should be limited to books and papers relevant to the subject
of investigation, which should be mentioned with reasonable certainty. Although the case particularly referred to the use of
"subpoena duces tecum" by internal revenue officers, its discussion is apropos:

The foregoing discussion will disclose that there are two factors involved in the correct solution of the question before
us. The first fact which must be made to appear by clear and unequivocal proof, as a condition precedent to the right
of a court, and, by analogy, an internal revenue officer, to require a person to deliver up for examination by the court
or an internal revenue officer his private books and papers, is their relevancy; and the second fact which must be
established in the same manner is the specification of documents and an indication of them with as much precision as
is fair and feasible[.]

Speaking to the fact of relevancy, there is absolutely no showing of the nature of any official investigation which is
being conducted by the Bureau of Internal Revenue, and this is a prerequisite to the use of the power granted by
section 436 of the Administrative Code. Moreover, when the production under a subpoena duces tecum is contested
on the ground of irrelevancy, it is for the movant or the internal revenue officer to show facts sufficient to enable the
court to determine whether the desired documents are material to the issues. And here, all that we have to justify
relevancy is the typewritten part of a mimeographed form reading: "it being necessary to use them (referring to the
books) in an investigation now pending under the Income Tax and Internal Revenue Laws." This is insufficient.

But it is in the second respect that the subpoena is most fatally defective. It will be recalled that it required the
production of "all the commercial books or any other papers on which are recorded your transactions showing income
and expenses for the years 1925, 1926, 1927, 1928 inclusive", that these books numbered fifty-three in all, and that
they are needed in the business of the corporation. In the parlance of equity, the subpoena before us savored of a
fishing bill, and such bills are to be condemned. That this is so is shown by the phraseology of the subpoena which is
a general command to produce all of the books of account for four years. This, it seems to us, made the subpoena
unreasonably broad in scope. The internal revenue officer had it within his power to examine any or all of the books
of the corporation in the offices of the corporation and then having ascertained what particular books were necessary
for an official investigation had it likewise within his power to issue a subpoena duces tecum sufficiently explicit to be
understood and sufficiently reasonable not to interfere with the ordinary course of business. But this method was not
followed. Obviously, if the special deputy could in 1930 call for the production of the books of the corporation for
1925, 1926, 1927, and 1928, the officer could have called for the production of the books for the year just previous, or
1929, and for the books of the current year, and if this could be done, the intrusion into private affairs with disastrous
paralyzation of business can easily be visualized.[8] (Citations omitted)
This Court held that the subpoena duces tecum issued by a special deputy of the Collector of Internal Revenue, which
commanded a Chinese merchant to appear at the Internal Revenue Office and produce for investigation all commercial books or
papers showing his transactions for four (4) years (from 1925 to 1928) was "unreasonably broad in scope." This Court further
held that the subpoena was not properly issued because the Collector failed to show the relevance of the Chinese books and to
specify the particular books desired, and its sweeping scope clashed with the constitutional prohibition against unreasonable
search and seizure. Thus:

Generally speaking, there are two readily understandable points of view of the question at issue. The first is the
viewpoint of the tax collecting officials. Taxation is a necessity as all must agree. It is for the officials who have to
enforce the revenue laws to see to it that there is no evasion of those laws and that there is an equal distribution of the
tax burden. To accomplish their duty it will often be incumbent upon the internal revenue officers, for the efficient
administration of the service, to inspect the books of merchants and even require the production of those books in the
offices of the inspecting officials. The right of a citizen to his property becomes subservient to the public welfare. All
[these] we are the first to concede. In proper cases, the officers of the Bureau of Internal Revenue should receive the
support of the courts when these officers attempt to perform in a conscientious and lawful manner the duties imposed
upon them by law. The trouble is that the particular subpoena under scrutiny neither shows its relevancy nor specifies
with the particularity required by law the books which are to be produced.

The second viewpoint is not that of the government on which is imposed the duty to collect taxes, but is the viewpoint
of the merchant. A citizen goes into business, and in so doing provides himself with the necessary books of account.
He cannot have government officials on a mere whim or a mere suspension taking his books from his offices to the
offices of the government for inspection. To permit that would be to place a weapon in the hands of a miscellaneous
number of government employees some of whom might use it improperly and others of whom might use it
improperly. With an understanding of the obligations of the government to protect the citizen, the constitution and the
organic law have done so by throwing around him a wall which makes his home and his private papers his castle. It
should be our constant purpose to keep a subpoena duces tecum from being of such a broad and sweeping character as
to clash with the constitutional prohibition against unreasonable searches and seizures.

Answering the question at issue, we do so without vacillation by holding that the subpoena duces tecum was not
properly issued in accordance with law because the showing of relevancy was not sufficient to justify enforcing the
production of the Chinese books; because the subpoena duces tecum failed to specify the particular books desired, and
because a ruling should be avoided which in any manner appears to sanction an unreasonable search and seizure. In
the absence of a showing of materiality, and in the absence of all particularity in specifying what is wanted by a
subpoena duces tecum, the refusal of a merchant to obey a subpoena, commanding him to produce his commercial
books, will be sustained. The courts function to protect the individual citizen of whatever class or nationality against
an unjust inquisition of his books and papers.[9]

If we were to uphold the validity of a letter of authority covering a base year plus unverified prior years, we would in essence
encourage the unscrupulous practice of issuing letters of authority even without prior compliance with the procedure that the
Commissioner herself prescribed. This would not help .in curtailing inefficiencies and abuses among revenue officers in the
discharge of their tasks. There is nothing more devious than the scenario where government ignores as much its own rules as the
taxpayer's constitutional right against the unreasonable examination of its books and papers.

In Viduya v. Berdiago:[10]

It is not for this Court to do less than it can to implement and enforce the mandates of the customs and revenue laws.
The evils associated with tax evasion must be stamped out - without any disregard, it is to be affirmed, of any
constitutional right.[11] (Emphasis supplied)

The inevitability and indispensability of taxation is conceded. Under the law, the Bureau of Internal Revenue has access to all
relevant or material records and data of the taxpayer for the purpose of collecting the correct amount of tax.[12] However, this
authority must be exercised reasonably and under the prescribed procedure.[13] The Commissioner and revenue officers must
strictly comply with the requirements of the law and its own rules,[14] with due regard to taxpayers' constitutional rights.
Otherwise, taxpayers are placed in jeopardy of being deprived of their property without due process of law.
There is nothing in the law-nor do I see any great difficulty-that could have prevented the Commissioner from cancelling Letter
of Authority No. 2794 and replacing it with a valid Letter of Authority. Thus, with the nullity of Letter of Authority No. 2794, the
assessment against DLSU should be set aside.
II
DLSU is not liable for deficiency income tax and value-added tax.
The following facts were established:
(1) DLSU derived its income from its lease contracts for canteen and bookstore services with the following concessionaires:
i. Alarey, Inc.
ii. Capri International, Inc.
iii. Zaide Food Corporation
iv. La Casita Roja
v. MTO International Product Mobilizer, Inc.
(2) The rental income from the concessionaires was added to the Depository Fund - PE Sports Complex Fund and to the
Physical Plant Fund (PPF), and, this income was spent on the Current Fund-Capital Projects Account (CF-CPA).
(3) DLSU's rental income from MTO- PE Sports Complex and La Casita, which was transmitted and used for the payment of
the loan from Philippine Trust Company for the construction of the PE Sports Complex, was actually, directly, and
exclusively used for educational purposes.[15]
(4) DLSU's rental income from Alarey, Inc., Zaide Food Corporation, Capri International, and MTO - Bookstore were
transmitted to the CF-CPA Account.[16]
These facts were supported by the findings of the Court commissioned independent CPA (ICPA), Atty. Raymund S. Gallardo of
Punongbayan & Araullo:
From the journal vouchers/official receipts, we have traced that the income received from Alarey, Capri, MTO-
Bookstore and Zaide were temporarily booked under the Revenue account with the following codes: 001000506,
001000507, 001000513 and 001000514. At the end of the year, said temporary account were closed to PPF account
(Exhibits LL-3-A, LL-3-B and LL-3-C).

On the other hand, we have traced that the rental income received from MTO-PE Sports and La Casita [was]
temporarily booked under the Revenue Account code 001000515 and 001000516 upon receipt in the fiscal year May
31, 2001. At the end of fiscal year 2001, the said temporary accounts were closed to the DF-PE Sports. However,
starting fiscal year 2002, the rental income from the said lessees was directly recorded under the DF-PE Sports
account (Exhibits LL-4-A, LL-4-B, and LL-4-C).[17] (Emphasis in the original)

With regard to the disbursements from the CF-CPA Fund, the ICPA examined DLSU's disbursement vouchers as well as
subsidiary and general ledgers. It made the following findings:

Nature of Expenditure 2001 2002 2003

Building Improvement P 9,612,347.74 13,445,828.40 16,763,378.06
Furniture, Fixtures & Equipment 2,329,566.54 1,931,392.20 4,714,171.44
Air conditioner 2,216,797.20 1,748,813.16 1,758,278.00
Computer Equipment - - 227,715.52

Total per subsidiary ledger P 14,158,711.48 P 17,126,033.76 P 23,463,543.02
Building Improvement 3,539,356.37 6,534,658.19 5,660,433.30
Furniture, Fixtures & Equipment 1,654,196.14 767,864.00 71,785.00
Air conditioner 2,111,552.20 1,444,594.21 340,300.00
Computer Equipment - - 186,560.00

Total per disbursement vouchers P 7,305,104.71 P 8,747,116.40 P 6,259,078.30
Difference P 6,853,606.77
P 8,378,917.36 P 17,204,464.72 [18]
Based on the subsidiary ledger (Exhibits "LL-29-A, LL-29-B and LL-29-C"), total expenses under the CF-CPA amounted to
P14,158,711.48 in 2001, P17,126,033.76 in 2002 and P23,463,543.02 in 2003. Of the said amounts, P6,853,606.77, 8,378,917.36,
P17,204,464.72 in 2001, 2002 and 2003 respectively, were not validated since the disbursement vouchers were not available. It
was represented by the management that such amounts were strictly spent for renovation. However, due to the migration of
accounts to the new accounting software to be used by the University sometime in 2011, some supporting documents which were
used in the migration were inadvertently misplaced.[19]

Hence, in its Decision dated January 5, 2010, the Court of Tax Appeals First Division upheld the Commissioner's assessment of
deficiency income tax "for petitioner's failure to fully account for and substantiate all the disbursements from the CF-CPA."[20]
According to the Court of Tax Appeals, "it cannot scertain whether rent income from MTO-Bookstore, Alarey, Zaide and Capri
were indeed used for educational purposes."[21]

DLSU moved for reconsideration. Subsequently, it formally offered to the Court of Tax Appeals First Division, among others,[22]
the following supplemental pieces of documentary evidence:

1) Summary Schedule to Support Misplaced Vouchers for the Period of 3 Years from School Year June 1, 2001 to May 31,
2003 (Exh. XX);[23] and
2) Schedule of Disbursement Vouchers Examined (Unlocate Documents) for the Fiscal Years Ended May 31, 2001 (Exh.
YY[24]), May 31, 2002 (Exh. ZZ[25]) and May 31, 2003 (Exh. AAA[26]).

These pieces of evidence were admitted by the Court of Tax Appeals in its Resolution dated June 9, 2010.[27]
DLSU's controller, Francisco C. De La Cruz, Jr. testified:

Q9: Please tell us the relevance of Exhibit "XX".

A9: Exhibit "XX" provides an overview of what accounts do those inadvertently misplaced documents pertain to. As
will be shown by the other exhibits, the details of these accounts are all entered, recorded and existing in the
accounting software of Petitioner.
Q10: Please tell us the relevance of Exhibits "YY", "ZZ" and "AAA".
A10: These are the details of the accounts pertaining to the inadvertently misplaced documents. Before the documents
were inadvertently misplaced, these have been entered in the accounting software of Petitioner. Details were
downloaded from Petitioner's accounting software.
These details include the Charge Account, the Classification of Expense per Chart Account of the University,
the Cost Center per Chart of Account of the University, the Supplier Name, the Disbursement Voucher Number,
the Disbursement Voucher Date, the Check Number, the Check Date, the Cost, and the Description per
Disbursement Voucher.
The specifics which accompany the entries were all taken from the documents before these were inadvertently
misplaced.
Exhibit "YY" pertains to the details of the accounts for Fiscal Year 2001, Exhibit "ZZ" for Fiscal Year 2002, and
Exhibit "AAA" for Fiscal Year 2003.[28]

Samples of the information provided in these pieces of evidence are as follows:

a. For Fiscal Year Ended May 31,2001 (Exhibit YY)

Charge Classification Cost Supplier Disbursement Disbursment Check Check Cost Description
Account of Expense Center Name Voucher No. Voucher No. Date per
per Chart of per Chart Date Disbursement
Account of of Voucher
the Accounts
University of the
University
100- Furniture, PFO BARILEA 2001050105 5/30/2001 180403 3-May- 89,234.04 TABLE, A
213-940 Fixture and Capital WOOD 01
1.20 x .60[29]
Equipment Projects WORKS

b. For Fiscal Year Ended May 31, 2002 (Exhibit ZZ)

Charge Classification Cost Supplier Name Disbursement Disbursment Check No. Check Cost Description
Account of Expense Center Voucher No. Voucher Date per
the Accounts
University of the
University
100- Airconditioner PFO RCC 2001081468 15-Aug-01 0000188442 16- 63,249.95 AIRCON
213-943 Capital MARKETING Aug- WIN TYPE
Projects CORPORATION 01 3TR 2HP
SPLIT
TYPE[30]

c. For Fiscal Year Ended May 31, 2003 (Exhibit AAA)

Charge Classification Cost Supplier Disbursement Disbursment Check Check Cost Description
Account of Expense Center Name Voucher No. Voucher No. Date per
the Accounts
University of the
University
100- COMPUTER VC SILICON 2002102047 10/18/2002 218124 26- 12,350.00 PRINTER HP
026-950 PRINTER Academics VALLEY Oct- DESKJET
COMPUTER 2002 960C[31]
CENTRE

However, the Court of Tax Appeals First Division was unconvinced. It simply stated that DLSU failed to sufficiently account for
the unsubstantiated disbursements. Although it considered the other additional documentary evidence (Exhibits "VV" and "WW")
formally offered by DLSU, Exhibits "XX," "YY," "ZZ," and "AAA" were brushed aside without citing any reason or discussing
the probative value or weight of these additional pieces of evidence.[32] Thus:

With regard the unsubstantiated disbursements from the CF-CPA, Petitioner alleged that the supporting documents
were inadvertently misplaced due to migration of accounts to its new accounting software used sometime in 2001. In
lieu thereof, petitioner submitted downloaded copies of the Schedule of Disbursement Vouchers from its accounting
software.

The Court is not convinced.
According to ICPA's findings, the petitioner was able to show only the disbursements from the CF-CPA amounting to
P7,305,104.71, P8,747,116.40 and P6,259,078.30 for the fiscal years 2001, 2002 and 2003, respectively.[33]

The Court of Tax Appeals First Division concluded that only the portion of the rental income pertaining to the substantiated
disbursements of the CF-CPA would be considered as actually, directly, and exclusively used for educational purposes.[34] This
portion was computed by multiplying the ratio of substantiated disbursements to the total disbursements per subsidiary ledgers to
the total rental income, thus:

Using the amounts determined for the Fiscal Year 2003,

P6,259,078.30
------------------ = 26.68% x P6,602,655.00 = P1,761,588.35
P23,463,543.02
Hence, for 2003, the portion of the rental income that was not sufficiently proven to have been used for educational purposes
amounted to P4,841,066.65. This amount was used as base for computing the deficiency income tax and value-added tax.

On appeal, the Court of Tax Appeals En Banc simply ruled that "petitioner again failed to fully account for and substantiate all
the disbursements from the CF-CPA Account."[35] The Court of Tax Appeals En Banc heavily relied on the findings of the ICPA
that "the [substantiated] disbursements from the CF-CPA Account for fiscal year 2003 amounts to P6,259,078.30."[36] However,
these findings of the ICPA were made when Exhibits "XX," "YY," "ZZ," and "AAA" had not yet been submitted. The additional
exhibits were offered by DLSU to address the findings of the ICPA with regard to the unsubstantiated disbursements.
Unfortunately, nowhere in the Decision of the Court of Tax Appeals En Banc was there a discussion on the probative value or
weight of these additional exhibits.
As a rule, factual findings of the Court of Tax Appeals are entitled to the highest respect and will not be disturbed on appeal.
Some exceptions that have been recognized by this Court are: (1) when a party shows that the findings are not supported by
substantial evidence or there is a showing of gross error or abuse on the part of the tax court;[37] (2) when the judgment is
premised on a misapprehension of facts;[38] or (3) when the tax court failed to notice certain relevant facts that, if considered,
would justify a different conclusion.[39] The third exception applies here.
The Court of Tax Appeals should have considered the additional pieces of evidence, which have been duly admitted and formed
part of the case records. This is a requirement of due process.[40] The right to be heard, which includes the right to present
evidence, is meaningless if the Court of Tax Appeals can simply ignore the evidence.
In Edwards v. McCoy:[41]
[T]he object of a hearing is as much to have evidence considered as it is to present it. The right to adduce evidence,
without the corresponding duty to consider it, is vain. Such right is conspicuously futile if the person or persons to
whom the evidence is presented can thrust it aside without notice or consideration.[42]

In Ang Tibay v. Court of Industrial Relations,[43] this Court similarly ruled that "not only must the party be given an opportunity
to present his case and to adduce evidence tending to establish the rights which he asserts but the tribunal must consider the
evidence presented."[44]

The Rules of Court allows the presentation of secondary evidence:

RULE 130

Rules of Admissibility

....

Section 5. When original document is unavailable. - When the original document has been lost or destroyed, or cannot
be produced in court, the offeror, upon proof of its execution or existence and the cause of its unavailability without
bad faith on his part, may prove its contents by a copy, or by a recital of its contents in some authentic document, or
by the testimony of witnesses in the order stated.

For secondary evidence to be admissible, there must be satisfactory proof of: (a) the execution and existence of the original; (b)
the loss and destruction of the original or its non-production in court; and (c) the unavailability of the original not being due to
bad faith on the part of the offeror. The admission by the Court of Tax Appeals First Division-which the En Banc affirmed of
these pieces of evidence presupposes that all three prerequisites have been established by DLSU, that is, that DLSU had
sufficiently explained its non-production of the disbursement vouchers, and the cause of unavailability is without bad faith on its
part.

There can be no just determination of the present action if we ignore Exhibits "XX," "YY," "ZZ," and "AAA," which were
submitted before the Court of Tax Appeals and which supposedly contained the same information embodied in the unlocated
disbursement vouchers. Exhibits "YY," "ZZ," and "AAA" were the downloaded copies of the Schedule of Disbursement Vouchers
from DLSU's accounting software. The Commissioner did not dispute the veracity or correctness of the detailed entries in these
documents.[45] Her objection to the additional pieces of evidence was based on the ground that "DLSU was indirectly reopening
the trial of the case" and the additional exhibits were "not newly discovered evidence."[46] An examination of these exhibits
shows that the disbursements from the CF-CPA Account were used for educational purposes.

These additional pieces of evidence, taken together with the findings of the ICPA, corroborate the findings of the Court of Tax
Appeals in its January 5, 2010 Decision that DLSU uses "fund accounting" to ensure that the utilization of an income (i.e., rental
income) is restricted to a specified purpose (educational purpose):

Petitioner's Controller, Mr. Francisco De La Cruz, stated the following in his judicial affidavit:

Q: You mentioned that one of your functions as Controller is to ensure that [petitioner]'s utilization of
income from all sources is consistent with existing policies. What are some of [petitioner]'s policies
regarding utilization of its income from all sources?

A: Of particular importance are the following:
1. [Petitioner] has a long-standing policy to obtain funding for all disbursements for educational
purposes primarily from rental income earned from its lease contracts, present and future;

2. In funding all disbursements for educational purposes, [petitioner] first exhausts its rental income
earned from its lease contracts before it utilizes income from other sources; and

3. [Petitioner] extends regular financial assistance by way of grants, donations, dole-outs, loans and the
like to St. Yon for the latter's pursuit of its purely educational purposes stated in its AOI.

The evaluation of petitioner's audited financial statements for the years 2001, 2002, and 2003 shows that it uses fund
accounting. The Notes to Financial Statements disclose:

2.6 Fund Accounting

To ensure observance of limitations and restrictions placed on the use of resources available to the
[Petitioner], the accounts of the [Petitioner] are maintained in accordance with the principle of fund
accounting. This is the procedure by which resources for various purposes are classified for accounting and
financial reporting purposes into funds that are in accordance with specified activities and objectives.
Separate accounts are maintained for each fund; however, in the accompanying financial statements, funds
that have similar characteristics have been combined into fund groups. Accordingly, all financial
transactions have been recorded and reported by fund group.[47]

ACCORDINGLY, I vote to GRANT the Petition of De La Salle University, Inc. and to SET ASIDE the deficiency assessments
issued against it.

[1]TAX CODE, sec. 13 provides:

Section 13. Authority of a Revenue Officer. - Subject to the rules and regulations to be prescribed by the Secretary of Finance,
upon recommendation of the Commissioner, a Revenue Officer assigned to perform assessment functions in any district may,
pursuant to a Letter of Authority issued by the Revenue Regional Director, examine taxpayers within the jurisdiction of the
district in order to collect the correct amount of tax, or to recommend the assessment of any deficiency tax due in the same
manner that the said acts could have been performed by the Revenue Regional Director himself.

[2]Revenue Audit Memorandum Order No. 1-00 (2000), VIII (C)(2.2) provides:

2.2 A Letter of Authority authorizes or empowers a designated Revenue Officer to examine, verify and scrutm1ze a taxpayer's
books and records in relation to his internal revenue tax liabilities for a particular period.

[3]
Revenue Memorandum Order No. 2-67 (1967), Amendment to Field Circular No. V-157 as amended by RMC No. 22-64 and
RMC No. 30-65.

[4] Commissioner of Internal Revenue v. Sony Philippines, Inc., 649 Phil. 519, 530 (2010) [Per J. Mendoza, Second Division].

[5] Per Decision, the date of the issuance is not on record.

[6] See Revenue Memorandum Circular No. 04-81, Guidelines in the Proper Enforcement of Tax Laws (July 8, 1980).

[7] 59 Phil. 244 (1933) [Per J. Malcolm, En Banc].

[8] Id. at 257-259.

[9] Id. at 259-260.

[10] 165 Phil. 533 (1976) [Per J. Fernando, Second Division).

[11] Id. at 542.

[12]
TAX CODE, sec. 5; Commissioner of Internal Revenue v. Hantex Trading Co., Inc., 494 Phil. 306 (2005) [Per J. Callejo, Sr.,
Second Division].
[13]Commissioner of Internal Revenue v. United Salvage and Towage (Phils.), Inc., 738 Phil. 335, 353 (2014) [Per J. Peralta,
Third Division].
[14]Commissioner of Internal Revenue v. Metro Star Superama, Inc., 652 Phil. 172, 184 (2010) [Per J. Mendoza, Second
Division].
[15] Rollo (G.R. No. 196596), pp. 143-144, CTA En Banc Decision dated July 29, 2010.
[16] Id. at 144.
[17] Id. at 119, CTA Decision dated January 5, 2010.
[18] Id. at 122.
[19] Rollo (G.R. No. 198841), p. 46.
[20] Id. at 132.
[21] Id.
[22] Rollo(G.R. No. 196596), pp. 140, 142-144. The other documents offered were: Statement of Receipts, Disbursement & Fund
Balance for the Period June 1, 1999 to May 31, 2000 (Exhibit "VV"); and Statement of Fund Changes as of May 31, 2000
(Exhibit "WW").
[23] Id. at 166.
[24] Id. at 167-169.
[25] Id. at 170-172.
[26] Id. at 174-179.
[27] Id. at 140.
[28] Id. at 183, Judicial Affidavit of witness Francisco C. De La Cruz, Jr. dated 15 April 2010.
[29] Id. at 169.
[30] Id. at 172.
[31] Id. at 179.
[32] Id. at 145.
[33] Id.
[34] Id.
[35] Rollo (G.R. No. 198841), p. 86.
[36] Id.
[37] Commissioner of Internal Revenue v. Mitsubishi Metal Corp., 260 Phil. 224, 235 (1990) [Per J. Regalado, Second Division];
Commissioner of Internal Revenue v. Metro Star Superama, Inc., 652 Phil. 172, 185 (2010) [Per J. Mendoza, Second Division].
[38] Miguel J. Ossorio Pension Foundation, Inc. v. Court of Appeals, 635 Phil. 573, 585 (2010) [Per J. Carpio, Second Division].
[39] BPI-Family Savings Bank, Inc. v. Court of Appeals, 386 Phil. 719, 727 (2000) [Per J. Panganiban, Third Division].
[40] See Ginete v. Court of Appeals, 351 Phil. 36, 56 (1998) [Per J. Romero, Third Division].
[41] 22 Phil. 598 (1912) [Per J. Moreland, First Division].
[42] Id. at 600-601.
[43] 69 Phil. 635 (1940) [Per J. Laurel, En Banc].
[44] Id. at 642.
[45] Rollo (G.R. No. 196596), p. 91.
[46] Id.
[47] Rollo (G.R. No. 198841), pp. 127-128.
Source: Supreme Court E-Library | Date created: September 11, 2018

807 Phil. 133
SECOND DIVISION
[ G.R. No. 215383, March 08, 2017 ]
HON. KIM S. JACINTO-HENARES, IN HER OFFICIAL CAPACITY AS
COMMISSIONER OF THE BUREAU OF INTERNAL REVENUE,
PETITIONER, VS. ST. PAUL COLLEGE OF MAKATI, RESPONDENT.
RESOLUTION
CARPIO, J.:
The Case
This petition for review[1] assails the Decision dated 25 July 2014[2] and Joint Resolution dated
29 October 2014[3] of the Regional Trial Court, Branch 143, Makati City (RTC), in Civil Case
No. 13-1405, declaring Revenue Memorandum Order (RMO) No. 20-2013 unconstitutional.

The Facts
On 22 July 2013, petitioner Kim S. Jacinto-Henares, acting in her capacity as then

Commissioner of Internal Revenue (CIR), issued RMO No. 20-2013, "Prescribing the Policies
and Guidelines in the Issuance of Tax Exemption Rulings to Qualified Non-Stock, Non-Profit
Corporations and Associations under Section 30 of the National Internal Revenue Code of
1997, as Amended."

On 29 November 2013, respondent St. Paul College of Makati (SPCM), a non-stock, non-profit
educational institution organized and existing under Philippine laws, filed a Civil Action to
Declare Unconstitutional [Bureau of Internal Revenue] RMO No. 20-2013 with Prayer for
Issuance of Temporary Restraining Order and Writ of Preliminary Injunction[4] before the RTC.
SPCM alleged that "RMO No. 20-2013 imposes as a prerequisite to the enjoyment by non-
stock, non-profit educational institutions of the privilege of tax exemption under Sec. 4(3) of
Article XIV of the Constitution both a registration and approval requirement, i.e., that they
submit an application for tax exemption to the BIR subject to approval by CIR in the form of a
Tax[]Exemption Ruling (TER) which is valid for a period of [three] years and subject to
renewal."[5] According to SPCM, RMO No. 20-2013 adds a prerequisite to the requirement
under Department of Finance Order No. 137-87,[6] and makes failure to file an annual
information return a ground for a non-stock, non profit educational institution to "automatically
lose its income tax-exempt status."[7]

In a Resolution dated 27 December 2013,[8] the RTC issued a temporary restraining order
against the implementation of RMO No. 20-2013. It found that failure of SPCM to comply with
RMO No. 20-2013 would necessarily result to losing its tax-exempt status and cause irreparable
injury.
In a Resolution dated 22 January 2014,[9] the RTC granted the writ of preliminary injunction
after finding that RMO No. 20-2013 appears to divest non-stock, non-profit educational
institutions of their tax exemption privilege. Thereafter, the RTC denied the CIR's motion for
reconsideration. On 29 April 2014, SPCM filed a Motion for Judgment on the Pleadings under
Rule 34 of the Rules of Court.
The Ruling of the RTC
In a Decision dated 25 July 2014, the RTC ruled in favor of SPCM and declared RMO No. 20-
2013 unconstitutional. It held that "by imposing the x x x [prerequisites alleged by SPCM,] and
if not complied with by non-stock, non-profit educational institutions, [RMO No. 20-2013
serves] as diminution of the constitutional privilege, which even Congress cannot diminish by
legislation, and thus more so by the [CIR] who merely exercise[s] quasi-legislative function."
[10]
The dispositive portion of the Decision reads:
WHEREFORE, in view of all the foregoing, the Court hereby declares BIR RMO
No. 20-2013 as UNCONSTITUTIONAL for being violative of Article XIV, Section
4, paragraph 3. Consequently, all Revenue Memorandum Orders subsequently issued
to implement BIR RMO No. 20-2013 are declared null and void.

The writ of preliminary injunction issued on 03 February 2014 is hereby made

permanent.

SO ORDERED.[11]
On 18 September 2014, the CIR issued RMO No. 34-2014,[12] which clarified certain
provisions of RMO No. 20-2013, as amended by RMO No. 28-2013.[13]

In a Joint Resolution dated 29 October 2014, the RTC denied the CIR's motion for
reconsideration, to wit:

WHEREFORE, viewed in the light of the foregoing premises, the Motion for
Reconsideration filed by the respondent is hereby DENIED for lack of merit.

Meanwhile, this Court clarifies that the phrase "Revenue Memorandum Order"
referred to in the second sentence of its decision dated July 25, 2014 refers to
"issuance/s" of the respondent which tends to implement RMO 20-2013 for if it is
otherwise, said decision would be useless and would be rendered nugatory.
SO ORDERED.[14]
Hence, this present petition.

The Issues
The CIR raises the following issues for resolution:

WHETHER THE TRIAL COURT CORRECTLY CONCLUDED THAT RMO

[NO.] 20-2013 IMPOSES A PREREQUISITE BEFORE A NON-STOCK, NON-
PROFIT EDUCATIONAL INSTITUTION MAY AVAIL OF THE TAX
EXEMPTION UNDER SECTION 4(3), ARTICLE XIV OF THE
CONSTITUTION.

WHETHER THE TRIAL COURT CORRECTLY CONCLUDED THAT RMO NO.

20-2013 ADDS TO THE REQUIREMENT UNDER DEPARTMENT OF
FINANCE ORDER NO. 137-87.[15]
The Ruling of the Court
We deny the petition on the ground of mootness.

We take judicial notice that on 25 July 2016, the present CIR Caesar R. Dulay issued RMO No.
44-2016, which provides that:

SUBJECT: Amending Revenue Memorandum Order No. 20-2013, as

amended (Prescribing the Policies and Guidelines in the
Issuance of Tax Exemption Rulings to Qualified Non-Stock,
Non-Profit Corporations and Associations under Section 30 of
the National Internal Revenue Code of 1997, as Amended)
In line with the Bureau's commitment to put in proper context the nature and
tax status of non-profit, non-stock educational institutions, this Order is being
issued to exclude non-stock, non-profit educational institutions from the
coverage of Revenue Memorandum Order No. 20-2013, as amended.

SECTION 1. Nature of Tax Exemption. --- The tax exemption of non-stock, non-
profit educational institutions is directly conferred by paragraph 3, Section 4,
Article XIV of the 1987 Constitution, the pertinent portion of which reads:
"All revenues and assets of non-stock, non-profit educational

institutions used actually, directly and exclusively for educational
purposes shall be exempt from taxes and duties."
This constitutional exemption is reiterated in Section 30 (H) of the 1997 Tax Code,
as amended, which provides as follows:

"Sec. 30. Exempt from Tax on Corporations. - The following

organizations shall not be taxed under this Title in respect to income
received by them as such:

x x x x x x x x x

(H) A non-stock and non-profit educational institution; x x x."
It is clear and unmistakable from the aforequoted constitutional provision that

non-stock, non-profit educational institutions are constitutionally exempt from
tax on all revenues derived in pursuance of its purpose as an educational
institution and used actually, directly and exclusively for educational purposes.
This constitutional exemption gives the non-stock, non-profit educational
institutions a distinct character. And for the constitutional exemption to be
enjoyed, jurisprudence and tax rulings affirm the doctrinal rule that there are
only two requisites: (1) The school must be non-stock and non-profit; and (2)
The income is actually, directly and exclusively used for educational purposes.
There are no other conditions and limitations.

In this light, the constitutional conferral of tax exemption upon non-stock and
non-profit educational institutions should not be implemented or interpreted in
such a manner that will defeat or diminish the intent and language of the
Constitution.

SECTION 2. Application for Tax Exemption. --- Non-stock, non-profit educational

institutions shall file their respective Applications for Tax Exemption with the Office
of the Assistant Commissioner, Legal Service, Attention: Law Division.

SECTION 3. Documentary Requirements. ---The non-stock, non-profit educational

institution shall submit the following documents:

a. Original copy of the application letter for issuance of Tax Exemption Ruling;
b. Certified true copy of the Certificate of Good Standing issued by the Securities
and Exchange Commission;
c. Original copy of the Certification under Oath of the Treasurer as to the amount of
the income, compensation, salaries or any emoluments paid to its trustees, officers
and other executive officers;
d. Certified true copy of the Financial Statements of the corporation for the last
three (3) years;
e. Certified true copy of government recognition/permit/accreditation to operate as

an educational institution issued by the Commission on Higher Education (CHED),
Department of Education (DepEd), or Technical Education and Skills Development
Authority (TESDA); Provided, that if the government
recognition/permit/accreditation to operate as an educational institution was issued
five (5) years prior to the application for tax exemption, an original copy of a current
Certificate of Operation/Good Standing, or other equivalent document issued by the
appropriate government agency (i.e., CHED, DepEd, or TESDA) shall be submitted
as proof that the non-stock and non-profit education is currently operating as such;
and
f. Original copy of the Certificate of utilization of annual revenues and assets by the
Treasurer or his equivalent of the non-stock and nonprofit educational institution.
SECTION 4. Request for Additional Documents. --- In the course of review of the
application for tax exemption, the Bureau may require additional information or
documents as the circumstances may warrant.
SECTION 5. Validity of the Tax Exemption Ruling. --- Tax Exemption Rulings or
Certificates of Tax Exemption of non-stock, non-profit educational institutions shall
remain valid and effective, unless recalled for valid grounds. They are not required
to renew or revalidate the Tax exemption rulings previously issued to them.
The Tax Exemption Ruling shall be subject to revocation if there are material
changes in the character, purpose or method of operation of the corporation which
are inconsistent with the basis for its income tax exemption.
SECTION 6. Transitory Provisions.--- To update the records of the Bureau and for
purposes of a better system of monitoring, non-stock, non-profit educational
institutions with Tax Exemption Rulings or Certificates of Exemption issued prior to
June 30, 2012 are required to apply for new Tax Exemption Rulings.
SECTION 7. Repealing Clause.--- Any revenue issuance which is inconsistent with

this Order is deemed revoked, repealed, or modified accordingly.
SECTION 8. Effectivity. --- This Order shall take effect immediately. (Emphases
supplied)
A moot and academic case is one that ceases to present a justiciable controversy by virtue of
supervening events, so that an adjudication of the case or a declaration on the issue would be of
no practical value or use.[16] Courts generally decline jurisdiction over such case or dismiss it
on the ground of mootness.[17]
With the issuance of RMO No. 44-2016, a supervening event has transpired that rendered this
petition moot and academic, and subject to denial. The CIR, in her petition, assails the RTC
Decision finding RMO No. 20-2013 unconstitutional because it violated the non-stock, non-
profit educational institutions' tax exemption privilege under the Constitution. However,
subsequently, RMO No. 44-2016 clarified that non-stock, non-profit educational institutions
are excluded from the coverage of RMO No. 20-2013. Consequently, the RTC Decision no
longer stands, and there is no longer any practical value in resolving the issues raised in this
petition.
WHEREFORE, we DENY the petition on the ground of mootness. We SET ASIDE the
Decision dated 25 July 2014 and Joint Resolution dated 29 October 2014 of the Regional Trial
Court, Branch 143, Makati City, declaring Revenue Memorandum Order No. 20-2013
unconstitutional. The writ of preliminary injunction is superseded by this Resolution.
SO ORDERED.
Peralta, Mendoza, Reyes, and Leonen, JJ., concur.
* Designated Fifth Member per Special Order No. 2416-BB dated 4 January 2017.

