G.R. No.

99886 March 31, 1993

JOHN H. OSMEÑA, petitioner,
vs.
OSCAR ORBOS, in his capacity as Executive Secretary; JESUS ESTANISLAO, in his capacity
as Secretary of Finance; WENCESLAO DELA PAZ, in his capacity as Head of the Office of
Energy Affairs; REX V. TANTIONGCO, and the ENERGY REGULATORY BOARD, respondents.

Nachura & Sarmiento for petitioner.

The Solicitor General for public respondents.

NARVASA, C.J.:

The petitioner seeks the corrective,  prohibitive and coercive remedies provided by Rule 65 of the
1

Rules of Court,  upon the following posited grounds, viz.:

2 3

1) the invalidity of the "TRUST ACCOUNT" in the books of account of the Ministry of Energy (now,
the Office of Energy Affairs), created pursuant to § 8, paragraph 1, of P.D. No. 1956, as amended,
"said creation of a trust fund being contrary to Section 29 (3), Article VI of the . . Constitution; 4

2) the unconstitutionality of § 8, paragraph 1 (c) of P.D. No. 1956, as amended by Executive Order
No. 137, for "being an undue and invalid delegation of legislative power . .  to the Energy Regulatory Board;" 5

3) the illegality of the reimbursements to oil companies, paid out of the Oil Price Stabilization
Fund,  because it contravenes § 8, paragraph 2 (2) of
6

P. D. 1956, as amended; and

4) the consequent nullity of the Order dated December 10, 1990 and the necessity of a rollback of
the pump prices and petroleum products to the levels prevailing prior to the said Order.

It will be recalled that on October 10, 1984, President Ferdinand Marcos issued P.D. 1956 creating a
Special Account in the General Fund, designated as the Oil Price Stabilization Fund (OPSF). The
OPSF was designed to reimburse oil companies for cost increases in crude oil and imported
petroleum products resulting from exchange rate adjustments and from increases in the world
market prices of crude oil.

Subsequently, the OPSF was reclassified into a "trust liability account," in virtue of E.O. 1024,  and 7

ordered released from the National Treasury to the Ministry of Energy. The same Executive Order
also authorized the investment of the fund in government securities, with the earnings from such
placements accruing to the fund.

President Corazon C. Aquino, amended P.D. 1956. She promulgated Executive Order No. 137 on
February 27, 1987, expanding the grounds for reimbursement to oil companies for possible cost
underrecovery incurred as a result of the reduction of domestic prices of petroleum products, the
amount of the underrecovery being left for determination by the Ministry of Finance.

Now, the petition alleges that the status of the OPSF as of March 31, 1991 showed a "Terminal Fund
Balance deficit" of some P12.877 billion;  that to abate the worsening deficit, "the Energy Regulatory
8
Board . . issued an Order on December 10, 1990, approving the increase in pump prices of petroleum products," and at the rate of
recoupment, the OPSF deficit should have been fully covered in a span of six (6) months, but this notwithstanding, the respondents — Oscar
Orbos, in his capacity as Executive Secretary; Jesus Estanislao, in his capacity as Secretary of Finance; Wenceslao de la Paz, in his
capacity as Head of the Office of Energy Affairs; Chairman Rex V. Tantiongco and the Energy Regulatory Board — "are poised to accept,
process and pay claims not authorized under P.D. 1956." 9

The petition further avers that the creation of the trust fund violates §
29(3), Article VI of the Constitution, reading as follows:

(3) All money collected on any tax levied for a special purpose shall be treated as a
special fund and paid out for such purposes only. If the purpose for which a special
fund was created has been fulfilled or abandoned, the balance, if any, shall be
transferred to the general funds of the Government.

The petitioner argues that "the monies collected pursuant to . . P.D. 1956, as amended, must be
treated as a 'SPECIAL FUND,' not as a 'trust account' or a 'trust fund,' and that "if a special tax is
collected for a specific purpose, the revenue generated therefrom shall 'be treated as a special fund'
to be used only for the purpose indicated, and not channeled to another government
objective."   Petitioner further points out that since "a 'special fund' consists of monies collected
10

through the taxing power of a State, such amounts belong to the State, although the use thereof is
limited to the special purpose/objective for which it was created."  11

He also contends that the "delegation of legislative authority" to the ERB violates § 28 (2). Article VI
of the Constitution, viz.:

(2) The Congress may, by law, authorize the President to fix, within specified limits,
and subject to such limitations and restrictions as it may impose, tariff rates, import
and export quotas, tonnage and wharfage dues, and other duties or imposts within
the framework of the national development program of the Government;

and, inasmuch as the delegation relates to the exercise of the power of taxation, "the limits,
limitations and restrictions must be quantitative, that is, the law must not only specify how to
tax, who (shall) be taxed (and) what the tax is for, but also impose a specific limit on how
much to tax."  12

The petitioner does not suggest that a "trust account" is illegal per se, but maintains that the monies
collected, which form part of the OPSF, should be maintained in a special account of the general
fund for the reason that the Constitution so provides, and because they are, supposedly, taxes
levied for a special purpose. He assumes that the Fund is formed from a tax undoubtedly because a
portion thereof is taken from collections of ad valorem taxes and the increases thereon.

It thus appears that the challenge posed by the petitioner is premised primarily on the view that the
powers granted to the ERB under P.D. 1956, as amended, partake of the nature of the taxation
power of the State. The Solicitor General observes that the "argument rests on the assumption that
the OPSF is a form of revenue measure drawing from a special tax to be expended for a special
purpose."   The petitioner's perceptions are, in the Court's view, not quite correct.
13

To address this critical misgiving in the position of the petitioner on these issues, the Court recalls its
holding in Valmonte v. Energy Regulatory Board, et al.   — 14

The foregoing arguments suggest the presence of misconceptions about the nature
and functions of the OPSF. The OPSF is a "Trust Account" which was established
"for the purpose of minimizing the frequent price changes brought about by
exchange rate adjustment and/or changes in world market prices of crude oil and
imported petroleum products."   Under P.D. No. 1956, as amended by Executive
15

Order No. 137 dated 27 February 1987, this Trust Account may be funded from any
of the following sources:

a) Any increase in the tax collection from ad valorem tax or customs

duty imposed on petroleum products subject to tax under this
Decree arising from exchange rate adjustment, as may be
determined by the Minister of Finance in consultation with the Board
of Energy;

b) Any increase in the tax collection as a result of the lifting of tax

exemptions of government corporations, as may be determined by
the Minister of Finance in consultation with the Board of Energy:

c) Any additional amount to be imposed on petroleum products to

augment the resources of the Fund through an appropriate Order that
may be issued by the Board of Energy requiring payment of persons
or companies engaged in the business of importing, manufacturing
and/or marketing petroleum products;

d) Any resulting peso cost differentials in case the actual peso costs
paid by oil companies in the importation of crude oil and petroleum
products is less than the peso costs computed using the reference
foreign exchange rate as fixed by the Board of Energy.

xxx xxx xxx

The fact that the world market prices of oil, measured by the spot market in
Rotterdam, vary from day to day is of judicial notice. Freight rates for hauling crude
oil and petroleum products from sources of supply to the Philippines may also vary
from time to time. The exchange rate of the peso vis-a-vis the U.S. dollar and other
convertible foreign currencies also changes from day to day. These fluctuations in
world market prices and in tanker rates and foreign exchange rates would in a
completely free market translate into corresponding adjustments in domestic prices
of oil and petroleum products with sympathetic frequency. But domestic prices which
vary from day to day or even only from week to week would result in a chaotic market
with unpredictable effects upon the country's economy in general. The OPSF was
established precisely to protect local consumers from the adverse consequences
that such frequent oil price adjustments may have upon the economy. Thus, the
OPSF serves as a pocket, as it were, into which a portion of the purchase price of oil
and petroleum products paid by consumers as well as some tax revenues are
inputted and from which amounts are drawn from time to time to reimburse oil
companies, when appropriate situations arise, for increases in, as well as
underrecovery of, costs of crude importation. The OPSF is thus a buffer mechanism
through which the domestic consumer prices of oil and petroleum products are
stabilized, instead of fluctuating every so often, and oil companies are allowed to
recover those portions of their costs which they would not otherwise recover given
the level of domestic prices existing at any given time. To the extent that some tax
revenues are also put into it, the OPSF is in effect a device through which the
domestic prices of petroleum products are subsidized in part. It appears to the Court
that the establishment and maintenance of the OPSF is well within that pervasive
 and non-waivable power and responsibility of the government to secure the physical
and economic survival and well-being of the community, that comprehensive
sovereign authority we designate as the police power of the State. The stabilization,
and subsidy of domestic prices of petroleum products and fuel oil — clearly critical in
importance considering, among other things, the continuing high level of dependence
of the country on imported crude oil — are appropriately regarded as public
purposes.

Also of relevance is this Court's ruling in relation to the sugar stabilization fund the nature of which is
not far different from the OPSF. In Gaston v. Republic Planters Bank,   this Court upheld the legality
16

of the sugar stabilization fees and explained their nature and character, viz.:

The stabilization fees collected are in the nature of a tax, which is within the power of
the State to impose for the promotion of the sugar industry (Lutz v. Araneta, 98 Phil.
148). . . . The tax collected is not in a pure exercise of the taxing power. It is levied
with a regulatory purpose, to provide a means for the stabilization of the sugar
industry. The levy is primarily in the exercise of the police power of the State (Lutz v.
Araneta, supra).

xxx xxx xxx

The stabilization fees in question are levied by the State upon sugar millers, planters
and producers for a special purpose — that of "financing the growth and
development of the sugar industry and all its components, stabilization of the
domestic market including the foreign market." The fact that the State has taken
possession of moneys pursuant to law is sufficient to constitute them state funds,
even though they are held for a special purpose (Lawrence v. American Surety Co.
263 Mich. 586, 249 ALR 535, cited in 42 Am Jur Sec. 2, p. 718). Having been levied
for a special purpose, the revenues collected are to be treated as a special fund, to
be, in the language of the statute, "administered in trust" for the purpose intended.
Once the purpose has been fulfilled or abandoned, the balance if any, is to be
transferred to the general funds of the Government. That is the essence of the trust
intended (SEE 1987 Constitution, Article VI, Sec. 29(3), lifted from the 1935
Constitution, Article VI, Sec. 23(1). 17

The character of the Stabilization Fund as a special kind of fund is emphasized by

the fact that the funds are deposited in the Philippine National Bank and not in the
Philippine Treasury, moneys from which may be paid out only in pursuance of an
appropriation made by law (1987) Constitution, Article VI, Sec. 29 (3), lifted from the
1935 Constitution, Article VI, Sec. 23(1). (Emphasis supplied).

Hence, it seems clear that while the funds collected may be referred to as taxes, they are exacted in
the exercise of the police power of the State. Moreover, that the OPSF is a special fund is plain from
the special treatment given it by E.O. 137. It is segregated from the general fund; and while it is
placed in what the law refers to as a "trust liability account," the fund nonetheless remains subject to
the scrutiny and review of the COA. The Court is satisfied that these measures comply with the
constitutional description of a "special fund." Indeed, the practice is not without precedent.

With regard to the alleged undue delegation of legislative power, the Court finds that the provision
conferring the authority upon the ERB to impose additional amounts on petroleum products provides
a sufficient standard by which the authority must be exercised. In addition to the general policy of the
law to protect the local consumer by stabilizing and subsidizing domestic pump rates, § 8(c) of P.D.
1956   expressly authorizes the ERB to impose additional amounts to augment the resources of the
18

Fund.

What petitioner would wish is the fixing of some definite, quantitative restriction, or "a specific limit on
how much to tax."   The Court is cited to this requirement by the petitioner on the premise that what
19

is involved here is the power of taxation; but as already discussed, this is not the case. What is here
involved is not so much the power of taxation as police power. Although the provision authorizing the
ERB to impose additional amounts could be construed to refer to the power of taxation, it cannot be
overlooked that the overriding consideration is to enable the delegate to act with expediency in
carrying out the objectives of the law which are embraced by the police power of the State.

The interplay and constant fluctuation of the various factors involved in the determination of the price
of oil and petroleum products, and the frequently shifting need to either augment or exhaust the
Fund, do not conveniently permit the setting of fixed or rigid parameters in the law as proposed by
the petitioner. To do so would render the ERB unable to respond effectively so as to mitigate or
avoid the undesirable consequences of such fluidity. As such, the standard as it is expressed,
suffices to guide the delegate in the exercise of the delegated power, taking account of the
circumstances under which it is to be exercised.

For a valid delegation of power, it is essential that the law delegating the power must be (1)
complete in itself, that is it must set forth the policy to be executed by the delegate and (2) it must fix
a standard — limits of which
are sufficiently determinate or determinable — to which the delegate must conform.  20

. . . As pointed out in Edu v. Ericta: "To avoid the taint of unlawful delegation, there
must be a standard, which implies at the very least that the legislature itself
determines matters of principle and lays down fundamental policy. Otherwise, the
charge of complete abdication may be hard to repel. A standard thus defines
legislative policy, marks its limits, maps out its boundaries and specifies the public
agency to apply it. It indicates the circumstances under which the legislative
command is to be effected. It is the criterion by which the legislative purpose may be
carried out. Thereafter, the executive or administrative office designated may in
pursuance of the above guidelines promulgate supplemental rules and regulations.
The standard may either be express or implied. If the former, the non-delegation
objection is easily met. The standard though does not have to be spelled out
specifically. It could be implied from the policy and purpose of the act considered as
a whole.  21

It would seem that from the above-quoted ruling, the petition for prohibition should fail.

The standard, as the Court has already stated, may even be implied. In that light, there can be no
ground upon which to sustain the petition, inasmuch as the challenged law sets forth a determinable
standard which guides the exercise of the power granted to the ERB. By the same token, the proper
exercise of the delegated power may be tested with ease. It seems obvious that what the law
intended was to permit the additional imposts for as long as there exists a need to protect the
general public and the petroleum industry from the adverse consequences of pump rate fluctuations.
"Where the standards set up for the guidance of an administrative officer and the action taken are in
fact recorded in the orders of such officer, so that Congress, the courts and the public are assured
that the orders in the judgment of such officer conform to the legislative standard, there is no failure
in the performance of the legislative functions." 22
This Court thus finds no serious impediment to sustaining the validity of the legislation; the express
purpose for which the imposts are permitted and the general objectives and purposes of the fund are
readily discernible, and they constitute a sufficient standard upon which the delegation of power may
be justified.

In relation to the third question — respecting the illegality of the reimbursements to oil companies,
paid out of the Oil Price Stabilization Fund, because allegedly in contravention of § 8, paragraph 2
(2) of P.D. 1956, amended   — the Court finds for the petitioner.
23

The petition assails the payment of certain items or accounts in favor of the petroleum companies
(i.e., inventory losses, financing charges, fuel oil sales to the National Power Corporation, etc.)
because not authorized by law. Petitioner contends that "these claims are not embraced in the
enumeration in § 8 of P.D. 1956 . . since none of them was incurred 'as a result of the reduction of
domestic prices of petroleum products,'"   and since these items are reimbursements for which the
24

OPSF should not have responded, the amount of the P12.877 billion deficit "should be reduced by
P5,277.2 million."   It is argued "that under the principle of ejusdem generis . . . the term 'other
25

factors' (as used in § 8 of P.D. 1956) . . can only include such 'other factors' which necessarily result
in the reduction of domestic prices of petroleum products."  26

The Solicitor General, for his part, contends that "(t)o place said (term) within the restrictive confines
of the rule of ejusdem generis would reduce (E.O. 137) to a meaningless provision."

This Court, in Caltex Philippines, Inc. v. The Honorable Commissioner on Audit, et al.,   passed
27

upon the application of ejusdem generis to paragraph 2 of § 8 of P.D. 1956, viz.:

The rule of ejusdem generis states that "[w]here words follow an enumeration of

persons or things, by words of a particular and specific meaning, such general words
are not to be construed in their widest extent, but are held to be as applying only to
persons or things of the same kind or class as those specifically mentioned."   A 28

reading of subparagraphs (i) and (ii) easily discloses that they do not have a common
characteristic. The first relates to price reduction as directed by the Board of Energy
while the second refers to reduction in internal ad valorem taxes. Therefore,
subparagraph (iii) cannot be limited by the enumeration in these subparagraphs.
What should be considered for purposes of determining the "other factors" in
subparagraph (iii) is the first sentence of paragraph (2) of the Section which explicitly
allows the cost underrecovery only if such were incurred as a result of the reduction
of domestic prices of petroleum products.

The Court thus holds, that the reimbursement of financing charges is not authorized by paragraph 2
of § 8 of P.D. 1956, for the reason that they were not incurred as a result of the reduction of
domestic prices of petroleum products. Under the same provision, however, the payment of
inventory losses is upheld as valid, being clearly a result of domestic price reduction, when oil
companies incur a cost underrecovery for yet unsold stocks of oil in inventory acquired at a higher
price.

Reimbursement for cost underrecovery from the sales of oil to the National Power Corporation is
equally permissible, not as coming within the provisions of P.D. 1956, but in virtue of other laws and
regulations as held in Caltex   and which have been pointed to by the Solicitor General. At any rate,
29

doubts about the propriety of such reimbursements have been dispelled by the enactment of R.A.
6952, establishing the Petroleum Price Standby Fund, § 2 of which specifically authorizes the
reimbursement of "cost underrecovery incurred as a result of fuel oil sales to the National Power
Corporation."
Anent the overpayment refunds mentioned by the petitioner, no substantive discussion has been
presented to show how this is prohibited by P.D. 1956. Nor has the Solicitor General taken any effort
to defend the propriety of this refund. In fine, neither of the parties, beyond the mere mention of
overpayment refunds, has at all bothered to discuss the arguments for or against the legality of the
so-called overpayment refunds. To be sure, the absence of any argument for or against the validity
of the refund cannot result in its disallowance by the Court. Unless the impropriety or illegality of the
overpayment refund has been clearly and specifically shown, there can be no basis upon which to
nullify the same.

Finally, the Court finds no necessity to rule on the remaining issue, the same having been rendered
moot and academic. As of date hereof, the pump rates of gasoline have been reduced to levels
below even those prayed for in the petition.

WHEREFORE, the petition is GRANTED insofar as it prays for the nullification of the reimbursement
of financing charges, paid pursuant to E.O. 137, and DISMISSED in all other respects.

SO ORDERED.
G.R. No. L-29646 November 10, 1978

MAYOR ANTONIO J. VILLEGAS, petitioner,

vs.
HIU CHIONG TSAI PAO HO and JUDGE FRANCISCO ARCA, respondents.

Angel C. Cruz, Gregorio A. Ejercito, Felix C. Chaves & Jose Laureta for petitioner.

Sotero H. Laurel for respondents.

FERNANDEZ, J.:

This is a petition for certiorari to review tile decision dated September 17, 1968 of respondent Judge
Francisco Arca of the Court of First Instance of Manila, Branch I, in Civil Case No. 72797, the
dispositive portion of winch reads.

Wherefore, judgment is hereby rendered in favor of the petitioner and against the
respondents, declaring Ordinance No. 6 37 of the City of Manila null and void. The
preliminary injunction is made permanent. No pronouncement as to cost.

SO ORDERED.

Manila, Philippines, September 17, 1968.

(SGD.)
FRAN
CISCO
ARCA

Judge 1

The controverted Ordinance No. 6537 was passed by the Municipal Board of Manila on February 22,
1968 and signed by the herein petitioner Mayor Antonio J. Villegas of Manila on March 27, 1968.  2

City Ordinance No. 6537 is entitled:

AN ORDINANCE MAKING IT UNLAWFUL FOR ANY PERSON NOT A CITIZEN OF

THE PHILIPPINES TO BE EMPLOYED IN ANY PLACE OF EMPLOYMENT OR TO
BE ENGAGED IN ANY KIND OF TRADE, BUSINESS OR OCCUPATION WITHIN
THE CITY OF MANILA WITHOUT FIRST SECURING AN EMPLOYMENT PERMIT
FROM THE MAYOR OF MANILA; AND FOR OTHER PURPOSES.  3

Section 1 of said Ordinance No. 6537   prohibits aliens from being employed or to engage or
4

participate in any position or occupation or business enumerated therein, whether permanent,

temporary or casual, without first securing an employment permit from the Mayor of Manila and
paying the permit fee of P50.00 except persons employed in the diplomatic or consular missions of
foreign countries, or in the technical assistance programs of both the Philippine Government and any
foreign government, and those working in their respective households, and members of religious
orders or congregations, sect or denomination, who are not paid monetarily or in kind.
Violations of this ordinance is punishable by an imprisonment of not less than three (3) months to six
(6) months or fine of not less than P100.00 but not more than P200.00 or both such fine and
imprisonment, upon conviction.  5

On May 4, 1968, private respondent Hiu Chiong Tsai Pao Ho who was employed in Manila, filed a
petition with the Court of First Instance of Manila, Branch I, denominated as Civil Case No. 72797,
praying for the issuance of the writ of preliminary injunction and restraining order to stop the
enforcement of Ordinance No. 6537 as well as for a judgment declaring said Ordinance No. 6537
null and void. 
6

In this petition, Hiu Chiong Tsai Pao Ho assigned the following as his grounds for wanting the
ordinance declared null and void:

1) As a revenue measure imposed on aliens employed in the City of Manila,

Ordinance No. 6537 is discriminatory and violative of the rule of the uniformity in
taxation;

2) As a police power measure, it makes no distinction between useful and non-useful

occupations, imposing a fixed P50.00 employment permit, which is out of proportion
to the cost of registration and that it fails to prescribe any standard to guide and/or
limit the action of the Mayor, thus, violating the fundamental principle on illegal
delegation of legislative powers:

3) It is arbitrary, oppressive and unreasonable, being applied only to aliens who are
thus, deprived of their rights to life, liberty and property and therefore, violates the
due process and equal protection clauses of the Constitution. 7

On May 24, 1968, respondent Judge issued the writ of preliminary injunction and on September 17,
1968 rendered judgment declaring Ordinance No. 6537 null and void and making permanent the writ
of preliminary injunction.  8

Contesting the aforecited decision of respondent Judge, then Mayor Antonio J. Villegas filed the
present petition on March 27, 1969. Petitioner assigned the following as errors allegedly committed
by respondent Judge in the latter's decision of September 17,1968:  9

THE RESPONDENT JUDGE COMMITTED A SERIOUS AND PATENT ERROR OF

LAW IN RULING THAT ORDINANCE NO. 6537 VIOLATED THE CARDINAL RULE
OF UNIFORMITY OF TAXATION.

