G.R. No.

L-7859        December 22, 1955

WALTER LUTZ, as Judicial Administrator of the Intestate Estate of the deceased

Antonio Jayme Ledesma, plaintiff-appellant,
vs.
J. ANTONIO ARANETA, as the Collector of Internal Revenue, defendant-appellee.

Ernesto J. Gonzaga for appellant.

Office of the Solicitor General Ambrosio Padilla, First Assistant Solicitor General
Guillermo E. Torres and Solicitor Felicisimo R. Rosete for appellee.

REYES, J.B L., J.:

This case was initiated in the Court of First Instance of Negros Occidental to test the
legality of the taxes imposed by Commonwealth Act No. 567, otherwise known as the
Sugar Adjustment Act.

Promulgated in 1940, the law in question opens (section 1) with a declaration of

emergency, due to the threat to our industry by the imminent imposition of export taxes
upon sugar as provided in the Tydings-McDuffe Act, and the "eventual loss of its
preferential position in the United States market"; wherefore, the national policy was
expressed "to obtain a readjustment of the benefits derived from the sugar industry by
the component elements thereof" and "to stabilize the sugar industry so as to prepare it
for the eventuality of the loss of its preferential position in the United States market and
the imposition of the export taxes."

In section 2, Commonwealth Act 567 provides for an increase of the existing tax on the
manufacture of sugar, on a graduated basis, on each picul of sugar manufactured; while
section 3 levies on owners or persons in control of lands devoted to the cultivation of
sugar cane and ceded to others for a consideration, on lease or otherwise —

a tax equivalent to the difference between the money value of the rental or
consideration collected and the amount representing 12 per centum of the
assessed value of such land.

According to section 6 of the law —

SEC. 6. All collections made under this Act shall accrue to a special fund in the
Philippine Treasury, to be known as the 'Sugar Adjustment and Stabilization
Fund,' and shall be paid out only for any or all of the following purposes or to
attain any or all of the following objectives, as may be provided by law.

First, to place the sugar industry in a position to maintain itself, despite the
gradual loss of the preferntial position of the Philippine sugar in the United States
market, and ultimately to insure its continued existence notwithstanding the loss
 of that market and the consequent necessity of meeting competition in the free
markets of the world;

Second, to readjust the benefits derived from the sugar industry by all of the
component elements thereof — the mill, the landowner, the planter of the sugar
cane, and the laborers in the factory and in the field — so that all might continue
profitably to engage therein;lawphi1.net

Third, to limit the production of sugar to areas more economically suited to the
production thereof; and

Fourth, to afford labor employed in the industry a living wage and to improve their
living and working conditions: Provided, That the President of the Philippines
may, until the adjourment of the next regular session of the National Assembly,
make the necessary disbursements from the fund herein created (1) for the
establishment and operation of sugar experiment station or stations and the
undertaking of researchers (a) to increase the recoveries of the centrifugal sugar
factories with the view of reducing manufacturing costs, (b) to produce and
propagate higher yielding varieties of sugar cane more adaptable to different
district conditions in the Philippines, (c) to lower the costs of raising sugar cane,
(d) to improve the buying quality of denatured alcohol from molasses for motor
fuel, (e) to determine the possibility of utilizing the other by-products of the
industry, (f) to determine what crop or crops are suitable for rotation and for the
utilization of excess cane lands, and (g) on other problems the solution of which
would help rehabilitate and stabilize the industry, and (2) for the improvement of
living and working conditions in sugar mills and sugar plantations, authorizing
him to organize the necessary agency or agencies to take charge of the
expenditure and allocation of said funds to carry out the purpose hereinbefore
enumerated, and, likewise, authorizing the disbursement from the fund herein
created of the necessary amount or amounts needed for salaries, wages,
travelling expenses, equipment, and other sundry expenses of said agency or
agencies.

Plaintiff, Walter Lutz, in his capacity as Judicial Administrator of the Intestate Estate of
Antonio Jayme Ledesma, seeks to recover from the Collector of Internal Revenue the
sum of P14,666.40 paid by the estate as taxes, under section 3 of the Act, for the crop
years 1948-1949 and 1949-1950; alleging that such tax is unconstitutional and void,
being levied for the aid and support of the sugar industry exclusively, which in plaintiff's
opinion is not a public purpose for which a tax may be constitutioally levied. The action
having been dismissed by the Court of First Instance, the plaintifs appealed the case
directly to this Court (Judiciary Act, section 17).

The basic defect in the plaintiff's position is his assumption that the tax provided for in
Commonwealth Act No. 567 is a pure exercise of the taxing power. Analysis of the Act,
and particularly of section 6 (heretofore quoted in full), will show that the tax is levied
with a regulatory purpose, to provide means for the rehabilitation and stabilization of the
threatened sugar industry. In other words, the act is primarily an exercise of the police
power.

This Court can take judicial notice of the fact that sugar production is one of the great
industries of our nation, sugar occupying a leading position among its export products;
that it gives employment to thousands of laborers in fields and factories; that it is a great
source of the state's wealth, is one of the important sources of foreign exchange needed
by our government, and is thus pivotal in the plans of a regime committed to a policy of
currency stability. Its promotion, protection and advancement, therefore redounds
greatly to the general welfare. Hence it was competent for the legislature to find that the
general welfare demanded that the sugar industry should be stabilized in turn; and in
the wide field of its police power, the lawmaking body could provide that the distribution
of benefits therefrom be readjusted among its components to enable it to resist the
added strain of the increase in taxes that it had to sustain (Sligh vs. Kirkwood, 237 U. S.
52, 59 L. Ed. 835; Johnson vs. State ex rel. Marey, 99 Fla. 1311, 128 So. 853; Maxcy
Inc. vs. Mayo, 103 Fla. 552, 139 So. 121).

As stated in Johnson vs. State ex rel. Marey, with reference to the citrus industry in
Florida —

The protection of a large industry constituting one of the great sources of the
state's wealth and therefore directly or indirectly affecting the welfare of so great
a portion of the population of the State is affected to such an extent by public
interests as to be within the police power of the sovereign. (128 Sp. 857).

Once it is conceded, as it must, that the protection and promotion of the sugar industry
is a matter of public concern, it follows that the Legislature may determine within
reasonable bounds what is necessary for its protection and expedient for its promotion.
Here, the legislative discretion must be allowed fully play, subject only to the test of
reasonableness; and it is not contended that the means provided in section 6 of the law
(above quoted) bear no relation to the objective pursued or are oppressive in character.
If objective and methods are alike constitutionally valid, no reason is seen why the state
may not levy taxes to raise funds for their prosecution and attainment. Taxation may be
made the implement of the state's police power (Great Atl. & Pac. Tea Co. vs. Grosjean,
301 U. S. 412, 81 L. Ed. 1193; U. S. vs. Butler, 297 U. S. 1, 80 L. Ed. 477; M'Culloch vs.
Maryland, 4 Wheat. 316, 4 L. Ed. 579).

That the tax to be levied should burden the sugar producers themselves can hardly be a
ground of complaint; indeed, it appears rational that the tax be obtained precisely from
those who are to be benefited from the expenditure of the funds derived from it. At any
rate, it is inherent in the power to tax that a state be free to select the subjects of
taxation, and it has been repeatedly held that "inequalities which result from a singling
out of one particular class for taxation, or exemption infringe no constitutional limitation"
(Carmichael vs. Southern Coal & Coke Co., 301 U. S. 495, 81 L. Ed. 1245, citing
numerous authorities, at p. 1251).
From the point of view we have taken it appears of no moment that the funds raised
under the Sugar Stabilization Act, now in question, should be exclusively spent in aid of
the sugar industry, since it is that very enterprise that is being protected. It may be that
other industries are also in need of similar protection; that the legislature is not required
by the Constitution to adhere to a policy of "all or none." As ruled in Minnesota ex rel.
Pearson vs. Probate Court, 309 U. S. 270, 84 L. Ed. 744, "if the law presumably hits the
evil where it is most felt, it is not to be overthrown because there are other instances to
which it might have been applied;" and that "the legislative authority, exerted within its
proper field, need not embrace all the evils within its reach" (N. L. R. B. vs. Jones &
Laughlin Steel Corp. 301 U. S. 1, 81 L. Ed. 893).

Even from the standpoint that the Act is a pure tax measure, it cannot be said that the
devotion of tax money to experimental stations to seek increase of efficiency in sugar
production, utilization of by-products and solution of allied problems, as well as to the
improvements of living and working conditions in sugar mills or plantations, without any
part of such money being channeled directly to private persons, constitutes expenditure
of tax money for private purposes, (compare Everson vs. Board of Education, 91 L. Ed.
472, 168 ALR 1392, 1400).

The decision appealed from is affirmed, with costs against appellant. So ordered.

Paras, C. J., Bengzon, Padilla, Reyes, A., Jugo, Bautista Angelo, Labrador, and
Concepcion, JJ., concur.
G.R. No. L- 41383 August 15, 1988

PHILIPPINE AIRLINES, INC., plaintiff-appellant,

vs.
ROMEO F. EDU in his capacity as Land Transportation Commissioner, and
UBALDO CARBONELL, in his capacity as National Treasurer, defendants-
appellants.

Ricardo V. Puno, Jr. and Conrado A. Boro for plaintiff-appellant.

GUTIERREZ, JR., J.:

What is the nature of motor vehicle registration fees? Are they taxes or regulatory fees?

This question has been brought before this Court in the past. The parties are, in effect,
asking for a re-examination of the latest decision on this issue.

This appeal was certified to us as one involving a pure question of law by the Court of
Appeals in a case where the then Court of First Instance of Rizal dismissed the portion-
about complaint for refund of registration fees paid under protest.

The disputed registration fees were imposed by the appellee, Commissioner Romeo F.
Elevate pursuant to Section 8, Republic Act No. 4136, otherwise known as the Land
Transportation and Traffic Code.

The Philippine Airlines (PAL) is a corporation organized and existing under the laws of
the Philippines and engaged in the air transportation business under a legislative
franchise, Act No. 42739, as amended by Republic Act Nos. 25). and 269.1 Under its
franchise, PAL is exempt from the payment of taxes. The pertinent provision of the
franchise provides as follows:

Section 13. In consideration of the franchise and rights hereby granted,

the grantee shall pay to the National Government during the life of this
franchise a tax of two per cent of the gross revenue or gross earning
derived by the grantee from its operations under this franchise. Such tax
shall be due and payable quarterly and shall be in lieu of all taxes of any
kind, nature or description, levied, established or collected by any
municipal, provincial or national automobiles, Provided, that if, after the
audit of the accounts of the grantee by the Commissioner of Internal
Revenue, a deficiency tax is shown to be due, the deficiency tax shall be
payable within the ten days from the receipt of the assessment. The
grantee shall pay the tax on its real property in conformity with existing
law.

On the strength of an opinion of the Secretary of Justice (Op. No. 307, series of 1956)
PAL has, since 1956, not been paying motor vehicle registration fees.
Sometime in 1971, however, appellee Commissioner Romeo F. Elevate issued a
regulation requiring all tax exempt entities, among them PAL to pay motor vehicle
registration fees.

Despite PAL's protestations, the appellee refused to register the appellant's motor
vehicles unless the amounts imposed under Republic Act 4136 were paid. The
appellant thus paid, under protest, the amount of P19,529.75 as registration fees of its
motor vehicles.

After paying under protest, PAL through counsel, wrote a letter dated May 19,1971, to
Commissioner Edu demanding a refund of the amounts paid, invoking the ruling
in Calalang v. Lorenzo (97 Phil. 212 [1951]) where it was held that motor vehicle
registration fees are in reality taxes from the payment of which PAL is exempt by virtue
of its legislative franchise.

Appellee Edu denied the request for refund basing his action on the decision
in Republic v. Philippine Rabbit Bus Lines, Inc., (32 SCRA 211, March 30, 1970) to the
effect that motor vehicle registration fees are regulatory exceptional. and not revenue
measures and, therefore, do not come within the exemption granted to PAL? under its
franchise. Hence, PAL filed the complaint against Land Transportation Commissioner
Romeo F. Edu and National Treasurer Ubaldo Carbonell with the Court of First Instance
of Rizal, Branch 18 where it was docketed as Civil Case No. Q-15862.

Appellee Romeo F. Elevate in his capacity as LTC Commissioner, and LOI Carbonell in
his capacity as National Treasurer, filed a motion to dismiss alleging that the complaint
states no cause of action. In support of the motion to dismiss, defendants repatriation
the ruling in Republic v. Philippine Rabbit Bus Lines, Inc., (supra) that registration fees
of motor vehicles are not taxes, but regulatory fees imposed as an incident of the
exercise of the police power of the state. They contended that while Act 4271 exempts
PAL from the payment of any tax except two per cent on its gross revenue or earnings,
it does not exempt the plaintiff from paying regulatory fees, such as motor vehicle
registration fees. The resolution of the motion to dismiss was deferred by the Court until
after trial on the merits.

On April 24, 1973, the trial court rendered a decision dismissing the appellant's
complaint "moved by the later ruling laid down by the Supreme Court in the case
or Republic v. Philippine Rabbit Bus Lines, Inc., (supra)." From this judgment, PAL
appealed to the Court of Appeals which certified the case to us.

Calalang v. Lorenzo (supra) and Republic v. Philippine Rabbit Bus Lines, Inc.

(supra) cited by PAL and Commissioner Romeo F. Edu respectively, discuss the main
points of contention in the case at bar.

Resolving the issue in the Philippine Rabbit case, this Court held:

 "The registration fee which defendant-appellee had to pay was imposed
by Section 8 of the Revised Motor Vehicle Law (Republic Act No. 587
[1950]). Its heading speaks of "registration fees." The term is repeated
four times in the body thereof. Equally so, mention is made of the "fee for
registration." (Ibid., Subsection G) A subsection starts with a categorical
statement "No fees shall be charged." (lbid., Subsection H) The
conclusion is difficult to resist therefore that the Motor Vehicle Act requires
the payment not of a tax but of a registration fee under the police power.
Hence the incipient, of the section relied upon by defendant-appellee
under the Back Pay Law, It is not held liable for a tax but for a registration
fee. It therefore cannot make use of a backpay certificate to meet such an
obligation.

Any vestige of any doubt as to the correctness of the above conclusion

should be dissipated by Republic Act No. 5448. ([1968]. Section 3 thereof
as to the imposition of additional tax on privately-owned passenger
automobiles, motorcycles and scooters was amended by Republic Act No.
5470 which is (sic) approved on May 30, 1969.) A special science fund
was thereby created and its title expressly sets forth that a tax on
privately-owned passenger automobiles, motorcycles and scooters was
imposed. The rates thereof were provided for in its Section 3 which clearly
specifies the" Philippine tax."(Cooley to be paid as distinguished from the
registration fee under the Motor Vehicle Act. There cannot be any clearer
expression therefore of the legislative will, even on the assumption that
the earlier legislation could by subdivision the point be susceptible of the
interpretation that a tax rather than a fee was levied. What is thus most
apparent is that where the legislative body relies on its authority to tax it
expressly so states, and where it is enacting a regulatory measure, it is
equally exploded (at p. 22,1969

In direct refutation is the ruling in Calalang v. Lorenzo (supra), where the Court, on the
other hand, held:

The charges prescribed by the Revised Motor Vehicle Law for the
registration of motor vehicles are in section 8 of that law called "fees". But
the appellation is no impediment to their being considered taxes if taxes
they really are. For not the name but the object of the charge determines
whether it is a tax or a fee. Geveia speaking, taxes are for revenue,
whereas fees are exceptional. for purposes of regulation and inspection
and are for that reason limited in amount to what is necessary to cover the
cost of the services rendered in that connection. Hence, a charge fixed by
statute for the service to be person,-When by an officer, where the charge
has no relation to the value of the services performed and where the
amount collected eventually finds its way into the treasury of the branch of
the government whose officer or officers collected the chauffeur, is not a
fee but a tax."(Cooley on Taxation, Vol. 1, 4th ed., p. 110.)
 From the data submitted in the court below, it appears that the
expenditures of the Motor Vehicle Office are but a small portion—about 5
per centum—of the total collections from motor vehicle registration fees.
And as proof that the money collected is not intended for the expenditures
of that office, the law itself provides that all such money shall accrue to the
funds for the construction and maintenance of public roads, streets and
bridges. It is thus obvious that the fees are not collected for regulatory
purposes, that is to say, as an incident to the enforcement of regulations
governing the operation of motor vehicles on public highways, for their
express object is to provide revenue with which the Government is to
discharge one of its principal functions—the construction and maintenance
of public highways for everybody's use. They are veritable taxes, not
merely fees.

As a matter of fact, the Revised Motor Vehicle Law itself now regards
those fees as taxes, for it provides that "no other taxes or fees than those
prescribed in this Act shall be imposed," thus implying that the charges
therein imposed—though called fees—are of the category of taxes. The
provision is contained in section 70, of subsection (b), of the law, as
amended by section 17 of Republic Act 587, which reads:

Sec. 70(b) No other taxes or fees than those prescribed in

this Act shall be imposed for the registration or operation or
on the ownership of any motor vehicle, or for the exercise of
the profession of chauffeur, by any municipal corporation,
the provisions of any city charter to the contrary
notwithstanding: Provided, however, That any provincial
board, city or municipal council or board, or other competent
authority may exact and collect such reasonable and
equitable toll fees for the use of such bridges and ferries,
within their respective jurisdiction, as may be authorized and
approved by the Secretary of Public Works and
Communications, and also for the use of such public roads,
as may be authorized by the President of the Philippines
upon the recommendation of the Secretary of Public Works
and Communications, but in none of these cases, shall any
toll fee." be charged or collected until and unless the
approved schedule of tolls shall have been posted levied, in
a conspicuous place at such toll station. (at pp. 213-214)

Motor vehicle registration fees were matters originally governed by the Revised Motor
Vehicle Law (Act 3992 [19511) as amended by Commonwealth Act 123 and Republic
Acts Nos. 587 and 1621.
Today, the matter is governed by Rep. Act 4136 [1968]), otherwise known as the Land
Transportation Code, (as amended by Rep. Acts Nos. 5715 and 64-67, P.D. Nos. 382,
843, 896, 110.) and BP Blg. 43, 74 and 398).

Section 73 of Commonwealth Act 123 (which amended Sec. 73 of Act 3992 and
remained unsegregated, by Rep. Act Nos. 587 and 1603) states:

Section 73. Disposal of moneys collected.—Twenty per centum of the

money collected under the provisions of this Act shall accrue to the road
and bridge funds of the different provinces and chartered cities in
proportion to the centum shall during the next previous year and the
remaining eighty per centum shall be deposited in the Philippine Treasury
to create a special fund for the construction and maintenance of national
and provincial roads and bridges. as well as the streets and bridges in the
chartered cities to be alloted by the Secretary of Public Works and
Communications for projects recommended by the Director of Public
Works in the different provinces and chartered cities. ....

Presently, Sec. 61 of the Land Transportation and Traffic Code provides:

Sec. 61. Disposal of Mortgage. Collected—Monies collected under the

provisions of this Act shall be deposited in a special trust account in the
National Treasury to constitute the Highway Special Fund, which shall be
apportioned and expended in accordance with the provisions of the"
Philippine Highway Act of 1935. "Provided, however, That the amount
necessary to maintain and equip the Land Transportation Commission but
not to exceed twenty per cent of the total collection during one year, shall
be set aside for the purpose. (As amended by RA 64-67, approved August
6, 1971).

It appears clear from the above provisions that the legislative intent and purpose behind
the law requiring owners of vehicles to pay for their registration is mainly to raise funds
for the construction and maintenance of highways and to a much lesser degree, pay for
the operating expenses of the administering agency. On the other hand, the Philippine
Rabbit case mentions a presumption arising from the use of the term "fees," which
appears to have been favored by the legislature to distinguish fees from other taxes
such as those mentioned in Section 13 of Rep. Act 4136 which reads:

Sec. 13. Payment of taxes upon registration.—No original registration of

motor vehicles subject to payment of taxes, customs s duties or other
charges shall be accepted unless proof of payment of the taxes due
thereon has been presented to the Commission.

referring to taxes other than those imposed on the registration, operation or ownership
of a motor vehicle (Sec. 59, b, Rep. Act 4136, as amended).
Fees may be properly regarded as taxes even though they also serve as an instrument
of regulation, As stated by a former presiding judge of the Court of Tax Appeals and
writer on various aspects of taxpayers

It is possible for an exaction to be both tax arose. regulation. License fees

are changes. looked to as a source of revenue as well as a means of
regulation (Sonzinky v. U.S., 300 U.S. 506) This is true, for example, of
automobile license fees. Isabela such case, the fees may properly be
regarded as taxes even though they also serve as an instrument of
regulation. If the purpose is primarily revenue, or if revenue is at least one
of the real and substantial purposes, then the exaction is properly called a
tax. (1955 CCH Fed. tax Course, Par. 3101, citing Cooley on Taxation
(2nd Ed.) 592, 593; Calalang v. Lorenzo. 97 Phil. 213-214) Lutz v. Araneta
98 Phil. 198.) These exactions are sometimes called regulatory taxes.
(See Secs. 4701, 4711, 4741, 4801, 4811, 4851, and 4881, U.S. Internal
Revenue Code of 1954, which classify taxes on tobacco and alcohol as
regulatory taxes.) (Umali, Reviewer in Taxation, 1980, pp. 12-13, citing
Cooley on Taxation, 2nd Edition, 591-593).

Indeed, taxation may be made the implement of the state's police power (Lutz v.
Araneta, 98 Phil. 148).

If the purpose is primarily revenue, or if revenue is, at least, one of the real and
substantial purposes, then the exaction is properly called a tax (Umali, Id.) Such is the
case of motor vehicle registration fees. The conclusions become inescapable in view of
Section 70(b) of Rep. Act 587 quoted in the Calalang case. The same provision appears
as Section 591-593). in the Land Transportation code. It is patent therefrom that the
legislators had in mind a regulatory tax as the law refers to the imposition on the
registration, operation or ownership of a motor vehicle as a "tax or fee." Though
nowhere in Rep. Act 4136 does the law specifically state that the imposition is a tax,
Section 591-593). speaks of "taxes." or fees ... for the registration or operation or on the
ownership of any motor vehicle, or for the exercise of the profession of chauffeur ..."
making the intent to impose a tax more apparent. Thus, even Rep. Act 5448 cited by the
respondents, speak of an "additional" tax," where the law could have referred to an
original tax and not one in addition to the tax already imposed on the registration,
operation, or ownership of a motor vehicle under Rep. Act 41383. Simply put, if the
exaction under Rep. Act 4136 were merely a regulatory fee, the imposition in Rep. Act
5448 need not be an "additional" tax. Rep. Act 4136 also speaks of other "fees," such
as the special permit fees for certain types of motor vehicles (Sec. 10) and additional
fees for change of registration (Sec. 11). These are not to be understood as taxes
because such fees are very minimal to be revenue-raising. Thus, they are not
mentioned by Sec. 591-593). of the Code as taxes like the motor vehicle registration fee
and chauffers' license fee. Such fees are to go into the expenditures of the Land
Transportation Commission as provided for in the last proviso of see. 61, aforequoted.
It is quite apparent that vehicle registration fees were originally simple exceptional.
intended only for rigidly purposes in the exercise of the State's police powers. Over the
years, however, as vehicular traffic exploded in number and motor vehicles became
absolute necessities without which modem life as we know it would stand still, Congress
found the registration of vehicles a very convenient way of raising much needed
revenues. Without changing the earlier deputy. of registration payments as "fees," their
nature has become that of "taxes."

In view of the foregoing, we rule that motor vehicle registration fees as at present
exacted pursuant to the Land Transportation and Traffic Code are actually taxes
intended for additional revenues. of government even if one fifth or less of the amount
collected is set aside for the operating expenses of the agency administering the
program.

May the respondent administrative agency be required to refund the amounts stated in
the complaint of PAL?

The answer is NO.

The claim for refund is made for payments given in 1971. It is not clear from the records
as to what payments were made in succeeding years. We have ruled that Section 24 of
Rep. Act No. 5448 dated June 27, 1968, repealed all earlier tax exemptions Of
corporate taxpayers found in legislative franchises similar to that invoked by PAL in this
case.

In Radio Communications of the Philippines, Inc. v. Court of Tax Appeals, et al. (G.R.

No. 615)." July 11, 1985), this Court ruled:

Under its original franchise, Republic Act No. 21); enacted in 1957,
petitioner Radio Communications of the Philippines, Inc., was subject to
both the franchise tax and income tax. In 1964, however, petitioner's
franchise was amended by Republic Act No. 41-42). to the effect that its
franchise tax of one and one-half percentum (1-1/2%) of all gross receipts
was provided as "in lieu of any and all taxes of any kind, nature, or
description levied, established, or collected by any authority whatsoever,
municipal, provincial, or national from which taxes the grantee is hereby
expressly exempted." The issue raised to this Court now is the validity of
the respondent court's decision which ruled that the exemption under
Republic Act No. 41-42). was repealed by Section 24 of Republic Act No.
5448 dated June 27, 1968 which reads:

"(d) The provisions of existing special or general laws to the

contrary notwithstanding, all corporate taxpayers not
specifically exempt under Sections 24 (c) (1) of this Code
shall pay the rates provided in this section. All corporations,
agencies, or instrumentalities owned or controlled by the
 government, including the Government Service Insurance
System and the Social Security System but excluding
educational institutions, shall pay such rate of tax upon their
taxable net income as are imposed by this section upon
associations or corporations engaged in a similar business
or industry. "

An examination of Section 24 of the Tax Code as amended shows clearly

that the law intended all corporate taxpayers to pay income tax as
provided by the statute. There can be no doubt as to the power of
Congress to repeal the earlier exemption it granted. Article XIV, Section 8
of the 1935 Constitution and Article XIV, Section 5 of the Constitution as
amended in 1973 expressly provide that no franchise shall be granted to
any individual, firm, or corporation except under the condition that it shall
be subject to amendment, alteration, or repeal by the legislature when the
public interest so requires. There is no question as to the public interest
involved. The country needs increased revenues. The repealing clause is
clear and unambiguous. There is a listing of entities entitled to tax
exemption. The petitioner is not covered by the provision. Considering the
foregoing, the Court Resolved to DENY the petition for lack of merit. The
decision of the respondent court is affirmed.

Any registration fees collected between June 27, 1968 and April 9, 1979, were correctly
imposed because the tax exemption in the franchise of PAL was repealed during the
period. However, an amended franchise was given to PAL in 1979. Section 13 of
Presidential Decree No. 1590, now provides:

In consideration of the franchise and rights hereby granted, the grantee

shall pay to the Philippine Government during the lifetime of this franchise
whichever of subsections (a) and (b) hereunder will result in a lower
taxes.)

(a) The basic corporate income tax based on the grantee's

annual net taxable income computed in accordance with the
provisions of the Internal Revenue Code; or

(b) A franchise tax of two per cent (2%) of the gross

revenues. derived by the grantees from all specific. without
distinction as to transport or nontransport corporations;
provided that with respect to international airtransport
service, only the gross passengers, mail, and freight
revenues. from its outgoing flights shall be subject to this
law.

The tax paid by the grantee under either of the above alternatives shall be
in lieu of all other taxes, duties, royalties, registration, license and other
 fees and charges of any kind, nature or description imposed, levied,
established, assessed, or collected by any municipal, city, provincial, or
national authority or government, agency, now or in the future, including
but not limited to the following:

xxx xxx xxx

(5) All taxes, fees and other charges on the registration, license,
acquisition, and transfer of airtransport equipment, motor vehicles, and all
other personal or real property of the gravitates (Pres. Decree 1590, 75
OG No. 15, 3259, April 9, 1979).

PAL's current franchise is clear and specific. It has removed the ambiguity found in the
earlier law. PAL is now exempt from the payment of any tax, fee, or other charge on the
registration and licensing of motor vehicles. Such payments are already included in the
basic tax or franchise tax provided in Subsections (a) and (b) of Section 13, P.D. 1590,
and may no longer be exacted.

WHEREFORE, the petition is hereby partially GRANTED. The prayed for refund of
registration fees paid in 1971 is DENIED. The Land Transportation Franchising and
Regulatory Board (LTFRB) is enjoined functions-the collecting any tax, fee, or other
charge on the registration and licensing of the petitioner's motor vehicles from April 9,
1979 as provided in Presidential Decree No. 1590.

SO ORDERED.

Fernan, C.J., Narvasa, Melencio-Herrera, Cruz, Paras, Feliciano, Gancayco, Padilla,

Bidin, Sarmiento, Cortes, Griño Aquino and Medialdea, JJ., concur.
G.R. No. 92585 May 8, 1992

CALTEX PHILIPPINES, INC., petitioner,

vs.
THE HONORABLE COMMISSION ON AUDIT, HONORABLE COMMISSIONER
BARTOLOME C. FERNANDEZ and HONORABLE COMMISSIONER ALBERTO P.
CRUZ, respondents.

DAVIDE, JR., J.:

This is a petition erroneously brought under Rule 44 of the Rules of Court 1 questioning

the authority of the Commission on Audit (COA) in disallowing petitioner's claims for
reimbursement from the Oil Price Stabilization Fund (OPSF) and seeking the reversal of
said Commission's decision denying its claims for recovery of financing charges from
the Fund and reimbursement of underrecovery arising from sales to the National Power
Corporation, Atlas Consolidated Mining and Development Corporation (ATLAS) and
Marcopper Mining Corporation (MAR-COPPER), preventing it from exercising the right
to offset its remittances against its reimbursement vis-a-vis the OPSF and disallowing
its claims which are still pending resolution before the Office of Energy Affairs (OEA)
and the Department of Finance (DOF).

Pursuant to the 1987 Constitution, 2 any decision, order or ruling of the Constitutional

Commissions 3 may be brought to this Court on certiorari by the aggrieved party within
thirty (30) days from receipt of a copy thereof. The certiorari referred to is the special
civil action for certiorari under Rule 65 of the Rules of Court. 4

Considering, however, that the allegations that the COA acted with:
(a) total lack of jurisdiction in completely ignoring and showing absolutely no respect for
the findings and rulings of the administrator of the fund itself and in disallowing a claim
which is still pending resolution at the OEA level, and (b) "grave abuse of discretion and
completely without jurisdiction" 5 in declaring that petitioner cannot avail of the right to
offset any amount that it may be required under the law to remit to the OPSF against
any amount that it may receive by way of reimbursement therefrom are sufficient to
bring this petition within Rule 65 of the Rules of Court, and, considering further the
importance of the issues raised, the error in the designation of the remedy pursued will,
in this instance, be excused.
The issues raised revolve around the OPSF created under Section 8 of Presidential
Decree (P.D.) No. 1956, as amended by Executive Order (E.O.) No. 137. As amended,
said Section 8 reads as follows:

Sec. 8 . There is hereby created a Trust Account in the books of accounts

of the Ministry of Energy to be designated as Oil Price Stabilization Fund
(OPSF) for the purpose of minimizing frequent price changes brought
about by exchange rate adjustments and/or changes in world market
prices of crude oil and imported petroleum products. The Oil Price
Stabilization Fund may be sourced from any of the following:

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 by 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.

