G.R. No.

164171

February 20, 2006

HON. EXECUTIVE SECRETARY, HON. SECRETARY OF THE DEPARTMENT OF TRANSPORTATION AND COMMUNICATIONS (DOTC), COMMISSIONER OF CUSTOMS, ASSISTANT SECRETARY, LAND TRANSPORTATION OFFICE (LTO), COLLECTOR OF CUSTOMS, SUBIC BAY FREE PORT ZONE, AND CHIEF OF LTO, SUBIC BAY FREE PORT ZONE, Petitioners, vs. SOUTHWING HEAVY INDUSTRIES, INC., represented by its President JOSE T. DIZON, UNITED AUCTIONEERS, INC., represented by its President DOMINIC SYTIN, and MICROVAN, INC., represented by its President MARIANO C. SONON, Respondents. x---------------x G.R. No. 164172 February 20, 2006

HON. EXECUTIVE SECRETARY, SECRETARY OF THE DEPARTMENT OF TRANSPORTATION AND COMMUNICATION (DOTC), COMMISSIONER OF CUSTOMS, ASSISTANT SECRETARY, LAND TRANSPORTATION OFFICE (LTO), COLLECTOR OF CUSTOMS, SUBIC BAY FREE PORT ZONE AND CHIEF OF LTO, SUBIC BAY FREE PORT ZONE, Petitioners, vs. SUBIC INTEGRATED MACRO VENTURES CORP., represented by its President YOLANDA AMBAR,Respondent. x---------------x G.R. No. 168741 February 20, 2006

HON. EXECUTIVE SECRETARY, HON. SECRETARY OF FINANCE, THE CHIEF OF THE LAND TRANSPORTATION OFFICE, THE COMMISSIONER OF CUSTOMS, and THE COLLECTOR OF CUSTOMS, SUBIC SPECIAL ECONOMIC ZONE, Petitioners, vs. MOTOR VEHICLE IMPORTERS ASSOCIATION OF SUBIC BAY FREEPORT, INC., represented by its President ALFREDO S. GALANG, Respondent. DECISION YNARES-SANTIAGO, J.: The instant consolidated petitions seek to annul and set aside the Decisions of the Regional Trial Court of Olongapo City, Branch 72, in Civil Case No. 20-0-04 and Civil Case No. 22-0-04, both dated May 24, 2004; and the February 14, 2005 Decision of the Court of Appeals in CA-G.R. SP. No. 83284, which declared Article 2, Section 3.1 of Executive Order No. 156 (EO 156) unconstitutional. Said executive issuance prohibits the importation into the country, inclusive of the Special Economic and Freeport Zone or the Subic Bay Freeport (SBF or Freeport), of used motor vehicles, subject to a few exceptions. The undisputed facts show that on December 12, 2002, President Gloria Macapagal-Arroyo, through Executive Secretary Alberto G. Romulo, issued EO 156, entitled "Providing for a comprehensive industrial policy and directions for the motor vehicle development program and its implementing guidelines." The challenged provision states:

3.1 The importation into the country, inclusive of the Freeport, of all types of used motor vehicles is prohibited, except for the following: 3.1.1 A vehicle that is owned and for the personal use of a returning resident or immigrant and covered by an authority to import issued under the No-dollar Importation Program. Such vehicles cannot be resold for at least three (3) years; 3.1.2 A vehicle for the use of an official of the Diplomatic Corps and authorized to be imported by the Department of Foreign Affairs; 3.1.3 Trucks excluding pickup trucks; 1. with GVW of 2.5-6.0 tons covered by an authority to import issued by the DTI. 2. With GVW above 6.0 tons. 3.1.4 Buses: 1. with GVW of 6-12 tons covered by an authority to import issued by DTI; 2. with GVW above 12 tons. 3.1.5 Special purpose vehicles: 1. fire trucks 2. ambulances 3. funeral hearse/coaches 4. crane lorries 5. tractor heads and truck tractors 6. boom trucks 7. tanker trucks 8. tank lorries with high pressure spray gun 9. reefers or refrigerated trucks 10. mobile drilling derricks 11. transit/concrete mixers 12. mobile radiological units 13. wreckers or tow trucks

14. concrete pump trucks 15. aerial/bucket flat-form trucks 16. street sweepers 17. vacuum trucks 18. garbage compactors 19. self loader trucks 20. man lift trucks 21. lighting trucks 22. trucks mounted with special purpose equipment 23. all other types of vehicle designed for a specific use. The issuance of EO 156 spawned three separate actions for declaratory relief before Branch 72 of the Regional Trial Court of Olongapo City, all seeking the declaration of the unconstitutionality of Article 2, Section 3.1 of said executive order. The cases were filed by herein respondent entities, who or whose members, are classified as Subic Bay Freeport Enterprises and engaged in the business of, among others, importing and/or trading used motor vehicles. G.R. No. 164171: On January 16, 2004, respondents Southwing Heavy Industries, Inc., (Southwing) United Auctioneers, Inc. (United Auctioneers), and Microvan, Inc. (Microvan), instituted a declaratory relief case docketed as Civil Case No. 20-0-04,1 against the Executive Secretary, Secretary of Transportation and Communication, Commissioner of Customs, Assistant Secretary and Head of the Land Transportation Office, Subic Bay Metropolitan Authority (SBMA), Collector of Customs for the Port at Subic Bay Freeport Zone, and the Chief of the Land Transportation Office at Subic Bay Freeport Zone. Southwing, United Auctioneers and Microvan prayed that judgment be rendered (1) declaring Article 2, Section 3.1 of EO 156 unconstitutional and illegal; (2) directing the Secretary of Finance, Commissioner of Customs, Collector of Customs and the Chairman of the SBMA to allow the importation of used motor vehicles; (2) ordering the Land Transportation Office and its subordinates inside the Subic Special Economic Zone to process the registration of the imported used motor vehicles; and (3) in general, to allow the unimpeded entry and importation of used motor vehicles subject only to the payment of the required customs duties. Upon filing of petitioners answer/comment, respondents Southwing and Microvan filed a motion for summary judgment which was granted by the trial court. On May 24, 2004, a summary judgment was rendered declaring that Article 2, Section 3.1 of EO 156 constitutes an unlawful usurpation of legislative power vested by the Constitution with Congress. The trial court further held that the proviso is contrary to the mandate of Republic Act No. 7227 (RA 7227) or the Bases Conversion and Development Act of 1992 which allows the free flow of goods and capital within the Freeport. The dispositive portion of the said decision reads:

WHEREFORE, judgment is hereby rendered in favor of petitioner declaring Executive Order 156 [Article 2, Section] 3.1 for being unconstitutional and illegal; directing respondents Collector of Customs based at SBMA to allow the importation and entry of used motor vehicles pursuant to the mandate of RA 7227; directing respondent Chief of the Land Transportation Office and its subordinates inside the Subic Special Economic Zone or SBMA to process the registration of imported used motor vehicle; and in general, to allow unimpeded entry and importation of used motor vehicles to the Philippines subject only to the payment of the required customs duties. SO ORDERED.2 From the foregoing decision, petitioners sought relief before this Court via a petition for review on certiorari, docketed as G.R. No. 164171. G.R. No. 164172: On January 20, 2004, respondent Subic Integrated Macro Ventures Corporation (Macro Ventures) filed with the same trial court, a similar action for declaratory relief docketed as Civil Case No. 22-004,3 with the same prayer and against the same parties4 as those in Civil Case No. 20-0-04. In this case, the trial court likewise rendered a summary judgment on May 24, 2004, holding that Article 2, Section 3.1 of EO 156, is repugnant to the constitution.5 Elevated to this Court via a petition for review on certiorari, Civil Case No. 22-0-04 was docketed as G.R. No. 164172. G.R. No. 168741 On January 22, 2003, respondent Motor Vehicle Importers Association of Subic Bay Freeport, Inc. (Association), filed another action for declaratory relief with essentially the same prayer as those in Civil Case No. 22-0-04 and Civil Case No. 20-0-04, against the Executive Secretary, Secretary of Finance, Chief of the Land Transportation Office, Commissioner of Customs, Collector of Customs at SBMA and the Chairman of SBMA. This was docketed as Civil Case No. 30-0-2003,6 before the same trial court. In a decision dated March 10, 2004, the court a quo granted the Associations prayer and declared the assailed proviso as contrary to the Constitution, to wit: WHEREFORE, judgment is hereby rendered in favor of petitioner declaring Executive Order 156 [Article 2, Section] 3.1 for being unconstitutional and illegal; directing respondents Collector of Customs based at SBMA to allow the importation and entry of used motor vehicles pursuant to the mandate of RA 7227; directing respondent Chief of the Land Transportation Office and its subordinates inside the Subic Special Economic Zone or SBMA to process the registration of imported used motor vehicles; directing the respondent Chairman of the SBMA to allow the entry into the Subic Special Economic Zone or SBMA imported used motor vehicle; and in general, to allow unimpeded entry and importation of used motor vehicles to the Philippines subject only to the payment of the required customs duties. SO ORDERED.7 Aggrieved, the petitioners in Civil Case No. 30-0-2003, filed a petition for certiorari8 with the Court of Appeals (CA-G.R. SP. No. 83284) which denied the petition on February 14, 2005 and sustained the finding of the trial court that Article 2, Section 3.1 of EO 156, is void for being repugnant to the constitution. The dispositive portion thereof, reads:

WHEREFORE, the instant petition for certiorari is hereby DENIED. The assailed decision of the Regional Trial Court, Third Judicial Region, Branch 72, Olongapo City, in Civil Case No. 30-0-2003, accordingly, STANDS. SO ORDERED.9 The aforequoted decision of the Court of Appeals was elevated to this Court and docketed as G.R. No. 168741. In a Resolution dated October 4, 2005,10 said case was consolidated with G.R. No. 164171 and G.R. No. 164172. Petitioners are now before this Court contending that Article 2, Section 3.1 of EO 156 is valid and applicable to the entire country, including the Freeeport. In support of their arguments, they raise procedural and substantive issues bearing on the constitutionality of the assailed proviso. The procedural issues are: the lack of respondents locus standi to question the validity of EO 156, the propriety of challenging EO 156 in a declaratory relief proceeding and the applicability of a judgment on the pleadings in this case. Petitioners argue that respondents will not be affected by the importation ban considering that their certificate of registration and tax exemption do not authorize them to engage in the importation and/or trading of used cars. They also aver that the actions filed by respondents do not qualify as declaratory relief cases. Section 1, Rule 63 of the Rules of Court provides that a petition for declaratory relief may be filed before there is a breach or violation of rights. Petitioners claim that there was already a breach of respondents supposed right because the cases were filed more than a year after the issuance of EO 156. In fact, in Civil Case No. 30-0-2003, numerous warrants of seizure and detention were issued against imported used motor vehicles belonging to respondent Associations members. Petitioners arguments lack merit. The established rule that the constitutionality of a law or administrative issuance can be challenged by one who will sustain a direct injury as a result of its enforcement11 has been satisfied in the instant case. The broad subject of the prohibited importation is "all types of used motor vehicles." Respondents would definitely suffer a direct injury from the implementation of EO 156 because their certificate of registration and tax exemption authorize them to trade and/or import new and used motor vehicles and spare parts, except "used cars."12 Other types of motor vehicles imported and/or traded by respondents and not falling within the category of used cars would thus be subjected to the ban to the prejudice of their business. Undoubtedly, respondents have the legal standing to assail the validity of EO 156. As to the propriety of declaratory relief as a vehicle for assailing the executive issuance, suffice it to state that any breach of the rights of respondents will not affect the case. In Commission on Audit of the Province of Cebu v. Province of Cebu,13 the Court entertained a suit for declaratory relief to finally settle the doubt as to the proper interpretation of the conflicting laws involved, notwithstanding a violation of the right of the party affected. We find no reason to deviate from said ruling mindful of the significance of the present case to the national economy. So also, summary judgments were properly rendered by the trial court because the issues involved in the instant case were pure questions of law. A motion for summary judgment is premised on the assumption that the issues presented need not be tried either because these are patently devoid of substance or that there is no genuine issue as to any pertinent fact. It is a method sanctioned by the Rules of Court for the prompt disposition of a civil action in which the pleadings raise only a legal issue, not a genuine issue as to any material fact.14

At any rate, even assuming the procedural flaws raised by petitioners truly exist, the Court is not precluded from brushing aside these technicalities and taking cognizance of the action filed by respondents considering its importance to the public and in keeping with the duty to determine whether the other branches of the government have kept themselves within the limits of the Constitution.15 We now come to the substantive issues, which are: (1) whether there is statutory basis for the issuance of EO 156; and (2) if the answer is in the affirmative, whether the application of Article 2, Section 3.1 of EO 156, reasonable and within the scope provided by law. The main thrust of the petition is that EO 156 is constitutional because it was issued pursuant to EO 226, the Omnibus Investment Code of the Philippines and that its application should be extended to the Freeport because the guarantee of RA 7227 on the free flow of goods into the said zone is merely an exemption from customs duties and taxes on items brought into the Freeport and not an open floodgate for all kinds of goods and materials without restriction. In G.R. No. 168741, the Court of Appeals invalidated Article 2, Section 3.1 of EO 156, on the ground of lack of any statutory basis for the President to issue the same. It held that the prohibition on the importation of used motor vehicles is an exercise of police power vested on the legislature and absent any enabling law, the exercise thereof by the President through an executive issuance, is void. Police power is inherent in a government to enact laws, within constitutional limits, to promote the order, safety, health, morals, and general welfare of society. It is lodged primarily with the legislature. By virtue of a valid delegation of legislative power, it may also be exercised by the President and administrative boards, as well as the lawmaking bodies on all municipal levels, including the barangay.16 Such delegation confers upon the Presidentquasi-legislative power which may be defined as the authority delegated by the law-making body to the administrative body to adopt rules and regulations intended to carry out the provisions of the law and implement legislative policy.17 To be valid, an administrative issuance, such as an executive order, must comply with the following requisites: (1) Its promulgation must be authorized by the legislature; (2) It must be promulgated in accordance with the prescribed procedure; (3) It must be within the scope of the authority given by the legislature; and (4) It must be reasonable.18 Contrary to the conclusion of the Court of Appeals, EO 156 actually satisfied the first requisite of a valid administrative order. It has both constitutional and statutory bases. Delegation of legislative powers to the President is permitted in Section 28(2) of Article VI of the Constitution. It provides: (2) The Congress may, by law, authorize the President to fix within specified limits, and subject to such limitations and restrictions as it may impose, tariff rates, import and export quotas, tonnage and wharfage dues, and other duties or imposts within the framework of the national development program of the Government.19 (Emphasis supplied)

The relevant statutes to execute this provision are: 1) The Tariff and Customs Code which authorizes the President, in the interest of national economy, general welfare and/or national security, to, inter alia, prohibit the importation of any commodity. Section 401 thereof, reads: Sec. 401. Flexible Clause. a. In the interest of national economy, general welfare and/or national security, and subject to the limitations herein prescribed, the President, upon recommendation of the National Economic and Development Authority (hereinafter referred to as NEDA), is hereby empowered: x x x (2) to establish import quota or to ban imports of any commodity, as may be necessary; x x x Provided, That upon periodic investigations by the Tariff Commission and recommendation of the NEDA, the President may cause a gradual reduction of protection levels granted in Section One hundred and four of this Code, including those subsequently granted pursuant to this section. (Emphasis supplied) 2) Executive Order No. 226, the Omnibus Investment Code of the Philippines which was issued on July 16, 1987, by then President Corazon C. Aquino, in the exercise of legislative power under the Provisional Freedom Constitution,20 empowers the President to approve or reject the prohibition on the importation of any equipment or raw materials or finished products. Pertinent provisions thereof, read: ART. 4. Composition of the board. The Board of Investments shall be composed of seven (7) governors: The Secretary of Trade and Industry, three (3) Undersecretaries of Trade and Industry to be chosen by the President; and three (3) representatives from the government agencies and the private sector x x x. ART. 7. Powers and duties of the Board. xxxx (12) Formulate and implement rationalization programs for certain industries whose operation may result in dislocation, overcrowding or inefficient use of resources, thus impeding economic growth. For this purpose, the Board may formulate guidelines for progressive manufacturing programs, local content programs, mandatory sourcing requirements and dispersal of industries. In appropriate cases and upon approval of the President, the Board may restrict, either totally or partially, the importation of any equipment or raw materials or finished products involved in the rationalization program; (Emphasis supplied) 3) Republic Act No. 8800, otherwise known as the "Safeguard Measures Act" (SMA), and entitled "An Act Protecting Local Industries By Providing Safeguard Measures To Be Undertaken In Response To Increased Imports And Providing Penalties For Violation Thereof,"21 designated the Secretaries22 of the Department of Trade and Industry (DTI) and the Department of Agriculture, in their capacity as alter egos of the President, as the implementing authorities of the safeguard measures, which include, inter alia, modification or imposition of any quantitative restriction on the importation of a product into the Philippines. The purpose of the SMA is stated in the declaration of policy, thus: SEC. 2. Declaration of Policy. The State shall promote competitiveness of domestic industries and producers based on sound industrial and agricultural development policies, and efficient use of human, natural and technical resources. In pursuit of this goal and in the public interest, the State

shall provide safeguard measures to protect domestic industries and producers from increased imports which cause or threaten to cause serious injury to those domestic industries and producers. There are thus explicit constitutional and statutory permission authorizing the President to ban or regulate importation of articles and commodities into the country. Anent the second requisite, that is, that the order must be issued or promulgated in accordance with the prescribed procedure, it is necessary that the nature of the administrative issuance is properly determined. As in the enactment of laws, the general rule is that, the promulgation of administrative issuances requires previous notice and hearing, the only exception being where the legislature itself requires it and mandates that the regulation shall be based on certain facts as determined at an appropriate investigation.23 This exception pertains to the issuance of legislative rules as distinguished from interpretative rules which give no real consequence more than what the law itself has already prescribed;24 and are designed merely to provide guidelines to the law which the administrative agency is in charge of enforcing.25 A legislative rule, on the other hand, is in the nature of subordinate legislation, crafted to implement a primary legislation. In Commissioner of Internal Revenue v. Court of Appeals,26 and Commissioner of Internal Revenue v. Michel J. Lhuillier Pawnshop, Inc.,27 the Court enunciated the doctrine that when an administrative rule goes beyond merely providing for the means that can facilitate or render less cumbersome the implementation of the law and substantially increases the burden of those governed, it behooves the agency to accord at least to those directly affected a chance to be heard and, thereafter, to be duly informed, before the issuance is given the force and effect of law. In the instant case, EO 156 is obviously a legislative rule as it seeks to implement or execute primary legislative enactments intended to protect the domestic industry by imposing a ban on the importation of a specified product not previously subject to such prohibition. The due process requirements in the issuance thereof are embodied in Section 40128 of the Tariff and Customs Code and Sections 5 and 9 of the SMA29 which essentially mandate the conduct of investigation and public hearings before the regulatory measure or importation ban may be issued. In the present case, respondents neither questioned before this Court nor with the courts below the procedure that paved the way for the issuance of EO 156. What they challenged in their petitions before the trial court was the absence of "substantive due process" in the issuance of the EO.30 Their main contention before the court a quo is that the importation ban is illogical and unfair because it unreasonably drives them out of business to the prejudice of the national economy. Considering the settled principle that in the absence of strong evidence to the contrary, acts of the other branches of the government are presumed to be valid,31 and there being no objection from the respondents as to the procedure in the promulgation of EO 156, the presumption is that said executive issuance duly complied with the procedures and limitations imposed by law. To determine whether EO 156 has complied with the third and fourth requisites of a valid administrative issuance, to wit, that it was issued within the scope of authority given by the legislature and that it is reasonable, an examination of the nature of a Freeport under RA 7227 and the primordial purpose of the importation ban under the questioned EO is necessary. RA 7227 was enacted providing for, among other things, the sound and balanced conversion of the Clark and Subic military reservations and their extensions into alternative productive uses in the form of Special Economic and Freeport Zone, or the Subic Bay Freeport, in order to promote the economic and social development of Central Luzon in particular and the country in general.