[1] Rollo, pp. 11-50. Under Rule 45 of the 1997 Rules of Civil Procedure.

[2] Id. at 58-61. Penned by Presiding Judge Maximo M. De Leon.

[3] Id. at 62-66.

[4] Id. at 85-100.

[5]Id. at 87. RMO No. 20-2013, Section 10 states: "Tax Exemption Rulings may be renewed
upon filing of a subsequent Application for Tax Exemption/Revalidation, under same
requirements and procedures provided herein. Otherwise, the exemption shall be deemed
revoked upon the expiration of the Tax Exemption Ruling. The new Tax Exemption Ruling shall
be valid for another period of three (3) years, unless sooner revoked or cancelled."

[6]Rules and Regulations Implementing Section 4(3), Article XIV of the New Constitution.
Dated 16 December 1987.

[7] RMO No. 20-2013, Section 11 states: "If a corporation or association which has been issued
a Tax Exemption Ruling fails to file its annual information return, it shall automatically lose its
income tax-exempt status beginning the taxable year for which it failed to file an annual
information return, in addition to the sanctions imposed under Section 250 of the NIRC, as
amended."
[8] Rollo, pp. 110-112.
[9] Id. at 113-115.
[10] Id. at 61.
[11] Id.
[12]"Clarifying Certain Provisions of Revenue Memorandum Order (RMO) No. 20-2013, as

amended by RMO No. 28-2013, on the issuance of Tax Exemption Rulings for Qualified Non-
Stock, Non-Profit Corporations and Associations under Section 30 of the National Internal
Revenue Code of 1997, as amended"
[13] RMO No. 28-2013 (dated 29 October 2013) amends Section 10 of RMO No. 20-2013 as
follows: "SEC. 10. Tax Exemption Rulings may be renewed upon filing of a subsequent
Application for Tax Exemption/Revalidation, under same requirements and procedures provided
herein. Failure to renew the Tax Exemption Ruling shall be deemed revocation thereof upon the
expiration of the three (3)-year period. The new Tax Exemption Ruling shall be valid for
another period of three (3) years, unless sooner revoked or cancelled."
[14] Rollo, p. 66.
[15] Id. at 30.
[16] Timbol v. Commission on Elections, 751 Phil. 456 (2015); Carpio v. Court of Appeals, 705
Phil. 153 (2013), citing Osmeña III v. Social Security System of the Philippines, 559 Phil. 723
(2007); Abdul v. Sandiganbayan, 722 Phil. 485 (2013).
[17]Carpio v. Court of Appeals, 705 Phil. 153 (2013), citing Osmeña III v. Social Security
System of the Philippines, 559 Phil. 723 (2007).
Source: Supreme Court E-Library | Date created: September 22, 2020

477 Phil. 141
EN BANC
[ G.R. No. 144104, June 29, 2004 ]
LUNG CENTER OF THE PHILIPPINES, PETITIONER, VS. QUEZON
CITY AND CONSTANTINO P. ROSAS, IN HIS CAPACITY AS CITY
ASSESSOR OF QUEZON CITY, RESPONDENTS.

DECISION
CALLEJO, SR., J.:
This is a petition for review on certiorari under Rule 45 of the Rules of Court, as amended, of
the Decision[1] dated July 17, 2000 of the Court of Appeals in CA-G.R. SP No. 57014 which
affirmed the decision of the Central Board of Assessment Appeals holding that the lot owned by
the petitioner and its hospital building constructed thereon are subject to assessment for
purposes of real property tax.

The Antecedents
The petitioner Lung Center of the Philippines is a non-stock and non-profit entity established on
January 16, 1981 by virtue of Presidential Decree No. 1823.[2] It is the registered owner of a
parcel of land, particularly described as Lot No. RP-3-B-3A-1-B-1, SWO-04-000495, located at
Quezon Avenue corner Elliptical Road, Central District, Quezon City. The lot has an area of
121,463 square meters and is covered by Transfer Certificate of Title (TCT) No. 261320 of the
Registry of Deeds of Quezon City. Erected in the middle of the aforesaid lot is a hospital known
as the Lung Center of the Philippines. A big space at the ground floor is being leased to private
parties, for canteen and small store spaces, and to medical or professional practitioners who use
the same as their private clinics for their patients whom they charge for their professional
services. Almost one-half of the entire area on the left side of the building along Quezon
Avenue is vacant and idle, while a big portion on the right side, at the corner of Quezon Avenue
and Elliptical Road, is being leased for commercial purposes to a private enterprise known as
the Elliptical Orchids and Garden Center.

The petitioner accepts paying and non-paying patients. It also renders medical services to out-
patients, both paying and non-paying. Aside from its income from paying patients, the petitioner
receives annual subsidies from the government.

On June 7, 1993, both the land and the hospital building of the petitioner were assessed for real
property taxes in the amount of P4,554,860 by the City Assessor of Quezon City.[3]
Accordingly, Tax Declaration Nos. C-021-01226 (16-2518) and C-021-01231 (15-2518-A) were
issued for the land and the hospital building, respectively.[4] On August 25, 1993, the petitioner
filed a Claim for Exemption[5] from real property taxes with the City Assessor, predicated on its
claim that it is a charitable institution. The petitioner’s request was denied, and a petition was,
thereafter, filed before the Local Board of Assessment Appeals of Quezon City (QC-LBAA, for
brevity) for the reversal of the resolution of the City Assessor. The petitioner alleged that under
Section 28, paragraph 3 of the 1987 Constitution, the property is exempt from real property
taxes. It averred that a minimum of 60% of its hospital beds are exclusively used for charity
patients and that the major thrust of its hospital operation is to serve charity patients. The
petitioner contends that it is a charitable institution and, as such, is exempt from real property
taxes. The QC-LBAA rendered judgment dismissing the petition and holding the petitioner
liable for real property taxes.[6]
The QC-LBAA’s decision was, likewise, affirmed on appeal by the Central Board of
Assessment Appeals of Quezon City (CBAA, for brevity)[7] which ruled that the petitioner was
not a charitable institution and that its real properties were not actually, directly and exclusively
used for charitable purposes; hence, it was not entitled to real property tax exemption under the
constitution and the law. The petitioner sought relief from the Court of Appeals, which rendered
judgment affirming the decision of the CBAA.[8]
Undaunted, the petitioner filed its petition in this Court contending that:
A. THE COURT A QUO ERRED IN DECLARING PETITIONER AS NOT

ENTITLED TO REALTY TAX EXEMPTIONS ON THE GROUND THAT
ITS LAND, BUILDING AND IMPROVEMENTS, SUBJECT OF
ASSESSMENT, ARE NOT ACTUALLY, DIRECTLY AND EXCLUSIVELY
DEVOTED FOR CHARITABLE PURPOSES.

B. WHILE PETITIONER IS NOT DECLARED AS REAL PROPERTY TAX

EXEMPT UNDER ITS CHARTER, PD 1823, SAID EXEMPTION MAY
NEVERTHELESS BE EXTENDED UPON PROPER APPLICATION.
The petitioner avers that it is a charitable institution within the context of Section 28(3), Article
VI of the 1987 Constitution. It asserts that its character as a charitable institution is not altered
by the fact that it admits paying patients and renders medical services to them, leases portions of
the land to private parties, and rents out portions of the hospital to private medical practitioners
from which it derives income to be used for operational expenses. The petitioner points out that
for the years 1995 to 1999, 100% of its out-patients were charity patients and of the hospital’s
282-bed capacity, 60% thereof, or 170 beds, is allotted to charity patients. It asserts that the fact
that it receives subsidies from the government attests to its character as a charitable institution.
It contends that the “exclusivity” required in the Constitution does not necessarily mean
“solely.” Hence, even if a portion of its real estate is leased out to private individuals from
whom it derives income, it does not lose its character as a charitable institution, and its
exemption from the payment of real estate taxes on its real property. The petitioner cited our
ruling in Herrera v. QC-BAA[9] to bolster its pose. The petitioner further contends that even if
P.D. No. 1823 does not exempt it from the payment of real estate taxes, it is not precluded from
seeking tax exemption under the 1987 Constitution.

In their comment on the petition, the respondents aver that the petitioner is not a charitable
entity. The petitioner’s real property is not exempt from the payment of real estate taxes under
P.D. No. 1823 and even under the 1987 Constitution because it failed to prove that it is a
charitable institution and that the said property is actually, directly and exclusively used for
charitable purposes. The respondents noted that in a newspaper report, it appears that graft
charges were filed with the Sandiganbayan against the director of the petitioner, its
administrative officer, and Zenaida Rivera, the proprietress of the Elliptical Orchids and Garden
Center, for entering into a lease contract over 7,663.13 square meters of the property in 1990 for
only P20,000 a month, when the monthly rental should be P357,000 a month as determined by
the Commission on Audit; and that instead of complying with the directive of the COA for the
cancellation of the contract for being grossly prejudicial to the government, the petitioner
renewed the same on March 13, 1995 for a monthly rental of only P24,000. They assert that the
petitioner uses the subsidies granted by the government for charity patients and uses the rest of
its income from the property for the benefit of paying patients, among other purposes. They aver
that the petitioner failed to adduce substantial evidence that 100% of its out-patients and 170
beds in the hospital are reserved for indigent patients. The respondents further assert, thus:
13. That the claims/allegations of the Petitioner LCP do not speak well of its
record of service. That before a patient is admitted for treatment in the Center,
first impression is that it is pay-patient and required to pay a certain amount as
deposit. That even if a patient is living below the poverty line, he is charged
with high hospital bills. And, without these bills being first settled, the poor
patient cannot be allowed to leave the hospital or be discharged without first
paying the hospital bills or issue a promissory note guaranteed and indorsed by
an influential agency or person known only to the Center; that even the
remains of deceased poor patients suffered the same fate. Moreover, before a
patient is admitted for treatment as free or charity patient, one must undergo a
series of interviews and must submit all the requirements needed by the Center,
usually accompanied by endorsement by an influential agency or person
known only to the Center. These facts were heard and admitted by the
Petitioner LCP during the hearings before the Honorable QC-BAA and
Honorable CBAA. These are the reasons of indigent patients, instead of
seeking treatment with the Center, they prefer to be treated at the Quezon
Institute. Can such practice by the Center be called charitable?[10]
The Issues
The issues for resolution are the following: (a) whether the petitioner is a charitable institution
within the context of Presidential Decree No. 1823 and the 1973 and 1987 Constitutions and
Section 234(b) of Republic Act No. 7160; and (b) whether the real properties of the petitioner
are exempt from real property taxes.

The Court’s Ruling
The petition is partially granted.

On the first issue, we hold that the petitioner is a charitable institution within the context of the
1973 and 1987 Constitutions. To determine whether an enterprise is a charitable
institution/entity or not, the elements which should be considered include the statute creating the
enterprise, its corporate purposes, its constitution and by-laws, the methods of administration,
the nature of the actual work performed, the character of the services rendered, the
indefiniteness of the beneficiaries, and the use and occupation of the properties.[11]
In the legal sense, a charity may be fully defined as a gift, to be applied consistently with
existing laws, for the benefit of an indefinite number of persons, either by bringing their minds
and hearts under the influence of education or religion, by assisting them to establish themselves
in life or otherwise lessening the burden of government.[12] It may be applied to almost
anything that tend to promote the well-doing and well-being of social man. It embraces the
improvement and promotion of the happiness of man.[13] The word “charitable” is not restricted
to relief of the poor or sick.[14] The test of a charity and a charitable organization are in law the
same. The test whether an enterprise is charitable or not is whether it exists to carry out a
purpose reorganized in law as charitable or whether it is maintained for gain, profit, or private
advantage.
Under P.D. No. 1823, the petitioner is a non-profit and non-stock corporation which, subject to
the provisions of the decree, is to be administered by the Office of the President of the
Philippines with the Ministry of Health and the Ministry of Human Settlements. It was
organized for the welfare and benefit of the Filipino people principally to help combat the high
incidence of lung and pulmonary diseases in the Philippines. The raison d’etre for the creation
of the petitioner is stated in the decree, viz:
Whereas, for decades, respiratory diseases have been a priority concern, having been
the leading cause of illness and death in the Philippines, comprising more than 45%
of the total annual deaths from all causes, thus, exacting a tremendous toll on human
resources, which ailments are likely to increase and degenerate into serious lung
diseases on account of unabated pollution, industrialization and unchecked cigarette
smoking in the country;

Whereas, the more common lung diseases are, to a great extent, preventable, and
curable with early and adequate medical care, immunization and through prompt and
intensive prevention and health education programs;

Whereas, there is an urgent need to consolidate and reinforce existing programs,

strategies and efforts at preventing, treating and rehabilitating people affected by
lung diseases, and to undertake research and training on the cure and prevention of
lung diseases, through a Lung Center which will house and nurture the above and
related activities and provide tertiary-level care for more difficult and problematical
cases;

Whereas, to achieve this purpose, the Government intends to provide material and
financial support towards the establishment and maintenance of a Lung Center for
the welfare and benefit of the Filipino people.[15]
The purposes for which the petitioner was created are spelled out in its Articles of
Incorporation, thus:

SECOND: That the purposes for which such corporation is formed are as follows:
1. To construct, establish, equip, maintain, administer and conduct an integrated

medical institution which shall specialize in the treatment, care, rehabilitation
and/or relief of lung and allied diseases in line with the concern of the
government to assist and provide material and financial support in the
establishment and maintenance of a lung center primarily to benefit the people
of the Philippines and in pursuance of the policy of the State to secure the well-
being of the people by providing them specialized health and medical services
and by minimizing the incidence of lung diseases in the country and elsewhere.

2. To promote the noble undertaking of scientific research related to the

prevention of lung or pulmonary ailments and the care of lung patients,
including the holding of a series of relevant congresses, conventions, seminars
and conferences;

3. To stimulate and, whenever possible, underwrite scientific researches on the

biological, demographic, social, economic, eugenic and physiological aspects
of lung or pulmonary diseases and their control; and to collect and publish the
findings of such research for public consumption;

4. To facilitate the dissemination of ideas and public acceptance of information

on lung consciousness or awareness, and the development of fact-finding,
information and reporting facilities for and in aid of the general purposes or
objects aforesaid, especially in human lung requirements, general health and
physical fitness, and other relevant or related fields;

5. To encourage the training of physicians, nurses, health officers, social workers

and medical and technical personnel in the practical and scientific
implementation of services to lung patients;

6. To assist universities and research institutions in their studies about lung

diseases, to encourage advanced training in matters of the lung and related
fields and to support educational programs of value to general health;

7. To encourage the formation of other organizations on the national, provincial

and/or city and local levels; and to coordinate their various efforts and
activities for the purpose of achieving a more effective programmatic approach
on the common problems relative to the objectives enumerated herein;

8. To seek and obtain assistance in any form from both international and local
foundations and organizations; and to administer grants and funds that may be
given to the organization;

9. To extend, whenever possible and expedient, medical services to the public

and, in general, to promote and protect the health of the masses of our people,
which has long been recognized as an economic asset and a social blessing;

10. To help prevent, relieve and alleviate the lung or pulmonary afflictions and
maladies of the people in any and all walks of life, including those who are
poor and needy, all without regard to or discrimination, because of race, creed,
color or political belief of the persons helped; and to enable them to obtain
treatment when such disorders occur;
11. To participate, as circumstances may warrant, in any activity designed and

carried on to promote the general health of the community;
12. To acquire and/or borrow funds and to own all funds or equipment, educational
materials and supplies by purchase, donation, or otherwise and to dispose of
and distribute the same in such manner, and, on such basis as the Center shall,
from time to time, deem proper and best, under the particular circumstances, to
serve its general and non-profit purposes and objectives;
13. To buy, purchase, acquire, own, lease, hold, sell, exchange, transfer and
dispose of properties, whether real or personal, for purposes herein mentioned;
and
14. To do everything necessary, proper, advisable or convenient for the

accomplishment of any of the powers herein set forth and to do every other act
and thing incidental thereto or connected therewith.[16]
Hence, the medical services of the petitioner are to be rendered to the public in general in any
and all walks of life including those who are poor and the needy without discrimination. After
all, any person, the rich as well as the poor, may fall sick or be injured or wounded and become
a subject of charity.[17]

As a general principle, a charitable institution does not lose its character as such and its
exemption from taxes simply because it derives income from paying patients, whether out-
patient, or confined in the hospital, or receives subsidies from the government, so long as the
money received is devoted or used altogether to the charitable object which it is intended to
achieve; and no money inures to the private benefit of the persons managing or operating the
institution.[18] In Congregational Sunday School, etc. v. Board of Review,[19] the State Supreme
Court of Illinois held, thus:

… [A]n institution does not lose its charitable character, and consequent exemption
from taxation, by reason of the fact that those recipients of its benefits who are able
to pay are required to do so, where no profit is made by the institution and the
amounts so received are applied in furthering its charitable purposes, and those
benefits are refused to none on account of inability to pay therefor. The fundamental
ground upon which all exemptions in favor of charitable institutions are based is the
benefit conferred upon the public by them, and a consequent relief, to some extent,
of the burden upon the state to care for and advance the interests of its citizens.[20]
As aptly stated by the State Supreme Court of South Dakota in Lutheran Hospital Association of
South Dakota v. Baker:[21]

… [T]he fact that paying patients are taken, the profits derived from attendance upon
these patients being exclusively devoted to the maintenance of the charity, seems
rather to enhance the usefulness of the institution to the poor; for it is a matter of
common observation amongst those who have gone about at all amongst the
suffering classes, that the deserving poor can with difficulty be persuaded to enter an
asylum of any kind confined to the reception of objects of charity; and that their
honest pride is much less wounded by being placed in an institution in which paying
patients are also received. The fact of receiving money from some of the patients
does not, we think, at all impair the character of the charity, so long as the money
thus received is devoted altogether to the charitable object which the institution is
intended to further.[22]
The money received by the petitioner becomes a part of the trust fund and must be devoted to
public trust purposes and cannot be diverted to private profit or benefit.[23]

Under P.D. No. 1823, the petitioner is entitled to receive donations. The petitioner does not lose
its character as a charitable institution simply because the gift or donation is in the form of
subsidies granted by the government. As held by the State Supreme Court of Utah in Yorgason
v. County Board of Equalization of Salt Lake County:[24]

Second, the … government subsidy payments are provided to the project. Thus,
those payments are like a gift or donation of any other kind except they come from
the government. In both Intermountain Health Care and the present case, the crux is
the presence or absence of material reciprocity. It is entirely irrelevant to this
analysis that the government, rather than a private benefactor, chose to make up the
deficit resulting from the exchange between St. Mark’s Tower and the tenants by
making a contribution to the landlord, just as it would have been irrelevant in
Intermountain Health Care if the patients’ income supplements had come from
private individuals rather than the government.

Therefore, the fact that subsidization of part of the cost of furnishing such housing is
by the government rather than private charitable contributions does not dictate the
denial of a charitable exemption if the facts otherwise support such an exemption, as
they do here.[25]
In this case, the petitioner adduced substantial evidence that it spent its income, including the
subsidies from the government for 1991 and 1992 for its patients and for the operation of the
hospital. It even incurred a net loss in 1991 and 1992 from its operations.

Even as we find that the petitioner is a charitable institution, we hold, anent the second issue,
that those portions of its real property that are leased to private entities are not exempt from real
property taxes as these are not actually, directly and exclusively used for charitable purposes.

The settled rule in this jurisdiction is that laws granting exemption from tax are construed
strictissimi juris against the taxpayer and liberally in favor of the taxing power. Taxation is the
rule and exemption is the exception. The effect of an exemption is equivalent to an
appropriation. Hence, a claim for exemption from tax payments must be clearly shown and
based on language in the law too plain to be mistaken.[26] As held in Salvation Army v. Hoehn:
[27]
An intention on the part of the legislature to grant an exemption from the taxing
power of the state will never be implied from language which will admit of any other
reasonable construction. Such an intention must be expressed in clear and
unmistakable terms, or must appear by necessary implication from the language
used, for it is a well settled principle that, when a special privilege or exemption is
claimed under a statute, charter or act of incorporation, it is to be construed strictly
against the property owner and in favor of the public. This principle applies with
peculiar force to a claim of exemption from taxation . …[28]
Section 2 of Presidential Decree No. 1823, relied upon by the petitioner, specifically provides
that the petitioner shall enjoy the tax exemptions and privileges:

SEC. 2. TAX EXEMPTIONS AND PRIVILEGES. Being a non-profit, non-stock

corporation organized primarily to help combat the high incidence of lung and
pulmonary diseases in the Philippines, all donations, contributions, endowments and
equipment and supplies to be imported by authorized entities or persons and by the
Board of Trustees of the Lung Center of the Philippines, Inc., for the actual use and
benefit of the Lung Center, shall be exempt from income and gift taxes, the same
further deductible in full for the purpose of determining the maximum deductible
amount under Section 30, paragraph (h), of the National Internal Revenue Code, as
amended.

The Lung Center of the Philippines shall be exempt from the payment of taxes,
charges and fees imposed by the Government or any political subdivision or
instrumentality thereof with respect to equipment purchases made by, or for the
Lung Center.[29]
It is plain as day that under the decree, the petitioner does not enjoy any property tax exemption
privileges for its real properties as well as the building constructed thereon. If the intentions
were otherwise, the same should have been among the enumeration of tax exempt privileges
under Section 2:

It is a settled rule of statutory construction that the express mention of one person,
thing, or consequence implies the exclusion of all others. The rule is expressed in the
familiar maxim, expressio unius est exclusio alterius.

The rule of expressio unius est exclusio alterius is formulated in a number of ways.
One variation of the rule is principle that what is expressed puts an end to that which
is implied. Expressium facit cessare tacitum. Thus, where a statute, by its terms, is
expressly limited to certain matters, it may not, by interpretation or construction, be
extended to other matters.

...
The rule of expressio unius est exclusio alterius and its variations are canons of
restrictive interpretation. They are based on the rules of logic and the natural
workings of the human mind. They are predicated upon one’s own voluntary act and
not upon that of others. They proceed from the premise that the legislature would not
have made specified enumeration in a statute had the intention been not to restrict its
meaning and confine its terms to those expressly mentioned.[30]
The exemption must not be so enlarged by construction since the reasonable presumption is that
the State has granted in express terms all it intended to grant at all, and that unless the privilege
is limited to the very terms of the statute the favor would be intended beyond what was meant.
[31]

Section 28(3), Article VI of the 1987 Philippine Constitution provides, thus:

(3) Charitable institutions, churches and parsonages or convents appurtenant thereto,

mosques, non-profit cemeteries, and all lands, buildings, and improvements,
actually, directly and exclusively used for religious, charitable or educational
purposes shall be exempt from taxation.[32]
The tax exemption under this constitutional provision covers property taxes only.[33] As Chief
Justice Hilario G. Davide, Jr., then a member of the 1986 Constitutional Commission,
explained: “. . . what is exempted is not the institution itself . . .; those exempted from real estate
taxes are lands, buildings and improvements actually, directly and exclusively used for
religious, charitable or educational purposes.”[34]

Consequently, the constitutional provision is implemented by Section 234(b) of Republic Act

No. 7160 (otherwise known as the Local Government Code of 1991) as follows:

SECTION 234. Exemptions from Real Property Tax. – The following are exempted

...
(b) Charitable institutions, churches, parsonages or convents appurtenant thereto,

mosques, non-profit or religious cemeteries and all lands, buildings, and
improvements actually, directly, and exclusively used for religious, charitable or
educational purposes.[35]
We note that under the 1935 Constitution, “... all lands, buildings, and improvements used
‘exclusively’ for … charitable … purposes shall be exempt from taxation.”[36] However, under
the 1973 and the present Constitutions, for “lands, buildings, and improvements” of the
charitable institution to be considered exempt, the same should not only be “exclusively” used
for charitable purposes; it is required that such property be used “actually” and “directly” for
such purposes.[37]

In light of the foregoing substantial changes in the Constitution, the petitioner cannot rely on
our ruling in Herrera v. Quezon City Board of Assessment Appeals which was promulgated on
September 30, 1961 before the 1973 and 1987 Constitutions took effect.[38] As this Court held
in Province of Abra v. Hernando:[39]
… Under the 1935 Constitution: “Cemeteries, churches, and parsonages or convents

appurtenant thereto, and all lands, buildings, and improvements used exclusively for
religious, charitable, or educational purposes shall be exempt from taxation.” The
present Constitution added “charitable institutions, mosques, and non-profit
cemeteries” and required that for the exemption of “lands, buildings, and
improvements,” they should not only be “exclusively” but also “actually” and
“directly” used for religious or charitable purposes. The Constitution is worded
differently. The change should not be ignored. It must be duly taken into
consideration. Reliance on past decisions would have sufficed were the words
“actually” as well as “directly” not added. There must be proof therefore of the
actual and direct use of the lands, buildings, and improvements for religious or
charitable purposes to be exempt from taxation. …
Under the 1973 and 1987 Constitutions and Rep. Act No. 7160 in order to be entitled to the
exemption, the petitioner is burdened to prove, by clear and unequivocal proof, that (a) it is a
charitable institution; and (b) its real properties are ACTUALLY, DIRECTLY and
EXCLUSIVELY used for charitable purposes. “Exclusive” is defined as possessed and enjoyed
to the exclusion of others; debarred from participation or enjoyment; and “exclusively” is
defined, “in a manner to exclude; as enjoying a privilege exclusively.”[40] If real property is
used for one or more commercial purposes, it is not exclusively used for the exempted purposes
but is subject to taxation.[41] The words “dominant use” or “principal use” cannot be substituted
for the words “used exclusively” without doing violence to the Constitutions and the law.[42]
Solely is synonymous with exclusively.[43]

What is meant by actual, direct and exclusive use of the property for charitable purposes is the
direct and immediate and actual application of the property itself to the purposes for which the
charitable institution is organized. It is not the use of the income from the real property that is
determinative of whether the property is used for tax-exempt purposes.[44]

The petitioner failed to discharge its burden to prove that the entirety of its real property is
actually, directly and exclusively used for charitable purposes. While portions of the hospital are
used for the treatment of patients and the dispensation of medical services to them, whether
paying or non-paying, other portions thereof are being leased to private individuals for their
clinics and a canteen. Further, a portion of the land is being leased to a private individual for her
business enterprise under the business name “Elliptical Orchids and Garden Center.” Indeed, the
petitioner’s evidence shows that it collected P1,136,483.45 as rentals in 1991 and P1,679,999.28
for 1992 from the said lessees.

Accordingly, we hold that the portions of the land leased to private entities as well as those parts
of the hospital leased to private individuals are not exempt from such taxes.[45] On the other
hand, the portions of the land occupied by the hospital and portions of the hospital used for its
patients, whether paying or non-paying, are exempt from real property taxes.
IN LIGHT OF ALL THE FOREGOING, the petition is PARTIALLY GRANTED. The
respondent Quezon City Assessor is hereby DIRECTED to determine, after due hearing, the
precise portions of the land and the area thereof which are leased to private persons, and to
compute the real property taxes due thereon as provided for by law.
SO ORDERED.
Davide, Jr., C.J., Puno, Panganiban, Quisumbing, Sandoval-Gutierrez, Carpio, Corona,

Carpio-Morales, Azcuna, and Tinga, JJ., concur.
Vitug, J., on official leave.
Ynares-Santiago, and Austria-Martinez, JJ., on leave.
[1]Penned by Associate Justice Remedios A. Salazar-Fernando, with Associate Justices Fermin

A. Martin, Jr. and Salvador J. Valdez, Jr. concurring.

[2]SECTION 1. – CREATION OF THE LUNG CENTER OF THE PHILIPPINES. There is

hereby created a trust, under the name and style of Lung Center of the Philippines, which,
subject to the provisions of this Decree, shall be administered, according to the Articles of
Incorporation, By-Laws and Objectives of the Lung Center of the Philippines, Inc., duly
registered (reg. No. 85886) with the Securities and Exchange Commission of the Republic of
the Philippines, by the Office of the President, in coordination with the Ministry of Human
Settlements and the Ministry of Health.

[3] Annex “C,” Rollo, p. 49.

[4] Annexes “2” & “2-A,” id. at 93-94.

[5] Annex “D,” id. at 50-52.

[6] Annex “E,” id. at 53-55.

[7] Annexes “4” & “5,” id. at 100-109.

[8] Annex “A,” id. at 33-41.

[9] 3 SCRA 187 (1961).

[10] Rollo, pp. 83-84.

[11]See Workmen’s Circle Educational Center of Springfield v. Board of Assessors of City of

Springfield, 51 N.E.2d 313 (1943).

[12] Congregational Sunday School & Publishing Society v. Board of Review, 125 N.E. 7 (1919),
citing Jackson v. Philipps, 14 Allen (Mass.) 539.
[13] Bader Realty & Investment Co. v. St. Louis Housing Authority, 217 S.W.2d 489 (1949).
[14] Board of Assessors of Boston v. Garland School of Homemaking, 6 N.E.2d 379.
[15] Rollo, pp. 119-120.
[16] Id. at 123-125.
[17] Scripps Memorial Hospital v. California Employment Commission, 24 Cal.2d 669, 151 P.2d
109 (1944).
[18] Sisters of Third Order of St. Frances v. Board of Review of Peoria County, 83 N.E. 272.
[19] See note 12.
[20] Id. at 10.
[21] 167 N.W. 148 (1918), citing State v. Powers, 10 Mo. App. 263, 74 Mo. 476.
[22] Id. at 149.
[23] See O’brien v. Physicians’ Hospital Association, 116 N.E. 975 (1917).
[24] 714 P.2d 653 (1986).
[25] Id. at 660-661.
[26] Commissioner of Internal Revenue v. Court of Appeals, 298 SCRA 83 (1998).
[27] 188 S.W.2d. 826 (1945).
[28] Id. at 829.
[29] Rollo, p. 120. (Underscoring supplied.)
[30] Malinias v. COMELEC, 390 SCRA 480 (2002).
[31] St. Louis Young Men’s Christian Association v. Gehner, 47 S.W.2d 776 (1932).

[33] Commissioner of Internal Revenue v. Court of Appeals, supra.
[34] Ibid. Citing II RECORDS OF THE CONSTITUTIONAL COMMISSION 90.
[36]Article VI, Section 22, par. (3) of the 1935 Constitution provides that, “Cemeteries,
churches and parsonages or convents appurtenant thereto, and all lands, buildings, and
improvements used exclusively for religious, charitable, or educational purposes shall be
exempt from taxation.”
[37] Article VIII, Section 17, par. (3) of the 1973 Constitution provides that, “Charitable
institutions, churches, parsonages or convents appurtenant thereto, mosques, and non-profit
cemeteries, and all lands, buildings, and improvements actually, directly, and exclusively used
for religious or charitable purposes shall be exempt from taxation.”
[38] 3 SCRA 186 (1961).
[39] 107 SCRA 105 (1981).
[40] Young Men’s Christian Association of Omaha v. Douglas County, 83 N.W. 924 (1900).
[41] St. Louis Young Men’s Christian Association v. Gehner, supra.
[42] See State ex rel Koeln v. St. Louis Y.M.C.A., 168 S.W. 589 (1914).
[43] Lodge v. Nashville, 154 S.W. 141.
[44] Christian Business College v. Kalamanzoo, 131 N.W. 553.
[45]See Young Men’s Christian Association of Omaha v. Douglas County, supra; Martin v. City
of New Orleans, 58 Am. 194 (1886).

805 Phil. 607
FIRST DIVISION
[ G.R. No. 203514, February 13, 2017 ]
COMMISSIONER OF INTERNAL REVENUE, PETITIONER, VS. ST.
LUKE'S MEDICAL CENTER, INC., RESPONDENT.
DECISION
DEL CASTILLO, J.:
The doctrine of stare decisis dictates that "absent any powerful countervailing considerations,
like cases ought to be decided alike."[1]

This Petition for Review on Certiorari[2] under Rule 45 of the Rules of Court assails the May 9,
2012 Decision[3] and the September 17, 2012 Resolution[4] of the Court of Tax Appeals (CTA)
in CTA EB Case No. 716.

Factual Antecedents

On December 14, 2007, respondent St. Luke's Medical Center, Inc. (SLIVIC) received from the
Large Taxpayers Service-Documents Processing and Quality Assurance Division of the Bureau
of Internal Revenue (BIR) Audit Results/Assessment Notice Nos. QA-07-000096[5] and QA-
07-000097,[6] assessing respondent SLMC deficiency income tax under Section 27(B)[7] of the
1997 National Internal Revenue Code (NIRC), as amended, for taxable year 2005 in the amount
of P78,617,434.54 and for taxable year 2006 in the amount of P57,119,867.33.

On January 14, 2008, SLMC filed with petitioner Commissioner of Internal Revenue (CIR) an
administrative protest[8] assailing the assessments. SLMC claimed that as a non-stock, non-
profit charitable and social welfare organization under Section 30(E) and (G)[9] of the 1997
NIRC, as amended, it is exempt from paying income tax.

On April 25, 2008, SLMC received petitioner CIR's Final Decision on the Disputed
Assessment[10] dated April 9, 2008 increasing the deficiency income for the taxable year 2005
tax to P82,419,522.21 and for the taxable year 2006 to P60,259,885.94, computed as follows:

For Taxable Year 2005:

ASSESSMENT NO. QA-07-000096
PARTICULARS AMOUNT
Sales/Revenues/Receipts/Fees P3,623,511,616.00
Less: Cost of Sales/Services 2,643,049,769.00
Gross Income From Operation 980,461,847.00
Add: Non-Operating & Other

-
Income
Total Gross Income 980,461,847.00
Less: Deductions 481,266,883.00
Net Income Subject to Tax 499,194,964.00
X Tax Rate 10%
Tax Due 49,919,496.40
Less: Tax Credits -
Deficiency Income Tax 49,919,496.40
Add: Increments
25% Surcharge 12,479,874.10
20% Interest Per Annum

19,995,151.71
(4/15/06-4/15/08)
Compromise Penalty for Late

25,000.00
Payment
Total increments 32,500,025.81
Total Amount Due P82,419,522.21
For Taxable Year 2006:

ASSESSMENT NO. QA-07-000097
PARTICULARS [AMOUNT]
Sales/Revenues/Receipts/Fees P3,815,922,240.00
2,760,518,437.00
Less: Cost of Sales/Service
Gross Income From Operation 1,055,403,803.00
Add: Non-Operating & Other

-
Income
Total Gross Income 1,055,403,803.00
Less: Deductions 640,147,719.00
Net Income Subject to Tax 415,256,084.00
X Tax Rate 10%
Tax Due 41,525,608.40
Less: Tax Credits -
Deficiency Income Tax 41,525,608.40
Add: Increments -
25% Surcharge 10,381,402.10
20% Interest Per

Annum (4/15/07- 8,327,875.44
4/15/08)
Compromise Penalty
25,000.00
for Late Payment
Total increments 18,734,277.54
Total Amount Due P60,259,885.94[11]
Aggrieved, SLMC elevated the matter to the CTA via a Petition for Review,[12] docketed as
CTA Case No. 7789.

