G.R. No.

L-21183

September 27, 1968

VICTORIAS MILLING CO., INC., plaintiff-appellant, vs.THE MUNICIPALITY OF VICTORIAS, PROVINCE OF NEGROS
OCCIDENTAL, defendant-appellant.
This case calls into question the validity of Ordinance No. 1, series of 1956, of the Municipality of Victorias, Negros Occidental.
The disputed ordinance was approved by the municipal Council of Victorias on September 22, 1956 by way of an amendment to two
1
2
municipal ordinances separately imposing license taxes on operators of sugar centrals and sugar refineries. The changes were:
with respect to sugar centrals, by increasing the rates of license taxes; and as to sugar refineries, by increasing the rates of license
taxes as well as the range of graduated schedule of annual output capacity.
3

Ordinance No. 1 is labeled "An Ordinance Amending Ordinance No. 25, Series of 1953 and Ordinance No. 18, Series of 1947 on
Sugar Central by Increasing the Rates on Sugar Refinery Mill by Increasing the Range of Graduated Schedule on Capacity Annual
Output Respectively". It was, as the ordinance itself states, enacted pursuant to the taxing power conferred by Commonwealth Act
472. By Section 1 of the Ordinance: "Any person, corporation or other forms of companies, operating sugar central or engage[d] in
the manufacture of centrifugal sugar shall be required to pay the following annual municipal license tax, payable quarterly, to wit: . .
." Section 1 referred to prescribes a wide range of schedule. It starts with a sugar central with mill having an annual output capacity
of not less than 50,000 piculs of centrifugal sugar, in which case an annual municipal license tax of P1,000.00 is provided. Depending
upon the annual output capacity the schedule of taxes continues with P2,000.00 progressively upward in twelve other grades until
an output capacity of 1,500,001 piculs or more shall have been reached. For this, the annual tax is P40,000.00. The tax on sugar
refineries is likewise calibrated with similar rates. It also starts with P1,000.00 for a refinery with mill having an annual output
capacity of not less than 25,000 bags of 100 lbs. of refined sugar. Then, it continues with the second bracket of from 25,001 bags to
75,000 bags of 100 lbs. Here, the municipal license tax is P1,500.00. Then follow the other rates in the graduated scale with the
ceiling placed at a capacity of 1,750,001 bags or more. The annual municipal license tax for the last mentioned output capacity is
P40,000.00.
Of importance are the provisions of Section 1(m) relating to sugar centrals and Section 2(m) covering sugar refineries with specific
reference to the maximum annual license tax, viz:
Section No. 1 Any person, corporation or other forms of Companies, operating Sugar Central or engage[d] in the
manufacture of centrifugal sugar shall be required to pay the following annual municipal license tax, payable quarterly, to
wit:
xxx

xxx

xxx

(m) Sugar Central with mill having a capacity of producing an annual output of from 1,500,001 piculs or more shall be
required to pay an annual municipal license tax of P40,000.00.
Section No. 2 Any person, corporation or other forms of Companies shall be required to pay an annual municipal license
tax for the operation of Sugar Refinery Mill at the following rates:
xxx

xxx

xxx

(m) Sugar Refinery with mill having a capacity of producing an annual output of from 1,750,001 bags of 100 lbs. or more
shall be required to pay an annual municipal license tax of P40,000.00.
For, the production of plaintiff Victorias Milling Co., Inc. in both its sugar central and its sugar refinery located in the Municipality of
Victorias comes within these items in the schedule.
4

Plaintiff filed suit below to ask for judgment declaring Ordinance No. 1, series of 1956, null and void; ordering the refund of all
license taxes paid and to be paid under protest; directing the officials of Victorias and the Province of Negros Occidental to observe,
during the pendency of the action, the provisions of section 357 of the Revised Manual of Instructions to Treasurers of Provinces,
5
Cities and Municipalities, 1954 edition, regarding the treatment of license taxes paid under protest by virtue of a disputed
6
ordinance; and other reliefs.

The reasons put forth by plaintiff are that: (a) the ordinance exceeds the amounts fixed in Provincial Circular 12-A issued by the
Finance Department on February 27, 1940; (b) it is discriminatory since it singles out plaintiff which is the only operator of a sugar
central and a sugar refinery within the jurisdiction of defendant municipality; (c) it constitutes double taxation; and (d) the national
government has preempted the field of taxation with respect to sugar centrals or refineries.
Upon the complaint as supplemented and amended, and the answer thereto, and following hearing on the merits, the trial court
rendered its judgment. After declaring that "[t]here is no doubt that" the ordinance in question refers to license taxes or fees," and
7
that "[i]t is settled that a license tax should be limited to the cost of licensing, regulating and surveillance," the trial court ruled that
8
said license taxes in dispute are unreasonable, and held that: "If the defendant has the power to tax the plaintiff for purposes of
9
revenue, it may do so by proper municipal legislation, but not in the guise of a license tax." The court added: "The Court is not,
however, prepared to order the refund of all the license taxes paid by the plaintiff under protest and amounting, up to the second
quarter of 1960, to P280,000.00, considering that the plaintiff appears to have agreed to the payment of the license taxes at the
rates fixed prior to Ordinance No. 1, series of 1956; that the defendant had evidently not complied with the provisions of Section
357 of the Revised Manual of Instructions to Treasurers of Provinces, Cities and Municipalities, 1954 Edition, as the plaintiff herein
seeks an order enjoining the defendant and its appropriate officials to carry out said provisions; that the financial position of the
defendant would surely be disrupted if ordered to refund, while the plaintiff may perhaps easily forego or forget what it had already
10
parted with". It disposes of the suit in the following manner:
WHEREFORE, judgment is rendered (a) declaring that Ordinance No. 1, series of 1956, of the municipality of Victorias,
Negros Occidental, is invalid; (b) ordering all officials of the defendant to observe the provisions of Section 357 of the
Revised Manual of Instructions to Treasurers of Provinces, Cities and Municipalities, 1954 Edition, with particular reference
to any license taxes paid by the plaintiff under said Ordinance No. 1, series of 1956, after notice of this decision; and (c)
ordering the defendant to refund to the plaintiff any and all such license taxes paid under protest after notice of this
11
decision.
Both plaintiff and defendant appealed direct to this Court. Plaintiff questions that portion of the decision denying the refund of the
license taxes paid under protest in the amount of P280,000 covering the period from the first quarter of 1957 to the second quarter
of 1960; and balked at the court's order limiting refund to "any and all such license taxes paid under protest after notice of this
decision." Defendant, upon the other hand, challenges the correctness of the court's decision invalidating Ordinance No. 1, series of
1956.
The questions raised in the appeals will be discussed in their proper sequence.
1. We first grapple with the threshold question: Was Ordinance No. 1, series of 1956, passed by defendant's municipal council as a
regulatory enactment or as a revenue measure?
The trial court says, and plaintiff seconds, that the amounts set forth in the ordinance in question did exceed the cost of licensing,
regulating and surveillance, and that defendant cannot impose a tax for revenue in the guise of a police or a regulatory
measure. Our finding, however, is the other way.1awphl.nt
The ordinance itself recites that its source of taxing power emanates from Commonwealth Act 472, Section 1 of which reads:
Section 1. A municipal council or municipal district council shall have authority to impose municipal license taxes upon
persons engaged in any occupation or business, or exercising privileges in the municipality or municipal district, by requiring
them to secure licenses at rates fixed by the municipal council, or municipal district council, and to collect fees and charges
for services rendered by the municipality or municipal district and shall otherwise have power to levy for public local
purposes, and for school purposes, including teachers' salaries, just and uniform taxes other than percentage taxes and
taxes on specified articles.
Under the statute just quoted and pertinent jurisprudence, a municipality is authorized to impose three kinds of licenses: (1) license
for regulation of useful occupations or enterprises; (2) license for restriction or regulation of non-useful occupations or enterprises;
12
13
and (3) license for revenue. The first two easily fall within the broad police power granted under the general welfare clause. The
third class, however, is for revenue purposes. It is not a license fee, properly speaking, and yet it is generally so termed. It rests on
14
the taxing power. That taxing power must be expressly conferred by statute upon the municipality. It is so granted under
Commonwealth Act 472.

