Tax II

Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 147324 May 25, 2004
PHILIPPINE COMMUNICATIONS SATELLITE CORPORATION, petitioner,
vs.
GLOBE TELECOM, INC. (formerly Globe Mckay Cable and Radio
Corporation), respondents.
x-----------------------------x
GLOBE TELECOM, INC., petitioner,
vs.
PHILIPPINE COMMUNICATION SATELLITE CORPORATION, respondent.
D E C I S I O N
TINGA, J .:
Before the Court are two Petitions for Review assailing the Decision of the Court of
Appeals, dated 27 February 2001, in CA-G.R. CV No. 63619.
1

The facts of the case are undisputed.
For several years prior to 1991, Globe Mckay Cable and Radio Corporation, now Globe
Telecom, Inc. (Globe), had been engaged in the coordination of the provision of various
communication facilities for the military bases of the United States of America (US) in
Clark Air Base, Angeles, Pampanga and Subic Naval Base in Cubi Point, Zambales.
The said communication facilities were installed and configured for the exclusive use of
the US Defense Communications Agency (USDCA), and for security reasons, were
operated only by its personnel or those of American companies contracted by it to
operate said facilities. The USDCA contracted with said American companies, and the
latter, in turn, contracted with Globe for the use of the communication facilities. Globe,
on the other hand, contracted with local service providers such as the Philippine
Communications Satellite Corporation (Philcomsat) for the provision of the
communication facilities.
On 07 May 1991, Philcomsat and Globe entered into an Agreement whereby
Philcomsat obligated itself to establish, operate and provide an IBS Standard B earth
station (earth station) within Cubi Point for the exclusive use of the USDCA.
2
The term
of the contract was for 60 months, or five (5) years.
3
In turn, Globe promised to pay
Philcomsat monthly rentals for each leased circuit involved.
4

At the time of the execution of the Agreement, both parties knew that the Military Bases
Agreement between the Republic of the Philippines and the US (RP-US Military Bases
Agreement), which was the basis for the occupancy of the Clark Air Base and Subic
Naval Base in Cubi Point, was to expire in 1991. Under Section 25, Article XVIII of the
1987 Constitution, foreign military bases, troops or facilities, which include those located
at the US Naval Facility in Cubi Point, shall not be allowed in the Philippines unless a
new treaty is duly concurred in by the Senate and ratified by a majority of the votes cast
by the people in a national referendum when the Congress so requires, and such new
treaty is recognized as such by the US Government.
Subsequently, Philcomsat installed and established the earth station at Cubi Point and
the USDCA made use of the same.
On 16 September 1991, the Senate passed and adopted Senate Resolution No. 141,
expressing its decision not to concur in the ratification of the Treaty of Friendship,
Cooperation and Security and its Supplementary Agreements that was supposed to
extend the term of the use by the US of Subic Naval Base, among others.
5
The last two
paragraphs of the Resolution state:
FINDING that the Treaty constitutes a defective framework for the continuing
relationship between the two countries in the spirit of friendship, cooperation and
sovereign equality: Now, therefore, be it Resolved by the Senate, as it is hereby
resolved, To express its decision not to concur in the ratification of the Treaty of
Friendship, Cooperation and Security and its Supplementary Agreements, at the
same time reaffirming its desire to continue friendly relations with the government
and people of the United States of America.
6

On 31 December 1991, the Philippine Government sent a Note Verbale to the US
Government through the US Embassy, notifying it of the Philippines termination of the
RP-US Military Bases Agreement. The Note Verbalestated that since the RP-US Military
Bases Agreement, as amended, shall terminate on 31 December 1992, the withdrawal
of all US military forces from Subic Naval Base should be completed by said date.
In a letter dated 06 August 1992, Globe notified Philcomsat of its intention to
discontinue the use of the earth station effective 08 November 1992 in view of the
withdrawal of US military personnel from Subic Naval Base after the termination of the
RP-US Military Bases Agreement. Globe invoked as basis for the letter of termination
Section 8 (Default) of the Agreement, which provides:
Neither party shall be held liable or deemed to be in default for any failure to
perform its obligation under this Agreement if such failure results directly or
indirectly from force majeure or fortuitous event. Either party is thus precluded
from performing its obligation until such force majeure or fortuitous event shall
terminate. For the purpose of this paragraph, force majeure shall mean
circumstances beyond the control of the party involved including, but not limited
to, any law, order, regulation, direction or request of the Government of the
Philippines, strikes or other labor difficulties, insurrection riots, national
emergencies, war, acts of public enemies, fire, floods, typhoons or other
catastrophies or acts of God.
Philcomsat sent a reply letter dated 10 August 1992 to Globe, stating that "we expect
[Globe] to know its commitment to pay the stipulated rentals for the remaining terms of
the Agreement even after [Globe] shall have discontinue[d] the use of the earth station
after November 08, 1992."
7
Philcomsat referred to Section 7 of the Agreement, stating
as follows:
7. DISCONTINUANCE OF SERVICE
Should [Globe] decide to discontinue with the use of the earth station after it has
been put into operation, a written notice shall be served to PHILCOMSAT at least
sixty (60) days prior to the expected date of termination. Notwithstanding the
non-use of the earth station, [Globe] shall continue to pay PHILCOMSAT for the
rental of the actual number of T1 circuits in use, but in no case shall be less than
the first two (2) T1 circuits, for the remaining life of the agreement. However,
should PHILCOMSAT make use or sell the earth station subject to this
agreement, the obligation of [Globe] to pay the rental for the remaining life of the
agreement shall be at such monthly rate as may be agreed upon by the parties.
8

After the US military forces left Subic Naval Base, Philcomsat sent Globe a letter dated
24 November 1993 demanding payment of its outstanding obligations under the
Agreement amounting to US$4,910,136.00 plus interest and attorneys fees. However,
Globe refused to heed Philcomsats demand.
On 27 January 1995, Philcomsat filed with the Regional Trial Court of Makati
a Complaint against Globe, praying that the latter be ordered to pay liquidated damages
under the Agreement, with legal interest, exemplary damages, attorneys fees and costs
of suit. The case was raffled to Branch 59 of said court.
Globe filed an Answer to the Complaint, insisting that it was constrained to end the
Agreement due to the termination of the RP-US Military Bases Agreement and the non-
ratification by the Senate of the Treaty of Friendship and Cooperation, which events
constituted force majeure under the Agreement. Globe explained that the occurrence of
said events exempted it from paying rentals for the remaining period of the Agreement.
On 05 January 1999, the trial court rendered its Decision, the dispositive portion of
which reads:
WHEREFORE, premises considered, judgment is hereby rendered as follows:
1. Ordering the defendant to pay the plaintiff the amount of Ninety Two
Thousand Two Hundred Thirty Eight US Dollars (US$92,238.00) or its
equivalent in Philippine Currency (computed at the exchange rate
prevailing at the time of compliance or payment) representing rentals for
the month of December 1992 with interest thereon at the legal rate of
twelve percent (12%) per annum starting December 1992 until the amount
is fully paid;
2. Ordering the defendant to pay the plaintiff the amount of Three Hundred
Thousand (P300,000.00) Pesos as and for attorneys fees;
3. Ordering the DISMISSAL of defendants counterclaim for lack of merit;
and
4. With costs against the defendant.
SO ORDERED.
9

Both parties appealed the trial courts Decision to the Court of Appeals.
Philcomsat claimed that the trial court erred in ruling that: (1) the non-ratification by the
Senate of the Treaty of Friendship, Cooperation and Security and its Supplementary
Agreements constitutes force majeure which exempts Globe from complying with its
obligations under the Agreement; (2) Globe is not liable to pay the rentals for the
remainder of the term of the Agreement; and (3) Globe is not liable to Philcomsat for
exemplary damages.
Globe, on the other hand, contended that the RTC erred in holding it liable for payment
of rent of the earth station for December 1992 and of attorneys fees. It explained that it
terminated Philcomsats services on 08 November 1992; hence, it had no reason to pay
for rentals beyond that date.
On 27 February 2001, the Court of Appeals promulgated its Decision dismissing
Philcomsats appeal for lack of merit and affirming the trial courts finding that certain
events constituting force majeure under Section 8 the Agreement occurred and justified
the non-payment by Globe of rentals for the remainder of the term of the Agreement.
The appellate court ruled that the non-ratification by the Senate of the Treaty of
Friendship, Cooperation and Security, and its Supplementary Agreements, and the
termination by the Philippine Government of the RP-US Military Bases Agreement
effective 31 December 1991 as stated in the Philippine Governments Note Verbale to
the US Government, are acts, directions, or requests of the Government of the
Philippines which constitute force majeure. In addition, there were circumstances
beyond the control of the parties, such as the issuance of a formal order by Cdr. Walter
Corliss of the US Navy, the issuance of the letter notification from ATT and the complete
withdrawal of all US military forces and personnel from Cubi Point, which prevented
further use of the earth station under the Agreement.
However, the Court of Appeals ruled that although Globe sought to terminate
Philcomsats services by 08 November 1992, it is still liable to pay rentals for the
December 1992, amounting to US$92,238.00 plus interest, considering that the US
military forces and personnel completely withdrew from Cubi Point only on 31
December 1992.
10

Both parties filed their respective Petitions for Review assailing the Decision of the
Court of Appeals.
In G.R. No. 147324,
11
petitioner Philcomsat raises the following assignments of error:
A. THE HONORABLE COURT OF APPEALS ERRED IN ADOPTING A
DEFINITION OF FORCE MAJEUREDIFFERENT FROM WHAT ITS LEGAL
DEFINITION FOUND IN ARTICLE 1174 OF THE CIVIL CODE, PROVIDES, SO
AS TO EXEMPT GLOBE TELECOM FROM COMPLYING WITH ITS
OBLIGATIONS UNDER THE SUBJECT AGREEMENT.
B. THE HONORABLE COURT OF APPEALS ERRED IN RULING THAT GLOBE
TELECOM IS NOT LIABLE TO PHILCOMSAT FOR RENTALS FOR THE
REMAINING TERM OF THE AGREEMENT, DESPITE THE CLEAR TENOR OF
SECTION 7 OF THE AGREEMENT.
C. THE HONORABLE OCURT OF APPEALS ERRED IN DELETING THE TRIAL
COURTS AWARD OF ATTORNEYS FEES IN FAVOR OF PHILCOMSAT.
D. THE HONORABLE COURT OF APPEALS ERRED IN RULING THAT GLOBE
TELECOM IS NOT LIABLE TO PHILCOMSAT FOR EXEMPLARY DAMAGES.
12

Philcomsat argues that the termination of the RP-US Military Bases Agreement cannot
be considered a fortuitous event because the happening thereof was foreseeable.
Although the Agreement was freely entered into by both parties, Section 8 should be
deemed ineffective because it is contrary to Article 1174 of the Civil Code. Philcomsat
posits the view that the validity of the parties definition of force majeure in Section 8 of
the Agreement as "circumstances beyond the control of the party involved including, but
not limited to, any law, order, regulation, direction or request of the Government of the
Philippines, strikes or other labor difficulties, insurrection riots, national emergencies,
war, acts of public enemies, fire, floods, typhoons or other catastrophies or acts of God,"
should be deemed subject to Article 1174 which defines fortuitous events as events
which could not be foreseen, or which, though foreseen, were inevitable.
13

Philcomsat further claims that the Court of Appeals erred in holding that Globe is not
liable to pay for the rental of the earth station for the entire term of the Agreement
because it runs counter to what was plainly stipulated by the parties in Section 7
thereof. Moreover, said ruling is inconsistent with the appellate courts pronouncement
that Globe is liable to pay rentals for December 1992 even though it terminated
Philcomsats services effective 08 November 1992, because the US military and
personnel completely withdrew from Cubi Point only in December 1992. Philcomsat
points out that it was Globe which proposed the five-year term of the Agreement, and
that the other provisions of the Agreement, such as Section 4.1
14
thereof, evince the
intent of Globe to be bound to pay rentals for the entire five-year term.
15

Philcomsat also maintains that contrary to the appellate courts findings, it is entitled to
attorneys fees and exemplary damages.
16

In its Comment to Philcomsats Petition, Globe asserts that Section 8 of the Agreement
is not contrary to Article 1174 of the Civil Code because said provision does not prohibit
parties to a contract from providing for other instances when they would be exempt from
fulfilling their contractual obligations. Globe also claims that the termination of the RP-
US Military Bases Agreement constitutes force majeure and exempts it from complying
with its obligations under the Agreement.
17
On the issue of the propriety of awarding
attorneys fees and exemplary damages to Philcomsat, Globe maintains that Philcomsat
is not entitled thereto because in refusing to pay rentals for the remainder of the term of
the Agreement, Globe only acted in accordance with its rights.
18

In G.R. No. 147334,
19
Globe, the petitioner therein, contends that the Court of Appeals
erred in finding it liable for the amount of US$92,238.00, representing rentals for
December 1992, since Philcomsats services were actually terminated on 08 November
1992.
20

In its Comment, Philcomsat claims that Globes petition should be dismissed as it raises
a factual issue which is not cognizable by the Court in a petition for review
on certiorari.
21

On 15 August 2001, the Court issued a Resolution giving due course to
Philcomsats Petition in G.R. No.
147324 and required the parties to submit their respective memoranda.
22

Similarly, on 20 August 2001, the Court issued a Resolution giving due course to
the Petition filed by Globe inG.R. No. 147334 and required both parties to submit their
memoranda.
23

Philcomsat and Globe thereafter filed their respective Consolidated Memoranda in the
two cases, reiterating their arguments in their respective petitions.
The Court is tasked to resolve the following issues: (1) whether the termination of the
RP-US Military Bases Agreement, the non-ratification of the Treaty of Friendship,
Cooperation and Security, and the consequent withdrawal of US military forces and
personnel from Cubi Point constitute force majeure which would exempt Globe from
complying with its obligation to pay rentals under its Agreement with Philcomsat; (2)
whether Globe is liable to pay rentals under the Agreement for the month of December
1992; and (3) whether Philcomsat is entitled to attorneys fees and exemplary damages.
No reversible error was committed by the Court of Appeals in issuing the
assailed Decision; hence the petitions are denied.
There is no merit is Philcomsats argument that Section 8 of the Agreement cannot be
given effect because the enumeration of events constituting force majeure therein
unduly expands the concept of a fortuitous event under Article 1174 of the Civil Code
and is therefore invalid.
In support of its position, Philcomsat contends that under Article 1174 of the Civil Code,
an event must be unforeseen in order to exempt a party to a contract from complying
with its obligations therein. It insists that since the expiration of the RP-US Military
Bases Agreement, the non-ratification of the Treaty of Friendship, Cooperation and
Security and the withdrawal of US military forces and personnel from Cubi Point were
not unforeseeable, but were possibilities known to it and Globe at the time they entered
into the Agreement, such events cannot exempt Globe from performing its obligation of
paying rentals for the entire five-year term thereof.
However, Article 1174, which exempts an obligor from liability on account of fortuitous
events or force majeure, refers not only to events that are unforeseeable, but also to
those which are foreseeable, but inevitable:
Art. 1174. Except in cases specified by the law, or when it is otherwise declared
by stipulation, or when the nature of the obligation requires the assumption of
risk, no person shall be responsible for those events which, could not be
foreseen, or which, though foreseen were inevitable.
A fortuitous event under Article 1174 may either be an "act of God," or natural
occurrences such as floods or typhoons,
24
or an "act of man," such as riots, strikes or
wars.
25

Philcomsat and Globe agreed in Section 8 of the Agreement that the following events
shall be deemed events constituting force majeure:
1. Any law, order, regulation, direction or request of the Philippine Government;
2. Strikes or other labor difficulties;
3. Insurrection;
4. Riots;
5. National emergencies;
6. War;
7. Acts of public enemies;
8. Fire, floods, typhoons or other catastrophies or acts of God;
9. Other circumstances beyond the control of the parties.
Clearly, the foregoing are either unforeseeable, or foreseeable but beyond the control of
the parties. There is nothing in the enumeration that runs contrary to, or expands, the
concept of a fortuitous event under Article 1174.
Furthermore, under Article 1306
26
of the Civil Code, parties to a contract may establish
such stipulations, clauses, terms and conditions as they may deem fit, as long as the
same do not run counter to the law, morals, good customs, public order or public
policy.
27

Article 1159 of the Civil Code also provides that "[o]bligations arising from contracts
have the force of law between the contracting parties and should be complied with in
good faith."
28
Courts cannot stipulate for the parties nor amend their agreement where
the same does not contravene law, morals, good customs, public order or public policy,
for to do so would be to alter the real intent of the parties, and would run contrary to the
function of the courts to give force and effect thereto.
29

Not being contrary to law, morals, good customs, public order, or public policy, Section
8 of the Agreement which Philcomsat and Globe freely agreed upon has the force of law
between them.
30

In order that Globe may be exempt from non-compliance with its obligation to pay
rentals under Section 8, the concurrence of the following elements must be established:
(1) the event must be independent of the human will; (2) the occurrence must render it
impossible for the debtor to fulfill the obligation in a normal manner; and (3) the obligor
must be free of participation in, or aggravation of, the injury to the creditor.
31

The Court agrees with the Court of Appeals and the trial court that the abovementioned
requisites are present in the instant case. Philcomsat and Globe had no control over the
non-renewal of the term of the RP-US Military Bases Agreement when the same
expired in 1991, because the prerogative to ratify the treaty extending the life thereof
belonged to the Senate. Neither did the parties have control over the subsequent
withdrawal of the US military forces and personnel from Cubi Point in December 1992:
Obviously the non-ratification by the Senate of the RP-US Military Bases
Agreement (and its Supplemental Agreements) under its Resolution No. 141.
(Exhibit "2") on September 16, 1991 is beyond the control of the parties. This
resolution was followed by the sending on December 31, 1991 o[f] a "Note
Verbale" (Exhibit "3") by the Philippine Government to the US Government
notifying the latter of the formers termination of the RP-US Military Bases
Agreement (as amended) on 31 December 1992 and that accordingly, the
withdrawal of all U.S. military forces from Subic Naval Base should be completed
by said date. Subsequently, defendant [Globe] received a formal order from Cdr.
Walter F. Corliss II Commander USN dated July 31, 1992 and a notification from
ATT dated July 29, 1992 to terminate the provision of T1s services (via an IBS
Standard B Earth Station) effective November 08, 1992. Plaintiff [Philcomsat]
was furnished with copies of the said order and letter by the defendant on August
06, 1992.
Resolution No. 141 of the Philippine Senate and the Note Verbale of the
Philippine Government to the US Government are acts, direction or request of
the Government of the Philippines and circumstances beyond the control of the
defendant. The formal order from Cdr. Walter Corliss of the USN, the letter
notification from ATT and the complete withdrawal of all the military forces and
personnel from Cubi Point in the year-end 1992 are also acts and circumstances
beyond the control of the defendant.
Considering the foregoing, the Court finds and so holds that the afore-narrated
circumstances constitute "force majeure or fortuitous event(s) as defined under
paragraph 8 of the Agreement.

From the foregoing, the Court finds that the defendant is exempted from paying
the rentals for the facility for the remaining term of the contract.
As a consequence of the termination of the RP-US Military Bases Agreement (as
amended) the continued stay of all US Military forces and personnel from Subic
Naval Base would no longer be allowed, hence, plaintiff would no longer be in
any position to render the service it was obligated under the Agreement. To put it
blantly (sic), since the US military forces and personnel left or withdrew from Cubi
Point in the year end December 1992, there was no longer any necessity for the
plaintiff to continue maintaining the IBS facility.
32
(Emphasis in the original.)
The aforementioned events made impossible the continuation of the Agreement until
the end of its five-year term without fault on the part of either party. The Court of
Appeals was thus correct in ruling that the happening of such fortuitous events rendered
Globe exempt from payment of rentals for the remainder of the term of the Agreement.
Moreover, it would be unjust to require Globe to continue paying rentals even though
Philcomsat cannot be compelled to perform its corresponding obligation under the
Agreement. As noted by the appellate court:
We also point out the sheer inequity of PHILCOMSATs position. PHILCOMSAT
would like to charge GLOBE rentals for the balance of the lease term without
there being any corresponding telecommunications service subject of the lease.
It will be grossly unfair and iniquitous to hold GLOBE liable for lease charges for
a service that was not and could not have been rendered due to an act of the
government which was clearly beyond GLOBEs control. The binding effect of a
contract on both parties is based on the principle that the obligations arising from
contracts have the force of law between the contracting parties, and there must
be mutuality between them based essentially on their equality under which it is
repugnant to have one party bound by the contract while leaving the other party
free therefrom (Allied Banking Corporation v. Court of Appeals, 284 SCRA
357).
33

With respect to the issue of whether Globe is liable for payment of rentals for the month
of December 1992, the Court likewise affirms the appellate courts ruling that Globe
should pay the same.
Although Globe alleged that it terminated the Agreement with Philcomsat effective 08
November 1992 pursuant to the formal order issued by Cdr. Corliss of the US Navy, the
date when they actually ceased using the earth station subject of the Agreement was
not established during the trial.
34
However, the trial court found that the US military
forces and personnel completely withdrew from Cubi Point only on 31 December
1992.
35
Thus, until that date, the USDCA had control over the earth station and had the
option of using the same. Furthermore, Philcomsat could not have removed or rendered
ineffective said communication facility until after 31 December 1992 because Cubi Point
was accessible only to US naval personnel up to that time. Hence, the Court of Appeals
did not err when it affirmed the trial courts ruling that Globe is liable for payment of
rentals until December 1992.
Neither did the appellate court commit any error in holding that Philcomsat is not entitled
to attorneys fees and exemplary damages.
The award of attorneys fees is the exception rather than the rule, and must be
supported by factual, legal and equitable justifications.
36
In previously decided cases,
the Court awarded attorneys fees where a party acted in gross and evident bad faith in
refusing to satisfy the other partys claims and compelled the former to litigate to protect
his rights;
37
when the action filed is clearly unfounded,
38
or where moral or exemplary
damages are awarded.
39
However, in cases where both parties have legitimate claims
against each other and no party actually prevailed, such as in the present case where
the claims of both parties were sustained in part, an award of attorneys fees would not
be warranted.
40

Exemplary damages may be awarded in cases involving contracts or quasi-contracts, if
the erring party acted in a wanton, fraudulent, reckless, oppressive or malevolent
manner.
41
In the present case, it was not shown that Globe acted wantonly or
oppressively in not heeding Philcomsats demands for payment of rentals. It was
established during the trial of the case before the trial court that Globe had valid
grounds for refusing to comply with its contractual obligations after 1992.
WHEREFORE, the Petitions are DENIED for lack of merit. The assailed Decision of the
Court of Appeals in CA-G.R. CV No. 63619 is AFFIRMED.
SO ORDERED.
Puno
*
, Quisumbing, Austria-Martinez, and Callejo, Sr., JJ., concur.
SYLLABI/SYNOPSIS
THIRD DIVISION
[G.R. No. 131359. May 5, 1999]
MANILA ELECTRIC COMPANY, petitioner vs. PROVINCE OF LAGUNA
and BENITO R. BALAZO, in his capacity as Provincial Treasurer of
Laguna, respondents.
D E C I S I O N
VITUG, J .:
On various dates, certain municipalities of the Province of Laguna including, Bian, Sta
Rosa, San Pedro, Luisiana, Calauan and Cabuyao, by virtue of existing laws then in effect, issued
resolutions through their respective municipal councils granting franchise in favor of petitioner
Manila Electric Company (MERALCO) for the supply of electric light, heat and power within
their concerned areas. On 19 January 1983, MERALCO was likewise granted a franchise by the
National Electrification Administration to operate an electric light and power service in the
Municipality of Calamba, Laguna.
On 12 September 1991, Republic Act No. 7160, otherwise known as the Local Government
Code of 1991, was enacted to take effect on 01 January 1992 enjoining local government units
to create their own sources of revenue and to levy taxes, fees and charges, subject to the
limitations expressed therein, consistent with the basic policy of local autonomy. Pursuant to the
provisions of the Code, respondent province enacted Laguna Provincial Ordinance No. 01-92,
effective 01 January 1993, providing, in part, as follows:
Sec. 2.09. Franchise Tax. There is hereby imposed a tax on businesses enjoying a
franchise, at a rate of fifty percent (50%) of one percent (1%) of the gross annual
receipts, which shall include both cash sales and sales on account realized during the
preceding calendar year within this province, including the territorial limits on any
city located in the province
[1]

On the basis of the above ordinance, respondent Provincial Treasurer sent a demand letter to
MERALCO for the corresponding tax payment. Petitioner MERALCO paid the tax, which then
amounted to P19,520,628.42, under protest. A formal claim for refund was thereafter sent by
MERALCO to the Provincial Treasurer of Laguna claiming that the franchise tax it had paid and
continued to pay to the National Government pursuant to P.D. 551 already included the franchise
tax imposed by the Provincial Tax Ordinance. MERALCO contended that the imposition of a
franchise tax under Section 2.09 of Laguna Provincial Ordinance No. 01-92, insofar as it
concerned MERALCO, contravened the provisions of Section 1 of P.D. 551 which read:
Any provision of law or local ordinance to the contrary notwithstanding, the
franchise tax payable by all grantees of franchises to generate, distribute and sell
electric current for light, heat and power shall be two per cent (2%) of their gross
receipts received from the sale of electric current and from transactions incident to the
generation, distribution and sale of electric current.
Such franchise tax shall be payable to the Commissioner of Internal Revenue or his
duly authorized representative on or before the twentieth day of the month following
the end of each calendar quarter or month, as may be provided in the respective
franchise or pertinent municipal regulation and shall, any provision of the Local Tax
Code or any other law to the contrary notwithstanding, be in lieu of all taxes and
assessments of whatever nature imposed by any national or local authority on
earnings, receipts, income and privilege of generation, distribution and sale of electric
current.
On 28 August 1995, the claim for refund of petitioner was denied in a letter signed by
Governor Jose D. Lina. In denying the claim, respondents relied on a more recent
law, i.e., Republic Act No. 7160 or the Local Government Code of 1991, than the old decree
invoked by petitioner.
On 14 February 1996, petitioner MERALCO filed with the Regional Trial Court of Sta
Cruz, Laguna, a complaint for refund, with a prayer for the issuance of a writ of preliminary
injunction and/or temporary restraining order, against the Province of Laguna and also Benito R.
Balazo in his capacity as the Provincial Treasurer of Laguna. Aside from the amount of
P19,520,628.42 for which petitioner MERALCO had priority made a formal request for refund,
petitioner thereafter likewise made additional payments under protest on various dates totaling
P27,669,566.91.
The trial court, in its assailed decision of 30 September 1997, dismissed the complaint and
concluded:
WHEREFORE, IN THE LIGHT OF ALL THE FOREGOING CONSIDERATIONS,
JUDGMENT is hereby rendered in favor of the defendants and against the plaintiff,
by:
1. Ordering the dismissal of the Complaint; and
2. Declaring Laguna Provincial Tax Ordinance No. 01-92 as valid, binding,
reasonable and enforceable.
[2]

In the instant petition, MERALCO assails the above ruling and brings up the following
issues; viz:
1. Whether the imposition of a franchise tax under Section 2.09 of Laguna
Provincial Ordinance No. 01-92, insofar as petitioner is concerned, is violative of
the non-impairment clause of the Constitution and Section 1 of Presidential Decree
No. 551.
2. Whether Republic Act. No. 7160, otherwise known as the Local
Government Code of 1991, has repealed, amended or modified Presidential Decree
No. 551.
3. Whether the doctrine of exhaustion of administrative remedies is applicable
in this case.
[3]

The petition lacks merit.
Prefatorily, it might be well to recall that local governments do not have the inherent power
to tax
[4]
except to the extent that such power might be delegatedto them either by the basic law or
by statute. Presently, under Article X of the 1987 Constitution, a general delegation of that
power has been given in favor of local government units. Thus:
Sec. 3. The Congress shall enact a local government code which shall provide for a
more responsive and accountable local government structure instituted through a
system of decentralization with effective mechanisms of recall, initiative, and
referendum, allocate among the different local government units their powers,
responsibilities, and resources, and provide for the qualifications, election,
appointment and removal, term, salaries, powers and functions, and duties of local
officials, and all other matters relating to the organization and operation of the local
units.
x x x x x x x x x
Sec. 5. Each local government shall have the power to create its own sources of
revenues and to levy taxes, fees, and charges subject to such guidelines and
limitations as the Congress may provide, consistent with the basic policy of local
autonomy. Such taxes, fees and charges shall accrue exclusively to the local
governments.
The 1987 Constitution has a counterpart provision in the 1973 Constitution which did come out
with a similar delegation of revenue making powers to local governments.
[5]

Under the regime of the 1935 Constitution no similar delegation of tax powers was
provided, and local government units instead derived their tax powers under a limited statutory
authority. Whereas, then, the delegation of tax powers granted at that time by statute to local
governments was confined and defined (outside of which the power was deemed withheld), the
present constitutional rule (starting with the 1973 Constitution), however, would broadly confer
such tax powers subject only to specific exceptions that the law might prescribe.
Under the now prevailing Constitution, where there is neither a grant nor a prohibition
by statute, the tax power must be deemed to exist although Congress may provide statutory
limitations and guidelines. The basic rationale for the current rule is to safeguard the viability
and self-sufficiency of local government units by directly granting them general and broad tax
powers. Nevertheless, the fundamental law did not intend the delegation to be absolute and
unconditional; the constitutional objective obviously is to ensure that, while the local
government units are being strengthened and made more autonomous,
[6]
the legislature must still
see to it that (a) the taxpayer will not be over-burdened or saddled with multiple and
unreasonable impositions; (b) each local government unit will have its fair share of available
resources; (c) the resources of the national government will not be unduly disturbed; and (d)
local taxation will be fair, uniform, and just.
The Local Government Code of 1991 has incorporated and adopted, by and large the
provisions of the now repealed Local Tax Code, which had been in effect since 01 July 1973,
promulgated into law by Presidential Decree No. 231
[7]
pursuant to the then provisions of Section
2, Article XI, of the 1973 Constitution. The 1991 Code explicitly authorizes provincial
governments, notwithstanding any exemption granted by any law or other special law, x x x (to)
impose a tax on businesses enjoying a franchise. Section 137 thereof provides:
Sec. 137. Franchise Tax Notwithstanding any exemption granted by any law or
other special law, the province may impose a tax on businesses enjoying a franchise,
at a rate not exceeding fifty percent (50%) of one percent (1%) of the gross annual
receipts for the preceding calendar year based on the incoming receipt, or realized,
within its territorial jurisdiction. In the case of a newly started business, the tax shall
not exceed one-twentieth (1/20) of one percent (1%) of the capital investment. In the
succeeding calendar year, regardless of when the business started to operate, the tax
shall be based on the gross receipts for the preceding calendar year, or any fraction
thereof, as provided herein. (Underscoring supplied for emphasis)
Indicative of the legislative intent to carry out the Constitutional mandate of vesting broad
tax powers to local government units, the Local Government Code has effectively withdrawn
under Section 193 thereof, tax exemptions or incentives theretofore enjoyed by certain
entities. This law states:
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 R.A. No.
6938, non-stock and non-profit hospitals and educational institutions, are hereby
withdrawn upon the effectivity of this Code. (Underscoring supplied for emphasis)
The Code, in addition, contains a general repealing clause in its Section 534; thus:
Section 534. Repealing Clause. x x x.
(f) All general and special laws, acts, city charters, decrees, executive orders,
proclamations and administrative regulations, or part or parts thereof which are
inconsistent with any of the provisions of this Code are hereby repealed or modified
accordingly. (Underscoring supplied for emphasis)
[8]

To exemplify, in Mactan Cebu International Airport Authority vs. Marcos,
[9]
the Court upheld
the withdrawal of the real estate tax exemption previously enjoyed by Mactan Cebu International Airport
Authority. The Court ratiocinated:
x x x These policy considerations are consistent with the State policy to ensure
autonomy to local governments and the objective of the LGC that they enjoy genuine
and meaningful local autonomy to enable them to attain their fullest development as
self-reliant communities and make them effective partners in the attainment of
national goals. The power to tax is the most effective instrument to raise needed
revenues to finance and support myriad activities of local government units for the
delivery of basic service essential to the promotion of the general welfare and the
enhancement of peace, progress, and prosperity of the people. It may also be relevant
to recall that the original reasons for the withdrawal of tax exemption privileges
granted to government-owned and controlled corporations and all other units of
government were that such privilege resulted in serious tax base erosion and
distortions in the tax treatment of similarly situated enterprises, and there was a need
for these entities to share in the requirements of development, fiscal or otherwise, by
paying the taxes and other charges due from them.
[10]

Petitioner in its complaint before the Regional Trial Court cited the ruling of this Court in
Province of Misamis Oriental vs. Cagayan Electric Power and Light Company, Inc.;
[11]
thus:
In an earlier case, the phrase shall be in lieu of all taxes and at any time levied,
established by, or collected by any authority found in the franchise of the Visayan
Electric Company was held to exempt the company from payment of the 5% tax on
corporate franchise provided in Section 259 of the Internal Revenue Code (Visayan
Electric Co. vs. David, 49 O.G. [No. 4] 1385)
Similarly, we ruled that the provision: shall be in lieu of all taxes of every name and
nature in the franchise of the Manila Railroad (Subsection 12, Section 1, Act No.
1510) exempts the Manila Railroad from payment of internal revenue tax for its
importations of coal and oil under Act No. 2432 and the Amendatory Acts of the
Philippine Legislature (Manila Railroad vs. Rafferty, 40 Phil. 224).
The same phrase found in the franchise of the Philippine Railway Co. (Sec. 13, Act
No. 1497) justified the exemption of the Philippine Railway Company from payment
of the tax on its corporate franchise under Section 259 of the Internal Revenue Code,
as amended by R.A. No. 39 (Philippine Railway Co vs. Collector of Internal Revenue,
91 Phil. 35).
Those magic words, shall be in lieu of all taxes also excused the Cotabato Light
and Ice Plant Company from the payment of the tax imposed by Ordinance No. 7 of
the City of Cotabato (Cotabato Light and Power Co. vs. City of Cotabato, 32 SCRA
231).
So was the exemption upheld in favor of the Carcar Electric and Ice Plant Company
when it was required to pay the corporate franchise tax under Section 259 of the
Internal Revenue Code as amended by R.A. No. 39 (Carcar Electric & Ice Plant vs.
Collector of Internal Revenue, 53 O.G. [No. 4] 1068). This Court pointed out that
such exemption is part of the inducement for the acceptance of the franchise and the
rendition of public service by the grantee.
[12]

In the recent case of the City Government of San Pablo, etc., et al. vs. Hon. Bienvenido V.
Reyes, et al.,
[13]
the Court has held that the phrase in lieu of all taxes have to give way to the
peremptory language of the Local Government Code specifically providing for the withdrawal of
such exemptions, privileges, and that upon the effectivity of the Local Government Code all
exemptions except only as provided therein can no longer be invoked by MERALCO to disclaim
liability for the local tax. In fine, the Court has viewed its previous rulings as laying stress
more on the legislative intent of the amendatory law whether the tax exemption privilege
is to be withdrawn or not rather than on whether the law can withdraw, without violating
the Constitution, the tax exemption or not.
While the Court has, not too infrequently, referred to tax exemptions contained in special
franchises as being in the nature of contracts and a part of the inducement for carrying on the
franchise, these exemptions, nevertheless, are far from being strictly contractual in
nature. Contractual tax exemptions, in the real sense of the term and where the non-
impairment clause of the Constitution can rightly be invoked, are those agreed to by the
taxing authority in contracts, such as those contained in government bonds or debentures,
lawfully entered into by them under enabling laws in which the government, acting in its
private capacity, sheds its cloak of authority and waives its governmental immunity. Truly,
tax exemptions of this kind may not be revoked without impairing the obligations of
contracts.
[14]
These contractual tax exemptions, however, are not to be confused with tax
exemptions granted under franchises. A franchise partakes the nature of a grant which is beyond
the purview of the non-impairment clause of the Constitution.
[15]
Indeed, Article XII, Section 11,
of the 1987 Constitution, like its precursor provisions in the 1935 and the 1973 Constitutions, is
explicit that no franchise for the operation of a public utility shall be granted except under the
condition that such privilege shall be subject to amendment, alteration or repeal by Congress as
and when the common good so requires.
WHEREFORE, the instant petition is hereby DISMISSED. No costs.
SO ORDERED.
Romero, Panganiban, Purisima, and Gonzaga-Reyes, JJ., concur.

[1]
Rollo, p. 27
[2]
Rollo, p. 31.
[3]
Rollo, p. 113
[4]

Basco vs. PAGCOR 197 SCRA 52.
[5]
Art XI 1973 Constitution.
[6]
See Sec. 25, Art. II and Sec. 2, Art. X.
[7]
Later amended by PD 426.
[8]
Rollo, pp. 28-29.
[9]
261 SCRA 667.
[10]
At. p. 690.
[11]
181 SCRA 38 citing Carcar Electric & Ice Plant vs. Colector of Internal Revenue, 56 OG (No. 4) 1068.
[12]
At pp. 42-43.
[13]
G.R. No. 127708, 25 March 1999.
[14]
See Casanovas vs. Hord 8 Phil. 125.
[15]
See Cagayan Electric Co. vs. Commissioner, G.R. No. L-601026, 25 September 1985, but see Prov. Of Misamis
Oriental vs. Cagayan Electric, 181 SCRA 38, reiterated in Comm. vs. CTA, 195 SCRA 445.
No. 131359. May 5, 1999)
18AUG
FACTS:
MERALCO was granted a franchise by several municipal councils and the National
Electrification Administration to operate an electric light and power service in the Laguna. Upon
enactment of Local Government Code, the provincial government issued ordinance imposing
franchise tax. MERALCO paid under protest and later claims for refund because of the duplicity
with Section 1 of P.D. No. 551. This was denied by the governor (Joey Lina) relying on a more
recent law (LGC). MERALCO filed with the RTC a complaint for refund, but was dismissed.
Hence, this petition.
ISSUE:
Whether or not the imposition of franchise tax under the provincial ordinance is violative of the
non-impairment clause of the Constitution and of P.D. 551.
HELD:
No. There is no violation of the non-impairment clause for the same must yield to the inherent
power of the state (taxation). The provincial ordinance is valid and constitutional.
RATIO:
The Local Government Code of 1991 has incorporated and adopted, by and large, the
provisions of the now repealed Local Tax Code. The 1991 Code explicitly authorizes provincial
governments, notwithstanding any exemption granted by any law or other special law, . . . (to)
impose a tax on businesses enjoying a franchise. A franchise partakes the nature of a grant
which is beyond the purview of the non-impairment clause of the Constitution.

Article XII,
Section 11, of the 1987 Constitution, like its precursor provisions in the 1935 and the 1973
Constitutions, is explicit that no franchise for the operation of a public utility shall be granted
except under the condition that such privilege shall be subject to amendment, alteration or
repeal by Congress as and when the common good so requires.
SUPREME COURT
Manila
EN BANC
G.R. No. L-22814 August 28, 1968
PEPSI-COLA BOTTLING CO. OF THE PHILIPPINES, INC., plaintiff-appellant,
vs.
CITY OF BUTUAN, MEMBERS OF THE MUNICIPAL BOARD,
THE CITY MAYOR and THE CITY TREASURER, all of the CITY OF
BUTUAN, defendants-appellees.
Sabido, Sabido and Associates for plaintiff-appellant.
The City Attorney of Butuan City for defendants-appellees.
CONCEPCION, C.J .:
Direct appeal to this Court, from a decision of the Court of First Instance of Agusan,
dismissing plaintiff's complaint, with costs.
Plaintiff, Pepsi-Cola Bottling Company of the Philippines, is a domestic corporation with
offices and principal place of business in Quezon City. The defendants are the City of
Butuan, its City Mayor, the members of its municipal board and its City Treasurer.
Plaintiff seeks to recover the sums paid by it to the City of Butuan hereinafter
referred to as the City and collected by the latter, pursuant to its Municipal Ordinance
No. 110, as amended by Municipal Ordinance No. 122, both series of 1960, which
plaintiff assails as null and void, and to prevent the enforcement thereof. Both parties
submitted the case for decision in the lower court upon a stipulation to the effect:
1. That plaintiff's warehouse in the City of Butuan serves as a storage for its
products the "Pepsi-Cola" soft drinks for sale to customers in the City of Butuan
and all the municipalities in the Province of Agusan. These "Pepsi-Cola Cola"
soft drinks are bottled in Cebu City and shipped to the Butuan City warehouse of
plaintiff for distribution and sale in the City of Butuan and all municipalities of
Agusan. .
2. That on August 16, 1960, the City of Butuan enacted Ordinance No. 110 which
was subsequently amended by Ordinance No. 122 and effective November 28,
1960. A copy of Ordinance No. 110, Series of 1960 and Ordinance No. 122 are
incorporated herein as Exhibits "A" and "B", respectively.
3. That Ordinance No. 110 as amended, imposes a tax on any person,
association, etc., of P0.10 per case of 24 bottles of Pepsi-Cola and the plaintiff
paid under protest the amount of P4,926.63 from August 16 to December 31,
1960 and the amount of P9,250.40 from January 1 to July 30, 1961.
4. That the plaintiff filed the foregoing complaint for the recovery of the total
amount of P14,177.03 paid under protest and those that if may later on pay until
the termination of this case on the ground that Ordinance No. 110 as amended of
the City of Butuan is illegal, that the tax imposed is excessive and that it is
unconstitutional.
5. That pursuant to Ordinance No. 110 as amended, the City Treasurer of Butuan
City, has prepared a form to be accomplished by the plaintiff for the computation
of the tax. A copy of the form is enclosed herewith as Exhibit "C".
6. That the Profit and Loss Statement of the plaintiff for the period from January
1, 1961 to July 30, 1961 of its warehouse in Butuan City is incorporated herein as
Exhibits "D" to "D-1" to "D-5". In this Profit and Loss Statement, the defendants
claim that the plaintiff is not entitled to a depreciation of P3,052.63 but only
P1,202.55 in which case the profit of plaintiff will be increased from P1,254.44 to
P3,104.52. The plaintiff differs only on the claim of depreciation which the
company claims to be P3,052.62. This is in accordance with the findings of the
representative of the undersigned City Attorney who verified the records of the
plaintiff.
7. That beginning November 21, 1960, the price of Pepsi-Cola per case of 24
bottles was increased to P1.92 which price is uniform throughout the Philippines.
Said increase was made due to the increase in the production cost of its
manufacture.
8. That the parties reserve the right to submit arguments on the constitutionality
and illegality of Ordinance No. 110, as amended of the City of Butuan in their
respective memoranda.
x x x x x x x x x1wph 1. t
Section 1 of said Ordinance No. 110, as amended, states what products are "liquors",
within the purview thereof. Section 2 provides for the payment by "any agent and/or
consignee" of any dealer "engaged in selling liquors, imported or local, in the City," of
taxes at specified rates. Section 3 prescribes a tax of P0.10 per case of 24 bottles of the
soft drinks and carbonated beverages therein named, and "all other soft drinks or
carbonated drinks." Section 3-A, defines the meaning of the term "consignee or agent"
for purposes of the ordinance. Section 4 provides that said taxes "shall be paid at the
end of every calendar month." Pursuant to Section 5, the taxes "shall be based and
computed from the cargo manifest or bill of lading or any other record showing the
number of cases of soft drinks, liquors or all other soft drinks or carbonated drinks
received within the month." Sections 6, 7 and 8 specify the surcharge to be added for
failure to pay the taxes within the period prescribed and the penalties imposable for
"deliberate and willful refusal to pay the tax mentioned in Sections 2 and 3" or for failure
"to furnish the office of the City Treasurer a copy of the bill of lading or cargo manifest or
record of soft drinks, liquors or carbonated drinks for sale in the City." Section 9 makes
the ordinance applicable to soft drinks, liquors or carbonated drinks "received outside"
but "sold within" the City. Section 10 of the ordinance provides that the revenue derived
therefrom "shall be alloted as follows: 40% for Roads and Bridges Fund; 40% for the
General Fund and 20% for the School Fund."
Plaintiff maintains that the disputed ordinance is null and void because: (1) it partakes of
the nature of an import tax; (2) it amounts to double taxation; (3) it is excessive,
oppressive and confiscatory; (4) it is highly unjust and discriminatory; and (5) section 2
of Republic Act No. 2264, upon the authority of which it was enacted, is an
unconstitutional delegation of legislative powers.
The second and last objections are manifestly devoid of merit. Indeed independently
of whether or not the tax in question, when considered in relation to the sales tax
prescribed by Acts of Congress, amounts to double taxation, on which we need not and
do not express any opinion - double taxation, in general, is not forbidden by our
fundamental law. We have not adopted, as part thereof, the injunction against double
taxation found in the Constitution of the United States and of some States of the
Union.
1
Then, again, the general principle against delegation of legislative powers, in
consequence of the theory of separation of powers
2
is subject to one well-established
exception, namely: legislative powers may be delegated to local governments to
which said theory does not apply
3
in respect of matters of local concern.
The third objection is, likewise, untenable. The tax of "P0.10 per case of 24 bottles," of
soft drinks or carbonated drinks in the production and sale of which plaintiff is
engaged or less than P0.0042 per bottle, is manifestly too small to be excessive,
oppressive, or confiscatory.
The first and the fourth objections merit, however, serious consideration. In this
connection, it is noteworthy that the tax prescribed in section 3 of Ordinance No. 110, as
originally approved, was imposed upon dealers "engaged in selling" soft drinks or
carbonated drinks. Thus, it would seem that the intent was then to levy a tax upon the
sale of said merchandise. As amended by Ordinance No. 122, the tax is, however,
imposed only upon "any agent and/or consignee of any person, association,
partnership, company or corporation engaged in selling ... soft drinks or carbonated
drinks." And, pursuant to section 3-A, which was inserted by said Ordinance No. 122:
... Definition of the Term Consignee or Agent. For purposes of this
Ordinance, a consignee of agent shall mean any person, association,
partnership, company or corporation who acts in the place of another by authority
from him or one entrusted with the business of another or to whom is consigned
or shipped no less than 1,000 cases of hard liquors or soft drinks every month
for resale, either retail or wholesale.
As a consequence, merchants engaged in the sale of soft drink or carbonated drinks,
are not subject to the tax,unless they are agents and/or consignees of another
dealer, who, in the very nature of things, must be one engaged in business outside the
City. Besides, the tax would not be applicable to such agent and/or consignee, if less
than 1,000 cases of soft drinks are consigned or shipped to him every month. When we
consider, also, that the tax "shall be based and computed from the cargo manifest or bill
of lading ... showing the number of cases" not sold but "received" by the taxpayer,
the intention to limit the application of the ordinance to soft drinks and carbonated drinks
brought into the City from outside thereof becomes apparent. Viewed from this angle,
the tax partakes of the nature of an import duty, which is beyond defendant's authority
to impose by express provision of law.
4

Even however, if the burden in question were regarded as a tax on the sale of said
beverages, it would still be invalid, as discriminatory, and hence, violative of the
uniformity required by the Constitution and the law therefor, since only sales by "agents
or consignees" of outside dealers would be subject to the tax. Sales by local dealers,
not acting for or on behalf of other merchants, regardless of the volume of their sales,
and even if the same exceeded those made by said agents or consignees of producers
or merchants established outside the City of Butuan, would be exempt from the
disputed tax.
It is true that the uniformity essential to the valid exercise of the power of taxation does
not require identity or equality under all circumstances, or negate the authority to
classify the objects of taxation.
5
The classification made in the exercise of this authority,
to be valid, must, however, be reasonable
6
and this requirement is not deemed satisfied
unless: (1) it is based upon substantial distinctions which make real differences; (2)
these are germane to the purpose of the legislation or ordinance; (3) the classification
applies, not only to present conditions, but, also, to future conditions substantially
identical to those of the present; and (4) the classification applies equally all those who
belong to the same class.
7

These conditions are not fully met by the ordinance in question.
8
Indeed, if its purpose
were merely to levy a burden upon the sale of soft drinks or carbonated beverages,
there is no reason why sales thereof by sealers other than agents or consignees of
producers or merchants established outside the City of Butuan should be exempt from
the tax.
WHEREFORE, the decision appealed from is hereby reversed, and another one shall
be entered annulling Ordinance No. 110, as amended by Ordinance No. 122, and
sentencing the City of Butuan to refund to plaintiff herein the amounts collected from
and paid under protest by the latter, with interest thereon at the legal rate from the date
of the promulgation of this decision, in addition to the costs, and defendants herein are,
accordingly, restrained and prohibited permanently from enforcing said Ordinance, as
amended. It is so ordered.
Reyes, J.B.L., Dizon, Makalintal, Zaldivar, Sanchez, Castro, Angeles and Fernando, JJ.,
concur. 1wph1.t
Pepsi Cola Bottiling Co. vs City
of Butuan (1968)
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Facts: Ordinance 110 was enacted by the City of Butuan imposing a tax of P0.10 per
case of 24 bottles of softdrinks or carbonated drinks. The tax was imposed upon dealers
engeged in selling softdrinks or carbonated drinks. When Ordinance 110, the tax was
imposed upon an agent or consignee of any person, association, partnership, company
or corporation engaged in selling softdrinks or carbonated drinks, with agent or
consignee being particularly defined on the inserted provision Section 3-A. In effect,
merchants engaged in the sale of softdrinks, etc. are not subject to the tax unless they
are agents or consignees of another dealer who must be one engaged in business
outside the City. Pepsi-Cola Bottling Co. filed suit to recover sums paid by it to the city
pursuant to the Ordinance, which it claims to be null and void.
Issue: Whether the Ordinance is discriminatory.
Held: The Ordinance, as amended, is discriminatory since only sales by agents or
consignees of outside dealers would be subject to the tax. Sales by local dealers, not
acting for or on behalf of other merchants, regardless of the volume of their sales , and
even if the same exceeded those made by said agents or consignees of producers or
merchants established outside the city, would be exempt from the tax. The classification
made in the exercise of the authority to tax, to be valid must be reasonable, which
would be satisfied if the classification is based upon substantial distinctions which
makes real differences; these are germane to the purpose of legislation or ordinance;
the classification applies not only to present conditions but also to future conditions
substantially identical to those of the present; and the classification applies equally to all
those who belong to the same class. These conditions are not fully met by the
ordinance in question.
SUPREME COURT
Manila
EN BANC

G.R. No. L-28271 July 25, 1975
SMITH, BELL AND CO. (PHIL.), INC., petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, respondent.
Hildawa and Gomez for petitioner.
Office of the Solicitor General Antonio P. Barredo, Assistant Solicitor General Antonio A.
Torres, Solicitor Lolita O. Gal-lang and Special Attorney Gamaliel H. Mantolino for
respondent.

CASTRO, J .:
This is a petition for review of the decision of the court of Tax Appeals in case 1733
which affirms the deficiency assessment made by the Commissioner of Internal
Revenue against the petitioner Smith, Bell & Co. in the amount of P11,713.90.
We affirm the decision of the Court of Tax Appeals.
From August 1963 to August 1965 the petitioner imported 119 cases of "Chatteau Gay"
wine which it declared as "still wine" under Section 134(b)of the Tax Code and paid
thereon the specific tax of P1.00 per liter of volume capacity. To determine the correct
amount of the specific tax due on the petitioner's importation, the Commissioner of
Internal Revenue (hereinafter referred to as the Commissioner) ordered it tested and
analyzed in the Bureau of Internal Revenue Laboratory Center. The analyst who
conducted the laboratory test reported that Chatteau Gay "is a delicate table wine, with
an alcohol content of 9.5% by volume (volume 745 cc @ 290C), characterized with
explosion upon opening and effervescence due to CO2 (residual)," and concluded that it
should be classified as "sparkling wine." The analyst's conclusion is supported by
Herstein and Jacobs who, in their book entitled "Chemistry & Technology of Wines and
Liquors," wrote:
(f) Sparkling wines are bottled before the fermentation has ceased so that
they contain carbon dioxide gas in solution at greater than atmospheric
pressure. When they are served, the carbon dioxide is liberated with
effervescence. These gas and alcoholic contents vary according to the
market for which they are intended. They may be dry or sweet, light or
strong. Champagne, sparkling Burgundy, and Asti-Spumante are
examples of sparkling wines.
On the basis of the analyst's report and recommendation, the Commissioner, on
October 11, 1965, assessed the petitioner a deficiency specific tax on the 119 cases of
imported Chatteau Gay in the sum of P11,713.90 under Section 134(a) of the Tax Code
which imposes a specific tax of P12.00 per liter of volume capacity on sparkling wines.
The petitioner does not dispute the mathematical correctness of the Commissioner's
assessment, but contends that the assessment is unconstitutional because Section
134(a) of the Tax Code under which it was issued lays down an insufficient and hazy
standard by which the policy and purpose of the law may be ascertained and as well
gives the Commissioner blanket authority to decide what is or is not the meaning of
"sparkling wines." The argument is thus advanced that there is here an abdication of
legislative power violative of the established doctrine, delegata potestas non potest
delegate, and the due process clause of the Constitution. The Commissioner disagrees
on the ground that Chapter I, Title IV of the Tax Code in no uncertain terms specifies
the articles subject to specific taxes, among which are wines, and Section 134 does no
more than classify wines in several categories and prescribe the corresponding
amounts of tax to be paid. The Commissioner's position was sustained by the Court of
Tax Appeals in its decision dated October 5, 1967.
The contention that in regard to Section 134(a) of the Tax Code there is an
unconstitutional surrender of legislative powers and a failure of due process, need not
give us more than a momentary pause.
Section 134 of the Tax Code provides:
1

Specific tax on wines. On wines and imitation wines there shall be
collected, per liter of volume capacity, the following taxes:
(a) Sparkling wines, regardless of proof, twelve pesos.
(b) Still wines containing fourteen per centum of alcohol or less, except
those produced from casuy and duhat, one peso.
(c) Still wines containing more than fourteen per centum of alcohol, two
pesos.
Imitation wines containing more than twenty-five per centum of alcohol
shall be taxed as distilled spirits.
There can be no uncertainty that the purpose of the abovequoted provision is to impose
a specific tax on wines and imitation wines. The first clause of Section 134 states so in
plain language. The sole object of the sub-enumeration that follows is in turn
unmistakably to prescribe the amount of the tax specifically to be paid for each type of
wine and/or imitation wine so classified and described. The section therefore clearly and
indubitably discloses the legislative will, leaving to the officers charged with
implementation and execution thereof no more than the administrative function of
determining whether a particular kind of wine or imitation wine falls in one class or
another. In the performance of this function, the internal revenue officers are
demonstrably guided by the sound established practices and technology of the wine
industry, an industry as aged and widely dispersed as one can care to know.
In the case at bar, the Commissioner had the petitioner's wine examined and analyzed.
The petitioner, on the other hand, does not appear to have made a similar effort. On the
bases of the test thus made and the authoritative and published work on the subject of
wines, the Commissioner ordered the corresponding deficiency assessment to be
issued. Having chosen to engage in the wine trading business, the petitioner is duty
bound to know the kinds of wine it deals in, particularly insofar as such knowledge may
be relevant to the proper appreciation of its tax liabilities, and cannot take comfort in its
pretended ignorance of what sparkling wine is.
ACCORDINGLY, the decision of the Court of Tax Appeals is affirmed, at petitioner's
cost.
Makalintal, C.J., Fernando, Barredo, Makasiar, Antonio, Esguerra, Muoz Palma,
Aquino, Concepcion, Jr., and Martin, JJ, concur.
Teehankee, J., is on leave.

SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 162015 March 6, 2006
THE CITY GOVERNMENT OF QUEZON CITY, AND THE CITY TREASURER OF
QUEZON CITY, DR. VICTOR B. ENRIGA, Petitioners,
vs.
BAYAN TELECOMMUNICATIONS, INC., Respondent.
D E C I S I O N
GARCIA,J .:
Before the Court, on pure questions of law, is this petition for review on certiorari under
Rule 45 of the Rules of Court to nullify and set aside the following issuances of the
Regional Trial Court (RTC) of Quezon City, Branch 227, in its Civil Case No. Q-02-
47292, to wit:
1) Decision
1
dated June 6, 2003, declaring respondent Bayan Telecommunications, Inc.
exempt from real estate taxation on its real properties located in Quezon City; and
2) Order
2
dated December 30, 2003, denying petitioners motion for reconsideration.
The facts:
Respondent Bayan Telecommunications, Inc.
3
(Bayantel) is a legislative franchise
holder under Republic Act (Rep. Act) No. 3259
4
to establish and operate radio stations
for domestic telecommunications, radiophone, broadcasting and telecasting.
Of relevance to this controversy is the tax provision of Rep. Act No. 3259, embodied in
Section 14 thereof, which reads:
SECTION 14. (a) The grantee shall be liable to pay the same taxes on its real estate,
buildings and personal property, exclusive of the franchise, as other persons or
corporations are now or hereafter may be required by law to pay. (b) The grantee shall
further pay to the Treasurer of the Philippines each year, within ten days after the audit
and approval of the accounts as prescribed in this Act, one and one-half per centum of
all gross receipts from the business transacted under this franchise by the said grantee
(Emphasis supplied).
On January 1, 1992, Rep. Act No. 7160, otherwise known as the "Local Government
Code of 1991" (LGC), took effect. Section 232 of the Code grants local government
units within the Metro Manila Area the power to levy tax on real properties, thus:
SEC. 232. Power to Levy Real Property Tax. A province or city or a municipality
within the Metropolitan Manila Area may levy an annual ad valorem tax on real property
such as land, building, machinery and other improvements not hereinafter specifically
exempted.
Complementing the aforequoted provision is the second paragraph of Section 234 of
the same Code which withdrew any exemption from realty tax heretofore granted to or
enjoyed by all persons, natural or juridical, to wit:
SEC. 234 - Exemptions from Real Property Tax. The following are exempted from
payment of the real property tax:
xxx xxx xxx
Except as provided herein, any exemption from payment of real property tax previously
granted to, or enjoyed by, all persons, whether natural or juridical, including
government-owned-or-controlled corporations is hereby withdrawn upon effectivity of
this Code (Emphasis supplied).
On July 20, 1992, barely few months after the LGC took effect, Congress enacted Rep.
Act No. 7633, amending Bayantels original franchise. The amendatory law (Rep. Act
No. 7633) contained the following tax provision:
SEC. 11. 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 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 telephone or other telecommunications
businesses 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 . xxx.
[Emphasis supplied]
It is undisputed that within the territorial boundary of Quezon City, Bayantel owned
several real properties on which it maintained various telecommunications facilities.
These real properties, as hereunder described, are covered by the following tax
declarations:
(a) Tax Declaration Nos. D-096-04071, D-096-04074, D-096-04072 and D-096-
04073 pertaining to Bayantels Head Office and Operations Center in Roosevelt
St., San Francisco del Monte, Quezon City allegedly the nerve center of
petitioners telecommunications franchise operations, said Operation Center
housing mainly petitioners Network Operations Group and switching,
transmission and related equipment;
(b) Tax Declaration Nos. D-124-01013, D-124-00939, D-124-00920 and D-124-
00941 covering Bayantels land, building and equipment in Maginhawa St.,
Barangay East Teachers Village, Quezon City which houses
telecommunications facilities; and
(c) Tax Declaration Nos. D-011-10809, D-011-10810, D-011-10811, and D-011-
11540 referring to Bayantels Exchange Center located in Proj. 8, Brgy. Bahay
Toro, Tandang Sora, Quezon City which houses the Network Operations Group
and cover switching, transmission and other related equipment.
In 1993, the government of Quezon City, pursuant to the taxing power vested on local
government units by Section 5, Article X of the 1987 Constitution, infra, in relation to
Section 232 of the LGC, supra, enacted City Ordinance No. SP-91, S-93, otherwise
known as the Quezon City Revenue Code (QCRC),
5
imposing, under Section 5 thereof,
a real property tax on all real properties in Quezon City, and, reiterating in its Section 6,
the withdrawal of exemption from real property tax under Section 234 of the LGC,
supra. Furthermore, much like the LGC, the QCRC, under its Section 230, withdrew tax
exemption privileges in general, as follows:
SEC. 230. 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 6938, non-stock and
non-profit hospitals and educational institutions, business enterprises certified by the
Board of Investments (BOI) as pioneer or non-pioneer for a period of six (6) and four (4)
years, respectively, are hereby withdrawn effective upon approval of this Code
Conformably with the Citys Revenue Code, new tax declarations for Bayantels real
properties in Quezon City were issued by the City Assessor and were received by
Bayantel on August 13, 1998, except one (Tax Declaration No. 124-01013) which was
received on July 14, 1999.
Meanwhile, on March 16, 1995, Rep. Act No. 7925,
6
otherwise known as the "Public
Telecommunications Policy Act of the Philippines," envisaged to level the playing field
among telecommunications companies, took effect. Section 23 of the Act provides:
SEC. 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 franchises 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.
On January 7, 1999, Bayantel wrote the office of the City Assessor seeking the
exclusion of its real properties in the city from the roll of taxable real properties. With its
request having been denied, Bayantel interposed an appeal with the Local Board of
Assessment Appeals (LBAA). And, evidently on its firm belief of its exempt status,
Bayantel did not pay the real property taxes assessed against it by the Quezon City
government.
On account thereof, the Quezon City Treasurer sent out notices of delinquency for the
total amount ofP43,878,208.18, followed by the issuance of several warrants of levy
against Bayantels properties preparatory to their sale at a public auction set on July 30,
2002.
Threatened with the imminent loss of its properties, Bayantel immediately withdrew its
appeal with the LBAA and instead filed with the RTC of Quezon City a petition for
prohibition with an urgent application for a temporary restraining order (TRO) and/or writ
of preliminary injunction, thereat docketed as Civil Case No. Q-02-47292, which was
raffled to Branch 227 of the court.
On July 29, 2002, or in the eve of the public auction scheduled the following day, the
lower court issued a TRO, followed, after due hearing, by a writ of preliminary injunction
via its order of August 20, 2002.
And, having heard the parties on the merits, the same court came out with its
challenged Decision of June 6, 2003, the dispositive portion of which reads:
WHEREFORE, premises considered, pursuant to the enabling franchise under Section
11 of Republic Act No. 7633, the real estate properties and buildings of petitioner [now,
respondent Bayantel] which have been admitted to be used in the operation of
petitioners franchise described in the following tax declarations are hereby DECLARED
exempt from real estate taxation:
(1) Tax Declaration No. D-096-04071
The preliminary prohibitory injunction issued in the August 20, 2002 Order of this Court
is hereby made permanent. Since this is a resolution of a purely legal issue, there is no
pronouncement as to costs.
SO ORDERED.
Their motion for reconsideration having been denied by the court in its Order dated
December 30, 2003, petitioners elevated the case directly to this Court on pure
questions of law, ascribing to the lower court the following errors:
I. [I]n declaring the real properties of respondent exempt from real property taxes
notwithstanding the fact that the tax exemption granted to Bayantel in its original
franchise had been withdrawn by the [LGC] and that the said exemption was not
restored by the enactment of RA 7633.
II. [In] declaring the real properties of respondent exempt from real property taxes
notwithstanding the enactment of the [QCRC] which withdrew the tax exemption which
may have been granted by RA 7633.
III. [In] declaring the real properties of respondent exempt from real property taxes
notwithstanding the vague and ambiguous grant of tax exemption provided under
Section 11 of RA 7633.
IV. [In] declaring the real properties of respondent exempt from real property taxes
notwithstanding the fact that [it] had failed to exhaust administrative remedies in its
claim for real property tax exemption. (Words in bracket added.)
As we see it, the errors assigned may ultimately be reduced to two (2) basic issues,
namely:
1. Whether or not Bayantels real properties in Quezon City are exempt from real
property taxes under its legislative franchise; and
2. Whether or not Bayantel is required to exhaust administrative remedies before
seeking judicial relief with the trial court.
We shall first address the second issue, the same being procedural in nature.
Petitioners argue that Bayantel had failed to avail itself of the administrative remedies
provided for under the LGC, adding that the trial court erred in giving due course to
Bayantels petition for prohibition. To petitioners, the appeal mechanics under the LGC
constitute Bayantels plain and speedy remedy in this case.
The Court does not agree.
Petitions for prohibition are governed by the following provision of Rule 65 of the Rules
of Court:
SEC. 2. Petition for prohibition. When the proceedings of any tribunal, are without
or in excess of its or his jurisdiction, or with grave abuse of discretion amounting to lack
or excess of jurisdiction, and there is no appeal or any other plain, speedy, and
adequate remedy in the ordinary course of law, a person aggrieved thereby may file a
verified petition in the proper court, alleging the facts with certainty and praying that
judgment be rendered commanding the respondent to desist from further proceedings in
the action or matter specified therein, or otherwise, granting such incidental reliefs as
law and justice may require.
With the reality that Bayantels real properties were already levied upon on account of
its nonpayment of real estate taxes thereon, the Court agrees with Bayantel that an
appeal to the LBAA is not a speedy and adequate remedy within the context of the
aforequoted Section 2 of Rule 65. This is not to mention of the auction sale of said
properties already scheduled on July 30, 2002.
Moreover, one of the recognized exceptions to the exhaustion- of-administrative
remedies rule is when, as here, only legal issues are to be resolved. In fact, the Court,
cognizant of the nature of the questions presently involved, gave due course to the
instant petition. As the Court has said in Ty vs. Trampe:
7

xxx. Although as a rule, administrative remedies must first be exhausted before resort to
judicial action can prosper, there is a well-settled exception in cases where the
controversy does not involve questions of fact but only of law. xxx.
Lest it be overlooked, an appeal to the LBAA, to be properly considered, required prior
payment under protest of the amount of P43,878,208.18, a figure which, in the light of
the then prevailing Asian financial crisis, may have been difficult to raise up. Given this
reality, an appeal to the LBAA may not be considered as a plain, speedy and adequate
remedy. It is thus understandable why Bayantel opted to withdraw its earlier appeal with
the LBAA and, instead, filed its petition for prohibition with urgent application for
injunctive relief in Civil Case No. Q-02-47292. The remedy availed of by Bayantel under
Section 2, Rule 65 of the Rules of Court must be upheld.
This brings the Court to the more weighty question of whether or not Bayantels real
properties in Quezon City are, under its franchise, exempt from real property tax.
The lower court resolved the issue in the affirmative, basically owing to the phrase
"exclusive of this franchise" found in Section 11 of Bayantels amended franchise, Rep.
Act No. 7633. To petitioners, however, the language of Section 11 of Rep. Act No. 7633
is neither clear nor unequivocal. The elaborate and extensive discussion devoted by the
trial court on the meaning and import of said phrase, they add, suggests as much. It is
petitioners thesis that Bayantel was in no time given any express exemption from the
payment of real property tax under its amendatory franchise.
There seems to be no issue as to Bayantels exemption from real estate taxes by virtue
of the term "exclusive of the franchise" qualifying the phrase "same taxes on its real
estate, buildings and personal property," found in Section 14, supra, of its franchise,
Rep. Act No. 3259, as originally granted.
The legislative intent expressed in the phrase "exclusive of this franchise" cannot be
construed other than distinguishing between two (2) sets of properties, be they real or
personal, owned by the franchisee, namely, (a) those actually, directly and exclusively
used in its radio or telecommunications business, and (b) those properties which are not
so used. It is worthy to note that the properties subject of the present controversy are
only those which are admittedly falling under the first category.
To the mind of the Court, Section 14 of Rep. Act No. 3259 effectively works to grant or
delegate to local governments of Congress inherent power to tax the franchisees
properties belonging to the second group of properties indicated above, that is, all
properties which, "exclusive of this franchise," are not actually and directly used in the
pursuit of its franchise. As may be recalled, the taxing power of local governments
under both the 1935 and the 1973 Constitutions solely depended upon an enabling law.
Absent such enabling law, local government units were without authority to impose and
collect taxes on real properties within their respective territorial jurisdictions. While
Section 14 of Rep. Act No. 3259 may be validly viewed as an implied delegation of
power to tax, the delegation under that provision, as couched, is limited to impositions
over properties of the franchisee which are not actually, directly and exclusively used in
the pursuit of its franchise. Necessarily, other properties of Bayantel directly used in the
pursuit of its business are beyond the pale of the delegated taxing power of local
governments. In a very real sense, therefore, real properties of Bayantel, save those
exclusive of its franchise, are subject to realty taxes. Ultimately, therefore, the inevitable
result was that all realties which are actually, directly and exclusively used in the
operation of its franchise are "exempted" from any property tax.
Bayantels franchise being national in character, the "exemption" thus granted under
Section 14 of Rep. Act No. 3259 applies to all its real or personal properties found
anywhere within the Philippine archipelago.
However, with the LGCs taking effect on January 1, 1992, Bayantels "exemption" from
real estate taxes for properties of whatever kind located within the Metro Manila area
was, by force of Section 234 of the Code, supra, expressly withdrawn. But, not long
thereafter, however, or on July 20, 1992, Congress passed Rep. Act No. 7633
amending Bayantels original franchise. Worthy of note is that Section 11 of Rep. Act
No. 7633 is a virtual reenacment of the tax provision, i.e., Section 14, supra, of
Bayantels original franchise under Rep. Act No. 3259. Stated otherwise, Section 14 of
Rep. Act No. 3259 which was deemed impliedly repealed by Section 234 of the LGC
was expressly revived under Section 14 of Rep. Act No. 7633. In concrete terms, the
realty tax exemption heretofore enjoyed by Bayantel under its original franchise, but
subsequently withdrawn by force of Section 234 of the LGC, has been restored by
Section 14 of Rep. Act No. 7633.
The Court has taken stock of the fact that by virtue of Section 5, Article X of the 1987
Constitution,
8
local governments are empowered to levy taxes. And pursuant to this
constitutional empowerment, juxtaposed with Section 232
9
of the LGC, the Quezon City
government enacted in 1993 its local Revenue Code, imposing real property tax on all
real properties found within its territorial jurisdiction. And as earlier stated, the Citys
Revenue Code, just like the LGC, expressly withdrew, under Section 230 thereof, supra,
all tax exemption privileges in general.
This thus raises the question of whether or not the Citys Revenue Code pursuant to
which the city treasurer of Quezon City levied real property taxes against Bayantels real
properties located within the City effectively withdrew the tax exemption enjoyed by
Bayantel under its franchise, as amended.
Bayantel answers the poser in the negative arguing that once again it is only "liable to
pay the same taxes, as any other persons or corporations on all its real or personal
properties, exclusive of its franchise."
Bayantels posture is well-taken. While the system of local government taxation has
changed with the onset of the 1987 Constitution, the power of local government units to
tax is still limited. As we explained in Mactan Cebu International Airport Authority:
10

The power to tax is primarily vested in the Congress; however, in our jurisdiction, it may
be exercised by local legislative bodies, no longer merely be virtue of a valid delegation
as before, but pursuant to direct authority conferred by Section 5, Article X of the
Constitution. Under the latter, the exercise of the power may be subject to such
guidelines and limitations as the Congress may provide which, however, must be
consistent with the basic policy of local autonomy. (at p. 680; Emphasis supplied.)
Clearly then, while a new slant on the subject of local taxation now prevails in the sense
that the former doctrine of local government units delegated power to tax had been
effectively modified with Article X, Section 5 of the 1987 Constitution now in place, .the
basic doctrine on local taxation remains essentially the same. For as the Court stressed
in Mactan, "the power to tax is [still] primarily vested in the Congress."
This new perspective is best articulated by Fr. Joaquin G. Bernas, S.J., himself a
Commissioner of the 1986 Constitutional Commission which crafted the 1987
Constitution, thus:
What is the effect of Section 5 on the fiscal position of municipal corporations? Section
5 does not change the doctrine that municipal corporations do not possess inherent
powers of taxation. What it does is to confer municipal corporations a general power to
levy taxes and otherwise create sources of revenue. They no longer have to wait for a
statutory grant of these powers. The power of the legislative authority relative to the
fiscal powers of local governments has been reduced to the authority to impose
limitations on municipal powers. Moreover, these limitations must be "consistent with
the basic policy of local autonomy." The important legal effect of Section 5 is thus to
reverse the principle that doubts are resolved against municipal corporations.
Henceforth, in interpreting statutory provisions on municipal fiscal powers, doubts will be
resolved in favor of municipal corporations. It is understood, however, that taxes
imposed by local government must be for a public purpose, uniform within a locality,
must not be confiscatory, and must be within the jurisdiction of the local unit to
pass.
11
In net effect, the controversy presently before the Court involves, at bottom, a clash
between the inherent taxing power of the legislature, which necessarily includes the
power to exempt, and the local governments delegated power to tax under the aegis of
the 1987 Constitution.
Now to go back to the Quezon City Revenue Code which imposed real estate taxes on
all real properties within the citys territory and removed exemptions theretofore
"previously granted to, or presently enjoyed by all persons, whether natural or juridical
.,"
12
there can really be no dispute that the power of the Quezon City Government to
tax is limited by Section 232 of the LGC which expressly provides that "a province or
city or municipality within the Metropolitan Manila Area may levy an annual ad valorem
tax on real property such as land, building, machinery, and other improvement not
hereinafter specifically exempted." Under this law, the Legislature highlighted its power
to thereafter exempt certain realties from the taxing power of local government units. An
interpretation denying Congress such power to exempt would reduce the phrase "not
hereinafter specifically exempted" as a pure jargon, without meaning whatsoever.
Needless to state, such absurd situation is unacceptable.
For sure, in Philippine Long Distance Telephone Company, Inc. (PLDT) vs. City of
Davao,
13
this Court has upheld the power of Congress to grant exemptions over the
power of local government units to impose taxes. There, the Court wrote:
Indeed, the grant of taxing powers to local government units under the Constitution and
the LGC does not affect the power of Congress to grant exemptions to certain persons,
pursuant to a declared national policy. The legal effect of the constitutional grant to local
governments simply means that in interpreting statutory provisions on municipal taxing
powers, doubts must be resolved in favor of municipal corporations. (Emphasis
supplied.)
As we see it, then, the issue in this case no longer dwells on whether Congress has the
power to exempt Bayantels properties from realty taxes by its enactment of Rep. Act
No. 7633 which amended Bayantels original franchise. The more decisive question
turns on whether Congress actually did exempt Bayantels properties at all by virtue of
Section 11 of Rep. Act No. 7633.
Admittedly, Rep. Act No. 7633 was enacted subsequent to the LGC. Perfectly aware
that the LGC has already withdrawn Bayantels former exemption from realty taxes,
Congress opted to pass Rep. Act No. 7633 using, under Section 11 thereof, exactly the
same defining phrase "exclusive of this franchise" which was the basis for Bayantels
exemption from realty taxes prior to the LGC. In plain language, Section 11 of Rep. Act
No. 7633 states that "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 are now or hereafter may be required by law
to pay." The Court views this subsequent piece of legislation as an express and real
intention on the part of Congress to once again remove from the LGCs delegated
taxing power, all of the franchisees (Bayantels) properties that are actually, directly and
exclusively used in the pursuit of its franchise.
WHEREFORE, the petition is DENIED.
No pronouncement as to costs.
SO ORDERED.
CANCIO C. GARCIA
Associate Justice
WE CONCUR:
City Government of QC vs. Bayantel
Post under case digests, Remedial Law at Wednesday, February 29, 2012 Posted by Schizophrenic Mind
Facts: Section 234 of the Local Government Code
withdrew any exemption from realty tax granted to or
enjoyed by all persons, natural or juridical.