Ruling of the Court of Tax Appeals Division

On August 26, 2010, the CTA Division rendered a Decision[13] finding SLMC not liable for
deficiency income tax under Section 27(B) of the 1997 NIRC, as amended, since it is exempt
from paying income tax under Section 30(E) and (G) of the same Code. Thus:

WHEREFORE, premises considered, the Petition for Review is hereby GRANTED.

Accordingly, Audit Results/Assessment Notice Nos. QA-07-000096 and QA-07-
000097, assessing petitioner for alleged deficiency income taxes for the taxable
years 2005 and 2006, respectively, are hereby CANCELLED and SET ASIDE.
SO ORDERED.[14]
CIR moved for reconsideration but the CTA Division denied the same in its December 28, 2010
Resolution.[15]

This prompted CIR to file a Petition for Review[16] before the CTA En Banc.

Ruling of the Court of Tax Appeals En Banc

On May 9, 2012, the CTA En Banc affirmed the cancellation and setting aside of the Audit
Results/Assessment Notices issued against SLMC. It sustained the findings of the CTA Division
that SLMC complies with all the requisites under Section 30(E) and (G) of the 1997 NIRC and
thus, entitled to the tax exemption provided therein.[17]

On September 17, 2012, the CTA En Banc denied CIR's Motion for Reconsideration.

Issue

Hence, CIR filed the instant Petition under Rule 45 of the Rules of Court contending that the
CTA erred in exempting SLMC from the payment of income tax.

Meanwhile, on September 26, 2012, the Court rendered a Decision in G.R. Nos. 195909 and
195960, entitled Commissioner of Internal Revenue v. St. Luke's Medical Center, Inc.,[18]
finding SLMC not entitled to the tax exemption under Section 30(E) and (G) of the NIRC of
1997 as it does not operate exclusively for charitable or social welfare purposes insofar as its
revenues from paying patients are concerned. Thus, the Court disposed of the case in this
manner:

WHEREFORE, the petition of the Commissioner of Internal Revenue in G.R. No.

195909 is PARTLY GRANTED. The Decision of the Court of Tax Appeals En Banc
dated 19 November 2010 and its Resolution dated 1 March 2011 in CTA Case No.
6746 are MODIFIED. St Luke's Medical Center, Inc. is ORDERED TO PAY the
deficiency income tax in 1998 based on the 10% preferential income tax rate under
Section 27(B) of the National h1ternal Revenue Code. However, it is not liable for
surcharges and interest on such deficiency income tax under Sections 248 and 249 of
the National Internal Revenue Code. All other parts of the Decision and Resolution
of the Court of Tax Appeals are AFFIRMED.

The petition of St. Luke's Medical Center, Inc. in G.R. No. 195960 is DENIED for
violating Section I, Rule 45 of the Rules of Court.

SO ORDERED.[19]
Considering the foregoing, SLMC then filed a Manifestation and Motion[20] informing the
Court that on April 30, 2013, it paid the BIR the amount of basic taxes due for taxable years
1998, 2000-2002, and 2004-2007, as evidenced by the payment confirmation[21] from the BIR,
and that it did not pay any surcharge, interest, and compromise penalty in accordance with the
above-mentioned Decision of the Court. In view of the payment it made, SLMC moved for the
dismissal of the instant case on the ground of mootness.
CIR opposed the motion claiming that the payment confirmation submitted by SLMC is not a
competent proof of payment as it is a mere photocopy and does not even indicate the quarter/s
and/or year/s said payment covers.[22]
In reply,[23] SLMC submitted a copy of the Certification[24] issued by the Large Taxpayers
Service of the BIR dated May 27, 2013, certifying that, "[a]s far as the basic deficiency income
tax for taxable years 2000, 2001, 2002, 2004, 2005, 2006, 2007 are concerned, this Office
considers the cases closed due to the payment made on April 30, 2013." SLMC likewise
submitted a letter[25] from the BIR dated November 26, 2013 with attached Certification of
Payment[26] and application for abatement,[27] which it earlier submitted to the Court in a
related case, G.R. No. 200688, entitled Commissioner of Internal Revenue v. St. Luke's Medical
Center, Inc.[28]
Thereafter, the parties submitted their respective memorandum.
CIR's Arguments
CIR argues that under the doctrine of stare decisis SLMC is subject to 10% income tax under
Section 27(B) of the 1997 NIRC.[29] It likewise asserts that SLMC is liable to pay compromise
penalty pursuant to Section 248(A)[30] of the 1997 NIRC for failing to file its quarterly income
tax returns.[31]
As to the alleged payment of the basic tax, CIR contends that this does not render the instant
case moot as the payment confirmation submitted by SLMC is not a competent proof of
payment of its tax liabilities.[32]
SLMC's Arguments
SLMC, on the other hand, begs the indulgence of the Court to revisit its ruling in G.R. Nos.
195909 and 195960 (Commissioner of Internal Revenue v. St. Luke's Medical Center, Inc.)[33]
positing that earning a profit by a charitable, benevolent hospital or educational institution does
not result in the withdrawal of its tax exempt privilege.[34] SLMC further claims that the income
it derives from operating a hospital is not income from "activities conducted for profit."[35]
Also, it maintains that in accordance with the ruling of the Court in G.R. Nos. 195909 and
195960 (Commissioner of Internal Revenue v. St. Luke's Medical Center, Inc.),[36] it is not liable
for compromise penalties.[37]
In any case, SLMC insists that the instant case should be dismissed in view of its payment of the
basic taxes due for taxable years 1998, 2000-2002, and 2004-2007 to the BIR on April 30, 2013.
[38]
Our Ruling
SLMC is liable for income tax under Section 27(B) of the 1997 NIRC insofar as its revenues
from paying patients are concerned.
The issue of whether SLMC is liable for income tax under Section 27(B) of the 1997 NIRC
insofar as its revenues from paying patients are concerned has been settled in G.R. Nos. 195909
and 195960 (Commissioner of Internal Revenue v. St. Luke's Medical Center, Inc.),[39] where
the Court ruled that:
xxx We hold that Section 27(B) of the NIRC does not remove the income tax
exemption of proprietary non-profit hospitals under Section 30(E) and (G). Section
27(B) on one hand, and Section 30(E) and (G) on the other hand, can be construed
together without the removal of such tax exemption. The effect of the introduction of
Section 27(B) is to subject the taxable income of two specific institutions, namely,
proprietary non-profit educational institutions and proprietary non-profit hospitals,
among the institutions covered by Section 30, to the 10% preferential rate under
Section 27(B) instead of the ordinary 30% corporate rate under the last paragraph of
Section 30 in relation to Section 27(A)(1).

Section 27(B) of the NIRC imposes a 10% preferential tax rate on the income of (1)
proprietary non-profit educational institutions and (2) proprietary non-profit
hospitals. The only qualifications for hospitals are that they must be proprietary and
non-profit. 'Proprietary' means private, following the definition of a 'proprietary
educational institution' as 'any private school maintained and administered by private
individuals or groups' with a government permit. 'Non-profit' means no net income
or asset accrues to or benefits any member or specific person, with all the net income
or asset devoted to the institution's purposes and all its activities conducted not for
profit.

'Non-profit' does not necessarily mean 'charitable.' In Collector of Internal Revenue

v. Club Filipino, Inc. de Cebu, this Court considered as non-profit a sports club
organized for recreation and entertainment of its stockholders and members. The
club was primarily funded by membership fees and dues. If it had profits, they were
used for overhead expenses and improving its golf course. The club was non-profit
because of its purpose and there was no evidence that it was engaged in a profit-
making enterprise.

The sports club in Club Filipino, Inc. de Cebu may be non-profit, but it was not
charitable. The Court defined 'charity' in Lung Center of the Philippines v. Quezon
City as 'a gift, to be applied consistently with existing laws, for the benefit of an
indefinite number of persons, either by bringing their minds and hearts under the
influence of education or religion, by assisting them to establish themselves in life or
[by] otherwise lessening the burden of government.' A non-profit club for the benefit
of its members fails this test. An organization may be considered as non-profit if it
does not distribute any part of its income to stockholders or members. However,
despite its being a tax exempt institution, any income such institution earns from
activities conducted for profit is taxable, ad expressly provided in the last paragraph
of Section 30.
To be a charitable institution, however, an organization must meet the substantive

test of charity in Lung Center. The issue in Lung Center concerns exemption from
real property tax and not income tax. However, it provides for the test of charity in
our jurisdiction. Charity is essentially a gift to an indefinite number of persons which
lessens the burden of government. In other words, charitable institutions provide for
free goods and services to the public which would otherwise fall on the shoulders of
government. Thus, as a matter of efficiency, the government forgoes taxes which
should have been spent to address public needs, because certain private entities
already assume a part of the burden. This is the rationale for the tax exemption of
charitable institutions. The loss of taxes by the government is compensated by its
relief from doing public works which would have been funded by appropriations
from the Treasury.
Charitable institutions, however, are not ipso facto entitled to a tax exemption. The
requirements for a tax exemption are specified by the law granting it. The power of
Congress to tax implies the power to exempt from tax. Congress can create tax
exemptions, subject to the constitutional provision that '[n]o law granting any tax
exemption shall be passed without the concurrence of a majority of all the Members
of Congress.' The requirements for a tax exemption are strictly construed against tl1e
taxpayer because an exemption restricts the collection of taxes necessary for the
existence of the government.
The Court in Lung Center declared that the Lung Center of the Philippines is a
charitable institution for the purpose of exemption from real property taxes. This
ruling uses the same premise as Hospital de San Juan and Jesus Sacred Heart
College which says that receiving income from paying patients does not destroy the
charitable nature of a hospital.
As a general principle, a charitable institution does not lose its character

as such and its exemption from taxes simply because it derives income
from paying patients, whether outpatient, or confined in the hospital, or
receives subsidies from the government, so long as the money received is
devoted or used altogether to the charitable object which it is intended to
achieve; and no money inures to the private benefit of the persons
managing or operating the institution.

For real property taxes, the incidental generation of income is permissible because
the test of exemption is the use of the property. The Constitution provides that
'[c]haritable institutions, churches and personages or convents appurtenant thereto,
mosques, non-profit cemeteries, and all lands, buildings, and improvements,
actually, directly, and exclusively used for religious, charitable, or educational
purposes shall be exempt from taxation.' The test of exemption is not strictly a
requirement on the intrinsic nature or character of the institution. The test requires
that the institution use property in a certain way, i.e., for a charitable purpose. Thus,
the Court held that the Lung Center of the Philippines did not lose its charitable
character when it used a portion of its lot for commercial purposes. The effect of
failing to meet the use requirement is simply to remove from the tax exemption that
portion of the property not devoted to charity.
The Constitution exempts charitable institutions only from real property taxes. In the
NIRC, Congress decided to extend the exemption to income taxes. However, the
way Congress crafted Section 30(E) of the NIRC is materially different from Section
28(3), Article VI of the Constitution. Section 30(E) of the NIRC defines the
corporation or association that is exempt from income tax. On the other hand,
Section 28(3), Article VI of the Constitution does not define a charitable institution,
but requires that the institution 'actually, directly and exclusively' use the property
for a charitable purpose.
Section 30(E) of the NIRC provides that a charitable institution must be:
(1) A non-stock corporation or association;
(2) Organized exclusively for charitable purposes;
(3) Operated exclusively for charitable purposes; and
(4) No part of its net income or asset shall belong to or inure to the benefit of any
member, organizer, officer or any specific person.
Thus, both the organization and operations of the charitable institution must be
devoted 'exclusively' for charitable purposes. The organization of the institution
refers to its corporate form, as shown by its articles of incorporation, by-laws and
other constitutive documents. Section 30(E) of the NIRC specifically requires that
the corporation or association be non-stock, which is defined by the Corporation
Code as 'one where no part of its income is distributable as dividends to its members,
trustees, or officers' and that any profit 'obtain[ed] as an incident to its operations
shall, whenever necessary or proper, be used tor the furtherance of the purpose or
purposes for which the corporation was organized.' However, under Lung Center,
any profit by a charitable institution must not only be plowed back 'whenever
necessary or proper,' but must be 'devoted or used altogether to the charitable object
which it is intended to achieve.'
The operations of the charitable institution generally refer to its regular activities.
Section 30(E) of the NIRC requires that these operations be exclusive to charity.
There is also a specific requirement that 'no part of [the] net income or asset shall
belong to or inure to the benefit of any member, organizer, officer or any specific
person.' The use of lands, buildings and improvements of the institution is but a part
of its operations.
There is no dispute that St. Luke's is organized as a non-stock and non profit
charitable institution. However, this does not automatically exempt St Luke's from
paying taxes. This only refers to the organization of St. Luke's. Even if St. Luke's
meets the test of charity, a charitable institution is not ipso facto tax exempt To be
exempt from real property taxes, Section 28(3), Article VI of the Constitution
requires that a charitable institution use the property 'actually, directly and
exclusively' for charitable purposes. To be exempt from income taxes, Section 30(E)
of the NIRC requires that a charitable institution must be 'organized and operated
exclusively' for charitable purposes. Likewise, to be exempt from income taxes,
Section 30(G) of the NIRC requires that the institution be 'operated exclusively' for
social welfare.
However, the last paragraph of Section 30 of the NIRC qualifies the words
'organized and operated exclusively' by providing that:
Notwithstanding the provisions in the preceding paragraphs, the income

of whatever kind and character of the foregoing organizations from any
of their properties, real or personal, or from any of their activities
conducted for profit regardless of the disposition made of such income,
shall be subject to tax imposed under this Code.

In short, the last paragraph of Section 30 provides that if a tax exempt charitable
institution conducts 'any' activity for profit, such activity is not tax exempt even as
its not-for-profit activities remain tax exempt. This paragraph qualifies the
requirements in Section 30(E) that the [n]on-stock corporation or association [must
be] organized and operated exclusively for . . . charitable . . . purposes . . . It likewise
qualifies the requirement in Section 30(G) that the civic organization must be
'operated exclusively' for the promotion of social welfare.

Thus, even if the charitable institution must be 'organized and operated exclusively'
for charitable purposes, it is nevertheless allowed to engage in 'activities conducted
for profit' without losing its tax exempt status for its not for profit activities. The
only consequence is that the 'income of whatever kind and character' of a charitable
institution 'from any of its activities conducted for profit, regardless of the
disposition made of such income, shall be subject to tax.' Prior to the introduction of
Section 27(B), the tax rate on such income from for profit activities was the ordinary
corporate rate under Section 27(A). With the introduction of Section 27(B), the tax
rate is now 10%.

In 1998, St. Luke's had total revenues of P1,730,367,965 from services to paying
patients. It cannot be disputed that a hospital which receives approximately P1.73
billion from paying patients is not an institution 'operated exclusively' for charitable
purposes. Clearly, revenues from paying patients are income received from 'activities
conducted for profit.' Indeed, St. Luke's admits that it derived profits from its paying
patients. St. Luke's declared P1,730,367,965 as 'Revenues from Services to Patients'
in contrast to its 'Free Services' expenditure of P218,187,498. In its Comment in
G.R. No. 195909, St. Luke's showed the following 'calculation' to support its claim
that 65.20% of its 'income after expenses was allocated to free or charitable services'
in 1998.

xxxx

In Lung Center, this Court declared:
'[e]xclusive' is defined as possessed and enjoyed to the exclusion of

others; debarred from participation or enjoyment; and 'exclusively' is
defined, 'in a manner to exclude; as enjoying a privilege exclusively.' ...
The words 'dominant use' or 'principal use' cannot be substituted for the
words 'used exclusively' without doing violence to the Constitution and
the law. Solely is synonymous with exclusively.
The Court cannot expand the meaning of the words 'operated exclusively' without
violating the NIRC. Services to paying patients are activities conducted for profit.
They cannot be considered any other way. There is a 'purpose to make profit over
and above the cost' of services. The P1.73 billion total revenues from paying patients
is not even incidental to St. Luke's charity expenditure of P218,187,498 for non-
paying patients.

St Luke's claims that its charity expenditure of P218,187,498 is 65.20% of its

operating income in 1998. However, if a part of the remaining 34.80% of the
operating income is reinvested in property, equipment or facilities used for services
to paying and non-paying patients, then it cannot be said that the income is 'devoted
or used altogether to the charitable object which it is intended to achieve.' The
income is plowed back to the corporation not entirely for charitable purposes, but for
profit as well. In any case, the last paragraph of Section 30 of the NIRC expressly
qualifies that income from activities for profit is taxable 'regardless of the disposition
made of such income.'

Jesus Sacred Heart College declared that there is no official legislative record
explaining the phrase 'any activity conducted for profit.' However, it quoted a
deposition of Senator Mariano Jesus Cuenco, who was a member of the Committee
of Conference for the Senate, which introduced the phrase 'or from any activity
conducted for profit.'

P. Cuando ha hablado de la Universidad de Santo Tomas que tiene un

hospital, no cree Vd. que es una actividad esencial dicho hospital para el
funcionamiento del colegio de medicina de medicina de dicha
universidad?

xxx xxx xxx

R. Si el hospital se limita a recibir enformos pobres, mi contestacion seria

afirmativa; pero considerando que el hospital tiene cuartos de pago, y a
los mismos generalmente van enformos de buena posicion social
economica, lo que se paga por estos enformos debe estar sujeto a 'income
tax', y es una de las razones que hemos tenido para insertar las palabras o
frase 'or from any activity conducted for profit.'

The question was whether having a hospital is essential to an educational institution

like the College of Medicine of the University of Santo Tomas. Senator Cuenco
answered that if the hospital has paid rooms generally occupied by people of good
economic standing, then it should be subject to income tax. He said that this was one
of the reasons Congress inserted the phrase 'or any activity conducted for profit.'
The question in Jesus Sacred Heart College involves an educational institution.

However, it is applicable to charitable institutions because Senator Cuenco's
response shows an intent to focus on the activities of charitable institutions.
Activities for profit should not escape the reach of taxation. Being a non-stock and
non-profit corporation does not, by this reason alone, completely exempt an
institution from tax. An institution cannot use its corporate form to prevent its
profitable activities from being taxed.
The Court finds that St. Luke's is a corporation that is not 'operated exclusively' for
charitable or social welfare purposes insofar as its revenues from paying patients are
C.Qncemed. This ruling is bacred not only on a strict interpretation of a provision
granting tax exemption, but also on the clear and plain text of Section 30(E) and (G).
Section 30(E) and (G) of the NIRC requires that an institution be 'operated
exclusively' for charitable or social welfare purposes to be completely exempt from
income tax. An institution tmder Section 30(E) or (G) does not lose its tax
exemption if it earns income from its for-profit activities. Such income from for-
profit activities, tmder the last paragraph of Section 30, is merely subject to income
tax, previously at the ordinary corporate rate but now at the preferential tO% rate
pursuant to Section 27(B).
A tax exemption is effectively a social subsidy granted by the State because an

exempt institution is spared from sharing in the expenses of government and yet
benefits from them. Tax exemptions for charitable institutions should therefore be
limited to institutions beneficial to the public and those which improve social
welfare. A profit-making entity should not be allowed to exploit this subsidy to the
detriment of the government and other taxpayers.
St. Luke's fails to meet the requirements under Section 30(E) and (G) of the NIRC to
be completely tax exempt from all its income. However, it remains a proprietary
non-profit hospital under Section 27(B) of the NIRC as long as it does not distribute
any of its profits to its members and such profits are reinvested pursuant to its
corporate purposes. St. Luke's, as a proprietary non-profit hospital, is entitled to the
preferential tax rate of 10% on its net income from its for-profit activities.
St. Luke's is therefore liable for deficiency income tax in 1998 under Section 27(B)
of the NIRC. However, St. Luke's has good reasons to rely on the letter dated 6 June
1990 by the BIR, which opined that St. Luke's is 'a corporation for purely charitable
and social welfare purposes' and thus exempt from income tax. In Michael J.
Lhuillier, Inc. v. Commissioner of Internal Revenue, the Court said that 'good faith
and honest belief that one is not subject to tax on the basis of previous interpretation
of government agencies tasked to implement the tax law, are sufficient justification
to delete the imposition of surcharges and interest.'[40]
A careful review of the pleadings reveals that there is no countervailing consideration for the
Court to revisit its aforequoted ruling in G.R. Nos. 195909 and 195960 (Commissioner of
Internal Revenue v. St. Luke's Medical Center, Inc.). Thus, under the doctrine of stare decisis,
which states that "[o]nce a case has been decided in one way, any other case involving exactly
the same point at issue xxx should be decided in the same manner,"[41] the Court finds that
SLMC is subject to 10% income tax insofar as its revenues from paying patients are concerned.
To be clear, for an institution to be completely exempt from income tax, Section 30(E) and (G)
of the 1997 NIRC requires said institution to operate exclusively for charitable or social welfare
purpose. But in case an exempt institution under Section 30(E) or (G) of the said Code earns
income from its for-profit activities, it will not lose its tax exemption. However, its income from
forprofit activities will be subject to income tax at the preferential 10% rate pursuant to Section
27(B) thereof.
SLMC is not liable for Compromise Penalty.
As to whether SLMC is liable for compromise penalty under Section 248(A) of the 1997 NIRC
for its alleged failure to file its quarterly income tax returns, this has also been resolved in G.R.
Nos. 195909 and 195960 (Commissioner of Internal Revenue v. St. Luke's Medical Center, Inc.),
[42] where the imposition of surcharges and interest under Sections 248[43] and 249[44] of the
1997 NIRC were deleted on the basis of good faith and honest belief on the part SLMC that it is
not subject to tax. Thus, following the ruling of the Court in the said case, SLMC is not liable to
pay compromise penalty under Section 248(A) of the 1997 NIRC.
The Petition is rendered moot by the payment made by SLMC on April 30, 2013.
However, in view of the payment of the basic taxes made by SLMC on April 30, 2013, the
instant Petition has become moot.
While the Court agrees with the CIR that the payment confirmation from the BIR presented by
SLMC is not a competent proof of payment as it does not indicate the specific taxable period the
said payment covers, the Court finds that the Certification issued by the Large Taxpayers
Service of the BIR dated May 27, 2013, and the letter from the BIR dated November 26, 2013
with attached Certification of Payment and application for abatement are sufficient to prove
payment especially since CIR never questioned the authenticity of these documents. In fact, in a
related case, G.R. No. 200688, entitled Commissioner of Internal Revenue v. St. Luke's Medical
Center, Inc.,[45] the Court dismissed the petition based on a letter issued by CIR confirming
SLMC's payment of taxes, which is the same letter submitted by SLMC in the instant case.
In fine, the Court resolves to dismiss the instant Petition as the same has been rendered moot by
the payment made by SLMC of the basic taxes for the taxable years 2005 and 2006, in the
amounts of P49,919,496.40 and P41,525,608.40, respectively.[46]
WHEREFORE, the Petition is hereby DISMISSED.
SO ORDERED.
Sereno, C.J., (Chairperson), Leonardo-De Castro, Perlas-Bernabe, and Caguioa, JJ., concur.
[1] Ty v. Banco Filipino Savings & Mortgage Bank, 511 Phil. 510, 520 (2005).
[2] Rollo, pp. 13-34.
[3]Id. at 39-51; penned by Associate Jvstice Lovell R. Bautista and concurred in by Presiding
Justice Ernesto D. Acosta and Associate Justices Juanito C. Castañeda. Jr., Caesar A. Casanova,
Olga Palanca-Enriquez, Esperanza R. Fabon-Victorino, Cielito N. Mindaro-Grulla, and Amelia
R. Cotangco-Manalastas; Associate Justice Erlinda P. Uy on leave.
[4]Id. at 52-55; penned by Associate Justice Lovell R. Bautista and concurred in by Presiding
Justice Ernesto D. Acosta and Associate Justices Juanito C. Castañeda, Jr., Caesar A. Casanova,
Olga Palanca-Enriquez, Esperanza R. Fabon-Victorino, Cielito N. Mindaro-Grulla, and Amelia
R. Cotangco-Manalastas; Associate Justice Erlinda P. Uy took no part.
[5] CTA rollo (Division), pp. 32-33.
[6] Id. at 34-35.
[7] SEC. 27. Rates of Income Tax on Domestic Corporations. -
xxxx
(8) Proprietary Educational Institutions and Hospitals. - Proprietary educational institutions

and hospitals which are non-profit shall pay a tax of ten percent (10%) on their taxable
income except those covered by Subsection (D) hereof: Provided, That if the gross income from
unrelated trade, business or other activity exceeds fifty percent (50%) of the total gross income
derived by such educational institutions or hospitals from all sources, the tax prescribed in
Subsection (A) hereof shall be imposed on the entire taxable income. For purposes of this
Subsection, the term 'unrelated trade, business or other activity means any trade, business or
other activity,' the conduct of which is not substantially related to the exercise or performance
by such educational insti1ution or hospital of its primary purpose or function. A 'proprietary
educational institution' is any private school maintained and administered by private individuals
or groups with an issued permit to operate from the Department of Education, Culture and
Sports (DECS), or the Commission on Higher Education (CHED). or the Technical Education
and Skills Development Authority (TESDA), as the case may be, in accordance with existing
laws and regulations. (Emphasis supplied)
[9]SEC. 30. Exemptions.from Tax on Corporations. - The following organizations shall not be
taxed under this Title in respect to income received by them as such:
xxxx
(E) Nonstock corporation or association organized and operated exclusively for religious,
charitable, scientific, athletic, or cultural purposes, or tor the rehabilitation of veterans, no
part of its net income or asset shall belong to or inure to the benefit of any member,
organizer, officer or any specific person; xxxx
(G) Civic league or organization not organized fur protit but operated exclusively for the
promotion of social welfare;
xxxx
Notwithstanding the pwvisions in the preceding paragraphs, the income of whatever kind and
character of the foregoing organizations from any of their properties, real or personal, or
from any of their activities conducted for profit regardless of the disposition made of such
income, shall be subject to tax imposed under this Code. (Emphasis supplied)
[11] Id. at 47-48.
[12] Id. at 1-31.
[13]Id. at 1059-1079; penned by Associate Justice Cielito N. Mindaro-Grulla and concurred in

by Associate Justices Juanito C. Castañeda, Jr. and Caesar A. Casanova.
[14] Id. at 1079.
[15] Id. at 1117-1125 (last page missing).
[16] CTA rollo (En Banc), pp. 1-8.
[17] Rollo, pp. 47-49.
[18] 695 Phil. 867 (2012).
[19] Id. at 895.
[20] Rollo, pp. 80-82.
[21] Id. at 83.
[22] Id. at 99-106.
[23] Id. at 112-116.
[24] Id. at 118.

[25] Id. at 119.
[26] Id. at 121.
[27] Id. at 123-129.
[28] G.R. No. 200688 (Notice), April 15, 2015.
[29] Rollo, pp. 186-193.
[30] Section 248. Civil Penalties. -
(A) There shall be imposed, in addition to the tax required to be paid, a penalty equivalent to
twenty-five percent (25%) of the amount due, in the following cases:
(1) Failure to file any return and pay the tax due thereon as required under the provisions of this
Code or rules and regulations on the date prescribed; or
(2) Unless otherwise authorized by the Commissioner, filing a return with an internal revenue
officer other than those with whom the return is required to be filed; or
(3) Failure to pay the deficiency tax within the time prescribed for its payment in the notice of
assessment; or
(4) Failure to pay the full or part of the amount of tax shown on any return required to be filed
under the provisions of this Code or rules and regulations, or the full amount oftax due for
which no return is required to be filed, on or before the date prescribed for its payment.
xxxx
[31] Rollo, p. 193.
[32] Id. at 193-194.
[33] Supra note 19.
[34] Rollo, pp. 150-155.
[35] Id. at 155-156.
[36] Supra note 19.
[37] Rollo, pp. 158-160.

[38] Id. at 160-162.
[39] Supra note 19.
[40] Id. at 885-895.
[41]
Chinese Young Men's Christian Association of the Philippine Islands v. Remington Steel
Corporation, 573 Phil. 320, 337 (2008).
[42] Supra note 19.
[43] Section 248. Civil Penalties.
(A) There shall be imposed, in addition to the tax required to be paid, a penalty equivalent to
twenty-five percent (25%) of the amount due, in the following cases:
(1) Failure to file any return and pay the tax due thereon as required under the provisions
of this Code or rules and regulations on the date prescribed; or
(2) Unless otherwise authorized by the Commissioner, filing a return with an internal
revenue officer other than those with whom the return is required to be filed; or
(3) Failure to pay the deficiency tax within the time prescribed for its payment in the
notice of assessment; or
(4) Failure to pay the full or part of the amount of tax shown on any return required to be
filed under the provisions of this Code or rules and regulations, or the full amount of tax
due for which no return is required to be filed, on or before the date prescribed for its
payment.
(B) In case of willful neglect to file the return within the period prescribed by this Code or by
rules and regulations, or in case a false or fraudulent return is willfully made, the penalty to be
imposed shall be fifty percent (50%) of the tax or of the deficiency tax, in case, any payment
has been made on the basis of such return before the discovery of the falsity or fraud: Provided,
That a substantial underdeclaration of taxable sales, receipts or income, or a substantial
overstatement of deductions, as determined by the Commissioner pursuant to the rules and
regulations to be promulgated by the Secretary of Finance, shall constitute prima facie evidence
of a false or fraudulent return: Provided, further, That failure to report sales, receipts or income
in an amount exceeding thirty percent (30%) of that declared per return, and a claim of
deductions in an amount exceeding (30%) of actual deductions, shall render the taxpayer liable
for substantial underdeclaration of sales, receipts or income or for overstatement of deductions,
as mentioned herein.
[44] Section 249. Interest.
(A) In General. - There shall be assessed and collected on any unpaid amount oftax, interest at
the rate of twenty percent (20%) per annwn, or such higher rate as may be prescribed by rules
and regulations, from the date prescribed for payment until the amount is fully paid.
(B) Deficiency Interest. - Any deficiency in the tax due, as the term is defined in this Code, shall
be subject to the interest prescribed in Subsection (A) hereof, which interest shall be assessed
and collected from the date prescribed for its payment until the full payment thereof.
(C) Delinquency Interest. - In case of failure to pay:
(1) The amount of the tax due on any return to be filed, or
(2) The amount of the tax due for which no return is required, or
(3) A deficiency tax, or any surcharge or interest thereon on the due date appearing in the
notice and demand of the Commissioner, there shall be assessed and collected on the
unpaid amount, interest at the rate prescribed in Subsection (A) hereof until the amount is
fully paid, which interest shall form part of the tax.
(D) Interest on Extended Payment. - If any person required to pay the tax is qualified and elects
to pay the tax on installment under the provisions of this Code, but fails to pay the tax or any
installment hereof, or any part of such amount or installment on or before the date prescribed for
its payment, or where the Commissioner has authorized an extension of time within which to
pay a tax or a deficiency tax or any part thereof, there shall be assessed and collected interest at
the rate hereinabove prescribed on the tax or deficiency tax or any part thereof unpaid from the
date of notice and demand until it is paid.
[45] Supra note 28.
[46] Rollo, p. 120.

EN BANC
[ G.R. 158540, September 20, 2005 ]
SOUTHERN CROSS CEMENT CORPORATION VS. PHIL. CEMENT
MANUFACTURERS CORP., ET AL.
Sirs/Mesdames:
Quoted hereunder, for your information, is a resolution of this Court dated SEP 20 2005.

G.R. No. 158540 (Southern Cross Cement Corporation vs. Phil. Cement Manufacturers Corp.,
et al.)

For resolution is a Motion for Clarification dated 30 August 2005 filed by petitioner Southern
Cross Cement Corporation wherein petitioner notes that the Resolution dated 3 August 2005,
which denied the Motions for Reconsideration filed by respondents, makes four references to
the Decision of the DTI Secretary dated 5 August 2003. Petitioner submits that the decision of
the DTI Secretary is actually dated 25 June 2003.

The submission is well-taken.

WHEREFORE, the Court hereby amends pages 87-89 of the Resolution dated 3 August 2005 to
read as follows:

Philcemcor argues that the granting of Southern Cross's Petition should not
necessarily lead to the voiding of the Decision of the DTI Secretary dated 25 June
2003 imposing the general safeguard measures. For Philcemcor, the availability of
appeal to the CTA as an available and adequate remedy would have made the Court
of Appeals' Decision merely erroneous or irregular, but not void. Moreover. the said
Decision merely required the DTI Secretary to render a decision, which could have
very well been a decision not to impose a safeguard measure; thus, it could not be
said that the annulled decision resulted from the judgment of the Court of Appeals.

The Court of Appeals' Decision was annulled precisely because the appellate court
did not have the power to rule on the petition in the first place. Jurisdiction is
necessarily the power to decide a case, and a court which does not have the power to
adjudicate a case is one that is bereft of jurisdiction. We find no reason to disturb our
earlier finding that the Court of Appeals' Decision is null and void.

At the same time, the Court in its Decision paid particular heed to the peculiarities
attaching to the 25 June 2003 Decision of the DTI Secretary. In the DTI Secretary's
Decision, he expressly states that as a result of the Court of Appeals' Decision, "there
is no legal impediment for the Secretary to decide on the application." Yet the truth
remained that there was a legal impediment, namely, that the decision of the
appellate court was not yet final and executory. Moreover, it was declared null and
void, and since the DTI Secretary expressly denominated the Court of Appeals'
Decision as his basis for deciding to impose the safeguard measures, the latter
decision must be voided as well. Otherwise put without the Court of Appeals'
Decision, the DTI Secretary's Decision of 25 June 2003 would not have been
rendered as well.
Accordingly, the Court reaffirms as a nullity the DTI Secretary's Decision dated 25
June 2003. As a necessary consequence, no further action can be taken on
Philcemcor's Petition for Extension of the Safeguard Measure. Obviously, if the
imposition of the general safeguard measure is void as we declared it to be any
extension thereof should likewise be fruitless. The proper remedy instead is to file a
new application for the imposition of safeguard measures, subject to the conditions
prescribed by the SMA. Should this step be eventually availed of, it is only hoped
that the parties involved would content themselves in observing the proper
procedure, instead of making a mockery of the rule of law.
Very truly yours,
(Sgd.) MA. LUISA D. VILLARAMA

Clerk of Court

776 Phil. 119
SECOND DIVISION
[ G.R. No. 169507, January 11, 2016 ]
AIR CANADA, PETITIONER, VS. COMMISSIONER OF INTERNAL
REVENUE, RESPONDENT.