The Fund herein created shall be used for the following:

1) To reimburse the oil companies for cost increases in

crude oil and imported petroleum products resulting from
exchange rate adjustment and/or increase in world market
prices of crude oil;

2) To reimburse the oil companies for possible cost under-

recovery incurred as a result of the reduction of domestic
prices of petroleum products. The magnitude of the
 underrecovery, if any, shall be determined by the Ministry of
Finance. "Cost underrecovery" shall include the following:

i. Reduction in oil company take as directed by

the Board of Energy without the corresponding
reduction in the landed cost of oil inventories in
the possession of the oil companies at the time
of the price change;

ii. Reduction in internal ad valorem taxes as a

result of foregoing government mandated price
reductions;

iii. Other factors as may be determined by the

Ministry of Finance to result in cost
underrecovery.

The Oil Price Stabilization Fund (OPSF) shall be administered by the

Ministry of Energy.

The material operative facts of this case, as gathered from the pleadings of the parties,
are not disputed.

On 2 February 1989, the COA sent a letter to Caltex Philippines, Inc. (CPI), hereinafter
referred to as Petitioner, directing the latter to remit to the OPSF its collection, excluding
that unremitted for the years 1986 and 1988, of the additional tax on petroleum products
authorized under the aforesaid Section 8 of P.D. No. 1956 which, as of 31 December
1987, amounted to P335,037,649.00 and informing it that, pending such remittance, all
of its claims for reimbursement from the OPSF shall be held in abeyance. 6

On 9 March 1989, the COA sent another letter to petitioner informing it that partial
verification with the OEA showed that the grand total of its unremitted collections of the
above tax is P1,287,668,820.00, broken down as follows:

1986 — P233,190,916.00
1987 — 335,065,650.00
1988 — 719,412,254.00;

directing it to remit the same, with interest and surcharges thereon, within sixty (60)
days from receipt of the letter; advising it that the COA will hold in abeyance the audit of
all its claims for reimbursement from the OPSF; and directing it to desist from further
offsetting the taxes collected against outstanding claims in 1989 and subsequent
periods. 7

In its letter of 3 May 1989, petitioner requested the COA for an early release of its
reimbursement certificates from the OPSF covering claims with the Office of Energy
Affairs since June 1987 up to March 1989, invoking in support thereof COA Circular No.
89-299 on the lifting of pre-audit of government transactions of national government
agencies and government-owned or controlled corporations. 8

In its Answer dated 8 May 1989, the COA denied petitioner's request for the early
release of the reimbursement certificates from the OPSF and repeated its earlier
directive to petitioner to forward payment of the latter's unremitted collections to the
OPSF to facilitate COA's audit action on the reimbursement claims. 9

By way of a reply, petitioner, in a letter dated 31 May 1989, submitted to the COA a
proposal for the payment of the collections and the recovery of claims, since the outright
payment of the sum of P1.287 billion to the OEA as a prerequisite for the processing of
said claims against the OPSF will cause a very serious impairment of its cash
position. 10 The proposal reads:

We, therefore, very respectfully propose the following:

(1) Any procedural arrangement acceptable to COA to

facilitate monitoring of payments and reimbursements will be
administered by the ERB/Finance Dept./OEA, as agencies
designated by law to administer/regulate OPSF.

(2) For the retroactive period, Caltex will deliver to OEA,

P1.287 billion as payment to OPSF, similarly OEA will
deliver to Caltex the same amount in cash reimbursement
from OPSF.

(3) The COA audit will commence immediately and will be

conducted expeditiously.

(4) The review of current claims (1989) will be conducted

expeditiously to preclude further accumulation of
reimbursement from OPSF.

On 7 June 1989, the COA, with the Chairman taking no part, handed down Decision No.
921 accepting the above-stated proposal but prohibiting petitioner from further offsetting
remittances and reimbursements for the current and ensuing years. 11 Decision No. 921
reads:

This pertains to the within separate requests of Mr. Manuel A. Estrella,

President, Petron Corporation, and Mr. Francis Ablan, President and
Managing Director, Caltex (Philippines) Inc., for reconsideration of this
Commission's adverse action embodied in its letters dated February 2,
1989 and March 9, 1989, the former directing immediate remittance to the
Oil Price Stabilization Fund of collections made by the firms pursuant to
P.D. 1956, as amended by E.O. No. 137, S. 1987, and the latter
 reiterating the same directive but further advising the firms to desist from
offsetting collections against their claims with the notice that "this
Commission will hold in abeyance the audit of all . . . claims for
reimbursement from the OPSF."

It appears that under letters of authority issued by the Chairman, Energy

Regulatory Board, the aforenamed oil companies were allowed to offset
the amounts due to the Oil Price Stabilization Fund against their
outstanding claims from the said Fund for the calendar years 1987 and
1988, pending with the then Ministry of Energy, the government entity
charged with administering the OPSF. This Commission, however,
expressing serious doubts as to the propriety of the offsetting of all types
of reimbursements from the OPSF against all categories of remittances,
advised these oil companies that such offsetting was bereft of legal basis.
Aggrieved thereby, these companies now seek reconsideration and in
support thereof clearly manifest their intent to make arrangements for the
remittance to the Office of Energy Affairs of the amount of collections
equivalent to what has been previously offset, provided that this
Commission authorizes the Office of Energy Affairs to prepare the
corresponding checks representing reimbursement from the OPSF. It is
alleged that the implementation of such an arrangement, whereby the
remittance of collections due to the OPSF and the reimbursement of
claims from the Fund shall be made within a period of not more than one
week from each other, will benefit the Fund and not unduly jeopardize the
continuing daily cash requirements of these firms.

Upon a circumspect evaluation of the circumstances herein obtaining, this

Commission perceives no further objectionable feature in the proposed
arrangement, provided that 15% of whatever amount is due from the Fund
is retained by the Office of Energy Affairs, the same to be answerable for
suspensions or disallowances, errors or discrepancies which may be
noted in the course of audit and surcharges for late remittances without
prejudice to similar future retentions to answer for any deficiency in such
surcharges, and provided further that no offsetting of remittances and
reimbursements for the current and ensuing years shall be allowed.

Pursuant to this decision, the COA, on 18 August 1989, sent the following letter to
Executive Director Wenceslao R. De la Paz of the Office of Energy Affairs: 12

Dear Atty. dela Paz:

Pursuant to the Commission on Audit Decision No. 921 dated June 7,

1989, and based on our initial verification of documents submitted to us by
your Office in support of Caltex (Philippines), Inc. offsets (sic) for the year
1986 to May 31, 1989, as well as its outstanding claims against the Oil
Price Stabilization Fund (OPSF) as of May 31, 1989, we are pleased to
inform your Office that Caltex (Philippines), Inc. shall be required to remit
to OPSF an amount of P1,505,668,906, representing remittances to the
OPSF which were offset against its claims reimbursements (net of
unsubmitted claims). In addition, the Commission hereby authorize (sic)
the Office of Energy Affairs (OEA) to cause payment of P1,959,182,612 to
Caltex, representing claims initially allowed in audit, the details of which
are presented hereunder: . . .

As presented in the foregoing computation the disallowances totalled

P387,683,535, which included P130,420,235 representing those claims
disallowed by OEA, details of which is (sic) shown in Schedule 1 as
summarized as follows:

Disallowance of COA
Particulars Amount

Recovery of financing charges P162,728,475 /a

Product sales 48,402,398 /b
Inventory losses
Borrow loan arrangement 14,034,786 /c
Sales to Atlas/Marcopper 32,097,083 /d
Sales to NPC 558
——————
P257,263,300

Disallowances of OEA 130,420,235

————————— ——————
Total P387,683,535

The reasons for the disallowances are discussed hereunder:

a. Recovery of Financing Charges

Review of the provisions of P.D. 1596 as amended by E.O. 137 seems to

indicate that recovery of financing charges by oil companies is not among
the items for which the OPSF may be utilized. Therefore, it is our view that
recovery of financing charges has no legal basis. The mechanism for such
claims is provided in DOF Circular 1-87.

b. Product Sales –– Sales to International Vessels/Airlines

BOE Resolution No. 87-01 dated February 7, 1987 as implemented by

OEA Order No. 87-03-095 indicating that (sic) February 7, 1987 as the
effectivity date that (sic) oil companies should pay OPSF impost on export
sales of petroleum products. Effective February 7, 1987 sales to
international vessels/airlines should not be included as part of its domestic
 sales. Changing the effectivity date of the resolution from February 7,
1987 to October 20, 1987 as covered by subsequent ERB Resolution No.
88-12 dated November 18, 1988 has allowed Caltex to include in their
domestic sales volumes to international vessels/airlines and claim the
corresponding reimbursements from OPSF during the period. It is our
opinion that the effectivity of the said resolution should be February 7,
1987.

c. Inventory losses –– Settlement of Ad Valorem

We reviewed the system of handling Borrow and Loan (BLA) transactions

including the related BLA agreement, as they affect the claims for
reimbursements of ad valorem taxes. We observed that oil companies
immediately settle ad valorem taxes for BLA transaction (sic). Loan
balances therefore are not tax paid inventories of Caltex subject to
reimbursements but those of the borrower. Hence, we recommend
reduction of the claim for July, August, and November, 1987 amounting to
P14,034,786.

d. Sales to Atlas/Marcopper

LOI No. 1416 dated July 17, 1984 provides that "I hereby order and direct
the suspension of payment of all taxes, duties, fees, imposts and other
charges whether direct or indirect due and payable by the copper mining
companies in distress to the national and local governments." It is our
opinion that LOI 1416 which implements the exemption from payment of
OPSF imposts as effected by OEA has no legal basis.

Furthermore, we wish to emphasize that payment to Caltex (Phil.) Inc., of

the amount as herein authorized shall be subject to availability of funds of
OPSF as of May 31, 1989 and applicable auditing rules and regulations.
With regard to the disallowances, it is further informed that the aggrieved
party has 30 days within which to appeal the decision of the Commission
in accordance with law.

On 8 September 1989, petitioner filed an Omnibus Request for the Reconsideration of

the decision based on the following grounds: 13

A) COA-DISALLOWED CLAIMS ARE AUTHORIZED UNDER EXISTING

RULES, ORDERS, RESOLUTIONS, CIRCULARS ISSUED BY THE
DEPARTMENT OF FINANCE AND THE ENERGY REGULATORY
BOARD PURSUANT TO EXECUTIVE ORDER NO. 137.

xxx xxx xxx

 B) ADMINISTRATIVE INTERPRETATIONS IN THE COURSE OF
EXERCISE OF EXECUTIVE POWER BY DEPARTMENT OF FINANCE
AND ENERGY REGULATORY BOARD ARE LEGAL AND SHOULD BE
RESPECTED AND APPLIED UNLESS DECLARED NULL AND VOID BY
COURTS OR REPEALED BY LEGISLATION.

xxx xxx xxx

C) LEGAL BASIS FOR RETENTION OF OFFSET ARRANGEMENT, AS

AUTHORIZED BY THE EXECUTIVE BRANCH OF GOVERNMENT,
REMAINS VALID.

x x x           x x x          x x x

On 6 November 1989, petitioner filed with the COA a Supplemental Omnibus Request
for Reconsideration. 14

On 16 February 1990, the COA, with Chairman Domingo taking no part and with
Commissioner Fernandez dissenting in part, handed down Decision No. 1171 affirming
the disallowance for recovery of financing charges, inventory losses, and sales to
MARCOPPER and ATLAS, while allowing the recovery of product sales or those arising
from export sales. 15 Decision No. 1171 reads as follows:

Anent the recovery of financing charges you contend that Caltex Phil. Inc.
has the .authority to recover financing charges from the OPSF on the
basis of Department of Finance (DOF) Circular 1-87, dated February 18,
1987, which allowed oil companies to "recover cost of financing working
capital associated with crude oil shipments," and provided a schedule of
reimbursement in terms of peso per barrel. It appears that on November 6,
1989, the DOF issued a memorandum to the President of the Philippines
explaining the nature of these financing charges and justifying their
reimbursement as follows:

As part of your program to promote economic recovery, . . .

oil companies (were authorized) to refinance their imports of
crude oil and petroleum products from the normal trade
credit of 30 days up to 360 days from date of loading . . .
Conformably . . ., the oil companies deferred their foreign
exchange remittances for purchases by refinancing their
import bills from the normal 30-day payment term up to the
desired 360 days. This refinancing of importations carried
additional costs (financing charges) which then became, due
to government mandate, an inherent part of the cost of the
purchases of our country's oil requirement.
 We beg to disagree with such contention. The justification that financing
charges increased oil costs and the schedule of reimbursement rate in
peso per barrel (Exhibit 1) used to support alleged increase (sic) were not
validated in our independent inquiry. As manifested in Exhibit 2, using the
same formula which the DOF used in arriving at the reimbursement rate
but using comparable percentages instead of pesos, the ineluctable
conclusion is that the oil companies are actually gaining rather than losing
from the extension of credit because such extension enables them to
invest the collections in marketable securities which have much higher
rates than those they incur due to the extension. The Data we used were
obtained from CPI (CALTEX) Management and can easily be verified from
our records.

With respect to product sales or those arising from sales to international

vessels or airlines, . . ., it is believed that export sales (product sales) are
entitled to claim refund from the OPSF.

As regard your claim for underrecovery arising from inventory losses, . . .

It is the considered view of this Commission that the OPSF is not liable to
refund such surtax on inventory losses because these are paid to BIR and
not OPSF, in view of which CPI (CALTEX) should seek refund from
BIR. . . .

Finally, as regards the sales to Atlas and Marcopper, it is represented that

you are entitled to claim recovery from the OPSF pursuant to LOI 1416
issued on July 17, 1984, since these copper mining companies did not pay
CPI (CALTEX) and OPSF imposts which were added to the selling price.

Upon a circumspect evaluation, this Commission believes and so holds

that the CPI (CALTEX) has no authority to claim reimbursement for this
uncollected OPSF impost because LOI 1416 dated July 17, 1984, which
exempts distressed mining companies from "all taxes, duties, import fees
and other charges" was issued when OPSF was not yet in existence and
could not have contemplated OPSF imposts at the time of its formulation.
Moreover, it is evident that OPSF was not created to aid distressed mining
companies but rather to help the domestic oil industry by stabilizing oil
prices.

Unsatisfied with the decision, petitioner filed on 28 March 1990 the present petition
wherein it imputes to the COA the commission of the following errors: 16

RESPONDENT COMMISSION ERRED IN DISALLOWING RECOVERY

OF FINANCING CHARGES FROM THE OPSF.
 II

RESPONDENT COMMISSION ERRED IN DISALLOWING

17
CPI's   CLAIM FOR REIMBURSEMENT OF UNDERRECOVERY
ARISING FROM SALES TO NPC.

III

RESPONDENT COMMISSION ERRED IN DENYING CPI's CLAIMS FOR

REIMBURSEMENT ON SALES TO ATLAS AND MARCOPPER.

IV

RESPONDENT COMMISSION ERRED IN PREVENTING CPI FROM

EXERCISING ITS LEGAL RIGHT TO OFFSET ITS REMITTANCES
AGAINST ITS REIMBURSEMENT VIS-A-VIS THE OPSF.

RESPONDENT COMMISSION ERRED IN DISALLOWING CPI's CLAIMS

WHICH ARE STILL PENDING RESOLUTION BY (SIC) THE OEA AND
THE DOF.

In the Resolution of 5 April 1990, this Court required the respondents to comment on
the petition within ten (10) days from notice. 18

On 6 September 1990, respondents COA and Commissioners Fernandez and Cruz,

assisted by the Office of the Solicitor General, filed their Comment. 19

This Court resolved to give due course to this petition on 30 May 1991 and required the
parties to file their respective Memoranda within twenty (20) days from notice. 20

In a Manifestation dated 18 July 1991, the Office of the Solicitor General prays that the
Comment filed on 6 September 1990 be considered as the Memorandum for
respondents. 21

Upon the other hand, petitioner filed its Memorandum on 14 August 1991.

I. Petitioner dwells lengthily on its first assigned error contending, in support thereof,
that:

(1) In view of the expanded role of the OPSF pursuant to Executive Order No. 137,
which added a second purpose, to wit:

2) To reimburse the oil companies for possible cost underrecovery

incurred as a result of the reduction of domestic prices of petroleum
 products. The magnitude of the underrecovery, if any, shall be determined
by the Ministry of Finance. "Cost underrecovery" shall include the
following:

i. Reduction in oil company take as directed by the Board of

Energy without the corresponding reduction in the landed
cost of oil inventories in the possession of the oil companies
at the time of the price change;

ii. Reduction in internal ad valorem taxes as a result of

foregoing government mandated price reductions;

iii. Other factors as may be determined by the Ministry of

Finance to result in cost underrecovery.

the "other factors" mentioned therein that may be determined by the Ministry (now
Department) of Finance may include financing charges for "in essence, financing
charges constitute unrecovered cost of acquisition of crude oil incurred by the oil
companies," as explained in the 6 November 1989 Memorandum to the President of the
Department of Finance; they "directly translate to cost underrecovery in cases where
the money market placement rates decline and at the same time the tax on interest
income increases. The relationship is such that the presence of underrecovery or
overrecovery is directly dependent on the amount and extent of financing charges."

(2) The claim for recovery of financing charges has clear legal and factual basis; it was
filed on the basis of Department of Finance Circular No.
1-87, dated 18 February 1987, which provides:

To allow oil companies to recover the costs of financing working capital

associated with crude oil shipments, the following guidelines on the
utilization of the Oil Price Stabilization Fund pertaining to the payment of
the foregoing (sic) exchange risk premium and recovery of financing
charges will be implemented:

1. The OPSF foreign exchange premium shall be reduced to

a flat rate of one (1) percent for the first (6) months and 1/32
of one percent per month thereafter up to a maximum period
of one year, to be applied on crude oil' shipments from
January 1, 1987. Shipments with outstanding financing as of
January 1, 1987 shall be charged on the basis of the fee
applicable to the remaining period of financing.

2. In addition, for shipments loaded after January 1987, oil

companies shall be allowed to recover financing charges
directly from the OPSF per barrel of crude oil based on the
following schedule:
F
i
n
a
n
c
i
n
g

P
e
r
i
o
d

R
e
i
m
b
u
r
s
e
m
e
n
t

R
a
t
e

P
e
s
o
s

p
e
r
 B
a
r
r
e
l

Less than 180 days None

180 days to 239 days 1.90
241 (sic) days to 299 4.02
300 days to 369 (sic) days 6.16
360 days or more 8.28

The above rates shall be subject to review every sixty

days. 22

Pursuant to this circular, the Department of Finance, in its letter of 18 February 1987,
advised the Office of Energy Affairs as follows:

HON. VICENTE T. PATERNO

Deputy Executive Secretary
For Energy Affairs
Office of the President
Makati, Metro Manila

Dear Sir:

This refers to the letters of the Oil Industry dated December 4, 1986 and
February 5, 1987 and subsequent discussions held by the Price Review
committee on February 6, 1987.

On the basis of the representations made, the Department of Finance

recognizes the necessity to reduce the foreign exchange risk premium
accruing to the Oil Price Stabilization Fund (OPSF). Such a reduction
would allow the industry to recover partly associated financing charges on
crude oil imports. Accordingly, the OPSF foreign exchange risk fee shall
be reduced to a flat charge of 1% for the first six (6) months plus 1/32% of
1% per month thereafter up to a maximum period of one year, effective
January 1, 1987. In addition, since the prevailing company take would still
leave unrecovered financing charges, reimbursement may be secured
from the OPSF in accordance with the provisions of the attached
Department of Finance circular. 23

Acting on this letter, the OEA issued on 4 May 1987 Order No. 87-05-096 which
contains the guidelines for the computation of the foreign exchange risk fee and the
recovery of financing charges from the OPSF, to wit:
B. FINANCE CHARGES

1. Oil companies shall be allowed to recover financing

charges directly from the OPSF for both crude and product
shipments loaded after January 1, 1987 based on the
following rates:

F
i
n
a
n
c
i
n
g

P
e
r
i
o
d

R
e
i
m
b
u
r
s
e
m
e
n
t

R
a
t
e

(
P
B
 b
l
.
)

Less than 180 days None

180 days to 239 days 1.90
240 days to 229 (sic) days 4.02
300 days to 359 days 6.16
360 days to more 8.28

2. The above rates shall be subject to review every sixty

days. 24

Then on 22 November 1988, the Department of Finance issued Circular No. 4-88
imposing further guidelines on the recoverability of financing charges, to wit:

Following are the supplemental rules to Department of Finance Circular

No. 1-87 dated February 18, 1987 which allowed the recovery of financing
charges directly from the Oil Price Stabilization Fund. (OPSF):

1. The Claim for reimbursement shall be on a per shipment

basis.

2. The claim shall be filed with the Office of Energy Affairs

together with the claim on peso cost differential for a
particular shipment and duly certified supporting documents
provided for under Ministry of Finance No. 11-85.

3. The reimbursement shall be on the form of reimbursement

certificate (Annex A) to be issued by the Office of Energy
Affairs. The said certificate may be used to offset against
amounts payable to the OPSF. The oil companies may also
redeem said certificates in cash if not utilized, subject to
availability of funds. 25

The OEA disseminated this Circular to all oil companies in its Memorandum Circular No.
88-12-017. 26

The COA can neither ignore these issuances nor formulate its own interpretation of the
laws in the light of the determination of executive agencies. The determination by the
Department of Finance and the OEA that financing charges are recoverable from the
OPSF is entitled to great weight and consideration. 27 The function of the COA,
particularly in the matter of allowing or disallowing certain expenditures, is limited to the
promulgation of accounting and auditing rules for, among others, the disallowance of
irregular, unnecessary, excessive, extravagant, or unconscionable expenditures, or
uses of government funds and properties. 28

(3) Denial of petitioner's claim for reimbursement would be inequitable. Additionally,

COA's claim that petitioner is gaining, instead of losing, from the extension of credit, is
belatedly raised and not supported by expert analysis.

In impeaching the validity of petitioner's assertions, the respondents argue that:

1. The Constitution gives the COA discretionary power to disapprove

irregular or unnecessary government expenditures and as the monetary
claims of petitioner are not allowed by law, the COA acted within its
jurisdiction in denying them;

2. P.D. No. 1956 and E.O. No. 137 do not allow reimbursement of
financing charges from the OPSF;

3. Under the principle of ejusdem generis, the "other factors" mentioned in

the second purpose of the OPSF pursuant to E.O. No. 137 can only
include "factors which are of the same nature or analogous to those
enumerated;"

4. In allowing reimbursement of financing charges from OPSF, Circular

No. 1-87 of the Department of Finance violates P.D. No. 1956 and E.O.
No. 137; and

5. Department of Finance rules and regulations implementing P.D. No.

1956 do not likewise allow reimbursement of financing
charges. 29

We find no merit in the first assigned error.

As to the power of the COA, which must first be resolved in view of its primacy, We find
the theory of petitioner –– that such does not extend to the disallowance of irregular,
unnecessary, excessive, extravagant, or unconscionable expenditures, or use of
government funds and properties, but only to the promulgation of accounting and
auditing rules for, among others, such disallowance –– to be untenable in the light of the
provisions of the 1987 Constitution and related laws.

Section 2, Subdivision D, Article IX of the 1987 Constitution expressly provides:

Sec. 2(l). The Commission on Audit shall have the power, authority, and
duty to examine, audit, and settle all accounts pertaining to the revenue
and receipts of, and expenditures or uses of funds and property, owned or
held in trust by, or pertaining to, the Government, or any of its
subdivisions, agencies, or instrumentalities, including government-owned
 and controlled corporations with original charters, and on a post-audit
basis: (a) constitutional bodies, commissions and offices that have been
granted fiscal autonomy under this Constitution; (b) autonomous state
colleges and universities; (c) other government-owned or controlled
corporations and their subsidiaries; and (d) such non-governmental
entities receiving subsidy or equity, directly or indirectly, from or through
the government, which are required by law or the granting institution to
submit to such audit as a condition of subsidy or equity. However, where
the internal control system of the audited agencies is inadequate, the
Commission may adopt such measures, including temporary or special
pre-audit, as are necessary and appropriate to correct the deficiencies. It
shall keep the general accounts, of the Government and, for such period
as may be provided by law, preserve the vouchers and other supporting
papers pertaining thereto.

(2) The Commission shall have exclusive authority, subject to the

limitations in this Article, to define the scope of its audit and examination,
establish the techniques and methods required therefor, and promulgate
accounting and auditing rules and regulations, including those for the
prevention and disallowance of irregular, unnecessary, excessive,
extravagant, or, unconscionable expenditures, or uses of government
funds and properties.

These present powers, consistent with the declared independence of the

Commission, 30 are broader and more extensive than that conferred by the 1973
Constitution. Under the latter, the Commission was empowered to:

Examine, audit, and settle, in accordance with law and regulations, all
accounts pertaining to the revenues, and receipts of, and expenditures or
uses of funds and property, owned or held in trust by, or pertaining to, the
Government, or any of its subdivisions, agencies, or instrumentalities
including government-owned or controlled corporations, keep the general
accounts of the Government and, for such period as may be provided by
law, preserve the vouchers pertaining thereto; and promulgate accounting
and auditing rules and regulations including those for the prevention of
irregular, unnecessary, excessive, or extravagant expenditures or uses of
funds and property. 31

Upon the other hand, under the 1935 Constitution, the power and authority of the COA's
precursor, the General Auditing Office, were, unfortunately, limited; its very role was
markedly passive. Section 2 of Article XI thereof provided:

Sec. 2. The Auditor General shall examine, audit, and settle all accounts
pertaining to the revenues and receipts from whatever source, including
trust funds derived from bond issues; and audit, in accordance with law
and administrative regulations, all expenditures of funds or property
 pertaining to or held in trust by the Government or the provinces or
municipalities thereof. He shall keep the general accounts of the
Government and the preserve the vouchers pertaining thereto. It shall be
the duty of the Auditor General to bring to the attention of the proper
administrative officer expenditures of funds or property which, in his
opinion, are irregular, unnecessary, excessive, or extravagant. He shall
also perform such other functions as may be prescribed by law.

As clearly shown above, in respect to irregular, unnecessary, excessive or extravagant

expenditures or uses of funds, the 1935 Constitution did not grant the Auditor General
the power to issue rules and regulations to prevent the same. His was merely to bring
that matter to the attention of the proper administrative officer.

The ruling on this particular point, quoted by petitioner from the cases of Guevarra
vs. Gimenez 32 and Ramos vs. Aquino, 33 are no longer controlling as the two (2) were
decided in the light of the 1935 Constitution.

There can be no doubt, however, that the audit power of the Auditor General under the
1935 Constitution and the Commission on Audit under the 1973 Constitution authorized
them to disallow illegal expenditures of funds or uses of funds and property. Our present
Constitution retains that same power and authority, further strengthened by the
definition of the COA's general jurisdiction in Section 26 of the Government Auditing
Code of the Philippines 34 and Administrative Code of 1987. 35 Pursuant to its power to
promulgate accounting and auditing rules and regulations for the prevention of irregular,
unnecessary, excessive or extravagant expenditures or uses of funds, 36 the COA
promulgated on 29 March 1977 COA Circular No. 77-55. Since the COA is responsible
for the enforcement of the rules and regulations, it goes without saying that failure to
comply with them is a ground for disapproving the payment of the proposed
expenditure. As observed by one of the Commissioners of the 1986 Constitutional
Commission, Fr. Joaquin G. Bernas: 37

It should be noted, however, that whereas under Article XI, Section 2, of

the 1935 Constitution the Auditor General could not correct "irregular,
unnecessary, excessive or extravagant" expenditures of public funds but
could only "bring [the matter] to the attention of the proper administrative
officer," under the 1987 Constitution, as also under the 1973 Constitution,
the Commission on Audit can "promulgate accounting and auditing rules
and regulations including those for the prevention and disallowance of
irregular, unnecessary, excessive, extravagant, or unconscionable
expenditures or uses of government funds and properties." Hence, since
the Commission on Audit must ultimately be responsible for the
enforcement of these rules and regulations, the failure to comply with
these regulations can be a ground for disapproving the payment of a
proposed expenditure.
Indeed, when the framers of the last two (2) Constitutions conferred upon the COA a
more active role and invested it with broader and more extensive powers, they did not
intend merely to make the COA a toothless tiger, but rather envisioned a dynamic,
effective, efficient and independent watchdog of the Government.

The issue of the financing charges boils down to the validity of Department of Finance
Circular No. 1-87, Department of Finance Circular No. 4-88 and the implementing
circulars of the OEA, issued pursuant to Section 8, P.D. No. 1956, as amended by E.O.
No. 137, authorizing it to determine "other factors" which may result in cost
underrecovery and a consequent reimbursement from the OPSF.

The Solicitor General maintains that, following the doctrine of ejusdem generis,
financing charges are not included in "cost underrecovery" and, therefore, cannot be
considered as one of the "other factors." Section 8 of P.D. No. 1956, as amended by
E.O. No. 137, does not explicitly define what "cost underrecovery" is. It merely states
what it includes. Thus:

. . . "Cost underrecovery" shall include the following:

i. Reduction in oil company takes as directed by the Board of Energy

without the corresponding reduction in the landed cost of oil inventories in
the possession of the oil companies at the time of the price change;

ii. Reduction in internal ad valorem taxes as a result of foregoing

government mandated price reductions;

iii. Other factors as may be determined by the Ministry of Finance to result

in cost underrecovery.

These "other factors" can include only those which are of the same class or nature as
the two specifically enumerated in subparagraphs (i) and (ii). A common characteristic
of both is that they are in the nature of government mandated price reductions. Hence,
any other factor which seeks to be a part of the enumeration, or which could qualify as a
cost underrecovery, must be of the same class or nature as those specifically
enumerated.

Petitioner, however, suggests that E.O. No. 137 intended to grant the Department of
Finance broad and unrestricted authority to determine or define "other factors."

Both views are unacceptable to this Court.

The rule of ejusdem generis states that "[w]here general 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. 38 A 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 cost
underrecovery only if such were incurred as a result of the reduction of domestic prices
of petroleum products.

Although petitioner's financing losses, if indeed incurred, may constitute cost

underrecovery in the sense that such were incurred as a result of the inability to fully
offset financing expenses from yields in money market placements, they do not,
however, fall under the foregoing provision of P.D. No. 1956, as amended, because the
same did not result from the reduction of the domestic price of petroleum products. Until
paragraph (2), Section 8 of the decree, as amended, is further amended by Congress,
this Court can do nothing. The duty of this Court is not to legislate, but to apply or
interpret the law. Be that as it may, this Court wishes to emphasize that as the facts in
this case have shown, it was at the behest of the Government that petitioner refinanced
its oil import payments from the normal 30-day trade credit to a maximum of 360 days.
Petitioner could be correct in its assertion that owing to the extended period for
payment, the financial institution which refinanced said payments charged a higher
interest, thereby resulting in higher financing expenses for the petitioner. It would
appear then that equity considerations dictate that petitioner should somehow be
allowed to recover its financing losses, if any, which may have been sustained because
it accommodated the request of the Government. Although under Section 29 of the
National Internal Revenue Code such losses may be deducted from gross income, the
effect of that loss would be merely to reduce its taxable income, but not to actually wipe
out such losses. The Government then may consider some positive measures to help
petitioner and others similarly situated to obtain substantial relief. An amendment, as
aforestated, may then be in order.