Thereafter, Congress enacted Rep. Act No. 7633,
amending Bayantels original franchise. It provided that the
same, 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 are now or hereafter may be required by law
to pay.

Within the territorial boundary of Quezon City, Bayantel
owned several real properties on which it maintained
various telecommunications facilities.

In 1993, the government of Quezon City, pursuant to the
taxing power vested on local government units by Section
5, Article X of the 1987 Constitution, in relation to Section
232 of the LGC, enacted City Ordinance No. SP-91, S-93,
otherwise known as the Quezon City Revenue Code
(QCRC), imposing, under Section 5 thereof, a real
property tax on all real properties in Quezon City, and,
reiterating in its Section 6, the withdrawal of exemption
from real property tax under Section 234 of the LGC.
Furthermore, much like the LGC, the QCRC, under its
Section 230, withdrew tax exemption privileges in
general.

Conformably with the Citys Revenue Code, new tax
declarations for Bayantels real properties in Quezon City
were issued by the City Assessor. Bayantel wrote the
office of the City Assessor seeking the exclusion of its real
properties in the city from the roll of taxable real
properties. With its request having been denied, Bayantel
interposed an appeal with the Local Board of Assessment
Appeals (LBAA). And, evidently on its firm belief of its
exempt status, Bayantel did not pay the real property
taxes assessed against it by the Quezon City
government.

On account thereof, the Quezon City Treasurer sent out
notices of delinquency , followed by the issuance of
several warrants of levy against Bayantels properties
preparatory to their sale at a public auction.

Threatened with the imminent loss of its properties,
Bayantel immediately withdrew its appeal with the LBAA
and instead filed with the RTC of Quezon City a petition
for prohibition with an urgent application for a temporary
restraining order (TRO) and/or writ of preliminary
injunction.

In the eve of the public auction, the lower court issued a
TRO, followed, after due hearing, by a writ of preliminary
injunction.

RTC: declared exempt from real estate taxation the
properties of Bayantel in QC. Denied petitioner's motion
for reconsideration having been denied .

Petitioners elevated the case directly to the Supreme
Court on pure questions of law.

Petitioners: Bayantel had failed to avail itself of the
administrative remedies provided for under the LGC, thus
the trial court erred in giving due course to Bayantels
petition for prohibition. The appeal mechanics under the
LGC constitute Bayantels plain and speedy remedy in this
case.

Issue: Whether or not Bayantel's failure to appeal its case
to the LBAA precludes its filing of a petition for prohibition.

Held: NO.

With the reality that Bayantels real properties were
already levied upon on account of its nonpayment of real
estate taxes thereon, an appeal to the LBAA is not a
speedy and adequate remedy within the context of the
aforequoted Section 2 of Rule 65. This is not to mention of
the auction sale of said properties already scheduled.

Moreover, one of the recognized exceptions to the
exhaustion- of-administrative remedies rule is when, as
here, only legal issues are to be resolved. In fact, the
Court, cognizant of the nature of the questions presently
involved, gave due course to the instant petition.

An appeal to the LBAA, to be properly considered,
required prior payment under protest of the amount of
P43,878,208.18, a figure which, in the light of the then
prevailing Asian financial crisis, may have been difficult to
raise up. Given this reality, an appeal to the LBAA may not
be considered as a plain, speedy and adequate remedy. It
is thus understandable why Bayantel opted to withdraw its
earlier appeal with the LBAA and, instead, filed its petition
for prohibition with urgent application for injunctive relief.

EN BANC

ABAKADA GURO PARTY LIST (Formerly
AASJAS) OFFICERS SAMSON S.
ALCANTARA and ED VINCENT S.
ALBANO,
G.R. No. 168056
Petitioners, Present:

DAVIDE, JR., C.J.,
PUNO,
PANGANIBAN,
QUISUMBING,
YNARES-SANTIAGO,
SANDOVAL-GUTIERREZ,
- versus - CARPIO,
AUSTRIA-MARTINEZ,
CORONA,
CARPIO-MORALES,
CALLEJO, SR.,
AZCUNA,
TINGA,
CHICO-NAZARIO, and
GARCIA, JJ.
THE HONORABLE EXECUTIVE
SECRETARY EDUARDO ERMITA;
HONORABLE SECRETARY OF THE
DEPARTMENT OF FINANCE CESAR
PURISIMA; and HONORABLE
COMMISSIONER OF INTERNAL
REVENUE GUILLERMO PARAYNO, JR.,

Respondents.

x - - - - - - - - - - - - - - - - - - - - - - - - - x

AQUILINO Q. PIMENTEL, JR., LUISA P.
EJERCITO-ESTRADA, JINGGOY E.
G.R. No. 168207
ESTRADA, PANFILO M. LACSON,
ALFREDO S. LIM, JAMBY A.S.
MADRIGAL, AND SERGIO R. OSMEA
III,
Petitioners,

- versus -

EXECUTIVE SECRETARY EDUARDO R.
ERMITA, CESAR V. PURISIMA,
SECRETARY OF FINANCE, GUILLERMO
L. PARAYNO, JR., COMMISSIONER OF
THE BUREAU OF INTERNAL REVENUE,

Respondents.

x - - - - - - - - - - - - - - - - - - - - - - - - - x

ASSOCIATION OF PILIPINAS SHELL
DEALERS, INC. represented by its
President, ROSARIO ANTONIO;
PETRON DEALERS ASSOCIATION
represented by its President, RUTH E.
BARBIBI; ASSOCIATION OF CALTEX
DEALERS OF THE PHILIPPINES
represented by its President,
MERCEDITAS A. GARCIA; ROSARIO
ANTONIO doing business under the
G.R. No. 168461
name and style of ANB NORTH SHELL
SERVICE STATION; LOURDES
MARTINEZ doing business under the
name and style of SHELL GATE N.
DOMINGO; BETHZAIDA TAN doing
business under the name and style of
ADVANCE SHELL STATION;
REYNALDO P. MONTOYA doing
NEW LAMUAN SHELL SERVICE
STATION; EFREN SOTTO doing
RED FIELD SHELL SERVICE STATION;
DONICA CORPORATION represented
by its President, DESI TOMACRUZ;
RUTH E. MARBIBI doing business under
the name and style of R&R PETRON
STATION; PETER M. UNGSON doing
CLASSIC STAR GASOLINE SERVICE
STATION; MARIAN SHEILA A. LEE
doing business under the name and
style of NTE GASOLINE & SERVICE
STATION; JULIAN CESAR P. POSADAS
doing business under the name and
style of STARCARGA ENTERPRISES;
ADORACION MAEBO doing business
under the name and style of CMA
MOTORISTS CENTER; SUSAN M.
ENTRATA doing business under the
name and style of LEONAS GASOLINE
STATION and SERVICE CENTER;
CARMELITA BALDONADO doing
FIRST CHOICE SERVICE CENTER;
MERCEDITAS A. GARCIA doing business
under the name and style of LORPED
SERVICE CENTER; RHEAMAR A.
RAMOS doing business under the
name and style of RJRAM PTT GAS
STATION; MA. ISABEL VIOLAGO doing
VIOLAGO-PTT SERVICE CENTER;
MOTORISTS HEART CORPORATION
represented by its Vice-President for
Operations, JOSELITO F. FLORDELIZA;
MOTORISTS HARVARD CORPORATION
MOTORISTS HERITAGE CORPORATION
PHILIPPINE STANDARD OIL
CORPORATION represented by its Vice-
President for Operations, JOSELITO F.
FLORDELIZA; ROMEO MANUEL doing
ROMMAN GASOLINE STATION;
ANTHONY ALBERT CRUZ III doing
TRUE SERVICE STATION,
Petitioners,

- versus -

CESAR V. PURISIMA, in his capacity as
Secretary of the Department of
Finance and GUILLERMO L. PARAYNO,
JR., in his capacity as Commissioner of
Internal Revenue,

Respondents.

x - - - - - - - - - - - - - - - - - - - - - - - - - x

FRANCIS JOSEPH G. ESCUDERO,
VINCENT CRISOLOGO, EMMANUEL
JOEL J. VILLANUEVA, RODOLFO G.
PLAZA, DARLENE ANTONINO-
CUSTODIO, OSCAR G. MALAPITAN,
BENJAMIN C. AGARAO, JR. JUAN
EDGARDO M. ANGARA, JUSTIN MARC
SB. CHIPECO, FLORENCIO G. NOEL,
MUJIV S. HATAMAN, RENATO B.
MAGTUBO, JOSEPH A. SANTIAGO,
TEOFISTO DL. GUINGONA III, RUY ELIAS
C. LOPEZ, RODOLFO Q. AGBAYANI and
TEODORO A. CASIO,
G.R. No. 168463
Petitioners,

- versus -

CESAR V. PURISIMA, in his capacity as
Secretary of Finance, GUILLERMO L.
PARAYNO, JR., in his capacity as
Commissioner of Internal Revenue,
and EDUARDO R. ERMITA, in his
capacity as Executive Secretary,

Respondents.

x - - - - - - - - - - - - - - - - - - - - - - - - - x

BATAAN GOVERNOR ENRIQUE T.
GARCIA, JR.
G.R. No. 168730
Petitioner,

- versus -

HON. EDUARDO R. ERMITA, in his
capacity as the Executive Secretary;
HON. MARGARITO TEVES, in his
capacity as Secretary of Finance; HON.
JOSE MARIO BUNAG, in his capacity as
the OIC Commissioner of the Bureau of
Internal Revenue; and HON.
ALEXANDER AREVALO, in his capacity
as the OIC Commissioner of the Bureau

of Customs,

Promulgated:
Respondents. September 1, 2005

x - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - x

D E C I S I O N

AUSTRIA-MARTINEZ, J.:

The expenses of government, having for their object the interest
of all, should be borne by everyone, and the more man enjoys the
advantages of society, the more he ought to hold himself honored in
contributing to those expenses.
-Anne Robert Jacques Turgot (1727-1781)
French statesman and economist

Mounting budget deficit, revenue generation, inadequate fiscal allocation
for education, increased emoluments for health workers, and wider coverage for
full value-added tax benefits these are the reasons why Republic Act No. 9337
(R.A. No. 9337)
[1]
was enacted. Reasons, the wisdom of which, the Court even
with its extensive constitutional power of review, cannot probe. The petitioners
in these cases, however, question not only the wisdom of the law, but also
perceived constitutional infirmities in its passage.

Every law enjoys in its favor the presumption of constitutionality. Their
arguments notwithstanding, petitioners failed to justify their call for the invalidity
of the law. Hence, R.A. No. 9337 is not unconstitutional.

LEGISLATIVE HISTORY

R.A. No. 9337 is a consolidation of three legislative bills namely, House Bill
Nos. 3555 and 3705, and Senate Bill No. 1950.

House Bill No. 3555
[2]
was introduced on first reading on January 7, 2005.
The House Committee on Ways and Means approved the bill, in substitution of
House Bill No. 1468, which Representative (Rep.) Eric D. Singson introduced
on August 8, 2004. The President certified the bill on January 7, 2005 for
immediate enactment. On January 27, 2005, the House of Representatives
approved the bill on second and third reading.

House Bill No. 3705
[3]
on the other hand, substituted House Bill No. 3105
introduced by Rep. Salacnib F. Baterina, and House Bill No. 3381 introduced by
Rep. Jacinto V. Paras. Its mother bill is House Bill No. 3555. The House
Committee on Ways and Means approved the bill on February 2, 2005. The
President also certified it as urgent on February 8, 2005. The House of
Representatives approved the bill on second and third reading on February 28,
2005.

Meanwhile, the Senate Committee on Ways and Means approved Senate
Bill No. 1950
[4]
on March 7, 2005, in substitution of Senate Bill Nos. 1337, 1838
and 1873, taking into consideration House Bill Nos. 3555 and 3705. Senator
Ralph G. Recto sponsored Senate Bill No. 1337, while Senate Bill Nos. 1838 and
1873 were both sponsored by Sens. Franklin M. Drilon, Juan M. Flavier and Francis
N. Pangilinan. The President certified the bill on March 11, 2005, and was
approved by the Senate on second and third reading on April 13, 2005.

On the same date, April 13, 2005, the Senate agreed to the request of the
House of Representatives for a committee conference on the disagreeing
provisions of the proposed bills.

Before long, the Conference Committee on the Disagreeing Provisions of
House Bill No. 3555, House Bill No. 3705, and Senate Bill No. 1950, after having
met and discussed in full free and conference, recommended the approval of its
report, which the Senate did on May 10, 2005, and with the House of
Representatives agreeing thereto the next day, May 11, 2005.

On May 23, 2005, the enrolled copy of the consolidated House and Senate
version was transmitted to the President, who signed the same into law on May
24, 2005. Thus, came R.A. No. 9337.

July 1, 2005 is the effectivity date of R.A. No. 9337.
[5]
When said date came,
the Court issued a temporary restraining order, effective immediately and
continuing until further orders, enjoining respondents from enforcing and
implementing the law.

Oral arguments were held on July 14, 2005. Significantly, during the
hearing, the Court speaking through Mr. Justice Artemio V. Panganiban, voiced
the rationale for its issuance of the temporary restraining order on July 1, 2005, to
wit:
J. PANGANIBAN : . . . But before I go into the details of your presentation, let
me just tell you a little background. You know when the law
took effect on July 1, 2005, the Court issued a TRO at about 5
oclock in the afternoon. But before that, there was a lot of
complaints aired on television and on radio. Some people in a
gas station were complaining that the gas prices went up by
10%. Some people were complaining that their electric bill will
go up by 10%. Other times people riding in domestic air carrier
were complaining that the prices that theyll have to pay would
have to go up by 10%. While all that was being aired, per your
presentation and per our own understanding of the law, thats
not true. Its not true that the e-vat law necessarily increased
prices by 10% uniformly isnt it?

ATTY. BANIQUED : No, Your Honor.

J. PANGANIBAN : It is not?

ATTY. BANIQUED : Its not, because, Your Honor, there is an Executive Order that
granted the Petroleum companies some subsidy . . . interrupted

J. PANGANIBAN : Thats correct . . .

ATTY. BANIQUED : . . . and therefore that was meant to temper the impact . . .
interrupted

J. PANGANIBAN : . . . mitigating measures . . .

ATTY. BANIQUED : Yes, Your Honor.

J. PANGANIBAN : As a matter of fact a part of the mitigating measures would
be the elimination of the Excise Tax and the import duties. That
is why, it is not correct to say that the VAT as to petroleum
dealers increased prices by 10%.


J. PANGANIBAN : And therefore, there is no justification for increasing the retail
price by 10% to cover the E-Vat tax. If you consider the excise
tax and the import duties, the Net Tax would probably be in the
neighborhood of 7%? We are not going into exact figures I am
just trying to deliver a point that different industries, different
products, different services are hit differently. So its not
correct to say that all prices must go up by 10%.
ATTY. BANIQUED : Youre right, Your Honor.

J. PANGANIBAN : Now. For instance, Domestic Airline companies, Mr. Counsel,
are at present imposed a Sales Tax of 3%. When this E-Vat law
took effect the Sales Tax was also removed as a mitigating
measure. So, therefore, there is no justification to increase the
fares by 10% at best 7%, correct?

ATTY. BANIQUED : I guess so, Your Honor, yes.

J. PANGANIBAN : There are other products that the people were complaining
on that first day, were being increased arbitrarily by 10%. And
thats one reason among many others this Court had to issue
TRO because of the confusion in the implementation. Thats
why we added as an issue in this case, even if its tangentially
taken up by the pleadings of the parties, the confusion in the
implementation of the E-vat. Our people were subjected to the
mercy of that confusion of an across the board increase of 10%,
which you yourself now admit and I think even the Government
will admit is incorrect. In some cases, it should be 3% only, in
some cases it should be 6% depending on these mitigating
measures and the location and situation of each product, of
each service, of each company, isnt it?


J. PANGANIBAN : Alright. So thats one reason why we had to issue a TRO
pending the clarification of all these and we wish the
government will take time to clarify all these by means of a
more detailed implementing rules, in case the law is upheld by
this Court. . . .
[6]

The Court also directed the parties to file their respective Memoranda.

G.R. No. 168056

Before R.A. No. 9337 took effect, petitioners ABAKADA GURO Party List, et
al., filed a petition for prohibition on May 27, 2005. They question the
constitutionality of Sections 4, 5 and 6 of R.A. No. 9337, amending Sections 106,
107 and 108, respectively, of the National Internal Revenue Code (NIRC). Section
4 imposes a 10% VAT on sale of goods and properties, Section 5 imposes a 10%
VAT on importation of goods, and Section 6 imposes a 10% VAT on sale of services
and use or lease of properties. These questioned provisions contain a
uniform proviso authorizing the President, upon recommendation of the
Secretary of Finance, to raise the VAT rate to 12%, effective January 1, 2006, after
any of the following conditions have been satisfied, to wit:

. . . That the President, upon the recommendation of the Secretary of Finance,
shall, effective January 1, 2006, raise the rate of value-added tax to twelve percent
(12%), after any of the following conditions has been satisfied:

(i) Value-added tax collection as a percentage of Gross Domestic Product (GDP)
of the previous year exceeds two and four-fifth percent (2 4/5%); or

(ii) National government deficit as a percentage of GDP of the previous year
exceeds one and one-half percent (1 %).

Petitioners argue that the law is unconstitutional, as it constitutes
abandonment by Congress of its exclusive authority to fix the rate of taxes under
Article VI, Section 28(2) of the 1987 Philippine Constitution.

G.R. No. 168207

On June 9, 2005, Sen. Aquilino Q. Pimentel, Jr., et al., filed a petition
for certiorari likewise assailing the constitutionality of Sections 4, 5 and 6 of R.A.
No. 9337.
Aside from questioning the so-called stand-by authority of the President to
increase the VAT rate to 12%, on the ground that it amounts to an undue
delegation of legislative power, petitioners also contend that the increase in the
VAT rate to 12% contingent on any of the two conditions being satisfied violates
the due process clause embodied in Article III, Section 1 of the Constitution, as it
imposes an unfair and additional tax burden on the people, in that: (1) the 12%
increase is ambiguous because it does not state if the rate would be returned to
the original 10% if the conditions are no longer satisfied; (2) the rate is unfair and
unreasonable, as the people are unsure of the applicable VAT rate from year to
year; and (3) the increase in the VAT rate, which is supposed to be an incentive to
the President to raise the VAT collection to at least 2
4
/
5
of the GDP of the
previous year, should only be based on fiscal adequacy.

Petitioners further claim that the inclusion of a stand-by authority granted
to the President by the Bicameral Conference Committee is a violation of the no-
amendment rule upon last reading of a bill laid down in Article VI, Section 26(2)
of the Constitution.

G.R. No. 168461

Thereafter, a petition for prohibition was filed on June 29, 2005, by the
Association of Pilipinas Shell Dealers, Inc., et al., assailing the following provisions
of R.A. No. 9337:
1) Section 8, amending Section 110 (A)(2) of the NIRC, requiring that the input tax
on depreciable goods shall be amortized over a 60-month period, if the
acquisition, excluding the VAT components, exceeds One Million Pesos (P1,
000,000.00);

2) Section 8, amending Section 110 (B) of the NIRC, imposing a 70% limit on the
amount of input tax to be credited against the output tax; and
Case Digest

ABAKADA Guro Party List vs. Ermita

G.R. No. 168056 September 1, 2005

FACTS:
Before R.A. No. 9337 took effect, petitioners ABAKADA GURO Party List, et al., filed a
petition for prohibition on May 27, 2005 questioning the constitutionality of Sections 4, 5
and 6 of R.A. No. 9337, amending Sections 106, 107 and 108, respectively, of the National
Internal Revenue Code (NIRC). Section 4 imposes a 10% VAT on sale of goods and
properties, Section 5 imposes a 10% VAT on importation of goods, and Section 6 imposes a
10% VAT on sale of services and use or lease of properties. These questioned provisions
contain a uniformp ro v is o authorizing the President, upon recommendation of the
Secretary of Finance, to raise the VAT rate to 12%, effective January 1, 2006, after
specified conditions have been satisfied. Petitioners argue that the law is unconstitutional.

ISSUES:

1. Whether or not there is a violation of Article VI, Section 24 of the Constitution.

2. Whether or not there is undue delegation of legislative power in violation of Article VI
Sec 28(2) of the Constitution.

3. Whether or not there is a violation of the due process and equal protection under
Article III Sec. 1 of the Constitution.

RULING:

1. Since there is no question that the revenue bill exclusively originated in the House of
Representatives, the Senate was acting within its constitutional power to introduce
amendments to the House bill when it included provisions in Senate Bill No. 1950 amending
corporate income taxes, percentage, and excise and franchise taxes.

2. There is no undue delegation of legislative power but only of the discretion as to the
execution of a law. This is constitutionally permissible. Congress does not abdicate its
functions or unduly delegate power when it describes what job must be done, who must do
it, and what is the scope of his authority; in our complex economy that is frequently the
only way in which the legislative process can go forward.

3. The power of the State to make reasonable and natural classifications for the purposes
of taxation has long been established. Whether it relates to the subject of taxation, the
kind of property, the rates to be levied, or the amounts to be raised, the methods of
assessment, valuation and collection, the States power is entitled to presumption of
validity. As a rule, the judiciary will not interfere with such power absent a clear showing
of unreasonableness, discrimination, or arbitrariness.
SUPREME COURT
Manila
EN BANC
G.R. No. L-42780 January 17, 1936
MANILA GAS CORPORATION, plaintiff-appellant,
vs.
THE COLLECTOR OF INTERNAL REVENUE, defendant-appellee.
DeWitt, Perkins and Ponce Enrile for appellant.
Office of the Solicitor-General Hilado for appellee.
MALCOLM, J .:
This is an action brought by the Manila Gas Corporation against the Collector of Internal
Revenue for the recovery of P56,757.37, which the plaintiff was required by the
defendant to deduct and withhold from the various sums paid it to foreign corporations
as dividends and interest on bonds and other indebtedness and which the plaintiff paid
under protest. On the trial court dismissing the complaint, with costs, the plaintiff
appealed assigning as the principal errors alleged to have been committed the
following:
1. The trial court erred in holding that the dividends paid by the plaintiff
corporation were subject to income tax in the hands of its stockholders, because
to impose the tax thereon would be to impose a tax on the plaintiff, in violation of
the terms of its franchise, and would, moreover, be oppressive and inequitable.
2. The trial court erred in not holding that the interest on bonds and other
indebtedness of the plaintiff corporation, paid by it outside of the Philippine
Islands to corporations not residing therein, were not, on the part of the recipients
thereof, income from Philippine sources, and hence not subject to Philippine
income tax.
The facts, as stated by the appellant and as accepted by the appellee, may be
summarized as follows: The plaintiff is a corporation organized under the laws of the
Philippine Islands. It operates a gas plant in the City of Manila and furnishes gas service
to the people of the metropolis and surrounding municipalities by virtue of a franchise
granted to it by the Philippine Government. Associated with the plaintiff are the Islands
Gas and Electric Company domiciled in New York, United States, and the General
Finance Company domiciled in Zurich, Switzerland. Neither of these last mentioned
corporations is resident in the Philippines.
For the years 1930, 1931, and 1932, dividends in the sum of P1,348,847.50 were paid
by the plaintiff to the Islands Gas and Electric Company in the capacity of stockholders
upon which withholding income taxes were paid to the defendant totalling P40,460.03
For the same years interest on bonds in the sum of P411,600 was paid by the plaintiff to
the Islands Gas and Electric Company upon which withholding income taxes were paid
to the defendant totalling P12,348. Finally for the stated time period, interest on other
indebtedness in the sum of P131,644,90 was paid by the plaintiff to the Islands Gas and
Electric Company and the General Finance Company respectively upon which
withholding income taxes were paid to the defendant totalling P3,949.34.
Some uncertainty existing regarding the place of payment, we will not go into this factor
of the case at this point, except to remark that the bonds and other tokens of
indebtedness are not to be found in the record. However, Exhibits E, F, and G, certified
correct by the Treasurer of the Manila Gas Corporation, purport to prove that the place
of payment was the United States and Switzerland.
The appeal naturally divides into two subjects, one covered by the first assigned error,
and the other by the second assigned error. We shall discuss these subjects and errors
in order.
1. Appellant first contends that the dividends paid by it to its stockholders, the
Islands Gas and Electric Company , were not subject to tax because to impose a
tax thereon would be to do so on the plaintiff corporation, in violation of the terms
of its franchise and would, moreover, be oppressive and inequitable. This
argument is predicated on the constitutional provision that no law impairing the
obligation of contracts shall be enacted. The particular portion of the franchise
which is invoked provides:
The grantee shall annually on the fifth day of January of each year pay to
the City of Manila and the municipalities in the Province of Rizal in which
gas is sold, two and one half per centum of the gross receipts within said
city and municipalities, respectively, during the preceding year. Said
payment shall be in lieu of all taxes, Insular, provincial and municipal,
except taxes on the real estate, buildings, plant, machinery, and other
personal property belonging to the grantee.
The trial judge was of the opinion that the instant case was governed by our
previous decision in the case ofPhilippine Telephone and Telegraph Co., vs.
Collector of Internal Revenue ([1933], 58 Phil. 639). In this view we concur. It is
true that the tax exemption provision relating to the Manila Gas Corporation
hereinbefore quoted differs in phraseology from the tax exemption provision to be
found in the franchise of the Telephone and Telegraph Company, but the ratio
decidendi of the two cases is substantially the same. As there held and as now
confirmed, a corporation has a personality distinct from that of its stockholders,
enabling the taxing power to reach the latter when they receive dividends from
the corporation. It must be considered as settled in this jurisdiction that dividends
of a domestic corporation, which are paid and delivered in cash to foreign
corporations as stockholders, are subject to the payment in the income tax, the
exemption clause in the charter of the corporation notwithstanding.
For the foreign reasons, we are led to sustain the decision of the trial court and to
overrule appellant's first assigned error.
2. In support of its second assignment of error, appellant contends that, as the
Islands Gas and Electric Company and the General Finance Company are
domiciled in the United States and Switzerland respectively, and as the interest
on the bonds and other indebtedness earned by said corporations has been paid
in their respective domiciles, this is not income from Philippine sources within the
meaning of the Philippine Income Tax Law. Citing sections 10 (a) and 13 (e) of
Act No. 2833, the Income Tax Law, appellant asserts that their applicability has
been squarely determined by decisions of this court in the cases ofManila
Railroad Co. vs. Collector of Internal Revenue (No. 31196, promulgated
December 2, 1929, nor reported), and Philippine Railway Co. vs. Posadas (No.
38766, promulgated October 30, 1933 [58 Phil., 968]) wherein it was held that
interest paid to non-resident individuals or corporations is not income from
Philippine sources, and hence not subject to the Philippine Income Tax. The
Solicitor-General answers with the observation that the cited decisions
interpreted the Income Tax Law before it was amended by Act No. 3761 to cover
the interest on bonds and other obligations or securities paid "within or without
the Philippine Islands." Appellant rebuts this argument by "assuming, for the sake
of the argument, that by the amendment introduced to section 13 of Act No. 2833
by Act No. 3761 the Legislature intended the interest from Philippine sources and
so is subject to tax," but with the necessary sequel that the amendatory statute is
invalid and unconstitutional as being the power of the Legislature to enact.
Taking first under observation that last point, it is to be observed that neither in the
pleadings, the decision of the trial court, nor the assignment of errors, was the question
of the validity of Act No. 3761 raised. Under such circumstances, and no jurisdictional
issue being involved, we do not feel that it is the duty of the court to pass on the
constitutional question, and accordingly will refrain from doing so. (Cadwaller-Gibson
Lumber Co. vs. Del Rosario [1913], 26 Phil., 192; Macondray and Co. vs. Benito and
Ocampo, P. 137, ante; State vs. Burke [1912], 175 Ala., 561.)
As to the applicability of the local cases cited and of the Porto Rican case of
Domenech vs. United Porto Rican Sugar co. ([1932], 62 F. [2d], 552), we need only
observe that these cases announced good law, but that each he must be decided on its
particular facts. In other words, in the opinion of the majority of the court, the facts at bar
and the facts in those cases can be clearly differentiated. Also, in the case at bar there
is some uncertainty concerning the place of payment, which under one view could be
considered the Philippines and under another view the United States and Switzerland,
but which cannot be definitely determined without the necessary documentary evidence
before, us.
The approved doctrine is that no state may tax anything not within its jurisdiction without
violating the due process clause of the constitution. The taxing power of a state does
not extend beyond its territorial limits, but within such it may tax persons, property,
income, or business. If an interest in property is taxed, the situs of either the property or
interest must be found within the state. If an income is taxed, the recipient thereof must
have a domicile within the state or the property or business out of which the income
issues must be situated within the state so that the income may be said to have a situs
therein. Personal property may be separated from its owner, and he may be taxed on its
account at the place where the property is although it is not the place of his own
domicile and even though he is not a citizen or resident of the state which imposes the
tax. But debts owing by corporations are obligations of the debtors, and only possess
value in the hands of the creditors. (Farmers Loan Co. vs. Minnesota [1930], 280 U.S.,
204; Union Refrigerator Transit Co. vs. Kentucky [1905], 199 U.S., 194 State Tax on
Foreign held Bonds [1873, 15 Wall., 300; Bick vs. Beach [1907], 206 U. S., 392;
State ex rel. Manitowoc Gas Co. vs. Wig. Tax Comm. [1915], 161 Wis., 111; United
States Revenue Act of 1932, sec. 143.)
These views concerning situs for taxation purposes apply as well to an organized,
unincorporated territory or to a Commonwealth having the status of the Philippines.
Pushing to one side that portion of Act No. 3761 which permits taxation of interest on
bonds and other indebtedness paid without the Philippine Islands, the question is if the
income was derived from sources within the Philippine Islands.
In the judgment of the majority of the court, the question should be answered in the
affirmative. The Manila Gas Corporation operates its business entirely within the
Philippines. Its earnings, therefore come from local sources. The place of material
delivery of the interest to the foreign corporations paid out of the revenue of the
domestic corporation is of no particular moment. The place of payment even if
conceded to be outside of tho country cannot alter the fact that the income was derived
from the Philippines. The word "source" conveys only one idea, that of origin, and the
origin of the income was the Philippines.
In synthesis, therefore, we hold that conditions have not been provided which justify the
court in passing on the constitutional question suggested; that the facts while somewhat
obscure differ from the facts to be found in the cases relied upon, and that the Collector
of Internal Revenue was justified in withholding income taxes on interest on bonds and
other indebtedness paid to non-resident corporations because this income was received
from sources within the Philippine Islands as authorized by the Income Tax Law. For the
foregoing reasons, the second assigned error will be overruled.
Before concluding, it is but fair to state that the writer's opinion on the first subject and
the first assigned error herein discussed is accurately set forth, but that his opinion on
the second subject and the second assigned error is not accurately reflected, because
on this last division his views coincide with those of the appellant. However, in the
interest of the prompt disposition of this case, the decision has been written up in
accordance with instructions received from the court.
Judgment affirmed, with the cost of this instance assessed against the appellant.
Hull, Vickers, Imperial, Butte, and Recto, JJ., concur.

Separate Opinions
VILLA-REAL, J ., concurring and dissenting:
I concur with the majority decision regarding the disposition of the second error, but
dissent as to its disposition of the first error. In my opinion, the exemption clause to be
found in the charter of the plaintiff is broader in scope than that to be found in the
charter of the Philippine Telephone and Telegraph Company, thus making inapplicable
the decision of this court in the case of Philippine Telephone and Telegraph Co. vs.
Collector of Internal Revenue (58 Phil., 639).
ABAD SANTOS, J ., concurring in part and dissenting in part:
I am of opinion that the first assignment of error should be sustained and the judgment
below reversed in that respect.
The franchise held by the appellant corporation contains a stipulation by the
Government to the effect that the payment by the corporation to the entities named in
the franchise of two and one-half per centum of its gross receipts, shall be in lieu of all
taxes, except taxes on the real estate, buildings, plant, machinery and other personal
property belonging to the corporation. The dividends paid by the appellant corporation
to its stockholders were a part of its earnings and as such not subject to tax under the
terms of the franchise. The franchise in this case is a contract, the obligation of which
can not be impaired.
I agree with the majority of the court that the second assignment of error should be
overruled, and the judgment affirmed in that particular.
Section 13 (e) of Act No. 2833, as amended by Act No. 3761, expressly provides for the
imposition of a tax "... upon the income derived from interest upon bonds and
mortgages, or deeds of trust, notes, or other interest-bearing obligations of a domestic
or resident foreign corporation, ..." The income derived from the interest on bonds and
other indebtedness of the appellant corporation, is clearly within the purview of the
statute. The power of the legislature to impose such a tax must be recognized. As
stated by Justice Bradley in United States vs. Erie R. Co. (106 U.S., 327; 27 Law. ed.,
151, 153) : "... The tax laid upon their bonds was intended to affect the owners of the
bonds, and whilst the companies were directed to pay it, they were authorized to retain
the amount from the installments due to the bondholders, whether citizens or aliens.
The objection that Congress had no power to tax non-resident aliens, is met by the fact
that the tax was not assessed against them personally, but against the rem, the credit,
the debt due to them. Congress has the right to tax all property within the jurisdiction of
the United States, with certain exceptions not necessary to be noted. The money due to
non-resident bondholders in this case was in the United States in the hands of the
company before it could be transmitted to London, or other place where the
bondholders resided. Whilst here it was liable to taxation. Congress, by the internal
revenue law, by way of tax., stopped a part of the money before its transmission,
namely; 5 per cent of it. Plausible grounds for levying such a tax might be assigned. It
might be said that the creditor is protected by our laws in the enjoyment of the debt; that
the whole machinery of our courts and the physical power of the government are placed
at his disposal for its security and collection."
AVANCEA, C.J ., dissenting:
I do not agree with the majority opinion with respect to the appellant's second
assignment of error, which in my opinion should be sustained. The question involved in
this error has been clearly decided by this court in the case of Manila Railroad Co. vs.
Collector of Internal Revenue (G.R. No. 31196, promulgated December 2, 1929, not
reported). In said case it was held that interest on bonds purchased outside the
Philippine Islands by non-residents of the Islands cannot be considered derived from
sources within the Islands. The amendment of the law introduced by Act no. 3761 as to
the place of payment of interest does not affect the aspect of the question raised in this
error if the interest on which the tax in the present case has been collected is not
derived from sources within the Islands, as it is not so in fact, in accordance with the
doctrine laid down in said case of Manila Railroad Co. vs. Collector of Internal Revenue.
GODDARD, J ., dissenting:
The tax exemption and commutation clause in the plaintiffs franchise provides that:
The grantee shall annually on the 5th day of January of each year pay to the City of
Manila and to the municipalities in the Province of Rizal in which gas is sold, two and
one half per centum of the gross receipts within said city and municipalities,
respectively, during the preceding year. Said payment shall be in lieu of all tax, Insular,
provincial and municipal, except taxes on the real estate, buildings, plant, machinery,
and other personal property belonging to the grantee.
This franchise is a contract between the Government and the grantees thereof, whose
rights have been acquired by the plaintiff corporation. In Manila Railroad Co. vs.
Rafferty (40 Phil., 224, 230), this court held that "... Once granted, a charter becomes a
private contract ...." Article 1091 of the Civil Code provides that "Obligations arising from
contract shall have the force of law between the contracting parties and must be
performed in accordance with their stipulations." It follows that as the plaintiff
corporation has paid to the City of Manila and to the municipalities of Rizal, where gas is
sold by it, the franchise tax stipulated in the contract, the Government has no legal right
to impose another tax on its earnings.
The case of Farrington vs. Tennessee (95 U.S., 679; 24 Law. ed., 558), is almost in
exact parallel with the case at bar. The facts of that case were as follows: The Union
and Planters' Bank of Memphis was duly organized under the charter granted by the
Legislature of Tennessee, by two Acts, respectively dated March 20, 1858, and
February 12, 1869. Since its organization it continued doing a regular banking business.
Its capital subscribed and paid in amounted to $675,000, divided into 6,750 shares of
$100 each. Farrington, the plaintiff in error, was the owner of 150 shares, of the value of
$15,000.
The tenth section of the charter of the bank declared:
That said Company shall pay to the State an annual tax of one-half of one per
cent on each share of the capital stock subscribe, which shall be in lieu of all
other taxes.
The State of Tennessee and the County of Shelby, claiming the right under the
Revenue Law of the State, to tax the stock of the plaintiff in error, a stockholder of the
bank, assessed and taxed it for the year 1872. It was assessed at its per value. The tax
imposed by the State was forty cents on the $100, making the state tax $60. The county
tax was $1.20 on the $100, making the county tax $180.
The plaintiff in error denied the right of the State and County to impose these taxes. He
claimed;
(1) That the 10th section of the charter was a contract between the State and the
bank;
(2) That any other tax than that therein specified was expressly forbidden, and.
(3) That the revenue laws imposing the taxes in question impaired the obligation
of the contract.
The Supreme Court of Tennessee adjudge the taxes to be valid and the plaintiff in error
thereupon removed the case to the Federal Supreme Court for review.
In upholding all of the contentions of the plaintiff in error, and pronouncing invalid the
taxes involved as impairing the obligation of the contract created by the franchise, the
United States Supreme court said:
This case turns upon the construction to be given to the 10th section of the
charter of the bank. . . .
x x x x x x x x x
When this charter was granted, the State might have been silent as to taxation.
In that case, the power would have been unfettered. (Bk. vs. Billings, 4 Pet.,
514.) It might have reserved the power as to some things, and yielded it as to
others. It had the power to make its own terms or to refuse the charter. It chose
to stipulate for a specified tax on the and declared and bound itself that this tax
should be "in lieu of all other taxes."
There is no question before us as to the tax imposed on the shares by the
charter. But the State has by her revenue imposed another and an additional tax
on these same shares. This is one of those "other taxes" which it had stipulated
to forego. The identity of the thing doubly taxed is not affected by the fact that in
one case the tax is to be paid vicariously by the bank, and in the other by the
owner of the share himself. The thing thus taxed is to the same, and the second
tax is expressly forbidden by the contract of the parties. After the most careful
consideration, we can come to no other conclusion. Such, we think, must have
been the understanding and intent of the parties when the charter was granted
and the bank was organized. Any other view would ignore the covenant that the
tax specified should be "in lieu of all other taxes." It would blot those terms from
the context, and construe it as if they were not a part of it. . . .
x x x x x x x x x
The decree of the Supreme Court of Tennessee is reversed and the case will be
remanded, with directions to enter a decree in favor of the plaintiff in error.
(Farrington vs. Tennessee, 95 U.S., 679; 24 Law. ed., 560, 561.)
That case, it will be observed, is almost in exact parallel with the case at bar. Both
cases deal with tax commutation provided for in a franchise granted by the State. In
both cases the State covenanted that the tax specified in the franchise should be in lieu
of all other taxes. In both cases the additional tax which the tax authorities sought to
impose was a revenue tax. In both cases the tax provided for in the franchise was paid
by the corporation, and the tax which the authorities attempted to collect were imposed
on the stockholders. In the Farrington case the provision in the Federal Constitution that
"No State shall ... pass any ... law impairing the obligation of contracts" was applied; in
this case the provision of our Organic Law that "no law impairing the obligation of
contracts shall be enacted" is involved. It will be observed further, that in the Farrington
case the franchise was granted to a corporation, yet the court held that the court
mutation provision of the franchise extended to the individual stockholders. In the case
at bar, while the plaintiff the present owner of the franchise. is a corporation, the original
grantees were natural persons; hence there is more reason for holding in the present
case that the mutation provision in the franchise granted by the Philippine Government
should extend to the stockholders of plaintiff corporation.
The Farrington Case, decided in 1878, was by a divided court. Eighteen years later
in 1896 the State of Tennessee sought to have the decision in that case reviewed, on
the ground that the court did not consider the other portions of the charter which,
according to the State, were material. The Supreme Court this time unanimously
declined to reverse its view as expressed in the Farrington decision, saying.
We do not think under the circumstances that we ought now to come to a
different conclusion upon the question of exemption from that which was arrived
at by this court in the Farrington Case. As the whole charter was then before the
court, we are not prepared to say that its force was misunderstood, or that there
was an omission by the court to consider all the language of the exemption
clause simply because a portion of its omitted in the quotation from the record
made in the opinion therein delivered. We are not inclined, therefore, to overrule
or distinguish the Farrington Case, and we must now told that the charter clause
of exemption limits the amount of tax on each share of stock in the hands of the
shareholder, and that any subsequent revenue law of the state which imposes an
additional tax on such shares in the hands or shareholders, impairs the obligation
of the contract, and is void. This compels us to reverse the judgments herein
against the shareholders. (Bank of Commerce vs. Tennessee, 16 U.S. 134; 40
Law. ed., 645, 648.)
The doctrine of the Farrington Case is now the settled rule of the highest court of the
United States. The first assignment of error should therefore be sustained.
As to the second assignment of error I concur with the dissenting opinion of the Chief
Justice for the reasons set forth therein. Consequently that assignment of error should
also be sustained.
The trial court erred in not holding that interest received by a non-resident corporation,
outside the Philippine Islands, is not income from Philippine sources and so not subject
to income tax.
In view of the above I am of the opinion that the appealed decision should be reversed
and another entered by this courts ordering the defendant to pay the plaintiff the sum of
P40,460.03, the amount of withholding taxes paid on account of interest on bonds and
other indebtedness, or a total of P56,757.37.
Manila Gas vs. Collector
FACTS: This is an action brought by the Manila Gas Corporation against the
Collector of Internal Revenue for the recovery of P56,757.37, which the
plaintiff was required by the defendant to deduct and withhold from the various
sums paid it to foreign corporations as dividends and interest on bonds and
other indebtedness and which the plaintiff paid under protest.
ISSUES: Won the Collector of Internal Revenue was justified in withholding
income taxes on interest on bonds and other indebtedness paid to nonresident
corporations
RULING: YES. The approved doctrine is that no state may tax anything not
within its jurisdiction without violating the due process clause of the
constitution. The taxing power of a state does not extend beyond its territorial
limits, but within such it may tax persons, property, income, or business. If an
interest in property is taxed, the situs of either the property or interest must be
found within the state. If an income is taxed, the recipient thereof must have a
domicile within the state or the property or business out of which the income
issues must be situated within the state so that the income may be said to
have a situs therein. Personal property may be separated from its owner, and
he may be taxed on its account at the place where the property is although it
is not the place of his own domicile and even though he is not a citizen or
resident of the state which imposes the tax. But debts owing by corporations
are obligations of the debtors, and only possess value in the hands of the
creditors.
The Manila Gas Corporation operates its business entirely within the
Philippines. Its earnings, therefore come from local sources. The place of
material delivery of the interest to the foreign corporations paid out of the
revenue of the domestic corporation is of no particular moment. The place of
payment even if conceded to be outside of the country cannot alter the fact
that the income was derived from the Philippines. The word "source" conveys
only one idea, that of origin, and the origin of the income was the Philippines.
The Collector of Internal Revenue was justified in withholding income taxes on
interest on bonds and other indebtedness paid to non-resident corporations
because this income was received from sources within the Philippine Islands
as authorized by the Income Tax Law.
FIRST DIVISION

[G.R. No. 21475. March 26, 1924. ]

VEGETABLE OIL CORPORATION, Plaintiff-Appellee, v. WINCESLAO TRINIDAD, Collector
of Internal Revenue of the Philippine Islands, Defendant-Appellant.

Attorney-General Villa-Real for Appellant.

Ross, Lawrence & Selph for Appellee.

SYLLABUS
1. INTERNATIONAL REVENUE; TAX ON CONSIGNMENTS. Discussion of the legislative and
judicial history of the tax on consignments of goods to foreign countries.

2. ID.; TAX ON CONSIGNMENT, NOT A SALES TAX. The tax on consignment is not a sales tax
properly speaking though it provided for in the same section of the Law as the sales tax.

3. ID.; TERM "MERCHANT" DEFINED. Section 1459 of the Administrative Code defines the
term "merchant." as there used, as "a person engaged in the sale, barter, or exchange of
personal property of whatever character." Held: That under this definition the term is not limited
to persons engaged in the sale, barter, or exchange of personal property in the Philippine
Islands, but that any such merchant no matter where he sells, barters, or exchanges may be
required to pay the percentage tax on consignments to foreign countries from Philippine ports.

4. ID.; ID.; TERM "CONSIGNED ABROAD" DEFINED. The term "consigned aboard" as used in
section 1459 of the Administrative Code is synonymous with the term "enviado al extranjero"
found in the Spanish version and signifies "sent or shipped abroad."cralaw vi rtua1aw l ibrary

5. ID.; ID.; CONSIGNMENT OF GOODS NOT FOR SALE. Merchants may be required to pay the
tax on consignments though it does not appear that the commodities, goods, wares, and
merchandise consigned are destined for sale.

D E C I S I O N

OSTRAND, J. :

This action is brought to recover back merchants percentage taxes to the amount of P19,975.70
levied on consignments under section 1459 of Act No. 2711 and paid by the plaintiff under
protest. The pertinent portions of the section mentioned, which went into effect on October 1,
1917, read as follow:jgc:chanrobles.com. ph

"All merchants not herein specifically exempted shall pay a tax of one per cent on the gross
value in money of the commodities, goods, wares and merchandise sold, bartered, exchanged,
or consigned abroad by them, such tax to be based on the actual selling price or value of the
thins in question at the time they are disposed of or consigned, whether consisting of raw
material or of manufactured or partially manufactured products, and whether of domestic or
foreign origin. The tax upon things consigned abroad shall be refunded upon satisfactory proof of
the return thereof to the Philippine Islands unsold.
x x x

"Merchant, as here used, means a person engaged in the sale, barter, or exchange of personal
property of whatever character. Except as specially provided, the term includes manufacturers
who sell articles of their own production and commission merchants having establishments of
their own for the keeping and disposal of goods of which sales or exchanges are effected, but
does not include merchandise brokers."cralaw virtua1aw l ibrary

The case was submitted to the Court of First Instance upon the following agreed statement of
facts:jgc: chanrobles.com.ph

"The parties hereto have agreed, and do agree, that the following facts shall be considered as
having been proven in the above cause:jgc: chanrobles.com.ph

"(1) The plaintiff is a foreign corporation, duly licensed to transact business in the Philippine
Islands and having its principal place of business therein in the City of Manila. Defendant is the
duly appointed and acting Collector of Internal Revenue of the Philippine Islands.

"(2) The plaintiff at all times since the 1st day of April, 1922, has been, and is now, engaged in
the purchase of copra, in the Philippine Islands, and the shipment of such copra, in the Philippine
Islands, and the shipment of such copra to its mills in the United States of America for
manufacture into vegetable oil. Plaintiff during said period has been, and is now, engaged in no
other business in the Philippine Islands. The cocoanut oil manufactured by the plaintiff is sold in
the United States.

"(3) During the period from April 1, 1922, to June 30, 1922, the plaintiff purchased in the
Philippine Islands, and shipped to its mills in the United States of America, copra of the value of
two hundred and fifty-six thousand seven hundred and ninety-seven pesos (P256,797). The
shipping documents covering the said copra were signed by the plaintiff. The copra so shipped
was converted into vegetable oil by the plaintiff in the United States, and there sold.

"(4) Defendant, under the alleged authority of section 1459 of Act No. 2711, demanded of
plaintiff a tax of one per cent (1%) of the value of the shipments of copra referred to in the
preceding paragraph, or the sum of two thousand five hundred and sixty, seven pesos and
ninety-seven centavos (2,567.97). Plaintiff, on the 20th day of July, 1922, to avoid penalties and
forfeitures for nonpayment, paid to defendant the sum of two thousand five hundred and sixty-
seven pesos and ninety-seven centavos (P2,567.97) under written protest, which protest
defendant overruled.

"(5) During the period from July 1, 1922, to September 30, 1922, the plaintiff purchased in the
Philippine Islands, and shipped to its mills in the United States of America, copra of the value of
one million four hundred and two thousand, one hundred and sixty-nine pesos (P1,402,169). The
shipping documents covering the said copra were signed by the plaintiff. The copra so shipped
was converted into vegetable oil by the plaintiff in the United States, and there sold.

Plaintiff a tax of one per cent (1%) of the value of the shipments of copra referred to in the
preceding paragraph, or the sum of fourteen thousand and twenty-one pesos and sixty-nine
centavos (P14,021.69). Plaintiff, on the 16th day of October, 1922, to avoid penalties and
forfeitures for nonpayment, paid to defendant the sum of fourteen thousand and twenty-one
pesos and sixty-nine centavos (P14,021.69) under written protest, which protest defendant
overruled.

"(7) During the period from October 1, 1922, to December 31, 1922, the plaintiff purchased in
the Philippine Islands and shipped to its mills in the United States of America copra of the value
of three hundred and thirty-nine thousand and four pesos (P339,004). The shipping documents
covering the said copra were signed by the plaintiff. The copra so shipped was converted into
vegetable oil by the plaintiff in the United States, and there sold.

Plaintiff a tax of one per cent (1%) of the value of the shipments of copra referred to in the
preceding paragraph, or the sum of three thousand three hundred and ninety pesos and four
centavos (P3,390.04). Plaintiff, on the 18th day of January, 1923, paid to defendant the sum of
three thousand three hundred and ninety pesos and four centavos (P3,390.04) under written
pretest, which protest, which protest defendant overruled."cralaw vi rtua1aw library

Upon the facts so stated the court below rendered judgment in favor of the plaintiff for the
recovery of the full amount of the tax paid and the case is now before us upon appeal by the
defendant from that judgment.

The case is not one of first impression. The questions involved have been passed upon
repeatedly by this court in various cases and, so far, that court has been entirely consistent in its
final disposal of all of them. But it often occurs due to the idiosyncrasies of the writers of the
decisions in several of these cases, dicta have crept into them which have tended to mislead the
merchants and the Bar and to lay the court open to the charge of inconsistency.

In order to correct existing misconceptions, a brief resume of both the legislative and the judicial
history of the merchants percentage tax in question may, perhaps, be useful.

The tax originated in section 139 of the Internal Revenue Act of 1904 (Act No. 1189) which, in
part, reads as follows:jgc:chanrobles.com. ph

"Except as hereinafter specifically exempted, there shall be paid by each merchant and
manufacturer a tax at the rate of one-third of one per cent on the gross value in money of all
goods, wares, and merchandise sold, bartered or exchanged for domestic consumption in the
Philippine Islands, and this tax shall be paid whether such commodities consist of raw materials
or manufactured or partially manufactured products, and whether of domestic production or
imported."cralaw virtua1aw l ibrary

Section 142 of the same Act contains the following provisions:jgc:chanrobles. com.ph

"The following persons shall be exempted from the payment of the taxes imposed in section one
hundred and thirty-nine:chanrob1es virtual 1aw l ibrary
x x x

"(b) Exporters, on the raw material and manufactured or partially manufactured products
actually exported by them."cralaw vi rtua1aw library

By Act NO. 2339, entitled "An act revising and consolidating the laws relative to Internal
Revenue," effective July 1, 1914, it was provided:jgc:chanrobles.com.ph

"SEC. 40. All merchants not herein specifically exempted shall pay a tax of one-third of one per
cent on the gross value in money of the commodities, goods, wares and merchandise sold,
bartered or exchanged by them, such tax to be based on the actual selling price or value at
which the things in question are disposed of, whether consisting of raw material or of
manufactured or partially manufactured products, and whether of domestic or foreign origin.

"SEC. 41. In computing the tax above imposed transactions in the following commodities shall be
excluded:jgc:chanrobles. com.ph

"(a) Merchandise actually exported by the vendor;

"x x x"

Section 5 of Act No. 2432, approved December 23, 1914, amended section 40 of Act No. 2339
by increasing the rate from one-third of 1 per cent to 1 per cent. Section 3 of Act No. 2541,
effective from January 1, 1916, amended section 41, of act No. 2339 by eliminating the clause"
(a) Merchandise actually exported by the vendor."cralaw virtua1aw l ibrary

As will be seen, up to this point the merchants percentage tax was a domestic sales tax pure
and simple and merchandise exported was specifically exempted from the tax. But section 3 of
Act No. 2541, by eliminating the exemption in favor of commodities exported, placed a severe
handicap upon the local merchants engaged in selling the products of the Islands for export who,
in view of the fact that such sales are usually consummated here, were compelled to pay the sale
tax, while the foreign firms, who maintained branches or agencies here, could ship directly to
themselves without selling and thus escape the payment of the tax. This fact becoming obvious
immediately after the passage of Act No. 2541, the Legislature at its next session passed Act No.
2622, effective January 1, 1916, which amended section 40 of Act No. 2339 by inserting the
word "consigned" immediately after the word "bartered" therein. This section was ratified by Act
of Congress of July 1, 1916.

The next legislation on the subject is contained in section 1614 of the Administrative Code of
1916, effective October 1st of the same year, which section is practically identical with section
1459 of Act No. 2711 quoted on the first page of the present decision. The latter section (1459)
was expressly ratified and confirmed by the Congress of the United States in the Act of June 5,
1918 (40 Stat. at L., p. 594) in the following language:jgc: chanrobles.com.ph

"The taxes imposed by the Philippine Legislature in section fourteen hundred and fifty-nine of the
Act Numbered Twenty-seven hundred and eleven, enacted by that body on March tenth,
nineteen hundred and seventeen, are hereby legalized and ratified, and the collection of all taxes
heretofore or hereafter is legalized, ratified, and confirmed hereby as fully to all intents and
purposes as if the same by prior Act of Congress specifically had been authorized and directed."cralaw
virtua1aw library

Apparently, through an oversight, section 1614 of the Administrative Code of 1916 was not
included in the ratification.

Section 11 of Act of Congress of August 29, 1916, the so-called "Jones Law," prohibited the
levying or collection of duties on exports from the Philippine Islands and on the strength of this
provision a large number of actions were brought during the years 1917 and 1918 to recover
back percentage taxes paid on consignments abroad.

Of these cases, the case of Smith, Bell & Co. v. Rafferty is typical. In that case the plaintiff
alleged that during the period from October 1, 1916 to December 31, 1917, it paid, under
protest, the sum of P413,180.05 in percentage taxes on merchandise exported from the
Philippine Islands and maintained that all of these taxes were in reality duties on exports and
collected in violation of the Jones Law. This court held, in substance, that the taxes levied under
section 1459 of Act No. 2711 were legal by virtue of the ratification of that section by Congress,
but that section 1614 of Act No. 2657 not having been ratified, the collection of taxes thereunder
was illegal. (Smith, Bell & Co. v. Rafferty, 40 Phil., 691.)

The case was taken to the United States Supreme Court by writ of certiorari and while it was
there pending section 1614 of Act No. 2657 was ratified by Act of Congress of June 5, 1920, in
substantially the same language as that employed in the ratification of section 1459 of Act No.
2711, and the United States Supreme Court accordingly declared the collection of taxes under
both sections valid. (Rafferty v. Smith, Bell & Co., 257 U. S., 226.)

At the January term of 1923, in the case of Murphy v. Trinidad (44 Phil., 649), this court was
again called upon to interpret the provisions of section 1459. The facts in that case are thus
stated in the decision of the court:jgc:chanrobles.com. ph

"It appears from the pleadings and admitted facts that the American Import Company, of San
Francisco, California, is extensively engaged in the exportation of embroideries from the
Philippine Islands for sale in the United States; and the plaintiff, R. E. Murphy, during the period
covered by the transactions now in question, was employed by said company as its supervising
agent in these Islands, upon a commission of three per cent of the value of the labor expended
in the embroidery work. It further appears that the company has adopted the plan of causing all
its product from the Philippine Islands to be embroidered here by native workers under the
supervision of the companys agent, and upon material supplied by the company from the United
States. For the purpose of securing a uniform quality of work, even the thread used in the
embroidery is supplied by said company to the embroiderers, but for this a charge is made at
cost price. In his capacity as agent, the plaintiff receives from San Francisco the goods to be
embroidered, supervises the manufacture of the embroidered product, and returns the same
from time to time in a finished state to the company in San Francisco.

"In respect to the transactions thus conducted by the Plaintiff for the American Import Company
of San Francisco during the period of five years from July 1, 1916, to July 1, 1921, the said
plaintiff made returns to the Collector of Internal Revenue, for the purposes of taxation under
section 1459 of the Administrative Code, showing taxable transactions to the value of P339,
544.59, consisting, first, of P36,691.94 the value of thread and damaged materials sold by the
plaintiff in the Islands; and, secondly, of P302,852.65, the value of the labor expended upon the
embroidery work prior to September of the year 1919. Upon these returns he was taxed
accordingly and paid the tax without protest.

"From the foregoing it will be seen that in the returns upon which the plaintiff was thus taxed, no
account was taken of the value of the goods used in the making of the embroideries, and after
September, 1919, no account was taken even of the value of the embroidery work.

"It appears, however, that during the aforesaid period of five years the plaintiff caused to be
embroidered cloth belonging to the American Import Company of a total value of P597,248.31,
upon which there was expended labor of a total value of P931,823.30, all of which was returned
to the American Import Company from time to time during the said period at its office in San
Francisco, California. The freight and cartage on said shipments amounted to P670.42; and the
plaintiff earned as his commission during the same time the sum of P28,785.04

"In view of the facts stated in the preceding paragraph, the Collector of Internal Revenue,
evidently assuming that the plaintiff had previously been under assessed, demanded payment of
the tax of one per cent on the difference between the gross amount of P1,595,219.01 and the
amount upon which the plaintiff had already been taxed (P339,544.59), that is to say, upon the
amount of P1,255,674.41, thus claiming additional tax to the amount of P12,556.74, together
with the statutory penalty of twenty-five per cent for delinquency, as prescribed in section 1458
of the Administrative Code, and a fine of P200, making in all the sum of P15,895.93. This
amount the plaintiff paid under protest, and now sues to recover the same, under the authority
granted in section 1579 of the Administrative Code."cralaw vi rtua1aw library

In discussing the law of the case the court, speaking through Mr. Justice Street, said:jgc:chanrobles. com.ph

"At the inception of the discussion we should note the fact that in the section referred to a tax of
one per cent is imposed upon the gross value of goods sold, bartered, exchanged, or consigned
abroad. The expression consigned abroad, as here used, means approximately the same as
exported, and under the organic law here in force the Philippine Legislature has no power,
without the express approval of Congress, to make a law imposing a tax on exports. But the
provision now in question has been three times ratified by different Acts of the Congress of the
United States, that is to say, first, as it originally stood in Act No. 2541, as amended by Act No.
2622 of the Philippine Legislature; secondly, as it now stands in section 1459 of the
Administrative Code of 1917; and, thirdly and lastly, as it stood in section 1614 in the
Administrative Code of 1916 (Acts of Congress of July 1, 1916; of June 4, 1918; and of June 5,
1920). There can therefore be no question as to the validity of said provision as it has stood at
all times upon our statute books since its first enactment; and we may say that the
Congressional Act of ratification of June 5, 1920, was passed by Congress after this court had
decided the case of Smith, Bell & Co. v. Rafferty (40 Phil., 691), and said decision was reversed
by the Supreme Court of the United States, in so far as relates to the efficacy of section 1614 of
the Administrative Code of 1916, solely because of said ratification by Congress pending the
appeal.

"And now, upon the point of liability for the tax that has been collected, we note the contention
in the appellants brief that the plaintiff Murphy himself is not a merchant. This contention is
undoubtedly correct if the plaintiff is considered without relation to the master that stands
behind him. Individually the plaintiff is no merchant. But he is the agent and representative in
the Philippine Islands of the American Import Company of San Francisco; and that the latter is a
merchant in the sense intended in section 1459 of the Administrative Code is obvious.

"The term merchant is there defined as a person engaged in the sale, barter, or exchange of
personal property of whatever character, and it is declared that the term includes manufacturers
who sell articles of their own production. The American Import Company fulfills every
requirement of this definition because it is engaged in the manufacture of Philippine embroideries
and exports the finished product for sale in the United States. The fact that the production and
export of these embroideries is effected through the agency of the plaintiff Murphy and that the
operations of the Company in these islands are conducted in his name in no wise alters the case.
Nor is the further circumstance here material that the consignor, or shipper of the goods from
these Islands is Murphy and the consignee in the United States is the American Import
Company. Where a consignment of goods is otherwise taxable, the tax should be assessed and
collected regardless of the personality of the consignor or consignee. A shipment of goods abroad
is no less taxable under this section, though consigned to the order of the shipper himself.
x x x

"From any point of view the tax which was collected in this case was due to the Philippine
Government from the American Import Company of San Francisco; and the circumstance that it
has been collected nominally from the plaintiff Murphy should mislead no one. He has acted
throughout as agent, and it is to be assumed, in the absence of proof to the contrary, that the
money which went into the public coffers belonged to his principal. Besides, as consignor of the
exported product, the plaintiff was apparently the person directly responsible to the Collector for
the taxes due on the several consignments."cralaw virtua1aw l ibrary

The court decided the case in favor of the defendant and held that the tax was lawfully collected.
The close analogy between that case and the one at bar will be readily observed; the distinctions
sought to be drawn between the two cases have, as far as we can see, no bearing whatever
upon the legal principles involved. They are distinctions without differences.

During the July term of 1923, cases R. G. Nos. 20101 and 20400, El Dorado Oil Works v.
collector of Internal Revenue 1 , came before this court. In these cases the plaintiff also sought
to recover back percentage taxes paid under protest on "consignments abroad," under section
1459. The court held that the taxes were improperly imposed and rendered judgment in favor of
the plaintiff. The opinion of the court was prepared by Mr. Justice Johns, who dissented in the
Murphy case, and states the essential facts in the following language:jgc: chanrobles. com.ph

". . . It will be noted that the plaintiff is a foreign corporation organized under the laws of the
State of California, with its principal office and place of business in the City of San Francisco,
where it is engaged in the manufacture and sale of cocoanut oil and its by-products. Although it
is duly licensed to transact business in the Philippine Islands, it has a resident purchasing agent
only here. That under the terms and conditions by which the agent made all of the purchases in
question, the copra was sold to the plaintiff, a foreign corporation, f. o. b. ship, Manila Bay. That
the merchants from whom it was purchased signed and executed all bills of lading for its
shipment, and directed the shipment of the copra to the plaintiff at San Francisco, and that upon
presenting the bills of lading thus prepared and signed, the merchants were then, and not
before, paid for the copra by the resident purchasing agent. On all such copra the percentage tax
of 1 per cent, payable under section 1459, was paid by the respective owners and sellers prior to
the date of the demand which was made by the defendant upon the resident purchasing agent
for the tax in question."cralaw vi rtua1aw library

Upon these facts no fault can be found with the disposal made of the case and if the writer of the
decision had rested there, no possible misunderstanding could have arisen. The issues are clean-
cut and clear: The plaintiffs local agent purchased the copra; the sales taxes were duly paid by
the vendors, who also made out and signed the bills of lading and placed the copra aboard the
ship. The vendors thus became the consignors; the plaintiffs agent did nothing but to pay for the
copra after it was consigned. Clearly, in such circumstances, the plaintiff was not the consignor
and could not be required to pay the consignment tax. But, unfortunately, the subsequent pages
of the decision contain dicta which tend to cloud the issues and to lead the Bar to believe that
the case is on a parity with the one now before us, which belief, as will be readily seen, is
without substantial foundation. Indeed, aside from the fact that in both cases the taxes in
dispute were collected on consignments, there is no essential resemblance between the two.

In the present case it is not disputed that the plaintiff corporation was the consignor of the
merchandise, but it is strenuously argued that inasmuch as it is not "engaged in the sale, barter,
or exchange of personal property" in the Philippine Islands, it is not a merchant within the
statutory definition of the term and therefore cannot be required to pay the consignment tax.
Just upon what ground this assumption rests is not quite clear; so far no adequate explanation
has been vouchsafed us. The statute itself does not provide that the sale, barter, or exchange
must take place in the Philippine Islands in order to make a person engaged in such business a
merchant.

But, presumably, the idea is the result of a misconception of the nature of the tax on
consignments, confusing it with the tax on sales. That the consignment tax is not a sales tax on
sales. That the consignment tax is not a sales tax is, however, too obvious for argument; the
fact that it is provided for in the same section as the sales tax does not necessarily make it so.
There is all the difference in the world between a consignment and a sale. As stated by counsel
for the appellee, the tax on consignments is "a privilege tax pure and simple;" it is a tax on the
business of consigning commodities abroad from these Islands. The definition of the word
"merchant" as a person who is engaged in the sale, barter, or exchange of personal property is
merely descriptive of the persons who are required to pay the tax and does not mean that, in
order to exact from them the payment of the consignment tax, the Government must also be in
position to impose taxes on their sales, barter, or exchange.

If the tax were one on sales, we would readily agree that the sales, in order to be taxable in the
Philippine Islands, must be consummated there; the Philippine Government cannot, of course,
collect privilege taxes on sales taking place in foreign countries no matter whether the vendor is
a Philippine merchant or whether he is a foreign one. Neither can the Government impose such
taxes on consignments from one foreign port to another. But, with the approval of Congress, it
may legally levy taxes on consignments from Philippine ports. That is what has been done in the
present instance. It has imposed the tax on local transactions; it does not seek to tax
transactions carried out abroad. But when a foreign merchant, as the word "merchant" is defined
in our statutes, comes to our shore and enters into transactions upon which a tax is laid, the
Government can, and does, place him on an equality with domestic merchants and requires him
to pay the same privilege taxes.

As we have seen, section 1459 provides that "All merchants not herein especifically exempted
shall pay a tax of one per cent on the gross value in money of the commodities, goods, wares,
and merchandise . . . consigned abroad by them." (Italics are ours.) It defines the word
"merchant" as a person who is engaged in the sale, barter, or exchange of personal property,
but does not say that he must be so engaged in the Philippine Islands in order to be considered a
merchant. As far as may be gathered from the plain language of the statute, he may do his
selling, bartering or exchanging wherever he pleases, but if he consigns merchandise abroad
from the Philippine Islands he must pay the tax on his consignments. Had it been the intention of
the Legislature to require only the local merchant to pay the tax, the definition of the word
"merchant" in section 1459 would have read:" Merchant as here used means a person engaged
in the sale, barter or exchange or personal property of whatever character in the Philippine
Islands." But it does not so read.

It is not disputed the Legislature has the power to define the class of persons who must pay
certain local taxes; in fact, the appellees argument rests precisely on such a statutory definition.
Neither can it be questioned that the Government may impose taxes on local business transacted
by freighters. In the absence of words of limitation or exemption in the statute, why must we
then assume that, in defining the word "merchants," the class or persons required to pay
consignment taxes, the definition the word "merchants," the class of persons required to pay
consignment taxes, the definition applies only to domestic and not to foreign merchants?

Perhaps it will be argued that a statutory definition is only of local application and is of no legal
effect beyond the boundaries of the country in which the statute is enacted. That is true, but has
nothing to do with the present case. We are not here applying the definition in relation to the
collection of a foreign tax; we are considering it in connection with the tax on a local
transaction.

To hold that only persons who engage in sales, barter or exchange in the Philippine Islands are
to pay the tax on consignments would place the local merchants at a serious disadvantage in
competition with the foreign merchants, and would defeat the very evident purpose of the tax.
The language of the statute is perfectly clear and places the burden of the tax on all merchants
alike. Are we then justified in exempting some of the merchants by reading non-existent
provisions into the statute which would defeat its unmistakable intent and seriously handicap the
local merchants, in some cases, perhaps, driving them out of business? We submit that to do so
would violate every canon of statutory construction and would clearly amount to unwarranted
judicial legislation.

It is also contended that merely shipping merchandise out of the country does not constitute
consigning abroad. In answer to this, it is sufficient to call attention to the fact that in the
Spanish text of section 1459 the term "consigned abroad" is rendered "enviado al extranjero"
(sent or shipped abroad) and that under the provisions of Act No. 2717 of the Philippine
Legislature the Spanish text prevails in the interpretation of Act No. 2711.

There is, however, no real conflict between the Spanish and the English versions. While formerly
the verb "consign" may have had a more restricted signification, it is now, in shipping and
commercial circles, used as the equivalent of the verb "ship" or "send." That this is the sense in
which it is used in the section under discussion is quite obvious.

It has been suggested that the tax applies only to a consignment or shipment of merchandise
destined for sale and that as it in this case appears that only the oil extracted from the copra and
not the copra itself was to be sold, the tax on the consignment was unlawfully imposed. We find
nothing in the law justifying this conclusion. A shipment is a shipment no matter what its
purpose may be and the only requisite for the collection of the tax upon it is that the consignor
or shipper must be a merchant. It would, indeed, be unreasonable to require the tax collector to
postpone the collection of the tax on a shipment until he could ascertain what had ultimately
been done with the goods shipped.

For the reasons stated, the judgment appealed from is hereby reversed and the defendant is
absolved from the complaint, without costs. So ordered.

Araullo, C.J., Street, Avancea, and Romualdez, JJ., concur.

Malcolm, J., dissents.
Separate Opinions

JOHNS, J., dissenting:chanrob1es virtual 1aw l ibrary

The majority opinion is well reasoned and well written, but it is not fundamentally sound. It
quotes very freely portions of the body of the majority opinion in Murphy v. Trinidad.

It is very apparent that there is a marked difference between the facts of the two cases. In the
Murphy-Trinidad case, the syllabus says:jgc:chanrobles.com.ph

"1. INTERNAL REVENUE; MERCHANTS TAX; EMBROIDERY MATERIAL SENT FROM ABROAD.
The merchants tax imposed by section 1459 of the Administrative Code must be paid by a
person who sends material to the Philippine Islands to be embroidered under the supervision of
its local agent by whom the finished product is returned to the owner. The person so sending
material to be embroidered and returned is engaged in the business of manufacture in these
Islands and is a manufacturing merchant within the meaning of the Internal Revenue Law."cralaw vi rtua1aw l ibrary

And in analyzing section 1459 of the Administrative Code in question, the opinion says:jgc:chanrobles. com.ph

"The term merchant is there defined as a person engaged in the sale, barter, or exchange of
personal property of whatever character, and it is declared that the term includes manufacturers
who sell articles of their own production. The American Import Company fulfills every
requirement of this definition because it is engaged in the manufacture of Philippine embroideries
and exports the finished product for sale in the United States."cralaw vi rtua1aw l ibrary

There is no claim or pretense that the plaintiff directly or indirectly ever manufactured anything
in the Philippine Islands, or that it is a manufacturer within the Philippine Islands, as the word is
defined in section 1459 of the Administrative Code.

It is stipulated that:jgc:chanrobles.com.ph

"(2) The plaintiff at all times since the 1st day of April, 1922, has been, and is now, engaged in
the purchase of copra, in the Philippine Islands, and the shipment of such copra to its mills in the
United States of America for manufacture into vegetable oil. Plaintiff during said period has been,
and is now, engaged in no other business in the Philippine Islands. The cocoanut oil
manufactured by the plaintiff is sold in the United States."cralaw virtua1aw l ibrary

The opinion in the Murphy-Trinidad case is expressly founded upon the fact that the American
Import company, whom the plaintiff represented, was a manufacturer within the meaning of
section 1459 of the Administrative Code, and that because it was a manufacturer, the plaintiff
was liable for the payment of the tax.