II

RESPONDENT JUDGE LIKEWISE COMMITTED A GRAVE AND PATENT ERROR

OF LAW IN RULING THAT ORDINANCE NO. 6537 VIOLATED THE PRINCIPLE
AGAINST UNDUE DESIGNATION OF LEGISLATIVE POWER.

III
 RESPONDENT JUDGE FURTHER COMMITTED A SERIOUS AND PATENT
ERROR OF LAW IN RULING THAT ORDINANCE NO. 6537 VIOLATED THE DUE
PROCESS AND EQUAL PROTECTION CLAUSES OF THE CONSTITUTION.

Petitioner Mayor Villegas argues that Ordinance No. 6537 cannot be declared null and void on the
ground that it violated the rule on uniformity of taxation because the rule on uniformity of taxation
applies only to purely tax or revenue measures and that Ordinance No. 6537 is not a tax or revenue
measure but is an exercise of the police power of the state, it being principally a regulatory measure
in nature.

The contention that Ordinance No. 6537 is not a purely tax or revenue measure because its principal
purpose is regulatory in nature has no merit. While it is true that the first part which requires that the
alien shall secure an employment permit from the Mayor involves the exercise of discretion and
judgment in the processing and approval or disapproval of applications for employment permits and
therefore is regulatory in character the second part which requires the payment of P50.00 as
employee's fee is not regulatory but a revenue measure. There is no logic or justification in exacting
P50.00 from aliens who have been cleared for employment. It is obvious that the purpose of the
ordinance is to raise money under the guise of regulation.

The P50.00 fee is unreasonable not only because it is excessive but because it fails to consider valid
substantial differences in situation among individual aliens who are required to pay it. Although the
equal protection clause of the Constitution does not forbid classification, it is imperative that the
classification should be based on real and substantial differences having a reasonable relation to the
subject of the particular legislation. The same amount of P50.00 is being collected from every
employed alien whether he is casual or permanent, part time or full time or whether he is a lowly
employee or a highly paid executive

Ordinance No. 6537 does not lay down any criterion or standard to guide the Mayor in the exercise
of his discretion. It has been held that where an ordinance of a municipality fails to state any policy
or to set up any standard to guide or limit the mayor's action, expresses no purpose to be attained by
requiring a permit, enumerates no conditions for its grant or refusal, and entirely lacks standard, thus
conferring upon the Mayor arbitrary and unrestricted power to grant or deny the issuance of building
permits, such ordinance is invalid, being an undefined and unlimited delegation of power to allow or
prevent an activity per se lawful. 
10

In Chinese Flour Importers Association vs. Price Stabilization Board,   where a law granted a
11

government agency power to determine the allocation of wheat flour among importers, the Supreme
Court ruled against the interpretation of uncontrolled power as it vested in the administrative officer
an arbitrary discretion to be exercised without a policy, rule, or standard from which it can be
measured or controlled.

It was also held in Primicias vs. Fugoso   that the authority and discretion to grant and refuse
12

permits of all classes conferred upon the Mayor of Manila by the Revised Charter of Manila is not
uncontrolled discretion but legal discretion to be exercised within the limits of the law.

Ordinance No. 6537 is void because it does not contain or suggest any standard or criterion to guide
the mayor in the exercise of the power which has been granted to him by the ordinance.

The ordinance in question violates the due process of law and equal protection rule of the
Constitution.
Requiring a person before he can be employed to get a permit from the City Mayor of Manila who
may withhold or refuse it at will is tantamount to denying him the basic right of the people in the
Philippines to engage in a means of livelihood. While it is true that the Philippines as a State is not
obliged to admit aliens within its territory, once an alien is admitted, he cannot be deprived of life
without due process of law. This guarantee includes the means of livelihood. The shelter of
protection under the due process and equal protection clause is given to all persons, both aliens and
citizens. 
13

The trial court did not commit the errors assigned.

WHEREFORE, the decision appealed from is hereby affirmed, without pronouncement as to costs.

SO ORDERED.

G.R. No. 122846               January 20, 2009

WHITE LIGHT CORPORATION, TITANIUM CORPORATION and STA. MESA TOURIST &
DEVELOPMENT CORPORATION, Petitioners,
vs.
CITY OF MANILA, represented by DE CASTRO, MAYOR ALFREDO S. LIM, Respondent.
 DECISION

Tinga, J.:

With another city ordinance of Manila also principally involving the tourist district as subject, the
Court is confronted anew with the incessant clash between government power and individual liberty
in tandem with the archetypal tension between law and morality.

In City of Manila v. Laguio, Jr.,1 the Court affirmed the nullification of a city ordinance barring the
operation of motels and inns, among other establishments, within the Ermita-Malate area. The
petition at bar assails a similarly-motivated city ordinance that prohibits those same establishments
from offering short-time admission, as well as pro-rated or "wash up" rates for such abbreviated
stays. Our earlier decision tested the city ordinance against our sacred constitutional rights to liberty,
due process and equal protection of law. The same parameters apply to the present petition.

This Petition2 under Rule 45 of the Revised Rules on Civil Procedure, which seeks the reversal of
the Decision3 in C.A.-G.R. S.P. No. 33316 of the Court of Appeals, challenges the validity of Manila
City Ordinance No. 7774 entitled, "An Ordinance Prohibiting Short-Time Admission, Short-Time
Admission Rates, and Wash-Up Rate Schemes in Hotels, Motels, Inns, Lodging Houses, Pension
Houses, and Similar Establishments in the City of Manila" (the Ordinance).

I.

The facts are as follows:

On December 3, 1992, City Mayor Alfredo S. Lim (Mayor Lim) signed into law the Ordinance. 4 The
Ordinance is reproduced in full, hereunder:

SECTION 1. Declaration of Policy. It is hereby the declared policy of the City Government to protect
the best interest, health and welfare, and the morality of its constituents in general and the youth in
particular.

SEC. 2. Title. This ordinance shall be known as "An Ordinance" prohibiting short time admission in
hotels, motels, lodging houses, pension houses and similar establishments in the City of Manila.

SEC. 3. Pursuant to the above policy, short-time admission and rate [sic], wash-up rate or other
similarly concocted terms, are hereby prohibited in hotels, motels, inns, lodging houses, pension
houses and similar establishments in the City of Manila.

SEC. 4. Definition of Term[s]. Short-time admission shall mean admittance and charging of room
rate for less than twelve (12) hours at any given time or the renting out of rooms more than twice a
day or any other term that may be concocted by owners or managers of said establishments but
would mean the same or would bear the same meaning.

SEC. 5. Penalty Clause. Any person or corporation who shall violate any provision of this ordinance
shall upon conviction thereof be punished by a fine of Five Thousand (₱5,000.00) Pesos or
imprisonment for a period of not exceeding one (1) year or both such fine and imprisonment at the
discretion of the court; Provided, That in case of [a] juridical person, the president, the manager, or
the persons in charge of the operation thereof shall be liable: Provided, further, That in case of
subsequent conviction for the same offense, the business license of the guilty party shall
automatically be cancelled.
SEC. 6. Repealing Clause. Any or all provisions of City ordinances not consistent with or contrary to
this measure or any portion hereof are hereby deemed repealed.

SEC. 7. Effectivity. This ordinance shall take effect immediately upon approval.

Enacted by the city Council of Manila at its regular session today, November 10, 1992.

Approved by His Honor, the Mayor on December 3, 1992.

On December 15, 1992, the Malate Tourist and Development Corporation (MTDC) filed a complaint
for declaratory relief with prayer for a writ of preliminary injunction and/or temporary restraining order
( TRO)5 with the Regional Trial Court (RTC) of Manila, Branch 9 impleading as defendant, herein
respondent City of Manila (the City) represented by Mayor Lim. 6 MTDC prayed that the Ordinance,
insofar as it includes motels and inns as among its prohibited establishments, be declared invalid
and unconstitutional. MTDC claimed that as owner and operator of the Victoria Court in Malate,
Manila it was authorized by Presidential Decree (P.D.) No. 259 to admit customers on a short time
basis as well as to charge customers wash up rates for stays of only three hours.

On December 21, 1992, petitioners White Light Corporation (WLC), Titanium Corporation (TC) and
Sta. Mesa Tourist and Development Corporation (STDC) filed a motion to intervene and to admit
attached complaint-in-intervention7 on the ground that the Ordinance directly affects their business
interests as operators of drive-in-hotels and motels in Manila. 8 The three companies are components
of the Anito Group of Companies which owns and operates several hotels and motels in Metro
Manila.9

On December 23, 1992, the RTC granted the motion to intervene. 10 The RTC also notified the
Solicitor General of the proceedings pursuant to then Rule 64, Section 4 of the Rules of Court. On
the same date, MTDC moved to withdraw as plaintiff.11

On December 28, 1992, the RTC granted MTDC's motion to withdraw. 12 The RTC issued a TRO on
January 14, 1993, directing the City to cease and desist from enforcing the Ordinance. 13 The City
filed an Answer dated January 22, 1993 alleging that the Ordinance is a legitimate exercise of police
power.14

On February 8, 1993, the RTC issued a writ of preliminary injunction ordering the city to desist from
the enforcement of the Ordinance.15 A month later, on March 8, 1993, the Solicitor General filed his
Comment arguing that the Ordinance is constitutional.

During the pre-trial conference, the WLC, TC and STDC agreed to submit the case for decision
without trial as the case involved a purely legal question. 16 On October 20, 1993, the RTC rendered a
decision declaring the Ordinance null and void. The dispositive portion of the decision reads:

WHEREFORE, in view of all the foregoing, [O]rdinance No. 7774 of the City of Manila is hereby
declared null and void.

Accordingly, the preliminary injunction heretofor issued is hereby made permanent.

SO ORDERED.17

The RTC noted that the ordinance "strikes at the personal liberty of the individual guaranteed and
jealously guarded by the Constitution."18 Reference was made to the provisions of the Constitution
encouraging private enterprises and the incentive to needed investment, as well as the right to
operate economic enterprises. Finally, from the observation that the illicit relationships the Ordinance
sought to dissuade could nonetheless be consummated by simply paying for a 12-hour stay, the
RTC likened the law to the ordinance annulled in Ynot v. Intermediate Appellate Court,19 where the
legitimate purpose of preventing indiscriminate slaughter of carabaos was sought to be effected
through an inter-province ban on the transport of carabaos and carabeef.

The City later filed a petition for review on certiorari with the Supreme Court.20 The petition was
docketed as G.R. No. 112471. However in a resolution dated January 26, 1994, the Court treated
the petition as a petition for certiorari and referred the petition to the Court of Appeals. 21

Before the Court of Appeals, the City asserted that the Ordinance is a valid exercise of police power
pursuant to Section 458 (4)(iv) of the Local Government Code which confers on cities, among other
local government units, the power:

[To] regulate the establishment, operation and maintenance of cafes, restaurants, beerhouses,
hotels, motels, inns, pension houses, lodging houses and other similar establishments, including
tourist guides and transports.22

The Ordinance, it is argued, is also a valid exercise of the power of the City under Article III, Section
18(kk) of the Revised Manila Charter, thus:

"to enact all ordinances it may deem necessary and proper for the sanitation and safety, the
furtherance of the prosperity and the promotion of the morality, peace, good order, comfort,
convenience and general welfare of the city and its inhabitants, and such others as be necessary to
carry into effect and discharge the powers and duties conferred by this Chapter; and to fix penalties
for the violation of ordinances which shall not exceed two hundred pesos fine or six months
imprisonment, or both such fine and imprisonment for a single offense. 23

Petitioners argued that the Ordinance is unconstitutional and void since it violates the right to privacy
and the freedom of movement; it is an invalid exercise of police power; and it is an unreasonable
and oppressive interference in their business.

The Court of Appeals reversed the decision of the RTC and affirmed the constitutionality of the
Ordinance.24 First, it held that the Ordinance did not violate the right to privacy or the freedom of
movement, as it only penalizes the owners or operators of establishments that admit individuals for
short time stays. Second, the virtually limitless reach of police power is only constrained by having a
lawful object obtained through a lawful method. The lawful objective of the Ordinance is satisfied
since it aims to curb immoral activities. There is a lawful method since the establishments are still
allowed to operate. Third, the adverse effect on the establishments is justified by the well-being of its
constituents in general. Finally, as held in Ermita-Malate Motel Operators Association v. City Mayor
of Manila, liberty is regulated by law.

TC, WLC and STDC come to this Court via petition for review on certiorari. 25 In their petition and
Memorandum, petitioners in essence repeat the assertions they made before the Court of Appeals.
They contend that the assailed Ordinance is an invalid exercise of police power.

II.

We must address the threshold issue of petitioners’ standing. Petitioners allege that as owners of
establishments offering "wash-up" rates, their business is being unlawfully interfered with by the
Ordinance. However, petitioners also allege that the equal protection rights of their clients are also
being interfered with. Thus, the crux of the matter is whether or not these establishments have the
requisite standing to plead for protection of their patrons' equal protection rights.

Standing or locus standi is the ability of a party to demonstrate to the court sufficient connection to
and harm from the law or action challenged to support that party's participation in the case. More
importantly, the doctrine of standing is built on the principle of separation of powers, 26 sparing as it
does unnecessary interference or invalidation by the judicial branch of the actions rendered by its
co-equal branches of government.

The requirement of standing is a core component of the judicial system derived directly from the
Constitution.27 The constitutional component of standing doctrine incorporates concepts which
concededly are not susceptible of precise definition. 28 In this jurisdiction, the extancy of "a direct and
personal interest" presents the most obvious cause, as well as the standard test for a petitioner's
standing.29 In a similar vein, the United States Supreme Court reviewed and elaborated on the
meaning of the three constitutional standing requirements of injury, causation, and redressability
in Allen v. Wright.30

Nonetheless, the general rules on standing admit of several exceptions such as the overbreadth
doctrine, taxpayer suits, third party standing and, especially in the Philippines, the doctrine of
transcendental importance.31

For this particular set of facts, the concept of third party standing as an exception and the
overbreadth doctrine are appropriate. In Powers v. Ohio,32 the United States Supreme Court wrote
that: "We have recognized the right of litigants to bring actions on behalf of third parties, provided
three important criteria are satisfied: the litigant must have suffered an ‘injury-in-fact,’ thus giving him
or her a "sufficiently concrete interest" in the outcome of the issue in dispute; the litigant must have a
close relation to the third party; and there must exist some hindrance to the third party's ability to
protect his or her own interests."33 Herein, it is clear that the business interests of the petitioners are
likewise injured by the Ordinance. They rely on the patronage of their customers for their continued
viability which appears to be threatened by the enforcement of the Ordinance. The relative silence in
constitutional litigation of such special interest groups in our nation such as the American Civil
Liberties Union in the United States may also be construed as a hindrance for customers to bring
suit.34

American jurisprudence is replete with examples where parties-in-interest were allowed standing to
advocate or invoke the fundamental due process or equal protection claims of other persons or
classes of persons injured by state action. In Griswold v. Connecticut,35 the United States Supreme
Court held that physicians had standing to challenge a reproductive health statute that would
penalize them as accessories as well as to plead the constitutional protections available to their
patients. The Court held that:

"The rights of husband and wife, pressed here, are likely to be diluted or adversely affected unless
those rights are considered in a suit involving those who have this kind of confidential relation to
them."36

An even more analogous example may be found in Craig v. Boren,37 wherein the United States
Supreme Court held that a licensed beverage vendor has standing to raise the equal protection
claim of a male customer challenging a statutory scheme prohibiting the sale of beer to males under
the age of 21 and to females under the age of 18. The United States High Court explained that the
vendors had standing "by acting as advocates of the rights of third parties who seek access to their
market or function."38
Assuming arguendo that petitioners do not have a relationship with their patrons for the former to
assert the rights of the latter, the overbreadth doctrine comes into play. In overbreadth analysis,
challengers to government action are in effect permitted to raise the rights of third parties. Generally
applied to statutes infringing on the freedom of speech, the overbreadth doctrine applies when a
statute needlessly restrains even constitutionally guaranteed rights. 39 In this case, the petitioners
claim that the Ordinance makes a sweeping intrusion into the right to liberty of their clients. We can
see that based on the allegations in the petition, the Ordinance suffers from overbreadth.

We thus recognize that the petitioners have a right to assert the constitutional rights of their clients to
patronize their establishments for a "wash-rate" time frame.

III.

To students of jurisprudence, the facts of this case will recall to mind not only the recent City of
Manila ruling, but our 1967 decision in Ermita-Malate Hotel and Motel Operations Association, Inc.,
v. Hon. City Mayor of Manila.40 Ermita-Malate concerned the City ordinance requiring patrons to fill
up a prescribed form stating personal information such as name, gender, nationality, age, address
and occupation before they could be admitted to a motel, hotel or lodging house. This earlier
ordinance was precisely enacted to minimize certain practices deemed harmful to public morals. A
purpose similar to the annulled ordinance in City of Manila which sought a blanket ban on motels,
inns and similar establishments in the Ermita-Malate area. However, the constitutionality of the
ordinance in Ermita-Malate was sustained by the Court.

The common thread that runs through those decisions and the case at bar goes beyond the
singularity of the localities covered under the respective ordinances. All three ordinances were
enacted with a view of regulating public morals including particular illicit activity in transient lodging
establishments. This could be described as the middle case, wherein there is no wholesale ban on
motels and hotels but the services offered by these establishments have been severely restricted. At
its core, this is another case about the extent to which the State can intrude into and regulate the
lives of its citizens.

The test of a valid ordinance is well established. A long line of decisions including City of Manila has
held that for an ordinance to be valid, it must not only be within the corporate powers of the local
government unit to enact and pass according to the procedure prescribed by law, it must also
conform to the following substantive requirements: (1) must not contravene the Constitution or any
statute; (2) must not be unfair or oppressive; (3) must not be partial or discriminatory; (4) must not
prohibit but may regulate trade; (5) must be general and consistent with public policy; and (6) must
not be unreasonable.41

The Ordinance prohibits two specific and distinct business practices, namely wash rate admissions
and renting out a room more than twice a day. The ban is evidently sought to be rooted in the police
power as conferred on local government units by the Local Government Code through such
implements as the general welfare clause.

A.

Police power, while incapable of an exact definition, 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 as the conditions warrant. 42 Police power is based upon the concept of
necessity of the State and its corresponding right to protect itself and its people. 43 Police power has
been used as justification for numerous and varied actions by the State. These range from the
regulation of dance halls,44 movie theaters,45 gas stations46 and cockpits.47 The awesome scope of
police power is best demonstrated by the fact that in its hundred or so years of presence in our
nation’s legal system, its use has rarely been denied.

The apparent goal of the Ordinance is to minimize if not eliminate the use of the covered
establishments for illicit sex, prostitution, drug use and alike. These goals, by themselves, are
unimpeachable and certainly fall within the ambit of the police power of the State. Yet the desirability
of these ends do not sanctify any and all means for their achievement. Those means must align with
the Constitution, and our emerging sophisticated analysis of its guarantees to the people. The Bill of
Rights stands as a rebuke to the seductive theory of Macchiavelli, and, sometimes even, the political
majorities animated by his cynicism.

Even as we design the precedents that establish the framework for analysis of due process or equal
protection questions, the courts are naturally inhibited by a due deference to the co-equal branches
of government as they exercise their political functions. But when we are compelled to nullify
executive or legislative actions, yet another form of caution emerges. If the Court were animated by
the same passing fancies or turbulent emotions that motivate many political decisions, judicial
integrity is compromised by any perception that the judiciary is merely the third political branch of
government. We derive our respect and good standing in the annals of history by acting as judicious
and neutral arbiters of the rule of law, and there is no surer way to that end than through the
development of rigorous and sophisticated legal standards through which the courts analyze the
most fundamental and far-reaching constitutional questions of the day.

B.

The primary constitutional question that confronts us is one of due process, as guaranteed under
Section 1, Article III of the Constitution. Due process evades a precise definition. 48 The purpose of
the guaranty is to prevent arbitrary governmental encroachment against the life, liberty and property
of individuals. The due process guaranty serves as a protection against arbitrary regulation or
seizure. Even corporations and partnerships are protected by the guaranty insofar as their property
is concerned.

The due process guaranty has traditionally been interpreted as imposing two related but distinct
restrictions on government, "procedural due process" and "substantive due process." Procedural due
process refers to the procedures that the government must follow before it deprives a person of life,
liberty, or property.49 Procedural due process concerns itself with government action adhering to the
established process when it makes an intrusion into the private sphere. Examples range from the
form of notice given to the level of formality of a hearing.

If due process were confined solely to its procedural aspects, there would arise absurd situation of
arbitrary government action, provided the proper formalities are followed. Substantive due process
completes the protection envisioned by the due process clause. It inquires whether the government
has sufficient justification for depriving a person of life, liberty, or property. 50

The question of substantive due process, moreso than most other fields of law, has reflected
dynamism in progressive legal thought tied with the expanded acceptance of fundamental freedoms.
Police power, traditionally awesome as it may be, is now confronted with a more rigorous level of
analysis before it can be upheld. The vitality though of constitutional due process has not been
predicated on the frequency with which it has been utilized to achieve a liberal result for, after all, the
libertarian ends should sometimes yield to the prerogatives of the State. Instead, the due process
clause has acquired potency because of the sophisticated methodology that has emerged to
determine the proper metes and bounds for its application.
 C.

The general test of the validity of an ordinance on substantive due process grounds is best tested
when assessed with the evolved footnote 4 test laid down by the U.S. Supreme Court in U.S. v.
Carolene Products.51 Footnote 4 of the Carolene Products case acknowledged that the judiciary
would defer to the legislature unless there is a discrimination against a "discrete and insular" minority
or infringement of a "fundamental right." 52 Consequently, two standards of judicial review were
established: strict scrutiny for laws dealing with freedom of the mind or restricting the political
process, and the rational basis standard of review for economic legislation.

A third standard, denominated as heightened or immediate scrutiny, was later adopted by the U.S.
Supreme Court for evaluating classifications based on gender 53 and legitimacy.54 Immediate scrutiny
was adopted by the U.S. Supreme Court in Craig,55 after the Court declined to do so in Reed v.
Reed.56 While the test may have first been articulated in equal protection analysis, it has in the
United States since been applied in all substantive due process cases as well.