Upon the other hand, to accept petitioner's theory of "unrestricted authority" on the part
of the Department of Finance to determine or define "other factors" is to uphold an
undue delegation of legislative power, it clearly appearing that the subject provision
does not provide any standard for the exercise of the authority. It is a fundamental rule
that delegation of legislative power may be sustained only upon the ground that some
standard for its exercise is provided and that the legislature, in making the delegation,
has prescribed the manner of the exercise of the delegated authority. 39

Finally, whether petitioner gained or lost by reason of the extensive credit is rendered
irrelevant by reason of the foregoing disquisitions. It may nevertheless be stated that
petitioner failed to disprove COA's claim that it had in fact gained in the process.
Otherwise stated, petitioner failed to sufficiently show that it incurred a loss. Such being
the case, how can petitioner claim for reimbursement? It cannot have its cake and eat it
too.
II. Anent the claims arising from sales to the National Power Corporation, We find for
the petitioner. The respondents themselves admit in their Comment that underrecovery
arising from sales to NPC are reimbursable because NPC was granted full exemption
from the payment of taxes; to prove this, respondents trace the laws providing for such
exemption. 40 The last law cited is the Fiscal Incentives Regulatory Board's Resolution
No. 17-87 of 24 June 1987 which provides, in part, "that the tax and duty exemption
privileges of the National Power Corporation, including those pertaining to its domestic
purchases of petroleum and petroleum products . . . are restored effective March 10,
1987." In a Memorandum issued on 5 October 1987 by the Office of the President,
NPC's tax exemption was confirmed and approved.

Furthermore, as pointed out by respondents, the intention to exempt sales of petroleum

products to the NPC is evident in the recently passed Republic Act No. 6952
establishing the Petroleum Price Standby Fund to support the OPSF. 41 The pertinent
part of Section 2, Republic Act No. 6952 provides:

Sec. 2. Application of the Fund shall be subject to the following conditions:

(1) That the Fund shall be used to reimburse the oil

companies for (a) cost increases of imported crude oil and
finished petroleum products resulting from foreign exchange
rate adjustments and/or increases in world market prices of
crude oil; (b) cost underrecovery incurred as a result of fuel
oil sales to the National Power Corporation (NPC); and (c)
other cost underrecoveries incurred as may be finally
decided by the Supreme
Court; . . .

Hence, petitioner can recover its claim arising from sales of petroleum products to the
National Power Corporation.

III. With respect to its claim for reimbursement on sales to ATLAS and MARCOPPER,
petitioner relies on Letter of Instruction (LOI) 1416, dated 17 July 1984, which ordered
the suspension of payments of all taxes, duties, fees and other charges, whether direct
or indirect, due and payable by the copper mining companies in distress to the national
government. Pursuant to this LOI, then Minister of Energy, Hon. Geronimo Velasco,
issued Memorandum Circular No. 84-11-22 advising the oil companies that Atlas
Consolidated Mining Corporation and Marcopper Mining Corporation are among those
declared to be in distress.

In denying the claims arising from sales to ATLAS and MARCOPPER, the COA, in its
18 August 1989 letter to Executive Director Wenceslao R. de la Paz, states that "it is our
opinion that LOI 1416 which implements the exemption from payment of OPSF imposts
as effected by OEA has no legal basis;" 42 in its Decision No. 1171, it ruled that "the CPI
(CALTEX) (Caltex) has no authority to claim reimbursement for this uncollected impost
because LOI 1416 dated July 17, 1984, . . . was issued when OPSF was not yet in
existence and could not have contemplated OPSF imposts at the time of its
formulation." 43 It is further stated that: "Moreover, it is evident that OPSF was not
created to aid distressed mining companies but rather to help the domestic oil industry
by stabilizing oil prices."

In sustaining COA's stand, respondents vigorously maintain that LOI 1416 could not
have intended to exempt said distressed mining companies from the payment of OPSF
dues for the following reasons:

a. LOI 1416 granting the alleged exemption was issued on July 17, 1984.
P.D. 1956 creating the OPSF was promulgated on October 10, 1984,
while E.O. 137, amending P.D. 1956, was issued on February 25, 1987.

b. LOI 1416 was issued in 1984 to assist distressed copper mining

companies in line with the government's effort to prevent the collapse of
the copper industry. P.D No. 1956, as amended, was issued for the
purpose of minimizing frequent price changes brought about by exchange
rate adjustments and/or changes in world market prices of crude oil and
imported petroleum product's; and

c. LOI 1416 caused the "suspension of all taxes, duties, fees, imposts and
other charges, whether direct or indirect, due and payable by the copper
mining companies in distress to the Notional and Local Governments . . ."
On the other hand, OPSF dues are not payable by (sic) distressed copper
companies but by oil companies. It is to be noted that the copper mining
companies do not pay OPSF dues. Rather, such imposts are built in or
already incorporated in the prices of oil products. 44

Lastly, respondents allege that while LOI 1416 suspends the payment of taxes by
distressed mining companies, it does not accord petitioner the same privilege with
respect to its obligation to pay OPSF dues.

We concur with the disquisitions of the respondents. Aside from such reasons, however,
it is apparent that LOI 1416 was never published in the Official Gazette 45 as required by
Article 2 of the Civil Code, which reads:

Laws shall take effect after fifteen days following the completion of their
publication in the Official Gazette, unless it is otherwise provided. . . .

In applying said provision, this Court ruled in the case of Tañada vs. Tuvera: 46

WHEREFORE, the Court hereby orders respondents to publish in the

Official Gazette all unpublished presidential issuances which are of
general application, and unless so published they shall have no binding
force and effect.
Resolving the motion for reconsideration of said decision, this Court, in its Resolution
promulgated on 29 December 1986, 47 ruled:

We hold therefore that all statutes, including those of local application and
private laws, shall be published as a condition for their effectivity, which
shall begin fifteen days after publication unless a different effectivity date
is fixed by the legislature.

Covered by this rule are presidential decrees and executive orders

promulgated by the President in the exercise of legislative powers
whenever the same are validly delegated by the legislature or, at present,
directly conferred by the Constitution. Administrative rules and regulations
must also be published if their purpose is to enforce or implement existing
laws pursuant also to a valid delegation.

xxx xxx xxx

WHEREFORE, it is hereby declared that all laws as above defined shall

immediately upon their approval, or as soon thereafter as possible, be
published in full in the Official Gazette, to become effective only after
fifteen days from their publication, or on another date specified by the
legislature, in accordance with Article 2 of the Civil Code.

LOI 1416 has, therefore, no binding force or effect as it was never published in the
Official Gazette after its issuance or at any time after the decision in the
abovementioned cases.

Article 2 of the Civil Code was, however, later amended by Executive Order No. 200,
issued on 18 June 1987. As amended, the said provision now reads:

Laws shall take effect after fifteen days following the completion of their
publication either in the Official Gazette or in a newspaper of general
circulation in the Philippines, unless it is otherwise provided.

We are not aware of the publication of LOI 1416 in any newspaper of general circulation
pursuant to Executive Order No. 200.

Furthermore, even granting arguendo that LOI 1416 has force and effect, petitioner's
claim must still fail. Tax exemptions as a general rule are construed strictly against the
grantee and liberally in favor of the taxing authority. 48 The burden of proof rests upon
the party claiming exemption to prove that it is in fact covered by the exemption so
claimed. The party claiming exemption must therefore be expressly mentioned in the
exempting law or at least be within its purview by clear legislative intent.

In the case at bar, petitioner failed to prove that it is entitled, as a consequence of its
sales to ATLAS and MARCOPPER, to claim reimbursement from the OPSF under LOI
1416. Though LOI 1416 may suspend the payment of taxes by copper mining
companies, it does not give petitioner the same privilege with respect to the payment of
OPSF dues.

IV. As to COA's disallowance of the amount of P130,420,235.00, petitioner maintains

that the Department of Finance has still to issue a final and definitive ruling thereon;
accordingly, it was premature for COA to disallow it. By doing so, the latter acted
beyond its jurisdiction. 49 Respondents, on the other hand, contend that said amount
was already disallowed by the OEA for failure to substantiate it. 50 In fact, when OEA
submitted the claims of petitioner for pre-audit, the abovementioned amount was
already excluded.

An examination of the records of this case shows that petitioner failed to prove or
substantiate its contention that the amount of P130,420,235.00 is still pending before
the OEA and the DOF. Additionally, We find no reason to doubt the submission of
respondents that said amount has already been passed upon by the OEA. Hence, the
ruling of respondent COA disapproving said claim must be upheld.

V. The last issue to be resolved in this case is whether or not the amounts due to the
OPSF from petitioner may be offset against petitioner's outstanding claims from said
fund. Petitioner contends that it should be allowed to offset its claims from the OPSF
against its contributions to the fund as this has been allowed in the past, particularly in
the years 1987 and 1988. 51

Furthermore, petitioner cites, as bases for offsetting, the provisions of the New Civil
Code on compensation and Section 21, Book V, Title I-B of the Revised Administrative
Code which provides for "Retention of Money for Satisfaction of Indebtedness to
Government." 52 Petitioner also mentions communications from the Board of Energy and
the Department of Finance that supposedly authorize compensation.

Respondents, on the other hand, citing Francia vs. IAC and Fernandez, 53 contend that

there can be no offsetting of taxes against the claims that a taxpayer may have against
the government, as taxes do not arise from contracts or depend upon the will of the
taxpayer, but are imposed by law. Respondents also allege that petitioner's reliance on
Section 21, Book V, Title I-B of the Revised Administrative Code, is misplaced because
"while this provision empowers the COA to withhold payment of a government
indebtedness to a person who is also indebted to the government and apply the
government indebtedness to the satisfaction of the obligation of the person to the
government, like authority or right to make compensation is not given to the private
person." 54 The reason for this, as stated in Commissioner of Internal Revenue
vs. Algue, Inc., 55 is that money due the government, either in the form of taxes or other
dues, is its lifeblood and should be collected without hindrance. Thus, instead of giving
petitioner a reason for compensation or set-off, the Revised Administrative Code makes
it the respondents' duty to collect petitioner's indebtedness to the OPSF.
Refuting respondents' contention, petitioner claims that the amounts due from it do not
arise as a result of taxation because "P.D. 1956, amended, did not create a source of
taxation; it instead established a special fund . . .," 56 and that the OPSF contributions do
not go to the general fund of the state and are not used for public purpose, i.e., not for
the support of the government, the administration of law, or the payment of public
expenses. This alleged lack of a public purpose behind OPSF exactions distinguishes
such from a tax. Hence, the ruling in the Francia case is inapplicable.

Lastly, petitioner cites R.A. No. 6952 creating the Petroleum Price Standby Fund to
support the OPSF; the said law provides in part that:

Sec. 2. Application of the fund shall be subject to the following conditions:

x x x           x x x          x x x

(3) That no amount of the Petroleum Price Standby Fund

shall be used to pay any oil company which has an
outstanding obligation to the Government without said
obligation being offset first, subject to the requirements of
compensation or offset under the Civil Code.

We find no merit in petitioner's contention that the OPSF contributions are not for a
public purpose because they go to a special fund of the government. Taxation is no
longer envisioned as a measure merely to raise revenue to support the existence of the
government; taxes may be levied with a regulatory purpose to provide means for the
rehabilitation and stabilization of a threatened industry which is affected with public
interest as to be within the police power of the state. 57 There can be no doubt that the
oil industry is greatly imbued with public interest as it vitally affects the general welfare.
Any unregulated increase in oil prices could hurt the lives of a majority of the people and
cause economic crisis of untold proportions. It would have a chain reaction in terms of,
among others, demands for wage increases and upward spiralling of the cost of basic
commodities. The stabilization then of oil prices is of prime concern which the state, via
its police power, may properly address.

Also, P.D. No. 1956, as amended by E.O. No. 137, explicitly provides that the source of
OPSF is taxation. No amount of semantical juggleries could dim this fact.

It is settled that a taxpayer may not offset taxes due from the claims that he may have
against the government. 58 Taxes cannot be the subject of compensation because the
government and taxpayer are not mutually creditors and debtors of each other and a
claim for taxes is not such a debt, demand, contract or judgment as is allowed to be set-
off. 59

We may even further state that technically, in respect to the taxes for the OPSF, the oil
companies merely act as agents for the Government in the latter's collection since the
taxes are, in reality, passed unto the end-users –– the consuming public. In that
capacity, the petitioner, as one of such companies, has the primary obligation to
account for and remit the taxes collected to the administrator of the OPSF. This duty
stems from the fiduciary relationship between the two; petitioner certainly cannot be
considered merely as a debtor. In respect, therefore, to its collection for the OPSF vis-
a-vis its claims for reimbursement, no compensation is likewise legally feasible. Firstly,
the Government and the petitioner cannot be said to be mutually debtors and creditors
of each other. Secondly, there is no proof that petitioner's claim is already due and
liquidated. Under Article 1279 of the Civil Code, in order that compensation may be
proper, it is necessary that:

(1) each one of the obligors be bound principally, and that he be at the
same time a principal creditor of the other;

(2) both debts consist in a sum of :money, or if the things due are
consumable, they be of the same kind, and also of the same quality if the
latter has been stated;

(3) the two (2) debts be due;

(4) they be liquidated and demandable;

(5) over neither of them there be any retention or controversy,

commenced by third persons and communicated in due time to the debtor.

That compensation had been the practice in the past can set no valid precedent. Such a
practice has no legal basis. Lastly, R.A. No. 6952 does not authorize oil companies to
offset their claims against their OPSF contributions. Instead, it prohibits the government
from paying any amount from the Petroleum Price Standby Fund to oil companies which
have outstanding obligations with the government, without said obligation being offset
first subject to the rules on compensation in the Civil Code.

WHEREFORE, in view of the foregoing, judgment is hereby rendered AFFIRMING the

challenged decision of the Commission on Audit, except that portion thereof disallowing
petitioner's claim for reimbursement of underrecovery arising from sales to the National
Power Corporation, which is hereby allowed.

With costs against petitioner.

SO ORDERED.

Narvasa, C.J., Melencio-Herrera, Gutierrez, Jr., Paras, Feliciano, Padilla, Bidin, Griño-
Aquino, Medialdea, Regalado, Romero and Nocon, JJ., concur.
G.R. No. 144440             September 1, 2004

COMMISSIONER OF CUSTOMS, petitioner,
vs.
PHILIPPINE PHOSPHATE FERTILIZER CORPORATION, respondent.

DECISION

TINGA, J.:

The financial planners of the State are often confounded by the precarious balance
between the need to provide a conducive investment climate and the need to enhance
revenue collections. In the present Petition for Review, the Court is called upon to
interpret the provisions of a law designed to benefit investors with tax exemptions. Tax
exemptions are generally construed strictly against the taxpayer; yet, when the
purported ambiguities in the law are more imagined than real, there should be no
hesitation to rule for the taxpayer.

The factual backdrop of the case is uncomplicated.

Respondent Philippine Phosphate Fertilizer Corporation (Philphos) is a domestic

corporation engaged in the manufacture and production of fertilizers for domestic and
international distribution. Its base of operations is in the Leyte Industrial Development
Estate, an export processing zone.1 It is also registered with the Export Processing
Zone Authority (EPZA), now known as the Philippine Export Zone Authority (PEZA).2

The manufacture of fertilizers required Philphos to purchase fuel and petroleum

products for its machineries. These fuel supplies are considered indispensable by
Philphos, as they are used to run the machines and equipment and in the
transformation of raw materials into fertilizer.3 The fuel supplies are secured
domestically from local distributors, in this case, Petron Corporation (Petron), which
imports the same and pays the corresponding customs duties to the Bureau of
Customs; and, the ad valorem and specific taxes to the Bureau of Internal Revenue.
When the fuel and petroleum products are delivered at Philphos’s manufacturing plant
inside the Leyte Industrial Development Estate, Philphos is billed by Petron the
corresponding customs duties imposed on these products. Effectively thus, Philphos
reimburses Petron for the customs duties on the purchased fuels and petroleum
products which are passed on by the Petron as part of the selling price.4

Under this arrangement, Philphos made several purchases from Petron of fuels and
other petroleum products used directly or indirectly in the manufacture of fertilizers for
the period of October 1991 until June 1992.5 During the period in question, Philphos
indirectly paid as customs duties, the amount of Twenty Million One Hundred Forty Nine
Thousand Four Hundred Seventy Three Pesos and Seventy Seven Centavos
(₱20,149,473.77).6

In a letter to the Bureau of Customs, dated 18 September 1992, Philphos sought the
refund of customs duties it had paid for the period covering the months of October to
December 1991, and January to June, 1992.7 It pointed out that Philphos, being an
enterprise registered with the export processing zone, is entitled to tax incentives under
Presidential Decree No. 66 (EPZA Law), referring specifically to Section 17 thereof
which exempts from customs and internal revenue laws, supplies brought into the
export processing zone. Consequently, Philphos argued that the customs duties billed
by Petron on Philphos should be refunded.

The Bureau of Customs denied the claim for refund in a letter dated 4 January
1993.8 Hence, a Petition for Review was filed with the Court of Tax Appeals (CTA),
assailing the denial of the refund. The CTA ruled for Philphos in a Decision9 dated 5
October 1995, ordering the issuance of a Tax Credit Certificate in the amount of Twenty
Million One Hundred Forty Nine Thousand Four Hundred Seventy Three Pesos and
Seventy Seven Centavos (₱20,149,473.77) in favor of Philphos. The matter was
elevated by the Commissioner of Customs (Commissioner) to the Court of Appeals
(CA), which eventually affirmed the CTA’s Decision in toto.10

Both the CTA and the CA relied upon Section 17(1) of the EPZA Law to justify the
conclusion that Philphos is entitled to the refund. Before this Court, the Commissioner
argues that since the importation of the subject products, made by the seller Petron,
had already been finally terminated, all future claims for refund are thus barred. It
likewise insists that controlling in this case is Section 18(i) of the EPZA Law, under
which claims for refunds similar to Philphos’s are precluded. Finally, the Commissioner
posits that since a refund on tax credit partakes the nature of an exemption, the grant
thereof must be explicit.

There is no need to inquire into the factual basis for the amount sought to be
refunded.11 Petitioner does not dispute the amount, but only the legal basis for the
exemption. Moreover, since the Court itself is not a trier of facts it will respect primarily
the findings of the ultimate trier of facts, namely: the CA. In this case, however, there is
coalescence in the findings of the two courts below.

The EPZA Law, promulgated in 1972, has since been superseded by Republic Act No.
7916, or "The Special Economic Zone Act of 1995." However, since the claim for
exemption covers the years 1991 and 1992, or before the enactment of Republic Act
No. 7916, the provisions of the EPZA Law are applicable in the present petition.

Consideration of the general philosophy and thrust of the EPZA Law cannot be evaded.
The export processing zone is intended to be a viable commercial, industrial and
investment area.12 The enunciated policy of the EPZA Law is to encourage and promote
foreign commerce as a means of making the Philippines a center of international trade;
strengthening our export trade and foreign exchange position; hastening
industrialization; reducing domestic unemployment; and accelerating the development
of the country, by establishing export processing zones in strategic locations in the
Philippines.13

As noted by the CTA, the basic policy in establishing export processing zones is to
attract enterprises, especially foreign investors, who will be manufacturing products
primarily for export and be able to do so without their supplies and raw materials
entering, and the export products leaving, the Philippine territory within the context of
customs and revenue regulations.14 From a macro-perspective though, export
processing zones are not intended to solely benefit investors. These zones are
scattered throughout the country in remote areas and have the patent benefit of creating
employment opportunities within their localities. It is the presence of tangible tax
benefits attached to these zones which make them viable as investment locations,
areas which ordinarily would be overlooked.

The incentives offered to enterprises duly registered with the PEZA consist, among
others, of tax exemptions. These benefits may, at first blush, place the government at a
disadvantage as they preclude the collection of revenue. Still, the expectation is that the
tax breaks ultimately redound to the benefit of the national economy, enticing as they do
more enterprises to invest and do business within the zones; thus creating more
employment opportunities and infusing more dynamism to the vibrant interplay of
market forces.

Section 17 of the EPZA Law particularizes the tax benefits accorded to duly registered
enterprises. It states:

SEC. 17. Tax Treatment of Merchandize in the Zone. – (1) Except as otherwise

provided in this Decree, foreign and domestic merchandise, raw
materials, supplies, articles, equipment, machineries, spare parts and wares
of every description, except those prohibited by law, brought into the Zone to
be sold, stored, broken up, repacked, assembled, installed, sorted, cleaned,
graded, or otherwise processed, manipulated, manufactured, mixed with foreign
or domestic merchandise or used whether directly or indirectly in such
activity, shall not be subject to customs and internal revenue laws and
regulations nor to local tax ordinances, the following provisions of law to
the contrary notwithstanding. (emphasis supplied)

The cited provision certainly covers petroleum supplies used, directly or indirectly, by

Philphos to facilitate its production of fertilizers, subject to the minimal requirement that
these supplies are brought into the zone. The supplies are not subject to customs and
internal revenue laws and regulations, nor to local tax ordinances. It is clear that Section
17(1) considers such supplies exempt even if they are used indirectly, as they had
been in this case.

Since Section 17(1) treats these supplies for tax purposes as beyond the ambit of
customs laws and regulations, the arguments of the Commissioner invoking the
provisions of the Tariff and Customs Code must fail. Particularly, his point that the
importation of the petroleum products by Petron was deemed terminated under Section
120215 of the Tariff and Customs Code, and that the termination consequently barred
any future claim for refund under Section 160316 of the same law is misplaced and
inconsequential. Moreover, the cited provisions of the Tariff and Customs Code if
related to Section 17(1) of the EPZA Law would significantly render the argument
strained and, if upheld, obviate many of the benefits granted by Section 17(1), for the
provision does not limit the tax exemption only to direct taxes. Following the
Commissioner’s interpretation, any duly registered enterprise sought to be held liable for
the controverted custom’s duty because the importer had shifted the duty to the buyer
would forever be precluded from challenging the duty, which it is not in the first place
obliged to pay under the law. Hand in hand with its patent noxiousness to the spirit of
the EPZA Law, the approach calls for the unwarranted application of the Tariff and
Customs Code to investors and players in the zones, which under the EPZA Law are
beyond the reach of domestic customs and tax laws, as well as regulations.

Neither would the prescriptive periods or procedural requirements provided under the
Tariff and Customs Code serve as a bar for the claim for refund. The holding of the CTA
on this point is illuminating:

Contrary to the allegation of the Respondent that Section 17(1) does not provide
for duty and tax exemption privilege, this Court disagrees. That phrase shall not
be subject to customs and internal revenue laws and regulations nor to local tax
ordinances, the provisions of law to the contrary notwithstanding cannot be
interpreted in any other manner than to mean that merchandise or supplies
brought into the zone are exempt from customs duties and taxes. The incentive
given under Section 17(1) is broader than a mere tax exemption. The phrase is
so broad to include not only the exemption from customs duties and taxes but
everything required in the enforcement of the customs and internal revenue laws
save on the exceptions and conditions specified in the EPZA law itself.
Considering that the customs and internal revenue laws are primarily enacted to
impose duties and taxes, the phrase cannot be interpreted to exclude these
impositions. More so, the phrase will also include exemption from other rules and
regulations which are normally followed in the discharge of importation such as
the filing of import entries, examinations and other requirements attendant to the
importation of goods into the country.17

Even our recent ruling in Nestle Philippines, Inc. v. Court of Appeals, 18 to the effect that
the claim for refund of customs duties in protestable cases may be foreclosed by the
failure to file a written protest, is not apropos in the case at bar because petitioner
therein was not a duly registered enterprise under the EPZA Law and thus not entitled
to the exemptions therein.19

This leads to another question well-worth resolving — what is the prescriptive period
which a duly registered enterprise should observe in applying for a refund to which it is
entitled under the EPZA Law? The EPZA Law itself is silent on the matter, and the
prescriptive periods under the Tariff and Customs Code and other revenue laws are
inapplicable, by specific mandate of Section 17(1) of the EPZA Law. This does not
mean though that prescription will not lie, as the Civil Code provisions on solutio
indebiti20 may find application. The Civil Code is not a customs and internal revenue
law. The Court has in the past sanctioned the application of the provisions on solutio
indebiti in cases when taxes were collected thru error or mistake. 21 Solutio indebiti is a
quasi-contract, thus the claim for refund must be commenced within six (6) years from
date of payment pursuant to Article 1145(2) of the New Civil Code.22 Clearly then,
Philphos’s right to refund has not yet prescribed.

Still, the Commissioner insists that it is Section 18(i) of the EPZA Law that is applicable,
and precludes Philphos’s claim for refund. The provision reads:

SEC. 18. Additional Incentives. A zone registered enterprise shall also

enjoy the following incentives:

xxx

(i)Tax credit. – Every registered zone enterprise shall enjoy a tax credit
equivalent to the sales, compensating and specific taxes and duties on
supplies, raw materials and semi-manufactured products used in the
manufacture, processing or production of its export products and forming
part thereof; x x x. (emphasis supplied)23

Indubitably, Section 18 does not exclude or otherwise limit the broad grant of benefits
accorded by Section 17. These "additional incentives" under Section 18 are to be
enjoyed in conjunction with the incentives under Section 17. This is indicated by the use
of the words "additional" and "shall also" in the first paragraph of Section 18. Even the
Commissioner admits the distinct character of Section 18.24 The divergent natures of the
benefits under Sections 17 and 18 become readily apparent upon examination of the
additional incentives enumerated under Section 18. They include allowance of net-
operating loss carry-over, accelerated depreciation, exemption from export tax, foreign
exchange assistance, financial assistance, exemptions for local taxes and licenses,
deductions for labor training services, and deductions for organizational and pre-
operating expenses.25 Section 18 does not serve the purpose of qualifying the benefits
provided under Section 17. Instead, it enumerates another class of incentives also
available to registered enterprises, in addition to, and apart from, the general benefits
accorded under Section 17. There can be no doubt that the additional incentives under
Section 18 are separate and distinct from those under the preceding section.

Still, the Commissioner argues that Section 18(i) of the EPZA Law specifically controls
the issuance of a tax credit equivalent to duties on supplies purchased, and that the
provision clearly states that such supplies must form part of the export products,
particularly fertilizer.
A plain reading of Section 18(i) unmistakably indicates that the tax credit as an
additional incentive avails only if the supplies actually form part of the export products.
There is an apparent distinction between this provision and Section 17(1) which
exempts from taxation supplies used indirectly by the registered enterprise. It is
apparent that the petroleum supplies in question, which physically do not form part of
the exportable fertilizers, are exempt from taxation under Section 17(1), but no tax credit
could be claimed on them under Section 18(i).

Still, this acknowledged distinction is not a cause for abject reversal of the assailed
decisions, as it does not affect the key disposition. For Section 17(1) is determinative
of the fundamental question whether there is legal basis for the claim of
exemption. On the other hand, Section 18(i) does not impose limitations on the
exemptions granted in the preceding provisions, but would only affect, if at all,
the modality by which the exemption takes form.

Obviously, the relief sought for erroneously paid taxes would be a return to the taxpayer
of the amount paid to the government. The Tax Reform Act of 1997 authorizes either a
refund or credit as a means of recovery of tax erroneously or illegally collected.26 It may
be that there is no essential difference between a tax refund and a tax credit since both
are modes of recovering taxes erroneously or illegally paid to the government. 27 Yet,
there are unmistakable formal and practical differences between the two modes.
Formally, a tax refund requires a physical return of the sum erroneously paid by the
taxpayer, while a tax credit involves the application of the reimbursable amount against
any sum that may be due and collectible from the taxpayer.28 On the practical side, the
taxpayer to whom the tax is refunded would have the option, among others, to invest for
profit the returned sum, an option not proximately available if the taxpayer chooses
instead to receive a tax credit.

It should be noted that in its initial letter to the Commissioner dated 18 September 1992,
Philphos specifically requested the refund of Twenty Million One Hundred Forty Nine
Thousand Four Hundred Seventy Three Pesos and Seventy Seven Centavos
(₱20,149,473.77). However, in its Petition for Review before the CTA, Philphos prayed
for the issuance of "corresponding tax credits" in the same amount. Still, there is no
vehement insistence on the part of Philphos that the return of the amount paid should
come in the form of a refund or a credit.29

The CTA, as affirmed by the CA, ordered the issuance of a Tax Credit Certificate in
favor of Philphos. No elaboration was made as to why the relief granted was a tax credit
and not a refund, but we can deduce that such was the relief afforded as it was the relief
prayed for by Philphos in its Petition before the tax court. However, a slight modification
of the award is necessary so as not to render nugatory the proscription under Section
18(i) that a tax credit avails only if the supplies form part of the export product. Instead
of awarding a Tax Credit Certificate to Philphos, a refund of the same amount is
warranted under the circumstances.
The grant of exemption under Section 17(1) is clear and unambiguous. There is neither
logic nor need to cast a speck of uncertainly on a doubt-free situation to resolve the
resulting forced question in favor of the government. The disposition arises not out of a
blind solicitude towards the concerns of business, but from the duty to affirm and
enforce a crystal-clear legislative policy and initiative intent. Indeed, the revenue
collectors of the government should be cautious before attempting to gut away at
concessions the State itself has deemed worthy of award to deserving investors. It is
unsound practice and uncouth behaviour to invite over guests to dinner at home, then
charge them for the use of the silverware before allowing them to dine.

WHEREFORE, the Petition for Review is DENIED. The assailed Decisions of the Court

of Appeals dated 4 August 2000 and of the Court of Tax Appeals dated 5 October 1995
are AFFIRMED, with modification that in lieu of the issuance of a Tax Credit Certificate,
the amount of Twenty Million One Hundred Forty Nine Thousand Four Hundred Seventy
Three Pesos and Seventy Seven Centavos (₱20,149,473.77) be refunded to
respondent Philippine Phosphate Fertilizer Corporation. No costs.

SO ORDERED.