The Rules and Regulations Implementing RA 7227 specifically defines the territory comprising the Subic Bay Freeport, referred to as the Special Economic and Freeport Zone in Section 12 of RA 7227 as "a separate customs territory consisting of the City of Olongapo and the Municipality of Subic, Province of Zambales, the lands occupied by the Subic Naval Base and its contiguous extensions as embraced, covered and defined by the 1947 Philippine-U.S. Military Base Agreement as amended and within the territorial jurisdiction of Morong and Hermosa, Province of Bataan, the metes and bounds of which shall be delineated by the President of the Philippines; provided further that pending establishment of secure perimeters around the entire SBF, the SBF shall refer to the area demarcated by the SBMA pursuant to Section 1332 hereof." Among the salient provisions of RA 7227 are as follows: SECTION 12. Subic Special Economic Zone. xxxx The abovementioned zone shall be subject to the following policies: xxxx (a) Within the framework and subject to the mandate and limitations of the Constitution and the pertinent provisions of the Local Government Code, the Subic Special Economic Zone shall be developed into a self-sustaining, industrial, commercial, financial and investment center to generate employment opportunities in and around the zone and to attract and promote productive foreign investments; (b) The Subic Special Economic Zone shall be operated and managed as a separate customs territory ensuring free flow or movement of goods and capital within, into and exported out of the Subic Special Economic Zone, as well as provide incentives such as tax and duty-free importations of raw materials, capital and equipment. However, exportation or removal of goods from the territory of the Subic Special Economic Zone to the other parts of the Philippine territory shall be subject to customs duties and taxes under the Customs and Tariff Code and other relevant tax laws of the Philippines; The Freeport was designed to ensure free flow or movement of goods and capital within a portion of the Philippine territory in order to attract investors to invest their capital in a business climate with the least governmental intervention. The concept of this zone was explained by Senator Guingona in this wise: Senator Guingona. Mr. President, the special economic zone is successful in many places, particularly Hong Kong, which is a free port. The difference between a special economic zone and an industrial estate is simply expansive in the sense that the commercial activities, including the establishment of banks, services, financial institutions, agro-industrial activities, maybe agriculture to a certain extent. This delineates the activities that would have the least of government intervention, and the running of the affairs of the special economic zone would be run principally by the investors themselves, similar to a housing subdivision, where the subdivision owners elect their representatives to run the affairs of the subdivision, to set the policies, to set the guidelines.

We would like to see Subic area converted into a little Hong Kong, Mr. President, where there is a hub of free port and free entry, free duties and activities to a maximum spur generation of investment and jobs. While the investor is reluctant to come in the Philippines, as a rule, because of red tape and perceived delays, we envision this special economic zone to be an area where there will be minimum government interference. The initial outlay may not only come from the Government or the Authority as envisioned here, but from them themselves, because they would be encouraged to invest not only for the land but also for the buildings and factories. As long as they are convinced that in such an area they can do business and reap reasonable profits, then many from other parts, both local and foreign, would invest, Mr. President.33 (Emphasis, added) With minimum interference from the government, investors can, in general, engage in any kind of business as well as import and export any article into and out of the Freeport. These are among the rights accorded to Subic Bay Freeport Enterprises under Section 39 of the Rules and Regulations Implementing RA 7227, thus SEC. 39. Rights and Obligations.- SBF Enterprises shall have the following rights and obligations: a. To freely engage in any business, trade, manufacturing, financial or service activity, and to import and export freely all types of goods into and out of the SBF, subject to the provisions of the Act, these Rules and other regulations that may be promulgated by the SBMA; Citing, inter alia, the interpellations of Senator Enrile, petitioners claim that the "free flow or movement of goods and capital" only means that goods and material brought within the Freeport shall not be subject to customs duties and other taxes and should not be construed as an open floodgate for entry of all kinds of goods. They thus surmise that the importation ban on motor vehicles is applicable within the Freeport. Pertinent interpellations of Senator Enrile on the concept of Freeport is as follows: Senator Enrile: Mr. President, I think we are talking here of sovereign concepts, not territorial concepts. The concept that we are supposed to craft here is to carve out a portion of our terrestrial domain as well as our adjacent waters and say to the world: "Well, you can set up your factories in this area that we are circumscribing, and bringing your equipment and bringing your goods, you are not subject to any taxes and duties because you are not within the customs jurisdiction of the Republic of the Philippines, whether you store the goods or only for purposes of transshipment or whether you make them into finished products again to be reexported to other lands." xxxx My understanding of a "free port" is, we are in effect carving out a part of our territory and make it as if it were foreign territory for purposes of our customs laws, and that people can come, bring their goods, store them there and bring them out again, as long as they do not come into the domestic commerce of the Republic. We do not really care whether these goods are stored here. The only thing that we care is for our people to have an employment because of the entry of these goods that are being discharged, warehoused and reloaded into the ships so that they can be exported. That will generate employment for us. For as long as that is done, we are saying, in effect, that we have the least contact with our tariff and customs laws and our tax laws. Therefore, we consider these goods as

outside of the customs jurisdiction of the Republic of the Philippines as yet, until we draw them from this territory and bring them inside our domestic commerce. In which case, they have to pass through our customs gate. I thought we are carving out this entire area and convert it into this kind of concept.34 However, contrary to the claim of petitioners, there is nothing in the foregoing excerpts which absolutely limits the incentive to Freeport investors only to exemption from customs duties and taxes. Mindful of the legislative intent to attract investors, enhance investment and boost the economy, the legislature could not have limited the enticement only to exemption from taxes. The minimum interference policy of the government on the Freeport extends to the kind of business that investors may embark on and the articles which they may import or export into and out of the zone. A contrary interpretation would defeat the very purpose of the Freeport and drive away investors. It does not mean, however, that the right of Freeport enterprises to import all types of goods and article is absolute. Such right is of course subject to the limitation that articles absolutely prohibited by law cannot be imported into the Freeport.35 Nevertheless, in determining whether the prohibition would apply to the Freeport, resort to the purpose of the prohibition is necessary. In issuing EO 156, particularly the prohibition on importation under Article 2, Section 3.1, the President envisioned to rationalize the importation of used motor vehicles and to enhance the capabilities of the Philippine motor manufacturing firms to be globally competitive producers of completely build-up units and their parts and components for the local and export markets.36 In justifying the issuance of EO 156, petitioners alleged that there has been a decline in the sales of new vehicles and a remarkable growth of the sales of imported used motor vehicles. To address the same, the President issued the questioned EO to prevent further erosion of the already depressed market base of the local motor vehicle industry and to curtail the harmful effects of the increase in the importation of used motor vehicles.37 Taking our bearings from the foregoing discussions, we hold that the importation ban runs afoul the third requisite for a valid administrative order. To be valid, an administrative issuance must not be ultra vires or beyond the limits of the authority conferred. It must not supplant or modify the Constitution, its enabling statute and other existing laws, for such is the sole function of the legislature which the other branches of the government cannot usurp. As held in United BF Homeowners Association v. BF Homes, Inc.:38 The rule-making power of a public administrative body is a delegated legislative power, which it may not use either to abridge the authority given it by Congress or the Constitution or to enlarge its power beyond the scope intended. Constitutional and statutory provisions control what rules and regulations may be promulgated by such a body, as well as with respect to what fields are subject to regulation by it. It may not make rules and regulations which are inconsistent with the provisions of the Constitution or a statute, particularly the statute it is administering or which created it, or which are in derogation of, or defeat, the purpose of a statute. In the instant case, the subject matter of the laws authorizing the President to regulate or forbid importation of used motor vehicles, is the domestic industry. EO 156, however, exceeded the scope of its application by extending the prohibition on the importation of used cars to the Freeport, which RA 7227, considers to some extent, a foreign territory. The domestic industry which the EO seeks to protect is actually the "customs territory" which is defined under the Rules and Regulations Implementing RA 7227, as follows: "the portion of the Philippines outside the Subic Bay Freeport where the Tariff and Customs Code of the Philippines and other national tariff and customs laws are in force and effect."39

The proscription in the importation of used motor vehicles should be operative only outside the Freeport and the inclusion of said zone within the ambit of the prohibition is an invalid modification of RA 7227. Indeed, when the application of an administrative issuance modifies existing laws or exceeds the intended scope, as in the instant case, the issuance becomes void, not only for being ultra vires, but also for being unreasonable. This brings us to the fourth requisite. It is an axiom in administrative law that administrative authorities should not act arbitrarily and capriciously in the issuance of rules and regulations. To be valid, such rules and regulations must be reasonable and fairly adapted to secure the end in view. If shown to bear no reasonable relation to the purposes for which they were authorized to be issued, then they must be held to be invalid.40 There is no doubt that the issuance of the ban to protect the domestic industry is a reasonable exercise of police power. The deterioration of the local motor manufacturing firms due to the influx of imported used motor vehicles is an urgent national concern that needs to be swiftly addressed by the President. In the exercise of delegated police power, the executive can therefore validly proscribe the importation of these vehicles. Thus, inTaxicab Operators of Metro Manila, Inc. v. Board of Transportation,41 the Court held that a regulation phasing out taxi cabs more than six years old is a valid exercise of police power. The regulation was sustained as reasonable holding that the purpose thereof was to promote the convenience and comfort and protect the safety of the passengers. The problem, however, lies with respect to the application of the importation ban to the Freeport. The Court finds no logic in the all encompassing application of the assailed provision to the Freeport which is outside the customs territory. As long as the used motor vehicles do not enter the customs territory, the injury or harm sought to be prevented or remedied will not arise. The application of the law should be consistent with the purpose of and reason for the law. Ratione cessat lex, et cessat lex. When the reason for the law ceases, the law ceases. It is not the letter alone but the spirit of the law also that gives it life.42 To apply the proscription to the Freeport would not serve the purpose of the EO. Instead of improving the general economy of the country, the application of the importation ban in the Freeport would subvert the avowed purpose of RA 7227 which is to create a market that would draw investors and ultimately boost the national economy. In similar cases, we also declared void the administrative issuance or ordinances concerned for being unreasonable. To illustrate, in De la Cruz v. Paras,43 the Court held as unreasonable and unconstitutional an ordinance characterized by overbreadth. In that case, the Municipality of Bocaue, Bulacan, prohibited the operation of all night clubs, cabarets and dance halls within its jurisdiction for the protection of public morals. As explained by the Court: x x x It cannot be said that such a sweeping exercise of a lawmaking power by Bocaue could qualify under the term reasonable. The objective of fostering public morals, a worthy and desirable end can be attained by a measure that does not encompass too wide a field. Certainly the ordinance on its face is characterized by overbreadth. The purpose sought to be achieved could have been attained by reasonable restrictions rather than by an absolute prohibition. The admonition in Salaveria should be heeded: "The Judiciary should not lightly set aside legislative action when there is not a clear invasion of personal or property rights under the guise of police regulation." It is clear that in the guise of a police regulation, there was in this instance a clear invasion of personal or property rights, personal in the case of those individuals desirous of patronizing those night clubs and property in terms of the investments made and salaries to be earned by those therein employed. Lupangco v. Court of Appeals,44 is a case involving a resolution issued by the Professional Regulation Commission which prohibited examinees from attending review classes and receiving

handout materials, tips, and the like three days before the date of examination in order to preserve the integrity and purity of the licensure examinations in accountancy. Besides being unreasonable on its face and violative of academic freedom, the measure was found to be more sweeping than what was necessary, viz: Needless to say, the enforcement of Resolution No. 105 is not a guarantee that the alleged leakages in the licensure examinations will be eradicated or at least minimized. Making the examinees suffer by depriving them of legitimate means of review or preparation on those last three precious days when they should be refreshing themselves with all that they have learned in the review classes and preparing their mental and psychological make-up for the examination day itself would be like uprooting the tree to get rid of a rotten branch. What is needed to be done by the respondent is to find out the source of such leakages and stop it right there. If corrupt officials or personnel should be terminated from their loss, then so be it. Fixers or swindlers should be flushed out. Strict guidelines to be observed by examiners should be set up and if violations are committed, then licenses should be suspended or revoked. x x x In Lucena Grand Central Terminal, Inc. v. JAC Liner, Inc.,45 the Court likewise struck down as unreasonable and overbreadth a city ordinance granting an exclusive franchise for 25 years, renewable for another 25 years, to one entity for the construction and operation of one common bus and jeepney terminal facility in Lucena City. While professedly aimed towards alleviating the traffic congestion alleged to have been caused by the existence of various bus and jeepney terminals within the city, the ordinance was held to be beyond what is reasonably necessary to solve the traffic problem in the city. By parity of reasoning, the importation ban in this case should also be declared void for its too sweeping and unnecessary application to the Freeport which has no bearing on the objective of the prohibition. If the aim of the EO is to prevent the entry of used motor vehicles from the Freeport to the customs territory, the solution is not to forbid entry of these vehicles into the Freeport, but to intensify governmental campaign and measures to thwart illegal ingress of used motor vehicles into the customs territory. At this juncture, it must be mentioned that on June 19, 1993, President Fidel V. Ramos issued Executive Order No. 97-A, "Further Clarifying The Tax And Duty-Free Privilege Within The Subic Special Economic And Free Port Zone," Section 1 of which provides: SECTION 1. The following guidelines shall govern the tax and duty-free privilege within the Secured Area of the Subic Special Economic and Free Port Zone: 1.1. The Secured Area consisting of the presently fenced-in former Subic Naval Base shall be the only completely tax and duty-free area in the SSEFPZ. Business enterprises and individuals (Filipinos and foreigners) residing within the Secured Area are free to import raw materials, capital goods, equipment, and consumer items tax and dutry-free. Consumption items, however, must be consumed within the Secured Area. Removal of raw materials, capital goods, equipment and consumer items out of the Secured Area for sale to non-SSEFPZ registered enterprises shall be subject to the usual taxes and duties, except as may be provided herein. In Tiu v. Court of Appeals46 as reiterated in Coconut Oil Refiners Association, Inc. v. Torres,47 this provision limiting the special privileges on tax and duty-free importation in the presently fenced-in former Subic Naval Base has been declared valid and constitutional and in accordance with RA 7227. Consistent with these rulings and for easier management and monitoring of activities and to prevent fraudulent importation of merchandise and smuggling, the free flow and importation of used motor vehicles shall be operative only within the "secured area."

In sum, the Court finds that Article 2, Section 3.1 of EO 156 is void insofar as it is made applicable to the presently secured fenced-in former Subic Naval Base area as stated in Section 1.1 of EO 97-A. Pursuant to the separability clause48 of EO 156, Section 3.1 is declared valid insofar as it applies to the customs territory or the Philippine territory outside the presently secured fenced-in former Subic Naval Base area as stated in Section 1.1 of EO 97-A. Hence, used motor vehicles that come into the Philippine territory via the secured fenced-in former Subic Naval Base area may be stored, used or traded therein, or exported out of the Philippine territory, but they cannot be imported into the Philippine territory outside of the secured fenced-in former Subic Naval Base area. WHEREFORE, the petitions are PARTIALLY GRANTED and the May 24, 2004 Decisions of Branch 72, Regional Trial Court of Olongapo City, in Civil Case No. 20-0-04 and Civil Case No. 22-0-04; and the February 14, 2005 Decision of the Court of Appeals in CA-G.R. SP No. 63284, are MODIFIED insofar as they declared Article 2, Section 3.1 of Executive Order No. 156, void in its entirety. Said provision is declared VALID insofar as it applies to the Philippine territory outside the presently fenced-in former Subic Naval Base area and VOID with respect to its application to the secured fenced-in former Subic Naval Base area. SO ORDERED. CONSUELO YNARES-SANTIAGO Associate Justice

[G. R. No. 119775. October 24, 2003]

JOHN HAY PEOPLES ALTERNATIVE COALITION, MATEO CARIO FOUNDATION INC., CENTER FOR ALTERNATIVE SYSTEMS FOUNDATION INC., REGINA VICTORIA A. BENAFIN REPRESENTED AND JOINED BY HER MOTHER MRS. ELISA BENAFIN, IZABEL M. LUYK REPRESENTED AND JOINED BY HER MOTHER MRS. REBECCA MOLINA LUYK, KATHERINE PE REPRESENTED AND JOINED BY HER MOTHER ROSEMARIE G. PE, SOLEDAD S. CAMILO, ALICIA C. PACALSO ALIAS KEVAB, BETTY I. STRASSER, RUBY C. GIRON, URSULA C. PEREZ ALIAS BA-YAY, EDILBERTO T. CLARAVALL, CARMEN CAROMINA, LILIA G. YARANON, DIANE MONDOC, petitioners, vs. VICTOR LIM, PRESIDENT, BASES CONVERSION DEVELOPMENT AUTHORITY; JOHN HAY PORO POINT DEVELOPMENT CORPORATION, CITY OF BAGUIO, TUNTEX (B.V.I.) CO. LTD., ASIAWORLD INTERNATIONALE GROUP, INC.,

DEPARTMENT OF ENVIRONMENT RESOURCES, respondents. DECISION

CARPIO MORALES, J.:

AND

NATURAL

By the present petition for prohibition, mandamus and declaratory relief with prayer for a temporary restraining order (TRO) and/or writ of preliminary injunction, petitioners assail, in the main, the constitutionality of Presidential Proclamation No. 420, Series of 1994, CREATING AND DESIGNATING A PORTION OF THE AREA COVERED BY THE FORMER CAMP JOHN [HAY] AS THE JOHN HAY SPECIAL ECONOMIC ZONE PURSUANT TO REPUBLIC ACT NO. 7227. Republic Act No. 7227, AN ACT ACCELERATING THE CONVERSION OF MILITARY RESERVATIONS INTO OTHER PRODUCTIVE USES, CREATING THE BASES CONVERSION AND DEVELOPMENT AUTHORITY FOR THIS PURPOSE, PROVIDING FUNDS THEREFOR AND FOR OTHER PURPOSES, otherwise known as the Bases Conversion and Development Act of 1992, which was enacted on March 13, 1992, set out the policy of the government to accelerate the sound and balanced conversion into alternative productive uses of the former military bases under the 1947 PhilippinesUnited States of America Military Bases Agreement, namely, the Clark and Subic military reservations as well as their extensions including the John Hay Station (Camp John Hay or the camp) in the City of Baguio.
[1]