The majority opinion cites and quotes with approval a portion of the opinion of this court in R. G.
No. 20101, El Dorado Oil Works v. Collector of internal Revenue, and says that the portion
quoted is good law upon the facts therein stated, and then says:jgc: chanrobles.com.ph

"The subsequent pages of the decision contain dicta which tend to cloud the issues and to lead
the Bar to believe that the case is on a parity with the one now before us."cralaw vi rtua1aw l ibrary

Suffice it to say that all of the material facts in the El Dorado Oil Works case were fully and fairly
discussed in open court, voted and decided before the opinion was written. When written the
opinion was first presented to the writer of the opinion in the Murphy case for his signature and
approval, and that after giving the case his usual careful consideration, he signed the opinion as
written, and it was then presented to the other members of the court, and that in turn it was
signed by all of them who were then present. During the discussion, the legal distinction between
the El Dorado Oil Works case and the Murphy case was clearly pointed out and well understood,
and for such reason the opinion in the El Dorado Oil Works case, as it was written, was
unanimously approved by the court. No member of the court, who signed the opinion, was
misled or deceived by anything that was said in the opinion.

There is no claim or pretense that the plaintiff here is a manufacturer in the Philippine Islands
within the meaning of section 1459 of the Administrative Code. The only question involved is
whether or not it is a merchant within the meaning of that section. If it is a merchant within the
meaning of that section, it is liable for the tax. If it is not a merchant, it is not liable, an
important fact which is ignored and overlooked in the majority opinion.

The statute in question reads:jgc:chanrobles.com.ph

"All merchants not herein specifically exempted shall pay a tax or one per cent on the gross
value in money of the commodities, goods, wares, and merchandise sold, bartered, exchanged,
or consigned abroad by them, such tax to be based on the actual selling price or value of the
things in question at the time they are disposed of or consigned, whether consisting of raw
material or of manufactured or partially manufactured products, and whether of domestic or
foreign origin. The tax upon things consigned abroad shall be refunded upon satisfactory proof of
the return thereof to the Philippine Islands unsold."cralaw virtua1aw library

In other words, a person who is a merchant is liable for the tax in question, and a person who is
not a merchant within the meaning of the section is not liable for the tax. The statute having
specified that merchants only are liable for the tax, it must follow that a person who is not a
merchant is not liable for the tax. The statute then says that:jgc:chanrobles. com.ph

"Merchant, as here used, means a person engaged in the sale, barter, or exchange of personal
property of whatever character."cralaw vi rtua1aw library

There is no claim or pretense that the plaintiff ever sold, bartered or exchanged personal
property of any king within the Philippine Islands. The statute then says that the word"
Merchant . . . includes manufactures who sell articles of their own production and commission
merchants having establishments of their own for the keeping and disposal of goods of which
sales or exchanges are effected, but does not include merchandise brokers."cralaw virtua1aw library

There is no claim or pretense that the plaintiff ever sold any articles of its own production within
the Philippine Islands, or that it is a commission merchant within the Philippine Islands. But the
majority opinion says that it is a merchant and a manufacturer in the United States, and because
it buts copra within the Philippine Islands and consigns it to itself, it follows that it is and has
been a merchant within the Philippine Islands.

The statute having defined the meaning of the word "merchant," this court has no legal right to
enlarge upon the definition or give to it any other or different meaning than the statute itself
gives. Yet, that is what the majority opinion does. It would have been a very easy matter for the
Legislature, in defining the word "merchant," to have said that any person who buys copra or
tobacco or hemp in the Philippine Islands to be consigned abroad is a merchant within the
meaning of the act. The Legislature did not say that, but in legal effect that is what the majority
opinion has said.

A statute ought not to be construed for or against the interests of resident merchants or anyone
else.

The majority opinion says:jgc:chanrobles.com.ph

"To hold that only persons who engage in sales, barter or exchange in the Philippine Islands are
to pay the tax on consignments would place the local merchants at a serious disadvantage in
competition with the foreign merchants, and would defeat the very evident purpose of the tax."cralaw virtua1aw
library

In other words, the plain, ordinary language of the statute should be given an unnatural and
strained construction to protect the interests of resident merchants. If the legislature had
intended that the word "merchant" to mean what the majority opinion says it does, it would have
said, merchant, as here used, means a person engaged in the sale, barter or exchange of
personal property of whatever character, or one who purchases personal property within the
Philippine Islands for consignment abroad.

Through judicial legislation, the majority opinion has supplied the missing definition of the word
"merchant." That is a very dangerous thing for a court to do. It overlooks the fact that a
merchant, as the word is defined by the act, and a merchant only, is liable for the sales tax on
"merchandise sold, bartered, exchanged or consigned abroad by them," and that if you are not a
merchant within the meaning of the act, you are not liable for the sales tax, and that the act
defines the word "merchant" as "a person engaged in the sale, barter, or exchange of personal
property," no matter what the purpose may be, whether it is for local consumption or
consignment abroad. There is no claim or pretense that the plaintiff ever sold, bartered, or
exchanged any personal property of any kind within the Philippine Islands. It is admitted that the
only thing which it ever did was to purchase copra for consignment abroad. How can you make a
person, even though he be a merchant, liable for the payment of the tax for the purchase of
property under a statute, which makes a merchant only, who is "engaged in the sale, barter of
exchange of personal property," liable for the payment of the tax? Yet, the majority opinion
makes a purchaser of property liable for a sales tax under a statute which provides that a
merchant "engaged in the sale, barter or exchange of personal property is liable for the tax." It
is a clear case of judicial legislation. The remedy should have been in the Legislature and not in
the court.

I vigorously dissent.

JOHNSON, J., dissenting:chanrob1es virtual 1aw library

I agree with the argument and conclusions of Mr. Justice Johns.

SUPREME COURT
Manila
THIRD DIVISION
G.R. No. L-52019 August 19, 1988
ILOILO BOTTLERS, INC., plaintiff-appellee,
vs.
CITY OF ILOILO, defendant-appellant.
Efrain B. Trenas for plaintiff-appellee.
Diosdado Garingalao for defendant-appellant.

CORTES, J .:
The fundamental issue in this appeal is whether the Iloilo Bottlers, Inc. which had its
bottling plant in Pavia, Iloilo, but which sold softdrinks in Iloilo City, is liable under Iloilo
City tax Ordinance No. 5, series of 1960, as amended, which imposes a municipal
license tax on distributors of soft-drinks.
On July 12,1972, Iloilo Bottlers, Inc. filed a complaint docketed as Civil Case No. 9046
with the Court of First Instance of Iloilo praying for the recovery of the sum of P3,329.20,
which amount allegedly constituted payments of municipal license taxes under
Ordinance No. 5 series of 1960, as amended, that the company paid under protest.
On November 15,1972, the parties submitted a partial stipulation of facts, the material
portions of which state
xxx xxx xxx
2. That plaintiff is engaged in the business of bottling softdrinks under the
trade name of Pepsi Cola And 7-up and selling the same to its customers,
with a bottling plant situated at Barrio Ungca Municipality of Pavia, Iloilo,
Philippines and which is outside the jurisdiction of defendant;
3. That defendant enacted an ordinance on January 11, 1960 known as
Ordinance No. 5, Series of 1960 which ordinance was successively
amended by Ordinance No. 28, Series of 1960; Ordinance No. 15, Series
of 1964; and Ordinance No. 45, Series of 1964; which provides as follows:
Section l. Any person, firm or corporation engaged in the distribution,
manufacture or bottling of coca-cola, pepsi cola, tru-orange, seven-up and
other soft drinks within the jurisdiction of the City of Iloilo, shall pay a
municipal license tax of ten (P0.10) centavos for every case of twenty-four
bottles; PROVIDED, HOWEVER, that softdrinks sold to the public at not
more than five (P0.05) centavos per bottle shall pay a tax of one and one
half (P0.015) (centavos) per case of twenty four bottles.
Section 1-AFor purposes of this Ordinance, all deliveries and/or
dispatches emanating or made at the plant and all goods or stocks taken
out of the plant for distribution, sale or exchange irrespective (of) where it
would take place shall be covered by the operation of this Ordinance.
4. That prior to September, 1966, Santiago Syjuco Inc., owned and
operated a bottling plant at Muelle Loney Street, Iloilo City, which was
doing business under the name of Seven-up Bottling Company of the
Philippines and bottled the soft-drinks Pepsi-Cola and 7-up; however
sometime on September 14,1966, Santiago Syjuco, Inc., informed all its
employees that it (was) closing its Iloilo Plant due to financial losses and in
fact closed the same and later sold the plant to the plaintiff Iloilo Bottlers,
Inc.
5. That thereafter, plaintiff operated the said plant by bottling the soft
drinks Pepsi-Cola and 7-up; however, sometime in July 1968, plaintiff
closed said bottling plant at Muelle Loney, Iloilo City, and transferred its
bottling operations to its new plant in Barrio Ungca, Municipality of Pavia,
Province of Iloilo, and which is outside the jurisdiction of the City of Iloilo;
6. That from the time of (the) enactment (of the ordinance), the Seven Up
Bottling Company of the Philippines under Santiago Syjuco Inc., had been
religiously paying the defendant City of Iloilo the above- mentioned
municipal license tax due therefrom for bottler because its bottling plant
was then still situated at Muelle Loney St., Iloilo City; but the plaintiff
stopped paying the municipal license tax (after) October 21, 1968 (when)
it transferred its plant to Barrio Ungca Municipality of Pavia, Iloilo which is
outside the jurisdiction of the City of Iloilo;
7. That sometime on July 31, 1969, the defendant demanded from the
plaintiff the payment of the municipal license tax under the above-
mentioned ordinance, a xerox copy of the said letter is attached to the
complaint as Annex "A" and made an integral part hereof by reference.
8. That plaintiff explained in a letter to the defendant that it could not
anymore be liable to pay the municipal license fee because its bottling
plant (was) not anymore inside the City of Iloilo, and that moreover, since
it itself (sold) its own products to its (customers) directly, it could not be
considered as a distributor in line with the doctrines enunciated by the
Supreme Court in the cases of City of Manila vs. Bugsuk Lumber Co., L-
8255, July 11, 1957; Manila Trading & Supply Co., Inc. vs. City of Manila
L-1 2156, April 29, 1959; Central Azucarera de Don Pedro vs. City of
Manila et al., G.R. No. L7679, September 29,1955; Cebu Portland Cement
vs. City of Manila and City Treasurer of Manila, L-1 4229,July 26,1960. A
xerox copy of the said letter is attached as Annex "B" to the complaint and
made an integral part hereof by reference. As a result of the said letter of
the plaintiff, the defendant did not anymore press the plaintiff to pay the
said municipal license tax;
9. That sometime on January 25, 1972, the defendant demanded from the
plaintiff compliance with the said ordinance for 1972 in view of the fact that
it was engaged in distribution of the softdrinks in the City of Iloilo, and it
further demanded from the plaintiff payment of back taxes from the time it
transferred its bottling plant to the Municipality of Pavia, Iloilo;
10. That the plaintiff demurred to the said demand of the defendant raising
as its jurisdiction the reason that its bottling plant is situated outside the
City of Iloilo and as bottler could not be considered as distributor under the
said ordinance although it sells its product directly to the consumer, in line
with the jurisprudence enunciated by the Supreme Court but due to
insistence of the defendant, the plaintiff paid on April 20, 1972, the first
quarter payment of the municipal licence tax in the sum of P3,329.20,
under protest, and thereafter has been paying defendant every quarter
under protest;
11. That on June l5, 1972,the defendant informed the plaintiff that it must
pay all the taxes due since July, 1968 up to the last quarter of 1971,
otherwise it shall be constrained to cancel the operation of the business of
the plaintiff, and because of this threat, and so as not to occasion
disruption of its business operation, the plaintiff under protest agreed to
the payment of the back taxes, on staggered basis, which was acceded to
by the defendant;
12. That as computed by the plaintiff the following are its softdrinks sold in
Iloilo City since it transferred its bottling plant from the City of Iloilo to
Barrio Ungca Pavia, Iloilo in July 1968, to wit:
No. of Cases sold

S
E
V
E
N
-
U
P
P
E
P
S
I-
C
O
L
A
T
O
T
A
L
T
A
X

D
U
E
1
9
6
8
J
u
l
t
o

D
e
c
3
9
,
3
4
0
4
9
,
0
6
0
8
8
,
4
0
0
P
8
,
8
4
0
1
9
6
9
J
a
n
.
t
o

D
e
8
1
,
2
4
0
8
7
,
6
6
0
1
6
8
,
9
0
0
1
6
,
8
9
0
c
.
1
9
7
0
J
a
n
.
t
o

D
e
c
.
7
9
,
3
8
9
8
9
,
2
1
1
1
6
8
,
6
0
0
1
6
,
6
0
0
1
9
7
1
J
a
n
.
t
o

D
e
c
.
8
0
,
6
7
0
8
8
,
4
8
0
1
6
9
,
1
5
0
1
6
,
9
1
5
T
O
T
A
L
2
8
0
,
6
3
9
3
1
4
,
4
1
1
5
9
5
,
0
5
0
P

5
9
,
5
0
5
13. That the plaintiff does not maintain any store or commercial
establishment in the City of Iloilo from which it distributes its products, but
by means of a fleet of delivery trucks, plaintiff distributes its products from
its bottling plant at Barrio Ungca Municipality of Pavia, Iloilo, directly to its
customers in the different towns of the Province of Iloilo as well as the City
of Iloilo;
14. That the plaintiff is already paying the National Government a
percentage Tax of 71/t, as manufacturer's sales tax on all the softdrinks it
manufactures as follows:
O.R. No. 4683995 - January, 1972 Sales P17,222.90
O.R. No. 5614767 - February " " 17,024.81
O.R. No. .5614870 - March " " 17,589.19
O.R. No. 5614891 - April " " 18,726.77
O.R. No. 5614897 - May " " 16,710.99
O.R. No. 5614935 - June " " 14,791.20
O.R. No. 5614967 - July " " 13,952.00
O.R. No. 5614973 - August " " 15,726.16
O.R. No. 56'L4999 - September " " 19,159.54
and is also paying the municipal license tax to the municipality of Pavia,
Iloilo in the amount of P l0,000.00 every year, plus a municipal license tax
for engaging in its business to the municipality of Pavia in its amount of
P2,000.00 every year.
xxx xxx xxx
[Rollo, P. 10 (Record on Appeal, pp. 25-31)]
On the basis of the above stipulations, the court a quo rendered on January 26, 1973 a
decision in favor of Iloilo Bottlers, Inc. declaring the Corporation not liable under the
ordinance and directing the City of Iloilo to pay the sum of' P3,329.20. The decision was
amended in an Order dated March 15, 1973, so as to include the amounts paid by the
company after the filing of the complaint. The City of Iloilo appealed to the Court of
Appeals which certified the case to this Court.
The tax ordinance imposes a tax on persons, firms, and corporations engaged in the
business of:
1. distribution of soft-drinks
2. manufacture of soft-drinks, and
3. bottling of softdrinks within the territorial jurisdiction of the City of Iloilo.
There is no question that after it transferred its plant to Pavia, Iloilo province, Iloilo
Bottlers, Inc. no longer manufactured/bottled its softdrinks within Iloilo City. Thus, it
cannot be taxed as one falling under the second or the third type of business. The
resolution of this case therefore hinges on whether the company may be considered
engaged in the distribution of softdrinks in Iloilo City, even after it had transferred its
bottling plant to Pavia, so as to be within the purview of the ordinance.
Iloilo Bottlers, Inc. disclaims liability on two grounds: First, it contends that since it is not
engaged in the independent business of distributing soft-drinks, but that its activity of
selling is merely an incident to, or is a necessary consequence of its main or principal
business of bottling, then it is NOT liable under the city tax ordinance. Second, it claims
that only manufacturers or bottlers having their plants inside the territorial jurisdiction of
the city are covered by the ordinance.
The second ground is manifestly devoid of merit. It is clear from the ordinance that three
types of activities are covered: (1) distribution, (2) manufacture and (3) bottling of
softdrinks. A person engaged in any or all of these activities is subject to the tax.
The first ground, however, merits serious consideration.
This Court has always recognized that the right to manufacture implies the right to
sell/distribute the manufactured products [See Central Azucarera de Don Pedro v. City
of Manila and Sarmiento, 97 Phil. 627 (1955); Caltex (Philippines), Inc. v. City of Manila
and Cudiamat, G.R. No. L-22764, July 28, 1969, 28 SCRA 840, 843.] Hence, for tax
purposes, a manufacturer does not necessarily become engaged in the separate
business of selling simply because it sells the products it manufactures. In certain
cases, however, a manufacturer may also be considered as engaged in the separate
business of selling its products.
To determine whether an entity engaged in the principal business of manufacturing, is
likewise engaged in the separate business of selling, its marketing system or sales
operations must be looked into.
In several cases [See Central Azucarera de Don Pedro v. City of Manila and
Sarmiento, supra; Cebu Portland Cement Co. v. City of Manila and the City Treasurer,
108 Phil. 1063 (1960); Caltex (Philippines), Inc. v. City of Manila and Cudiamat, supra],
this Court had occasion to distinguish two marketing systems:
Under the first system, the manufacturer enters into sales transactions and invoices the
sales at its main office where purchase orders are received and approved before
delivery orders are sent to the company's warehouses, where in turn actual deliveries
are made. No warehouse sales are made; nor are separate stores maintained where
products may be sold independently from the main office. The warehouses only serve
as storage sites and delivery points of the products earlier sold at the main office. Under
the second system, sales transactions are entered into and perfected at stores or
warehouses maintained by the company. Any one who desires to purchase the product
may go to the store or warehouse and there purchase the merchandise. The stores and
warehouses serve as selling centers.
Entities operating under the first system are NOT considered engaged in the separate
business of selling or dealing in their products, independent of their manufacturing
business. Entities operating under the second system are considered engaged in the
separate business of selling.
In the case at bar, the company distributed its softdrinks by means of a fleet of delivery
trucks which went directly to customers in the different places in lloilo province. Sales
transactions with customers were entered into and sales were perfected and
consummated by route salesmen. Truck sales were made independently of transactions
in the main office. The delivery trucks were not used solely for the purpose of delivering
softdrinks previously sold at Pavia. They served as selling units. They were what were
called, until recently, "rolling stores". The delivery trucks were therefore much the same
as the stores and warehouses under the second marketing system. Iloilo Bottlers, Inc.
thus falls under the second category above. That is, the corporation was engaged in the
separate business of selling or distributing soft-drinks, independently of its business of
bottling them.
The tax imposed under Ordinance No. 5 is an excise tax. It is a tax on the privilege of
distributing, manufacturing or bottling softdrinks. Being an excise tax, it can be levied by
the taxing authority only when the acts, privileges or businesses are done or performed
within the jurisdiction of said authority [Commissioner of Internal Revenue v. British
Overseas Airways Corp. and Court of Appeals, G.R. Nos. 65773-74, April 30, 1987, 149
SCRA 395, 410.] Specifically, the situs of the act of distributing, bottling or
manufacturing softdrinks must be within city limits, before an entity engaged in any of
the activities may be taxed in Iloilo City.
As stated above, sales were made by Iloilo Bottlers, Inc. in Iloilo City. Thus, We have no
option but to declare the company liable under the tax ordinance.
With the foregoing discussion, it becomes unnecessary to discuss the other issues
raised by the parties.
WHEREFORE, the appealed decision is hereby REVERSED. The complaint in Civil
Case No. 9046 is ordered DISMISSED. No Costs.
SO ORDERED.
TITLE
: Iloilo Bottlers v City of Iloilo 164 SCRA 607Topic: Situs of Taxation and Double Taxation Part III of the
outlineDigest by: Andrew Velasco Seat number: 31 Law 124 Section: A
FACTS:
Iloilo Bottlers Inc., a company in the business of bottling and selling soft drinks, wasdemanded by the
City of Iloilo to pay an amount of 59,505 in the form of an license tax the cityclaims were due to it under
an ordinance which was enacted on January 11, 1960 known asOrdinance No. 5, Series of 1960; which
provides that manufacturers, bottlers, and distributers of soft drinks in Iloilo are subject to a municipal
license tax of 10 centavos per case of 24 bottles.Iloilo Bottling Inc asserted however that since their
plant base has moved to municipality of Pavia shortly after the aforementioned ordinance was enacted,
they are not liable for any taxes.The city however, still demanded taxes and also demanded back taxes
under the claim that IloiloBottlers is still distributing in the city of Iloilo since its transfer. Iloilo Bottlers
paid thedemanded license tax and back taxes under protest. After bringing the case to court, the
courtsruled in favor of Iloilo Bottlers and declared that Iloilo Bottlers is free from liability. The city of
Iloilo then appealed this ruling, hence this case.
ISSUE:
Whether or not the courts were correct in their initial ruling that Iloilo Bottlers Inc. isfree from liability
and directing the city of Iloilo to refund the tax money.
HELD:
No, the courts were not correct. The ruling was reversed in favor of the City of Iloiloand Iloilo Bottlers is
deemed liable for the aforementioned taxes.
RATIO:
Situs of taxation (place of taxation) depends on various factors including the nature of the tax and
subject matter thereof both of which must be scrutinized to reach a fair decision. Thetax ordinance
enacted by the City of Iloilo imposes a tax on persons, firms, and corporationsengaged in the business of
distribution of soft-drinks, manufacture of soft-drinks, and bottling of soft drinks within the territorial
jurisdiction of the City of Iloilo. There is no question that IloiloBottlers has moved out of Iloilo Citys
jurisdiction and into the municipality of Pavia where its plant now stands therefore, the latter two
conditions for taxation are no longer applicable. Theruling now depends upon whether or not Iloilo
Bottlers can be considered as distributing its products within Iloilo city. Iloilo Bottlers disclaims liability,
saying that it does notindependently distribute but rather actively sells directly to its consumers.
Distribution istherefore only incidental to its business. However, the courts find that Iloilo Bottlers is
indeedconsidered as distributing since while the manufacturing and bottling occurs outside of Iloilocity,
the drinks are sold in Iloilo city to consumers in a moving store fashion. The transactionsare
considered to occur within the city. The tax imposed under Ordinance No. 5 is an excise tax.By its
nature, the power to levy an excise tax depends upon the place where the business is done,or the
occupation is engaged in, or where the transaction took place. In this case, it is a tax on the privilege of
distributing, manufacturing or bottling soft drinks. Even though the base of operations is at Pavia, the
areas of transactions where it conducts its business are within Iloilocity limits. The Situs for excise tax is
the area of transaction, not necessarily base of operation.Since Iloilo Bottlers does distribute within city
limits, it is therefore subject to the ordinance andtherefore should pay the pertinent amounts to the city
of Iloilo

SUPREME COURT
Manila
EN BANC
G.R. No. L-65773-74 April 30, 1987
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
BRITISH OVERSEAS AIRWAYS CORPORATION and COURT OF TAX
APPEALS, respondents.
Quasha, Asperilla, Ancheta, Pea, Valmonte & Marcos for respondent British Airways.

MELENCIO-HERRERA, J .:
Petitioner Commissioner of Internal Revenue (CIR) seeks a review on certiorari of the
joint Decision of the Court of Tax Appeals (CTA) in CTA Cases Nos. 2373 and 2561,
dated 26 January 1983, which set aside petitioner's assessment of deficiency income
taxes against respondent British Overseas Airways Corporation (BOAC) for the fiscal
years 1959 to 1967, 1968-69 to 1970-71, respectively, as well as its Resolution of 18
November, 1983 denying reconsideration.
BOAC is a 100% British Government-owned corporation organized and existing under
the laws of the United Kingdom It is engaged in the international airline business and is
a member-signatory of the Interline Air Transport Association (IATA). As such it
operates air transportation service and sells transportation tickets over the routes of the
other airline members. During the periods covered by the disputed assessments, it is
admitted that BOAC had no landing rights for traffic purposes in the Philippines, and
was not granted a Certificate of public convenience and necessity to operate in the
Philippines by the Civil Aeronautics Board (CAB), except for a nine-month period, partly
in 1961 and partly in 1962, when it was granted a temporary landing permit by the CAB.
Consequently, it did not carry passengers and/or cargo to or from the Philippines,
although during the period covered by the assessments, it maintained a general sales
agent in the Philippines Wamer Barnes and Company, Ltd., and later Qantas
Airways which was responsible for selling BOAC tickets covering passengers and
cargoes. 1
G.R. No. 65773 (CTA Case No. 2373, the First Case)
On 7 May 1968, petitioner Commissioner of Internal Revenue (CIR, for brevity)
assessed BOAC the aggregate amount of P2,498,358.56 for deficiency income taxes
covering the years 1959 to 1963. This was protested by BOAC. Subsequent
investigation resulted in the issuance of a new assessment, dated 16 January 1970 for
the years 1959 to 1967 in the amount of P858,307.79. BOAC paid this new assessment
under protest.
On 7 October 1970, BOAC filed a claim for refund of the amount of P858,307.79, which
claim was denied by the CIR on 16 February 1972. But before said denial, BOAC had
already filed a petition for review with the Tax Court on 27 January 1972, assailing the
assessment and praying for the refund of the amount paid.
G.R. No. 65774 (CTA Case No. 2561, the Second Case)
On 17 November 1971, BOAC was assessed deficiency income taxes, interests, and
penalty for the fiscal years 1968-1969 to 1970-1971 in the aggregate amount of
P549,327.43, and the additional amounts of P1,000.00 and P1,800.00 as compromise
penalties for violation of Section 46 (requiring the filing of corporation returns) penalized
under Section 74 of the National Internal Revenue Code (NIRC).
On 25 November 1971, BOAC requested that the assessment be countermanded and
set aside. In a letter, dated 16 February 1972, however, the CIR not only denied the
BOAC request for refund in the First Case but also re-issued in the Second Case the
deficiency income tax assessment for P534,132.08 for the years 1969 to 1970-71 plus
P1,000.00 as compromise penalty under Section 74 of the Tax Code. BOAC's request
for reconsideration was denied by the CIR on 24 August 1973. This prompted BOAC to
file the Second Case before the Tax Court praying that it be absolved of liability for
deficiency income tax for the years 1969 to 1971.
This case was subsequently tried jointly with the First Case.
On 26 January 1983, the Tax Court rendered the assailed joint Decision reversing the
CIR. The Tax Court held that the proceeds of sales of BOAC passage tickets in the
Philippines by Warner Barnes and Company, Ltd., and later by Qantas Airways, during
the period in question, do not constitute BOAC income from Philippine sources "since
no service of carriage of passengers or freight was performed by BOAC within the
Philippines" and, therefore, said income is not subject to Philippine income tax. The
CTA position was that income from transportation is income from services so that the
place where services are rendered determines the source. Thus, in the dispositive
portion of its Decision, the Tax Court ordered petitioner to credit BOAC with the sum of
P858,307.79, and to cancel the deficiency income tax assessments against BOAC in
the amount of P534,132.08 for the fiscal years 1968-69 to 1970-71.
Hence, this Petition for Review on certiorari of the Decision of the Tax Court.
The Solicitor General, in representation of the CIR, has aptly defined the issues, thus:
1. Whether or not the revenue derived by private respondent British
Overseas Airways Corporation (BOAC) from sales of tickets in the
Philippines for air transportation, while having no landing rights here,
constitute income of BOAC from Philippine sources, and, accordingly,
taxable.
2. Whether or not during the fiscal years in question BOAC s a resident
foreign corporation doing business in the Philippines or has an office or
place of business in the Philippines.
3. In the alternative that private respondent may not be considered a
resident foreign corporation but a non-resident foreign corporation, then it
is liable to Philippine income tax at the rate of thirty-five per cent (35%) of
its gross income received from all sources within the Philippines.
Under Section 20 of the 1977 Tax Code:
(h) the term resident foreign corporation engaged in trade or business
within the Philippines or having an office or place of business therein.
(i) The term "non-resident foreign corporation" applies to a foreign
corporation not engaged in trade or business within the Philippines and
not having any office or place of business therein
It is our considered opinion that BOAC is a resident foreign corporation. There is no
specific criterion as to what constitutes "doing" or "engaging in" or "transacting"
business. Each case must be judged in the light of its peculiar environmental
circumstances. The term implies a continuity of commercial dealings and arrangements,
and contemplates, to that extent, the performance of acts or works or the exercise of
some of the functions normally incident to, and in progressive prosecution of
commercial gain or for the purpose and object of the business organization.
2
"In order that
a foreign corporation may be regarded as doing business within a State, there must be continuity of
conduct and intention to establish a continuous business, such as the appointment of a local agent, and
not one of a temporary character.
3

BOAC, during the periods covered by the subject - assessments, maintained a general
sales agent in the Philippines, That general sales agent, from 1959 to 1971, "was
engaged in (1) selling and issuing tickets; (2) breaking down the whole trip into series of
trips each trip in the series corresponding to a different airline company; (3) receiving
the fare from the whole trip; and (4) consequently allocating to the various airline
companies on the basis of their participation in the services rendered through the mode
of interline settlement as prescribed by Article VI of the Resolution No. 850 of the IATA
Agreement."
4
Those activities were in exercise of the functions which are normally incident to, and are
in progressive pursuit of, the purpose and object of its organization as an international air carrier. In fact,
the regular sale of tickets, its main activity, is the very lifeblood of the airline business, the generation of
sales being the paramount objective. There should be no doubt then that BOAC was "engaged in"
business in the Philippines through a local agent during the period covered by the assessments.
Accordingly, it is a resident foreign corporation subject to tax upon its total net income received in the
preceding taxable year from all sources within the Philippines.
5

Sec. 24. Rates of tax on corporations. ...
(b) Tax on foreign corporations. ...
(2) Resident corporations. A corporation organized, authorized, or
existing under the laws of any foreign country, except a foreign fife
insurance company, engaged in trade or business within the Philippines,
shall be taxable as provided in subsection (a) of this section upon the total
net income received in the preceding taxable year from all sources within
the Philippines. (Emphasis supplied)
Next, we address ourselves to the issue of whether or not the revenue from sales of
tickets by BOAC in the Philippines constitutes income from Philippine sources and,
accordingly, taxable under our income tax laws.
The Tax Code defines "gross income" thus:
"Gross income" includes gains, profits, and income derived from salaries,
wages or compensation for personal service of whatever kind and in
whatever form paid, or from profession, vocations, trades,business,
commerce, sales, or dealings in property, whether real or personal,
growing out of the ownership or use of or interest in such property; also
from interests, rents, dividends, securities, or the transactions of any
business carried on for gain or profile, or gains, profits, and income
derived from any source whatever (Sec. 29[3]; Emphasis supplied)
The definition is broad and comprehensive to include proceeds from sales of transport
documents. "The words 'income from any source whatever' disclose a legislative policy
to include all income not expressly exempted within the class of taxable income under
our laws." Income means "cash received or its equivalent"; it is the amount of money
coming to a person within a specific time ...; it means something distinct from principal
or capital. For, while capital is a fund, income is a flow. As used in our income tax law,
"income" refers to the flow of wealth.
6

The records show that the Philippine gross income of BOAC for the fiscal years 1968-69
to 1970-71 amounted to P10,428,368 .00.
7

Did such "flow of wealth" come from "sources within the Philippines",
The source of an income is the property, activity or service that produced the
income.
8
For the source of income to be considered as coming from the Philippines, it is sufficient that
the income is derived from activity within the Philippines. In BOAC's case, the sale of tickets in the
Philippines is the activity that produces the income. The tickets exchanged hands here and payments for
fares were also made here in Philippine currency. The site of the source of payments is the Philippines.
The flow of wealth proceeded from, and occurred within, Philippine territory, enjoying the protection
accorded by the Philippine government. In consideration of such protection, the flow of wealth should
share the burden of supporting the government.
A transportation ticket is not a mere piece of paper. When issued by a common carrier,
it constitutes the contract between the ticket-holder and the carrier. It gives rise to the
obligation of the purchaser of the ticket to pay the fare and the corresponding obligation
of the carrier to transport the passenger upon the terms and conditions set forth
thereon. The ordinary ticket issued to members of the traveling public in general
embraces within its terms all the elements to constitute it a valid contract, binding upon
the parties entering into the relationship.
9

True, Section 37(a) of the Tax Code, which enumerates items of gross income from
sources within the Philippines, namely: (1) interest, (21) dividends, (3) service, (4)
rentals and royalties, (5) sale of real property, and (6) sale of personal property, does
not mention income from the sale of tickets for international transportation. However,
that does not render it less an income from sources within the Philippines. Section 37,
by its language, does not intend the enumeration to be exclusive. It merely directs that
the types of income listed therein be treated as income from sources within the
Philippines. A cursory reading of the section will show that it does not state that it is an
all-inclusive enumeration, and that no other kind of income may be so considered. " 10
BOAC, however, would impress upon this Court that income derived from transportation
is income for services, with the result that the place where the services are rendered
determines the source; and since BOAC's service of transportation is performed outside
the Philippines, the income derived is from sources without the Philippines and,
therefore, not taxable under our income tax laws. The Tax Court upholds that stand in
the joint Decision under review.
The absence of flight operations to and from the Philippines is not determinative of the
source of income or the site of income taxation. Admittedly, BOAC was an off-line
international airline at the time pertinent to this case. The test of taxability is the
"source"; and the source of an income is that activity ... which produced the
income. 11Unquestionably, the passage documentations in these cases were sold in the Philippines and the revenue therefrom was
derived from a activity regularly pursued within the Philippines. business a And even if the BOAC tickets sold covered the "transport of
passengers and cargo to and from foreign cities", 12it cannot alter the fact that income from the sale of tickets was derived from the
Philippines. The word "source" conveys one essential idea, that of origin, and the origin of the income herein is the Philippines. 13
It should be pointed out, however, that the assessments upheld herein apply only to the
fiscal years covered by the questioned deficiency income tax assessments in these
cases, or, from 1959 to 1967, 1968-69 to 1970-71. For, pursuant to Presidential Decree
No. 69, promulgated on 24 November, 1972, international carriers are now taxed as
follows:
... Provided, however, That international carriers shall pay a tax of 2- per
cent on their cross Philippine billings. (Sec. 24[b] [21, Tax Code).
Presidential Decree No. 1355, promulgated on 21 April, 1978, provided a statutory
definition of the term "gross Philippine billings," thus:
... "Gross Philippine billings" includes gross revenue realized from uplifts
anywhere in the world by any international carrier doing business in the
Philippines of passage documents sold therein, whether for passenger,
excess baggage or mail provided the cargo or mail originates from the
Philippines. ...
The foregoing provision ensures that international airlines are taxed on their income
from Philippine sources. The 2- % tax on gross Philippine billings is an income tax. If it
had been intended as an excise or percentage tax it would have been place under Title
V of the Tax Code covering Taxes on Business.
Lastly, we find as untenable the BOAC argument that the dismissal for lack of merit by
this Court of the appeal inJAL vs. Commissioner of Internal Revenue (G.R. No. L-
30041) on February 3, 1969, is res judicata to the present case. The ruling by the Tax
Court in that case was to the effect that the mere sale of tickets, unaccompanied by the
physical act of carriage of transportation, does not render the taxpayer therein subject to
the common carrier's tax. As elucidated by the Tax Court, however, the common
carrier's tax is an excise tax, being a tax on the activity of transporting, conveying or
removing passengers and cargo from one place to another. It purports to tax the
business of transportation. 14 Being an excise tax, the same can be levied by the State
only when the acts, privileges or businesses are done or performed within the
jurisdiction of the Philippines. The subject matter of the case under consideration is
income tax, a direct tax on the income of persons and other entities "of whatever kind
and in whatever form derived from any source." Since the two cases treat of a different
subject matter, the decision in one cannot be res judicata to the other.
WHEREFORE, the appealed joint Decision of the Court of Tax Appeals is hereby SET
ASIDE. Private respondent, the British Overseas Airways Corporation (BOAC), is
hereby ordered to pay the amount of P534,132.08 as deficiency income tax for the fiscal
years 1968-69 to 1970-71 plus 5% surcharge, and 1% monthly interest from April 16,
1972 for a period not to exceed three (3) years in accordance with the Tax Code. The
BOAC claim for refund in the amount of P858,307.79 is hereby denied. Without costs.
SO ORDERED.
Paras, Gancayco, Padilla, Bidin, Sarmiento and Cortes, JJ., concur.
Fernan, J., took no part.

Separate Opinions

TEEHANKEE, C.J ., concurring:
I concur with the Court's majority judgment upholding the assessments of deficiency
income taxes against respondent BOAC for the fiscal years 1959-1969 to 1970-1971
and therefore setting aside the appealed joint decision of respondent Court of Tax
Appeals. I just wish to point out that the conflict between the majority opinion penned by
Mr. Justice Feliciano as to the proper characterization of the taxable income derived by
respondent BOAC from the sales in the Philippines of tickets foe BOAC form the issued
by its general sales agent in the Philippines gas become moot after November 24,
1972. Booth opinions state that by amendment through P.D. No.69, promulgated on
November 24, 1972, of section 24(b) (2) of the Tax Code providing dor the rate of
income tax on foreign corporations, international carriers such as respondent BOAC,
have since then been taxed at a reduced rate of 2-% on their gross Philippine billings.
There is, therefore, no longer ant source of substantial conflict between the two opinions
as to the present 2-% tax on their gross Philippine billings charged against such
international carriers as herein respondent foreign corporation.
FELICIANO, J ., dissenting:
With great respect and reluctance, i record my dissent from the opinion of Mme. Justice
A.A. Melencio-Herrera speaking for the majority . In my opinion, the joint decision of the
Court of Tax Appeals in CTA Cases Nos. 2373 and 2561, dated 26 January 1983, is
correct and should be affirmed.
The fundamental issue raised in this petition for review is whether the British Overseas
Airways Corporation (BOAC), a foreign airline company which does not maintain any
flight operations to and from the Philippines, is liable for Philippine income taxation in
respect of "sales of air tickets" in the Philippines through a general sales agent, relating
to the carriage of passengers and cargo between two points both outside the
Philippines.
1. The Solicitor General has defined as one of the issue in this case the question of:
2. Whether or not during the fiscal years in question 1 BOAC [was] a resident foreign
corporation doing business in the Philippines or [had] an office or place of business in the Philippines.
It is important to note at the outset that the answer to the above-quoted issue is not
determinative of the lialibity of the BOAC to Philippine income taxation in respect of the
income here involved. The liability of BOAC to Philippine income taxation in respect of
such income depends, not on BOAC's status as a "resident foreign corporation" or
alternatively, as a "non-resident foreign corporation," but rather on whether or not such
income is derived from "source within the Philippines."
A "resident foreign corporation" or foreign corporation engaged in trade or business in
the Philippines or having an office or place of business in the Philippines is subject to
Philippine income taxation only in respect of income derived from sources within the
Philippines. Section 24 (b) (2) of the National Internal Revenue CODE ("Tax Code"), as
amended by Republic Act No. 2343, approved 20 June 1959, as it existed up to 3
August 1969, read as follows:
(2) Resident corporations. A foreign corporation engaged in trade or
business with in the Philippines (expect foreign life insurance companies)
shall be taxable as provided in subsection (a) of this section.
Section 24 (a) of the Tax Code in turn provides:
Rate of tax on corporations. (a) Tax on domestic corporations. ...
and a like tax shall be livied, collected, and paid annually upon the total
net income received in the preceeding taxable year from all sources within
the Philippines by every corporation organized, authorized, or
existing under the laws of any foreign country: ... . (Emphasis supplied)
Republic Act No. 6110, which took effect on 4 August 1969, made this even clearer
when it amended once more Section 24 (b) (2) of the Tax Code so as to read as
follows:
(2) Resident Corporations. A corporation, organized, authorized
or existing under the laws of any foreign counrty, except foreign life
Exactly the same rule is provided by Section 24 (b) (1) of the Tax Code upon non-
resident foreign corporations. Section 24 (b) (1) as amended by Republic Act No. 3825
approved 22 June 1963, read as follows:
(b) Tax on foreign corporations. (1) Non-resident corporations. There
shall be levied, collected and paid for each taxable year, in lieu of the tax
imposed by the preceding paragraph upon the amount received by every
foreign corporation not engaged in trade or business within the
Philippines, from all sources within the Philippines, as interest, dividends,
rents, salaries, wages, premium, annuities, compensations,
remunerations, emoluments, or other fixed or determinative annual or
periodical gains, profits and income a tax equal to thirty per centum of
such amount: provided, however, that premiums shall not include
reinsurance premiums.
2

Clearly, whether the foreign corporate taxpayer is doing business in the Philippines and
therefore a resident foreign corporation, or not doing business in the Philippines and
therefore a non-resident foreign corporation, it is liable to income tax only to the extent
that it derives income from sources within the Philippines. The circumtances that a
foreign corporation is resident in the Philippines yields no inference that all or any part
of its income is Philippine source income. Similarly, the non-resident status of a foreign
corporation does not imply that it has no Philippine source income. Conversely, the
receipt of Philippine source income creates no presumption that the recipient foreign
corporation is a resident of the Philippines. The critical issue, for present purposes, is
thereforewhether of not BOAC is deriving income from sources within the Philippines.
2. For purposes of income taxation, it is well to bear in mind that the "source of income"
relates not to the physical sourcing of a flow of money or the physical situs of
payment but rather to the "property, activity or service which produced the income."
In Howden and Co., Ltd. vs. Collector of Internal Revenue,
3
the court dealt with the issue of
the applicable source rule relating to reinsurance premiums paid by a local insurance company to a
foreign reinsurance company in respect of risks located in the Philippines. The Court said:
The source of an income is the property, activity or services that produced
the income. The reinsurance premiums remitted to appellants by virtue of
the reinsurance contract, accordingly, had for their source the undertaking
to indemnify Commonwealth Insurance Co. against liability. Said
undertaking is the activity that produced the reinsurance premiums, and
the same took place in the Philippines. [T]he reinsurance, the liabilities
insured and the risk originally underwritten by Commonwealth Insurance
Co., upon which the reinsurance premiums and indemnity were based,
were all situated in the Philippines.
4

The Court may be seen to be saying that it is the underlying prestation which is properly
regarded as the activity giving rise to the income that is sought to be taxed. In
the Howden case, that underlying prestation was theindemnification of the local
insurance company. Such indemnification could take place only in the Philippines where
the risks were located and where payment from the foreign reinsurance (in case the
casualty insured against occurs) would be received in Philippine pesos under the
reinsurance premiums paid by the local insurance companies constituted Philippine
source income of the foreign reinsurances.
The concept of "source of income" for purposes of income taxation originated in the
United States income tax system. The phrase "sources within the United States" was
first introduced into the U.S. tax system in 1916, and was subsequently embodied in the
1939 U.S. Tax Code. As is commonly known, our Tax Code (Commonwealth Act 466,
as amended) was patterned after the 1939 U.S. Tax Code. It therefore seems useful to
refer to a standard U.S. text on federal income taxation:
The Supreme Court has said, in a definition much quoted but often
debated, that income may be derived from three possible sources
only: (1) capital and/or (2) labor and/or (3) the sale of capital assets. While
the three elements of this attempt at definition need not be accepted as
all-inclusive, they serve as useful guides in any inquiry into whether a
particular item is from "source within the United States" and suggest an
investigation into the nature and location of the activities or property which
produce the income. If the income is from labor (services) the place where
the labor is doneshould be decisive; if it is done in this counrty, the income
should be from "source within the United States." If the income is from
capital, the place where the capital is employed should be decisive; if it is
employed in this country, the income should be from "source within the
United States". If the income is from the sale of capital assets, the place
where the sale is made should be likewise decisive. Much confusion will
be avoided by regarding the term "source" in this fundamental light. It is
not a place; it is an activity or property. As such, it has a situs or
location; and if that situs or location is within the United States the
resulting income is taxable to nonresident aliens and foreign corporations.
The intention of Congress in the 1916 and subsequent statutes was to
discard the 1909 and 1913 basis of taxing nonresident aliens and foreign
corporations and to make the test of taxability the "source", or situs of the
activities or property which produce the income . . . . Thus, if income is to
taxed, the recipient thereof must be resident within the jurisdiction, or the
property or activities out of which the income issue or is derived must be
situated within the jurisdiction so that the source of the income may be
said to have a situs in this country. The underlying theory is that the
consideration for taxation is protection of life and property and that the
income rightly to be levied upon to defray the burdens of the United States
Government is that income which is created by activities and property
protected by this Government or obtained by persons enjoying that
protection.
5

3. We turn now to the question what is the source of income rule applicable in the
instant case. There are two possibly relevant source of income rules that must be
confronted; (a) the source rule applicable in respect ofcontracts of service; and (b) the
source rule applicable in respect of sales of personal property.
Where a contract for the rendition of service is involved, the applicable source rule may
be simply stated as follows: the income is sourced in the place where the service
contracted for is rendered. Section 37 (a) (3) of our Tax Code reads as follows:
Section 37. Income for sources within the Philippines.
(a) Gross income from sources within the Philippines. The following
items of gross income shall be treated as gross income from sources
within the Philippines:
xxx xxx xxx
(3) Services. Compensation for labor or personal
services performed in the Philippines;... (Emphasis supplied)
Section 37 (c) (3) of the Tax Code, on the other hand, deals with income from sources
without the Philippines in the following manner:
(c) Gross income from sources without the Philippines. The following
items of gross income shall be treated as income from sources without the
Philippines:
(3) Compensation for labor or personal services performed without the
Philippines; ... (Emphasis supplied)
It should not be supposed that Section 37 (a) (3) and (c) (3) of the Tax Code apply only
in respect of services rendered by individual natural persons; they also apply to services
rendered by or through the medium of a juridical person.
6
Further, a contract of carriage or of
transportation is assimilated in our Tax Code and Revenue Regulations to a contract for services. Thus,
Section 37 (e) of the Tax Code provides as follows:
(e) Income form sources partly within and partly without the Philippines.
Items of gross income, expenses, losses and deductions, other than those
specified in subsections (a) and (c) of this section shall be allocated or
apportioned to sources within or without the Philippines, under the rules
and regulations prescribed by the Secretary of Finance. ... Gains, profits,
and income from (1)transportation or other services rendered partly within
and partly without the Philippines, or (2) from the sale of personnel
property produced (in whole or in part) by the taxpayer within and sold
without the Philippines, or produced (in whole or in part) by the taxpayer
without and sold within the Philippines, shall be treated as derived partly
from sources within and partly from sources without the Philippines. ...
(Emphasis supplied)
It should be noted that the above underscored portion of Section 37 (e) was derived
from the 1939 U.S. Tax Code which "was based upon a recognition that transportation
was a service and that the source of the income derived therefrom was to be treated as
being the place where the service of transportation was rendered.
7

Section 37 (e) of the Tax Code quoted above carries a strong well-nigh irresistible,
implication that income derived from transportation or other services rendered entirely
outside the Philippines must be treated as derived entirely from sources without the
Philippines. This implication is reinforced by a consideration of certain provisions of
Revenue Regulations No. 2 entitled "Income Tax Regulations" as amended, first
promulgated by the Department of Finance on 10 February 1940. Section 155 of
Revenue Regulations No. 2 (implementing Section 37 of the Tax Code) provides in part
as follows:
Section 155. Compensation for labor or personnel services. Gross
income from sources within the Philippines includes compensation for
labor or personal services within the Philippines regardless of the
residence of the payer, of the place in which the contract for services was
made, or of the place of payment (Emphasis supplied)
Section 163 of Revenue Regulations No. 2 (still relating to Section 37 of the Tax Code)
deals with a particular species of foreign transportation companies i.e.,
foreign steamship companies deriving income from sources partly within and partly
without the Philippines:
Section 163 Foreign steamship companies. The return of foreign
steamship companies whose vessels touch parts of the Philippines should
include as gross income, the total receipts of all out-going
business whether freight or passengers. With the gross income thus
ascertained, the ratio existing between it and the gross income from all
ports, both within and without the Philippines of all vessels, whether
touching of the Philippines or not, should be determined as the basis upon
which allowable deductions may be computed, . (Emphasis supplied)
Another type of utility or service enterprise is dealt with in Section 164 of Revenue
Regulations No. 2 (again implementing Section 37 of the Tax Code) with provides as
follows:
Section 164. Telegraph and cable services. A foreign corporation
carrying on the business of transmission of telegraph or cable messages
between points in the Philippines and points outside the Philippines
derives income partly form source within and partly from sources without
the Philippines.
... (Emphasis supplied)
Once more, a very strong inference arises under Sections 163 and 164 of Revenue
Regulations No. 2 that steamship and telegraph and cable services rendered between
points both outside the Philippines give rise to income wholly from sources outside the
Philippines, and therefore not subject to Philippine income taxation.
We turn to the "source of income" rules relating to the sale of personal property, upon
the one hand, and to the purchase and sale of personal property, upon the other hand.
We consider first sales of personal property. Income from the sale of personal property
by the producer or manufacturer of such personal property will be regarded as
sourced entirely within or entirely without the Philippines or as sourced partly within and
partly without the Philippines, depending upon two factors: (a) the place where the sale
of such personal property occurs; and (b) the place where such personal property was
produced or manufactured. If the personal property involved was both produced or
manufactured and sold outside the Philippines, the income derived therefrom will be
regarded as sourced entirely outside the Philippines, although the personal property
had been produced outside the Philippines, or if the sale of the property takes place
outside the Philippines and the personal was produced in the Philippines, then, the
income derived from the sale will be deemed partly as income sourced without the
Philippines. In other words, the income (and the related expenses, losses and
deductions) will be allocated between sources within and sources without the
Philippines. Thus, Section 37 (e) of the Tax Code, although already quoted above, may
be usefully quoted again:
(e) Income from sources partly within and partly without the Philippines. ...
Gains, profits and income from (1) transportation or other services
rendered partly within and partly without the Philippines; or (2) from the
sale of personal property produced (in whole or in part) by the taxpayer
within and sold without the Philippines, or produced (in whole or in part) by
the taxpayer without and sold within the Philippines, shall be treated as
derived partly from sources within and partly from sources without the
Philippines. ... (Emphasis supplied)
In contrast, income derived from the purchase and sale of personal property i. e.,
trading is, under the Tax Code, regarded as sourced wholly in the place where the
personal property is sold. Section 37 (e) of the Tax Code provides in part as follows:
(e) Income from sources partly within and partly without the Philippines ...
Gains, profits and income derived from the purchase of personal property
within and its sale without the Philippines or from the purchase of personal
property without and its sale within the Philippines, shall be treated as
derived entirely from sources within the country in which sold. (Emphasis
supplied)
Section 159 of Revenue Regulations No. 2 puts the applicable rule succinctly:
Section 159. Sale of personal property. Income derived from the purchase
and sale of personal property shall be treated as derived entirely from the
country in which sold. The word "sold" includes "exchange." The "country"
in which "sold" ordinarily means the place where the property is marketed.
This Section does not apply to income from the sale personal property
produced (in whole or in part) by the taxpayer within and sold without the
Philippines or produced (in whole or in part) by the taxpayer without and
sold within the Philippines. (See Section 162 of these regulations).
(Emphasis supplied)
4. It will be seen that the basic problem is one of characterization of the transactions
entered into by BOAC in the Philippines. Those transactions may be characterized
either as sales of personal property (i. e., "sales of airline tickets") or as entering into a
lease of services or a contract of service or carriage. The applicable "source of income"
rules differ depending upon which characterization is given to the BOAC transactions.
The appropriate characterization, in my opinion, of the BOAC transactions is that of
entering into contracts of service, i.e., carriage of passengers or cargo between points
located outside the Philippines.
The phrase "sale of airline tickets," while widely used in popular parlance, does not
appear to be correct as a matter of tax law. The airline ticket in and of itself has no
monetary value, even as scrap paper. The value of the ticket lies wholly in the right
acquired by the "purchaser" the passenger to demand a prestation from BOAC,
which prestation consists of the carriage of the "purchaser" or passenger from the one
point to another outside the Philippines. The ticket is really the evidence of the contract
of carriage entered into between BOAC and the passenger. The money paid by the
passenger changes hands in the Philippines. But the passenger does not receive
undertaken to be delivered by BOAC. The "purchase price of the airline ticket" is quite
different from the purchase price of a physical good or commodity such as a pair of
shoes of a refrigerator or an automobile; it is really the compensation paid for the
undertaking of BOAC to transport the passenger or cargo outside the Philippines.
The characterization of the BOAC transactions either as sales of personal property or
as purchases and sales of personal property, appear entirely inappropriate from other
viewpoint. Consider first purchases and sales: is BOAC properly regarded as engaged
in trading in the purchase and sale of personal property? Certainly, BOAC was not
purchasing tickets outside the Philippines and selling them in the Philippines. Consider
next sales: can BOAC be regarded as "selling" personal property produced or
manufactured by it? In a popular or journalistic sense, BOAC might be described as
"selling" "a product" its service. However, for the technical purposes of the law on
income taxation, BOAC is in fact entering into contracts of service or carriage. The very
existance of "source rules" specifically and precisely applicable to the rendition of
services must preclude the application here of "source rules" applying generally to
sales, and purchases and sales, of personal property which can be invoked only by the
grace of popular language. On a slighty more abstract level, BOAC's income is more
appropriately characterized as derived from a "service", rather than from an "activity" (a
broader term than service and including the activity of selling) or from the here involved
is income taxation, and not a sales tax or an excise or privilege tax.
5. The taxation of international carriers is today effected under Section 24 (b) (2) of the
Tax Code, as amended by Presidential Decree No. 69, promulgated on 24 November
1972 and by Presidential Decree No. 1355, promulgated on 21 April 1978, in the
following manner:
existing under the laws of any foreign country, engaged in trade or
business within the Philippines, shall be taxable as provided in subsection
(a) of this section upon the total net income received in the preceeding
taxable year from all sources within the Philippines: Provided,
however, That international carriers shall pay a tax of two and one-half per
cent on their gross Philippine billings. "Gross Philippines of passage
documents sold therein, whether for passenger, excess baggege or mail,
provide the cargo or mail originates from the Philippines. The gross
revenue realized from the said cargo or mail shall include the gross freight
charge up to final destination. Gross revenues from chartered flights
originating from the Philippines shall likewise form part of "gross Philippine
billings" regardless of the place of sale or payment of the passage
documents. For purposes of determining the taxability to revenues from
chartered flights, the term "originating from the Philippines" shall include
flight of passsengers who stay in the Philippines for more than forty-eight
(48) hours prior to embarkation. (Emphasis supplied)
Under the above-quoted proviso international carriers issuing for compensation
passage documentation in the Philippines for uplifts from any point in the world to any
other point in the world, are not charged any Philippineincome tax on their Philippine
billings (i.e., billings in respect of passenger or cargo originating from the Philippines).
Under this new approach, international carriers who service port or points in the
Philippines are treated in exactly the same way as international carriers not serving any
port or point in the Philippines. Thus, the source of income rule applicable, as above
discussed, to transportation or other services rendered partly within and partly without
the Philippines, or wholly without the Philippines, has been set aside. in place of
Philippine income taxation, the Tax Code now imposes this 2 per cent tax computed
on the basis of billings in respect of passengers and cargo originating from the
Philippines regardless of where embarkation and debarkation would be taking place.
This 2- per cent tax is effectively a tax on gross receipts or an excise or privilege tax
and not a tax on income. Thereby, the Government has done away with the difficulties
attending the allocation of income and related expenses, losses and deductions.
Because taxes are the very lifeblood of government, the resulting potential "loss" or
"gain" in the amount of taxes collectible by the state is sometimes, with varying degrees
of consciousness, considered in choosing from among competing possible
characterizations under or interpretation of tax statutes. It is hence perhaps useful to
point out that the determination of the appropriate characterization here that of
contracts of air carriage rather than sales of airline tickets entails no down-the-road
loss of income tax revenues to the Government. In lieu thereof, the Government takes
in revenues generated by the 2- per cent tax on the gross Philippine billings or
receipts of international carriers.
I would vote to affirm the decision of the Court of Tax Appeals.

Separate Opinions
TEEHANKEE, C.J ., concurring:
I concur with the Court's majority judgment upholding the assessments of deficiency
income taxes against respondent BOAC for the fiscal years 1959-1969 to 1970-1971
and therefore setting aside the appealed joint decision of respondent Court of Tax
Appeals. I just wish to point out that the conflict between the majority opinion penned by
Mr. Justice Feliciano as to the proper characterization of the taxable income derived by
respondent BOAC from the sales in the Philippines of tickets foe BOAC form the issued
by its general sales agent in the Philippines gas become moot after November 24,
1972. Booth opinions state that by amendment through P.D. No.69, promulgated on
November 24, 1972, of section 24(b) (2) of the Tax Code providing dor the rate of
income tax on foreign corporations, international carriers such as respondent BOAC,
have since then been taxed at a reduced rate of 2-% on their gross Philippine billings.
There is, therefore, no longer ant source of substantial conflict between the two opinions
as to the present 2-% tax on their gross Philippine billings charged against such
international carriers as herein respondent foreign corporation.
FELICIANO, J ., dissenting:
With great respect and reluctance, i record my dissent from the opinion of Mme. Justice
A.A. Melencio-Herrera speaking for the majority . In my opinion, the joint decision of the
Court of Tax Appeals in CTA Cases Nos. 2373 and 2561, dated 26 January 1983, is
correct and should be affirmed.
The fundamental issue raised in this petition for review is whether the British Overseas
Airways Corporation (BOAC), a foreign airline company which does not maintain any
flight operations to and from the Philippines, is liable for Philippine income taxation in
respect of "sales of air tickets" in the Philippines through a general sales agent, relating
to the carriage of passengers and cargo between two points both outside the
Philippines.
1. The Solicitor General has defined as one of the issue in this case the question of:
2. Whether or not during the fiscal years in question 1 BOAC [was] a resident foreign
corporation doing business in the Philippines or [had] an office or place of business in the Philippines.
It is important to note at the outset that the answer to the above-quoted issue is not
determinative of the lialibity of the BOAC to Philippine income taxation in respect of the
income here involved. The liability of BOAC to Philippine income taxation in respect of
such income depends, not on BOAC's status as a "resident foreign corporation" or
alternatively, as a "non-resident foreign corporation," but rather on whether or not such
income is derived from "source within the Philippines."
A "resident foreign corporation" or foreign corporation engaged in trade or business in
the Philippines or having an office or place of business in the Philippines is subject to
Philippine income taxation only in respect of income derived from sources within the
Philippines. Section 24 (b) (2) of the National Internal Revenue CODE ("Tax Code"), as
amended by Republic Act No. 2343, approved 20 June 1959, as it existed up to 3
August 1969, read as follows:
(2) Resident corporations. A foreign corporation engaged in trade or
business with in the Philippines (expect foreign life insurance companies)
shall be taxable as provided in subsection (a) of this section.
Section 24 (a) of the Tax Code in turn provides:
Rate of tax on corporations. (a) Tax on domestic corporations. ...
and a like tax shall be livied, collected, and paid annually upon the total
net income received in the preceeding taxable year from all sources within
the Philippines by every corporation organized, authorized, or
existing under the laws of any foreign country: ... . (Emphasis supplied)
Republic Act No. 6110, which took effect on 4 August 1969, made this even clearer
when it amended once more Section 24 (b) (2) of the Tax Code so as to read as
follows:
(2) Resident Corporations. A corporation, organized, authorized
or existing under the laws of any foreign counrty, except foreign life
Exactly the same rule is provided by Section 24 (b) (1) of the Tax Code upon non-
resident foreign corporations. Section 24 (b) (1) as amended by Republic Act No. 3825
approved 22 June 1963, read as follows:
(b) Tax on foreign corporations. (1) Non-resident corporations. There
shall be levied, collected and paid for each taxable year, in lieu of the tax
imposed by the preceding paragraph upon the amount received by every
foreign corporation not engaged in trade or business within the
Philippines, from all sources within the Philippines, as interest, dividends,
rents, salaries, wages, premium, annuities, compensations,
remunerations, emoluments, or other fixed or determinative annual or
periodical gains, profits and income a tax equal to thirty per centum of
such amount: provided, however, that premiums shall not include
reinsurance premiums.
2

Clearly, whether the foreign corporate taxpayer is doing business in the Philippines and
therefore a resident foreign corporation, or not doing business in the Philippines and
therefore a non-resident foreign corporation, it is liable to income tax only to the extent
that it derives income from sources within the Philippines. The circumtances that a
foreign corporation is resident in the Philippines yields no inference that all or any part
of its income is Philippine source income. Similarly, the non-resident status of a foreign
corporation does not imply that it has no Philippine source income. Conversely, the
receipt of Philippine source income creates no presumption that the recipient foreign
corporation is a resident of the Philippines. The critical issue, for present purposes, is
thereforewhether of not BOAC is deriving income from sources within the Philippines.
2. For purposes of income taxation, it is well to bear in mind that the "source of income"
relates not to the physical sourcing of a flow of money or the physical situs of
payment but rather to the "property, activity or service which produced the income."
In Howden and Co., Ltd. vs. Collector of Internal Revenue,
3
the court dealt with the issue of
the applicable source rule relating to reinsurance premiums paid by a local insurance company to a
foreign reinsurance company in respect of risks located in the Philippines. The Court said:
The source of an income is the property, activity or services that produced
the income. The reinsurance premiums remitted to appellants by virtue of
the reinsurance contract, accordingly, had for their source the undertaking
to indemnify Commonwealth Insurance Co. against liability. Said
undertaking is the activity that produced the reinsurance premiums, and
the same took place in the Philippines. [T]he reinsurance, the liabilities
insured and the risk originally underwritten by Commonwealth Insurance
Co., upon which the reinsurance premiums and indemnity were based,
were all situated in the Philippines.
4

The Court may be seen to be saying that it is the underlying prestation which is properly
regarded as the activity giving rise to the income that is sought to be taxed. In
the Howden case, that underlying prestation was theindemnification of the local
insurance company. Such indemnification could take place only in the Philippines where
the risks were located and where payment from the foreign reinsurance (in case the
casualty insured against occurs) would be received in Philippine pesos under the
reinsurance premiums paid by the local insurance companies constituted Philippine
source income of the foreign reinsurances.
The concept of "source of income" for purposes of income taxation originated in the
United States income tax system. The phrase "sources within the United States" was
first introduced into the U.S. tax system in 1916, and was subsequently embodied in the
1939 U.S. Tax Code. As is commonly known, our Tax Code (Commonwealth Act 466,
as amended) was patterned after the 1939 U.S. Tax Code. It therefore seems useful to
refer to a standard U.S. text on federal income taxation:
The Supreme Court has said, in a definition much quoted but often
debated, that income may be derived from three possible sources
only: (1) capital and/or (2) labor and/or (3) the sale of capital assets. While
the three elements of this attempt at definition need not be accepted as
all-inclusive, they serve as useful guides in any inquiry into whether a
particular item is from "source within the United States" and suggest an
investigation into the nature and location of the activities or property which
produce the income. If the income is from labor (services) the place where
the labor is doneshould be decisive; if it is done in this counrty, the income
should be from "source within the United States." If the income is from
capital, the place where the capital is employed should be decisive; if it is
employed in this country, the income should be from "source within the
United States". If the income is from the sale of capital assets, the place
where the sale is made should be likewise decisive. Much confusion will
be avoided by regarding the term "source" in this fundamental light. It is
not a place; it is an activity or property. As such, it has a situs or
location; and if that situs or location is within the United States the
resulting income is taxable to nonresident aliens and foreign corporations.
The intention of Congress in the 1916 and subsequent statutes was to
discard the 1909 and 1913 basis of taxing nonresident aliens and foreign
corporations and to make the test of taxability the "source", or situs of the
activities or property which produce the income . . . . Thus, if income is to
taxed, the recipient thereof must be resident within the jurisdiction, or the
property or activities out of which the income issue or is derived must be
situated within the jurisdiction so that the source of the income may be
said to have a situs in this country. The underlying theory is that the
consideration for taxation is protection of life and property and that the
income rightly to be levied upon to defray the burdens of the United States
Government is that income which is created by activities and property
protected by this Government or obtained by persons enjoying that
protection.
5

3. We turn now to the question what is the source of income rule applicable in the
instant case. There are two possibly relevant source of income rules that must be
confronted; (a) the source rule applicable in respect ofcontracts of service; and (b) the
source rule applicable in respect of sales of personal property.
Where a contract for the rendition of service is involved, the applicable source rule may
be simply stated as follows: the income is sourced in the place where the service
contracted for is rendered. Section 37 (a) (3) of our Tax Code reads as follows:
Section 37. Income for sources within the Philippines.
(a) Gross income from sources within the Philippines. The following
items of gross income shall be treated as gross income from sources
within the Philippines:
xxx xxx xxx
(3) Services. Compensation for labor or personal
services performed in the Philippines;... (Emphasis supplied)
Section 37 (c) (3) of the Tax Code, on the other hand, deals with income from sources
without the Philippines in the following manner:
(c) Gross income from sources without the Philippines. The following
items of gross income shall be treated as income from sources without the
Philippines:
(3) Compensation for labor or personal services performed without the
Philippines; ... (Emphasis supplied)
It should not be supposed that Section 37 (a) (3) and (c) (3) of the Tax Code apply only
in respect of services rendered by individual natural persons; they also apply to services
rendered by or through the medium of a juridical person.
6
Further, a contract of carriage or of
transportation is assimilated in our Tax Code and Revenue Regulations to a contract for services. Thus,
Section 37 (e) of the Tax Code provides as follows:
(e) Income form sources partly within and partly without the Philippines.
Items of gross income, expenses, losses and deductions, other than those
specified in subsections (a) and (c) of this section shall be allocated or
apportioned to sources within or without the Philippines, under the rules
and regulations prescribed by the Secretary of Finance. ... Gains, profits,
and income from (1)transportation or other services rendered partly within
and partly without the Philippines, or (2) from the sale of personnel
property produced (in whole or in part) by the taxpayer within and sold
without the Philippines, or produced (in whole or in part) by the taxpayer
without and sold within the Philippines, shall be treated as derived partly
from sources within and partly from sources without the Philippines. ...
(Emphasis supplied)
It should be noted that the above underscored portion of Section 37 (e) was derived
from the 1939 U.S. Tax Code which "was based upon a recognition that transportation
was a service and that the source of the income derived therefrom was to be treated as
being the place where the service of transportation was rendered.
7

Section 37 (e) of the Tax Code quoted above carries a strong well-nigh irresistible,
implication that income derived from transportation or other services rendered entirely
outside the Philippines must be treated as derived entirely from sources without the
Philippines. This implication is reinforced by a consideration of certain provisions of
Revenue Regulations No. 2 entitled "Income Tax Regulations" as amended, first
promulgated by the Department of Finance on 10 February 1940. Section 155 of
Revenue Regulations No. 2 (implementing Section 37 of the Tax Code) provides in part
as follows:
Section 155. Compensation for labor or personnel services. Gross
income from sources within the Philippines includes compensation for
labor or personal services within the Philippines regardless of the
residence of the payer, of the place in which the contract for services was
made, or of the place of payment (Emphasis supplied)
Section 163 of Revenue Regulations No. 2 (still relating to Section 37 of the Tax Code)
deals with a particular species of foreign transportation companies i.e.,
foreign steamship companies deriving income from sources partly within and partly
without the Philippines:
Section 163 Foreign steamship companies. The return of foreign
steamship companies whose vessels touch parts of the Philippines should
include as gross income, the total receipts of all out-going
business whether freight or passengers. With the gross income thus
ascertained, the ratio existing between it and the gross income from all
ports, both within and without the Philippines of all vessels, whether
touching of the Philippines or not, should be determined as the basis upon
which allowable deductions may be computed, . (Emphasis supplied)
Another type of utility or service enterprise is dealt with in Section 164 of Revenue
Regulations No. 2 (again implementing Section 37 of the Tax Code) with provides as
follows:
Section 164. Telegraph and cable services. A foreign corporation
carrying on the business of transmission of telegraph or cable messages
between points in the Philippines and points outside the Philippines
derives income partly form source within and partly from sources without
the Philippines.
... (Emphasis supplied)
Once more, a very strong inference arises under Sections 163 and 164 of Revenue
Regulations No. 2 that steamship and telegraph and cable services rendered between
points both outside the Philippines give rise to income wholly from sources outside the
Philippines, and therefore not subject to Philippine income taxation.
We turn to the "source of income" rules relating to the sale of personal property, upon
the one hand, and to the purchase and sale of personal property, upon the other hand.
We consider first sales of personal property. Income from the sale of personal property
by the producer or manufacturer of such personal property will be regarded as
sourced entirely within or entirely without the Philippines or as sourced partly within and
partly without the Philippines, depending upon two factors: (a) the place where the sale
of such personal property occurs; and (b) the place where such personal property was
produced or manufactured. If the personal property involved was both produced or
manufactured and sold outside the Philippines, the income derived therefrom will be
regarded as sourced entirely outside the Philippines, although the personal property
had been produced outside the Philippines, or if the sale of the property takes place
outside the Philippines and the personal was produced in the Philippines, then, the
income derived from the sale will be deemed partly as income sourced without the
Philippines. In other words, the income (and the related expenses, losses and
deductions) will be allocated between sources within and sources without the
Philippines. Thus, Section 37 (e) of the Tax Code, although already quoted above, may
be usefully quoted again:
(e) Income from sources partly within and partly without the Philippines. ...
Gains, profits and income from (1) transportation or other services
rendered partly within and partly without the Philippines; or (2) from the
sale of personal property produced (in whole or in part) by the taxpayer
within and sold without the Philippines, or produced (in whole or in part) by
the taxpayer without and sold within the Philippines, shall be treated as
derived partly from sources within and partly from sources without the
Philippines. ... (Emphasis supplied)
In contrast, income derived from the purchase and sale of personal property i. e.,
trading is, under the Tax Code, regarded as sourced wholly in the place where the
personal property is sold. Section 37 (e) of the Tax Code provides in part as follows:
(e) Income from sources partly within and partly without the Philippines ...
Gains, profits and income derived from the purchase of personal property
within and its sale without the Philippines or from the purchase of personal
property without and its sale within the Philippines, shall be treated
as derived entirely from sources within the country in which sold.
(Emphasis supplied)
Section 159 of Revenue Regulations No. 2 puts the applicable rule succinctly:
Section 159. Sale of personal property. Income derived from the purchase
and sale of personal property shall be treated as derived entirely from the
country in which sold. The word "sold" includes "exchange." The "country"
in which "sold" ordinarily means the place where the property is marketed.
This Section does not apply to income from the sale personal property
produced (in whole or in part) by the taxpayer within and sold without the
Philippines or produced (in whole or in part) by the taxpayer without and
sold within the Philippines. (See Section 162 of these regulations).
(Emphasis supplied)
4. It will be seen that the basic problem is one of characterization of the transactions
entered into by BOAC in the Philippines. Those transactions may be characterized
either as sales of personal property (i. e., "sales of airline tickets") or as entering into a
lease of services or a contract of service or carriage. The applicable "source of income"
rules differ depending upon which characterization is given to the BOAC transactions.
The appropriate characterization, in my opinion, of the BOAC transactions is that of
entering into contracts of service, i.e., carriage of passengers or cargo between points
located outside the Philippines.
The phrase "sale of airline tickets," while widely used in popular parlance, does not
appear to be correct as a matter of tax law. The airline ticket in and of itself has no
monetary value, even as scrap paper. The value of the ticket lies wholly in the right
acquired by the "purchaser" the passenger to demand a prestation from BOAC,
which prestation consists of the carriage of the "purchaser" or passenger from the one
point to another outside the Philippines. The ticket is really the evidence of the contract
of carriage entered into between BOAC and the passenger. The money paid by the
passenger changes hands in the Philippines. But the passenger does not receive
undertaken to be delivered by BOAC. The "purchase price of the airline ticket" is quite
different from the purchase price of a physical good or commodity such as a pair of
shoes of a refrigerator or an automobile; it is really the compensation paid for the
undertaking of BOAC to transport the passenger or cargo outside the Philippines.
The characterization of the BOAC transactions either as sales of personal property or
as purchases and sales of personal property, appear entirely inappropriate from other
viewpoint. Consider first purchases and sales: is BOAC properly regarded as engaged
in trading in the purchase and sale of personal property? Certainly, BOAC was not
purchasing tickets outside the Philippines and selling them in the Philippines. Consider
next sales: can BOAC be regarded as "selling" personal property produced or
manufactured by it? In a popular or journalistic sense, BOAC might be described as
"selling" "a product" its service. However, for the technical purposes of the law on
income taxation, BOAC is in fact entering into contracts of service or carriage. The very
existance of "source rules" specifically and precisely applicable to the rendition of
services must preclude the application here of "source rules" applying generally to
sales, and purchases and sales, of personal property which can be invoked only by the
grace of popular language. On a slighty more abstract level, BOAC's income is more
appropriately characterized as derived from a "service", rather than from an "activity" (a
broader term than service and including the activity of selling) or from the here involved
is income taxation, and not a sales tax or an excise or privilege tax.
5. The taxation of international carriers is today effected under Section 24 (b) (2) of the
Tax Code, as amended by Presidential Decree No. 69, promulgated on 24 November
1972 and by Presidential Decree No. 1355, promulgated on 21 April 1978, in the
following manner:
existing under the laws of any foreign country, engaged in trade or
business within the Philippines, shall be taxable as provided in subsection
(a) of this section upon the total net income received in the preceeding
taxable year from all sources within the Philippines: Provided,
however, That international carriers shall pay a tax of two and one-half per
cent on their gross Philippine billings. "Gross Philippines of passage
documents sold therein, whether for passenger, excess baggege or mail,
provide the cargo or mail originates from the Philippines. The gross
revenue realized from the said cargo or mail shall include the gross freight
charge up to final destination. Gross revenues from chartered flights
originating from the Philippines shall likewise form part of "gross Philippine
billings" regardless of the place of sale or payment of the passage
documents. For purposes of determining the taxability to revenues from
chartered flights, the term "originating from the Philippines" shall include
flight of passsengers who stay in the Philippines for more than forty-eight
(48) hours prior to embarkation. (Emphasis supplied)
Under the above-quoted proviso international carriers issuing for compensation
passage documentation in the Philippines for uplifts from any point in the world to any
other point in the world, are not charged any Philippineincome tax on their Philippine
billings (i.e., billings in respect of passenger or cargo originating from the Philippines).
Under this new approach, international carriers who service port or points in the
Philippines are treated in exactly the same way as international carriers not serving any
port or point in the Philippines. Thus, the source of income rule applicable, as above
discussed, to transportation or other services rendered partly within and partly without
the Philippines, or wholly without the Philippines, has been set aside. in place of
Philippine income taxation, the Tax Code now imposes this 2 per cent tax computed
on the basis of billings in respect of passengers and cargo originating from the
Philippines regardless of where embarkation and debarkation would be taking place.
This 2- per cent tax is effectively a tax on gross receipts or an excise or privilege tax
and not a tax on income. Thereby, the Government has done away with the difficulties
attending the allocation of income and related expenses, losses and deductions.
Because taxes are the very lifeblood of government, the resulting potential "loss" or
"gain" in the amount of taxes collectible by the state is sometimes, with varying degrees
of consciousness, considered in choosing from among competing possible
characterizations under or interpretation of tax statutes. It is hence perhaps useful to
point out that the determination of the appropriate characterization here that of
contracts of air carriage rather than sales of airline tickets entails no down-the-road
loss of income tax revenues to the Government. In lieu thereof, the Government takes
in revenues generated by the 2- per cent tax on the gross Philippine billings or
receipts of international carriers.
I would vote to affirm the decision of the Court of Tax Appeals.
Narvasa, Gutierrez, Jr., and Cruz, JJ., dissent.
CIR vs. British Overseas Airways Corporation
(BOAC)
Post under case digests, Taxation at Sunday, February 26, 2012 Posted by Schizophrenic Mind
Facts: British Overseas Airways Corp (BOAC) is a 100%
British Government-owned corporation engaged
in international airlinebusiness and is a member of the
Interline Air Transport Association, and thus, it operates
air transportation services and sells transportation tickets
over the routes of the other airline members.