To be recalled at this point is that Ordinance No. 1, series of 1956, is but an amendment of Ordinance No. 18, series of 1947, in
reference to refineries, and Ordinance No. 25, series of 1953, covering sugar centrals. Ordinance No. 18 imposes "municipal taxes on
15
persons, firms or corporations operating refinery mills in this municipality." Ordinance No. 25 speaks of municipal taxes "relative to
16
the output of the sugar centrals."
17

What are these taxes for? Resolution No. 60 of the municipal council of Victorias, adopted also on September 22, 1956 in
conjunction with Ordinance No. 1, series of 1956, furnishes a ready answer. It reads in part:
WHEREAS, the Municipal Treasurer informed the Municipal Council of the revenue of the Municipality and the heavy
obligations which confront it because of the implementation of Minimum Wage Law on the salaries and wages it pays to its
municipal employees and laborers thus greatly draining the Municipal Treasury;
WHEREAS, this local administration is committed to the plan of ameliorating the deplorable situation existing in the barrios,
sitios and rural areas by giving them essential and necessary facilities calculated to improve conditions thereat thru
improvements of roads and feeder roads;
WHEREAS, one of the causes of the municipality's financial difficulty is low rates of municipal taxes imposed by some of the
ordinances enacted by the local legislative body;
WHEREAS, [in] . . . the ordinances known as Ordinance No. 25, Series of 1953, dealing on the operation of Sugar Central,
and Ordinance No. 18, Series of 1947, which exclusively deals with the operation of Sugar Refinery Mill, the rates so given
are rates suggested and determined by the Provincial Circular No. 12-A, dated February 27, 1940 issued by the Department
of Finance as regards to Sugar Centrals;
WHEREAS, the Municipal Council has come to the conclusion that the rates provided for in such ordinances are no longer
adequate if made in keeping with the present high cost of living;
WHEREAS, the Municipal Council has also taken cognizance of the fact that the price of sugar per picul today is more than
18
twice its pre-war average price; . . . .
Given the purposes just mentioned, we find no warrant in logic to give our assent to the view that the ordinance in question is solely
for regulatory purpose. Plain is the meaning conveyed. The ordinance is for raising money. To say otherwise is to misread the
purpose of the ordinance.1awphl.nt
We should not hang so heavy a meaning on the use of the term "municipal license tax". This does not necessarily connote the idea
that the tax is imposed as the lower court would want it to mean a revenue measure in the guise of a license tax. For really,
this runs counter to the declared purpose to make money.
Besides, the term "license tax" has not acquired a fixed meaning. It is often "used indiscriminately to designate impositions exacted
19
for the exercise of various privileges." It does not refer solely to a license for regulation. In many instances, it refers to "revenue20
raising exactions on privileges or activities." On the other hand, license feesare commonly called taxes. But, legally speaking, the
latter are "for the purpose of raising revenues," in contrast to the former which are imposed "in the exercise of police power for
21
purposes of regulation."
We accordingly say that the designation given by the municipal authorities does not decide whether the imposition is properly a
license tax or a license fee. The determining factors are the purpose and effect of the imposition as may be apparent from the
22
provisions of the ordinance. Thus, "[w]hen no police inspection, supervision, or regulation is provided, nor any standard set for the
23
applicant to establish, or that he agrees to attain or maintain, but any and all persons engaged in the business designated, without
qualification or hindrance, may come, and a license on payment of the stipulated sum will issue, to do business, subject to no
prescribed rule of conduct and under no guardian eye, but according to the unrestrained judgment or fancy of the applicant and
24
licensee, the presumption is strong that the power of taxation, and not the police power, is being exercised."
Precisely because of these considerations the present imposition must be treated as a levy for revenue purposes. A quick glance at
the big amount of maximum annual tax set forth in the ordinance, P40,000.00 for sugar centrals, and P40,000.00 for sugar refineries,
will readily convince one that the tax is really a revenue tax. And then, we read in the ordinance nothing which would as much as
indicate that the tax imposed is merely for police inspection, supervision or regulation.