DECISION
LEONEN, J.:
An offline international air carrier selling passage tickets in the Philippines, through a general
sales agent, is a resident foreign corporation doing business in the Philippines. As such, it is
taxable under Section 28(A)(1), and not Section 28(A)(3) of the 1997 National Internal Revenue
Code, subject to any applicable tax treaty to which the Philippines is a signatory. Pursuant to
Article 8 of the Republic of the Philippines-Canada Tax Treaty, Air Canada may only be
imposed a maximum tax of 1 1/2% of its gross revenues earned from the sale of its tickets in the
Philippines.

This is a Petition for Review[1] appealing the August 26, 2005 Decision[2] of the Court of Tax
Appeals En Banc, which in turn affirmed the December 22, 2004 Decision[3] and April 8, 2005
Resolution[4] of the Court of Tax Appeals First Division denying Air Canada's claim for refund.

Air Canada is a "foreign corporation organized and existing under the laws of Canada[.]"[5] On
April 24, 2000, it was granted an authority to operate as an offline carrier by the Civil
Aeronautics Board, subject to certain conditions, which authority would expire on April 24,
2005.[6] "As an off-line carrier, [Air Canada] does not have flights originating from or coming
to the Philippines [and does not] operate any airplane [in] the Philippines[.]"[7]

On July 1, 1999, Air Canada engaged the services of Aerotel Ltd., Corp. (Aerotel) as its general
sales agent in the Philippines.[8] Aerotel "sells [Air Canada's] passage documents in the
Philippines."[9]

For the period ranging from the third quarter of 2000 to the second quarter of 2002, Air Canada,
through Aerotel, filed quarterly and annual income tax returns and paid the income tax on Gross
Philippine Billings in the total amount of P5,185,676.77,[10] detailed as follows:

Applicable Quarter[/]Year Date Filed/Paid Amount of Tax

3rd Qtr 2000 November 29,2000 P 395,165.00
Annual ITR 2000 April 16, 2001 381,893.59
1st Qtr 2001 May 30, 2001 522,465.39
2nd Qtr 2001 August 29, 2001 1,033,423.34
3rd Qtr 2001 November 29, 2001 765,021.28
Annual ITR 2001 April 15, 2002 328,193.93
1st Qtr 2002 May 30,2002 594,850.13
2nd Qtr 2002 August 29,2002 1,164,664.11
TOTAL P 5,185,676.77[11]
On November 28, 2002, Air Canada filed a written claim for refund of alleged erroneously paid
income taxes amounting to P5,185,676.77 before the Bureau of Internal Revenue,[12] Revenue
District Office No. 47-East Makati.[13] It found basis from the revised definition[14] of Gross
Philippine Billings under Section 28(A)(3)(a) of the 1997 National Internal Revenue Code:

SEC. 28. Rates of Income Tax on Foreign Corporations. -

(A) Tax on Resident Foreign Corporations. -

....
(3) International Carrier. - An international carrier doing business in the Philippines

shall pay a tax of two and one-half percent (2 1/2%) on its 'Gross Philippine Billings'
as defined hereunder:

(a) International Air Carrier. - 'Gross Philippine Billings' refers to the amount of
gross revenue derived from carriage of persons, excess baggage, cargo and mail
originating from the Philippines in a continuous and uninterrupted flight,
irrespective of the place of sale or issue and the place of payment of the ticket or
passage document: Provided, That tickets revalidated, exchanged and/or indorsed to
another international airline form part of the Gross Philippine Billings if the
passenger boards a plane in a port or point in the Philippines: Provided, further, That
for a flight which originates from the Philippines, but transshipment of passenger
takes place at any port outside the Philippines on another airline, only-the aliquot
portion of the cost of the ticket corresponding to the leg flown from the Philippines
to the point of transshipment shall form part of Gross Philippine Billings. (Emphasis
supplied)
To prevent the running of the prescriptive period, Air Canada filed a Petition for Review before
the Court of Tax Appeals on November 29, 2002.[15] The case was docketed as C.T.A. Case No.
6572.[16]

On December 22, 2004, the Court of Tax Appeals First Division rendered its Decision denying
the Petition for Review and, hence, the claim for refund.[17] It found that Air Canada was
engaged in business in the Philippines through a local agent that sells airline tickets on its
behalf. As such, it should be taxed as a resident foreign corporation at the regular rate of 32%.
[18]Further, according to the Court of Tax Appeals First Division, Air Canada was deemed to
have established a "permanent establishment"[19] in the Philippines under Article V(2)(i) of the
Republic of the Philippines-Canada Tax Treaty[20] by the appointment of the local sales agent,
"in which [the] petitioner uses its premises as an outlet where sales of [airline] tickets are
made[.]"[21]
Air Canada seasonably filed a Motion for Reconsideration, but the Motion was denied in the
Court of Tax Appeals First Division's Resolution dated April 8, 2005 for lack of merit.[22] The
First Division held that while Air Canada was not liable for tax on its Gross Philippine Billings
under Section 28(A)(3), it was nevertheless liable to pay the 32% corporate income tax on
income derived from the sale of airline tickets within the Philippines pursuant to Section 28(A)
(1).[23]
On May 9, 2005, Air Canada appealed to the Court of Tax Appeals En Bane.[24] The appeal was
docketed as CTAEB No. 86.[25]
In the Decision dated August 26, 2005, the Court of Tax Appeals En Bane affirmed the findings
of the First Division.[26] The En Banc ruled that Air Canada is subject to tax as a resident
foreign corporation doing business in the Philippines since it sold airline tickets in the
Philippines.[27] The Court of Tax Appeals En Bane disposed thus:
WHEREFORE, premises considered, the instant petition is hereby DENIED DUE

COURSE, and accordingly, DISMISSED for lack of merit.[28]
Hence, this Petition for Review[29] was filed. The issues for our consideration are:

First, whether petitioner Air Canada, as an offline international carrier selling passage
documents through a general sales agent in the Philippines, is-a resident foreign corporation
within the meaning of Section 28(A)(1) of the 1997 National Internal Revenue Code;

Second, whether petitioner Air Canada is subject to the 21/2% tax on Gross Philippine Billings
pursuant to Section 28(A)(3). If not, whether an offline international carrier selling passage
documents through a general sales agent can be subject to the regular corporate income tax of
32%[30] on taxable income pursuant to Section 28(A)(1);

Third, whether the Republic of the Philippines-Canada Tax Treaty applies, specifically:

a. Whether the Republic of the Philippines-Canada Tax Treaty is enforceable;

b. Whether the appointment of a local general sales agent in the Philippines falls under the
definition of "permanent establishment" under Article V(2)(i) of the Republic of the
Philippines-Canada Tax Treaty; and
Lastly, whether petitioner Air Canada is entitled to the refund of P5,185,676.77 pertaining
allegedly to erroneously paid tax on Gross Philippine Billings from the third quarter of 2000 to
the second quarter of 2002.
Petitioner claims that the general provision imposing the regular corporate income tax on
resident foreign corporations provided under Section 28(A)(1) of the 1997 National Internal
Revenue Code does not apply to "international carriers,"[31] which are especially classified and
taxed under Section 28(A)(3).[32] It adds that the fact that it is no longer subject to Gross
Philippine Billings tax as ruled in the assailed Court of Tax Appeals Decision "does not render it
ipso facto subject to 32% income tax on taxable income as a resident foreign corporation."[33]
Petitioner argues that to impose the 32% regular corporate income tax on its income would
violate the Philippine government's covenant under Article VIII of the Republic of the
Philippines-Canada Tax Treaty not to impose a tax higher than 1 Vi% of the carrier's gross
revenue derived from sources within the Philippines.[34] It would also allegedly result in
"inequitable tax treatment of on-line and off-line international air carriers[.]"[35]
Also, petitioner states that the income it derived from the sale of airline tickets in the Philippines
was income from services and not income from sales of personal property.[36] Petitioner cites
the deliberations of the Bicameral Conference Committee on House Bill No. 9077 (which
eventually became the 1997 National Internal Revenue Code), particularly Senator Juan Ponce
Enrile's statement,[37] to reveal the "legislative intent to treat the revenue derived from air
carriage as income from services, and that the carriage of passenger or cargo as the activity that
generates the income."[38] Accordingly, applying the principle on the situs of taxation in
taxation of services, petitioner claims that its income derived "from services rendered outside
the Philippines [was] not subject to Philippine income taxation."[39]
Petitioner further contends that by the appointment of Aerotel as its general sales agent,
petitioner cannot be considered to have a "permanent establishment"[40] in the Philippines
pursuant to Article V(6) of the Republic of the Philippines-Canada Tax Treaty.[41] It points out
that Aerotel is an "independent general sales agent that acts as such for ... other international
airline companies in the ordinary course of its business."[42] Aerotel sells passage tickets on
behalf of petitioner and receives a commission for its services.[43] Petitioner states that even the
Bureau of Internal Revenue— through VAT Ruling No. 003-04 dated February 14, 2004—has
conceded that an offline international air carrier, having no flight operations to and from the
Philippines, is not deemed engaged in business in the Philippines by merely appointing a
general sales agent.[44] Finally, petitioner maintains that its "claim for refund of erroneously
paid Gross Philippine Billings cannot be denied on the ground that [it] is subject to income tax
under Section 28 (A) (I)"[45] since it has not been assessed at all by the Bureau of Internal
Revenue for any income tax liability.[46]
On the other hand, respondent maintains that petitioner is subject to the 32% corporate income
tax as a resident foreign corporation doing business in the Philippines. Petitioner's total payment
of P5,185,676.77 allegedly shows that petitioner was earning a sizable income from the sale of
its plane tickets within the Philippines during the relevant period.[47] Respondent further points
out that this court in Commissioner of Internal Revenue v. American Airlines, Inc.,[48] which in
turn cited the cases involving the British Overseas Airways Corporation and Air India, had
already settled that "foreign airline companies which sold tickets in the Philippines through their
local agents . . . [are] considered resident foreign corporations engaged in trade or business in
the country."[49] It also cites Revenue Regulations No. 6-78 dated April 25, 1978, which defined
the phrase "doing business in the Philippines" as including "regular sale of tickets in the
Philippines by offline international airlines either by themselves or through their agents."[50]
Respondent further contends that petitioner is not entitled to its claim for refund because the
amount of P5,185,676.77 it paid as tax from the third quarter of 2000 to the second quarter of
2001 was still short of the 32% income tax due for the period.[51] Petitioner cannot allegedly
claim good faith in its failure to pay the right amount of tax since the National Internal Revenue
Code became operative on January 1, 1998 and by 2000, petitioner should have already been
aware of the implications of Section 28(A)(3) and the decided cases of this court's ruling on the
taxability of offline international carriers selling passage tickets in the Philippines.[52]
At the outset, we affirm the Court of Tax Appeals' ruling that petitioner, as an offline
international carrier with no landing rights in the Philippines, is not liable to tax on Gross
Philippine Billings under Section 28(A)(3) of the 1997 National Internal Revenue Code:


....
(3) International Carrier. - An international carrier doing business in the Philippines

shall pay a tax of two and one-half percent (2 1/2%) on its 'Gross Philippine
Billings' as defined hereunder:

(a) International Air Carrier. - 'Gross Philippine Billings' refers to the amount of
gross revenue derived from carriage of persons, excess baggage, cargo and mail
originating from the Philippines in a continuous and uninterrupted flight,
irrespective of the place of sale or issue and the place of payment of the ticket or
passage document: Provided, That tickets revalidated, exchanged and/or indorsed to
another international airline form part of the Gross Philippine Billings if the
passenger boards a plane in a port or point in the Philippines: Provided, further, That
for a flight which originates from the Philippines, but transshipment of passenger
takes place at any port outside the Philippines on another airline, only the aliquot
portion of the cost of the ticket corresponding to the leg flown from the Philippines
to the point of transshipment shall form part of Gross Philippine Billings. (Emphasis
supplied)

Under the foregoing provision, the tax attaches only when the carriage of persons, excess
baggage, cargo, and mail originated from the Philippines in a continuous and uninterrupted
flight, regardless of where the passage documents were sold.
Not having flights to and from the Philippines, petitioner is clearly not liable for the Gross
Philippine Billings tax.
II
Petitioner, an offline carrier, is a resident foreign corporation for income tax purposes. Petitioner
falls within the definition of resident foreign corporation under Section 28(A)(1) of the 1997
National Internal Revenue Code, thus, it may be subject to 32%[53] tax on its taxable income:


(1) In General. - Except as otherwise provided in this Code, a corporation

organized, authorized, or existing under the laws of any foreign country, engaged
in trade or business within the Philippines, shall be subject to an income tax
equivalent to thirty-five percent (35%) of the taxable income derived in the
preceding taxable year from all sources within the Philippines: Provided, That
effective January 1, 1998, the rate of income tax shall be thirty-four percent (34%);
effective January 1, 1999, the rate shall be thirty- three percent (33%); and effective
January 1, 2000 and thereafter, the rate shall be thirty-two percent (32%[54]).
(Emphasis supplied)
The definition of "resident foreign corporation" has not substantially changed throughout the
amendments of the National Internal Revenue Code. All versions refer to "a foreign corporation
engaged in trade or business within the Philippines."

Commonwealth Act No. 466, known as the National Internal Revenue Code and approved on
June 15, 1939, defined "resident foreign corporation" as applying to "a foreign corporation
engaged in trade or business within the Philippines or having an office or place of business
therein."[55]

Section 24(b)(2) of the National Internal Revenue Code, as amended by Republic Act No. 6110,
approved on August 4, 1969, reads:

Sec. 24. Rates of tax on corporations. — . . .

(b) Tax on foreign corporations. — . . .

(2) Resident corporations. — A corporation organized, authorized, or existing under

the laws of any foreign country, except a foreign life insurance company, engaged in
trade or business within the Philippines, shall be taxable as provided in subsection
(a) of this section upon the total net income received in the preceding taxable year
from all sources within the Philippines.[56] (Emphasis supplied)
Presidential Decree No. 1158-A took effect on June 3, 1977 amending certain sections of the
1939 National Internal Revenue Code. Section 24(b)(2) on foreign resident corporations was
amended, but it still provides that "[a] corporation organized, authorized, or existing under the
laws of any foreign country, engaged in trade or business within the Philippines, shall be
taxable as provided in subsection (a) of this section upon the total net income received in the
preceding taxable year from all sources within the Philippines[.]"[57]

As early as 1987, this court in Commissioner of Internal Revenue v. British Overseas Airways
Corporation[58] declared British Overseas Airways Corporation, an international air carrier with
no landing rights in the Philippines, as a resident foreign corporation engaged in business in the
Philippines through its local sales agent that sold and issued tickets for the airline company.[59]
This court discussed that:

There is no specific criterion as to what constitutes "doing" or "engaging in" or

"transacting" business. Each case must be judged in the light of its peculiar
environmental circumstances. The term implies a continuity of commercial dealings
and arrangements, and contemplates, to that extent, the performance of acts or
works or the exercise of some of the functions normally incident to, and in
progressive prosecution of commercial gain or for the purpose and object of the
business organization. "In order that a foreign corporation may be regarded as doing
business within a State, there must be continuity of conduct and intention to
establish a continuous business, such as the appointment of a local agent, and not
one of a temporary character. ["]
BOAC, during the periods covered by the subject-assessments, maintained a general

sales agent in the Philippines. That general sales agent, from 1959 to 1971, "was
engaged in (1) selling and issuing tickets; (2) breaking down the whole trip into
series of trips — each trip in the series corresponding to a different airline company;
(3) receiving the fare from the whole trip; and (4) consequently allocating to the
various airline companies on the basis of their participation in the services rendered
through the mode of interline settlement as prescribed by Article VI of the
Resolution No. 850 of the IATA Agreement." Those activities were in exercise of the
functions which are normally incident to, and are in progressive pursuit of, the
purpose and object of its organization as an international air carrier. In fact, the
regular sale of tickets, its main activity, is the very lifeWood of the airline business,
the generation of sales being the paramount objective. There should be no doubt then
that BOAC was "engaged in" business in the Philippines through a local agent
during the period covered by the assessments. Accordingly, it is a resident foreign
corporation subject to tax upon its total net income received in the preceding taxable
year from all sources within the Philippines.[60] (Emphasis supplied, citations
omitted)

Republic Act No. 7042 or the Foreign Investments Act of 1991 also provides guidance with its
definition of "doing business" with regard to foreign corporations. Section 3(d) of the law
enumerates the activities that constitute doing business:
d. the phrase "doing business" shall include soliciting orders, service contracts,
opening offices, whether called "liaison" offices or branches; appointing
representatives or distributors domiciled in the Philippines or who in any calendar
year stay in the country for a period or periods totalling one hundred eighty (180)
days or more; participating in the management, supervision or control of any
domestic business, firm, entity or corporation in the Philippines; and any other act
or acts that imply a continuity of commercial dealings or arrangements, and
contemplate to that extent the performance of acts or works, or the exercise of
some of the functions normally incident to, and in progressive prosecution of,
commercial gain or of the purpose and object of the business organization:
Provided, however, That' the phrase "doing business" shall not be deemed to include
mere investment as a shareholder by a foreign entity in domestic corporations duly
registered to do business, and/or the exercise of rights as such investor; nor having a
nominee director or officer to represent its interests in such corporation; nor
appointing a representative or distributor domiciled in the Philippines which
transacts business in its own name and for its own account[.][61] (Emphasis
supplied)
While Section 3(d) above states that "appointing a representative or distributor domiciled in the
Philippines which transacts business in its own name and for its own account" is not considered
as "doing business," the Implementing Rules and Regulations of Republic Act No. 7042
clarifies that "doing business" includes "appointing representatives or distributors, operating
under full control of the foreign corporation, domiciled in the Philippines or who in any
calendar year stay in the country for a period or periods totaling one hundred eighty (180) days
or more[.]"[62]

An offline carrier is "any foreign air carrier not certificated by the [Civil Aeronautics] Board,
but who maintains office or who has designated or appointed agents or employees in the
Philippines, who sells or offers for sale any air transportation in behalf of said foreign air carrier
and/or others, or negotiate for, or holds itself out by solicitation, advertisement, or otherwise
sells, provides, furnishes, contracts, or arranges for such transportation."[63]

"Anyone desiring to engage in the activities of an off-line carrier [must] apply to the [Civil
Aeronautics] Board for such authority."[64] Each offline carrier must file with the Civil
Aeronautics Board a monthly report containing information on the tickets sold, such as the
origin and destination of the passengers, carriers involved, and commissions received.[65]

Petitioner is undoubtedly "doing business" or "engaged in trade or business" in the Philippines.

Aerotel performs acts or works or exercises functions that are incidental and beneficial to the
purpose of petitioner's business. The activities of Aerotel bring direct receipts or profits to
petitioner.[66] There is nothing on record to show that Aerotel solicited orders alone and for its
own account and without interference from, let alone direction of, petitioner. On the contrary,
Aerotel cannot "enter into any contract on behalf of [petitioner Air Canada] without the express
written consent of [the latter,]"[67] and it must perform its functions according to the standards
required by petitioner.[68] Through Aerotel, petitioner is able to engage in an economic activity
in the Philippines.
Further, petitioner was issued by the Civil Aeronautics Board an authority to operate as an
offline carrier in the Philippines for a period of five years, or from April 24, 2000 until April 24,
2005.[69]
Petitioner is, therefore, a resident foreign corporation that is taxable on its income derived from
sources within the Philippines. Petitioner's income from sale of airline tickets, through Aerotel,
is income realized from the pursuit of its business activities in the Philippines.
III
However, the application of the regular 32% tax rate under Section 28(A)(1) of the 1997
National Internal Revenue Code must consider the existence of an effective tax treaty between
the Philippines and the home country of the foreign air carrier.
In the earlier case of South African Airways v. Commissioner of Internal Revenue,[70] this court
held that Section 28(A)(3)(a) does not categorically exempt all international air carriers from the
coverage of Section 28(A)(1). Thus, if Section 28(A)(3)(a) is applicable to a taxpayer, then the
general rule under Section 28(A)(1) does not apply. If, however, Section 28(A)(3)(a) does not
apply, an international air carrier would be liable for the tax under Section 28(A)(1).[71]
This court in South African Airways declared that the correct interpretation of these provisions
is that: "international air carrier[s] maintaining] flights to and from the Philippines . . . shall be
taxed at the rate of 21/2% of its Gross Philippine Billings[;] while international air carriers that
do not have flights to and from the Philippines but nonetheless earn income from other activities
in the country [like sale of airline tickets] will be taxed at the rate of 32% of such [taxable]
income."[72]
In this case, there is a tax treaty that must be taken into consideration to determine the proper
tax rate.
A tax treaty is an agreement entered into between sovereign states "for purposes of eliminating
double taxation on income and capital, preventing fiscal evasion, promoting mutual trade and
investment, and according fair and equitable tax treatment to foreign residents or nationals."[73]
Commissioner of Internal Revenue v. S.C. Johnson and Son, Inc.[74] explained the purpose of a
tax treaty:
The purpose of these international agreements is to reconcile the national fiscal
legislations of the contracting parties in order to help the taxpayer avoid
simultaneous taxation in two different jurisdictions. More precisely, the tax
conventions are drafted with a view towards the elimination of international
juridical double taxation, which is defined as the imposition of comparable taxes in
two or more states on the same taxpayer in respect of the same subject matter and for
identical periods.
The apparent rationale for doing away with double taxation is to encourage the free
flow of goods and services and the movement of capital, technology and persons
between countries, conditions deemed vital in creating robust and dynamic
economies. Foreign investments will only thrive in a fairly predictable and
reasonable international investment climate and the protection against double
taxation is crucial in creating such a climate.[75] (Emphasis in the original, citations
omitted)
Observance of any treaty obligation binding upon the government of the Philippines is anchored
on the constitutional provision that the Philippines "adopts the generally accepted principles of
international law as part of the law of the land[.]" [76] Pacta sunt servanda is a fundamental
international law principle that requires agreeing parties to comply with their treaty obligations
in good faith.[77]

Hence, the application of the provisions of the National Internal Revenue Code must be subject
to the provisions of tax treaties entered into by the Philippines with foreign countries.

In Deutsche Bank AG Manila Branch v. Commissioner of Internal Revenue,[78] this court

stressed the binding effects of tax treaties. It dealt with the issue of "whether the failure to
strictly comply with [Revenue Memorandum Order] RMO No. 1-2000[79] will deprive persons
or corporations of the benefit of a tax treaty."[80] Upholding the tax treaty over the
administrative issuance, this court reasoned thus:

Our Constitution provides for adherence to the general principles of international

law as part of the law of the land. The time-honored international principle of pacta
sunt servanda demands the performance in good faith of treaty obligations on the
part of the states that enter into the agreement. Every treaty in force is binding upon
the parties, and obligations under the treaty must be performed by them in good
faith. More importantly, treaties have the force and effect of law in this jurisdiction.

Tax treaties are entered into "to reconcile the national fiscal legislations of the
contracting parties and, in turn, help the taxpayer avoid simultaneous taxations in
two different jurisdictions." CIR v. S.C. Johnson and Son, Inc. further clarifies that
"tax conventions are drafted with a view towards the elimination of international
juridical double taxation, which is defined as the imposition of comparable taxes in
two or more states on the same taxpayer in respect of the same subject matter and for
identical periods. The apparent rationale for doing away with double taxation is to
encourage the free flow of goods and services and the movement of capital,
technology and persons between countries, conditions deemed vital in creating
robust and dynamic economies. Foreign investments will only thrive in a fairly
predictable and reasonable international investment climate and the protection
against double taxation is crucial in creating such a climate." Simply put, tax treaties
are entered into to minimize, if not eliminate the harshness of international juridical
double taxation, which is why they are also known as double tax treaty or double tax
agreements.
"A state that has contracted valid international obligations is bound to make in its
legislations those modifications that may be necessary to ensure the fulfillment of the
obligations undertaken. " Thus, laws and issuances must ensure that the reliefs
granted under tax treaties are accorded to the parties entitled thereto. The BIR must
not impose additional requirements that would negate the availment of the reliefs
provided for under international agreements. More so, when the RP-Germany Tax
Treaty does not provide for any pre-requisite for the availment of the benefits under
said agreement.
....
Bearing in mind the rationale of tax treaties, the period of application for the
availment of tax treaty relief as required by RMO No. 1 -2000 should not operate to
divest entitlement to the relief as it would constitute a violation of the duty required
by good faith in complying with a tax treaty. The denial of the availment of tax relief
for the failure of a taxpayer to apply within the prescribed period under the
administrative issuance would impair the value of the tax treaty. At most, the
application for a tax treaty relief from the BIR should merely operate to confirm the
entitlement of the taxpayer to the relief.
The obligation to comply with a tax treaty must take precedence over the objective
of RMO No. 1-2000. Logically, noncompliance with tax treaties has negative
implications on international relations, and unduly discourages foreign investors.
While the consequences sought to be prevented by RMO No. 1-2000 involve an
administrative procedure, these may be remedied through other system management
processes, e.g., the imposition of a fine or penalty. But we cannot totally deprive
those who are entitled to the benefit of a treaty for failure to strictly comply with an
administrative issuance requiring prior application for tax treaty relief.[81] (Emphasis
supplied, citations omitted)
On March 11, 1976, the representatives[82] for the government of the Republic of the
Philippines and for the government of Canada signed the Convention between the Philippines
and Canada for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with
Respect to Taxes on Income (Republic of the Philippines-Canada Tax Treaty). This treaty
entered into force on December 21, 1977.

Article V[83] of the Republic of the Philippines-Canada Tax Treaty defines "permanent
establishment" as a "fixed place of business in which the business of the enterprise is wholly or
partly carried on."[84]
Even though there is no fixed place of business, an enterprise of a Contracting State is deemed
to have a permanent establishment in the other Contracting State if under certain conditions
there is a person acting for it.
Specifically, Article V(4) of the Republic of the Philippines-Canada Tax Treaty states that "[a]
person acting in a Contracting State on behalf of an enterprise of the other Contracting State
(other than an agent of independent status to whom paragraph 6 applies) shall be deemed to be a
permanent establishment in the first-mentioned State if . . . he has and habitually exercises in
that State an authority to conclude contracts on behalf of the enterprise, unless his activities are
limited to the purchase of goods or merchandise for that enterprise[.]" The provision seems to
refer to one who would be considered an agent under Article 1868[85] of the Civil Code of the
Philippines.
On the other hand, Article V(6) provides that "[a]n enterprise of a Contracting State shall not be
deemed to have a permanent establishment in the other Contracting State merely because it
carries on business in that other State through a broker, general commission agent or any other
agent of an independent status, where such persons are acting in the ordinary course of their
business."
Considering Article XV[86] of the same Treaty, which covers dependent personal services, the
term "dependent" would imply a relationship between the principal and the agent that is akin to
an employer-employee relationship.
Thus, an agent may be considered to be dependent on the principal where the latter exercises
comprehensive control and detailed instructions over the means and results of the activities of
the agent.[87]
Section 3 of Republic Act No. 776, as amended, also known as The Civil Aeronautics Act of the
Philippines, defines a general sales agent as "a person, not a bonafide employee of an air carrier,
who pursuant to an authority from an airline, by itself or through an agent, sells or offers for sale
any air transportation, or negotiates for, or holds himself out by solicitation, advertisement or
otherwise as one who sells, provides, furnishes, contracts or arranges for, such air
transportation."[88] General sales agents and their property, property rights, equipment,
facilities, and franchise are subject to the regulation and control of the Civil Aeronautics Board.
[89] A permit or authorization issued by the Civil Aeronautics Board is required before a general
sales agent may engage in such an activity.[90]
Through the appointment of Aerotel as its local sales agent, petitioner is deemed to have created
a "permanent"establishment" in the Philippines as defined under the Republic of the
Philippines-Canada Tax Treaty.
Petitioner appointed Aerotel as its passenger general sales agent to perform the sale of
transportation on petitioner and handle reservations, appointment, and supervision of
International Air Transport Association-approved and petitioner-approved sales agents,
including the following services:
ARTICLE 7

GSA SERVICES
The GSA [Aerotel Ltd., Corp.] shall perform on behalf of AC [Air Canada] the
following services:

a) Be the fiduciary of AC and in such capacity act solely and entirely for the benefit
of AC in every matter relating to this Agreement;
....
c) Promotion of passenger transportation on AC;

....
e) Without the need for endorsement by AC, arrange for the reissuance, in the
Territory of the GSA [Philippines], of traffic documents issued by AC outside the
said territory of the GSA [Philippines], as required by the passenger(s);
....
h) Distribution among passenger sales agents and display of timetables, fare sheets,
tariffs and publicity material provided by AC in accordance with the reasonable
requirements of AC;
....
j) Distribution of official press releases provided by AC to media and reference of

any press or public relations inquiries to AC;
....
o) Submission for AC's approval, of an annual written sales plan on or before a date
to be determined by AC and in a form acceptable to AC;
....
q) Submission of proposals for AC's approval of passenger sales agent incentive

plans at a reasonable time in advance of proposed implementation.
....
r) Provision of assistance on request, in its relations with Governmental and other

authorities, offices and agencies in the Territory [Philippines].
....
u) Follow AC guidelines for the handling of baggage claims and customer

complaints and, unless otherwise stated in the guidelines, refer all such claims and
complaints to AC.[91]
Under the terms of the Passenger General Sales Agency Agreement, Aerotel will "provide at its
own expense and acceptable to [petitioner Air Canada], adequate and suitable premises,
qualified staff, equipment, documentation, facilities and supervision and in consideration of the
remuneration and expenses payable[,] [will] defray all costs and expenses of and incidental to
the Agency."[92] "[I]t is the sole employer of its employees and . . . is responsible for [their]
actions ... or those of any subcontractor."[93] In remuneration for its services, Aerotel would be
paid by petitioner a commission on sales of transportation plus override commission on flown
revenues.[94] Aerotel would also be reimbursed "for all authorized expenses supported by
original supplier invoices."[95]
Aerotel is required to keep "separate books and records of account, including supporting
documents, regarding all transactions at, through or in any way connected with [petitioner Air
Canada] business."[96]
"If representing more than one carrier, [Aerotel must] represent all carriers in an unbiased way."
[97] Aerotel cannot "accept additional appointments as General Sales Agent of any other carrier
without the prior written consent of [petitioner Air Canada]."[98]
The Passenger General Sales Agency Agreement "may be terminated by either party without
cause upon [no] less than 60 days' prior notice in writing[.]"[99] In case of breach of any
provisions of the Agreement, petitioner may require Aerotel "to cure the breach in 30 days
failing which [petitioner Air Canada] may terminate [the] Agreement[.]"[100]
The following terms are indicative of Aerotel's dependent status:
First, Aerotel must give petitioner written notice "within 7 days of the date [it] acquires or takes
control of another entity or merges with or is acquired or controlled by another person or
entity[,]"[101] Except with the written consent of petitioner, Aerotel must not acquire a
substantial interest in the ownership, management, or profits of a passenger sales agent affiliated
with the International Air Transport Association or a non-affiliated passenger sales agent nor
shall an affiliated passenger sales agent acquire a substantial interest in Aerotel as to influence
its commercial policy and/or management decisions.[102] Aerotel must also provide petitioner
"with a report on any interests held by [it], its owners, directors, officers, employees and their
immediate families in companies and other entities in the aviation industry or ... industries
related to it[.]"[103] Petitioner may require that any interest be divested within a set period of
time.[104]
Second, in carrying out the services, Aerotei cannot enter into any contract on behalf of
petitioner without the express written consent of the latter;[105] it must act according to the
standards required by petitioner;[106] "follow the terms and provisions of the [petitioner Air
Canada] GS A Manual [and all] written instructions of [petitioner Air Canada;]"[107] and "[i]n
the absence of an applicable provision in the Manual or instructions, [Aerotei must] carry out its
functions in accordance with [its own] standard practices and procedures[.]"[108]
Third, Aerotei must only "issue traffic documents approved by [petitioner Air Canada] for all
transportation over [its] services[.]"[109] All use of petitioner's name, logo, and marks must be
with the written consent of petitioner and according to petitioner's corporate standards and
guidelines set out in the Manual.[110]
Fourth, all claims, liabilities, fines, and expenses arising from or in connection with the
transportation sold by Aerotei are for the account of petitioner, except in the case of negligence
of Aerotei.[111]
Aerotei is a dependent agent of petitioner pursuant to the terms of the Passenger General Sales
Agency Agreement executed between the parties. It has the authority or power to conclude
contracts or bind petitioner to contracts entered into in the Philippines. A third-party liability on
contracts of Aerotei is to petitioner as the principal, and not to Aerotei, and liability to such third
party is enforceable against petitioner. While Aerotei maintains a certain independence and its
activities may not be devoted wholly to petitioner, nonetheless, when representing petitioner
pursuant to the Agreement, it must carry out its functions solely for the benefit of petitioner and
according to the latter's Manual and written instructions. Aerotei is required to submit its annual
sales plan for petitioner's approval.
In essence, Aerotei extends to the Philippines the transportation business of petitioner. It is a

conduit or outlet through which petitioner's airline tickets are sold.[112]
Under Article VII (Business Profits) of the Republic of the Philippines-Canada Tax Treaty, the
"business profits" of an enterprise of a Contracting State is "taxable only in that State[,] unless
the enterprise carries on business in the other Contracting State through a permanent
establishment);.]"[113] Thus, income attributable to Aerotel or from business activities effected
by petitioner through Aerotel may be taxed in the Philippines. However, pursuant to the last
paragraph[114] of Article VII in relation to Article VIII[115] (Shipping and Air Transport) of the
same Treaty, the tax imposed on income derived from the operation of ships or aircraft in
international traffic should not exceed 1 1/2% of gross revenues derived from Philippine
sources.
IV
While petitioner is taxable as a resident foreign corporation under Section 28(A)(1) of the 1997
National Internal Revenue Code on its taxable income[116] from sale of airline tickets in the
Philippines, it could only be taxed at a maximum of 1 1/2% of gross revenues, pursuant to
Article VIII of the Republic of the Philippines-Canada Tax Treaty that applies to petitioner as a
"foreign corporation organized and existing under the laws of Canada[.]"[117]
Tax treaties form part of the law of the land,[118] and jurisprudence has applied the statutory
construction principle that specific laws prevail over general ones.[119]
The Republic of the Philippines-Canada Tax Treaty was ratified on December 21, 1977 and
became valid and effective on that date. On the other hand, the applicable provisions[120]
relating to the taxability of resident foreign corporations and the rate of such tax found in the
National Internal Revenue Code became effective on January 1, 1998.[121] Ordinarily, the later
provision governs over the earlier one.[122] In this case, however, the provisions of the Republic
of the Philippines-Canada Tax Treaty are more specific than the provisions found in the
National Internal Revenue Code.
These rules of interpretation apply even though one of the sources is a treaty and not simply a
statute.
Article VII, Section 21 of the Constitution provides:
SECTION 21. No treaty or international agreement shall be valid and effective

unless concurred in by at least two-thirds of all the Members of the Senate.
This provision states the second of two ways through which international obligations become
binding. Article II, Section 2 of the Constitution deals with international obligations that are
incorporated, while Article VII, Section 21 deals with international obligations that become
binding through ratification.

"Valid and effective" means that treaty provisions that define rights and duties as well as
definite prestations have effects equivalent to a statute. Thus, these specific treaty provisions
may amend statutory provisions. Statutory provisions may also amend these types of treaty
obligations.

We only deal here with bilateral treaty state obligations that are not international obligations
erga omnes. We are also not required to rule in this case on the effect of international customary
norms especially those with jus cogens character.