From 1959 to 1972, BOAC had no landing rights for traffic
purposes in the Philippines and thus, did not carry
passengers and/or cargo to or from the Philippines but
maintained a general sales agent in the Philippines -
Warner Barnes & Co. Ltd. and later, Qantas Airways -
which was responsible for selling BOAC tickets covering
passengers and cargoes. The Commissioner of Internal
Revenue assesseddeficiency income taxes against
BOAC.

Issue: Whether the revenue derived by BOAC from ticket
sales in the Philippines, constitute income of BOAC from
Philippine sources, and accordingly taxable.

Held: The source of an income is the property, activity, or
service that produced the income. For the source of
income to be considered as coming from the Philippines, it
is sufficient that the income is derived from activity within
the Philippines. Herein, the sale of tickets in the
Philippines is the activity that produced the income. The
tickets exchanged hands here and payment for fares were
also made here in the Philippine currency.

The situs of the source of payments is the Philippines. The
flow of wealth proceeded from, and occurred within
Philippine territory, enjoying the protection accorded by
the Philippine government. In consideration of such
protection, the flow of wealth should share the burden of
supporting the government. PD 68, in relation to PD 1355,
ensures that international airlines are taxed on their
income from Philippine sources. The 2 1/2% tax on
gross billings is an income tax. If it had been intended as
an excise tax or percentage tax, it would have been
placed under Title V of the Tax Code covering taxes on
business.
Hopewell Power Corp vs. Commissioner of Internal Revenue,
CTA Case No.5310, November 18, 1998
Facts:
Petitioner sought for tax credit/refund of input value-added tax (VAT) paid oncapital goods. Hopewell
Power Corp. Is a domestic corporation engaged in the businessof power generation and sale. The basis
for asking for such refund is Sec 106 (b) of theTax Code as amended by RA 7716. (petitioner actually
relied on Sec 106 (c) of the1994 Tax Code which was the law governing at that time; same content
anyway). Sec106 (c) of the 1994 Tax Code requires that an applicant for refund prove that a. It is aVAT
registered person b. Input taxes claimed was paid on capital goods c. Input taxeshave not been applied
against output tax liability d. Administrative claim was seasonablyfiled (2 yr prescriptive period) .Of its 6
claims, 4 had prescribed and 2 had been filedseasonably. Court was also convinced that requisites (a)
and (c) had been met.
Issue:
Whether or not there should be a refund or whether or not the input taxesclaimed was paid on capital
goods.
RULING:
Yes, the expenditures were properly considered as capital goods. Theamount was recomputed and
reduced though.Capital goods refer to goods with estimated useful life greater than 1 year andwhich are
treated as depreciable assets under Sec 29(f), used directly or indirectly inthe production and sale of
taxable goods or services. Statutorily, capital expenditures are specified as amounts paid out for a
newbuilding or for permanent improvements or betterments made to increase the value of any
property or amounts expended in restoring property.Hopewell spent for engineering and structural
services for purposes of
constructing power plant facilities needed in the production of electricity which is its a
chief product. Such expenses are necessary and as such, should form part of the costof the power plant
facilities.

Smith v. Commissioner of Internal Revenue
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Smith v. Commissioner, 40 B.T.A. 1038 is a United States tax case discussing the boundaries of tax
deductibility.
HELD:
Cost of hiring nursemaids to care for the infant child of a couple, both of whom are employed, not
deductible as an ordinary and necessary business expense of the wife.
Contents
[hide]
1 Academic commentary
2 Facts
3 Judgment
4 References
Academic commentary[edit]
The Smith decision demonstrates that it is the basic terms of existence of a person already at work that mark
the boundary between business and personal expense.
[1]

Facts[edit]

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by adding to it. (July 2010)
Judgment[edit]

This section contains too many or too-lengthy quotations for an encyclopedic
entry.Please help improve the article by editing it to take facts from excessively
quoted material and rewrite them as sourced original prose. Consider
transferring direct quotations toWikiquote. (November 2012)
The following is a quotation from the body of the court's judgment:
Petitioners would have us apply the but for test. They propose that but for the nurses the wife could not leave
her child; but for the freedom so secured she could not pursue her gainful labors; and but for them there would
be no income and no tax. This thought evokes an array of interesting possibilities. The fee to the doctor, but for
whose healing service the earner of the family income could not leave his sickbed; the cost of the laborer's
raiment, for how can the world proceed about its business unclothed; the very home which gives us shelter and
rest and the food which provides energy, might all by an extension of the same proposition be construed as
necessary to the operation of business and to the creation of income. Yet these are the very essence of those
personal expenses the deductibility of which is expressly denied. Revenue Act of 1936, section 24(a).
We are told that the working wife is a new phenomenon. This is relied on to account for the apparent
inconsistency that the expenses in issue are now a commonplace, yet have not been the subject of legislation,
ruling, or adjudicated controversy. But if that is true it becomes all the more necessary to apply accepted
principles to the novel facts. We are not prepared to say that the care of children, like similar aspects of family
and household life, is other than a personal concern. The wife's services as custodian of the home and
protector of its children are ordinarily rendered without monetary compensation. There results no taxable
income from the performance of this service and the correlative expenditure is personal and not susceptible of
deduction. Rosa E. Burkhart, 11 B.T.A. 275. Here the wife has chosen to employ others to discharge her
domestic function and the services she performs are rendered outside the home. They are a source of actual
income and taxable as such. But that does not deprive the same work performed by others of its personal
character nor furnish a reason why its cost should be treated as an offset in the guise of a deductible item.
We are not unmindful that, as petitioners suggest, certain disbursements normally personal may become
deductible by reason of their intimate connection with an occupation carried on for profit. In this category fall
entertainment, Blackmer v. Commissioner, 70 Fed.(2d) 255 (C.C.A., 2d Cir.), and traveling expenses, Joseph
W. Powell, 34 B.T.A. 655; affd., 94 Fed. (2d) 483 (C.C.A., 1st Cir.), and the cost of an actor's wardrobe,
Charles Hutchison, 13 B.T.A. 1187. The line is not always an easy one to draw nor the test simple to apply. But
we think its principle is clear. It may for practical purposes be said to constitute a distinction between those
activities which, as a matter of common acceptance and universal experience, are ordinary or usual as the
direct accompaniment of business pursuits, on the one hand; and those which, though they may in some
indirect and tenuous degree relate to the circumstances of a profitable occupation, are nevertheless personal in
their nature, of a character applicable to human beings generally, and which exist on that plane regardless of
the occupation, *1040 though not necessarily of the station in life, of the individuals concerned. See Welch v.
Helvering, 290 U.S. 111.
In the latter category, we think, fall payments made to servants or others occupied in looking to the personal
wants of their employers. David Sonenblick, 4 B.T.A. 986. And we include in this group nursemaids retained to
care for infant children.
Smith v. Commissioner
SMITH v. COMMISSIONER
48 T.C. 872 (1967)
Editor's Summary
Key Topics
LOSSES
Capital v. ordinary
Purchase price prepaid at discount
Facts
The taxpayer was a stockholder in a corporation which on April 10, 1962, entered into
an agreement to sell a tract of timberland. The terms of the agreement were $3,000
down, a $9,000 interest-bearing promissory note to be paid January 1, 1963, and ten
annual installments totaling $39,960 at 6 percent interest. However, the purchaser had
the right to pay the $39,960 at any time prior to January 1, 1963, at a discount of 18
percent. The corporation reported a capital gain on the sale in its tax return for its
fiscal year ended October 31, 1962. Thereafter, the purchaser exercised his right to
prepay the contract balance at a saving to him and a loss to the corporation of
$7,192.80. The corporation deducted the loss from ordinary income, but the
Commissioner contended that is was a capital loss and disallowed the deduction.
Tax Court
Held: For the Commissioner. The character of a loss is fixed by reference to the
character of the original transaction. In the instant case the original transaction was
capital in nature. Thus, the discount should properly be treated as a capital loss. In
effect, the discount amounted to a reduction in the purchase price of the timberland.
[NOTE-As to payments received after 12/31/63 on account of sales or exchanges
occurring after 6/30/63, see also Section 483, I.R.C. 1954.]
Case Text
[Timber Issues Only]
Fay, Judge: Respondent determined deficiencies in the Federal income tax of
petitioners for the years 1962 and 1963 as follows:
Year Docket No. Petitioner Amount
1962 1182-66 Joe M. and Florence Smith $ 2,438.44

1307-66
Robert H. Anderson, Dec'd, Laria M. Anderson,
Executrix, and Laria M. Anderson
596.31
1963 1186-66 Joe M. and Florence Smith 100,323.57

1183-66 Henry V. and Margaret E. Nielsen 77,852.86
Various adjustments have been stipulated to by the parties, and an unrelated issue in
Docket No. 1307-66 was abandoned by petitioners at trial. The remaining issues for
determination are:
2. Whether Smith-Nielsen Manufacturing Company, having reported as a long-term
capital gain the gain on the sale of timberland under a contract which gave the
purchaser the right to a discount for full payment before a certain date, may in a
subsequent year treat the amount of the discount as an ordinary expense or as a capital
loss in the amount of $7,192.80.
FINDINGS OF FACT
General
Most of the facts have been stipulated, and the stipulation of facts, together with the
exhibits attached thereto, is incorporated herein by this reference.
Joe M. Smith (hereinafter referred to as Smith) and Florence P. Smith are husband and
wife with legal residence in Spokane, Washington, at the time the petition herein was
filed. They filed Federal joint income tax returns for the years 1962 and 1963 with the
district director of internal revenue at Tacoma, Washington.
Henry V. Nielsen (hereinafter referred to as Nielsen) and Margaret E. Nielsen are
husband and wife with legal residence in Spokane, Washington, at .the time the
petition herein was filed. They filed a Federal joint income tax return for the taxable
year 1963 with the district director of internal revenue at Tacoma, Washington.
Laria M. Anderson, for herself and as executrix of the estate of Robert H. Anderson,
deceased, had legal residence in Spokane, Washington, at the time the petit. ion herein
was filed. Robert H. Anderson (hereinafter referred to as Anderson) and Laria M.
Anderson filed a Federal joint income tax return for the year 1962 with the district
director of internal revenue at Tacoma, Washington.
In 1962 Smith, Nielsen, and Anderson (sometimes hereinafter referred to collectively
as petitioners), and one Alvin W. Luhr (hereinafter referred to as Luhr) were
associated together either as common stockholders or partners in two businesses,
namely, Smith-Nielsen Manufacturing Company, a small business corporation
(hereinafter sometimes referred to as the corporation), and Smith-Nielsen Logging
and Lumber Company, a partnership (hereinafter sometimes referred to as the
partnership).
* * *
Issue 2
On April 10, 1962, the corporation entered into an agreement to sell to James E.
Wyatt (hereinafter sometimes referred to as Wyatt) approximately 3,464 acres of
timberland for a price of $51,960. The terms of the contract were $3,000 down, a
$9,000 interest-bearing promissory note to be paid January 1, 1963, and ten equal
annual installments totaling $39,960 at 6 percent interest, the first of which was due
March 1, 1963. The purchaser had a right to pay the $39,960 balance at any time prior
to January 1, 1963, at a discount of 18 percent. The term of the contract pertaining to
the right of prepayment provides as follows:
4. That it is understood and agreed between the parties that the Purchasers may have
the right to pay the entire unpaid purchase price of $39,960.00 at any time before the
1st day of January, 1963 conditioned upon the Seller then being the owner of said
contract, at a discount of 18% and said Seller further agrees that if said Seller has an
opportunity to sell said contract, prior to said January 1, 1963, it shall give the
Purchasers notice in writing of said opportunity and said Purchasers shall have ten
(10) days in which to purchase contract at said 18% discount, And, in the event said
contract has not been sold by the 1st day of January, 1963, and the Seller elects at a
later date to sell said contract, at that time shall also give said Purchasers at least ten
(10) days notice in writing of election to sell said contract and at which the same is to
be sold and the Purchasers shall have ten (10) days from and after receiving said
notice in which to purchase said contract at the same price the said Seller has elected
to sell the same.
For the fiscal year ended October 31, 1962, the corporation reported a long-term
capital gain on the sale to Wyatt in the amount of $29,871.83. Thereafter Wyatt timely
exercised his right to prepay the contract balance and to take advantage of the 18
percent discount in the amount of $7,192.80.
For the fiscal year ended October 31, 1963, the corporation claimed the $7,192.80 as
an ordinary expense. Respondent in his statutory notice of deficiency disallowed the
deduction and determined that the amount was properly allowable as a capital loss.
OPINION
Issue 2
The second issue is whether the corporation's discounting of a contract in the fiscal
year ended October 31, 1963, entitles petitioners Smith and Nielsen to treat such
amount as an ordinary expense or a capital loss.
The discount arose pursuant to the terms of a sales contract entered into between the
corporation and Wyatt on April 10, 1962. The corporation reported the gain on that
transaction as long-term capital gain for the fiscal year ended October 31, 1962.
Exercising his contract option to prepay the balance of the purchase price and obtain a
discount, Wyatt prepaid the balance during the fiscal year ended October 31, 1963.
Petitioners contend that the discounting of the contract is productive of an ordinary
loss due to the absence of any sale or exchange in the fiscal year ended October 31,
1963. We cannot agree.
We are of the opinion that this situation is clearly within the rationale of such cases
as Arrowsmith v. Commissioner, 344 U.S. 6 (1952); Estate of James M. Shannon
house, 21 T. C. 422 (1953); and Rees Blow Pipe Manufacturing CO., 41 T. C. 598
(1964), aff'd, per curium 342 F. 2d 990 (C. A. 9, 1965), so that the character of the
toss is fixed by reference to the original transaction, which in this case was capital in
nature.
7

We also note the case of Weber v. Commissioner, 242 F. 2d 938 (C. A. 9, 1957),
affirming 24 T. C. 529 (1955), which though it dealt with a single tax year, held that
where a release or compromise is in reality part of the original transaction, it is to be
treated as one transaction, i.e., as a reduction in the original purchase price.
8
This
case, when viewed in conjunction with the line of authority cited earlier, clearly
supports respondent 's Contention that the discount is productive of a capital loss on
the facts before us.
Decisions will be entered under Rule 50.
SUPREME COURT
Manila
EN BANC
G.R. Nos. L-9456 and L-9481 January 6, 1958
THE COLLECTOR OF INTERNAL REVENUE, petitioner,
vs.
DOMINGO DE LARA, as ancilliary administrator of the estate of HUGO H. MILLER
(Deceased), and the COURT OF TAX APPEALS, respondents.
Allison J. Gibbs, Zafra, De Leon and Veneracion for Domingo E. de Lara.
Assistant Solicitor General Ramon L. Avancena and Cezar L. Kierulf for the Collector of
Internal Revenue.
MONTEMAYOR, J .:
These are two separate appeals, one by the Collector of Internal Revenue, later on
referred to as the Collector, and the other by Domingo de Lara as Ancilliary
Administrator of the estate of Hugo H. Miller, from the decision of the Court of Tax
Appeals of June 25, 1955, with the following dispositive part:
WHEREFORE, respondent's assessment for estate and inheritance taxes upon
the estate of the decedent Hugo H. Miller is hereby modified in accordance with
the computation attached as Annex "A" of this decision. Petitioner is hereby
ordered to pay the amount of P2,047.22 representing estate taxes due, together
with the interests and other increments. In case of failure to pay the amount of
P2,047.22 within thirty (30) days from the time this decision has become final, the
5 per cent surcharge and the corresponding interest due thereon shall be paid as
a part of the tax.
The facts in the case gathered from the record and as found by the Court of Tax
Appeals may be briefly stated as follows: Hugo H. Miller, an American citizen, was born
in Santa Cruz, California, U.S.A., in 1883. In 1905, he came to the Philippines. From
1906 to 1917, he was connected with the public school system, first as a teacher and
later as a division superintendent of schools, later retiring under the Osmeiia Retirement
Act. After his retirement, Miller accepted an executive position in the local branch of
Ginn & Co., book publishers with principal offices in New York and Boston, U.S.A., up to
the outbreak of the Pacific War. From 1922 up to December 7, 1941, he was stationed
in the Philippines as Oriental representative of Ginn & Co., covering not only the
Philippines, but also China and Japan. His principal work was selling books specially
written for Philippine schools. In or about the year 1922, Miller lived at the Manila Hotel.
His wife remained at their home in Ben-Lomond, Santa Cruz, California, but she used to
come to the Philippines for brief visits with Miller, staying three or four months. Miller
also used to visit his wife in California. He never lived in any residential house in the
Philippines. After the death of his wife in 1931, he transferred from the Manila Hotel to
the Army and Navy Club, where he was staying at the outbreak of the Pacific War. On
January 17, 1941, Miller executed his last will and testament in Santa Cruz, California,
in which he declared that he was "of Santa Cruz, California". On December 7, 1941,
because of the Pacific War, the office of Ginn & Co. was closed, and Miller joined the
Board of Censors of the United States Navy. During the war, he was taken prisoner by
the Japanese forces in Leyte, and in January, 1944, he was transferred to Catbalogan,
Samar, where he was reported to have been executed by said forces on March 11,
1944, and since then, nothing has been heard from him. At the time of his death in
1944, Miller owned the following properties:
Real Property situated in Ben-Lomond, Santa Cruz,
California valued at
...................................................................... P 5,000.00
Real property situated in Burlingame, San Mateo,
California valued at
........................................................................................ 16,200.00
Tangible Personal property,
worth............................................. 2,140.00
Cash in the banks in the United
States.................................... 21,178.20
Accounts Receivable from various persons in the
United States including notes
............................................................... 36,062.74
Stocks in U.S. Corporations and U.S. Savings Bonds,
valued at
........................................................................................ 123,637.16
Shares of stock in Philippine Corporations, valued at
.......... 51,906.45
Testate proceedings were instituted before the Court of California in Santa Cruz County,
in the course of which Miller's will of January 17, 1941 was admitted to probate on May
10, 1946. Said court subsequently issued an order and decree of settlement of final
account and final distribution, wherein it found that Miller was a "resident of the County
of Santa Cruz, State of California" at the time of his death in 1944. Thereafter ancilliary
proceedings were filed by the executors of the will before the Court of First Instance of
Manila, which court by order of November 21, 1946, admitted to probate the will of Miller
was probated in the California court, also found that Miller was a resident of Santa Cruz,
California, at the time of his death. On July 29, 1949, the Bank of America, National
Trust and Savings Association of San Francisco California, co-executor named in
Miller's will, filed an estate and inheritance tax return with the Collector, covering only
the shares of stock issued by Philippines corporations, reporting a liability of P269.43 for
taxes and P230.27 for inheritance taxes. After due investigation, the Collector assessed
estate and inheritance taxes, which was received by the said executor on April 3, 1950.
The estate of Miller protested the assessment of the liability for estate and inheritance
taxes, including penalties and other increments at P77,300.92, as of January 16, 1954.
This assessment was appealed by De Lara as Ancilliary Administrator before the Board
of Tax Appeals, which appeal was later heard and decided by the Court of Tax Appeals.
In determining the "gross estate" of a decedent, under Section 122 in relation to section
88 of our Tax Code, it is first necessary to decide whether the decedent was a resident
or a non-resident of the Philippines at the time of his death. The Collector maintains that
under the tax laws, residence and domicile have different meanings; that tax laws on
estate and inheritance taxes only mention resident and non-resident, and no reference
whatsoever is made to domicile except in Section 93 (d) of the Tax Code; that Miller
during his long stay in the Philippines had required a "residence" in this country, and
was a resident thereof at the time of his death, and consequently, his intangible
personal properties situated here as well as in the United States were subject to said
taxes. The Ancilliary Administrator, however, equally maintains that for estate and
inheritance tax purposes, the term "residence" is synonymous with the term domicile.
We agree with the Court of Tax Appeals that at the time that The National Internal
Revenue Code was promulgated in 1939, the prevailing construction given by the courts
to the "residence" was synonymous with domicile. and that the two were used
intercnangeabiy. Cases were cited in support of this view, paricularly that of Velilla vs.
Posadas, 62 Phil. 624, wherein this Tribunal used the terms "residence" and "domicile"
interchangeably and without distinction, the case involving the application of the term
residence employed in the inheritance tax law at the time (section 1536- 1548 of the
Revised Administrative Code), and that consequently, it will be presumed that in using
the term residence or resident in the meaning as construed and interpreted by the
Court. Moreover, there is reason to believe that the Legislature adopted the American
(Federal and State) estate and inheritance tax system (see e.g. Report to the Tax
Commision of the Philippines, Vol. II, pages 122-124, cited in I Dalupan, National
Internal Revenue Code Annotated, p. 469-470). In the United States, for estate tax
purposes, a resident is considered one who at the time of his death had his domicile in
the United States, and in American jurisprudence, for purposes of estate and taxation,
"residence" is interpreted as synonymous with domicile, and that
The incidence of estate and succession has historically been determined by
domicile and situs and not by the fact of actual residence. (Bowring vs. Bowers,
(1928) 24 F 2d 918, at 921, 6 AFTR 7498, cert. den (1928) 272 U.S.608).
We also agree with the Court of Tax Appeals that at the time of his death, Miller had his
residence or domicile in Santa Cruz, California. During his country, Miller never
acquired a house for residential purposes for he stayed at the Manila Hotel and later on
at the Army and Navy Club. Except this wife never stayed in the Philippines. The bulk of
his savings and properties were in the United States. To his home in California, he had
been sending souvenirs, such as carvings, curios and other similar collections from the
Philippines and the Far East. In November, 1940, Miller took out a property insurance
policy and indicated therein his address as Santa Cruz, California, this aside from the
fact that Miller, as already stated, executed his will in Santa Cruz, California, wherein he
stated that he was "of Santa Cruz, California". From the foregoing, it is clear that as a
non-resident of the Philippines, the only properties of his estate subject to estate and
inheritance taxes are those shares of stock issued by Philippines corporations, valued
at P51,906.45. It is true, as stated by the Tax Court, that while it may be the general rule
that personal property, like shares of stock in the Philippines, is taxable at the domicile
of the owner (Miller) under the doctrine of mobilia secuuntur persona, nevertheless,
when he during his life time,
. . . extended his activities with respect to his intangibles, so as to avail himself of
the protection and benefits of the laws of the Philippines, in such a way as to
bring his person or property within the reach of the Philippines, the reason for a
single place of taxation no longer obtains- protection, benefit, and power over the
subject matter are no longer confined to California, but also to the Philippines
(Wells Fargo Bank & Union Trust Co. vs. Collector (1940), 70 Phil. 325). In the
instant case, the actual situs of the shares of stock is in the Philippines, the
corporation being domiciled herein: and besides, the right to vote the certificates
at stockholders' meetings, the right to collect dividends, and the right to dispose
of the shares including the transmission and acquisition thereof by succession,
all enjoy the protection of the Philippines, so that the right to collect the estate
and inheritance taxes cannot be questioned (Wells Fargo Bank & Union Trust
Co. vs. Collector supra). It is recognized that the state may, consistently with due
process, impose a tax upon transfer by death of shares of stock in a domestic
corporation owned by a decedent whose domicile was outside of the state
(Burnett vs. Brooks, 288 U.S. 378; State Commission vs. Aldrich, (1942) 316
U.S. 174, 86 L. Ed. 1358, 62 ALR 1008)." (Brief for the Petitioner, p. 79-80).
The Ancilliary Administrator for purposes of exemption invokes the proviso in Section
122 of the Tax Code, which provides as follows:
. . ."And Provided, however, That no tax shall be collected under this Title in
respect of intangible personal property (a) if the decedent at the time of his death
was a resident of a foreign country which at the time of his death did not impose
a transfer tax or death tax of any character in respect of intangible personal
property of citizens of the Philippines not residing in that country, or (b) if the laws
of the foreign country of which the decedent was resident at the tune of his death
allow a similar exemption from transfer taxes or death taxes of every character in
respect of intangible personal property owned by citizen, of the Philippine not
residing in that foreign country.
The Ancilliary Administrator bases his claim of exemption on (a) the exemption of non-
residents from the California inheritance taxes with respect to intangibles, and (b) the
exemption by way of reduction of P4,000 from the estates of non-residents, under the
United States Federal Estate Tax Law. Section 6 of the California Inheritance Tax Act of
1935, now reenacted as Section 13851, California Revenue and Taxation Code, reads
as follows:
SEC. 6. The following exemption from the tax are hereby allowed:
xxx xxx xxx.
(7) The tax imposed by this act in respect of intangible personal property shall
not be payable if decedent is a resident of a State or Territory of the United
States or a foreign state or country which at the time of his death imposed a
legacy, succession of death tax in respect of intangible personal property within
the State or Territory or foreign state or country of residents of the States or
Territory or foreign state or country of residence of the decedent at the time of his
death contained a reciprocal provision under which non-residents were exempted
from legacy or succession taxes or death taxes of every character in respect of
intangible personal property providing the State or Territory or foreign state or
country of residence of such non-residents allowed a similar exemption to
residents of the State, Territory or foreign state or country of residence of such
decedent.
Considering the State of California as a foreign country in relation to section 122 of Our
Tax Code we beleive and hold, as did the Tax Court, that the Ancilliary Administrator is
entitled to exemption from the tax on the intangible personal property found in the
Philippines. Incidentally, this exemption granted to non-residents under the provision of
Section 122 of our Tax Code, was to reduce the burden of multiple taxation, which
otherwise would subject a decedent's intangible personal property to the inheritance tax,
both in his place of residence and domicile and the place where those properties are
found. As regards the exemption or reduction of P4,000 based on the reduction under
the Federal Tax Law in the amount of $2,000, we agree with the Tax Court that the
amount of $2,000 allowed under the Federal Estate Tax Law is in the nature of
deduction and not of an exemption. Besides, as the Tax Court observes--.
. . . this exemption is allowed on all gross estate of non-residents of the United
States, who are not citizens thereof, irrespective of whether there is a
corresponding or similar exemption from transfer or death taxes of non-residents
of the Philippines, who are citizens of the United States; and thirdly, because this
exemption is allowed on all gross estates of non-residents irrespective of whether
it involves tangible or intangible, real or personal property; so that for these
reasons petitioner cannot claim a reciprocity. . .
Furthermore, in the Philippines, there is already a reduction on gross estate tax in the
amount of P3,000 under section 85 of the Tax Code, before it was amended, which in
part provides as follows:
SEC. 85. Rates of estate tax.There shall be levied, assessed, collected, and
paid upon the transfer of the net estate of every decedent, whether a resident or
non-resident of the Philippines, a tax equal to the sum of the following
percentages of the value of the net estate determined as provided in sections 88
and 89:
One per centrum of the amount by which the net estate exceeds three thousand
pesos and does not exceed ten thousand pesos;. . .
It will be noticed from the dispositive part of the appealed decision of the Tax Court that
the Ancilliary Administrator was ordered to pay the amount of P2,047.22, representing
estate taxes due, together with interest and other increments. Said Ancilliary
Administrator invokes the provisions of Republic Act No. 1253, which was passed for
the benefit of veterans, guerrillas or victims of Japanese atrocities who died during the
Japanese occupation. The provisions of this Act could not be invoked during the hearing
before the Tax Court for the reason that said Republic Act was approved only on June
10, 1955. We are satisfied that inasmuch as Miller, not only suffered deprivation of the
war, but was killed by the Japanese military forces, his estate is entitled to the benefits
of this Act. Consequently, the interests and other increments provided in the appealed
judgment should not be paid by his estate.
With the above modification, the appealed decision of the Court of Tax Appeals is
hereby affirmed. We deem it unnecessary to pass upon the other points raised in the
appeal. No costs.
Bengzon, Paras, C.J., Padilla, Reyes, A., Bautista Angelo, Labrador, Concepcion,
Reyes, J.B.L., Endencia, and Felix, JJ., concur.
OLLECTOR V. LARA
(multiplicity of situs)
FACTS:
Hugo H. Miller, an American citizen, was born in SantaCruz, California, U.S.A., in 1883. In 1905, he came
to thePhilippines. From 1906 to 1917, he was connected with thepublic school system, first as a teacher
and later as a divisionsuperintendent of schools. After his retirement, Miller acceptedan executive
position in the local branch of Ginn & Co., bookpublishers with principal offices in New York and
Boston,U.S.A., up to the outbreak of the Pacific War. Miller lived at theManila Hotel. He never lived in
any residential house in thePhilippines. After the death of his wife in 1931, he transferredfrom the
Manila Hotel to the Army and Navy Club, where hewas staying at the outbreak of the Pacific War. On
January 17,1941, Miller executed his last will and testament in Santa Cruz,California, in which he
declared that he was "of Santa Cruz,California". On December 7, 1941, because of the Pacific War,the
office of Ginn & Co. was closed, and Miller joined theBoard of Censors of the United States Navy. During
the war,he was taken prisoner by the Japanese forces in Leyte, and inJanuary, 1944, he was transferred
to Catbalogan, Samar,where he was reported to have been executed by said forceson March 11,
1944.Testate proceedings were instituted before the Courtof California in Santa Cruz County, which
subsequently issuedan order and decree of settlement of final account and finaldistribution. The Bank of
America, National Trust and SavingsAssociation of San Francisco California, co-executor named inMiller's
will, filed an estate and inheritance tax return with theCollector, covering only the shares of stock issued
byPhilippine corporations. After due investigation, the Collector assessed estate and inheritance taxes,
which was received bythe said executor. The estate of Miller protested saidassessment. This assessment
was appealed by De Lara asAncilliary Administrator before the Board of Tax Appeals, whichappeal was
later heard and decided by the Court of TaxAppeals.In determining the "gross estate" of a decedent,
under Section 122 in relation to section 88 of our Tax Code, it is firstnecessary to decide whether the
decedent was a resident or anon-resident of the Philippines at the time of his death. TheCollector
maintains that under the tax laws, residence anddomicile have different meanings; that tax laws on
estate andinheritance taxes only mention resident and non-resident, andno reference whatsoever is
made to domicile except in Section93 (d) of the Tax Code; that Miller during his long stay in
thePhilippines had required a "residence" in this country, and wasa resident thereof at the time of his
death, and consequently,his intangible personal properties situated here as well as inthe United States
were subject to said taxes. The AncilliaryAdministrator, however, equally maintains that for estate
andinheritance tax purposes, the term "residence" is synonymouswith the term domicile.
ISSUE:
W/N the estate is liable to file an estate andinheritance tax return besides those covering shares of
stocksissued by Philippine corporations.
HELD: No
. The Court agrees with the Court of Tax Appealsthat at the time that The National Internal Revenue
Code waspromulgated in 1939, the prevailing construction given by thecourts to the "residence" was
synonymous with domicile. andthat the two were used intercnangeabiy. Moreover, there isreason to
believe that the Legislature adopted the American(Federal and State) estate and inheritance tax system
(see e.g.Report to the Tax Commision of the Philippines, Vol. II, pages122-124, cited in I Dalupan,
National Internal Revenue Code Annotated, p. 469-470). In the United States, for estate taxpurposes, a
resident is considered one who at the time of hisdeath had his domicile in the United States, and in
American jurisprudence, for purposes of estate and taxation, "residence"is interpreted as synonymous
with domicile, and that
The incidence of estate and succession hashistorically been determined by domicile andsitus and not by
the fact of actual residence.
(Bowring vs. Bowers)At the time of his death, Miller had his residence or domicile in Santa Cruz,
California. During his stay in thecountry, Miller never acquired a house for residential purposesfor he
stayed at the Manila Hotel and later on at the Army andNavy Club. The bulk of his savings and properties
were in theUnited States. To his home in California, he had been sendingsouvenirs. In November, 1940,
Miller took out a propertyinsurance policy and indicated therein his address as SantaCruz, California, this
aside from the fact that Miller, as alreadystated, executed his will in Santa Cruz, California, wherein
hestated that he was "of Santa Cruz, California".*** As to the shares of stocks issued by
Philippinecorporations, an exemption was granted to the estate by virtueof Section 122 of the Tax Code,
which provides as follows:. . ."And Provided, however, That no tax shall becollected under this Title in
respect of intangiblepersonal property (a) if the decedent at the time of hisdeath was a resident of a
foreign country which at thetime of his death did not impose a transfer tax or death tax of any character
in respect of intangiblepersonal property of citizens of the Philippines notresiding in that country, or (b)
if the laws of the foreigncountry of which the decedent was resident at thetune of his death allow a
similar exemption fromtransfer taxes or death taxes of every character inrespect of intangible personal
property owned bycitizen, of the Philippine not residing in that foreigncountry.

EN BANC
[G.R. No. 118295. May 2, 1997]
WIGBERTO E. TAADA and ANNA DOMINIQUE COSETENG, as
members of the Philippine Senate and as taxpayers; GREGORIO
ANDOLANA and JOKER ARROYO as members of the House of
Representatives and as taxpayers; NICANOR P. PERLAS and
HORACIO R. MORALES, both as taxpayers; CIVIL LIBERTIES
UNION, NATIONAL ECONOMIC PROTECTIONISM ASSOCIATION,
CENTER FOR ALTERNATIVE DEVELOPMENT INITIATIVES,
LIKAS-KAYANG KAUNLARAN FOUNDATION, INC., PHILIPPINE
RURAL RECONSTRUCTION MOVEMENT, DEMOKRATIKONG
KILUSAN NG MAGBUBUKID NG PILIPINAS, INC., and
PHILIPPINE PEASANT INSTITUTE, in representation of various
taxpayers and as non-governmental organizations, petitioners,
vs. EDGARDO ANGARA, ALBERTO ROMULO, LETICIA RAMOS-
SHAHANI, HEHERSON ALVAREZ, AGAPITO AQUINO, RODOLFO
BIAZON, NEPTALI GONZALES, ERNESTO HERRERA, JOSE
LINA, GLORIA MACAPAGAL-ARROYO, ORLANDO MERCADO,
BLAS OPLE, JOHN OSMEA, SANTANINA RASUL, RAMON
REVILLA, RAUL ROCO, FRANCISCO TATAD and FREDDIE
WEBB, in their respective capacities as members of the
Philippine Senate who concurred in the ratification by the
President of the Philippines of the Agreement Establishing the
World Trade Organization; SALVADOR ENRIQUEZ, in his
capacity as Secretary of Budget and Management; CARIDAD
VALDEHUESA, in her capacity as National Treasurer; RIZALINO
NAVARRO, in his capacity as Secretary of Trade and Industry;
ROBERTO SEBASTIAN, in his capacity as Secretary of
Agriculture; ROBERTO DE OCAMPO, in his capacity as
Secretary of Finance; ROBERTO ROMULO, in his capacity as
Secretary of Foreign Affairs; and TEOFISTO T. GUINGONA, in
his capacity as Executive Secretary, respondents.
D E C I S I O N
PANGANIBAN, J .:
The emergence on January 1, 1995 of the World Trade Organization,
abetted by the membership thereto of the vast majority of countries has
revolutionized international business and economic relations amongst
states. It has irreversibly propelled the world towards trade liberalization and
economic globalization. Liberalization, globalization, deregulation and
privatization, the third-millennium buzz words, are ushering in a new
borderless world of business by sweeping away as mere historical relics the
heretofore traditional modes of promoting and protecting national economies
like tariffs, export subsidies, import quotas, quantitative restrictions, tax
exemptions and currency controls. Finding market niches and becoming the
best in specific industries in a market-driven and export-oriented global
scenario are replacing age-old beggar-thy-neighbor policies that unilaterally
protect weak and inefficient domestic producers of goods and services. In the
words of Peter Drucker, the well-known management guru, Increased
participation in the world economy has become the key to domestic economic
growth and prosperity.
Brief Historical Background
To hasten worldwide recovery from the devastation wrought by the
Second World War, plans for the establishment of three multilateral
institutions -- inspired by that grand political body, the United Nations -- were
discussed at Dumbarton Oaks and Bretton Woods. The first was the World
Bank (WB) which was to address the rehabilitation and reconstruction of war-
ravaged and later developing countries; the second, the International
Monetary Fund (IMF) which was to deal with currency problems; and the third,
the International Trade Organization (ITO), which was to foster order and
predictability in world trade and to minimize unilateral protectionist policies
that invite challenge, even retaliation, from other states. However, for a
variety of reasons, including its non-ratification by the United States, the ITO,
unlike the IMF and WB, never took off. What remained was only GATT -- the
General Agreement on Tariffs and Trade. GATT was a collection of treaties
governing access to the economies of treaty adherents with no
institutionalized body administering the agreements or dependable system of
dispute settlement.
After half a century and several dizzying rounds of negotiations, principally
the Kennedy Round, the Tokyo Round and the Uruguay Round, the world
finally gave birth to that administering body -- the World Trade Organization --
with the signing of the Final Act in Marrakesh, Morocco and the ratification of
the WTO Agreement by its members.
[1]

Like many other developing countries, the Philippines joined WTO as a
founding member with the goal, as articulated by President Fidel V. Ramos in
two letters to the Senate (infra), of improving Philippine access to foreign
markets, especially its major trading partners, through the reduction of tariffs
on its exports, particularly agricultural and industrial products. The
President also saw in the WTO the opening of new opportunities for the
services sector x x x, (the reduction of) costs and uncertainty associated with
exporting x x x, and (the attraction of) more investments into the
country. Although the Chief Executive did not expressly mention it in his
letter, the Philippines - - and this is of special interest to the legal profession - -
will benefit from the WTO system of dispute settlement by judicial adjudication
through the independent WTO settlement bodies called (1) Dispute
Settlement Panels and (2) Appellate Tribunal. Heretofore, trade disputes
were settled mainly through negotiations where solutions were arrived at
frequently on the basis of relative bargaining strengths, and where naturally,
weak and underdeveloped countries were at a disadvantage.
The Petition in Brief
Arguing mainly (1) that the WTO requires the Philippines to place
nationals and products of member-countries on the same footing as Filipinos
and local products and (2) that the WTO intrudes, limits and/or impairs the
constitutional powers of both Congress and the Supreme Court, the instant
petition before this Court assails the WTO Agreement for violating the
mandate of the 1987 Constitution to develop a self-reliant and independent
national economy effectively controlled by Filipinos x x x (to) give preference
to qualified Filipinos (and to) promote the preferential use of Filipino labor,
domestic materials and locally produced goods.
Simply stated, does the Philippine Constitution prohibit Philippine
participation in worldwide trade liberalization and economic
globalization? Does it prescribe Philippine integration into a global economy
that is liberalized, deregulated and privatized? These are the main questions
raised in this petition for certiorari, prohibition and mandamus under Rule 65
of the Rules of Court praying (1) for the nullification, on constitutional grounds,
of the concurrence of the Philippine Senate in the ratification by the President
of the Philippines of the Agreement Establishing the World Trade Organization
(WTO Agreement, for brevity) and (2) for the prohibition of its implementation
and enforcement through the release and utilization of public funds, the
assignment of public officials and employees, as well as the use of
government properties and resources by respondent-heads of various
executive offices concerned therewith. This concurrence is embodied in
Senate Resolution No. 97, dated December 14, 1994.
The Facts
On April 15, 1994, Respondent Rizalino Navarro, then Secretary of
the Department of Trade and Industry (Secretary Navarro, for brevity),
representing the Government of the Republic of the Philippines, signed in
Marrakesh, Morocco, the Final Act Embodying the Results of the Uruguay
Round of Multilateral Negotiations (Final Act, for brevity).
By signing the Final Act,
[2]
Secretary Navarro on behalf of the Republic of
the Philippines, agreed:
(a) to submit, as appropriate, the WTO Agreement for the consideration of their
respective competent authorities, with a view to seeking approval of the Agreement in
accordance with their procedures; and
(b) to adopt the Ministerial Declarations and Decisions.
On August 12, 1994, the members of the Philippine Senate received a
letter dated August 11, 1994 from the President of the Philippines,
[3]
stating
among others that the Uruguay Round Final Act is hereby submitted to the
Senate for its concurrence pursuant to Section 21, Article VII of the
Constitution.
On August 13, 1994, the members of the Philippine Senate received
another letter from the President of the Philippines
[4]
likewise dated August 11,
1994, which stated among others that the Uruguay Round Final Act, the
Agreement Establishing the World Trade Organization, the Ministerial
Declarations and Decisions, and the Understanding on Commitments in
Financial Services are hereby submitted to the Senate for its concurrence
pursuant to Section 21, Article VII of the Constitution.
On December 9, 1994, the President of the Philippines certified the
necessity of the immediate adoption of P.S. 1083, a resolution entitled
Concurring in the Ratification of the Agreement Establishing the World Trade
Organization.
[5]

On December 14, 1994, the Philippine Senate adopted Resolution No. 97
which Resolved, as it is hereby resolved, that the Senate concur, as it
hereby concurs, in the ratification by the President of the Philippines of the
Agreement Establishing the World Trade Organization.
[6]
The text of the WTO
Agreement is written on pages 137 et seq. of Volume I of the 36-
volume Uruguay Round of Multilateral Trade Negotiations and includes
various agreements and associated legal instruments (identified in the said
Agreement as Annexes 1, 2 and 3 thereto and collectively referred to as
Multilateral Trade Agreements, for brevity) as follows:
ANNEX 1
Annex 1A: Multilateral Agreement on Trade in Goods
General Agreement on Tariffs and Trade 1994
Agreement on Agriculture
Agreement on the Application of Sanitary and
Phytosanitary Measures
Agreement on Textiles and Clothing
Agreement on Technical Barriers to Trade
Agreement on Trade-Related Investment Measures
Agreement on Implementation of Article VI of the General
Agreement on Tariffs and Trade 1994
Agreement on Implementation of Article VII of the General on
Tariffs and Trade 1994
Agreement on Pre-Shipment Inspection
Agreement on Rules of Origin
Agreement on Imports Licensing Procedures
Agreement on Subsidies and Coordinating Measures
Agreement on Safeguards
Annex 1B: General Agreement on Trade in Services and Annexes
Annex 1C: Agreement on Trade-Related Aspects of Intellectual Property Rights
ANNEX 2
Understanding on Rules and Procedures Governing the Settlement
of Disputes
ANNEX 3
Trade Policy Review Mechanism
On December 16, 1994, the President of the Philippines signed
[7]
the
Instrument of Ratification, declaring:
NOW THEREFORE, be it known that I, FIDEL V. RAMOS, President of the
Republic of the Philippines, after having seen and considered the aforementioned
Agreement Establishing the World Trade Organization and the agreements and
associated legal instruments included in Annexes one (1), two (2) and three (3) of that
Agreement which are integral parts thereof, signed at Marrakesh, Morocco on 15
April 1994, do hereby ratify and confirm the same and every Article and Clause
thereof.
To emphasize, the WTO Agreement ratified by the President of the
Philippines is composed of the Agreement Proper and the associated legal
instruments included in Annexes one (1), two (2) and three (3) of that
Agreement which are integral parts thereof.
On the other hand, the Final Act signed by Secretary Navarro embodies
not only the WTO Agreement (and its integral annexes aforementioned) but
also (1) the Ministerial Declarations and Decisions and (2) the Understanding
on Commitments in Financial Services. In his Memorandum dated May 13,
1996,
[8]

the Solicitor General describes these two latter documents as follows:
The Ministerial Decisions and Declarations are twenty-five declarations and
decisions on a wide range of matters, such as measures in favor of least developed
countries, notification procedures, relationship of WTO with the International
Monetary Fund (IMF), and agreements on technical barriers to trade and on dispute
settlement.
The Understanding on Commitments in Financial Services dwell on, among other
things, standstill or limitations and qualifications of commitments to existing non-
conforming measures, market access, national treatment, and definitions of non-
resident supplier of financial services, commercial presence and new financial
service.
On December 29, 1994, the present petition was filed. After careful
deliberation on respondents comment and petitioners reply thereto, the Court
resolved on December 12, 1995, to give due course to the petition, and the
parties thereafter filed their respective memoranda. The Court also requested
the Honorable Lilia R. Bautista, the Philippine Ambassador to the United
Nations stationed in Geneva, Switzerland, to submit a paper, hereafter
referred to as Bautista Paper,
[9]
for brevity, (1) providing a historical
background of and (2) summarizing the said agreements.
During the Oral Argument held on August 27, 1996, the Court directed:
(a) the petitioners to submit the (1) Senate Committee Report on the matter in
controversy and (2) the transcript of proceedings/hearings in the Senate; and
(b) the Solicitor General, as counsel for respondents, to file (1) a list of Philippine
treaties signed prior to the Philippine adherence to the WTO Agreement, which
derogate from Philippine sovereignty and (2) copies of the multi-volume WTO
Agreement and other documents mentioned in the Final Act, as soon as possible.
After receipt of the foregoing documents, the Court said it would consider
the case submitted for resolution. In a Compliance dated September 16,
1996, the Solicitor General submitted a printed copy of the 36-
volume Uruguay Round of Multilateral Trade Negotiations, and in another
Compliance dated October 24, 1996, he listed the various bilateral or
multilateral treaties or international instruments involving derogation of
Philippine sovereignty. Petitioners, on the other hand, submitted their
Compliance dated January 28, 1997, on January 30, 1997.
The Issues
In their Memorandum dated March 11, 1996, petitioners summarized the
issues as follows:
A. Whether the petition presents a political question or is otherwise not justiciable.
B. Whether the petitioner members of the Senate who participated in the
deliberations and voting leading to the concurrence are estopped from
impugning the validity of the Agreement Establishing the World Trade
Organization or of the validity of the concurrence.
C. Whether the provisions of the Agreement Establishing the World Trade
Organization contravene the provisions of Sec. 19, Article II, and Secs. 10 and
12, Article XII, all of the 1987 Philippine Constitution.
D. Whether provisions of the Agreement Establishing the World Trade
Organization unduly limit, restrict and impair Philippine sovereignty
specifically the legislative power which, under Sec. 2, Article VI, 1987
Philippine Constitution is vested in the Congress of the Philippines;
E. Whether provisions of the Agreement Establishing the World Trade
Organization interfere with the exercise of judicial power.
F. Whether the respondent members of the Senate acted in grave abuse of
discretion amounting to lack or excess of jurisdiction when they voted for
concurrence in the ratification of the constitutionally-infirm Agreement
Establishing the World Trade Organization.
G. Whether the respondent members of the Senate acted in grave abuse of
discretion amounting to lack or excess of jurisdiction when they concurred
only in the ratification of the Agreement Establishing the World Trade
Organization, and not with the Presidential submission which included the
Final Act, Ministerial Declaration and Decisions, and the Understanding on
Commitments in Financial Services.
On the other hand, the Solicitor General as counsel for respondents
synthesized the several issues raised by petitioners into the following:
[10]

1. Whether or not the provisions of the Agreement Establishing the World Trade
Organization and the Agreements and Associated Legal Instruments included in
Annexes one (1), two (2) and three (3) of that agreement cited by petitioners directly
contravene or undermine the letter, spirit and intent of Section 19, Article II and
Sections 10 and 12, Article XII of the 1987 Constitution.
2. Whether or not certain provisions of the Agreement unduly limit, restrict or impair
the exercise of legislative power by Congress.
3. Whether or not certain provisions of the Agreement impair the exercise of judicial
power by this Honorable Court in promulgating the rules of evidence.
4. Whether or not the concurrence of the Senate in the ratification by the President of
the Philippines of the Agreement establishing the World Trade Organization implied
rejection of the treaty embodied in the Final Act.
By raising and arguing only four issues against the seven presented by
petitioners, the Solicitor General has effectively ignored three, namely: (1)
whether the petition presents a political question or is otherwise not
justiciable; (2) whether petitioner-members of the Senate (Wigberto E. Taada
and Anna Dominique Coseteng) are estopped from joining this suit; and (3)
whether the respondent-members of the Senate acted in grave abuse of
discretion when they voted for concurrence in the ratification of the WTO
Agreement. The foregoing notwithstanding, this Court resolved to deal with
these three issues thus:
(1) The political question issue -- being very fundamental and vital, and being a
matter that probes into the very jurisdiction of this Court to hear and decide this case -
- was deliberated upon by the Court and will thus be ruled upon as the first issue;
(2) The matter of estoppel will not be taken up because this defense is waivable and
the respondents have effectively waived it by not pursuing it in any of their pleadings;
in any event, this issue, even if ruled in respondents favor, will not cause the
petitions dismissal as there are petitioners other than the two senators, who are not
vulnerable to the defense of estoppel; and
(3) The issue of alleged grave abuse of discretion on the part of the respondent
senators will be taken up as an integral part of the disposition of the four issues raised
by the Solicitor General.
During its deliberations on the case, the Court noted that the respondents
did not question the locus standi of petitioners. Hence, they are also deemed
to have waived the benefit of such
TANADA v. ANGARA
October 26, 2012 Leave a Comment
272 SCRA 18, May 2, 1997
Facts :
This is a petition seeking to nullify the Philippine ratification of the World Trade Organization (WTO)
Agreement. Petitioners question the concurrence of herein respondents acting in their capacities as
Senators via signing the said agreement.
The WTO opens access to foreign markets, especially its major trading partners, through the reduction of
tariffs on its exports, particularly agricultural and industrial products. Thus, provides new opportunities
for the service sector cost and uncertainty associated with exporting and more investment in the country.
These are the predicted benefits as reflected in the agreement and as viewed by the signatory Senators, a
free market espoused by WTO.
Petitioners on the other hand viewed the WTO agreement as one that limits, restricts and impair Philippine
economic sovereignty and legislative power. That the Filipino First policy of the Constitution was taken for
granted as it gives foreign trading intervention.

Issue : Whether or not there has been a grave abuse of discretion amounting to lack or excess of
jurisdiction on the part of the Senate in giving its concurrence of the said WTO agreement.
Held:
In its Declaration of Principles and state policies, the Constitution adopts the generally accepted
principles of international law as part of the law of the land, and adheres to the policy of peace, equality,
justice, freedom, cooperation and amity , with all nations. By the doctrine of incorporation, the country is
bound by generally accepted principles of international law, which are considered automatically part of our
own laws. Pacta sunt servanda international agreements must be performed in good faith. A treaty is not
a mere moral obligation but creates a legally binding obligation on the parties.
Through WTO the sovereignty of the state cannot in fact and reality be considered as absolute because it
is a regulation of commercial relations among nations. Such as when Philippines joined the United Nations
(UN) it consented to restrict its sovereignty right under the concept of sovereignty as autolimitation.
What Senate did was a valid exercise of authority. As to determine whether such exercise is wise,
beneficial or viable is outside the realm of judicial inquiry and review. The act of signing the said
agreement is not a legislative restriction as WTO allows withdrawal of membership should this be the
political desire of a member. Also, it should not be viewed as a limitation of economic sovereignty. WTO
remains as the only viable structure for multilateral trading and the veritable forum for the development of
international trade law. Its alternative is isolation, stagnation if not economic self-destruction. Thus, the
people be allowed, through their duly elected officers, make their free choice.
Petition is DISMISSED for lack of merit.
SUPREME COURT
Manila
SECOND DIVISION

G.R. No. L-54908 January 22, 1990
vs.
MITSUBISHI METAL CORPORATION, ATLAS CONSOLIDATED MINING AND
DEVELOPMENT CORPORATION and the COURT OF TAX APPEALS, respondents.
G.R. No. 80041 January 22, 1990
vs.
MITSUBISHI METAL CORPORATION, ATLAS CONSOLIDATED MINING AND
DEVELOPMENT CORPORATION and the COURT OF TAX APPEALS, respondents.
Gadioma Law Offices for respondents.

REGALADO, J .:
These cases, involving the same issue being contested by the same parties and having
originated from the same factual antecedents generating the claims for tax credit of
private respondents, the same were consolidated by resolution of this Court dated May
31, 1989 and are jointly decided herein.
The records reflect that on April 17, 1970, Atlas Consolidated Mining and Development
Corporation (hereinafter, Atlas) entered into a Loan and Sales Contract with Mitsubishi
Metal Corporation (Mitsubishi, for brevity), a Japanese corporation licensed to engage
in business in the Philippines, for purposes of the projected expansion of the productive
capacity of the former's mines in Toledo, Cebu. Under said contract, Mitsubishi agreed
to extend a loan to Atlas 'in the amount of $20,000,000.00, United States currency, for
the installation of a new concentrator for copper production. Atlas, in turn undertook to
sell to Mitsubishi all the copper concentrates produced from said machine for a period of
fifteen (15) years. It was contemplated that $9,000,000.00 of said loan was to be used
for the purchase of the concentrator machinery from Japan.
1

Mitsubishi thereafter applied for a loan with the Export-Import Bank of Japan (Eximbank
for short) obviously for purposes of its obligation under said contract. Its loan application
was approved on May 26, 1970 in the sum of 4,320,000,000.00, at about the same
time as the approval of its loan for 2,880,000,000.00 from a consortium of Japanese
banks. The total amount of both loans is equivalent to $20,000,000.00 in United States
currency at the then prevailing exchange rate. The records in the Bureau of Internal
Revenue show that the approval of the loan by Eximbank to Mitsubishi was subject to
the condition that Mitsubishi would use the amount as a loan to Atlas and as a
consideration for importing copper concentrates from Atlas, and that Mitsubishi had to
pay back the total amount of loan by September 30, 1981.
2

Pursuant to the contract between Atlas and Mitsubishi, interest payments were made by
the former to the latter totalling P13,143,966.79 for the years 1974 and 1975. The
corresponding 15% tax thereon in the amount of P1,971,595.01 was withheld pursuant
to Section 24 (b) (1) and Section 53 (b) (2) of the National Internal Revenue Code, as
amended by Presidential Decree No. 131, and duly remitted to the Government.
3

On March 5, 1976, private respondents filed a claim for tax credit requesting that the
sum of P1,971,595.01 be applied against their existing and future tax liabilities.
Parenthetically, it was later noted by respondent Court of Tax Appeals in its decision
that on August 27, 1976, Mitsubishi executed a waiver and disclaimer of its interest in
the claim for tax credit in favor of
Atlas.
4

The petitioner not having acted on the claim for tax credit, on April 23, 1976 private
respondents filed a petition for review with respondent court, docketed therein as CTA
Case No. 2801.
5
The petition was grounded on the claim that Mitsubishi was a mere agent of
Eximbank, which is a financing institution owned, controlled and financed by the Japanese Government.
Such governmental status of Eximbank, if it may be so called, is the basis for private repondents' claim for
exemption from paying the tax on the interest payments on the loan as earlier stated. It was further
claimed that the interest payments on the loan from the consortium of Japanese banks were likewise
exempt because said loan supposedly came from or were financed by Eximbank. The provision of the
National Internal Revenue Code relied upon is Section 29 (b) (7) (A),
6
which excludes from gross income:
(A) Income received from their investments in the Philippines in loans,
stocks, bonds or other domestic securities, or from interest on their
deposits in banks in the Philippines by (1) foreign governments, (2)
financing institutions owned, controlled, or enjoying refinancing from them,
and (3) international or regional financing institutions established by
governments.
Petitioner filed an answer on July 9, 1976. The case was set for hearing on April 6, 1977
but was later reset upon manifestation of petitioner that the claim for tax credit of the
alleged erroneous payment was still being reviewed by the Appellate Division of the
Bureau of Internal Revenue. The records show that on November 16, 1976, the said
division recommended to petitioner the approval of private respondent's claim.
However, before action could be taken thereon, respondent court scheduled the case
for hearing on September 30, 1977, during which trial private respondents presented
their evidence while petitioner submitted his case on the basis of the records of the
Bureau of Internal Revenue and the pleadings.
7

On April 18, 1980, respondent court promulgated its decision ordering petitioner to grant
a tax credit in favor of Atlas in the amount of P1,971,595.01. Interestingly, the tax court
held that petitioner admitted the material averments of private respondents when he
supposedly prayed "for judgment on the pleadings without off-spring proof as to the
truth of his allegations."
8
Furthermore, the court declared that all papers and documents pertaining
to the loan of 4,320,000,000.00 obtained by Mitsubishi from Eximbank show that this was the same
amount given to Atlas. It also observed that the money for the loans from the consortium of private
Japanese banks in the sum of 2,880,000,000.00 "originated" from Eximbank. From these, respondent
court concluded that the ultimate creditor of Atlas was Eximbank with Mitsubishi acting as a mere
"arranger or conduit through which the loans flowed from the creditor Export-Import Bank of Japan to the
debtor Atlas Consolidated Mining & Development Corporation."
9

A motion for reconsideration having been denied on August 20, 1980, petitioner
interposed an appeal to this Court, docketed herein as G.R. No. 54908.
While CTA Case No. 2801 was still pending before the tax court, the corresponding
15% tax on the amount of P439,167.95 on the P2,927,789.06 interest payments for the
years 1977 and 1978 was withheld and remitted to the Government. Atlas again filed a
claim for tax credit with the petitioner, repeating the same basis for exemption.
On June 25, 1979, Mitsubishi and Atlas filed a petition for review with the Court of Tax
Appeals docketed as CTA Case No. 3015. Petitioner filed his answer thereto on August
14, 1979, and, in a letter to private respondents dated November 12, 1979, denied said
claim for tax credit for lack of factual or legal basis.
10

On January 15, 1981, relying on its prior ruling in CTA Case No. 2801, respondent court
rendered judgment ordering the petitioner to credit Atlas the aforesaid amount of tax
paid. A motion for reconsideration, filed on March 10, 1981, was denied by respondent
court in a resolution dated September 7, 1987. A notice of appeal was filed on
September 22, 1987 by petitioner with respondent court and a petition for review was
filed with this Court on December 19, 1987. Said later case is now before us as G.R.
No. 80041 and is consolidated with G.R. No. 54908.
The principal issue in both petitions is whether or not the interest income from the loans
extended to Atlas by Mitsubishi is excludible from gross income taxation pursuant to
Section 29 b) (7) (A) of the tax code and, therefore, exempt from withholding
tax. Apropos thereto, the focal question is whether or not Mitsubishi is a mere conduit of
Eximbank which will then be considered as the creditor whose investments in the
Philippines on loans are exempt from taxes under the code.
Prefatorily, it must be noted that respondent court erred in holding in CTA Case No.
2801 that petitioner should be deemed to have admitted the allegations of the private
respondents when it submitted the case on the basis of the pleadings and records of the
bureau. There is nothing to indicate such admission on the part of petitioner nor can we
accept respondent court's pronouncement that petitioner did not offer to prove the truth
of its allegations. The records of the Bureau of Internal Revenue relevant to the case
were duly submitted and admitted as petitioner's supporting evidence. Additionally, a
hearing was conducted, with presentation of evidence, and the findings of respondent
court were based not only on the pleadings but on the evidence adduced by the parties.
There could, therefore, not have been a judgment on the pleadings, with the theorized
admissions imputed to petitioner, as mistakenly held by respondent court.
Time and again, we have ruled that findings of fact of the Court of Tax Appeals are
entitled to the highest respect and can only be disturbed on appeal if they are not
supported by substantial evidence or if there is a showing of gross error or abuse on the
part of the tax court.
11
Thus, ordinarily, we could give due consideration to the holding of respondent
court that Mitsubishi is a mere agent of Eximbank. Compelling circumstances obtaining and proven in
these cases, however, warrant a departure from said general rule since we are convinced that there is a
misapprehension of facts on the part of the tax court to the extent that its conclusions are speculative in
nature.
The loan and sales contract between Mitsubishi and Atlas does not contain any direct or
inferential reference to Eximbank whatsoever. The agreement is strictly between
Mitsubishi as creditor in the contract of loan and Atlas as the seller of the copper
concentrates. From the categorical language used in the document, one prestation was
in consideration of the other. The specific terms and the reciprocal nature of their
obligations make it implausible, if not vacuous to give credit to the cavalier assertion
that Mitsubishi was a mere agent in said transaction.
Surely, Eximbank had nothing to do with the sale of the copper concentrates since all
that Mitsubishi stated in its loan application with the former was that the amount being
procured would be used as a loan to and in consideration for importing copper
concentrates from Atlas.
12
Such an innocuous statement of purpose could not have been intended
for, nor could it legally constitute, a contract of agency. If that had been the purpose as respondent court
believes, said corporations would have specifically so stated, especially considering their experience and
expertise in financial transactions, not to speak of the amount involved and its purchasing value in 1970.
A thorough analysis of the factual and legal ambience of these cases impels us to give
weight to the following arguments of petitioner:
The nature of the above contract shows that the same is not just a simple
contract of loan. It is not a mere creditor-debtor relationship. It is more of a
reciprocal obligation between ATLAS and MITSUBISHI where the latter
shall provide the funds in the installation of a new concentrator at the
former's Toledo mines in Cebu, while ATLAS in consideration of which,
shall sell to MITSUBISHI, for a term of 15 years, the entire copper
concentrate that will be produced by the installed concentrator.
Suffice it to say, the selling of the copper concentrate to MITSUBISHI
within the specified term was the consideration of the granting of the
amount of $20 million to ATLAS. MITSUBISHI, in order to fulfill its part of
the contract, had to obtain funds. Hence, it had to secure a loan or loans
from other sources. And from what sources, it is immaterial as far as
ATLAS in concerned. In this case, MITSUBISHI obtained the $20 million
from the EXIMBANK, of Japan and the consortium of Japanese banks
financed through the EXIMBANK, of Japan.
When MITSUBISHI therefore secured such loans, it was in its own
independent capacity as a private entity and not as a conduit of the
consortium of Japanese banks or the EXIMBANK of Japan. While the
loans were secured by MITSUBISHI primarily "as a loan to and in
consideration for importing copper concentrates from ATLAS," the fact
remains that it was a loan by EXIMBANK of Japan to MITSUBISHI and not
to ATLAS.
Thus, the transaction between MITSUBISHI and EXIMBANK of Japan was
a distinct and separate contract from that entered into by MITSUBISHI and
ATLAS. Surely, in the latter contract, it is not EXIMBANK, that was
intended to be benefited. It is MITSUBISHI which stood to profit. Besides,
the Loan and Sales Contract cannot be any clearer. The only signatories
to the same were MITSUBISHI and ATLAS. Nowhere in the contract can it
be inferred that MITSUBISHI acted for and in behalf of EXIMBANK, of
Japan nor of any entity, private or public, for that matter.
Corollary to this, it may well be stated that in this jurisdiction, well-settled is
the rule that when a contract of loan is completed, the money ceases to be
the property of the former owner and becomes the sole property of the
obligor (Tolentino and Manio vs. Gonzales Sy, 50 Phil. 558).
In the case at bar, when MITSUBISHI obtained the loan of $20 million
from EXIMBANK, of Japan, said amount ceased to be the property of the
bank and became the property of MITSUBISHI.
The conclusion is indubitable; MITSUBISHI, and NOT EXIMBANK, is the
sole creditor of ATLAS, the former being the owner of the $20 million upon
completion of its loan contract with EXIMBANK of Japan.
The interest income of the loan paid by ATLAS to MITSUBISHI is
therefore entirely different from the interest income paid by MITSUBISHI
to EXIMBANK, of Japan. What was the subject of the 15% withholding tax
is not the interest income paid by MITSUBISHI to EXIMBANK, but the
interest income earned by MITSUBISHI from the loan to ATLAS. . . .
13

To repeat, the contract between Eximbank and Mitsubishi is entirely different. It is
complete in itself, does not appear to be suppletory or collateral to another contract and
is, therefore, not to be distorted by other considerations aliunde. The application for the
loan was approved on May 20, 1970, or more than a month after the contract between
Mitsubishi and Atlas was entered into on April 17, 1970. It is true that under the contract
of loan with Eximbank, Mitsubishi agreed to use the amount as a loan to and in
consideration for importing copper concentrates from Atlas, but all that this proves is the
justification for the loan as represented by Mitsubishi, a standard banking practice for
evaluating the prospects of due repayment. There is nothing wrong with such stipulation
as the parties in a contract are free to agree on such lawful terms and conditions as
they see fit. Limiting the disbursement of the amount borrowed to a certain person or to
a certain purpose is not unusual, especially in the case of Eximbank which, aside from
protecting its financial exposure, must see to it that the same are in line with the
provisions and objectives of its charter.
Respondents postulate that Mitsubishi had to be a conduit because Eximbank's charter
prevents it from making loans except to Japanese individuals and corporations. We are
not impressed. Not only is there a failure to establish such submission by adequate
evidence but it posits the unfair and unexplained imputation that, for reasons subject
only of surmise, said financing institution would deliberately circumvent its own charter
to accommodate an alien borrower through a manipulated subterfuge, but with it as a
principal and the real obligee.
The allegation that the interest paid by Atlas was remitted in full by Mitsubishi to
Eximbank, assuming the truth thereof, is too tenuous and conjectural to support the
proposition that Mitsubishi is a mere conduit. Furthermore, the remittance of the interest
payments may also be logically viewed as an arrangement in paying Mitsubishi's
obligation to Eximbank. Whatever arrangement was agreed upon by Eximbank and
Mitsubishi as to the manner or procedure for the payment of the latter's obligation is
their own concern. It should also be noted that Eximbank's loan to Mitsubishi imposes
interest at the rate of 75% per annum, while Mitsubishis contract with Atlas merely
states that the "interest on the amount of the loan shall be the actual cost beginning
from and including other dates of releases against loan."
14

It is too settled a rule in this jurisdiction, as to dispense with the need for citations, that
laws granting exemption from tax are construed strictissimi juris against the taxpayer
and liberally in favor of the taxing power. Taxation is the rule and exemption is the
exception. The burden of proof rests upon the party claiming exemption to prove that it
is in fact covered by the exemption so claimed, which onus petitioners have failed to
discharge. Significantly, private respondents are not even among the entities which,
under Section 29 (b) (7) (A) of the tax code, are entitled to exemption and which should
indispensably be the party in interest in this case.
Definitely, the taxability of a party cannot be blandly glossed over on the basis of a
supposed "broad, pragmatic analysis" alone without substantial supportive evidence,
lest governmental operations suffer due to diminution of much needed funds. Nor can
we close this discussion without taking cognizance of petitioner's warning, of pervasive
relevance at this time, that while international comity is invoked in this case on the
nebulous representation that the funds involved in the loans are those of a foreign
government, scrupulous care must be taken to avoid opening the floodgates to the
violation of our tax laws. Otherwise, the mere expedient of having a Philippine
corporation enter into a contract for loans or other domestic securities with private
foreign entities, which in turn will negotiate independently with their governments, could
be availed of to take advantage of the tax exemption law under discussion.
WHEREFORE, the decisions of the Court of Tax Appeals in CTA Cases Nos. 2801 and
3015, dated April 18, 1980 and January 15, 1981, respectively, are hereby REVERSED
and SET ASIDE.
SO ORDERED.
Melencio-Herrera, Paras, Padilla and Sarmiento, JJ., concur.
CIR vs. Mitsubishi Metal Corporation (G.R. No. L-
54908. January 22, 1990)
Post under case digests, Taxation at Saturday, March 10, 2012 Posted by Schizophrenic Mind
Facts: On April 17, 1970, Atlas Consolidated Mining and
Development Corporation entered into a Loan and Sales
Contractwith Mitsubishi Metal Corporation, a Japanese
corporation licensed to engage in business in the
Philippines, for purposes of the projected expansion of the
productive capacity of the former's mines in Toledo, Cebu.
Under said contract, Mitsubishi agreed to extend a loan to
Atlas 'in the amount of $20,000,000.00, United
Statescurrency. Atlas, in turn undertook to sell to
Mitsubishi all the copper concentrates produced for a
period of fifteen (15) years. Mitsubishi thereafter applied
for a loan with the Export-Import Bank of Japan
(Eximbank) for purposes of its obligation under said
contract. Its loan application was approved on May 26,
1970 in the equivalent sum of $20,000,000.00 in United
States currency at the then prevailingexchange rate. The
records in the Bureau of Internal Revenue show that the
approval of the loan by Eximbank to Mitsubishi was
subject to the condition that Mitsubishi would use the
amount as a loan to Atlas and as a consideration for
importing copper concentrates from Atlas, and that
Mitsubishi had to pay back the total amount of loan by
September 30, 1981. Pursuant to the contract between
Atlas and Mitsubishi, interest payments were made by the
former to the latter totaling P13,143,966.79 for the years
1974 and 1975. The corresponding 15% tax thereon in the
amount of P1,971,595.01 was withheld pursuant to
Section 24 (b) (1) and Section 53 (b) (2) of the
National Internal Revenue Code, as amended by
Presidential Decree No. 131, and duly remitted to the
Government.

Issue: Whether or not the interest income from the
loans extended to Atlas by Mitsubishi is excludible from
gross income taxation pursuant to Section 29 of the tax
code and, therefore, exempt from withholding tax.

Held: The court ruled in the negative. Eximbank
had nothing to dowith the sale of the copper concentrates
since all that Mitsubishi stated in its loan application with
the former was that the amount being procured would be
used as a loan to and in consideration for importing
copper concentrates from Atlas. Such an innocuous
statement of purpose could not have been intended for,
nor could it legally constitute, a contract of agency. The
conclusion is indubitable; MITSUBISHI, and NOT
EXIMBANK, is the sole creditor of ATLAS, the former
being the owner of the $20 million upon completion of its
loan contract with EXIMBANK of Japan. It is settled a rule
in this jurisdiction that laws granting exemption from tax
are construed strictissimi juris against the taxpayer and
liberally in favor of the taxing power. Taxation is the rule
and exemption is the exception. The burden of proof rests
upon the party claimingexemption to prove that it is in fact
covered by the exemption so claimed, which the
petitioners have failed to discharge. Significantly, private
respondents are not among the entities which, under
Section 29 of the tax code, are entitled to exemption and
which should indispensably be the party in interest in this
case.
SUPREME COURT
Manila
EN BANC

G.R. No. 88291 June 8, 1993
ERNESTO M. MACEDA, petitioner,
vs.
HON. CATALINO MACARAIG, JR., in his capacity as Executive Secretary, Office
of the President, HON. VICENTE JAYME, ETC., ET AL., respondents.
Angara, Abello, Concepcion & Cruz for respondent Pilipinas Shell Petroleum
Corporation.
Siguion Reyna, Montecillo & Ongsiako for Caltex.