G.R. No. 199669

SOUTHERN LUZON DRUG CORPORATION, Petitioner,

vs.
THE DEPARTMENT OF SOCIAL WELFARE AND DEVELOPMENT, THE NATIONAL
COUNCIL FOR THE WELFARE OF DISABLED PERSONS, THE DEPARTMENT OF
FINANCE, and THE BUREAU OF INTERNAL REVENUE, Respondents

DECISION

REYES, J.:

Before the Court is a Petition for Review on Certiorari1under Rule 45 of the Rules of
Court, assailing the Decision2 dated June 17, 2011, and Resolution3 dated November
25, 2011 of the Court of Appeals (CA) in CA-G.R. SP No. 102486, which dismissed the
petition for prohibition filed by Southern Luzon Drug Corporation (petitioner) against the
Department of1 Social Welfare and Development (DSWD), the National Council for the
Welfare of Disabled Persons (NCWDP) (now National Council on Disability Affairs or
NCDA), the Department of Finance (DOF) and the Bureau of: Internal Revenue
(collectively, the respondents), which sought to prohibit the implementation of Section
4(a) of Republic Act (R.A.) No. 9257, otherwise known as the "Expanded Senior
Citizens Act of 2003" and Section 32 of R.A. No. 9442, which amends the "Magna
Carta for Disabled Persons," particularly the granting of 20% discount on the purchase
of medicines by senior citizens and persons with disability (PWD),: respectively, and
treating them as tax deduction.
The petitioner is a domestic corporation engaged in the business of: drugstore operation
in the Philippines while the respondents are government' agencies, office and bureau
tasked to monitor compliance with R.A. Nos. 9257 and 9442, promulgate implementing
rules and regulations for their effective implementation, as well as prosecute and revoke
licenses of erring1 establishments.

Factual Antecedents

On April 23, 1992, R.A. No. 7432, entitled "An Act to Maximize the Contribution of
Senior Citizens to Nation-Building, Grant Benefits and Special Privileges and For Other
Purposes," was enacted. Under the said law, a senior citizen, who must be at least 60
years old and has an annual income of not more than P60,000.00,4 may avail of the
privileges provided in Section 4 thereof, one of which is 20% discount on the purchase
of medicines. The said provision states:

Sec. 4. Privileges for the Senior Citizen. - x x x:

a) the grant of twenty percent (20%) discount from all establishments relative to
utilization of transportation services, hotels and similar lodging establishment,
restaurants and recreation centers and purchase of medicine anywhere in the country:
Provided, That private establishments may claim the cost as tax credit[.]

x x x x (Emphasis ours)

To recoup the amount given as discount to qualified senior citizens, covered

establishments can claim an equal amount as tax credit which can be applied against
the income tax due from them.

On February 26, 2004, then President Gloria Macapagal-Arroyo signed R.A. No. 9257,
amending some provisions of R.A. No. 7432. The new law retained the 20% discount on
the purchase of medicines but removed the annual income ceiling thereby qualifying all
senior citizens to the privileges under the law. Further, R.A. No. 9257 modified the tax
treatment of the discount granted to senior citizens, from tax credit to tax deduction from
gross income, computed based on the net cost of goods sold or services rendered. The
pertinent provision, as amended by R.A. No. 9257, reads as follows:

SEC. 4. Privileges for the Senior Citizens. - The senior citizens shall be entitled to the
following:

(a) the grant of twenty percent (20%) discount from all establishments relative to the
utilization of services in hotels and similar lodging establishments, restaurants and
recreation centers, and purchase of medicines in all establishments for the exclusive
use or enjoyment of senior citizens, including funeral and burial services for the death of
senior citizens;

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

On May 28, 2004, the DSWD issued the Implementing Rules and Regulations (IRR) of
R.A. No. 9257. Article 8 of Rule VI of the said IRR provides:

Article 8. Tax Deduction of Establishments. - The establishment may claim the

discounts granted under Rule V, Section 4 - Discounts for Establishments; Section 9,
Medical and Dental Services in Private Facilities and Sections 10 and 11 -Air, Sea and
Land Transportation as tax deduction based on the net cost of the goods sold or
services rendered. Provided, That the cost of the discount shall be allowed as
deduction from gross income for the same taxable year that the discount is
granted; Provided, further, That the total amount of the claimed tax deduction net of
value-added tax if applicable, shall be included in their gross sales receipts for tax
purposes and shall be subject to proper documentation and to the provisions of the
National Internal Revenue Code, as amended; Provided, finally, that the implementation
of the tax deduction shall be subject to the Revenue Regulations to be issued by the
Bureau of Internal Revenue (BIR) and approved by the Department of Finance (DOF).
(Emphasis ours)

The change in the tax treatment of the discount given to senior citizens did not sit well
with some drug store owners and corporations, claiming it affected the profitability of
their business. Thus, on January 13, 2005, I Carlos Superdrug Corporation (Carlos
Superdrug), together with other. corporation and proprietors operating drugstores in the
Philippines, filed a Petition for Prohibition with Prayer for Temporary Restraining Order
(TRO) I and/or Preliminary Injunction before this Court, entitled Carlos
Superdrug I Corporation v. DSWD,5docketed as G.R. No. 166494, assailing the
constitutionality of Section 4(a) of R.A. No. 9257 primarily on the ground that it amounts
to taking of private property without payment of just compensation. In a Decision dated
June 29, 2007, the Court upheld the constitutionality of the assailed provision, holding
that the same is a legitimate exercise of police power. The relevant portions of the
decision read, thus:

The law is a legitimate exercise of police power which, similar to the power of eminent
domain, has general welfare for its object. Police power is not capable of an exact
definition, but has been purposely veiled in general terms to underscore its
comprehensiveness to meet all exigencies and provide enough room for an efficient and
flexible response to conditions and circumstances, thus assuring the greatest benefits.
Accordingly, it has been described as "the most essential, insistent and the least
limitable of powers, extending as it does to all the great public needs." It is "[t]he power
vested in the legislature by the constitution to make, ordain, and establish all manner of
wholesome and reasonable laws, statutes, and ordinances, either with penalties or
without, not repugnant to the constitution, as they shall judge to be for the good and
welfare of the commonwealth, and of the subjects of the same."

For this reason, when the conditions so demand as determined by the legislature,
property rights must bow to the primacy of police power because property rights, though
sheltered by due process, must yield to general welfare.

xxxx

Moreover, the right to property has a social dimension. While Article XIII of the
Constitution provides the precept for the protection of property, various laws and
jurisprudence, particularly on agrarian reform and the regulation of contracts and public
utilities, continuously serve as a reminder that the right to property can be relinquished
upon the command of the State for the promotion of public good. Undeniably, the
success of the senior citizens program rests largely on the support imparted by
petitioners and the other private establishments concerned. This being the case, the
means employed in invoking the active participation of the private sector, in order to
achieve the purpose or objective of the law, is reasonably and directly related. Without
sufficient proof that Section 4(a) of RA. No. 9257 is arbitrary, and that the continued
implementation of the same would be unconscionably detrimental to petitioners, the
Court will refrain from quashing a legislative act.

WHEREFORE, the petition is DISMISSED for lack of merit.6 (Citations omitted)

On August 1, 2007, Carlos Superdrug filed a motion for reconsideration of the foregoing
decision. Subsequently, the Court issued Resolution dated August 21, 2007, denying
the said motion with finality. 7

Meanwhile, on March 24, 1992, R.A. No. 7277 pertaining to the "Magna Carta for
Disabled Persons" was enacted, codifying the rights and privileges of PWDs.
Thereafter, on April 30, 2007, R.A. No. 9442 was enacted, amending R.A. No. 7277.
One of the salient amendments in the law is the insertion of Chapter 8 in Title 2 thereof,
which enumerates the other privileges and incentives of PWDs, including the grant of
20% discount on the purchase of medicines. Similar to R.A. No. 9257, covered
establishments shall claim the discounts given to PWDs as tax deductions from the
gross income, based on the net cost of goods sold or services rendered. Section 32
ofR.A. No. 9442 reads:

CHAPTER 8. Other Privileges and Incentives

SEC. 32. Persons with disability shall be entitled to the following:

xxxx
(c) At least twenty percent (20%) discount for the purchase of medicines in all
drugstores for the exclusive use or enjoyment of persons with disability;

xxxx

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

Pursuant to the foregoing, the IRR of R.A. No. 9442 was promulgated by the DSWD,
Department of Education, DOF, Department of Tourism and the Department of
Transportation and Communications.8Sections 5 .1 and 6.1.d thereof provide:

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

5.1. Persons with Disability are those individuals defined under Section

4 of RA 7277, "An Act Providing for the Rehabilitation, Self-Development
and Self-Reliance of Persons with Disability as amended and their
integration into the Mainstream of Society and for Other Purposes." This is
defined as a person suffering from restriction or different abilities, as a
result of a mental, physical or sensory impairment, to perform an activity in
a manner or within the range considered normal for human being.
Disability shall mean: (1) a physical or mental impairment that
substantially limits one or more psychological, physiological or anatomical
function of an individual or activities of such individual; (2) a record of such
an impairment; or (3) being regarded as having such an impairment.

xxxx

6.1.d Purchase of Medicine - At least twenty percent (20%) discount on

the purchase of medicine for the exclusive use and enjoyment of persons
with disability. All drug stores, hospital, pharmacies, clinics and other
similar establishments selling medicines are required to provide at least
twenty percent (20%) discount subject to the guidelines issued by DOH
and PHILHEALTH.

On February 26, 2008, the petitioner filed a Petition for Prohibition

G.R. No. 194561, September 14, 2016

DRUGSTORES ASSOCIATION OF THE PHILIPPINES, INC. AND NORTHERN

LUZON DRUG CORPORATION, Petitioners, v. NATIONAL COUNCIL ON DISABILITY
AFFAIRS; DEPARTMENT OF HEALTH; DEPARTMENT OF FINANCE; BUREAU OF
INTERNAL REVENUE; DEPARTMENT OF THE INTERIOR AND LOCAL
GOVERNMENT; AND DEPARTMENT OF SOCIAL WELFARE AND
DEVELOPMENT, Respondent.

DECISION

PERALTA, J.:

Before us is a Petition for Review on Certiorari1 with a Prayer for a Temporary

Restraining Order and/or Writ of Preliminary Injunction which seeks to annul and set
aside the Decision2 dated July 26, 2010, and the Resolution3 dated November 19, 2010
of the Court of Appeals (CA) in CA-G.R. SP No. 109903. The CA dismissed petitioners'
Petition for Prohibition4 and upheld the constitutionality of the mandatory twenty percent
(20%) discount on the purchase of medicine by persons with disability (PWD).

The antecedents are as follows:

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

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

chanRoblesvirtualLawlibrary(a) Disabled Persons are those suffering from restriction of

different abilities, as a result of a mental, physical or sensory impairment, to perform an
activity in the manner or within the range considered normal for a human being;

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

anatomical structure of function;

(c) Disability shall mean (1) a physical or mental impairment that substantially limits one
or more psychological, physiological or anatomical function of an individual or activities
of such individual; (2) a record of such an impairment; or (3) being regarded as having
such an impairment.6chanroblesvirtuallawlibrary
On April 30, 2007, Republic Act No. 94427 was enacted amending R.A. No. 7277. The
Title of R.A. No. 7277 was amended to read as "Magna Carta for Persons with
Disability" and all references on the law to "disabled persons" were amended to read as
"persons with disability" (PWD).8 Specifically, R.A. No. 9442 granted the PWDs a twenty
(20) percent discount on the purchase of medicine, and a tax deduction scheme was
adopted wherein covered establishments may deduct the discount granted from gross
income based on the net cost of goods sold or services
rendered:ChanRoblesVirtualawlibrary
CHAPTER 8. Other Privileges and Incentives. SEC. 32. Persons with disability shall be
entitled to the following:

chanRoblesvirtualLawlibraryx x x x
 
(d) At least twenty percent (20%) discount for the purchase of medicines in all
drugstores for the exclusive use or enjoyment of persons with disability;

x x x x

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

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

x x x x

The establishments may claim the discounts granted in subsections (a), (b), (c), (f) and
(g) as tax deductions based on the net cost of the goods sold or services
rendered: Provided, however, That the cost of the discount shall be allowed as
deduction from gross income for the same taxable year that the discount is
granted: Provided, further, That the total amount of the claimed tax deduction net of
value-added tax if applicable, shall be included in their gross sales receipts for tax
purposes and shall be subject to proper documentation and to the provisions of the
National Internal Revenue Code (NIRC), as amended.9chanroblesvirtuallawlibrary
The Implementing Rules and Regulations (IRR) of R.A. No. 944210 was jointly
promulgated by the Department of Social Welfare and Development (DSWD),
Department of Education, Department of Finance (DOF), Department of Tourism,
Department of Transportation and Communication, Department of the Interior and Local
Government (DILG) and Department of Agriculture. Insofar as pertinent to this petition,
the salient portions of the IRR are hereunder quoted:11
RULE III. DEFINITION OF TERMS

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

chanRoblesvirtualLawlibrary5.1. Persons with Disability - are those individuals defined

under Section 4 of RA 7277 "An Act Providing for the Rehabilitation, Self-Development
and Self-Reliance of Persons with Disability as amended and their integration into the
Mainstream of Society and for Other Purposes". This is defined as a person suffering
from restriction or different abilities, as a result of a mental, physical or sensory
impairment, to perform an activity in a manner or within the range considered normal for
human being. Disability shall mean (1) a physical or mental impairment that
substantially limits one or more psychological, physiological or anatomical function of an
individual or activities of such individual; (2) a record of such an impairment; or (3) being
regarded as having such an impairment.

x x x x

RULE IV. PRIVILEGES AND INCENTIVES FOR THE PERSONS WITH DISABILITY

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

chanRoblesvirtualLawlibraryx x x x

6.1.d. Purchase of Medicine - at least twenty percent (20%) discount on the purchase of

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

x x x x

6.11 The abovementioned privileges are available only to persons with disability who
are Filipino citizens upon submission of any of the following as proof of his/her
entitlement thereto subject to the guidelines issued by the NCWDP in coordination with
DSWD, DOH and DILG.
6.11.1 An identification card issued by the city or municipal mayor or the barangay
captain of the place where the person with disability resides;

6.11.2 The passport of the persons with disability concerned; or

6.11.3 Transportation discount fare Identification Card (ID) issued by the National
Council for the Welfare of Disabled Persons (NCWDP). However, upon effectivity of this
Implementing Rules and Regulations, NCWDP will already adopt the Identification Card
issued by the Local Government Unit for purposes of uniformity in the implementation.
NCWDP will provide the design and specification of the identification card that will be
issued by the Local Government Units.13chanroblesvirtuallawlibrary
6.14. Availmenl of Tax Deductions by Establishment Granting Twenty Percent. 20%
Discount - The establishments may claim the discounts granted in sub-sections (6.1),
(6.2), (6.4), (6.5) and (6.6) as tax deductions based on the net cost of the goods sold or
services rendered: Provided, however, that the cost of the discount shall be allowed as
deduction from gross income for the same taxable year that the discount is granted:
Provided, further, That the total amount of the claimed tax deduction net of value-added
tax if applicable, shall be included in their gross sales receipts for tax purposes and
shall be subject to proper documentation and to the provisions of the National Internal
Revenue Code, as amended.
On April 23, 2008, the National Council on Disability Affairs (NCDA)14 issued
Administrative Order (A.O.) No. 1, Series of 2008,15 prescribing guidelines which should
serve as a mechanism for the issuance of a PWD Identification Card (IDC) which shall
be the basis for providing privileges and discounts to bona fide PWDs in accordance
with R.A. 9442:ChanRoblesVirtualawlibrary
IV. INSTITUTIONAL ARRANGEMENTS

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

x x x x

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

applicant is as follows:ChanRoblesVirtualawlibrary
Disability Document Issuing Entity
Apparent Medical
Licensed Private or Government Physician
Disability Certificate
School Licensed Teacher duly signed by the School
 
Assessment Principal
Certificate of Head of the Business Establishment or Head
 
Disability of Non-Government Organization
Non-Apparent Medical
Licensed Private or Government Physician
Disability Certificate
E. PWD Registration Forms and ID Cards shall be issued and signed by the City or
Municipal Mayor, or Barangay Captain.

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

chanRoblesvirtualLawlibraryA. Completion of the Requirements. Complete and/or make

available the following requirements:ChanRoblesVirtualawlibrary

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

thumbmarks at the back of the picture

2. One (1) Valid ID

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

Section IV, D for the required document).

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

On May 20, 2009, the DOH issued A.O. No. 2009-0011 18 specifically stating that the
grant of 20% discount shall be provided in the purchase of branded medicines and
unbranded generic medicines from all establishments dispensing medicines for the
exclusive use of the PWDs.19 It also detailed the guidelines for the provision of medical
and related discounts and special privileges to PWDs pursuant to R.A.
9442.20chanrobleslaw

On July 28, 2009, petitioners filed a Petition for Prohibition with application for a
Temporary Restraining Order and/or a Writ of Preliminary Injunction21 before the Court
of Appeals to annul and enjoin the implementation of the following
laws:ChanRoblesVirtualawlibrary
1) Section 32 of R.A. No. 7277 as amended by R.A. No. 9442;

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

3) NCDA A.O. No. 1;

4) DOF Revenue Regulation No. 1-2009;

5) DOH A.O. No. 2009-0011.
On July 26, 2010, the CA rendered a Decision upholding the constitutionality of R.A.
7277 as amended, as well as the assailed administrative issuances. However, the CA
suspended the effectivity of NCDA A.O. No. 1 pending proof of respondent NCDA's
compliance with filing of said administrative order with the Office of the National
Administrative Register (ONAR) and its publication in a newspaper of general
circulation. The dispositive portion of the Decision states:ChanRoblesVirtualawlibrary
WHEREFORE, the petition is PARTLY GRANTED. The effectivity of NCDA
Administrative Order No. 1 is hereby SUSPENDED pending Respondent's compliance
with the proof of filing of NCDA Administrative Order No. 1 with the Office of the
National Administrative Register and its publication in a newspaper of general
circulation.
Respondent NCDA filed a motion for reconsideration before the CA to lift the
suspension of the implementation of NCDA A.O. No. 1 attaching thereto proof of its
publication in the Philippine Star and Daily Tribune on August 12, 2010, as well as a
certification from the ONAR showing that the same was filed with the said office on
October 22, 2009.22 Likewise, petitioners filed a motion for reconsideration of the CA
Decision.

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

Hence, the instant petition raising the following issues:ChanRoblesVirtualawlibrary

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

II. THE CA SERIOUSLY ERRED WHEN IT RULED THAT SECTION 32 OF RA 7277

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

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

DISABILITIES UNDER SECTION 4(A), SECTION 4(B) AND SECTION 4(C) OF RA
7277 AS AMENDED BY RA 9442, RULE 1 OF THE IMPLEMENTING RULES AND
REGULATIONS23 OF RA 7277, SECTION 5.1 OF THE IMPLEMENTING RULES AND
REGULATIONS OF RA 9442, NCDA AO 1 AND DOH AO 2009-11 ARE NOT VAGUE,
AMBIGUOUS AND UNCONSTITUTIONAL;

IV. THE CA SERIOUSLY ERRED WHEN IT RULED THAT THE MANDATED PWD
DISCOUNT DOES NOT VIOLATE THE EQUAL PROTECTION CLAUSE.
We deny the petition.

The CA is correct when it applied by analogy the case of Carlos Superdrug Corporation
et al. v. DSWD, et al. 24 wherein We pronouced that Section 4 of R.A. No. 9257 which
grants 20% discount on the purchase of medicine of senior citizens is a legitimate
exercise of police power:ChanRoblesVirtualawlibrary
The law is a legitimate exercise of police power which, similar to the power of eminent
domain, has general welfare for its object. Police power is not capable of an exact
definition, but has been purposely veiled in general terms to underscore its
comprehensiveness to meet all exigencies and provide enough room for an efficient and
flexible response to conditions and circumstances, thus assuring the greatest
benefits.25cralawred Accordingly, it has been described as the most essential, insistent
and the least limitable of powers, extending as it does to all the great public needs.26 It
is [t]he power vested in the legislature by the constitution to make, ordain, and establish
all manner of wholesome and reasonable laws, statutes, and ordinances, either with
penalties or without, not repugnant to the constitution, as they shall judge to be for the
good and welfare of the commonwealth, and of the subjects of the
same.27chanrobleslaw

For this reason, when the conditions so demand as determined by the legislature,
property rights must bow to the primacy of police power because property rights, though
sheltered by due process, must yield to general welfare.28chanrobleslaw

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

considerably if on the mere plea of petitioners that they will suffer loss of earnings and
capital, the questioned provision is invalidated. Moreover, in the absence of evidence
demonstrating the alleged confiscatory effect of the provision in question, there is no
basis for its nullification in view of the presumption of validity which every law has in its
favor.29chanroblesvirtuallawlibrary
Police power is the power of the state to promote public welfare by restraining and
regulating the use of liberty and property. On the other hand, the power of eminent
domain is the inherent right of the state (and of those entities to which the power has
been lawfully delegated) to condemn private property to public use upon payment of just
compensation. In the exercise of police power, property rights of private individuals are
subjected to restraints and burdens in order to secure the general comfort, health, and
prosperity of the state.30 A legislative act based on the police power requires the
concurrence of a lawful subject and a lawful method. In more familiar words, (a) the
interests of the public generally, as distinguished from those of a particular class, should
justify the interference of the state; and (b) the means employed are reasonably
necessary for the accomplishment of the purpose and not unduly oppressive upon
individuals.31chanrobleslaw

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

NATIONAL ECONOMY AND PATRIMONY

xxxx

Section 6. The use of property bears a social function, and all economic agents shall
contribute to the common good. Individuals and private groups, including corporations,
cooperatives, and similar collective organizations, shall have the right to own, establish,
and operate economic enterprises, subject to the duty of the State to promote
distributive justice and to intervene when the common good so
demands.32chanrobleslaw

ARTICLE XIII

SOCIAL JUSTICE AND HUMAN RIGHTS

xxxx

Section 11. The State shall adopt an integrated and comprehensive approach to health
development which shall endeavor to make essential goods, health and other social
services available to all the people at affordable cost. There shall be priority for the
needs of the underprivileged, sick, elderly, disabled, women, and children. The State
shall endeavor to provide free medical care to paupers.33chanroblesvirtuallawlibrary
Thus, R.A. No. 7277 provides:ChanRoblesVirtualawlibrary
SECTION 2. Declaration of Policy. The grant of the rights and privileges for disabled
persons shall be guided by the following principles:

chanRoblesvirtualLawlibrary(a). Disabled persons are part of the Philippine society, thus

the Senate shall give full support to the improvement of the total well-being of disabled
persons and their integration into the mainstream of society.

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

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

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

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

Government.
x x x x
(d). The State also recognizes the role of the private sector in promoting the welfare of
disabled persons and shall encourage partnership in programs that address their needs
and concerns.34chanroblesvirtuallawlibrary
To implement the above policies, R.A. No. 9442 which amended R.A. No. 7277 grants
incentives and benefits including a twenty percent (20%) discount to PWDs in the
purchase of medicines; fares for domestic air, sea and land travels including public
railways and skyways; recreation and amusement centers including theaters, food
chains and restaurants.35 This is specifically stated in Section 4 of the IRR of R.A. No.
9442:ChanRoblesVirtualawlibrary
Section 4. Policies and Objectives - It is the objective of Republic Act No. 9442 to
provide persons with disability, the opportunity to participate fully into the
mainstream of society by granting them at least twenty percent (20%) discount in
all basic services. It is a declared policy of RA 7277 that persons with disability are
part of Philippine society, and thus the State shall give full support to the
improvement of their total wellbeing and their integration into the mainstream of
society. They have the same rights as other people to take their proper place in
society. They should be able to live freely and as independently as possible. This must
be the concern of everyone the family, community and all government and non-
government organizations. Rights of persons with disability must never be perceived as
welfare services. Prohibitions on verbal, non-verbal ridicule and vilification against
persons with disability shall always be observed at all times.36chanroblesvirtuallawlibrary
Hence, the PWD mandatory discount on the purchase of medicine is supported by a
valid objective or purpose as aforementioned. It has a valid subject considering that the
concept of public use is no longer confined to the traditional notion of use by the public,
but held synonymous with public interest, public benefit, public welfare, and public
convenience. As in the case of senior citizens,37 the discount privilege to which the
PWDs are entitled is actually a benefit enjoyed by the general public to which these
citizens belong. The means employed in invoking the active participation of the private
sector, in order to achieve the purpose or objective of the law, is reasonably and directly
related.38 Also, the means employed to provide a fair, just and quality health care to
PWDs are reasonably related to its accomplishment, and are not oppressive,
considering that as a form of reimbursement, the discount extended to PWDs in the
purchase of medicine can be claimed by the establishments as allowable tax deductions
pursuant to Section 32 of R.A. No. 9442 as implemented in Section 4 of DOF Revenue
Regulations No. 1-2009. Otherwise stated, the discount reduces taxable income upon
which the tax liability of the establishments is computed.

Further, petitioners aver that Section 32 of R.A. No. 7277 as amended by R.A. No. 9442
is unconstitutional and void for violating the due process clause of the Constitution since
entitlement to the 20% discount is allegedly merely based on any of the three
documents mentioned in the provision, namely: (i) an identification card issued by the
city or municipal mayor or the barangay captain of the place where the PWD resides; (ii)
the passport of the PWD; or (iii) transportation discount fare identification card issued by
NCDA. Petitioners, thus, maintain that none of the said documents has any relation to a
medical finding of disability, and the grant of the discount is allegedly without any
process for the determination of a PWD in accordance with law.
Section 32 of R.A. No. 7277, as amended by R.A. No. 9442, must be read with its IRR
which stated that upon its effectivity, NCWDP (which is the government agency tasked
to ensure the implementation of RA 7277), would adopt the IDC issued by the local
government units for purposes of uniformity in the implementation.39 Thus, NCDA A.O.
No. 1 provides the reasonable guidelines in the issuance of IDCs to PWDs as proof of
their entitlement to the privileges and incentives under the law40 and fills the details in
the implementation of the law.

As stated in NCDA A.O. No. 1, before an IDC is issued by the city or municipal mayor or
the barangay captain,41 or the Chairman of the NCDA,42 the applicant must first secure a
medical certificate issued by a licensed private or government physician that will confirm
his medical or disability condition. If an applicant is an employee with apparent
disability, a "certificate of disability" issued by the head of the business establishment or
the head of the non-governmental organization is needed for him to be issued a PWD-
IDC. For a student with apparent disability, the "school assessment" issued by the
teacher and signed by the school principal should be presented to avail of a PWD-ID.

Petitioners' insistence that Part IV (D) of NCDA Administrative Order No. 1 is void
because it allows allegedly non-competent persons like teachers, head of
establishments and heads of Non-Governmental Organizations (NGOs) to confirm the
medical condition of the applicant is misplaced. It must be stressed that only for
apparent disabilities can the teacher or head of a business establishment validly issue
the mentioned required document because, obviously, the disability is easily seen or
clearly visible. It is, therefore, not an unqualified grant of authority for the said non-
medical persons as it is simply limited to apparent disabilities. For a non-apparent
disability or a disability condition that is not easily seen or clearly visible, the disability
can only be validated by a licensed private or government physician, and a medical
certificate has to be presented in the procurement of an IDC. Relative to this issue, the
CA validly ruled, thus:ChanRoblesVirtualawlibrary
We agree with the Office of the Solicitor General's (OSG) ratiocination that teachers,
heads of business establishments and heads of NGOs can validly confirm the medical
condition of their students/employees with apparent disability for obvious reasons as
compared to non-apparent disability which can only be determined by licensed
physicians. Under the Labor Code, disabled persons are eligible as apprentices or
learners provided that their handicap are not as much as to effectively impede the
performance of their job. We find that heads of business establishments can validly
issue certificates of disability of their employees because aside from the fact that they
can obviously validate the disability, they also have medical records of the employees
as a pre-requisite in the hiring of employees. Hence, Part IV (D) of NCDA AO No. 1 is
logical and valid.43chanroblesvirtuallawlibrary
Furthermore, DOH A.O. No. 2009-11 prescribes additional guidelines for the 20%
discount in the purchase of all medicines for the exclusive use of PWD.44 To avail of the
discount, the PWD must not only present his I.D. but also the doctor's prescription
stating, among others, the generic name of the medicine, the physician's address,
contact number and professional license number, professional tax receipt number and
narcotic license number, if applicable. A purchase booklet issued by the local
social/health office is also required in the purchase of over-the-counter medicines.
Likewise, any single dispensing of medicine must be in accordance with the prescription
issued by the physician and should not exceed a one (1) month supply. Therefore, as
correctly argued by the respondents, Section 32 of R.A. No. 7277 as amended by R.A.
No. 9442 complies with the standards of substantive due process.

We are likewise not persuaded by the argument of petitioners that the definition of
"disabilities" under the subject laws is vague and ambiguous because it is allegedly so
general and broad that the person tasked with implementing the law will undoubtedly
arrive at different interpretations and applications of the law. Aside from the definitions
of a "person with disability" or "disabled persons" under Section 4 of R.A. No. 7277 as
amended by R.A. No. 9442 and in the IRR of RA 9442, NCDA A.O. No. 1 also
provides:ChanRoblesVirtualawlibrary

4. Identification Cards shall be issued to any bonafide PWD with permanent

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

Similarly, DOH A.O. No. 2009-0011 defines the different categories of disability as
follows:ChanRoblesVirtualawlibrary
Rule IV, Section 4, Paragraph B of the Implementing Rules and Regulations (IRR) of
this Act required the Department of Health to address the health concerns of seven (7)
different categories of disability, which include the following: (1) Psychological and
behavioral disabilities (2) Chronic illness with disabilities (3)Learning(cognitive or
intellectual) disabilities (4) Mental disabilities (5) Visual/seeing disabilities (6)
Orthopedic/moving, and (7) communication deficits.46chanroblesvirtuallawlibrary
Elementary is the rule that when laws or rules are clear, when the law is unambiguous
and unequivocal, application not interpretation thereof is imperative. However, where
the language of a statute is vague and ambiguous, an interpretation thereof is resorted
to. A law is deemed ambiguous when it is capable of being understood by reasonably
well-informed persons in either of two or more senses. The fact that a law admits of
different interpretations is the best evidence that it is vague and
ambiguous.47chanrobleslaw

In the instant case, We do not find the aforestated definition of terms as vague and
ambiguous. Settled is the rule that courts will not interfere in matters which are
addressed to the sound discretion of the government agency entrusted with the
regulation of activities coming under the special and technical training and knowledge of
such agency.48 As a matter of policy, We accord great respect to the decisions and/or
actions of administrative authorities not only because of the doctrine of separation of
powers but also for their presumed knowledge, ability, and expertise in the enforcement
of laws and regulations entrusted to their jurisdiction. The rationale for this rule relates
not only to the emergence of the multifarious needs of a modern or modernizing society
and the establishment of diverse administrative agencies for addressing and satisfying
those needs; it also relates to the accumulation of experience and growth of specialized
capabilities by the administrative agency charged with implementing a particular
statute.49chanrobleslaw

Lastly, petitioners contend that R.A. No. 7227, as amended by R.A. No. 9442, violates
the equal protection clause of the Constitution because it fairly singles out drugstores to
bear the burden of the discount, and that it can hardly be said to "rationally" meet a
legitimate government objective which is the purpose of the law. The law allegedly
targets only retailers such as petitioners, and that the other enterprises in the drug
industry are not imposed with similar burden. This same argument had been raised in
the case of Carlos Superdrug Corp., et al. v. DSWD, et al.,50 and We reaffirm and apply
the ruling therein in the case at bar:ChanRoblesVirtualawlibrary
The Court is not oblivious of the retail side of the pharmaceutical industry and the
competitive pricing component of the business. While the Constitution protects property
rights, petitioners must accept the realities of business and the State, in the exercise of
police power, can intervene in the operations of a business which may result in an
impairment of property rights in the process.