The second paragraph of Article VIII states that "profits from sources within a Contracting State
derived by an enterprise of the other Contracting State from the operation of ships or aircraft in
international traffic may be taxed in the first-mentioned State but the tax so charged shall not
exceed the lesser of a) one and one-half per cent of the gross revenues derived from sources in
that State; and b) the lowest rate of Philippine tax imposed on such profits derived by an
enterprise of a third State."

The Agreement between the government of the Republic of the Philippines and the government
of Canada on Air Transport, entered into on January 14, 1997, reiterates the effectivity of
Article VIII of the Republic of the Philippines-Canada Tax Treaty:

ARTICLE XVI
(Taxation)
The Contracting Parties shall act in accordance with the provisions of Article VIII of
the Convention between the Philippines and Canada for the Avoidance of Double
Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income,
signed at Manila on March 31, 1976 and entered into force on December 21, 1977,
and any amendments thereto, in respect of the operation of aircraft in international
traffic.[123]
Petitioner's income from sale of ticket for international carriage of passenger is income derived
from international operation of aircraft. The sale of tickets is closely related to the international
operation of aircraft that it is considered incidental thereto.

"[B]y reason of our bilateral negotiations with [Canada], we have agreed to have our right to tax
limited to a certain extent[.]"[124] Thus, we are bound to extend to a Canadian air carrier doing
business in the Philippines through a local sales agent the benefit of a lower tax equivalent to 1
1/2% on business profits derived from sale of international air transportation.

Finally, we reject petitioner's contention that the Court of Tax Appeals erred in denying its claim
for refund of erroneously paid Gross Philippine Billings tax on the ground that it is subject to
income tax under Section 28(A)(1) of the National Internal Revenue Code because (a) it has not
been assessed at all by the Bureau of Internal Revenue for any income tax liability;[125] and (b)
internal revenue taxes cannot be the subject of set-off or compensation,[126] citing Republic v.
Mambulao Lumber Co., et al.[127] and Francia v. Intermediate Appellate Court.[128]

In SMI-ED Philippines Technology, Inc. v. Commissioner of Internal Revenue,[129] we have

ruled that "[i]n an action for the refund of taxes allegedly erroneously paid, the Court of Tax
Appeals may determine whether there are taxes that should have been paid in lieu of the taxes
paid."[130] The determination of the proper category of tax that should have been paid is
incidental and necessary to resolve the issue of whether a refund should be granted.[131] Thus:

Petitioner argued that the Court of Tax Appeals had no jurisdiction to subject it to
6% capital gains tax or other taxes at the first instance. The Court of Tax Appeals
has no power to make an assessment.

As earlier established, the Court of Tax Appeals has no assessment powers. In

stating that petitioner's transactions are subject to capital gains tax, however, the
Court of Tax Appeals was not making an assessment. It was merely determining the
proper category of tax that petitioner should have paid, in view of its claim that it
erroneously imposed upon itself and paid the 5% final tax imposed upon PEZA-
registered enterprises.

The determination of the proper category of tax that petitioner should have paid is an
incidental matter necessary for the resolution of the principal issue, which is whether
petitioner was entitled to a refund.

The issue of petitioner's claim for tax refund is intertwined with the issue of the
proper taxes that are due from petitioner. A claim for tax refund carries the
assumption that the tax returns filed were correct. If the tax return filed was not
proper, the correctness of the amount paid and, therefore, the claim for refund
become questionable. In that case, the court must determine if a taxpayer claiming
refund of erroneously paid taxes is more properly liable for taxes other than that
paid.
In South African Airways v. Commissioner of Internal Revenue, South African

Airways claimed for refund of its erroneously paid 2 1/2% taxes on its gross
Philippine billings. This court did not immediately grant South African's claim for
refund. This is because although this court found that South African Airways was
not subject to the 2 1/2% tax on its gross Philippine billings, this court also found
that it was subject to 32% tax on its taxable income.
In this case, petitioner's claim that it erroneously paid the 5% final tax is an
admission that the quarterly tax return it filed in 2000 was improper. Hence, to
determine if petitioner was entitled to the refund being claimed, the Court of Tax
Appeals has the duty to determine if petitioner was indeed not liable for the 5% final
tax and, instead, liable for taxes other than the 5% final tax. As in South African
Airways, petitioner's request for refund can neither be granted nor denied outright
without such determination.
If the taxpayer is found liable for taxes other than the erroneously paid 5% final tax,
the amount of the taxpayer's liability should be computed and deducted from the
refundable amount.
Any liability in excess of the refundable amount, however, may not be collected in a
case involving solely the issue of the taxpayer's entitlement to refund. The question
of tax deficiency is distinct and unrelated to the question of petitioner's entitlement
to refund. Tax deficiencies should be subject to assessment procedures and the rules
of prescription. The court cannot be expected to perform the BIR's duties whenever
it fails to do so either through neglect or oversight. Neither can court processes be
used as a tool to circumvent laws protecting the rights of taxpayers.[132]
Hence, the Court of Tax Appeals properly denied petitioner's claim for refund of allegedly
erroneously paid tax on its Gross Philippine Billings, on the ground that it was liable instead for
the regular 32% tax on its taxable income received from sources within the Philippines. Its
determination of petitioner's liability for the 32% regular income tax was made merely for the
purpose of ascertaining petitioner's entitlement to a tax refund and not for imposing any
deficiency tax.

In this regard, the matter of set-off raised by petitioner is not an issue. Besides, the cases cited
are based on different circumstances. In both cited cases,[133] the taxpayer claimed that his (its)
tax liability was off-set by his (its) claim against the government.

Specifically, in Republic v. Mambulao Lumber Co., et al, Mambulao Lumber contended that the
amounts it paid to the government as reforestation charges from 1947 to 1956, not having been
used in the reforestation of the area covered by its license, may be set off or applied to the
payment of forest charges still due and owing from it.[134] Rejecting Mambulao's claim of legal
compensation, this court ruled:
[A]ppellant and appellee are not mutually creditors and debtors of each other.
Consequently, the law on compensation is inapplicable. On this point, the trial court
correctly observed:

Under Article 1278, NCC, compensation should take place when two
persons in their own right are creditors and debtors of each other. With
respect to the forest charges which the defendant Mambulao Lumber
Company has paid to the government, they are in the coffers of the
government as taxes collected, and the government does not owe
anything to defendant Mambulao Lumber Company. So, it is crystal clear
that the Republic of the Philippines and the Mambulao Lumber Company
are not creditors and debtors of each other, because compensation refers
to mutual debts. * * *.
And the weight of authority is to the effect that internal revenue taxes, such as the
forest charges in question, can not be the subject of set-off or compensation.
A claim for taxes is not such a debt, demand, contract or judgment as is

allowed to be set-off under the statutes of set-off, which are construed
uniformly, in the light of public policy, to exclude the remedy in an
action or any indebtedness of the state or municipality to one who is
liable to the state or municipality for taxes. Neither are they a proper
subject of recoupment since they do not arise out of the contract or
transaction sued on. * * *. (80 C.J.S. 73-74.)

The general rule, based on grounds of public policy is well-settled that no

set-off is admissible against demands for taxes levied for general or local
governmental purposes. The reason on which the general rule is based, is
that taxes are not in the nature of contracts between the party and party
but grow out of a duty to, and are the positive acts of the government, to
the making and enforcing of which, the personal consent of individual
taxpayers is not required. * * * If the taxpayer can properly refuse to pay
his tax when called upon by the Collector, because he has a claim against
the governmental body which is not included in the tax levy, it is plain
that some legitimate and necessary expenditure must be curtailed. If the
taxpayer's claim is disputed, the collection of the tax must await and
abide the result of a lawsuit, and meanwhile the financial affairs of the
government will be thrown into great confusion. (47 Am. Jur. 766-767.)
[135] (Emphasis supplied)
In Francia, this court did not allow legal compensation since not all requisites of legal
compensation provided under Article 1279 were present.[136] In that case, a portion of Francia's
property in Pasay was expropriated by the national government,[137] which did not immediately
pay Francia. In the meantime, he failed to pay the real property tax due on his remaining
property to the local government of Pasay, which later on would auction the property on account
of such delinquency. He then moved to set aside the auction sale and argued, among others, that
his real property tax delinquency was extinguished by legal compensation on account of his
unpaid claim against the national government.[139] This court ruled against Francia:
There is no legal basis for the contention. By legal compensation, obligations of

persons, who in their own right are reciprocally debtors and creditors of each other,
are extinguished (Art. 1278, Civil Code). The circumstances of the case do not
satisfy the requirements provided by Article 1279, to wit:

(1) that each one of the obligors be bound principally and that he be at
the same time a principal creditor of the other;

xxx xxx xxx

(3) that the two debts be due.

xxx xxx xxx

This principal contention of the petitioner has no merit. We have consistently ruled
that there can be no off-setting of taxes against the claims that the taxpayer may have
against the government. A person cannot refuse to pay a tax on the ground that the
government owes him an amount equal to or greater than the tax being collected.
The collection of a tax cannot await the results of a lawsuit against the government.
....
There are other factors which compel us to rule against the petitioner. The tax was
due to the city government while the expropriation was effected by the national
government. Moreover, the amount of P4,116.00 paid by the national government for
the 125 square meter portion of his lot was deposited with the Philippine National
Bank long before the sale at public auction of his remaining property. Notice of the
deposit dated September 28, 1977 was received by the petitioner on September 30,
1977. The petitioner admitted in his testimony that he knew about the P4,116.00
deposited with the bank but he did not withdraw it. It would have been an easy
matter to withdraw P2,400.00 from the deposit so that he could pay the tax
obligation thus aborting the sale at public auction.[140]
The ruling in Francia was applied to the subsequent cases of Caltex Philippines, Inc. v.
Commission on Audit[141] and Philex Mining Corporation v. Commissioner of Internal Revenue.
[142] In Caltex, this court reiterated:

[A] taxpayer may not offset taxes due from the claims that he may have against the
government. Taxes cannot be the subject of compensation because the government
and taxpayer are not mutually creditors and debtors of each other and a claim for
taxes is not such a debt, demand, contract or judgment as is allowed to beset-off.[143]
(Citations omitted)
Philex Mining ruled that "[t]here is a material distinction between a tax and debt. Debts are due
to the Government in its corporate capacity, while taxes are due to the Government in its
sovereign capacity."[144] Rejecting Philex Mining's assertion that the imposition of surcharge
and interest was unjustified because it had no obligation to pay the excise tax liabilities within
the prescribed period since, after all, it still had pending claims for VAT input credit/refund with
the Bureau of Internal Revenue, this court explained:

To be sure, we cannot allow Philex to refuse the payment of its tax liabilities on the
ground that it has a pending tax claim for refund or credit against the government
which has not yet been granted. It must be noted that a distinguishing feature of a tax
is that it is compulsory rather than a matter of bargain. Hence, a tax does not depend
upon the consent of the taxpayer. If any tax payer can defer the payment of taxes by
raising the defense that it still has a pending claim for refund or credit, this would
adversely affect the government revenue system. A taxpayer cannot refuse to pay his
taxes when they fall due simply because he has a claim against the government or
that the collection of the tax is contingent on the result of the lawsuit it filed against
the government. Moreover, Philex's theory that would automatically apply its VAT
input credit/refund against its tax liabilities can easily give rise to confusion and
abuse, depriving the government of authority over the manner by which taxpayers
credit and offset their tax liabilities.[145] (Citations omitted)

In sum, the rulings in those cases were to the effect that the taxpayer cannot simply refuse to
pay tax on the ground that the tax liabilities were off-set against any alleged claim the taxpayer
may have against the government. Such would merely be in keeping with the basic policy on
prompt collection of taxes as the lifeblood of the government.

Here, what is involved is a denial of a taxpayer's refund claim on account of the Court of Tax
Appeals' finding of its liability for another tax in lieu of the Gross Philippine Billings tax that
was allegedly erroneously paid.

Squarely applicable is South African Airways where this court rejected similar arguments on the
denial of claim for tax refund:

Commissioner of Internal Revenue v. Court of Tax Appeals, however, granted the

offsetting of a tax refund with a tax deficiency in this wise:

Further, it is also worth noting that the Court of Tax Appeals erred in
denying petitioner's supplemental motion for reconsideration alleging
bringing to said court's attention the existence of the deficiency income
and business tax assessment against Citytrust. The fact of such deficiency
assessment is intimately related to and inextricably intertwined with the
right of respondent bank to claim for a tax refund for the same year. To
award such refund despite the existence of that deficiency assessment is
an absurdity and a polarity in conceptual effects. Herein private
respondent cannot be entitled to refund and at the same time be liable for
a tax deficiency assessment for the same year.
The grant of a refund is founded on the assumption that the tax return is
valid, that is, the facts stated therein are true and correct. The deficiency
assessment, although not yet final, created a doubt as to and constitutes a
challenge against the truth and accuracy of the facts stated in said return
which, by itself and without unquestionable evidence, cannot be the basis
for the grant of the refund.
Section 82, Chapter IX of the National Internal Revenue Code of 1977,

which was the applicable law when the claim of Citytrust was filed,
provides that "(w)hen an assessment is made in case of any list,
statement, or return, which in the opinion of the Commissioner of
Internal Revenue was false or fraudulent or contained any understatement
or undervaluation, no tax collected under such assessment shall be
recovered by any suits unless it is proved that the said list, statement, or
return was not false nor fraudulent and did not contain any
understatement or undervaluation; but this provision shall not apply to
statements or returns made or to be made in good faith regarding annual
depreciation of oil or gas wells and mines."
Moreover, to grant the refund without determination of the proper

assessment and the tax due would inevitably result in multiplicity of
proceedings or suits. If the deficiency assessment should subsequently be
upheld, the Government will be forced to institute anew a proceeding for
the recovery of erroneously refunded taxes which recourse must be filed
within the prescriptive period of ten years after discovery of the falsity,
fraud or omission in the false or fraudulent return involved. This would
necessarily require and entail additional efforts and expenses on the part
of the Government, impose a burden on and a drain of government funds,
and impede or delay the collection of much-needed revenue for
governmental operations.
Thus, to avoid multiplicity of suits and unnecessary difficulties or

expenses, it is both logically necessary and legally appropriate that the
issue of the deficiency tax assessment against Citytrust be resolved
jointly with its claim for tax refund, to determine once and for all in a
single proceeding the true and correct amount of tax due or refundable.
In fact, as the Court of Tax Appeals itself has heretofore conceded, it

would be only just and fair that the taxpayer and the Government alike be
given equal opportunities to avail of remedies under the law to defeat
each other's claim and to determine all matters of dispute between them
in one single case. It is important to note that in determining whether or
not petitioner is entitled to the refund of the amount paid, it would [be]
necessary to determine how much the Government is entitled to collect as
taxes. This would necessarily include the determination of the correct
liability of the taxpayer and, certainly, a determination of this case would
constitute res judicata on both parties as to all the matters subject thereof
or necessarily involved therein.
Sec. 82, Chapter IX of the 1977 Tax Code is now Sec. 72, Chapter XI of the 1997
NIRC. The above pronouncements are, therefore, still applicable today.

Here, petitioner's similar tax refund claim assumes that the tax return that it filed was
correct. Given, however, the finding of the CTA that petitioner, although not liable
under Sec. 28(A)(3)(a) of the 1997 NIRC, is liable under Sec. 28(A)(1), the
correctness of the return filed by petitioner is now put in doubt. As such, we cannot
grant the prayer for a refund.[146] (Emphasis supplied, citation omitted)
In the subsequent case of United Airlines, Inc. v. Commissioner of Internal Revenue,[147] this
court upheld the denial of the claim for refund based on the Court of Tax Appeals' finding that
the taxpayer had, through erroneous deductions on its gross income, underpaid its Gross
Philippine Billing tax on cargo revenues for 1999, and the amount of underpayment was even
greater than the refund sought for erroneously paid Gross Philippine Billings tax on passenger
revenues for the same taxable period.[148]

In this case, the P5,185,676.77 Gross Philippine Billings tax paid by petitioner was computed at
the rate of 1 1/2% of its gross revenues amounting to P345,711,806.08[149] from the third
quarter of 2000 to the second quarter of 2002. It is quite apparent that the tax imposable under
Section 28(A)(1) of the 1997 National Internal Revenue Code [32% of taxable income, that is,
gross income less deductions] will exceed the maximum ceiling of 1 1/2% of gross revenues as
decreed in Article VIII of the Republic of the Philippines-Canada Tax Treaty. Hence, no refund
is forthcoming.

WHEREFORE, the Petition is DENIED. The Decision dated August 26, 2005 and Resolution
dated April 8, 2005 of the Court of Tax Appeals En Banc are AFFIRMED.
SO ORDERED.

Carpio, (Chairperson), Brion, Del Castillo, and Mendoza, JJ., concur.

[1] Rollo, pp. 9-40. The Petition was filed pursuant to Rule 45 of the Rules of Court.

[2]Id. at 57-72. The Decision was penned by Associate Justice Olga Palanca-Enriquez and
concurred in by Presiding Justice Ernesto D. Acosta and Associate Justices Lovell R. Bautista,
Erlinda P. Uy, and Caesar A. Casanova. Associate Justice Juanito C. Castaneda, Jr. voluntarily
inhibited himself.
[3]Id. at 41-5 1. The Decision was penned by Associate Justice Lovell R. Bautista and
concurred in by Presiding Justice Ernesto D. Acosta and Associate Justice Caesar A. Casanova.
[4]Id. at 52-56. The Resolution was signed by Presiding Justice Ernesto D. Acosta and
Associate Justices Lovell R. Bautista and Caesar A. Casanova.
[5] Id. at 59, Court of Tax Appeals En Bane Decision.
[6] Id. at 78, Civil Aeronautics Board Executive Director's Letter.
[7] Id. at 300, Air Canada's Memorandum.
[8]Id. at 118-140, Passenger General Sales Agency Agreement Between Air Canada and
Aerotel Ltd., Corp.
[10] Id. at 59-60, Court of Tax Appeals En Banc Decision.
[11] Id.
[12] Id. at 60.
[13] Id. at 13, Petition.
[14] Pres. Decree No. 1355 (1978), sec. 1 defines Gross Philippine Billings as: "Gross Philippine
billings" includes gross revenue realized from uplifts anywhere in the world by any international
carrier doing business in the Philippines of passage documents sold therein, whether for
passenger, excess baggage or mail, provided the cargo or mail originates from the Philippines.
The gross revenue realized from the said cargo or mail shall include the gross freight charge up
to final destination. Gross revenues from chartered flights originating from the Philippines shall
likewise form part of "gross Philippine billings" regardless of the place of sale or payment of
the passage documents. For purposes of determining the taxability of revenues from chartered
flights, the term "originating from the Philippines" shall include flight of passengers who stay in
the Philippines for more than forty-eight (48) hours prior to embarkation." (Emphasis supplied)
[15] Rollo, p. 60, Court of Tax Appeals En Banc Decision.
[16] Id. at 41, Court of Tax Appeals First Division Decision.
[17] Id. at 51.

[18] Id. at 47-48.
[19] Id. at 51.
[20] Id. at 50.
[21] Id. at 51.
[22] Id. at 53 and 56, Court of Tax Appeals First Division Resolution.
[23] Id. at 54.
[25] Id.
[26] Id. at 71, Court of Tax Appeals En Banc Decision.
[27] Id. at 67-68.
[28] Id. at 71.
[29] The Petition was received by the court on October 20, 2005. Respondent filed its Comment
(Id. at 252-261) on August 6, 2007. Subsequently, pursuant to the court's Resolution (Id. at 282-
283) dated November 28, 2007, petitioner filed its Memorandum (Id. at 284-328) on February
21, 2008 and respondent filed its Manifestation (Id. at 349-350) on January 5, 2009, stating that
it is adopting its Comment as its Memorandum.
[30]Pursuant to Rep. Act No. 9337 (2005), the rate is reduced to 30% beginning January 1,
2009.
[31] Rollo, pp. 22, Petition, and 307, Air Canada's Memorandum.
[32] Id.
[34] Id. at 23-24, Petition, and 315, Air Canada's Memorandum.
[36] Id. at 28-29, Petition.

[37] Id. at 29. According to Senator Juan Ponce Enrile, "the gross Philippine billings of
international air carriers must refer to flown revenue because this is an income from services
and this will make the determination of the tax base a lot easier by following the same rule in
determining the liability of the carrier for common carrier's tax." (Minutes of the Bicameral
Conference Committee on House Bill No. 9077 [Comprehensive Tax Reform Program], 10
October 1997, pp. 19-20).
[38] Id.
[41] Id. at 35, Petition, and 322, Air Canada's Memorandum.
[44] Id. at 35-36, Petition, and 322-323, Air Canada's Memorandum.
[45] Id. at 37, Petition, and 325, Air Canada's Memorandum.
[46] Id. at 37, Petition, and 325-326, Air Canada's Memorandum.
[47] Id. at 256, Commissioner of Internal Revenue's Comment.
[48] 259 Phil. 757 (1989) [Per J. Regalado, Second Division].
[49] Rollo, p. 258, Commissioner of Internal Revenue's Comment.
[50] Id. at 257.
[51] Id. at 260.
[52] Id. at 260-261.
2009.
2009.
[55] Com. Act No. 466 (1939), sec. 84(g).
[56] Commissioner of Internal Revenue v. British Overseas Airways Corporation, 233 Phil. 406,
421 (1987) [Per J. Melencio-Herrera, En Banc], citing Tax Code, sec. 24(b)(2), as amended by
Rep. Act No. 6110 (1969).
[57] Pres. Decree No. 1158-A (1977), sec. 1.
[58]
233 Phil. 406 (1987) [Per J. Melencio-Herrera, En Banc], cited in Commissioner of Internal
Revenue v. Air India, 241 Phil. 689, 694-696 (1988) [Per J. Gancayco, First Division].
[59] Id. at 420-421.
[60] Id.
[61] Rep. Act No. 7042(1991), sec 3(d).
[62] Implementing Rules and Regulations of Rep. Act No. 7042 (1991), sec 1(f).
[63] Civil Aeronautics Board Economic Regulation No. 4, chap. I, sec. 2(b).
[64] Civil Aeronautics Board Economic Regulation No. 4, chap. Ill, sec. 26.
[65] Civil Aeronautics Board Economic Regulation No. 4, chap. Ill, sec. 30.
[66]Cf. Cargill, Inc. v. Intra Strata Assurance Corporation, 629 Phil. 320, 332 (2010) [Per J.
Carpio, Second Division], citing National Sugar Trading Corporation v. Court of Appeals, 316
Phil. 562, 568-569 (1995) [Per J. Quiason, First Division].
[67]Rollo, p. 122, Passenger General Sales Agency Agreement Between Air Canada and
Aerotel Ltd., Corp.
[68] Id. at 126.
[69]Id. at 78, Civil Aeronautics Board Executive Director Guia Martinez's letter to Aerotel
Limited Corporation.
[70] 626 Phil. 566 (2010) [Per J. Velasco, Jr., Third Division]. The case was also cited in United
Airlines, Inc. v. Commissioner of Internal Revenue, 646 Phil. 184, 193 (2010) [Per J. Villarama,
Jr., Third Division].
[71] South African Airways v. Commissioner of Internal Revenue, 626 Phil. 566, 574-575 (2010)
[Per J. Velasco, Jr., Third Division].
[72] Id. at 575.
[73]J. Paras, Dissenting Opinion in Commissioner of Internal Revenue v. Procter & Gamble
Philippine Manufacturing Corporation, G.R. No. 66838, December 2, 1991, 204 SCRA 377,
411 [Per J. Feliciano, En Banc].
[74] 368 Phil. 388 (1999) [Per J. Gonzaga-Reyes, Third Division].
[75] Id. at 404-405.
[76] CONST., art. II, sec. 2.
[77] Tanada v. Angara, 338 Phil. 546, 591-592 (1997) [Per J. Panganiban, En Banc]: "[W]hile
sovereignty has traditionally been deemed absolute and all-encompassing on the domestic level,
it is however subject to restrictions and limitations voluntarily agreed to by the Philippines,
expressly or impliedly, as a member of the family of nations. Unquestionably, the Constitution
did not envision a hermit-type isolation of the country from the rest of the world. In its
Declaration of Principles and State Policies, the Constitution "adopts the generally accepted
principles of international law as part of the law of the land, and adheres to the policy of peace,
equality, justice, freedom, cooperation and amity, with all nations." By the doctrine of
incorporation, the country is bound by generally accepted principles of international law, which
are considered to be automatically part of our own laws. One of the oldest and most
fundamental rules in international law is pacta sunt servanda — international agreements must
be performed in good faith. "A treaty engagement is not a mere moral obligation but creates a
legally binding obligation on the parties. . . . A state which has contracted valid international
obligations is bound to make in its legislations such modifications as may be necessary to
ensure the fulfillment of the obligations undertaken." (Citations omitted)
[78] G.R. No. 188550, August 28, 2013, 704 SCRA 216 [Per C.J. Sereno, First Division]. Also
cited in CBK Power Company Limited v. Commissioner of Internal Revenue, G.R. Nos. 193383-
84, January 14, 2015 7-8 [Per J. Perlas-Bernabe, First Division].
[79] Deutsche Bank AG Manila Branch v. Commissioner of Internal Revenue, G.R. No. 188550,
August 28, 2013, 704 SCRA 216, 223 [Per C.J. Sereno, First Division]. The Bureau of Internal
Revenue "issued RMO No. 1-2000, which requires that any availment of the tax treaty relief
must be preceded by an application with ITAD at least 15 days before the transaction. The
Order was issued to streamline the processing of the application of tax treaty relief in order to
improve efficiency and service to the taxpayers. Further, it also aims to prevent the
consequences of an erroneous interpretation and/or application of the treaty provisions (i.e.,
filing a claim for a tax refund/credit for the overpayment of taxes or for deficiency tax liabilities
for underpayment)." (Citation omitted)
[80] Id.
[81] Id. at 227-228.
[82] Convention with Canada for the Avoidance of Double Taxation and the Prevention of Fiscal
Evasion with Respect to Taxes on Income, March 11, 1976 (1977) (visited July 21, 2015). Cesar
Virata signed for the government of the Republic of the Philippines, while Donald Jamieson
signed for the government of Canada.
[83]
Convention with Canada for the Avoidance of Double Taxation and the Prevention of Fiscal
Evasion with Respect to Taxes on Income, art. V provides:
Article V
Permanent Establishment
1. For the purposes of this Convention, the term "permanent establishment" means a fixed
place of business in which the business of the enterprise is wholly or partly carried on.
2. The term "permanent establishment" shall include especially:
a) a place of management;
b) a branch;
c) an office;
d) a factory;
e) a workshop;

or other place of extraction of natural resources;
f) a mine, quarry

g) a building or construction site or supervisory activities in connection therewith, where

such activities continue for a period more than six months;
h) an assembly or installation project which exists for more than three months;
i) premises used as a sales outlet;
j) a warehouse, in relation to a person providing storage facilities for others.

3. The term "permanent establishment" shall not be deemed to include:

a) the use of facilities solely for the purpose of storage, display or delivery of goods or
merchandise belonging to the enterprise;
b) the maintenance of a stock of goods or
merchandise belonging to the enterprise solely
for the purpose of storage, display or delivery;

c) the maintenance of a stock of goods or merchandise belonging to the enterprise solely

for the purpose of processing by another enterprise;
d) the maintenance of a fixed place of business solely
for the purpose of purchasing goods
or merchandise, or for collecting information for the enterprise;
e) the maintenance of a fixed place of business solely for the
purpose of advertising, for
the supply of information, for scientific research, or for similar activities which have a
preparatory or auxiliary character, for the enterprise.

4. A person acting in a Contracting State on behalf of an enterprise of the other Contracting

State (other than an agent of independent status to whom paragraph 6 applies) shall be
deemed to be a permanent establishment in the first-mentioned State if:

a) he has and habitually exercises in that State an authority to conclude contracts on

behalf of the enterprise, unless his activities are limited to the purchase of goods or
merchandise for that enterprise; or
b) he has no such authority, but habitually maintains in the first-mentioned State a stock of
goods or merchandise from which he regularly delivers goods or merchandise on behalf of
the enterprise.
5. An insurance enterprise of a Contracting State shall, except in regard to re-insurance, be

deemed to have a permanent establishment in the other State if it collects premiums in the
territory of that State or insures risks situated therein through an employee or through a
representative who is not an agent of independent status within the meaning of paragraph
6.
6. An enterprise of a Contracting State shall not be deemed to have a permanent

establishment in the other Contracting State merely because it carries on business in that
other State through a broker, general commission agent or any other agent of an
independent status, where such persons are acting in the ordinary course of their business.
7. The fact that a company which is a resident of a Contracting State controls or is controlled
by a company which is a resident of the other Contracting State, or which carries on
business in that other State (whether through a permanent establishment or otherwise),
shall not of itself constitute for either company a permanent establishment of the other.
(Emphasis supplied)
[84]
Convention with Canada for the Avoidance of Double Taxation and the Prevention of Fiscal
Evasion with Respect to Taxes on Income, art. V(1).

[85]CIVIL CODE, art. 1868 provides:

Article 1868. By the contract of agency a person binds himself to render some service or to do
something in representation or on behalf of another, with the consent or authority of the latter.

[86]Convention with Canada for the Avoidance of Double Taxation and the Prevention of Fiscal
Evasion with Respect to Taxes on Income, art. XV provides:

Article XV
Dependent
Personal Services

1. Subject to the provisions of Articles XVI, XVIII and XIX, salaries, wages and other
similar remuneration derived by a resident of a Contracting State in respect of an
employment shall be taxable only in that State unless the employment is exercised in the
other Contracting State. If the employment is so exercised, such remuneration as is
derived therefrom may be taxed in that other State.

2. Notwithstanding the provisions of paragraph 1, remuneration derived by a resident of a

Contracting State in respect of an employment exercised in the other Contracting State
shall be taxable only in the first-mentioned State if the recipient is present in the other
Contracting State for a period or periods not exceeding in the aggregate 183 days in the
calendar year concerned, and either
a) the remuneration earned in the other Contracting State in the calendar year concerned
does not exceed two thousand five hundred Canadian dollars ($2,500) or its equivalent in
Philippine pesos or such other amount as may be specified and agreed in letters exchanged
between the competent authorities of the Contracting States; or
b) the remuneration is paid by, or on behalf of, an employer who is not a resident of the
other State, and such remuneration is not borne by a permanent establishment or a fixed
base which the employer has in the other State.
3. Notwithstanding the preceding provisions of this Article, remuneration in respect of

employment as a member of the regular crew or complement of a ship or aircraft operated
in international traffic by an enterprise of a Contracting State, shall be taxable only in that
State.
[87] Among the four elements of an employer-employee relationship (i.e., (i) the selection and
engagement of the employee; (ii) the payment of wages; (iii) the power of dismissal; and (iv)
the power of control of the employees conduct), the control test is regarded as the most
important. Under this test, an employer-employee relationship exists if the employer has
reserved the right to control the employee not only as to the result of the work done but also as
to the means and methods by which the same is to be accomplished. See Fuji Television
Network, Inc. v. Espiritu, G.R. Nos. 204944^1-5, December 3, 2014 19-20 [Per J. Leonen,
Second Division]; Royale Homes Marketing Corporation v. Alcantara, G.R. No. 195190, July
28, 2014, 731 SCRA 147, 162 [Per J. Del Castillo, Second Division]; Tongko v. The
Manufacturers Life Insurance Co. (Phils.), Inc., 655 Phil. 384, 400-401 (2011) [Per J. Brion, En
Banc]; Sonza v. ABS-CBN Broadcasting Corporation, G.R. No. 138051, June 10, 2004, 431
SCRA 583, 594-595 [Per J. Carpio, First Division]; Dr. Sara v. Agarrado, 248 Phil. 847, 851
(1988) [Per C.J. Fernan, Third Division], and Investment Planning Corporation of the
Philippines v. Social Security System, 129 Phil. 143, 147 (1967) [Per J. Makalintal, En Banc],
cited in Insular Life Assurance Co., Ltd. v. National Labor Relations Commission, 259 Phil. 65,
72 (1989) [Per J. Narvasa, First Division].

[88] Rep. Act No. 776(1952), sec.1(jj), as amended by Pres. Decree No. 1462 (1978), sec. 1.
[89] Rep. Act No. 776 (1952), sec. 10(A), as amended by Pres. Decree No. 1462 (1978), sec. 6.

[90] Rep. Act No. 776 (1952), sec. 11, as amended by Pres. Decree No. 1462 (1978), sec. 7.

[91]
Rollo, pp. 124-125, Passenger General Sales Agency Agreement Between Air Canada and
Aerotel Ltd., Corp.

[92] Id. at 126.

[93] Id. at 122.

[94] Id. at 127.
[95] Id. at 128.
[96] Id. at 130.
[97] Id. at 122.
[98] Id.
[99] Id. at 137.
[100] Id.
[101] Id. at 122.
[102] Id. at 123.
[103] Id.
[104] Id.
[105] Id. at 122.
[106] Id. at 126.
[107] Id.
[108] Id.
[109] Id. at 129.
[110] Id. at 131.
[111] Id. at 132.
[112] Cf. Steelcase, Inc. v. Design International Selections, Inc., G.R. No. 171995, April 18,
2012, 670 SCRA 64 [Per J. Mendoza, Third Division]. This couit held that "the appointment of
a distributor in the Philippines is not sufficient to constitute 'doing business' unless it is under
the full control of the foreign corporation. On the other hand, if the distributor is an independent
entity which buys and distributes products, other than those of the foreign corporation, for its
own name and its own account, A the latter cannot be considered to be doing business in the
Philippines. It should be kept in mind that the determination of whether a foreign corporation is
doing business in the Philippines must be judged in light of the attendant circumstances." (Id. at
74, citations omitted) This court found that Design International Selections, Inc. "was an
independent contractor, distributing various products of Steelcase and of other companies,
acting in its own name and for its own account." (Id. at 75) "As a result, Steelcase cannot be
considered to be doing business in the Philippines by its act of appointing a distributor as it falls
under one of the exceptions under R.A. No. 7042." (Id. at 77).
[113]Convention with Canada for the Avoidance of Double Taxation and the Prevention of
Fiscal Evasion with Respect to Taxes on Income, art. VII provides:
Article VII
Business Profits
1. The profits of an enterprise of a Contracting State shall be taxable only in that State unless
the enterprise carries on business in the other Contracting State through a permanent
establishment situated therein. If the enterprise carries on or has carried on business as
aforesaid, the profits of the enterprise may be taxed in the other State but only so much of
them as is attributable to:

a) that permanent establishment; or

b) sales of goods or merchandise of the same or similar kind as those sold, or from other
business activities of the same or similar kind as those affected, through that permanent
establishment.

2. Subject to the provisions of paragraph 3, where an enterprise of a Contracting State carries

on business in the other Contracting State through a permanent establishment situated
therein, there shall be attributed to that permanent establishment profits which it might be
expected to make if it were a distinct and separate enterprise engaged in the same or
similar activities under the same or similar conditions and dealing wholly independently
with the enterprise of which it is a permanent establishment.