As noted in its title, R.A. No. 7227 created public respondent Bases Conversion and Development Authority (BCDA), vesting it with powers pertaining to the multifarious aspects of carrying out the ultimate objective of utilizing the base areas in accordance with the declared government policy.
[2]

R.A. No. 7227 likewise created the Subic Special Economic [and Free Port] Zone (Subic SEZ) the metes and bounds of which were to be delineated in a proclamation to be issued by the President of the Philippines.
[3]

R.A. No. 7227 granted the Subic SEZ incentives ranging from tax and duty-free importations, exemption of businesses therein from local and national taxes, to other hallmarks of a liberalized financial and business climate.
[4]

And R.A. No. 7227 expressly gave authority to the President to create through executive proclamation, subject to the concurrence of the local government units directly affected, other Special Economic Zones (SEZ) in

the areas covered respectively by the Clark military reservation, the Wallace Air Station in San Fernando, La Union, and Camp John Hay.
[5]

On August 16, 1993, BCDA entered into a Memorandum of Agreement and Escrow Agreement with private respondents Tuntex (B.V.I.) Co., Ltd (TUNTEX) and Asiaworld Internationale Group, Inc. (ASIAWORLD), private corporations registered under the laws of the British Virgin Islands, preparatory to the formation of a joint venture for the development of Poro Point in La Union and Camp John Hay as premier tourist destinations and recreation centers. Four months later or on December 16, 1993, BCDA, TUNTEX and ASIAWORD executed a Joint Venture Agreement whereby they bound themselves to put up a joint venture company known as the Baguio International Development and Management Corporation which would lease areas within Camp John Hay and Poro Point for the purpose of turning such places into principal tourist and recreation spots, as originally envisioned by the parties under their Memorandum of Agreement.
[6]

The Baguio City government meanwhile passed a number of resolutions in response to the actions taken by BCDA as owner and administrator of Camp John Hay. By Resolution of September 29, 1993, the Sangguniang Panlungsod of Baguio City (the sanggunian) officially asked BCDA to exclude all the barangays partly or totally located within Camp John Hay from the reach or coverage of any plan or program for its development.
[7]

By a subsequent Resolution dated January 19, 1994, the sanggunian sought from BCDA an abdication, waiver or quitclaim of its ownership over the home lots being occupied by residents of nine (9) barangays surrounding the military reservation.
[8]

Still by another resolution passed on February 21, 1994, the sanggunian adopted and submitted to BCDA a 15-point concept for the development of Camp John Hay. The sanggunians vision expressed, among other things, a kind of development that affords protection to the environment, the making of a family-oriented type of tourist destination, priority in employment opportunities for Baguio residents and free access to the base area, guaranteed participation of the city government in the management and operation of the camp, exclusion of the previously named nine barangays from the area for development, and liability for local taxes of businesses to be established within the camp.
[9] [10]

BCDA, TUNTEX and ASIAWORLD agreed to some, but rejected or modified the other proposals of the sanggunian. They stressed the need to
[11]

declare Camp John Hay a SEZ as a condition precedent to its full development in accordance with the mandate of R.A. No. 7227.
[12]

On May 11, 1994, the sanggunian passed a resolution requesting the Mayor to order the determination of realty taxes which may otherwise be collected from real properties of Camp John Hay. The resolution was intended to intelligently guide the sanggunian in determining its position on whether Camp John Hay be declared a SEZ, it (the sanggunian) being of the view that such declaration would exempt the camps property and the economic activity therein from local or national taxation.
[13]

More than a month later, however, the sanggunian passed Resolution No. 255, (Series of 1994), seeking and supporting, subject to its concurrence, the issuance by then President Ramos of a presidential proclamation declaring an area of 288.1 hectares of the camp as a SEZ in accordance with the provisions of R.A. No. 7227. Together with this resolution was submitted a draft of the proposed proclamation for consideration by the President.
[14] [15]

On July 5, 1994 then President Ramos issued Proclamation No. 420, the title of which was earlier indicated, which established a SEZ on a portion of Camp John Hay and which reads as follows:
[16]

xxx Pursuant to the powers vested in me by the law and the resolution of concurrence by the City Council of Baguio, I, FIDEL V. RAMOS, President of the Philippines, do hereby create and designate a portion of the area covered by the former John Hay reservation as embraced, covered, and defined by the 1947 Military Bases Agreement between the Philippines and the United States of America, as amended, as the John Hay Special Economic Zone, and accordingly order: SECTION 1. Coverage of John Hay Special Economic Zone. The John Hay Special Economic Zone shall cover the area consisting of Two Hundred Eighty Eight and one/tenth (288.1) hectares, more or less, of the total of Six Hundred SeventySeven (677) hectares of the John Hay Reservation, more or less, which have been surveyed and verified by the Department of Environment and Natural Resources (DENR) as defined by the following technical description: A parcel of land, situated in the City of Baguio, Province of Benguet, Island of Luzon, and particularly described in survey plans Psd-131102-002639 and Ccs-131102000030 as approved on 16 August 1993 and 26 August 1993, respectively, by the Department of Environment and Natural Resources, in detail containing :

Lot 1, Lot 2, Lot 3, Lot 4, Lot 5, Lot 6, Lot 7, Lot 13, Lot 14, Lot 15, and Lot 20 of Ccs-131102-000030 -andLot 3, Lot 4, Lot 5, Lot 6, Lot 7, Lot 8, Lot 9, Lot 10, Lot 11, Lot 14, Lot 15, Lot 16, Lot 17, and Lot 18 of Psd-131102-002639 being portions of TCT No. T-3812, LRC Rec. No. 87. With a combined area of TWO HUNDRED EIGHTY EIGHT AND ONE/TENTH HECTARES (288.1 hectares); Provided that the area consisting of approximately Six and two/tenth (6.2) hectares, more or less, presently occupied by the VOA and the residence of the Ambassador of the United States, shall be considered as part of the SEZ only upon turnover of the properties to the government of the Republic of the Philippines. Sec. 2. Governing Body of the John Hay Special Economic Zone. Pursuant to Section 15 of Republic Act No. 7227, the Bases Conversion and Development Authority is hereby established as the governing body of the John Hay Special Economic Zone and, as such, authorized to determine the utilization and disposition of the lands comprising it, subject to private rights, if any, and in consultation and coordination with the City Government of Baguio after consultation with its inhabitants, and to promulgate the necessary policies, rules, and regulations to govern and regulate the zone thru the John Hay Poro Point Development Corporation, which is its implementing arm for its economic development and optimum utilization. Sec. 3. Investment Climate in John Hay Special Economic Zone. Pursuant to Section 5(m) and Section 15 of Republic Act No. 7227, the John Hay Poro Point Development Corporation shall implement all necessary policies, rules, and regulations governing the zone, including investment incentives, in consultation with pertinent government departments. Among others, the zone shall have all the applicable incentives of the Special Economic Zone under Section 12 of Republic Act No. 7227 and those applicable incentives granted in the Export Processing Zones, the Omnibus Investment Code of 1987, the Foreign Investment Act of 1991, and new investment laws that may hereinafter be enacted. Sec. 4. Role of Departments, Bureaus, Offices, Agencies and Instrumentalities. All Heads of departments, bureaus, offices, agencies, and instrumentalities of the government are hereby directed to give full support to Bases Conversion and Development Authority and/or its implementing subsidiary or joint venture to facilitate the necessary approvals to expedite the implementation of various projects of the conversion program.

Sec. 5. Local Authority. Except as herein provided, the affected local government units shall retain their basic autonomy and identity. Sec. 6. Repealing Clause. All orders, rules, and regulations, or parts thereof, which are inconsistent with the provisions of this Proclamation, are hereby repealed, amended, or modified accordingly. Sec. 7. Effectivity. This proclamation shall take effect immediately. Done in the City of Manila, this 5th day of July, in the year of Our Lord, nineteen hundred and ninety-four. The issuance of Proclamation No. 420 spawned the present petition for prohibition, mandamus and declaratory relief which was filed on April 25, 1995 challenging, in the main, its constitutionality or validity as well as the legality of the Memorandum of Agreement and Joint Venture Agreement between public respondent BCDA and private respondents TUNTEX and ASIAWORLD.
[17]

Petitioners allege as grounds for the allowance of the petition the following:
I. PRESIDENTIAL PROCLAMATION NO. 420, SERIES OF 1990 (sic) IN SO FAR AS IT GRANTS TAX EXEMPTIONS IS INVALID AND ILLEGAL AS IT IS AN UNCONSTITUTIONAL EXERCISE BY THE PRESIDENT OF A POWER GRANTED ONLY TO THE LEGISLATURE. II. PRESIDENTIAL PROCLAMATION NO. 420, IN SO FAR AS IT LIMITS THE POWERS AND INTERFERES WITH THE AUTONOMY OF THE CITY OF BAGUIO IS INVALID, ILLEGAL AND UNCONSTITUTIONAL. III. PRESIDENTIAL PROCLAMATION NO. 420, SERIES OF 1994 IS UNCONSTITUTIONAL IN THAT IT VIOLATES THE RULE THAT ALL TAXES SHOULD BE UNIFORM AND EQUITABLE.

IV. THE MEMORANDUM OF AGREEMENT ENTERED INTO BY AND BETWEEN PRIVATE AND PUBLIC RESPONDENTS BASES CONVERSION DEVELOPMENT AUTHORITY HAVING BEEN ENTERED INTO ONLY BY DIRECT NEGOTIATION IS ILLEGAL. V. THE TERMS AND CONDITIONS OF THE MEMORANDUM OF AGREEMENT ENTERED INTO BY AND BETWEEN PRIVATE AND PUBLIC RESPONDENT BASES CONVERSION DEVELOPMENT AUTHORITY IS (sic) ILLEGAL. VI. THE CONCEPTUAL DEVELOPMENT PLAN OF RESPONDENTS NOT HAVING UNDERGONE ENVIRONMENTAL IMPACT ASSESSMENT IS BEING ILLEGALLY CONSIDERED WITHOUT A VALID ENVIRONMENTAL IMPACT ASSESSMENT.

A temporary restraining order and/or writ of preliminary injunction was prayed for to enjoin BCDA, John Hay Poro Point Development Corporation

and the city government from implementing Proclamation No. 420, and TUNTEX and ASIAWORLD from proceeding with their plan respecting Camp John Hays development pursuant to their Joint Venture Agreement with BCDA.
[18]

Public respondents, by their separate Comments, allege as moot and academic the issues raised by the petition, the questioned Memorandum of Agreement and Joint Venture Agreement having already been deemed abandoned by the inaction of the parties thereto prior to the filing of the petition as in fact, by letter of November 21, 1995, BCDA formally notified TUNTEX and ASIAWORLD of the revocation of their said agreements.
[19]

In maintaining the validity of Proclamation No. 420, respondents contend that by extending to the John Hay SEZ economic incentives similar to those enjoyed by the Subic SEZ which was established under R.A. No. 7227, the proclamation is merely implementing the legislative intent of said law to turn the US military bases into hubs of business activity or investment. They underscore the point that the governments policy of bases conversion can not be achieved without extending the same tax exemptions granted by R.A. No. 7227 to Subic SEZ to other SEZs. Denying that Proclamation No. 420 is in derogation of the local autonomy of Baguio City or that it is violative of the constitutional guarantee of equal protection, respondents assail petitioners lack of standing to bring the present suit even as taxpayers and in the absence of any actual case or controversy to warrant this Courts exercise of its power of judicial review over the proclamation. Finally, respondents seek the outright dismissal of the petition for having been filed in disregard of the hierarchy of courts and of the doctrine of exhaustion of administrative remedies. Replying, petitioners aver that the doctrine of exhaustion of administrative remedies finds no application herein since they are invoking the exclusive authority of this Court under Section 21 of R.A. No. 7227 to enjoin or restrain implementation of projects for conversion of the base areas; that the established exceptions to the aforesaid doctrine obtain in the present petition; and that they possess the standing to bring the petition which is a taxpayers suit.
[20]

Public respondents have filed their Rejoinder and the parties have filed their respective memoranda.
[21]

Before dwelling on the core issues, this Court shall first address the preliminary procedural questions confronting the petition. The judicial policy is and has always been that this Court will not entertain direct resort to it except when the redress sought cannot be obtained in the proper courts, or when exceptional and compelling circumstances warrant availment of a remedy within and calling for the exercise of this Courts primary jurisdiction. Neither will it entertain an action for declaratory relief, which is partly the nature of this petition, over which it has no original jurisdiction.
[22]

Nonetheless, as it is only this Court which has the power under Section 21 of R.A. No. 7227 to enjoin implementation of projects for the development of the former US military reservations, the issuance of which injunction petitioners pray for, petitioners direct filing of the present petition with it is allowed. Over and above this procedural objection to the present suit, this Court retains full discretionary power to take cognizance of a petition filed directly to it if compelling reasons, or the nature and importance of the issues raised, warrant. Besides, remanding the case to the lower courts now would just unduly prolong adjudication of the issues.
[23] [24]

The transformation of a portion of the area covered by Camp John Hay into a SEZ is not simply a re-classification of an area, a mere ascription of a status to a place. It involves turning the former US military reservation into a focal point for investments by both local and foreign entities. It is to be made a site of vigorous business activity, ultimately serving as a spur to the countrys long awaited economic growth. For, as R.A. No. 7227 unequivocally declares, it is the governments policy to enhance the benefits to be derived from the base areas in order to promote the economic and social development of Central Luzon in particular and the country in general. Like the Subic SEZ, the John Hay SEZ should also be turned into a self-sustaining, industrial, commercial, financial and investment center.
[25] [26]

More than the economic interests at stake, the development of Camp John Hay as well as of the other base areas unquestionably has critical links to a host of environmental and social concerns. Whatever use to which these lands will be devoted will set a chain of events that can affect one way or another the social and economic way of life of the communities where the bases are located, and ultimately the nation in general. Underscoring the fragility of Baguio Citys ecology with its problem on the scarcity of its water supply, petitioners point out that the local and national government are faced with the challenge of how to provide for an ecologically sustainable, environmentally sound, equitable transition for the city in the

wake of Camp John Hays reversion to the mass of government property. But that is why R.A. No. 7227 emphasizes the sound and balanced conversion of the Clark and Subic military reservations and their extensions consistent with ecological and environmental standards. It cannot thus be gainsaid that the matter of conversion of the US bases into SEZs, in this case Camp John Hay, assumes importance of a national magnitude.
[27] [28]

Convinced then that the present petition embodies crucial issues, this Court assumes jurisdiction over the petition. As far as the questioned agreements between BCDA and TUNTEX and ASIAWORLD are concerned, the legal questions being raised thereon by petitioners have indeed been rendered moot and academic by the revocation of such agreements. There are, however, other issues posed by the petition, those which center on the constitutionality of Proclamation No. 420, which have not been mooted by the said supervening event upon application of the rules for the judicial scrutiny of constitutional cases. The issues boil down to:
(1) (2) Whether the present petition complies with the requirements for this Courts exercise of jurisdiction over constitutional issues; Whether Proclamation No. 420 is constitutional by providing for national and local tax exemption within and granting other economic incentives to the John Hay Special Economic Zone; and Whether Proclamation No. 420 is constitutional for limiting or interfering with the local autonomy of Baguio City;

(3)

It is settled that when questions of constitutional significance are raised, the court can exercise its power of judicial review only if the following requisites are present: (1) the existence of an actual and appropriate case; (2) a personal and substantial interest of the party raising the constitutional question; (3) the exercise of judicial review is pleaded at the earliest opportunity; and (4) the constitutional question is the lis mota of the case.
[29]

An actual case or controversy refers to an existing case or controversy that is appropriate or ripe for determination, not conjectural or anticipatory. The controversy needs to be definite and concrete, bearing upon the legal relations of parties who are pitted against each other due to their adverse legal interests. There is in the present case a real clash of interests and rights between petitioners and respondents arising from the issuance of a presidential proclamation that converts a portion of the area covered by Camp John Hay into a SEZ, the former insisting that such
[30] [31]

proclamation otherwise.

contains

unconstitutional

provisions,

the

latter

claiming

R.A. No. 7227 expressly requires the concurrence of the affected local government units to the creation of SEZs out of all the base areas in the country. The grant by the law on local government units of the right of concurrence on the bases conversion is equivalent to vesting a legal standing on them, for it is in effect a recognition of the real interests that communities nearby or surrounding a particular base area have in its utilization. Thus, the interest of petitioners, being inhabitants of Baguio, in assailing the legality of Proclamation No. 420, is personal and substantial such that they have sustained or will sustain direct injury as a result of the government act being challenged. Theirs is a material interest, an interest in issue affected by the proclamation and not merely an interest in the question involved or an incidental interest, for what is at stake in the enforcement of Proclamation No. 420 is the very economic and social existence of the people of Baguio City.
[32] [33] [34]

Petitioners locus standi parallels that of the petitioner and other residents of Bataan, specially of the town of Limay, in Garcia v. Board of Investments where this Court characterized their interest in the establishment of a petrochemical plant in their place as actual, real, vital and legal, for it would affect not only their economic life but even the air they breathe.
[35]

Moreover, petitioners Edilberto T. Claravall and Lilia G. Yaranon were duly elected councilors of Baguio at the time, engaged in the local governance of Baguio City and whose duties included deciding for and on behalf of their constituents the question of whether to concur with the declaration of a portion of the area covered by Camp John Hay as a SEZ. Certainly then, petitioners Claravall and Yaranon, as city officials who voted against the sanggunian Resolution No. 255 (Series of 1994) supporting the issuance of the now challenged Proclamation No. 420, have legal standing to bring the present petition.
[36]

That there is herein a dispute on legal rights and interests is thus beyond doubt. The mootness of the issues concerning the questioned agreements between public and private respondents is of no moment. By the mere enactment of the questioned law or the approval of the challenged act, the dispute is deemed 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.
[37]