NOCON, J .:
Just like lightning which does strike the same place twice in some instances, this matter
of indirect tax exemption of the private respondent National Power Corporation (NPC) is
brought to this Court a second time. Unfazed by the Decision We promulgated on May
31, 1991
1
petitioner Ernesto Maceda asks this Court to reconsider said Decision. Lest We be criticized
for denying due process to the petitioner. We have decided to take a second look at the issues. In the
process, a hearing was held on July 9, 1992 where all parties presented their respective arguments.
Etched in this Court's mind are the paradoxical claims by both petitioner and private respondents that
their respective positions are for the benefit of the Filipino people.
I
A Chronological review of the relevant NPC laws, specially with respect to its tax
exemption provisions, at the risk of being repetitious is, therefore, in order.
On November 3, 1936, Commonwealth Act No. 120 was enacted creating the National
Power Corporation, a public corporation, mainly to develop hydraulic power from all
water sources in the Philippines.
2
The sum of P250,000.00 was appropriated out of the funds in
the Philippine Treasury for the purpose of organizing the NPC and conducting its preliminary work.
3
The
main source of funds for the NPC was the flotation of bonds in the capital markets
4
and these bonds
. . . issued under the authority of this Act shall be exempt from the
payment of all taxes by the Commonwealth of the Philippines, or by any
authority, branch, division or political subdivision thereof and subject to the
provisions of the Act of Congress, approved March 24, 1934, otherwise
known as the Tydings McDuffle Law, which facts shall be stated upon the
face of said bonds. . . . .
5

On June 24, 1938, C.A. No. 344 was enacted increasing to P550,000.00 the funds
needed for the initial operations of the NPC and reiterating the provision of the flotation
of bonds as soon as the first construction of any hydraulic power project was to be
decided by the NPC Board.
6
The provision on tax exemption in relation to the issuance of the NPC
bonds was neither amended nor deleted.
On September 30, 1939, C.A. No. 495 was enacted removing the provision on the
payment of the bond's principal and interest in "gold coins" but adding that payment
could be made in United States dollars.
7
The provision on tax exemption in relation to the
issuance of the NPC bonds was neither amended nor deleted.
On June 4, 1949, Republic Act No. 357 was enacted authorizing the President of the
Philippines to guarantee, absolutely and unconditionally, as primary obligor, the
payment of any and all NPC loans.
8
He was also authorized to contract on behalf of the NPC with
the International Bank for Reconstruction and Development (IBRD) for NPC loans for the accomplishment
of NPC's corporate objectives
9
and for the reconstruction and development of the economy of the
country.
10
It was expressly stated that:
Any such loan or loans shall be exempt from taxes, duties, fees, imposts,
charges, contributions and restrictions of the Republic of the Philippines,
its provinces, cities and municipalities.
11

On the same date, R.A. No. 358 was enacted expressly authorizing the NPC, for the
first time, to incur other types of indebtedness, aside from indebtedness incurred by
flotation of bonds.
12
As to the pertinent tax exemption provision, the law stated as follows:
To facilitate payment of its indebtedness, the National Power Corporation
shall be exempt from all taxes, duties, fees, imposts, charges, and
restrictions of the Republic of the Philippines, its provinces, cities and
municipalities.
13

On July 10, 1952, R.A. No. 813 was enacted amending R.A. No. 357 in that, aside from
the IBRD, the President of the Philippines was authorized to negotiate, contract and
guarantee loans with the Export-Import Bank of of Washigton, D.C., U.S.A., or any other
international financial institution.
14
The tax provision for repayment of these loans, as stated in
R.A. No. 357, was not amended.
On June 2, 1954, R.A. No. 987 was enacted specifically to withdraw NPC's tax
exemption for real estate taxes. As enacted, the law states as follows:
To facilitate payment of its indebtedness, the National Power Corporation
shall be exempt from all taxes, except real property tax, and from all
duties, fees, imposts, charges, and restrictions of the Republic of the
Philippines, its provinces, cities, and municipalities.
15

On September 8, 1955, R.A. No. 1397 was enacted directing that the NPC projects to
be funded by the increased indebtedness
16
should bear the National Economic Council's stamp
of approval. The tax exemption provision related to the payment of this total indebtedness was not
amended nor deleted.
On June 13, 1958, R.A. No. 2055 was enacted increasing the total amount of foreign
loans NPC was authorized to incur to US$100,000,000.00 from the US$50,000,000.00
ceiling in R.A. No. 357.
17
The tax provision related to the repayment of these loans was not
amended nor deleted.
On June 13, 1958, R.A. No. 2058 was enacting fixing the corporate life of NPC to
December 31, 2000.
18
All laws or provisions of laws and executive orders contrary to said R.A. No.
2058 were expressly repealed.
19

On June 18, 1960, R.A. No 2641 was enacted converting the NPC from a public
corporation into a stock corporation with an authorized capital stock of P100,000,000.00
divided into 1,000.000 shares having a par value of P100.00 each, with said capital
stock wholly subscribed to by the Government.
20
No tax exemption was incorporated in said
Act.
On June 17, 1961, R.A. No. 3043 was enacted increasing the above-mentioned
authorized capital stock to P250,000,000.00 with the increase to be wholly subscribed
by the Government.
21
No tax provision was incorporated in said Act.
On June 17, 1967, R.A. No 4897 was enacted. NPC's capital stock was increased again
to P300,000,000.00, the increase to be wholly subscribed by the Government. No tax
provision was incorporated in said Act.
22

On September 10, 1971, R.A. No. 6395 was enacted revising the charter of the NPC,
C.A. No. 120, as amended. Declared as primary objectives of the nation were:
Declaration of Policy. Congress hereby declares that (1) the
comprehensive development, utilization and conservation of Philippine
water resources for all beneficial uses, including power generation, and (2)
the total electrification of the Philippines through the development of
power from all sources to meet the needs of industrial development and
dispersal and the needs of rural electrification are primary objectives of the
nation which shall be pursued coordinately and supported by all
instrumentalities and agencies of the government, including the financial
institutions.
23

Section 4 of C.A. No. 120, was renumbered as Section 8, and divided into sections 8 (a)
(Authority to incur Domestic Indebtedness) and Section 8 (b) (Authority to Incur Foreign
Loans).
As to the issuance of bonds by the NPC, Paragraph No. 3 of Section 8(a), states as
follows:
The bonds issued under the authority of this subsection shall be exempt
from the payment of all taxes by the Republic of the Philippines, or by any
authority, branch, division or political subdivision thereof which facts shall
be stated upon the face of said bonds. . . .
24

As to the foreign loans the NPC was authorized to contract, Paragraph No. 5, Section
8(b), states as follows:
The loans, credits and indebtedness contracted under this subsection and
the payment of the principal, interest and other charges thereon, as well
as the importation of machinery, equipment, materials and supplies by the
Corporation, paid from the proceeds of any loan, credit or indebtedeness
incurred under this Act, shall also be exempt from all taxes, fees, imposts,
other charges and restrictions, including import restrictions, by the
Republic of the Philippines, or any of its agencies and political
subdivisions.
25

A new section was added to the charter, now known as Section 13, R.A. No. 6395,
which declares the non-profit character and tax exemptions of NPC as follows:
The Corporation shall be non-profit and shall devote all its returns from its
capital investment, as well as excess revenues from its operation, for
expansion. To enable the Corporation to pay its indebtedness and
obligations and in furtherance and effective implementation of the policy
enunciated in Section one of this Act, the Corporation is hereby declared
exempt:
(a) From the payment of all taxes, duties, fees, imposts, charges costs
and service fees in any court or administrative proceedings in which it may
be a party, restrictions and duties to the Republic of the Philippines, its
provinces, cities, and municipalities and other government agencies and
instrumentalities;
(b) From all income taxes, franchise taxes and realty taxes to be paid to
the National Government, its provinces, cities, municipalities and other
government agencies and instrumentalities;
(c) From all import duties, compensating taxes and advanced sales tax,
and wharfage fees on import of foreign goods required for its operations
and projects; and
(d) From all taxes, duties, fees, imposts and all other charges its
provinces, cities, municipalities and other government agencies and
instrumentalities, on all petroleum products used by the Corporation in the
generation, transmission, utilization, and sale of electric power.
26

On November 7, 1972, Presidential Decree No. 40 was issued declaring that the
electrification of the entire country was one of the primary concerns of the country. And in
connection with this, it was specifically stated that:
The setting up of transmission line grids and the construction of
associated generation facilities in Luzon, Mindanao and major islands of
the country, including the Visayas, shall be the responsibility of the
National Power Corporation (NPC) as the authorized implementing
agency of the State.
27

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

On January 22, 1974, P.D. No. 380 was issued giving extra powers to the NPC to
enable it to fulfill its role under aforesaid P.D. No. 40. Its authorized capital stock was
raised to P2,000,000,000.00,
29
its total domestic indebtedness was pegged at a maximum of
P3,000,000,000.00 at any one time,
30
and the NPC was authorized to borrow a total of
US$1,000,000,000.00
31
in foreign loans.
The relevant tax exemption provision for these foreign loans states as follows:
as the importation of machinery, equipment, materials, supplies and
services, by the Corporation, paid from the proceeds of any loan, credit or
indebtedness incurred under this Act, shall also be exempt from all direct
and indirect taxes, fees, imposts, other charges and restrictions, including
import restrictions previously and presently imposed, and to be imposed
by the Republic of the Philippines, or any of its agencies and political
subdivisions.
32
(Emphasis supplied)
Section 13(a) and 13(d) of R.A. No 6395 were amended to read as follows:
(a) From the payment of all taxes, duties, fees, imposts, charges and
restrictions to the Republic of the Philippines, its provinces, cities,
municipalities and other government agencies and instrumentalities
including the taxes, duties, fees, imposts and other charges provided for
under the Tariff and Customs Code of the Philippines, Republic Act
Numbered Nineteen Hundred Thirty-Seven, as amended, and as further
amended by Presidential Decree No. 34 dated October 27, 1972, and
Presidential Decree No. 69, dated November 24, 1972, and costs and
service fees in any court or administrative proceedings in which it may be
a party;
xxx xxx xxx
(d) From all taxes, duties, fees, imposts, and all other charges
imposed directly or indirectly by the Republic of the Philippines, its
generation, transmission, utilization and sale of electric power.
33
(Emphasis
supplied)
On February 26, 1970, P.D. No. 395 was issued removing certain restrictions in the
NPC's sale of electricity to its different customers.
34
No tax exemption provision was amended,
deleted or added.
On July 31, 1975, P.D. No. 758 was issued directing that P200,000,000.00 would be
appropriated annually to cover the unpaid subscription of the Government in the NPC
authorized capital stock, which amount would be taken from taxes accruing to the
General Funds of the Government, proceeds from loans, issuance of bonds, treasury
bills or notes to be issued by the Secretary of Finance for this particular purpose.
35

On May 27, 1976 P.D. No. 938 was issued
(I)n view of the accelerated expansion programs for generation and
transmission facilities which includes nuclear power generation, the
present capitalization of National Power Corporation (NPC) and the
ceilings for domestic and foreign borrowings are deemed insufficient;
36

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

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

Thus NPC's capital stock was raised to P8,000,000,000.00,
39
the total domestic
indebtedness ceiling was increased to P12,000,000,000.00,
40
the total foreign loan ceiling was raised to
US$4,000,000,000.00
41
and Section 13 of R.A. No. 6395, was amended to read as follows:
capital investment as well as excess revenues from its operation, for
expansion. To enable the Corporation to pay to its indebtedness and
enunciated in Section one of this Act, the Corporation, including its
subsidiaries, is hereby declared exempt from the payment of all forms of
taxes, duties, fees, imposts as well as costs and service fees including
filing fees, appeal bonds, supersedeas bonds, in any court or
administrative proceedings.
42

II
On the other hand, the pertinent tax laws involved in this controversy are P.D. Nos. 882,
1177, 1931 and Executive Order No. 93 (S'86).
On January 30, 1976, P.D. No. 882 was issued withdrawing the tax exemption of NPC
with regard to imports as follows:
WHEREAS, importations by certain government agencies, including
government-owned or controlled corporation, are exempt from the
payment of customs duties and compensating tax; and
WHEREAS, in order to reduce foreign exchange spending and to protect
domestic industries, it is necessary to restrict and regulate such tax-free
importations.
NOW THEREFORE, I, FERDINAND E. MARCOS, President of the
Philippines, by virtue of the powers vested in me by the Constitution, and
do hereby decree and order the following:
Sec. 1. All importations of any government agency, including government-
owned or controlled corporations which are exempt from the payment of
customs duties and internal revenue taxes, shall be subject to the prior
approval of an Inter-Agency Committee which shall insure compliance with
the following conditions:
(a) That no such article of local manufacture are available in sufficient
quantity and comparable quality at reasonable prices;
(b) That the articles to be imported are directly and actually needed and
will be used exclusively by the grantee of the exemption for its operations
and projects or in the conduct of its functions; and
(c) The shipping documents covering the importation are in the name of
the grantee to whom the goods shall be delivered directly by customs
authorities.
xxx xxx xxx
Sec. 3. The Committee shall have the power to regulate and control the
tax-free importation of government agencies in accordance with the
conditions set forth in Section 1 hereof and the regulations to be
promulgated to implement the provisions of this Decree. Provided,
however, That any government agency or government-owned or
controlled corporation, or any local manufacturer or business firm
adversely affected by any decision or ruling of the Inter-Agency
Committee may file an appeal with the Office of the President within ten
days from the date of notice thereof. . . . .
xxx xxx xxx
Sec. 6. . . . . Section 13 of Republic Act No. 6395; . . .. and all similar
provisions of all general and special laws and decrees are hereby
amended accordingly.
xxx xxx xxx
On July 30, 1977, P.D. 1177 was issued as it was
. . . declared the policy of the State to formulate and implement a National
Budget that is an instrument of national development, reflective of national
objectives, strategies and plans. The budget shall be supportive of and
consistent with the socio-economic development plan and shall be
oriented towards the achievement of explicit objectives and expected
results, to ensure that funds are utilized and operations are conducted
effectively, economically and efficiently. The national budget shall be
formulated within a context of a regionalized government structure and of
the totality of revenues and other receipts, expenditures and borrowings of
all levels of government-owned or controlled corporations. The budget
shall likewise be prepared within the context of the national long-term plan
and of a long-term budget program.
43

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

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

On July 11, 1984, most likely due to the economic morass the Government found itself
in after the Aquino assassination, P.D. No. 1931 was issued to reiterate that:
WHEREAS, Presidential Decree No. 1177 has already expressly repealed
the grant of tax privileges to any government-owned or controlled
corporation and all other units of government;
46

and since there was a
. . . need for government-owned or controlled corporations and all other
units of government enjoying tax privileges to share in the requirements of
development, fiscal or otherwise, by paying the duties, taxes and other
charges due from them.
47

it was decreed that:
Sec. 1. The provisions of special on general law to the contrary
notwithstanding, all exemptions from the payment of duties, taxes, fees,
imposts and other charges heretofore granted in favor of government-
owned or controlled corporations including their subsidiaries, are hereby
withdrawn.
Sec. 2. The President of the Philippines and/or the Minister of Finance,
upon the recommendation of the Fiscal Incentives Review Board created
under Presidential Decree No. 776, is hereby empowered to restore,
partially or totally, the exemptions withdrawn by Section 1 above, any
applicable tax and duty, taking into account, among others, any or all of
the following:
1) The effect on the relative price levels;
2) The relative contribution of the corporation to the revenue generation
effort;
3) The nature of the activity in which the corporation is engaged in; or
4) In general the greater national interest to be served.
xxx xxx xxx
Sec. 5. The provisions of Presidential Decree No. 1177 as well as all other
laws, decrees, executive orders, administrative orders, rules, regulations
or parts thereof which are inconsistent with this Decree are hereby
repealed, amended or modified accordingly.
On December 17, 1986, E.O. No. 93 (S'86) was issued with a view to correct
presidential restoration or grant of tax exemption to other government and private
entities without benefit of review by the Fiscal Incentives Review Board, to wit:
WHEREAS, Presidential Decree Nos. 1931 and 1955 issued on June 11,
1984 and October 14, 1984, respectively, withdrew the tax and duty
exemption privileges, including the preferential tax treatment, of
government and private entities with certain exceptions, in order that the
requirements of national economic development, in terms of fiscals and
other resources, may be met more adequately;
xxx xxx xxx
WHEREAS, in addition to those tax and duty exemption privileges were
restored by the Fiscal Incentives Review Board (FIRB), a number of
affected entities, government and private, had their tax and duty
exemption privileges restored or granted by Presidential action without
benefit or review by the Fiscal Incentives Review Board (FIRB);
xxx xxx xxx
Since it was decided that:
[A]ssistance to government and private entities may be better provided
where necessary by explicit subsidy and budgetary support rather than tax
and duty exemption privileges if only to improve the fiscal monitoring
aspects of government operations.
It was thus ordered that:
Sec. 1. The Provisions of any general or special law to the contrary
notwithstanding, all tax and duty incentives granted to government and
private entities are hereby withdrawn, except:
a) those covered by the non-impairment clause of the Constitution;
b) those conferred by effective internation agreement to which the
Government of the Republic of the Philippines is a signatory;
c) those enjoyed by enterprises registered with:
(i) the Board of Investment pursuant to Presidential Decree
No. 1789, as amended;
(ii) the Export Processing Zone Authority, pursuant to
Presidential Decree No. 66 as amended;
(iii) the Philippine Veterans Investment Development
Corporation Industrial Authority pursuant to Presidential
Decree No. 538, was amended.
d) those enjoyed by the copper mining industry pursuant to the provisions
of Letter of Instructions No. 1416;
e) those conferred under the four basic codes namely:
(i) the Tariff and Customs Code, as amended;
(ii) the National Internal Revenue Code, as amended;
(iii) the Local Tax Code, as amended;
(iv) the Real Property Tax Code, as amended;
f) those approved by the President upon the
recommendation of the Fiscal Incentives Review Board.
Sec. 2. The Fiscal Incentives Review Board created under Presidential
Decree No. 776, as amended, is hereby authorized to:
a) restore tax and/or duty exemptions withdrawn hereunder in whole or in
part;
b) revise the scope and coverage of tax and/or duty exemption that may
be restored;
c) impose conditions for the restoration of tax and/or duty exemption;
d) prescribe the date of period of effectivity of the restoration of tax and/or
duty exemption;
e) formulate and submit to the President for approval, a complete system
for the grant of subsidies to deserving beneficiaries, in lieu of or in
combination with the restoration of tax and duty exemptions or preferential
treatment in taxation, indicating the source of funding therefor, eligible
beneficiaries and the terms and conditions for the grant thereof taking into
consideration the international commitment of the Philippines and the
necessary precautions such that the grant of subsidies does not become
the basis for countervailing action.
Sec. 3. In the discharge of its authority hereunder, the Fiscal Incentives
Review Board shall take into account any or all of the following
considerations:
a) the effect on relative price levels;
b) relative contribution of the beneficiary to the revenue generation effort;
c) nature of the activity the beneficiary is engaged; and
d) in general, the greater national interest to be served.
xxx xxx xxx
Sec. 5. All laws, orders, issuances, rules and regulations or parts thereof
inconsistent with this Executive Order are hereby repealed or modified
accordingly.
E.O. No. 93 (S'86) was decreed to be effective
48
upon the promulgation of the rules and
regulations, to be issued by the Ministry of Finance.
49
Said rules and regulations were promulgated and
published in the Official Gazette
on February 23, 1987. These became effective on the 15th day after promulgation
50
in the Official
Gasetter,
51
which 15th day was March 10, 1987.
III
Now to some definitions. We refer to the very simplistic approach that all would-be
lawyers, learn in their TAXATION I course, which fro convenient reference, is as follows:
Classifications or kinds of Taxes:
According to Persons who pay or who bear the burden:
a. Direct Tax the where the person supposed to pay the tax really pays
it. WITHOUT transferring the burden to someone else.
Examples: Individual income tax, corporate income tax, transfer taxes
(estate tax, donor's tax), residence tax, immigration tax
b. Indirect Tax that where the tax is imposed upon
goods BEFORE reaching the consumer who ultimately pays for it, not as a
tax, but as a part of the purchase price.
Examples: the internal revenue indirect taxes (specific tax, percentage
taxes, (VAT) and the tariff and customs indirect taxes (import duties,
special import tax and other dues)
52

IV
To simply matter, the issues raised by petitioner in his motion for reconsideration can be
reduced to the following:
(1) What kind of tax exemption privileges did NPC have?
(2) For what periods in time were these privileges being enjoyed?
(3) If there are taxes to be paid, who shall pay for these taxes?
V
Petitioner contends that P.D. No. 938 repealed the indirect tax exemption of NPC as the
phrase "all forms of taxes etc.," in its section 10, amending Section 13, R.A. No. 6395,
as amended by P.D. No. 380, does not expressly include "indirect taxes."
His point is not well-taken.
A chronological review of the NPC laws will show that it has been the lawmaker's
intention that the NPC was to be completely tax exempt from all forms of taxes direct
and indirect.
NPC's tax exemptions at first applied to the bonds it was authorized to float to finance
its operations upon its creation by virtue of C.A. No. 120.
When the NPC was authorized to contract with the IBRD for foreign financing, any loans
obtained were to be completely tax exempt.
After the NPC was authorized to borrow from other sources of funds aside issuance
of bonds it was again specifically exempted from all types of taxes "to facilitate
payment of its indebtedness." Even when the ceilings for domestic and foreign
borrowings were periodically increased, the tax exemption privileges of the NPC were
maintained.
NPC's tax exemption from real estate taxes was, however, specifically withdrawn by
Rep. Act No. 987, as above stated. The exemption was, however, restored by R.A. No.
6395.
Section 13, R.A. No. 6395, was very comprehensive in its enumeration of the tax
exemptions allowed NPC. Its section 13(d) is the starting point of this bone of contention
among the parties. For easy reference, it is reproduced as follows:
[T]he Corporation is hereby declared exempt:
xxx xxx xxx
(d) From all taxes, duties, fees, imposts and all other charges imposed by
the Republic of the Philippines, its provinces, cities, municipalities and
other government agencies and instrumentalities, on all petroleum
products used by the Corporation in the generation, transmission,
utilization, and sale of electric power.
P.D. No. 380 added phrase "directly or indirectly" to said Section 13(d), which now
reads as follows:
xxx xxx xxx
(d) From all taxes, duties, fees, imposts, and all other charges
imposed directly or indirectly by the Republic of the Philippines, its
generation, transmission, utilization and sale of electric power. (Emphasis
supplied)
Then came P.D. No. 938 which amended Sec. 13(a), (b), (c) and (d) into one very
simple paragraph as follows:
capital investment as well as excess revenues from its operation, for
expansion. To enable the Corporation to pay its indebtedness and
enunciated in Section one of this Act, the Corporation, including its
subsidiaries, is hereby declared exempt from the payment of ALL FORMS
OF taxes, duties, fees, imposts as well as costs and service fees including
filing fees, appeal bonds, supersedeas bonds, in any court or
administrative proceedings. (Emphasis supplied)
Petitioner reminds Us that:
[I]t must be borne in mind that Presidential Decree Nos. 380
and 938 were issued by one man, acting as such the Executive and
Legislative.
53

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

Actually, P.D. No. 938 attests to the ingenuousness of then President Marcos no matter
what his fault were. It should be noted that section 13, R.A. No. 6395, provided for tax
exemptions for the following items:
13(a) : court or administrative proceedings;
13(b) : income, franchise, realty taxes;
13(c) : import of foreign goods required for its operations and projects;
13(d) : petroleum products used in generation of electric power.
P.D. No. 938 lumped up 13(b), 13(c), and 13(d) into the phrase "ALL FORMS OF
TAXES, ETC.,", included 13(a) under the "as well as" clause and added PNOC
subsidiaries as qualified for tax exemptions.
This is the only conclusion one can arrive at if he has read all the NPC laws in the order
of enactment or issuance as narrated above in part I hereof. President Marcos must
have considered all the NPC statutes from C.A. No. 120 up to its latest amendments,
P.D. No. 380, P.D. No. 395 and P.D. No. 759, AND came up
55
with a very simple Section 13,
R.A. No. 6395, as amended by P.D. No. 938.
One common theme in all these laws is that the NPC must be enable to pay its
indebtedness
56
which, as of P.D. No. 938, was P12 Billion in total domestic indebtedness, at any one
time, and U$4 Billion in total foreign loans at any one time. The NPC must be and has to be exempt from
all forms of taxes if this goal is to be achieved.
By virtue of P.D. No. 938 NPC's capital stock was raised to P8 Billion. It must be
remembered that to pay the government share in its capital stock P.D. No. 758 was
issued mandating that P200 Million would be appropriated annually to cover the said
unpaid subscription of the Government in NPC's authorized capital stock. And
significantly one of the sources of this annual appropriation of P200 million is TAX
MONEY accruing to the General Fund of the Government. It does not stand to reason
then that former President Marcos would order P200 Million to be taken partially or
totally from tax money to be used to pay the Government subscription in the NPC, on
one hand, and then order the NPC to pay all its indirect taxes, on the other.
The above conclusion that then President Marcos lumped up Sections 13 (b), 13 (c) and
(d) into the phrase "All FORMS OF" is supported by the fact that he did not do the same
for the tax exemption provision for the foreign loans to be incurred.
The tax exemption on foreign loans found in Section 8(b), R.A. No. 6395, reads as
follows:
as the importation of machinery, equipment, materials and supplies by the
Corporation, paid from the proceeds of any loan, credit or indebtedness
incurred under this Act, shall also be exempt from all taxes, fees, imposts,
other charges and restrictions, including import restrictions, by the
Republic of the Philippines, or any of its agencies and political
subdivisions.
57

The same was amended by P.D. No. 380 as follows:
The loans, credits and indebtedness contracted this subsection and the
payment of the principal, interest and other charges thereon, as well as
the importation of machinery, equipment, materials, supplies and services,
by the Corporation, paid from the proceeds of any loan, credit or
indebtedness incurred under this Act, shall also be exempt from all direct
and indirect taxes, fees, imposts, other charges and restrictions, including
import restrictions previously and presently imposed, and to be
imposed by the Republic of the Philippines, or any of its agencies and
political subdivisions.
58
(Emphasis supplied)
P.D. No. 938 did not amend the same
59
and so the tax exemption provision in Section 8 (b), R.A.
No. 6395, as amended by P.D. No. 380, still stands. Since the subject matter of this particular Section 8
(b) had to do only with loans and machinery imported, paid for from the proceeds of these foreign
loans, THERE WAS NO OTHER SUBJECT MATTER TO LUMP IT UP WITH, and so, the tax exemption
stood as is with the express mention of "direct
and indirect" tax exemptions. And this "direct and indirect" tax exemption privilege extended to "taxes,
fees, imposts, other charges . . . to be imposed" in the future surely, an indication that the lawmakers
wanted the NPC to be exempt from ALL FORMS of taxes direct and indirect.
It is crystal clear, therefore, that NPC had been granted tax exemption privileges for
both direct and indirect taxes under P.D. No. 938.
VI
Five (5) years on into the now discredited New Society, the Government decided to
rationalize government receipts and expenditures by formulating and implementing a
National Budget.
60
The NPC, being a government owned and controlled corporation had to be shed
off its tax exemption status privileges under P.D. No. 1177. It was, however, allowed to ask for a subsidy
from the General Fund in the exact amount of taxes/duties due.
Actually, much earlier, P.D. No. 882 had already repealed NPC's tax-free importation
privileges. It allowed, however, NPC to appeal said repeal with the Office of the
President and to avail of tax-free importation privileges under its Section 1, subject to
the prior approval of an Inter-Agency Committed created by virtue of said P.D. No. 882.
It is presumed that the NPC, being the special creation of the State, was allowed to
continue its tax-free importations.
This Court notes that petitioner brought to the attention of this Court, the matter of the
abolition of NPC's tax exemption privileges by P.D. No. 1177
61
only in his Common
Reply/Comment to private Respondents' "Opposition" and "Comment" to Motion for Reconsideration, four
(4) months AFTER the motion for Reconsideration had been filed. During oral arguments heard on July 9,
1992, he proceeded to discuss this tax exemption withdrawal as explained by then Secretary of Justice
Vicente Abad Santos in opinion No. 133 (S '77).
62
A careful perusal of petitioner's senate Blue Ribbon
Committee Report No. 474, the basis of the petition at bar, fails to yield any mention of said P.D. No.
1177's effect on NPC's tax exemption privileges.
63
Applying by analogy Pulido vs. Pablo,
64
the court
declares that the matter of P.D. No. 1177 abolishing NPC's tax exemption privileges was not seasonably
invoked
65
by the petitioner.
Be that as it may, the Court still has to discuss the effect of P.D. No. 1177 on the NPC
tax exemption privileges as this statute has been reiterated twice in P.D. No. 1931. The
express repeal of tax privileges of any government-owned or controlled corporation
(GOCC). NPC included, was reiterated in the fourth whereas clause of P.D. No. 1931's
preamble. The subsidy provided for in Section 23, P.D. No. 1177, being inconsistent
with Section 2, P.D. No. 1931, was deemed repealed as the Fiscal Incentives Revenue
Board was tasked with recommending the partial or total restoration of tax exemptions
withdrawn by Section 1, P.D. No. 1931.
The records before Us do not indicate whether or not NPC asked for the subsidy
contemplated in Section 23, P.D. No. 1177. Considering, however, that under Section
16 of P.D. No. 1177, NPC had to submit to the Office of the President its request for the
P200 million mandated by P.D. No. 758 to be appropriated annually by the Government
to cover its unpaid subscription to the NPC authorized capital stock and that under
Section 22, of the same P.D. No. NPC had to likewise submit to the Office of the
President its internal operating budget for review due to capital inputs of the government
(P.D. No. 758) and to the national government's guarantee of the domestic and foreign
indebtedness of the NPC, it is clear that NPC was covered by P.D. No. 1177.
There is reason to believe that NPC availed of subsidy granted to exempt GOCC's that
suddenly found themselves having to pay taxes. It will be noted that Section 23, P.D.
No. 1177, mandated that the Secretary of Finance and the Commissioner of the Budget
had to establish the necessary procedure to accomplish the tax payment/tax subsidy
scheme of the Government. In effect, NPC, did not put any cash to pay any tax as it got
from the General Fund the amounts necessary to pay different revenue collectors for
the taxes it had to pay.
In his memorandum filed July 16, 1992, petitioner submits:
[T]hat with the enactment of P.D. No. 1177 on July 30, 1977, the NPC lost
all its duty and tax exemptions, whether direct or indirect. And so there
was nothing to be withdrawn or to be restored under P.D. No. 1931,
issued on June 11, 1984. This is evident from sections 1 and 2 of said
P.D. No. 1931, which reads:
"Section 1. The provisions of special or general law to the
contrary notwithstanding, all exemptions from the payment of
duties, taxes, fees, imports and other charges heretofore
granted in favor of government-owned or controlled
corporations including their subsidiaries are hereby
withdrawn."
Sec. 2. The President of the Philippines and/or the Minister
of Finance, upon the recommendation of the Fiscal
Incentives Review Board created under P.D. No. 776, is
hereby empowered to restore partially or totally, the
exemptions withdrawn by section 1 above. . . .
Hence, P.D. No. 1931 did not have any effect or did it change NPC's
status. Since it had already lost all its tax exemptions privilege with the
issuance of P.D. No. 1177 seven (7) years earlier or on July 30, 1977,
there were no tax exemptions to be withdrawn by section 1 which could
later be restored by the Minister of Finance upon the recommendation of
the FIRB under Section 2 of P.D. No. 1931. Consequently, FIRB
resolutions No. 10-85, and 1-86, were all illegally and validly issued since
FIRB acted beyond their statutory authority by creating and not merely
restoring the tax exempt status of NPC. The same is true for FIRB Res.
No. 17-87 which restored NPC's tax exemption under E.O. No. 93 which
likewise abolished all duties and tax exemptions but allowed the President
upon recommendation of the FIRB to restore those abolished.
The Court disagrees.
Applying by analogy the weight of authority that:
When a revised and consolidated act re-enacts in the same or
substantially the same terms the provisions of the act or acts so revised
and consolidated, the revision and consolidation shall be taken to be a
continuation of the former act or acts, although the former act or acts may
be expressly repealed by the revised and consolidated act; and all rights
and liabilities under the former act or acts are preserved and may be
enforced.
66

the Court rules that when P.D. No. 1931 basically reenacted in its Section 1 the first half
of Section 23, P.D. No. 1177, on withdrawal of tax exemption privileges of all GOCC's
said Section 1, P.D. No. 1931 was deemed to be a continuation of the first half of
Section 23, P.D. No. 1177, although the second half of Section 23, P.D. No. 177, on the
subsidy scheme for former tax exempt GOCCs had been expressly repealed by Section
2 with its institution of the FIRB recommendation of partial/total restoration of tax
exemption privileges.
The NPC tax privileges withdrawn by Section 1. P.D. No. 1931, were, therefore, the
same NPC tax exemption privileges withdrawn by Section 23, P.D. No. 1177. NPC
could no longer obtain a subsidy for the taxes it had to pay. It could, however, under
P.D. No. 1931, ask for a total restoration of its tax exemption privileges, which, it did,
and the same were granted under FIRB Resolutions Nos. 10-85
67
and 1-86
68
as approved
by the Minister of Finance.
Consequently, contrary to petitioner's submission, FIRB Resolutions Nos. 10-85 and 1-
86 were both legally and validly issued by the FIRB pursuant to P.D. No. 1931. FIRB did
not created NPC's tax exemption status but merely restored it.
69

Some quarters have expressed the view that P.D. No. 1931 was illegally issued under
the now rather infamous Amendment No. 6
70
as there was no showing that President Marcos'
encroachment on legislative prerogatives was justified under the then prevailing condition that he could
legislate "only if the Batasang Pambansa 'failed or was unable to act inadequately on any matter that in
his judgment required immediate action' to meet the 'exigency'.
71

Actually under said Amendment No. 6, then President Marcos could issue decrees not
only when the Interim Batasang Pambansa failed or was unable to act adequately on
any matter for any reason that in his (Marcos') judgment required immediate action, but
also when there existed a grave emergency or a threat or thereof. It must be
remembered that said Presidential Decree was issued only around nine (9) months after
the Philippines unilaterally declared a moratorium on its foreign debt payments
72
as a
result of the economic crisis triggered by loss of confidence in the government brought about by the
Aquino assassination. The Philippines was then trying to reschedule its debt payments.
73
One of the big
borrowers was the NPC
74
which had a US$ 2.1 billion white elephant of a Bataan Nuclear Power Plant
on its back.
75
From all indications, it must have been this grave emergency of a debt rescheduling which
compelled Marcos to issue P.D. No. 1931, under his Amendment 6 power.
76

The rule, therefore, that under the 1973 Constitution "no law granting a tax exemption
shall be passed without the concurrence of a majority of all the members of the
Batasang Pambansa"
77
does not apply as said P.D. No. 1931 was not passed by the Interim
Batasang Pambansa but by then President Marcos under His Amendment No. 6 power.
P.D. No. 1931 was, therefore, validly issued by then President Marcos under his
Amendment No. 6 authority.
Under E.O No. 93 (S'86) NPC's tax exemption privileges were again clipped by, this
time, President Aquino. Its section 2 allowed the NPC to apply for the restoration of its
tax exemption privileges. The same was granted under FIRB Resolution No. 17-
87
78
dated June 24, 1987 which restored NPC's tax exemption privileges effective, starting March 10,
1987, the date of effectivity of E.O. No. 93 (S'86).
FIRB Resolution No. 17-87 was approved by the President on October 5, 1987.
79
There
is no indication, however, from the records of the case whether or not similar approvals were given by
then President Marcos for FIRB Resolutions Nos. 10-85 and 1- 86. This has led some quarters to believe
that a "travesty of justice" might have occurred when the Minister of Finance approved his own
recommendation as Chairman of the Fiscal Incentives Review Board as what happened inZambales
Chromate vs. Court of Appeals
80
when the Secretary of Agriculture and Natural Resources approved a
decision earlier rendered by him when he was the Director of Mines,
81
and in Anzaldo vs. Clave
82
where
Presidential Executive Assistant Clave affirmed, on appeal to Malacaang, his own decision as Chairman
of the Civil Service Commission.
83

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

In Zambales Chromite and Anzaldo, two (2) different parties were involved: mining
groups and scientist-doctors, respectively. Thus, there was a need for procedural due
process to be followed.
In the case of the tax exemption restoration of NPC, there is no other comparable entity
not even a single public or private corporation whose rights would be violated if
NPC's tax exemption privileges were to be restored. While there might have been a
MERALCO before Martial Law, it is of public knowledge that the MERALCO generating
plants were sold to the NPC in line with the State policy that NPC was to be the State
implementing arm for the electrification of the entire country. Besides, MERALCO was
limited to Manila and its environs. And as of 1984, there was no more MERALCO as
a producer of electricity which could have objected to the restoration of NPC's tax
exemption privileges.
It should be noted that NPC was not asking to be granted tax exemption privileges for
the first time. It was just asking that its tax exemption privileges be restored. It is for
these reasons that, at least in NPC's case, the recommendation and approval of NPC's
tax exemption privileges under FIRB Resolution Nos. 10-85 and 1-86, done by the
same person acting in his dual capacities as Chairman of the Fiscal Incentives Review
Board and Minister of Finance, respectively, do not violate procedural due process.
While as above-mentioned, FIRB Resolution No. 17-87 was approved by President
Aquino on October 5, 1987, the view has been expressed that President Aquino, at
least with regard to E.O. 93 (S'86), had no authority to sub-delegate to the FIRB, which
was allegedly not a delegate of the legislature, the power delegated to her thereunder.
A misconception must be cleared up.
When E.O No. 93 (S'86) was issued, President Aquino was exercising both Executive
and Legislative powers. Thus, there was no power delegated to her, rather it was she
who was delegating her power. She delegated it to the FIRB, which, for purposes of E.O
No. 93 (S'86), is a delegate of the legislature. Clearly, she was not sub-delegating her
power.
And E.O. No. 93 (S'86), as a delegating law, was complete in itself it set forth the
policy to be carried out
85
and it fixed the standard to which the delegate had to conform in the
performance of his functions,
86
both qualities having been enunciated by this Court in Pelaez vs. Auditor
General.
87

Thus, after all has been said, it is clear that the NPC had its tax exemption privileges
restored from June 11, 1984 up to the present.
VII
The next question that projects itself is who pays the tax?
The answer to the question could be gleamed from the manner by which the
Commissaries of the Armed Forces of the Philippines sell their goods.
By virtue of P.D. No. 83,
88
veterans, members of the Armed of the Philippines, and their defendants
but groceries and other goods free of all taxes and duties if bought from any AFP Commissaries.
In practice, the AFP Commissary suppliers probably treat the unchargeable specific, ad
valorem and other taxes on the goods earmarked for AFP Commissaries as an added
cost of operation and distribute it over the total units of goods sold as it would any other
cost. Thus, even the ordinary supermarket buyer probably pays for the specific,ad
valorem and other taxes which theses suppliers do not charge the AFP
Commissaries.
89

IN MUCH THE SAME MANNER, it is clear that private respondents-oil companies have
to absorb the taxes they add to the bunker fuel oil they sell to NPC.
It should be stated at this juncture that, as early as May 14, 1954, the Secretary of
Justice renders an opinion,
90
wherein he stated and We quote:
xxx xxx xxx
Republic Act No. 358 exempts the National Power Corporation from "all
taxes, duties, fees, imposts, charges, and restrictions of the Republic of
the Philippines and its provinces, cities, and municipalities." This
exemption is broad enough to include all taxes, whether direct or indirect,
which the National Power Corporation may be required to pay, such as the
specific tax on petroleum products. That it is indirect or is of no amount
[should be of no moment], for it is the corporation that ultimately pays
it. The view which refuses to accord the exemption because the tax is first
paid by the seller disregards realities and gives more importance to form
than to substance. Equity and law always exalt substance over from.
xxx xxx xxx
Tax exemptions are undoubtedly to be construed strictly but not so
grudgingly as knowledge that many impositions taxpayers have to pay are
in the nature of indirect taxes. To limit the exemption granted the National
Power Corporation to direct taxes notwithstanding the general and broad
language of the statue will be to thwrat the legislative intention in giving
exemption from all forms of taxes and impositions without distinguishing
between those that are direct and those that are not. (Emphasis supplied)
In view of all the foregoing, the Court rules and declares that the oil companies which
supply bunker fuel oil to NPC have to pay the taxes imposed upon said bunker fuel oil
sold to NPC. By the very nature of indirect taxation, the economic burden of such
taxation is expected to be passed on through the channels of commerce to the user or
consumer of the goods sold. Because, however, the NPC has been exempted from both
direct and indirect taxation, the NPC must beheld exempted from absorbing the
economic burden of indirect taxation. This means, on the one hand, that the oil
companies which wish to sell to NPC absorb all or part of the economic burden of the
taxes previously paid to BIR, which could they shift to NPC if NPC did not enjoy
exemption from indirect taxes. This means also, on the other hand, that the NPC may
refuse to pay the part of the "normal" purchase price of bunker fuel oil which represents
all or part of the taxes previously paid by the oil companies to BIR. If NPC nonetheless
purchases such oil from the oil companies because to do so may be more
convenient and ultimately less costly for NPC than NPC itself importing and hauling and
storing the oil from overseas NPC is entitled to be reimbursed by the BIR for that part
of the buying price of NPC which verifiably represents the tax already paid by the oil
company-vendor to the BIR.
It should be noted at this point in time that the whole issue of who WILL pay these
indirect taxes HAS BEEN RENDERED moot and academic by E.O. No. 195 issued on
June 16, 1987 by virtue of which the ad valorem tax rate on bunker fuel oil was reduced
to ZERO (0%) PER CENTUM. Said E.O. no. 195 reads as follows:
EXECUTIVE ORDER NO. 195
AMENDING PARAGRAPH (b) OF SECTION 128 OF THE NATIONAL
INTERNAL REVENUE CODE, AS AMENDED BY REVISING THE
EXCISE TAX RATES OF CERTAIN PETROLEUM PRODUCTS.
xxx xxx xxx
Sec. 1. Paragraph (b) of Section 128 of the National Internal Revenue
Code, as amended, is hereby amended to read as follows:
Par. (b) For products subject to ad valorem tax only:
PRODUCT AD VALOREM TAX RATE
1. . . .
2. . . .
3. . . .
4. Fuel oil, commercially known as bunker oil and on similar fuel oils
having more or less the same generating power 0%
xxx xxx xxx
Sec. 3. This Executive Order shall take effect immediately.
Done in the city of Manila, this 17th day of June, in the year of Our Lord,
nineteen hundred and eighty-seven. (Emphasis supplied)
The oil companies can now deliver bunker fuel oil to NPC without having to worry about
who is going to bear the economic burden of the ad valorem taxes. What this Court will
now dispose of are petitioner's complaints that some indirect tax money has been
illegally refunded by the Bureau of Internal Revenue to the NPC and that more claims
for refunds by the NPC are being processed for payment by the BIR.
A case in point is the Tax Credit Memo issued by the Bureau of Internal Revenue in
favor of the NPC last July 7, 1986 for P58.020.110.79 which were for "erroneously paid
specific and ad valorem taxes during the period from October 31, 1984 to April 27,
1985.
91
Petitioner asks Us to declare this Tax Credit Memo illegal as the PNC did not have indirect tax
exemptions with the enactment of P.D. No. 938. As We have already ruled otherwise, the only questions
left are whether NPC Is entitled to a tax refund for the tax component of the price of the bunker fuel oil
purchased from Caltex (Phils.) Inc. and whether the Bureau of Internal Revenue properly refunded the
amount to NPC.
After P.D. No. 1931 was issued on June 11, 1984 withdrawing the
tax exemptions of all GOCCs NPC included, it was only on May 8, 1985 when the
BIR issues its letter authority to the NPC authorizing it to withdraw tax-free bunker fuel
oil from the oil companies pursuant to FIRB Resolution No. 10-85.
92
Since the tax
exemption restoration was retroactive to June 11, 1984 there was a need. therefore, to recover said
amount as Caltex (PhiIs.) Inc. had already paid the BIR the specific and ad valorem taxes on the bunker
oil it sold NPC during the period above indicated and had billed NPC correspondingly.
93
It should be
noted that the NPC, in its letter-claim dated September 11, 1985 to the Commissioner of the Bureau of
Internal Revenue DID NOT CATEGORICALLY AND UNEQUIVOCALLY STATE that itself paid the
P58.020,110.79 as part of the bunker fuel oil price it purchased from Caltex (Phils) Inc.
94

The law governing recovery of erroneously or illegally, collected taxes is section 230 of
the National Internal Revenue Code of 1977, as amended which reads as follows:
Sec. 230. Recover of tax erroneously or illegally collected. No suit or
proceeding shall be maintained in any court for the recovery of any
national internal revenue tax hereafter alleged to have been erroneously
or illegally assessed or collected, or of any penalty claimed to have been
collected without authority, or of any sum alleged to have been excessive
or in any Manner wrongfully collected. until a claim for refund or credit has
been duly filed with the Commissioner; but such suit or proceeding may be
maintained, whether or not such tax, penalty, or sum has been paid under
protest or duress.
In any case, no such suit or proceeding shall be begun after the expiration
of two years from the date of payment of the tax or penalty regardless of
any supervening cause that may arise after payment; Provided, however,
That the Commissioner may, even without a written claim therefor, refund
or credit any tax, where on the face of the return upon which payment was
made, such payment appears clearly, to have been erroneously paid.
xxx xxx xxx
Inasmuch as NPC filled its claim for P58.020,110.79 on September 11, 1985,
95
the
Commissioner correctly issued the Tax Credit Memo in view of NPC's indirect tax exemption.
Petitioner, however, asks Us to restrain the Commissioner from acting favorably on
NPC's claim for P410.580,000.00 which represents specific and ad valorem taxes paid
by the oil companies to the BIR from June 11, 1984 to the early part of 1986.
96

A careful examination of petitioner's pleadings and annexes attached thereto does not
reveal when the alleged claim for a P410,580,000.00 tax refund was filed. It is only
stated In paragraph No. 2 of the Deed of Assignment
97
executed by and between NPC and
Caltex (Phils.) Inc., as follows:
That the ASSIGNOR(NPC) has a pending tax credit claim with the Bureau
of Internal Revenue amounting to P442,887,716.16. P58.020,110.79 of
which is due to Assignor's oil purchases from the Assignee (Caltex [Phils.]
Inc.)
Actually, as the Court sees it, this is a clear case of a "Mexican standoff." We cannot
restrain the BIR from refunding said amount because of Our ruling that NPC has both
direct and indirect tax exemption privileges. Neither can We order the BIR to refund said
amount to NPC as there is no pending petition for review on certiorari of a suit for its
collection before Us. At any rate, at this point in time, NPC can no longer file any suit to
collect said amount EVEN IF lt has previously filed a claim with the BIR because it is
time-barred under Section 230 of the National Internal Revenue Code of 1977. as
amended, which states:
In any case, no such suit or proceeding shall be begun after the expiration
of two years from the date of payment of the tax or penalty REGARDLESS
of any supervening cause that may arise afterpayment. . . . (Emphasis
supplied)
The date of the Deed of Assignment is June 6. 1986. Even if We were to assume that
payment by NPC for the amount of P410,580,000.00 had been made on said date. it is
clear that more than two (2) years had already elapsed from said date. At the same
time, We should note that there is no legal obstacle to the BIR granting, even without a
suit by NPC, the tax credit or refund claimed by NPC, assuming that NPC's claim had
been made seasonably, and assuming the amounts covered had actually been paid
previously by the oil companies to the BIR.
WHEREFORE, in view of all the foregoing, the Motion for Reconsideration of petitioner
is hereby DENIED for lack of merit and the decision of this Court promulgated on May
31, 1991 is hereby AFFIRMED.
SO ORDERED.
Narvasa, C.J., Feliciano, Bidin, Regalado, Romero, Bellosillo and Melo, JJ., concur.
Padilla and Quiason, JJ. took no part.

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Political Law Control Power Acts of the Executive Secretary
The National Power Corporation was created by CA 120. In 1949, it was given tax exemption by
RA 358. NPC was further strengthened by RA 6395 in 1971. In 1984, PD 1931 was passed
removing the tax exemption of NPC and other GOCCs. There was a reservation, however, that
the president or the Minister of Finance upon recommendation by the Fiscal Incentives Review
Board may restore or modify the exemption. In 1985, the tax exemption was revived. It was
again removed in 1987 by virtue of EO 93 w/c again provided that upon FIRB recommendation
it can again be restored. In the same year, FIRB resolved to restore the exemption. The same
was approved by Cory through exec sec Macaraig acting as her alter ego. Maceda opined the
FIRB resolution averring that the power granted to the FIRB is an undue delegation of legislative
power. His claim was strengthened by Opinion 77 issued by DOJ Secretary Ordoez.
ISSUE: Whether or not Opinion 77 can be given credence.
HELD: The SC ruled that there is no undue delegation of legislative power. First of all, since the
NPC is a GOCC and is non-profit it can be exempt from taxation. Also, Opinion 77 issued by
DOJ Sec Ordoez was overruled by Macaraig. This action by Macaraig is valid because the
Executive Secretary, by authority of the President, has the power to modify, alter or reverse the
construction of a statute given by a department secretary pursuant to the presidents control
power.
[Syllabus]
THIRD DIVISION
[G.R. No. 120082. September 11, 1996]
MACTAN CEBU INTERNATIONAL AIRPORT AUTHORITY, petitioner,
vs. HON. FERDINAND J. MARCOS, in his capacity as the
Presiding Judge of the Regional Trial Court, Branch 20, Cebu
City, THE CITY OF CEBU, represented by its Mayor, HON.
TOMAS R. OSMEA, and EUSTAQUIO B. CESA, respondents.
D E C I S I O N
DAVIDE, JR., J .:
For review under Rule 45 of the Rules of Court on a pure question of law are the
decision of 22 March 1995
[1]
of the Regional Trial Court (RTC) of Cebu City, Branch 20,
dismissing the petition for declaratory relief in Civil Case No. CEB-16900, entitled
Mactan Cebu International Airport Authority vs. City of Cebu, and its order of 4 May
1995
[2]
denying the motion to reconsider the decision.
We resolved to give due course to this petition for it raises issues dwelling on the
scope of the taxing power of local government units and the limits of tax exemption
privileges of government-owned and controlled corporations.
The uncontradicted factual antecedents are summarized in the instant petition as
follows:
Petitioner Mactan Cebu International Airport Authority (MCIAA) was created by
virtue of Republic Act No. 6958, mandated to principally undertake the economical,
efficient and effective control, management and supervision of the Mactan
International Airport in the Province of Cebu and the Lahug Airport in Cebu City, x x
x and such other airports as may be established in the Province of Cebu x x x (Sec. 3,
RA 6958). It is also mandated to:
a) encourage, promote and develop international and domestic air traffic in the
Central Visayas and Mindanao regions as a means of making the regions centers of
international trade and tourism, and accelerating the development of the means of
transportation and communication in the country; and,
b) upgrade the services and facilities of the airports and to formulate
internationally acceptable standards of airport accommodation and service.
Since the time of its creation, petitioner MCIAA enjoyed the privilege of exemption
from payment of realty taxes in accordance with Section 14 of its Charter:
Sec. 14. Tax Exemptions. -- The Authority shall be exempt from realty taxes imposed
by the National Government or any of its political subdivisions, agencies and
instrumentalities x x x.
On October 11, 1994, however, Mr. Eustaquio B. Cesa, Officer-in-Charge, Office of
the Treasurer of the City of Cebu, demanded payment for realty taxes on several
parcels of land belonging to the petitioner (Lot Nos. 913-G, 743, 88 SWO, 948-A,
989-A, 474, 109(931), I-M, 918, 919, 913-F, 941, 942, 947, 77 Psd., 746 and 991-A),
located at Barrio Apas and Barrio Kasambagan, Lahug, Cebu City, in the total amount
of P2,229,078.79.
Petitioner objected to such demand for payment as baseless and unjustified, claiming
in its favor the aforecited Section 14 of RA 6958 which exempts it from payment of
realty taxes. It was also asserted that it is an instrumentality of the government
performing governmental functions, citing Section 133 of the Local Government
Code of 1991 which puts limitations on the taxing powers of local government units:
Section 133. Common Limitations on the Taxing Powers of Local Government Units. -
- Unless otherwise provided herein, the exercise of the taxing powers of provinces,
cities, municipalities, and barangays shall not extend to the levy of the following:
a) x x x
x x x
o) Taxes, fees or charges of any kind on the National Government, its agencies and
instrumentalities, and local government units. (underscoring supplied)
Respondent City refused to cancel and set aside petitioners realty tax account,
insisting that the MCIAA is a government-controlled corporation whose tax
exemption privilege has been withdrawn by virtue of Sections 193 and 234 of the
Local Government Code that took effect on January 1, 1992:
Section 193. Withdrawal of Tax Exemption Privilege. 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. (underscoring supplied)
x x x
Section 234. Exemptions from Real Property Taxes. x x x
(a) x x x
x x x
(e) x x x
Except as provided herein, any exemption from payment of real property tax
previously granted to, or presently enjoyed by all persons, whether natural or juridical,
including government-owned or controlled corporations are hereby withdrawn upon
the effectivity of this Code.
As the City of Cebu was about to issue a warrant of levy against the properties of
petitioner, the latter was compelled to pay its tax account under protest and
thereafter filed a Petition for Declaratory Relief with the Regional Trial Court of
Cebu, Branch 20, on December 29, 1994. MCIAA basically contended that the taxing
powers of local government units do not extend to the levy of taxes or fees of any
kind on an instrumentality of the national government. Petitioner insisted that while it
is indeed a government-owned corporation, it nonetheless stands on the same footing
as an agency or instrumentality of the national government by the very nature of its
powers and functions.
Respondent City, however, asserted that MCIAA is not an instrumentality of the
government but merely a government-owned corporation performing proprietary
functions. As such, all exemptions previously granted to it were deemed withdrawn
by operation of law, as provided under Sections 193 and 234 of the Local Government
Code when it took effect on January 1, 1992.
[3]

The petition for declaratory relief was docketed as Civil Case No. CEB-16900.
In its decision of 22 March 1995,
[4]
the trial court dismissed the petition in light of its
findings, to wit:
A close reading of the New Local Government Code of 1991 or RA 7160 provides the
express cancellation and withdrawal of exemption of taxes by government-owned and
controlled corporation per Sections after the effectivity of said Code on January 1,
1992, to wit: [proceeds to quote Sections 193 and 234]
Petitioners claimed that its real properties assessed by respondent City Government of
Cebu are exempted from paying realty taxes in view of the exemption granted under
RA 6958 to pay the same (citing Section 14 of RA 6958).
However, RA 7160 expressly provides that All general and special laws, acts, city
charters, decrees [sic], executive orders, proclamations and administrative regulations,
or part of parts thereof which are inconsistent with any of the provisions of this Code
are hereby repealed or modified accordingly. (/f/, Section 534, RA 7160).
With that repealing clause in RA 7160, it is safe to infer and state that the tax
exemption provided for in RA 6958 creating petitioner had been expressly repealed by
the provisions of the New Local Government Code of 1991.
So that petitioner in this case has to pay the assessed realty tax of its properties
effective after January 1, 1992 until the present.
This Courts ruling finds expression to give impetus and meaning to the overall
objectives of the New Local Government Code of 1991, RA 7160. It is hereby
declared the policy of the State that the territorial and political subdivisions of the
State shall enjoy genuine and meaningful local autonomy to enable them to attain
their fullest development as self-reliant communities and make them more effective
partners in the attainment of national goals. Toward this end, the State shall provide
for a more responsive and accountable local government structure instituted through a
system of decentralization whereby local government units shall be given more
powers, authority, responsibilities, and resources. The process of decentralization
shall proceed from the national government to the local government units. x x x
[5]

Its motion for reconsideration having been denied by the trial court in its 4 May 1995
order, the petitioner filed the instant petition based on the following assignment of
errors:
I. RESPONDENT JUDGE ERRED IN FAILING TO RULE THAT THE PETITIONER IS
VESTED WITH GOVERNMENT POWERS AND FUNCTIONS WHICH PLACE IT IN
THE SAME CATEGORY AS AN INSTRUMENTALITY OR AGENCY OF THE
GOVERNMENT.
II. RESPONDENT JUDGE ERRED IN RULING THAT PETITIONER IS LIABLE TO
PAY REAL PROPERTY TAXES TO THE CITY OF CEBU.
Anent the first assigned error, the petitioner asserts that although it is a
government-owned or controlled corporation, it is mandated to perform functions in the
same category as an instrumentality of Government. An instrumentality of Government
is one created to perform governmental functions primarily to promote certain aspects of
the economic life of the people.
[6]
Considering its task not merely to efficiently operate
and manage the Mactan-Cebu International Airport, but more importantly, to carry out
the Government policies of promoting and developing the Central Visayas and
Mindanao regions as centers of international trade and tourism, and accelerating the
development of the means of transportation and communication in the country,
[7]
and
that it is an attached agency of the Department of Transportation and Communication
(DOTC),
[8]
the petitioner may stand in [sic] the same footing as an agency or
instrumentality of the national government. Hence, its tax exemption privilege under
Section 14 of its Charter cannot be considered withdrawn with the passage of the Local
Government Code of 1991 (hereinafter LGC) because Section 133 thereof specifically
states that the `taxing powers of local government units shall not extend to the levy of
taxes or fees or charges of any kind on the national government, its agencies and
instrumentalities.
As to the second assigned error, the petitioner contends that being an
instrumentality of the National Government, respondent City of Cebu has no power nor
authority to impose realty taxes upon it in accordance with the aforesaid Section 133 of
the LGC, as explained in Basco vs. Philippine Amusement and Gaming Corporation:
[9]

Local governments have no power to tax instrumentalities of the National
Government. PAGCOR is a government owned or controlled corporation with an
original charter, PD 1869. All of its shares of stock are owned by the National
Government. . . .
PAGCOR has a dual role, to operate and regulate gambling casinos. The latter role is
governmental, which places it in the category of an agency or instrumentality of the
Government. Being an instrumentality of the Government, PAGCOR should be and
actually is exempt from local taxes. Otherwise, its operation might be burdened,
impeded or subjected to control by a mere Local government.
The states have no power by taxation or otherwise, to retard, impede, burden or in any
manner control the operation of constitutional laws enacted by Congress to carry into
execution the powers vested in the federal government. (McCulloch v. Maryland, 4
Wheat 316, 4 L Ed. 579)
This doctrine emanates from the supremacy of the National Government over local
governments.
Justice Holmes, speaking for the Supreme Court, made reference to the entire
absence of power on the part of the States to touch, in that way (taxation) at least, the
instrumentalities of the United States (Johnson v. Maryland, 254 US 51) and it can be
agreed that no state or political subdivision can regulate a federal instrumentality in
such a way as to prevent it from consummating its federal responsibilities, or even to
seriously burden it in the accomplishment of them. (Antieau, Modern Constitutional
Law, Vol. 2, p. 140)
Otherwise, mere creatures of the State can defeat National policies thru extermination
of what local authorities may perceive to be undesirable activities or enterprise using
the power to tax as a tool for regulation (U.S. v. Sanchez, 340 US 42). The power
to tax which was called by Justice Marshall as the power to destroy (Mc Culloch v.
Maryland, supra) cannot be allowed to defeat an instrumentality or creation of the
very entity which has the inherent power to wield it. (underscoring supplied)
It then concludes that the respondent Judge cannot therefore correctly say that the
questioned provisions of the Code do not contain any distinction between a government
corporation performing governmental functions as against one performing merely
proprietary ones such that the exemption privilege withdrawn under the said Code
would apply to all government corporations. For it is clear from Section 133, in relation
to Section 234, of the LGC that the legislature meant to exclude instrumentalities of the
national government from the taxing powers of the local government units.
In its comment, respondent City of Cebu alleges that as a local government unit and
a political subdivision, it has the power to impose, levy, assess, and collect taxes within
its jurisdiction. Such power is guaranteed by the Constitution
[10]
and enhanced further
by the LGC. While it may be true that under its Charter the petitioner was exempt from
the payment of realty taxes,
[11]
this exemption was withdrawn by Section 234 of the
LGC. In response to the petitioners claim that such exemption was not repealed
because being an instrumentality of the National Government, Section 133 of the LGC
prohibits local government units from imposing taxes, fees, or charges of any kind on it,
respondent City of Cebu points out that the petitioner is likewise a government-owned
corporation, and Section 234 thereof does not distinguish between government-owned
or controlled corporations performing governmental and purely proprietary
functions. Respondent City of Cebu urges this Court to apply by analogy its ruling that
the Manila International Airport Authority is a government-owned corporation,
[12]
and to
reject the application of Basco because it was promulgated . . . before the enactment
and the signing into law of R.A. No. 7160, and was not, therefore, decided in the light
of the spirit and intention of the framers of the said law.
As a general rule, the power to tax is an incident of sovereignty and is unlimited in
its range, acknowledging in its very nature no limits, so that security against its abuse is
to be found only in the responsibility of the legislature which imposes the tax on the
constituency who are to pay it. Nevertheless, effective limitations thereon may be
imposed by the people through their Constitutions.
[13]
Our Constitution, for instance,
provides that the rule of taxation shall be uniform and equitable and Congress shall
evolve a progressive system of taxation.
[14]
So potent indeed is the power that it was
once opined that the power to tax involves the power to destroy.
[15]
Verily, taxation is a
destructive power which interferes with the personal and property rights of the people
and takes from them a portion of their property for the support of the
government. Accordingly, tax statutes must be construed strictly against the
government and liberally in favor of the taxpayer.
[16]
But since taxes are what we pay for
civilized society,
[17]
or are the lifeblood of the nation, the law frowns against exemptions
from taxation and statutes granting tax exemptions are thus construed strictissimi
juris against the taxpayer and liberally in favor of the taxing authority.
[18]
A claim of
exemption from tax payments must be clearly shown and based on language in the law
too plain to be mistaken.
[19]
Elsewise stated, taxation is the rule, exemption therefrom is
the exception.
[20]
However, if the grantee of the exemption is a political subdivision or
instrumentality, the rigid rule of construction does not apply because the practical effect
of the exemption is merely to reduce the amount of money that has to be handled by the
government in the course of its operations.
[21]

The power to tax is primarily vested in the Congress; however, in our jurisdiction, it
may be exercised by local legislative bodies, no longer merely by virtue of a valid
delegation as before, but pursuant to direct authority conferred by Section 5, Article X of
the Constitution.
[22]
Under the latter, the exercise of the power may be subject to such
guidelines and limitations as the Congress may provide which, however, must be
consistent with the basic policy of local autonomy.
There can be no question that under Section 14 of R.A. No. 6958 the petitioner is
exempt from the payment of realty taxes imposed by the National Government or any of
its political subdivisions, agencies, and instrumentalities. Nevertheless, since taxation is
the rule and exemption therefrom the exception, the exemption may thus be withdrawn
at the pleasure of the taxing authority. The only exception to this rule is where the
exemption was granted to private parties based on material consideration of a mutual
nature, which then becomes contractual and is thus covered by the non-impairment
clause of the Constitution.
[23]

The LGC, enacted pursuant to Section 3, Article X of the Constitution, provides for
the exercise by local government units of their power to tax, the scope thereof or its
limitations, and the exemptions from taxation.
Section 133 of the LGC prescribes the common limitations on the taxing powers of
local government units as follows:
SEC. 133. Common Limitations on the Taxing Power of Local Government Units.
Unless otherwise provided herein, the exercise of the taxing powers of provinces,
cities, municipalities, and barangays shall not extend to the levy of the following:
(a) Income tax, except when levied on banks and other financial institutions;
(b) Documentary stamp tax;
(c) Taxes on estates, inheritance, gifts, legacies and other acquisitions mortis
causa, except as otherwise provided herein;
(d) Customs duties, registration fees of vessel and wharfage on wharves,
tonnage dues, and all other kinds of customs fees, charges and dues except
wharfage on wharves constructed and maintained by the local government unit
concerned;
(e) Taxes, fees and charges and other impositions upon goods carried into or
out of, or passing through, the territorial jurisdictions of local government units in the
guise of charges for wharfage, tolls for bridges or otherwise, or other taxes, fees or
charges in any form whatsoever upon such goods or merchandise;
(f) Taxes, fees or charges on agricultural and aquatic products when sold by marginal
farmers or fishermen;
(g) Taxes on business enterprises certified to by the Board of Investments as
pioneer or non-pioneer for a period of six (6) and four (4) years, respectively from
the date of registration;
(h) Excise taxes on articles enumerated under the National Internal Revenue
Code, as amended, and taxes, fees or charges on petroleum products;
(i) Percentage or value-added tax (VAT) on sales, barters or exchanges or similar
transactions on goods or services except as otherwise provided herein;
(j) Taxes on the gross receipts of transportation contractors and persons engaged in
the transportation of passengers or freight by hire and common carriers by air, land
or water, except as provided in this Code;
(k) Taxes on premiums paid by way of reinsurance or retrocession;
(l) Taxes, fees or charges for the registration of motor vehicles and for the issuance of
all kinds of licenses or permits for the driving thereof, except, tricycles;
(m) Taxes, fees, or other charges on Philippine products actually exported,
except as otherwise provided herein;
(n) Taxes, fees, or charges, on Countryside and Barangay Business Enterprises
and cooperatives duly registered under R.A. No. 6810 and Republic Act Numbered
Sixty-nine hundred thirty-eight (R.A. No. 6938) otherwise known as the
Cooperatives Code of the Philippines respectively; and
(o) TAXES, FEES OR CHARGES OF ANY KIND ON THE NATIONAL
GOVERNMENT, ITS AGENCIES AND INSTRUMENTALITIES, AND LOCAL
GOVERNMENT UNITS. (emphasis supplied)
Needless to say, the last item (item o) is pertinent to this case. The taxes, fees or
charges referred to are of any kind; hence, they include all of these, unless otherwise
provided by the LGC. The term taxes is well understood so as to need no further
elaboration, especially in light of the above enumeration. The term fees means
charges fixed by law or ordinance for the regulation or inspection of business or
activity,
[24]
while charges are pecuniary liabilities such as rents or fees against persons
or property.
[25]

Among the taxes enumerated in the LGC is real property tax, which is governed
by Section 232. It reads as follows:
SEC. 232. Power to Levy Real Property Tax. A province or city or a
municipality within the Metropolitan Manila Area may levy an annual ad valorem tax
on real property such as land, building, machinery, and other improvements not
hereafter specifically exempted.
Section 234 of the LGC provides for the exemptions from payment of real property
taxes and withdraws previous exemptions therefrom granted to natural and juridical
persons, including government-owned and controlled corporations, except as provided
therein. It provides:
SEC. 234. Exemptions from Real Property Tax. The following are exempted
from payment of the real property tax:
(a) Real property owned by the Republic of the Philippines or any of its political
subdivisions except when the beneficial use thereof had been granted, for
consideration or otherwise, to a taxable person;
(b) Charitable institutions, churches, parsonages or convents appurtenant
thereto, mosques, nonprofit or religious cemeteries and all lands, buildings and
improvements actually, directly, and exclusively used for religious, charitable or
educational purposes;
(c) All machineries and equipment that are actually, directly and exclusively
used by local water districts and government-owned or controlled corporations
engaged in the supply and distribution of water and/or generation and transmission
of electric power;
(d) All real property owned by duly registered cooperatives as provided for
under R.A. No. 6938; and
(e) Machinery and equipment used for pollution control and environmental
protection.
previously granted to, or presently enjoyed by, all persons, whether natural or
juridical, including all government-owned or controlled corporations are hereby
withdrawn upon the effectivity of this Code.
These exemptions are based on the ownership, character, and use of the
property. Thus:
(a) Ownership Exemptions. Exemptions from real property taxes on the basis
of ownership are real properties owned by: (i) the Republic, (ii) a province, (iii) a city,
(iv) a municipality, (v) a barangay, and (vi) registered cooperatives.
(b) Character Exemptions. Exempted from real property taxes on the basis of
their character are: (i) charitable institutions, (ii) houses and temples of prayer like
churches, parsonages or convents appurtenant thereto, mosques, and (iii) non-profit
or religious cemeteries.
(c) Usage exemptions. Exempted from real property taxes on the basis of the
actual, direct and exclusive use to which they are devoted are: (i) all lands, buildings
and improvements which are actually directly and exclusively used for religious,
charitable or educational purposes; (ii) all machineries and equipment actually,
directly and exclusively used by local water districts or by government-owned or
controlled corporations engaged in the supply and distribution of water and/or
generation and transmission of electric power; and (iii) all machinery and equipment
used for pollution control and environmental protection.
To help provide a healthy environment in the midst of the modernization of the
country, all machinery and equipment for pollution control and environmental
protection may not be taxed by local governments.
2. Other Exemptions Withdrawn. All other exemptions previously granted to
natural or juridical persons including government-owned or controlled corporations
are withdrawn upon the effectivity of the Code.
[26]

Section 193 of the LGC is the general provision on withdrawal of tax exemption
privileges. It provides:
SEC. 193. Withdrawal of Tax Exemption Privileges. Unless otherwise provided in
persons, whether natural or juridical, including government-owned or controlled
corporations, except local water districts, cooperatives duly registered under R.A.
6938, non-stock and non-profit hospitals and educational institutions, are hereby
On the other hand, the LGC authorizes local government units to grant tax
exemption privileges. Thus, Section 192 thereof provides:
SEC. 192. Authority to Grant Tax Exemption Privileges.-- Local government units
may, through ordinances duly approved, grant tax exemptions, incentives or reliefs
under such terms and conditions as they may deem necessary.
The foregoing sections of the LGC speak of: (a) the limitations on the taxing powers
of local government units and the exceptions to such limitations; and (b) the rule on tax
exemptions and the exceptions thereto. The use of exceptions or provisos in these
sections, as shown by the following clauses:
(1) unless otherwise provided herein in the opening paragraph of Section 133;
(2) Unless otherwise provided in this Code in Section 193;
(3) not hereafter specifically exempted in Section 232; and
(4) Except as provided herein in the last paragraph of Section 234
initially hampers a ready understanding of the sections. Note, too, that the
aforementioned clause in Section 133 seems to be inaccurately worded. Instead of the
clause unless otherwise provided herein, with the herein to mean, of course, the
section, it should have used the clause unless otherwise provided in this Code. The
former results in absurdity since the section itself enumerates what are beyond the
taxing powers of local government units and, where exceptions were intended, the
exceptions are explicitly indicated in the next. For instance, in item (a) which excepts
income taxes when levied on banks and other financial institutions; item (d) which
excepts wharfage on wharves constructed and maintained by the local government unit
concerned; and item (1) which excepts taxes, fees and charges for the registration and
issuance of licenses or permits for the driving of tricycles. It may also be observed that
within the body itself of the section, there are exceptions which can be found only in
other parts of the LGC, but the section interchangeably uses therein the clause except
as otherwise provided herein as in items (c) and (i), or the clause except as provided
in this Code in item (j). These clauses would be obviously unnecessary or mere
surplusages if the opening clause of the section were Unless otherwise provided in this
Code instead of Unless otherwise provided herein. In any event, even if the latter is
used, since under Section 232 local government units have the power to levy real
property tax, except those exempted therefrom under Section 234, then Section 232
must be deemed to qualify Section 133.
Thus, reading together Sections 133, 232, and 234 of the LGC, we conclude that as
a general rule, as laid down in Section 133, the taxing powers of local government units
cannot extend to the levy of, inter alia, taxes, fees and charges of any kind on the
National Government, its agencies and instrumentalities, and local government units;
however, pursuant to Section 232, provinces, cities, and municipalities in the
Metropolitan Manila Area may impose the real property tax except on, inter alia, real
property owned by the Republic of the Philippines or any of its political subdivisions
except when the beneficial use thereof has been granted, for consideration or
otherwise, to a taxable person, as provided in item (a) of the first paragraph of Section
234.
As to tax exemptions or incentives granted to or presently enjoyed by natural or
juridical persons, including government-owned and controlled corporations, Section 193
of the LGC prescribes the general rule, viz., they are withdrawn upon the effectivity of
the LGC, exceptthose granted to local water districts, cooperatives duly registered
under R.A. No. 6938, non-stock and non-profit hospitals and educational institutions,
and unless otherwise provided in the LGC. The latter proviso could refer to Section 234
which enumerates the properties exempt from real property tax. But the last paragraph
of Section 234 further qualifies the retention of the exemption insofar as real property
taxes are concerned by limiting the retention only to those enumerated therein; all
others not included in the enumeration lost the privilege upon the effectivity of the
LGC. Moreover, even as to real property owned by the Republic of the Philippines or
any of its political subdivisions covered by item (a) of the first paragraph of Section 234,
the exemption is withdrawn if the beneficial use of such property has been granted to a
taxable person for consideration or otherwise.
Since the last paragraph of Section 234 unequivocally withdrew, upon the effectivity
of the LGC, exemptions from payment of real property taxes granted to natural or
juridical persons, including government-owned or controlled corporations, except as
provided in the said section, and the petitioner is, undoubtedly, a government-owned
corporation, it necessarily follows that its exemption from such tax granted it in Section
14 of its Charter, R.A. No. 6958, has been withdrawn. Any claim to the contrary can
only be justified if the petitioner can seek refuge under any of the exceptions provided in
Section 234, but not under Section 133, as it now asserts, since, as shown above, the
said section is qualified by Sections 232 and 234.
In short, the petitioner can no longer invoke the general rule in Section 133 that the
taxing powers of the local government units cannot extend to the levy of:
(o) taxes, fees or charges of any kind on the National Government, its agencies or
instrumentalities, and local government units.
It must show that the parcels of land in question, which are real property, are any one of
those enumerated in Section 234, either by virtue of ownership, character, or use of the
property. Most likely, it could only be the first, but not under any explicit provision of the
said section, for none exists. In light of the petitioners theory that it is an
instrumentality of the Government, it could only be within the first item of the first
paragraph of the section by expanding the scope of the term Republic of the
Philippines to embrace its instrumentalities and agencies. For expediency, we
quote:
(a) real property owned by the Republic of the Philippines, or any of its political
subdivisions except when the beneficial use thereof has been granted, for
consideration or otherwise, to a taxable person.
This view does not persuade us. In the first place, the petitioners claim that it is an
instrumentality of the Government is based on Section 133(o), which expressly
mentions the word instrumentalities; and, in the second place, it fails to consider the
fact that the legislature used the phrase National Government, its agencies and
instrumentalities in Section 133(o), but only the phrase Republic of the Philippines or
any of its political subdivisions in Section 234(a).
The terms Republic of the Philippines and National Government are not
interchangeable. The former is broader and synonymous with Government of the
Republic of the Philippines which the Administrative Code of 1987 defines as the
corporate governmental entity through which the functions of government are exercised
throughout the Philippines, including, save as the contrary appears from the context, the
various arms through which political authority is made affective in the Philippines,
whether pertaining to the autonomous regions, the provincial, city, municipal or
barangay subdivisions or other forms of local government.
[27]
These autonomous
regions, provincial, city, municipal or barangay subdivisions are the political
subdivisions.
[28]

On the other hand, National Government refers to the entire machinery of the
central government, as distinguished from the different forms of local
governments.
[29]
The National Government then is composed of the three great
departments: the executive, the legislative and the judicial.
[30]

An agency of the Government refers to any of the various units of the
Government, including a department, bureau, office, instrumentality, or government-
owned or controlled corporation, or a local government or a distinct unit therein;
[31]
while
an instrumentality refers to any agency of the National Government, not integrated
within the department framework, vested with special functions or jurisdiction by law,
endowed with some if not all corporate powers, administering special funds, and
enjoying operational autonomy, usually through a charter. This term includes regulatory
agencies, chartered institutions and government-owned and controlled corporations.
[32]

If Section 234(a) intended to extend the exception therein to the withdrawal of the
exemption from payment of real property taxes under the last sentence of the said
section to the agencies and instrumentalities of the National Government mentioned in
Section 133(o), then it should have restated the wording of the latter. Yet, it did
not. Moreover, that Congress did not wish to expand the scope of the exemption in
Section 234(a) to include real property owned by other instrumentalities or agencies of
the government including government-owned and controlled corporations is further
borne out by the fact that the source of this exemption is Section 40(a) of P.D. No. 464,
otherwise known as The Real Property Tax Code, which reads:
SEC. 40. Exemptions from Real Property Tax. The exemption shall be as
follows:
subdivisions and any government-owned or controlled corporation so exempt by its
charter: Provided, however, That this exemption shall not apply to real property of the
above-mentioned entities the beneficial use of which has been granted, for
consideration or otherwise, to a taxable person.
Note that as reproduced in Section 234(a), the phrase and any government-owned or
controlled corporation so exempt by its charter was excluded. The justification for this
restricted exemption in Section 234(a) seems obvious: to limit further tax exemption
privileges, especially in light of the general provision on withdrawal of tax exemption
privileges in Section 193 and the special provision on withdrawal of exemption from
payment of real property taxes in the last paragraph of Section 234. These policy
considerations are consistent with the State policy to ensure autonomy to local
governments
[33]
and the objective of the LGC that they enjoy genuine and meaningful
local autonomy to enable them to attain their fullest development as self-reliant
communities and make them effective partners in the attainment of national
goals.
[34]
The power to tax is the most effective instrument to raise needed revenues to
finance and support myriad activities of local government units for the delivery of basic
services essential to the promotion of the general welfare and the enhancement of
peace, progress, and prosperity of the people. It may also be relevant to recall that the
original reasons for the withdrawal of tax exemption privileges granted to government-
owned and controlled corporations and all other units of government were that such
privilege resulted in serious tax base erosion and distortions in the tax treatment of
similarly situated enterprises, and there was a need for these entities to share in the
requirements of development, fiscal or otherwise, by paying the taxes and other
charges due from them.
[35]

The crucial issues then to be addressed are: (a) whether the parcels of land in
question belong to the Republic of the Philippines whose beneficial use has been
granted to the petitioner, and (b) whether the petitioner is a taxable person.
Section 15 of the petitioners Charter provides:
Sec. 15. Transfer of Existing Facilities and Intangible Assets. All existing public
airport facilities, runways, lands, buildings and other properties, movable or
immovable, belonging to or presently administered by the airports, and all assets,
powers, rights, interests and privileges relating on airport works or air operations,
including all equipment which are necessary for the operations of air navigation,
aerodrome control towers, crash, fire, and rescue facilities are hereby transferred to
the Authority: Provided, however, that the operations control of all equipment
necessary for the operation of radio aids to air navigation, airways communication, the
approach control office, and the area control center shall be retained by the Air
Transportation Office. No equipment, however, shall be removed by the Air
Transportation Office from Mactan without the concurrence of the Authority. The
Authority may assist in the maintenance of the Air Transportation Office equipment.
The airports referred to are the Lahug Air Port in Cebu City and the Mactan
International Airport in the Province of Cebu,
[36]
which belonged to the Republic of the
Philippines, then under the Air Transportation Office (ATO).
[37]

It may be reasonable to assume that the term lands refer to lands in Cebu City
then administered by the Lahug Air Port and includes the parcels of land the respondent
City of Cebu seeks to levy on for real property taxes. This section involves a transfer
of the lands, among other things, to the petitioner and not just the transfer of the
beneficial use thereof, with the ownership being retained by the Republic of the
Philippines.
This transfer is actually an absolute conveyance of the ownership thereof because
the petitioners authorized capital stock consists of,inter alia, the value of such real
estate owned and/or administered by the airports.
[38]
Hence, the petitioner is now the
owner of the land in question and the exception in Section 234(c) of the LGC is
inapplicable.
Moreover, the petitioner cannot claim that it was never a taxable person under its
Charter. It was only exempted from the payment of real property taxes. The grant of
the privilege only in respect of this tax is conclusive proof of the legislative intent to
make it a taxable person subject to all taxes, except real property tax.
Finally, even if the petitioner was originally not a taxable person for purposes of real
property tax, in light of the foregoing disquisitions, it had already become, even if it be
conceded to be an agency or instrumentality of the Government, a taxable person for
such purpose in view of the withdrawal in the last paragraph of Section 234 of
exemptions from the payment of real property taxes, which, as earlier adverted to,
applies to the petitioner.
Accordingly, the position taken by the petitioner is untenable. Reliance on Basco
vs. Philippine Amusement and Gaming Corporation
[39]
is unavailing since it was decided
before the effectivity of the LGC. Besides, nothing can prevent Congress from
decreeing that even instrumentalities or agencies of the Government performing
governmental functions may be subject to tax. Where it is done precisely to fulfill a
constitutional mandate and national policy, no one can doubt its wisdom.
WHEREFORE, the instant petition is DENIED. The challenged decision and order
of the Regional Trial Court of Cebu, Branch 20, in Civil Case No. CEB-16900 are
AFFIRMED.
No pronouncement as to costs.
SO ORDERED.
Narvasa, C.J., (Chairman), Melo, Francisco, and Panganiban, JJ., concur.