Our view that the tax imposed by the ordinance is for revenue purposes finds support in judicial pronouncements which have gained
25
foothold in this jurisdiction. In Standard Vacuum vs. Antigua, this Court had occasion to pass upon a similar ordinance. In
categorical terms, we there stated: "We are satisfied that the graduated license tax imposed by the ordinance in question is an
occupation tax, imposed not under the police or regulatory power of the municipality but by virtue of its taxing power for purposes
26
of revenue, and is in accordance with the last part of Section 1 of Commonwealth Act No. 472. It is, therefore, valid."
27

The present case is not to be analogized with Panaligan vs. City of Tacloban cited in the decision below. For there, the inspection
fee sought to be collected upon every head of specified animals to be transported out of the City of Tacloban (P2.00 per hog,
P10.00 per cow and 20.00 per carabao) was in reality an export tax specifically withheld from municipal taxing power under
Section 2287 of the Revised Administrative Code.
28

29

So also do we say that the cases of Pacific Commercial Co. vs. Romualdez, Lacson vs. City of Bacolod, andSantos vs. Municipal
30
Government of Caloocan, used by plaintiff as references, are entirely inopposite. In Pacific Commercial, the tax involved on
frozen meat was nullified because tax measures on cold stores were not then within the legislative grant to the City of Manila.
In Lacson, the City of Bacolod taxed every admission ticket sold in the moviehouses. And justification for this imposition was moored
to the general welfare clause of the city charter. This Court held the ordinance ultra vires for the reason that the authority to tax
cannot be derived from the general welfare clause. In Santos, the taxes in controversy were internal organs fees, meat inspection
fees and corral fees, separate from the slaughter or slaughterhouse fees. In annulling the taxes there questioned, this Court
declared: "[W]hen the Council ordained the payment of internal organs fees, meat inspection fees and corral fees, aside from the
slaughter or slaughterhouse fees, it overstepped the limits of its statutory grant [Sec. 1, C.A. 655]. Only one fee was allowed by that
law to be charged and that was slaughter or slaughterhouse fees."
In the cases cited then, the tax ordinances did not find plain and clear statutory prop. Such infirmity is not present here.
We, accordingly, rule that Ordinance No. 1, series of 1956, of the Municipality of Victorias, was promulgated not in the exercise of
the municipality's regulatory power but as a revenue measure a tax on occupation or business. The authority to impose such tax
is backed by the express grant of power in Section 1 of Commonwealth Act 472.
2. Not that the disputed ordinance lacks the imprimatur of the Secretary of Finance required in paragraph 2, Section 4, of
Commonwealth Act 472. This legal provision necessitates such approval "[w]henever the rate of fixed municipal license taxes on
businesses not excepted in this Act or otherwise covered by the preceding paragraph and subject to the fixed annual tax imposed in
section one hundred eighty-two of the National Internal Revenue Law, is in excess of fifty pesos per annum; . . . ."
The ordinance here challenged was recommended by the Provincial Board of Negros Occidental in its resolution (No. 1864) of
31
October 26, 1956. And, the Undersecretary of Finance in his letter to the municipal council of Victorias on December 18, 1956
approved said ordinance. But considering that it is amendatory in nature, that approval was coupled with the mandate that the
ordinance "should take effect at the beginning of the ensuing calendar year [1957] pursuant to Section 2309 of the Revised
32
Administrative Code."
3. Plaintiff argues that the municipality is bereft of authority to enact the ordinance in question because the national government
33
"had preempted it from entering the field of taxation of sugar centrals and sugar refineries." Plaintiff seeks refuge in Section 189
of the National Internal Revenue Code which subjects proprietors or operators of sugar centrals or sugar refineries to percentage
tax.
The implausibility of this position is at once apparent. We are not dealing here with percentage tax. Rather, we are concerned with a
tax specifically for operators of sugar centrals and sugar refineries. The rates imposed are based on the maximum annual output
capacity. Which is not a percentage. Because it is not a share. Nor is it a tax based on the amount of the proceeds realized out of the
34
sale of sugar, centrifugal or refined.
What can be said at most is that the national government has preempted the field of percentage taxation. Section 1 of
Commonwealth Act 472, while granting municipalities power to levy taxes, expressly removes from them the power to exact
"percentage taxes".
It is correct to say that preemption in the matter of taxation simply refers to an instance where the national government elects to
tax a particular area, impliedly withholding from the local government the delegated power to tax the same field. This doctrine
35
primarily rests upon the intention of Congress. Conversely, should Congress allow municipal corporations to cover fields of
taxation it already occupies, then the doctrine of preemption will not apply.