We ourselves have often applied the rational basis test mainly in analysis of equal protection
challenges.57 Using the rational basis examination, laws or ordinances are upheld if they rationally
further a legitimate governmental interest.58 Under intermediate review, governmental interest is
extensively examined and the availability of less restrictive measures is considered. 59 Applying strict
scrutiny, the focus is on the presence of compelling, rather than substantial, governmental interest
and on the absence of less restrictive means for achieving that interest.

In terms of judicial review of statutes or ordinances, strict scrutiny refers to the standard for
determining the quality and the amount of governmental interest brought to justify the regulation of
fundamental freedoms.60 Strict scrutiny is used today to test the validity of laws dealing with the
regulation of speech, gender, or race as well as other fundamental rights as expansion from its
earlier applications to equal protection. 61 The United States Supreme Court has expanded the scope
of strict scrutiny to protect fundamental rights such as suffrage, 62 judicial access63 and interstate
travel.64

If we were to take the myopic view that an Ordinance should be analyzed strictly as to its effect only
on the petitioners at bar, then it would seem that the only restraint imposed by the law which we are
capacitated to act upon is the injury to property sustained by the petitioners, an injury that would
warrant the application of the most deferential standard – the rational basis test. Yet as earlier
stated, we recognize the capacity of the petitioners to invoke as well the constitutional rights of their
patrons – those persons who would be deprived of availing short time access or wash-up rates to
the lodging establishments in question.

Viewed cynically, one might say that the infringed rights of these customers were are trivial since
they seem shorn of political consequence. Concededly, these are not the sort of cherished rights
that, when proscribed, would impel the people to tear up their cedulas. Still, the Bill of Rights does
not shelter gravitas alone. Indeed, it is those "trivial" yet fundamental freedoms – which the people
reflexively exercise any day without the impairing awareness of their constitutional consequence –
that accurately reflect the degree of liberty enjoyed by the people. Liberty, as integrally incorporated
as a fundamental right in the Constitution, is not a Ten Commandments-style enumeration of what
may or what may not be done; but rather an atmosphere of freedom where the people do not feel
labored under a Big Brother presence as they interact with each other, their society and nature, in a
manner innately understood by them as inherent, without doing harm or injury to others.

D.
The rights at stake herein fall within the same fundamental rights to liberty which we upheld in City of
Manila v. Hon. Laguio, Jr. We expounded on that most primordial of rights, thus:

Liberty as guaranteed by the Constitution was defined by Justice Malcolm to include "the right to
exist and the right to be free from arbitrary restraint or servitude. The term cannot be dwarfed into
mere freedom from physical restraint of the person of the citizen, but is deemed to embrace the right
of man to enjoy the facilities with which he has been endowed by his Creator, subject only to such
restraint as are necessary for the common welfare."[ 65] In accordance with this case, the rights of the
citizen to be free to use his faculties in all lawful ways; to live and work where he will; to earn his
livelihood by any lawful calling; and to pursue any avocation are all deemed embraced in the
concept of liberty.[66]

The U.S. Supreme Court in the case of Roth v. Board of Regents, sought to clarify the meaning of
"liberty." It said:

While the Court has not attempted to define with exactness the liberty . . . guaranteed [by the Fifth
and Fourteenth Amendments], the term denotes not merely freedom from bodily restraint but also
the right of the individual to contract, to engage in any of the common occupations of life, to acquire
useful knowledge, to marry, establish a home and bring up children, to worship God according to the
dictates of his own conscience, and generally to enjoy those privileges long recognized . . . as
essential to the orderly pursuit of happiness by free men. In a Constitution for a free people, there
can be no doubt that the meaning of "liberty" must be broad indeed. 67 [Citations omitted]

It cannot be denied that the primary animus behind the ordinance is the curtailment of sexual
behavior. The City asserts before this Court that the subject establishments "have gained notoriety
as venue of ‘prostitution, adultery and fornications’ in Manila since they ‘provide the necessary
atmosphere for clandestine entry, presence and exit and thus became the ‘ideal haven for
prostitutes and thrill-seekers.’"68 Whether or not this depiction of a mise-en-scene of vice is accurate,
it cannot be denied that legitimate sexual behavior among willing married or consenting single adults
which is constitutionally protected69 will be curtailed as well, as it was in the City of Manila case. Our
holding therein retains significance for our purposes:

The concept of liberty compels respect for the individual whose claim to privacy and interference
demands respect. As the case of Morfe v. Mutuc, borrowing the words of Laski, so very aptly stated:

Man is one among many, obstinately refusing reduction to unity. His separateness, his isolation, are
indefeasible; indeed, they are so fundamental that they are the basis on which his civic obligations
are built. He cannot abandon the consequences of his isolation, which are, broadly speaking, that
his experience is private, and the will built out of that experience personal to himself. If he surrenders
his will to others, he surrenders himself. If his will is set by the will of others, he ceases to be a
master of himself. I cannot believe that a man no longer a master of himself is in any real sense free.

Indeed, the right to privacy as a constitutional right was recognized in Morfe, the invasion of which
should be justified by a compelling state interest. Morfe accorded recognition to the right to privacy
independently of its identification with liberty; in itself it is fully deserving of constitutional protection.
Governmental powers should stop short of certain intrusions into the personal life of the citizen. 70

We cannot discount other legitimate activities which the Ordinance would proscribe or impair. There
are very legitimate uses for a wash rate or renting the room out for more than twice a day. Entire
families are known to choose pass the time in a motel or hotel whilst the power is momentarily out in
their homes. In transit passengers who wish to wash up and rest between trips have a legitimate
purpose for abbreviated stays in motels or hotels. Indeed any person or groups of persons in need of
comfortable private spaces for a span of a few hours with purposes other than having sex or using
illegal drugs can legitimately look to staying in a motel or hotel as a convenient alternative.

E.

That the Ordinance prevents the lawful uses of a wash rate depriving patrons of a product and the
petitioners of lucrative business ties in with another constitutional requisite for the legitimacy of the
Ordinance as a police power measure. It must appear that the interests of the public generally, as
distinguished from those of a particular class, require an interference with private rights and the
means must be reasonably necessary for the accomplishment of the purpose and not unduly
oppressive of private rights.71 It must also be evident that no other alternative for the accomplishment
of the purpose less intrusive of private rights can work. More importantly, a reasonable relation must
exist between the purposes of the measure and the means employed for its accomplishment, for
even under the guise of protecting the public interest, personal rights and those pertaining to private
property will not be permitted to be arbitrarily invaded. 72

Lacking a concurrence of these requisites, the police measure shall be struck down as an arbitrary
intrusion into private rights. As held in Morfe v. Mutuc, the exercise of police power is subject to
judicial review when life, liberty or property is affected. 73 However, this is not in any way meant to
take it away from the vastness of State police power whose exercise enjoys the presumption of
validity.74

Similar to the Comelec resolution requiring newspapers to donate advertising space to candidates,
this Ordinance is a blunt and heavy instrument.75 The Ordinance makes no distinction between
places frequented by patrons engaged in illicit activities and patrons engaged in legitimate actions.
Thus it prevents legitimate use of places where illicit activities are rare or even unheard of. A plain
reading of section 3 of the Ordinance shows it makes no classification of places of lodging, thus
deems them all susceptible to illicit patronage and subject them without exception to the unjustified
prohibition.

The Court has professed its deep sentiment and tenderness of the Ermita-Malate area, its longtime
home,76 and it is skeptical of those who wish to depict our capital city – the Pearl of the Orient – as a
modern-day Sodom or Gomorrah for the Third World set. Those still steeped in Nick Joaquin-dreams
of the grandeur of Old Manila will have to accept that Manila like all evolving big cities, will have its
problems. Urban decay is a fact of mega cities such as Manila, and vice is a common problem
confronted by the modern metropolis wherever in the world. The solution to such perceived decay is
not to prevent legitimate businesses from offering a legitimate product. Rather, cities revive
themselves by offering incentives for new businesses to sprout up thus attracting the dynamism of
individuals that would bring a new grandeur to Manila.

The behavior which the Ordinance seeks to curtail is in fact already prohibited and could in fact be
diminished simply by applying existing laws. Less intrusive measures such as curbing the
proliferation of prostitutes and drug dealers through active police work would be more effective in
easing the situation. So would the strict enforcement of existing laws and regulations penalizing
prostitution and drug use. These measures would have minimal intrusion on the businesses of the
petitioners and other legitimate merchants. Further, it is apparent that the Ordinance can easily be
circumvented by merely paying the whole day rate without any hindrance to those engaged in illicit
activities. Moreover, drug dealers and prostitutes can in fact collect "wash rates" from their clientele
by charging their customers a portion of the rent for motel rooms and even apartments.

IV.
We reiterate that individual rights may be adversely affected only to the extent that may fairly be
required by the legitimate demands of public interest or public welfare. The State is a leviathan that
must be restrained from needlessly intruding into the lives of its citizens. However well-intentioned
the Ordinance may be, it is in effect an arbitrary and whimsical intrusion into the rights of the
establishments as well as their patrons. The Ordinance needlessly restrains the operation of the
businesses of the petitioners as well as restricting the rights of their patrons without sufficient
justification. The Ordinance rashly equates wash rates and renting out a room more than twice a day
with immorality without accommodating innocuous intentions.

The promotion of public welfare and a sense of morality among citizens deserves the full
endorsement of the judiciary provided that such measures do not trample rights this Court is sworn
to protect.77 The notion that the promotion of public morality is a function of the State is as old as
Aristotle.78 The advancement of moral relativism as a school of philosophy does not de-legitimize the
role of morality in law, even if it may foster wider debate on which particular behavior to penalize. It
is conceivable that a society with relatively little shared morality among its citizens could be
functional so long as the pursuit of sharply variant moral perspectives yields an adequate
accommodation of different interests.79

To be candid about it, the oft-quoted American maxim that "you cannot legislate morality" is
ultimately illegitimate as a matter of law, since as explained by Calabresi, that phrase is more
accurately interpreted as meaning that efforts to legislate morality will fail if they are widely at
variance with public attitudes about right and wrong. 80 Our penal laws, for one, are founded on age-
old moral traditions, and as long as there are widely accepted distinctions between right and wrong,
they will remain so oriented.

Yet the continuing progression of the human story has seen not only the acceptance of the right-
wrong distinction, but also the advent of fundamental liberties as the key to the enjoyment of life to
the fullest. Our democracy is distinguished from non-free societies not with any more extensive
elaboration on our part of what is moral and immoral, but from our recognition that the individual
liberty to make the choices in our lives is innate, and protected by the State. Independent and fair-
minded judges themselves are under a moral duty to uphold the Constitution as the embodiment of
the rule of law, by reason of their expression of consent to do so when they take the oath of office,
and because they are entrusted by the people to uphold the law. 81

Even as the implementation of moral norms remains an indispensable complement to governance,

that prerogative is hardly absolute, especially in the face of the norms of due process of liberty. And
while the tension may often be left to the courts to relieve, it is possible for the government to avoid
the constitutional conflict by employing more judicious, less drastic means to promote morality.

WHEREFORE, the Petition is GRANTED. The Decision of the Court of Appeals is REVERSED, and
the Decision of the Regional Trial Court of Manila, Branch 9, is REINSTATED. Ordinance No. 7774
is hereby declared UNCONSTITUTIONAL. No pronouncement as to costs.

SO ORDERED.
 EN BANC

G.R. No. L-16315             May 30, 1964

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
HAWAIIAN-PHILIPPINE COMPANY, respondent.

Office of the Solicitor General for petitioner.

Hilado and Hilado for respondent.

DIZON, J.:
This is a petition filed by the Commissioner of Internal Revenue for the review of the decision of the
Court of Tax Appeals in C.T.A. Case No. 598 ordering him to refund to respondent Hawaiian-
Philippine Company the amount of P8,411.99 representing fixed and percentage taxes assessed
against it and which the latter had deposited with the City Treasurer of Silay, Occidental Negros.

The undisputed facts of this ease, as found by the Court of Tax Appeals, are as follows:

The petitioner, a corporation duly organized in accordance with law, is operating a sugar
central in the City of Silay, Occidental Negros. It produces centrifugal sugar from sugarcane
supplied by planters. The processed sugar is divided between the planters and the petitioner
in the proportion stipulated in the milling contracts, and thereafter is deposited in the
warehouses of the latter. (Pp. 4-5, t.s.n.) For the sugar deposited by the planters, the
petitioner issues the corresponding warehouse receipts of "quedans". It does not collect
storage charges on the sugar deposited in its warehouse during the first 90 days period
counted from the time it is extracted from the sugarcane. Upon the lapse of the first ninety
days and up to the beginning of the next milling season, it collects a fee of P0.30 per picul a
month. Henceforth, if the sugar is not yet withdrawn, a penalty of P0.25 per picul or fraction
thereof a month is imposed. (Exhibits "B-1", "C-1", "D-1", "B-2", "C-2", p. 10, t.s.n.)

The storage of sugar is carried in the books of the company under Account No. 5000,
denominated "Manufacturing Cost Ledger Control"; the storage fees under Account No.
521620; the expense accounts of the factory under Account No. 5200; and the so-called
"Sugar Bodega Operations" under Account No. 5216, under which is a Sub-Account No. 20,
captioned, "Credits". (Pp. 16-17, t.s.n., Exhibit "F".) The collections from storage after the
lapse of the first 90 days period are entered in the company's books as debit to CASH, and
credit to Expense Account No. 2516-20 (p. 18, t.s.n.).

The credit for storage charges decreased the deductible expense resulting in the
corresponding increase of the taxable income of the petitioner. This is reflected by the
entries enclosed in parenthesis in Exhibit "G", under the heading "Storage Charges". (P. 18,
t.s.n.) The alleged reason for this accounting operation is that, inasmuch as the "Sugar
Bodega Operations" is considered as an expense account, entries under it are "debits".
Similarly, since "Storage Charges" constitute "credit", the corresponding figures (see Exhibit
"C") are enclosed in parenthesis as they decrease the expenses of maintaining the sugar
warehouses.

Upon investigation conducted by the Bureau, it was found that during the years 1949 to
1957, the petitioner realized from collected storage fees a total gross receipts of
P212,853.00, on the basis of which the respondent determined the petitioner's liability for
fixed and percentage taxes, 25% surcharge, and administrative penalty in the aggregate
amount of P8,411.99 (Exhibit "5", p. 11, BIR rec.)

On October 20, 1958, the petitioner deposited the amount of P8,411.99 with the Office of the
City Treasurer of Silay. (Exhibits "I" and "I-1", pp. 59-60, CTA rec.) Later, it filed its petition
for review before this Court (Exhibit "K", p. 25, CTA rec.)

After due hearing the Court of Tax Appeals rendered the appealed decision.

The only issue to be resolved in the case at bar is whether or not, upon the facts stated above,
petitioner is a warehouseman liable for the payment of the fixed and percentage taxes prescribed in
Sections 182 and 191 of the National Internal Revenue Code which read as follows:
 SEC. 182. FIXED TAXES — (a) ON BUSINESS (1) PERSONS SUBJECT TO
PERCENTAGE TAX. — Unless otherwise provided every person engaging in a business on
which the percentage tax is imposed shall pay a fixed annual tax of twenty pesos. ... .

SEC. 191. PERCENTAGE TAX ON ROAD, BUILDING, IRRIGATION, ARTESIAN WELL,

WATERWORKS, AND OTHER CONSTRUCTION WORK CONTRACTORS,
PROPRIETORS OR OPERATORS OF DOCKYARD, AND OTHERS. ... warehousemen;
plumbers, smiths; house or sign painters; lithographers, publishers, except those engaged in
the publication or printing and publication of any newspaper, magazine, review or bulletin
which appear at regular intervals with fixed prices for subscription and sale, and which is not
devoted principally to the publication of advertisements; printers and bookbinders, business
agents and other independent contractors, shall pay a tax equivalent to THREE
PERCENTUM of their gross receipts. ... .

Respondent disclaims liability under the provisions quoted above, alleging that it is not engaged the
business of storing its planters' sugar for profit; that the maintenance of its warehouses is merely
incidental to its business of manufacturing sugar and in compliance with its obligation to its planters.
We find this to be without merit.

It is clear from the facts of the case that, after manufacturing the sugar of its planters, respondent
stores it in its warehouses and issues the corresponding "quedans" to the planters who own the
sugar; that while the sugar is stored free during the first ninety days from the date the it "quedans"
are issued, the undisputed fact is that, upon the expiration of said period, respondent charger, and
collects storage fees; that for the period beginning 1949 to 1957, respondent's total gross receipts
from this particular enterprise amounted to P212,853.00.

A warehouseman has been defined as one who receives and stores goods of another for
compensation (44 Words and Phrases, p. 635). For one to be considered engaged in the
warehousing business, therefore, it is sufficient that he receives goods owned by another for
storage, and collects fees in connection with the same. In fact, Section 2 of the General Bonded
Warehouse Act, as amended, defines a warehouseman as "a person engaged in the business of
receiving commodity for storage."

That respondent stores its planters' sugar free of charge for the first ninety days does not exempt it
from liability under the legal provisions under consideration. Were such fact sufficient for that
purpose, the law imposing the tax would be rendered ineffectual.  1äwphï1.ñët

Neither is the fact that respondent's warehousing business is carried in addition to, or in relation with,
the operation of its sugar central sufficient to exempt it from payment of the tax prescribed in the
legal provisions quoted heretofore Under Section 178 of the National Internal Revenue Code, the tax
on business is payable for every separate or distinct establishment or place where business subject
to the tax is conducted, and one line of business or occupation does not become exempt by being
conducted with some other business or occupation for which such tax has been paid.

Lastly, respondent's contention that the imposition of the tax under consideration would amount to
double taxation is likewise without merit. As is clear from the facts, respondent's warehousing
business, although carried on in relation to the operation of its sugar central, is a distinct and
separate business taxable under a different provision of the Tax Code. There can be no double
taxation where the State merely imposes a tax on every separate and distinct business in which a
party is engaged. Moreover, in Manufacturers Life insurance Co. vs. Meer, G.R. No. L-2910, June
29, 1951; City of Manila vs. Inter-Island Gas service, G.R. L-8799, August 31, 1956, We have ruled
that there is no prohibition against double or multiple taxation in this jurisdiction.
WHEREFORE, the decision appealed from is reversed and set aside, with costs.

G.R. No. 131359 May 5, 1999

MANILA ELECTRIC COMPANY, petitioner,

vs.
PROVINCE OF LAGUNA and BENITO R. BALAZO, in his capacity as Provincial Treasurer of
Laguna, respondents.

VITUG, J.:

On various dates, certain municipalities of the Province of Laguna, including, Biñan, Sta. Rosa, San
Pedro, Luisiana, Calauan and Cabuyao, by virtue of existing laws then in effect, issued resolutions
through their respective municipal councils granting franchise in favor of petitioner Manila Electric
Company ("MERALCO") for the supply of electric light, heat and power within their concerned areas.
On 19 January 1983, MERALCO was likewise granted a franchise by the National Electrification
Administration to operate an electric light and power service in the Municipality of Calamba, Laguna.

On 12 September 1991, Republic Act No. 7160, otherwise known as the "Local Government Code of
1991," was enacted to take effect on 01 January 1992 enjoining local government units to create
their own sources of revenue and to levy taxes, fees and charges, subject to the limitations
expressed therein, consistent with the basic policy of local autonomy. Pursuant to the provisions of
the Code, respondent province enacted Laguna Provincial Ordinance No. 01-92, effective 01
January 1993, providing, in part, as follows:

Sec. 2.09. Franchise Tax. — There is hereby imposed a tax on businesses enjoying
a franchise, at a rate of fifty percent (50%) of one percent (1%) of the gross annual
receipts, which shall include both cash sales and sales on account realized during
the preceding calendar year within this province, including the territorial limits on any
city located in the province.

On the basis of the above ordinance, respondent Provincial Treasurer sent a demand letter to
MERALCO for the corresponding tax payment. Petitioner MERALCO paid the tax, which then
amounted to P19,520.628.42, under protest. A formal claim for refund was thereafter sent by
MERALCO to the Provincial Treasurer of Laguna claiming that the franchise tax it had paid and
continued to pay to the National Government pursuant to P.D. 551 already included the franchise tax
imposed by the Provincial Tax Ordinance. MERALCO, contended that the imposition of a franchise
tax under Section 2.09 of Laguna Provincial Ordinance No. 01-92, insofar as it concerned
MERALCO, contravened the provisions of Section 1 of P.D. 551 which read:

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

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

On 28 August 1995, the claim for refund of petitioner was denied in a letter signed by Governor Jose
D. Lina relied on a more recent law, i.e. Republic Act No. 7160 or the Local Government Code of
1991, than the old decree invoked by petitioner.

On 14 February 1996, petitioner MERALCO filed with the Regional Trial Court of Sta. Cruz, Laguna,
a complaint for refund, with a prayer for the issuance of a writ of preliminary injunction and/or
temporary restraining order, against the Province of Laguna and also Benito R. Balazo in his
capacity as the Provincial Treasurer of Laguna. Aside from the amount of P19,520,628.42 for which
petitioner MERALCO had priorly made a formal request for refund, petitioner thereafter likewise
made additional payments under protest on various dates totaling P27,669,566.91.
The trial court, in its assailed decision of 30 September 1997, dismissed the complaint and
concluded:

WHEREFORE, IN THE LIGHT OF ALL THE FOREGOING CONSIDERATIONS,

JUDGMENT is hereby rendered in favor of the defendants and against the plaintiff,
by:

1. Ordering the dismissal of the Complaint; and

2. Declaring Laguna Provincial Tax Ordinance No. 01-92 as valid, binding,

reasonable and enforceable.  2

In the instant petition, MERALCO assails the above ruling and brings up the following issues; viz:

1. Whether the imposition of a franchise tax under Section 2.09 of Laguna Provincial
Ordinance No. 01-92, insofar as petitioner is concerned, is violative of the non-
impairment clause of the Constitution and Section 1 of Presidential Decree No. 551.

2. Whether Republic Act No. 7160, otherwise known Local Government Code of
1991, has repealed, amended or modified Presidential Decree No. 551.

3. Whether the doctrine of administrative remedies is applicable in this case.  3

The petition lacks merit.