[1]
Rollo, 27-29. Per Judge Ferdinand J. Marcos.
[2]
Id., 30-31.
[3]
Rollo, 10-13.
[4]
Supra note 1.
[5]
Rollo, 28-29.
[6]
Citing Gonzales vs. Hechanova, 118 Phil. 1065 [1963].
[7]
Citing Section 3, R.A. No. 6958.
[8]
Citing Section 2, Id.
[9]
197 SCRA 52 [1991].
[10]
Section 5, Article X, 1987 Constitution.
[11]
Section 14, R.A. No. 6958.
[12]
Manila International Airport Authority (MIAA) vs. Commission on Audit, 238 SCRA 714 [1994].
[13]
COOLEY on Constitutional Law, 4th ed. [1931], 62.
[14]
Section 28(1), Article VI, 1987 Constitution.
[15]
Chief Justice Marshall in McCulloch vs. Maryland, 4 Wheat, 316, 4 L ed. 579, 607. Later Justice
Holmes brushed this aside by declaring in Panhandle Oil Co. vs. Mississippi (277 U.S. 218) that "the
power to tax is not the power to destroy while this Court sits." Justice Frankfurter in Graves vs. New York
(306 U.S. 466) also remarked that Justice Marshall's statement was a "mere flourish or rhetoric" and a
product of the "intellectual fashion of the times" to indulge in "a free case of absolutes." (See SINCO,
Philippine Political Law [1954], 577-578).
[16]
AGPALO, RUBEN E., Statutory Construction [1990 ed.], 216. See also SANDS, DALLAS C., Statutes
and Statutory Construction, vol. 3 [1974] 179.
[17]
Justice Holmes in his dissent in Compania General vs. Collector of Internal Revenue, 275 U.S. 87, 100
[1927].
[18]
AGPALO, op cit., 217; SANDS, op cit., 207.
[19]
SINCO, op cit., 587.
[20]
SANDS, op cit., 207.
[21]
Maceda vs. Macaraig, Jr. 197 SCRA 771, 799 [1991], citing 2 COOLEY on the Law on Taxation, 4th
ed. [1927], 1414, and SANDS, op cit., 207.
[22]
CRUZ, ISAGANI A., Constitutional Law [1991], 84.
[23]
Id., 91-92; SINCO, op cit., 587.
[24]
Section 131(l), Local Government Code of 1991.
[25]
Section 131(g), Id.
[26]
PIMENTEL, AQUILINO JR., The Local Government Code of 1991 - The Key to National Development
[1933], 329.
[27]
Section 2(1), Introductory Provisions, Administrative Code of 1987.
[28]
Section 1, Article X, 1987 Constitution.
[29]
Section 2(2), introductory Provisions, Administrative Code of 1987.
[30]
Bacani vs. National Coconut Corporation, 100 Phil. 468, 472 [1956].
[31]
Section 2(4), Introductory Provisions, Administrative Code of 1987.
[32]
Section 2(10), Id., Id.
[33]
Section 25, Article II, and Section 2, Article X, Constitution.
[34]
Section 2(a), Local Government Code of 1991.
[35]
P.D. No. 1931.
[36]
Section 3, R.A. No. 6958.
[37]
Section 18, Id.
[38]
Section 9(b), Id.
[39]
Supra note 9.
SUPREME COURT
Manila
EN BANC
G.R. No. L-2947 January 11, 1951
MANILA RACE HORSE TRAINERS ASSOCIATION, INC., and JUAN T.
SORDAN, plaintiffs-appellants,
vs.
MANUEL DE LA FUENTE, defendant-appellee.
Soriano, Garde and Cervania for appellants.
City Fiscal Eugenio Angeles and Assistant Fiscal Arsenio Naawa for appellee.
TUASON, J .:
This action was instituted for a declaratory relief by the Manila Race Horses Trainers
Association, Inc., a non-stock corporation duly organized and existing under and by
virtue of the laws of the Philippines, who allege that they are owners of boarding stables
for race horses and that their rights as such are affected by Ordinance No. 3065 of the
City of Manila approved on July 1, 1947.
1
They made the Mayor of Manila defendant
and prayed that said ordinance be declared invalid as violative of the Philippine
Constitution.
The case was submitted on the pleadings, and the decision was that the ordinance in
question "is constitutional and valid and has been enacted in accordance with the
powers of the Municipal Board granted by the Charter of the City of Manila."
On appeal, the plaintiffs as appellants make three assignments of error, the first two of
which are discussed jointly in their brief under two separate topics.
First, it is maintained that the ordinance under consideration is a tax on race horses as
distinct from boarding stables. It is argued that by section 2 the basis of the license fees
"is the number of race horses kept or maintained in the boarding stables to be paid by
the maintainers at the rate of P10.00 a year for each race horse;" that "the fee is
increased correspondingly P10 for each additional race horse maintained or fed in the
stable;" and that "by the same token, an empty stable for race horse pays no license fee
at all."
The spirit, rather than the letter, of an ordinance determines the construction thereof,
and the court looks less to its words and more to the context, subject matter,
consequence and effect. Accordingly, what is within the spirit is within the ordinance
although it is not within the letter thereof, while that which is in the letter, although not
within the spirit, is not within the ordinance. (62 C. J. S., 845.) From the context of
Ordinance No. 3065, the intent to tax or license stables and not horses is clearly
manifest. The tax is assessed not on the owners of the horses but on the owners of the
stables, as counsel admit in their brief, although there is nothing, of course, to stop
stable owners from shifting the tax to the horse owners in the form of increased rents or
fees, which is generally the case.
It is also plain from the text of the whole ordinance that the number of horses is used in
the assessment purely as a method of fixing an equitable and practical distribution of
the burden imposed by the measure. Far from being obnoxious, the method is fair and
just. It is but fair and just that for a boarding stable where only one horse is maintained
proportionately less amount should be exacted than for a stable where more horses are
kept and from which greater income is derived.
We do not share plaintiff's opinion, apropos the second proposition, that the ordinance
in question is discriminatory and savors of class legislation. In taxing only boarding
stables for race horses, we do not believe that the ordinance, makes arbitrary
classification. In the case of Eastern Theatrical Co. Inc., vs. Alfonso, 46 Off. Gaz. Supp.
to No. 11, p. 303,
*
it was said there is equality and uniformity in taxation if all articles or
kinds of property of the same class are taxed at the same rate. Thus, it was held in that
case, that "the fact that some places of amusement are not taxed while others, such as
cinematographs, theaters, vaudeville companies, theatrical shows, and boxing
exhibitions and other kinds of amusements or places of amusement are taxed, is not
argument at all against the equality and uniformity of tax imposition." Applying this
criterion to the present case, there would be discrimination if some boarding stables of
the same class used for the same number of horses were not taxed or were made to
pay less or more than others.
From the viewpoint of economics and public policy the taxing of boarding stables for
race horses to the exclusion of boarding stables for horses dedicated to other purposes
is not indefensible. The owners of boarding stables for race horses and, for that matter,
the race horse owners themselves, who in the scheme of shifting may carry the taxation
burden, are a class by themselves and appropriately taxed where owners of other kinds
of horses are taxed less or not at all, considering that equity in taxation is generally
conceived in terms of ability to pay in relation to the benefits received by the taxpayer
and by the public from the business or property taxed. Race horses are devoted to
gambling if legalized, their owners derive fat income and the public hardly any profit
from horse racing, and this business demands relatively heavy police supervision.
Taking everything into account, the differentiation against which the plaintiffs complain
conforms to the practical dictates of justice and equity and is not discrimatory within the
meaning of the Constitution.
One ground of attack in the court below on the constitutionality of the ordinance
variance between the title and the subject matter apparently has been abandoned. In
its place a new question is brought up on the appeal in the third and last assignment of
error. It is now contended, for the first time, that "the Municipal Board of Manila (is)
without power to enact ordinance taxing private stables for race horses," and that the
lower court erred in not so declaring. This assignment of error has reference to Class B
or the second sub-paragraph of section 1 of the ordinance.
Not having been raised in the pleading, this question was properly ignored, not to say
that even it had been raised it would not have been available as basis for a declaration
of nullity of the ordinance. The clause of the ordinance taxing or licensing boarding
stables for race horses does not prejudice the plaintiffs in any material way, and it is
well settled that a person who is not adversely affected by a licensing ordinance may
not attack its validity. Stated differently, he may not complain that a licensing ordinance
is invalid as against a class other than that to which he belongs. (62 C. J. S.830, 831.)
By analogy, where a municipal ordinance is valid in some of its parts and invalid as to
others and the valid parts are separable from the invalid ones in which latter case the
valid provisions stand as operative the plaintiff may contest the validity of the
provisions that injure his interest but not those that do not.
We are of the opinion that the trial court committed no error and the judgment is
affirmed with costs against the plaintiff-appellants.
Moran, C.J., Paras, Feria, Pablo, Bengzon, Padilla, Montemayor, Reyes, Jugo and
Bautista Angelo, JJ., concur.

Footnotes
1
AN ORDINANCE PROVIDING FOR LICENSE FEES ON PERSONS
MAINTAINING OR CONDUCTING ANY BOARDING STABLE FOR HORSE
RACES AND/OR HORSE STABLES, OR PLACES WHERE HORSE ARE KEPT,
FED, OR BOARDED FOR OTHERS, FOR COMPENSATION OR HIRE,
AND/OR FOR PRIVATE, AND FOR OTHER PURPOSES.
Be it ordained by the Municipal Board of the City of Manila, that:
SECTION 1. License. No person shall own, keep, maintain, or conduct any
boarding stable, or place where race horse are kept, fed, or boarded for others,
for compensation or hire, and/or for race horse stable privately owned not for
hire, without first having obtained a permit from the Mayor and license therefor
from the City Treasurer.
SEC. 2. Fees. For every license granted under the provisions of this
ordinance, there shall be paid an annual license fee, which may be paid either
annually, semestrally or quarterly at the option of the taxpayer, to wit:
Boarding stable for race horses:
Class A For each race horse, kept,
maintained, fed or boarded in boarding
stables........................................................
P10.00

Class B For each race horse, kept,
maintained, or fed in private race horse
stables........................................................
P5.00
SEC. 3. Contents of application. Every application for the license in this
ordinance required, shall be accompanied by a sworn statement of the greatest
number of animals to be kept by the applicant, which statement shall be the basis
for computing the amount of fees to be paid for such license.
SEC. 4. Effectivity. This ordinance shall take effect upon its approval.
*
83 Phil., 852.
Manila Race Horse v. Dela FuenteFacts:
This action was instituted for a declaratoryrelief by the Manila Race Horses TrainersAssociation, Inc., a
non-stock corporation dulyorganized and existing under and by virtue of the laws of the Philippines, who
allege that theyare owners of boarding stables for race horsesand that their rights as such are affected
byOrdinance No. 3065 of the City of Manilaapproved on July 1, 1947.
1
They made theMayor of Manila defendant and prayed thatsaid ordinance be declared invalid as
violativeof the Philippine Constitution.The case was submitted on the pleadings, andthe decision was
that the ordinance in question"is constitutional and valid and has beenenacted in accordance with the
powers of theMunicipal Board granted by the Charter of theCity of Manila."
Issue
: WON the ordinance makes an arbitraryclassification--- thus being violative of theconstitution.
Held:
In taxing only boarding stables for race horses,we do not believe that the ordinance, makesarbitrary
classification. In the case of EasternTheatrical Co. Inc., vs. Alfonso, it was said thereis equality and
uniformity in taxation if allarticles or kinds of property of the same classare taxed at the same rate.Thus,
it was held in that case, that "the fact thatsome places of amusement are not taxed whileothers, such as
cinematographs, theaters,vaudeville companies, theatrical shows, andboxing exhibitions and other kinds
of amusements or places of amusement are taxed,is not argument at all against the equality
anduniformity of tax imposition." Applying thiscriterion to the present case, there would be
discrimination if some boarding stables of thesame class used for the same number of horseswere not
taxed or were made to pay less ormore than others.From the viewpoint of economics and publicpolicy
the taxing of boarding stables for racehorses to the exclusion of boarding stables forhorses dedicated to
other purposes is notindefensible.The owners of boarding stables for race horsesand, for that matter,
the race horse ownersthemselves, who in the scheme of shifting maycarry the taxation burden, are a
class bythemselves and appropriately taxed whereowners of other kinds of horses are taxed lessor not
at all, considering that equity in taxationisgenerally conceived in terms of ability to pay inrelation to the
benefits received by thetaxpayer and by the public from the business orpropertytaxed. Race horses are
devoted to gambling if legalized, their owners derive fat income andthe public hardly any profit from
horse racing,and this business demands relatively heavypolice supervision.Taking everything into
account, thedifferentiation against which the plaintiffscomplain conforms to the practical dictates of
justice and equity and is not discrimatory withinthe meaning of the Constitution

SUPREME COURT
Manila
EN BANC

G.R. No. 115455 October 30, 1995
ARTURO M. TOLENTINO, petitioner,
vs.
THE SECRETARY OF FINANCE and THE COMMISSIONER OF INTERNAL
REVENUE, respondents.
G.R. No. 115525 October 30, 1995
JUAN T. DAVID, petitioner,
vs.
TEOFISTO T. GUINGONA, JR., as Executive Secretary; ROBERTO DE OCAMPO,
as Secretary of Finance; LIWAYWAY VINZONS-CHATO, as Commissioner of
Internal Revenue; and their AUTHORIZED AGENTS OR
REPRESENTATIVES, respondents.
G.R. No. 115543 October 30, 1995
RAUL S. ROCO and the INTEGRATED BAR OF THE PHILIPPINES, petitioners,
vs.
THE SECRETARY OF THE DEPARTMENT OF FINANCE; THE COMMISSIONERS
OF THE BUREAU OF INTERNAL REVENUE AND BUREAU OF
CUSTOMS, respondents.
G.R. No. 115544 October 30, 1995
PHILIPPINE PRESS INSTITUTE, INC.; EGP PUBLISHING CO., INC.; KAMAHALAN
PUBLISHING CORPORATION; PHILIPPINE JOURNALISTS, INC.; JOSE L. PAVIA;
and OFELIA L. DIMALANTA, petitioners,
vs.
HON. LIWAYWAY V. CHATO, in her capacity as Commissioner of Internal
Revenue; HON. TEOFISTO T. GUINGONA, JR., in his capacity as Executive
Secretary; and HON. ROBERTO B. DE OCAMPO, in his capacity as Secretary of
Finance, respondents.
G.R. No. 115754 October 30, 1995
CHAMBER OF REAL ESTATE AND BUILDERS ASSOCIATIONS, INC.,
(CREBA), petitioner,
vs.
THE COMMISSIONER OF INTERNAL REVENUE, respondent.
G.R. No. 115781 October 30, 1995
KILOSBAYAN, INC., JOVITO R. SALONGA, CIRILO A. RIGOS, ERME CAMBA,
EMILIO C. CAPULONG, JR., JOSE T. APOLO, EPHRAIM TENDERO, FERNANDO
SANTIAGO, JOSE ABCEDE, CHRISTINE TAN, FELIPE L. GOZON, RAFAEL G.
FERNANDO, RAOUL V. VICTORINO, JOSE CUNANAN, QUINTIN S. DOROMAL,
MOVEMENT OF ATTORNEYS FOR BROTHERHOOD, INTEGRITY AND
NATIONALISM, INC. ("MABINI"), FREEDOM FROM DEBT COALITION, INC., and
PHILIPPINE BIBLE SOCIETY, INC. and WIGBERTO TAADA,petitioners,
vs.
THE EXECUTIVE SECRETARY, THE SECRETARY OF FINANCE, THE
COMMISSIONER OF INTERNAL REVENUE and THE COMMISSIONER OF
CUSTOMS, respondents.
G.R. No. 115852 October 30, 1995
PHILIPPINE AIRLINES, INC., petitioner,
vs.
THE SECRETARY OF FINANCE and COMMISSIONER OF INTERNAL
REVENUE, respondents.
G.R. No. 115873 October 30, 1995
COOPERATIVE UNION OF THE PHILIPPINES, petitioner,
vs.
HON. LIWAYWAY V. CHATO, in her capacity as the Commissioner of Internal
Revenue, HON. TEOFISTO T. GUINGONA, JR., in his capacity as Executive
Secretary, and HON. ROBERTO B. DE OCAMPO, in his capacity as Secretary of
Finance, respondents.
G.R. No. 115931 October 30, 1995
PHILIPPINE EDUCATIONAL PUBLISHERS ASSOCIATION, INC. and ASSOCIATION
OF PHILIPPINE BOOK SELLERS, petitioners,
vs.
HON. ROBERTO B. DE OCAMPO, as the Secretary of Finance; HON. LIWAYWAY
V. CHATO, as the Commissioner of Internal Revenue; and HON. GUILLERMO
PARAYNO, JR., in his capacity as the Commissioner of Customs, respondents.
R E S O L U T I O N

MENDOZA, J .:
These are motions seeking reconsideration of our decision dismissing the petitions filed
in these cases for the declaration of unconstitutionality of R.A. No. 7716, otherwise
known as the Expanded Value-Added Tax Law. The motions, of which there are 10 in
all, have been filed by the several petitioners in these cases, with the exception of the
Philippine Educational Publishers Association, Inc. and the Association of Philippine
Booksellers, petitioners in G.R. No. 115931.
The Solicitor General, representing the respondents, filed a consolidated comment, to
which the Philippine Airlines, Inc., petitioner in G.R. No. 115852, and the Philippine
Press Institute, Inc., petitioner in G.R. No. 115544, and Juan T. David, petitioner in G.R.
No. 115525, each filed a reply. In turn the Solicitor General filed on June 1, 1995 a
rejoinder to the PPI's reply.
On June 27, 1995 the matter was submitted for resolution.
I. Power of the Senate to propose amendments to revenue bills. Some of the petitioners
(Tolentino, Kilosbayan, Inc., Philippine Airlines (PAL), Roco, and Chamber of Real
Estate and Builders Association (CREBA)) reiterate previous claims made by them that
R.A. No. 7716 did not "originate exclusively" in the House of Representatives as
required by Art. VI, 24 of the Constitution. Although they admit that H. No. 11197 was
filed in the House of Representatives where it passed three readings and that afterward
it was sent to the Senate where after first reading it was referred to the Senate Ways
and Means Committee, they complain that the Senate did not pass it on second and
third readings. Instead what the Senate did was to pass its own version (S. No. 1630)
which it approved on May 24, 1994. Petitioner Tolentino adds that what the Senate
committee should have done was to amend H. No. 11197 by striking out the text of the
bill and substituting it with the text of S. No. 1630. That way, it is said, "the bill remains a
House bill and the Senate version just becomes the text (only the text) of the House
bill."
The contention has no merit.
The enactment of S. No. 1630 is not the only instance in which the Senate proposed an
amendment to a House revenue bill by enacting its own version of a revenue bill. On at
least two occasions during the Eighth Congress, the Senate passed its own version of
revenue bills, which, in consolidation with House bills earlier passed, became the
enrolled bills. These were:
R.A. No. 7369 (AN ACT TO AMEND THE OMNIBUS INVESTMENTS CODE OF 1987
BY EXTENDING FROM FIVE (5) YEARS TO TEN YEARS THE PERIOD FOR TAX
AND DUTY EXEMPTION AND TAX CREDIT ON CAPITAL EQUIPMENT) which was
approved by the President on April 10, 1992. This Act is actually a consolidation of H.
No. 34254, which was approved by the House on January 29, 1992, and S. No. 1920,
which was approved by the Senate on February 3, 1992.
R.A. No. 7549 (AN ACT GRANTING TAX EXEMPTIONS TO WHOEVER SHALL GIVE
REWARD TO ANY FILIPINO ATHLETE WINNING A MEDAL IN OLYMPIC GAMES)
which was approved by the President on May 22, 1992. This Act is a consolidation of H.
No. 22232, which was approved by the House of Representatives on August 2, 1989,
and S. No. 807, which was approved by the Senate on October 21, 1991.
On the other hand, the Ninth Congress passed revenue laws which were also the result
of the consolidation of House and Senate bills. These are the following, with indications
of the dates on which the laws were approved by the President and dates the separate
bills of the two chambers of Congress were respectively passed:
1. R.A. NO. 7642
AN ACT INCREASING THE PENALTIES FOR TAX EVASION,
AMENDING FOR THIS PURPOSE THE PERTINENT SECTIONS OF
THE NATIONAL INTERNAL REVENUE CODE (December 28, 1992).
House Bill No. 2165, October 5, 1992
Senate Bill No. 32, December 7, 1992
2. R.A. NO. 7643
AN ACT TO EMPOWER THE COMMISSIONER OF INTERNAL
REVENUE TO REQUIRE THE PAYMENT OF THE VALUE-ADDED TAX
EVERY MONTH AND TO ALLOW LOCAL GOVERNMENT UNITS TO
SHARE IN VAT REVENUE, AMENDING FOR THIS PURPOSE CERTAIN
SECTIONS OF THE NATIONAL INTERNAL REVENUE CODE
(December 28, 1992)
House Bill No. 1503, September 3, 1992
Senate Bill No. 968, December 7, 1992
3. R.A. NO. 7646
AN ACT AUTHORIZING THE COMMISSIONER OF INTERNAL
REVENUE TO PRESCRIBE THE PLACE FOR PAYMENT OF INTERNAL
REVENUE TAXES BY LARGE TAXPAYERS, AMENDING FOR THIS
PURPOSE CERTAIN PROVISIONS OF THE NATIONAL INTERNAL
REVENUE CODE, AS AMENDED (February 24, 1993)
House Bill No. 1470, October 20, 1992
Senate Bill No. 35, November 19, 1992
4. R.A. NO. 7649
AN ACT REQUIRING THE GOVERNMENT OR ANY OF ITS POLITICAL
SUBDIVISIONS, INSTRUMENTALITIES OR AGENCIES INCLUDING
GOVERNMENT-OWNED OR CONTROLLED CORPORATIONS
(GOCCS) TO DEDUCT AND WITHHOLD THE VALUE-ADDED TAX DUE
AT THE RATE OF THREE PERCENT (3%) ON GROSS PAYMENT FOR
THE PURCHASE OF GOODS AND SIX PERCENT (6%) ON GROSS
RECEIPTS FOR SERVICES RENDERED BY CONTRACTORS (April 6,
1993)
House Bill No. 5260, January 26, 1993
Senate Bill No. 1141, March 30, 1993
5. R.A. NO. 7656
AN ACT REQUIRING GOVERNMENT-OWNED OR CONTROLLED
CORPORATIONS TO DECLARE DIVIDENDS UNDER CERTAIN
CONDITIONS TO THE NATIONAL GOVERNMENT, AND FOR OTHER
PURPOSES (November 9, 1993)
House Bill No. 11024, November 3, 1993
6. R.A. NO. 7660
AN ACT RATIONALIZING FURTHER THE STRUCTURE AND
ADMINISTRATION OF THE DOCUMENTARY STAMP TAX, AMENDING
FOR THE PURPOSE CERTAIN PROVISIONS OF THE NATIONAL
INTERNAL REVENUE CODE, AS AMENDED, ALLOCATING FUNDS
FOR SPECIFIC PROGRAMS, AND FOR OTHER PURPOSES
(December 23, 1993)
House Bill No. 7789, May 31, 1993
7. R.A. NO. 7717
AN ACT IMPOSING A TAX ON THE SALE, BARTER OR EXCHANGE OF
SHARES OF STOCK LISTED AND TRADED THROUGH THE LOCAL
STOCK EXCHANGE OR THROUGH INITIAL PUBLIC OFFERING,
AMENDING FOR THE PURPOSE THE NATIONAL INTERNAL
REVENUE CODE, AS AMENDED, BY INSERTING A NEW SECTION
AND REPEALING CERTAIN SUBSECTIONS THEREOF (May 5, 1994)
House Bill No. 9187, November 3, 1993
Senate Bill No. 1127, March 23, 1994
Thus, the enactment of S. No. 1630 is not the only instance in which the Senate, in the
exercise of its power to propose amendments to bills required to originate in the House,
passed its own version of a House revenue measure. It is noteworthy that, in the
particular case of S. No. 1630, petitioners Tolentino and Roco, as members of the
Senate, voted to approve it on second and third readings.
On the other hand, amendment by substitution, in the manner urged by petitioner
Tolentino, concerns a mere matter of form. Petitioner has not shown what substantial
difference it would make if, as the Senate actually did in this case, a separate bill like S.
No. 1630 is instead enacted as a substitute measure, "taking into Consideration . .
. H.B. 11197."
Indeed, so far as pertinent, the Rules of the Senate only provide:
RULE XXIX
AMENDMENTS
xxx xxx xxx
68. Not more than one amendment to the original amendment shall be
considered.
No amendment by substitution shall be entertained unless the text thereof
is submitted in writing.
Any of said amendments may be withdrawn before a vote is taken
thereon.
69. No amendment which seeks the inclusion of a legislative provision
foreign to the subject matter of a bill (rider) shall be entertained.
xxx xxx xxx
70-A. A bill or resolution shall not be amended by substituting it with
another which covers a subject distinct from that proposed in the original
bill or resolution. (emphasis added).
Nor is there merit in petitioners' contention that, with regard to revenue bills, the
Philippine Senate possesses less power than the U.S. Senate because of textual
differences between constitutional provisions giving them the power to propose or
concur with amendments.
Art. I, 7, cl. 1 of the U.S. Constitution reads:
All Bills for raising Revenue shall originate in the House of
Representatives; but the Senate may propose or concur with amendments
as on other Bills.
Art. VI, 24 of our Constitution reads:
All appropriation, revenue or tariff bills, bills authorizing increase of the
public debt, bills of local application, and private bills shall originate
exclusively in the House of Representatives, but the Senate may propose
or concur with amendments.
The addition of the word "exclusively" in the Philippine Constitution and the decision to
drop the phrase "as on other Bills" in the American version, according to petitioners,
shows the intention of the framers of our Constitution to restrict the Senate's power to
propose amendments to revenue bills. Petitioner Tolentino contends that the word
"exclusively" was inserted to modify "originate" and "the words 'as in any other bills' (sic)
were eliminated so as to show that these bills were not to be like other bills but must be
treated as a special kind."
The history of this provision does not support this contention. The supposed indicia of
constitutional intent are nothing but the relics of an unsuccessful attempt to limit the
power of the Senate. It will be recalled that the 1935 Constitution originally provided for
a unicameral National Assembly. When it was decided in 1939 to change to a bicameral
legislature, it became necessary to provide for the procedure for lawmaking by the
Senate and the House of Representatives. The work of proposing amendments to the
Constitution was done by the National Assembly, acting as a constituent assembly,
some of whose members, jealous of preserving the Assembly's lawmaking powers,
sought to curtail the powers of the proposed Senate. Accordingly they proposed the
following provision:
All bills appropriating public funds, revenue or tariff bills, bills of local
application, and private bills shall originate exclusively in the Assembly,
but the Senate may propose or concur with amendments. In case of
disapproval by the Senate of any such bills, the Assembly may repass the
same by a two-thirds vote of all its members, and thereupon, the bill so
repassed shall be deemed enacted and may be submitted to the President
for corresponding action. In the event that the Senate should fail to finally
act on any such bills, the Assembly may, after thirty days from the opening
of the next regular session of the same legislative term, reapprove the
same with a vote of two-thirds of all the members of the Assembly. And
upon such reapproval, the bill shall be deemed enacted and may be
submitted to the President for corresponding action.
The special committee on the revision of laws of the Second National Assembly vetoed
the proposal. It deleted everything after the first sentence. As rewritten, the proposal
was approved by the National Assembly and embodied in Resolution No. 38, as
amended by Resolution No. 73. (J. ARUEGO, KNOW YOUR CONSTITUTION 65-66
(1950)). The proposed amendment was submitted to the people and ratified by them in
the elections held on June 18, 1940.
This is the history of Art. VI, 18 (2) of the 1935 Constitution, from which Art. VI, 24 of
the present Constitution was derived. It explains why the word "exclusively" was added
to the American text from which the framers of the Philippine Constitution borrowed and
why the phrase "as on other Bills" was not copied. Considering the defeat of the
proposal, the power of the Senate to propose amendments must be understood to be
full, plenary and complete "as on other Bills." Thus, because revenue bills are required
to originate exclusively in the House of Representatives, the Senate cannot enact
revenue measures of its own without such bills. After a revenue bill is passed and sent
over to it by the House, however, the Senate certainly can pass its own version on the
same subject matter. This follows from the coequality of the two chambers of Congress.
That this is also the understanding of book authors of the scope of the Senate's power
to concur is clear from the following commentaries:
The power of the Senate to propose or concur with amendments is
apparently without restriction. It would seem that by virtue of this power,
the Senate can practically re-write a bill required to come from the House
and leave only a trace of the original bill. For example, a general revenue
bill passed by the lower house of the United States Congress contained
provisions for the imposition of an inheritance tax . This was changed by
the Senate into a corporation tax. The amending authority of the Senate
was declared by the United States Supreme Court to be sufficiently broad
to enable it to make the alteration. [Flint v. Stone Tracy Company, 220
U.S. 107, 55 L. ed. 389].
(L. TAADA AND F. CARREON, POLITICAL LAW OF THE PHILIPPINES
247 (1961))
The above-mentioned bills are supposed to be initiated by the House of
Representatives because it is more numerous in membership and
therefore also more representative of the people. Moreover, its members
are presumed to be more familiar with the needs of the country in regard
to the enactment of the legislation involved.
The Senate is, however, allowed much leeway in the exercise of its power
to propose or concur with amendments to the bills initiated by the House
of Representatives. Thus, in one case, a bill introduced in the U.S. House
of Representatives was changed by the Senate to make a proposed
inheritance tax a corporation tax. It is also accepted practice for the
Senate to introduce what is known as an amendment by substitution,
which may entirely replace the bill initiated in the House of
Representatives.
(I. CRUZ, PHILIPPINE POLITICAL LAW 144-145 (1993)).
In sum, while Art. VI, 24 provides that all appropriation, revenue or tariff bills, bills
authorizing increase of the public debt, bills of local application, and private bills must
"originate exclusively in the House of Representatives," it also adds, "but the Senate
may propose or concur with amendments." In the exercise of this power, the Senate
may propose an entirely new bill as a substitute measure. As petitioner Tolentino states
in a high school text, a committee to which a bill is referred may do any of the following:
(1) to endorse the bill without changes; (2) to make changes in the bill
omitting or adding sections or altering its language; (3) to make and
endorse an entirely new bill as a substitute, in which case it will be known
as a committee bill; or (4) to make no report at all.
(A. TOLENTINO, THE GOVERNMENT OF THE PHILIPPINES 258
(1950))
To except from this procedure the amendment of bills which are required to originate in
the House by prescribing that the number of the House bill and its other parts up to the
enacting clause must be preserved although the text of the Senate amendment may be
incorporated in place of the original body of the bill is to insist on a mere technicality. At
any rate there is no rule prescribing this form. S. No. 1630, as a substitute measure, is
therefore as much an amendment of H. No. 11197 as any which the Senate could have
made.
II. S. No. 1630 a mere amendment of H. No. 11197. Petitioners' basic error is that they
assume that S. No. 1630 is an independent and distinct bill. Hence their repeated
references to its certification that it was passed by the Senate "in substitution of
S.B. No. 1129, taking into consideration P.S. Res. No. 734 and H.B. No. 11197,"
implying that there is something substantially different between the reference to S. No.
1129 and the reference to H. No. 11197. From this premise, they conclude that R.A. No.
7716 originated both in the House and in the Senate and that it is the product of two
"half-baked bills because neither H. No. 11197 nor S. No. 1630 was passed by both
houses of Congress."
In point of fact, in several instances the provisions of S. No. 1630, clearly appear to be
mere amendments of the corresponding provisions of H. No. 11197. The very tabular
comparison of the provisions of H. No. 11197 and S. No. 1630 attached as Supplement
A to the basic petition of petitioner Tolentino, while showing differences between the two
bills, at the same time indicates that the provisions of the Senate bill were precisely
intended to be amendments to the House bill.
Without H. No. 11197, the Senate could not have enacted S. No. 1630. Because the
Senate bill was a mere amendment of the House bill, H. No. 11197 in its original form
did not have to pass the Senate on second and three readings. It was enough that after
it was passed on first reading it was referred to the Senate Committee on Ways and
Means. Neither was it required that S. No. 1630 be passed by the House of
Representatives before the two bills could be referred to the Conference Committee.
There is legislative precedent for what was done in the case of H. No. 11197 and S. No.
1630. When the House bill and Senate bill, which became R.A. No. 1405 (Act
prohibiting the disclosure of bank deposits), were referred to a conference committee,
the question was raised whether the two bills could be the subject of such conference,
considering that the bill from one house had not been passed by the other and vice
versa. As Congressman Duran put the question:
MR. DURAN. Therefore, I raise this question of order as to procedure: If a
House bill is passed by the House but not passed by the Senate, and a
Senate bill of a similar nature is passed in the Senate but never passed in
the House, can the two bills be the subject of a conference, and can a law
be enacted from these two bills? I understand that the Senate bill in this
particular instance does not refer to investments in government securities,
whereas the bill in the House, which was introduced by the Speaker,
covers two subject matters: not only investigation of deposits in banks but
also investigation of investments in government securities. Now, since the
two bills differ in their subject matter, I believe that no law can be enacted.
Ruling on the point of order raised, the chair (Speaker Jose B. Laurel, Jr.) said:
THE SPEAKER. The report of the conference committee is in order. It is
precisely in cases like this where a conference should be had. If the
House bill had been approved by the Senate, there would have been no
need of a conference; but precisely because the Senate passed another
bill on the same subject matter, the conference committee had to be
created, and we are now considering the report of that committee.
(2 CONG. REC. NO. 13, July 27, 1955, pp. 3841-42 (emphasis added))
III. The President's certification. The fallacy in thinking that H. No. 11197 and S. No.
1630 are distinct and unrelated measures also accounts for the petitioners'
(Kilosbayan's and PAL's) contention that because the President separately certified to
the need for the immediate enactment of these measures, his certification was
ineffectual and void. The certification had to be made of the version of the same
revenue bill which at the momentwas being considered. Otherwise, to follow petitioners'
theory, it would be necessary for the President to certify as many bills as are presented
in a house of Congress even though the bills are merely versions of the bill he has
already certified. It is enough that he certifies the bill which, at the time he makes the
certification, is under consideration. Since on March 22, 1994 the Senate was
considering S. No. 1630, it was that bill which had to be certified. For that matter on
June 1, 1993 the President had earlier certified H. No. 9210 for immediate enactment
because it was the one which at that time was being considered by the House. This bill
was later substituted, together with other bills, by H. No. 11197.
As to what Presidential certification can accomplish, we have already explained in the
main decision that the phrase "except when the President certifies to the necessity of its
immediate enactment, etc." in Art. VI, 26 (2) qualifies not only the requirement that
"printed copies [of a bill] in its final form [must be] distributed to the members three days
before its passage" but also the requirement that before a bill can become a law it must
have passed "three readings on separate days." There is not only textual support for
such construction but historical basis as well.
Art. VI, 21 (2) of the 1935 Constitution originally provided:
(2) No bill shall be passed by either House unless it shall have been
printed and copies thereof in its final form furnished its Members at least
three calendar days prior to its passage, except when the President shall
have certified to the necessity of its immediate enactment. Upon the last
reading of a bill, no amendment thereof shall be allowed and the question
upon its passage shall be taken immediately thereafter, and
the yeas and nays entered on the Journal.
When the 1973 Constitution was adopted, it was provided in Art. VIII, 19 (2):
(2) No bill shall become a law unless it has passed three readings on
separate days, and printed copies thereof in its final form have been
distributed to the Members three days before its passage, except when
the Prime Minister certifies to the necessity of its immediate enactment to
meet a public calamity or emergency. Upon the last reading of a bill, no
amendment thereto shall be allowed, and the vote thereon shall be taken
immediately thereafter, and the yeas and nays entered in the Journal.
This provision of the 1973 document, with slight modification, was adopted in Art. VI,
26 (2) of the present Constitution, thus:
(2) No bill passed by either House shall become a law unless it has
passed three readings on separate days, and printed copies thereof in its
final form have been distributed to its Members three days before its
passage, except when the President certifies to the necessity of its
immediate enactment to meet a public calamity or emergency. Upon the
last reading of a bill, no amendment thereto shall be allowed, and the vote
thereon shall be taken immediately thereafter, and
the yeasand nays entered in the Journal.
The exception is based on the prudential consideration that if in all cases three readings
on separate days are required and a bill has to be printed in final form before it can be
passed, the need for a law may be rendered academic by the occurrence of the very
emergency or public calamity which it is meant to address.
Petitioners further contend that a "growing budget deficit" is not an emergency,
especially in a country like the Philippines where budget deficit is a chronic condition.
Even if this were the case, an enormous budget deficit does not make the need for R.A.
No. 7716 any less urgent or the situation calling for its enactment any less an
emergency.
Apparently, the members of the Senate (including some of the petitioners in these
cases) believed that there was an urgent need for consideration of S. No. 1630,
because they responded to the call of the President by voting on the bill on second and
third readings on the same day. While the judicial department is not bound by the
Senate's acceptance of the President's certification, the respect due coequal
departments of the government in matters committed to them by the Constitution and
the absence of a clear showing of grave abuse of discretion caution a stay of the judicial
hand.
At any rate, we are satisfied that S. No. 1630 received thorough consideration in the
Senate where it was discussed for six days. Only its distribution in advance in its final
printed form was actually dispensed with by holding the voting on second and third
readings on the same day (March 24, 1994). Otherwise, sufficient time between the
submission of the bill on February 8, 1994 on second reading and its approval on March
24, 1994 elapsed before it was finally voted on by the Senate on third reading.
The purpose for which three readings on separate days is required is said to be two-
fold: (1) to inform the members of Congress of what they must vote on and (2) to give
them notice that a measure is progressing through the enacting process, thus enabling
them and others interested in the measure to prepare their positions with reference to it.
(1 J. G. SUTHERLAND, STATUTES AND STATUTORY CONSTRUCTION 10.04, p.
282 (1972)). These purposes were substantially achieved in the case of R.A. No. 7716.
IV. Power of Conference Committee. It is contended (principally by Kilosbayan, Inc. and
the Movement of Attorneys for Brotherhood, Integrity and Nationalism, Inc. (MABINI))
that in violation of the constitutional policy of full public disclosure and the people's right
to know (Art. II, 28 and Art. III, 7) the Conference Committee met for two days in
executive session with only the conferees present.
As pointed out in our main decision, even in the United States it was customary to hold
such sessions with only the conferees and their staffs in attendance and it was only in
1975 when a new rule was adopted requiring open sessions. Unlike its American
counterpart, the Philippine Congress has not adopted a rule prescribing open hearings
for conference committees.
It is nevertheless claimed that in the United States, before the adoption of the rule in
1975, at least staff members were present. These were staff members of the Senators
and Congressmen, however, who may be presumed to be their confidential men, not
stenographers as in this case who on the last two days of the conference were
excluded. There is no showing that the conferees themselves did not take notes of their
proceedings so as to give petitioner Kilosbayan basis for claiming that even in secret
diplomatic negotiations involving state interests, conferees keep notes of their meetings.
Above all, the public's right to know was fully served because the Conference
Committee in this case submitted a report showing the changes made on the differing
versions of the House and the Senate.
Petitioners cite the rules of both houses which provide that conference committee
reports must contain "a detailed, sufficiently explicit statement of the changes in or other
amendments." These changes are shown in the bill attached to the Conference
Committee Report. The members of both houses could thus ascertain what changes
had been made in the original bills without the need of a statement detailing the
changes.
The same question now presented was raised when the bill which became R.A. No.
1400 (Land Reform Act of 1955) was reported by the Conference Committee.
Congressman Bengzon raised a point of order. He said:
MR. BENGZON. My point of order is that it is out of order to consider the
report of the conference committee regarding House Bill No. 2557 by
reason of the provision of Section 11, Article XII, of the Rules of this
House which provides specifically that the conference report must be
accompanied by a detailed statement of the effects of the amendment on
the bill of the House. This conference committee report is not
accompanied by that detailed statement, Mr. Speaker. Therefore it is out
of order to consider it.
Petitioner Tolentino, then the Majority Floor Leader, answered:
MR. TOLENTINO. Mr. Speaker, I should just like to say a few words in
connection with the point of order raised by the gentleman from
Pangasinan.
There is no question about the provision of the Rule cited by the
gentleman from Pangasinan, but this provision applies to those cases
where only portions of the bill have been amended. In this case before us
an entire bill is presented; therefore, it can be easily seen from the reading
of the bill what the provisions are. Besides, this procedure has been an
established practice.
After some interruption, he continued:
MR. TOLENTINO. As I was saying, Mr. Speaker, we have to look into the
reason for the provisions of the Rules, and the reason for the requirement
in the provision cited by the gentleman from Pangasinan is when there are
only certain words or phrases inserted in or deleted from the provisions of
the bill included in the conference report, and we cannot understand what
those words and phrases mean and their relation to the bill. In that case, it
is necessary to make a detailed statement on how those words and
phrases will affect the bill as a whole; but when the entire bill itself is
copied verbatim in the conference report, that is not necessary. So when
the reason for the Rule does not exist, the Rule does not exist.
(2 CONG. REC. NO. 2, p. 4056. (emphasis added))
Congressman Tolentino was sustained by the chair. The record shows that when the
ruling was appealed, it was upheld by viva voce and when a division of the House was
called, it was sustained by a vote of 48 to 5. (Id.,
p. 4058)
Nor is there any doubt about the power of a conference committee to insert new
provisions as long as these are germane to the subject of the conference. As this Court
held in Philippine Judges Association v. Prado, 227 SCRA 703 (1993), in an opinion
written by then Justice Cruz, the jurisdiction of the conference committee is not limited
to resolving differences between the Senate and the House. It may propose an entirely
new provision. What is important is that its report is subsequently approved by the
respective houses of Congress. This Court ruled that it would not entertain allegations
that, because new provisions had been added by the conference committee, there was
thereby a violation of the constitutional injunction that "upon the last reading of a bill, no
amendment thereto shall be allowed."
Applying these principles, we shall decline to look into the petitioners'
charges that an amendment was made upon the last reading of the
bill that eventually became R.A. No. 7354 and that copiesthereof in its final
form were not distributed among the members of each House. Both the
enrolled bill and the legislative journals certify that the measure was duly
enacted i.e., in accordance with Article VI, Sec. 26 (2) of the Constitution.
We are bound by such official assurances from a coordinate department
of the government, to which we owe, at the very least, a becoming
courtesy.
(Id. at 710. (emphasis added))
It is interesting to note the following description of conference committees in the
Philippines in a 1979 study:
Conference committees may be of two types: free or instructed. These
committees may be given instructions by their parent bodies or they may
be left without instructions. Normally the conference committees are
without instructions, and this is why they are often critically referred to as
"the little legislatures." Once bills have been sent to them, the conferees
have almost unlimited authority to change the clauses of the bills and in
fact sometimes introduce new measures that were not in the original
legislation. No minutes are kept, and members' activities on conference
committees are difficult to determine. One congressman known for his
idealism put it this way: "I killed a bill on export incentives for my interest
group [copra] in the conference committee but I could not have done so
anywhere else." The conference committee submits a report to both
houses, and usually it is accepted. If the report is not accepted, then the
committee is discharged and new members are appointed.
(R. Jackson, Committees in the Philippine Congress, in COMMITTEES
AND LEGISLATURES: A COMPARATIVE ANALYSIS 163 (J. D. LEES
AND M. SHAW, eds.)).
In citing this study, we pass no judgment on the methods of conference committees. We
cite it only to say that conference committees here are no different from their
counterparts in the United States whose vast powers we noted in Philippine Judges
Association v. Prado, supra. At all events, under Art. VI, 16(3) each house has the
power "to determine the rules of its proceedings," including those of its committees. Any
meaningful change in the method and procedures of Congress or its committees must
therefore be sought in that body itself.
V. The titles of S. No. 1630 and H. No. 11197. PAL maintains that R.A. No. 7716
violates Art. VI, 26 (1) of the Constitution which provides that "Every bill passed by
Congress shall embrace only one subject which shall be expressed in the title thereof."
PAL contends that the amendment of its franchise by the withdrawal of its exemption
from the VAT is not expressed in the title of the law.
Pursuant to 13 of P.D. No. 1590, PAL pays a franchise tax of 2% on its gross revenue
"in lieu of all other taxes, duties, royalties, registration, license and other fees and
charges of any kind, nature, or description, imposed, levied, established, assessed or
collected by any municipal, city, provincial or national authority or government agency,
now or in the future."
PAL was exempted from the payment of the VAT along with other entities by 103 of
the National Internal Revenue Code, which provides as follows:
103. Exempt transactions. The following shall be exempt from the
value-added tax:
xxx xxx xxx
(q) Transactions which are exempt under special laws or international
agreements to which the Philippines is a signatory.
R.A. No. 7716 seeks to withdraw certain exemptions, including that granted to PAL, by
amending 103, as follows:
103. Exempt transactions. The following shall be exempt from the
value-added tax:
xxx xxx xxx
(q) Transactions which are exempt under special laws, except those
granted under Presidential Decree Nos. 66, 529, 972, 1491, 1590. . . .
The amendment of 103 is expressed in the title of R.A. No. 7716 which reads:
AN ACT RESTRUCTURING THE VALUE-ADDED TAX (VAT) SYSTEM,
WIDENING ITS TAX BASE AND ENHANCING ITS ADMINISTRATION,
AND FOR THESE PURPOSES AMENDING AND REPEALING THE
RELEVANT PROVISIONS OF THE NATIONAL INTERNAL REVENUE
CODE, AS AMENDED, AND FOR OTHER PURPOSES.
By stating that R.A. No. 7716 seeks to "[RESTRUCTURE] THE VALUE-ADDED TAX
(VAT) SYSTEM [BY] WIDENING ITS TAX BASE AND ENHANCING ITS
ADMINISTRATION, AND FOR THESE PURPOSES AMENDING AND REPEALING
THE RELEVANT PROVISIONS OF THE NATIONAL INTERNAL REVENUE CODE, AS
AMENDED AND FOR OTHER PURPOSES," Congress thereby clearly expresses its
intention to amend any provision of the NIRC which stands in the way of accomplishing
the purpose of the law.
PAL asserts that the amendment of its franchise must be reflected in the title of the law
by specific reference to P.D. No. 1590. It is unnecessary to do this in order to comply
with the constitutional requirement, since it is already stated in the title that the law
seeks to amend the pertinent provisions of the NIRC, among which is 103(q), in order
to widen the base of the VAT. Actually, it is the bill which becomes a law that is required
to express in its title the subject of legislation. The titles of H. No. 11197 and S. No.
1630 in fact specifically referred to 103 of the NIRC as among the provisions sought to
be amended. We are satisfied that sufficient notice had been given of the pendency of
these bills in Congress before they were enacted into what is now R.A.
No. 7716.
In Philippine Judges Association v. Prado, supra, a similar argument as that now made
by PAL was rejected. R.A. No. 7354 is entitled AN ACT CREATING THE PHILIPPINE
POSTAL CORPORATION, DEFINING ITS POWERS, FUNCTIONS AND
RESPONSIBILITIES, PROVIDING FOR REGULATION OF THE INDUSTRY AND FOR
OTHER PURPOSES CONNECTED THEREWITH. It contained a provision repealing all
franking privileges. It was contended that the withdrawal of franking privileges was not
expressed in the title of the law. In holding that there was sufficient description of the
subject of the law in its title, including the repeal of franking privileges, this Court held:
To require every end and means necessary for the accomplishment of the
general objectives of the statute to be expressed in its title would not only
be unreasonable but would actually render legislation impossible. [Cooley,
Constitutional Limitations, 8th Ed., p. 297] As has been correctly
explained:
The details of a legislative act need not be specifically stated
in its title, but matter germane to the subject as expressed in
the title, and adopted to the accomplishment of the object in
view, may properly be included in the act. Thus, it is proper
to create in the same act the machinery by which the act is
to be enforced, to prescribe the penalties for its infraction,
and to remove obstacles in the way of its execution. If such
matters are properly connected with the subject as
expressed in the title, it is unnecessary that they should also
have special mention in the title. (Southern Pac. Co. v.
Bartine, 170 Fed. 725)
(227 SCRA at 707-708)
VI. Claims of press freedom and religious liberty. We have held that, as a general
proposition, the press is not exempt from the taxing power of the State and that what
the constitutional guarantee of free press prohibits are laws which single out the press
or target a group belonging to the press for special treatment or which in any way
discriminate against the press on the basis of the content of the publication, and R.A.
No. 7716 is none of these.
Now it is contended by the PPI that by removing the exemption of the press from the
VAT while maintaining those granted to others, the law discriminates against the press.
At any rate, it is averred, "even nondiscriminatory taxation of constitutionally guaranteed
freedom is unconstitutional."
With respect to the first contention, it would suffice to say that since the law granted the
press a privilege, the law could take back the privilege anytime without offense to the
Constitution. The reason is simple: by granting exemptions, the State does not forever
waive the exercise of its sovereign prerogative.
Indeed, in withdrawing the exemption, the law merely subjects the press to the same tax
burden to which other businesses have long ago been subject. It is thus different from
the tax involved in the cases invoked by the PPI. The license tax in Grosjean
v. American Press Co., 297 U.S. 233, 80 L. Ed. 660 (1936) was found to be
discriminatory because it was laid on the gross advertising receipts only of newspapers
whose weekly circulation was over 20,000, with the result that the tax applied only to 13
out of 124 publishers in Louisiana. These large papers were critical of Senator Huey
Long who controlled the state legislature which enacted the license tax. The censorial
motivation for the law was thus evident.
On the other hand, in Minneapolis Star & Tribune Co. v. Minnesota Comm'r of Revenue,
460 U.S. 575, 75 L. Ed. 2d 295 (1983), the tax was found to be discriminatory because
although it could have been made liable for the sales tax or, in lieu thereof, for the use
tax on the privilege of using, storing or consuming tangible goods, the press was not.
Instead, the press was exempted from both taxes. It was, however, later made to pay
a special use tax on the cost of paper and ink which made these items "the only items
subject to the use tax that were component of goods to be sold at retail." The U.S.
Supreme Court held that the differential treatment of the press "suggests that the goal of
regulation is not related to suppression of expression, and such goal is presumptively
unconstitutional." It would therefore appear that even a law that favors the press is
constitutionally suspect. (See the dissent of Rehnquist, J. in that case)
Nor is it true that only two exemptions previously granted by E.O. No. 273 are
withdrawn "absolutely and unqualifiedly" by R.A. No. 7716. Other exemptions from the
VAT, such as those previously granted to PAL, petroleum concessionaires, enterprises
registered with the Export Processing Zone Authority, and many more are likewise
totally withdrawn, in addition to exemptions which are partially withdrawn, in an effort to
broaden the base of the tax.
The PPI says that the discriminatory treatment of the press is highlighted by the fact that
transactions, which are profit oriented, continue to enjoy exemption under R.A. No.
7716. An enumeration of some of these transactions will suffice to show that by and
large this is not so and that the exemptions are granted for a purpose. As the Solicitor
General says, such exemptions are granted, in some cases, to encourage agricultural
production and, in other cases, for the personal benefit of the end-user rather than for
profit. The exempt transactions are:
(a) Goods for consumption or use which are in their original state
(agricultural, marine and forest products, cotton seeds in their original
state, fertilizers, seeds, seedlings, fingerlings, fish, prawn livestock and
poultry feeds) and goods or services to enhance agriculture (milling of
palay, corn, sugar cane and raw sugar, livestock, poultry feeds, fertilizer,
ingredients used for the manufacture of feeds).
(b) Goods used for personal consumption or use (household and personal
effects of citizens returning to the Philippines) or for professional use, like
professional instruments and implements, by persons coming to the
Philippines to settle here.
(c) Goods subject to excise tax such as petroleum products or to be used
for manufacture of petroleum products subject to excise tax and services
subject to percentage tax.
(d) Educational services, medical, dental, hospital and veterinary services,
and services rendered under employer-employee relationship.
(e) Works of art and similar creations sold by the artist himself.
(f) Transactions exempted under special laws, or international
agreements.
(g) Export-sales by persons not VAT-registered.
(h) Goods or services with gross annual sale or receipt not
exceeding P500,000.00.
(Respondents' Consolidated Comment on the Motions for
Reconsideration, pp. 58-60)
The PPI asserts that it does not really matter that the law does not discriminate against
the press because "even nondiscriminatory taxation on constitutionally guaranteed
freedom is unconstitutional." PPI cites in support of this assertion the following
statement in Murdock v. Pennsylvania, 319 U.S. 105, 87 L. Ed. 1292 (1943):
The fact that the ordinance is "nondiscriminatory" is immaterial. The
protection afforded by the First Amendment is not so restricted. A license
tax certainly does not acquire constitutional validity because it classifies
the privileges protected by the First Amendment along with the wares and
merchandise of hucksters and peddlers and treats them all alike. Such
equality in treatment does not save the ordinance. Freedom of press,
freedom of speech, freedom of religion are in preferred position.
The Court was speaking in that case of a license tax, which, unlike an ordinary tax, is
mainly for regulation. Its imposition on the press is unconstitutional because it lays a
prior restraint on the exercise of its right. Hence, although its application to others, such
those selling goods, is valid, its application to the press or to religious groups, such as
the Jehovah's Witnesses, in connection with the latter's sale of religious books and
pamphlets, is unconstitutional. As the U.S. Supreme Court put it, "it is one thing to
impose a tax on income or property of a preacher. It is quite another thing to exact a tax
on him for delivering a sermon."
A similar ruling was made by this Court in American Bible Society v. City of Manila, 101
Phil. 386 (1957) which invalidated a city ordinance requiring a business license fee on
those engaged in the sale of general merchandise. It was held that the tax could not be
imposed on the sale of bibles by the American Bible Society without restraining the free
exercise of its right to propagate.
The VAT is, however, different. It is not a license tax. It is not a tax on the exercise of a
privilege, much less a constitutional right. It is imposed on the sale, barter, lease or
exchange of goods or properties or the sale or exchange of services and the lease of
properties purely for revenue purposes. To subject the press to its payment is not to
burden the exercise of its right any more than to make the press pay income tax or
subject it to general regulation is not to violate its freedom under the Constitution.
Additionally, the Philippine Bible Society, Inc. claims that although it sells bibles, the
proceeds derived from the sales are used to subsidize the cost of printing copies which
are given free to those who cannot afford to pay so that to tax the sales would be to
increase the price, while reducing the volume of sale. Granting that to be the case, the
resulting burden on the exercise of religious freedom is so incidental as to make it
difficult to differentiate it from any other economic imposition that might make the right to
disseminate religious doctrines costly. Otherwise, to follow the petitioner's argument, to
increase the tax on the sale of vestments would be to lay an impermissible burden on
the right of the preacher to make a sermon.
On the other hand the registration fee of P1,000.00 imposed by 107 of the NIRC, as
amended by 7 of R.A. No. 7716, although fixed in amount, is really just to pay for the
expenses of registration and enforcement of provisions such as those relating to
accounting in 108 of the NIRC. That the PBS distributes free bibles and therefore is
not liable to pay the VAT does not excuse it from the payment of this fee because it also
sells some copies. At any rate whether the PBS is liable for the VAT must be decided in
concrete cases, in the event it is assessed this tax by the Commissioner of Internal
Revenue.
VII. Alleged violations of the due process, equal protection and contract clauses and the
rule on taxation. CREBA asserts that R.A. No. 7716 (1) impairs the obligations of
contracts, (2) classifies transactions as covered or exempt without reasonable basis and
(3) violates the rule that taxes should be uniform and equitable and that Congress shall
"evolve a progressive system of taxation."
With respect to the first contention, it is claimed that the application of the tax to existing
contracts of the sale of real property by installment or on deferred payment basis would
result in substantial increases in the monthly amortizations to be paid because of the
10% VAT. The additional amount, it is pointed out, is something that the buyer did not
anticipate at the time he entered into the contract.
The short answer to this is the one given by this Court in an early case: "Authorities
from numerous sources are cited by the plaintiffs, but none of them show that a lawful
tax on a new subject, or an increased tax on an old one, interferes with a contract or
impairs its obligation, within the meaning of the Constitution. Even though such taxation
may affect particular contracts, as it may increase the debt of one person and lessen
the security of another, or may impose additional burdens upon one class and release
the burdens of another, still the tax must be paid unless prohibited by the Constitution,
nor can it be said that it impairs the obligation of any existing contract in its true legal
sense." (La Insular v. Machuca Go-Tauco and Nubla Co-Siong, 39 Phil. 567, 574
(1919)). Indeed not only existing laws but also "the reservation of the essential attributes
of sovereignty, is . . . read into contracts as a postulate of the legal order." (Philippine-
American Life Ins. Co. v. Auditor General, 22 SCRA 135, 147 (1968)) Contracts must be
understood as having been made in reference to the possible exercise of the rightful
authority of the government and no obligation of contract can extend to the defeat of
that authority. (Norman v. Baltimore and Ohio R.R., 79 L. Ed. 885 (1935)).
It is next pointed out that while 4 of R.A. No. 7716 exempts such transactions as the
sale of agricultural products, food items, petroleum, and medical and veterinary
services, it grants no exemption on the sale of real property which is equally essential.
The sale of real property for socialized and low-cost housing is exempted from the tax,
but CREBA claims that real estate transactions of "the less poor," i.e., the middle class,
who are equally homeless, should likewise be exempted.
The sale of food items, petroleum, medical and veterinary services, etc., which are
essential goods and services was already exempt under 103, pars. (b) (d) (1) of the
NIRC before the enactment of R.A. No. 7716. Petitioner is in error in claiming that R.A.
No. 7716 granted exemption to these transactions, while subjecting those of petitioner
to the payment of the VAT. Moreover, there is a difference between the "homeless
poor" and the "homeless less poor" in the example given by petitioner, because the
second group or middle class can afford to rent houses in the meantime that they
cannot yet buy their own homes. The two social classes are thus differently situated in
life. "It is inherent in the power to tax that the State be free to select the subjects of
taxation, and it has been repeatedly held that 'inequalities which result from a singling
out of one particular class for taxation, or exemption infringe no constitutional
limitation.'" (Lutz v. Araneta, 98 Phil. 148, 153 (1955). Accord, City of Baguio v. De
Leon, 134 Phil. 912 (1968); Sison, Jr. v. Ancheta, 130 SCRA 654, 663 (1984); Kapatiran
ng mga Naglilingkod sa Pamahalaan ng Pilipinas, Inc. v. Tan, 163 SCRA 371 (1988)).
Finally, it is contended, for the reasons already noted, that R.A. No. 7716 also violates
Art. VI, 28(1) which provides that "The rule of taxation shall be uniform and equitable.
The Congress shall evolve a progressive system of taxation."
Equality and uniformity of taxation means that all taxable articles or kinds of property of
the same class be taxed at the same rate. The taxing power has the authority to make
reasonable and natural classifications for purposes of taxation. To satisfy this
requirement it is enough that the statute or ordinance applies equally to all persons,
forms and corporations placed in similar situation. (City of Baguio v. De Leon, supra;
Sison, Jr. v. Ancheta, supra)
Indeed, the VAT was already provided in E.O. No. 273 long before R.A. No. 7716 was
enacted. R.A. No. 7716 merely expands the base of the tax. The validity of the original
VAT Law was questioned in Kapatiran ng Naglilingkod sa Pamahalaan ng Pilipinas,
Inc. v. Tan, 163 SCRA 383 (1988) on grounds similar to those made in these cases,
namely, that the law was "oppressive, discriminatory, unjust and regressive in violation
of Art. VI, 28(1) of the Constitution." (At 382) Rejecting the challenge to the law, this
Court held:
As the Court sees it, EO 273 satisfies all the requirements of a valid tax. It
is uniform. . . .
The sales tax adopted in EO 273 is applied similarly on all goods and
services sold to the public, which are not exempt, at the constant rate of
0% or 10%.
The disputed sales tax is also equitable. It is imposed only on sales of
goods or services by persons engaged in business with an aggregate
gross annual sales exceeding P200,000.00. Small corner sari-sari stores
are consequently exempt from its application. Likewise exempt from the
tax are sales of farm and marine products, so that the costs of basic food
and other necessities, spared as they are from the incidence of the VAT,
are expected to be relatively lower and within the reach of the general
public.
(At 382-383)
The CREBA claims that the VAT is regressive. A similar claim is made by the
Cooperative Union of the Philippines, Inc. (CUP), while petitioner Juan T. David argues
that the law contravenes the mandate of Congress to provide for a progressive system
of taxation because the law imposes a flat rate of 10% and thus places the tax burden
on all taxpayers without regard to their ability to pay.
The Constitution does not really prohibit the imposition of indirect taxes which, like the
VAT, are regressive. What it simply provides is that Congress shall "evolve a
progressive system of taxation." The constitutional provision has been interpreted to
mean simply that "direct taxes are . . . to be preferred [and] as much as possible,
indirect taxes should be minimized." (E. FERNANDO, THE CONSTITUTION OF THE
PHILIPPINES 221 (Second ed. (1977)). Indeed, the mandate to Congress is not
to prescribe, but to evolve, a progressive tax system. Otherwise, sales taxes, which
perhaps are the oldest form of indirect taxes, would have been prohibited with the
proclamation of Art. VIII, 17(1) of the 1973 Constitution from which the present Art. VI,
28(1) was taken. Sales taxes are also regressive.
Resort to indirect taxes should be minimized but not avoided entirely because it is
difficult, if not impossible, to avoid them by imposing such taxes according to the
taxpayers' ability to pay. In the case of the VAT, the law minimizes the regressive
effects of this imposition by providing for zero rating of certain transactions (R.A. No.
7716, 3, amending 102 (b) of the NIRC), while granting exemptions to other
transactions. (R.A. No. 7716, 4, amending 103 of the NIRC).
Thus, the following transactions involving basic and essential goods and services are
exempted from the VAT:
(a) Goods for consumption or use which are in their original state
(agricultural, marine and forest products, cotton seeds in their original
state, fertilizers, seeds, seedlings, fingerlings, fish, prawn livestock and
poultry feeds) and goods or services to enhance agriculture (milling of
palay, corn sugar cane and raw sugar, livestock, poultry feeds, fertilizer,
ingredients used for the manufacture of feeds).
(b) Goods used for personal consumption or use (household and personal
effects of citizens returning to the Philippines) and or professional use, like
professional instruments and implements, by persons coming to the
Philippines to settle here.
(c) Goods subject to excise tax such as petroleum products or to be used
for manufacture of petroleum products subject to excise tax and services
subject to percentage tax.
(d) Educational services, medical, dental, hospital and veterinary services,
and services rendered under employer-employee relationship.
(e) Works of art and similar creations sold by the artist himself.
(f) Transactions exempted under special laws, or international
agreements.
(g) Export-sales by persons not VAT-registered.
(h) Goods or services with gross annual sale or receipt not
exceeding P500,000.00.
(Respondents' Consolidated Comment on the Motions for
Reconsideration, pp. 58-60)
On the other hand, the transactions which are subject to the VAT are those which
involve goods and services which are used or availed of mainly by higher income
groups. These include real properties held primarily for sale to customers or for lease in
the ordinary course of trade or business, the right or privilege to use patent, copyright,
and other similar property or right, the right or privilege to use industrial, commercial or
scientific equipment, motion picture films, tapes and discs, radio, television, satellite
transmission and cable television time, hotels, restaurants and similar places, securities,
lending investments, taxicabs, utility cars for rent, tourist buses, and other common
carriers, services of franchise grantees of telephone and telegraph.
The problem with CREBA's petition is that it presents broad claims of constitutional
violations by tendering issues not at retail but at wholesale and in the abstract. There is
no fully developed record which can impart to adjudication the impact of actuality. There
is no factual foundation to show in the concrete the application of the law to actual
contracts and exemplify its effect on property rights. For the fact is that petitioner's
members have not even been assessed the VAT. Petitioner's case is not made
concrete by a series of hypothetical questions asked which are no different from those
dealt with in advisory opinions.
The difficulty confronting petitioner is thus apparent. He alleges
arbitrariness. A mere allegation, as here, does not suffice. There must be
a factual foundation of such unconstitutional taint. Considering that
petitioner here would condemn such a provision as void on its face, he
has not made out a case. This is merely to adhere to the authoritative
doctrine that where the due process and equal protection clauses are
invoked, considering that they are not fixed rules but rather broad
standards, there is a need for proof of such persuasive character as would
lead to such a conclusion. Absent such a showing, the presumption of
validity must prevail.
(Sison, Jr. v. Ancheta, 130 SCRA at 661)
Adjudication of these broad claims must await the development of a concrete case. It
may be that postponement of adjudication would result in a multiplicity of suits. This
need not be the case, however. Enforcement of the law may give rise to such a case. A
test case, provided it is an actual case and not an abstract or hypothetical one, may
thus be presented.
Nor is hardship to taxpayers alone an adequate justification for adjudicating abstract
issues. Otherwise, adjudication would be no different from the giving of advisory opinion
that does not really settle legal issues.
We are told that it is our duty under Art. VIII, 1, 2 to decide whenever a claim is made
that "there has been a grave abuse of discretion amounting to lack or excess of
jurisdiction on the part of any branch or instrumentality of the government." This duty
can only arise if an actual case or controversy is before us. Under Art . VIII, 5 our
jurisdiction is defined in terms of "cases" and all that Art. VIII, 1, 2 can plausibly mean
is that in the exercise of that jurisdiction we have the judicial power to determine
questions of grave abuse of discretion by any branch or instrumentality of the
government.
Put in another way, what is granted in Art. VIII, 1, 2 is "judicial power," which is "the
power of a court to hear and decide cases pending between parties who have the right
to sue and be sued in the courts of law and equity" (Lamb v. Phipps, 22 Phil. 456, 559
(1912)), as distinguished from legislative and executive power. This power cannot be
directly appropriated until it is apportioned among several courts either by the
Constitution, as in the case of Art. VIII, 5, or by statute, as in the case of the Judiciary
Act of 1948 (R.A. No. 296) and the Judiciary Reorganization Act of 1980 (B.P. Blg. 129).
The power thus apportioned constitutes the court's "jurisdiction," defined as "the power
conferred by law upon a court or judge to take cognizance of a case, to the exclusion of
all others." (United States v. Arceo, 6 Phil. 29 (1906)) Without an actual case coming
within its jurisdiction, this Court cannot inquire into any allegation of grave abuse of
discretion by the other departments of the government.
VIII. Alleged violation of policy towards cooperatives. On the other hand, the
Cooperative Union of the Philippines (CUP), after briefly surveying the course of
legislation, argues that it was to adopt a definite policy of granting tax exemption to
cooperatives that the present Constitution embodies provisions on cooperatives. To
subject cooperatives to the VAT would therefore be to infringe a constitutional policy.
Petitioner claims that in 1973, P.D. No. 175 was promulgated exempting cooperatives
from the payment of income taxes and sales taxes but in 1984, because of the crisis
which menaced the national economy, this exemption was withdrawn by P.D. No. 1955;
that in 1986, P.D. No. 2008 again granted cooperatives exemption from income and
sales taxes until December 31, 1991, but, in the same year, E.O. No. 93 revoked the
exemption; and that finally in 1987 the framers of the Constitution "repudiated the
previous actions of the government adverse to the interests of the cooperatives, that
is, the repeated revocation of the tax exemption to cooperatives and instead upheld the
policy of strengthening the cooperatives by way of the grant of tax exemptions," by
providing the following in Art. XII:
1. The goals of the national economy are a more equitable distribution of
opportunities, income, and wealth; a sustained increase in the amount of
goods and services produced by the nation for the benefit of the people;
and an expanding productivity as the key to raising the quality of life for all,
especially the underprivileged.
The State shall promote industrialization and full employment based on
sound agricultural development and agrarian reform, through industries
that make full and efficient use of human and natural resources, and which
are competitive in both domestic and foreign markets. However, the State
shall protect Filipino enterprises against unfair foreign competition and
trade practices.
In the pursuit of these goals, all sectors of the economy and all regions of
the country shall be given optimum opportunity to develop. Private
enterprises, including corporations, cooperatives, and similar collective
organizations, shall be encouraged to broaden the base of their
ownership.
15. The Congress shall create an agency to promote the viability and
growth of cooperatives as instruments for social justice and economic
development.
Petitioner's contention has no merit. In the first place, it is not true that P.D. No. 1955
singled out cooperatives by withdrawing their exemption from income and sales taxes
under P.D. No. 175, 5. What P.D. No. 1955, 1 did was to withdraw the exemptions
and preferential treatments theretofore granted to private business enterprises in
general, in view of the economic crisis which then beset the nation. It is true that after
P.D. No. 2008, 2 had restored the tax exemptions of cooperatives in 1986, the
exemption was again repealed by E.O. No. 93, 1, but then again cooperatives were
not the only ones whose exemptions were withdrawn. The withdrawal of tax incentives
applied to all, including government and private entities. In the second place, the
Constitution does not really require that cooperatives be granted tax exemptions in
order to promote their growth and viability. Hence, there is no basis for petitioner's
assertion that the government's policy toward cooperatives had been one of vacillation,
as far as the grant of tax privileges was concerned, and that it was to put an end to this
indecision that the constitutional provisions cited were adopted. Perhaps as a matter of
policy cooperatives should be granted tax exemptions, but that is left to the discretion of
Congress. If Congress does not grant exemption and there is no discrimination to
cooperatives, no violation of any constitutional policy can be charged.
Indeed, petitioner's theory amounts to saying that under the Constitution cooperatives
are exempt from taxation. Such theory is contrary to the Constitution under which only
the following are exempt from taxation: charitable institutions, churches and
parsonages, by reason of Art. VI, 28 (3), and non-stock, non-profit educational
institutions by reason of Art. XIV, 4 (3).
CUP's further ground for seeking the invalidation of R.A. No. 7716 is that it denies
cooperatives the equal protection of the law because electric cooperatives are
exempted from the VAT. The classification between electric and other cooperatives
(farmers cooperatives, producers cooperatives, marketing cooperatives, etc.) apparently
rests on a congressional determination that there is greater need to provide cheaper
electric power to as many people as possible, especially those living in the rural areas,
than there is to provide them with other necessities in life. We cannot say that such
classification is unreasonable.
We have carefully read the various arguments raised against the constitutional validity
of R.A. No. 7716. We have in fact taken the extraordinary step of enjoining its
enforcement pending resolution of these cases. We have now come to the conclusion
that the law suffers from none of the infirmities attributed to it by petitioners and that its
enactment by the other branches of the government does not constitute a grave abuse
of discretion. Any question as to its necessity, desirability or expediency must be
addressed to Congress as the body which is electorally responsible, remembering that,
as Justice Holmes has said, "legislators are the ultimate guardians of the liberties and
welfare of the people in quite as great a degree as are the courts." (Missouri, Kansas &
Texas Ry. Co. v. May, 194 U.S. 267, 270, 48 L. Ed. 971, 973 (1904)). It is not right, as
petitioner in G.R. No. 115543 does in arguing that we should enforce the public
accountability of legislators, that those who took part in passing the law in question by
voting for it in Congress should later thrust to the courts the burden of reviewing
measures in the flush of enactment. This Court does not sit as a third branch of the
legislature, much less exercise a veto power over legislation.
WHEREFORE, the motions for reconsideration are denied with finality and the
temporary restraining order previously issued is hereby lifted.
SO ORDERED.
POLITICAL LAW 1 CASE DIGEST: TOLENTINO V.
SECRETARY OF FINANCE
Posted: 08/24/2013 in Uncategorized
Tags: case digest, consti1, political law, tolentino v. secretary of finance
0
TOLENTINO V. SEC. OF FINANCE (1994)
G.R. No. 115455
235 SCRA 630

NATURE: Constitutionality issue. This is case is a consolidation of motions for reconsideration in SCs
decision in dismissing the initial petitions to declare RA 7716 or the Expanded Value-Added Tax Law
unconstitutional.