In the case at bar, Section 4(1) of Commonwealth Act 472 clearly and specifically allows municipal councils to tax persons engaged in
"the same businesses or occupation" on which "fixed internal revenue privilege taxes" are "regularly imposed by the National
Government." With certain exceptions specified in Section 3 of the same statute. Our case does not fall within the exceptions. It
would therefore be futile to argue that Congress exclusively reserved to the national government the right to impose the disputed
taxes.
We rule that there is no preemption.
4. Petitioner advances the theory that the ordinance is excessive.
An ordinance carries with it the presumption of validity. The question of reasonableness though is open to judicial inquiry. Much
should be left thus to the discretion of municipal authorities. Courts will go slow in writing off an ordinance as unreasonable unless
36
the amount is so excessive as to be prohibitive, arbitrary, unreasonable, oppressive, or confiscatory. A rule which has gained
acceptance is that factors relevant to such an inquiry are the municipal conditions as a whole and the nature of the business made
37
subject to imposition.
Plaintiff has however not sufficiently proven that, taking these factors together, the license taxes are unreasonable. The
presumption of validity subsists. For, plaintiff has limited itself to insisting that the amounts levied exceed the cost of regulation and
that the municipality has adequate funds for the alleged purposes as evidenced by the municipality's cash surplus for the fiscal year
ending 1956.
The cost of regulation cannot be taken as a gauge, if the municipality really intended to enact a revenue ordinance. For, "if the
38
charge exceeds the expense of issuance of a license and costs of regulation, it is a tax." And if it is, and it is validly imposed, as in
this case, "the rule that license fees for regulation must bear a reasonable relation to the expense of the regulation has no
39
application."
And then, a cash surplus alone cannot stop a municipality from enacting a revenue ordinance increasing license taxes in anticipation
of municipal needs. Discretion to determine the amount of revenue required for the needs of the municipality is lodged with the
municipal authorities. Again, judicial intervention steps in only when there is a flagrant, oppressive and excessive abuse of power by
40
said municipal authorities.
Not that defendant municipality was without reason. On February 27, 1940, the Secretary of Finance, later President, Manuel A.
Roxas, issued Provincial Circular 12-A. In that circular, the then Finance Secretary stated that his "Department has reached the
conclusion that a tax on the basis of one centavo for every picul of annual output capacity of sugar centrals ... would be just and
reasonable." At that time, the price of sugar was around P6.00 per picul. Sixteen years later 1956 when Ordinance No. 1 was
41
approved, the market quotation for export sugar ranged from P12.00 to P15.00 per picul. And yet, since then the rate per output
capacity of a sugar central in Ordinance No. 1 was merely from one centavo to two centavos. There is a statement in the
42
municipality's brief that thereafter the price of sugar had never gone below P16.00 per picul; instead it had gone up.
The reasonableness of the ordinance may not be disputed. It is not confiscatory.
There was misapprehension in the decision below in its statement that the increase of rates for refineries was 2,000%. We should
not overlook the fact that the original maximum rate covering refineries in Ordinance No. 18, series of 1947, was P2,000.00; but that
was only for a refinery with an output capacity of 90,000 or more sacks. Under Section 2(c) of Ordinance No. 1, series of 1956, where
the refineries have an output capacity of from 75,001 bags to 100,000 bags, the tax remains at P2,000.00. From here on, the
ordinance provides for ten more scales for the graduation of the tax depending upon the output capacity (P3,000.00, P4,000.00,
P5,000.00, P10,000.00, P15,000.00, P20,000.00, P25,000.00, P30,000.00, P35,000.00 and P40,000.00). But it is only where a refinery
has an output capacity of 1,750,001 or more bags that the present ordinance imposes a tax of P40,000.00. The happenstance that
plaintiff's refinery is in the last bracket calling upon it to pay P40,000.00 per annum does not make the ordinance in question
unreasonable.
Neither may we tag the ordinance with excessiveness if we consider the capital invested by plaintiff in both its sugar central and
sugar refinery and its annual income from both. Plaintiff's capital investment in the sugar central and sugar refinery is more or less
43
P26,000,000.00. And here are its annual net income: for the year 1956 P3,852,910; for the year 1957 P3,854,520; for the
44
year 1958 P7,230,493; for the year 1959 P5,951,187; and for the year 1960 P7,809,250. If these figures mean anything at
all, they show that the ordinance in question is neither confiscatory nor unjust and unreasonable.

5. Upon the averment that in the Municipality of Victorias plaintiff is the only operator of a sugar central and sugar refinery, plaintiff
now presses its argument that Ordinance No. 1, series of 1956, is discriminatory. The ordinance does not single out Victorias as the
only object of the ordinance. Said ordinance is made to apply to any sugar central or sugar refinery which may happen to operate in
the municipality. So it is, that the fact that plaintiff is actually the sole operator of a sugar central and a sugar refinery does not make
45
the ordinance discriminatory. Argument along the same lines was rejected in Shell Co. of P.I., Ltd. vs. Vao, this Court holding that
the circumstance "that there is no other person in the locality who exercises" the occupation designated as installation manager
"does not make the ordinance discriminatory and hostile, inasmuch as it is and will be applicable to any person or firm who exercises
46
such calling or occupation." And in Ormoc Sugar Company, Inc. vs. Municipal Board of Ormoc City, declaratory relief was sought to
test the validity of a municipal ordinance which provides a city tax of twenty centavos per picul of centrifugal sugar and one per
centum on the gross sale of its derivatives and by-products "produced by the Ormoc Sugar Company, Incorporated, or by any other
sugar mill in Ormoc City." Mr. Justice Enrique Fernando, delivering the opinion of this Court, declared that the ordinance did not
suffer "from a constitutional or statutory infirmity." And yet, in Ormoc, it is to be observed that Section 1 of the ordinance spelled
out Ormoc Sugar Company, Incorporated specifically by name. Not even the name of plaintiff herein was ever mentioned in the
ordinance now disputed.
No discrimination exists.
6. As infirm is plaintiff's stand that its business is not confined to the Municipality of Victorias. It suffices that plantiff engages in a
business or occupation subject to an exaction by the municipality within the territorial boundaries of that municipality. Plaintiff's
sugar central and sugar refinery are located within the Municipality of Victorias. In this central and refinery, plaintiff manufactures
centrifugal sugar and refined sugar, respectively.
But plaintiff insists that plaintiff's sugar milling and refining operations are not wholly performed within the territorial limits of
Victorias. According to plaintiff, transportation of canes from plantation to the mill site, operation and maintenance of telephone
system, inspection of crop progress and other related activities, are conducted not only in defendant's municipality but also in the
47
municipalities of Cadiz, Manapla, Sagay and Saravia as well. We fail to see the relevance of these facts. Because, if we follow
plaintiff's ratiocination, neither Victorias nor any of the municipalities just adverted to would be able to impose the tax. One thing
certain, of course, is that the tax is imposed upon the business of operating a sugar central and a sugar refinery. And the situs of that
business is precisely the Municipality of Victorias.
7. Plaintiff finally impleads double taxation. Its reason is that in computing the amount of taxes to be paid by the sugar refinery the
cost of the raw sugar coming from the sugar central is not deducted; ergo, plaintiff is taxed twice on the raw sugar.
48

Double taxation has been otherwise described as "direct duplicate taxation." For double taxation to exist, "the same property
49
must be taxed twice, when it should be taxed but once." Double taxation has also been "defined as taxing the same person twice
50
51
by the same jurisdiction for the same thing." As stated in Manila Motor Company, Inc. vs. Ciudad de Manila, there is double
taxation "cuando la misma propiedad se sujeta a dos impuestos por la misma entidad o Gobierno, para el mismo fin y durante el
mismo periodo de tiempo."
With the foregoing precepts in mind, we find no difficulty in saying that plaintiff's argument on double taxation does not inspire
assent. First. The two taxes cover two different objects. Section 1 of the ordinance taxes a person operating sugar centrals or
engaged in the manufacture of centrifugal sugar. While under Section 2, those taxed are the operators of sugar refinery mills. One
occupation or business is different from the other. Second. The disputed taxes are imposed on occupation or business. Both taxes
are not on sugar. The amount thereof depends on the annual output capacity of the mills concerned, regardless of the actual sugar
milled. Plaintiff's argument perhaps could make out a point if the object of taxation here were the sugar it produces, not the
business of producing it.
There is no double taxation.
For the reasons given
The judgment under review is hereby reversed; and
Judgment is hereby rendered: (a) declaring valid and subsisting Ordinance No. 1, series of 1956, of the Municipality of Victorias,
Province of Negros Occidental; and (b) dismissing plaintiff's complaint as supplemented and amended. Costs against plaintiff. So
ordered.