As to the third and fourth requisites of a judicial inquiry, there is likewise no question that they have been complied with in the case at bar. This is an action filed purposely to bring forth constitutional issues, ruling on which this Court must take up. Besides, respondents never raised issues with respect to these requisites, hence, they are deemed waived. Having cleared the way for judicial review, the constitutionality of Proclamation No. 420, as framed in the second and third issues above, must now be addressed squarely. The second issue refers to petitioners objection against the creation by Proclamation No. 420 of a regime of tax exemption within the John Hay SEZ. Petitioners argue that nowhere in R. A. No. 7227 is there a grant of tax exemption to SEZs yet to be established in base areas, unlike the grant under Section 12 thereof of tax exemption and investment incentives to the therein established Subic SEZ. The grant of tax exemption to the John Hay SEZ, petitioners conclude, thus contravenes Article VI, Section 28 (4) of the Constitution which provides that No law granting any tax exemption shall be passed without the concurrence of a majority of all the members of Congress. Section 3 of Proclamation No. 420, the challenged provision, reads: Sec. 3. Investment Climate in John Hay Special Economic Zone. Pursuant to Section 5(m) and Section 15 of Republic Act No. 7227, the John Hay Poro Point Development Corporation shall implement all necessary policies, rules, and regulations governing the zone, including investment incentives, in consultation with pertinent government departments. Among others, the zone shall have all the applicable incentives of the Special Economic Zone under Section 12 of Republic Act No. 7227 and those applicable incentives granted in the Export Processing Zones, the Omnibus Investment Code of 1987, the Foreign Investment Act of 1991, and new investment laws that may hereinafter be enacted. (Emphasis and underscoring supplied) Upon the other hand, Section 12 of R.A. No. 7227 provides: xxx (a) Within the framework and subject to the mandate and limitations of the Constitution and the pertinent provisions of the Local Government Code, the Subic Special Economic Zone shall be developed into a self-sustaining, industrial, commercial, financial and investment center to generate employment opportunities in and around the zone and to attract and promote productive foreign investments;

b) The Subic Special Economic Zone shall be operated and managed as a separate customs territory ensuring free flow or movement of goods and capital within, into and exported out of the Subic Special Economic Zone, as well as provide incentives such as tax and duty free importations of raw materials, capital and equipment. However, exportation or removal of goods from the territory of the Subic Special Economic Zone to the other parts of the Philippine territory shall be subject to customs duties and taxes under the Customs and Tariff Code and other relevant tax laws of the Philippines; (c) The provisions of existing laws, rules and regulations to the contrary notwithstanding, no taxes, local and national, shall be imposed within the Subic Special Economic Zone. In lieu of paying taxes, three percent (3%) of the gross income earned by all businesses and enterprises within the Subic Special Economic Zone shall be remitted to the National Government, one percent (1%) each to the local government units affected by the declaration of the zone in proportion to their population area, and other factors. In addition, there is hereby established a development fund of one percent (1%) of the gross income earned by all businesses and enterprises within the Subic Special Economic Zone to be utilized for the Municipality of Subic, and other municipalities contiguous to be base areas. In case of conflict between national and local laws with respect to tax exemption privileges in the Subic Special Economic Zone, the same shall be resolved in favor of the latter; (d) No exchange control policy shall be applied and free markets for foreign exchange, gold, securities and futures shall be allowed and maintained in the Subic Special Economic Zone; (e) The Central Bank, through the Monetary Board, shall supervise and regulate the operations of banks and other financial institutions within the Subic Special Economic Zone; (f) Banking and Finance shall be liberalized with the establishment of foreign currency depository units of local commercial banks and offshore banking units of foreign banks with minimum Central Bank regulation; (g) Any investor within the Subic Special Economic Zone whose continuing investment shall not be less than Two Hundred fifty thousand dollars ($250,000), his/her spouse and dependent children under twenty-one (21) years of age, shall be granted permanent resident status within the Subic Special Economic Zone. They shall have freedom of ingress and egress to and from the Subic Special Economic Zone without any need of special authorization from the Bureau of Immigration and Deportation. The Subic Bay Metropolitan Authority referred to in Section 13 of this Act may also issue working visas renewable every two (2) years to foreign executives

and other aliens possessing highly-technical skills which no Filipino within the Subic Special Economic Zone possesses, as certified by the Department of Labor and Employment. The names of aliens granted permanent residence status and working visas by the Subic Bay Metropolitan Authority shall be reported to the Bureau of Immigration and Deportation within thirty (30) days after issuance thereof; x x x (Emphasis supplied) It is clear that under Section 12 of R.A. No. 7227 it is only the Subic SEZ which was granted by Congress with tax exemption, investment incentives and the like. There is no express extension of the aforesaid benefits to other SEZs still to be created at the time via presidential proclamation. The deliberations of the Senate confirm the exclusivity to Subic SEZ of the tax and investment privileges accorded it under the law, as the following exchanges between our lawmakers show during the second reading of the precursor bill of R.A. No. 7227 with respect to the investment policies that would govern Subic SEZ which are now embodied in the aforesaid Section 12 thereof: xxx Senator Maceda: This is what I was talking about. We get into problems here because all of these following policies are centered around the concept of free port. And in the main paragraph above, we have declared both Clark and Subic as special economic zones, subject to these policies which are, in effect, a free-port arrangement. Senator Angara: The Gentleman is absolutely correct, Mr. President. So we must confine these policies only to Subic. May I withdraw then my amendment, and instead provide that THE SPECIAL ECONOMIC ZONE OF SUBIC SHALL BE ESTABLISHED IN ACCORDANCE WITH THE FOLLOWING POLICIES. Subject to style, Mr. President. Thus, it is very clear that these principles and policies are applicable only to Subic as a free port. Senator Paterno: Mr. President. The President: Senator Paterno is recognized.

Senator Paterno: I take it that the amendment suggested by Senator Angara would then prevent the establishment of other special economic zones observing these policies. Senator Angara: No, Mr. President, because during our short caucus, Senator Laurel raised the point that if we give this delegation to the President to establish other economic zones, that may be an unwarranted delegation. So we agreed that we will simply limit the definition of powers and description of the zone to Subic, but that does not exclude the possibility of creating other economic zones within the baselands. Senator Paterno: But if that amendment is followed, no other special economic zone may be created under authority of this particular bill. Is that correct, Mr. President? Senator Angara: Under this specific provision, yes, Mr. President. This provision now will be confined only to Subic.
[38]

x x x (Underscoring supplied). As gathered from the earlier-quoted Section 12 of R.A. No. 7227, the privileges given to Subic SEZ consist principally of exemption from tariff or customs duties, national and local taxes of business entities therein (paragraphs (b) and (c)), free market and trade of specified goods or properties (paragraph d), liberalized banking and finance (paragraph f), and relaxed immigration rules for foreign investors (paragraph g). Yet, apart from these, Proclamation No. 420 also makes available to the John Hay SEZ benefits existing in other laws such as the privilege of export processing zonebased businesses of importing capital equipment and raw materials free from taxes, duties and other restrictions; tax and duty exemptions, tax holiday, tax credit, and other incentives under the Omnibus Investments Code of 1987; and the applicability to the subject zone of rules governing foreign investments in the Philippines.
[39] [40] [41]

While the grant of economic incentives may be essential to the creation and success of SEZs, free trade zones and the like, the grant thereof to the John Hay SEZ cannot be sustained. The incentives under R.A. No. 7227 are exclusive only to the Subic SEZ, hence, the extension of the same to the John Hay SEZ finds no support therein. Neither does the same grant of privileges to the John Hay SEZ find support in the other laws specified under Section 3 of Proclamation No. 420, which laws were already extant before the issuance of the proclamation or the enactment of R.A. No. 7227.

More importantly, the nature of most of the assailed privileges is one of tax exemption. It is the legislature, unless limited by a provision of the state constitution, that has full power to exempt any person or corporation or class of property from taxation, its power to exempt being as broad as its power to tax. Other than Congress, the Constitution may itself provide for specific tax exemptions, or local governments may pass ordinances on exemption only from local taxes.
[42] [43] [44]

The challenged grant of tax exemption would circumvent the Constitutions imposition that a law granting any tax exemption must have the concurrence of a majority of all the members of Congress. In the same vein, the other kinds of privileges extended to the John Hay SEZ are by tradition and usage for Congress to legislate upon.
[45]

Contrary to public respondents suggestions, the claimed statutory exemption of the John Hay SEZ from taxation should be manifest and unmistakable from the language of the law on which it is based; it must be expressly granted in a statute stated in a language too clear to be mistaken. Tax exemption cannot be implied as it must be categorically and unmistakably expressed.
[46] [47]

If it were the intent of the legislature to grant to the John Hay SEZ the same tax exemption and incentives given to the Subic SEZ, it would have so expressly provided in the R.A. No. 7227. This Court no doubt can void an act or policy of the political departments of the government on either of two groundsinfringement of the Constitution or grave abuse of discretion.
[48]

This Court then declares that the grant by Proclamation No. 420 of tax exemption and other privileges to the John Hay SEZ is void for being violative of the Constitution. This renders it unnecessary to still dwell on petitioners claim that the same grant violates the equal protection guarantee. With respect to the final issue raised by petitioners that Proclamation No. 420 is unconstitutional for being in derogation of Baguio Citys local autonomy, objection is specifically mounted against Section 2 thereof in which BCDA is set up as the governing body of the John Hay SEZ.
[49]

Petitioners argue that there is no authority of the President to subject the John Hay SEZ to the governance of BCDA which has just oversight functions over SEZ; and that to do so is to diminish the city governments power over an area within its jurisdiction, hence, Proclamation No. 420 unlawfully gives the President power of control over the local government instead of just mere supervision.

Petitioners arguments are bereft of merit. Under R.A. No. 7227, the BCDA is entrusted with, among other things, the following purpose:
[50]

xxx (a) To own, hold and/or administer the military reservations of John Hay Air Station, Wallace Air Station, ODonnell Transmitter Station, San Miguel Naval Communications Station, Mt. Sta. Rita Station (Hermosa, Bataan) and those portions of Metro Manila Camps which may be transferred to it by the President; x x x (Underscoring supplied) With such broad rights of ownership and administration vested in BCDA over Camp John Hay, BCDA virtually has control over it, subject to certain limitations provided for by law. By designating BCDA as the governing agency of the John Hay SEZ, the law merely emphasizes or reiterates the statutory role or functions it has been granted. The unconstitutionality of the grant of tax immunity and financial incentives as contained in the second sentence of Section 3 of Proclamation No. 420 notwithstanding, the entire assailed proclamation cannot be declared unconstitutional, the other parts thereof not being repugnant to law or the Constitution. The delineation and declaration of a portion of the area covered by Camp John Hay as a SEZ was well within the powers of the President to do so by means of a proclamation. The requisite prior concurrence by the Baguio City government to such proclamation appears to have been given in the form of a duly enacted resolution by the sanggunian. The other provisions of the proclamation had been proven to be consistent with R.A. No. 7227.
[51]

Where part of a statute is void as contrary to the Constitution, while another part is valid, the valid portion, if separable from the invalid, may stand and be enforced. This Court finds that the other provisions in Proclamation No. 420 converting a delineated portion of Camp John Hay into the John Hay SEZ are separable from the invalid second sentence of Section 3 thereof, hence they stand.
[52]

WHEREFORE, the second sentence of Section 3 of Proclamation No. 420 is hereby declared NULL AND VOID and is accordingly declared of no legal force and effect. Public respondents are hereby enjoined from implementing the aforesaid void provision. Proclamation No. 420, without the invalidated portion, remains valid and effective.

SO ORDERED.

G.R. No. L-69259 January 26, 1988 DELPHER TRADES CORPORATION, and DELPHIN PACHECO, petitioners, vs. INTERMEDIATE APPELLATE COURT and HYDRO PIPES PHILIPPINES, INC., respondents.

GUTIERREZ, JR., J.: The petitioners question the decision of the Intermediate Appellate Court which sustained the private respondent's contention that the deed of exchange whereby Delfin Pacheco and Pelagia Pacheco conveyed a parcel of land to Delpher Trades Corporation in exchange for 2,500 shares of stock was actually a deed of sale which violated a right of first refusal under a lease contract. Briefly, the facts of the case are summarized as follows: In 1974, Delfin Pacheco and his sister, Pelagia Pacheco, were the owners of 27,169 square meters of real estate Identified as Lot. No. 1095, Malinta Estate, in the Municipality of Polo (now Valenzuela), Province of Bulacan (now Metro Manila) which is covered by Transfer Certificate of Title No. T-4240 of the Bulacan land registry. On April 3, 1974, the said co-owners leased to Construction Components International Inc. the same property and providing that during the existence or after the term of this lease the lessor should he decide to sell the property leased shall first offer the same to the lessee and the letter has the priority to buy under similar conditions (Exhibits A to A-5) On August 3, 1974, lessee Construction Components International, Inc. assigned its rights and obligations under the contract of lease in favor of Hydro Pipes Philippines, Inc. with the signed conformity and consent of lessors Delfin Pacheco and Pelagia Pacheco (Exhs. B to B-6 inclusive) The contract of lease, as well as the assignment of lease were annotated at he back of the title, as per stipulation of the parties (Exhs. A to D-3 inclusive) On January 3, 1976, a deed of exchange was executed between lessors Delfin and Pelagia Pacheco and defendant Delpher Trades Corporation whereby the former conveyed to the latter the leased property (TCT No.T-4240) together with another parcel of land also located in Malinta Estate, Valenzuela, Metro Manila (TCT No. 4273) for 2,500 shares of stock of defendant corporation with a total value of P1,500,000.00 (Exhs. C to C-5, inclusive) (pp. 44-45, Rollo) On the ground that it was not given the first option to buy the leased property pursuant to the proviso in the lease agreement, respondent Hydro Pipes Philippines, Inc., filed an amended complaint for

reconveyance of Lot. No. 1095 in its favor under conditions similar to those whereby Delpher Trades Corporation acquired the property from Pelagia Pacheco and Delphin Pacheco. After trial, the Court of First Instance of Bulacan ruled in favor of the plaintiff. The dispositive portion of the decision reads: ACCORDINGLY, the judgment is hereby rendered declaring the valid existence of the plaintiffs preferential right to acquire the subject property (right of first refusal) and ordering the defendants and all persons deriving rights therefrom to convey the said property to plaintiff who may offer to acquire the same at the rate of P14.00 per square meter, more or less, for Lot 1095 whose area is 27,169 square meters only. Without pronouncement as to attorney's fees and costs. (Appendix I; Rec., pp. 246247). (Appellant's Brief, pp. 1-2; p. 134, Rollo) The lower court's decision was affirmed on appeal by the Intermediate Appellate Court. The defendants-appellants, now the petitioners, filed a petition for certiorari to review the appellate court's decision. We initially denied the petition but upon motion for reconsideration, we set aside the resolution denying the petition and gave it due course. The petitioners allege that: The denial of the petition will work great injustice to the petitioners, in that: 1. Respondent Hydro Pipes Philippines, Inc, ("private respondent") will acquire from petitioners a parcel of industrial land consisting of 27,169 square meters or 2.7 hectares (located right after the Valenzuela, Bulacan exit of the toll expressway) for only P14/sq. meter, or a total of P380,366, although the prevailing value thereof is approximately P300/sq. meter or P8.1 Million; 2. Private respondent is allowed to exercise its right of first refusal even if there is no "sale" or transfer of actual ownership interests by petitioners to third parties; and 3. Assuming arguendo that there has been a transfer of actual ownership interests, private respondent will acquire the land not under "similar conditions" by which it was transferred to petitioner Delpher Trades Corporation, as provided in the same contractual provision invoked by private respondent. (pp. 251-252, Rollo) The resolution of the case hinges on whether or not the "Deed of Exchange" of the properties executed by the Pachecos on the one hand and the Delpher Trades Corporation on the other was meant to be a contract of sale which, in effect, prejudiced the private respondent's right of first refusal over the leased property included in the "deed of exchange." Eduardo Neria, a certified public accountant and son-in-law of the late Pelagia Pacheco testified that Delpher Trades Corporation is a family corporation; that the corporation was organized by the children of the two spouses (spouses Pelagia Pacheco and Benjamin Hernandez and spouses Delfin Pacheco and Pilar Angeles) who owned in common the parcel of land leased to Hydro Pipes Philippines in order to perpetuate their control over the property through the corporation and to avoid taxes; that in order to accomplish this end, two pieces of real estate, including Lot No. 1095 which

had been leased to Hydro Pipes Philippines, were transferred to the corporation; that the leased property was transferred to the corporation by virtue of a deed of exchange of property; that in exchange for these properties, Pelagia and Delfin acquired 2,500 unissued no par value shares of stock which are equivalent to a 55% majority in the corporation because the other owners only owned 2,000 shares; and that at the time of incorporation, he knew all about the contract of lease of Lot. No. 1095 to Hydro Pipes Philippines. In the petitioners' motion for reconsideration, they refer to this scheme as "estate planning." (p. 252, Rollo) Under this factual backdrop, the petitioners contend that there was actually no transfer of ownership of the subject parcel of land since the Pachecos remained in control of the property. Thus, the petitioners allege: "Considering that the beneficial ownership and control of petitioner corporation remained in the hands of the original co-owners, there was no transfer of actual ownership interests over the land when the same was transferred to petitioner corporation in exchange for the latter's shares of stock. The transfer of ownership, if anything, was merely in form but not in substance. In reality, petitioner corporation is a mere alter ego or conduit of the Pacheco co-owners; hence the corporation and the co-owners should be deemed to be the same, there being in substance and in effect an Identity of interest." (p. 254, Rollo) The petitioners maintain that the Pachecos did not sell the property. They argue that there was no sale and that they exchanged the land for shares of stocks in their own corporation. "Hence, such transfer is not within the letter, or even spirit of the contract. There is a sale when ownership is transferred for a price certain in money or its equivalent (Art. 1468, Civil Code) while there is a barter or exchange when one thing is given in consideration of another thing (Art. 1638, Civil Code)." (pp. 254-255, Rollo) On the other hand, the private respondent argues that Delpher Trades Corporation is a corporate entity separate and distinct from the Pachecos. Thus, it contends that it cannot be said that Delpher Trades Corporation is the Pacheco's same alter ego or conduit; that petitioner Delfin Pacheco, having treated Delpher Trades Corporation as such a separate and distinct corporate entity, is not a party who may allege that this separate corporate existence should be disregarded. It maintains that there was actual transfer of ownership interests over the leased property when the same was transferred to Delpher Trades Corporation in exchange for the latter's shares of stock. We rule for the petitioners. After incorporation, one becomes a stockholder of a corporation by subscription or by purchasing stock directly from the corporation or from individual owners thereof (Salmon, Dexter & Co. v. Unson, 47 Phil, 649, citing Bole v. Fulton [1912], 233 Pa., 609). In the case at bar, in exchange for their properties, the Pachecos acquired 2,500 original unissued no par value shares of stocks of the Delpher Trades Corporation. Consequently, the Pachecos became stockholders of the corporation by subscription "The essence of the stock subscription is an agreement to take and pay for original unissued shares of a corporation, formed or to be formed." (Rohrlich 243, cited in Agbayani, Commentaries and Jurisprudence on the Commercial Laws of the Philippines, Vol. III, 1980 Edition, p. 430) It is significant that the Pachecos took no par value shares in exchange for their properties. A no-par value share does not purport to represent any stated proportionate interest in the capital stock measured by value, but only an aliquot part of the whole number of such shares of the issuing corporation. The holder of no-par shares may see from the certificate itself that he is only an aliquot sharer in the assets of the corporation. But this character of proportionate interest is not hidden beneath a false appearance of a given sum in money, as in the case of par value shares. The capital stock of a corporation issuing only no-par value shares is not set forth by a stated amount of

money, but instead is expressed to be divided into a stated number of shares, such as, 1,000 shares. This indicates that a shareholder of 100 such shares is an aliquot sharer in the assets of the corporation, no matter what value they may have, to the extent of 100/1,000 or 1/10. Thus, by removing the par value of shares, the attention of persons interested in the financial condition of a corporation is focused upon the value of assets and the amount of its debts. (Agbayani, Commentaries and Jurisprudence on the Commercial Laws of the Philippines, Vol. III, 1980 Edition, p. 107). Moreover, there was no attempt to state the true or current market value of the real estate. Land valued at P300.00 a square meter was turned over to the family's corporation for only P14.00 a square meter. It is to be stressed that by their ownership of the 2,500 no par shares of stock, the Pachecos have control of the corporation. Their equity capital is 55% as against 45% of the other stockholders, who also belong to the same family group. In effect, the Delpher Trades Corporation is a business conduit of the Pachecos. What they really did was to invest their properties and change the nature of their ownership from unincorporated to incorporated form by organizing Delpher Trades Corporation to take control of their properties and at the same time save on inheritance taxes. As explained by Eduardo Neria: xxx xxx xxx ATTY. LINSANGAN: Q Mr. Neria, from the point of view of taxation, is there any benefit to the spouses Hernandez and Pacheco in connection with their execution of a deed of exchange on the properties for no par value shares of the defendant corporation? A Yes, sir. COURT: Q What do you mean by "point of view"? A To take advantage for both spouses and corporation in entering in the deed of exchange. ATTY. LINSANGAN: Q (What do you mean by "point of view"?) What are these benefits to the spouses of this deed of exchange? A Continuous control of the property, tax exemption benefits, and other inherent benefits in a corporation.