3. In the determination of the profits of a permanent establishment, there shall be allowed

those ' deductible expenses which are incurred for the purposes of the permanent
establishment including executive and general administrative expenses, whether incurred
in the State in which the permanent establishment is situated or elsewhere.
4. No profits shall be attributed to a permanent establishment by reason of the
mere purchase
by that permanent establishment of goods or merchandise for the enterprise.
5. For the purposes of the preceding paragraphs, the profits to be attributed to
the permanent
establishment shall be determined by the same method year by year unless there is good
and sufficient reason to the contrary.
6. Where profits include items of income
which are dealt with separately in other Articles of
this Convention, then, the provisions of those Articles shall not be affected by the
provisions of this Article.
Fiscal Evasion with Respect to Taxes on Income, art. VII, par. 6 provides:
6. Where profits include items of income which are dealt with separately in other Articles of
this Convention, then, the provisions of those Articles shall not be affected by the
provisions of this Article.
Fiscal Evasion with Respect to Taxes on Income, art. VIII provides:

Article VIII
Shipping and
Air Transport

1. Profits derived by an enterprise of a Contracting State from the operation of ships or

aircraft shall be taxable only in that State.

2. Notwithstanding the provisions of paragraph 1, profits from sources within a Contracting

State derived by an enterprise of the other Contracting State from the operation of ships or
aircraft in international traffic may be taxed in the first-mentioned State but the tax so
charged shall not exceed the lesser of

a) one and one-half per cent of the gross revenues derived from sources in that State; and
b) the lowest rate of Philippine tax imposed on such profits derived by an enterprise of
a
third State.
[116] TAX CODE, sec. 31 provides:

SEC. 31. Taxable Income Defined. - The term 'taxable income' means the pertinent items of
gross income specified in this Code, less the deductions and/or personal and additional
exemptions, if any, authorized for such types of income by this Code or other special laws.

[117] Rollo, p. 59, Court of Tax Appeals En Bance Decision.

[118] Const., an. II, sec. 2.

[119]Lex specialis derogat generali; See BAYAN (Bagong Alyansang Makabayan) v. Exec. Sec.
Zamora, 396 Phil. 623, 652 (2000) [Per J. Buena, En Banc], citing Manila Railroad Co. v
Collector of Customs, 52 Phil. 950, 952 (1929) [Per J. Malcolm, En Banc] and Leveriza v.
Intermediate Appellate Court, 241 Phil. 285, 299 (1988) [Per J. Bidin, Third Division], cited in
Republic v. Sandiganbayan, First Division, 255 Phil. 71, 83-84 (1989) [Per J. Gutierrez, Jr., En
Banc].

[120] TAX CODE, sec. 28(A)(1), as amended by Rep. Act No. 9337 (2005), sec. 2.
[121] See Bureau of Internal Revenue website (visited July 21, 2015).
[122]See Herman v. Radio Corporation of the Philippines, 50 Phil. 490, 498 (1927) [Per J.
Street, En Banc] in that the later legislative expression prevails when two statutes apply.
[123] Agreement Between the Government of Canada and the Government of the Republic of the
Philippines on Air Transport, Global Affairs Canada (visited July 21, 2015).
[124]Marubeni Corporation v. Commissioner of Internal Revenue, 258 Phil. 295, 306 (1989)
[Per CJ. Fernan, Third Division].
[125] Rollo, pp. 325-326, Air Canada's Memorandum.
[126] Id. at 323-325.
[127] 114 Phil. 549, 554-555 (1962) [Per J. Barrera, En Banc].
[128] 245 Phil. 717, 722-723 (1988) [Per J. Gutierrez, Jr., Third Division].
[129] G.R. No. 175410, November 12, 2014 [Per J. Leonen, Second Division],
[130] Id. at 1.
[131] Id.
[132] Id. at 9-10.
[133] Republic v. Mambulao Lumber Co., et al., 114 Phil. 549, 552 (1962) [Per J. Barrera, En
Banc] and Francia v. Intermediate Appellate Court, 245 Phil. 717, 722 (1988) [Per J. Gutierrez,
Jr., Third Division].
[134]
Republic v. Mambulao Lumber Co., et al, 114 Phil. 549, 552 (1962) [Per J. Barrera, En
Banc].
[135] Id. at 554-555.
[136]Francia v. Intermediate Appellate Court, 245 Phil. 717, 722 (1988) [Per J. Gutierrez, Jr.,
Third Division].
[137] Id. at 719.

[138] Id. at 720.
[139] Id. at 722.
[140] Id. at 722-723.
[141] G.R. No. 92585, May 8, 1992, 208 SCRA 726 [Per J. Davide, Jr., En Banc].
[142] 356 Phil. 189 (1998) [Per J. Romero, Third Division].
[143] CaltexPhilippines, Inc. v. Commission on Audit, G.R. No. 92585, May 8, 1992, 208 SCRA
726, 756 [Per J. Davide, Jr., En Banc].
[144] Philex Mining Corporation v. Commissioner of Internal Revenue, 356 Phil. 189, 198
(1998) [Per J. Romero, Third Division], citing Commissioner of Internal Revenue v. Palanca,
Jr., 124 Phil. 1102, 1107 (1966) [Per J. Regala, En Banc].
[145] Id. at 200.
[146] South African Airways v. Commissioner of Internal Revenue, 626 Phil. 566, 577 (2010)
[Per J. Velasco, Jr., Third Division].
[147] 646 Phil. 184 (2010) [Per J. Villarama. Jr., Third Division].
[148] Id. at 198-199.
[149] Rollo, pp. 79-105, Air Canada's Quarterly and Annual Income Tax Returns.
Source: Supreme Court E-Library | Date created: March 01, 2018

717 Phil. 611
THIRD DIVISION
[ G.R. Nos. 167274-75, September 11, 2013 ]
FORTUNE TOBACCO CORPORATION, RESPONDENT.

[G.R. No. 192576]

FORTUNE TOBACCO CORPORATION, PETITIONER, VS.

COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

DECISION
VELASCO JR., J.:
Fortune Tobacco Corporation (FTC), as petitioner in G.R. No. 192576,[1] assails and seeks the
reversal of the Decision of the Court of Tax Appeals (CTA) En Banc dated March 12, 2010, as
effectively reiterated in a Resolution of June 11, 2010, both rendered in C.T.A. EB No. 530
entitled Fortune Tobacco Corporation v. Commissioner of Internal Revenue. The assailed
issuances affirmed the Resolution of the CTA First Division dated June 4, 2009, denying the
Motion for Issuance of Additional Writ of Execution filed by herein petitioner in CTA Case
Nos. 6365, 6383 & 66l2, and the Resolution dated August 10, 2009 which denied its Motion for
Reconsideration.

The present appellate proceeding traces its origin from and finds context in the July 21, 2008
Decision[2] of the Court in G.R. Nos. 167274-75, an appeal thereto interposed by the
Commissioner of Internal Revenue (BIR Commissioner) from the consolidated Decision and
Resolution issued by the Court of Appeals on September 28, 2004 and March 1, 2005,
respectively, in CA-G.R. SP Nos. 80675 and 83165. The decretal part of the July 21, 2008
Decision reads:

WHEREFORE, the petition is DENIED. The Decision of the Court of Appeals in

CA G.R. SP No. 80675, dated 28 September 2004, and its Resolution, dated 1
March 2005, are AFFIRMED. No pronouncement as to costs.

SO ORDERED.[3] (Emphasis supplied.)

The antecedent facts, as summarized by the CTA in its adverted March 12, 2010 Decision, are
as follows:

FTC (herein petitioner Fortune Tobacco Corporation) is engaged in manufacturing or

producing cigarette brands with tax rate classification based on net retail price
prescribed as follows:
Brand Tax Rate

Champion M
P1.00
100
Salem M 100 P1.00
Salem M King P1.00
Camel F King P1.00
Camel Lights
P1.00
Box 20’s
Camel Filters
P1.00
Box 20’s
Winston F
P5.00
King
Winston
P5.00
Lights
Prior to January 1, 1997, the aforesaid cigarette brands were subject to ad-valorem
tax under Section 142 of the 1977 Tax Code, as amended. However, upon the
effectivity of Republic Act (R.A.) No. 8240 on January 1, 1997, a shift from ad
valorem tax system to the specific tax system was adopted imposing excise taxes on
cigarette brands under Section 142 thereof, now renumbered as Section 145 of the
1997 Tax Code, stating the following pertinent provision:

The excise tax from any brand of cigarettes within the next three (3)
years from the effectivity of R.A. No. 8240 shall not be lower than the
tax, which is due from each brand on October 1, 1996. x x x The rates of
excise tax on cigars and cigarettes under paragraphs (1), (2), (3) and (4)
hereof, shall be increased by twelve percent (12%) on January 1, 2000.

Upon the Commissioner’s recommendation, the Secretary of Finance, issued

Revenue Regulations (RR) No. 17-99 dated December 16, 1999 for the purpose of
implementing the provision for a 12% increase of excise tax on, among others,
cigars and cigarettes packed by machines by January 1, 2000. RR No. 17-99
provides that the new specific tax rate for any existing brand of cigars, cigarettes
packed by machine x x x shall not be lower than the excise tax that is actually being
paid prior to January 1, 2000.

FTC paid excise taxes on all its cigarettes manufactured and removed from its place
of production for the following period:

PERIOD PAYMENT
January 1, 2000 to January 31, 2000 P585,705,250.00
February 1, 2000 to December 31, 2001 P19,366,783,535.00
January 1, 2002 to December 31, 2002 P11,359,578,560.00
FTC subsequently sought administrative redress for refund before the Commissioner
on the following dates:

PERIOD ADMINISTRATIVE FILING AMOUNT

OF CLAIM CLAIMED
January 1, 2000 to
February 7, 2000 P35,651,410.00
January 31, 2000
Various claims filed from
February 1, 2000 to
March 21, 2000 – January 28, P644,735,615.00
December 31, 2001
2002
January 1, 2002 to
February 3, 2003 P355,385,920.00
December 31, 2002
(CTA En Banc Decision, Annex “A,” Petition, pp. 2-4)
2. Since the claim for refund was not acted upon, petitioner filed on December 11,
2001 and January 30, 2002, respectively, Petitions for Review before the Court of
Tax Appeals (CTA) docketed as CTA Case Nos. 6365 and 6383 questioning the
validity of Revenue Regulations No. 17-99 with claims for refund in the amounts
P35,651,410.00 and P644,735,615.00, respectively.

These amounts represented overpaid excise taxes for the periods from January 1,
2000 to January 31, 2000 and February 1, 2000 to December 31, 2001, respectively
(Ibid., pp. 4-5).

3. In [separate] Decision dated October 21, 2002, the CTA in Division ordered the
Commissioner of Internal Revenue (respondent herein) to refund to petitioner the
erroneously paid excise taxes in the amounts of P35,651,410.00 for the period
covering January 1, 2000 to January 31, 2000 (CTA Case No. 6365) and
P644,735,615.00 for the period February 1, 2000 to December 31, 2001 (CTA Case
No. 6383)(Ibid.).

4. Respondent filed a motion for reconsideration of the Decision dated October 21,
2002 covering CTA Case Nos. 6365 and 6383 which was granted in the Resolution
dated July 15, 2003.

5. Subsequently, petitioner filed another petition docketed as CTA Case No. 6612
questioning the validity of Revenue Regulations No. 17-99 with a prayer for the
refund of overpaid excise tax amounting to P355,385,920.00, covering the period
from January 1, 2002 to December 31, 2002 (Ibid., p. 5).

6. Petitioner thereafter filed a consolidated Motion for Reconsideration of the

Resolution dated July 15, 2003 (Ibid., pp. 5-6).

7. The CTA in Division issued Resolution dated November 4, 2003 which reversed
the Resolution dated July 15, 2003 and ordered respondent to refund to petitioner the
amounts of P35,651,410.00 for the period covering January 1 to January 31, 2000
and P644,735,615.00 for the period covering February 1, 2000 to December 31,
2001, or in the aggregate amount of P680,387,025.00, representing erroneously paid
excise taxes (Ibid., p. 6).
8. In its Decision dated December 4, 2003, the CTA in Division in Case No. 6612
declared RR No. 17-99 invalid and contrary to Section 145 of the 1997 National
Internal Revenue Code (NIRC). The Court ordered respondent to refund to petitioner
the amount of P355,385,920.00 representing overpaid excise taxes for the period
covering January 1, 2002 to December 21, 2002 (Ibid.)
9. Respondent filed a motion for reconsideration of the Decision dated December 4,

2003 but this was denied in the Resolution dated March 17, 2004 (Ibid.)
10. On December 10, 2003, respondent [Commissioner] filed a Petition for

Review with the Court of Appeals (CA) questioning the CTA Resolution dated
November 4, 2003 which was issued in CTA Case Nos. 6365 and 6383. The case
was docketed as CA-G.R. SP No. 80675 (Ibid.).
11. On April 28, 2004, respondent [Commissioner] filed another appeal before
the CA questioning the CTA Decision dated December 4, 2003 issued in CTA
Case No. 6612. The case was docketed as CA-G.R. SP No. 83165 (Ibid., p. 7).
12. Thereafter, petitioner filed a Consolidated Motion for Execution Pending Appeal
before the CTA for CTA Case Nos. 6365 and 6383 and an Amended Motion for
Execution Pending Appeal for CTA Case No. 6612 (Ibid.).
13. The motions were denied in the CTA Resolutions dated August 2, 2004 and
August 3, 2004, respectively.
The CTA in Division pointed out that Section 12, Rule 43 of the 1997 Rules of Civil
Procedure should be interpreted with Section 18 of R.A. 1125 which provides that
CTA rulings become final and conclusive only where there is no perfected appeal.
Considering that respondent filed an appeal with the CA, the CTA in Division’s
rulings granting the amounts of P355,385,920.00 and P680,387,025.00 were not yet
final and executory (Ibid.).
14. In the consolidated CA Decision dated September 28, 2004 issued in CA-
G.R. SP Nos. 80675 (CTA Case Nos. 6365 and 6383) and 83165 (CTA Case No.
6612), the appellate court denied respondent’s petitions and affirmed
petitioner’s refund claims in the amounts of P680,387,025.00 (CTA Case Nos.
6365 and 6383) and P355,385,920.00 (CTA Case No. 6612), respectively (Ibid., p.
8).
15. Respondent filed a motion for reconsideration of the CA Decision dated

September 28, 2004 but this was denied in the CA’s Resolution dated March 1, 2005
(Ibid.).
16. Respondent, filed a Petition for Review on Certiorari [docketed as G.R. Nos.
167274-75 on May 4, 2005] before the Honorable Court. On June 22, 2005, a
Supplemental Petition for Review was filed and the petitions were consolidated
(Ibid.).
17. In its Decision dated July 21, 2008 [in G.R. Nos. 167274-75], the Honorable
Court affirmed the findings of the CA granting petitioner’s claim for refund. The
dispositive portion of said Decision reads:
WHEREFORE, the petition is DENIED. The Decision of the Court of

Appeals in CA-G.R. SP No. 80675, dated 28 September 2004, and its
Resolution, dated 1 March 2005, are AFFIRMED. No pronouncement as
to costs.

SO ORDERED.

[Commissioner of Internal Revenue vs. Fortune Tobacco Corporation, 559 SCRA

160 (2008)]
18. On January 23, 2009, petitioner filed a motion for execution praying for the
issuance of a writ of execution of the Decision of the Honorable Court in G.R. Nos.
167274-75 dated July 21, 2008 which was recorded in the Book of Entries of
Judgments on November 6, 2008 (Ibid., p. 10).

Petitioner’s prayer was for the CTA to order the BIR to pay/refund the amounts
adjudged by the CTA, as follows:

a) CTA Case No. 6612 under the Decision 04 December 2003 – the amount of Three
Hundred Fifty Five Million Three Hundred Eighty Five Thousand Nine Hundred
Twenty Pesos (P355,385,920.00).

b) CTA Case Nos. 6365 and 6383 under the Decisions dated 21 October 2002 and
Resolution dated 04 November 2003 – the amount of Six Hundred Eighty Million
Three Hundred Eighty Seven Thousand Twenty Five Pesos (P680,387,025.00).
(Petition, p. 11)
19. On April 14, 2009, the CTA issued a Writ of Execution, which reads:

You are hereby ORDERED TO REFUND in favor of the petitioner FORTUNE

TOBACCO CORPORATION, pursuant to the Supreme Court Decision in the
above-entitled case (SC G.R. 167274-75), dated July 21, 2008, which has become
final and executory on November 6, 2008, by virtue of the Entry of Judgment by
the Supreme Court on said dated, which reads as follows:

xxxx

the amounts of P35,651,410.00 (C.T.A Case No. 6365) and P644,735,615.00

(C.T.A Case No. 6383) or a total of P680,387,025.00 representing petitioners’
erroneously paid excise taxes for the periods January 1-31, 2000 and February 1,
2000 to December 31, 2001, respectively under CA G.R. SP No. 80675 (C.T.A. Case
No. 6365 and C.T.A. Case No. 6383).

(CTA – 1st Division Resolution dated June 04, 2009, pp. 2-3)
20. On April 21, 2009, petitioner filed a motion for the issuance of an additional writ
of execution praying that the CTA order the Commissioner of Internal Revenue to
pay petitioner the amount of Three Hundred Fifty-Five Million Three Hundred
Eighty Five Thousand Nine Hundred Twenty Pesos (P355,385,920.00) representing
the amount of tax to be refunded in C.T.A. Case No. 6612 under its Decision dated
December 4, 2003 and affirmed by the Honorable Court in its Decision dated July
21, 2008 (Petition, p. 12, CTA Decision dated March 12, 2010, supra, p. 10).
21. In the CTA Resolution dated June 4, 2009, the CTA denied petitioner’s Motion
for the Issuance of Additional Writ of Execution (Ibid., p. 11).
22. Petitioner filed a motion for reconsideration of the Resolution dated June 4,
2009, but this was denied in the CTA Resolution dated August 10, 2009 (Ibid.).
The dispositive portion of the Resolution reads:
WHEREFORE, premises considered, the instant “Motion for

Reconsideration” is hereby DENIED for lack of merit.

23. Aggrieved by the Decision, petitioner filed a petition for review before the CTA
En Banc docketed as CTA EB Case No. 530, raising the following arguments, to wit:
The Honorable Court of Tax Appeals seriously erred contrary to law and
jurisprudence when it held in the assailed decision and resolution that
petitioner Fortune Tobacco Corporation is not entitled to the writ of
execution covering the decision in CTA Case No. 6612.

The Decision of the Court of Tax Appeals in CTA Case Nos. 6365, 6383
and 6612 has become final and executory.

The Decision of the Honorable Supreme Court in GR Nos. 167274-75

covers both CA GR SP No. 80675 and 83165.

(Ibid., p. 12)
24. The CTA En Banc, in the Decision dated March 12, 2010, dismissed said petition
for review. The dispositive portion of said Decision reads:

WHEREFORE, premises considered, the Petition for Review is

DISMISSED. The Resolutions dated June 4, 2009 and August 10, 2009
are AFFIRMED.

SO ORDERED.

(Annex “A,” Petition, p. 16)
25. Petitioner filed a Motion for Leave to file Motion for Reconsideration with
attached Motion for Reconsideration but this was denied in the CTA En Banc’s
Resolution dated June 11, 2010. The dispositive portion of said Resolution reads:
WHEREFORE, premises considered, petitioner’s Motion for Leave to

file attached Motion for Reconsideration and its Motion for
Reconsideration are hereby DENIED for lack of merit.

Undeterred by the rebuff from the CTA, petitioner FTC has come to this Court via a petition for
review, the recourse docketed as G.R. 192576, thereat praying in essence that an order issue (a)
directing the CTA to issue an additional writ of execution directing the Bureau of Internal
Revenue (BIR) to pay FTC the amount of tax refund (P355,385,920.00) as adjudged in CTA
Case No. 6612 and (b) clarifying that the Court’s Decision in G.R. Nos. 167274-75 applies to
the affirmatory ruling of the CA in CA G.R. SP 80675 and CA G.R. SP No. 83165. FTC
predicates its instant petition on two (2) stated grounds, viz.:

The Decision of the Honorable Supreme Court in S.C. GR Nos. 167274-75, which
has become final and executory, affirmed the Decision of the Court of Tax Appeals
in CTA Case Nos. 6365, 6383 and 6612 and to the Decision of the Court of Appeals
in CA G.R. SP No. 80675 and CA G.R. SP No. 83165.

II

The writ of execution prayed for and pertaining to CTA Case No. 6612 and CA G.R.
SP No. 83165 is consistent with the decision of the Supreme Court in GR Nos.
167274-75.

The petition is meritorious. But before delving on the merits of this recourse, certain undisputed
predicates have to be laid and basic premises restated to explain the consolidation of G.R. Nos.
167274-75 and G.R. No. 192576, thus:

1. As may be recalled, FTC filed before the CTA three (3) separate petitions for refund covering
three different periods involving varying amounts as hereunder indicated:

a) CTA Case No. 6365 (Jan. 1 to Jan. 31, 2000) for P35,651,410.00;

b) CTA Case No. 6383 (Feb. 1, 2000 to Dec. 31, 2001) for P644,735,615.00; and

c) CTA Case No. 6612 (Jan. 1 to Dec. 31, 2002) for 355,385,920.00.

In three (3) separate decisions/resolutions, the CTA found the claims for refund for the amounts
aforestated valid and thus ordered the payment thereof.

2. From the adverse ruling of the CTA in the three (3) cases, the BIR Commissioner went to the
CA on a petition for review assailing in CA-G.R. SP No. 80675 the CTA decision/resolution
pertaining to consolidated CTA Case Nos. 6365 & 6383. A similar petition, docketed as CA
G.R. SP No. 83165, was subsequently filed assailing the CTA decision/resolution on CTA Case
No. 6612.
3. Eventually, the CA, by Decision dated September 4, 2004, denied the Commissioner’s
consolidated petition for review. The appellate Court also denied the Commissioner’s motion
for reconsideration on March 1, 2005.
4. It is upon the foregoing state of things that the Commissioner came to this Court in G.R. Nos.
167274-75 to defeat FTC’s claim for refund thus granted initially by the CTA and then by the
CA in CA-G.R. SP No. 80675 and CA-G.R. SP No. 83165.
By Decision dated July 21, 2008, the Court found against the Commissioner, disposing as
follows:
WHEREFORE, the petition is DENIED. The Decision of the Court of Appeals in

CA G.R. SP No. 80675, dated 28 September 2004, and its Resolution, dated 1
March 2005, are AFFIRMED. No pronouncement as to costs.


From the foregoing narration, two critical facts are at once apparent. First, the BIR
Commissioner came to this Court on a petition for review in G.R. Nos. 167274-75 to set aside
the consolidated decision of the CA in CA-G.R. SP No. 80675 and CA-G.R. SP No. 83165.
Second, while the Court’s Decision dated July 21, 2008 in G.R. Nos. 167274-75 denied the
Commissioner’s petition for review, necessarily implying that the CA’s appealed consolidated
decision is affirmed in toto, the fallo of that decision makes no mention or even alludes to the
appealed CA decision in CA-G.R. No. 83165, albeit the main decision’s recital of facts made
particular reference to that appealed CA decision. In fine, there exists an apparent inconsistency
between the dispositive portion and the body of the main decision, which ideally should have
been addressed before the finality of the said decision.

Owing to the foregoing aberration, but cognizant of the fact that the process of clarifying the
dispositive portion in G.R. Nos. 167274-75 should be acted upon in the main case, the Court, by
Resolution[6] dated February 25, 2013 ordered the consolidation of this petition (G.R. No.
l92576) with G.R. Nos. 167274-75, to be assigned to any of the members of the Division who
participated in the rendition of the decision.

Now to the crux of the controversy.

Petitioner FTC posits that the CTA should have issued the desired additional writ of execution
in CTA Case No. 6612 since the body of the Decision of this Court in G.R. Nos. 167274-75
encompasses both CA G.R. Case No. 80675 which covers CTA Case Nos. 6365 and 6383 and
CA G.R. Case No. 83165 which embraces CTA Case No. 6612. While the fallo of the Decision
dated July 21, 2008 in G.R. Case Nos. 167274-75 did not indeed specifically mention CA G.R.
SP No. 83165, petitioner FTC would nonetheless maintain that such a slip is but an inadvertent
omission in the fallo. For the text of the July 21, 2008 Decision, FTC adds, clearly reveals that
said CA case was intended to be included in the disposition of the case.

Respondent Commissioner, on the other hand, argues that per the CTA, no reversible error may
be attributed to the tax court in rejecting, without more, the prayer for the additional writ of
execution pertaining to CTA Case No. 6612, subject of CA G.R. SP No. 83165. For the purpose,
the Commissioner cited a catena of cases on the limits of a writ of execution. It is pointed out
that such writ must conform to the judgment to be executed; its enforcement may not vary the
terms of the judgment it seeks to enforce, nor go beyond its terms. As further asseverated,
“whatever may be found in the body of the decision can only be considered as part of the
reasons or conclusions of the court and while they may serve as guide or enlightenment to
determine the ratio decidendi, what is controlling is what appears in the dispositive part of the
decision.”[7]
Respondent Commissioner’s posture on the tenability of the CTA’s assailed denial action is
correct. As it were, CTA did no more than simply apply established jurisprudence that a writ of
execution issued by the court of origin tasked to implement the final decision in the case
handled by it cannot go beyond the contents of the dispositive portion of the decision sought to
be implemented. The execution of a judgment is purely a ministerial phase of adjudication. The
executing court is without power, on its own, to tinker let alone vary the explicit wordings of the
dispositive portion, as couched.
But the state of things under the premises ought not to remain uncorrected. And the BIR cannot
plausibly raise a valid objection for such approach. That bureau knew where it was coming from
when it appealed, first before the CA then to this Court, the award of refund to FTC and the
rationale underpinning the award. It cannot plausibly, in all good faith, seek refuge on the basis
of slip on the formulation of the fallo of a decision to evade a duty. On the other hand, FTC has
discharged its burden of establishing its entitlement to the tax refund in the total amount
indicated in its underlying petitions for refund filed with the CTA. The successive favorable
rulings of the tax court, the appellate court and finally this Court in G.R. Nos. 167274-75 say as
much. Accordingly, the Court, in the higher interest of justice and orderly proceedings should
make the corresponding clarification on the fallo of its July 21, 2008 Decision in G.R. Case
Nos. 162274-75. It is an established rule that when the dispositive portion of a judgment, which
has meanwhile become final and executory, contains a clerical error or an ambiguity arising
from a inadvertent omission, such error or ambiguity may be clarified by reference to the body
of the decision itself.[8]
After a scrutiny of the body of the aforesaid July 21, 2008 Decision, the Court finds it necessary
to render a judgment nunc pro tunc and address an error in the fallo of said decision. The office
of a judgment nunc pro tunc is to record some act of the court done at a former time which was
not then carried into the record, and the power of a court to make such entries is restricted to
placing upon the record evidence of judicial action which has actually been taken.[9] The object
of a judgment nunc pro tunc is not the rendering of a new judgment and the ascertainment and
determination of new rights, but is one placing in proper form on the record, that has been
previously rendered, to make it speak the truth, so as to make it show what the judicial action
really was, not to correct judicial errors, such as to render a judgment which the court ought to
have rendered, in place of the one it did erroneously render, not to supply non-action by the
court, however erroneous the judgment may have been.[10] The Court would thus have the
record reflect the deliberations and discussions had on the issue. In this particular case it is a
correction of a clerical, not a judicial error. The body of the decision in question is clear proof
that the fallo must be corrected, to properly convey the ruling of this Court.
We thus declare that the dispositive portion of said decision should be clarified to include CA
G.R. SP No. 83165 which affirmed the December 4, 2003 Decision of the Court of Tax Appeals
in CTA Case No. 6612, for the following reasons, heretofore summarized:
1. The petition for review on certiorari in G.R. Nos. 167274-75 filed by respondent CIR sought
the reversal of the September 28, 2004 Decision of the Court of Appeals rendered in the
consolidated cases of CA-G.R. SP No. 80675 and CA-G.R. SP No. 83165, thus:
Hence, this petition for review on certiorari under Rule 45 of the Rules of Court
which seeks the nullification of the Court of Appeals’ (1) Decision promulgated on
September 28, 2004 in CA-G.R. SP No. 80675 and CA-G.R. SP No. 83165, both
entitled “Commissioner of Internal Revenue vs. Fortune Tobacco Corporation,”
denying the CIR’s petition and affirming the assailed decisions and resolutions of the
Court of Tax Appeals (CTA) in CTA Cases Nos. 6365, 6383 and 6612; and (2)
Resolution dated March 1, 2005 denying petitioner’s motion for reconsideration of
the said decision.”[11]

Earlier on, it was made clear that respondent CIR questioned the Decision of the CTA dated
October 21, 2002 in CTA Case Nos. 6365 and 6383 in CA G.R. SP No. 80675 before the Court
of Appeals. In CA G.R. SP No. 83165, the Commissioner also assailed the Decision of the CTA
dated December 4, 2003 in CTA Case No. 66l2 also before the same appellate court. The two
CA cases were later consolidated. Since the appellate court rendered its September 28, 2004
Decision in the consolidated cases of CA G.R. SP Nos. 80675 and 83165, what reached and was
challenged before this Court in G.R. Nos. 167274-75 is the ruling of the Court of Appeals in
both cases. When this Court rendered its July 21, 2008 Decision, the ruling necessarily
embraced both CA G.R. SP Case Nos. 80675 and 83165 and adjudicated the respective rights of
the parties. Clearly then, there was indeed an inadvertence in not specifying in the fallo of our
July 21, 2008 Decision that the September 28, 2004 CA Decision included not only CA G.R. SP
No. 80675 but also CA G.R. SP No. 83165 since the two cases were merged prior to the
issuance of the September 28, 2004 Decision.

Given the above perspective, the inclusion of CA G.R. SP Case No. 83165 in the fallo of the
Decision dated July 21, 2008 is very much in order and is in keeping with the imperatives of
fairness.

2. The very contents of the body of the Decision dated July 21, 2008 rendered by this Court in
G.R. Nos. 167274-75 undoubtedly reveal that both CA G.R. SP No. 80675 and CA G.R. SP No.
83165 were the subject matter of the petition therein. And as FTC would point out at every turn,
the Court’s Decision passed upon and decided the merits of the September 28, 2004 Decision of
the Court of Appeals in the consolidated cases of CA G.R. SP Case Nos. 80675 and 83165 and
necessarily CA G.R. SP No. 83165 was included in our disposition of G.R. Nos. 167274-75. We
quote the pertinent portions of the said decision:

The following undisputed facts, summarized by the Court of Appeals, are quoted in
the assailed Decision dated 28 September 2004:

CAG.R. SP No. 80675

xxxx
Petitioner [FTC] is the manufacturer/producer of, among others, the following

cigarette brands, with tax rate classification based on net retail price prescribed by
Annex “D” to R.A. No. 4280, to wit:
Brand Tax Rate

Champion M
P1.00
100
Salem M 100 P1.00
Salem M King P1.00
Camel F King P1.00
Camel Lights
P1.00
Box 20’s
Camel Filters
P1.00
Box 20’s
Winston F
P5.00
King
Winston
P5.00
Lights
Immediately prior to January 1, 1997, the above-mentioned cigarette brands were

subject to ad valorem tax pursuant to then Section 142 of the Tax Code of 1977, as
amended. However, on January 1, 1997, R.A. No. 8240 took effect whereby a shift
from the ad valorem tax (AVT) system to the specific tax system was made and
subjecting the aforesaid cigarette brands to specific tax under [S]ection 142 thereof,
now renumbered as Sec. 145 of the Tax Code of 1997, pertinent provisions of which
are quoted thus:

xxxx

The rates of excise tax on cigars and cigarettes under paragraphs (1), (2) (3)
and (4) hereof, shall be increased by twelve percent (12%) on January 1, 2000.
(Emphasis supplied.)

xxxx

To implement the provisions for a twelve percent (12%) increase of excise tax on,
among others, cigars and cigarettes packed by machines by January 1, 2000, the
Secretary of Finance, xxx issued Revenue Regulations [RR] No. 17-99, dated
December 16, 1999, which provides the increase on the applicable tax rates on cigar
and cigarettes x x x.

[tax rates deleted]

Revenue Regulations No. 17-99 likewise provides in the last paragraph of Section 1
thereof, “(t)hat the new specific tax rate for any existing brand of cigars,
cigarettes packed by machine, distilled spirits, wines and fermented liquor shall
not be lower than the excise tax that is actually being paid prior to January 1,
2000.”
For the period covering January 1-31, 2000, petitioner allegedly paid specific taxes
on all brands manufactured and removed in the total amounts of P585,705,250.00.
On February 7, 2000, petitioner filed with respondent’s Appellate Division a claim

for refund or tax credit of its purportedly overpaid excise tax for the month of
January 2000 in the amount of P35,651,410.00.
On June 21, 2001, petitioner filed with respondent’s Legal Service a letter dated June
20, 2001 reiterating all the claims for refund/tax credit of its overpaid excise taxes
filed on various dates, including the present claim for the month of January 2000 in
the amount of P35,651,410.00.
As there was no action on the part of the respondent, petitioner filed the instant
petition for review with this Court on December 11, 2001, in order to comply with
the two-year period for filing a claim for refund.
xxxx
CA G.R. SP No. 83165
The petition contains essentially similar facts, except that the said case questions the
CTA’s December 4, 2003 decision in CTA Case No. 6612 granting respondent’s
claim for refund of the amount of P355,385,920.00 representing erroneously or
illegally collected specific taxes covering the period January 1, 2002 to December
31, 2002, as well as its March 17, 2004 Resolution denying a reconsideration
thereof.
xxxx
However, on consolidated motions for reconsideration filed by the respondent in

CTA Case Nos. 6363 and 6383, the July 15, 2002 resolution was set aside, and the
Tax Court ruled, this time with a semblance of finality, that the respondent is entitled
to the refund claimed. Hence, in a resolution dated November 4, 2003, the tax court
reinstated its December 21, 2002 Decision and disposed as follows:
WHEREFORE, our Decisions in CTA Case Nos. 6365 and 6383 are
hereby REINSTATED. Accordingly, respondent is hereby ORDERED to
REFUND petitioner the total amount of P680,387,025.00 representing
erroneously paid excise taxes for the period January 1, 2000 to January
31, 2000 and February 1, 2000 to December 31, 2001.

SO ORDERED.

Meanwhile, on December 4, 2003, the [CTA] rendered a decision in CTA Case No.
6612 granting the prayer for the refund of the amount of P355,385,920.00
representing overpaid excise tax for the period covering January 1, 2002 to
December 31, 2002. The tax court disposed of the case as follows:
IN VIEW OF THE FOREGOING, the Petition for Review is
GRANTED. Accordingly, respondent is hereby ORDERED to REFUND
to petitioner the amount of P355,385,920.00 representing overpaid excise
tax for the period covering January 1, 2002 to December 31, 2002.
SO ORDERED.
Petitioner sought reconsideration of the decision, but the same was denied in a
Resolution dated March 17, 2004. (Emphasis supplied; citations omitted.)

The Commissioner appealed the aforesaid decisions of the CTA. The petition
questioning the grant of refund in the amount of P680,387,025.00 was docketed as
CA-G.R. SP No. 80675, whereas that assailing the grant of refund in the amount of
P355,385,920.00 was docketed as CA-G.R. SP No. 83165. The petitions were
consolidated and eventually denied by the [CA]. The appellate court also denied
reconsideration in its Resolution dated 1 March 2005.