Prefatorily, it might be well to recall that local governments do not have the inherent power to
tax   except to the extent that such power might be delegated to them either by the basic law or by
4

statute. Presently, under Article X of the 1987 Constitution, a general delegation of that power has
been given in favor of local government units. Thus:

Sec. 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 xxx xxx

Sec. 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.

The 1987 Constitution has a counterpart provision in the 1973 Constitution which did come
out with a similar delegation of revenue making powers to local governments.  5
Under regime of the 1935 Constitution no similar delegation of tax powers was provided, and local
government units instead derived their tax powers under a limited statutory authority. Whereas, then,
the delegation of tax powers granted at that time by statute to local governments was confined and
defined (outside of which the power was deemed withheld), the present constitutional rule (starting
with the 1973 Constitution), however, would broadly confer such tax powers subject only to specific
exceptions that the law might prescribe.

Under the now prevailing Constitution, where there is neither a grant nor a prohibition by statute, the
tax power must be deemed to exist although Congress may provide statutory limitations and
guidelines. The basic rationale for the current rule is to safeguard the viability and self-sufficiency of
local government units by directly granting them general and broad tax powers. Nevertheless, the
fundamental law did not intend the delegation to be absolute and unconditional; the constitutional
objective obviously is to ensure that, while the local government units are being strengthened and
made more autonomous,   the legislature must still see to it that (a) the taxpayer will not be over-
6

burdened or saddled with multiple and unreasonable impositions; (b) each local government unit will
have its fair share of available resources; (c) the resources of the national government will not be
unduly disturbed; and (d) local taxation will be fair, uniform, and just.

The Local Government Code of 1991 has incorporated and adopted, by and large, the provisions of
the now repealed Local Tax Code, which had been in effect since 01 July 1973, promulgated into
law by Presidential Decree
No. 231  pursuant to the then provisions of Section 2, Article XI, of the 1973 Constitution. The 1991
7

Code explicitly authorizes provincial governments, notwithstanding "any exemption granted by any
law or other special law, . . . (to) impose a tax on businesses enjoying a franchise." Section 137
thereof provides:

Sec. 137. Franchise Tax — Notwithstanding any exemption granted by any law or

other special law, the province may impose a tax on businesses enjoying a franchise,
at a rate not exceeding fifty percent (50%) of one percent (1%) of the gross annual
receipts for the preceding calendar year based on the incoming receipt, or realized,
within its territorial jurisdiction. In the case of a newly started business, the tax shall
not exceed one-twentieth (1/20) of one percent (1%) of the capital investment. In the
succeeding calendar year, regardless of when the business started to operate, the
tax shall be based on the gross receipts for the preceding calendar year, or any
fraction thereof, as provided herein. (Underscoring supplied for emphasis)

Indicative of the legislative intent to carry out the Constitutional mandate of vesting broad tax powers
to local government units, the Local Government Code has effectively withdrawn under Section 193
thereof, tax exemptions or incentives theretofore enjoyed by certain entities. This law states:

Sec. 193. Withdrawal of Tax Exemption Privileges — Unless otherwise provided in

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

The Code, in addition, contains a general repealing clause in its Section 534; thus:

Sec. 534. Repealing Clause. — . . .

 (f) All general and special laws, acts, city charters, decrees, executive orders,
proclamations and administrative regulations, or part or parts thereof which are
inconsistent with any of the provisions of this Code are hereby repealed or modified
accordingly. (Underscoring supplied for emphasis)  8

To exemplify, in Mactan Cebu International Airport Authority vs. Marcos,   the Court upheld the
9

withdrawal of the real estate tax exemption previously enjoyed by Mactan Cebu International Airport
Authority. The Court ratiocinated:

. . . These policy considerations are consistent with the State policy to ensure
autonomy to local governments and the objective of the LGC that they enjoy genuine
and meaningful local autonomy to enable them to attain their fullest development as
self-reliant communities and make them effective partners in the attainment of
national goals. The power to tax is the most effective instrument to raise needed
revenues to finance and support myriad activities if local government units for the
delivery of basic services essential to the promotion of the general welfare and the
enhancement of peace, progress, and prosperity of the people. It may also be
relevant to recall that the original reasons for the withdrawal of tax exemption
privileges granted to government-owned and controlled corporations and all other
units of government were that such privilege resulted in serious tax base erosion and
distortions in the tax treatment of similarity situated enterprises, and there was a
need for these entities to share in the requirements of development, fiscal or
otherwise, by paying the taxes and other charges due from them.  10

Petitioner in its complaint before the Regional Trial Court cited the ruling of this Court in Province of
Misamis Oriental vs. Cagayan Electric Power and Light Company, Inc.;   thus:
11

In an earlier case, the phrase "shall be in lieu of all taxes and at any time levied,
established by, or collected by any authority" found in the franchise of the Visayan
Electric Company was held to exempt the company from payment of the 5% tax on
corporate franchise provided in Section 259 of the Internal Revenue Code (Visayan
Electric Co. vs. David, 49 O.G. [No. 4] 1385)

Similarly, we ruled that the provision: "shall be in lieu of all taxes of every name and
nature" in the franchise of the Manila Railroad (Subsection 12, Section 1, Act No.
1510) exempts the Manila Railroad from payment of internal revenue tax for its
importations of coal and oil under Act No. 2432 and the Amendatory Acts of the
Philippine Legislature (Manila Railroad vs. Rafferty, 40 Phil. 224).

The same phrase found in the franchise of the Philippine Railway Co. (Sec. 13, Act
No. 1497) justified the exemption of the Philippine Railway Company from payment
of the tax on its corporate franchise under Section 259 of the Internal Revenue Code,
as amended by R.A. No. 39 (Philippine Railway Co vs. Collector of Internal Revenue,
91 Phil. 35).

Those magic words, "shall be in lieu of all taxes" also excused the Cotabato Light
and Ice Plant Company from the payment of the tax imposed by Ordinance No. 7 of
the City of Cotabato (Cotabato Light and Power Co. vs. City of Cotabato, 32 SCRA
231).

So was the exemption upheld in favor of the Carcar Electric and Ice Plant Company
when it was required to pay the corporate franchise tax under Section 259 of the
 Internal Revenue Code, as amended by R.A. No. 39 (Carcar Electric & Ice Plant vs.
Collector of Internal Revenue, 53 O.G. [No. 4]. 1068). This Court pointed out that
such exemption is part of the inducement for the acceptance of the franchise and the
rendition of public service by the grantee. 
2

In the recent case of the City Government of San Pablo, etc., et al. vs. Hon. Bienvenido V.

Reyes, et al.,   the Court has held that the phrase in lieu of all taxes "have to give way to the
13

peremptory language of the Local Government Code specifically providing for the withdrawal of such
exemptions, privileges," and that "upon the effectivity of the Local Government Code all exemptions
except only as provided therein can no longer be invoked by MERALCO to disclaim liability for the
local tax." In fine, the Court has viewed its previous rulings as laying stress more on the legislative
intent of the amendatory law — whether the tax exemption privilege is to be withdrawn or not —
rather than on whether the law can withdraw, without violating the Constitution, the tax exemption or
not.

While the Court has, not too infrequently, referred to tax exemptions contained in special franchises
as being in the nature of contracts and a part of the inducement for carrying on the franchise, these
exemptions, nevertheless, are far from being strictly contractual in nature. Contractual tax
exemptions, in the real sense of the term and where the non-impairment clause of the Constitution
can rightly be invoked, are those agreed to by the taxing authority in contracts, such as those
contained in government bonds or debentures, lawfully entered into by them under enabling laws in
which the government, acting in its private capacity, sheds its cloak of authority and waives its
governmental immunity. Truly, tax exemptions of this kind may not be revoked without impairing the
obligations of contracts.   These contractual tax exemptions, however, are not to be confused with
14

tax exemptions granted under franchises. A franchise partakes the nature of a grant which is beyond
the purview of the non-impairment clause of the Constitution.  Indeed, Article XII, Section 11, of the
15

1987 Constitution, like its precursor provisions in the 1935 and the 1973 Constitutions, is explicit that
no franchise for the operation of a public utility shall be granted except under the condition that such
privilege shall be subject to amendment, alteration or repeal by Congress as and when the common
good so requires.

WHEREFORE, the instant petition is hereby DISMISSED. No costs. 1âwphi1.nêt

SO ORDERED.

G.R. No. L-19707             August 17, 1967

PHILIPPINE ACETYLENE CO., INC., petitioner,

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

Ponce Enrile, Siguion Reyna, Montecillo and Belo, for petitioner.

Office of the Solicitor General for respondents.

CASTRO, J.:
The petitioner is a corporation engaged in the manufacture and sale of oxygen and acetylene gases.
During the period from June 2, 1953 to June 30, 1958, it made various sales of its products to the
National Power Corporation, an agency of the Philippine Government, and to the Voice of America
an agency of the United States Government. The sales to the NPC amounted to P145,866.70, while
those to the VOA amounted to P1,683, on account of which the respondent Commission of Internal
Revenue assessed against, and demanded from, the petitioner the payment of P12,910.60 as
deficiency sales tax and surcharge, pursuant to the following-provisions of the National Internal
Revenue Code:

Sec. 186. Percentage tax on sales of other articles.—There shall be levied, assessed and
collected once only on every original sale, barter, exchange, and similar transaction either for
nominal or valuable considerations, intended to transfer ownership of, or title to, the articles
not enumerated in sections one hundred and eighty-four and one hundred and eighty-five a
tax equivalent to seven per centum of the gross selling price or gross value in money of the
articles so sold, bartered exchanged, or transferred, such tax to be paid by the manufacturer
or producer: . . . .

Sec. 183. Payment of percentage taxes.—(a) In general.—It shall be the duty of every

person conducting business on which a percentage tax is imposed under this Title, to make
a true and complete return of the amount of his, her, or its gross monthly sales, receipts or
earnings, or gross value of output actually removed from the factory or mill warehouse and
within twenty days after the end of each month, pay the tax due thereon: Provided, That any
person retiring from a business subject to the percentage tax shall notify the nearest internal
revenue officer thereof, file his return or declaration and pay the tax due thereon within
twenty days after closing his business.

If the percentage tax on any business is not paid within the time specified above, the amount
of the tax shall be increased by twenty-five per centum, the increment to be a part of the tax.

The petitioner denied liability for the payment of the tax on the ground that both the NPC and the
VOA are exempt from taxation. It asked for a reconsideration of the assessment and, failing to
secure one, appealed to the Court of Tax Appeals.

The court ruled that the tax on the sale of articles or goods in section 186 of the Code is a tax on the
manufacturer and not on the buyer with the result that the "petitioner Philippine Acetylene Company,
the manufacturer or producer of oxygen and acetylene gases sold to the National Power
Corporation, cannot claim exemption from the payment of sales tax simply because its buyer — the
National Power Corporation — is exempt from the payment of all taxes." With respect to the sales
made to the VOA, the court held that goods purchased by the American Government or its agencies
from manufacturers or producers are exempt from the payment of the sales tax under the agreement
between the Government of the Philippines and that of the United States, provided the purchases
are supported by certificates of exemption, and since purchases amounting to only P558, out of a
total of P1,683, were not covered by certificates of exemption, only the sales in the sum of P558
were subject to the payment of tax. Accordingly, the assessment was revised and the petitioner's
liability was reduced from P12,910.60, as assessed by the respondent commission, to P12,812.16. 1

The petitioner appealed to this Court. Its position is that it is not liable for the payment of tax on the
sales it made to the NPC and the VOA because both entities are exempt from taxation.

The NPC enjoys tax exemption by virtue of an act2 of Congress which provides as follows:
 Sec. 2. To facilitate the payment of its indebtedness, the National Power Corporation shall be
exempt from all taxes, except real property tax, and from all duties, fees, imposts, charges,
and restrictions of the Republic of the Philippines, its provinces, cities and municipalities.

It is contended that the immunity thus given to the NPC would be impaired by the imposition of a tax
on sales made to it because while the tax is paid by the manufacturer or producer, the tax is
ultimately shifted by the latter to the former. The petitioner invokes in support of its position a 1954
opinion of the Secretary of Justice which ruled that the NPC is exempt from the payment of all taxes
"whether direct or indirect."

We begin with an analysis of the nature of the percentage (sales) tax imposed by section 186 of the
Code. Is it a tax on the producer or on the purchaser? Statutes of the type under consideration,
which impose a tax on sales, have been described as "act[s] with schizophrenic symptoms," 3 as they
apparently have two faces — one that of a vendor tax, the other, a vendee tax. Fortunately for us the
provisions of the Code throw some light on the problem. The Code states that the sales tax "shall be
paid by the manufacturer or producer," 4 who must "make a true and complete return of the amount of
his, her or its gross monthly sales, receipts or earnings or gross value of output actually removed
from the factory or mill warehouse and within twenty days after the end of each month, pay the tax
due thereon."5

But it is argued that a sales tax is ultimately passed on to the purchaser, and that, so far as the
purchaser is an entity like the NPC which is exempt from the payment of "all taxes, except real
property tax," the tax cannot be collected from sales.

Many years ago, Mr. Justice Oliver Wendell Holmes expressed dissatisfaction with the use of the
phrase "pass the tax on." Writing the opinion of the U.S. Supreme Court in Lash's Products v. United
States,6 he said: "The phrase 'passed the tax on' is inaccurate, as obviously the tax is laid and
remains on the manufacturer and on him alone. The purchaser does not really pay the tax. He pays
or may pay the seller more for the goods because of the seller's obligation, but that is all. . . . The
price is the sum total paid for the goods. The amount added because of the tax is paid to get the
goods and for nothing else. Therefore it is part of the price . . .".

It may indeed be that the incidence of the tax ultimately settles on the purchaser, but it is not for that
reason alone that one may validly argue that it is a tax on the purchaser. The exemption granted to
the NPC may be likened to the immunity of the Federal Government from state taxation and vice
versa in the federal system of government of the United States. In the early case of Panhandle Oil
Co. v. Mississippi7 the doctrine of intergovernment mental tax immunity was held as prohibiting the
imposition of a tax on sales of gasoline made to the Federal Government. Said the Supreme court of
the United States:

A charge at the prescribed. rate is made on account of every gallon acquired by the United
States. It is immaterial that the seller and not the purchaser is required to report and make
payment to the state. Sale and purchase constitute a transaction by which the tax is
measured and on which the burden rests. . . . The necessary operation of these enactments
when so construed is directly to retard, impede and burden the exertion by the United States,
of its constitutional powers to operate the fleet and hospital. . . . To use the number of
gallons sold the United States as a measure of the privilege tax is in substance and legal
effect to tax the sale. . . . And that is to tax the United States — to exact tribute on its
transactions and apply the same to the support of the state. 1äwphï1.ñët

Justice Holmes did not agree. In a powerful dissent joined by Justices Brandeis and Stone, he said:
 If the plaintiff in error had paid the tax and added it to the price the government would have
nothing to say. It could take the gasoline or leave it but it could not require the seller to abate
his charge even if it had been arbitrarily increased in the hope of getting more from the
government than could be got from the public at large. . . . It does not appear that the
government would have refused to pay a price that included the tax if demanded, but if the
government had refused it would not have exonerated the seller. . . .

. . . I am not aware that the President, the Members of the Congress, the Judiciary or to
come nearer to the case at hand, the Coast Guard or the officials of the Veterans' Hospital
[to which the sales were made], because they are instrumentalities of government and
cannot function naked and unfed, hitherto have been held entitled to have their bills for food
and clothing cut down so far as their butchers and tailors have been taxed on their sales;
and I had not supposed that the butchers and tailors could omit from their tax returns all
receipts from the large class of customers to which I have referred. The question of
interference with Government, I repeat, is one of reasonableness and degree and it seems
to me that the interference in this case is too remote.

But time was not long in coming to confirm the soundness of Holmes' position. Soon it became
obvious that to test the constitutionality of a statute by determining the party on which the legal
incidence of the tax fell was an unsatisfactory way of doing things. The fall of the bastion was
signalled by Chief Justice Hughes' statement in James v. Dravo Constructing Co.8 that "These cases
[referring to Panhandle and Indian Motorcycle Co. v. United States, 283 U.S. 570 (1931)] have been
distinguished and must be deemed to be limited to their particular facts."

In 1941, Alabama v. King & Boozer9 held that the constitutional immunity of the United States from
state taxation was not infringed by the imposition of a state sales tax with which the seller was
chargeable but which he was required to collect from the buyer, in respect of materials purchased by
a contractor with the United States on a cost-plus basis for use in carrying out its contract, despite
the fact that the economic burden of the tax was borne by the United States.

The asserted right of the one to be free of taxation by the other does not spell immunity from
paying the added costs, attributable to the taxation of those who furnish supplies to the
Government and who have been granted no tax immunity. So far as a different view has
prevailed, see Panhandle Oil Co. v. Mississippi and Graves v. Texas Co., supra, we think it
no longer tenable.

Further inroads into the doctrine of Panhandle were made in 1943 when the U.S. Supreme Court
held that immunity from state regulation in the performance of governmental functions by Federal
officers and agencies did not extend to those who merely contracted to furnish supplies or render
services to the government even though as a result of an increase in the price of such supplies or
services attributable to the state regulation, its ultimate effect may be to impose an additional
economic burden on the Government.10

But if a complete turnabout from the rule announced in Panhandle was yet to be made, it was so
made in 1952 in Esso Standard Oil v. Evans11 which held that a contractor is not exempt from the
payment of a state privilege tax on the business of storing gasoline simply because the Federal
Government with which it has a contract for the storage of gasoline is immune from state taxation.

This tax was imposed because Esso stored gasoline. It is not . . . based on the worth of the
government property. Instead, the amount collected is graduated in accordance with the
exercise of Esso's privilege to engage in such operations; so it is not "on" the federal
property. . . . Federal ownership of the fuel will not immunize such a private contractor from
 the tax on storage. It may generally, as it did here, burden the United States financially. But
since James vs. Dravo Contracting Co., 302 U.S. 134, 151, 82 L. ed. 155, 167, 58 S. Ct.
208, 114 ALR 318, this has been no fatal flaw. . . . 12

We have determined the current status of the doctrine of intergovernmental tax immunity in the
United States, by showing the drift of the decisions following announcement of the original rule, to
point up the that fact that even in those cases where exemption from tax was sought on the ground
of state immunity, the attempt has not met with success.

As Thomas Reed Powell noted in 1945 in reviewing the development of the doctrine:

Since the Dravo case settled that it does not matter that the economic burden of the gross
receipts tax may be shifted to the Government, it could hardly matter that the shift comes
about by explicit agreement covering taxes rather than by being absorbed in a higher
contract price by bidders for a contract. The situation differed from that in the Panhandle and
similar cases in that they involved but two parties whereas here the transaction was tripartite.
These cases are condemned in so far as they rested on the economic ground of the ultimate
incidence of the burden being on the Government, but this condemnation still leaves open
the question whether either the state or the United States when acting in governmental
matters may be made legally liable to the other for a tax imposed on it as vendee.

The carefully chosen language of the Chief Justice keeps these cases from foreclosing the
issue. . . . Yet at the time it would have been a rash man who would find in this a dictum that
a sales tax clearly on the Government as purchaser is invalid or a dictum that Congress may
immunize its contractors.13

If a claim of exemption from sales tax based on state immunity cannot command assent, much less
can a claim resting on statutory grant.

It may indeed be that the economic burden of the tax finally falls on the purchaser; when it does the
tax becomes a part of the price which the purchaser must pay. It does not matter that an additional
amount is billed as tax to the purchaser. The method of listing the price and the tax separately and
defining taxable gross receipts as the amount received less the amount of the tax added, merely
avoids payment by the seller of a tax on the amount of the tax. The effect is still the same, namely,
that the purchaser does not pay the tax. He pays or may pay the seller more for the goods because
of the seller's obligation, but that is all and the amount added because of the tax is paid to get the
goods and for nothing else.14

But the tax burden may not even be shifted to the purchaser at all. A decision to absorb the burden
of the tax is largely a matter of economics.15 Then it can no longer be contended that a sales tax is a
tax on the purchaser.

We therefore hold that the tax imposed by section 186 of the National Internal Revenue Code is a
tax on the manufacturer or producer and not a tax on the purchaser except probably in a very
remote and inconsequential sense. Accordingly its levy on the sales made to tax-exempt entities like
the NPC is permissible.

II

This conclusion should dispose of the same issue with respect to sales made to the VOA, except
that a claim is here made that the exemption of such sales from taxation rests on stronger grounds.
Even the Court of Tax Appeals appears to share this view as is evident from the following portion of
its decision:

With regard to petitioner's sales to the Voice of America, it appears that the petitioner and
the respondent are in agreement that the Voice of America is an agency of the United States
Government and as such, all goods purchased locally by it directly from manufacturers or
producers are exempt from the payment of the sales tax under the provisions of the
agreement between the Government of the Philippines and the Government of the United
States, (See Commonwealth Act No. 733) provided such purchases are supported by serially
numbered Certificates of Tax Exemption issued by the vendee-agency, as required by
General Circular No. V-41, dated October 16, 1947. . . .

The circular referred to reads:

Goods purchased locally by U.S. civilian agencies directly from manufacturers, producers or
importers shall be exempt from the sales tax.

It was issued purportedly to implement the Agreement between the Republic of the Philippines and
the United States of America Concerning Military Bases,16 but we find nothing in the language of the
Agreement to warrant the general exemption granted by that circular.

The pertinent provisions of the Agreement read:

ARTICLE V. — Exemption from Customs and Other Duties

No import, excise, consumption or other tax, duty or impost shall be charged on material,
equipment, supplies or goods, including food stores and clothing, for exclusive use in the
construction, maintenance, operation or defense of the bases, consigned to, or destined for,
the United States authorities and certified by them to be for such purposes.

ARTICLE XVIII.—Sales and Services Within the Bases

1. It is mutually agreed that the United States Shall have the right to establish on bases, free
of all licenses; fees; sales, excise or other taxes, or imposts; Government agencies, including
concessions, such as sales commissaries and post exchanges, messes and social clubs, for
the exclusive use of the United States military forces and authorized civilian personnel and
their families. The merchandise or services sold or dispensed by such agencies shall be free
of all taxes, duties and inspection by the Philippine authorities. . . .