G.R. No. L-23794

February 17, 1968

ORMOC SUGAR COMPANY, INC., plaintiff-appellant, vs.THE TREASURER OF ORMOC CITY, THE MUNICIPAL BOARD OF ORMOC CITY,
HON. ESTEBAN C. CONEJOS as Mayor of Ormoc City and ORMOC CITY, defendants-appellees.
1

On January 29, 1964, the Municipal Board of Ormoc City passed Ordinance No. 4, Series of 1964, 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
2
centum (1%) per export sale to the United States of America and other foreign countries."
Payments for said tax were made, under protest, by Ormoc Sugar Company, Inc. on March 20, 1964 for P7,087.50 and on April
20, 1964 for P5,000, or a total of P12,087.50.
On June 1, 1964, Ormoc Sugar Company, Inc. filed before the Court of First Instance of Leyte, with service of a copy upon the
3
Solicitor General, a complaint against the City of Ormoc as well as its Treasurer, Municipal Board and Mayor, alleging that the
afore-stated ordinance is unconstitutional for being violative of the equal protection clause (Sec. 1[1], Art. III, Constitution) and the
rule of uniformity of taxation (Sec. 22[1]), Art. VI, Constitution), aside from being an export tax forbidden under Section 2287 of the
Revised Administrative Code. It further alleged that the tax is neither a production nor a license tax which Ormoc City under Section
15-kk of its charter and under Section 2 of Republic Act 2264, otherwise known as the Local Autonomy Act, is authorized to impose;
and that the tax amounts to a customs duty, fee or charge in violation of paragraph 1 of Section 2 of Republic Act 2264 because the
tax is on both the sale and export of sugar.
Answering, the defendants asserted that the tax ordinance was within defendant city's power to enact under the Local
Autonomy Act and that the same did not violate the afore-cited constitutional limitations. After pre-trial and submission of the case
on memoranda, the Court of First Instance, on August 6, 1964, rendered a decision that upheld the constitutionality of the ordinance
and declared the taxing power of defendant chartered city broadened by the Local Autonomy Act to include all other forms of taxes,
licenses or fees not excluded in its charter.
Appeal therefrom was directly taken to Us by plaintiff Ormoc Sugar Company, Inc. Appellant alleges the same statutory and
constitutional violations in the aforesaid taxing ordinance mentioned earlier.
Section 1 of the ordinance states: "There shall be paid to the City Treasurer on any and all productions of centrifugal sugar
milled at the Ormoc Sugar Company, Incorporated, in Ormoc City, a municipal tax equivalent to one per centum (1%) per export sale
to the United States of America and other foreign countries." Though referred to as a tax on the export of centrifugal sugar
produced at Ormoc Sugar Company, Inc. For production of sugar alone is not taxable; the only time the tax applies is when the sugar
produced is exported.
Appellant questions the authority of the defendant Municipal Board to levy such an export tax, in view of Section 2287 of the
Revised Administrative Code which denies from municipal councils the power to impose an export tax. Section 2287 in part states:
"It shall not be in the power of the municipal council to impose a tax in any form whatever, upon goods and merchandise carried
into the municipality, or out of the same, and any attempt to impose an import or export tax upon such goods in the guise of an
unreasonable charge for wharfage use of bridges or otherwise, shall be void."
Subsequently, however, Section 2 of Republic Act 2264 effective June 19, 1959, gave chartered cities, municipalities and
municipal districts authority to levy for public purposes just and uniform taxes, licenses or fees. Anent the inconsistency between
Section 2287 of the Revised Administrative Code and Section 2 of Republic Act 2264, this Court, in Nin Bay Mining Co. v. Municipality
4
of Roxas held the former to have been repealed by the latter. And expressing Our awareness of the transcendental effects that
municipal export or import taxes or licenses will have on the national economy, due to Section 2 of Republic Act 2264, We stated
that there was no other alternative until Congress acts to provide remedial measures to forestall any unfavorable results.
The point remains to be determined, however, whether constitutional limits on the power of taxation, specifically the equal
protection clause and rule of uniformity of taxation, were infringed.
The Constitution in the bill of rights provides: ". . . nor shall any person be denied the equal protection of the laws." (Sec. 1 [1],
5
Art. III) In Felwa vs. Salas, We ruled that the 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 on substantial
distinctions which make real differences; (2) these are germane to the purpose of the law; (3) the classification applies not only to

present conditions but also to future conditions which are substantially identical to those of the present; (4) the classification applies
only to those who belong to the same class.
A perusal of the requisites instantly 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. At the time of the taxing ordinance's enactment,
Ormoc Sugar Company, Inc., it is true, was the only sugar central in the city of Ormoc. Still, the classification, to be reasonable,
should be in terms applicable to future conditions as well. The taxing ordinance should not be singular and exclusive as to exclude
any subsequently established sugar central, of the same class as plaintiff, for the coverage of the tax. As it is now, even if later a
similar company is set up, it cannot be subject to the tax because the ordinance expressly points only to Ormoc City Sugar Company,
Inc. as the entity to be levied upon.
Appellant, however, is not entitled to interest; on the refund because the taxes were not arbitrarily collected (Collector of
6
Internal Revenue v. Binalbagan). At the time of collection, the ordinance provided a sufficient basis to preclude arbitrariness, the
same being then presumed constitutional until declared otherwise.
WHEREFORE, the decision appealed from is hereby reversed, the challenged ordinance is declared unconstitutional and the
defendants-appellees are hereby ordered to refund the P12,087.50 plaintiff-appellant paid under protest. No costs. So ordered.
[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.
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
[1]
[2]
[3]
Decision promulgated on August 29, 1996, and Resolution dated November 13, 1996, in CA-GR SP No. 37788. 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 the sangguniang 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 taxand-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
[4]
of the zone outside of the secured area is discriminatory or not.
The Courts Ruling

[5]

The petition 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
[6]
another. The classification must also be germane to the purpose of the law and must apply to all those belonging to the same
[7]
[8]
class. Explaining the nature of the equal protection guarantee, the Court in Ichong v. Hernandez 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
[9]
existing conditions only, and (4) apply equally to all members of the same class.
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
[10]
and investment center.
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
[11]
to extend economic incentives to attract and encourage investors, both local and foreign. Among such enticements are: (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
[12]
law. And as the legal maxim goes, The intent of a statute is the law.
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.
[13]
It is well-settled that the equal-protection guarantee does not require territorial uniformity of laws. 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.