In its Memorandum 22 dated November 2006, filed on behalf of the Commissioner,

the Office of the Solicitor General (OSG) seeks to convince the Court that the literal
interpretation given by the CTA and the [CA] of Section 145 of the Tax Code of
1997 (Tax Code) would lead to a lower tax imposable on 1 January 2000 than that
imposable during the transition period. Instead of an increase of 12% in the tax rate
effective on 1 January 2000 as allegedly mandated by the Tax Code, the appellate
court’s ruling would result in a significant decrease in the tax rate by as much as
66%.

xxxx

Finally, the OSG asserts that a tax refund is in the nature of a tax exemption and
must, therefore, be construed strictly against the taxpayer, such as Fortune Tobacco.

In its Memorandum dated 10 November 2006, Fortune Tobacco argues that the CTA
and the [CA] merely followed the letter of the law when they ruled that the basis for
the 12% increase in the tax rate should be the net retail price of the cigarettes in the
market as outlined in paragraph C, sub [par.] (1)-(4), Section 145 of the Tax Code.
The Commissioner allegedly has gone beyond his delegated rule-making power
when he promulgated, enforced and implemented [RR] No. 17-99, which effectively
created a separate classification for cigarettes based on the excise tax “actually being
paid prior to January 1, 2000.”

xxxx

This entire controversy revolves around the interplay between Section 145 of the Tax
Code and [RR] 17-99. The main issue is an inquiry into whether the revenue
regulation has exceeded the allowable limits of legislative delegation.

xxxx

Revenue Regulation 17-99, which was issued pursuant to the unquestioned authority
of the Secretary of Finance to promulgate rules and regulations for the effective
implementation of the Tax Code, interprets the above-quoted provision and reflects
the 12% increase in excise taxes in the following manner:
[table on tax rates deleted]
This table reflects Section 145 of the Tax Code insofar as it mandates a 12% increase
effective on 1 January 2000 based on the taxes indicated under paragraph C, sub-
paragraph (1)-(4). However, [RR]No. 17-99 went further and added that “[T]he new
specific tax rate for any existing brand of cigars, cigarettes packed by machine,
distilled spirits, wines and fermented liquor shall not be lower than the excise tax
that is actually being paid prior to January 1, 2000.”
Parenthetically, Section 145 states that during the transition period, i.e., within the
next three (3) years from the effectivity of the Tax Code, the excise tax from any
brand of cigarettes shall not be lower than the tax due from each brand on 1 October
1996. This qualification, however, is conspicuously absent as regards the 12%
increase which is to be applied on cigars and cigarettes packed by machine, among
others, effective on 1 January 2000. Clearly and unmistakably, Section 145 mandates
a new rate of excise tax for cigarettes packed by machine due to the 12% increase
effective on 1 January 2000 without regard to whether the revenue collection starting
from this period may turn out to be lower than that collected prior to this date.
By adding the qualification that the tax due after the 12% increase becomes effective
shall not be lower than the tax actually paid prior to 1 January 2000, [RR] No. 17-99
effectively imposes a tax which is the higher amount between the ad valorem tax
being paid at the end of the three (3)-year transition period and the specific tax under
paragraph C, sub-paragraph (1)-(4), as increased by 12%—a situation not supported
by the plain wording of Section 145 of the Tax Code.
This is not the first time that national revenue officials had ventured in the area of
unauthorized administrative legislation.
In Commissioner of Internal Revenue v. Reyes, respondent was not informed in

writing of the law and the facts on which the assessment of estate taxes was made
pursuant to Section 228 of the 1997 Tax Code, as amended by Republic Act (R.A.)
No. 8424. She was merely notified of the findings by the Commissioner, who had
simply relied upon the old provisions of the law and [RR] No. 12-85 which was
based on the old provision of the law. The Court held that in case of discrepancy
between the law as amended and the implementing regulation based on the old law,
the former necessarily prevails. The law must still be followed, even though the
existing tax regulation at that time provided for a different procedure.
xxxx
In the case at bar, the OSG’s argument that by 1 January 2000, the excise tax on
cigarettes should be the higher tax imposed under the specific tax system and the tax
imposed under the ad valorem tax system plus the 12% increase imposed by
paragraph 5, Section 145 of the Tax Code, is an unsuccessful attempt to justify what
is clearly an impermissible incursion into the limits of administrative legislation.
Such an interpretation is not supported by the clear language of the law and is
obviously only meant to validate the OSG’s thesis that Section 145 of the Tax Code
is ambiguous and admits of several interpretations.
The contention that the increase of 12% starting on 1 January 2000 does not apply to
the brands of cigarettes listed under Annex “D” is likewise unmeritorious, absurd
even. Paragraph 8, Section 145 of the Tax Code simply states that, “[T]he
classification of each brand of cigarettes based on its average net retail price as of
October 1, 1996, as set forth in Annex ‘D’, shall remain in force until revised by
Congress.” This declaration certainly does not lend itself to the interpretation given
to it by the OSG. As plainly worded, the average net retail prices of the listed brands
under Annex “D,” which classify cigarettes according to their net retail price into
low, medium or high, obviously remain the bases for the application of the increase
in excise tax rates effective on 1 January 2000.
The foregoing leads us to conclude that [RR] No. 17-99 is indeed indefensibly
flawed. The Commissioner cannot seek refuge in his claim that the purpose behind
the passage of the Tax Code is to generate additional revenues for the government.
Revenue generation has undoubtedly been a major consideration in the passage of
the Tax Code. However, as borne by the legislative record, the shift from the ad
valorem system to the specific tax system is likewise meant to promote fair
competition among the players in the industries concerned, to ensure an equitable
distribution of the tax burden and to simplify tax administration by classifying
cigarettes x x x into high, medium and low-priced based on their net retail price and
accordingly graduating tax rates.
xxxx

WHEREFORE, the petition is DENIED. The Decision of the Court of

Appeals in CA G.R. SP No. 80675, dated 28 September 2004, and its
Resolution, dated 1 March 2005, are AFFIRMED. No pronouncement as
to costs.

SO ORDERED.[12]

The July 21, 2008 Decision in G.R. Nos. 167274-75 brings into sharp focus the following facts
and proceedings:

1. It specifically mentioned CA G.R. SP No. 80675 and CA G.R. SP No. 83165 as the subject
matter of the decision on p. 2 and p. 7, respectively.

2. It traced the history of CTA Case Nos. 6365 and 6383 from the time the CTA peremptorily
resolved the twin refund suits to the appeal of the decisions thereat to the Court of Appeals via a
petition docketed as CA-G.R. SP No. 80675 and eventually to this Court in G.R. Nos. 167274-
75. It likewise narrated the events connected with CTA Case No. 6612 to the time the decision
in said case was appealed to the Court of Appeals in CA-G.R. SP No. 83165, consolidated with
CA G.R. SP No. 80675 and later decided by the appellate court. It cited the appeal from the CA
decision by the BIR Commissioner to this Court in G.R. Nos. 167274-75.
3. It resolved in the negative the main issue presented in both CA-G.R. SP No. 80675 and CA-
G.R. SP No. 83165 as to whether or not the last paragraph of Section 1 of Revenue Regulation
No. 17-99 is in accordance with the pertinent provisions of Republic Act No. 8240, now
incorporated in Section 145 of the Tax Code of 1997.
4. The very disposition in the fallo in G.R. Case Nos. 167274-75 that “the petition is denied”
and that the “Decision of the Court of Appeals x x x dated 28 September 2004 and its
Resolution dated 1 March 2005 are affirmed” reflects an intention that CA G.R. SP No. 83165
should have been stated therein, being one of the cases subject of the September 28, 2004 CA
Decision.
The legality of Revenue Regulation No. 17-99 is the only determinative issue resolved by the
July 21, 2008 Decision which was the very same issue resolved by the CA in the consolidated
CA-G.R. SP Nos. 80675 and 83165 and exactly the same issue in CTA Nos. 6365, 6383 and
6612.
From the foregoing cogent reasons, We conclude that CA-G.R. SP No. 83165 should be
included in the fallo of the July 21, 2008 decision.
It is established jurisprudence that “the only portion of the decision which becomes the subject
of execution and determines what is ordained is the dispositive part, the body of the decision
being considered as the reasons or conclusions of the Court, rather than its adjudication.”[13]
In the case of Ong Ching Kian Chung v. China National Cereals Oil and Foodstuffs Import and
Export Corporation, the Court noted two (2) exceptions to the rule that the fallo prevails over
the body of the opinion, viz:
(a) where there is ambiguity or uncertainty, the body of the opinion may be referred
to for purposes of construing the judgment because the dispositive part of a decision
must find support from the decision’s ratio decidendi;

(b) where extensive and explicit discussion and settlement of the issue is found in
the body of the decision.[14]

Both exceptions obtain in the present case. We find that there is an ambiguity in the fallo of Our
July 21, 2008 Decision in G.R. Nos. 167274-75 considering that the propriety of the CA holding
in CA-G.R. SP No. 83165 formed part of the core issues raised in G.R. Case Nos. 167274-75,
but unfortunately was left out in the all-important decretal portion of the judgment. The fallo of
Our July 21, 2008 Decision should, therefore, be correspondingly corrected.

For sure, the CTA cannot, as the Commissioner argues, be faulted for denying petitioner FTC’s
Motion for Additional Writ of Execution filed in CTA Case Nos. 6365, 6383 and 6612 and for
denying petitioner’s Motion for Reconsideration for it has no power nor authority to deviate
from the wording of the dispositive portion of Our July 21, 2008 Decision in G.R. Nos. 167274-
75. To reiterate, the CTA simply followed the all too familiar doctrine that “when there is a
conflict between the dispositive portion of the decision and the body thereof, the dispositive
portion controls irrespective of what appears in the body of the decision.”[15] Veering away
from the fallo might even be viewed as irregular and may give rise to a charge of breach of the
Code of Judicial Conduct. Nevertheless, it behooves this Court for reasons articulated earlier to
grant relief to petitioner FTC by way of clarifying Our July 21, 2008 Decision. This corrective
step constitutes, in the final analysis, a continuation of the proceedings in G.R. Case Nos.
167274-75. And it is the right thing to do under the premises. If the BIR, or other government
taxing agencies for that matter, expects taxpayers to observe fairness, honesty, transparency and
accountability in paying their taxes, it must, to borrow from BPI Family Savings Bank, Inc. v
Court of Appeals[16] hold itself against the same standard in refunding excess payments or
illegal exactions. As a necessary corollary, when the taxpayer’s entitlement to a refund stands
undisputed, the State should not misuse technicalities and legalisms, however exalted, to keep
money not belonging to it.[17] As we stressed in G.R. Nos. 167274-75, the government is not
exempt from the application of solutio indebiti, a basic postulate proscribing one, including the
State, from enriching himself or herself at the expense of another.[18] So it must be here.
WHEREFORE, the petition is GRANTED. The dispositive portion of the Court’s July 21,
2008 Decision in G.R. Nos. 167274-75 is corrected to reflect the inclusion of CA G.R. SP No.
83165 therein. As amended, the fallo of the aforesaid decision shall read:
WHEREFORE, the petition is DENIED. The Decision of the Court of Appeals in the
consolidated cases of CA- G.R. SP No. 80675 and 83165 dated 28 September 2004,
and its Resolution, dated 1 March 2005, are AFFIRMED. No pronouncement as to
costs.

The Decision of the Court of Tax Appeals (CTA) En Banc dated March 12, 2010 and the
Resolution dated June 11, 2010 in CTA EB No. 530 entitled “Fortune Tobacco Corporation vs.
Commissioner of Internal Revenue” as well as the Resolutions dated June 4, 2009 and August
10, 2009 which denied the Motion for Issuance of Additional Writ of Execution of the CTA
First Division in CTA Cases Nos. 6365, 6383 and 6612 are SET ASIDE. The CTA is
ORDERED to issue a writ of execution directing the respondent CIR to pay petitioner Fortune
Tobacco Corporation the amount of tax refund of P355,385,920.00 as adjudged in CTA Case
No. 6612.

SO ORDERED.

Peralta, Abad, Mendoza, and Leonen, JJ., concur.

[1] A petition for review on certiorari under Rule 45 of the Rules of Court.

[2]
Penned by Associate Justice Dante Tinga, now retired, for the then Second Division of the
Court.

[3] Rollo (G.R. Nos. 167274-75), p. 522.
[4] Rollo (G.R. No. 192576), pp. 83-92.

[5] Rollo (G.R. Nos. 167274-75), p. 522.
[6] Rollo (G.R. No. 192576), pp. 121-127.
[7] Tropical Homes, Inc. v. Fortun, G.R. No. 51554, January 13, 1989, 169 SCRA 81, 91.
[8]Philippine Health Insurance Corporation v. Court of Appeals, G.R. No. 176276, November
28, 2008, 572 SCRA 720.
[9]Briones-Vasquez v. Court of Appeals, G.R. No. 144882, February 4, 2005, 450 SCRA 482,
491.
[10] Manning International Corporation v. NLRC, G.R. No. 83018, March 13, 1991, 195 SCRA
155, 161-162.
[11] Rollo (G.R. Nos. 167274-75), p. 10.
[12] Rollo (G.R. Nos. 167274-75), pp. 500-522.
[13] Edward v. Arce, No. L-6932, March 26, 1956.
[14] G.R. No. 131502. June 8, 2000, 333 SCRA 390, 401.
[15] Aguirre v. Aguirre, No. L-33080, August 15, 1974, 58 SCRA 461.
[16] G.R. No. 122480, April 12, 2000, 330 SCRA 507.
[17]Id.; see also State Land Investment Corporation v. Commissioner of Internal Revenue, G.R.
No. 171956, January 18, 2008, 542 SCRA 114.
[18] Id.
Source: Supreme Court E-Library | Date created: May 25, 2017

358 Phil. 562
FIRST DIVISION
[ G.R. No. 124043, October 14, 1998 ]
COURT OF APPEALS, COURT OF TAX APPEALS AND YOUNG MEN’S
CHRISTIAN ASSOCIATION OF THE PHILIPPINES, INC.,
RESPONDENTS.
DECISION
PANGANIBAN, J.:
Is the income derived from rentals of real property owned by the Young Men’s Christian
Association of the Philippines, Inc. (YMCA) - established as "a welfare, educational and
charitable non-profit corporation" -- subject to income tax under the National Internal Revenue
Code (NIRC) and the Constitution?

The Case
This is the main question raised before us in this petition for review on certiorari challenging
two Resolutions issued by the Court of Appeals[1] on September 28, 1995[2] and February 29,
1996[3] in CA-GR SP No. 32007. Both Resolutions affirmed the Decision of the Court of Tax
Appeals (CTA) allowing the YMCA to claim tax exemption on the latter’s income from the
lease of its real property.

The Facts
The Facts are undisputed.[4] Private Respondent YMCA is a non-stock, non-profit institution,
which conducts various programs and activities that are beneficial to the public, especially the
young people, pursuant to its religious, educational and charitable objectives.

In 1980, private respondent earned, among others, an income of P676,829.80 from leasing out a
portion of its premises to small shop owners, like restaurants and canteen operators, and
P44,259.00 from parking fees collected from non-members. On July 2, 1984, the commissioner
of internal revenue (CIR) issued an assessment to private respondent, in the total amount of
P415,615.01 including surcharge and interest, for deficiency income tax, deficiency expanded
withholding taxes on rentals and professional fees and deficiency withholding tax on wages.
Private respondent formally protested the assessment and, as a supplement to its basic protest,
filed a letter dated October 8, 1985. In reply, the CIR denied the claims of YMCA.

Contesting the denial of its protest, the YMCA filed a petition for review at the Court if Tax
Appeals (CTA) on March 14, 1989. In due course, the CTA issued this ruling in favor of the
YMCA:
"xxx [T]he leasing of private respondent’s facilities to small shop owners, to

restaurant and canteen operators and the operation of the parking lot are reasonably
incidental to and reasonably necessary for the accomplishment of the objectives of
the [private respondents]. It appears from the testimonies of the witnesses for the
[private respondent] particularly Mr. James C. Delote, former accountant of YMCA,
that these facilities were leased to members and that they have to service the needs
of its members and their guests. The Rentals were minimal as for example, the
barbershop was only charged P300 per month. He also testified that there was
actually no lot devoted for parking space but the parking was done at the sides of the
building. The parking was primarily for members with stickers on the windshields of
their cars and they charged P.50 for non-members. The rentals and parking fees were
just enough to cover the costs of operation and maintenance only. The earning[s]
from these rentals and parking charges including those from lodging and other
charges for the use of the recreational facilities constitute [the] bulk of its income
which [is] channeled to support its many activities and attainment of its objectives.
As pointed out earlier, the membership dues are very insufficient to support its
program. We find it reasonably necessary therefore for [private respondent] to make
[the] most out [of] its existing facilities to earn some income. It would have been
different if under the circumstances, [private respondent] will purchase a lot and
convert it to a parking lot to cater to the needs of the general public for a fee, or
construct a building and lease it out to the highest bidder or at the market rate for
commercial purposes, or should it invest its funds in the buy and sell of properties,
real or personal. Under these circumstances, we could conclude that the activities are
already profit oriented, not incidental and reasonably necessary to the pursuit of the
objectives of the association and therefore, will fall under the last paragraph of
section 27 of the Tax Code and any income derived therefrom shall be taxable.

"Considering our findings that [private respondent] was not engaged in the business
of operating or contracting [a] parking lot, we find no legal basis also for the
imposition of [a] deficiency fixed tax and [a] contractor’s tax in the amount[s] of
P353.15 and P3,129.73, respectively.

xxxxxxxxx

"WHEREFORE, in view of all the foregoing, the following assessments are hereby
dismissed for lack of merit:

1980 Deficiency Fixed Tax - P353,15;

1980 Deficiency Contractor’s Tax - P3,129.23;

1980 Deficiency Income Tax - P372,578.20.
While the following assessments are hereby

sustained:
1980 Deficiency Expanded Withholding Tax - P1,798.93;
1980 Deficiency Withholding Tax on Wages - P33,058.82
plus 10% surcharge and 20% interest per annum from July 2, 1984 until fully paid
but not to exceed three (3) years pursuant to Section 51 (e)(2) & (3) of the National
Internal Revenue Code effective as of 1984."[5]
Dissatisfied with the CTA ruling, the CIR elevated the case to the Court of Appeals (CA). In its
Decision of February 16, 1994, the CA[6] initially decided in favor of the CIR and disposed of
the appeal in the following manner:

"Following the ruling in the afore-cited cases of Province of Abra vs. Hernando and Abra Valley
College Inc. vs. Aquino, the ruling of the respondent Court of Tax Appeals that ‘the leasing of
petitioner’s (herein respondent) facilities to small shop owners, to restaurant and canteen
operators and the operation of the parking lot are reasonably incidental to and reasonably
necessary for the accomplishment of the objectives of the petitioners,' and the income derived
therefrom are tax exempt, must be reversed.

"WHEREFORE, the appealed decision is hereby REVERSED in so far as it

dismissed the assessment for:

1980 Deficiency Income Tax P 353.15

&
1980 Deficiency Contractor’s Tax P 3,129.23,
1980 Deficiency Income Tax P 372,578.20,
but the same is AFFIRMED in all other respect."[7]
Aggrieved, the YMCA asked for reconsideration based on the following grounds:

"The findings of facts of the Public Respondent Court of Tax Appeals being
supported by substantial evidence [are] final and conclusive.

II
"The conclusions of law of [p]ublic [r]espondent exempting [p]rivate [r]espondent

from the income on rentals of small shops and parking fees [are] in accord with the
applicable law and jurisprudence."[8]
Finding merit in the Motion for Reconsideration filed by the YMCA, the CA reversed itself and
promulgated on September 28, 1995 its first assailed Resolution which, in part, reads:

"The Court cannot depart from the CTA’s findings of fact, as they are supported by
evidence beyond what is considered as substantial.

xxxxxxxxx

"The second ground raised is that the respondent CTA did not err in saying that the
rental from small shops and parking fees do not result in the loss of the exemption.
Not even the petitioner would hazard the suggestion that YMCA is designed for
profit. Consequently, the little income from small shops and parking fees help[s] to
keep its head above the water, so to speak, and allow it to continue with its laudable
work.
"The Court, therefore, finds the second ground of the motion to be meritorious and
in accord with law and jurisprudence.
"WHEREFORE, the motion for reconsideration is GRANTED; the respondent

CTA’s decision is AFFIRMED in toto."[9]
The internal revenue commissioner’s own Motion for Reconsideration was denied by
Respondent Court in its second assailed Resolution of February 29, 1996. Hence, this petition
for review under Rule 45 of the Rules of Court.[10]

The Issues
Before us, petitioner imputes to the Court of Appeals the following errors:

"In holding that it had departed from the findings of fact of Respondent Court of Tax
Appeals when it rendered its Decision dated February 16, 1994; and

II
"In affirming the conclusion of Respondent Court of Tax Appeals that the income of
private respondent from rentals of small shops and parking fees [is] exempt from
taxation."[11]
This Court’s Ruling
The Petition is meritorious.

First Issue:
Factual Findings of
the CTA
Private respondent contends that the February 16, 1994 CA Decision reversed the factual
findings of the CTA. On the other hand, petitioner argues that the CA merely reversed the
"ruling of the CTA that the leasing of private respondent’s facilities to small shop owners, to
restaurant and canteen operators and the operation of parking lots are reasonably incidental to
and reasonably necessary for the accomplishment of the objectives of the private respondent and
that the income derived therefrom are tax exempt."[12] Petitioner insists that what the appellate
court reversed was the legal conclusion, not the factual finding, of the CTA.[13] The
commissioner has a point.

Indeed, it is a basic rule in taxation that the factual findings of the CTA, when supported by
substantial evidence, will not be disturbed on appeal unless it is shown that the said court
committed gross error in the appreciation of facts.[14] In the present case, this Court finds that
the February 16, 1994 Decision of the CA did not deviate from this rule. The latter merely
applied the law to the facts as found by the CTA and ruled on the issue raised by the CIR:
"Whether or not the collection or earnings of rental income from the lease of certain premises
and income earned from parking fees shall fall under the last paragraph of Section 27 of the
National Internal Revenue Code of 1977, as amended."[15]
Clearly, the CA did not alter any fact or evidence. It merely resolved the aforementioned issue,
as indeed it was expected to. That it did so in a manner different from that of the CTA did not
necessarily imply a reversal of factual findings.
The distinction between a question of law and a question of fact is clear-cut. It has been held
that "[t]here is a question of law in a given case when the doubt or difference arises as to what
the law is on a certain state of facts; there is a question of fact when the doubt or difference
arises as to the truth or falsehood of alleged facts."[16] In the present case, the CA did not doubt,
much less change, the facts narrated by the CTA. It merely applied the law to the facts. That its
interpretation or conclusion is different from that of the CTA is not irregular or abnormal.
Second Issue:
Is the Rental Income of the YMCA Taxable?
We now come to the crucial issue: Is the rental income of the YMCA from its real estate subject
to tax? At the outset, we set forth the relevant provision of the NIRC:
"SEC. 27. Exemptions from tax on corporations. -- The following organizations shall
not be taxed under this Title in respect to income received by them as such --

xxxxxxxxx

(g) Civic league or organization not organized for profit but operated exclusively for
the promotion of social welfare;

(h) Club organized and operated exclusively for pleasure, recreation, and other non-
profitable purposes, no part of the net income of which inures to the benefit of any
private stockholder or member;

xxxxxxxxx

Notwithstanding the provision in the preceding paragraphs, the income of whatever

kind and character of the foregoing organization from any of their properties, real or
personal, or from any of their activities conducted for profit, regardless of the
disposition made of such income, shall be subject to the tax imposed under this
Code. (as amended by Pres. Decree No. 1457)"
Petitioners argues that while the income received by the organizations enumerated in Section 27
(now Section 26) of the NIRC is, as a rule, exempted from the payment of tax "in respect to
income received by them as such," the exemption does not apply to income derived "xxx from
any if their properties, real or personal, or from any of their activities conducted for profit,
regardless, of the disposition made of such income xxx."
Petitioner adds that "rented income derived by a tax-exempt organization from the lease of its
properties, real or personal, [is] not, therefore, exempt from income taxation, even if such
income [is] exclusively used for the accomplishment of its objectives."[17] We agree with the
commissioner.
Because taxes are the lifeblood of the nation, the Court has always applied the doctrine of strict
interpretation in construing tax exemptions.[18] Furthermore, a claim of statutory exemption
from taxation should be manifest and unmistakable from the language of the law on which it is
based. Thus, the claimed exemption "must expressly be granted in a statute stated in a language
too clear to be mistaken."[19]
In the instant case, the exemption claimed by the YMCA is expressly disallowed by the very
wording of the last paragraph of then Section 27 of the NIRC which mandates that the income
of exempt organizations (such as the YMCA) from any of their properties, real or personal, be
subject to the imposed by the same Code. Because the last paragraph of said section
unequivocally subjects to tax the rent income f the YMCA from its rental property,[20] the Court
is duty-bound to abide strictly by its literal meaning and to refrain from resorting to any
convoluted attempt at construction.
It is axiomatic that where the language of the law is clear and unambiguous, its express terms
must be applied.[21] Parenthetically, a consideration of the question of construction must not
even begin, particularly when such question is on whether to apply a strict construction or a
literal one on statutes that grant tax exemptions to "religious, charitable and educational
propert[ies] or institutions."[22]
The last paragraph of Section 27, the YMCA argues, should be "subject to the qualification that
the income from the properties must arise from activities ‘conducted for profit’ before it may be
considered taxable."[23] This argument is erroneous. As previously stated, a reading of said
paragraph ineludibly shows that the income from any property of exempt organizations, as well
as that arising from any activity it conducts for profit, is taxable. The phrase "any of their
activities conducted for profit" does not qualify the word "properties." This makes income from
the property of the organization taxable, regardless of how that income is used -- whether for
profit or for lofty non-profit purposes.
Verba legis non est recedendum. Hence, Respondent Court of Appeals committed reversible
error when it allowed, on reconsideration, the tax exemption claimed by YMCA on income it
derived from renting out its real property, on the solitary but unconvincing ground that the said
income is not collected for profit but is merely incidental to its operation. The law does not
make a distinction. The rental income is taxable regardless of whence such income is derived
and how it used or disposed of. Where the law does not distinguish, neither should we.
Constitutional Provisions
on Taxation
Invoking not only the NIRC but also the fundamental law, private respondent submits that
Article VI, Section 28 of par. 3 of the 1987 Constitution,[24] exempts "charitable institutions"
from the payment not only of property taxes but also of income tax from any source.[25] In
support of its novel theory, it compares the use of the words "charitable institutions," "actually"
and "directly" in the 1973 and the 1987 Constitutions, on the hand; and in Article VI Section 22,
par. 3 of the 1935 Constitution, on the other hand.[26]
Private respondent enunciates three points. First, the present provision is divisible into two
categories: (1) "[c]haritable institutions, churches and parsonages or convents appurtenant
thereto, mosques and non-profit cemeteries," the incomes of which are, from whatever source,
all tax-exempt;[27] and (2) "[a]ll lands, buildings and improvements actually and directly used
for religious, charitable or educational purposes," which are exempt only from property taxes.
[28] Second, Lladoc v. Commissioner of Internal Revenue,[29] which limited the exemption only
to the payment of property taxes, referred to the provision of the 1935 Constitution and not to its
counterparts in the 1973 and the 1987 Constitutions.[30] Third, the phrase "actually, directly and
exclusively used for religious, charitable or educational purposes" refers not only to "all lands,
buildings and improvements," but also to the above-quoted first category which includes
charitable institutions like the private respondent.[31]
The Court is not persuaded. The debates, interpellations and expressions of opinion of the
framers of the Constitution reveal their intent which, in turn, may have guided the people in
ratifying the Charter.[32]Such intent must be effectuated.
Accordingly, Justice Hilario G. Davide, Jr., a former constitutional commissioner, who is now a
member of this Court, stressed during the Concom debates that "xxx what is exempted is not the
institution itself xxx; those exempted from real estate taxes are lands, buildings and
improvements actually, directly and exclusively used for religious, charitable or educational
purposes."[33] Father Joaquin G. Bernas, an eminent authority on the Constitution and also a
member of the Concom, adhered to the same view that the exemption created by said provision
pertained only to property taxes.[34]
In his treatise on taxation, Mr. Justice Jose C. Vitug concurs, stating that "[t]he tax exemption
covers property taxes only."[35] Indeed, the income tax exemption claimed by private
respondent finds no basis in Article VI, Section 28, par. 3 of the Constitution.
Private respondent also invokes Article XIV, Section 4, par. 3 of the Charter,[36] claiming that
the YMCA "is a non-stock, non-profit educational institution whose revenues and assets are
used actually, directly and exclusively for educational purposes so it is exempt from taxes on its
properties and income."[37] We reiterate that private respondent is exempt from the payment of
property tax, but not income tax on the rentals from its property. The bare allegation alone that it
is a non-stock, non-profit educational institution is insufficient to justify its exemption from the
payment of income tax.
As previously discussed, laws allowing tax exemption are construed strictissimi juris. Hence,
for the YMCA to be granted the exemption it claims under the aforecited provision, it must
prove with substantial evidence that (1) it falls under the classification non-stock, non-profit
educational institution; and (2) the income it seeks to be exempted from taxation is used
actually, directly, and exclusively for educational purposes. However, the Court notes that not a
scintilla of evidence was submitted by private respondent to prove that it met the said requisites.
Is the YMCA an educational institution within the purview of Article XIV, Section 4, par.3 of
the Constitution? We rule that it is not. The term "educational institution" or "institution of
learning" has acquired a well-known technical meaning, of which the members of the
Constitutional Commission are deemed cognizant.[38] Under the Education Act of 1982, such
term refers to schools.[39] The school system is synonymous with formal education,[40] which
"refers to the hierarchically structured and chronological graded learnings organized and
provided by the formal school system and for which certification is required in order for the
learner to progress through the grades or move to the higher levels."[41] The Court has
examined the "Amended Articles of Incorporation"[42] and "By-Laws"[43] of the YMCA, but
found nothing in them that even hints that it is a school or an educational institution.[44]
Furthermore, under the Education Act of 1982, even non-formal education is understood to be
school-based and "private auspices such as foundations and civic-spirited organizations" are
ruled out.[45] It is settled that the term "educational institution," when used in laws granting tax
exemptions, refers to a - xxx school seminary, college or educational establishment xxx."[46]
Therefore, the private respondent cannot be deemed one of the educational institutions covered
by the constitutional provision under consideration.
"xxx Words used in the Constitution are to be taken in their ordinary acceptation.
While in its broadest and best sense education embraces all forms and phrases of
instruction, improvement and development of mind and body, and as well of
religious and moral sentiments, yet in the common understanding and application it
means a place where systematic instruction in any or all of the useful branches of
learning is given by methods common to schools and institutions of learning. That
we conceive to be the true intent and scope of the term [educational institutions,] as
used in the Constitution."[47]
Moreover, without conceding that Private Respondent YMCA is an educational institution, the
Court also notes that the former did not submit proof of the proportionate amount of the subject
income that was actually, directly and exclusively used for educational purposes. Article XIII,
Section 5 of the YMCA by-laws, which formed part of the evidence submitted, is patently
insufficient, since the same merely signified that "[t]he net income derived from the rentals of
the commercial buildings shall be apportioned to the Federation and Member Associations as
the National Board may decide."[48] In sum, we find no basis for granting the YMCA
exemption from income tax under the constitutional provision invoked

Cases Cited by Private

Respondent Inapplicable
The cases[49] relied on by private respondent do not support its cause. YMCA of Manila v.
Collector of Internal Revenue[50] and Abra Valley College, Inc. v. Aquino[51] are not applicable,
because the controversy in both cases involved exemption from the payment of property tax, not
income tax. Hospital de San Juan de Dios, Inc. v. Pasay City[52] is not in point either, because it
involves a claim for exemption from the payment of regulatory fees, specifically electrical
inspection fees, imposed by an ordinance of Pasay City -- an issue not at all related to that
involved in a claimed exemption from the payment if income taxes imposed on property leases.
In Jesus Sacred Heart College v. Com. Of Internal Revenue,[53] the party therein, which claimed
an exemption from the payment of income tax, was an educational institution which submitted
substantial evidence that the income subject of the controversy had been devoted or used solely
for educational purposes. On the other hand, the private respondent in the present case had not
given any proof that it is an educational institution, or that of its rent income is actually, directly
and exclusively used for educational purposes.
Epilogue
In deliberating on this petition, the Court expresses its sympathy with private respondent. It
appreciates the nobility its cause. However, the Court’s power and function are limited merely
to applying the law fairly and objectively. It cannot change the law or bend it to suit its
sympathies and appreciations. Otherwise, it would be overspilling its role and invading the
realm of legislation.
We concede that private respondent deserves the help and the encouragement of the
government. It needs laws that can facilitate, and not frustrate, its humanitarian tasks. But the
Court regrets that, given its limited constitutional authority, it cannot rule on the wisdom or
propriety of legislation. That prerogative belongs to the political departments of government.
Indeed, some of the member of the Court may even believe in the wisdom and prudence of
granting more tax exemptions to private respondent. But such belief, however well-meaning and
sincere, cannot bestow upon the Court the power to change or amend the law.
WHEREFORE, the petition is GRANTED. The Resolutions of the Court of Appeals dated
September 28, 1995 and February 29, 1996 are hereby dated February 16, 1995 is REVERSED
and SET ASIDE. The Decision of the Court of Appeals dated February 16, 1995 is
REINSTATED, insofar as it ruled that the income tax. No pronouncement as to costs.
SO ORDERED.
Davide, Jr. (Chairman), Vitug and Quisumbing, JJ., concur.

Bellosillo, J., see Dissenting Opinion.
[1]Special Former Fourth Division composed of J. Nathanael P. de Pano, Jr., presiding justice
and ponente; and JJ., Fidel P. Purisima (now an associate justice of the Supreme Court) and
Corona Ibay-Somera, concurring.

[2] Rollo, pp. 42-48.

[3] Ibid., pp. 50-51.