RELATION TO THE SUBJECT: Generally the case is political in nature as the constitutionality of a law is
being assailed but what is to be noted in relevance to the subject is the process in which the bill was passed.
This case is under LEGISLATIVE PROCESS, REQUIREMENTS AS TO CERTAIN LAWS. Said
requirement is expressed in Art VI, Sec. 24 of the Constitution where revenue or tariff bills, among others,
ought to originate from the HoR while the Senate can propose or concur with amendments from there. The
Senate Bill where this law was passed is in question.

FACTS:
1. There are 10 separate petitions is this case, taken all together as one since all were filed against the
constitutionality of one law.
2. The law in question is the Expanded Value-Added Tax Law or RA 7716 widening the tax base of the
existing VAT system and enhance its administration by amending the National Internal Revenue Code.
3. Its constitutionality is being assailed on various grounds but the most notable or important to resolve are the
contentions that: 1. RA 7716 did not originate exclusively from the House of Representatives but is a mere
consolidation of HB. No. 11197 and SB. No. 1630 and; 2. That it did not pass three readings on separate
days on the Senate thus violating Article VI, Sections 24 and 26(2) of the Constitution, respectively.
Art. VI, Section 24: All appropriation, revenue or tariff bills, bills authorizing increase of the public debt,
bills of local application, and private bills shall originate exclusively in the House of Representatives, but the
Senate may propose or concur with amendments.
Art. VI, Section 26(2): No bill passed by either House shall become a law unless it has passed three
readings on separate days, and printed copies thereof in its final form have been distributed to its Members
three days before its passage, except when the President certifies to the necessity of its immediate enactment
to meet a public calamity or emergency. Upon the last reading of a bill, no amendment thereto shall be
allowed, and the vote thereon shall be taken immediately thereafter, and the yeas and nays entered in the
Journal.
ISSUE:
WON RA 7716 violated Art. VI, Section 24 and Art. VI, Section 26(2) of the Constitution.
HELD:
Motions for reconsideration are DENIED with FINALITY. RA 7716 is Constitutional, as
previously decided.
The primary argument that RA 7716 did not originate exclusively in the HoR(as required by Art. VI Sec. 24 of
the Constitution) is without merit as the phrase originates exclusively refers to the revenue bill and not to the
revenue law. The Constitution only requires the revenue bill to originate exclusively form the HoR. Insisting
that a revenue statute and not only the bill which initiated the legislative process culminating in the enactment
of the law must substantially be the same as the House bill would be to deny the Senates power not only to
concur with amendments but also to propose amendments. What the Constitution intends is for the initiative
(for filing revenue, tariff or tax bills, bills authorizing an increase of the public debt, private bills and bills of
local application) to come from the HoR. This is in relation to the theory that representatives having been
elected from the districts are deemed to be more sensitive to the local needs and problems (micro).
Nevertheless, the Constitution does not prohibit the filing in the Senate of a substitute bill in anticipation of its
receipt of the bill from the House, so long as action by the Senate as a body is withheld pending receipt of the
House bill.
Another argument raised in the petitions says that SB. No. 1630 did not pass 3 readings on separate days as
required by the Constitution because the second and third readings were done on the same day. It must be
understood that SB. No. 1630, having been certified as urgent by the President need not meet the requirement
not only of printing but also of reading the bill on separate days.

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7
Equal Protection
Sison assails the validity of BP 135 w/c further amended Sec 21 of the National Internal
Revenue Code of 1977. The law provides that thered be a higher tax impost against income
derived from professional income as opposed to regular income earners. Sison, as a
professional businessman, and as taxpayer alleges that by virtue thereof, he would be unduly
discriminated against by the imposition of higher rates of tax upon his income arising from the
exercise of his profession vis-a-vis those which are imposed upon fixed income or salaried
individual taxpayers. He characterizes the above section as arbitrary amounting to class
legislation, oppressive and capricious in character. There is a transgression of both the equal
protection and due process clauses of the Constitution as well as of the rule requiring uniformity
in taxation.
ISSUE: Whether the imposition of a higher tax rate on taxable net income derived from
business or profession than on compensation is constitutionally infirm.
HELD: The SC ruled against Sison. The power to tax, an inherent prerogative, has to be availed
of to assure the performance of vital state functions. It is the source of the bulk of public funds.
Taxes, being the lifeblood of the government, their prompt and certain availability is of the
essence. According to the Constitution: The rule of taxation shall be uniform and equitable.
However, the rule of uniformity does not call for perfect uniformity or perfect equality, because
this is hardly attainable. Equality and uniformity in taxation means that all taxable articles or
kinds of property of the same class shall be taxed at the same rate. The taxing power has the
authority to make reasonable and natural classifications for purposes of taxation. Where the
differentiation complained of conforms to the practical dictates of justice and equity it is not
discriminatory within the meaning of this clause and is therefore uniform. There is quite a
similarity then to the standard of equal protection for all that is required is that the tax applies
equally to all persons, firms and corporations placed in similar situation.
What misled Sison is his failure to take into consideration the distinction between a tax rate and
a tax base. There is no legal objection to a broader tax base or taxable income by eliminating all
deductible items and at the same time reducing the applicable tax rate. Taxpayers may be
classified into different categories. In the case of the gross income taxation embodied in BP
135, the discernible basis of classification is the susceptibility of the income to the application of
generalized rules removing all deductible items for all taxpayers within the class and fixing a set
of reduced tax rates to be applied to all of them. Taxpayers who are recipients of compensation
income are set apart as a class. As there is practically no overhead expense, these taxpayers
are not entitled to make deductions for income tax purposes because they are in the same
situation more or less. On the other hand, in the case of professionals in the practice of their
calling and businessmen, there is no uniformity in the costs or expenses necessary to produce
their income. It would not be just then to disregard the disparities by giving all of them zero
deduction and indiscriminately impose on all alike the same tax rates on the basis of gross
income. There is ample justification then for the Batasang Pambansa to adopt the gross system
of income taxation to compensation income, while continuing the system of net income taxation
as regards professional and business income.

SUPREME COURT
Manila
EN BANC
G.R. No. L-19201 June 16, 1965
REV. FR. CASIMIRO LLADOC, petitioner,
vs.
The COMMISSIONER OF INTERNAL REVENUE and The COURT of TAX
Hilado and Hilado for petitioner.
Office of the Solicitor General for respondents.
PAREDES, J .:
Sometime in 1957, the M.B. Estate, Inc., of Bacolod City, donated P10,000.00 in cash
to Rev. Fr. Crispin Ruiz, then parish priest of Victorias, Negros Occidental, and
predecessor of herein petitioner, for the construction of a new Catholic Church in the
locality. The total amount was actually spent for the purpose intended.
On March 3, 1958, the donor M.B. Estate, Inc., filed the donor's gift tax return. Under
date of April 29, 1960, the respondent Commissioner of Internal Revenue issued an
assessment for donee's gift tax against the Catholic Parish of Victorias, Negros
Occidental, of which petitioner was the priest. The tax amounted to P1,370.00 including
surcharges, interests of 1% monthly from May 15, 1958 to June 15, 1960, and the
compromise for the late filing of the return.
Petitioner lodged a protest to the assessment and requested the withdrawal thereof.
The protest and the motion for reconsideration presented to the Commissioner of
Internal Revenue were denied. The petitioner appealed to the Court of Tax Appeals on
November 2, 1960. In the petition for review, the Rev. Fr. Casimiro Lladoc claimed,
among others, that at the time of the donation, he was not the parish priest in Victorias;
that there is no legal entity or juridical person known as the "Catholic Parish Priest of
Victorias," and, therefore, he should not be liable for the donee's gift tax. It was also
asserted that the assessment of the gift tax, even against the Roman Catholic Church,
would not be valid, for such would be a clear violation of the provisions of the
Constitution.
After hearing, the CTA rendered judgment, the pertinent portions of which are quoted
below:
... . Parish priests of the Roman Catholic Church under canon laws are similarly
situated as its Archbishops and Bishops with respect to the properties of the
church within their parish. They are the guardians, superintendents or
administrators of these properties, with the right of succession and may sue and
be sued.
x x x x x x x x x
The petitioner impugns the, fairness of the assessment with the argument that he
should not be held liable for gift taxes on donation which he did not receive
personally since he was not yet the parish priest of Victorias in the year 1957
when said donation was given. It is intimated that if someone has to pay at all, it
should be petitioner's predecessor, the Rev. Fr. Crispin Ruiz, who received the
donation in behalf of the Catholic parish of Victorias or the Roman Catholic
Church. Following petitioner's line of thinking, we should be equally unfair to hold
that the assessment now in question should have been addressed to, and
collected from, the Rev. Fr. Crispin Ruiz to be paid from income derived from his
present parish where ever it may be. It does not seem right to indirectly burden
the present parishioners of Rev. Fr. Ruiz for donee's gift tax on a donation to
which they were not benefited.
x x x x x x x x x
We saw no legal basis then as we see none now, to include within the
Constitutional exemption, taxes which partake of the nature of an excise upon
the use made of the properties or upon the exercise of the privilege of receiving
the properties. (Phipps vs. Commissioner of Internal Revenue, 91 F [2d] 627;
1938, 302 U.S. 742.)
It is a cardinal rule in taxation that exemptions from payment thereof are highly
disfavored by law, and the party claiming exemption must justify his claim by
a clear, positive, or express grant of such privilege by law. (Collector vs. Manila
Jockey Club, G.R. No. L-8755, March 23, 1956; 53 O.G. 3762.)
The phrase "exempt from taxation" as employed in Section 22(3), Article VI of the
Constitution of the Philippines, should not be interpreted to mean exemption from
all kinds of taxes. Statutes exempting charitable and religious property from
taxation should be construed fairly though strictly and in such manner as to give
effect to the main intent of the lawmakers. (Roman Catholic Church vs. Hastrings
5 Phil. 701.)
x x x x x x x x x
WHEREFORE, in view of the foregoing considerations, the decision of the
respondent Commissioner of Internal Revenue appealed from, is hereby affirmed
except with regard to the imposition of the compromise penalty in the amount of
P20.00 (Collector of Internal Revenue v. U.S.T., G.R. No. L-11274, Nov. 28,
1958); ..., and the petitioner, the Rev. Fr. Casimiro Lladoc is hereby ordered to
pay to the respondent the amount of P900.00 as donee's gift tax, plus the
surcharge of five per centum (5%) as ad valorem penalty under Section 119 (c)
of the Tax Code, and one per centum (1%) monthly interest from May 15, 1958
to the date of actual payment. The surcharge of 25% provided in Section 120 for
failure to file a return may not be imposed as the failure to file a return was not
due to willful neglect.( ... ) No costs.
The above judgment is now before us on appeal, petitioner assigning two (2) errors
allegedly committed by the Tax Court, all of which converge on the singular issue of
whether or not petitioner should be liable for the assessed donee's gift tax on the
P10,000.00 donated for the construction of the Victorias Parish Church.
Section 22 (3), Art. VI of the Constitution of the Philippines, exempts from taxation
cemeteries, churches and parsonages or convents, appurtenant thereto, and
all lands, buildings, and improvements used exclusively for religious purposes. The
exemption is only from the payment of taxes assessed on such properties enumerated,
as property taxes, as contra distinguished from excise taxes. In the present case, what
the Collector assessed was a donee's gift tax; the assessment was not on the
properties themselves. It did not rest upon general ownership; it was an excise upon the
use made of the properties, upon the exercise of the privilege of receiving the properties
(Phipps vs. Com. of Int. Rec. 91 F 2d 627). Manifestly, gift tax is not within the
exempting provisions of the section just mentioned. A gift tax is not a property tax, but
an excise tax imposed on the transfer of property by way of giftinter vivos, the
imposition of which on property used exclusively for religious purposes, does not
constitute an impairment of the Constitution. As well observed by the learned
respondent Court, the phrase "exempt from taxation," as employed in the Constitution
(supra) should not be interpreted to mean exemption from all kinds of taxes. And there
being no clear, positive or express grant of such privilege by law, in favor of petitioner,
the exemption herein must be denied.
The next issue which readily presents itself, in view of petitioner's thesis, and Our
finding that a tax liability exists, is, who should be called upon to pay the gift tax?
Petitioner postulates that he should not be liable, because at the time of the donation he
was not the priest of Victorias. We note the merit of the above claim, and in order to put
things in their proper light, this Court, in its Resolution of March 15, 1965, ordered the
parties to show cause why the Head of the Diocese to which the parish of Victorias
pertains, should not be substituted in lieu of petitioner Rev. Fr. Casimiro Lladoc it
appearing that the Head of such Diocese is the real party in interest. The Solicitor
General, in representation of the Commissioner of Internal Revenue, interposed no
objection to such a substitution. Counsel for the petitioner did not also offer objection
thereto.
On April 30, 1965, in a resolution, We ordered the Head of the Diocese to present
whatever legal issues and/or defenses he might wish to raise, to which resolution
counsel for petitioner, who also appeared as counsel for the Head of the Diocese, the
Roman Catholic Bishop of Bacolod, manifested that it was submitting itself to the
jurisdiction and orders of this Court and that it was presenting, by reference, the brief of
petitioner Rev. Fr. Casimiro Lladoc as its own and for all purposes.
In view here of and considering that as heretofore stated, the assessment at bar had
been properly made and the imposition of the tax is not a violation of the constitutional
provision exempting churches, parsonages or convents, etc. (Art VI, sec. 22 [3],
Constitution), the Head of the Diocese, to which the parish Victorias Pertains, is liable
for the payment thereof.
The decision appealed from should be, as it is hereby affirmed insofar as tax liability is
concerned; it is modified, in the sense that petitioner herein is not personally liable for
the said gift tax, and that the Head of the Diocese, herein substitute petitioner, should
pay, as he is presently ordered to pay, the said gift tax, without special, pronouncement
as to costs.
Bengzon, C.J., Bautista Angelo, Concepcion, Reyes, J.B.L., Dizon, Regala, Makalintal,
Bengzon, J.P., and Zaldivar, JJ., concur.
Barrera, J., took no part.
THE PROVINCE OF ABRA vs HERNANDO
16112011

2 Votes

Read case digest here.
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. L-49336 August 31, 1981
THE PROVINCE OF ABRA, represented by LADISLAO ANCHETA, Provincial
Assessor, petitioner,
vs.
HONORABLE HAROLD M. HERNANDO, in his capacity as Presiding Judge of Branch I, Court
of First Instance Abra; THE ROMAN CATHOLIC BISHOP OF BANGUED, INC., represented by
Bishop Odilo etspueler and Reverend Felipe Flores, respondents.

FERNANDO, C.J.:
On the face of this certiorari and mandamus petition filed by the Province of Abra,
1
it
clearly appears that the actuation of respondent Judge Harold M. Hernando of the Court of
First Instance of Abra left much to be desired. First, there was a denial of a motion to
dismiss
2
an action for declaratory relief by private respondent Roman Catholic Bishop of
Bangued desirous of being exempted from a real estate tax followed by a summary
judgment
3
granting such exemption, without even hearing the side of petitioner. In the
rather vigorous language of the Acting Provincial Fiscal, as counsel for petitioner,
respondent Judge virtually ignored the pertinent provisions of the Rules of Court;
wantonly violated the rights of petitioner to due process, by giving due course to the
petition of private respondent for declaratory relief, and thereafter without allowing
petitioner to answer and without any hearing, adjudged the case; all in total disregard of
basic laws of procedure and basic provisions of due process in the constitution, thereby
indicating a failure to grasp and understand the law, which goes into the competence of
the Honorable Presiding Judge.
4

It was the submission of counsel that an action for declaratory relief would be proper only
before a breach or violation of any statute, executive order or regulation.
5
Moreover, there
being a tax assessment made by the Provincial Assessor on the properties of respondent
Roman Catholic Bishop, petitioner failed to exhaust the administrative remedies available
under Presidential Decree No. 464 before filing such court action. Further, it was pointed
out to respondent Judge that he failed to abide by the pertinent provision of such
Presidential Decree which provides as follows: No court shall entertain any suit assailing
the validity of a tax assessed under this Code until the taxpayer, shall have paid, under
protest, the tax assessed against him nor shall any court declare any tax invalid by reason
of irregularities or informalities in the proceedings of the officers charged with the
assessment or collection of taxes, or of failure to perform their duties within this time
herein specified for their performance unless such irregularities, informalities or failure
shall have impaired the substantial rights of the taxpayer; nor shall any court declare any
portion of the tax assessed under the provisions of this Code invalid except upon condition
that the taxpayer shall pay the just amount of the tax, as determined by the court in the
pending proceeding.
6

When asked to comment, respondent Judge began with the allegation that there is no
question that the real properties sought to be taxed by the Province of Abra are properties
of the respondent Roman Catholic Bishop of Bangued, Inc.
7
The very next sentence
assumed the very point it asked when he categorically stated: Likewise, there is no dispute
that the properties including their procedure are actually, directly and exclusively used by
the Roman Catholic Bishop of Bangued, Inc. for religious or charitable purposes.
8
For him
then: The proper remedy of the petitioner is appeal and not this special civil action.
9
A
more exhaustive comment was submitted by private respondent Roman Catholic Bishop of
Bangued, Inc. It was, however, unable to lessen the force of the objection raised by
petitioner Province of Abra, especially the due process aspect. it is to be admitted that his
opposition to the petition, pressed with vigor, ostensibly finds a semblance of support
from the authorities cited. It is thus impressed with a scholarly aspect. It suffers, however,
from the grave infirmity of stating that only a pure question of law is presented when a
claim for exemption is made.
The petition must be granted.
1. Respondent Judge would not have erred so grievously had he merely compared the
provisions of the present Constitution with that appearing in the 1935 Charter on the tax
exemption of lands, buildings, and improvements. There is a marked difference. Under
the 1935 Constitution: Cemeteries, churches, and parsonages or convents appurtenant
thereto, and all lands, buildings, and improvements used exclusively for religious,
charitable, or educational purposes shall be exempt from taxation.
10
The present
Constitution added charitable institutions, mosques, and non-profit cemeteries and
required that for the exemption of :lands, buildings, and improvements, they should not
only be exclusively but also actually and directly used for religious or charitable
purposes.
11
The Constitution is worded differently. The change should not be ignored. It
must be duly taken into consideration. Reliance on past decisions would have sufficed were
the words actually as well as directly not added. There must be proof therefore of
the actual and direct use of the lands, buildings, and improvements for religious or
charitable purposes to be exempt from taxation. According to Commissioner of Internal
Revenue v. Guerrero:
12
From 1906, in Catholic Church v. Hastings to 1966, in Esso
Standard Eastern, Inc. v. Acting Commissioner of Customs, it has been the constant and
uniform holding that exemption from taxation is not favored and is never presumed, so
that if granted it must be strictly construed against the taxpayer. Affirmatively put, the law
frowns on exemption from taxation, hence, an exempting provision should be
construed strictissimi juris.
13
In Manila Electric Company v. Vera,
14
a 1975 decision, such
principle was reiterated, reference being made to Republic Flour Mills, Inc. v. Commissioner
of Internal Revenue;
15
Commissioner of Customs v. Philippine Acetylene Co. &
CTA;
16
and Davao Light and Power Co., Inc. v. Commissioner of Customs.
17

2. Petitioner Province of Abra is therefore fully justified in invoking the protection of
procedural due process. If there is any case where proof is necessary to demonstrate that
there is compliance with the constitutional provision that allows an exemption, this is it.
Instead, respondent Judge accepted at its face the allegation of private respondent. All that
was alleged in the petition for declaratory relief filed by private respondents, after
mentioning certain parcels of land owned by it, are that they are used actually, directly
and exclusively as sources of support of the parish priest and his helpers and also of
private respondent Bishop.
18
In the motion to dismiss filed on behalf of petitioner Province
of Abra, the objection was based primarily on the lack of jurisdiction, as the validity of a
tax assessment may be questioned before the Local Board of Assessment Appeals and not
with a court. There was also mention of a lack of a cause of action, but only because, in its
view, declaratory relief is not proper, as there had been breach or violation of the right of
government to assess and collect taxes on such property. It clearly appears, therefore, that
in failing to accord a hearing to petitioner Province of Abra and deciding the case
immediately in favor of private respondent, respondent Judge failed to abide by the
constitutional command of procedural due process.
WHEREFORE, the petition is granted and the resolution of June 19, 1978 is set aside.
Respondent Judge, or whoever is acting on his behalf, is ordered to hear the case on the
merit. No costs.
LLADOC VS. COMMISSIONER OF INTERNAL
REVENUE [14 SCRA 292; NO.L-19201; 16 JUN 1965]
Saturday, January 31, 2009 Posted by Coffeeholic Writes
Labels: Case Digests, Political Law

Facts: Sometime in 1957, M.B. Estate Inc., of Bacolod City,
donated 10,000.00 pesos in cash to Fr. Crispin Ruiz, the parish
priest ofVictorias, Negros Occidental, and predecessor of Fr. Lladoc,
for the construction of a new Catholic church in the locality. The
donated amount was spent for such purpose.

On March 3, 1958, the donor M.B. Estate filed the donor's gift tax
return. Under date of April 29, 1960. Commissioner of Internal
Revenue issued an assessment for the donee's gift tax against the
Catholic Parish of Victorias of which petitioner was the parish priest.

Issue: Whether or not the imposition of gift tax despite the fact
the Fr. Lladoc was not the Parish priest at the time of donation,
Catholic Parish priest of Victorias did not have juridical personality
as the constitutional exemption for religious purpose is valid.

Held: Yes, imposition of the gift tax was valid, under Section
22(3) Article VI of the Constitution contemplates exemption only
from payment of taxes assessed on such properties as Property
taxes contra distinguished from Excise taxes The imposition of
the gift taxon the property used for religious purpose is not a
violation of the Constitution. A gift tax is not a property by way of
gift inter vivos.

The head of the Diocese and not the parish priest is the real party in
interest in the imposition of the donee's tax on the property donated
to the church for religious purpose.
Abra Valley College vs Aquino (G.R. No. L-39086)
Posted: July 25, 2011 in Case Digests
0
FACTS: Petitioner, an educational corporation and institution of higher learning duly incorporated with the
Securities and Exchange Commission in 1948, filed a complaint to annul and declare void the Notice of
Seizure and the Notice of Sale of its lot and building located at Bangued, Abra, for non-payment of real
estate taxes and penalties amounting to P5,140.31. Said Notice of Seizure by respondents Municipal
Treasurer and Provincial Treasurer, defendants below, was issued for the satisfaction of the said taxes thereon.
The parties entered into a stipulation of facts adopted and embodied by the trial court in its questioned
decision. The trial court ruled for the government, holding that the second floor of the building is being used
by the director for residential purposes and that the ground floor used and rented by Northern Marketing
Corporation, a commercial establishment, and thus the property is not being used exclusively for educational
purposes. Instead of perfecting an appeal, petitioner availed of the instant petition for review on certiorari with
prayer for preliminary injunction before the Supreme Court, by filing said petition on 17 August 1974.
ISSUE: Whether or not the lot and building are used exclusively for educational purposes.
HELD: Section 22, paragraph 3, Article VI, of the then 1935 Philippine Constitution, expressly grants
exemption from realty taxes for cemeteries, churches and parsonages or convents appurtenant thereto, and all
lands, buildings, and improvements used exclusively for religious, charitable or educational purposes.
Reasonable emphasis has always been made that the exemption extends to facilities which are incidental to and
reasonably necessary for the accomplishment of the main purposes. The use of the school building or lot for
commercial purposes is neither contemplated by law, nor by jurisprudence. In the case at bar, the lease of the
first floor of the building to the Northern Marketing Corporation cannot by any stretch of the imagination be
considered incidental to the purpose of education. The test of exemption from taxation is the use of the
property for purposes mentioned in the Constitution.
The decision of the CFI Abra (Branch I) is affirmed subject to the modification that half of the assessed tax be
returned to the petitioner. The modification is derived from the fact that the ground floor is being used for
commercial purposes (leased) and the second floor being used as incidental to education (residence of the
director).
FIRST DIVISION
[G.R. No. 124043. October 14, 1998]
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. COURT OF
APPEALS, COURT OF TAX APPEALS and YOUNG MENS
CHRISTIAN ASSOCIATION OF THE PHILIPPINES,
INC., respondents.
D E C I S I O N
PANGANIBAN, J .:
Is the income derived from rentals of real property owned by the Young Mens Christian
Association of the Philippines, Inc. (YMCA) established as a welfare, educational and
charitable non-profit corporation -- subject to income tax under the National Internal Revenue
Code (NIRC) and the Constitution?
The Case
This is the main question raised before us in this petition for review
on certiorari challenging two Resolutions issued by the Court of Appeals
[1]
on September 28,
1995
[2]
and February 29, 1996
[3]
in CA-GR SP No. 32007. Both Resolutions affirmed the
Decision of the Court of Tax Appeals (CTA) allowing the YMCA to claim tax exemption on the
latters income from the lease of its real property.
The Facts
The Facts are undisputed.
[4]
Private Respondent YMCA is a non-stock, non-profit institution,
which conducts various programs and activities that are beneficial to the public, especially the
young people, pursuant to its religious, educational and charitable objectives.
In 1980, private respondent earned, among others, an income of P676,829.80 from leasing
out a portion of its premises to small shop owners, like restaurants and canteen operators,
and P44,259.00 from parking fees collected from non-members. On July 2, 1984, the
commissioner of internal revenue (CIR) issued an assessment to private respondent, in the total
amount of P415,615.01 including surcharge and interest, for deficiency income tax, deficiency
expanded withholding taxes on rentals and professional fees and deficiency withholding tax on
wages. Private respondent formally protested the assessment and, as a supplement to its basic
protest, filed a letter dated October 8, 1985. In reply, the CIR denied the claims of YMCA.
Contesting the denial of its protest, the YMCA filed a petition for review at the Court if Tax
Appeals (CTA) on March 14, 1989. In due course, the CTA issued this ruling in favor of the
YMCA:
xxx [T]he leasing of private respondents facilities to small shop owners, to
restaurant and canteen operators and the operation of the parking lot are reasonably
incidental to and reasonably necessary for the accomplishment of the objectives of the
[private respondents]. It appears from the testimonies of the witnesses for the [private
respondent] particularly Mr. James C. Delote, former accountant of YMCA, that these
facilities were leased to members and that they have to service the needs of its
members and their guests. The Rentals were minimal as for example, the barbershop
was only charged P300 per month. He also testified that there was actually no lot
devoted for parking space but the parking was done at the sides of the building. The
parking was primarily for members with stickers on the windshields of their cars and
they charged P.50 for non-members. The rentals and parking fees were just enough to
cover the costs of operation and maintenance only. The earning[s] from these rentals
and parking charges including those from lodging and other charges for the use of the
recreational facilities constitute [the] bulk of its income which [is] channeled to
support its many activities and attainment of its objectives. As pointed out earlier, the
membership dues are very insufficient to support its program. We find it reasonably
necessary therefore for [private respondent] to make [the] most out [of] its existing
facilities to earn some income. It would have been different if under the
circumstances, [private respondent] will purchase a lot and convert it to a parking lot
to cater to the needs of the general public for a fee, or construct a building and lease it
out to the highest bidder or at the market rate for commercial purposes, or should it
invest its funds in the buy and sell of properties, real or personal. Under these
circumstances, we could conclude that the activities are already profit oriented, not
incidental and reasonably necessary to the pursuit of the objectives of the association
and therefore, will fall under the last paragraph of section 27 of the Tax Code and any
income derived therefrom shall be taxable.
Considering our findings that [private respondent] was not engaged in the business of
operating or contracting [a] parking lot, we find no legal basis also for the imposition
of [a] deficiency fixed tax and [a] contractors tax in the amount[s] of P353.15
and P3,129.73, respectively.
x x x x x x x x x
WHEREFORE, in view of all the foregoing, the following assessments are hereby
dismissed for lack of merit:
1980 Deficiency Fixed Tax P353,15;
1980 Deficiency Contractors Tax P3,129.23;
1980 Deficiency Income Tax P372,578.20.
While the following assessments are hereby sustained:
1980 Deficiency Expanded Withholding Tax P1,798.93;
1980 Deficiency Withholding Tax on Wages P33,058.82
plus 10% surcharge and 20% interest per annum from July 2, 1984 until fully paid but not to
exceed three (3) years pursuant to Section 51 (e)(2) & (3) of the National Internal Revenue Code
effective as of 1984.
[5]

Dissatisfied with the CTA ruling, the CIR elevated the case to the Court of Appeals
(CA). In its Decision of February 16, 1994, the CA
[6]
initially decided in favor of the CIR and
disposed of the appeal in the following manner:
Following the ruling in the afore-cited cases of Province of Abra vs. Hernando and
Abra Valley College Inc. vs. Aquino, the ruling of the respondent Court of Tax
Appeals that the leasing of petitioners (herein respondent) facilities to small shop
owners, to restaurant and canteen operators and the operation of the parking lot are
reasonably incidental to and reasonably necessary for the accomplishment of the
objectives of the petitioners,' and the income derived therefrom are tax exempt, must
be reversed.
WHEREFORE, the appealed decision is hereby REVERSED in so far as it dismissed
the assessment for:
1980 Deficiency Income Tax P 353.15
1980 Deficiency Contractors Tax P 3,129.23, &
1980 Deficiency Income Tax P372,578.20,
but the same is AFFIRMED in all other respect.
[7]

Aggrieved, the YMCA asked for reconsideration based on the following grounds:
I
The findings of facts of the Public Respondent Court of Tax Appeals being
supported by substantial evidence [are] final and conclusive.
II
The conclusions of law of [p]ublic [r]espondent exempting [p]rivate [r]espondent from the
income on rentals of small shops and parking fees [are] in accord with the applicable law
and jurisprudence.
[8]

Finding merit in the Motion for Reconsideration filed by the YMCA, the CA reversed itself
and promulgated on September 28, 1995 its first assailed Resolution which, in part, reads:
The Court cannot depart from the CTAs findings of fact, as they are supported by
evidence beyond what is considered as substantial.
x x x x x x x x x
The second ground raised is that the respondent CTA did not err in saying that the
rental from small shops and parking fees do not result in the loss of the
exemption. Not even the petitioner would hazard the suggestion that YMCA is
designed for profit. Consequently, the little income from small shops and parking
fees help[s] to keep its head above the water, so to speak, and allow it to continue with
its laudable work.
The Court, therefore, finds the second ground of the motion to be meritorious and in
accord with law and jurisprudence.
WHEREFORE, the motion for reconsideration is GRANTED; the respondent CTAs decision is
AFFIRMED in toto.
[9]

The internal revenue commissioners own Motion for Reconsideration was denied by
Respondent Court in its second assailed Resolution of February 29, 1996. Hence, this petition for
review under Rule 45 of the Rules of Court.
[10]

The Issues
Before us, petitioner imputes to the Court of Appeals the following errors:
I
In holding that it had departed from the findings of fact of Respondent Court of
Tax Appeals when it rendered its Decision dated February 16, 1994; and
II
In affirming the conclusion of Respondent Court of Tax Appeals that the income of private
respondent from rentals of small shops and parking fees [is] exempt from taxation.
[11]

This Courts Ruling
The Petition is meritorious.
First Issue:
Factual Findings of the CTA
Private respondent contends that the February 16, 1994 CA Decision reversed the factual
findings of the CTA. On the other hand, petitioner argues that the CA merely reversed the
ruling of the CTA that the leasing of private respondents facilities to small shop owners, to
restaurant and canteen operators and the operation of parking lots are reasonably incidental to
and reasonably necessary for the accomplishment of the objectives of the private respondent and
that the income derived therefrom are tax exempt.
[12]
Petitioner insists that what the appellate
court reversed was the legal conclusion, not the factual finding, of the CTA.
[13]
The commissioner
has a point.
Indeed, it is a basic rule in taxation that the factual findings of the CTA, when supported by
substantial evidence, will not be disturbed on appeal unless it is shown that the said court
committed gross error in the appreciation of facts.
[14]
In the present case, this Court finds that the
February 16, 1994 Decision of the CA did not deviate from this rule. The latter merely applied
the law to the facts as found by the CTA and ruled on the issue raised by the CIR: Whether or
not the collection or earnings of rental income from the lease of certain premises and income
earned from parking fees shall fall under the last paragraph of Section 27 of the National Internal
Revenue Code of 1977, as amended.
[15]

Clearly, the CA did not alter any fact or evidence. It merely resolved the aforementioned
issue, as indeed it was expected to. That it did so in a manner different from that of the CTA did
not necessarily imply a reversal of factual findings.
The distinction between a question of law and a question of fact is clear-cut. It has been
held that [t]here is a question of law in a given case when the doubt or difference arises as to
what the law is on a certain state of facts; there is a question of fact when the doubt or difference
arises as to the truth or falsehood of alleged facts.
[16]
In the present case, the CA did not doubt,
much less change, the facts narrated by the CTA. It merely applied the law to the facts. That its
interpretation or conclusion is different from that of the CTA is not irregular or abnormal.
Second Issue:
I s the Rental Income of the YMCA Taxable?
We now come to the crucial issue: Is the rental income of the YMCA from its real estate
subject to tax? At the outset, we set forth the relevant provision of the NIRC:
SEC. 27. Exemptions from tax on corporations. -- The following organizations shall
not be taxed under this Title in respect to income received by them as such --
x x x x x x x x x
(g) Civic league or organization not organized for profit but operated exclusively for
the promotion of social welfare;
(h) Club organized and operated exclusively for pleasure, recreation, and other non-
profitable purposes, no part of the net income of which inures to the benefit of any
private stockholder or member;
x x x x x x x x x
Notwithstanding the provision in the preceding paragraphs, the income of whatever
kind and character of the foregoing organization from any of their properties, real or
personal, or from any of their activities conducted for profit, regardless of the
disposition made of such income, shall be subject to the tax imposed under this Code.
(as amended by Pres. Decree No. 1457)
Petitioners argues that while the income received by the organizations enumerated in
Section 27 (now Section 26) of the NIRC is, as a rule, exempted from the payment of tax in
respect to income received by them as such, the exemption does not apply to income derived
xxx from any if their properties, real or personal, or from any of their activities conducted for
profit, regardless, of the disposition made of such income xxx.
Petitioner adds that rented income derived by a tax-exempt organization from the lease of
its properties, real or personal, [is] not, therefore, exempt from income taxation, even if such
income [is] exclusively used for the accomplishment of its objectives.
[17]
We agree with the
commissioner.
Because taxes are the lifeblood of the nation, the Court has always applied the doctrine of
strict interpretation in construing tax exemptions.
[18]
Furthermore, a claim of statutory exemption
from taxation should be manifest and unmistakable from the language of the law on which it is
based. Thus, the claimed exemption must expressly be granted in a statute stated in a language
too clear to be mistaken.
[19]

In the instant case, the exemption claimed by the YMCA is expressly disallowed by the very
wording of the last paragraph of then Section 27 of the NIRC which mandates that the income of
exempt organizations (such as the YMCA) from any of their properties, real or personal, be
subject to the imposed by the same Code. Because the last paragraph of said section
unequivocally subjects to tax the rent income f the YMCA from its rental property,
[20]
the Court
is duty-bound to abide strictly by its literal meaning and to refrain from resorting to any
convoluted attempt at construction.
It is axiomatic that where the language of the law is clear and unambiguous, its express
terms must be applied.
[21]
Parenthetically, a consideration of the question of construction must not
even begin, particularly when such question is on whether to apply a strict construction or a
literal one on statutes that grant tax exemptions to religious, charitable and educational
propert[ies] or institutions.
[22]

The last paragraph of Section 27, the YMCA argues, should be subject to the qualification
that the income from the properties must arise from activities conducted for profit before it may
be considered taxable.
[23]
This argument is erroneous. As previously stated, a reading of said
paragraph ineludibly shows that the income from any property of exempt organizations, as well
as that arising from any activity it conducts for profit, is taxable. The phrase any of their
activities conducted for profit does not qualify the word properties. This makes income from
the property of the organization taxable, regardless of how that income is used -- whether for
profit or for lofty non-profit purposes.
Verba legis non est recedendum. Hence, Respondent Court of Appeals committed
reversible error when it allowed, on reconsideration, the tax exemption claimed by YMCA on
income it derived from renting out its real property, on the solitary but unconvincing ground that
the said income is not collected for profit but is merely incidental to its operation. The law does
not make a distinction. The rental income is taxable regardless of whence such income is
derived and how it used or disposed of. Where the law does not distinguish, neither should we.
Constitutional Provisions
on Taxation
Invoking not only the NIRC but also the fundamental law, private respondent submits that
Article VI, Section 28 of par. 3 of the 1987 Constitution,
[24]
exempts charitable institutions
from the payment not only of property taxes but also of income tax from any source.
[25]
In
support of its novel theory, it compares the use of the words charitable institutions, actually
and directly in the 1973 and the 1987 Constitutions, on the hand; and in Article VI Section 22,
par. 3 of the 1935 Constitution, on the other hand.
[26]

Private respondent enunciates three points. First, the present provision is divisible into two
categories: (1) [c]haritable institutions, churches and parsonages or convents appurtenant
thereto, mosques and non-profit cemeteries, the incomes of which are, from whatever source,
all tax-exempt;
[27]
and (2) [a]ll lands, buildings and improvements actually and directly used for
religious, charitable or educational purposes, which are exempt only from property
taxes.
[28]
Second, Lladoc v. Commissioner of Internal Revenue,
[29]
which limited the exemption
only to the payment of property taxes, referred to the provision of the 1935 Constitution and not
to its counterparts in the 1973 and the 1987 Constitutions.
[30]

Third, the phrase actually, directly
and exclusively used for religious, charitable or educational purposes refers not only to all
lands, buildings and improvements, but also to the above-quoted first category which includes
charitable institutions like the private respondent.
[31]

The Court is not persuaded. The debates, interpellations and expressions of opinion of the
framers of the Constitution reveal their intent which, in turn, may have guided the people in
ratifying the Charter.
[32]
Such intent must be effectuated.
Accordingly, Justice Hilario G. Davide, Jr., a former constitutional commissioner, who is
now a member of this Court, stressed during the Concom debates that xxx what is exempted is
not the institution itself xxx; those exempted from real estate taxes are lands, buildings and
improvements actually, directly and exclusively used for religious, charitable or educational
purposes.
[33]
Father Joaquin G. Bernas, an eminent authority on the Constitution and also a
member of the Concom, adhered to the same view that the exemption created by said provision
pertained only to property taxes.
[34]

In his treatise on taxation, Mr. Justice Jose C. Vitug concurs, stating that [t]he tax
exemption covers property taxes only."
[35]
Indeed, the income tax exemption claimed by private
respondent finds no basis in Article VI, Section 28, par. 3 of the Constitution.
Private respondent also invokes Article XIV, Section 4, par. 3 of the Charter,
[36]
claiming
that the YMCA is a non-stock, non-profit educational institution whose revenues and assets are
used actually, directly and exclusively for educational purposes so it is exempt from taxes on its
properties and income.
[37]
We reiterate that private respondent is exempt from the payment of
property tax, but not income tax on the rentals from its property. The bare allegation alone that it
is a non-stock, non-profit educational institution is insufficient to justify its exemption from the
payment of income tax.
As previously discussed, laws allowing tax exemption are construed strictissimi
juris. Hence, for the YMCA to be granted the exemption it claims under the aforecited
provision, it must prove with substantial evidence that (1) it falls under the classification non-
stock, non-profit educational institution; and (2) the income it seeks to be exempted from
taxation is used actually, directly, and exclusively for educational purposes. However, the Court
notes that not a scintilla of evidence was submitted by private respondent to prove that it met the
said requisites.
Is the YMCA an educational institution within the purview of Article XIV, Section 4, par.3
of the Constitution? We rule that it is not. The term educational institution or institution of
learning has acquired a well-known technical meaning, of which the members of the
Constitutional Commission are deemed cognizant.
[38]
Under the Education Act of 1982, such
term refers to schools.
[39]
The school system is synonymous with formal education,
[40]
which
refers to the hierarchically structured and chronological graded learnings organized and
provided by the formal school system and for which certification is required in order for the
learner to progress through the grades or move to the higher levels.
[41]
The Court has examined
the Amended Articles of Incorporation
[42]
and By-Laws
[43]
of the YMCA, but found nothing
in them that even hints that it is a school or an educational institution.
[44]

Furthermore, under the Education Act of 1982, even non-formal education is understood to
be school-based and private auspices such as foundations and civic-spirited organizations are
ruled out.
[45]
It is settled that the term educational institution, when used in laws granting tax
exemptions, refers to a xxx school seminary, college or educational establishment
xxx.
[46]
Therefore, the private respondent cannot be deemed one of the educational institutions
covered by the constitutional provision under consideration.
xxx Words used in the Constitution are to be taken in their ordinary acceptation. While in its
broadest and best sense education embraces all forms and phrases of instruction, improvement
and development of mind and body, and as well of religious and moral sentiments, yet in the
common understanding and application it means a place where systematic instruction in any or
all of the useful branches of learning is given by methods common to schools and institutions of
learning. That we conceive to be the true intent and scope of the term [educational institutions,]
as used in the Constitution.
[47]

Moreover, without conceding that Private Respondent YMCA is an educational institution,
the Court also notes that the former did not submit proof of the proportionate amount of the
subject income that was actually, directly and exclusively used for educational purposes. Article
XIII, Section 5 of the YMCA by-laws, which formed part of the evidence submitted, is patently
insufficient, since the same merely signified that [t]he net income derived from the rentals of
the commercial buildings shall be apportioned to the Federation and Member Associations as the
National Board may decide.
[48]
In sum, we find no basis for granting the YMCA exemption from
income tax under the constitutional provision invoked
Cases Cited by Private
Respondent I napplicable
The cases
[49]
relied on by private respondent do not support its cause. YMCA of Manila v.
Collector of Internal Revenue
[50]
and Abra Valley College, Inc. v. Aquino
[51]
are not applicable,
because the controversy in both cases involved exemption from the payment of property tax, not
income tax. Hospital de San Juan de Dios, Inc. v. Pasay City
[52]
is not in point either, because it
involves a claim for exemption from the payment of regulatory fees, specifically electrical
inspection fees, imposed by an ordinance of Pasay City -- an issue not at all related to that
involved in a claimed exemption from the payment if income taxes imposed on property
leases. In Jesus Sacred Heart College v. Com. Of Internal Revenue,
[53]
the party therein, which
claimed an exemption from the payment of income tax, was an educational institution which
submitted substantial evidence that the income subject of the controversy had been devoted or
used solely for educational purposes. On the other hand, the private respondent in the present
case had not given any proof that it is an educational institution, or that of its rent income is
actually, directly and exclusively used for educational purposes.
Epilogue
In deliberating on this petition, the Court expresses its sympathy with private respondent. It
appreciates the nobility its cause. However, the Courts power and function are limited merely
to applying the law fairly and objectively. It cannot change the law or bend it to suit its
sympathies and appreciations. Otherwise, it would be overspilling its role and invading the
realm of legislation.
We concede that private respondent deserves the help and the encouragement of the
government. It needs laws that can facilitate, and not frustrate, its humanitarian tasks. But the
Court regrets that, given its limited constitutional authority, it cannot rule on the wisdom or
propriety of legislation. That prerogative belongs to the political departments of
government. Indeed, some of the member of the Court may even believe in the wisdom and
prudence of granting more tax exemptions to private respondent. But such belief, however well-
meaning and sincere, cannot bestow upon the Court the power to change or amend the law.
WHEREFORE, the petition is GRANTED. The Resolutions of the Court of Appeals dated
September 28, 1995 and February 29, 1996 are hereby dated February 16, 1995
is REVERSED and SET ASI DE. The Decision of the Court of Appeals dated February 16,
1995 is REI NSTATED, insofar as it ruled that the income tax. No pronouncement as to costs.
SO ORDERED.
Davide, Jr. (Chairman), Vitug and Quisumbing, JJ., concur.
Bellosillo, J., see Dissenting Opinion.

[1]
Special Former Fourth Division composed of J. Nathanael P. de Pano, Jr., presiding justice and ponente;
and JJ., Fidel P. Purisima (now an associate justice of the Supreme Court) and Corona Ibay-Somera, concurring.
[2]
Rollo, pp. 42-48.
[3]
Ibid., pp. 50-51.
[4]
See Memorandum of private respondent, pp. 1-10 and Memorandum of petitioner, pp. 3-10; rollo, pp. 149-158
and 192-199, respectively. See also Decision of the CTA, pp. 1-21; rollo,pp. 69-89.
[5]
CTA Decision, pp. 16-18 and 2--21; rollo, pp. 84-86 and 88-89.
[6]
Penned by J. Asaali S. Isnani and concurred in by JJ. Nathanael P. De Pano, Jr., chairman, and Corona Ibay-
Somera of the Fourth Division.
[7]
Rollo, pp. 39-40.
[8]
CA Resolution, p. 2; rollo, p. 43.
[9]
Ibid., pp. 2,, 6-7; rollo, pp. 43, 47-48.
[10]
The case was submitted for resolution on April 27, 1998, upon receipt by this Court of private respondents
Reply Memorandum.
[11]
Petitioners Memorandum, pp. 10-11; rollo, pp. 199-200.
[12]
Ibid., p. 16; rollo, p. 205.
[13]
Ibid., p. 17; rollo, p. 206.
[14]
Commissioner of Internal Revenue v. Mitsubishi Metal Corp., 181 SCRA 214, 220, January 22, 1990.
[15]
Rollo, p. 36.
[16]
Ramos et al. v. Pepsi Cola Bottling Co. of the P.I. et al., 19 SCRA 289, 292, February 9, 1967, per
Bengzon, J.; citing II Martin, Rules of Court in the Philippines, 255 and II Bouviers Law Dictionary, 2784.
[17]
Memorandum for Petitioner, pp. 21-22; rollo, pp. 210-211.
[18]
See Commissioner of Internal Revenue v. Court of Appeals, 271 SCRA 605, 613, April 18, 1997.
[19]
Davao Gulf Lumber Corporation v. Commissioner of Internal Revenue and Court of Appeals, GR No. 117359, p.
15, July 23, 1998, per Panganiban, J.
[20]
Justice Jose C. Vitug, Compendium of Tax Law and Jurisprudence, p. 75, 4th revised ed. (1989); and De Leon,
Hector S., The National Internal Revenue Code Annotated, p. 108, 5th ed. (1994), citing a BIR ruling dated May 6,
1975.
[21]
See Ramirez v. Court of Appeals, 248 SCRA 590, 596, September 28, 1995.
[22]
Cooley, Thomas M., The Law of Taxation, p. 1415, Vol. II, 4th ed. (1924).
[23]
Reply Memorandum of private respondent, p. 10. p. 234.
[24]
Charitable institutions, churches and parsonages of convents appurtenant thereto, mosques, non-
profit cemeteries, and all lands, buildings, and improvements actually, directly, and exclusively used for religious,
charitable, or educational purposes shall be exempt from taxation. (Underlining copied from Reply Memorandum
of Private Respondent, p. 7; rollo, p. 231)
[25]
Reply Memorandum of private respondent, p. 7; rollo, p. 231.
[26]
Cemeteries, churches, and parsonages or convents appurtenant thereto, and all lands, buildings, and
improvements actually, directly , and exclusively used for religious, charitable, or educational purposes shall be
exempt from taxation.
[27]
Reply Memorandum of private respondent, pp. 7-8; rollo, pp. 231-232.
[28]
Ibid., p. 8; rollo, p. 232.
[29]
14 SCRA 292, June 16, 1965.
[30]
[31]
Ibid., p. 9; rollo, p. 233.
[32]
Nitafan v. Commissioner of Internal Revenue, 152 SCRA 284, 291-292, July 27, 1987.
[33]
Record of the Constitutional Commission, Vol. Two, p. 90.
[34]
Bernas, Joaquin G., The 1987 Constitution of the Republic of the Philippines: A Commentary, p. 720, 1996 ed.;
citing Lladoc v. Commissioner of Internal Revenue, supra, p. 295.
[35]
Vitug, supra, p. 16.
[36]
All revenues and assets of non-stock, non-profit educational institutions used actually, directly, and exclusively
for educational purposes shall be exempt from taxes and duties. Upon the dissolution or cessation of the corporate
existence of such institutions, their assets shall be disposed of in the manner provided by law.
[37]
Reply Memorandum of private respondent, p. 20; rollo, p. 244.
[38]
See Krivenko v. Register of Deeds of Manila, 79 Phil 461, 468 (1947).
[39]
Section 26, Batas Pambansa Blg. 232.
[40]
[41]
[42]
Exhibit B, BIR Records, pp. 54-56.
[43]
Exhibit C, BIR Records, pp. 27-53.
[44]
This is in stark contrast to its predecessor, the YMCA of Manila. In YMCA of Manila v. Collector of Internal
Revenue (33 Phil 217, 221 [1916]), cited by private respondent, it was noted that the said institution had an
educational department that taught courses in various subjects such as law, commerce, social ethics, political
economy and others.
[45]
Dizon, Amado C., Education Act of 1982 Annotated, Expanded and Updated, p. 72 (1990).
[46]
84 CJS 566.
[47]
Kesselring v. Bonnycastle Club, 186 SW2d 402, 404 (1945).
[48]
By-Laws of the YMCA, p. 22; BIR Records, p. 31.
[49]
[50]
Supra.
[51]
162 SCRA 106, June 15, 1988.
[52]
16 SCRA 226, February 28, 1966.
[53]
95 SCRA 16, May 24, 1954.
American Bible Society vs. City of Manila

American Bible Society vs. City of Manila
GR No. L-9637 | April 30, 1957

Facts:
American Bible Society is a foreign, non-stock, non-profit, religious, missionary corporation duly
registered and doing business in the Philippines through its Philippine agency established in Manila in
November, 1898
City of Manila is a municipal corporation with powers that are to be exercised in conformity with the
provisions of Republic Act No. 409, known as the Revised Charter of the City of Manila
American Bible Society has been distributing and selling bibles and/or gospel portions throughout the
Philippines and translating the same into several Philippine dialect
City Treasurer of Manila informed American Bible Society that it was violating several Ordinances for
operating without the necessary permit and license, thereby requiring the corporation to secure the
permit and license fees covering the period from 4Q 1945-2Q 1953
To avoid closing of its business, American Bible Society paid the City of Manila its permit and license
fees under protest
American Bible filed a complaint, questioning the constitutionality and legality of the Ordinances 2529
and 3000, and prayed for a refund of the payment made to the City of Manila. They contended:
a. They had been in the Philippines since 1899 and were not required to pay any license fee or sales tax
b. it never made any profit from the sale of its bibles
City of Manila prayed that the complaint be dismissed, reiterating the constitutionality of the
Ordinances in question
Trial Court dismissed the complaint
American Bible Society appealed to the Court of Appeals

Issue: WON American Bible Society liable to pay sales tax for the distribution and sale of bibles

Ruling: NO
Under Sec. 1 of Ordinance 3000, one of the ordinance in question, person or entity engaged in any of
the business, trades or occupation enumerated under Sec. 3 must obtain a Mayors permit and license
from the City Treasurer. American Bible Societys business is not among those enumerated
However, item 79 of Sec. 3 of the Ordinance provides that all other businesses, trade or occupation not
mentioned, except those upon which the City is not empowered to license or to tax P5.00
Therefore, the necessity of the permit is made to depend upon the power of the City to license or tax
said business, trade or occupation.
2 provisions of law that may have bearing on this case:
a. Chapter 60 of the Revised Administrative Code, the Municipal Board of the City of Manila is
empowered to tax and fix the license fees on retail dealers engaged in the sale of books
b. Sec. 18(o) of RA 409: to tax and fix the license fee on dealers in general merchandise, including
importers and indentors, except those dealers who may be expressly subject to the payment of some
other municipal tax. Further, Dealers in general merchandise shall be classified as (a) wholesale
dealers and (b) retail dealers. For purposes of the tax on retail dealers, general merchandise shall be
classified into four main classes: namely (1) luxury articles, (2) semi-luxury articles, (3) essential
commodities, and (4) miscellaneous articles. A separate license shall be prescribed for each class but
where commodities of different classes are sold in the same establishment, it shall not be compulsory
for the owner to secure more than one license if he pays the higher or highest rate of tax prescribed by
ordinance. Wholesale dealers shall pay the license tax as such, as may be provided by ordinance
The only difference between the 2 provisions is the limitation as to the amount of tax or license fee
that a retail dealer has to pay per annum
As held in Murdock vs. Pennsylvania, The power to impose a license tax on the exercise of these
freedoms provided for in the Bill of Rights, is indeed as potent as the power of censorship which this
Court has repeatedly struck down. It is not a nominal fee imposed as a regulatory measure to defray
the expenses of policing the activities in question. It is in no way apportioned. It is flat license tax
levied and collected as a condition to the pursuit of activities whose enjoyment is guaranteed by the
constitutional liberties of press and religion and inevitably tends to suppress their exercise. That is
almost uniformly recognized as the inherent vice and evil of this flat license tax.
Further, the case also mentioned that the power to tax the exercise of a privilege is the power to
control or suppress its enjoyment. Those who can tax the exercise of this religious practice can make
its exercise so costly as to deprive it of the resources necessary for its maintenance. Those who can tax
the privilege of engaging in this form of missionary evangelism can close all its doors to all those who
do not have a full purse
Under Sec. 27(e) of Commonwealth Act No. 466 or the National Internal Revenue
Code,Corporations or associations organized and operated exclusively for religious, charitable, . . . or
educational purposes, . . .: Provided, however, That the income of whatever kind and character from
any of its properties, real or personal, or from any activity conducted for profit, regardless of the
disposition made of such income, shall be liable to the tax imposed under this Code shall not be taxed
The price asked for the bibles and other religious pamphlets was in some instances a little bit higher
than the actual cost of the same but this cannot mean that American Bible Society was engaged in the
business or occupation of selling said "merchandise" for profit
Therefore, the Ordinance cannot be applied for in doing so it would impair American Bible Societys
free exercise and enjoyment of its religious profession and worship as well as its rights of dissemination
of religious beliefs.

Wherefore, and on the strength of the foregoing considerations, We hereby reverse the decision
appealed from, sentencing defendant return to plaintiff the sum of P5,891.45 unduly collected
from it
Commissioner of Internal Revenue vs. CA G.R. No.
124043, October 14, 1998
Sunday, January 25, 2009 Posted by Coffeeholic Writes
Labels: Case Digests, Political Law

Facts: Private respondent YMCA is a non-stock, non-profit
institution, which conducts various programs and activities that are
beneficial to the public, especially the young people, pursuant to its
religious, educational and charitable objectives. YMCA earned an
income from leasing out a portion of its premises to small shop
owners and from parking fees collected from non-members. The
Commissioner of Internal Revenue (CIR) issued an assessment for
deficiency income tax, deficiency expanded withholding taxes on
rentals and professional fees and deficiency withholding tax on
wages. YMCA protested the assessment.

Issue: Whether or not the income of private respondent YMCA
from rentals of small shops and parking fees is exempt from
taxation

Held: YMCA argues that Art. VI, Sec. 28(3) of the Constitution
exempts charitable institutions from the payment not only of
property taxes but also of income tax from any source. The Court is
not persuaded. The debates, interpellations and expressions of
opinion of the framers of the Constitution reveal their intent. Justice
Hilario Davide Jr., a former constitutional commissioner, stressed
during the Concom debate that what is exempted is not the
institution itself; those exempted from real estate taxes are lands,
buildings and improvements actually, directly and exclusively used
for religious, charitable or educational purposes. Fr. Joaquin Bernas,
an eminent authority on the Constitution and also a member of the
Concom, adhered to the same view that the exemption created by
said provision pertained only to property taxes. In his treatise on
taxation, Justice Jose Vitug concurs, stating that the tax exemption
covers property taxes only. Indeed, the income tax exemption
claimed by YMCA finds no basis in Art. VI, Sec. 28(3) of the
Constitution.

YMCA also invokes Art. XIV, Sec. 4(3) of the Constitution claiming
that YMCA is a non-stock, non-profit educational institution whose
revenues and assets are used actually, directly and exclusively for
educational purposes so it is exempt from taxes on its properties
and income. The Court reiterates that YMCA is exempt from the
payment of property tax, but not income tax on the rentals from its
property. The bare allegation alone that it is a non-stock, non-profit
educational institution is insufficient to justify its exemption from
the payment of income tax. Laws allowing tax exemption are
construed strictissimi juris. Hence, for the YMCA to be granted the
exemption it claims under the aforecited provision, it must prove
with substantial evidence that: 1. it falls under the classification
non-stock, non-profit educational institution; and 2. the income it
seeks to be exempted from taxation is used actually, directly and
exclusively for educational purposes. However, the Court notes that
not a scintilla of evidence was submitted by YMCA to prove that it
met the said requisites.
YMCA is not an educational institution within the purview of Art.
XIV, Sec. 4(3) of the Constitution. The term educational
institution, when used in laws granting tax exemptions, refers to a
school, seminary, college or educational establishment. Therefore,
YMCA cannot be deemed one of the educational institutions covered
by the said constitutional provision. Moreover, the Court notes that
YMCA did not submit proof of the proportionate amount of the
subject income that was actually, directly and exclusively used for
educational purposes.
SECOND DIVISION
[G.R. No. 149636. June 8, 2005]
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. BANK OF
COMMERCE, respondent.
D E C I S I O N
CALLEJO, SR., J .:
This is a petition for review on certiorari of the Decision
[1]
of the Court of Appeals
(CA) in CA-G.R. SP No. 52706, affirming the ruling of the Court of Tax Appeals (CTA)
[2]

in CTA Case No. 5415.
The facts of the case are undisputed.
In 1994 and 1995, the respondent Bank of Commerce derived passive income in
the form of interests or discounts from its investments in government securities and
private commercial papers. On several occasions during the said period, it paid 5%
gross receipts tax on its income, as reflected in its quarterly percentage tax returns.
Included therein were the respondent banks passive income from the said investments
amounting to P85,384,254.51, which had already been subjected to a final tax of 20%.
Meanwhile, on January 30, 1996, the CTA rendered judgment in Asia Bank
Corporation v. Commissioner of Internal Revenue, CTA Case No. 4720, holding that the
20% final withholding tax on interest income from banks does not form part of taxable
gross receipts for Gross Receipts Tax (GRT) purposes. The CTA relied on Section 4(e)
of Revenue Regulations (Rev. Reg.) No. 12-80.
Relying on the said decision, the respondent bank filed an administrative claim for
refund with the Commissioner of Internal Revenue on July 19, 1996. It claimed that it
had overpaid its gross receipts tax for 1994 to 1995 by P853,842.54, computed as
follows:
Gross receipts subjected to
Final Tax Derived from Passive
Investment P85,384,254.51
x 20%
20% Final Tax Withheld 17,076,850.90
at Source x 5%
P 853,842.54
Before the Commissioner could resolve the claim, the respondent bank filed a
petition for review with the CTA, lest it be barred by the mandatory two-year prescriptive
period under Section 230 of the Tax Code (now Section 229 of the Tax Reform Act of
1997).
In his answer to the petition, the Commissioner interposed the following special and
affirmative defenses:

5. The alleged refundable/creditable gross receipts taxes were collected and paid
pursuant to law and pertinent BIR implementing rules and regulations; hence, the
same are not refundable. Petitioner must prove that the income from which the
refundable/creditable taxes were paid from, were declared and included in its gross
income during the taxable year under review;
6. Petitioners allegation that it erroneously and excessively paid its gross receipt
tax during the year under review does not ipso facto warrant the refund/credit.
Petitioner must prove that the exclusions claimed by it from its gross receipts must be
an allowable exclusion under the Tax Code and its pertinent implementing Rules and
Regulations. Moreover, it must be supported by evidence;
7. Petitioner must likewise prove that the alleged refundable/creditable gross
receipt taxes were neither automatically applied as tax credit against its tax liability
for the succeeding quarter/s of the succeeding year nor included as creditable taxes
declared and applied to the succeeding taxable year/s;
8. Claims for tax refund/credit are construed in strictissimi juris against the
taxpayer as it partakes the nature of an exemption from tax and it is incumbent upon
the petitioner to prove that it is entitled thereto under the law. Failure on the part of
the petitioner to prove the same is fatal to its claim for tax refund/credit;
9. Furthermore, petitioner must prove that it has complied with the provision of
Section 230 (now Section 229) of the Tax Code, as amended.
[3]

The CTA summarized the issues to be resolved as follows: whether or not the final
income tax withheld should form part of the gross receipts
[4]
of the taxpayer for GRT
purposes; and whether or not the respondent bank was entitled to a refund
of P853,842.54.
[5]

The respondent bank averred that for purposes of computing the 5% gross receipts
tax, the final withholding tax does not form part of gross receipts.
[6]
On the other hand,
while the Commissioner conceded that the Court defined gross receipts as all
receipts of taxpayers excluding those which have been especially earmarked by law or
regulation for the government or some person other than the taxpayer in CIR v. Manila
Jockey Club, Inc.,
[7]
he claimed that such definition was applicable only to a proprietor of
an amusement place, not a banking institution which is an entirely different entity
altogether. As such, according to the Commissioner, the ruling of the Court in Manila
Jockey Club was inapplicable.
In its Decision dated April 27, 1999, the CTA by a majority decision
[8]
partially
granted the petition and ordered that the amount ofP355,258.99 be refunded to the
respondent bank. The fallo of the decision reads:
WHEREFORE, in view of all the foregoing, respondent is hereby ORDERED
to REFUND in favor of petitioner Bank of Commerce the amount of P355,258.99
representing validly proven erroneously withheld taxes from interest income derived
from its investments in government securities for the years 1994 and 1995.
[9]

In ruling for respondent bank, the CTA relied on the ruling of the Court in Manila
Jockey Club, and held that the term gross receipts excluded those which had been
especially earmarked by law or regulation for the government or persons other than the
taxpayer. The CTA also cited its rulings in China Banking Corporation
v. CIR
[10]
and Equitable Banking Corporation v. CIR.
[11]

The CTA ratiocinated that the aforesaid amount of P355,258.99 represented the
claim of the respondent bank, which was filed within the two-year mandatory
prescriptive period and was substantiated by material and relevant evidence. The CTA
applied Section 204(3) of the National Internal Revenue Code (NIRC).
[12]

The Commissioner then filed a petition for review under Rule 43 of the Rules of
Court before the CA, alleging that:
(1) There is no provision of law which excludes the 20% final income tax
withheld under Section 50(a) of the Tax Code in the computation of the 5%
gross receipts tax.
(2) The Tax Court erred in applying the ruling in Collector of Internal Revenue
vs. Manila Jockey Club (108 Phil. 821) in the resolution of the legal issues
involved in the instant case.
[13]

The Commissioner reiterated his stand that the ruling of this Court in Manila Jockey
Club, which was affirmed in Visayan Cebu Terminal Co., Inc. v. Commissioner of
Internal Revenue,
[14]
is not decisive. He averred that the factual milieu in the said case is
different, involving as it did the wager fund. The Commissioner further pointed out that
in Manila Jockey Club, the Court ruled that the race tracks commission did not form
part of the gross receipts, and as such were not subjected to the 20% amusement tax.
On the other hand, the issue in Visayan Cebu Terminal was whether or not the gross
receipts corresponding to 28% of the total gross income of the service contractor
delivered to the Bureau of Customs formed part of the gross receipts was subject to 3%
of contractors tax under Section 191 of the Tax Code. It was further pointed out that
the respondent bank, on the other hand, was a banking institution and not a contractor.
The petitioner insisted that the term gross receipts is self-evident; it includes all items
of income of the respondent bank regardless of whether or not the same were allocated
or earmarked for a specific purpose, to distinguish it from net receipts.
On August 14, 2001, the CA rendered judgment dismissing the petition. Citing
Sections 51 and 58(A) of the NIRC, Section 4(e) of Rev. Reg. No. 12-80
[15]
and the ruling
of this Court in Manila Jockey Club, the CA held that the P17,076,850.90 representing
the final withholding tax derived from passive investments subjected to final tax should
not be construed as forming part of the gross receipts of the respondent bank upon
which the 5% gross receipts tax should be imposed. The CA declared that the final
withholding tax in the amount of P17,768,509.00 was a trust fund for the government;
hence, does not form part of the respondents gross receipts. The legal ownership of
the amount had already been vested in the government. Moreover, the CA declared,
the respondent did not reap any benefit from the said amount. As such, subjecting the
said amount to the 5% gross receipts tax would result in double taxation. The appellate
court further cited CIR v. Tours Specialists, Inc.,
[16]
and declared that the ruling of the
Court in Manila Jockey Club was decisive of the issue.
The Commissioner now assails the said decision before this Court, contending that:
THE COURT OF APPEALS ERRED IN HOLDING THAT THE 20% FINAL
WITHHOLDING TAX ON BANKS INTEREST INCOME DOES NOT FORM
PART OF THE TAXABLE GROSS RECEIPTS IN COMPUTING THE 5% GROSS
RECEIPTS TAX (GRT, for brevity).
[17]

The petitioner avers that the reliance by the CTA and the CA on Section 4(e) of
Rev. Reg. No. 12-80 is misplaced; the said provision merely authorizes the
determination of the amount of gross receipts based on the taxpayers method of
accounting under then Section 37 (now Section 43) of the Tax Code. The petitioner
asserts that the said provision ceased to exist as of October 15, 1984, when Rev. Reg.
No. 17-84 took effect. The petitioner further points out that under paragraphs 7(a) and
(c) of Rev. Reg. No. 17-84, interest income of financial institutions (including banks)
subject to withholding tax are included as part of the gross receipts upon which the
gross receipts tax is to be imposed. Citing the ruling of the CA in Commissioner of
Internal Revenue v. Asianbank Corporation
[18]
(which likewise cited Bank of America NT
& SA v. Court of Appeals,
[19]
) the petitioner posits that in computing the 5% gross
receipts tax, the income need not be actually received. For income to form part of the
taxable gross receipts, constructive receipt is enough. The petitioner is, likewise,
adamant in his claim that the final withholding tax from the respondent banks income
forms part of the taxable gross receipts for purposes of computing the 5% of gross
receipts tax. The petitioner posits that the ruling of this Court in Manila Jockey Club is
not decisive of the issue in this case.
The petition is meritorious.
The issues in this case had been raised and resolved by this Court in China
Banking Corporation v. Court of Appeals,
[20]
and CIR v. Solidbank Corporation.
[21]

Section 27(D)(1) of the Tax Code reads:
(D) Rates of Tax on Certain Passive Incomes.
(1) Interest from Deposits and Yield or any other Monetary Benefit from Deposit
Substitutes and from Trust Funds and Similar Arrangements, and Royalties. A
final tax at the rate of twenty percent (20%) is hereby imposed upon the amount of
interest on currency bank deposit and yield or any other monetary benefit from
deposit substitutes and from trust funds and similar arrangements received by
domestic corporations, and royalties, derived from sources within the
Philippines: Provided, however, That interest income derived by a domestic
corporation from a depository bank under the expanded foreign currency deposit
system shall be subject to a final income tax at the rate of seven and one-half percent
(7%) of such interest income.
On the other hand, Section 57(A)(B) of the Tax Code authorizes the withholding of
final tax on certain income creditable at source:
SEC. 57. Withholding of Tax at Source.
(A) Withholding of Final Tax on Certain Incomes. Subject to rules and
regulations, the Secretary of Finance may promulgate, upon the recommendation of
the Commissioner, requiring the filing of income tax return by certain income payees,
the tax imposed or prescribed by Sections 24(B)(1), 24(B)(2), 24(C), 24(D)(1);
25(A)(2), 25(A)(3), 25(B), 25(C), 25(D), 25(E); 27(D)(1), 27(D)(2), 27(D)(3),
27(D)(5); 28(A)(4), 28(A)(5), 28(A)(7)(a), 28(A)(7)(b), 28(A)(7)(c), 28(B)(1),
28(B)(2), 28(B)(3), 28(B)(4), 28(B)(5)(a), 28(B)(5)(b), 28(B)(5)(c); 33; and 282 of
this Code on specified items of income shall be withheld by payor-corporation and/or
person and paid in the same manner and subject to the same conditions as provided in
Section 58 of this Code.
(B) Withholding of Creditable Tax at Source. The Secretary of Finance may,
upon the recommendation of the Commissioner, require the withholding of a tax on
the items of income payable to natural or juridical persons, residing in the
Philippines, by payor-corporation/persons as provided for by law, at the rate of not
less than one percent (1%) but not more than thirty-two percent (32%) thereof, which
shall be credited against the income tax liability of the taxpayer for the taxable year.
The tax deducted and withheld by withholding agents under the said provision shall
be held as a special fund in trust for the government until paid to the collecting officer.
[22]