G.R. No. L-15270

September 30, 1961
JOSE V. HERRERA and ESTER OCHANGCO HERRERA, petitioners,
vs.
THE QUEZON CITY BOARD OF ASSESSMENT APPEALS, respondent.
Angel A. Sison for petitioners.
Jaime Agloro for respondent.

CONCEPCION, J.:
Appeal, by petitioners Jose V. Herrera and Ester Ochangco Herrera, from a decision of the Court of Tax Appeals affirming
that of the Board of Assessment Appeals of Quezon City, which held that certain properties of said petitioners are
subject to assessment for purposes of real estate tax.
The facts and the issue are set forth in the aforementioned decision of the Court of Tax Appeals, from which we quote:
On July 24, 1952, the Director of the Bureau of Hospitals authorized the petitioners to establish and operate the "St.
Catherine's Hospital", located at 58 D. Tuazon, Sta. Mesa Heights, Quezon City (Exhibit "F-1", p. 7, BIR rec.). On or about
January 3, 1953, the petitioners sent a letter to the Quezon City Assessor requesting exemption from payment of real
estate tax on the lot, building and other improvements comprising the hospital stating that the same was established for
charitable and humanitarian purposes and not for commercial gain (Exhibit "F-2", pp. 8-9, BIR rec.). After an inspection
of the premises in question and after a careful study of the case, the exemption from real property taxes was granted
effective the years 1953, 1954 and 1955.
Subsequently, however, in a letter dated August 10, 1955 (Exhibit "E", p. 65, CTA rec.) the Quezon City Assessor notified
the petitioners that the aforesaid properties were re-classified from exempt to "taxable" and thus assessed for real
property taxes effective 1956, enclosing therewith copies of Tax Declarations Nos. 19321 to 19322 covering the said
properties. The petitioners appealed the assessment to the Quezon City Board of Assessment Appeals, which, in a
decision dated March 31, 1956 and received by the former on May 17, 1956, affirmed the decision of the City Assessor.
A motion for reconsideration thereof was denied on March 8, 1957. From this decision, the petitioners instituted the
instant appeal.1awphl.nt
The building involved in this case is principally used as a hospital. It is mainly a surgical and orthopedic hospital with
emphasis on obstetrical cases, the latter constituting 90% of the total number of cases registered therein. The hospital
has thirty-two (32) beds, of which twenty (20) are for charity-patients and twelve (12) for pay-patients. From the
evidence presented by petitioners, it is made to appear that there are two kinds of charity patients (a) those who
come for consultation only ("out-charity patients"); and (b) those who remain in the hospital for treatment ("lying-inpatients"). The out-charity patients are given free consultation and prescription, although sometimes they are furnished
with free medicines which are not costly like aspirin, sulfatiazole, etc. The charity lying-in-patients are given free medical
service and medicine although the food served to the pay-patients is very much better than that given to the former.
Although no condition is imposed by the hospital on the admission of charity lying-in-patients, they however, usually
give donations to the hospital. On the other hand, the pay-patients are required to pay for hospital services ranging from
the minimum charge of P5.00 to the maximum of P40.00 for each day of stay in the hospital. The income realized from
pay-patients is spent for the improvement of the charity wards. The hospital personnel is composed of three nurses, two
graduate midwives, a resident physician receiving a salary of P170.00 a month and the petitioner, Dr. Ester Ochangco
Herrera, as directress. As such directress, the latter does not receive any salary.
Petitioners also operate within the premises of the hospital the "St. Catherine's School of Midwifery" which was granted
government recognition by the Secretary of Education on February 1, 1955 (Exhibit "F-3", p. 10, BIR rec.) This school has
an enrollment of about two hundred students. The students are charged a matriculation fee of P300.00 for 1- years,
plus P50.00 a month for board and lodging, which includes transportation to the St. Mary's Hospital. The students
practice in the St. Catherine's Hospital, as well as in the St. Mary's Hospital, which is also owned by the petitioners. A
separate set of accounting books is maintained by the school for midwifery distinct from that kept by the hospital. The
petitioners alleged that the accounts of the school are not included in Exhibits "A", "A-1", "A-2", "B", "B-1", "B-2", "C",
"C-1" and "C-2" which relate to the hospital only. However, the petitioners have refused to submit a separate statement
of accounts of the school.
Aside from the St. Catherine and St. Mary hospitals, the petitioners declared that they also own lands and coconut
plantations in Quezon Province, and other real estate in the City of Manila consisting of apartments for rent. The
petitioner, Jose V. Herrera, is an architect, actively engaged in the practice of his profession, with office at Tuason