Moreover, the right to property has a social dimension. While Article XIII of the
Constitution provides the precept for the protection of property, various laws and
jurisprudence, particularly on agrarian reform and the regulation of contracts and public
utilities, continuously serve as a reminder that the right to property can be relinquished
upon the command of the State for the promotion of public
good.51chanroblesvirtuallawlibrary
Under the equal protection clause, all persons or things similarly situated must be
treated alike, both in the privileges conferred and the obligations imposed. Conversely,
all persons or things differently situated should be treated differently.52 In the case
of ABAKADA Guro Party List, et al. v. Hon. Purisima, et al.,53 We
held:ChanRoblesVirtualawlibrary
Equality guaranteed under the equal protection clause is equality under the same
conditions and among persons similarly situated; it is equality among equals, not
similarity of treatment of persons who are classified based on substantial differences in
relation to the object to be accomplished. When things or persons are different in fact or
circumstance, they may be treated in law differently. In Victoriano v. Elizalde Rope
Workers' Union, this Court declared:ChanRoblesVirtualawlibrary
The guaranty of equal protection of the laws is not a guaranty of equality in the
application of the laws upon all citizens of the State. It is not, therefore, a requirement,
in order to avoid the constitutional prohibition against inequality, that every man, woman
and child should be affected alike by a statute. Equality of operation of statutes does not
mean indiscriminate operation on persons merely as such, but on persons according to
the circumstances surrounding them. It guarantees equality, not identity of rights. The
Constitution does not require that things which are different in fact be treated in
law as though they were the same. The equal protection clause does not forbid
discrimination as to things that are different. It does not prohibit legislation which
is limited either in the object to which it is directed or by the territory within which it
is to operate.

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

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

Subject to the determination of the courts as to what is a proper exercise of police

power using the due process clause and the equal protection clause as yardsticks, the
State may interfere wherever the public interests demand it, and in this particular, a
large discretion is necessarily vested in the legislature to determine, not only what
interests of the public require, but what measures are necessary for the protection of
such interests.55 Thus, We are mindful of the fundamental criteria in cases of this nature
that all reasonable doubts should be resolved in favor of the constitutionality of a
statute.56 The burden of proof is on him who claims that a statute is unconstitutional.
Petitioners failed to discharge such burden of proof.
WHEREFORE, the petition is DENIED. The Decision of the Court of Appeals dated July
26, 2010, and the Resolution dated November 19, 2010, in CA-G.R. SP No. 109903
are AFFIRMED.

SO ORDERED.chanRoblesvirtualLawlibrary

G.R. No. 163835               July 7, 2010

COMMISSIONER OF INTERNAL REVENUE, Petitioner,

vs.
EASTERN TELECOMMUNICATIONS PHILIPPINES, INC., Respondent.

DECISION

BRION, J.:

Through a petition for review on certiorari,1 petitioner Commissioner of Internal Revenue

(CIR) seeks to set aside the decision dated October 1, 20032 and the resolution dated
May 26, 20043 of the Court of Appeals (CA) in CA G.R. SP No. 61157. The assailed CA
rulings affirmed the decision dated July 17, 20004 of the Court of Tax Appeals (CTA) in
CTA Case No. 5551, partially granting respondent Eastern Telecommunications
Philippines, Inc.’s (Eastern’s) claim for refund of unapplied input tax from its purchase
and importation of capital goods.

THE FACTUAL ANTECEDENTS

Eastern is a domestic corporation granted by Congress with a telecommunications

franchise under Republic Act (RA) No. 7617 on June 25, 1992. Under its franchise,
Eastern is allowed to install, operate, and maintain telecommunications system
throughout the Philippines.

From July 1, 1995 to December 31, 1996, Eastern purchased various imported
equipment, machineries, and spare parts necessary in carrying out its business
activities. The importations were subjected to a 10% value-added tax (VAT) by the
Bureau of Customs, which was duly paid by Eastern.
On September 19, 1997, Eastern filed with the CIR a written application for refund or
credit of unapplied input taxes it paid on the imported equipment during the taxable
years 1995 and 1996 amounting to ₱22,013,134.00. In claiming for the tax refund,
Eastern principally relied on Sec. 10 of RA No. 7617, which allows Eastern to pay 3% of
its gross receipts in lieu of all taxes on this franchise or earnings thereof.5 In the
alternative, Eastern cited Section 106(B) of the National Internal Revenue Code of
19776 (Tax Code) which authorizes a VAT-registered taxpayer to claim for the issuance
of a tax credit certificate or a tax refund of input taxes paid on capital goods imported or
purchased locally to the extent that such input taxes7 have not been applied against its
output taxes.8

To toll the running of the two-year prescriptive period under the same provision, Eastern
filed an appeal with the CTA on September 25, 1997 without waiting for the CIR’s
decision on its application for refund. The CIR filed an Answer to Eastern’s appeal in
which it raised the following special and affirmative defenses:

6. [Eastern’s] claim for refund/tax credit is pending administrative investigation;

xxxx

8. [Eastern’s] exempting clause under its legislative franchise x x x should be

understood or interpreted as written, meaning, the 3% franchise tax shall be
collected as substitute for any internal revenue taxes x x x imposed on its
franchise or gross receipts/earnings thereof x x x;

9. The [VAT] on importation under Section 101 of the [1977] Tax Code is neither
a tax on franchise nor on gross receipts or earnings thereof. It is a tax on the
privilege of importing goods whether or not the taxpayer is engaged in business,
and regardless of whether the imported goods are intended for sale, barter or
exchange;

10. The VAT under Section 101(A) of the Tax Code x x x replaced the advance
sales tax and compensating tax x x x. Accordingly, the 3% franchise tax did not
substitute the 10% [VAT] on [Eastern’s] importation of equipment, machineries
and spare parts for the use of its telecommunication system;

11. Tax refunds are in the nature of tax exemptions. As such, they are regarded
in derogation of sovereign authority and to be construed in strictissimi juris
against the person or entity claiming the exemption. The burden is upon him who
claims the exemption in his favour and he must be able to justify his claim by the
clearest grant of organic or statute law and cannot be permitted to exist upon
vague implication x x x;

12. Taxes paid and collected are presumed to have been made in accordance
with the laws and regulations; and
 13. It is incumbent upon the taxpayer to establish its right to the refund and
failure to sustain the burden is fatal to the claim for refund.9

Ruling in favor of Eastern, the CTA found that Eastern has a valid claim for the
refund/credit of the unapplied input taxes, not on the basis of the "in lieu of all taxes"
provision of its legislative franchise,10 but rather, on Section 106(B) of the Tax Code,
which states:

SECTION 106. Refunds or tax credits of input tax.

xxxx

(b) Capital goods. - A VAT-registered person may apply for the issuance of a tax credit
certificate or refund of input taxes paid on capital goods imported or locally purchased,
to the extent that such input taxes have not been applied against output taxes. The
application may be made only within two (2) years after the close of the taxable quarter
when the importation or purchase was made.11 [Emphases supplied.]

The CTA ruled that Eastern had satisfactorily shown that it was entitled to the claimed
refund/credit as all the elements of the above provision were present: (1) Eastern was a
VAT-registered entity which paid 10% input taxes on its importations of capital
equipment; (2) this input VAT remained unapplied as of the first quarter of 1997; and (3)
Eastern seasonably filed its application for refund/credit within the two-year period
stated in the law. However, the CTA noted that Eastern was able to substantiate only
₱21,487,702.00 of its claimed amount of ₱22,013,134.00. The difference represented
input taxes that were allegedly paid but were not supported by the corresponding
receipts, as found by an independent auditor. Moreover, it excluded ₱5,360,634.00 in
input taxes on imported equipment for the year 1995, even when these were properly
documented as they were already booked by Eastern as part of the cost. Once input tax
becomes part of the cost of capital equipment, it necessarily forms part of depreciation.
Thus, to grant the refund of the 1995 creditable input tax amounts to twice giving
Eastern the tax benefit. Thus, in its July 17, 2000 decision, the CTA granted in part
Eastern’s appeal by declaring it entitled to a tax refund of ₱16,229,100.00, representing
unapplied input taxes on imported capital goods for the taxable year 1996.12

The CIR filed, on August 3, 2000, a motion for reconsideration13 of the CTA’s decision.
About a month and a half later, it filed a supplemental motion for reconsideration dated
September 15, 2000.14 The CTA denied the CIR’s motion for reconsideration in its
resolution dated September 20, 2000.15 The CIR then elevated the case to the CA
through a petition for review under Rule 43 of the Rules of Court. The CA affirmed the
CTA ruling through its decision dated October 1, 2003 16 and its resolution dated May 26,
2004,17 denying the motion for reconsideration. Hence, the present petition.

THE PETITIONER’S ARGUMENTS

The CIR takes exception to the CA’s ruling that Eastern is entitled to the full amount of
unapplied input taxes paid for its purchase of imported capital goods that were
substantiated by the corresponding receipts and invoices. The CIR posits that, applying
Section 104(A) of the Tax Code on apportionment of tax credits, Eastern is entitled to a
tax refund of only ₱8,814,790.15, instead of the ₱16,229,100.00 adjudged by the CTA
and the CA. Section 104(A) of the Tax Code states:

SEC. 104. Tax Credits. –

(a) Creditable Input tax. -

xxxx

A VAT-registered person who is also engaged in transactions not subject to the value-
added tax shall be allowed input tax credit as follows:

(A) Total input tax which can be directly attributed to transactions subject to
value-added tax; and

(B) A ratable portion of any input tax which cannot be directly attributed to either
activity.18 [Emphases supplied.]

To be entitled to a tax refund of the full amount of ₱16,229,100.00, the CIR asserts that
Eastern must prove that (a) it was engaged in purely VAT taxable transactions and (b)
the unapplied input taxes it claims as refund were directly attributable to transactions
subject to VAT. The VAT returns of Eastern for the 1st, 2nd, 3rd, and 4th quarters of
1996, however, showed that it earned income from both transactions subject to VAT
and transactions exempt from VAT;19 the returns reported income earned from taxable
sales, zero-rated sales, and exempt sales in the following amounts:

Zero-Rated
1996 Taxable Sales Exempt Sales
Sales
1st Quarter 820,673.70 --- ---
2nd
3,361,618.59 225,088,899.07 140,111,655.85
Quarter
3rd Quarter 2,607,168.96 169,821,537.80 187,712,657.16
4th Quarter 1,134,942.71 162,530,947.40 147,717,028.53
TOTAL 7,924,403.96 557,441,384.27 475,541,341.54
Total Amount of Sales 1,040,907,129.77
The taxable sales and zero-rated sales are considered transactions subject to
VAT,20 while exempt sales refer to transactions not subject to VAT.

Since the VAT returns clearly reflected income from exempt sales, the CIR asserts that
this constitutes as an admission on Eastern’s part that it engaged in transactions not
subject to VAT. Hence, the proportionate allocation of the tax credit to VAT and non-
VAT transactions provided in Section 104(A) of the Tax Code should apply. Eastern is
then entitled to only ₱8,814,790.15 as the ratable portion of the tax credit, computed in
the following manner:

Taxable Sales + Zero-rated

Sales x Input Tax as found by the = Refundable input
CTA tax
Total Sales
7,924,403.96 +
557,445,384.97
x 16,229,100.00 = P8,814,790.15
1,040,907,129.77

THE RESPONDENT’S ARGUMENTS

Eastern objects to the arguments raised in the petition, alleging that these have not
been raised in the Answer filed by the CIR before the CTA. In fact, the CIR only raised
the applicability of Section 104(A) of the Tax Code in his supplemental motion for
reconsideration of the CTA’s ruling which, notably, was filed a month and a half after the
original motion was filed, and thus beyond the 15-day reglementary
period.21 Accordingly, the applicability of Section 104(A) was never validly presented as
an issue before the CTA; this, Eastern presumes, is the reason why it was not
discussed in the CTA’s resolution denying the motion for reconsideration. Eastern
claims that for the CIR to raise such an issue now would constitute a violation of its right
to due process; following settled rules of procedure and fair play, the CIR should not be
allowed at the appeal level to change his theory of the case.

Moreover, in raising the question of whether Eastern was in fact engaged in

transactions not subject to VAT and whether the unapplied input taxes can be directly
attributable to transactions subject to VAT, Eastern posits that the CIR is effectively
raising factual questions that cannot be the subject of an appeal by certiorari before the
Court.

Even if the CIR’s arguments were considered, Eastern insists that the petition should
nevertheless be denied since the CA found that there was no evidence in the claim that
it was engaged in non-VAT transactions. The CA has ruled that:

The following requirements must be present before [Section 104(A)] of the [1977 Tax
Code] can be applied, to wit:
 1. The person claiming the creditable input tax must be VAT-registered;

2. Such person is engaged in a transaction subject to VAT;

3. The person is also engaged in other transactions not subject to VAT; and

4. The ratable portion of any input tax cannot be directly attributed to either
activity.

In the case at bar, the third and fourth requisites are not extant. It is undisputed that
[Eastern] is VAT-registered and the importation of [Eastern’s] telecommunications
equipment, machinery, spare parts, fiber optic cables, and the like, as found by the
CTA, is a transaction subject to VAT. However, there is no evidence on record that
would evidently show that respondent is also engaged in other transactions that are not
subject to VAT. [Emphasis supplied.]22

Given the parties’ arguments, the issue for resolution is whether the rule in Section
104(A) of the Tax Code on the apportionment of tax credits can be applied in
appreciating Eastern’s claim for tax refund, considering that the matter was raised by
the CIR only when he sought reconsideration of the CTA ruling?

THE COURT’S RULING

We find the CIR’s petition meritorious.

The Rules of Court prohibits raising new issues on appeal; the question of the
applicability of Section 104(A) of the Tax Code was already raised but the tax court did
not rule on it

Section 15, Rule 44 of the Rules of Court embodies the rule against raising new issues
on appeal:

SEC. 15. Questions that may be raised on appeal. – Whether or not the appellant has
filed a motion for new trial in the court below, he may include in his assignment of errors
any question of law or fact that has been raised in the court below and which is within
the issues framed by the parties.

The general rule is that appeals can only raise questions of law or fact that (a) were
raised in the court below, and (b) are within the issues framed by the parties
therein.23 An issue which was neither averred in the pleadings nor raised during trial in
the court below cannot be raised for the first time on appeal. 24 The rule was made for
the benefit of the adverse party and the trial court as well. Raising new issues at the
appeal level is offensive to the basic rules of fair play and justice and is violative of a
party’s constitutional right to due process of law. Moreover, the trial court should be
given a meaningful opportunity to consider and pass upon all the issues, and to avoid or
correct any alleged errors before those issues or errors become the basis for an
appeal.25

Eastern posits that since the CIR raised the applicability of Section 104(A) of the Tax
Code only in his supplemental motion for reconsideration of the CTA decision (which
was even belatedly filed), the issue was not properly and timely raised and, hence,
could not be considered by the CTA. By raising the issue in his appeal before the CA,
the CIR has violated the above-cited procedural rule.

Contrary to Eastern’s claim, we find that the CIR has previously questioned the nature
of Eastern’s transactions insofar as they affected the claim for tax refund in his motion
for reconsideration of the CTA decision, although it did not specifically refer to Section
104(A) of the Tax Code. We quote relevant portions of the motion:

[W]e maintain that [Eastern’s] claims are not creditable input taxes under [Section
104(A) of the Tax Code]. What the law contemplates as creditable input taxes are only
those paid on purchases of goods and services specifically enumerated under [Section
104 (A)] and that such input tax must have been paid by a VAT[-]registered
person/entity in the course of trade or business. It must be noted that [Eastern] failed to
prove that such purchases were used in their VAT[-]taxable business. [Eastern’s pieces
of] evidence are not purchases of capital goods and do not fall under the enumeration x
x x.

It is significant to point out here that refund of input taxes on capital goods shall be
allowed only to the extent that such capital goods are used in VAT[-]taxable business. x
x x a perusal of the evidence submitted before [the CTA] does not show that the alleged
capital goods were used in VAT[-]taxable business of [Eastern] x x x. [Emphases
supplied.]26

In raising these matters in his motion for reconsideration, the CIR put forward the
applicability of Section 104(A) because, essentially, the applicability of the provision
boils down to the question of whether the purchased capital goods which a taxpayer
paid input taxes were also used in a VAT-taxable business, i.e., transactions that were
subject to VAT, in order for them to be refundable/creditable. Once proved that the
taxpayer used the purchased capital goods in a both VAT taxable and non-VAT taxable
business, the proportional allocation of tax credits stated in the law necessarily applies.
This rule is also embodied in Section 4.106-1 of Revenue Regulation No. 7-95, entitled
Consolidated Value-Added Tax Regulations, which states:

SEC. 4.106-1. Refunds or tax credits of input tax. – x x x x

(b) Capital Goods. – Only a VAT-registered person may apply for issuance of a tax
credit certificate or refund of input taxes paid on capital goods imported or locally
purchased. The refund shall be allowed to the extent that such input taxes have not
been applied against output taxes. The application should be made within two (2) years
after the close of the taxable quarter when the importation or purchase was made.
Refund of input taxes on capital goods shall be allowed only to the extent that such
capital goods are used in VAT taxable business. If it is also used in exempt operations,
the input tax refundable shall only be the ratable portion corresponding to the taxable
operations. [Emphasis supplied.]

That the CTA failed to rule on this question when it resolved the CIR’s motion for
reconsideration should not be taken against the CIR. It was the CTA which committed
an error when it failed to avail of that "meaningful opportunity to avoid or correct any
alleged errors before those errors become the basis for an appeal."271avvphi1

Exceptions to the general rule; Eastern’s VAT returns reporting income from exempt
sales are matters of record that the tax court should have considered

The rule against raising new issues on appeal is not without exceptions; it is a
procedural rule that the Court may relax when compelling reasons so warrant or when
justice requires it. What constitutes good and sufficient cause that would merit
suspension of the rules is discretionary upon the courts.28 Former Senator Vicente
Francisco, a noted authority in procedural law, cites an instance when the appellate
court may take up an issue for the first time:

The appellate court may, in the interest of justice, properly take into consideration in
deciding the case matters of record having some bearing on the issue submitted which
the parties failed to raise or the lower court ignored, although they have not been
specifically raised as issues by the pleadings. This is in consonance with the liberal
spirit that pervades the Rules of Court, and the modern trend of procedure which accord
the courts broad discretionary power, consistent with the orderly administration of
justice, in the decision of cases brought before them.29 [Emphasis supplied.]

As applied in the present case, even without the CIR raising the applicability of Section
104(A), the CTA should have considered it since all four of Eastern’s VAT returns
corresponding to each taxable quarter of 1996 clearly stated that it earned income from
exempt sales, i.e., non-VAT taxable sales. Eastern’s quarterly VAT returns are matters
of record. In fact, Eastern included them in its formal offer of evidence before the CTA
"to prove that [it is] engaged in VAT taxable, VAT exempt, and VAT zero-rated sales."
By declaring income from exempt sales, Eastern effectively admitted that it engaged in
transactions not subject to VAT. In VAT-exempt sales, the taxpayer/seller shall not bill
any output tax on his sales to his customers and, corollarily, is not allowed any credit or
refund of the input taxes he paid on his purchases.30 This non-crediting of input taxes in
exempt transactions is the underlying reason why the Tax Code adopted the rule on
apportionment of tax credits under Section 104(A) whenever a VAT-registered taxpayer
engages in both VAT taxable and non-VAT taxable sales. In the face of these
disclosures by Eastern, we thus find the CA’s the conclusion that "there is no evidence
on record that would evidently show that [Eastern] is also engaged in other transactions
that are not subject to VAT" to be questionable.31

Also, we disagree with the CA’s declaration that:

The mere fact that [Eastern’s] Quarterly VAT Returns confirm that [Eastern’s]
transactions involved zero-rated sales and exempt sales do not sufficiently establish
that the same were derived from [Eastern’s] transactions that are not subject to VAT.
On the contrary, the transactions from which [Eastern’s] sales were derived are subject
to VAT but are either zero[-]rated (0%) or otherwise exempted for falling within the
transactions enumerated in [Section 102(B) or Section 103] of the Tax
Code.32 [Emphasis supplied.]

Section 103 of the Tax Code33 is an enumeration of transactions exempt from VAT.
Explaining the relation between exempt transactions in Section 103 and claims for tax
refunds, the Court declared in CIR v. Toshiba Equipment (Phils.), Inc. that:

Section 103 x x x of the Tax Code of 1977, as amended, relied upon by petitioner CIR,
relates to VAT-exempt transactions. These are transactions exempted from VAT by
special laws or international agreements to which the Philippines is a signatory. Since
such transactions are not subject to VAT, the sellers cannot pass on any output VAT to
the purchasers of goods, properties, or services, and they may not claim tax
credit/refund of the input VAT they had paid thereon.34

The mere declaration of exempt sales in the VAT returns, whether based on Section
103 of the Tax Code or some other special law, should have prompted the CA to apply
Section 104(A) of the Tax Code to Eastern’s claim. It was thus erroneous for the
appellate court to rule that the declaration of exempt sales in Eastern’s VAT return,
which may correspond to exempt transactions under Section 103, does not indicate that
Eastern was also involved in non-VAT transactions.

Exception to general rule; taxpayer claiming refund has the duty to prove entitlement
thereto

Another exemption from the rule against raising new issues on appeal is when the
question involves matters of public importance.35

The power of taxation is an inherent attribute of sovereignty; the government chiefly

relies on taxation to obtain the means to carry on its operations. Taxes are essential to
its very existence;36 hence, the dictum that "taxes are the lifeblood of the government."
For this reason, the right of taxation cannot easily be surrendered; statutes granting tax
exemptions are considered as a derogation of the sovereign authority and are strictly
construed against the person or entity claiming the exemption. Claims for tax refunds,
when based on statutes granting tax exemption or tax refund, partake of the nature of
an exemption; thus, the rule of strict interpretation against the taxpayer-claimant
similarly applies.37

The taxpayer is charged with the heavy burden of proving that he has complied with and
satisfied all the statutory and administrative requirements to be entitled to the tax
refund. This burden cannot be offset by the non-observance of procedural technicalities
by the government’s tax agents when the non-observance of the remedial measure
addressing it does not in any manner prejudice the taxpayer’s due process rights, as in
the present case.

Eastern cannot validly claim to have been taken by surprise by the CIR’s arguments on
the relevance of Section 104(A) of the Tax Code, considering that the arguments were
based on the reported exempt sales in the VAT returns that Eastern itself prepared and
formally offered as evidence. Even if we were to consider the CIR’s act as a lapse in the
observance of procedural rules, such lapse does not work to entitle Eastern to a tax
refund when the established and uncontested facts have shown otherwise. Lapses in
the literal observance of a rule of procedure may be overlooked when they have not
prejudiced the adverse party and especially when they are more consistent with
upholding settled principles in taxation.

WHEREFORE, we GRANT the petitioner’s petition for review on certiorari, and

REVERSE the decision of the Court of Appeals in CA G.R. SP No. 61157, promulgated
on October 1, 2003, as well as its resolution of May 26, 2004. We order the REMAND of
the case to the Court of Tax Appeals to determine the proportionate amount of tax credit
that respondent is entitled to, consistent with our ruling above. Costs against the
respondent.

SO ORDERED.
G.R. No. 119252 August 18, 1997

COMMISSIONER OF INTERNAL REVENUE and COMMISSIONER OF

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

HERMOSISIMA, JR., J.:

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

In this petition, the Commissioner of Internal Revenue and the Commissioner of

Customs jointly seek the reversal of the Decision,1 dated February 16, 1995, of herein
public respondent, Hon. Apolinario B. Santos, Presiding Judge of Branch 67 of the
Regional Trial Court of Pasig City.

The following facts, concisely related in the petition2 of the Office of the Solicitor
General, appear to be undisputed:

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

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

2. On August 5, 1988, Felicidad L. Viray, then Regional Director, Region

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

3. On August 17, 1988, pursuant to the aforementioned Mission Order, the

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

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

5. Subsequently, BIR officer Eliseo Corcega submitted to his superiors a

report of the inventory conducted and a computation of the value-added
tax and ad valorem tax on the articles for evaluation and disposition.4

6. Mr. Hans Brumann, the owner of the establishment, never filed a

protest with the BIR on the preventive embargo of the articles.5

7. On October 17, 1988, Letter of Authority No. 0020596 was issued by

Deputy Commissioner Eufracio D. Santos to BIR officers to examine the
books of accounts and other accounting records of Hans Brumann, Inc.,
for "stocktaking investigation for excise tax purposes for the period
January 1, 1988 to present" (Exhibit "C"). In a letter dated October 27,
1988, in connection with the physical count of the inventory (stocks on
hand) pursuant to said Letter of Authority, Hans Brumann, Inc. was
requested to prepare and make available to the BIR the documents
indicated therein (Exhibit "D").

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

9. Similar Letter of Authority were issued to BIR officers to examine the

books of accounts and other accounting records of Miladay Jewels, Inc.,
Mercelles, Inc., Solid Gold International Traders, Inc., (Exhibits "E", "G"
and "N") and Diagem Trading Corporation7 for "stocktaking/investigation
far excise tax purpose for the period January 1, 1988 to present."

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

11. In the case of Solid Gold International Traders Corporation, the BIR
officers made an inventory of the articles in the establishment.8 The same
is true with respect to Diagem Traders Corporation.9

12. On November 29, 1988, private respondents Antonio M. Marco and

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

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

petition. . . .

14 On October 16, 1989, private respondents filed a Motion with Leave to

Amend Petition by including as petitioner the Guild of Philippine Jewelers,
Inc., which motion was granted. . . .

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

16. On February 16, 1995, public respondents rendered a decision, the

dispositive portion of which reads:

In view of the foregoing reflections, judgment is hereby

rendered, as follows:

1. Declaring Section 104 of the Tariff and the

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

2. Enforcement of the same is hereby enjoined.

No cost.

SO ORDERED.

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

Sec. 150. Non-essential goods. — There shall be levied, assessed and

collected a tax equivalent to 20% based on the wholesale price or the
value of importation used by the Bureau of Customs in determining tariff
and customs duties; net of the excise tax and value-added tax, of the
following goods:

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

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

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

Sec. 163. Percentage tax on sales of non-essential articles. — There shall

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

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

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

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

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

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

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

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

The following issues were thus raised therein:

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

2. Whether the petition states a cause of action or whether the petition

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

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

valid and legal.

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

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

Evidence for the petitioners indeed reveals that government taxation

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

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

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

The Court finds that indeed government taxation policy trats(sic)

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

The Court elaborates further on the experiences of other countries in their

treatment of the jewelry sector.

MALAYSIA

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

THAILAND

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

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

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

To illustrate, shown hereunder is the Philippine tariff and tax structure on

jewelry and other precious and semi-precious stones compared to other
neighboring countries, to wit:

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

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

applied in stages

Malaysia None None None

Thailand None None None

Singapore None None None

Hongkong None None None

In this connection, the present tariff and tax structure increases

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

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

Worthy of note is the fact that indeed no evidence was adduced by

respondents to disprove the foregoing allegations of fact. Under the
foregoing factual circumstances, the Court finds the questioned statutory
provisions confiscatory and destructive of the proprietary right of the
 petitioners to engage in business in violation of Section 1, Article III of the
Constitution which states, as follows:

No person shall be deprived of the life, liberty, or property without due

process of law . . . . 12

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

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

We rule in favor of the petitioners.

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

A perusal of the appealed decision would undoubtedly disclose that public

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

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

It is submitted that public respondent confined himself on this issue which

is clearly a judicial question.

We find it incongruous, in the face of the sweeping pronouncements made by Judge

Santos in his decision, that private respondents can still persist in their argument that
the former did not overreach the restrictions dictated upon him by law. There is no doubt
in the Court's mind, despite protestations to the contrary, that respondent judge
encroached upon matters properly falling within the province of legislative functions. In
citing as basis for his decision unproven comparative data pertaining to differences
between tax rates of various Asian countries, and concluding that the jewelry industry in
the Philippines suffers as a result, the respondent judge took it upon himself to supplant
legislative policy regarding jewelry taxation. In advocating the abolition of local tax and
duty on jewelry simply because other countries have adopted such policies, the
respondent judge overlooked the fact that such matters are not for him to decide. There
are reasons why jewelry, a non-essential item, is taxed as it is in this country, and these
reasons, deliberated upon by our legislature, are beyond the reach of judicial
questioning. As held in Macasiano vs. National Housing Authority: 15

The policy of the courts is to avoid ruling on constitutional questions and to

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

What we see here is a debate on the WISDOM of the laws in question. This is a matter
on which the RTC is not competent to rule. 16 As Cooley observed: "Debatable
questions are for the legislature to decide. The courts do not sit to resolve the merits of
conflicting issues." 17 In Angara vs. Electoral Commission, 18 Justice Laurel made it clear
that "the judiciary does not pass upon questions of wisdom, justice or expediency of
legislation." And fittingly so, for in the exercise of judicial power, we are allowed only "to
settle actual controversies involving rights which are legally demandable and
enforceable", and may not annul an act of the political departments simply because we
feel it is unwise or impractical. 19 This is not to say that Regional Trial Courts have no
power whatsoever to declare a law unconstitutional. In J.M. Tuason and Co. v. Court of
Appeals, 20 we said that "[p]lainly the Constitution contemplates that the inferior courts
should have jurisdiction in cases involving constitutionality of any treaty or law, for it
speaks of appellate review of final judgments of inferior courts in cases where such
constitutionality happens to be in issue." This authority of lower courts to decide
questions of constitutionality in the first instance reaffirmed in Ynos v. Intermediate
Court of Appeals. 21 But this authority does not extend to deciding questions which
pertain to legislative policy.

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

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

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

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

WHEREFORE, premises considered, the petition is hereby GRANTED, and the

Decision in Civil Case No. 56736 is hereby REVERSED and SET ASIDE. No costs.

SO ORDERED.
G.R. No. 160756               March 9, 2010

CHAMBER OF REAL ESTATE AND BUILDERS' ASSOCIATIONS, INC., Petitioner,

vs.
THE HON. EXECUTIVE SECRETARY ALBERTO ROMULO, THE HON. ACTING
SECRETARY OF FINANCE JUANITA D. AMATONG, and THE HON.
COMMISSIONER OF INTERNAL REVENUE GUILLERMO PARAYNO,
JR., Respondents.