Thus only sales made "for exclusive use in the construction, maintenance, operation or defense of
the bases," in a word, only sales to the quartermaster, are exempt under article V from taxation.
Sales of goods to any other party even if it be an agency of the United States, such as the VOA, or
even to the quartermaster but for a different purpose, are not free from the payment of the tax.

On the other hand, article XVIII exempts from the payment of the tax sales made within the
base by (not sales to) commissaries and the like in recognition of the principle that a sales tax is a
tax on the seller and not on the purchaser.

It is a familiar learning in the American law of taxation that tax exemption must be strictly construed
and that the exemption will not be held to be conferred unless the terms under which it is granted
clearly and distinctly show that such was the intention of the parties. 17 Hence, in so far as the circular
of the Bureau of Internal Revenue would give the tax exemptions in the Agreement an expansive
construction it is void.

We hold, therefore, that sales to the VOA are subject to the payment of percentage taxes under
section 186 of the Code. The petitioner is thus liable for P12,910.60, computed as follows:

Sales to NPC P145,866.70

Sales to VOA P 1,683.00

Total sales subject to tax P147,549.70

7% sales tax due thereon P 10,328.48

Add: 25% surcharge P 2,582.12

Total amount due and collectible P 12,910.60

Accordingly, the decision a quo is modified by ordering the petitioner to pay to the respondent
Commission the amount of P12,910.60 as sales tax and surcharge, with costs against the petitioner.

Reyes, J.B.L., Makalintal, Bengzon, J.P., Zaldivar, Sanchez, Angeles and Fernando, JJ., concur.
Concepcion, C.J., and Dizon, J., took no part.

G.R. No. L-14878          December 26, 1963

SURIGAO CONSOLIDATED MINING CO., INC., petitioner,

vs.
COLLECTOR OF INTERNAL REVENUE and COURT OF APPEALS, respondents.

Leido, Angeles and Valladolid for petitioner.

Office of the Solicitor General for respondents.

REGALA, J.:
This is a petition to review the decision of the Court of Tax Appeals in Manila Civil Case No. 4770
dismissing for lack of merit the action of the Surigao Consolidated Mining Company for the refund of
the total amount of P17,051.14 allegedly representing overpayment of ad valorem tax for the fourth
quarter of 1941.

The record shows that before the outbreak of World War II, the Surigao Consolidated Mining
Company (called SURIGAO CONSOLIDATED, for short), a domestic corporation which then had its
principal office in the City of Iloilo, was operating its mining concessions in Mainit, Surigao. Pursuant
to section 246 of the Internal Revenue Code, which prescribes the time and manner of payment of
royalties or ad valorem taxes, it filed a bond and had been regularly filing its returns for minerals
removed from its mines during each calendar quarter and paying ad valorem tax thereon within 20
days after the close of every quarter. In each case, computation of the ad valorem tax was based on
the market value of the minerals set forth in the returns, subject to adjustment upon the receipt of the
smelter showing the actual market value of the minerals to the United States.

Due to the interruption, of the communications outbreak of the war, the principal office of Surigao
Consolidated lost contact with its mines and never received the production reports for the fourth
quarter of 1941. In order to avoid incurring any tax penalty, said company, on January 19, 1942,
deposited a check amount of P27,000.00 payable to and "indorsed in favor of the City Treasurer (of
Iloilo) in payment of the ad valorem taxes (approximate adjustment to be made when circumstances
allow it) for the fourth quarter of 1941."

After the termination of the war, Commonwealth Act No. 722 was enacted, which provided for the
filing of returns for minerals removed during the last quarter of 1941 up to December 31, 1945 and
the payment of ad valorem tax on said minerals to February 28, 1946.

Availing of the provisions of the aforementioned Act, the Surigao Consolidated, on December 28,
1945, ad valorem tax returns for the fourth quarter declaring as its tax liability the amount of
P43,486.54. Applying the amount of P27,000.00 previously deposited with the City Treasurer of
Iloilo, the returns indicated an unpaid balance of P16,486.54 as the " tax subject to revision."

However, on February 26, 1946, the Surigao Consolidated filed an amended ad valorem tax returns
under which amendment it declared a reduced ad valorem tax in the amount of P37,189.00. And
crediting itself with the amount of P27,000.00 previously deposited with the City Treasurer of Iloilo, it
paid the remaining balance of P10,189.00.

On September 24, 1946, the Surigao Consolidated again filed a statement of adjustment allegedly
containing figures and data of the complete smelter returns for minerals shipped to the United
States. In the accompanying letter, a request was made, this time not only for the reduction of tax,
but for the refund of the amount of P18,107.87. On October 19, 1946, another statement of
adjustment was filed reducing the claim for refund to P17,158.01. Finally, on March 15, 1947, a third
statement of adjustment was submitted further reducing the claim for refund to the amount of P
17,051.14.

As the Collector of Internal Revenue denied the request for the refund of the said P17,051.14 on the
ground that the money already paid as ad valorem tax was legally due to the Government, the
Surigao Consolidated instituted with the Court of First Instance of Manila civil action for its recovery.
However, upon the enactment of Republic Act No. 1125 creating the Court of Tax Appeals, the case
was remanded to the latter court for proper disposition.

After hearing, the Court of Tax Appeals, on July 16, 1958, finding that the amount sought to be
refunded been lawfully collected, rendered its decision denying the claim for refund. The Surigao
Consolidated in due time filed a motion for new trial on the ground that the decision was "not justified
by the overwhelming weight of evidence" and that it was contrary to law. The tax court, however,
denied the motion. Hence, this petition for review. lawphil.net

The question to be resolved is whether or not Surigao Consolidated, petitioner herein, is entitled to
the refund of ad valorem tax in the total amount of P17,051.14, itemized as follows:

1. Ad valorem tax on minerals removed from the P1,191.46

mines but allegedly lost in transit on account
of war
2. Ad valorem tax on minerals extracted from the 15,609.73
mines but allegedly looted during the
Japanese occupation
3. Alleged overpayment of ad valorem tax on 249.95
minerals shipped to the United States

P17,051.14

The first, item in petitioner's claim for refund in the amount of P1,191.46 represents the amount of ad
valorem tax paid on minerals removed from the mines but alleged to have been lost in transit on
account of the war. The refund is sought under section 1 (d) of Republic Act No. 81, which provides
as follows:

SECTION 1. Any provision of existing law to the contrary notwithstanding:

x x x           x x x          x x x

(d) All unpaid royalties, ad valorem or specific taxes on all minerals mined from mining
claims or concessions existing and in force on January first, nineteen hundred and forty-two,
and which minerals were lost by reason of the war or circumstances arising therefrom, are
hereby condoned: Provided, That if said minerals had been or shall be recovered by the
miner or producer, such royalties, ad valorem or specific taxes on the same shall be
immediately due and demandable.

Petitioner argues that since the law condones the taxes due from taxpayers who failed to pay their
taxes, it would be unfair to deny this benefit to those taxpayers who had been prompt in paying
theirs. The argument merits careful consideration. At first it would seem to be sound and logical. But
the aforequoted section clearly refers to the condonation of unpaid taxes only. The condonation of a
tax liability is equivalent and is in the nature of a tax exemption. Being so, it should be sustained only
when expressed in explicit terms, and it can not be extended beyond the plain meaning of those
terms. It is the universal rule that he who claims an exemption from his share of the common burden
of taxation must justify his claim by showing that the Legislature intended to exempt him by words
too plain to be mistaken. (Statutory Construction by Francisco, citing Government of P. I. v. Monte
de Piedad, 25 Phil. 42.)

The application of a statute creating an exemption for taxation to taxes already assessed
depends upon whether it is retrospective in its operation. Such a statute has no retrospective
operation, unless by the terms thereof it clearly appears to be the intention of the legislature
that the exemption shall relate back to taxes which have already become fixed, as a statute
which releases a person or corporation from a burden common to the whole community
 should be strictly (Louisville Water Co. v. Hamilton, 81 Ky. 517, ... cited 6 American and
English Ann. Cases, p. 438).

Petitioner having failed to point to Us any portion of the law that explicitly provides for a refund of
those taxpayers who had paid their taxes on the items and under circumstances mentioned in the
abovequoted provision, We are constrained to hold that the benefits of said provision does not
extend to it.

Even assuming arguendo that the provisions of Republic Act No. 81 authorizes the refund of taxes
already paid by petitioner, the latter would not still be entitled to the refund sought for under the first
item. It is to be noted that petitioner's evidence of the alleged loss in transit as observed by the Court
of Tax Appeals, merely of testimony of witnesses who did not have personal knowledge of the
circumstances which gave rise to the loss. Such evidence cannot, of course be considered sufficient
to establish that the minerals were in fact lost. Judge Luciano of the Court of Tax Appeals during the
trial, would be to create a dangerous precendent.

Under the second item, petitioner seeks to recover the amount of P15,609.73 representing the ad
valorem tax paid on minerals extracted from its mines but alleged to have been looted during the
enemy occupation. In connection with the alleged looting of the minerals, the Tax Court has this to
say:

We are again confronted with the case where plaintiff has, to our mind, failed to present
adequate evidence to prove such loss. The evidence, if at all, is merely limited to the general
and uncorroborated statements of plaintiff's officers that the same were lost in the mines.
These testimonies cannot be taken on their full face value, especially because they had no
direct supervision over the handling of such minerals at the time of the alleged loss. Much
less had these officers have personal knowledge of the loss. Under the circumstances, we
can not make the finding that the minerals were in fact lost.

Going over the record, We find no reason to disturb the above findings of the Court of Tax Appeals,
there being no showing that they are not substantiated by the evidence. With this observation, it
would be useless ceremony to delve into the issue of whether ad valorem tax should be or should
not be paid on minerals extracted from the mines but not removed therefrom.

One more item in petitioner's claim is the alleged overpayment of ad valorem tax in the amount of
P249.95 on the minerals shipped to the United States. It is that an ad valorem tax in the amount of
P20,387.81 was originally paid on the minerals shipped to the United States with a gross value of
P410,299.49; that the smelter returns from the United States show that the actual market value of
the minerals shipped to the States was P416,895.28; and that after deducting all allowable
deductions amounting in all to P1,828,34, the true and correct amount of ad valorem tax on said
minerals was P20,137.86. Petitioner, therefore, claims difference between the amount of P20,387.81
and P20,137.86 is an overpayment.

It is not disputed that, as indicated above, the amount of ad valorem tax on the minerals shipped to
the United States is subject to adjustment upon the receipt of the smelter returns showing their
actual market value Petitioner contends that the statements of adjustment alleged to contain the
figures and data set forth in the smelter returns are adequate evidence of the actual market value of
the minerals shipped to the United States.

The best evidence of the actual market value minerals shipped to the United States are the smelter
returns themselves. These returns are admittedly petitioner's possession, but for unknown reasons,
petitioner failed to produce them during the trial. As there is no credible and satisfactory explanation
for the non-production of said returns, there arises the presumption that if produced they would be
adverse to petitioner. Under the circumstances, the Court of Tax Appeals cannot be said to have
committed error, much less abused its discretion, in refusing to give any probative value statements
of adjustment.

It is a settled doctrine that in a suit for the recovery of the payment of taxes or any portion thereof as
having been illegally or erroneously collected, the burden is upon the taxpayer to establish the facts
which show the illegality of the tax or that the determination thereof is erroneous. In this case,
petitioner failed to show that the amount of taxes sought to be refunded have been erroneously
collected.

Conformably to the above, We are of the opinion that the Court of Tax Appeals did not commit any
error in denying petitioner's claim.

WHEREFORE, the decision appealed from is hereby affirmed. Costs against petitioner.

G.R. No. 156040             December 11, 2008

DIGITAL TELECOMMUNICATIONS PHILIPPINES, INC., petitioner,

vs.
CITY GOVERNMENT OF BATANGAS represented by HON. ANGELITO DONDON A.
DIMACUHA, Batangas City Mayor, MR. BENJAMIN S. PARGAS, Batangas City Treasurer, and
ATTY. TEODULFO A. DEQUITO, Batangas City Legal Officer, respondents.

DECISION

CARPIO, J.:
 The Case

This is a petition for review on certiorari1 assailing the Regional Trial Court’s Order2 dated 2 May
2002 in Civil Case No. 5343 as well as the 19 November 2002 Order denying the Motion for
Reconsideration. In the assailed orders, Branch 8 of the Regional Trial Court (RTC) of Batangas City
(RTC-Branch 8) reversed the 28 March 2001 Order 3 issued by Branch 3 of RTC-Batangas City
(RTC-Branch 3). RTC-Branch 8 declared that under its legislative franchise, Digital
Telecommunications Philippines, Inc. (petitioner) is not exempt from paying real property tax
assessed by the Batangas City Government (respondent).

The Facts

On 17 February 1994, Republic Act No. 7678 (RA 7678) 4 granted petitioner a 25-year franchise to
install, operate and maintain telecommunications systems throughout the Philippines. Section 5 of
RA 7678 reads:

Sec. 5. Tax Provisions. - The grantee shall be liable to pay the same taxes on its real
estate, buildings, and personal property exclusive of this franchise as other persons
or corporations are now or hereafter may be required by law to pay. In addition thereto,
the grantee shall pay to the Bureau of Internal Revenue each year, within thirty (30) days
after the audit and approval of the accounts, a franchise tax as may be prescribed by law of
all gross receipts of the telephone or other telecommunications businesses transacted under
this franchise by the grantee; Provided, That the grantee shall continue to be liable for
income taxes payable under Title II of the National Internal Revenue Code pursuant to
Section 2 of Executive Order No. 72 unless the latter enactment is amended or repealed, in
which case the amendment or repeal shall be applicable thereto.

The grantee shall file the return with and pay the tax due thereon to the Commissioner of
Internal Revenue or his duly authorized representative in accordance with the National
Internal Revenue Code and the return shall be subject to audit by the Bureau of Internal
Revenue. (Boldfacing and underscoring supplied)

Sometime in 1997, respondent issued a building permit for the installation of petitioner’s
telecommunications facilities in Batangas City. After the installation of the facilities, petitioner applied
with the Mayor’s office of Batangas City for a permit to operate. Because of a discrepancy in the
actual investment costs used in computing the prescribed fees for the clearances and permits,
petitioner was not able to secure a Mayor’s Permit for the year 1998. Petitioner was also advised to
settle its unpaid realty taxes. However, petitioner claimed exemption from the payment of realty tax,
citing the first sentence of Section 5 of RA 7678, the Letter-Opinion of the Bureau of Local
Government Finance (BLGF) dated 8 April 1997,5 and the letter of the Office of the President dated
12 March 1996.6

In 1999, respondent refused to issue a Mayor’s Permit to petitioner without payment of its realty
taxes.

On 22 June 1999, petitioner paid P68,890.39 under protest as fees for the permit to operate, but
respondent refused to accept the payment unless petitioner also paid the realty taxes. 7

On 2 July 1999, respondent threatened to close down petitioner’s operations. Hence, on 3 July
1999, petitioner instituted a complaint for prohibition and mandamus with prayer for a temporary
restraining order or writ of preliminary injunction. This case was raffled to RTC-Branch 3. On the
same date, respondent served a Cease and Desist Order on petitioner. 8
On 20 January 2000, during the pendency of the complaint, petitioner paid its realty taxes
of P2,043,265 under protest.9 Petitioner resumed its business, rendering the other issues raised in
petitioner’s complaint moot. Consequently, the only issue left for resolution is whether petitioner is
exempt from the realty tax under Section 5 of RA 7678.

The Ruling of RTC-Branch 3

On 28 March 2001, RTC-Branch 3 issued the following Order:

WHEREFORE, premises considered, the Court hereby declares that the real estate,
buildings and personal property of plaintiff Digital Telecommunications Philippines, Inc. which
are used in the operation of its franchise are exempt from payment of real property taxes, but
those not so used should be held liable thereto. 10

RTC-Branch 3 reasoned that the phrase "exclusive of this franchise" in the first sentence of Section
5 of RA 7678 limits the real properties that are subject to realty tax only to those which are not used
in petitioner’s telecommunications business. In short, petitioner’s real properties used in its
telecommunications business are not subject to realty tax.11

On 1 May 2001, respondent moved for reconsideration. Before acting on the motion, the Presiding
Judge of RTC-Branch 3 voluntarily inhibited himself because the newly-elected mayor of Batangas
City was his kumpadre.12 The case was re-raffled to RTC-Branch 8.

The Ruling of RTC-Branch 8

On 2 May 2002, RTC-Branch 8 issued an Order which reads:

WHEREFORE, the defendants’ Motion for Reconsideration is hereby granted. The Order of

this Court dated March 21, 2001 is hereby set aside and, in lieu thereof, judgment is hereby
rendered in favor of the defendants and against the plaintiff:

- DISMISSING the Amended Complaint;

- DECLARING that the plaintiff Digital Telecommunications Philippines, Inc., under its

legislative franchise RA No. 7678, is not exempted from the payment of real property tax
being collected by the defendant City of Batangas and, accordingly,

- ORDERING said plaintiff to pay the City of Batangas real estate taxes in the amount of
Ph4,620,683.33 which was due as of January, 2000, as well as those due thereafter, plus
corresponding interest and penalties.13

On 29 May 2002, petitioner moved for reconsideration. On 19 November 2002, RTC-Branch 8

denied petitioner’s motion for reconsideration.

Hence, this petition.

The Issue

The sole issue for resolution is whether, under the first sentence of Section 5 of RA 7678,
petitioner’s real properties used in its telecommunications business are exempt from the realty tax.
 Petitioner’s Contentions

Petitioner contends that its exemption from realty tax is based on the first sentence of Section 5 of
RA 7678. Petitioner claims that the evident purpose of the phrase "exclusive of this franchise" is to
limit the real properties that are subject to realty tax only to properties that are not used in
petitioner’s telecommunications business.14 Petitioner asserts that the phrase "exclusive of this
franchise" must not be construed as a useless surplusage. Petitioner points out that its exemption
from realty tax was affirmed in two separate opinions, one rendered by the Office of the President on
12 March 1996 and the other by the BLGF on 8 April 1997 and reaffirmed on 4 January 1999. 15 The
BLGF declared that "the real properties of Digitel, which are used in the operation of its franchise are
x x x found to be exempt from the payment of real property taxes beginning 1 January 1993.
However, all other properties of that company not used in connection with the operation of its
franchise shall remain taxable."16

Petitioner further argues that under the Local Government Code, the realty tax is imposed on all
lands, buildings, machineries and other improvements attached to real property. A franchise is an
incorporeal being, a special privilege granted by the legislature. Hence, to read the first sentence of
Section 5 of RA 7678 to mean that the franchisee shall pay taxes on its real properties used in its
telecommunications business would render the phrase "exclusive of this franchise" meaningless.

Petitioner admits that the franchise granted under RA 7678 is a personal property, but the franchise
is not the "personal property" referred to in the first sentence of Section 5. Petitioner asserts that the
phrase "real estate, buildings, and personal property" in the first sentence of Section 5 refers solely
to real properties and does not include personal properties. Petitioner explains thus:

For PTEs (public telecommunication entities), these personal properties include the switches
which were installed in the exchange buildings as well as the outside and inside plant
equipment. Initially, these telecommunications materials and equipment were personal
property in character. But, having been installed and made operational by being attached to
the exchange building, they are now converted into immovables or real property. That being
the case, the phrase "real estate, buildings and personal property" actually refer[s] to
properties that are liable for real estate tax. And, Congress having made the qualification
with the phrase "exclusive of this franchise," only such real properties that are not used in
furtherance of the franchise are subject to real property tax.17 (Emphasis supplied)

Respondent’s Contentions

Respondent contends that the phrase "exclusive of this franchise" does not mean that petitioner is
exempt from the realty tax on its real properties used in its telecommunications business. The first
sentence of Section 5 of RA 7678 makes petitioner "liable to pay the same taxes for its real estate,
buildings, and personal property exclusive of this franchise as other persons or corporations are or
hereafter may be required by law to pay." This shows the clear intent of Congress to tax petitioner’s
real and personal properties.18 Respondent asserts that the phrase "exclusive of this franchise" is a
qualification of the broad declaration on the franchisee’s liability for taxes which is the main thrust of
the first sentence of Section 5. Respondent points out that petitioner is paying taxes and fees on all
its motor vehicles, which are personal properties, without distinction. 19 Respondent also points out
that petitioner admits that the first sentence of Section 5 of RA 7678 is ambiguous with respect to the
phrase "exclusive of this franchise," 20 thus petitioner resorted to the rules on statutory construction. 21

Respondent adds that the legislative franchises granted to other telecommunications companies
contain the same phrase "exclusive of this franchise." This shows the intent of Congress to make
franchisees liable for the realty tax rather than exempt them even if the real properties are used in
their telecommunications business.22

The Office of the Solicitor General (OSG), appearing for respondent, contends that the first sentence
of Section 5 provides for petitioner’s general liability to pay taxes and does not provide for
petitioner’s exemption from realty tax. The OSG invokes the doctrine of last antecedent which is an
aid in statutory construction. The OSG argues that under this doctrine, the qualifying word or phrase
only restricts the word or phrase to which the qualifying word or phrase is immediately associated
and not the word or phrase which is distantly or remotely located. In the first sentence of Section 5,
the phrase "exclusive of this franchise" restricts only the words "personal property" which
immediately precede the phrase "exclusive of this franchise." This means that the franchise, an
intangible personal property, should be excluded from the personal properties that are subject to
taxes under the first sentence of Section 5. The OSG adds that the use of the comma to separate
"real estate, buildings" from "personal property" exerts a dominant influence in the application of the
doctrine of last antecedent. Further, the OSG reiterates that laws granting exemption from tax are to
be construed strictissimi juris against the taxpayer and liberally in favor of the taxing power.

The Ruling of the Court

The petition has no merit.

Section 5 of RA 7678 imposes taxes

and does not exempt from realty tax

The issue in this case involves the interpretation of the phrase "exclusive of this franchise" in the
first sentence of Section 5 of RA 7678.

Section 5 of RA 7678 states:

Sec. 5. Tax Provisions. - The grantee shall be liable to pay the same taxes on its real
estate, buildings, and personal property exclusive of this franchise as other persons
or corporations are now or hereafter may be required by law to pay. In addition thereto,
the grantee shall pay to the Bureau of Internal Revenue each year, within thirty (30) days
after the audit and approval of the accounts, a franchise tax as may be prescribed by law of
all gross receipts of the telephone or other telecommunications businesses transacted under
this franchise by the grantee; Provided, That the grantee shall continue to be liable for
income taxes payable under Title II of the National Internal Revenue Code pursuant to
Section 2 of Executive Order No. 72 unless the latter enactment is amended or repealed, in
which case the amendment or repeal shall be applicable thereto.