Building, Escolta, Manila. He was formerly Chairman, Board of Examiners for Architects and Chairman, Board of
Architects connected with the United Nations. He was also connected with the Allied Technologists which constructed
the Veterans Hospital in Quezon City.
The only issue raised, is whether or not the lot, building and other improvements occupied by the St. Catherine Hospital
are exempt from the real property tax. The resolution of this question boils down to the corollary issue as to whether or
not the said properties are used exclusively for charitable or educational purposes. (Petitioners' brief, pp. 24-29).
The Court of Tax Appeals decided the issue in the negative, upon the ground that the St. Catherine's Hospital "has a pay
ward for ... pay-patients, who are charged for the use of the private rooms, operating room, laboratory room, delivery
room, etc., like other hospitals operated for profit" and that "petitioners and their family occupy a portion of the
building for their residence." With respect to petitioners' claim for exemption based upon the operation of the school of
midwifery, the Court conceded that "the proposition might be proper if the property used for the school of midwifery
were separate and distinct from the hospital." It added, however, that, "in the instant case, the portions of the building
used for classrooms of the school of midwifery have not been shown to be exclusively for school purposes"; that said
portions "rather ... have a dual use, i.e., for classroom and for hospital use, the latter not being a purpose that renders
the property tax exempt;" that part of the building and lot in question "is used as a hospital, part as residence of the
petitioners, part as garage, part as dormitory and part as school"; and that "the portion dedicated to educational and
charitable purposes can not be identified from those destined to other uses; and the building is itself an indivisible unit
of property."
It should be noted, however, that, according to the very statement of facts made in the decision appealed from, of the
thirty-two (32) beds in the hospital, twenty (20) are for charity-patients; that "the income realized from pay-patients is
spent for improvement of the charity wards;" and that "petitioners, Dr. Ester Ochangco Herrera, as directress" of said
hospital, "does not receive any salary," although its resident physician gets a monthly salary of P170.00. It is well settled,
in this connection, that the admission of pay-patients does not detract from the charitable character of a hospital, if all
its funds are devoted "exclusively to the maintenance of the institution" as a "public charity" (84 C.J.S., 617; see, also, 51
Am. Jur. 607; Cooley on Taxation, Vol. 2, p. 1562; 144 A.L.R., 1489-1492). "In other words, where rendering charity is its
primary object, and the funds derived from payments made by patients able to pay are devoted to the benevolent
purposes of the institution, the mere fact that a profit has been made will not deprive the hospital of its benevolent
character" (Prairie Du Chien Sanitarium Co. vs. City of Prairie Du Chien, 242 Wis. 262, 7 NW [2d] 832, 144 A.L.R. 1480).
Thus, we have held that the U.S.T. Hospital was not established for profit-making purposes, although it had 140 paying
beds maintained only to partly finance the expenses of the free wards, containing 203 beds for charity patients (U.S.T.
Hospital Employees Association vs. Sto. Tomas University Hospital, L-6988, May 24, 1954), that St. Paul's Hospital of
Iloilo, a corporation organized for "charitable educational and religious purposes" can not be considered as engaged in
business merely because its pharmacy department charges paying patients the cost of their medicine, plus 10% thereof,
to partly offset the cost of medicines supplied free of charge to charity patients (Collector of Internal Revenue vs. St.
Paul's Hospital of Iloilo, L-12127, May 25, 1959), and that the amendment of the original articles of incorporation of the
University of Visayas to convert it from a non-stock to a stock corporation and the increase of its assets from P9,000 to
P50,000, distributed among the members of the original non-stock corporation in terms of shares of stock, as well as the
subsequent move of its board of trustees to double the stock dividends of the corporation, in view of a gain of
P200,000.00 in property, besides good-will, which was not carried out, does not justify the inference that the
corporation has become one for business and profit, none of its profits having inured to the benefit of any stockholder
or individual (Collector of Internal Revenue vs. University of Visayas, L-13554, February 28, 1961).
Moreover, the exemption in favor of property used exclusively for charitable or educational purposes is "not limited to
property actually indispensable" therefor (Cooley on Taxation, Vol. 2, p. 1430), but extends to facilities which are
"incidental to and reasonably necessary for" the accomplishment of said purposes, such as, in the case of hospitals, "a
school for training nurses, a nurses' home, property use to provide housing facilities for interns, resident doctors,
superintendents, and other members of the hospital staff, and recreational facilities for student nurses, interns and
residents" (84 C.J.S., 621), such as "athletic fields," including "a farm used for the inmates of the institution" (Cooley on
Taxation, Vol. 2, p. 1430).

Within the purview of the Constitutional exemption from taxation, the St. Catherine's Hospital is, therefore, a charitable
institution, and the fact that it admits pay-patients does not bar it from claiming that it is devoted exclusively to
benevolent purposes, it being admitted that the income derived from pay-patients is devoted to the improvement of the
charity wards, which represent almost two-thirds (2/3) of the bed capacity of the hospital, aside from "out-charity
patients" who come only for consultation.
Again, the existence of "St. Catherine's School of Midwifery", with an enrollment of about 200 students, who practice
partly in St. Catherine's Hospital and partly in St. Mary's Hospital, which, likewise, belongs to petitioners herein, does
not, and cannot, affect the exemption to which St. Catherine's Hospital is entitled under our fundamental law. On the
contrary, it furnishes another ground for exemption. Seemingly, the Court of Tax Appeals was impressed by the fact that
the size of said enrollment and the matriculation fee charged from the students of midwifery, aside from the amount
they paid for board and lodging, including transportation to St. Mary's Hospital, warrants the belief that petitioners
derive a substantial profit from the operation of the school aforementioned. Such factor is, however, immaterial to the
issue in the case at bar, for "all lands, building and improvements used exclusively for religious, charitable or educational
purposes shall be exempt from taxation," pursuant to the Constitution, regardless of whether or not material profits are
derived from the operation of the institutions in question. In other words, Congress may, if it deems fit to do so, impose
taxes upon such "profits", but said "lands, buildings and improvements" are beyond its taxing power.
Similarly, the garage in the building above referred to which was obviously essential to the operation of the school of
midwifery, for the students therein enrolled practiced, not only in St. Catherine's Hospital, but, also, in St. Mary's
Hospital, and were entitled to transportation thereto for Mrs. Herrera received no compensation as directress of St.
Catherine's Hospital were incidental to the operation of the latter and of said school, and, accordingly, did not affect
the charitable character of said hospital and the educational nature of said school.
WHEREFORE, the decision of the Court of Tax Appeals, as well as that of the Assessment Board of Appeals of Quezon
City, are hereby reversed and set aside, and another one entered declaring that the lot, building and improvements
constituting the St. Catherine's Hospital are exempt from taxation under the provisions of the Constitution, without
special pronouncement as to costs. It is so ordered.
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 nonprofit 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 anddirect 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 toRepublic 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 who ever is
acting on his behalf, is ordered to hear the case on the merit. No costs.