Q What are these advantages to the said spouses from the point of view of taxation in entering in the deed of exchange? A Having fulfilled the conditions in the income tax law, providing for tax free exchange of property, they were able to execute the deed of exchange free from income tax and acquire a corporation. Q What provision in the income tax law are you referring to? A I refer to Section 35 of the National Internal Revenue Code under par. C-sub-par. (2) Exceptions regarding the provision which I quote: "No gain or loss shall also be recognized if a person exchanges his property for stock in a corporation of which as a result of such exchange said person alone or together with others not exceeding four persons gains control of said corporation." Q Did you explain to the spouses this benefit at the time you executed the deed of exchange? A Yes, sir Q You also, testified during the last hearing that the decision to have no par value share in the defendant corporation was for the purpose of flexibility. Can you explain flexibility in connection with the ownership of the property in question? A There is flexibility in using no par value shares as the value is determined by the board of directors in increasing capitalization. The board can fix the value of the shares equivalent to the capital requirements of the corporation. Q Now also from the point of taxation, is there any flexibility in the holding by the corporation of the property in question? A Yes, since a corporation does not die it can continue to hold on to the property indefinitely for a period of at least 50 years. On the other hand, if the property is held by the spouse the property will be tied up in succession proceedings and the consequential payments of estate and inheritance taxes when an owner dies. Q Now what advantage is this continuity in relation to ownership by a particular person of certain properties in respect to taxation? A The property is not subjected to taxes on succession as the corporation does not die. Q So the benefit you are talking about are inheritance taxes? A Yes, sir. (pp. 3-5, tsn., December 15, 1981)

The records do not point to anything wrong or objectionable about this "estate planning" scheme resorted to by the Pachecos. "The legal right of a taxpayer to decrease the amount of what otherwise could be his taxes or altogether avoid them, by means which the law permits, cannot be doubted." (Liddell & Co., Inc. v. The collector of Internal Revenue, 2 SCRA 632 citing Gregory v. Helvering, 293 U.S. 465, 7 L. ed. 596). The "Deed of Exchange" of property between the Pachecos and Delpher Trades Corporation cannot be considered a contract of sale. There was no transfer of actual ownership interests by the Pachecos to a third party. The Pacheco family merely changed their ownership from one form to another. The ownership remained in the same hands. Hence, the private respondent has no basis for its claim of a light of first refusal under the lease contract. WHEREFORE, the instant petition is hereby GRANTED, The questioned decision and resolution of the then Intermediate Appellate Court are REVERSED and SET ASIDE. The amended complaint in Civil Case No. 885-V-79 of the then Court of First Instance of Bulacan is DISMISSED. No costs. SO ORDERED. Fernan (Chairman), Bidin and Cortes, JJ., concur. Feliciano, J., took no part.

G.R. No. 119176

March 19, 2002

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. LINCOLN PHILIPPINE LIFE INSURANCE COMPANY, INC. (now JARDINE-CMA LIFE INSURANCE COMPANY, INC.) and THE COURT OF APPEALS, respondents. KAPUNAN, J.: This is a petition for review on certiorari filed by the Commission on Internal Revenue of the decision of the Court of Appeals dated November 18, 1994 in C.A. G.R. SP No. 31224 which reversed in part the decision of the Court of Tax Appeals in C.T.A. Case No. 4583. The facts of the case are undisputed. Private respondent Lincoln Philippine Life Insurance Co., Inc., (now Jardine-CMA Life Insurance Company, Inc.) is a domestic corporation registered with the Securities and Exchange Commission and engaged in life insurance business. In the years prior to 1984, private respondent issued a special kind of life insurance policy known as the "Junior Estate Builder Policy," the distinguishing feature of which is a clause providing for an automatic increase in the amount of life insurance coverage upon attainment of a certain age by the insured without the need of issuing a new policy. The clause was to take effect in the year 1984. Documentary stamp taxes due on the policy were paid by petitioner only on the initial sum assured. In 1984, private respondent also issued 50,000 shares of stock dividends with a par value of P100.00 per share or a total par value of P5,000,000.00. The actual value of said shares,

represented by its book value, wasP19,307,500.00. Documentary stamp taxes were paid based only on the par value of P5,000,000.00 and not on the book value.
1wphi 1.nt

Subsequently, petitioner issued deficiency documentary stamps tax assessment for the year 1984 in the amounts of (a) P464,898.75, corresponding to the amount of automatic increase of the sum assured on the policy issued by respondent, and (b) P78,991.25 corresponding to the book value in excess of the par value of the stock dividends. The computation of the deficiency documentary stamp taxes is as follows: On Policies Issued: Total policy issued during the year Documentary stamp tax due thereon (P1,360,054,000.00 divided by P200.00 multiplied by P0.35) Less: Payment Deficiency Add: Compromise Penalty P1,360,054,000.00

P 2,380,094.50 P 1,915,495.75 P 464,598.75 300.00 -----------------------

TOTAL AMOUNT DUE & COLLECTIBLE

P 464,898.75

Private respondent questioned the deficiency assessments and sought their cancellation in a petition filed in the Court of Tax Appeals, docketed as CTA Case No. 4583. On March 30, 1993, the Court of Tax Appeals found no valid basis for the deficiency tax assessment on the stock dividends, as well as on the insurance policy. The dispositive portion of the CTAs decision reads: WHEREFORE, the deficiency documentary stamp tax assessments in the amount of P464,898.76 andP78,991.25 or a total of P543,890.01 are hereby cancelled for lack of merit. Respondent Commissioner of Internal Revenue is ordered to desist from collecting said deficiency documentary stamp taxes for the same are considered withdrawn. SO ORDERED.1 Petitioner appealed the CTAs decision to the Court of Appeals. On November 18, 1994, the Court of Appeals promulgated a decision affirming the CTAs decision insofar as it nullified the deficiency assessment on the insurance policy, but reversing the same with regard to the deficiency assessment on the stock dividends. The CTA ruled that the correct basis of the documentary stamp tax due on the stock dividends is the actual value or book value represented by the shares. The dispositive portion of the Court of Appeals decision states: IN VIEW OF ALL THE FOREGOING, the decision appealed from is hereby REVERSED with respect to the deficiency tax assessment on the stock dividends, but AFFIRMED with

regards to the assessment on the Insurance Policies. Consequently, private respondent is ordered to pay the petitioner herein the sum ofP78,991.25, representing documentary stamp tax on the stock dividends it issued. No costs pronouncement. SO ORDERED.2 A motion for reconsideration of the decision having been denied,3 both the Commissioner of Internal Revenue and private respondent appealed to this Court, docketed as G.R. No. 118043 and G.R. No. 119176, respectively. In G.R. No. 118043, private respondent appealed the decision of the Court of Appeals insofar as it upheld the validity of the deficiency tax assessment on the stock dividends. The Commissioner of Internal Revenue, on his part, filed the present petition questioning that portion of the Court of Appeals decision which invalidated the deficiency assessment on the insurance policy, attributing the following errors: THE HONORABLE COURT OF APPEALS ERRED WHEN IT RULED THAT THERE IS A SINGLE AGREEMENT EMBODIED IN THE POLICY AND THAT THE AUTOMATIC INCREASE CLAUSE IS NOT A SEPARATE AGREEMENT, CONTRARY TO SECTION 49 OF THE INSURANCE CODE AND SECTION 183 OF THE REVENUE CODE THAT A RIDER, A CLAUSE IS PART OF THE POLICY. THE HONORABLE COURT OF APPEALS ERRED IN NOT COMPUTING THE AMOUNT OF TAX ON THE TOTAL VALUE OF THE INSURANCE ASSURED IN THE POLICY INCLUDING THE ADDITIONAL INCREASE ASSURED BY THE AUTOMATIC INCREASE CLAUSE DESPITE ITS RULING THAT THE ORIGINAL POLICY AND THE AUTOMATIC CLAUSE CONSTITUTED ONLY A SINGULAR TRANSACTION.4 Section 173 of the National Internal Revenue Code on documentary stamp taxes provides: Sec. 173. Stamp taxes upon documents, instruments and papers. - Upon documents, instruments, loan agreements, and papers, and upon acceptances, assignments, sales, and transfers of the obligation, right or property incident thereto, there shall be levied, collected and paid for, and in respect of the transaction so had or accomplished, the corresponding documentary stamp taxes prescribed in the following section of this Title, by the person making, signing, issuing, accepting, or transferring the same wherever the document is made, signed, issued, accepted, or transferred when the obligation or right arises from Philippine sources or the property is situated in the Philippines, and at the same time such act is done or transaction had: Provided, That whenever one party to the taxable document enjoys exemption from the tax herein imposed, the other party thereto who is not exempt shall be the one directly liable for the tax. (As amended by PD No. 1994) The basis for the value of documentary stamp taxes to be paid on the insurance policy is Section 183 of the National Internal Revenue Code which states in part: The basis for the value of documentary stamp taxes to be paid on the insurance policy is Section 183 of the National Internal Revenue Code which states in part: Sec. 183. Stamp tax on life insurance policies. - On all policies of insurance or other instruments by whatever name the same may be called, whereby any insurance shall be made or renewed upon any life or lives, there shall be collected a documentary stamp tax of thirty (now 50c) centavos on each Two hundred pesos per fractional part thereof, of the amount insured by any such policy.

Petitioner claims that the "automatic increase clause" in the subject insurance policy is separate and distinct from the main agreement and involves another transaction; and that, while no new policy was issued, the original policy was essentially re-issued when the additional obligation was assumed upon the effectivity of this "automatic increase clause" in 1984; hence, a deficiency assessment based on the additional insurance not covered in the main policy is in order. The Court of Appeals sustained the CTAs ruling that there was only one transaction involved in the issuance of the insurance policy and that the "automatic increase clause" is an integral part of that policy. The petition is impressed with merit. Section 49, Title VI of the Insurance Code defines an insurance policy as the written instrument in which a contract of insurance is set forth.5 Section 50 of the same Code provides that the policy, which is required to be in printed form, may contain any word, phrase, clause, mark, sign, symbol, signature, number, or word necessary to complete the contract of insurance.6 It is thus clear that any rider, clause, warranty or endorsement pasted or attached to the policy is considered part of such policy or contract of insurance. The subject insurance policy at the time it was issued contained an "automatic increase clause." Although the clause was to take effect only in 1984, it was written into the policy at the time of its issuance. The distinctive feature of the "junior estate builder policy" called the "automatic increase clause" already formed part and parcel of the insurance contract, hence, there was no need for an execution of a separate agreement for the increase in the coverage that took effect in 1984 when the assured reached a certain age. It is clear from Section 173 that the payment of documentary stamp taxes is done at the time the act is done or transaction had and the tax base for the computation of documentary stamp taxes on life insurance policies under Section 183 is the amount fixed in policy, unless the interest of a person insured is susceptible of exact pecuniary measurement.7 What then is the amount fixed in the policy? Logically, we believe that the amount fixed in the policy is the figure written on its face and whatever increases will take effect in the future by reason of the "automatic increase clause" embodied in the policy without the need of another contract. Here, although the automatic increase in the amount of life insurance coverage was to take effect later on, the date of its effectivity, as well as the amount of the increase, was already definite at the time of the issuance of the policy. Thus, the amount insured by the policy at the time of its issuance necessarily included the additional sum covered by the automatic increase clause because it was already determinable at the time the transaction was entered into and formed part of the policy. The "automatic increase clause" in the policy is in the nature of a conditional obligation under Article 1181,8 by which the increase of the insurance coverage shall depend upon the happening of the event which constitutes the obligation. In the instant case, the additional insurance that took effect in 1984 was an obligation subject to a suspensive obligation,9 but still a part of the insurance sold to which private respondent was liable for the payment of the documentary stamp tax. The deficiency of documentary stamp tax imposed on private respondent is definitely not on the amount of the original insurance coverage, but on the increase of the amount insured upon the effectivity of the "Junior Estate Builder Policy." Finally, it should be emphasized that while tax avoidance schemes and arrangements are not prohibited,10 tax laws cannot be circumvented in order to evade the payment of just taxes. In the

case at bar, to claim that the increase in the amount insured (by virtue of the automatic increase clause incorporated into the policy at the time of issuance) should not be included in the computation of the documentary stamp taxes due on the policy would be a clear evasion of the law requiring that the tax be computed on the basis of the amount insured by the policy. WHEREFORE, the petition is hereby given DUE COURSE. The decision of the Court of Appeals is SET ASIDEinsofar as it affirmed the decision of the Court of Tax Appeals nullifying the deficiency stamp tax assessment petitioner imposed on private respondent in the amount of P464,898.75 corresponding to the increase in 1984 of the sum under the policy issued by respondent.
1wphi1.nt

SO ORDERED. Davide, Jr., C.J. and Ynares-Santiago, J., concur. Puno, J., on official leave.

G.R. No. 147188

September 14, 2004

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. THE ESTATE OF BENIGNO P. TODA, JR., Represented by Special Co-administrators Lorna Kapunan and Mario Luza Bautista, respondents. DECISION DAVIDE, JR., C.J.: This Court is called upon to determine in this case whether the tax planning scheme adopted by a corporation constitutes tax evasion that would justify an assessment of deficiency income tax. The petitioner seeks the reversal of the Decision1 of the Court of Appeals of 31 January 2001 in CAG.R. SP No. 57799 affirming the 3 January 2000 Decision2 of the Court of Tax Appeals (CTA) in C.T.A. Case No. 5328,3 which held that the respondent Estate of Benigno P. Toda, Jr. is not liable for the deficiency income tax of Cibeles Insurance Corporation (CIC) in the amount of P79,099,999.22 for the year 1989, and ordered the cancellation and setting aside of the assessment issued by Commissioner of Internal Revenue Liwayway Vinzons-Chato on 9 January 1995. The case at bar stemmed from a Notice of Assessment sent to CIC by the Commissioner of Internal Revenue for deficiency income tax arising from an alleged simulated sale of a 16-storey commercial building known as Cibeles Building, situated on two parcels of land on Ayala Avenue, Makati City. On 2 March 1989, CIC authorized Benigno P. Toda, Jr., President and owner of 99.991% of its issued and outstanding capital stock, to sell the Cibeles Building and the two parcels of land on which the building stands for an amount of not less than P90 million.4 On 30 August 1989, Toda purportedly sold the property for P100 million to Rafael A. Altonaga, who, in turn, sold the same property on the same day to Royal Match Inc. (RMI) for P200 million. These two transactions were evidenced by Deeds of Absolute Sale notarized on the same day by the same notary public.5

For the sale of the property to RMI, Altonaga paid capital gains tax in the amount of P10 million.6 On 16 April 1990, CIC filed its corporate annual income tax return7 for the year 1989, declaring, among other things, its gain from the sale of real property in the amount of P75,728.021. After crediting withholding taxes ofP254,497.00, it paid P26,341,2078 for its net taxable income of P75,987,725. On 12 July 1990, Toda sold his entire shares of stocks in CIC to Le Hun T. Choa for P12.5 million, as evidenced by a Deed of Sale of Shares of Stocks.9 Three and a half years later, or on 16 January 1994, Toda died. On 29 March 1994, the Bureau of Internal Revenue (BIR) sent an assessment notice10 and demand letter to the CIC for deficiency income tax for the year 1989 in the amount of P79,099,999.22. The new CIC asked for a reconsideration, asserting that the assessment should be directed against the old CIC, and not against the new CIC, which is owned by an entirely different set of stockholders; moreover, Toda had undertaken to hold the buyer of his stockholdings and the CIC free from all tax liabilities for the fiscal years 1987-1989.11 On 27 January 1995, the Estate of Benigno P. Toda, Jr., represented by special co-administrators Lorna Kapunan and Mario Luza Bautista, received a Notice of Assessment12 dated 9 January 1995 from the Commissioner of Internal Revenue for deficiency income tax for the year 1989 in the amount of P79,099,999.22, computed as follows: Income Tax 1989 Net Income per return P75,987,725.00

Add: Additional gain on sale of real property taxable under ordinary corporate income but were substituted with individual capital gains(P200M 100,000,000.00 100M) Total Net Taxable Income per investigation Tax Due thereof at 35% Less: Payment already made 1. Per return 2. Thru Capital Gains Tax made by R.A. Altonaga P26,595,704.00 10,000,000.00 36,595,704.00 P 24,999,999.75 Add: 50% Surcharge 25% Surcharge Total Add: Interest 20% from 4/16/90-4/30/94 (.808) 35,349,999.65 12,499,999.88 6,249,999.94 P 43,749,999.57 Balance of tax due P 61,595,703.75 P175,987,725.00

TOTAL AMT. DUE & COLLECTIBLE

P 79,099,999.22 ==============

The Estate thereafter filed a letter of protest.13 In the letter dated 19 October 1995,14 the Commissioner dismissed the protest, stating that a fraudulent scheme was deliberately perpetuated by the CIC wholly owned and controlled by Toda by covering up the additional gain of P100 million, which resulted in the change in the income structure of the proceeds of the sale of the two parcels of land and the building thereon to an individual capital gains, thus evading the higher corporate income tax rate of 35%. On 15 February 1996, the Estate filed a petition for review15 with the CTA alleging that the Commissioner erred in holding the Estate liable for income tax deficiency; that the inference of fraud of the sale of the properties is unreasonable and unsupported; and that the right of the Commissioner to assess CIC had already prescribed. In his Answer16 and Amended Answer,17 the Commissioner argued that the two transactions actually constituted a single sale of the property by CIC to RMI, and that Altonaga was neither the buyer of the property from CIC nor the seller of the same property to RMI. The additional gain of P100 million (the difference between the second simulated sale for P200 million and the first simulated sale for P100 million) realized by CIC was taxed at the rate of only 5% purportedly as capital gains tax of Altonaga, instead of at the rate of 35% as corporate income tax of CIC. The income tax return filed by CIC for 1989 with intent to evade payment of the tax was thus false or fraudulent. Since such falsity or fraud was discovered by the BIR only on 8 March 1991, the assessment issued on 9 January 1995 was well within the prescriptive period prescribed by Section 223 (a) of the National Internal Revenue Code of 1986, which provides that tax may be assessed within ten years from the discovery of the falsity or fraud. With the sale being tainted with fraud, the separate corporate personality of CIC should be disregarded. Toda, being the registered owner of the 99.991% shares of stock of CIC and the beneficial owner of the remaining 0.009% shares registered in the name of the individual directors of CIC, should be held liable for the deficiency income tax, especially because the gains realized from the sale were withdrawn by him as cash advances or paid to him as cash dividends. Since he is already dead, his estate shall answer for his liability. In its decision18 of 3 January 2000, the CTA held that the Commissioner failed to prove that CIC committed fraud to deprive the government of the taxes due it. It ruled that even assuming that a pre-conceived scheme was adopted by CIC, the same constituted mere tax avoidance, and not tax evasion. There being no proof of fraudulent transaction, the applicable period for the BIR to assess CIC is that prescribed in Section 203 of the NIRC of 1986, which is three years after the last day prescribed by law for the filing of the return. Thus, the governments right to assess CIC prescribed on 15 April 1993. The assessment issued on 9 January 1995 was, therefore, no longer valid. The CTA also ruled that the mere ownership by Toda of 99.991% of the capital stock of CIC was not in itself sufficient ground for piercing the separate corporate personality of CIC. Hence, the CTA declared that the Estate is not liable for deficiency income tax of P79,099,999.22 and, accordingly, cancelled and set aside the assessment issued by the Commissioner on 9 January 1995. In its motion for reconsideration,19 the Commissioner insisted that the sale of the property owned by CIC was the result of the connivance between Toda and Altonaga. She further alleged that the latter was a representative, dummy, and a close business associate of the former, having held his office in a property owned by CIC and derived his salary from a foreign corporation (Aerobin, Inc.) duly owned by Toda for representation services rendered. The CTA denied20 the motion for reconsideration, prompting the Commissioner to file a petition for review21 with the Court of Appeals.