The grantee shall file the return with and pay the tax due thereon to the Commissioner of
Internal Revenue or his duly authorized representative in accordance with the National
Internal Revenue Code and the return shall be subject to audit by the Bureau of Internal
Revenue. (Boldfacing and underscoring supplied)

The first sentence of Section 5 of RA 7678 is the same provision found in almost all legislative
franchises in the telecommunications industry dating back to 1905. 23 It is also the same provision
that appears in the legislative franchises of other telecommunications companies like Philippine
Long Distance Telephone Company,24 Smart Information Technologies, Inc.,25 and Globe
Telecom.26 Since 1905, no telecommunications company has claimed exemption from realty tax
based on the phrase "exclusive of this franchise," until petitioner filed the present case on 3 July
1999.27
The first sentence of Section 5 clearly states that the legislative franchisee shall be liable to pay the
following taxes: (1) "the same taxes on its real estate, buildings, and personal property exclusive
of this franchise as other persons or corporations are now or hereafter may be required by law to
pay"; (2) "franchise tax as may be prescribed by law of all gross receipts of the telephone or other
telecommunications businesses transacted under this franchise"; 28 and (3) "income taxes payable
under Title II of the National Internal Revenue Code."

The crux of the controversy lies in the interpretation of the phrase "exclusive of this franchise" in the
first sentence of Section 5. Petitioner interprets the phrase to mean that its real properties that are
used in its telecommunications business shall not be subject to realty tax. Respondent interprets the
same phrase to mean that the term "personal property" shall not include petitioner’s franchise, which
is an intangible personal property.

We rule that the phrase "exclusive of this franchise" simply means that petitioner’s franchise shall
not be subject to the taxes imposed in the first sentence of Section 5. The first sentence lists the
properties that are subject to taxes, and the list excludes the franchise. Thus, the first sentence
provides:

The grantee shall be liable to pay the same taxes on its real estate, buildings, and personal
property exclusive of this franchise as other persons or corporations are now or hereafter
may be required by law to pay. (Emphasis supplied)

A plain reading shows that the phrase "exclusive of this franchise" is meant to exclude the
legislative franchise from the properties subject to taxes under the first sentence. In effect,
petitioner’s franchise, which is a personal property, is not subject to the taxes imposed on properties
under the first sentence of Section 5.

However, petitioner’s gross receipts from its franchise are subject to the "franchise tax" under the
second sentence of Section 5. Thus, the second sentence provides:

In addition thereto, the grantee shall pay to the Bureau of Internal Revenue each year, within
thirty (30) days after the audit and approval of the accounts, a franchise tax as may be
prescribed by law of all gross receipts of the telephone or other telecommunications
businesses transacted under this franchise by the grantee; x x x (Emphasis supplied)

In short, petitioner’s franchise is excluded from the properties taxable under the first sentence of
Section 5 but the gross receipts from its franchise are expressly taxable under the second sentence
of the same Section.

The first sentence of Section 5 imposes on the franchisee the "same taxes" that non-franchisees
are subject to with respect to real and personal properties. The clear intent is to put the franchisees
and non-franchisees in parity in the taxation of their real and personal properties. Since non-
franchisees have obviously no franchises, the franchise must be excluded from the list of properties
subject to tax to maintain the parity between the franchisees and non-franchisees. However, the
franchisee is taxable separately from its franchise. Thus, the second sentence of Section 5 imposes
the "franchise tax" on gross receipts, which under Republic Act No. 7716 has been replaced by the
10% Valued Added Tax effective 1 January 1996.29

Section 5 can be divided into three parts. First is the first sentence which imposes taxes on real and
personal properties, excluding one property, that is, the franchise. This puts in parity the franchisees
and non-franchisees in the taxation of real and personal properties. Second is the second sentence
which imposes the franchise tax, which is applicable solely to the franchisee. And third is the proviso
in the second sentence that imposes the income tax on the franchisee, the same income tax payable
by non-franchisees.

Petitioner claims that the first sentence refers only to real properties, and that the phrase "exclusive
of this franchise" exempts petitioner from realty tax on its real properties used in its
telecommunications business. This claim has no basis in the language of the law as written in the
first sentence of Section 5. First, the first sentence expressly refers to taxes on "real estate" and on
"personal property." Clearly, the first sentence does not refer only to taxes on real properties, but
also to taxes on personal properties. The trial court correctly observed that petitioner pays taxes on
its motor vehicles,30 which are personal properties, that are used in its telecommunications
business.31 There is also the documentary stamp tax on transactions involving real and personal
properties, which petitioner and other taxpayers are liable for.32

A franchise granted by Congress to operate a private radio station for the franchisee’s
communications in deep-sea fishing shows that the first sentence of Section 5 of RA 7678 does not
refer to real properties alone. Section 6 of Republic Act No. 3218 (RA 3218), entitled An Act
Granting Batas Riego De Dios A Franchise To Construct, Maintain And Operate Private Radio
Stations For Radio Communications In Its Deep-Sea Fishing Industry, provides:

SECTION 6. The grantee shall be liable (1) to pay the same taxes on its real
estate, building, fishing boats and personal property, exclusive of this franchise as
other persons or corporations are now, or hereafter may be required by law to pay, and shall
further be liable (2) to pay all other taxes that may be imposed by the National Internal
Revenue Code by reason of this franchise. (Emphasis supplied)

The inclusion of "fishing boats," personal properties that can never be attached to a land or building
so as to make them real properties, demonstrates that Section 6 of RA 3218, like the first sentence
of Section 5 of RA 7678, not only applies to real properties but also to personal properties.

Second, there is no language in the first sentence of Section 5 expressly or even impliedly
exempting petitioner from the realty tax. The phrases "exemption from real estate tax," "free from
real estate tax" or "not subject to real estate tax" do not appear in the first sentence. No matter how
one reads the first sentence, there is no grant of exemption, express or implied, from realty tax. In
fact, the first sentence expressly imposes taxes on both real and personal properties, excluding only
the intangible personal property that is the franchise.

A tax exemption cannot arise from vague inference. The first sentence of Section 5 does not grant
any express or even implied exemption from realty tax. On the contrary, the first sentence
categorically states that the franchisee is subject to the "same taxes currently imposed, and those
taxes that may be subsequently imposed, on other persons or corporations," taxpayers that
admittedly are all subject to realty tax. The first sentence does not limit the imposition of the "same
taxes" to realty tax only but even to "those taxes" that may in the future be imposed on other
taxpayers, which future taxes shall also be imposed on petitioner. Thus, the first sentence of Section
5 imposes on petitioner not only realty tax but also other taxes.

The phrase "personal property exclusive of this franchise" merely means that "personal property"
does not include the franchise even if the franchise is an intangible personal property. Stated
differently, the first sentence of Section 5 provides that petitioner shall pay tax on its real properties
as well as on its personal properties but the franchise, which is an intangible personal property, shall
not be deemed personal property.
The historical usage of the phrase "exclusive of this franchise" in franchise laws enacted by
Congress indubitably shows that the phrase is not a grant of tax exemption, but an exclusion of one
type of personal property subject to taxes, and the excluded personal property is the franchise.
Thus, the franchises of telecommunications companies in Republic Act Nos.
4137,33 5692,34 5739,35 5785,36 5790,37 5791,38 5795,39 5810,40 5847,41 5848,42 5856,43 5857,44 5913,45 59
14,46 5929,47 5937,48 5958,49 5959,50 5974,51 5993,52 5994,53 6002,54 6006,55 6007,56 6013,57 6024,58 6097
,59 6510,60 6536,61 and 653062 contain the following common tax provision:

The grantee shall be liable to pay the same taxes, unless exempted therefrom, on its
business, real estate, buildings, and personal property, exclusive of this franchise, as
other persons or corporations are now or hereafter may be required by law to pay.
(Emphasis supplied)

The phrase "unless exempted therefrom" in the common provision clearly clarifies that the phrase
"exclusive of this franchise" does not grant any tax exemption. To claim tax exemption, there must
be an express exemption from tax in another provision of law. On the other hand, the deletion of the
phrase "unless exempted therefrom" from the common provision does not give rise to any tax
exemption.

Bayantel and Digitel Cases

In City Government of Quezon City v. Bayan Telecommunications, Inc.,63 this Court’s Second

Division held that "all realties which are actually, directly and exclusively used in the operation of its
franchise are ‘exempted’ from any property tax." The Second Division added that Bayantel’s
franchise being national in character, the "exemption" granted applies to all its real and personal
properties found anywhere within the Philippines. The Second Division reasoned in this wise:

The legislative intent expressed in the phrase ‘exclusive of this franchise’ cannot be

construed other than distinguishing between two (2) sets of properties, be they real or
personal, owned by the franchisee, namely, (a) those actually, directly and exclusively used
in its radio or telecommunications business, and (b) those properties which are not so used.
It is worthy to note that the properties subject of the present controversy are only those which
are admittedly falling under the first category.

To the mind of the Court, Section 14 of Rep. Act No. 3259 effectively works to grant or
delegate to local governments of Congress’ inherent power to tax the franchisee’s properties
belonging to the second group of properties indicated above, that is, all properties which,
"exclusive of this franchise," are not actually and directly used in the pursuit of its franchise.
As may be recalled, the taxing power of local governments under both the 1935 and the
1973 Constitutions solely depended upon an enabling law. Absent such enabling law, local
government units were without authority to impose and collect taxes on real properties within
their respective territorial jurisdictions. While Section 14 of Rep. Act No. 3259 may be validly
viewed as an implied delegation of power to tax, the delegation under that provision, as
couched, is limited to impositions over properties of the franchisee which are not actually,
directly and exclusively used in the pursuit of its franchise. Necessarily, other properties of
Bayantel directly used in the pursuit of its business are beyond the pale of the delegated
taxing power of local governments. In a very real sense, therefore, real properties of
Bayantel, save those exclusive of its franchise, are subject to realty taxes. Ultimately,
therefore, the inevitable result was that all realties which are actually, directly and
exclusively used in the operation of its franchise are "exempted" from any property
tax. (Emphasis supplied)
In Digital Telecommunications Philippines, Inc. (Digitel) v. Province of Pangasinan, 64 this Court’s
Third Division ruled that Digitel’s real properties located within the territorial jurisdiction of
Pangasinan that are actually, directly and exclusively used in its franchise are exempt from realty tax
under the first sentence of Section 5 of RA 7678. The Third Division explained thus:

The more pertinent issue to consider is whether or not, by passing Republic Act No. 7678,
Congress intended to exempt petitioner DIGITEL’s real properties actually, directly and
exclusively used by the grantee in its franchise.

The fact that Republic Act No. 7678 was a later piece of legislation can be taken to mean
that Congress, knowing fully well that the Local Government Code had already withdrawn
exemptions from real property taxes, chose to restore such immunity even to a limited
degree. Accordingly:

The Court views this subsequent piece of legislation as an express and real intention
on the part of Congress to once again remove from the LGC’s delegated taxing
power, all of the franchisee’s x x x properties that are actually, directly and
exclusively used in the pursuit of its franchise.

In view of the unequivocal intent of Congress to exempt from real property tax those real
properties actually, directly and exclusively used by petitioner DIGITEL in the pursuit of its
franchise, respondent Province of Pangasinan can only levy real property tax on the
remaining real properties of the grantee located within its territorial jurisdiction not part of the
above-stated classification. Said exemption, however, merely applies from the time of the
effectivity of petitioner DIGITEL’s legislative franchise and not a moment sooner.

Nowhere in the language of the first sentence of Section 5 of RA 7678 does it expressly or even
impliedly provide that petitioner’s real properties that are actually, directly and exclusively used in its
telecommunications business are exempt from payment of realty tax. On the contrary, the first
sentence of Section 5 specifically states that the petitioner, as the franchisee, shall pay the "same
taxes on its real estate, buildings, and personal property exclusive of this franchise as other persons
or corporations are now or hereafter may be required by law to pay."

The heading of Section 5 is "Tax Provisions," not Tax Exemptions. To reiterate, the phrase
"exemption from real estate tax" or other words conveying exemption from realty tax do not appear
in the first sentence of Section 5. The phrase "exclusive of this franchise" in the first sentence of
Section 5 merely qualifies the phrase "personal property" to exclude petitioner’s legislative franchise,
which is an intangible personal property. Petitioner’s franchise is subject to tax in the second
sentence of Section 5 which imposes the "franchise tax." Thus, there is no grant of tax exemption in
the first sentence of Section 5.

The interpretation of the phrase "exclusive of this franchise" in the Bayantel and Digitel cases goes

against the basic principle in construing tax exemptions. In PLDT v. City of Davao,65 the Court held
that "tax exemptions should be granted only by clear and unequivocal provision of law on the basis
of language too plain to be mistaken. They cannot be extended by mere implication or inference."

Tax exemptions must be clear and unequivocal. A taxpayer claiming a tax exemption must point to a
specific provision of law conferring on the taxpayer, in clear and plain terms, exemption from a
common burden. Any doubt whether a tax exemption exists is resolved against the taxpayer. 66

RCPI case
In Radio Communications of the Philippines, Inc. (RCPI) v. Provincial Assessor of South
Cotabato,67the Court’s First Division held that RCPI’s radio relay station tower, radio station building,
and machinery shed are real properties and are subject to real property tax. The Court added that:

RCPI cannot also invoke the equality of treatment clause under Section 23 of Republic Act
No. 7925. The franchises of Smart, Islacom, TeleTech, Bell, Major Telecoms, Island
Country, and IslaTel,68 all expressly declare that the franchisee shall pay the real estate tax,
using words similar to Section 14 of RA 2036, as amended. The provisions of these
subsequent telecommunication franchises imposing the real estate tax on franchisees only
confirm that RCPI is subject to the real estate tax. Otherwise, RCPI will stick out like a sore
thumb, being the only telecommunications company exempt from the real estate tax, in
mockery of the spirit of equality of treatment that RCPI is invoking, not to mention the
violation of the constitutional rule on uniformity of taxation.

It is an elementary rule in taxation that exemptions are strictly construed against the taxpayer
and liberally in favor of the taxing authority. It is the taxpayer’s duty to justify the exemption
by words too plain to be mistaken and too categorical to be misinterpreted. (Emphasis
supplied)

In RCPI, the Court emphasized that telecommunications companies which were granted legislative
franchise are liable to realty tax. The intent to grant realty tax exemption cannot be discerned from
Republic Act No. 405469 and neither from the legislative franchises of other telecommunications
companies. Tax exemptions granted to one or more, but not to all, telecommunications companies
similarly situated will violate the constitutional rule on uniformity of taxation. 70

The intent of Congress is to make

legislative franchisees liable to tax

In PLDT v. City of Davao,71 it was observed that after the imposition of VAT on telecommunications
companies, Congress refused to grant any tax exemption to telecommunications companies that
sought new franchises from Congress, except the exemption from specific tax. 72 More importantly,
the uniform tax provision in these new franchises expressly states that the franchisee shall pay not
only all taxes, except specific tax, under the National Internal Revenue Code, but also all taxes
under "other applicable laws,"73 one of which is the Local Government Code which imposes the
realty tax.74

In fact, Section 12 of Republic Act No. 9180 (RA 9180), 75 the legislative franchise of Digitel Mobile, a
100%-owned subsidiary of petitioner, states that the franchisee, its successors or assigns shall be
subject to the payment of "all taxes, duties, fees or charges and other impositions under the
National Internal Revenue Code of 1997, as amended, and other applicable laws."76 Section 12 of
RA 9180 provides:

SECTION 12. Tax Provisions. \emdash The grantee, its successors or assigns, shall be
subject to the payment of all taxes, duties, fees or charges and other impositions
under the National Internal Revenue Code of 1997, as amended, and other applicable
laws: Provided, That nothing herein shall be construed as repealing any specific tax
exemptions, incentives, or privileges granted under any relevant law: Provided, further, That
all rights, privileges, benefits and exemptions accorded to existing and future
telecommunications franchises shall likewise be extended to the grantee.

The grantee shall file the return with the city or province where its facility is located and pay
the income tax due thereon to the Commissioner of Internal Revenue or his duly authorized
 representatives in accordance with the National Internal Revenue Code and the return shall
be subject to audit by the Bureau of Internal Revenue. (Emphasis supplied)

Thus, Digitel Mobile is subject to tax on its real estate and personal properties, whether or not used
in its telecommunications business.

In Compagnie Financiere Sucres et Denrees v. Commissioner of Internal Revenue,77 the Court ruled

that "the governing principle is that tax exemptions are to be construed in strictissimi juris against the
taxpayer and liberally in favor of the taxing authority \endash he who claims an exemption must be
able to justify his claim by the clearest grant of statute." A person claiming an exemption has the
burden of justifying the exemption by words too plain to be mistaken and too categorical to be
misinterpreted. Tax exemptions are never presumed and the burden lies with the taxpayer to clearly
establish his right to exemption.78

BLGF Opinions

On 25 October 2004, the BLGF issued Memorandum Circular No. 15-2004. 79 This circular reversed
the BLGF’s Letter-Opinion dated 8 April 1997 recognizing realty tax exemption under the phrase
"exclusive of this franchise." This later circular states that the real properties owned by Globe and
Smart Telecommunications and all other telecommunications companies similarly situated are
subject to the realty tax. The BLGF has reversed its opinion on the realty tax exemption of
telecommunications companies. Hence, petitioner’s claim of tax exemption based on BLGF’s opinion
does not hold water. Besides, the BLGF has no authority to rule on claims for exemption from the
realty tax.80

WHEREFORE, we DENY the petition. We AFFIRM the 2 May 2002 and 19 November 2002 Orders
of the Regional Trial Court, Branch 8, Batangas City, in Civil Case No. 5343.

SO ORDERED.

G.R. No. 88291 June 8, 1993

ERNESTO M. MACEDA, petitioner,
vs.
HON. CATALINO MACARAIG, JR., in his capacity as Executive Secretary, Office of the
President, HON. VICENTE JAYME, ETC., ET AL., respondents.

Angara, Abello, Concepcion & Cruz for respondent Pilipinas Shell Petroleum Corporation.

Siguion Reyna, Montecillo & Ongsiako for Caltex.

NOCON, J.:
Just like lightning which does strike the same place twice in some instances, this matter of indirect
tax exemption of the private respondent National Power Corporation (NPC) is brought to this Court a
second time. Unfazed by the Decision We promulgated on May 31, 1991  petitioner Ernesto Maceda
1

asks this Court to reconsider said Decision. Lest We be criticized for denying due process to the
petitioner. We have decided to take a second look at the issues. In the process, a hearing was held
on July 9, 1992 where all parties presented their respective arguments. Etched in this Court's mind
are the paradoxical claims by both petitioner and private respondents that their respective positions
are for the benefit of the Filipino people.

A Chronological review of the relevant NPC laws, specially with respect to its tax exemption
provisions, at the risk of being repetitious is, therefore, in order.

On November 3, 1936, Commonwealth Act No. 120 was enacted creating the National Power
Corporation, a public corporation, mainly to develop hydraulic power from all water sources in the
Philippines.  The sum of P250,000.00 was appropriated out of the funds in the Philippine Treasury
2

for the purpose of organizing the NPC and conducting its preliminary work.  The main source of
3

funds for the NPC was the flotation of bonds in the capital markets  and these bonds
4

. . . issued under the authority of this Act shall be exempt from the payment of all
taxes by the Commonwealth of the Philippines, or by any authority, branch, division
or political subdivision thereof and subject to the provisions of the Act of Congress,
approved March 24, 1934, otherwise known as the Tydings McDuffle Law, which
facts shall be stated upon the face of said bonds. . . . .5

On June 24, 1938, C.A. No. 344 was enacted increasing to P550,000.00 the funds needed for the
initial operations of the NPC and reiterating the provision of the flotation of bonds as soon as the first
construction of any hydraulic power project was to be decided by the NPC Board.  The provision on
6

tax exemption in relation to the issuance of the NPC bonds was neither amended nor deleted.

On September 30, 1939, C.A. No. 495 was enacted removing the provision on the payment of the
bond's principal and interest in "gold coins" but adding that payment could be made in United States
dollars.  The provision on tax exemption in relation to the issuance of the NPC bonds was neither
7

amended nor deleted.

On June 4, 1949, Republic Act No. 357 was enacted authorizing the President of the Philippines to
guarantee, absolutely and unconditionally, as primary obligor, the payment of any and all NPC
loans.  He was also authorized to contract on behalf of the NPC with the International Bank for
8

Reconstruction and Development (IBRD) for NPC loans for the accomplishment of NPC's corporate
objectives  and for the reconstruction and development of the economy of the country.   It was
9 10

expressly stated that:

Any such loan or loans shall be exempt from taxes, duties, fees, imposts, charges,
contributions and restrictions of the Republic of the Philippines, its provinces, cities
and municipalities. 11

On the same date, R.A. No. 358 was enacted expressly authorizing the NPC, for the first time, to
incur other types of indebtedness, aside from indebtedness incurred by flotation of bonds.   As to the12

pertinent tax exemption provision, the law stated as follows:

 To facilitate payment of its indebtedness, the National Power Corporation shall be
exempt from all taxes, duties, fees, imposts, charges, and restrictions of the Republic
of the Philippines, its provinces, cities and municipalities. 
13

On July 10, 1952, R.A. No. 813 was enacted amending R.A. No. 357 in that, aside from the IBRD,
the President of the Philippines was authorized to negotiate, contract and guarantee loans with the
Export-Import Bank of of Washigton, D.C., U.S.A., or any other international financial
institution.   The tax provision for repayment of these loans, as stated in R.A. No. 357, was not
14

amended.

On June 2, 1954, R.A. No. 987 was enacted specifically to withdraw NPC's tax exemption for real
estate taxes. As enacted, the law states as follows:

To facilitate payment of its indebtedness, the National Power Corporation shall be

exempt from all taxes, except real property tax, and from all duties, fees, imposts,
charges, and restrictions of the Republic of the Philippines, its provinces, cities, and
municipalities. 15

On September 8, 1955, R.A. No. 1397 was enacted directing that the NPC projects to be funded by
the increased indebtedness   should bear the National Economic Council's stamp of approval. The
16

tax exemption provision related to the payment of this total indebtedness was not amended nor
deleted.