DECISION

CORONA, J.:

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

and Builders’ Associations, Inc. is questioning the constitutionality of Section 27 (E) of
Republic Act (RA) 84242 and the revenue regulations (RRs) issued by the Bureau of
Internal Revenue (BIR) to implement said provision and those involving creditable
withholding taxes.3

Petitioner is an association of real estate developers and builders in the Philippines. It

impleaded former Executive Secretary Alberto Romulo, then acting Secretary of
Finance Juanita D. Amatong and then Commissioner of Internal Revenue Guillermo
Parayno, Jr. as respondents.

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

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

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

Petitioner also seeks to nullify Sections 2.57.2(J) (as amended by RR 6-2001) and
2.58.2 of RR 2-98, and Section 4(a)(ii) and (c)(ii) of RR 7-2003, all of which prescribe
the rules and procedures for the collection of CWT on the sale of real properties
categorized as ordinary assets. Petitioner contends that these revenue regulations are
contrary to law for two reasons: first, they ignore the different treatment by RA 8424 of
ordinary assets and capital assets and second, respondent Secretary of Finance has no
authority to collect CWT, much less, to base the CWT on the gross selling price or fair
market value of the real properties classified as ordinary assets.

Petitioner also asserts that the enumerated provisions of the subject revenue
regulations violate the due process clause because, like the MCIT, the government
collects income tax even when the net income has not yet been determined. They
contravene the equal protection clause as well because the CWT is being levied upon
real estate enterprises but not on other business enterprises, more particularly those in
the manufacturing sector.

The issues to be resolved are as follows:

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

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

unconstitutional and

(3) whether or not the imposition of CWT on income from sales of real properties
classified as ordinary assets under RRs 2-98, 6-2001 and 7-2003, is
unconstitutional.

Overview of the Assailed Provisions

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

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

(1) Imposition of Tax. – A [MCIT] of two percent (2%) of the gross income as of
the end of the taxable year, as defined herein, is hereby imposed on a
corporation taxable under this Title, beginning on the fourth taxable year
immediately following the year in which such corporation commenced its
business operations, when the minimum income tax is greater than the tax
computed under Subsection (A) of this Section for the taxable year.

(2) Carry Forward of Excess Minimum Tax. – Any excess of the [MCIT] over the
normal income tax as computed under Subsection (A) of this Section shall be
carried forward and credited against the normal income tax for the three (3)
immediately succeeding taxable years.
 (3) Relief from the [MCIT] under certain conditions. – The Secretary of Finance is
hereby authorized to suspend the imposition of the [MCIT] on any corporation
which suffers losses on account of prolonged labor dispute, or because of force
majeure, or because of legitimate business reverses.

The Secretary of Finance is hereby authorized to promulgate, upon

recommendation of the Commissioner, the necessary rules and regulations that
shall define the terms and conditions under which he may suspend the imposition
of the [MCIT] in a meritorious case.

(4) Gross Income Defined. – For purposes of applying the [MCIT] provided under
Subsection (E) hereof, the term ‘gross income’ shall mean gross sales less sales
returns, discounts and allowances and cost of goods sold. "Cost of goods sold"
shall include all business expenses directly incurred to produce the merchandise
to bring them to their present location and use.

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

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

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

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

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

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

(1) Imposition of the Tax. – A [MCIT] of two percent (2%) of the gross income as of the
end of the taxable year (whether calendar or fiscal year, depending on the accounting
period employed) is hereby imposed upon any domestic corporation beginning the
fourth (4th) taxable year immediately following the taxable year in which such
corporation commenced its business operations. The MCIT shall be imposed whenever
such corporation has zero or negative taxable income or whenever the amount of
minimum corporate income tax is greater than the normal income tax due from such
corporation.

For purposes of these Regulations, the term, "normal income tax" means the income
tax rates prescribed under Sec. 27(A) and Sec. 28(A)(1) of the Code xxx at 32%
effective January 1, 2000 and thereafter.

x x x           x x x          x x x

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

x x x           x x x          x x x

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

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

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

x x x           x x x          x x x

(J) Gross selling price or total amount of consideration or its equivalent paid to the
seller/owner for the sale, exchange or transfer of. – Real property, other than capital
assets, sold by an individual, corporation, estate, trust, trust fund or pension fund and
the seller/transferor is habitually engaged in the real estate business in accordance with
the following schedule –

Those which are exempt from Exempt

a withholding tax at source as
prescribed in Sec. 2.57.5 of
these regulations.

With a selling price of five 1.5%

hundred thousand pesos
(₱500,000.00) or less.

With a selling price of more 3.0%

than five hundred thousand
 pesos (₱500,000.00) but not
more than two million pesos
(₱2,000,000.00).

With selling price of more than 5.0%

two million pesos
(₱2,000,000.00)

x x x           x x x          x x x

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

Where the consideration or part thereof is payable on installment, no withholding tax is

required to be made on the periodic installment payments where the buyer is an
individual not engaged in trade or business. In such a case, the applicable rate of tax
based on the entire consideration shall be withheld on the last installment or
installments to be paid to the seller.

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

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

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

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

x x x           x x x          x x x

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

Where the seller/transferor is exempt from [CWT] in Exempt

accordance with Sec. 2.57.5 of these regulations.
Upon the following values of real property, where  
the seller/transferor is habitually engaged in the real
estate business.
With a selling price of Five Hundred Thousand 1.5%
 Pesos (₱500,000.00) or less.
With a selling price of more than Five Hundred 3.0%
Thousand Pesos (₱500,000.00) but not more than
Two Million Pesos (₱2,000,000.00).
With a selling price of more than two Million Pesos 5.0%
(₱2,000,000.00).

x x x           x x x          x x x

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

x x x           x x x          x x x

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

otherwise, these rules shall apply:

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

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

In any case, no Certificate Authorizing Registration (CAR) shall be issued to the buyer
unless the [CWT] due on the sale, transfer or exchange of real property other than
capital asset has been fully paid. (Underlined amendments in the original)

Section 2.58.2 of RR 2-98 implementing Section 58(E) of RA 8424 provides that any
sale, barter or exchange subject to the CWT will not be recorded by the Registry of
Deeds until the CIR has certified that such transfers and conveyances have been
reported and the taxes thereof have been duly paid:7

Sec. 2.58.2. Registration with the Register of Deeds. – Deeds of conveyances of land or
land and building/improvement thereon arising from sales, barters, or exchanges
subject to the creditable expanded withholding tax shall not be recorded by the Register
of Deeds unless the [CIR] or his duly authorized representative has certified that such
transfers and conveyances have been reported and the expanded withholding tax,
inclusive of the documentary stamp tax, due thereon have been fully paid xxxx.
On February 11, 2003, RR No. 7-20038 was promulgated, providing for the guidelines in
determining whether a particular real property is a capital or an ordinary asset for
purposes of imposing the MCIT, among others. The pertinent portions thereof state:

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

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

a. In the case of individual citizen (including estates and trusts), resident aliens, and
non-resident aliens engaged in trade or business in the Philippines;

x x x           x x x          x x x

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

x x x           x x x          x x x

c. In the case of domestic corporations. –

x x x           x x x          x x x

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

x x x           x x x          x x x

We shall now tackle the issues raised.

Existence of a Justiciable Controversy

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

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

[petitioner] did not allege that CREBA, as a corporate entity, or any of its members, has
been assessed by the BIR for the payment of [MCIT] or [CWT] on sales of real property.
Neither did petitioner allege that its members have shut down their businesses as a
result of the payment of the MCIT or CWT. Petitioner has raised concerns in mere
abstract and hypothetical form without any actual, specific and concrete instances cited
that the assailed law and revenue regulations have actually and adversely affected it.
Lacking empirical data on which to base any conclusion, any discussion on the
constitutionality of the MCIT or CWT on sales of real property is essentially an academic
exercise.

Perceived or alleged hardship to taxpayers alone is not an adequate justification for

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

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

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

Contrary to respondents’ assertion, we do not have to wait until petitioner’s members

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

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

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

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

Petitioner is an association of some of the real estate developers and builders in the
Philippines. Petitioners did not allege that [it] itself is in the real estate business. It did
not allege any material interest or any wrong that it may suffer from the enforcement of
[the assailed provisions].15
Legal standing or locus standi is a party’s personal and substantial interest in a case
such that it has sustained or will sustain direct injury as a result of the governmental act
being challenged.16 In Holy Spirit Homeowners Association, Inc. v. Defensor,17 we held
that the association had legal standing because its members stood to be injured by the
enforcement of the assailed provisions:

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

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

Concept and Rationale of the MCIT

The MCIT on domestic corporations is a new concept introduced by RA 8424 to the

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

Senator Enrile. Mr. President, we are not unmindful of the practice of certain
corporations of reporting constantly a loss in their operations to avoid the payment of
taxes, and thus avoid sharing in the cost of government. In this regard, the Tax Reform
Act introduces for the first time a new concept called the [MCIT] so as to minimize tax
evasion, tax avoidance, tax manipulation in the country and for administrative
convenience. … This will go a long way in ensuring that corporations will pay their just
share in supporting our public life and our economic advancement.22

Domestic corporations owe their corporate existence and their privilege to do business
to the government. They also benefit from the efforts of the government to improve the
financial market and to ensure a favorable business climate. It is therefore fair for the
government to require them to make a reasonable contribution to the public expenses.
Congress intended to put a stop to the practice of corporations which, while having
large turn-overs, report minimal or negative net income resulting in minimal or zero
income taxes year in and year out, through under-declaration of income or over-
deduction of expenses otherwise called tax shelters.23

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

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

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

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

Second, the law allows the carrying forward of any excess of the MCIT paid over the
normal income tax which shall be credited against the normal income tax for the three
immediately succeeding years.27

Third, since certain businesses may be incurring genuine repeated losses, the law
authorizes the Secretary of Finance to suspend the imposition of MCIT if a corporation
suffers losses due to prolonged labor dispute, force majeure and legitimate business
reverses.28

Even before the legislature introduced the MCIT to the Philippine taxation system,
several other countries already had their own system of minimum corporate income
taxation. Our lawmakers noted that most developing countries, particularly Latin
American and Asian countries, have the same form of safeguards as we do. As pointed
out during the committee hearings:
[Mr. Medalla:] Note that most developing countries where you have of course quite a bit
of room for underdeclaration of gross receipts have this same form of safeguards.

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

The other thing you’ll notice is the preponderance of Latin American countries that
employed this method. Okay, those are additional Latin American countries.29

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

MCIT Is Not Violative of Due Process

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

We disagree.

Taxes are the lifeblood of the government. Without taxes, the government can neither
exist nor endure. The exercise of taxing power derives its source from the very
existence of the State whose social contract with its citizens obliges it to promote public
interest and the common good.33

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

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

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

The constitutional safeguard of due process is embodied in the fiat "[no] person shall be
deprived of life, liberty or property without due process of law." In Sison, Jr. v. Ancheta,
et al.,38 we held that the due process clause may properly be invoked to invalidate, in
appropriate cases, a revenue measure39 when it amounts to a confiscation of
property.40 But in the same case, we also explained that we will not strike down a
revenue measure as unconstitutional (for being violative of the due process clause) on
the mere allegation of arbitrariness by the taxpayer.41 There must be a factual
foundation to such an unconstitutional taint.42 This merely adheres to the authoritative
doctrine that, where the due process clause is invoked, considering that it is not a fixed
rule but rather a broad standard, there is a need for proof of such persuasive
character.43

Petitioner is correct in saying that income is distinct from capital.44 Income means all the
wealth which flows into the taxpayer other than a mere return on capital. Capital is a
fund or property existing at one distinct point in time while income denotes a flow of
wealth during a definite period of time.45 Income is gain derived and severed from
capital.46 For income to be taxable, the following requisites must exist:

(1) there must be gain;

(2) the gain must be realized or received and

(3) the gain must not be excluded by law or treaty from taxation.47

Certainly, an income tax is arbitrary and confiscatory if it taxes capital because capital is
not income. In other words, it is income, not capital, which is subject to income tax.
However, the MCIT is not a tax on capital.

The MCIT is imposed on gross income which is arrived at by deducting the capital spent
by a corporation in the sale of its goods, i.e., the cost of goods48 and other direct
expenses from gross sales. Clearly, the capital is not being taxed.

Furthermore, the MCIT is not an additional tax imposition. It is imposed in lieu of the

normal net income tax, and only if the normal income tax is suspiciously low. The MCIT
merely approximates the amount of net income tax due from a corporation, pegging the
rate at a very much reduced 2% and uses as the base the corporation’s gross income.

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

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

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

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

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

In enacting the minimum tax, Congress attempted to remedy general taxpayer distrust
of the system growing from large numbers of taxpayers with large incomes who were
yet paying no taxes.

x x x           x x x          x x x

We thus join a number of other courts in upholding the constitutionality of the [AMT]. xxx
[It] is a rational means of obtaining a broad-based tax, and therefore is constitutional.54

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

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

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

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

In sum, petitioner failed to support, by any factual or legal basis, its allegation that the
MCIT is arbitrary and confiscatory. The Court cannot strike down a law as
unconstitutional simply because of its yokes.58 Taxation is necessarily burdensome
because, by its nature, it adversely affects property rights. 59 The party alleging the law’s
unconstitutionality has the burden to demonstrate the supposed violations in
understandable terms.60

RR 9-98 Merely Clarifies Section 27(E) of RA 8424

Petitioner alleges that RR 9-98 is a deprivation of property without due process of law
because the MCIT is being imposed and collected even when there is actually a loss, or
a zero or negative taxable income:

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

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

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

We now proceed to the issues involving the CWT.

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

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

Petitioner theorizes that since RA 8424 treats capital assets and ordinary assets
differently, respondents cannot disregard the distinctions set by the legislators as
regards the tax base, modes of collection and payment of taxes on income from the
sale of capital and ordinary assets.
Petitioner’s arguments have no merit.

Authority of the Secretary of Finance to Order the Collection of CWT on Sales of

Real Property Considered as Ordinary Assets

The Secretary of Finance is granted, under Section 244 of RA 8424, the authority to
promulgate the necessary rules and regulations for the effective enforcement of the
provisions of the law. Such authority is subject to the limitation that the rules and
regulations must not override, but must remain consistent and in harmony with, the law
they seek to apply and implement.64 It is well-settled that an administrative agency
cannot amend an act of Congress.65

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

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

SEC. 57. Withholding of Tax at Source. –

x x x           x x x          x x x

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

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

The questioned provisions of RR 2-98, as amended, are well within the authority given
by Section 57(B) to the Secretary, i.e., the graduated rate of 1.5%-5% is between the
1%-32% range; the withholding tax is imposed on the income payable and the tax is
creditable against the income tax liability of the taxpayer for the taxable year.

Effect of RRs on the Tax Base for the Income Tax of Individuals or Corporations
Engaged in the Real Estate Business
Petitioner maintains that RR 2-98, as amended, arbitrarily shifted the tax base of a real
estate business’ income tax from net income to GSP or FMV of the property sold.

Petitioner is wrong.

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

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

Section 4. – Applicable taxes on sale, exchange or other disposition of real property. -

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

x x x           x x x          x x x

a. In the case of individual citizens (including estates and trusts), resident aliens, and
non-resident aliens engaged in trade or business in the Philippines;

x x x           x x x          x x x

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

x x x           x x x          x x x

c. In the case of domestic corporations.

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

Accordingly, at the end of the year, the taxpayer/seller shall file its income tax return
and credit the taxes withheld (by the withholding agent/buyer) against its tax due. If the
tax due is greater than the tax withheld, then the taxpayer shall pay the difference. If, on
the other hand, the tax due is less than the tax withheld, the taxpayer will be entitled to
a refund or tax credit. Undoubtedly, the taxpayer is taxed on its net income.

The use of the GSP/FMV as basis to determine the withholding taxes is evidently for
purposes of practicality and convenience. Obviously, the withholding agent/buyer who is
obligated to withhold the tax does not know, nor is he privy to, how much the
taxpayer/seller will have as its net income at the end of the taxable year. Instead, said
withholding agent’s knowledge and privity are limited only to the particular transaction in
which he is a party. In such a case, his basis can only be the GSP or FMV as these are
the only factors reasonably known or knowable by him in connection with the
performance of his duties as a withholding agent.

No Blurring of Distinctions Between Ordinary Assets and Capital Assets

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

The differences between the two forms of withholding tax, i.e., creditable and final, show
that ordinary assets are not treated in the same manner as capital assets. Final
withholding tax (FWT) and CWT are distinguished as follows:

FWT CWT

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

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

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

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

c) The payee is not required to file c) The income recipient is still

an income tax return for the required to file an income tax
particular income.73 return, as prescribed in Sec. 51
and Sec. 52 of the NIRC, as
amended.74

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

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

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

No Rule that Only Passive

Incomes Can Be Subject to CWT

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

SEC. 57. Withholding of Tax at Source. —

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

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

This line of reasoning is non sequitur.

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

…if the income is generated in the active pursuit and performance of the corporation’s
primary purposes, the same is not passive income…76

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

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

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

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

from the text of Section 57(B). RR 2-98 merely implements the law by specifying what
income is subject to CWT. It has been held that, where a statute does not require any
particular procedure to be followed by an administrative agency, the agency may adopt
any reasonable method to carry out its functions.77 Similarly, considering that the law
uses the general term "income," the Secretary and CIR may specify the kinds of income
the rules will apply to based on what is feasible. In addition, administrative rules and
regulations ordinarily deserve to be given weight and respect by the courts78 in view of
the rule-making authority given to those who formulate them and their specific expertise
in their respective fields.

No Deprivation of Property Without Due Process

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

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

Petitioner protests that the refund remedy does not make the CWT less burdensome
because taxpayers have to wait years and may even resort to litigation before they are
granted a refund.81 This argument is misleading. The practical problems encountered in
claiming a tax refund do not affect the constitutionality and validity of the CWT as a
method of collecting the tax.1avvphi1

Petitioner complains that the amount withheld would have otherwise been used by the
enterprise to pay labor wages, materials, cost of money and other expenses which can
then save the entity from having to obtain loans entailing considerable interest expense.
Petitioner also lists the expenses and pitfalls of the trade which add to the burden of the
realty industry: huge investments and borrowings; long gestation period; sudden and
unpredictable interest rate surges; continually spiraling development/construction costs;
heavy taxes and prohibitive "up-front" regulatory fees from at least 20 government
agencies.82

Petitioner’s lamentations will not support its attack on the constitutionality of the CWT.
Petitioner’s complaints are essentially matters of policy best addressed to the executive
and legislative branches of the government. Besides, the CWT is applied only on the
amounts actually received or receivable by the real estate entity. Sales on installment
are taxed on a per-installment basis.83 Petitioner’s desire to utilize for its operational and
capital expenses money earmarked for the payment of taxes may be a practical
business option but it is not a fundamental right which can be demanded from the court
or from the government.
No Violation of Equal Protection

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

Again, we disagree.

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

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

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

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

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

Petitioner counters that there are other businesses wherein expensive items are also
sold infrequently, e.g. heavy equipment, jewelry, furniture, appliance and other capital
goods yet these are not similarly subjected to the CWT.89 As already discussed, the
Secretary may adopt any reasonable method to carry out its functions.90 Under Section
57(B), it may choose what to subject to CWT.

A reading of Section 2.57.2 (M) of RR 2-98 will also show that petitioner’s argument is
not accurate. The sales of manufacturers who have clients within the top 5,000
corporations, as specified by the BIR, are also subject to CWT for their transactions with
said 5,000 corporations.91

Section 2.58.2 of RR No. 2-98 Merely Implements Section 58 of RA 8424

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

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

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

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

Conclusion

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

WHEREFORE, the petition is hereby DISMISSED.

Costs against petitioner.

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

COMMISSIONER OF INTERNAL REVENUE, petitioner,

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

CRUZ, J.:

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

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

We deal first with the procedural question.

The record shows that on January 14, 1965, the private respondent, a domestic
corporation engaged in engineering, construction and other allied activities, received a
letter from the petitioner assessing it in the total amount of P83,183.85 as delinquency
income taxes for the years 1958 and 1959.1 On January 18, 1965, Algue flied a letter of
protest or request for reconsideration, which letter was stamp received on the same day
in the office of the petitioner. 2 On March 12, 1965, a warrant of distraint and levy was
presented to the private respondent, through its counsel, Atty. Alberto Guevara, Jr., who
refused to receive it on the ground of the pending protest. 3 A search of the protest in
the dockets of the case proved fruitless. Atty. Guevara produced his file copy and gave
a photostat to BIR agent Ramon Reyes, who deferred service of the warrant. 4 On April
7, 1965, Atty. Guevara was finally informed that the BIR was not taking any action on
the protest and it was only then that he accepted the warrant of distraint and levy earlier
sought to be served.5 Sixteen days later, on April 23, 1965, Algue filed a petition for
review of the decision of the Commissioner of Internal Revenue with the Court of Tax
Appeals.6

The above chronology shows that the petition was filed seasonably. According to Rep.
Act No. 1125, the appeal may be made within thirty days after receipt of the decision or
ruling challenged.7 It is true that as a rule the warrant of distraint and levy is "proof of the
finality of the assessment" 8 and renders hopeless a request for
9
reconsideration,"   being "tantamount to an outright denial thereof and makes the said
request deemed rejected." 10 But there is a special circumstance in the case at bar that
prevents application of this accepted doctrine.

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

As the Court of Tax Appeals correctly noted," 11 the protest filed by private respondent
was not pro forma and was based on strong legal considerations. It thus had the effect
of suspending on January 18, 1965, when it was filed, the reglementary period which
started on the date the assessment was received, viz., January 14, 1965. The period
started running again only on April 7, 1965, when the private respondent was definitely
informed of the implied rejection of the said protest and the warrant was finally served
on it. Hence, when the appeal was filed on April 23, 1965, only 20 days of the
reglementary period had been consumed.

Now for the substantive question.

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

Parenthetically, it may be observed that the petitioner had Originally claimed these
promotional fees to be personal holding company income 12 but later conformed to the
decision of the respondent court rejecting this assertion.13 In fact, as the said court
found, the amount was earned through the joint efforts of the persons among whom it
was distributed It has been established that the Philippine Sugar Estate Development
Company had earlier appointed Algue as its agent, authorizing it to sell its land,
factories and oil manufacturing process. Pursuant to such authority, Alberto Guevara,
Jr., Eduardo Guevara, Isabel Guevara, Edith, O'Farell, and Pablo Sanchez, worked for
the formation of the Vegetable Oil Investment Corporation, inducing other persons to
invest in it.14 Ultimately, after its incorporation largely through the promotion of the said
persons, this new corporation purchased the PSEDC properties.15 For this sale, Algue
received as agent a commission of P126,000.00, and it was from this commission that
the P75,000.00 promotional fees were paid to the aforenamed individuals.16

There is no dispute that the payees duly reported their respective shares of the fees in
their income tax returns and paid the corresponding taxes thereon.17 The Court of Tax
Appeals also found, after examining the evidence, that no distribution of dividends was
involved.18

The petitioner claims that these payments are fictitious because most of the payees are
members of the same family in control of Algue. It is argued that no indication was
made as to how such payments were made, whether by check or in cash, and there is
not enough substantiation of such payments. In short, the petitioner suggests a tax
dodge, an attempt to evade a legitimate assessment by involving an imaginary
deduction.

We find that these suspicions were adequately met by the private respondent when its
President, Alberto Guevara, and the accountant, Cecilia V. de Jesus, testified that the
payments were not made in one lump sum but periodically and in different amounts as
each payee's need arose. 19 It should be remembered that this was a family corporation
where strict business procedures were not applied and immediate issuance of receipts
was not required. Even so, at the end of the year, when the books were to be closed,
each payee made an accounting of all of the fees received by him or her, to make up
the total of P75,000.00. 20 Admittedly, everything seemed to be informal. This
arrangement was understandable, however, in view of the close relationship among the
persons in the family corporation.

We agree with the respondent court that the amount of the promotional fees was not
excessive. The total commission paid by the Philippine Sugar Estate Development Co.
to the private respondent was P125,000.00. 21 After deducting the said fees, Algue still
had a balance of P50,000.00 as clear profit from the transaction. The amount of
P75,000.00 was 60% of the total commission. This was a reasonable proportion,
considering that it was the payees who did practically everything, from the formation of
the Vegetable Oil Investment Corporation to the actual purchase by it of the Sugar
Estate properties. This finding of the respondent court is in accord with the following
provision of the Tax Code:

SEC. 30. Deductions from gross income.--In computing net income there

shall be allowed as deductions —

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

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

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

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

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

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

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

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

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

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

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

ACCORDINGLY, the appealed decision of the Court of Tax Appeals is AFFIRMED in

toto, without costs.

SO ORDERED.

Teehankee, C.J., Narvasa, Gancayco and Griño-Aquino, JJ., concur.

G.R. No. 106611 July 21, 1994

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
COURT OF APPEALS, CITYTRUST BANKING CORPORATION and COURT OF TAX
APPEALS, respondents.

The Solicitor General for petitioner.

Palaez, Adriano & Gregorio for private respondent.

REGALADO, J.:

The judicial proceedings over the present controversy commenced with CTA Case No.
4099, wherein the Court of Tax Appeals ordered herein petitioner Commissioner of
Internal Revenue to grant a refund to herein private respondent Citytrust Banking
Corporation (Citytrust) in the amount of P13,314,506.14, representing its overpaid
income taxes for 1984 and 1985, but denied its claim for the alleged refundable amount
reflected in its 1983 income tax return on the ground of prescription.1 That judgment of
the tax court was affirmed by respondent Court of Appeals in its judgment in CA-G.R.
SP
No. 26839.2 The case was then elevated to us in the present petition for review
on certiorari wherein the latter judgment is impugned and sought to be nullified and/or
set aside.

It appears that in a letter dated August 26, 1986, herein private respondent corporation
filed a claim for refund with the Bureau of Internal Revenue (BIR) in the amount of
P19,971,745.00 representing the alleged aggregate of the excess of its carried-over
total quarterly payments over the actual income tax due, plus carried-over withholding
tax payments on government securities and rental income, as computed in its final
income tax return for the calendar year ending December 31, 1985.3

Two days later, or on August 28, 1986, in order to interrupt the running of the
prescriptive period, Citytrust filed a petition with the Court of Tax Appeals, docketed
therein as CTA Case No. 4099, claiming the refund of its income tax overpayments for
the years 1983, 1984 and 1985 in the total amount of P19,971,745.00.4
In the answer filed by the Office of the Solicitor General, for and in behalf of therein
respondent commissioner, it was asserted that the mere averment that Citytrust
incurred a net loss in 1985 does not ipso facto merit a refund; that the amounts of
P6,611,223.00, P1,959,514.00 and P28,238.00 claimed by Citytrust as 1983 income tax
overpayment, taxes withheld on proceeds of government securities investments, as well
as on rental income, respectively, are not properly documented; that
assuming arguendo that petitioner is entitled to refund, the right to claim the same has
prescribed
with respect to income tax payments prior to August 28, 1984, pursuant to Sections 292
and 295 of the National Internal Revenue Code of 1977, as amended, since the petition
was filed only on August 28, 1986.5

On February 20, 1991, the case was submitted for decision based solely on the
pleadings and evidence submitted by herein private respondent Citytrust. Herein
petitioner could not present any evidence by reason of the repeated failure of the Tax
Credit/Refund Division of the BIR to transmit the records of the case, as well as the
investigation report thereon, to the Solicitor General.6

However, on June 24, 1991, herein petitioner filed with the tax court a manifestation and
motion praying for the suspension of the proceedings in the said case on the ground
that the claim of Citytrust for tax refund in the amount of P19,971,745.00 was already
being processed by the Tax Credit/Refund Division of the BIR, and that said bureau was
only awaiting the submission by Citytrust of the required confirmation receipts which
would show whether or not the aforestated amount was actually paid and remitted to the
BIR.7

Citytrust filed an opposition thereto, contending that since the Court of Tax Appeals
already acquired jurisdiction over the case, it could no longer be divested of the same;
and, further, that the proceedings therein could not be suspended by the mere fact that
the claim for refund was being administratively processed, especially where the case
had already been submitted for decision.
It also argued that the BIR had already conducted an audit, citing therefor Exhibits Y, Y-
1, Y-2 and Y-3 adduced in the case, which clearly showed that there was an
overpayment of income taxes and for which a tax credit or refund was due to Citytrust.
The Foregoing exhibits are allegedly conclusive proof of and an admission by herein
petitioner that there had been an overpayment of income taxes.8

The tax court denied the motion to suspend proceedings on the ground that the case
had already been submitted for decision since February 20, 1991.9

Thereafter, said court rendered its decision in the case, the decretal portion of which
declares:

WHEREFORE, in view of the foregoing, petitioner is entitled to a refund

but only for the overpaid taxes incurred in 1984 and 1985. The refundable
amount as shown in its 1983 income tax return is hereby denied on the
 ground of prescription. Respondent is hereby ordered to grant a refund to
petitioner Citytrust Banking Corp. in the amount of P13,314,506.14
representing the overpaid income taxes for 1984 and 1985, recomputed
as follows:

1984 Income tax due P 4,715,533.00

Less: 1984 Quarterly payments P 16,214,599.00*
1984 Tax Credits —
W/T on int. on gov't. sec. 1,921,245.37*
W/T on rental inc. 26,604.30* 18,162,448.67
——————— ———————
Tax Overpayment (13,446,915.67)
Less: FCDU payable 150,252.00
———————
Amount refundable for 1984 P (13,296,663.67)

1985 Income tax due (loss) P — 0 —

Less: W/T on rentals 36,716.47*
———————
Tax Overpayment (36,716.47)*
Less: FCDU payable 18,874.00
———————
Amount Refundable for 1985 P (17,842.47)

* Note:

These credits are smaller than the claimed amount because

only the above figures are well supported by the various
exhibits presented during the hearing.

No pronouncement as to costs.