In its challenged Decision of 31 January 2001, the Court of Appeals affirmed the decision of the CTA, reasoning that the CTA, being more advantageously situated and having the necessary expertise in matters of taxation, is "better situated to determine the correctness, propriety, and legality of the income tax assessments assailed by the Toda Estate."22 Unsatisfied with the decision of the Court of Appeals, the Commissioner filed the present petition invoking the following grounds: I. THE COURT OF APPEALS ERRED IN HOLDING THAT RESPONDENT COMMITTED NO FRAUD WITH INTENT TO EVADE THE TAX ON THE SALE OF THE PROPERTIES OF CIBELES INSURANCE CORPORATION. II. THE COURT OF APPEALS ERRED IN NOT DISREGARDING THE SEPARATE CORPORATE PERSONALITY OF CIBELES INSURANCE CORPORATION. III. THE COURT OF APPEALS ERRED IN HOLDING THAT THE RIGHT OF PETITIONER TO ASSESS RESPONDENT FOR DEFICIENCY INCOME TAX FOR THE YEAR 1989 HAD PRESCRIBED. The Commissioner reiterates her arguments in her previous pleadings and insists that the sale by CIC of the Cibeles property was in connivance with its dummy Rafael Altonaga, who was financially incapable of purchasing it. She further points out that the documents themselves prove the fact of fraud in that (1) the two sales were done simultaneously on the same date, 30 August 1989; (2) the Deed of Absolute Sale between Altonaga and RMI was notarized ahead of the alleged sale between CIC and Altonaga, with the former registered in the Notarial Register of Jocelyn H. Arreza Pabelana as Doc. 91, Page 20, Book I, Series of 1989; and the latter, as Doc. No. 92, Page 20, Book I, Series of 1989, of the same Notary Public; (3) as early as 4 May 1989, CIC received P40 million from RMI, and not from Altonaga. The said amount was debited by RMI in its trial balance as of 30 June 1989 as investment in Cibeles Building. The substantial portion of P40 million was withdrawn by Toda through the declaration of cash dividends to all its stockholders. For its part, respondent Estate asserts that the Commissioner failed to present the income tax return of Altonaga to prove that the latter is financially incapable of purchasing the Cibeles property. To resolve the grounds raised by the Commissioner, the following questions are pertinent: 1. Is this a case of tax evasion or tax avoidance? 2. Has the period for assessment of deficiency income tax for the year 1989 prescribed? and 3. Can respondent Estate be held liable for the deficiency income tax of CIC for the year 1989, if any? We shall discuss these questions in seriatim. Is this a case of tax evasion or tax avoidance? Tax avoidance and tax evasion are the two most common ways used by taxpayers in escaping from taxation. Tax avoidance is the tax saving device within the means sanctioned by law. This method should be used by the taxpayer in good faith and at arms length. Tax evasion, on the other hand, is

a scheme used outside of those lawful means and when availed of, it usually subjects the taxpayer to further or additional civil or criminal liabilities.23 Tax evasion connotes the integration of three factors: (1) the end to be achieved, i.e., the payment of less than that known by the taxpayer to be legally due, or the non-payment of tax when it is shown that a tax is due; (2) an accompanying state of mind which is described as being "evil," in "bad faith," "willfull," or "deliberate and not accidental"; and (3) a course of action or failure of action which is unlawful.24 All these factors are present in the instant case. It is significant to note that as early as 4 May 1989, prior to the purported sale of the Cibeles property by CIC to Altonaga on 30 August 1989, CIC received P40 million from RMI,25 and not from Altonaga. That P40 million was debited by RMI and reflected in its trial balance26 as "other inv. Cibeles Bldg." Also, as of 31 July 1989, another P40 million was debited and reflected in RMIs trial balance as "other inv. Cibeles Bldg." This would show that the real buyer of the properties was RMI, and not the intermediary Altonaga.
lavvphi1.net

The investigation conducted by the BIR disclosed that Altonaga was a close business associate and one of the many trusted corporate executives of Toda. This information was revealed by Mr. Boy Prieto, the assistant accountant of CIC and an old timer in the company.27 But Mr. Prieto did not testify on this matter, hence, that information remains to be hearsay and is thus inadmissible in evidence. It was not verified either, since the letter-request for investigation of Altonaga was unserved,28 Altonaga having left for the United States of America in January 1990. Nevertheless, that Altonaga was a mere conduit finds support in the admission of respondent Estate that the sale to him was part of the tax planning scheme of CIC. That admission is borne by the records. In its Memorandum, respondent Estate declared: Petitioner, however, claims there was a "change of structure" of the proceeds of sale. Admitted one hundred percent. But isnt this precisely the definition of tax planning? Change the structure of the funds and pay a lower tax. Precisely, Sec. 40 (2) of the Tax Code exists, allowing tax free transfers of property for stock, changing the structure of the property and the tax to be paid. As long as it is done legally, changing the structure of a transaction to achieve a lower tax is not against the law. It is absolutely allowed. Tax planning is by definition to reduce, if not eliminate altogether, a tax. Surely petitioner [sic] cannot be faulted for wanting to reduce the tax from 35% to 5%.29 [Underscoring supplied]. The scheme resorted to by CIC in making it appear that there were two sales of the subject properties, i.e., from CIC to Altonaga, and then from Altonaga to RMI cannot be considered a legitimate tax planning. Such scheme is tainted with fraud. Fraud in its general sense, "is deemed to comprise anything calculated to deceive, including all acts, omissions, and concealment involving a breach of legal or equitable duty, trust or confidence justly reposed, resulting in the damage to another, or by which an undue and unconscionable advantage is taken of another."30 Here, it is obvious that the objective of the sale to Altonaga was to reduce the amount of tax to be paid especially that the transfer from him to RMI would then subject the income to only 5% individual capital gains tax, and not the 35% corporate income tax. Altonagas sole purpose of acquiring and transferring title of the subject properties on the same day was to create a tax shelter. Altonaga never controlled the property and did not enjoy the normal benefits and burdens of ownership. The sale to him was merely a tax ploy, a sham, and without business purpose and economic substance.

Doubtless, the execution of the two sales was calculated to mislead the BIR with the end in view of reducing the consequent income tax liability.
lavvphi 1.net

In a nutshell, the intermediary transaction, i.e., the sale of Altonaga, which was prompted more on the mitigation of tax liabilities than for legitimate business purposes constitutes one of tax evasion.31 Generally, a sale or exchange of assets will have an income tax incidence only when it is consummated.32 The incidence of taxation depends upon the substance of a transaction. The tax consequences arising from gains from a sale of property are not finally to be determined solely by the means employed to transfer legal title. Rather, the transaction must be viewed as a whole, and each step from the commencement of negotiations to the consummation of the sale is relevant. A sale by one person cannot be transformed for tax purposes into a sale by another by using the latter as a conduit through which to pass title. To permit the true nature of the transaction to be disguised by mere formalisms, which exist solely to alter tax liabilities, would seriously impair the effective administration of the tax policies of Congress.33 To allow a taxpayer to deny tax liability on the ground that the sale was made through another and distinct entity when it is proved that the latter was merely a conduit is to sanction a circumvention of our tax laws. Hence, the sale to Altonaga should be disregarded for income tax purposes.34 The two sale transactions should be treated as a single direct sale by CIC to RMI. Accordingly, the tax liability of CIC is governed by then Section 24 of the NIRC of 1986, as amended (now 27 (A) of the Tax Reform Act of 1997), which stated as follows: Sec. 24. Rates of tax on corporations. (a) Tax on domestic corporations.- A tax is hereby imposed upon the taxable net income received during each taxable year from all sources by every corporation organized in, or existing under the laws of the Philippines, and partnerships, no matter how created or organized but not including general professional partnerships, in accordance with the following: Twenty-five percent upon the amount by which the taxable net income does not exceed one hundred thousand pesos; and Thirty-five percent upon the amount by which the taxable net income exceeds one hundred thousand pesos. CIC is therefore liable to pay a 35% corporate tax for its taxable net income in 1989. The 5% individual capital gains tax provided for in Section 34 (h) of the NIRC of 198635 (now 6% under Section 24 (D) (1) of the Tax Reform Act of 1997) is inapplicable. Hence, the assessment for the deficiency income tax issued by the BIR must be upheld. Has the period of assessment prescribed? No. Section 269 of the NIRC of 1986 (now Section 222 of the Tax Reform Act of 1997) read: Sec. 269. Exceptions as to period of limitation of assessment and collection of taxes.-(a) In the case of a false or fraudulent return with intent to evade tax or of failure to file a return, the tax may be assessed, or a proceeding in court after the collection of such tax may be begun without assessment, at any time within ten years after the discovery of the falsity, fraud or omission: Provided, That in a fraud assessment which has become final and executory, the

fact of fraud shall be judicially taken cognizance of in the civil or criminal action for collection thereof . Put differently, in cases of (1) fraudulent returns; (2) false returns with intent to evade tax; and (3) failure to file a return, the period within which to assess tax is ten years from discovery of the fraud, falsification or omission, as the case may be. It is true that in a query dated 24 August 1989, Altonaga, through his counsel, asked the Opinion of the BIR on the tax consequence of the two sale transactions.36 Thus, the BIR was amply informed of the transactions even prior to the execution of the necessary documents to effect the transfer. Subsequently, the two sales were openly made with the execution of public documents and the declaration of taxes for 1989. However, these circumstances do not negate the existence of fraud. As earlier discussed those two transactions were tainted with fraud. And even assuming arguendo that there was no fraud, we find that the income tax return filed by CIC for the year 1989 was false. It did not reflect the true or actual amount gained from the sale of the Cibeles property. Obviously, such was done with intent to evade or reduce tax liability. As stated above, the prescriptive period to assess the correct taxes in case of false returns is ten years from the discovery of the falsity. The false return was filed on 15 April 1990, and the falsity thereof was claimed to have been discovered only on 8 March 1991.37 The assessment for the 1989 deficiency income tax of CIC was issued on 9 January 1995. Clearly, the issuance of the correct assessment for deficiency income tax was well within the prescriptive period. Is respondent Estate liable for the 1989 deficiency income tax of Cibeles Insurance Corporation? A corporation has a juridical personality distinct and separate from the persons owning or composing it. Thus, the owners or stockholders of a corporation may not generally be made to answer for the liabilities of a corporation and vice versa. There are, however, certain instances in which personal liability may arise. It has been held in a number of cases that personal liability of a corporate director, trustee, or officer along, albeit not necessarily, with the corporation may validly attach when: 1. He assents to the (a) patently unlawful act of the corporation, (b) bad faith or gross negligence in directing its affairs, or (c) conflict of interest, resulting in damages to the corporation, its stockholders, or other persons; 2. He consents to the issuance of watered down stocks or, having knowledge thereof, does not forthwith file with the corporate secretary his written objection thereto; 3. He agrees to hold himself personally and solidarily liable with the corporation; or 4. He is made, by specific provision of law, to personally answer for his corporate action.38 It is worth noting that when the late Toda sold his shares of stock to Le Hun T. Choa, he knowingly and voluntarily held himself personally liable for all the tax liabilities of CIC and the buyer for the years 1987, 1988, and 1989. Paragraph g of the Deed of Sale of Shares of Stocks specifically provides: g. Except for transactions occurring in the ordinary course of business, Cibeles has no liabilities or obligations, contingent or otherwise, for taxes, sums of money or insurance claims other than those reported in its audited financial statement as of December 31, 1989, attached hereto as "Annex B" and made a part hereof. The business of Cibeles has at all

times been conducted in full compliance with all applicable laws, rules and regulations. SELLER undertakes and agrees to hold the BUYER and Cibeles free from any and all income tax liabilities of Cibeles for the fiscal years 1987, 1988 and 1989.39 [Underscoring Supplied]. When the late Toda undertook and agreed "to hold the BUYER and Cibeles free from any all income tax liabilities of Cibeles for the fiscal years 1987, 1988, and 1989," he thereby voluntarily held himself personally liable therefor. Respondent estate cannot, therefore, deny liability for CICs deficiency income tax for the year 1989 by invoking the separate corporate personality of CIC, since its obligation arose from Todas contractual undertaking, as contained in the Deed of Sale of Shares of Stock. WHEREFORE, in view of all the foregoing, the petition is hereby GRANTED. The decision of the Court of Appeals of 31 January 2001 in CA-G.R. SP No. 57799 is REVERSED and SET ASIDE, and another one is hereby rendered ordering respondent Estate of Benigno P. Toda Jr. to pay P79,099,999.22 as deficiency income tax of Cibeles Insurance Corporation for the year 1989, plus legal interest from 1 May 1994 until the amount is fully paid. Costs against respondent. SO ORDERED.

SECOND DIVISION

The CITY OF ILOILO, Mr. ROMEO V. MANIKAN, in his capacity as the Treasurer of Iloilo City, Petitioners,

G.R. No. 167260 Present: QUISUMBING, J., Chairperson, CARPIO MORALES, VELASCO, JR., NACHURA,* and BRION, JJ.

versus -

Promulgated: SMART COMMUNICATIONS, INC. (SMART), Respondent. February 27, 2009 x -------------------------------------------------------------------------------------------x DECISION BRION, J.:

Before this Court is the appeal by certiorari filed by the City of Iloilo (petitioner) under Rule 45 of the Rules of Court seeking to set aside the decision of the Regional Trial Court (RTC) of Iloilo City, Branch 28, which declared that respondent SMART Communications, Inc. (SMART) is exempt from the payment of local franchise and business taxes.

BACKGROUND FACTS

The facts of the case are not in dispute. SMART received a letter of assessment dated February 12, 2002 from petitioner requiring it to pay deficiency local franchise and business taxes (in the amount of P764,545.29, plus interests and surcharges) which it incurred for the years 1997 to 2001. SMART protested the assessment by sending a letter dated February 15, 2002 to the City Treasurer. It claimed exemption from payment of local franchise and business taxes based on Section 9 of its legislative franchise under Republic Act (R.A.) No. 7294 (SMARTs franchise). Under SMARTs franchise, it was required to pay a franchise tax equivalent to 3% of all gross receipts, which amount shall be in lieu of all taxes. SMART contends that the in lieu of all taxes clause covers local franchise and business taxes. SMART similarly invoked R.A. No. 7925 or the Public Telecommunications Policy Act (Public Telecoms Act) whose Section 23 declares that any existing privilege, incentive, advantage, or exemption granted under existing franchises shall ipso facto become part of previously granted-telecommunications franchise. SMART contends that by virtue of Section 23, tax exemptions granted by the legislature to other holders of telecommunications franchise may be extended to and availed of by SMART. Through a letter dated April 4, 2002, petitioner denied SMARTs protest, citing the failure of SMART to comply with Section 252 of R.A. No. 7160 or the Local Government Code (LGC) before filing the protest against the assessment. Section 252 of the LGC requires payment of the tax before any protest against the tax assessment can be made. SMART objected to the petitioners denial of its protest by instituting a case against petitioner before the RTC of Iloilo City.[1] The trial court ruled in favour of SMART and declared the telecommunications firm exempt from the payment of local franchise and business taxes;[2] it agreed with SMARTs claim of exemption under Section 9 of its franchise and Section 23 of the Public Telecoms Act.[3] From this judgment, petitioner files this petition for review on certiorari raising the sole issue of whether SMART is exempt from the payment of local franchise and business taxes. THE COURTS RULING

SMART relies on two provisions of law to support its claim for tax exemption: Section 9 of SMARTs franchise and Section 23 of the Public Telecoms Act. After a review of pertinent laws and jurisprudence particularly of SMART Communications, Inc. v. City of Davao,[4] a case which, except for the respondent, involves the same set of facts and issues we find SMARTs claim for exemption to be unfounded. Consequently, we find the petition meritorious. The basic principle in the construction of laws granting tax exemptions has been very stable. As early as 1916, in the case ofGovernment of the Philippine Islands v. Monte de Piedad,[5] this Court has declared that he who claims an exemption from his share of the common burden of taxation must justify his claim by showing that the Legislature intended to exempt him by words too plain to be beyond doubt or mistake. This doctrine was repeated in the 1926 case of Asiatic Petroleum v. Llanes,[6] as well as in the case ofBorja v. Commissioner of Internal Revenue (CIR)[7] decided in 1961. Citing American jurisprudence, the Court stated in E. Rodriguez, Inc. v. CIR:[8]
The right of taxation is inherent in the State. It is a prerogative essential to the perpetuity of the government; and he who claims an exemption from the common burden, must justify his claim by the clearest grant of organic or statute law xxx When exemption is claimed, it must be shown indubitably to exist. At the outset, every presumption is against it. A well-founded doubt is fatal to the claim; it is only when the terms of the concession are too explicit to admit fairly of any other construction that the proposition can be supported.

In the recent case of Digital Telecommunications, Inc. v. City Government of Batangas, et al.,[9] we adhered to the same principle when we said:
A tax exemption cannot arise from vague inference...Tax exemptions must be clear and unequivocal. A taxpayer claiming a tax exemption must point to a specific provision of law conferring on the taxpayer, in clear and plain terms, exemption from a common burden. Any doubt whether a tax exemption exists is resolved against the taxpayer.