Section 121 (formerly Section 119) of the Tax Code provides that a tax on gross
receipts derived from sources within the Philippines by all banks and non-bank financial
intermediaries shall be computed in accordance with the schedules therein:
(a) On interest, commissions and discounts from lending activities as well as income
from financial leasing, on the basis of remaining maturities of instruments from which
such receipts are derived:
Short-term maturity (not in excess of two (2) years) 5%
Medium-term maturity (over two (2) years but
not exceeding four (4) years) 3%
Long-term maturity
(1) Over four (4) years but not exceeding
seven (7) years 1%
(2) Over seven (7) years 0%
(b) On dividends 0%
(c) On royalties, rentals of property, real or personal,
profits from exchange and all other items treated
as gross income under Section 32 of this Code 5%
Provided, however, That in case the maturity period referred to in paragraph (a) is
shortened thru pre-termination, then the maturity period shall be reckoned to end as
of the date of pre-termination for purposes of classifying the transaction as short,
medium or long-term and the correct rate of tax shall be applied accordingly.
Nothing in this Code shall preclude the Commissioner from imposing the same tax
herein provided on persons performing similar banking activities.
The Tax Code does not define gross receipts. Absent any statutory definition, the
Bureau of Internal Revenue has applied the term in its plain and ordinary meaning.
[23]

In National City Bank v. CIR,
[24]
the CTA held that gross receipts should be
interpreted as the whole amount received as interest, without deductions; otherwise, if
deductions were to be made from gross receipts, it would be considered as net
receipts. The CTA changed course, however, when it promulgated its decision in Asia
Bank; it applied Section 4(e) of Rev. Reg. No. 12-80 and the ruling of this Court
in Manila Jockey Club, holding that the 20% final withholding tax on the petitioner
banks interest income should not form part of its taxable gross receipts, since the final
tax was not actually received by the petitioner bank but went to the coffers of the
government.
The Court agrees with the contention of the petitioner that the appellate courts
reliance on Rev. Reg. No. 12-80, the rulings of the CTA inAsia Bank, and of this Court
in Manila Jockey Club has no legal and factual bases. Indeed, the Court ruled in China
Banking Corporation v. Court of Appeals
[25]
that:
In Far East Bank & Trust Co. v. Commissioner and Standard Chartered Bank v.
Commissioner, both promulgated on 16 November 2001, the tax court ruled that the
final withholding tax forms part of the banks gross receipts in computing the gross
receipts tax. The tax court held that Section 4(e) of Revenue Regulations No. 12-80
did not prescribe the computation of the amount of gross receipts but merely
authorized the determination of the amount of gross receipts on the basis of the
method of accounting being used by the taxpayer.
The word gross must be used in its plain and ordinary meaning. It is defined as
whole, entire, total, without deduction. A common definition is without
deduction.
[26]
Gross is also defined as taking in the whole; having no deduction or
abatement; whole, total as opposed to a sum consisting of separate or specified
parts.
[27]
Gross is the antithesis of net.
[28]
Indeed, in China Banking Corporation v. Court
of Appeals,
[29]
the Court defined the term in this wise:
As commonly understood, the term gross receipts means the entire receipts without
any deduction. Deducting any amount from the gross receipts changes the result, and
the meaning, to net receipts. Any deduction from gross receipts is inconsistent with a
law that mandates a tax on gross receipts, unless the law itself makes an exception.
As explained by the Supreme Court of Pennsylvania in Commonwealth of
Pennsylvania v. Koppers Company, Inc., -
Highly refined and technical tax concepts have been developed by the accountant and
legal technician primarily because of the impact of federal income tax legislation.
However, this in no way should affect or control the normal usage of words in the
construction of our statutes; and we see nothing that would require us not to include
the proceeds here in question in the gross receipts allocation unless statutorily such
inclusion is prohibited. Under the ordinary basic methods of handling accounts, the
term gross receipts, in the absence of any statutory definition of the term, must be
taken to include the whole total gross receipts without any deductions, x x
x. [Citations omitted] (Emphasis supplied)
Likewise, in Laclede Gas Co. v. City of St. Louis, the Supreme Court of Missouri
held:
The word gross appearing in the term gross receipts, as used in the ordinance,
must have been and was there used as the direct antithesis of the word net. In its
usual and ordinary meaning gross receipts of a business is the whole and entire
amount of the receipts without deduction, x x x. On the contrary, net receipts
usually are the receipts which remain after deductions are made from the gross
amount thereof of the expenses and cost of doing business, including fixed charges
and depreciation. Gross receipts become net receipts after certain proper deductions
are made from the gross. And in the use of the words gross receipts, the instant
ordinance, of course, precluded plaintiff from first deducting its costs and expenses of
doing business, etc., in arriving at the higher base figure upon which it must pay the
5% tax under this ordinance. (Emphasis supplied)
Absent a statutory definition, the term gross receipts is understood in its plain and
ordinary meaning. Words in a statute are taken in their usual and familiar
signification, with due regard to their general and popular use. The Supreme Court of
Hawaii held in Bishop Trust Company v. Burns that -
xxx It is fundamental that in construing or interpreting a statute, in order to ascertain
the intent of the legislature, the language used therein is to be taken in the generally
accepted and usual sense. Courts will presume that the words in a statute were used to
express their meaning in common usage. This principle is equally applicable to a tax
statute. [Citations omitted] (Emphasis supplied)
The Court, likewise, declared that Section 121 of the Tax Code expressly subjects
interest income of banks to the gross receipts tax. Such express inclusion of interest
income in taxable gross receipts creates a presumption that the entire amount of the
interest income, without any deduction, is subject to the gross receipts tax. Indeed,
there is a presumption that receipts of a person engaging in business are subject to the
gross receipts tax. Such presumption may only be overcome by pointing to a specific
provision of law allowing such deduction of the final withholding tax from the taxable
gross receipts, failing which, the claim of deduction has no leg to stand on. Moreover,
where such an exception is claimed, the statute is construed strictly in favor of the
taxing authority. The exemption must be clearly and unambiguously expressed in the
statute, and must be clearly established by the taxpayer claiming the right thereto.
Thus, taxation is the rule and the claimant must show that his demand is within the letter
as well as the spirit of the law.
[30]

In this case, there is no law which allows the deduction of 20% final tax from the
respondent banks interest income for the computation of the 5% gross receipts tax. On
the other hand, Section 8(a)(c), Rev. Reg. No. 17-84 provides that interest earned on
Philippine bank deposits and yield from deposit substitutes are included as part of the
tax base upon which the gross receipts tax is imposed. Such earned interest refers to
the gross interest without deduction since the regulations do not provide for any such
deduction. The gross interest, without deduction, is the amount the borrower pays, and
the income the lender earns, for the use by the borrower of the lenders money. The
amount of the final tax plainly covers for the interest earned and is consequently part of
the taxable gross receipt of the lender.
[31]

The bare fact that the final withholding tax is a special trust fund belonging to the
government and that the respondent bank did not benefit from it while in custody of the
borrower does not justify its exclusion from the computation of interest income. Such
final withholding tax covers for the respondent banks income and is the amount to be
used to pay its tax liability to the government. This tax, along with the creditable
withholding tax, constitutes payment which would extinguish the respondent banks
obligation to the government. The bank can only pay the money it owns, or the money
it is authorized to pay.
[32]

In the same vein, the respondent banks reliance on Section 4(e) of Rev. Reg. No.
12-80 and the ruling of the CTA in Asia Bank is misplaced. The Courts discussion
in China Banking Corporation
[33]
is instructive on this score:
CBC also relies on the Tax Courts ruling in Asia Bank that Section 4(e) of Revenue
Regulations No. 12-80 authorizes the exclusion of the final tax from the banks
taxable gross receipts. Section 4(e) provides that:
Sec. 4. x x x
(e) Gross receipts tax on banks, non-bank financial intermediaries, financing
companies, and other non-bank financial intermediaries not performing quasi-
banking functions. - The rates of taxes to be imposed on the gross receipts of such
financial institutions shall be based on all items of income actually received. Mere
accrual shall not be considered, but once payment is received on such accrual or in
cases of prepayment, then the amount actually received shall be included in the tax
base of such financial institutions, as provided hereunder: x x x. (Emphasis supplied
by Tax Court)
Section 4(e) states that the gross receipts shall be based on all items of income
actually received. The tax court in Asia Bank concluded that it is but logical to infer
that the final tax, not having been received by petitioner but instead went to the
coffers of the government, should no longer form part of its gross receipts for the
purpose of computing the GRT.
The Tax Court erred glaringly in interpreting Section 4(e) of Revenue Regulations
No. 12-80. Income may be taxable either at the time of its actual receipt or its accrual,
depending on the accounting method of the taxpayer. Section 4(e) merely provides
for an exception to the rule, making interest income taxable for gross receipts tax
purposes only upon actual receipt. Interest is accrued, and not actually received, when
the interest is due and demandable but the borrower has not actually paid and remitted
the interest, whether physically or constructively. Section 4(e) does not exclude
accrued interest income from gross receipts but merelypostpones its inclusion until
actual payment of the interest to the lending bank. This is clear when Section 4(e)
states that [m]ere accrual shall not be considered, but once payment is received on
such accrual or in case of prepayment, then the amount actually received shall be
included in the tax base of such financial institutions x x x.
Actual receipt of interest income is not limited to physical receipt. Actual receipt may
either be physical receipt or constructive receipt. When the depository bank
withholds the final tax to pay the tax liability of the lending bank, there is prior to the
withholding a constructive receipt by the lending bank of the amount withheld. From
the amount constructively received by the lending bank, the depository bank deducts
the final withholding tax and remits it to the government for the account of the
lending bank. Thus, the interest income actually received by the lending bank, both
physically and constructively, is the net interest plus the amount withheld as final tax.
The concept of a withholding tax on income obviously and necessarily implies that
the amount of the tax withheld comes from the income earned by the taxpayer. Since
the amount of the tax withheld constitutes income earned by the taxpayer, then that
amount manifestly forms part of the taxpayers gross receipts. Because the amount
withheld belongs to the taxpayer, he can transfer its ownership to the government in
payment of his tax liability. The amount withheld indubitably comes from income of
the taxpayer, and thus forms part of his gross receipts.
The Court went on to explain in that case that far from supporting the petitioners
contention, its ruling in Manila Jockey Club, in fact even buttressed the contention of the
Commissioner. Thus:
CBC cites Collector of Internal Revenue v. Manila Jockey Club as authority that the
final withholding tax on interest income does not form part of a banks gross receipts
because the final tax is earmarked by regulation for the government. CBCs
reliance on the Manila Jockey Club is misplaced. In this case, the Court stated that
Republic Act No. 309 and Executive Order No. 320 apportioned the total amount of
the bets in horse races as follows:
87 % as dividends to holders of winning tickets, 12 % as commission of the
Manila Jockey Club, of which % was assigned to the Board of Races and 5% was
distributed as prizes for owners of winning horses and authorized bonuses for jockeys.
A subsequent law, Republic Act No. 1933 (RA No. 1933), amended the sharing by
ordering the distribution of the bets as follows:
Sec. 19. Distribution of receipts. The total wager funds or gross receipts from the
sale of pari-mutuel tickets shall be apportioned as follows: eighty-seven and one-half
per centum shall be distributed in the form of dividends among the holders of win,
place and show horses, as the case may be, in the regular races; six and one-half per
centum shall be set aside as the commission of the person, racetrack, racing club, or
any other entity conducting the races; five and one-half per centum shall be set aside
for the payment of stakes or prizes for win, place and show horses and authorized
bonuses for jockeys; and one-half per centum shall be paid to a special fund to be used
by the Games and Amusements Board to cover its expenses and such other purposes
authorized under this Act. xxx. (Emphasis supplied)
Under the distribution of receipts expressly mandated in Section 19 of RA No.
1933, the gross receipts apportioned to Manila Jockey Club referred only to its own
6 % commission. There is no dispute that the 5 % share of the horse-owners and
jockeys, and the % share of the Games and Amusements Board, do not form part of
Manila Jockey Clubs gross receipts. RA No. 1933 took effect on 22 June 1957, three
years before the Court decided Manila Jockey Club on 30 June 1960.
Even under the earlier law, Manila Jockey Club did not own the entire 12 %
commission. Manila Jockey Club owned, and could keep and use, only 7% of the
total bets. Manila Jockey Club merely held in trust the balance of 5 % for the
benefit of the Board of Races and the winning horse-owners and jockeys, the real
owners of the 5 1/2 % share.
The Court in Manila Jockey Club quoted with approval the following Opinion of the
Secretary of Justice made prior to RA No. 1933:
There is no question that the Manila Jockey Club, Inc. owns only 7-1/2% [sic] of the
bets registered by the Totalizer. This portion represents its share or commission in the
total amount of money it handles and goes to the funds thereof as its own property
which it may legally disburse for its own purposes. The 5% [sic] does not belong to
the club. It is merely held in trust for distribution as prizes to the owners of winning
horses. It is destined for no other object than the payment of prizes and the club
cannot otherwise appropriate this portion without incurring liability to the owners of
winning horses. It can not be considered as an item of expense because the sum used
for the payment of prizes is not taken from the funds of the club but from a certain
portion of the total bets especially earmarked for that purpose. (Emphasis supplied)
Consequently, the Court ruled that the 5 % balance of the commission, not being
owned by Manila Jockey Club, did not form part of its gross receipts for purposes of
the amusement tax. Manila Jockey Club correctly paid the amusement tax based only
on its own 7% commission under RA No. 309 and Executive Order No. 320.
Manila Jockey Club does not support CBCs contention but rather the
Commissioners position. The Court ruled in Manila Jockey Club that receipts not
owned by the Manila Jockey Club but merely held by it in trust did not form part of
Manila Jockey Clubs gross receipts. Conversely, receipts owned by the Manila
Jockey Club would form part of its gross receipts.
[34]

We reverse the ruling of the CA that subjecting the Final Withholding Tax (FWT) to
the 5% of gross receipts tax would result in double taxation. In CIR v. Solidbank
Corporation,
[35]
we ruled, thus:
We have repeatedly said that the two taxes, subject of this litigation, are different from
each other. The basis of their imposition may be the same, but their natures are
different, thus leading us to a final point. Is there double taxation?
The Court finds none.
Double taxation means taxing the same property twice when it should be taxed only
once; that is, xxx taxing the same person twice by the same jurisdiction for the same
thing. It is obnoxious when the taxpayer is taxed twice, when it should be but once.
Otherwise described as direct duplicate taxation, the two taxes must be imposed on
the same subject matter, for the same purpose, by the same taxing authority, within
the same jurisdiction, during the same taxing period; and they must be of the same
kind or character.
First, the taxes herein are imposed on two different subject matters. The subject
matter of the FWT is the passive income generated in the form of interest on deposits
and yield on deposit substitutes, while the subject matter of the GRT is the privilege
of engaging in the business of banking.
A tax based on receipts is a tax on business rather than on the property; hence, it is an
excise rather than a property tax. It is not an income tax, unlike the FWT. In fact, we
have already held that one can be taxed for engaging in business and further taxed
differently for the income derived therefrom. Akin to our ruling in Velilla v.
Posadas, these two taxes are entirely distinct and are assessed under different
provisions.
Second, although both taxes are national in scope because they are imposed by the
same taxing authority the national government under the Tax Code and operate
within the same Philippine jurisdiction for the same purpose of raising revenues, the
taxing periods they affect are different. The FWT is deducted and withheld as soon as
the income is earned, and is paid after every calendar quarter in which it is earned.
On the other hand, the GRT is neither deducted nor withheld, but is paid only after
every taxable quarter in which it is earned.
Third, these two taxes are of different kinds or characters. The FWT is an income tax
subject to withholding, while the GRT is a percentage tax not subject to withholding.
In short, there is no double taxation, because there is no taxing twice, by the same
taxing authority, within the same jurisdiction, for the same purpose, in different taxing
periods, some of the property in the territory. Subjecting interest income to a 20%
FWT and including it in the computation of the 5% GRT is clearly not double
taxation.
IN LIGHT OF THE FOREGOING, the petition is GRANTED. The decision of the
Court of Appeals in CA-G.R. SP No. 52706 and that of the Court of Tax Appeals in CTA
Case No. 5415 are SET ASIDE and REVERSED. The CTA is hereby ORDERED to
DISMISS the petition of respondent Bank of Commerce. No costs.
SO ORDERED.
Austria-Martinez, (Acting Chairman), Tinga, and Chico-Nazario, JJ., concur.
Puno, (Chairman), on official leave.

[1]
Penned by Associate Justice Presbitero J. Velasco, Jr. (now Court Administrator) with Associate
Justices Ruben T. Reyes and Juan Q. Enriquez, Jr., concurring; Rollo,pp. 23-31.
[2]
Penned by Presiding Judge Ernesto D. Acosta with Judges Ramon O. De Veyra, concurring and
Amancio Q. Saga, dissenting.
[3]
Rollo, p. 35.
[4]
Section 119 of the Tax Code.
[5]
Rollo, p. 37.
[6]
Citing the rulings in Asian Bank Corporation v. Commissioner of Internal Revenue, CTA Case No. 4720,
January 30, 1996; and in CIR v. Manila Jockey Club, 108 Phil. 821 (1960).
[7]
108 Phil. 821 (1960).
[8]
Penned by Presiding Judge Ernesto D. Acosta, with Judges Ramon O. De Veyra, concurring and
Amancio Q. Saga, dissenting.
[9]
Rollo, p. 44.
[10]
CTA Case No. 5433, October 7, 1995.
[11]
CTA Case No. 4720, January 30, 1996.
[12]
Rollo, pp. 42-43.
[13]
CA Rollo, p. 9.
[14]
G.R. Nos. L-19530 and L-19444, 27 February 1965, 13 SCRA 357.
[15]
Issued on 7 November 1980.
[16]
G.R. No. 66416, 21 March 1990, 183 SCRA 402.
[17]
Rollo, p. 11.
[18]
CA-G.R. SP No. 51248, 22 November 1999.
[19]
G.R. No. 103092, 21 July 1994, 234 SCRA 302.
[20]
G.R. No. 146749, 10 June 2003, 403 SCRA 634.
[21]
G.R. No. 148191, 25 November 2003, 416 SCRA 436.
[22]
Section 58(A).
[23]
China Banking Corporation v. Court of Appeals, supra; CIR v. Solidbank Corporation, supra.
[24]
CTA Case No. 52 (1952).
[25]
Supra..
[26]
First Trust Co. of St. Paul v. Commonwealth Co., 98 F.2d27 (1938).
[27]
Scott v. Hartley, 25 NE 826 (1890).
[28]
Laclede Gas Co. v. City of St. Louis, 253 S.W. 2d 832 (1953).
[29]
Supra.
[30]
Kewanee Industries, Inc. v. Reese, 845 P.2d 1238 (1993).
[31]
China Banking Corporation v. Court of Appeals, supra.
[32]
Supra.
[33]
Ibid.
[34]
China Banking Corporation v. Court of Appeals, supra.
[35]
Supra.
Ormoc Sugar Company, Inc. v. Treasurer of Ormoc
City [G.R. No. 23794 February 17, 1968]
Post under case digests, Taxation at Thursday, March 29, 2012 Posted by Schizophrenic Mind
Facts: The Municipal Board of Ormoc City passed
Ordinance No. 4 imposing on any and all productions of
centrifugal sugar milled at the Ormoc Sugar Company,
Inc., in Ormoc City a municipal tax equivalent to one per
centum (1%) per export sale to USA and otherforeign
countries. Payments for said tax were made,
under protest, by Ormoc Sugar Company, Inc. Ormoc
Sugar Company, Inc. filed before the Court of
First Instance of Leyte a complaint against the City of
Ormoc as well as its Treasurer, Municipal Board and
Mayor alleging that the ordinance is unconstitutional for
being violative of the equal protection clause and the rule
of uniformity of taxation. The court rendered a decision
that upheld the constitutionality of the ordinance. Hence,
this appeal.

Issue: Whether or not constitutional limits on the power of
taxation, specifically the equal protection clause and rule
of uniformity of taxation, were infringed?

Held: Yes. Equal protection clause applies only to persons
or things identically situated and does not bar a
reasonable classification of the subject of legislation, and
a classification is reasonable where 1) it is based upon
substantial distinctions; 2) these are germane to the
purpose of the law; 3) the classification applies not only to
present conditions, but also to future conditions
substantially identical to those present; and 4) the
classification applies only to those who belong to the same
class. A perusal of the requisites shows that the
questioned ordinance does not meet them, for it taxes only
centrifugal sugar produced and exported by the Ormoc
Sugar Company, Inc. and none other. The taxing
ordinance should not be singular and exclusive as to
exclude any subsequently established sugar central for
the coverage of the tax.
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Facts: The municipal council of Cordova, Cebu adopted Ordinance 10 (1946) imposing
an annual tax of P150 on occupation or the exercise of the privilege of installation
manager; Ordinance 9 (1947) imposing an annual tax of P40 for local deposits in drums
of combustible and inflammable materials and an annual tax of P200 for tin can
factories; and Ordinance 11 (1948) imposing an annual tax of P150 on tin can factories
having a maximum annual output capacity of 30,000 tin cans. Shell Co., a foreign
corporation, filed suit for the refund of the taxes paid by it, on the ground that the
ordinances imposing such taxes are ultra vires.

Issue: Whether Ordinance 10 is discriminatory and hostile because there is no other
person in the locality who exercise such designation or occupation.
Held: The fact that there is no other person in the locality who exercises such a
designation or calling does not make the ordinance discriminatory and hostile,
inasmuch as it is and will be applicable to any person or firm who exercises such calling
or occupation named or designated as installation manager.
SYLLABI/SYNOPSIS
EN BANC
[G.R. No. 127410. January 20, 1999]
CONRADO L. TIU, JUAN T. MONTELIBANO JR. and ISAGANI M.
JUNGCO, petitioners, vs. COURT OF APPEALS, HON. TEOFISTO T.
GUINGONA JR., BASES CONVERSION AND DEVELOPMENT
AUTHORITY, SUBIC BAY METROPOLITAN AUTHORITY,
BUREAU OF INTERNAL REVENUE, CITY TREASURER OF
OLONGAPO and MUNICIPAL TREASURER OF SUBIC,
ZAMBALES, respondents.
D E C I S I O N
PANGANIBAN, J .:
The constitutional right to equal protection of the law is not violated by an executive order,
issued pursuant to law, granting tax and duty incentives only to businesses and residents within
the secured area of the Subic Special Economic Zone and denying them to those who live
within the Zone but outside such fenced-in territory. The Constitution does not require
absolute equality among residents. It is enough that all persons under like circumstances or
conditions are given the same privileges and required to follow the same obligations. In short, a
classification based on valid and reasonable standards does not violate the equal protection
clause.
The Case

Before us is a petition for review under Rule 45 of the Rules of Court, seeking the reversal
of the Court of Appeals Decision
[1]
promulgated on August 29, 1996, and Resolution
[2]
dated
November 13, 1996, in CA-GR SP No. 37788.
[3]
The challenged Decision upheld the
constitutionality and validity of Executive Order No. 97-A (EO 97-A), according to which the
grant and enjoyment of the tax and duty incentives authorized under Republic Act No. 7227 (RA
7227) were limited to the business enterprises and residents within the fenced-in area of the
Subic Special Economic Zone (SSEZ).
The assailed Resolution denied the petitioners motion for reconsideration.
The Facts

On March 13, 1992, Congress, with the approval of the President, passed into law RA 7227
entitled 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. Section 12 thereof created the Subic Special Economic
Zone and granted thereto special privileges, as follows:
SEC. 12. Subic Special Economic Zone. -- Subject to the concurrence by resolution
of the sangguniang panlungsod of the City of Olongapo and thesangguniang bayan of
the Municipalities of Subic, Morong and Hermosa, there is hereby created a Special
Economic and Free-port Zone 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
Military Bases Agreement between the Philippines and the United States of America
as amended, and within the territorial jurisdiction of the Municipalities of Morong and
Hermosa, Province of Bataan, hereinafter referred to as the Subic Special Economic
Zone whose metes and bounds shall be delineated in a proclamation to be issued by
the President of the Philippines. Within thirty (30) days after the approval of this Act,
each local government unit shall submit its resolution of concurrence to join the Subic
Special Economic Zone to the Office of the President. Thereafter, the President of the
Philippines shall issue a proclamation defining the metes and bounds of the zone as
provided herein.
The abovementioned zone shall be subject to the following policies:
(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 provision of existing laws, rules and regulations to the contrary
notwithstanding, no taxes, local and national, shall be imposed within the Subic
Special Economic Zone. In lieu of paying taxes, three percent (3%) of the gross
income earned by all businesses and enterprises within the Subic Special Economic
Zone shall be remitted to the National Government, one percent (1%) each to the local
government units affected by the declaration of the zone in proportion to their
population area, and other factors. In addition, there is hereby established a
development fund of one percent (1%) of the gross income earned by all businesses
and enterprises within the Subic Special Economic Zone to be utilized for the
development of municipalities outside the City of Olongapo and the Municipality of
Subic, and other municipalities contiguous to the base areas.
In case of conflict between national and local laws with respect to tax exemption
privileges in the Subic Special Economic Zone, the same shall be resolved in favor of
the latter;
(d) No exchange control policy shall be applied and free markets for foreign
exchange, gold, securities and future shall be allowed and maintained in the Subic
Special Economic Zone;
(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 the 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;
(h) The defense of the zone and the security of its perimeters shall be the
responsibility of the National Government in coordination with the Subic Bay
Metropolitan Authority. The Subic Bay Metropolitan Authority shall provide and
establish its own security and fire-fighting forces; and
(i) Except as herein provided, the local government units comprising the Subic
Special Economic Zone shall retain their basic autonomy and identity. The cities shall
be governed by their respective charters and the municipalities shall operate and
function in accordance with Republic Act No. 7160, otherwise known as the Local
Government Code of 1991.
On June 10, 1993, then President Fidel V. Ramos issued Executive Order No. 97 (EO 97),
clarifying the application of the tax and duty incentives thus:
Section 1. On Import Taxes and Duties -- Tax and duty-free importations shall apply
only to raw materials, capital goods and equipment brought in by business enterprises
into the SSEZ. Except for these items, importations of other goods into the SSEZ,
whether by business enterprises or resident individuals, are subject to taxes and duties
under relevant Philippine laws.
The exportation or removal of tax and duty-free goods from the territory of the SSEZ
to other parts of the Philippine territory shall be subject to duties and taxes under
relevant Philippine laws.
Section 2. On All Other Taxes. -- In lieu of all local and national taxes (except
import taxes and duties), all business enterprises in the SSEZ shall be required to pay
the tax specified in Section 12(c) of R.A. No. 7227.
Nine days after, on June 19, 1993, the President issued Executive Order No. 97-A (EO 97-
A), specifying the area within which the tax-and-duty-free privilege was operative, viz.:
Section 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 [Subic
Special Economic and Free Port Zone]. 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 duty-
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
On October 26, 1994, the petitioners challenged before this Court the constitutionality of EO
97-A for allegedly being violative of their right to equal protection of the laws. In a Resolution
dated June 27, 1995, this Court referred the matter to the Court of Appeals, pursuant to Revised
Administrative Circular No. 1-95.
Incidentally, on February 1, 1995, Proclamation No. 532 was issued by President Ramos. It
delineated the exact metes and bounds of the Subic Special Economic and Free Port Zone,
pursuant to Section 12 of RA 7227.
Ruling of the Court of Appeals

Respondent Court held that there is no substantial difference between the provisions of EO
97-A and Section 12 of RA 7227. In both, the Secured Area is precise and well-defined as
xxx the lands occupied by the Subic Naval Base and its contiguous extensions as embraced,
covered and defined by the 1947 Military Bases Agreement between the Philippines and the
United States of America, as amended, xxx. The appellate court concluded that such being the
case, petitioners could not claim that EO 97-A is unconstitutional, while at the same time
maintaining the validity of RA 7227.
The court a quo also explained that the intention of Congress was to confine the coverage of
the SSEZ to the secured area and not to include the entire Olongapo City and other areas
mentioned in Section 12 of the law. It relied on the following deliberations in the Senate:
Senator Paterno. Thank you, Mr. President. My first question is the extent of the economic
zone. Since this will be a free port, in effect, I believe that it is important to delineate or make sure that
the delineation will be quite precise[. M]y question is: Is it the intention that the entire of Olongapo City,
the Municipality of Subic and the Municipality of Dinalupihan will be covered by the special economic
zone or only portions thereof?
Senator Shahani. Only portions, Mr. President. In other words, where the actual operations of the
free port will take place.
Senator Paterno. I see. So, we should say, COVERING THE DESIGNATED PORTIONS OR
CERTAIN PORTIONS OF OLONGAPO CITY, SUBIC AND DINALUPIHAN to make it clear that it
is not supposed to cover the entire area of all of these territories.
Senator Shahani. So, the Gentleman is proposing that the words CERTAIN AREAS ...
The President. The Chair would want to invite the attention of the Sponsor and Senator Paterno to
letter C, which says: THE PRESIDENT OF THE PHILIPPINES IS HEREBY AUTHORIZED TO
PROCLAIM, DELINEATE AND SPECIFY THE METES AND BOUNDS OF OTHER SPECIAL
ECONOMIC ZONES WHICH MAY BE CREATED IN THE CLARK MILITARY RESERVATIONS
AND ITS EXTENSIONS.
Probably, this provision can be expanded since, apparently, the intention is that what is referred to
in Olongapo as Metro Olongapo is not by itself ipso jure already a special economic zone.
Senator Paterno. That is correct.
The President. Someone, some authority must declare which portions of the same shall be the
economic zone. Is it the intention of the author that it is the President of the Philippines who will make
such delineation?
Senator Shahani. Yes, Mr. President.
The Court of Appeals further justified the limited application of the tax incentives as being
within the prerogative of the legislature, pursuant to its avowed purpose [of serving] some
public benefit or interest. It ruled that EO 97-A merely implements the legislative purpose of
[RA 7227].
Disagreeing, petitioners now seek before us a review of the aforecited Court of Appeals
Decision and Resolution.
The Issue

Petitioners submit the following issue for the resolution of the Court:
[W]hether or not Executive Order No. 97-A violates the equal protection clause of the
Constitution. Specifically the issue is whether the provisions of Executive Order No. 97-A
confining the application of R.A. 7227 within the secured area and excluding the residents of the
zone outside of the secured area is discriminatory or not.
[4]

The Courts Ruling

The petition
[5]
is bereft of merit.
Main Issue: The Constitutionality of EO 97-A

Citing Section 12 of RA 7227, petitioners contend that the SSEZ encompasses (1) the City
of Olongapo, (2) the Municipality of Subic in Zambales, and (3) the area formerly occupied by
the Subic Naval Base. However, EO 97-A, according to them, narrowed down the area within
which the special privileges granted to the entire zone would apply to the present fenced-in
former Subic Naval Base only. It has thereby excluded the residents of the first two
components of the zone from enjoying the benefits granted by the law. It has effectively
discriminated against them, without reasonable or valid standards, in contravention of the equal
protection guarantee.
On the other hand, the solicitor general defends, on behalf of respondents, the validity of EO
97-A, arguing that Section 12 of RA 7227 clearly vests in the President the authority to delineate
the metes and bounds of the SSEZ. He adds that the issuance fully complies with the
requirements of a valid classification.
We rule in favor of the constitutionality and validity of the assailed EO. Said Order is not
violative of the equal protection clause; neither is it discriminatory. Rather, we find real and
substantive distinctions between the circumstances obtaining inside and those outside the Subic
Naval Base, thereby justifying a valid and reasonable classification.
The fundamental right of equal protection of the laws is not absolute, but is subject to
reasonable classification. If the groupings are characterized by substantial distinctions that make
real differences, one class may be treated and regulated differently from another.
[6]
The
classification must also be germane to the purpose of the law and must apply to all those
belonging to the same class.
[7]
Explaining the nature of the equal protection guarantee, the Court
in Ichong v. Hernandez
[8]
said:
The equal protection of the law clause is against undue favor and individual or class
privilege, as well as hostile discrimination or the oppression of inequality. It is not
intended to prohibit legislation which is limited either [by] the object to which it is
directed or by [the] territory within which it is to operate. It does not demand absolute
equality among residents; it merely requires that all persons shall be treated
alike, under like circumstances and conditions both as to privileges conferred and
liabilities enforced. The equal protection clause is not infringed by legislation which
applies only to those persons falling within a specified class, if it applies alike to all
persons within such class, and reasonable grounds exist for making a distinction
between those who fall within such class and those who do not.
Classification, to be valid, must (1) rest on substantial distinctions, (2) be germane to the
purpose of the law, (3) not be limited to existing conditions only, and (4) apply equally to all
members of the same class.
[9]

We first determine the purpose of the law. From the very title itself, it is clear that RA 7227
aims primarily to accelerate the conversion of military reservations into productive
uses. Obviously, the lands covered under the 1947 Military Bases Agreement are its
object. Thus, the law avows this policy:
SEC. 2. Declaration of Policies. -- It is hereby declared the policy of the
Government to accelerate the sound and balanced conversion into alternative
productive uses of the Clark and Subic military reservations and their extensions
(John Hay Station, Wallace Air Station, ODonnell Transmitter Station, San Miguel
Naval Communications Station and Capas Relay Station), to raise funds by the sale of
portions of Metro Manila military camps, and to apply said funds as provided herein
for the development and conversion to productive civilian use of the lands covered
under the 1947 Military Bases Agreement between the Philippines and the United
States of America, as amended.
To undertake the above objectives, the same law created the Bases Conversion and
Development Authority, some of whose relevant defined purposes are:
(b) To adopt, prepare and implement a comprehensive and detailed development
plan embodying a list of projects including but not limited to those provided in the
Legislative-Executive Bases Council (LEBC) framework plan for the sound and
balanced conversion of the Clark and Subic military reservations and their extensions
consistent with ecological and environmental standards, into other productive uses to
promote the economic and social development of Central Luzon in particular and the
country in general;
(c) To encourage the active participation of the private sector in transforming the
Clark and Subic military reservations and their extensions into other productive uses;
Further, in creating the SSEZ, the law declared it a policy to develop the zone into a self-
sustaining, industrial, commercial, financial and investment center.
[10]

From the above provisions of the law, it can easily be deduced that the real concern of RA
7227 is to convert the lands formerly occupied by the US military bases into economic or
industrial areas. In furtherance of such objective, Congress deemed it necessary to extend
economic incentives to attract and encourage investors, both local and foreign. Among such
enticements are:
[11]
(1) a separate customs territory within the zone, (2) tax-and-duty-free
importations, (3) restructured income tax rates on business enterprises within the zone, (4) no
foreign exchange control, (5) liberalized regulations on banking and finance, and (6) the grant of
resident status to certain investors and of working visas to certain foreign executives and
workers.
We believe it was reasonable for the President to have delimited the application of some
incentives to the confines of the former Subic military base. It is this specific area which the
government intends to transform and develop from its status quo ante as an abandoned naval
facility into a self-sustaining industrial and commercial zone, particularly for big foreign and
local investors to use as operational bases for their businesses and industries. Why the seeming
bias for big investors? Undeniably, they are the ones who can pour huge investments to spur
economic growth in the country and to generate employment opportunities for the Filipinos, the
ultimate goals of the government for such conversion. The classification is, therefore, germane
to the purposes of the law. And as the legal maxim goes, The intent of a statute is the law.
[12]

Certainly, there are substantial differences between the big investors who are being lured to
establish and operate their industries in the so-called secured area and the present business
operators outside the area. On the one hand, we are talking of billion-peso investments and
thousands of new jobs. On the other hand, definitely none of such magnitude. In the first, the
economic impact will be national; in the second, only local. Even more important, at this time
the business activities outside the secured area are not likely to have any impact in achieving
the purpose of the law, which is to turn the former military base to productive use for the benefit
of the Philippine economy. There is, then, hardly any reasonable basis to extend to them the
benefits and incentives accorded in RA 7227. Additionally, as the Court of Appeals pointed out,
it will be easier to manage and monitor the activities within the secured area, which is already
fenced off, to prevent fraudulent importation of merchandise or smuggling.
It is well-settled that the equal-protection guarantee does not require territorial uniformity of
laws.
[13]
As long as there are actual and material differences between territories, there is no
violation of the constitutional clause. And of course, anyone, including the petitioners,
possessing the requisite investment capital can always avail of the same benefits by channeling
his or her resources or business operations into the fenced-off free port zone.
We believe that the classification set forth by the executive issuance does not apply merely
to existing conditions. As laid down in RA 7227, the objective is to establish a self-sustaining,
industrial, commercial, financial and investment center in the area. There will, therefore, be a
long-term difference between such investment center and the areas outside it.
Lastly, the classification applies equally to all the resident individuals and businesses within
the secured area. The residents, being in like circumstances or contributing directly to the
achievement of the end purpose of the law, are not categorized further. Instead, they are all
similarly treated, both in privileges granted and in obligations required.
All told, the Court holds that no undue favor or privilege was extended. The classification
occasioned by EO 97-A was not unreasonable, capricious or unfounded. To repeat, it was based,
rather, on fair and substantive considerations that were germane to the legislative purpose.
WHEREFORE, the petition is DENIED for lack of merit. The assailed Decision and
Resolution are hereby AFFIRMED. Costs against petitioners.
SO ORDERED.
Davide, Jr., C.J., Romero, Bellosillo, Melo, Puno, Vitug, Kapunan, Mendoza, Martinez,
Quisumbing, Purisima, Pardo, Buena, and Gonzaga-Reyes, JJ.,concur.

[1]
Rollo, pp. 20-37.
[2]
Ibid., pp. 39-55.
[3]
Decided by the Special Thirteenth Division, composed of Associate Justices Artemon D. Luna (chairman
and ponente), Ramon A. Barcelona and Salvador J. Valdez Jr.
[4]
Petition, p. 3; rollo, p. 6.
[5]
This case was deemed submitted for resolution upon receipt of Respondent BCDAs Memorandum on September
7, 1998.
[6]
Dumlao v. Comelec, 95 SCRA 392, 404, January 22, 1980; Himagan v. People, 237 SCRA 538, October 7,
1994. See also JMM Promotion and Management, Inc. v. Court of Appeals, 260 SCRA 319, 331-332, August 5,
1996; Conference of Maritime Manning Agencies, Inc. v. POEA, 243 SCRA 666, 677, April 21, 1995;
Ceniza v. Comelec, 95 SCRA 763, 772, January 28, 1980; Vera v. Cuevas, 90 SCRA 379, May 31, 1979; Tolentino
v. Secretary of Finance, 235 SCRA 630, August 25, 1994.
[7]
Dumlao v. Comelec, ibid., p. 405; citing Peralta v. Comelec, 82 SCRA 30 (1978); Rafael v. Embroidery and
Apparel Control and Inspection Board, 21 SCRA 336 (1967); and Ichong v.Hernandez, 101 Phil 1155 (1957). See
also JMM Promotion and Management, Inc. v. Court of Appeals, ibid.; Philippine Judges Association v. Prado, 227
SCRA 703, November 11, 1993; Villegas v. Hiu Chiong Tsai Pao Ho, 86 SCRA 270, 275 (1978).
[8]
Ibid., p. 1164, per Labrador, J.; citing 2 Cooley, Constitutional Limitations, 824-825. See further discussion on
pp. 1175-1180.
[9]
Bernas, The 1987 Constitution of the Republic of the Philippines: A Commentary, 1996 ed., p. 124; quoting
People v. Cayat, 68 Phil 12, 18 (1939).
[10]
12 (a), RA 7227.
[11]
12 (b, c, d, e & f).
[12]
Philippine National Bank v. Office of the President, 252 SCRA 5, January 18, 1996; Eugenio v. Drilon, 252
SCRA 106, January 22, 1996.
[13]
Bernas, supra, p. 132.
Tiu vs. CA (GR. No. 127410 January 20, 1999)
Post under case digests, Taxation at Saturday, March 10, 2012 Posted by Schizophrenic Mind
Facts: Congress, with the approval of the President,
passed into law RA 7227 entitled "An Act Accelerating
the Conversion of MilitaryReservations Into Other
Productive Uses, Creating the BasesConversion and
Development Authority for this Purpose, Providing Funds
Therefor and for Other Purposes." Section 12 thereof
created the Subic Special Economic Zone and granted
there to special privileges. President Ramos
issued Executive Order No. 97, clarifying the application of
the tax and duty incentives. The President
issued Executive Order No. 97-A, specifying the area
within which the tax-and-duty-free privilege was operative.
The petitioners challenged before this Court the
constitutionality of EO 97-A for allegedly being violative of
their right to equal protection of the laws. This Court
referred the matter to the Court of Appeals. Proclamation
No. 532 was issued by President Ramos. It delineated the
exact metes and bounds of the Subic
Special Economic and Free Port Zone, pursuant to
Section 12 of RA 7227. Respondent Court held that "there
is no substantial difference between the provisions of EO
97-A and Section 12 of RA 7227. In both, the 'Secured
Area' is precise and well-defined as '. . . the lands
occupied by the Subic Naval Base and its contiguous
extensions as embraced, covered and defined by the
1947 Military Bases Agreement between the Philippines
and the United States of America, as amended . . .'"

Issue: Whether or not Executive Order No. 97-A violates
the equal protection clause of the Constitution

Held: No. The Court found real and substantive
distinctions between the circumstances obtaining inside
and those outside the Subic Naval Base, thereby justifying
a valid and reasonableclassification. The fundamental
right of equal protection of the laws is not absolute, but is
subject to reasonable classification. If the groupings are
characterized by substantial distinctions that make real
differences, one class may be treated and regulated
differently from another. The classification must also be
germane to the purpose of the law and must apply to all
those belonging to the same class. Classification, to be
valid, must (1) rest on substantial distinctions, (2) be
germane to the purpose of the law, (3) not be limited to
existing conditions only, and (4) apply equally to all
members of the same class. The Supreme Court believed
it was reasonable for the President to have delimited the
application of some incentives to the confines of the
former Subic military base. It is this specific area which the
government intends to transform and develop from its
status quo ante as an abandoned naval facility into a self-
sustaining industrial and commercial zone, particularly for
big foreign and local investors to use as operational bases
for their businesses and industries.
EN BANC
[G.R. No. 143076. June 10, 2003]
PHILIPPINE RURAL ELECTRIC COOPERATIVES ASSOCIATION, INC.
(PHILRECA); AGUSAN DEL NORTE ELECTRIC COOPERATIVE,
INC. (ANECO); ILOILO I ELECTRIC COOPERATIVE, INC. (ILECO
I); and ISABELA I ELECTRIC COOPERATIVE, INC. (ISELCO
I), petitioners, vs. THE SECRETARY, DEPARTMENT OF
INTERIOR AND LOCAL GOVERNMENT, and THE
SECRETARY, DEPARTMENT OF FINANCE, respondents.
D E C I S I O N
PUNO, J .:
This is a petition for Prohibition under Rule 65 of the Rules of Court with prayer for
the issuance of a temporary restraining order seeking to annul as unconstitutional
sections 193 and 234 of R.A. No. 7160 otherwise known as the Local Government
Code.
On May 23, 2000, a class suit was filed by petitioners in their own behalf and in
behalf of other electric cooperatives organized and existing under P.D. No. 269 who are
members of petitioner Philippine Rural Electric Cooperatives Association, Inc.
(PHILRECA). Petitioner PHILRECA is an association of 119 electric cooperatives
throughout the country. Petitioners Agusan del Norte Electric Cooperative, Inc.
(ANECO), Iloilo I Electric Cooperative, Inc. (ILECO I) and Isabela I Electric Cooperative,
Inc. (ISELCO I) are non-stock, non-profit electric cooperatives organized and existing
under P.D. No. 269, as amended, and registered with the National Electrification
Administration (NEA).
Under P.D. No. 269, as amended, or the National Electrification Administration
Decree, it is the declared policy of the State to provide the total electrification of the
Philippines on an area coverage basis the same being vital to the people and the
sound development of the nation.
[1]
Pursuant to this policy, P.D. No. 269 aims to
promote, encourage and assist all public service entities engaged in supplying electric
service, particularly electric cooperatives by giving every tenable support and
assistance to the electric cooperatives coming within the purview of the
law.
[2]
Accordingly, Section 39 of P.D. No. 269 provides for the following tax incentives to
electric cooperatives:
SECTION 39. Assistance to Cooperatives; Exemption from Taxes, Imposts,
Duties, Fees; Assistance from the National Power Corporation. Pursuant to the
national policy declared in Section 2, the Congress hereby finds and declares that the
following assistance to cooperative is necessary and appropriate:
(a) Provided that it operates in conformity with the purposes and provisions of
this Decree, cooperatives (1) shall be permanently exempt from paying income
taxes, and (2) for a period ending on December 31 of the thirtieth full calendar year
after the date of a cooperative's organization or conversion hereunder, or until it shall
become completely free of indebtedness incurred by borrowing, whichever event first
occurs, shall be exempt from the payment (a) of all National Government, local
government and municipal taxes and fees, including franchise, filing,
recordation, license or permit fees or taxes and any fees, charges, or costs
involved in any court or administrative proceeding in which it may be a
party, and (b) of all duties or imposts on foreign goods acquired for its
operations, the period of such exemption for a new cooperative formed by
consolidation, as provided for in Section 29, to begin from as of the date of the
beginning of such period for the constituent consolidating cooperative which was
most recently organized or converted under this Decree: Provided, That the Board of
Administrators shall, after consultation with the Bureau of Internal Revenue,
promulgate rules and regulations for the proper implementation of the tax exemptions
provided for in this Decree.
.
[3]

From 1971 to 1978, in order to finance the electrification projects envisioned by P.D.
No. 269, as amended, the Philippine Government, acting through the National
Economic Council (now National Economic Development Authority) and the NEA,
entered into six (6) loan agreements with the government of the United States of
America through the United States Agency for International Development (USAID) with
electric cooperatives, including petitioners ANECO, ILECO I and ISELCO I, as
beneficiaries. The six (6) loan agreements involved a total amount of approximately
US$86,000,000.00. These loan agreements are existing until today.
The loan agreements contain similarly worded provisions on the tax application of
the loan and any property or commodity acquired through the proceeds of the loan.
Thus, Section 6.5 of A.I.D. Loan No. 492-H-027 dated November 15, 1971 provides:
Section 6.5. Taxes and Duties. The Borrower covenants and agrees that this Loan
Agreement and the Loan provided for herein shall be free from, and the Principal and
interest shall be paid to A.I.D. without deduction for and free from, any taxation or
fees imposed under any laws or decrees in effect within the Republic of the
Philippines or any such taxes or fees so imposed or payable shall be reimbursed by the
Borrower with funds other than those provided under the Loan. To the extent that (a)
any contractor, including any consulting firm, any personnel of such contractor
financed hereunder, and any property or transactions relating to such contracts and (b)
any commodity procurement transactions financed hereunder, are not exempt from
identifiable taxes, tariffs, duties and other levies imposed under laws in effect in the
country of the Borrower, the Borrower and/or Beneficiary shall pay or reimburse the
same with funds other than those provided under the Loan.
[4]

Petitioners contend that pursuant to the provisions of P.D. No. 269, as amended,
and the above-mentioned provision in the loan agreements, they are exempt from
payment of local taxes, including payment of real property tax. With the passage of the
Local Government Code, however, they allege that their tax exemptions have been
invalidly withdrawn. In particular, petitioners assail Sections 193 and 234 of the Local
Government Code on the ground that the said provisions discriminate against them, in
violation of the equal protection clause. Further, they submit that the said provisions are
unconstitutional because they impair the obligation of contracts between the Philippine
Government and the United States Government.
On July 25, 2000 we issued a Temporary Restraining Order.
[5]

We note that the instant action was filed directly to this Court, in disregard of the
rule on hierarchy of courts. However, we opt to take primary jurisdiction over the present
petition and decide the same on its merits in view of the significant constitutional issues
raised by the parties dealing with the tax treatment of cooperatives under existing laws
and in the interest of speedy justice and prompt disposition of the matter.
I
There is No Violation of the Equal Protection Clause
The pertinent parts of Sections 193 and 234 of the Local Government Code provide:
Section 193. Withdrawal of Tax Exemption Privileges.Unless otherwise provided in
persons, whether natural or juridical, including government-owned and controlled
No. 6938, non-stock and non-profit hospitals and educational institutions, are hereby
.
Section 234. Exemptions from real property tax.The following are exempted from
payment of the real property tax:
.
.
previously granted to, or presently enjoyed by, all persons whether natural or juridical,
including all government-owned and controlled corporations are hereby withdrawn
upon effectivity of this Code.
[6]

Petitioners argue that the above provisions of the Local Government Code are
unconstitutional for violating the equal protection clause. Allegedly, said provisions
unduly discriminate against petitioners who are duly registered cooperatives under P.D.
No. 269, as amended, and not under R.A. No. 6938 or the Cooperative Code of the
Philippines. They stress that cooperatives registered under R.A. No. 6938 are singled
out for tax exemption privileges under the Local Government Code. They maintain that
electric cooperatives registered with the NEA under P.D. No. 269, as amended, and
electric cooperatives registered with the Cooperative Development Authority (CDA)
under R.A. No. 6938 are similarly situated for the following reasons: a) petitioners are
registered with the NEA which is a government agency like the CDA; b) petitioners, like
CDA-registered cooperatives, operate for service to their member-consumers; and c)
prior to the enactment of the Local Government Code, petitioners, like CDA-registered
cooperatives, were already tax-exempt.
[7]
Thus, petitioners contend that to grant tax
exemptions from local government taxes, including real property tax under Sections 193
and 234 of the Local Government Code only to registered cooperatives under R.A. No.
6938 is a violation of the equal protection clause.
We are not persuaded. The equal protection clause under the Constitution means
that no person or class of persons shall be deprived of the same protection of laws
which is enjoyed by other persons or other classes in the same place and in like
circumstances.
[8]
Thus, the guaranty of the equal protection of the laws is not violated
by a law based on reasonable classification. Classification, to be reasonable, must (1)
rest on substantial distinctions; (2) be germane to the purposes of the law; (3) not be
limited to existing conditions only; and (4) apply equally to all members of the same
class.
[9]

We hold that there is reasonable classification under the Local Government Code to
justify the different tax treatment between electric cooperatives covered by P.D. No.
269, as amended, and electric cooperatives under R.A. No. 6938.
First, substantial distinctions exist between cooperatives under P.D. No. 269, as
amended, and cooperatives under R.A. No. 6938. These distinctions are manifest in at
least two material respects which go into the nature of cooperatives envisioned by R.A.
No. 6938 and which characteristics are not present in the type of cooperative
associations created under P.D. No. 269, as amended.
a. Capital Contributions by Members
A cooperative under R.A. No. 6938 is defined as:
[A] duly registered association of persons with a common bond of interest,
who have voluntarily joined together to achieve a lawful common or social
economic end, making equitable contributions to the capital required and
accepting a fair share of the risks and benefits of the undertaking in
accordance with universally accepted cooperative principles.
[10]

The above definition provides for the following elements of a cooperative: a)
association of persons; b) common bond of interest; c) voluntary association; d) lawful
common social or economic end; e) capital contributions; f) fair share of risks and
benefits; g) adherence to cooperative values; and g) registration with the appropriate
government authority.
[11]

The importance of capital contributions by members of a cooperative under R.A.
No. 6938 was emphasized during the Senate deliberations as one of the key factors
which distinguished electric cooperatives under P.D. No. 269, as amended, from electric
cooperatives under the Cooperative Code. Thus:
Senator Osmea. Will this Code, Mr. President, cover electric cooperatives as they
exist in the country today and are administered by the National Electrification
Administration?
Senator Aquino. That cannot be answered with a simple yes or no, Mr. President.
The answer will depend on what provisions we will eventually come up with.Electric
cooperatives as they exist today would not fall under the term cooperative as
used in this bill because the concept of a cooperative is that which adheres and
practices certain cooperative principles. .
.
Senator Aquino. To begin with, one of the most important requirements, Mr.
President, is the principle where members bind themselves to help themselves. It
is because of their collectivity that they can have some economic benefits. In this
particular case [cooperatives under P.D. No. 269], the government is the one that
funds these so-called electric cooperatives.
.
Senator Aquino. That is why in Article III we have the following definition:
A cooperative is an association of persons with a common bond of interest who have
voluntarily joined together to achieve a common social or economic end, making
equitable contributions to the capital required.
In this particular case [cooperatives under P.D. No. 269], Mr. President, the
members do not make substantial contribution to the capital required. It is the
government that puts in the capital, in most cases.
.
Senator Osmea. Under line 6, Mr. President, making equitable contributions to the
capital required would exclude electric cooperatives [under P.D. No. 269]. Because
the membership does not make equitable contributions.
Senator Aquino. Yes, Mr. President. This is precisely what I mean, that electric
cooperatives [under P.D. No. 269] do not qualify in the spirit of cooperatives. That is
the reason why they should be eventually assessed whether they intend to comply
with the cooperatives or not. Because, if after giving them a second time, they do not
comply, then, they should not be classified as cooperatives.
Senator Osmea. Mr. President, the measure of their qualifying as a cooperative
would be the requirement that a member of the electric cooperative must
contribute a pro rata share of the capital of the cooperative in cash to be a
cooperative.
[12]

Nowhere in P.D. No. 269, as amended, does it require cooperatives to make
equitable contributions to capital. Petitioners themselves admit that to qualify as a
member of an electric cooperative under P.D. No. 269, only the payment of a P5.00
membership fee is required which is even refundable the moment the member is no
longer interested in getting electric service from the cooperative or will transfer to
another place outside the area covered by the cooperative.
[13]
However, under the
Cooperative Code, the articles of cooperation of a cooperative applying for registration
must be accompanied with the bonds of the accountable officers and a sworn statement
of the treasurer elected by the subscribers showing that at least twenty-five per cent
(25%) of the authorized share capital has been subscribed and at least twenty-five per
cent (25%) of the total subscription has been paid and in no case shall the paid-up
share capital be less than Two thousand pesos (P2,000.00).
[14]

b. Extent of Government Control over Cooperatives
Another principle adhered to by the Cooperative Code is the principle of
subsidiarity. Pursuant to this principle, the government may only engage in development
activities where cooperatives do not posses the capability nor the resources to do so
and only upon the request of such cooperatives.
[15]
Thus, Article 2 of the Cooperative
Code provides:
Art. 2. Declaration of Policy. It is the declared policy of the State to foster the
creation and growth of cooperatives as a practical vehicle for prompting self-reliance
and harnessing people power towards the attainment of economic development and
social justice. The State shall encourage the private sector to undertake the actual
formation and organization to cooperatives and shall create an atmosphere that is
conducive to the growth and development of these cooperatives.
Towards this end, the Government and all its branches, subdivisions, instrumentalities
and agencies shall ensure the provision of technical guidance, financial assistance and
other services to enable said cooperatives to develop into viable and responsive
economic enterprises and thereby bring about a strong cooperative movement that is
free from any conditions that might infringe upon the autonomy or organizational
integrity of cooperatives.
Further, the State recognizes the principle of subsidiarity under which the
cooperative sector will initiate and regulate within its own ranks the promotion
and organization, training and research, audit and support services relating to
cooperatives with government assistance where necessary.
[16]

Accordingly, under the charter of the CDA, or the primary government agency
tasked to promote and regulate the institutional development of cooperatives, it is the
declared policy of the State that:
[g]overnment assistance to cooperatives shall be free from any restriction and
conditionality that may in any manner infringe upon the objectives and character of
cooperatives as provided in this Act. The State shall, except as provided in this Act,
maintain the policy of noninterference in the management and operation of
cooperatives.
[17]

In contrast, P.D. No. 269, as amended by P.D. No. 1645, is replete with provisions
which grant the NEA, upon the happening of certain events, the power to control and
take over the management and operations of cooperatives registered under it. Thus:
a) the NEA Administrator has the power to designate, subject to the confirmation
of the Board of Administrators, an Acting General Manager and/or Project
Supervisor for a cooperative where vacancies in the said positions occur and/or
when the interest of the cooperative or the program so requires, and to
prescribe the functions of the said Acting General Manager and/or Project
Supervisor,which powers shall not be nullified, altered or diminished by any
policy or resolution of the Board of Directors of the cooperative
concerned;
[18]

b) the NEA is given the power of supervision and control over electric
cooperatives and pursuant to such powers, NEA may issue orders, rules and
regulations motu propio or upon petition of third parties to conduct referenda
and other similar actions in all matters affecting electric cooperatives;
[19]

c) No cooperative shall borrow money from any source without the approval of the
Board of Administrators of the NEA;
[20]
and
d) The management of a cooperative shall be vested in its Board, subject to the
supervision and control of NEA which shall have the right to be represented
and to participate in all Board meetings and deliberations and to approve all
policies and resolutions.
[21]

The extent of government control over electric cooperatives covered by P.D. No.
269, as amended, is largely a function of the role of the NEAas a primary source of
funds of these electric cooperatives. It is crystal clear that NEA incurred loans from
various sources to finance the development and operations of the electric
cooperatives. Consequently, amendments to P.D. No. 269 were primarily geared to
expand the powers of the NEA over the electric cooperatives to ensure that loans
granted to them would be repaid to the government. In contrast, cooperatives under
R.A. No. 6938 are envisioned to be self-sufficient and
independent organizations with minimal government intervention or regulation.
To be sure, the transitory provisions of R.A. No. 6938 are indicative of the
recognition by Congress of the fundamental distinctions between electric cooperatives
organized under P.D No. 269, as amended, and cooperatives under the new
Cooperative Code. Article 128 of the Cooperative Code provides that all cooperatives
registered under previous laws shall be deemed registered with the CDA upon
submission of certain requirements within one year. However, cooperatives created
under P.D. No. 269, as amended, are given three years within which toqualify and
register with the CDA, after which, provisions of P.D. No. 1645 which expand the
powers of the NEA over electric cooperatives, would no longer apply.
[22]

Second, the classification of tax-exempt entities in the Local Government Code is
germane to the purpose of the law. The Constitutional mandate that every local
government unit shall enjoy local autonomy, does not mean that the exercise of power
by local governments is beyond regulation by Congress. Thus, while each government
unit is granted the power to create its own sources of revenue, Congress, in light of its
broad power to tax, has the discretion to determine the extent of the taxing powers of
local government units consistent with the policy of local autonomy.
[23]

Section 193 of the Local Government Code is indicative of the legislative intent to
vest broad taxing powers upon local government units and to limit exemptions from
local taxation to entities specifically provided therein. Section 193 provides:
Section 193. Withdrawal of Tax Exemption Privileges.Unless otherwise provided in
persons, whether natural or juridical, including government-owned and controlled
No. 6938, non-stock and non-profit hospitals and educational institutions, are hereby
[24]

The above provision effectively withdraws exemptions from local taxation enjoyed
by various entities and organizations upon effectivity of the Local Government
Code except for a) local water districts; b) cooperatives duly registered under
R.A. No. 6938; and c) non-stock and non-profit hospitals and educational
institutions. Further, with respect to real property taxes, the Local Government Code
again specifically enumerates entities which are exempt therefrom and withdraws
exemptions enjoyed by all other entities upon the effectivity of the code. Thus, Section
234 provides:
SEC. 234. Exemptions from Real Property Tax. The following are exempted
from payment of the real property tax:
subdivisions except when the beneficial use thereof had been granted for
consideration or otherwise, to a taxable person;
(b) Charitable institutions, churches, parsonages or convents appurtenant thereto,
mosques, nonprofit or religious cemeteries and all lands, buildings and improvements
actually, directly, and exclusively used for religious, charitable or educational
purposes;
(c) All machineries and equipment that are actually, directly and exclusively used
by local water districts and government-owned or controlled corporations engaged in
the supply and distribution of water and/or generation and transmission of electric
power;
(e) Machinery and equipment used for pollution control and environmental
protection.
previously granted to, or presently enjoyed by, all persons, whether natural or
juridical, including all government-owned or controlled corporations are hereby
[25]

In Mactan Cebu International Airport Authority v. Marcos,
[26]
this Court held that
the limited and restrictive nature of the tax exemption privileges under the Local
Government Code is consistent with the State policy to ensure autonomy of local
governments and the objective of the Local Government Code to grant genuine and
meaningful autonomy to enable local government units to attain their fullest
development as self-reliant communities and make them effective partners in the
attainment of national goals. The obvious intention of the law is to broaden the tax base
of local government units to assure them of substantial sources of revenue.
While we understand petitioners predicament brought about by the withdrawal of
their local tax exemption privileges under the Local Government Code, it is not the
province of this Court to go into the wisdom of legislative enactments. Courts can only
interpret laws. The principle of separation of powers prevents them from re-inventing the
laws.
Finally, Sections 193 and 234 of the Local Government Code permit reasonable
classification as these exemptions are not limited to existing conditions and apply
equally to all members of the same class. Exemptions from local taxation, including real
property tax, are granted to all cooperatives covered by R.A. No. 6938 and such
exemptions exist for as long as the Local Government Code and the provisions therein
on local taxation remain good law.
II
There is No Violation of the Non-Impairment Clause
It is ingrained in jurisprudence that the constitutional prohibition on the impairment
of the obligation of contracts does not prohibit every change in existing laws. To fall
within the prohibition, the change must not only impair the obligation of the existing
contract, but the impairment must be substantial.
[27]
What constitutes substantial
impairment was explained by this Court in Clemons v. Nolting:
[28]

A law which changes the terms of a legal contract between parties, either in the time
or mode of performance, or imposes new conditions, or dispenses with those
expressed, or authorizes for its satisfaction something different from that provided in
its terms, is law which impairs the obligation of a contract and is therefore null and
void.
Moreover, to constitute impairment, the law must affect a change in the rights of the
parties with reference to each other and not with respect to non-parties.
[29]

Petitioners insist that Sections 193 and 234 of the Local Government Code impair
the obligations imposed under the six (6) loan agreements executed by the NEA as
borrower and USAID as lender. All six agreements contain similarly worded provisions
on the tax treatment of the proceeds of the loan and properties and commodities
acquired through the loan. Thus:
Section 6.5. Taxes and Duties. The Borrower covenants and agrees that this Loan
Agreement and the Loan provided for herein shall be free from, and the Principal
and interest shall be paid to A.I.D. without deduction for and free from, any
taxation or fees imposed under any laws or decrees in effect within the Republic of
the Philippines or any such taxes or fees so imposed or payable shall be reimbursed by
the Borrower with funds other than those provided under the Loan. To the extent that
(a) any contractor, including any consulting firm, any personnel of such
contractor financed hereunder, and any property or transactions relating to such
contracts and (b) any commodity procurement transactions financed hereunder,
are not exempt from identifiable taxes, tariffs, duties and other levies imposed
under laws in effect in the country of the Borrower, the Borrower and/or
Beneficiary shall pay or reimburse the same with funds other than those
provided under the Loan.
[30]

Petitioners contend that the withdrawal by the Local Government Code of the tax
exemptions of cooperatives under P.D. No. 269, as amended, is an impairment of the
tax exemptions provided under the loan agreements. Petitioners argue that as
beneficiaries of the loan proceeds, pursuant to the above provision, [a]ll the assets
of petitioners, such as lands, buildings, distribution lines acquired through the proceeds
of the Loan Agreements are tax exempt.
[31]

We hold otherwise.
A plain reading of the provision quoted above readily shows that it does not grant
any tax exemption in favor of the borrower or the beneficiary either on the proceeds of
the loan itself or the properties acquired through the said loan. It simply states that the
loan proceeds and the principal and interest of the loan, upon repayment by the
borrower, shall be without deduction of any tax or fee that may be payable under
Philippine law as such tax or fee will be absorbed by the borrower with funds
other than the loan proceeds. Further, the provision states that with respect to any
payment made by the borrower to (1) any contractor or any personnel of such
contractor or any property transaction and (2) any commodity transaction using the
proceeds of the loan, the tax to be paid, if any, on such transactions shall be
absorbed by the borrower and/or beneficiary through funds other than the loan
proceeds.
Beyond doubt, the import of the tax provision in the loan agreements cited by
petitioners is twofold: (1) the borrower is entitled to receive from and is obliged to pay
the lender the principal amount of the loan and the interest thereon in full, without any
deduction of the tax component thereof imposed under applicable Philippine law
and any tax imposed shall be paid by the borrower with funds other than the loan
proceeds and (2) with respect to payments made to any contractor, its personnel or
any property or commodity transaction entered into pursuant to the loan agreement and
with the use of the proceeds thereof, taxes payable under the said transactions shall be
paid by the borrower and/or beneficiary with the use of funds other than the loan
proceeds. The quoted provision does not purport to grant any tax exemption in favor of
any party to the contract, including the beneficiaries thereof. The provisions simply shift
the tax burden, if any, on the transactions under the loan agreements to the borrower
and/or beneficiary of the loan. Thus, the withdrawal by the Local Government Code
under Sections 193 and 234 of the tax exemptions previously enjoyed by petitioners
does not impair the obligation of the borrower, the lender or the beneficiary under the
loan agreements as in fact, no tax exemption is granted therein.
III
Conclusion
Petitioners lament the difficulties they face in complying with the implementing rules
and regulations issued by the CDA for the conversion of electric cooperatives under
P.D. No. 269, as amended, to cooperatives under R.A. No. 6938. They allege that
because of the cumbersome legal and technical requirements imposed by the Omnibus
Rules and Regulations on the Registration of Electric Cooperatives under R.A. No.
6938, petitioners cannot register and convert as stock cooperatives under the
Cooperative Code.
[32]

The Court understands the plight of the petitioners. Their remedy, however, is not
judicial. Striking down Sections 193 and 234 of the Local Government Code as
unconstitutional or declaring them inapplicable to petitioners is not the proper course of
action for them to obtain their previous tax exemptions. The language of the law and the
intention of its framers are clear and unequivocal and courts have no other duty except
to uphold the law. The task to re-examine the rules and guidelines on the conversion of
electric cooperatives to cooperatives under R.A. No. 6938 and provide every assistance
available to them should be addressed by the proper authorities of government. This is
necessary to encourage the growth and viability of cooperatives as instruments of social
justice and economic development.
WHEREFORE, the instant petition is DENIED and the temporary restraining order
heretofore issued is LIFTED.
SO ORDERED.
Davide, Jr., C.J., Bellosillo, Vitug, Panganiban, Quisumbing, Ynares-Santiago,
Sandoval-Gutierrez, Carpio, Austria-Martinez, Corona, Carpio-Morales, Callejo,
Sr., and Azcuna, JJ., concur.

[1]
Section 2, P.D. No. 269.
[2]
Id.
[3]
Emphasis supplied.
[4]
Rollo, p. 38.
[5]
Id. at 262.
[6]
Emphasis supplied.
[7]
Rollo, p. 11.
[8]
Tolentino v. Board of Accountancy, G.R. No. L-3062, September 28, 1951, 90 Phil 83, 90.
[9]
People v. Cayat, G.R. No. 45987, May 5, 1939, 68 Phil 12, 18.
[10]
Art. 3, R.A. No. 6938. Emphasis supplied.
[11]
M. F. VERZOSA, THE PHILIPPINE COOPERATIVE LAW, ANNOTATED: 28-30 (1991).
[12]
Record of the Senate, Third Regular Session 1989, Vol. 1, No. 13, pp. 378-379.
[13]
Rollo, p. 377.
[14]
Art. 14 (5), R.A. No. 6938.
[15]
Supra, note 11 at 27.
[16]
Emphasis supplied.
[17]
Art. 2, R.A. No. 6939 or An Act Creating the Cooperative Development Authority to Promote the
Viability and Growth of Cooperatives as Instruments of Equity, Social Justice and Economic
Development, defining its Powers, Functions and Responsibilities, Rationalizing Government
Policies and Agencies with Cooperative Functions, Supporting Cooperative Development,
Transferring the Registration and Regulation Functions of Existing Government Agencies on
Cooperatives as such and Consolidating the same with the Authority, Appropriating Funds
Therefor, and for other Purposes. Emphasis supplied.
[18]
Section 5 (a) (6), P.D. No. 269, as amended by P.D. No. 1645.
[19]
Section 10, P.D. No. 269, as amended by P.D. No. 1645.
[20]
Id.
[21]
Section 24, P.D. No. 269, as amended by P.D. No. 1645.
[22]
Art. 128. Transitory Provisions. All cooperatives registered under Presidential Decree Nos. 175
and 775 and Executive Order No. 898, and all other laws shall be deemed registered with the
Cooperative Development Authority: Provided, however, That they shall submit to the nearest
Cooperative Development Authority office their certificate of registration, copies of the articles of
cooperation and bylaws and their latest duly audited financial statements within one (1) year from
the effectivity of this Act, otherwise their registration shall be cancelled: Provided, further, That
cooperatives created under Presidential Decree No. 269, as amended by Presidential Decree No.
1645, shall be given three (3) years within which to qualify and register with the Authority:
Provided, finally, That after these cooperatives shall have qualified and registered, the provisions
of Sections 3 and 5 of Presidential Decree No. 1645 shall no longer be applicable to said
cooperatives.
[23]
Art. X, Sections 2, 3 and 5, 1987 Constitution.
[24]
Emphasis supplied.
[25]
Emphasis supplied.
[26]
G.R. No. 120082, September 11, 1996, 261 SCRA 667, 690.
[27]
Gaspar v. Molina, G.R. No. 2206, November 2, 1905, 5 Phil 197, 202-203.
[28]
G.R. No. 17959, January 24, 1922, 42 Phil 702, 717.
[29]
BERNAS, THE 1987 CONSTITUTION OF THE REPUBLIC OF THE PHILIPPINES: A
COMMENTARY 390 (1996).
[30]
A.I.D. Loan No. 492-H-027 dated November 15, 1971. Rollo, p. 38. Emphasis supplied.
[31]
Rollo, p. 12.
[32]
Id. at 375-376.
CIR vs. Lingayen Gulf Electric (G.R. No. L-
23771. August 04, 1988)
31MAY
THE COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
LINGAYEN GULF ELECTRIC POWER CO., INC. and THE COURT OF TAX
Angel Sanchez for Lingayen Electric Power Co., Inc.
Ponente: SARMIENTO
FACTS:
The respondent taxpayer operates an electric power plant serving the adjoining municipalities of
Lingayen and Binmaley, both in the province of Pangasinan, pursuant to the municipal franchise
granted it by their respective municipal councils, under Resolution Nos. 14 and 25 of June 29
and July 2, 1946, respectively. Bureau of Internal Revenue (BIR) assessed against and
demanded from the private respondent deficiency franchise taxes and surcharges for the years
1946 to 1954 applying the franchise tax rate of 5% on gross receipts from March 1, 1948 to
December 31, 1954 as prescribed in Section 259 of the National Internal Revenue Code,
instead of the lower rates as provided in the municipal franchises. Respondent submits that
R.A. No. 3843 is unconstitutional insofar as it provides for the payment by the private
respondent of a franchise tax of 2% of its gross receipts, while other taxpayers similarly situated
were subject to the 5% franchise tax imposed in Section 259 of the Tax Code, thereby
discriminatory and violative of the rule on uniformity and equality of taxation. Court of tax
Appeals ruled in favor of respondent.
ISSUE:
Whether or not Section 4 of R.A. No. 3843, assuming it is valid, could be given retroactive effect
so as to render uncollected taxes in question which were assessed before its enactment.
HELD:
YES. Appealed decision was affirmed.
RATIO:
A tax is uniform when it operates with the same force and effect in every place where the
subject of it is found. Uniformity means that all property belonging to the same class shall be
taxed alike The Legislature has the inherent power not only to select the subjects of taxation but
to grant exemptions. Tax exemptions have never been deemed violative of the equal protection
clause. It is true that the private respondents municipal franchises were obtained under Act No.
667 of the Philippine Commission, but these original franchises have been replaced by a new
legislative franchise, i.e. R.A. No. 3843.
Given the validity of said law, it should be applied retroactively so as to render uncollectible the
taxes in question which were assessed before its enactment. The question of whether a statute
operates retrospectively or only prospectively depends on the legislative intent. In the instant
case, Act No. 3843 provides that effective upon the date the original franchise was granted,
no other tax and/or licenses other than the franchise tax of two per centum on the gross receipts
shall be collected, any provision to the contrary notwithstanding. Republic Act No. 3843
therefore specifically provided for the retroactive effect of the law.
Misamis Oriental vs Cagayan
Electric (1990)
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Facts: Cagayan Electric Power and light Co, Inc. (CEPALCO) was granted a franchise
in 1961 under RA 3247 to install, operate and maintain an electric light, heat and power
system in Cagayan de Oro and its suburbs. In 1973, the Local Tax Code (PD 231) was
promulgated, where Section 9 thereof providing for a franchise tax. Pursuant thereto,
the province of Misamis Oriental enacted Provincial Revenue Ordinance 19, whose
Section 12 also provides for a franchise tax. The Provincial Treasurer demanded
payment of the provincial franchise tax from CEPALCO. CEPALCO paid under protest.
Issue: Whether CEPALCO is exempt from the provincial franchise tax.
Held: Local Tax Regulation 3-75 issued by the Secretary of Finance in 1976 made it
clear that the franchise tax provided in the Local Tax Code may only be imposed on
companies with franchise that do not contain the exempting clause, i.e. in-lieu-of-all-
taxes-proviso. CEPALCOs franchise i.e. RA 3247, 3571 and 6020 (Section 3 thereof),
uniformly provides that in consideration of the franchise and rights hereby granted, the
grantee shall pay a franchise tax equal to 3% of the gross earnings for electric current
sold under the franchise, of which 2% goes to the national Treasury and 1% goes into
the treasury of the municipalities of Tagoloan, Opol, Villanueva, Jasaan, and Cagayan
de Oro, as the case may be: Provided, that the said franchise tax of 3% of the gross
earnings shall be in lieu of all taxes and assessments of whatever authority upon
privileges, earnings, income, franchise and poles, wires, transformers, and insulators of
the grantee from which taxes and assessments the grantee is hereby expressly
exempted.

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