[4] See Memorandum of private respondent, pp. 1-10 and Memorandum of petitioner, pp. 3-10;
rollo, pp. 149-158 and 192-199, respectively. See also Decision of the CTA, pp. 1-21; rollo, pp.
69-89.
[5] CTA Decision, pp. 16-18 and 2--21; rollo, pp. 84-86 and 88-89.
[6]Penned by J. Asaali S. Isnani and concurred in by JJ. Nathanael P. De Pano, Jr., chairman,
and Corona Ibay-Somera of the Fourth Division.
[7] Rollo, pp. 39-40.
[8] CA Resolution, p. 2; rollo, p. 43.
[9] Ibid., pp. 2,, 6-7; rollo, pp. 43, 47-48.
[10]The case was submitted for resolution on April 27, 1998, upon receipt by this Court of
private respondent’s Reply Memorandum.
[11] Petitioner’s Memorandum, pp. 10-11; rollo, pp. 199-200.
[12] Ibid., p. 16; rollo, p. 205.
[13] Ibid., p. 17; rollo, p. 206.
[14]Commissioner of Internal Revenue v. Mitsubishi Metal Corp., 181 SCRA 214, 220, January
22, 1990.
[15] Rollo, p. 36.
[16]
Ramos et al. v. Pepsi Cola Bottling Co. of the P.I. et al., 19 SCRA 289, 292, February 9,
1967, per Bengzon, J.; citing II Martin, Rules of Court in the Philippines, 255 and II Bouvier’s
Law Dictionary, 2784.
[17] Memorandum for Petitioner, pp. 21-22; rollo, pp. 210-211.
[18]
See Commissioner of Internal Revenue v. Court of Appeals, 271 SCRA 605, 613, April 18,
1997.
[19]
Davao Gulf Lumber Corporation v. Commissioner of Internal Revenue and Court of
Appeals, GR No. 117359, p. 15, July 23, 1998, per Panganiban, J.
[20] Justice Jose C. Vitug, Compendium of Tax Law and Jurisprudence, p. 75, 4th revised ed.
(1989); and De Leon, Hector S., The National Internal Revenue Code Annotated, p. 108, 5th ed.
(1994), citing a BIR ruling dated May 6, 1975.
[21] See Ramirez v. Court of Appeals, 248 SCRA 590, 596, September 28, 1995.
[22] Cooley, Thomas M., The Law of Taxation, p. 1415, Vol. II, 4th ed. (1924).
[23] Reply Memorandum of private respondent, p. 10. p. 234.
[24]"Charitable institutions, churches and parsonages of convents appurtenant thereto, mosques,

non-profit cemeteries, and all lands, buildings, and improvements actually, directly, and
exclusively used for religious, charitable, or educational purposes shall be exempt from
taxation." (Underlining copied from Reply Memorandum of Private Respondent, p. 7; rollo, p.
231)
[25] Reply Memorandum of private respondent, p. 7; rollo, p. 231.
[26] "Cemeteries, churches, and parsonages or convents appurtenant thereto, and all lands,
buildings, and improvements actually, directly , and exclusively used for religious, charitable, or
educational purposes shall be exempt from taxation."
[27] Reply Memorandum of private respondent, pp. 7-8; rollo, pp. 231-232.
[28] Ibid., p. 8; rollo, p. 232.
[29] 14 SCRA 292, June 16, 1965.
[31] Ibid., p. 9; rollo, p. 233.
[32] Nitafan v. Commissioner of Internal Revenue, 152 SCRA 284, 291-292, July 27, 1987.
[33] Record of the Constitutional Commission, Vol. Two, p. 90.
[34] Bernas, Joaquin G., The 1987 Constitution of the Republic of the Philippines: A
Commentary, p. 720, 1996 ed.; citing Lladoc v. Commissioner of Internal Revenue, supra, p.
295.
[35] Vitug, supra, p. 16.
[36] "All revenues and assets of non-stock, non-profit educational institutions used actually,
directly, and exclusively for educational purposes shall be exempt from taxes and duties. Upon
the dissolution or cessation of the corporate existence of such institutions, their assets shall be
disposed of in the manner provided by law."
[37] Reply Memorandum of private respondent, p. 20; rollo, p. 244.
[38] See Krivenko v. Register of Deeds of Manila, 79 Phil 461, 468 (1947).
[39] Section 26, Batas Pambansa Blg. 232.
[42] Exhibit B, BIR Records, pp. 54-56.
[43] Exhibit C, BIR Records, pp. 27-53.
[44]This is in stark contrast to its predecessor, the YMCA of Manila. In YMCA of Manila v.
Collector of Internal Revenue (33 Phil 217, 221 [1916]), cited by private respondent, it was
noted that the said institution had an educational department that taught courses in various
subjects such as law, commerce, social ethics, political economy and others.
[45] Dizon, Amado C., Education Act of 1982 Annotated, Expanded and Updated, p. 72 (1990).
[46] 84 CJS 566.
[47] Kesselring v. Bonnycastle Club, 186 SW2d 402, 404 (1945).
[48] "By-Laws of the YMCA," p. 22; BIR Records, p. 31.
[50] Supra.
[51] 162 SCRA 106, June 15, 1988.
[52] 16 SCRA 226, February 28, 1966.
[53] 95 SCRA 16, May 24, 1954.
DISSENTING OPINION
BELLOSILLO, J.:
I vote to deny the petition. The basic rule is that the factual findings of the Court of Tax Appeals
when supported by substantial evidence will not be disturbed on appeal unless it is shown that
the court committed gave error in the appreciation of facts.[1] In the instant case, there is no
dispute as to the validity of the findings of the Court of Tax Appeals that private respondent
Young Men’s Christian Association (YMCA is an association organized and operated
exclusively for the promotion of social welfare and other non-profitable purposes, particularly
the physical and character development of the youth.[2] the enduring objectives of respondent
YMCA as reflected in its Constitution and By-laws are:
(a) To develop well-balanced Christian personality, mission in life, usefulness of

individuals, and the promotion of unity among Christians and understanding among
peoples of all faiths, to the end that the Brotherhood of Man under the Fatherhood of
God may be fostered in an atmosphere of mutual respect and understanding;

(b) To promote on equal basis the physical, mental, and spiritual welfare of the
youth, with emphasis on reverence for God, social discipline, responsibility for the
common good, respect for human dignity, and the observance of the Golden Rule;

(c) To encourage members of the Young men’s Christian Associations in the

Philippines to participate loyally in the life of their respective churches; to bring
these churches closer together; and to participate in the effort to realize the church
Universal;

(d) To strengthen and coordinate the work of the Young Men’s Christian
Associations in the Philippines and to foster the extension of the Youth Men's
Christian Associations to new areas;

(e) To help its Member Associations develop and adopt their programs to the needs
of the youth;

(f) To assist the Member Associations in developing and maintaining a high standard
of management, operation and practice; and

(g) To undertake and sponsor national and international programs and activities in
pursuance of its purposes and objectives.[3]
Pursuant to these objectives, YMCA has continuously organized and undertaken throughout the
country various programs for the youth through actual workshops, seminars, training, sports and
summer camps, conferences on the cultivation of Christian moral values, drug addiction, out-of-
school youth, those with handicap and physical defects and youth alcoholism. To fulfill these
multifarious projects and attain the laudable objectives of YMCA, fund raising has become an
indispensable and integral part of the activities of the Association. YMCA derives its funds
from various sources such as membership dues, charges in the use of facilities like bowling and
billiards, lodging, interest income, parking fees, restaurant and canteen. Since the membership
dues are very minimal, the Association derives funds from rentals of small shops, restaurant,
canteen and parking fees. For the taxable year ending December 1980, YMCA earned gross
rental income of P676,829.00 and P44,259.00 from parking fees which became the subject of
the questioned assessment by petitioner.
The majority of this Court upheld the findings of the Court of Tax Appeals that the leasing of
petitioner’s facilities to small shop owners and to restaurant and canteen operators on addition to
the operation of a parking lot are reasonably necessary for and incidental to the accomplishment
of the objectives of YMCA.[4] In fact, these facilities are leased to members in order to service
their needs and those of their guests. The rentals are minimal, such as, the rent of P300.00 for
barbershop. With regard to parking space, there is no lot actually devoted therefor and the
parking is done only along the sides of the building. The parking is primarily for members with
car stickers but to non-members, parking fee is P.50 only. The rentals and parking fees are just
enough to cover the operation and maintenance costs of these facilities. The earnings which
YMCA derives from these rentals and parking fees, together with the charges for lodging and
use of recreational facilities, constitute the bulk or majority of its income used to support its
programs and activities.
In its decision of 16 February 1994, the Court of Appeals thus committed grave error in
departing from the findings of the Court of Tax Appeals by declaring that the leasing of
YMCA’s facilities to shop owners and restaurant operators and the operation of a parking lot are
used for commercial purposes or for profit, which fact takes YMCA outside the coverage of tax
exemption. In later granting the motion for reconsideration filed by respondent YMCA, the
Court of Appeals correctly reversed its earlier decision and upheld the findings of the Court of
Tax Appeals by ruling that YMCA is not designed for profit and the little income it derives from
rentals and parking fees helps maintain its noble existence for the fulfillment of its goal for the
Christian development of the youth.
Respondent YMCA is undoubtedly exempt from corporate income tax under the provisions of
Sec. 27, pars. (g) and (h), of the national Internal Revenue Code, to wit:
Sec. 27. Exemptions from tax on corporations. - The following organizations shall
not be taxed under this Title in respect to income received by them as such - x x x x
(g) civic league or organization not organized for profit but operated exclusively for
the promotion of social welfare’ (h) club organized and operated exclusively for
pleasure, recreation and other non-profitable purposes, no part of the net income of
which inures to the benefit of any private stockholder or members x x x x
Notwithstanding the provisions in the preceding paragraphs, the income of whatever
kind and character of the foregoing organizations from any of their properties, real or
personal, or from any of their activities conducted for profit, regardless of the
disposition made of such income, shall be subject to tax imposed under this Code.
The majority of the Court accepted petitioner’s view that while the income of organizations
enumerated in Sec. 27 are exempt from income tax, such exemption does not however extend to
their income of whatever kind or character from any of their properties real or personal
regardless of the disposition made of such income; that based on the wording of the law which
is plain and simple and does not need any interpretation, any income of a tax exempt entity from
any of its properties is a taxable income; hence, the rental income derived by a tax exempt
organization from the lease of its properties is not therefore exempt from income taxation even
if such income is exclusively used for the accomplishment of its objectives.

Income derived from its property by a tax exempt organization is not absolutely taxable. Taken
in solitude, a word or phrase such as, in this case, "the income of whatever kind and character x
x x from any of their properties" might easily convey a meaning quite different from the one
actually intended and evident when a word or phrase is considered with those with which it is
associated.[5] it is a rule in statutory construction that every part of the statute must be
interpreted with reference to the context, that every part of the statute must be considered
together with the other parts and kept subservient to the general intent of the whole enactment.
[6] A close reading of the last paragraph of Sec. 27 of the National Internal Revenue Code, in
relation to the whole section on tax exemption of the organizations enumerated therein, shows
that the phrase "conducted for profit" in the last paragraph of Sec. 27 qualifies, limits and
describes "the income of whatever kind and character of the foregoing organizations from any
of their properties, real or personal, or from any of their activities" in order to make such
income taxable. It is the exception to Sec. 27 pars. (g) and (h) providing for the tax exemptions
of the income of said organizations. Hence, if such income from property or any other property
is not conducted for profit, then it is not taxable.
Even taken alone and understood according to its plain, simple and literal meaning, the word
"income" which is derived from property, real or personal, provided in the last paragraph of Sec.
27 means the amount of money coming to a person or corporation within a specified time as
profit from investment; the return in money from one’s business or capital invested.[7] Income
from property also means gains and profits derived from the sale or other disposition of capital
assets; the money which any person or corporation periodically receives either as profits from
business, or as returns from investments[8] The word "income" as used in tax statutes is to be
taken in its ordinary sense as gain or profit.[9]
Clearly, therefore, income derived from property whether real or personal connotes profit from
business or from investment of the same. If we are to apply the ordinary meaning of income
from property as profit to the language of the last paragraph of Sec. 27 of the NIRC, then only
those profits arising from business and investment involving property are taxable. In the instant
case, there is no question that in leasing its facilities to small shop owners and in operating
parking spaces, YMCA does not engage in any profit-making business. Both the Court of Tax
Appeals, and the Court of Appeals in its resolution of 25 September 1995, categorically found
that these activities conducted on YMCA’s property where aimed not only at fulfilling the needs
and requirements of its members as part of YMCA’s youth program but, more importantly, at
raising funds to finance the multifarious projects of the Association.
As the Court has ruled in one case, the fact that an educational institution charges tuition fees
and other fees for the different services it renders to the students does not in itself make the
school a profit-making enterprises that would place it beyond the purview of the law exempting
it from taxation. The mere realization of profits out of its operation does not automatically result
in the loss of an educational institution’s exemption from income tax as long as no part of its
profits inures to the benefit of any stockholder or individual.[10] In order to claim exemption
from income tax, a corporation or association must show that it is organized and operated
exclusively for religious, charitable, scientific, athletic, cultural or educational purposes or for
the rehabilitation of veterans, and that no part of its income inures to the benefit any private
stockholder or individual.[11] The main evidence of the purpose of a corporation should be its
articles of incorporation and by-laws, for such purpose is required by statute to be stated in the
articles of incorporation, and the by-laws outline the administrative organization of the
corporation which, in turn, is supposed to insure or facilitate the accomplishment of said
purpose.[12]
The foregoing principle applies to income derived by tax exempt corporations from their
property. The criterion or test in order to make such income taxable is when it arises from
purely profit-making business. Otherwise, when the income derived from use of property is
reasonable and incidental to the charitable, benevolent, educational or religious purpose for
which the corporation or association is created, such income should be tax-exempt.
In Hospital de San Juan de Dios, Inc. v. Pasay City[13] we held-
In this connection, it should be noted that respondent therein is a corporation organized for
‘charitable, educational and religious purposes’; that no part of its net income inures to the
benefit of any private individual; that it is exempt from paying income tax; that it operates a
hospital in which MEDICAL assistance is given to destitute persons free of charge; that it
maintains a pharmacy department within the premises of said hospital, to supply drugs and
medicines only to charity and paying patients confined therein; and that only the paying patients
are required to pay the medicines supplied to them, for which they are charged the cost of the
medicines, plus an additional 10% thereof, to partly offset the cost of medicines supplied free of
charge to charity patients. Under these facts we are of the opinion and so hold that the Hospital
may not be regarded as engaged in "business" by reason of said sale of medicines to its paying
patients x x x x (W)e held that the UST Hospital was not established for profit-making
purposes, despite the fact that it had 140 paying beds, because the same were maintained only to
partly finance the expenses of the free wards containing 203 beds for charity patients.
In YMCA of Manila v. Collector of Internal Revenue,[14] this Court explained -
It is claimed however that the institution is run as a business in that it keeps a lodging and
boarding house. It may be admitted that there are 64 persons occupying rooms in the main
building as lodgers or roomers and that they take meals at the restaurant below. These facts
however are far from constituting a business in the ordinary acceptation of the word. In the first
place, no profit is realized by the association in any sense. In the second place it is undoubted,
as it is undisputed, that the purpose of the association is not primarily to obtain the money
which comes from the lodgers and boarders. The real purpose is to keep the membership
continually within the sphere of influence of the institution; and thereby to prevent, as far as
possible, the opportunities which vice presents to young men in foreign countries who lack
home or other similar influences.
The majority, if not all, of the income of the organizations covered by the exemption provided in
Sec. 27, pars. (g) and (h), of the NIRC are derived from their properties, real or personal. If we
are to interpret the last paragraph of Sec. 27 to the effect that all income of whatever kind from
the properties of said organization, real or personal, are taxable, even if not conducted for profit,
then Sec. 27, pars. (g) and (h), would be rendered ineffective and nugatory. As this Court
elucidated in Jesus Sacred Heart College v. Collector of Internal Revenue,[15] every responsible
organization must be so run as to at least inure its existence by operating within the limits of its
own resources, especially its regular income. It should always strive whenever possible to have
a surplus. If the benefits of the exemption would be limited to institutions which do not hope or
propose to have such surplus, then exemption would apply only to schools which are on the
verge of bankruptcy. Unlike the United States where a substantial number or institutions of
learning are dependent upon voluntary contributions and still enjoy economic stability, such as
Harvard, the trust fund of which has been steadily increasing with the years, there are and there
have always been very few educational enterprises in the Philippines which are supported by
donations, and these organizations usually have a very precarious existence.[16]
Finally, the non-taxability of all income and properties of educational institutions finds enduring
support in Art. XIV, Sec. 4, par. 3, of the 1987 Constitution -
(3) All revenues and assets of non-stock, non-profit educational institutions used actually,
directly and exclusively for educational purposes shall be exempt from taxes and duties. Upon
the dissolution or cessation of the corporate existence of such institutions, their assets shall be
disposed of in the manner provided by law.
In YMCA of Manila v. Collector of Internal Revenue[17] this Court categorically held and found
YMCA to be an educational institution exclusively devoted to educational and charitable
purposes and not operated for profit. The purposes of the Association as set forth in its charter
and constitution are "to develop the Christian character and usefulness of its members, to
improve the spiritual, intellectual, social and physical condition of young men and to acquire,
hold, mortgage and dispose of the necessary lands, building and personal property for the use of
said corporation exclusively for religious, charitable and educational purposes, and not for
investment or profit." YMCA has an educational department, the aim of which is to furnish, at
much less than cost, instructions on subjects that will greatly increase the mental efficiency and
wage-earning capacity of young men, prepare them in special lines of business and offer them
special lines of study. We ruled therein that YMCA cannot be said to be an institution used
exclusively for religious purposes or an institution devoted exclusively for charitable purposes
or an institution devoted exclusively to educational purposes, but it can be truthfully said that it
is an institution used exclusively for all three purposes and that, as such, it is entitled to be
exempted from taxation.
[1]Commissioner of Internal Revenue v. Mitsubishi Metal Corporation, G.R. No. 54908, 22

January 1995, 181 SCRA 2140.

[2] Rollo, p. 76.
[3] Rollo, pp. 76-77.

[4] Rollo, p. 84.
[5] Sajonas v. Court of Appeals, G.R. No. 102377, 5 July 1996, 258 SCRA 79.

[6] Paras v. Commission on Elections, G.R. No. 123169, 4 November 1996, 264 SCRA 49.

[7] Moreno, Federico B., Philippine Law Dictionary, Third Edition.
[8] Sibal, Jose Agaton R., Philippine Legal Encyclopedia 1986 Edition.
[9] Words and Phrases, Vol. 20A 1959 Ed. P. 1616.
[10]
Collector of Internal Revenue v. University of the Visayas, L-13554, 28 February 1961, 1
SCRA 669.
[11] Ibid.
[12] Jesus Sacred Heart College v. Collector of Internal Revenue, 95 Phil. 16 [1954].
[13] No. L-19371, 28 February 1966, 16 SCRA 226.
[14] 33 Phil 217 [1916].
[15] See Note 11.
[16] Ibid.
[17] See Note 13.

183 Phil. 453
FIRST DIVISION
[ G.R. No. L-24265, December 28, 1979 ]
PROCTER & GAMBLE PHILIPPINE
MANUFACTURING
CORPORATION, PLAINTIFF-APPELLANT, VS. THE MUNICIPALITY
OF JAGNA, PROVINCE OF BOHOL, DEFENDANT-APPELLEE.
DECISION
MELENCIO-HERRERA, J.:
A direct appeal by plaintiff company

from the judgment of the Court of First Instance of
Manila, Branch VI,
upholding the validity of Ordinance No. 4, Series of 1957, enacted by
defendant
Municipality, which imposed
"storage fees on all exportable copra deposited in the
bodega within the
jurisdiction of the Municipality of Jagna, Bohol."
Plaintiff-appellant is a domestic corporation with principal

offices in Manila. It is a
consolidated corporation of Procter
& Gamble Trading Company and Philippine Manufacturing
Company, which later
became Procter & Gamble Trading Company, Philippines. It is engaged
in the manufacture of soap,
edible oil, margarine and other similar products, and for this purpose
maintains a "bodega" in defendant
Municipality where it stores copra
purchased in the
municipality and therefrom ships the
same for its manufacturing and other operations.
On December 13, 1957,

the Municipal Council of Jagna enacted Municipal
Ordinance No. 4,
Series of 1957, quoted hereinbelow:
"AN ORDINANCE IMPOSING STORAGE FEES OF ALL EXPORTABLE

COPRA
DEPOSITED IN THE BODEGA WITHIN THE JURISDICTION OF THE
MUNICIPALITY
OF JAGNA, BOHOL.
"Be it ordained by the Municipal Council of Jagna, Bohol,

that:
"SECTION 1. Any person, firm or corporation having a

deposit of exportable copra
in the bodega, within the jurisdiction of the
Municipality of Jagna, Bohol,
shall pay
to the Municipal Treasury a storage fee of TEN (P0.10) CENTAVOS FOR
EVERY
HUNDRED (100) kilos;
"SECTION 2. All exportable copra deposited in the bodega

within the Municipality
of Jagna, Bohol, is part of the surveillance and lookout
of the Municipal Authorities;
"SECTION 3. Any person, firm or corporation found

violating the provision of the
preceding section of this Ordinance shall be
punished by a fine of not less than TWO
HUNDRED (P200.00) PESOS, nor more than
FOUR HUNDRED (P400.00)
PESOS, or an imprisonment of not less than ONE MONTH,
nor more than THREE
MONTHS, or both fines and imprisonment at the discretion of
the court.
"SECTION 4. This Ordinance shall take effect on January 1, 1958.
"APPROVED, December 13, 1957.
(Sgd.) TEODORO B. GALACAR
Municipal Mayor
"[1]
For a period of six years, from 1958 to 1963, plaintiff paid defendant
Municipality, allegedly
under
protest, storage fees in the total sum of P42,265.13,
broken down as follows:
"Procter & Gamble Trading Co.– Procter & Gamble

Philippine Manufacturing Corp.
1958 5,072.13 P - - -
1959 7,076.00 - - -
1960 9,950.00 - - -
1961 7,830.00 - - -
1962 3,648.00 P5,279.00
1963 - - - P3,410.00
P33,576.13 P8,689.00
TOTAL CLAIM – P42,265.13"[2]
On March 3, 1964, plaintiff filed this suit in the Court of First

Instance of Manila, Branch VI,
wherein it prayed that 1) Ordinance No. 4 be declared
inapplicable to it, or in the alternative,
that it be pronounced ultra-vires and void for being beyond the power of the
Municipality to
enact; and 2) that defendant Municipality be ordered to refund
to it the amount of P42,265.13
which it had paid under
protest; and costs.
For its part, defendant Municipality upheld its power to enact

the Ordinance in question;
questioned the jurisdiction of the trial Court to
take cognizance of the action under section 44(h)
of the Judiciary Act in that
it seeks to enjoin the enforcement of a Municipal Ordinance; and
pleaded
prescription and laches for plaintiff's failure to
timely question the validity of the said
Ordinance.
After the parties had agreed to submit the case for judgment on
the pleadings, the trial Court
upheld its jurisdiction as well as defendant
Municipality's power to enact the Ordinance in
question under section 2238 of
the Revised Administrative Code, otherwise known as the
general welfare clause,
and declared that plaintiff's right of action had prescribed under the 5-
year
period provided for by Article 1149 of the Civil Code.
In this appeal, plaintiff interposes the following Assignments of

Error:
I
"THE TRIAL COURT ERRED IN HOLDING THAT ORDINANCE NO. 4,

SERIES
OF 1957, ENACTED BY THE DEFENDANT MUNICIPALITY OF
JAGNA, BOHOL, IS A VALID,
LEGAL AND ENFORCEABLE ORDINANCE
AGAINST THE PLAINTIFF.
II
"THE TRIAL COURT ERRED IN HOLDING THAT PAYMENT OF THE TAX

UNDER ORDINANCE NO. 4, SERIES OF 1957 WAS NOT DONE UNDER
PROTEST.
III
"THE TRIAL COURT ERRED IN HOLDING THAT THE ACTION OF THE

PLAINTIFF TO ANNUL AND TO DECLARE ORDINANCE NO. 4, SERIES OF
1957 OF THE
DEFENDANT HAS ALREADY PRESCRIBED.
IV
"AND, FINALLY, THE TRIAL COURT ERRED IN NOT HOLDING

ORDINANCE
NO. 4, SERIES OF 1957 ULTRA VIRES AND VOID AND IN NOT
ORDERING THE REFUND OF
TAXES PAID THEREUNDER."[3]
It is plaintiff's submission that the subject Ordinance is

inapplicable to it as it is not engaged in
the business or trade of storing
copra for others for compensation or profit and that the only
copra it stores
is for its exclusive use in connection with its business as manufacturer of
soap,
edible oil, margarine and other similar products; that the levy is
intended as an "export tax" as it
is collected on "exportable
copra", and, therefore, beyond the power of the Municipality to
enact; and
that the fee of P0.10 for every 100 kilos of copra stored in the bodega is
excessive,
unreasonable and oppressive and is imposed more for revenue than as
a regulatory fee.
The main question to determine is whether defendant Municipality

was authorized to impose
and collect the storage fee provided for in the
challenged Ordinance under the laws then
prevailing.
The validity of the Ordinance must be upheld pursuant to the

broad authority conferred upon
municipalities by Commonwealth Act No. 472,
approved on June 16, 1939, which was the
prevailing law when the Ordinance was
enacted (Procter & Gamble Trading Co. vs.
Municipality of Medina, 43 SCRA
130 [1972]). Section 1 thereof reads:
"Section 1. A municipal council or municipal district

council shall have the
authority to impose municipal license taxes upon persons
engaged in any occupation
or business, or exercising privileges in the
municipality or municipal district, by
requiring them to secure licenses at
rates fixed by the municipal council, or
municipal district council, and to
collect fees and charges for services rendered by
the municipality or municipal
district and shall otherwise have power to levy for
public local purposes, and
for school purposes, including teachers' salaries, just and
uniform taxes other
than percentage taxes and taxes on specified articles.
Under the foregoing provision, a municipality is authorized to

impose three kinds of licenses:
(1) a
license for regulation of useful occupation or enterprises; (2) license for
restriction or
regulation of non-useful occupations or enterprises; and (3)
license for revenue.[4]
It is thus
unnecessary, as plaintiff would have us do, to determine whether the
subject storage fee is a tax
for revenue purposes or a license fee to reimburse
defendant Municipality for service of
supervision because defendant
Municipality is authorized not only to impose a license fee but
also to tax for
revenue purposes.
The storage fee imposed under the questioned Ordinance is

actually a municipal license tax or
fee on persons, firms and corporations,
like plaintiff, exercising the privilege of storing copra in
a bodega within
the Municipality's territorial jurisdiction.
For the term "license tax" has not
acquired a fixed
meaning. It is often used
indiscriminately to designate impositions exacted for
the exercise of various
privileges. In many instances, it refers
to "revenue-raising exactions on
privileges or activities."[5]
Not only is the imposition of the storage fee authorized by the

general grant of authority under
section 1 of CA No. 472. Neither is the storage fee in question
prohibited nor beyond the power
of the municipal councils and municipal
district councils to impose, as listed in section 3 of said
CA. No. 472.[6]
Moreover, the business of buying and selling and storing copra is

properly the subject of
regulation within the police power granted to
municipalities under section 2238 of the Revised
Administrative Code or the
"general welfare clause”, which we quote hereunder:
"Section 2238. General power of council

to enact ordinances and make regulations.
– The municipal council shall enact such
ordinances and make such regulations, not
repugnant to law, as may be necessary
to carry into effect and discharge the powers
and duties conferred upon it by
law and such as shall seem necessary and proper to
provide for the health and
safety, promote the prosperity, improve the morals, peace,
good order, comfort,
and convenience of the municipality and the inhabitants
thereof, and for the
protection of property therein."
For it has been held that a warehouse

used for keeping or storing copra is an establishment
likely to endanger the
public safety or likely to give rise to conflagration because the oil content
of the copra when ignited is difficult to put under control by water and the
use of chemicals is
necessary to put out the fire.[7]
And as the Ordinance itself states, all exportable copra deposited
within the
municipality is "part of the surveillance and lookout of municipal
authorities."
Plaintiff's argument that the imposition of P0.10 per 100 kilos

of copra stored in a bodega within
defendant's territory is beyond the cost of
regulation and surveillance is not well taken.
As
enunciated in the case of Victorias Milling
Co. vs. Municipality of Victorias, supra.
"The cost of regulation cannot be taken as a gauge, if the

municipality really
intended to enact a revenue ordinance. For, 'if the charge exceeds the expense of
issuance of a license and costs of regulation, it is a tax'. And if it is, and it is validly
imposed, 'the
rule that license fees for regulation must bear a reasonable relation to
the
expense of the regulation has no application'.
Municipal corporations are allowed wide discretion in determining

the rates of imposable
license fees even in cases of purely police power
measures. In the absence of proof as to
municipal conditions and the nature of the business being taxed as well as
other factors relevant
to the issue of arbitrariness or unreasonableness of the
questioned rates, Courts will go slow in
writing off an Ordinance.[8]
In the case at bar, appellant has not sufficiently shown that the rate
imposed
by the questioned Ordinance is oppressive, excessive and prohibitive.
Plaintiff's averment that the Ordinance, even if presumed valid,

is inapplicable to it because it is
not engaged in the business or occupation
of buying or selling of copra but is only storing copra
in connection with its
main business of manufacturing soap and other similar products, and that
to be
compelled to pay the storage fees would amount to double taxation, does not
inspire
assent. The question of whether
appellant is engaged in that business or not is irrelevant
because the storage
fee, as previously mentioned, is an imposition on the privilege of storing
copra in a bodega within defendant municipality by persons, firms or
corporations. Section 1 of
the Ordinance
in question does not state that said persons, firms or corporations should be
engaged in the business or occupation of buying or selling copra. Moreover, by plaintiff's own
admission that
it is a consolidated corporation with its trading company, it will be hard to
segregate the copra it uses for trading from that it utilizes for
manufacturing.
Thus, it can be said that plaintiff's payment of storage fees

imposed by the Ordinance in
question does not amount to double taxation. For double taxation to exist, the same
property
must be taxed twice, when it should be taxed but once. Double taxation has also been defined
as
taxing the same person twice by the same jurisdiction for the same thing.[9]
Surely, a tax on
plaintiff's products is different from a tax on the privilege
of storing copra in a bodega situated
within the territorial boundary of
defendant municipality.
Plaintiff's further contention that the

storage fee imposed by the Ordinance is actually intended
to be an export tax,
which is expressly prohibited by section 2287 of the Revised Administrative
Code, is without merit. Said provision
reads as follows:
"Section 2287. x x x
"It shall not be in the power of the municipal council to

impose a tax in any form
whatever upon goods and merchandise carried into the
municipality, or out of the
same, and any attempt to impose an import or export
tax upon such goods in the
guise of an unreasonable charge for wharfage, use of bridges or otherwise, shall be
void. x x x ."
We have held that only where there is a

clear showing that what is being taxed is an export to
any foreign country
would the prohibition come into play.[10]
When the Ordinance itself speaks
of "exportable" copra, the meaning
conveyed is not exclusively export to a foreign country but
shipment out of the
municipality. The storage fee impugned
is not a tax on export because it is
imposed not only upon copra to be exported
but also upon copra sold and to be used for
domestic purposes if stored in any
warehouse in the Municipality and the weight thereof is 100
kilos or more.[11]
Thus finding the Ordinance in question to be valid, legal and
enforceable, we find it
unnecessary to discuss the ascribed error that the
Court a quo erred in declaring that appellant
had not paid the
taxes under protest.
However, we find merit in plaintiff's contention that the lower

Court erred in ruling that its
action has prescribed under Article 1149 of the
Civil Code, which provides for a period of five
years for all actions whose
periods are not fixed in that Code. The
case of Municipality of Opon
vs. Caltex
Phil.,[12]
is authority for the view that the period for prescription of actions to
recover
municipal license taxes is six years under Article 1145(2) of the Civil
Code. Thus, plaintiff's
action brought
within six years from the time the right of action first accrued in 1958 has
not yet
prescribed.
WHEREFORE, affirming the judgment appealed from, we

sustain the validity of Ordinance
No. 4, Series of 1957, of defendant
Municipality of Jagna, Bohol,
under the laws then
prevailing.
Costs against plaintiff-appellant.
SO ORDERED.
Teehankee, (Chairman), Makasiar, Fernandez, Guerrero, and De Castro, JJ., concur.

Pp. 7-8, Annex "A", Record on Appeal.
[1]
[2] p. 4, Record on Appeal.

[3] Pp. 3-4, Brief for Plaintiff-Appellant.
Victorias Milling Co., Inc. vs. The Municipality of Victorias, Province

of Negros Occidental,
[4]
25 SCRA 192 (1968), citing Cu Unjieng vs. Patstone, 42 Phil. 818 (1922).
[5] Victorias
Milling Co., Inc. vs. Municipality of Victorias, Negros Occidental, supra.
[6] Uy Matiao & Co., Inc. vs.
The City of Cebu,
et al., 93 Phil. 300 (1953).
[7] Uy Matiao & Co., Inc. vs. The City of Cebu, et al., supra.

Northern Phil. Tobacco Co. vs. Municipality of Agoo,
31 SCRA 304, (1970); Victorias
[8]
Milling Co. vs.

Municipality of Victorias, supra; San
Miguel Brewery Inc. vs. City of Cebu, 43
SCRA
275, (1972).
[9] Victorias
Milling Co. vs. Municipality of Victorias, supra.
[10] Procter & Gamble Trading Co. vs. Municipality of Medina, supra.
[11] Uy Matiao & Co., Inc. vs. The City of Cebu, et al., supra.

22 SCRA 755 (1968), citing Puyat vs. The
City of Manila, 7 SCRA 970 (1963).
[12]

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809 Phil.

Sec. 4. Privileges for the Senior Citizen. – x x x:

Article 8. Tax Deduction of Establishments. - The establishment may claim the

WHEREFORE, the petition is DISMISSED for lack of merit.[6] (Citations omitted)

CHAPTER 8. Other Privileges and Incentives

SEC. 32. Persons with disability shall be entitled to the following:

6.1.d Purchase of Medicine – At least twenty percent (20%) discount on

THE CA SERIOUSLY ERRED WHEN IT RULED THAT A PETITION FOR

THE CA SERIOUSLY ERRED WHEN IT HELD THAT THE SUPREME

THE CA SERIOUSLY ERRED ON A QUESTION OF SUBSTANCE WHEN

THE CA SERIOUSLY ERRED ON A QUESTION OF SUBSTANCE WHEN

THE CA SERIOUSLY ERRED ON A QUESTION OF SUBSTANCE WHEN

Ruling of the Court

Prohibition may be filed to question

The Court clarifies.

In Social Weather Stations, Inc. v. Commission on Elections,[21] therein petitioner filed a

In another instance, consolidated petitions for prohibitions[26] questioning the constitutionality

The instant case is not barred by

The Court believes so.

SEC. 2. [R.A.] No. 7432 is hereby amended to read as follows:

SEC. 1. Declaration of Policies and Objectives.— Pursuant to Article

(f) To recognize the important role of the private sector in

The Court is not swayed.

What is crucial in judicial consideration of regulatory takings is that government

A restriction on use of property may also constitute a 'taking" if not reasonably

According to Republic of the Philippines v. Vda. de Castellvi,[45] five circumstances must be

Before the passage of the law:

The subject laws do not violate the

The contention lacks merit.

To recognize all senior citizens as a group, without distinction as to income, is a valid

The definitions of "disabilities" and

The Court disagrees.

Moreover, in Estrada v. Sandiganbayan,[75] it was declared, thus:

(II) The passport of the persons with disability concerned; or

DISABILITY DOCUMENT ISSUING ENTITY

Non-Apparent Medical Certificate Licensed Private or

i. PWD identification card x x x

b) Booklet control number

i) Information of medicine purchased:

i.1 Name of medicine

i.5 Servicing drug store name

i.6 Name of dispensing pharmacist

j) Authorization letter of the PWD x x x in case the medicine is bought by the

Very truly yours,

[1] Rollo, pp. 11-78.

[3] Id. at 94.

[4] R.A. No. 7432, Section 2.

[5] 553 Phil. 120 (2007).

[6] Id. at 132-135.

[7] Rollo, p. 433.

[8] Id. at 434-435.

[9] Id. at 100-158.

[10] Supra note 5.

[11] Rollo, p. 87.

[13] Id. at 91.

[14] Id. at 335-383.

[15] Id. at 94.

[16] Id. at 25.

[17] Id. at 89.

[19] 669 Phil. 371 (2011).

[20] Id. at 383.

[21] 409 Phil. 571 (2001).

[22] Id. at 592.

[23] 591 Phil. 393 (2008).