The burden therefore is on SMART to prove that, based on its franchise and the Public Telecoms Act, it is entitled to exemption from the local franchise and business taxes being collected by the petitioner. Claim for Exemption under SMARTs franchise Section 9 of SMARTs franchise states:
Section 9. Tax provisions. The grantee, its successors or assigns shall be liable to pay the same taxes on their real estate buildings and personal property, exclusive of' this franchise, as other persons or corporations which are now or hereafter may be required by law to pay. In addition thereto, the grantee, its successors or assigns shall pay a franchise tax equivalent to three percent (3%) of all gross receipts of the business transacted under this franchise by the grantee, its successors or assigns and the said percentage shall be in lieu of all taxes on this franchise or earnings thereof: Provided, That the grantee, its successors or assigns shall continue to be liable for income taxes payable under Title II of the National Internal Revenue Code pursuant to Section 2 of Executive Order No. 72 unless the latter enactment is amended or repealed, in which case the amendment or repeal shall be applicable thereto. The grantee shall file the return with and pay the tax due thereon to the Commissioner of Internal Revenue or his duly authorized representative in accordance with the National Internal Revenue Code and the return shall be subject to audit by the Bureau of Internal Revenue. [Emphasis supplied.]

The petitioner posits that SMARTs claim for exemption under its franchise is not equivocal enough to prevail over the specific grant of power to local government units to exact taxes from businesses operating within its territorial jurisdiction under Section 137 in relation to Section 151 of the LGC. More importantly, it claimed that exemptions from taxation have already been removed by Section 193 of the LGC:
Section 193. Withdrawal of Tax Exemption Privileges. Unless otherwise provided in this Code, tax exemptions or incentives granted to, or presently enjoyed by all persons, whether natural or juridical, including government-owned or controlled corporations, except local water districts, cooperatives duly registered under RA No. 6938, non-stock and non-profit

hospitals and educational institutions, are hereby withdrawn upon the effectivity of this Code. [Emphasis supplied.]

The petitioner argues, too, that SMARTs claim for exemption from taxes under Section 9 of its franchise is not couched in plain and unequivocal language such that it restored the withdrawal of tax exemptions under Section 193 above. It claims that if Congress intended that the tax exemption privileges withdrawn by Section 193 of RA 7160 [LGC] were to be restored in respondents [SMARTs] franchise, it would have so expressly provided therein and not merely [restored the exemption] by the simple expedient of including the in lieu of all taxes provision in said franchise.[10]

We have indeed ruled that by virtue of Section 193 of the LGC, all tax exemption privileges then enjoyed by all persons, save those expressly mentioned, have been withdrawn effective January 1, 1992 the date of effectivity of the LGC.[11] The first clause of Section 137 of the LGC states the same rule.[12] However, the withdrawal of exemptions, whether under Section 193 or 137 of the LGC, pertains only to those already existing when the LGC was enacted. The intention of the legislature was to remove all tax exemptions or incentives granted prior to the LGC.[13] As SMARTs franchise was made effective on March 27, 1992 after the effectivity of the LGC Section 193 will therefore not apply in this case. But while Section 193 of the LGC will not affect the claimed tax exemption under SMARTs franchise, we fail to find a categorical and encompassing grant of tax exemption to SMART covering exemption from both national and local taxes:
R.A. No 7294 does not expressly provide what kind of taxes SMART is exempted from. It is not clear whether the in lieu of all taxes provision in the franchise of SMART would include exemption from local or national taxation. What is clear is that SMART shall pay franchise tax equivalent to three percent (3%) of all gross receipts of the business transacted under its franchise. But whether the franchise tax exemption would include exemption from exactions by both the local and the national government is not unequivocal. The uncertainty in the in lieu of all taxes clause in R.A. No. 7294 on whether SMART is exempted from both local and national franchise tax must be construed strictly against SMART which claims the [14] exemption. [Emphasis supplied.]

Justice Carpio, in his Separate Opinion in PLDT v. City of Davao,[15] explains why:
The proviso in the first paragraph of Section 9 of Smarts franchise states that the grantee shall continue to be liable for income taxes payable under Title II of the National Internal Revenue Code. Also, the second paragraph of Section 9 speaks of tax returns filed and taxes paid to the Commissioner of Internal Revenue or his duly authorized representative in accordance with the National Internal Revenue Code. Moreover, the same paragraph declares that the tax returns shall be subject to audit by the Bureau of Internal Revenue. Nothing is mentioned in Section 9 about local taxes. The clear intent is for the in lieu of all taxes clause to apply only to taxes under the National Internal Revenue Code and not to local taxes.

Nonetheless, even if Section 9 of SMARTs franchise can be construed as covering local taxes as well, reliance thereon would now be unavailing. The in lieu of all taxes clause basically exempts SMART from paying all other kinds of taxes for as long as it pays the 3% franchise tax; it is the franchise tax that shall be in lieu of all taxes, and not any other form of tax. [16] Franchise taxes on telecommunications companies, however, have been abolished by R.A. No. 7716 or the Expanded Value-Added Tax Law (E-VAT Law), which was enacted by Congress on January 1, 1996.[17] To replace the franchise tax, the E-VAT Law imposed a 10%[18]value-added tax on telecommunications companies under Section 108 of the National Internal Revenue Code.[19] The in lieu of all taxes clause in the legislative franchise of SMART has thus become functus officio, made inoperative for lack of a franchise tax.[20] SMARTs claim for exemption from local business and franchise taxes based on Section 9 of its franchise is therefore unfounded.

Claim for Exemption Under Public Telecoms Act SMART additionally invokes the equality clause under Section 23

of the Public Telecoms Act:

SECTION 23. Equality of Treatment in the Telecommunications Industry. Any advantage, favor, privilege, exemption, or immunity granted under existing franchises, or may hereafter be granted, shall ipso facto become part of previously granted telecommunications franchise and shall be accorded immediately and unconditionally to the grantees of such franchises: Provided, however, That the foregoing shall neither apply to nor affect provisions of telecommunications franchises concerning territory covered by the franchise, the life span of the franchise, or the type of service authorized by the franchise. [Emphasis supplied.]

As in the case of SMART v. City of Davao,[21] SMART posits that since the franchise of telecommunications companies granted after the enactment of its franchise contained provisions exempting these companies from both national and local taxes, these privileges should extend to and benefit SMART, applying the equality clause above. The petitioner, on the other hand, believes that the claimed exemption under Section 23 of the Public Telecoms Act is similarly unfounded.

We agree with the petitioner.

Whether Section 23 of the cited law extends tax exemptions granted by Congress to new franchise holders to existing ones has been answered in the negative in the case of PLDT v. City of Davao.[22] The term exemption in Section 23 of the Public Telecoms Act does not mean tax exemption; rather, it refers to exemption from certain regulatory or reporting requirements imposed by government agencies such as the National Telecommunications Commission. The thrust of the Public Telecoms Act is to promote the gradual deregulation of entry, pricing, and operations of all public telecommunications entities, and thus to level the playing field in the telecommunications industry. The language of Section 23 and the proceedings of both Houses of Congress are bereft of anything that would signify the grant of tax exemptions to all telecommunications entities.[23] Intent to grant tax exemption cannot therefore be discerned from the law; the term exemption is too general to include tax exemption and runs counter to the requirement that the grant of tax exemption should be stated in clear and unequivocal language too plain to be beyond doubt or mistake.

Surcharge and Interests

Since SMART cannot validly claim any tax exemption based either on Section 9 of its franchise or Section 23 of the Public Telecoms Act, it follows that petitioner can impose and collect the local franchise and business taxes amounting to P764,545.29 it assessed against SMART. Aside from these, SMART should also be made to pay surcharge and interests on the taxes due. The settled rule is that good faith and honest belief that one is not subject to tax on the basis of previous interpretation of government agencies tasked to implement the tax laws are sufficient justification to delete the imposition of surcharges and interest.[24] In refuting liability for the local franchise and business taxes, we do not believe SMART relied in good faith in the findings and conclusion of the Bureau of Local Government and Finance (BLGF). In a letter dated August 13, 1998, the BLGF opined that SMART should be considered exempt from the franchise tax that the local government may impose under Section 137 of the LGC.[25] SMART, relying on the letter-opinion of the BLGF, invoked the same in the administrative protest it filed against petitioner on February 15, 2002, as well as in the petition for prohibition that it filed before the RTC of Iloilo on April 30, 2002. However, in the 2001 case of PLDT v. City of Davao,[26] we declared that we do not find BLGFs interpretation of local tax laws to be authoritative and persuasive. The BLGFs function is merely to provide consultative services and technical assistance to the local governments and the general public on local taxation, real property assessment, and other related matters.[27] Unlike the Commissioner of Internal Revenue who has been given the express power to interpret the Tax Code and other national tax laws,[28] no such power is given to the BLGF. SMARTs dependence on BLGFs interpretation was thus misplaced. WHEREFORE, we hereby GRANT the petition and REVERSE the decision of the RTC dated January 19, 2005 in Civil Case No. 02-27144 and find SMART liable to pay the local franchise and business taxes amounting to P764,545.29, assessed against it by petitioner, plus the surcharges and interest due thereon.

SO ORDERED.

G.R. No. 171470

January 30, 2009

NATIONAL POWER CORPORATION, Petitioner, vs. CENTRAL BOARD OF ASSESSMENT APPEALS (CBAA), LOCAL BOARD OF ASSESSMENT APPEALS (LBAA) OF LA UNION, PROVINCIAL TREASURER, LA UNION and MUNICIPAL ASSESSOR OF BAUANG, LA UNION,Respondents. DECISION BRION, J.: What are the real property tax implications of a Build-Operate-Transfer (BOT) agreement between a government-owned and controlled corporation (GOCC) that enjoys tax exemption and a private corporation? Specifically, under the terms of the BOT Areement, can the GOCC be deemed the actual, direct, and exclusive user of machineries and equipment for tax exemption purposes? If not, can it pass on its tax-exempt status to its BOT partner, a private corporation, through the BOT agreement? The National Power Corporation (NAPOCOR) claims in this case that the machineries and equipment used in a project covered by a BOT agreement, to which it is a party, should be accorded the tax-exempt status it enjoys. The Local Board of Assessment Appeals of the Province of La Union (LBAA), the Central Board of Assessment Appeals (CBAA) and the Court of Tax Appeals (CTA) were one in rejecting NAPOCORs claim. The present petition for review on certiorari filed under Rule 45 of the Rules of Court by NAPOCOR challenges this uniform ruling and seeks the reversal of the CTAs Decision dated February 13, 2006 in the consolidated cases of NAPOCOR v. CBAA, et al.1 and Bauang Private Power Corp. v. Sangguniang Panlalawigan ng La Union, et al.,2 and of the denial of the motion for reconsideration that followed. THE ANTECEDENTS On January 11, 1993, First Private Power Corporation (FPPC) entered into a BOT agreement with NAPOCOR for the construction of the 215 Megawatt Bauang Diesel Power Plant in Payocpoc, Bauang, La Union. The BOT Agreement provided, via an Accession Undertaking, for the creation of the Bauang Private Power Corporation (BPPC) that will own, manage and operate the power plant/station, and assume and perform FPPCs obligations under the BOT agreement. For a fee,3 BPPC will convert NAPOCORs supplied diesel fuel into electricity and deliver the product to NAPOCOR. The pertinent provisions of the BOT agreement, as they relate to the submitted issues in the present case, read: 2.03 NAPOCOR shall make available the Site to CONTRACTOR for the purpose of building and operating the Power Station at no cost to CONTRACTOR for the period commencing on the Effective Date and ending on the Transfer Date and NAPOCOR shall be responsible for the payment

of all real estate taxes and assessments, rates, and other charges in respect of the Site and the buildings and improvements thereon. xxxx 2.08 From the date hereof until the Transfer Date, CONTRACTOR shall, directly or indirectly, own the Power Station and all the fixtures, fittings, machinery, and equipment on the Site or used in connection with the Power Station which have been supplied by it or at its cost and it shall operate and manage the Power Station for the purpose of converting fuel of NAPOCOR into electricity. 2.09 Until the Transfer Date, NAPOCOR shall, at its own cost, supply and deliver all Fuel for the Power Station and shall take all electricity generated by the Power Station at the request of NAPOCOR which shall pay to CONTRACTOR fees as provided in Clause 11. xxxx 2.11 On the Transfer Date, the Power Station shall be transferred by the CONTRACTOR to NAPOCOR without payment of any compensation. The Officer-in-Charge of the Municipal Assessors Office of Bauang, La Union initially issued Declaration of Real Property Nos. 25016 and 25022 to 25029 declaring BPPCs machineries and equipment as tax-exempt. On the initiative of the Bauang Vice Mayor, the municipality questioned before the Regional Director of the Bureau of Local Government Finance (BLGF) the declared tax exemption; later, the issue was elevated to the Deputy Executive Director and Officer-in-Charge of the BLGF, Department of Finance, who ruled that BPPCs machineries and equipments are subject to real property tax and directed the Assessors Office to take appropriate action. The Provincial/Municipal Assessors thereupon issued Revised Tax Declaration Nos. 30026 to 30033 and 30337, and cancelled the earlier issued Declarations of Real Property. The Municipal Assessor of Bauang then issued a Notice of Assessment and Tax Bill to BPPC assessing/taxing the machineries and equipments in the total sum ofP288,582,848.00 for the 1995-1998 period, sans interest of two percent (2%) on the unpaid amounts. BPPCs Vice-President and Plant Manager received the Notice of Assessment and Tax Bill on August 7, 1998. On October 5, 1998, NAPOCOR filed a petition (styled In Re Petition to Declare Exempt the Revised and Retroactive to 1995 Tax Declaration Nos. 30026 to 30033 and 30037) with the LBAA. The petition asked that, retroactive to 1995, the machineries covered by the tax declarations be exempt from real property tax under Section 234(c) of Republic Act No. 7160 (the Local Government Code or LGC); and, that these properties be dropped from the assessment roll pursuant to Section 206 of the LGC. Section 234(c) of the LGC provides: 4 Section 234. Exemptions from Real Property Tax. The following are exempted from the payment of real property tax: xxxx (c) All machineries and equipment that are actually, directly and exclusively used by local water districts and government-owned or controlled corporations engaged in the supply and distribution of water and/or generation and transmission of electric power; x x x x.

The LBAA denied NAPOCORs petition for exemption in a Decision dated October 26, 2001. It ruled that the exemption provided by Section 234(c) of the LGC applies only when a government-owned or controlled corporation like NAPOCOR owns and/or actually uses machineries and equipment for the generation and transmission of electric power; in this case, NAPOCOR does not own and does not even actually and directly use the machineries. It is the BPPC, a non-government entity, which owns, maintains, and operates the machineries and equipment; using these, it generates electricity and then sells this to NAPOCOR. Additionally, it ruled that the liability for the payment of the real estate taxes is determined by law and not by the agreement of the parties; hence, the provision in the BOT Agreement whereby NAPOCOR assumed responsibility for the payment of all real estate taxes and assessments, rates, and other charges, in relation with the site, buildings, and improvements in the BOT project, is an arrangement between the parties that cannot be the basis in identifying who is liable to the government for the real estate tax. NAPOCOR appealed the LBAA ruling to the CBAA. BPPC moved to intervene on the ground that it has a direct interest in the outcome of the litigation.5 The CBAA subsequently dismissed the appeal based on its finding that the BPPC, and not NAPOCOR, is the actual, direct and exclusive user of the equipment and machineries; thus, the exemption under Section 234(c) does not apply. The CBAA ruled: Sec. 234 (c), R.A. 7160 (supra), is clear and unambiguous: "there is no room for construction." (citations omitted) xxxx Actual use, according to Sec. 199 (b) of R.A. 7160, "refers to the purpose for which the property is principally or predominantly utilized by the person in possession thereof." In Velez v. Locsin, 55 SCRA 152: "The word use means to employ for the attainment of some purpose or end." In the "Operation of the Power Station" (Clause 8.01 of the BOT Agreement), CONTRACTOR shall, at its own cost, be responsible for the management, operation, maintenance and repair of the Power Station during the Co-operation period x x x." Said Co-operation period is fifteen (15) years, after which the Power Station will be turned over or transferred to NAPOCOR. Does this determine when NAPOCOR should take over the actual, direct and exclusive use of the Power Station? That is fifteen (15) years therefrom? It has been established that BPPC manufactures or generates the power which is sold to NAPOCOR and NAPOCOR distributes said power to the consumers. In other words, the relationship between BPPC and NAPOCOR is one of manufacturer or seller and exclusive distributor or buyer. The general perception is that the exclusive distributor or buyer of goods has nothing to do with the manufacturing thereof but as exclusive distributor the latter has the right to acquire all the goods to be sold to the exclusion of all others. In terms of the definitions under Sec. 199 (b) and that offered by Respondents-Appelless (supra), the machineries and equipment are principally or predominantly utilized by BPPC. In terms of the Velez vs. Locsin case (supra), BPPC employs the machineries and equipment to attain its purpose of generating power to be sold to NAPOCOR and collect payment therefrom to compensate for its investment. The BOT Agreement is not a contract for nothing. The following definitions are given by Blacks Law Dictionary, Third Edition: "Actually is opposed to seemingly, pretendedly, or feignedly, as actually engaged in farming means really, truly in fact."

"Directly. In a direct way without anything intervening; not by secondary, but by direct means." "Exclusively. Apart from all others; without admission of others to participation; in a manner to exclude." Indeed BPPC does not use said machineries and equipment pretendedly or feignedly but truly and factually hence, "actually." BPPC uses them without anything intervening hence, directly. BPPC uses the same machineries and equipment apart from all others hence, exclusively. This is the fact against the fact there is no argument. This same fact will also deny NAPOCORs claim to a ten (10%) assessment level provided for under Sec. 218 of R.A. 7160 (supra) as to the requirement thereto is simply the same as that in realty tax exemption. The BPPC is a private entity, not a Government Owned or Controlled Corporation (GOCC), hence, not entitled to a 10% assessment level. NAPOCOR then filed with the CTA a petition for review, docketed as CTA E.B. No. 51, to challenge the CBAA decision. BPPC filed its own petition for review of the CBAA decision with the CTA which was docketed as CTA E.B. No. 58. The two petitions were subsequently consolidated. THE APPEALED CTA RULING The CTA rendered on February 13, 2006 a decision dismissing the consolidated petitions. It ruled on two issues: (1) whether BPPC seasonably filed its protest against the assessment; and (2) whether the machineries and equipments are actually, directly, and exclusively used by NAPOCOR in the generation and transmission of electric power, and are therefore not subject to tax. On the first issue, the CTA applied Section 226 of the LGC which provides the remedy from an assessment as follows: SEC. 226. Local Board of Assessment Appeals. Any owner or person having legal interest in the property who is not satisfied with the action of the provincial, city or municipal assessor in the assessment of his property may, within sixty (60) days from the date of receipt of the written notice of assessment, appeal to the Board of Assessment Appeals in the province or city by filing a petition under oath in the form prescribed for the purpose, together with copies of tax declarations and such affidavits or documents submitted in support of the appeal. It found that BPPC never filed an appeal to contest or question the assessment; instead, it was NAPOCOR that filed the purported appeal a petition for exemption of the machineries and equipment. The CTA, however, said that NAPOCOR is not the proper party, and the purported appeal did not substantially comply with the requisites of the law. According to the CTA, NAPOCOR is not the registered owner of the machineries and equipment. These are registered in BPPCs name as further confirmed by Section 2.08 of the BOT Agreement.6 Thus, the CTA declared that until the transfer date of the power station, NAPOCOR does not own any of the machineries and equipment, and therefore has no legal right, title, or interest over these properties. Thus, the CTA concluded that NAPOCOR has no cause of action and no legal personality to question the assessment. As the respondent local government units claim, NAPOCOR is an interloper in the issue of BPPCs real estate tax liabilities. The CTA additionally found that BPPCs subsequent attempt to question the assessment via a motion for intervention with the CBAA failed to follow the correct process prescribed by the Rules Governing Appeals to the CBAA;7 its appeal was not accompanied by an appeal bond.