On June 13, 1958, R.A. No. 2055 was enacted increasing the total amount of foreign loans NPC was
authorized to incur to US$100,000,000.00 from the US$50,000,000.00 ceiling in R.A. No. 357.   The 17

tax provision related to the repayment of these loans was not amended nor deleted.

On June 13, 1958, R.A. No. 2058 was enacting fixing the corporate life of NPC to December 31,
2000.   All laws or provisions of laws and executive orders contrary to said R.A. No. 2058 were
18

expressly repealed.  19

On June 18, 1960, R.A. No 2641 was enacted converting the NPC from a public corporation into a
stock corporation with an authorized capital stock of P100,000,000.00 divided into 1,000.000 shares
having a par value of P100.00 each, with said capital stock wholly subscribed to by the
Government.   No tax exemption was incorporated in said Act.
20

On June 17, 1961, R.A. No. 3043 was enacted increasing the above-mentioned authorized capital
stock to P250,000,000.00 with the increase to be wholly subscribed by the Government.   No tax 21

provision was incorporated in said Act.

On June 17, 1967, R.A. No 4897 was enacted. NPC's capital stock was increased again to
P300,000,000.00, the increase to be wholly subscribed by the Government. No tax provision was
incorporated in said Act.  22

On September 10, 1971, R.A. No. 6395 was enacted revising the charter of the NPC, C.A. No. 120,
as amended. Declared as primary objectives of the nation were:

Declaration of Policy. — Congress hereby declares that (1) the comprehensive

development, utilization and conservation of Philippine water resources for all
beneficial uses, including power generation, and (2) the total electrification of the
Philippines through the development of power from all sources to meet the needs of
 industrial development and dispersal and the needs of rural electrification are primary
objectives of the nation which shall be pursued coordinately and supported by all
instrumentalities and agencies of the government, including the financial
institutions. 
23

Section 4 of C.A. No. 120, was renumbered as Section 8, and divided into sections 8 (a) (Authority
to incur Domestic Indebtedness) and Section 8 (b) (Authority to Incur Foreign Loans).

As to the issuance of bonds by the NPC, Paragraph No. 3 of Section 8(a), states as follows:

The bonds issued under the authority of this subsection shall be exempt from the
payment of all taxes by the Republic of the Philippines, or by any authority, branch,
division or political subdivision thereof which facts shall be stated upon the face of
said bonds. . . . 
24

As to the foreign loans the NPC was authorized to contract, Paragraph No. 5, Section 8(b), states as
follows:

The loans, credits and indebtedness contracted under this subsection and the
payment of the principal, interest and other charges thereon, as well as the
importation of machinery, equipment, materials and supplies by the Corporation, paid
from the proceeds of any loan, credit or indebtedeness incurred under this Act, shall
also be exempt from all taxes, fees, imposts, other charges and restrictions, including
import restrictions, by the Republic of the Philippines, or any of its agencies and
political subdivisions. 
25

A new section was added to the charter, now known as Section 13, R.A. No. 6395, which declares
the non-profit character and tax exemptions of NPC as follows:

The Corporation shall be non-profit and shall devote all its returns from its capital
investment, as well as excess revenues from its operation, for expansion. To enable
the Corporation to pay its indebtedness and obligations and in furtherance and
effective implementation of the policy enunciated in Section one of this Act, the
Corporation is hereby declared exempt:

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

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

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

(d) From all taxes, duties, fees, imposts and all other charges its provinces, cities,
municipalities and other government agencies and instrumentalities, on all petroleum
 products used by the Corporation in the generation, transmission, utilization, and
sale of electric power.  26

On November 7, 1972, Presidential Decree No. 40 was issued declaring that the
electrification of the entire country was one of the primary concerns of the country.
And in connection with this, it was specifically stated that:

The setting up of transmission line grids and the construction of associated

generation facilities in Luzon, Mindanao and major islands of the country, including
the Visayas, shall be the responsibility of the National Power Corporation (NPC) as
the authorized implementing agency of the State.  27

xxx xxx xxx

It is the ultimate objective of the State for the NPC to own and operate as a single
integrated system all generating facilities supplying electric power to the entire area
embraced by any grid set up by the NPC.  28

On January 22, 1974, P.D. No. 380 was issued giving extra powers to the NPC to enable it to fulfill
its role under aforesaid P.D. No. 40. Its authorized capital stock was raised to
P2,000,000,000.00,   its total domestic indebtedness was pegged at a maximum of
29

P3,000,000,000.00 at any one time,   and the NPC was authorized to borrow a total of
30

US$1,000,000,000.00   in foreign loans.

31

The relevant tax exemption provision for these foreign loans states as follows:

The loans, credits and indebtedness contracted under this subsection and the
payment of the principal, interest and other charges thereon, as well as the
importation of machinery, equipment, materials, supplies and services, by the
Corporation, paid from the proceeds of any loan, credit or indebtedness incurred
under this Act, shall also be exempt from all direct and indirect taxes, fees, imposts,
other charges and restrictions, including import restrictions previously and presently
imposed, and to be imposed by the Republic of the Philippines, or any of its agencies
and political subdivisions.   (Emphasis supplied)
32

Section 13(a) and 13(d) of R.A. No 6395 were amended to read as follows:

(a) From the payment of all taxes, duties, fees, imposts, charges and restrictions to
the Republic of the Philippines, its provinces, cities, municipalities and other
government agencies and instrumentalities including the taxes, duties, fees, imposts
and other charges provided for under the Tariff and Customs Code of the Philippines,
Republic Act Numbered Nineteen Hundred Thirty-Seven, as amended, and as further
amended by Presidential Decree No. 34 dated October 27, 1972, and Presidential
Decree No. 69, dated November 24, 1972, and costs and service fees in any court or
administrative proceedings in which it may be a party;

xxx xxx xxx

(d) From all taxes, duties, fees, imposts, and all other charges imposed directly or
indirectly by the Republic of the Philippines, its provinces, cities, municipalities and
other government agencies and instrumentalities, on all petroleum products used by
 the Corporation in the generation, transmission, utilization and sale of electric
power.   (Emphasis supplied)
33

On February 26, 1970, P.D. No. 395 was issued removing certain restrictions in the NPC's sale of
electricity to its different customers.   No tax exemption provision was amended, deleted or added.
34

On July 31, 1975, P.D. No. 758 was issued directing that P200,000,000.00 would be appropriated
annually to cover the unpaid subscription of the Government in the NPC authorized capital stock,
which amount would be taken from taxes accruing to the General Funds of the Government,
proceeds from loans, issuance of bonds, treasury bills or notes to be issued by the Secretary of
Finance for this particular purpose. 
35

On May 27, 1976 P.D. No. 938 was issued

(I)n view of the accelerated expansion programs for generation and transmission
facilities which includes nuclear power generation, the present capitalization of
National Power Corporation (NPC) and the ceilings for domestic and foreign
borrowings are deemed insufficient;  36

xxx xxx xxx

(I)n the application of the tax exemption provisions of the Revised Charter, the non-
profit character of NPC has not been fully utilized because of restrictive interpretation
of the taxing agencies of the government on said provisions;  37

xxx xxx xxx

(I)n order to effect the accelerated expansion program and attain the declared
objective of total electrification of the country, further amendments of certain sections
of Republic Act No. 6395, as amended by Presidential Decrees Nos. 380, 395 and
758, have become imperative;  38

Thus NPC's capital stock was raised to P8,000,000,000.00,   the total domestic indebtedness ceiling
39

was increased to P12,000,000,000.00,   the total foreign loan ceiling was raised to
40

US$4,000,000,000.00   and Section 13 of R.A. No. 6395, was amended to read as follows:
41

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 to 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.  42

II

On the other hand, the pertinent tax laws involved in this controversy are P.D. Nos. 882, 1177, 1931
and Executive Order No. 93 (S'86).
On January 30, 1976, P.D. No. 882 was issued withdrawing the tax exemption of NPC with regard to
imports as follows:

WHEREAS, importations by certain government agencies, including government-

owned or controlled corporation, are exempt from the payment of customs duties and
compensating tax; and

WHEREAS, in order to reduce foreign exchange spending and to protect domestic

industries, it is necessary to restrict and regulate such tax-free importations.

NOW THEREFORE, I, FERDINAND E. MARCOS, President of the Philippines, by

virtue of the powers vested in me by the Constitution, and do hereby decree and
order the following:

Sec. 1. All importations of any government agency, including government-owned or

controlled corporations which are exempt from the payment of customs duties and
internal revenue taxes, shall be subject to the prior approval of an Inter-Agency
Committee which shall insure compliance with the following conditions:

(a) That no such article of local manufacture are available in sufficient quantity and
comparable quality at reasonable prices;

(b) That the articles to be imported are directly and actually needed and will be used
exclusively by the grantee of the exemption for its operations and projects or in the
conduct of its functions; and

(c) The shipping documents covering the importation are in the name of the grantee
to whom the goods shall be delivered directly by customs authorities.

xxx xxx xxx

Sec. 3. The Committee shall have the power to regulate and control the tax-free
importation of government agencies in accordance with the conditions set forth in
Section 1 hereof and the regulations to be promulgated to implement the provisions
of this Decree. Provided, however, That any government agency or government-
owned or controlled corporation, or any local manufacturer or business firm
adversely affected by any decision or ruling of the Inter-Agency Committee may file
an appeal with the Office of the President within ten days from the date of notice
thereof. . . . .

xxx xxx xxx

Sec. 6. . . . . Section 13 of Republic Act No. 6395; . . .. and all similar provisions of all
general and special laws and decrees are hereby amended accordingly.

x x x           x x x          x x x

On July 30, 1977, P.D. 1177 was issued as it was

. . . declared the policy of the State to formulate and implement a National Budget
that is an instrument of national development, reflective of national objectives,
 strategies and plans. The budget shall be supportive of and consistent with the socio-
economic development plan and shall be oriented towards the achievement of
explicit objectives and expected results, to ensure that funds are utilized and
operations are conducted effectively, economically and efficiently. The national
budget shall be formulated within a context of a regionalized government structure
and of the totality of revenues and other receipts, expenditures and borrowings of all
levels of government-owned or controlled corporations. The budget shall likewise be
prepared within the context of the national long-term plan and of a long-term budget
program.  43

In line with such policy, the law decreed that

All units of government, including government-owned or controlled corporations, shall pay income
taxes, customs duties and other taxes and fees are imposed under revenues laws: provided, that
organizations otherwise exempted by law from the payment of such taxes/duties may ask for a
subsidy from the General Fund in the exact amount of taxes/duties due: provided, further, that a
procedure shall be established by the Secretary of Finance and the Commissioner of the Budget,
whereby such subsidies shall automatically be considered as both revenue and expenditure of the
General Fund.  44

The law also declared that —

[A]ll laws, decrees, executive orders, rules and regulations or parts thereof which are
inconsistent with the provisions of the Decree are hereby repealed and/or modified
accordingly.  45

On July 11, 1984, most likely due to the economic morass the Government found itself in after the
Aquino assassination, P.D. No. 1931 was issued to reiterate that:

WHEREAS, Presidential Decree No. 1177 has already expressly repealed the grant
of tax privileges to any government-owned or controlled corporation and all other
units of government;  46

and since there was a

. . . need for government-owned or controlled corporations and all other units of

government enjoying tax privileges to share in the requirements of development,
fiscal or otherwise, by paying the duties, taxes and other charges due from them.  47

it was decreed that:

Sec. 1. The provisions of special on general law to the contrary notwithstanding, all
exemptions from the payment of duties, taxes, fees, imposts and other charges
heretofore granted in favor of government-owned or controlled corporations including
their subsidiaries, are hereby withdrawn.

Sec. 2. The President of the Philippines and/or the Minister of Finance, upon the
recommendation of the Fiscal Incentives Review Board created under Presidential
Decree No. 776, is hereby empowered to restore, partially or totally, the exemptions
withdrawn by Section 1 above, any applicable tax and duty, taking into account,
among others, any or all of the following:
 1) The effect on the relative price levels;

2) The relative contribution of the corporation to the revenue generation effort;

3) The nature of the activity in which the corporation is engaged in; or

4) In general the greater national interest to be served.

xxx xxx xxx

Sec. 5. The provisions of Presidential Decree No. 1177 as well as all other laws,
decrees, executive orders, administrative orders, rules, regulations or parts thereof
which are inconsistent with this Decree are hereby repealed, amended or modified
accordingly.

On December 17, 1986, E.O. No. 93 (S'86) was issued with a view to correct presidential restoration
or grant of tax exemption to other government and private entities without benefit of review by the
Fiscal Incentives Review Board, to wit:

WHEREAS, Presidential Decree Nos. 1931 and 1955 issued on June 11, 1984 and
October 14, 1984, respectively, withdrew the tax and duty exemption privileges,
including the preferential tax treatment, of government and private entities with
certain exceptions, in order that the requirements of national economic development,
in terms of fiscals and other resources, may be met more adequately;

xxx xxx xxx

WHEREAS, in addition to those tax and duty exemption privileges were restored by
the Fiscal Incentives Review Board (FIRB), a number of affected entities,
government and private, had their tax and duty exemption privileges restored or
granted by Presidential action without benefit or review by the Fiscal Incentives
Review Board (FIRB);

x x x           x x x          x x x

Since it was decided that:

[A]ssistance to government and private entities may be better provided where

necessary by explicit subsidy and budgetary support rather than tax and duty
exemption privileges if only to improve the fiscal monitoring aspects of government
operations.

It was thus ordered that:

Sec. 1. The Provisions of any general or special law to the contrary notwithstanding,
all tax and duty incentives granted to government and private entities are hereby
withdrawn, except:

a) those covered by the non-impairment clause of the Constitution;

b) those conferred by effective internation agreement to which the Government of the
Republic of the Philippines is a signatory;

c) those enjoyed by enterprises registered with:

(i) the Board of Investment pursuant to Presidential Decree No. 1789,

as amended;

(ii) the Export Processing Zone Authority, pursuant to Presidential

Decree No. 66 as amended;

(iii) the Philippine Veterans Investment Development Corporation

Industrial Authority pursuant to Presidential Decree No. 538, was
amended.

d) those enjoyed by the copper mining industry pursuant to the provisions of Letter of
Instructions No. 1416;

e) those conferred under the four basic codes namely:

(i) the Tariff and Customs Code, as amended;

(ii) the National Internal Revenue Code, as amended;

(iii) the Local Tax Code, as amended;

(iv) the Real Property Tax Code, as amended;

f) those approved by the President upon the recommendation of the

Fiscal Incentives Review Board.

Sec. 2. The Fiscal Incentives Review Board created under Presidential Decree No.
776, as amended, is hereby authorized to:

a) restore tax and/or duty exemptions withdrawn hereunder in whole or in part;

b) revise the scope and coverage of tax and/or duty exemption that may be restored;

c) impose conditions for the restoration of tax and/or duty exemption;

d) prescribe the date of 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 commitment of the
Philippines and the necessary precautions such that the grant of subsidies does not
become the basis for countervailing action.
 Sec. 3. In the discharge of its authority hereunder, the Fiscal Incentives Review
Board shall take into account any or all of the following considerations:

a) the effect on relative price levels;

b) relative contribution of the beneficiary to the revenue generation effort;

c) nature of the activity the beneficiary is engaged; and

d) in general, the greater national interest to be served.

xxx xxx xxx

Sec. 5. All laws, orders, issuances, rules and regulations or parts thereof inconsistent
with this Executive Order are hereby repealed or modified accordingly.

E.O. No. 93 (S'86) was decreed to be effective   upon the promulgation of the rules and regulations,
48

to be issued by the Ministry of Finance.   Said rules and regulations were promulgated and
49

published in the Official Gazette

on February 23, 1987. These became effective on the 15th day after promulgation   in the Official
50

Gasetter,   which 15th day was March 10, 1987.

51

III

Now to some definitions. We refer to the very simplistic approach that all would-be lawyers, learn in
their TAXATION I course, which fro convenient reference, is as follows:

Classifications or kinds of Taxes:

According to Persons who pay or who bear the burden:

a. Direct Tax — the where the person supposed to pay the tax really pays
it. WITHOUT transferring the burden to someone else.

Examples: Individual income tax, corporate income tax, transfer taxes (estate tax,
donor's tax), residence tax, immigration tax

b. Indirect Tax — that where the tax is imposed upon goods BEFORE reaching the
consumer who ultimately pays for it, not as a tax, but as a part of the purchase price.

Examples: the internal revenue indirect taxes (specific tax, percentage taxes, (VAT)
and the tariff and customs indirect taxes (import duties, special import tax and other
dues) 52

IV

To simply matter, the issues raised by petitioner in his motion for reconsideration can be reduced to
the following:

(1) What kind of tax exemption privileges did NPC have?

(2) For what periods in time were these privileges being enjoyed?

(3) If there are taxes to be paid, who shall pay for these taxes?

Petitioner contends that P.D. No. 938 repealed the indirect tax exemption of NPC as the phrase "all
forms of taxes etc.," in its section 10, amending Section 13, R.A. No. 6395, as amended by P.D. No.
380, does not expressly include "indirect taxes."

His point is not well-taken.

A chronological review of the NPC laws will show that it has been the lawmaker's intention that the
NPC was to be completely tax exempt from all forms of taxes — direct and indirect.

NPC's tax exemptions at first applied to the bonds it was authorized to float to finance its operations
upon its creation by virtue of C.A. No. 120.

When the NPC was authorized to contract with the IBRD for foreign financing, any loans obtained
were to be completely tax exempt.

After the NPC was authorized to borrow from other sources of funds — aside issuance of bonds — it
was again specifically exempted from all types of taxes "to facilitate payment of its indebtedness."
Even when the ceilings for domestic and foreign borrowings were periodically increased, the tax
exemption privileges of the NPC were maintained.

NPC's tax exemption from real estate taxes was, however, specifically withdrawn by Rep. Act No.
987, as above stated. The exemption was, however, restored by R.A. No. 6395.

Section 13, R.A. No. 6395, was very comprehensive in its enumeration of the tax exemptions
allowed NPC. Its section 13(d) is the starting point of this bone of contention among the parties. For
easy reference, it is reproduced as follows:

[T]he Corporation is hereby declared exempt:

xxx xxx xxx

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

P.D. No. 380 added phrase "directly or indirectly" to said Section 13(d), which now reads as follows:

xxx xxx xxx

(d) From all taxes, duties, fees, imposts, and all other charges imposed directly or
indirectly by the Republic of the Philippines, its provinces, cities, municipalities and
other government agencies and instrumentalities, on all petroleum products used by
the Corporation in the generation, transmission, utilization and sale of electric power.
(Emphasis supplied)
Then came P.D. No. 938 which amended Sec. 13(a), (b), (c) and (d) into one very simple paragraph
as follows:

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. (Emphasis supplied)

Petitioner reminds Us that:

[I]t must be borne in mind that Presidential Decree Nos. 380

and 938 were issued by one man, acting as such the Executive and Legislative.  53

xxx xxx xxx

[S]ince both presidential decrees were made by the same person, it would have been
very easy for him to retain the same or similar language used in P.D. No. 380 P.D.
No. 938 if his intention were to preserve the indirect tax exemption of NPC. 
54

Actually, P.D. No. 938 attests to the ingenuousness of then President Marcos no matter what his
fault were. It should be noted that section 13, R.A. No. 6395, provided for tax exemptions for the
following items:

13(a) : court or administrative proceedings;

13(b) : income, franchise, realty taxes;

13(c) : import of foreign goods required for its operations and projects;

13(d) : petroleum products used in generation of electric power.

P.D. No. 938 lumped up 13(b), 13(c), and 13(d) into the phrase "ALL FORMS OF TAXES, ETC.,",
included 13(a) under the "as well as" clause and added PNOC subsidiaries as qualified for tax
exemptions.

This is the only conclusion one can arrive at if he has read all the NPC laws in the order of
enactment or issuance as narrated above in part I hereof. President Marcos must have considered
all the NPC statutes from C.A. No. 120 up to its latest amendments, P.D. No. 380, P.D. No. 395 and
P.D. No. 759, AND came up   with a very simple Section 13, R.A. No. 6395, as amended by P.D.
55

No. 938.

One common theme in all these laws is that the NPC must be enable to pay its
indebtedness   which, as of P.D. No. 938, was P12 Billion in total domestic indebtedness, at any one
56

time, and U$4 Billion in total foreign loans at any one time. The NPC must be and has to be exempt
from all forms of taxes if this goal is to be achieved.
By virtue of P.D. No. 938 NPC's capital stock was raised to P8 Billion. It must be remembered that to
pay the government share in its capital stock P.D. No. 758 was issued mandating that P200 Million
would be appropriated annually to cover the said unpaid subscription of the Government in NPC's
authorized capital stock. And significantly one of the sources of this annual appropriation of P200
million is TAX MONEY accruing to the General Fund of the Government. It does not stand to reason
then that former President Marcos would order P200 Million to be taken partially or totally from tax
money to be used to pay the Government subscription in the NPC, on one hand, and then order the
NPC to pay all its indirect taxes, on the other.

The above conclusion that then President Marcos lumped up Sections 13 (b), 13 (c) and (d) into the
phrase "All FORMS OF" is supported by the fact that he did not do the same for the tax exemption
provision for the foreign loans to be incurred.

The tax exemption on foreign loans found in Section 8(b), R.A. No. 6395, reads as follows:

The loans, credits and indebtedness contracted under this subsection and the
payment of the principal, interest and other charges thereon, as well as the
importation of machinery, equipment, materials and supplies by the Corporation, paid
from the proceeds of any loan, credit or indebtedness incurred under this Act, shall
also be exempt from all taxes, fees, imposts, other charges and restrictions, including
import restrictions, by the Republic of the Philippines, or any of its agencies and
political subdivisions. 
57

The same was amended by P.D. No. 380 as follows:

The loans, credits and indebtedness contracted this subsection and the payment of
the principal, interest and other charges thereon, as well as the importation of
machinery, equipment, materials, supplies and services, by the Corporation, paid
from the proceeds of any loan, credit or indebtedness incurred under this Act, shall
also be exempt from all direct and indirect taxes, fees, imposts, other charges and
restrictions, including import restrictions previously and presently imposed, and to be
imposed by the Republic of the Philippines, or any of its agencies and political
subdivisions.   (Emphasis supplied)
58

P.D. No. 938 did not amend the same   and so the tax exemption provision in Section 8 (b), R.A. No.
59

6395, as amended by P.D. No. 380, still stands. Since the subject matter of this particular Section 8
(b) had to do only with loans and machinery imported, paid for from the proceeds of these foreign
loans, THERE WAS NO OTHER SUBJECT MATTER TO LUMP IT UP WITH, and so, the tax
exemption stood as is — with the express mention of "direct
and indirect" tax exemptions. And this "direct and indirect" tax exemption privilege extended to
"taxes, fees, imposts, other charges . . . to be imposed" in the future — surely, an indication that the
lawmakers wanted the NPC to be exempt from ALL FORMS of taxes — direct and indirect.