SO ORDERED.10

The order for refund was based on the following findings of the Court of Tax Appeals:
(1) the fact of withholding has been established by the statements and certificates of
withholding taxes accomplished by herein private respondent's withholding agents, the
authenticity of which were neither disputed nor controverted by herein petitioner; (2) no
evidence was presented which could effectively dispute the correctness of the income
tax return filed by herein respondent corporation and other material facts stated therein;
(3) no deficiency assessment was issued by herein petitioner; and (4) there was an
audit report submitted by the BIR Assessment Branch, recommending the refund of
overpaid taxes for the years concerned (Exhibits Y to Y-3), which enjoys the
presumption of regularity in the performance of official duty.11
A motion for the reconsideration of said decision was initially filed by the Solicitor
General on the sole ground that the statements and certificates of taxes allegedly
withheld are not conclusive evidence of actual payment and remittance of the taxes
withheld to the BIR.12 A supplemental motion for reconsideration was thereafter filed,
wherein it was contended for the first time that herein private respondent had
outstanding unpaid deficiency income taxes. Petitioner alleged that through an inter-
office memorandum of the Tax Credit/Refund Division, dated August 8, 1991, he came
to know only lately that Citytrust had outstanding tax liabilities for 1984 in the amount of
P56,588,740.91 representing deficiency income and business taxes covered by
Demand/Assessment Notice No. FAS-1-84-003291-003296.13

Oppositions to both the basic and supplemental motions for reconsideration were filed
by private respondent Citytrust.14 Thereafter, the Court of Tax Appeals issued a
resolution denying both motions for the reason that Section 52 (b) of the Tax Code, as
implemented by Revenue Regulation
6-85, only requires that the claim for tax credit or refund must show that the income
received was declared as part of the gross income, and that the fact of withholding was
duly established. Moreover, with regard to the argument raised in the supplemental
motion for reconsideration anent the deficiency tax assessment against herein
petitioner, the tax court ruled that since that matter was not raised in the pleadings, the
same cannot be considered, invoking therefor the salutary purpose of the omnibus
motion rule which is to obviate multiplicity of motions and to discourage dilatory
pleadings.15

As indicated at the outset, a petition for review was filed by herein petitioner with
respondent Court of Appeals which in due course promulgated its decision affirming the
judgment of the Court of Tax Appeals. Petitioner eventually elevated the case to this
Court, maintaining that said respondent court erred in affirming the grant of the claim for
refund of Citytrust, considering that, firstly, said private respondent failed to prove and
substantiate its claim for such refund; and, secondly, the bureau's findings of deficiency
income and business tax liabilities against private respondent for the year 1984 bars
such payment.16

After a careful review of the records, we find that under the peculiar circumstances of
this case, the ends of substantial justice and public interest would be better subserved
by the remand of this case to the Court of Tax Appeals for further proceedings.

It is the sense of this Court that the BIR, represented herein by petitioner Commissioner
of Internal Revenue, was denied its day in court by reason of the mistakes and/or
negligence of its officials and employees. It can readily be gleaned from the records that
when it was herein petitioner's turn to present evidence, several postponements were
sought by its counsel, the Solicitor General, due to the unavailability of the necessary
records which were not transmitted by the Refund Audit Division of the BIR to said
counsel, as well as the investigation report made by the Banks/Financing and Insurance
Division of the said bureau/ despite repeated requests.17 It was under such a
predicament and in deference to the tax court that ultimately, said records being still
unavailable, herein petitioner's counsel was constrained to submit the case for decision
on February 20, 1991 without presenting any evidence.

For that matter, the BIR officials and/or employees concerned also failed to heed the
order of the Court of Tax Appeals to remand the records to it pursuant to Section 2,
Rule 7 of the Rules of the Court of Tax Appeals which provides that the Commissioner
of Internal Revenue and the Commissioner of Customs shall certify and forward to the
Court of Tax Appeals, within ten days after filing his answer, all the records of the case
in his possession, with the pages duly numbered, and if the records are in separate
folders, then the folders shall also be numbered.

The aforestated impassé came about due to the fact that, despite the filing of the
aforementioned initiatory petition in CTA Case No. 4099 with the Court of Tax Appeals,
the Tax Refund Division of the BIR still continued to act administratively on the claim for
refund previously filed therein, instead of forwarding the records of the case to the Court
of Tax Appeals as ordered.18

It is a long and firmly settled rule of law that the Government is not bound by the errors
committed by its agents.19 In the performance of its governmental functions, the State
cannot be estopped by the neglect of its agent and officers. Although the Government
may generally be estopped through the affirmative acts of public officers acting within
their authority, their neglect or omission of public duties as exemplified in this case will
not and should not produce that effect.

Nowhere is the aforestated rule more true than in the field of taxation. 20 It is axiomatic
that the Government cannot and must not be estopped particularly in matters involving
taxes. Taxes are the lifeblood of the nation through which the government agencies
continue to operate and with which the State effects its functions for the welfare of its
constituents.21 The errors of certain administrative officers should never be allowed to
jeopardize the Government's financial position,22 especially in the case at bar where the
amount involves millions of pesos the collection whereof, if justified, stands to be
prejudiced just because of bureaucratic lethargy.

Further, it is also worth nothing that the Court of Tax Appeals erred in denying
petitioner's supplemental motion for reconsideration alleging bringing to said court's
attention the existence of the deficiency income and business tax assessment against
Citytrust. The fact of such deficiency assessment is intimately related to and inextricably
intertwined with the right of respondent bank to claim for a tax refund for the same year.
To award such refund despite the existence of that deficiency assessment is an
absurdity and a polarity in conceptual effects. Herein private respondent cannot be
entitled to refund and at the same time be liable for a tax deficiency assessment for the
same year.

The grant of a refund is founded on the assumption that the tax return is valid, that is,
the facts stated therein are true and correct. The deficiency assessment, although not
yet final, created a doubt as to and constitutes a challenge against the truth and
accuracy of the facts stated in said return which, by itself and without unquestionable
evidence, cannot be the basis for the grant of the refund.

Section 82, Chapter IX of the National Internal Revenue Code of 1977, which was the
applicable law when the claim of Citytrust was filed, provides that "(w)hen an
assessment is made in case of any list, statement, or return, which in the opinion of the
Commissioner of Internal Revenue was false or fraudulent or contained any
understatement or undervaluation, no tax collected under such assessment shall be
recovered by any suits unless it is proved that the said list, statement, or return was not
false nor fraudulent and did not contain any understatement or undervaluation; but this
provision shall not apply to statements or returns made or to be made in good faith
regarding annual depreciation of oil or gas wells and mines."

Moreover, to grant the refund without determination of the proper assessment and the
tax due would inevitably result in multiplicity of proceedings or suits. If the deficiency
assessment should subsequently be upheld, the Government will be forced to institute
anew a proceeding for the recovery of erroneously refunded taxes which recourse must
be filed within the prescriptive period of ten years after discovery of the falsity, fraud or
omission in the false or fraudulent return involved.23 This would necessarily require and
entail additional efforts and expenses on the part of the Government, impose a burden
on and a drain of government funds, and impede or delay the collection of much-
needed revenue for governmental operations.

Thus, to avoid multiplicity of suits and unnecessary difficulties or expenses, it is both

logically necessary and legally appropriate that the issue of the deficiency tax
assessment against Citytrust be resolved jointly with its claim for tax refund, to
determine once and for all in a single proceeding the true and correct amount of tax due
or refundable.

In fact, as the Court of Tax Appeals itself has heretofore conceded, 24 it would be only
just and fair that the taxpayer and the Government alike be given equal opportunities to
avail of remedies under the law to defeat each other's claim and to determine all matters
of dispute between them in one single case. It is important to note that in determining
whether or not petitioner is entitled to the refund of the amount paid, it would necessary
to determine how much the Government is entitled to collect as taxes. This would
necessarily include the determination of the correct liability of the taxpayer and,
certainly, a determination of this case would constitute res judicata on both parties as to
all the matters subject thereof or necessarily involved therein.

The Court cannot end this adjudication without observing that what caused the
Government to lose its case in the tax court may hopefully be ascribed merely to the
ennui or ineptitude of officialdom, and not to syndicated intent or corruption. The
evidential cul-de-sac in which the Solicitor General found himself once again gives
substance to the public perception and suspicion that it is another proverbial tip in the
iceberg of venality in a government bureau which is pejoratively rated over the years.
What is so distressing, aside from the financial losses to the Government, is the erosion
of trust in a vital institution wherein the reputations of so many honest and dedicated
workers are besmirched by the acts or omissions of a few. Hence, the liberal view we
have here taken pro hac vice, which may give some degree of assurance that this Court
will unhesitatingly react to any bane in the government service, with a replication of
such response being likewise expected by the people from the executive authorities.

WHEREFORE, the judgment of respondent Court of Appeals in CA-G.R. SP No. 26839

is hereby SET ASIDE and the case at bar is REMANDED to the Court of Tax Appeals
for further proceedings and appropriate action, more particularly, the reception of
evidence for petitioner and the corresponding disposition of CTA Case No. 4099 not
otherwise inconsistent with our adjudgment herein.

SO ORDERED.

Narvasa, C.J., Padilla, Puno and Mendoza, JJ., concur.

G.R. No. 117359 July 23, 1998

DAVAO GULF LUMBER CORPORATION, petitioner,

vs.

COMMISSIONER OF INTERNAL REVENUE and COURT OF APPEALS, respondents.

PANGANIBAN, J.:

Because taxes are the lifeblood of the nation, statutes that allow exemptions are
construed strictly against the grantee and liberally in favor of the government. Otherwise
stated, any exemption from the payment of a tax must be clearly stated in the language
of the law; it cannot be merely implied therefrom.

Statement of the Case

This principium is applied by the Court in resolving this petition for review under Rule 45
of the Rules of Court, assailing the Decision 1 of Respondent Court of Appeals 2 in
CA-GR SP No. 34581 dated September 26, 1994, which affirmed the June 21, 1994
Decision 3 of the Court of Tax Appeals 4 in CTA Case No. 3574. The dispositive
portion of the CTA Decision affirmed by Respondent Court reads:

WHEREFORE, judgment is hereby rendered ordering the respondent

to refund to the petitioner the amount of P2,923.15 representing the
partial refund of specific taxes paid on manufactured oils and fuels. 5

The Antecedent Facts

The facts are undisputed. 6 Petitioner is a licensed forest concessionaire

possessing a Timber License Agreement granted by the Ministry of Natural
Resources (now Department of Environment and Natural Resources). From July
1, 1980 to January 31, 1982 petitioner purchased, from various oil companies,
refined and manufactured mineral oils as well as motor and diesel fuels, which it
used exclusively for the exploitation and operation of its forest concession. Said
oil companies paid the specific taxes imposed, under Sections 153 and 156 7 of
the 1977 National Internal Revenue Code (NIRC), on the sale of said products.
Being included in the purchase price of the oil products, the specific taxes paid
by the oil companies were eventually passed on to the user, the petitioner in this
case.

On December 13, 1982, petitioner filed before Respondent Commissioner of

Internal Revenue (CIR) a claim for refund in the amount of P120,825.11,
representing 25% of the specific taxes actually paid on the above-mentioned fuels
and oils that were used by petitioner in its operations as forest concessionaire.
The claim was based on Insular Lumber Co. vs. Court of Tax Appeals 8 and
Section 5 of RA 1435 which reads:

Sec. 5. The proceeds of the additional tax on manufactured oils shall

accrue to the road and bridge funds of the political subdivision for
whose benefit the tax is collected: Provided, however, That whenever
any oils mentioned above are used by miners or forest
concessionaires in their operations, twenty-five per centum of the
specific tax paid thereon shall be refunded by the Collector of
Internal Revenue upon submission of proof of actual use of oils and
under similar conditions enumerated in subparagraphs one and two
of section one hereof, amending section one hundred forty-two of
the Internal Revenue Code: Provided, further, That no new road shall
be constructed unless the routes or location thereof shall have been
approved by the Commissioner of Public Highways after a
determination that such road can be made part of an integral and
articulated route in the Philippine Highway System, as required in
section twenty-six of the Philippine Highway Act of 1953.

It is an unquestioned fact that petitioner complied with the procedure for refund,
including the submission of proof of the actual use of the aforementioned oils in
its forest concession as required by the above-quoted law. Petitioner, in support
of its claim for refund, submitted to the CIR the affidavits of its general manager,
the president of the Philippine Wood Products Association, and three
disinterested persons, all attesting that the said manufactured diesel and fuel oils
were actually used in the exploitation and operation of its forest concession.

On January 20, 1983, petitioner filed at the CTA a petition for review docketed as
CTA Case No. 3574. On June 21, 1994, the CTA rendered its decision finding
petitioner entitled to a partial refund of specific taxes the latter had paid in the
reduced amount of P2,923.15. The CTA ruled that the claim on purchases of
lubricating oil (from July 1, 1980 to January 19, 1981) and on manufactured oils
other than lubricating oils (from July 1, 1980 to January 4, 1981) had prescribed.
Disallowed on the ground that they were not included in the original claim filed
before the CIR were the claims for refund on purchases of manufactured oils from
January 1, 1980 to June 30, 1980 and from February 1, 1982 to June 30, 1982. In
regard to the other purchases, the CTA granted the claim, but it computed the
refund based on rates deemed paid under RA 1435, and not on the higher rates
actualhy paid by petitioner under the NIRC.

Insisting that the basis for computing the refund should be the increased rates
prescribed by Sections 153 and 156 of the NIRC, petitioner elevated the matter to
the Court of Appeals. As noted earlier, the Court of Appeals affirmed the CTA
Decision. Hence, this petition for review. 9

Public Respondent's Ruling

In its petition before the Court of Appeals, petitioner raised the following
arguments:

I. The respondent Court of Tax Appeals failed to apply the Supreme

Court's Decision in Insular Lumber Co. v. Court of Tax
Appeals which granted the claim for partial refund of specific taxes
paid by the claimant, without qualification or limitation.

II. The respondent Court of Tax Appeals ignored the increase in rates
imposed by succeeding amendatory laws,under which the petitioner
paid the specific taxes on manufactured and diesel fuels.

III. In its decision, the respondent Court of Tax Appeals ruled

contrary to established tenets of law when it lent itself to interpreting
Section 5 of R.A. 1435, when the construction of said law is not
necessary.

IV. Sections 1 and 2 of R.A. 1435 are not the operative provisions to
be applied but rather, Sections 153 and 156 of the National Internal
Revenue Code, as amended.
 V. To rule that the basis for computation of the refunded taxes
should be Sections 1 and 2 of R.A. 1435 rather than Section 153 and
156 of the National Internal Revenue Code is unfair, erroneous,
arbitrary, inequitable and oppressive. 10

The Court of Appeals held that the claim for refund should indeed be computed
on the basis of the amounts deemed paid under Sections 1 and 2 of RA 1435. In
so ruling, it cited our pronouncement in Commissioner of Internal Revenue v. Rio
Tuba Nickel Mining Corporation 11 and subsequent Resolution dated June 15,
1992 clarifying the said Decision. Respondent Court further ruled that the claims
for refund which prescribed and those which were not filed at the administrative
level must be excluded.

The Issue

In its Memorandum, petitioner raises one critical issue:

Whether or not petitioner is entitled under Republic Act No. 1435 to

the refund of 25% of the amount of specific taxes it actually paid on
various refined and manufactured mineral oils and other oil products
taxed under Sec. 153 and Sec. 156 of the 1977 (Sec. 142 and Sec. 145
of the 1939) National Internal Revenue Code. 12

In the main, the question before us pertains only to the computation of the tax
refund. Petitioner argues that the refund should be based on the increased rates
of specific taxes which it actually paid, as prescribed in Sections 153 and 156 of
the NIRC. Public respondent, on the other hand, contends that it should be based
on specific taxes deemed paid under Sections 1 and 2 of RA 1435.

The Court's Ruling

The petition is not meritorious.

Petitioner Entitled to Refund

Under Sec. 5 of RA 1435

At the outset, it must be stressed that petitioner is entitled to a partial refund

under Section 5 of RA 1435, which was enacted to provide means for increasing
the Highway Special Fund.

The rationale for this grant of partial refund of specific taxes paid on purchases of
manufactured diesel and fuel oils rests on the character of the Highway Special
Fund. The specific taxes collected on gasoline and fuel accrue to the Fund, which
is to be used for the construction and maintenance of the highway system. But
because the gasoline and fuel purchased by mining and lumber concessionaires
are used within their own compounds and roads, and their vehicles seldom use
the national highways, they do not directly benefit from the Fund and its use.
Hence, the tax refund gives the mining and the logging companies a measure of
relief in light of their peculiar situation. 13 When the Highway Special Fund was
abolished in 1985, the reason for the refund likewise ceased to exist. 14 Since
petitioner purchased the subject manufactured diesel and fuel oils from July 1,
1980 to January 31, 1982 and submitted the required proof that these were
actually used in operating its forest concession, it is entitled to claim the refund
under Section 5 of RA 1435.

Tax Refund Strictly Constrtued

Against the Grantee

Petitioner submits that it is entitled to the refund of 25 percent of the specific

taxes it had actually paid for the petroleum products used in its operations. In
other words, it claims a refund based on the increased rates under Sections 153
and 156 of the NIRC. 15 Petitioner argues that the statutory grant of the refund
privilege, specifically the phrase "twenty-five per centum of the specific tax paid
thereon shall be refunded by the Collector of Internal Revenue," is "clear and
unambiguous" enough to require construction or qualification thereof. 16 In
addition, it cites our pronouncement in Insular Lumber vs. Court of Tax
Appeals: 17

. . . Sec. 5 [of RA 1435] makes reference to subparagraphs 1 and 2 of

Section 1 only for the purpose of prescribing the procedure for
refund. This express reference cannot be expanded in scope to
include the limitation of the period of refund. If the limitation of the
period of refund of specific taxes paid on oils used in aviation and
agriculture is intended to cover similar taxes paid on oil used by
miners and forest concessionaires, there would have been no need
of dealing with oil used by miners and forest concessions separately
and Section 5 would very well have been included in Section 1 of
Republic Act No. 1435, notwithstanding the different rate of
exemption.

Petitioner then reasons that "the express mention of Section 1 of RA 1435 in

Section 5 cannot be expanded to include a limitation on the tax rates to be
applied . . . [otherwise,] Section 5 should very well have been included in Section
1 . . . ." 18

The Court is nor persuaded. The relevant statutory provisions do not clearly
support petitioner's claim for refund. RA 1435 provides:

Sec. 1 Section one hundred and forty-two of the National Internal

Revenue Code, as amended, is further amended to read as follows:
Sec. 142. Specific tax on manufactured oils and other fuels. — On
refined and manufactured mineral oils and motor fuels, there shall be
collected the following taxes:

(a) Kerosene or petroleum, per liter of volume capacity, two and one-
half centavos;

(b) Lubricating oils, per liter of volume capacity, seven centavos;

(c) Naptha, gasoline, and all other similar products of distillation, per
liter of volume capacity, eight centavos; and

(d) On denatured alcohol to be used for motive power, per liter of

volume capacity, one centavo: Provided, That if the denatured
alcohol is mixed with gasoline, the specific tax on which has already
been paid, only the alcohol content shall be subject to the tax herein
prescribed. For the purpose of this subsection, the removal of
denatured alcohol of not less than one hundred eighty degrees proof
(ninety per centum absolute alcohol) shall be deemed to have been
removed for motive power, unless shown to the contrary.

Whenever any of the oils mentioned above are, during the five years
from June eighteen, nineteen hundred and fifty two, used in
agriculture and aviation, fifty per centum of the specific tax paid
thereon shall be refunded by the Collector of Internal Revenue upon
the submission of the following:

(1) A sworn affidavit of the producer and two disinterested persons

proving that the said oils were actually used in agriculture, or in lieu
thereof.

(2) Should the producer belong to any producers' association or

federation, duly registered with the Securities and Exchange
Commission, the affidavit of the president of the association or
federation, attesting to the fact that the oils were actually used in
agriculture.

(3) In the case of aviation oils, a sworn certificate satisfactory to the

Collector proving that the said oils were actually used in
aviation: Provided, That no such refunds shall be granted in respect
to the oils used in aviation by citizens and corporations of foreign
countries which do not grant equivalent refunds or exemptions in
respect to similar oils used in aviation by citizens and corporations
of the Philippines.
 Sec. 2 Section one hundred and forty-five of the National Internal
Revenue Code, as amended, is further amended to read as follows:

Sec. 145. Specific Tax on Diesel fuel oil. — On fuel oil, commercially

known as diesel fuel oil, and on all similar fuel oils, having more or
less the same generating power, there shall be collected, per metric
ton, one peso.

x x x           x x x          x x x

Sec. 5. The proceeds of the additional tax on manufactured oils shall

accrue to the road and bridge funds of the political subdivision for
whose benefit the tax is collected: Provided, however, That whenever
any oils mentioned above are used by miners or forest
concessionaires in their operations, twenty-five per centum of the
specific tax paid thereon shall be refunded by the Collector of
Internal Revenue upon submission of proof of actual use of oils and
under similar conditions enumerated in subparagraphs one and two
of section one hereof, amending section one hundred forty-two of
the Internal Revenue Code: Provided, further, That no new road shall
be constructed unless the route or location thereof shall have been
approved by the Commissioner of Public Highways after a
determination that such road can be made part of an integral and
articulated route in the Philippine Highway System, as required in
section twenty-six of the Philippine Highway Act of 1953.

Subsequently the 1977 NIRC, PD 1672 and EO 672 amended the first two
provisions, renumbering them and prescribing higher rates. Accordingly,
petitioner paid specific taxes on petroleum products purchased from July 1, 1980
to January 31, 1982 under the following statutory provisions.

From February 8, 1980 to March 20, 1981, Sections 153 and 156 provided as
follows:

Sec. 153. Specific tax on manufactured oils and other fuels. — On

refined and manufactured mineral oils and motor fuels, there shall be
collected the following taxes which shall attach to the articles
hereunder enumerated as soon as they are in existence as such:

(a) Kerosene, per liter of volume capacity, seven centavos;

(b) Lubricating oils, per liter of volume capacity, eighty centavos;

(c) Naphtha, gasoline and all other similar products of distillation,

per liter of volume capacity, ninety-one centavos: Provided, That on
 premium and aviation gasoline, the tax shall be one peso per liter of
volume capacity;

(d) On denatured alcohol to be used for motive power, per liter of

volume capacity, one centavo: Provided, That unless otherwise
provided for by special laws, if the denatured alcohol is mixed with
gasoline, the specific tax on which has already been paid, only the
alcohol content shall be subject to the tax herein prescribed. For the
purposes of this subsection, the removal of denatured alcohol of not
less than one hundred eighty degrees proof (ninety per centum
absolute alcohol) shall be deemed to have been removed for motive
power, unless shown to the contrary;

(e) Processed gas, per liter of volume capacity, three centavos;

(f) Thinners and solvents, per liter of volume capacity, fifty-seven

centavos;

(g) Liquefied petroleum gas, per kilogram, fourteen

centavos: Provided, That liquefied petroleum gas used for motive
power shall be taxed at the equivalent rate as the specific tax on
diesel fuel oil;

(h) Asphalts, per kilogram, eight centavos;

(i) Greases, waxes and petrolatum, per kilogram, fifty centavos;

(j) Aviation turbo jet fuel, per liter of volume capacity, fifty-five
centavos. (As amended by Sec. 1, P.D. No. 1672.)

x x x           x x x          x x x

Sec. 156. Specific tax on diesel fuel oil. — On fuel oil, commercially

known as diesel fuel oil, and on all similar fuel oils, having more or
less the same generating power, per liter of volume capacity,
seventeen and one-half centavos, which tax shall attach to this fuel
oil as soon as it is in existence as such.

Then on March 21, 1981, these provisions were amended by EO 672 to read:

Sec. 153. Specific tax on manufactured oils and other fuels. — On

refined and manufactured mineral oils and motor fuels, there shall be
collected the following taxes which shall attach to the articles
hereunder enumerated as soon as they are in existence as such:

(a) Kerosene, per liter of volume capacity, nine centavos;

 (b) Lubricating oils, per liter of volume capacity, eighty centavos;

(c) Naphtha, gasoline and all other similar products of distillation,

per liter of volume capacity, one peso and six centavos: Provided,
That on premium and aviation gasoline, the tax shall be one peso
and ten centavos and one peso, respectively, per liter of volume
capacity;

(d) On denatured alcohol to be used for motive power, per liter of

volume capacity, one centavo; Provided, That unless otherwise
provided for by special laws, if the denatured alcohol is mixed with
gasoline, the specific tax on which has already been paid, only the
alcohol content shall be subject to the tax herein prescribed. For the
purpose of this subsection, the removal of denatured alcohol of not
less than one hundred eighty degrees proof (ninety per
centum absolute alcohol) shall be deemed to have been removed for
motive power, unless shown to the contrary;

(e) Processed gas, per liter of volume capacity, three centavos;

(f) Thinners and solvents, per liter of volume capacity, sixty-one

centavos;

(g) Liquefied petroleum gas, per kilogram, twenty-one

centavos: Provided, That, liquified petroleum gas used for motive
power shall be taxed at the equivalent rate as the specific tax on
diesel fuel oil;

(h) Asphalts, per kilogram, twelve centavos;

(i) Greases, waxes and petrolatum, per kilogram, fifty centavos;

(j) Aviation turbo-jet fuel, per liter of volume capacity, sixty-four

centavos.

x x x           x x x          x x x

Sec. 156. Specific tax on diesel fuel oil. — On fuel oil, commercially

known as diesel fuel oil, and all similar fuel oils, having more or less
the same generating power, per liter of volume capacity, twenty-five
and one-half centavos, which tax shall attach to this fuel oil as soon
as it is in existence as such.

A tax cannot be imposed unless it is supported by the clear and express

language of a statute; 19 on the other hand, once the tax is unquestionably
imposed, "[a] claim of exemption from tax payments must be clearly shown and
based on language in the law too plain to be mistaken." 20 Since the partial refund
authorized under Section 5, RA 1435, is in the nature of a tax exemption, 21 it must
be construed strictissimi Juris against the grantee. Hence, petitioner's claim of
refund on the basis of the specific taxes it actually paid must expressly be
granted in a statute stated in a language too clear to be mistaken.

We have carefully scrutinized RA 1435 and the subsequent pertinent statutes and
found no expression of a legislative will authorizing a refund based on the higher
rates claimed by petitioner. The mere fact that the privilege of refund was
included in Section 5, and not in Section 1, is insufficient to support petitioner's
claim. When the law itself does not explicitly provide that a refund under RA 1435
may be based on higher rates which were nonexistent at the time of its
enactment, this Coure cannot presume otherwise. A legislative lacuna cannot be
filled by judicial fiat. 22

The issue is not really novel. In Commissioner of Internal Revenue vs. Court of
Appeals and Atlas Consolidated Mining and Development
Corporation 23 (the second Atlas case), the CIR contended that the refund should
be based on Sections 1 and 2 of RA 1435, not Sections 153 and 156 of the NIRC of
1977. In categorically ruling that Private Respondent Atlas Consolidated Mining
and Development Corporation was entitled to a refund based on Sections 1 and 2
of RA 1435, the Court, through Mr. Justice Hilario G. Davide, Jr., reiterated our
pronouncement in Commissioner of Internal Revenue vs. Rio Tuba Nickel and
Mining Corporation:

Our Resolution of 25 March 1992 modifying our 30 September 1991

Decision in the Rio Tuba case sets forth the controlling doctrine. In
that Resolution, we stated:

Since the private respondent's claim for refund covers specific taxes
paid from 1980 to July 1983 then we find that the private respondent
is entitled to a refund. It should be made clear, however, that Rio
Tuba is not entitled to the whole amount it claims as refund.

The specific taxes on oils which Rio Tuba paid for the aforesaid
period were no longer based on the rates specified by Sections 1
and 2 of R.A. No. 1435 but on the increased rates mandated under
Sections 153 and 156 of the National Internal Revenue Code of 1977.
We note however, that the latter law does not specifically provide for
a refund to these mining and lumber companies of specific taxes
paid on manufactured and diesel fuel oils.

In Insular Lumber Co. v. Court of Tax Appeals, (104 SCRA 710

[1981]), the Court held that the authorized partial refund under
Section 5 of R.A. No. 1435 partakes of the nature of a tax exemption
and therefore cannot be allowed unless granted in the most explicit
 and categorical language. Since the grant of refund privileges must
be strictly construed against the taxpayer, the basis for the refund
shall be the amounts deemed paid under Sections 1 and 2 of R.A.
No. 1435.

ACCORDINGLY, the decision in G.R. Nos. 83583-84 is hereby

MODIFIED. The private respondent's CLAIM for REFUND is
GRANTED, computed on the basis of the amounts deemed paid
under Sections 1 and 2 of R.A. No. 1435, without interest. 24

We rule, therefore, that since Atlas's claims for refund cover specific
taxes paid before 1985, it should be granted the refund based on the
rates specified by Sections 1 and 2 of R.A. No. 1435 and not on the
increased rates under Sections 153 and 156 of the Tax Code of 1977,
provided the claims are not yet barred by prescription. (Emphasis
supplied.)

Insular Lumber Co. and First Atlas Case

Not Inconsistent With Rio Tuba

and Second Atlas Case

Petitioner argues that the applicable jurisprudence in this case should

be Commissioner of Internal Revenue vs. Atlas Consolidated and Mining Corp.
(the first Atlas case), an unsigned resolution, and Insular Lumber Co. vs. Court of
Tax Appeals, an en banc decision. 25 Petitioner also asks the Court to take a
"second look" at Rio Tuba and the second Atlas case, both decided by Divisions,
in view of Insular which was decided en banc. Petitioner posits that "[I]n view of
the similarity of the situation of herein petitioner with Insular Lumber Company
(claimant in Insular Lumber) and Rio Tuba Nickel Mining Corporation (claimant
in Rio Tuba), a dilemma has been created as to whether or not Insular Lumber,
which has been decided by the Honorable Court en banc, or Rio Tuba, which was
decided only [by] the Third Division of the Honorable Court, should
apply." 26

We find no conflict between these two pairs of cases. Neither Insular Lumber Co.
nor the first Atlas case ruled on the issue of whether the refund privilege under
Section 5 should be computed based on the specific tax deemed paid under
Sections 1 and 2 of RA 1435, regardless of what was actually paid under the
increased rates. Rio Tuba and the second Atlas case did.

Insular Lumber Co. decided a claim for refund on specific tax paid on petroleum
products purchased in the year 1963, when the increased rates under the NIRC of
1977 were nor yet in effect. Thus, the issue now before us did not exist at the
time, since the applicable rates were still those prescribed under Sections 1 and 2
of RA 1435.

On the other hand, the issue raised in the first Atlas case was whether the
claimant was entitled to the refund under Section 5, notwithstanding its failure to
pay any additional tax under a municipal or city ordinance. Although Atlas
purchased petroleum products in the years, 1976 to 1978 when the rates had
already been changed, the Court did not decide or make any pronouncement on
the issue in that case.

Clearly, it is impossible for these two decisions to clash with our pronouncement
in Rio Tuba and second Atlas case, in which we ruled that the refund granted be
computed on the basis of the amounts deemed paid under Sections 1 and 2 of RA
1435. In this light, we find no basis for petitioner's invocation of the constitutional
proscription that "no doctrine or principle of law laid down by the Court in a
decision rendered en banc or in division may be modified or reversed except by
the Court sitting en banc. 27

Finally, petitioner asserts that "equity and justice demand that the computation of
the tax refunds be based on actual amounts paid under Sections 153 and 156 of
the NIRC." 28 We disagree. According to an eminent authority on taxation, "there
is no tax exemption solely on the, ground of equity." 29

WHEREFORE, the petition is hereby DENIED and the assailed Decision of the
Court of Appeals is AFFIRMED.

SO ORDERED.

Narvasa, C.J., Regalado, Davide, Jr., Romero, Bellosillo, Melo, Puno, Vitug,
Kapunan, Mendoza, Martinez, Qiusumbing and Purisima, JJ., concur.
G.R. No. L-22074             April 30, 1965

THE PHILIPPINE GUARANTY CO., INC., petitioner,

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

Josue H. Gustilo and Ramirez and Ortigas for petitioner.