Also, the CTA found NAPOCORs petition to be an inappropriate remedy, as it is not the appeal contemplated by law; NAPOCOR was in fact asserting an exemption on the basis of the provisions of the BOT Agreement. An exemption is an evidentiary matter for the assessors, not for the LBAA, to decide pursuant to Section 206 of the LGC;8 NAPOCOR cannot simply bypass the authority granted to concerned administrative agencies, as these available administrative remedies must first be exhausted. On the more substantive second issue, the CTA saw it clear from the BOT Agreement that BPPC owns and uses the machineries and equipment in the power station, thus directly addressing and disproving NAPOCORs "actual, direct, and exclusive use" argument. It noted that under the BOT Agreement, NAPOCOR shall have a right over the machineries and equipments only after their transfer at the end of the 15-year co-operation period. "By the nature of the agreement and work of BPPC, the [machineries] are actually, directly, and exclusively used by it in the conversion of bunker fuel to electricity for [NAPOCOR] for a fee," the CTA said. Section 234(c) of the LGC, according to the CTA, is clear. The exemption under the law does not apply because BPPC is not a GOCC it is an independent power corporation currently operating and maintaining the power plant pursuant to the BOT Agreement. The BOT agreement cannot likewise be the basis for the claimed exemption; tax exemption cannot be agreed upon by mere contract between the parties (BPPC and NAPOCOR), as it must be expressly granted by the Constitution, statute, or franchise. A tax exemption, if and when granted, is also not transferrable, as it is a personal privilege and it must be strictly construed, the CTA said in closing. THE SEPARATE APPEALS Thereupon, NAPOCOR and BPPC sought separate reviews of the CTA decision with us. G.R. No. 173811 BPPC filed on September 11, 2006 its petition separately from NAPOCOR. The BPPC petition was docketed as G.R. No. 173811 and was raffled to the First Division of the Court. The First Division denied BPPCs petition in its Resolution dated October 4, 2006 on the reasoning that BPPC failed to sufficiently show that the CTA committed any reversible error in the challenged decision and resolution as to warrant the exercise of the Courts discretionary appellate jurisdiction. BPPC moved to reconsider the denial of its petition, but the Third Division (after the Courts reorganization) denied the motion for reconsideration with finality after finding no substantial arguments to warrant reconsideration. The resolution denying BPPCs petition for review had become final and executory and was thus recorded in the Book of Entries of Judgment on April 3, 2007. G.R. No. 171470 The Present Case The NAPOCOR petition now pending with us was filed on April 6, 2006 and was docketed as G.R. No. 171470. We required the respondents to comment on the petition in our Resolution of May 3, 2006. The respondents filed the required comments. NAPOCOR subsequently filed its Reply. NAPOCOR cited the following as grounds for its petition: I.

THE CTA ERRED ON A QUESTION OF LAW IN NOT RULING THAT PETITIONER IS THE ACTUAL, DIRECT, AND EXCLUSIVE USER OF THE BAUANG DIESEL POWER PLANT. II. THE CTA ERRED ON A QUESTION OF LAW IN DISREGARDING THAT THE REAL PROPERTY TAX EXEMPTION IS RETAINED UNDER R.A. NO. 7160. III. THE CTA ERRED ON A QUESTION OF LAW IN RULING THAT PETITIONER MUST BE ENGAGED IN BOTH GENERATION AND TRANSMISSION OF POWER BEFORE THE EXEMPTION UNDER SECTION 234(C) OF R.A. NO. 7160 CAN APPLY. IV. THE CTA ERRED ON A QUESTION OF LAW IN NOT CONSTRUING THE EXEMPTIONS UNDER R.A. NO. 7160 IN HARMONY WITH PETITIONERS CHARTER AND THE BOT LAW. V. ASSUMING THE 215 MW BAUANG DIESEL POWER PLANT IS TAXABLE, THE SAME SHOULD BE CLASSIFIED AS "SPECIAL" FOR REAL PROEPRTY TAX PURPOSES SUBJECT TO A 10% ASSESSMENT LEVEL, AND NOT AS COMMERCIAL/INDUSTRIAL PROPERTIES SUBJECT TO AN 80% ASSESSMENT RATE. In the interim and in light of the sale at public auction of the machineries and equipments, NAPOCOR filed a Supplemental Petition based on the following grounds: I. THE CTA ERRED ON A QUESTION OF LAW IN DISMISSING PETITIONERS APPEAL BECAUSE THE LATTER IS A GOVERNMENT INSTRUMENTALITY WHOSE FOREIGN AND DOMESTIC INDEBTEDNESS ARE GUARANTEED BY THE NATIONAL GOVERNMENT, IS THE BENEFICIAL OWNER OF THE SUBJECT POWER PLANT AND [IS] THUS EXEMPT FROM THE PAYMENT OF REAL PROPERTY TAXES. II. THE CTA ERRED ON A QUESTION OF LAW IN DISMISSING PETITIONERS APPEAL BECAUSE THIS LED TO THE SALE OF THE BAUANG POWER PLANT TO THE PROVINCIAL GOVERNMENT OF LA UNION, THUS SERIOUSLY VIOLATING PETITIONERS STATUTORY MANDATE TO CARRY OUT THE TOTAL ELECTRIFICATION OF THE COUNTRY. To support its claim that it is entitled to tax exemption as the actual, direct, and exclusive user of the machineries and equipment, NAPOCOR argues that: a. the BOT agreement is a financing agreement where it (NAPOCOR) is the beneficial owner and the actual, direct, and exclusive user of the power plant, while BPPC is the lender/creditor that retains the plants legal ownership until it is fully paid; the power plant is a NAPOCOR project and BPPC is just the financier-contractor, and any BPPC activity is made

on NAPOCORs behalf as a contractor for NAPOCOR; in this way, NAPOCOR takes advantage of BPPCs financial resources and technical expertise to secure a continuous supply of electric power. b. its payment of energy fees, fixed operating fees, and other infrastructure fees to BPPC is not inconsistent with its (NAPOCORs) beneficial ownership and actual, direct, and exclusive use of the power plant, since the collection of the fees is the repayment scheme prescribed by Section 69 of Republic Act No. 6957,10 as amended by Republic Act No. 7718 (BOT Law, as amended); its amortizations over the 15-year co-operation period constitute full payment for the power plant that would warrant the transfer of ownership without payment of additional compensation; finally, that Republic Act No. 9136 or the Electric Power Industry Reform Act of 2001 has booked the power plant as NAPOCORs asset for privatization purposes. c. its tax exemption should apply to a BOT project, citing the conditions that gave rise to the BOT law and its own mandate to provide electricity nationwide; BOT projects are really government projects where the private sector participates to provide the heavy initial financial requirements; and that Congress specifically considered NAPOCORs situation in granting tax exemption to machineries and equipment used in power generation and distribution. d. in the interpretation of Section 234(c) of the LGC, related statutes must be considered and the task of the courts is to harmonize all these laws, if possible; specifically, Section 234(c) of the LGC was enacted to clarify or restore NAPOCORs real property tax exemption so that NAPOCOR can perform its public function of supplying electricity to the entire country at affordable rates, while the BOT law was enacted, among others, to authorize NAPOCOR to enter into BOT contracts with the private sector so that NAPOCOR can carry out its mandate; the tax exemption under Section 234(c) of the LGC must be given effect as the only legal and cogent way of harmonizing it with NAPOCORs Charter and the BOT law. NAPOCOR concludes that the CTAs ruling clearly defeats the spirit behind its creation, the enactment of the BOT Law, and the tax exemption provision under the LGC. THE COURTS RULING We find the petition devoid of merit. Like the Courts First Division (later, Third Division) in G.R. No. 173811, we find that NAPOCOR failed to sufficiently show that the CTA committed any reversible error in its ruling. NAPOCORs basis for its claimed exemption Section 234(c) of the LGC is clear and not at all ambiguous in its terms. Exempt from real property taxation are: (a) all machineries and equipment; (b) [that are] actually, directly, and exclusively used by; (c) [local water districts and] governmentowned or controlled corporations engaged in the [supply and distribution of water and/or] generation and transmission of electric power. We note, in the first place, that the present case is not the first occasion where NAPOCOR claimed real property tax exemption for a contract partner under Sec. 234 (c) of the LGC. In FELS Energy, Inc. v. The Province of Batangas11 (that was consolidated with NAPOCOR v. Local Board of Assessment Appeals of Batangas, et al.),12the Province of Batangas assessed real property taxes against FELS Energy, Inc. the owner of a barge used in generating electricity under an agreement with NAPOCOR. Their agreement provided that NAPOCOR shall pay all of FELS real estate taxes and assessments. We concluded in that case that we could not recognize the tax exemption

claimed, since NAPOCOR was not the actual, direct and exclusive user of the barge as required by Sec. 234 (c). In making this ruling, we cited the required standard of construction applicable to tax exemptions and said: Time and again, the Supreme Court has stated that taxation is the rule and exemption is the exception. The law does not look with favor on tax exemptions and the entity that would seek to be thus privileged must justify it by words too plain to be mistaken and too categorical to be misinterpreted. Thus, applying the rule of strict construction of laws granting tax exemptions, and the rule that doubts should be resolved in favor of provincial corporations, we hold that FELS is considered a taxable entity. The mere undertaking of petitioner NPC under Section 10.1 of the Agreement, that it shall be responsible for the payment of all real estate taxes and assessments, does not justify the exemption. The privilege granted to petitioner NPC cannot be extended to FELS. The covenant is between FELS and NPC and does not bind a third person not privy thereto, in this case, the Province of Batangas. We also recognized this strictissimi juris standard in NAPOCOR v. City of Cabanatuan.13 Under this standard, the claimant must show beyond doubt, with clear and convincing evidence, the factual basis for the claim. Thus, the real issue in a tax exemption case such as the present case is whether NAPOCOR was able to convincingly show the factual basis for its claimed exception. The records show that NAPOCOR, no less, admits BPPCs ownership of the machineries and equipment in the power plant.14 Likewise, the provisions of the BOT agreement cited above clearly show BPPCs ownership. Thus, ownership is not a disputed issue. Rather than ownership, NAPOCORs use of the machineries and equipment is the critical issue, since its claim under Sec. 234(c) of the LGC is premised on actual, direct and exclusive use. To support this claim, NAPOCOR characterizes the BOT Agreement as a mere financing agreement where BPPC is the financier, while it (NAPOCOR) is the actual user of the properties. As in the fact of ownership, NAPOCORs assertion is belied by the documented arrangements between the contracting parties, viewed particularly from the prism of the BOT law. The underlying concept behind a BOT agreement is defined and described in the BOT law as follows: Build-operate-and-transfer A contractual arrangement whereby the project proponent undertakes the construction, including financing, of a given infrastructure facility, and the operation and maintenance thereof. The project proponent operates the facility over a fixed term during which it is allowed to charge facility users appropriate tolls, fees, rentals, and charges not exceeding those proposed in its bid or as negotiated and incorporated in the contract to enable the project proponent to recover its investment, and operating and maintenance expenses in the project. The project proponent transfers the facility to the government agency or local government unit concerned at the end of the fixed term which shall not exceed fifty (50) years x x x x. Under this concept, it is the project proponent who constructs the project at its own cost and subsequently operates and manages it. The proponent secures the return on its investments from those using the projects facilities through appropriate tolls, fees, rentals, and charges not exceeding those proposed in its bid or as negotiated. At the end of the fixed term agreed upon, the project proponent transfers the ownership of the facility to the government agency. Thus, the government is

able to put up projects and provide immediate services without the burden of the heavy expenditures that a project start up requires. A reading of the provisions of the parties BOT Agreement shows that it fully conforms to this concept. By its express terms, BPPC has complete ownership both legal and beneficial of the project, including the machineries and equipment used, subject only to the transfer of these properties without cost to NAPOCOR after the lapse of the period agreed upon. As agreed upon, BPPC provided the funds for the construction of the power plant, including the machineries and equipment needed for power generation; thereafter, it actually operated and still operates the power plant, uses its machineries and equipment, and receives payment for these activities and the electricity generated under a defined compensation scheme. Notably, BPPC as owner-user is responsible for any defect in the machineries and equipment.15 As envisioned in the BOT law, the parties agreement assumes that within the agreed BOT period, BPPC the investorprivate corporation shall recover its investment and earn profits through the agreed compensation scheme; thereafter, it shall transfer the whole project, including machineries and equipment, to NAPOCOR without additional cost or compensation. The latter, for its part, derives benefit from the project through the fulfillment of its mandate of delivering electricity to consumers at the soonest possible time, without immediately shouldering the huge financial requirements that the project would entail if it were to undertake the project on its own. Its obligation, in exchange, is to shoulder specific operating costs under a compensation scheme that includes the purchase of all the electricity that BPPC generates. That some kind of "financing" arrangement is contemplated in the sense that the private sector proponent shall initially shoulder the heavy cost of constructing the projects buildings and structures and of purchasing the needed machineries and equipment is undeniable. The arrangement, however, goes beyond the simple provision of funds, since the private sector proponent not only constructs and buys the necessary assets to put up the project, but operates and manages it as well during an agreed period that would allow it to recover its basic costs and earn profits. In other words, the private sector proponent goes into business for itself, assuming risks and incurring costs for its account. If it receives support from the government at all during the agreed period, these are preagreed items of assistance geared to ensure that the BOT agreements objectives both for the project proponent and for the government are achieved. In this sense, a BOT arrangement is sui generis and is different from the usual financing arrangements where funds are advanced to a borrower who uses the funds to establish a project that it owns, subject only to a collateral security arrangement to guard against the nonpayment of the loan. It is different, too, from an arrangement where a government agency borrows funds to put a project from a private sector-lender who is thereafter commissioned to run the project for the government agency. In the latter case, the government agency is the owner of the project from the beginning, and the lender-operator is merely its agent in running the project. If the BOT Agreement under consideration departs at all from the concept of a BOT project as defined by law, it is only in the way BPPCs cost recovery is achieved; instead of selling to facility users or to the general public at large, the generated electricity is purchased by NAPOCOR which then resells it to power distribution companies. This deviation, however, is dictated, more than anything else, by the structure and usages of the power industry and does not change the BOT nature of the transaction between the parties. Consistent with the BOT concept and as implemented, BPPC the owner-manager-operator of the project is the actual user of its machineries and equipment. BPPCs ownership and use of the machineries and equipment are actual, direct, and immediate, while NAPOCORs is contingent and,

at this stage of the BOT Agreement, not sufficient to support its claim for tax exemption. Thus, the CTA committed no reversible error in denying NAPOCORs claim for tax exemption. For these same reasons, we reject NAPOCORs argument that the machineries and equipment must be subjected to a lower assessment level. NAPOCOR cites as support Section 216 of the LGC which provides: Section 216. Special Classes of Real Property. - All lands, buildings, and other improvements thereon actually, directly and exclusively used for hospitals, cultural, or scientific purposes, and those owned and used by local water districts, and government-owned or controlled corporations rendering essential public services in the supply and distribution of water and/or generation and transmission of electric power shall be classified as special. in relation with Section 218 (d) of the LGC which provides: Section 218. Assessment Levels. - The assessment levels to be applied to the fair market value of real property to determine its assessed value shall be fixed by ordinances of the Sangguniang Panlalawigan, Sangguniang Panlungsod or Sangguniang Bayan of a municipality within the Metropolitan Manila Area, at the rates not exceeding the following: xxxx (d) On Special Classes: The assessment levels for all lands buildings, machineries and other improvements; Actual Use Cultural Scientific Hospital Local water districts Government-owned or controlled corporations engaged in the supply and distribution of water and/or generation and transmission of electric power Assessment Level 15% 15% 15% 10% 10%

Since the basis for the application of the claimed differential treatment or assessment level is the same as the claimed tax exemption, the lower tribunals correctly found that there is no basis to apply the lower assessment level of 10%. As our last point, we note that a real concern for NAPOCOR in this case is its assumption under the BOT agreement of BPPCs real property tax liability (which in itself is a recognition that BPPCs real properties are not really tax exempt). NAPOCOR argues that if no tax exemption will be recognized, the responsibility it assumed carries practical implications that are very difficult to ignore. In fact, NAPOCORs supplemental petition is anchored on these practical implications the alleged

detriment to the public interest that will result if the levy, sale, and transfer of the machineries and equipment were to be completed. NAPOCORs reference is to the fact that the machineries and equipment have been sold in public auction and the buyer the respondent Province will consolidate its ownership over these properties on February 1, 2009. We fully recognize these concerns. However, these considerations are not relevant to our disposition of the issues in this case. We are faced here with the application of clear provisions of law and settled jurisprudence to a case that, to our mind, should not be treated differently solely because of non-legal or practical considerations. Significantly, local government real property taxation also has constitutional underpinnings, based on Section 5 of Article X of the Constitution,16 that we cannot simply ignore. In FELS Energy, Inc. v. The Province of Batangas,17 earlier cited, we said: The power to tax is an incident of sovereignty and is unlimited in its magnitude, acknowledging in its very nature no perimeter so that security against its abuse is to be found only in the responsibility of the legislature which imposes the tax on the constituency who are to pay for it. The right of local government units to collect taxes due must always be upheld to avoid severe tax erosion. This consideration is consistent with the State policy to guarantee the autonomy of local governments and the objective of the Local Government Code that they enjoy genuine and meaningful local autonomy to empower them to achieve their fullest development as self-reliant communities and make them effective partners in the attainment of national goals. In conclusion, we reiterate that the power to tax is the most potent instrument to raise the needed revenues to finance and support myriad activities of the local government units for the delivery of basic services essential to the promotion of the general welfare and the enhancement of peace, progress, and prosperity of the people. [Emphasis supplied.] This ruling reminds us of the other side of the coin in terms of concerns and protection of interests. La Union, as a local government unit, has no less than its own constitutional interests to protect in pursuing this case. These are interests that this Court must also be sensitive to and has taken into account in this Decision. We close with the observation that our role in addressing the concerns and the interests at stake is not all-encompassing. The Judiciary can only resolve the current dispute through our reading and interpretation of the law. The other branches of government which act on policy and which execute these policies, including NAPOCOR itself and the respondent local government unit, are more in the position to act in tackling feared practical consequences. This ruling on the law can be their springboard for action. In light of these conclusions and observations, we need not discuss the other issues raised. WHEREFORE, premises considered, we DENY NAPOCORs petition for lack of merit. We AFFIRM the appealed decision of the Court of Tax Appeals. Costs against NAPOCOR. SO ORDERED.