It is crystal clear, therefore, that NPC had been granted tax exemption privileges for both direct and
indirect taxes under P.D. No. 938.

VI

Five (5) years on into the now discredited New Society, the Government decided to rationalize
government receipts and expenditures by formulating and implementing a National Budget.   The 60

NPC, being a government owned and controlled corporation had to be shed off its tax exemption
status privileges under P.D. No. 1177. It was, however, allowed to ask for a subsidy from the
General Fund in the exact amount of taxes/duties due.

Actually, much earlier, P.D. No. 882 had already repealed NPC's tax-free importation privileges. It
allowed, however, NPC to appeal said repeal with the Office of the President and to avail of tax-free
importation privileges under its Section 1, subject to the prior approval of an Inter-Agency Committed
created by virtue of said P.D. No. 882. It is presumed that the NPC, being the special creation of the
State, was allowed to continue its tax-free importations.

This Court notes that petitioner brought to the attention of this Court, the matter of the abolition of
NPC's tax exemption privileges by P.D. No. 1177   only in his Common Reply/Comment to private
61

Respondents' "Opposition" and "Comment" to Motion for Reconsideration, four (4) months AFTER
the motion for Reconsideration had been filed. During oral arguments heard on July 9, 1992, he
proceeded to discuss this tax exemption withdrawal as explained by then Secretary of Justice
Vicente Abad Santos in opinion No. 133 (S '77).   A careful perusal of petitioner's senate Blue
62

Ribbon Committee Report No. 474, the basis of the petition at bar, fails to yield any mention of said
P.D. No. 1177's effect on NPC's tax exemption privileges.   Applying by analogy Pulido vs.
63

Pablo,   the court declares that the matter of P.D. No. 1177 abolishing NPC's tax exemption
64

privileges was not seasonably invoked   by the petitioner.

65

Be that as it may, the Court still has to discuss the effect of P.D. No. 1177 on the NPC tax exemption
privileges as this statute has been reiterated twice in P.D. No. 1931. The express repeal of tax
privileges of any government-owned or controlled corporation (GOCC). NPC included, was
reiterated in the fourth whereas clause of P.D. No. 1931's preamble. The subsidy provided for in
Section 23, P.D. No. 1177, being inconsistent with Section 2, P.D. No. 1931, was deemed repealed
as the Fiscal Incentives Revenue Board was tasked with recommending the partial or total
restoration of tax exemptions withdrawn by Section 1, P.D. No. 1931.

The records before Us do not indicate whether or not NPC asked for the subsidy contemplated in
Section 23, P.D. No. 1177. Considering, however, that under Section 16 of P.D. No. 1177, NPC had
to submit to the Office of the President its request for the P200 million mandated by P.D. No. 758 to
be appropriated annually by the Government to cover its unpaid subscription to the NPC authorized
capital stock and that under Section 22, of the same P.D. No. NPC had to likewise submit to the
Office of the President its internal operating budget for review due to capital inputs of the
government (P.D. No. 758) and to the national government's guarantee of the domestic and foreign
indebtedness of the NPC, it is clear that NPC was covered by P.D. No. 1177.

There is reason to believe that NPC availed of subsidy granted to exempt GOCC's that suddenly
found themselves having to pay taxes. It will be noted that Section 23, P.D. No. 1177, mandated that
the Secretary of Finance and the Commissioner of the Budget had to establish the necessary
procedure to accomplish the tax payment/tax subsidy scheme of the Government. In effect, NPC,
did not put any cash to pay any tax as it got from the General Fund the amounts necessary to pay
different revenue collectors for the taxes it had to pay.

In his memorandum filed July 16, 1992, petitioner submits:

[T]hat with the enactment of P.D. No. 1177 on July 30, 1977, the NPC lost all its duty
and tax exemptions, whether direct or indirect. And so there was nothing to be
withdrawn or to be restored under P.D. No. 1931, issued on June 11, 1984. This is
evident from sections 1 and 2 of said P.D. No. 1931, which reads:
 "Section 1. The provisions of special or general law to the contrary
notwithstanding, all exemptions from the payment of duties, taxes,
fees, imports and other charges heretofore granted in favor of
government-owned or controlled corporations including their
subsidiaries are hereby withdrawn."

Sec. 2. The President of the Philippines and/or the Minister of

Finance, upon the recommendation of the Fiscal Incentives Review
Board created under P.D. No. 776, is hereby empowered to restore
partially or totally, the exemptions withdrawn by section 1 above. . . .

Hence, P.D. No. 1931 did not have any effect or did it change NPC's status. Since it
had already lost all its tax exemptions privilege with the issuance of P.D. No. 1177
seven (7) years earlier or on July 30, 1977, there were no tax exemptions to be
withdrawn by section 1 which could later be restored by the Minister of Finance upon
the recommendation of the FIRB under Section 2 of P.D. No. 1931. Consequently,
FIRB resolutions No. 10-85, and 1-86, were all illegally and validly issued since FIRB
acted beyond their statutory authority by creating and not merely restoring the tax
exempt status of NPC. The same is true for FIRB Res. No. 17-87 which restored
NPC's tax exemption under E.O. No. 93 which likewise abolished all duties and tax
exemptions but allowed the President upon recommendation of the FIRB to restore
those abolished.

The Court disagrees.

Applying by analogy the weight of authority that:

When a revised and consolidated act re-enacts in the same or substantially the same
terms the provisions of the act or acts so revised and consolidated, the revision and
consolidation shall be taken to be a continuation of the former act or acts, although
the former act or acts may be expressly repealed by the revised and consolidated
act; and all rights
and liabilities under the former act or acts are preserved and may be enforced.  66

the Court rules that when P.D. No. 1931 basically reenacted in its Section 1 the first half of Section
23, P.D. No. 1177, on withdrawal of tax exemption privileges of all GOCC's said Section 1, P.D. No.
1931 was deemed to be a continuation of the first half of Section 23, P.D. No. 1177, although the
second half of Section 23, P.D. No. 177, on the subsidy scheme for former tax exempt GOCCs had
been expressly repealed by Section 2 with its institution of the FIRB recommendation of partial/total
restoration of tax exemption privileges.

The NPC tax privileges withdrawn by Section 1. P.D. No. 1931, were, therefore, the same NPC tax
exemption privileges withdrawn by Section 23, P.D. No. 1177. NPC could no longer obtain a subsidy
for the taxes it had to pay. It could, however, under P.D. No. 1931, ask for a total restoration of its
tax exemption privileges, which, it did, and the same were granted under FIRB Resolutions Nos. 10-
85   and 1-86   as approved by the Minister of Finance.
67 68

Consequently, contrary to petitioner's submission, FIRB Resolutions Nos. 10-85 and 1-86 were both
legally and validly issued by the FIRB pursuant to P.D. No. 1931. FIRB did not created NPC's tax
exemption status but merely restored it.  69
Some quarters have expressed the view that P.D. No. 1931 was illegally issued under the now
rather infamous Amendment No. 6   as there was no showing that President Marcos' encroachment
70

on legislative prerogatives was justified under the then prevailing condition that he could legislate
"only if the Batasang Pambansa 'failed or was unable to act inadequately on any matter that in his
judgment required immediate action' to meet the 'exigency'.  71

Actually under said Amendment No. 6, then President Marcos could issue decrees not only when
the Interim Batasang Pambansa failed or was unable to act adequately on any matter for any reason
that in his (Marcos') judgment required immediate action, but also when there existed a grave
emergency or a threat or thereof. It must be remembered that said Presidential Decree was issued
only around nine (9) months after the Philippines unilaterally declared a moratorium on its foreign
debt payments   as a result of the economic crisis triggered by loss of confidence in the government
72

brought about by the Aquino assassination. The Philippines was then trying to reschedule its debt
payments.   One of the big borrowers was the NPC   which had a US$ 2.1 billion white elephant of a
73 74

Bataan Nuclear Power Plant on its back.   From all indications, it must have been this grave
75

emergency of a debt rescheduling which compelled Marcos to issue P.D. No. 1931, under his
Amendment 6 power.  76

The rule, therefore, that under the 1973 Constitution "no law granting a tax exemption shall be
passed without the concurrence of a majority of all the members of the Batasang Pambansa"   does 77

not apply as said P.D. No. 1931 was not passed by the Interim Batasang Pambansa but by then
President Marcos under His Amendment No. 6 power.

P.D. No. 1931 was, therefore, validly issued by then President Marcos under his Amendment No. 6
authority.

Under E.O No. 93 (S'86) NPC's tax exemption privileges were again clipped by, this time, President
Aquino. Its section 2 allowed the NPC to apply for the restoration of its tax exemption privileges. The
same was granted under FIRB Resolution No. 17-87   dated June 24, 1987 which restored NPC's
78

tax exemption privileges effective, starting March 10, 1987, the date of effectivity of E.O. No. 93
(S'86).

FIRB Resolution No. 17-87 was approved by the President on October 5, 1987.   There is no
79

indication, however, from the records of the case whether or not similar approvals were given by
then President Marcos for FIRB Resolutions Nos. 10-85 and 1- 86. This has led some quarters to
believe that a "travesty of justice" might have occurred when the Minister of Finance approved his
own recommendation as Chairman of the Fiscal Incentives Review Board as what happened
in Zambales Chromate vs. Court of Appeals   when the Secretary of Agriculture and Natural
80

Resources approved a decision earlier rendered by him when he was the Director of Mines,   and81

in Anzaldo vs. Clave   where Presidential Executive Assistant Clave affirmed, on appeal to
82

Malacañang, his own decision as Chairman of the Civil Service Commission.  83

Upon deeper analysis, the question arises as to whether one can talk about "due process" being
violated when FIRB Resolutions Nos. 10-85 and 1-86 were approved by the Minister of Finance
when the same were recommended by him in his capacity as Chairman of the Fiscal Incentives
Review Board.  84

In Zambales Chromite and Anzaldo, two (2) different parties were involved: mining groups and
scientist-doctors, respectively. Thus, there was a need for procedural due process to be followed.

In the case of the tax exemption restoration of NPC, there is no other comparable entity — not even
a single public or private corporation — whose rights would be violated if NPC's tax exemption
privileges were to be restored. While there might have been a MERALCO before Martial Law, it is of
public knowledge that the MERALCO generating plants were sold to the NPC in line with the State
policy that NPC was to be the State implementing arm for the electrification of the entire country.
Besides, MERALCO was limited to Manila and its environs. And as of 1984, there was no more
MERALCO — as a producer of electricity — which could have objected to the restoration of NPC's
tax exemption privileges.

It should be noted that NPC was not asking to be granted tax exemption privileges for the first time.
It was just asking that its tax exemption privileges be restored. It is for these reasons that, at least in
NPC's case, the recommendation and approval of NPC's tax exemption privileges under FIRB
Resolution Nos. 10-85 and 1-86, done by the same person acting in his dual capacities as Chairman
of the Fiscal Incentives Review Board and Minister of Finance, respectively, do not violate
procedural due process.

While as above-mentioned, FIRB Resolution No. 17-87 was approved by President Aquino on
October 5, 1987, the view has been expressed that President Aquino, at least with regard to E.O. 93
(S'86), had no authority to sub-delegate to the FIRB, which was allegedly not a delegate of the
legislature, the power delegated to her thereunder.

A misconception must be cleared up.

When E.O No. 93 (S'86) was issued, President Aquino was exercising both Executive and
Legislative powers. Thus, there was no power delegated to her, rather it was she who was
delegating her power. She delegated it to the FIRB, which, for purposes of E.O No. 93 (S'86), is a
delegate of the legislature. Clearly, she was not sub-delegating her power.

And E.O. No. 93 (S'86), as a delegating law, was complete in itself — it set forth the policy to be
carried out   and it fixed the standard to which the delegate had to conform in the performance of his
85

functions,   both qualities having been enunciated by this Court in Pelaez vs. Auditor General. 
86 87

Thus, after all has been said, it is clear that the NPC had its tax exemption privileges restored from
June 11, 1984 up to the present.

VII

The next question that projects itself is — who pays the tax?

The answer to the question could be gleamed from the manner by which the Commissaries of the
Armed Forces of the Philippines sell their goods.

By virtue of P.D. No. 83,   veterans, members of the Armed of the Philippines, and their defendants
88

but groceries and other goods free of all taxes and duties if bought from any AFP Commissaries.

In practice, the AFP Commissary suppliers probably treat the unchargeable specific, ad valorem and
other taxes on the goods earmarked for AFP Commissaries as an added cost of operation and
distribute it over the total units of goods sold as it would any other cost. Thus, even the ordinary
supermarket buyer probably pays for the specific, ad valorem and other taxes which theses
suppliers do not charge the AFP Commissaries.  89

IN MUCH THE SAME MANNER, it is clear that private respondents-oil companies have to absorb
the taxes they add to the bunker fuel oil they sell to NPC.
It should be stated at this juncture that, as early as May 14, 1954, the Secretary of Justice renders
an opinion,   wherein he stated and We quote:
90

xxx xxx xxx

Republic Act No. 358 exempts the National Power Corporation from "all taxes,
duties, fees, imposts, charges, and restrictions of the Republic of the Philippines and
its provinces, cities, and municipalities." This exemption is broad enough to include
all taxes, whether direct or indirect, which the National Power Corporation may be
required to pay, such as the specific tax on petroleum products. That it is indirect or
is of no amount [should be of no moment], for it is the corporation that ultimately pays
it. The view which refuses to accord the exemption because the tax is first paid by
the seller disregards realities and gives more importance to form than to substance.
Equity and law always exalt substance over from.

xxx xxx xxx

Tax exemptions are undoubtedly to be construed strictly but not so grudgingly as

knowledge that many impositions taxpayers have to pay are in the nature of indirect
taxes. To limit the exemption granted the National Power Corporation to direct taxes
notwithstanding the general and broad language of the statue will be to thwrat the
legislative intention in giving exemption from all forms of taxes and impositions
without distinguishing between those that are direct and those that are not.
(Emphasis supplied)

In view of all the foregoing, the Court rules and declares that the oil companies which supply bunker
fuel oil to NPC have to pay the taxes imposed upon said bunker fuel oil sold to NPC. By the very
nature of indirect taxation, the economic burden of such taxation is expected to be passed on
through the channels of commerce to the user or consumer of the goods sold. Because, however,
the NPC has been exempted from both direct and indirect taxation, the NPC must beheld exempted
from absorbing the economic burden of indirect taxation. This means, on the one hand, that the oil
companies which wish to sell to NPC absorb all or part of the economic burden of the taxes
previously paid to BIR, which could they shift to NPC if NPC did not enjoy exemption from indirect
taxes. This means also, on the other hand, that the NPC may refuse to pay the part of the "normal"
purchase price of bunker fuel oil which represents all or part of the taxes previously paid by the oil
companies to BIR. If NPC nonetheless purchases such oil from the oil companies — because to do
so may be more convenient and ultimately less costly for NPC than NPC itself importing and hauling
and storing the oil from overseas — NPC is entitled to be reimbursed by the BIR for that part of the
buying price of NPC which verifiably represents the tax already paid by the oil company-vendor to
the BIR.

It should be noted at this point in time that the whole issue of who WILL pay these indirect taxes
HAS BEEN RENDERED moot and academic by E.O. No. 195 issued on June 16, 1987 by virtue of
which the ad valorem tax rate on bunker fuel oil was reduced to ZERO (0%) PER CENTUM. Said
E.O. no. 195 reads as follows:

EXECUTIVE ORDER NO. 195

AMENDING PARAGRAPH (b) OF SECTION 128 OF THE NATIONAL INTERNAL

REVENUE CODE, AS AMENDED BY REVISING THE EXCISE TAX RATES OF
CERTAIN PETROLEUM PRODUCTS.
 xxx xxx xxx

Sec. 1. Paragraph (b) of Section 128 of the National Internal Revenue Code, as
amended, is hereby amended to read as follows:

Par. (b) — For products subject to ad valorem tax only:

PRODUCT AD VALOREM TAX RATE

1. . . .

2. . . .

3. . . .

4. Fuel oil, commercially known as bunker oil and on similar fuel oils having more or
less the same generating power 0%

xxx xxx xxx

Sec. 3. This Executive Order shall take effect immediately.

Done in the city of Manila, this 17th day of June, in the year of Our Lord, nineteen
hundred and eighty-seven. (Emphasis supplied)

The oil companies can now deliver bunker fuel oil to NPC without having to worry about who is going
to bear the economic burden of the ad valorem taxes. What this Court will now dispose of are
petitioner's complaints that some indirect tax money has been illegally refunded by the Bureau of
Internal Revenue to the NPC and that more claims for refunds by the NPC are being processed for
payment by the BIR.

A case in point is the Tax Credit Memo issued by the Bureau of Internal Revenue in favor of the
NPC last July 7, 1986 for P58.020.110.79 which were for "erroneously paid specific and ad
valorem taxes during the period from October 31, 1984 to April 27, 1985.   Petitioner asks Us to
91

declare this Tax Credit Memo illegal as the PNC did not have indirect tax exemptions with the
enactment of P.D. No. 938. As We have already ruled otherwise, the only questions left are whether
NPC Is entitled to a tax refund for the tax component of the price of the bunker fuel oil purchased
from Caltex (Phils.) Inc. and whether the Bureau of Internal Revenue properly refunded the amount
to NPC.

After P.D. No. 1931 was issued on June 11, 1984 withdrawing the
tax exemptions of all GOCCs — NPC included, it was only on May 8, 1985 when the BIR issues its
letter authority to the NPC authorizing it to withdraw tax-free bunker fuel oil from the oil companies
pursuant to FIRB Resolution No. 10-85.   Since the tax exemption restoration was retroactive to
92

June 11, 1984 there was a need. therefore, to recover said amount as Caltex (PhiIs.) Inc. had
already paid the BIR the specific and ad valorem taxes on the bunker oil it sold NPC during the
period above indicated and had billed NPC correspondingly.   It should be noted that the NPC, in its
93

letter-claim dated September 11, 1985 to the Commissioner of the Bureau of Internal Revenue DID
NOT CATEGORICALLY AND UNEQUIVOCALLY STATE that itself paid the P58.020,110.79 as part
of the bunker fuel oil price it purchased from Caltex (Phils) Inc. 
94
The law governing recovery of erroneously or illegally, collected taxes is section 230 of the National
Internal Revenue Code of 1977, as amended which reads as follows:

Sec. 230. Recover of tax erroneously or illegally collected. — No suit or proceeding

shall be maintained in any court for the recovery of any national internal revenue tax
hereafter alleged to have been erroneously or illegally assessed or collected, or of
any penalty claimed to have been collected without authority, or of any sum alleged
to have been excessive or in any Manner wrongfully collected. until a claim for refund
or credit has been duly filed with the Commissioner; but such suit or proceeding may
be maintained, whether or not such tax, penalty, or sum has been paid under protest
or duress.

In any case, no such suit or proceeding shall be begun after the expiration of two
years from the date of payment of the tax or penalty regardless of any supervening
cause that may arise after payment; Provided, however, That the Commissioner
may, even without a written claim therefor, refund or credit any tax, where on the
face of the return upon which payment was made, such payment appears clearly, to
have been erroneously paid.

x x x           x x x          x x x

Inasmuch as NPC filled its claim for P58.020,110.79 on September 11, 1985,   the Commissioner
95

correctly issued the Tax Credit Memo in view of NPC's indirect tax exemption.

Petitioner, however, asks Us to restrain the Commissioner from acting favorably on NPC's claim for
P410.580,000.00 which represents specific and ad valorem taxes paid by the oil companies to the
BIR from June 11, 1984 to the early part of 1986.  96

A careful examination of petitioner's pleadings and annexes attached thereto does not reveal when
the alleged claim for a P410,580,000.00 tax refund was filed. It is only stated In paragraph No. 2 of
the Deed of Assignment   executed by and between NPC and Caltex (Phils.) Inc., as follows:
97

That the ASSIGNOR(NPC) has a pending tax credit claim with the Bureau of Internal
Revenue amounting to P442,887,716.16. P58.020,110.79 of which is due to
Assignor's oil purchases from the Assignee (Caltex [Phils.] Inc.)

Actually, as the Court sees it, this is a clear case of a "Mexican standoff." We cannot restrain the BIR
from refunding said amount because of Our ruling that NPC has both direct and indirect tax
exemption privileges. Neither can We order the BIR to refund said amount to NPC as there is no
pending petition for review on certiorari of a suit for its collection before Us. At any rate, at this point
in time, NPC can no longer file any suit to collect said amount EVEN IF lt has previously filed a claim
with the BIR because it is time-barred under Section 230 of the National Internal Revenue Code of
1977. as amended, which states:

In any case, no such suit or proceeding shall be begun after the expiration of two
years from the date of payment of the tax or penalty REGARDLESS of any
supervening cause that may arise after payment. . . . (Emphasis supplied)

The date of the Deed of Assignment is June 6. 1986. Even if We were to assume that payment by
NPC for the amount of P410,580,000.00 had been made on said date. it is clear that more than two
(2) years had already elapsed from said date. At the same time, We should note that there is no
legal obstacle to the BIR granting, even without a suit by NPC, the tax credit or refund claimed by
NPC, assuming that NPC's claim had been made seasonably, and assuming the amounts covered
had actually been paid previously by the oil companies to the BIR.

WHEREFORE, in view of all the foregoing, the Motion for Reconsideration of petitioner is hereby
DENIED for lack of merit and the decision of this Court promulgated on May 31, 1991 is hereby
AFFIRMED.

SO ORDERED.