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

BENGZON, J.P., J.:

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

The reinsurance contracts made the commencement of the reinsurers' liability

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

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

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

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

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

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

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

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

==========

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

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

IN VIEW OF THE FOREGOING CONSIDERATIONS, petitioner Philippine

Guaranty Co., Inc. is hereby ordered to pay to the Commissioner of Internal
Revenue the respective sums of P202,192.00 and P173,153.00 or the total sum
of P375,345.00 as withholding income taxes for the years 1953 and 1954, plus
the statutory delinquency penalties thereon. With costs against petitioner.

Philippine Guaranty Co, Inc. has appealed, questioning the legality of the Commissioner
of Internal Revenue's assessment for withholding tax on the reinsurance premiums
ceded in 1953 and 1954 to the foreign reinsurers.

Petitioner maintain that the reinsurance premiums in question did not constitute income
from sources within the Philippines because the foreign reinsurers did not engage in
business in the Philippines, nor did they have office here.

The reinsurance contracts, however, show that the transactions or activities that
constituted the undertaking to reinsure Philippine Guaranty Co., Inc. against loses
arising from the original insurances in the Philippines were performed in the Philippines.
The liability of the foreign reinsurers commenced simultaneously with the liability of
Philippine Guaranty Co., Inc. under the original insurances. Philippine Guaranty Co.,
Inc. kept in Manila a register of the risks ceded to the foreign reinsurers. Entries made in
such register bound the foreign resinsurers, localizing in the Philippines the actual
cession of the risks and premiums and assumption of the reinsurance undertaking by
the foreign reinsurers. Taxes on premiums imposed by Section 259 of the Tax Code for
the privilege of doing insurance business in the Philippines were payable by the foreign
reinsurers when the same were not recoverable from the original assured. The foreign
reinsurers paid Philippine Guaranty Co., Inc. an amount equivalent to 5% of the ceded
premiums, in consideration for administration and management by the latter of the
affairs of the former in the Philippines in regard to their reinsurance activities here.
Disputes and differences between the parties were subject to arbitration in the City of
Manila. All the reinsurance contracts, except that with Swiss Reinsurance Company,
were signed by Philippine Guaranty Co., Inc. in the Philippines and later signed by the
foreign reinsurers abroad. Although the contract between Philippine Guaranty Co., Inc.
and Swiss Reinsurance Company was signed by both parties in Switzerland, the same
specifically provided that its provision shall be construed according to the laws of the
Philippines, thereby manifesting a clear intention of the parties to subject themselves to
Philippine law.

Section 24 of the Tax Code subjects foreign corporations to tax on their income from
sources within the Philippines. The word "sources" has been interpreted as the activity,
property or service giving rise to the income. 1 The reinsurance premiums were income
created from the undertaking of the foreign reinsurance companies to reinsure
Philippine Guaranty Co., Inc., against liability for loss under original insurances. Such
undertaking, as explained above, took place in the Philippines. These insurance
premiums, therefore, came from sources within the Philippines and, hence, are subject
to corporate income tax.

The foreign insurers' place of business should not be confused with their place of
activity. Business should not be continuity and progression of transactions 2 while
activity may consist of only a single transaction. An activity may occur outside the place
of business. Section 24 of the Tax Code does not require a foreign corporation to
engage in business in the Philippines in subjecting its income to tax. It suffices that the
activity creating the income is performed or done in the Philippines. What is controlling,
therefore, is not the place of business but the place of activity that created an income.

Petitioner further contends that the reinsurance premiums are not income from sources
within the Philippines because they are not specifically mentioned in Section 37 of the
Tax Code. Section 37 is not an all-inclusive enumeration, for it merely directs that the
kinds of income mentioned therein should be treated as income from sources within the
Philippines but it does not require that other kinds of income should not be considered
likewise.1äwphï1.ñët

The power to tax is an attribute of sovereignty. It is a power emanating from necessity. It

is a necessary burden to preserve the State's sovereignty and a means to give the
citizenry an army to resist an aggression, a navy to defend its shores from invasion, a
corps of civil servants to serve, public improvement designed for the enjoyment of the
citizenry and those which come within the State's territory, and facilities and protection
which a government is supposed to provide. Considering that the reinsurance premiums
in question were afforded protection by the government and the recipient foreign
reinsurers exercised rights and privileges guaranteed by our laws, such reinsurance
premiums and reinsurers should share the burden of maintaining the state.
Petitioner would wish to stress that its reliance in good faith on the rulings of the
Commissioner of Internal Revenue requiring no withholding of the tax due on the
reinsurance premiums in question relieved it of the duty to pay the corresponding
withholding tax thereon. This defense of petitioner may free if from the payment of
surcharges or penalties imposed for failure to pay the corresponding withholding tax,
but it certainly would not exculpate if from liability to pay such withholding tax The
Government is not estopped from collecting taxes by the mistakes or errors of its
agents.3

In respect to the question of whether or not reinsurance premiums ceded to foreign

reinsurers not doing business in the Philippines are subject to withholding tax under
Section 53 and 54 of the Tax Code, suffice it to state that this question has already
been answered in the affirmative in Alexander Howden & Co., Ltd. vs. Collector of
Internal Revenue, L-19393, April 14, 1965.

Finally, petitioner contends that the withholding tax should be computed from the
amount actually remitted to the foreign reinsurers instead of from the total amount
ceded. And since it did not remit any amount to its foreign insurers in 1953 and 1954, no
withholding tax was due.

The pertinent section of the Tax Code States:

Sec. 54. Payment of corporation income tax at source. — In the case of foreign

corporations subject to taxation under this Title not engaged in trade or business
within the Philippines and not having any office or place of business therein,
there shall be deducted and withheld at the source in the same manner and upon
the same items as is provided in Section fifty-three a tax equal to twenty-four per
centum thereof, and such tax shall be returned and paid in the same manner and
subject to the same conditions as provided in that section.

The applicable portion of Section 53 provides:

(b) Nonresident aliens. — All persons, corporations and general copartnerships

(compañias colectivas), in what ever capacity acting, including lessees or
mortgagors of real or personal property, trustees acting in any trust capacity,
executors, administrators, receivers, conservators, fiduciaries, employers, and all
officers and employees of the Government of the Philippines having the control,
receipt, custody, disposal, or payment of interest, dividends, rents, salaries,
wages, premiums, annuities, compensation, remunerations, emoluments, or
other fixed or determinable annual or periodical gains, profits, and income of any
nonresident alien individual, not engaged in trade or business within the
Philippines and not having any office or place of business therein, shall (except in
the case provided for in subsection [a] of this section) deduct and withhold from
such annual or periodical gains, profits, and income a tax equal to twelve per
centum thereof: Provided That no deductions or withholding shall be required in
the case of dividends paid by a foreign corporation unless (1) such corporation is
 engaged in trade or business within the Philippines or has an office or place of
business therein, and (2) more than eighty-five per centum of the gross income
of such corporation for the three-year period ending with the close of its taxable
year preceding the declaration of such dividends (or for such part of such period
as the corporation has been in existence)was derived from sources within the
Philippines as determined under the provisions of section thirty-
seven: Provided, further, That the Collector of Internal Revenue may authorize
such tax to be deducted and withheld from the interest upon any securities the
owners of which are not known to the withholding agent.

The above-quoted provisions allow no deduction from the income therein enumerated in
determining the amount to be withheld. According, in computing the withholding tax due
on the reinsurance premium in question, no deduction shall be recognized.

WHEREFORE, in affirming the decision appealed from, the Philippine Guaranty Co.,
Inc. is hereby ordered to pay to the Commissioner of Internal Revenue the sums of
P202,192.00 and P173,153.00, or a total amount of P375,345.00, as withholding tax for
the years 1953 and 1954, respectively. If the amount of P375,345.00 is not paid within
30 days from the date this judgement becomes final, there shall be collected a
surcharged of 5% on the amount unpaid, plus interest at the rate of 1% a month from
the date of delinquency to the date of payment, provided that the maximum amount that
may be collected as interest shall not exceed the amount corresponding to a period of
three (3) years. With costs againsts petitioner.

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

Footnotes
1
Mertens, Jr., Jacob, Law On Federal Income Taxation, Vol. 8, Section 45.27.
2
Imperial v. Collector of Internal Revenue, L-7924, September 30, 1955.
3
Hilado v. Collector of Internal Revenue, 53 O.G. 2471; Koppel (Philippines), Inc.
v. Collector of Internal Revenues, L-10550, September 19, 1961; Compañia
General de Tabacos de Filipinas v. City of Manila, L-16619, June 29, 1963.
G.R. No. 193007               July 19, 2011

RENATO V. DIAZ and AURORA MA. F. TIMBOL, Petitioners,

vs.
THE SECRETARY OF FINANCE and THE COMMISSIONER OF INTERNAL
REVENUE, Respondents.

DECISION

ABAD, J.:

May toll fees collected by tollway operators be subjected to value- added tax?

The Facts and the Case

Petitioners Renato V. Diaz and Aurora Ma. F. Timbol (petitioners) filed this petition for
declaratory relief1 assailing the validity of the impending imposition of value-added tax
(VAT) by the Bureau of Internal Revenue (BIR) on the collections of tollway operators.

Petitioners claim that, since the VAT would result in increased toll fees, they have an
interest as regular users of tollways in stopping the BIR action. Additionally, Diaz claims
that he sponsored the approval of Republic Act 7716 (the 1994 Expanded VAT Law or
EVAT Law) and Republic Act 8424 (the 1997 National Internal Revenue Code or the
NIRC) at the House of Representatives. Timbol, on the other hand, claims that she
served as Assistant Secretary of the Department of Trade and Industry and consultant
of the Toll Regulatory Board (TRB) in the past administration.

Petitioners allege that the BIR attempted during the administration of President Gloria
Macapagal-Arroyo to impose VAT on toll fees. The imposition was deferred, however, in
view of the consistent opposition of Diaz and other sectors to such move. But, upon
President Benigno C. Aquino III’s assumption of office in 2010, the BIR revived the idea
and would impose the challenged tax on toll fees beginning August 16, 2010 unless
judicially enjoined.

Petitioners hold the view that Congress did not, when it enacted the NIRC, intend to
include toll fees within the meaning of "sale of services" that are subject to VAT; that a
toll fee is a "user’s tax," not a sale of services; that to impose VAT on toll fees would
amount to a tax on public service; and that, since VAT was never factored into the
formula for computing toll fees, its imposition would violate the non-impairment clause of
the constitution.

On August 13, 2010 the Court issued a temporary restraining order (TRO), enjoining the
implementation of the VAT. The Court required the government, represented by
respondents Cesar V. Purisima, Secretary of the Department of Finance, and Kim S.
Jacinto-Henares, Commissioner of Internal Revenue, to comment on the petition within
10 days from notice.2 Later, the Court issued another resolution treating the petition as
one for prohibition.3

On August 23, 2010 the Office of the Solicitor General filed the government’s
comment.4 The government avers that the NIRC imposes VAT on all kinds of services
of franchise grantees, including tollway operations, except where the law provides
otherwise; that the Court should seek the meaning and intent of the law from the words
used in the statute; and that the imposition of VAT on tollway operations has been the
subject as early as 2003 of several BIR rulings and circulars.5

The government also argues that petitioners have no right to invoke the non-impairment
of contracts clause since they clearly have no personal interest in existing toll operating
agreements (TOAs) between the government and tollway operators. At any rate, the
non-impairment clause cannot limit the State’s sovereign taxing power which is
generally read into contracts.

Finally, the government contends that the non-inclusion of VAT in the parametric
formula for computing toll rates cannot exempt tollway operators from VAT. In any
event, it cannot be claimed that the rights of tollway operators to a reasonable rate of
return will be impaired by the VAT since this is imposed on top of the toll rate. Further,
the imposition of VAT on toll fees would have very minimal effect on motorists using the
tollways.
In their reply6 to the government’s comment, petitioners point out that tollway operators
cannot be regarded as franchise grantees under the NIRC since they do not hold
legislative franchises. Further, the BIR intends to collect the VAT by rounding off the toll
rate and putting any excess collection in an escrow account. But this would be illegal
since only the Congress can modify VAT rates and authorize its disbursement. Finally,
BIR Revenue Memorandum Circular 63-2010 (BIR RMC 63-2010), which directs toll
companies to record an accumulated input VAT of zero balance in their books as of
August 16, 2010, contravenes Section 111 of the NIRC which grants entities that first
become liable to VAT a transitional input tax credit of 2% on beginning inventory. For
this reason, the VAT on toll fees cannot be implemented.

The Issues Presented

The case presents two procedural issues:

1. Whether or not the Court may treat the petition for declaratory relief as one for
prohibition; and

2. Whether or not petitioners Diaz and Timbol have legal standing to file the
action.

The case also presents two substantive issues:

1. Whether or not the government is unlawfully expanding VAT coverage by

including tollway operators and tollway operations in the terms "franchise
grantees" and "sale of services" under Section 108 of the Code; and

2. Whether or not the imposition of VAT on tollway operators a) amounts to a tax

on tax and not a tax on services; b) will impair the tollway operators’ right to a
reasonable return of investment under their TOAs; and c) is not administratively
feasible and cannot be implemented.

The Court’s Rulings

A. On the Procedural Issues:

On August 24, 2010 the Court issued a resolution, treating the petition as one for
prohibition rather than one for declaratory relief, the characterization that petitioners
Diaz and Timbol gave their action. The government has sought reconsideration of the
Court’s resolution,7 however, arguing that petitioners’ allegations clearly made out a
case for declaratory relief, an action over which the Court has no original jurisdiction.
The government adds, moreover, that the petition does not meet the requirements of
Rule 65 for actions for prohibition since the BIR did not exercise judicial, quasi-judicial,
or ministerial functions when it sought to impose VAT on toll fees. Besides, petitioners
Diaz and Timbol has a plain, speedy, and adequate remedy in the ordinary course of
law against the BIR action in the form of an appeal to the Secretary of Finance.
But there are precedents for treating a petition for declaratory relief as one for
prohibition if the case has far-reaching implications and raises questions that need to be
resolved for the public good.8 The Court has also held that a petition for prohibition is a
proper remedy to prohibit or nullify acts of executive officials that amount to usurpation
of legislative authority.9

Here, the imposition of VAT on toll fees has far-reaching implications. Its imposition
would impact, not only on the more than half a million motorists who use the tollways
everyday, but more so on the government’s effort to raise revenue for funding various
projects and for reducing budgetary deficits.

To dismiss the petition and resolve the issues later, after the challenged VAT has been
imposed, could cause more mischief both to the tax-paying public and the government.
A belated declaration of nullity of the BIR action would make any attempt to refund to
the motorists what they paid an administrative nightmare with no solution.
Consequently, it is not only the right, but the duty of the Court to take cognizance of and
resolve the issues that the petition raises.

Although the petition does not strictly comply with the requirements of Rule 65, the
Court has ample power to waive such technical requirements when the legal questions
to be resolved are of great importance to the public. The same may be said of the
requirement of locus standi which is a mere procedural requisite.10

B. On the Substantive Issues:

One. The relevant law in this case is Section 108 of the NIRC, as amended. VAT is
levied, assessed, and collected, according to Section 108, on the gross receipts derived
from the sale or exchange of services as well as from the use or lease of properties.
The third paragraph of Section 108 defines "sale or exchange of services" as follows:

The phrase ‘sale or exchange of services’ means the performance of all kinds of
services in the Philippines for others for a fee, remuneration or consideration, including
those performed or rendered by construction and service contractors; stock, real estate,
commercial, customs and immigration brokers; lessors of property, whether personal or
real; warehousing services; lessors or distributors of cinematographic films; persons
engaged in milling, processing, manufacturing or repacking goods for others;
proprietors, operators or keepers of hotels, motels, resthouses, pension houses, inns,
resorts; proprietors or operators of restaurants, refreshment parlors, cafes and other
eating places, including clubs and caterers; dealers in securities; lending investors;
transportation contractors on their transport of goods or cargoes, including persons who
transport goods or cargoes for hire and other domestic common carriers by land relative
to their transport of goods or cargoes; common carriers by air and sea relative to their
transport of passengers, goods or cargoes from one place in the Philippines to another
place in the Philippines; sales of electricity by generation companies, transmission, and
distribution companies; services of franchise grantees of electric utilities, telephone and
telegraph, radio and television broadcasting and all other franchise grantees except
those under Section 119 of this Code and non-life insurance companies (except their
crop insurances), including surety, fidelity, indemnity and bonding companies; and
similar services regardless of whether or not the performance thereof calls for the
exercise or use of the physical or mental faculties. (Underscoring supplied)

It is plain from the above that the law imposes VAT on "all kinds of services" rendered in
the Philippines for a fee, including those specified in the list. The enumeration of
affected services is not exclusive.11 By qualifying "services" with the words "all kinds,"
Congress has given the term "services" an all-encompassing meaning. The listing of
specific services are intended to illustrate how pervasive and broad is the VAT’s reach
rather than establish concrete limits to its application. Thus, every activity that can be
imagined as a form of "service" rendered for a fee should be deemed included unless
some provision of law especially excludes it.

Now, do tollway operators render services for a fee? Presidential Decree (P.D.) 1112 or
the Toll Operation Decree establishes the legal basis for the services that tollway
operators render. Essentially, tollway operators construct, maintain, and operate
expressways, also called tollways, at the operators’ expense. Tollways serve as
alternatives to regular public highways that meander through populated areas and
branch out to local roads. Traffic in the regular public highways is for this reason slow-
moving. In consideration for constructing tollways at their expense, the operators are
allowed to collect government-approved fees from motorists using the tollways until
such operators could fully recover their expenses and earn reasonable returns from
their investments.

When a tollway operator takes a toll fee from a motorist, the fee is in effect for the
latter’s use of the tollway facilities over which the operator enjoys private proprietary
rights12 that its contract and the law recognize. In this sense, the tollway operator is no
different from the following service providers under Section 108 who allow others to use
their properties or facilities for a fee:

1. Lessors of property, whether personal or real;

2. Warehousing service operators;

3. Lessors or distributors of cinematographic films;

4. Proprietors, operators or keepers of hotels, motels, resthouses, pension

houses, inns, resorts;

5. Lending investors (for use of money);

6. Transportation contractors on their transport of goods or cargoes, including

persons who transport goods or cargoes for hire and other domestic common
carriers by land relative to their transport of goods or cargoes; and
 7. Common carriers by air and sea relative to their transport of passengers,
goods or cargoes from one place in the Philippines to another place in the
Philippines.

It does not help petitioners’ cause that Section 108 subjects to VAT "all kinds of
services" rendered for a fee "regardless of whether or not the performance thereof calls
for the exercise or use of the physical or mental faculties." This means that "services" to
be subject to VAT need not fall under the traditional concept of services, the personal or
professional kinds that require the use of human knowledge and skills.

And not only do tollway operators come under the broad term "all kinds of services,"
they also come under the specific class described in Section 108 as "all other franchise
grantees" who are subject to VAT, "except those under Section 119 of this Code."

Tollway operators are franchise grantees and they do not belong to exceptions (the low-
income radio and/or television broadcasting companies with gross annual incomes of
less than ₱10 million and gas and water utilities) that Section 11913 spares from the
payment of VAT. The word "franchise" broadly covers government grants of a special
right to do an act or series of acts of public concern.14

Petitioners of course contend that tollway operators cannot be considered "franchise

grantees" under Section 108 since they do not hold legislative franchises. But nothing in
Section 108 indicates that the "franchise grantees" it speaks of are those who hold
legislative franchises. Petitioners give no reason, and the Court cannot surmise any, for
making a distinction between franchises granted by Congress and franchises granted
by some other government agency. The latter, properly constituted, may grant
franchises. Indeed, franchises conferred or granted by local authorities, as agents of the
state, constitute as much a legislative franchise as though the grant had been made by
Congress itself.15 The term "franchise" has been broadly construed as referring, not only
to authorizations that Congress directly issues in the form of a special law, but also to
those granted by administrative agencies to which the power to grant franchises has
been delegated by Congress.16

Tollway operators are, owing to the nature and object of their business, "franchise
grantees." The construction, operation, and maintenance of toll facilities on public
improvements are activities of public consequence that necessarily require a special
grant of authority from the state. Indeed, Congress granted special franchise for the
operation of tollways to the Philippine National Construction Company, the former
tollway concessionaire for the North and South Luzon Expressways. Apart from
Congress, tollway franchises may also be granted by the TRB, pursuant to the exercise
of its delegated powers under P.D. 1112.17 The franchise in this case is evidenced by a
"Toll Operation Certificate."18

Petitioners contend that the public nature of the services rendered by tollway operators
excludes such services from the term "sale of services" under Section 108 of the Code.
But, again, nothing in Section 108 supports this contention. The reverse is true. In
specifically including by way of example electric utilities, telephone, telegraph, and
broadcasting companies in its list of VAT-covered businesses, Section 108 opens other
companies rendering public service for a fee to the imposition of VAT. Businesses of a
public nature such as public utilities and the collection of tolls or charges for its use or
service is a franchise.19

Nor can petitioners cite as binding on the Court statements made by certain lawmakers
in the course of congressional deliberations of the would-be law. As the Court said in
South African Airways v. Commissioner of Internal Revenue,20 "statements made by
individual members of Congress in the consideration of a bill do not necessarily reflect
the sense of that body and are, consequently, not controlling in the interpretation of
law." The congressional will is ultimately determined by the language of the law that the
lawmakers voted on. Consequently, the meaning and intention of the law must first be
sought "in the words of the statute itself, read and considered in their natural, ordinary,
commonly accepted and most obvious significations, according to good and approved
usage and without resorting to forced or subtle construction."

Two. Petitioners argue that a toll fee is a "user’s tax" and to impose VAT on toll fees is
tantamount to taxing a tax.21 Actually, petitioners base this argument on the following
discussion in Manila International Airport Authority (MIAA) v. Court of Appeals:22

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

x x x The operation by the government of a tollway does not change the character of the
road as one for public use. Someone must pay for the maintenance of the road, either
the public indirectly through the taxes they pay the government, or only those among
the public who actually use the road through the toll fees they pay upon using the
road. The tollway system is even a more efficient and equitable manner of taxing the
public for the maintenance of public roads.

The charging of fees to the public does not determine the character of the property
whether it is for public dominion or not. Article 420 of the Civil Code defines property of
public dominion as "one intended for public use." Even if the government collects toll
fees, the road is still "intended for public use" if anyone can use the road under the
same terms and conditions as the rest of the public. The charging of fees, the limitation
on the kind of vehicles that can use the road, the speed restrictions and other conditions
for the use of the road do not affect the public character of the road.

The terminal fees MIAA charges to passengers, as well as the landing fees MIAA
charges to airlines, constitute the bulk of the income that maintains the operations of
MIAA. The collection of such fees does not change the character of MIAA as an airport
for public use. Such fees are often termed user’s tax. This means taxing those among
the public who actually use a public facility instead of taxing all the public including
those who never use the particular public facility. A user’s tax is more equitable – a
principle of taxation mandated in the 1987 Constitution."23 (Underscoring supplied)

Petitioners assume that what the Court said above, equating terminal fees to a "user’s
tax" must also pertain to tollway fees. But the main issue in the MIAA case was whether
or not Parañaque City could sell airport lands and buildings under MIAA administration
at public auction to satisfy unpaid real estate taxes. Since local governments have no
power to tax the national government, the Court held that the City could not proceed
with the auction sale. MIAA forms part of the national government although not
integrated in the department framework."24 Thus, its airport lands and buildings are
properties of public dominion beyond the commerce of man under Article 420(1)25 of the
Civil Code and could not be sold at public auction.

As can be seen, the discussion in the MIAA case on toll roads and toll fees was made,
not to establish a rule that tollway fees are user’s tax, but to make the point that airport
lands and buildings are properties of public dominion and that the collection of terminal
fees for their use does not make them private properties. Tollway fees are not taxes.
Indeed, they are not assessed and collected by the BIR and do not go to the general
coffers of the government.

It would of course be another matter if Congress enacts a law imposing a user’s tax,
collectible from motorists, for the construction and maintenance of certain roadways.
The tax in such a case goes directly to the government for the replenishment of
resources it spends for the roadways. This is not the case here. What the government
seeks to tax here are fees collected from tollways that are constructed, maintained, and
operated by private tollway operators at their own expense under the build, operate, and
transfer scheme that the government has adopted for expressways.26 Except for a
fraction given to the government, the toll fees essentially end up as earnings of the
tollway operators.

In sum, fees paid by the public to tollway operators for use of the tollways, are not taxes
in any sense. A tax is imposed under the taxing power of the government principally for
the purpose of raising revenues to fund public expenditures. 27 Toll fees, on the other
hand, are collected by private tollway operators as reimbursement for the costs and
expenses incurred in the construction, maintenance and operation of the tollways, as
well as to assure them a reasonable margin of income. Although toll fees are charged
for the use of public facilities, therefore, they are not government exactions that can be
properly treated as a tax. Taxes may be imposed only by the government under its
sovereign authority, toll fees may be demanded by either the government or private
individuals or entities, as an attribute of ownership.28

Parenthetically, VAT on tollway operations cannot be deemed a tax on tax due to the
nature of VAT as an indirect tax. In indirect taxation, a distinction is made between the
liability for the tax and burden of the tax. The seller who is liable for the VAT may shift or
pass on the amount of VAT it paid on goods, properties or services to the buyer. In such
a case, what is transferred is not the seller’s liability but merely the burden of the VAT.29

Thus, the seller remains directly and legally liable for payment of the VAT, but the buyer
bears its burden since the amount of VAT paid by the former is added to the selling
price. Once shifted, the VAT ceases to be a tax30 and simply becomes part of the cost
that the buyer must pay in order to purchase the good, property or service.

Consequently, VAT on tollway operations is not really a tax on the tollway user, but on
the tollway operator. Under Section 105 of the Code, 31 VAT is imposed on any person
who, in the course of trade or business, sells or renders services for a fee. In other
words, the seller of services, who in this case is the tollway operator, is the person liable
for VAT. The latter merely shifts the burden of VAT to the tollway user as part of the toll
fees.

For this reason, VAT on tollway operations cannot be a tax on tax even if toll fees were
deemed as a "user’s tax." VAT is assessed against the tollway operator’s gross receipts
and not necessarily on the toll fees. Although the tollway operator may shift the VAT
burden to the tollway user, it will not make the latter directly liable for the VAT. The
shifted VAT burden simply becomes part of the toll fees that one has to pay in order to
use the tollways.32

Three. Petitioner Timbol has no personality to invoke the non-impairment of contract

clause on behalf of private investors in the tollway projects. She will neither be
prejudiced by nor be affected by the alleged diminution in return of investments that
may result from the VAT imposition. She has no interest at all in the profits to be earned
under the TOAs. The interest in and right to recover investments solely belongs to the
private tollway investors.

Besides, her allegation that the private investors’ rate of recovery will be adversely
affected by imposing VAT on tollway operations is purely speculative. Equally
presumptuous is her assertion that a stipulation in the TOAs known as the Material
Adverse Grantor Action will be activated if VAT is thus imposed. The Court cannot rule
on matters that are manifestly conjectural. Neither can it prohibit the State from
exercising its sovereign taxing power based on uncertain, prophetic grounds.

Four. Finally, petitioners assert that the substantiation requirements for claiming input
VAT make the VAT on tollway operations impractical and incapable of implementation.
They cite the fact that, in order to claim input VAT, the name, address and tax
identification number of the tollway user must be indicated in the VAT receipt or invoice.
The manner by which the BIR intends to implement the VAT – by rounding off the toll
rate and putting any excess collection in an escrow account – is also illegal, while the
alternative of giving "change" to thousands of motorists in order to meet the exact toll
rate would be a logistical nightmare. Thus, according to them, the VAT on tollway
operations is not administratively feasible.33
Administrative feasibility is one of the canons of a sound tax system. It simply means
that the tax system should be capable of being effectively administered and enforced
with the least inconvenience to the taxpayer. Non-observance of the canon, however,
will not render a tax imposition invalid "except to the extent that specific constitutional or
statutory limitations are impaired."34 Thus, even if the imposition of VAT on tollway
operations may seem burdensome to implement, it is not necessarily invalid unless
some aspect of it is shown to violate any law or the Constitution.

Here, it remains to be seen how the taxing authority will actually implement the VAT on
tollway operations. Any declaration by the Court that the manner of its implementation is
illegal or unconstitutional would be premature. Although the transcript of the August 12,
2010 Senate hearing provides some clue as to how the BIR intends to go about it, 35 the
facts pertaining to the matter are not sufficiently established for the Court to pass
judgment on. Besides, any concern about how the VAT on tollway operations will be
enforced must first be addressed to the BIR on whom the task of implementing tax laws
primarily and exclusively rests. The Court cannot preempt the BIR’s discretion on the
matter, absent any clear violation of law or the Constitution.

For the same reason, the Court cannot prematurely declare as illegal, BIR RMC 63-
2010 which directs toll companies to record an accumulated input VAT of zero balance
in their books as of August 16, 2010, the date when the VAT imposition was supposed
to take effect. The issuance allegedly violates Section 111(A)36 of the Code which
grants first time VAT payers a transitional input VAT of 2% on beginning inventory.

In this connection, the BIR explained that BIR RMC 63-2010 is actually the product of
negotiations with tollway operators who have been assessed VAT as early as 2005, but
failed to charge VAT-inclusive toll fees which by now can no longer be collected. The
tollway operators agreed to waive the 2% transitional input VAT, in exchange for
cancellation of their past due VAT liabilities. Notably, the right to claim the 2%
transitional input VAT belongs to the tollway operators who have not questioned the
circular’s validity. They are thus the ones who have a right to challenge the circular in a
direct and proper action brought for the purpose.

Conclusion

In fine, the Commissioner of Internal Revenue did not usurp legislative prerogative or
expand the VAT law’s coverage when she sought to impose VAT on tollway operations.
Section 108(A) of the Code clearly states that services of all other franchise grantees
are subject to VAT, except as may be provided under Section 119 of the Code. Tollway
operators are not among the franchise grantees subject to franchise tax under the latter
provision. Neither are their services among the VAT-exempt transactions under Section
109 of the Code.

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

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

The VAT on franchise grantees has been in the statute books since 1994 when R.A.
7716 or the Expanded Value-Added Tax law was passed. It is only now, however, that
the executive has earnestly pursued the VAT imposition against tollway operators. The
executive exercises exclusive discretion in matters pertaining to the implementation and
execution of tax laws. Consequently, the executive is more properly suited to deal with
the immediate and practical consequences of the VAT imposition.

WHEREFORE, the Court DENIES respondents Secretary of Finance and

Commissioner of Internal Revenue’s motion for reconsideration of its August 24, 2010
resolution, DISMISSES the petitioners Renato V. Diaz and Aurora Ma. F. Timbol’s
petition for lack of merit, and SETS ASIDE the Court’s temporary restraining order dated
August 13, 2010.

SO ORDERED.