LUNG CENTER OF THE PHILIPPINES, petitioner, vs. QUEZON CITY and CONSTANTINO P. ROSAS, in his capacity as City
Assessor of Quezon City,respondents.
DECISION
CALLEJO, SR., J.:
This is a petition for review on certiorari under Rule 45 of the Rules of Court, as amended, of the Decision[1] dated July
17, 2000 of the Court of Appeals in CA-G.R. SP No. 57014 which affirmed the decision of the Central Board of
Assessment Appeals holding that the lot owned by the petitioner and its hospital building constructed thereon are
subject to assessment for purposes of real property tax.
The Antecedents
The petitioner Lung Center of the Philippines is a non-stock and non-profit entity established on January 16, 1981 by
virtue of Presidential Decree No. 1823.[2] It is the registered owner of a parcel of land, particularly described as Lot No.
RP-3-B-3A-1-B-1, SWO-04-000495, located at Quezon Avenue corner Elliptical Road, Central District, Quezon City. The
lot has an area of 121,463 square meters and is covered by Transfer Certificate of Title (TCT) No. 261320 of the Registry
of Deeds of Quezon City. Erected in the middle of the aforesaid lot is a hospital known as the Lung Center of
the Philippines. A big space at the ground floor is being leased to private parties, for canteen and small store spaces,
and to medical or professional practitioners who use the same as their private clinics for their patients whom they
charge for their professional services. Almost one-half of the entire area on the left side of the building along Quezon
Avenue is vacant and idle, while a big portion on the right side, at the corner of Quezon Avenue and Elliptical Road, is
being leased for commercial purposes to a private enterprise known as the Elliptical Orchids and Garden Center.
The petitioner accepts paying and non-paying patients. It also renders medical services to out-patients, both paying and
non-paying. Aside from its income from paying patients, the petitioner receives annual subsidies from the government.
On June 7, 1993, both the land and the hospital building of the petitioner were assessed for real property taxes in the
amount of P4,554,860 by the City Assessor of Quezon City.[3]Accordingly, Tax Declaration Nos. C-021-01226 (16-2518)
and C-021-01231 (15-2518-A) were issued for the land and the hospital building, respectively.[4] On August 25, 1993, the
petitioner filed a Claim for Exemption[5] from real property taxes with the City Assessor, predicated on its claim that it is
a charitable institution. The petitioners request was denied, and a petition was, thereafter, filed before the Local Board
of Assessment Appeals of Quezon City (QC-LBAA, for brevity) for the reversal of the resolution of the City Assessor. The
petitioner alleged that under Section 28, paragraph 3 of the 1987 Constitution, the property is exempt from real
property taxes. It averred that a minimum of 60% of its hospital beds are exclusively used for charity patients and that
the major thrust of its hospital operation is to serve charity patients. The petitioner contends that it is a charitable
institution and, as such, is exempt from real property taxes. The QC-LBAA rendered judgment dismissing the petition
and holding the petitioner liable for real property taxes.[6]
The QC-LBAAs decision was, likewise, affirmed on appeal by the Central Board of Assessment Appeals of Quezon City
(CBAA, for brevity)[7] which ruled that the petitioner was not a charitable institution and that its real properties were not
actually, directly and exclusively used for charitable purposes; hence, it was not entitled to real property tax exemption
under the constitution and the law. The petitioner sought relief from the Court of Appeals, which rendered judgment
affirming the decision of the CBAA.[8]
Undaunted, the petitioner filed its petition in this Court contending that:
A. THE COURT A QUO ERRED IN DECLARING PETITIONER AS NOT ENTITLED TO REALTY TAX EXEMPTIONS ON THE
GROUND THAT ITS LAND, BUILDING AND IMPROVEMENTS, SUBJECT OF ASSESSMENT, ARE NOT ACTUALLY, DIRECTLY
AND EXCLUSIVELY DEVOTED FOR CHARITABLE PURPOSES.
B. WHILE PETITIONER IS NOT DECLARED AS REAL PROPERTY TAX EXEMPT UNDER ITS CHARTER, PD 1823, SAID
EXEMPTION MAY NEVERTHELESS BE EXTENDED UPON PROPER APPLICATION.
The petitioner avers that it is a charitable institution within the context of Section 28(3), Article VI of the 1987
Constitution. It asserts that its character as a charitable institution is not altered by the fact that it admits paying
patients and renders medical services to them, leases portions of the land to private parties, and rents out portions of
the hospital to private medical practitioners from which it derives income to be used for operational expenses. The
petitioner points out that for the years 1995 to 1999, 100% of its out-patients were charity patients and of the hospitals
282-bed capacity, 60% thereof, or 170 beds, is allotted to charity patients. It asserts that the fact that it receives
subsidies from the government attests to its character as a charitable institution. It contends that the exclusivity
required in the Constitution does not necessarily mean solely. Hence, even if a portion of its real estate is leased out
to private individuals from whom it derives income, it does not lose its character as a charitable institution, and its
exemption from the payment of real estate taxes on its real property. The petitioner cited our ruling in Herrera v. QC-

BAA[9] to bolster its pose. The petitioner further contends that even if P.D. No. 1823 does not exempt it from the
payment of real estate taxes, it is not precluded from seeking tax exemption under the 1987 Constitution.
In their comment on the petition, the respondents aver that the petitioner is not a charitable entity. The petitioners
real property is not exempt from the payment of real estate taxes under P.D. No. 1823 and even under the 1987
Constitution because it failed to prove that it is a charitable institution and that the said property is actually, directly and
exclusively used for charitable purposes. The respondents noted that in a newspaper report, it appears that graft
charges were filed with the Sandiganbayan against the director of the petitioner, its administrative officer, and Zenaida
Rivera, the proprietress of the Elliptical Orchids and Garden Center, for entering into a lease contract over 7,663.13
square meters of the property in 1990 for only P20,000 a month, when the monthly rental should be P357,000 a month
as determined by the Commission on Audit; and that instead of complying with the directive of the COA for the
cancellation of the contract for being grossly prejudicial to the government, the petitioner renewed the same on March
13, 1995 for a monthly rental of only P24,000. They assert that the petitioner uses the subsidies granted by the
government for charity patients and uses the rest of its income from the property for the benefit of paying patients,
among other purposes. They aver that the petitioner failed to adduce substantial evidence that 100% of its out-patients
and 170 beds in the hospital are reserved for indigent patients. The respondents further assert, thus:
13. That the claims/allegations of the Petitioner LCP do not speak well of its record of service. That before a patient is
admitted for treatment in the Center, first impression is that it is pay-patient and required to pay a certain amount as
deposit. That even if a patient is living below the poverty line, he is charged with high hospital bills. And, without these
bills being first settled, the poor patient cannot be allowed to leave the hospital or be discharged without first paying the
hospital bills or issue a promissory note guaranteed and indorsed by an influential agency or person known only to the
Center; that even the remains of deceased poor patients suffered the same fate. Moreover, before a patient is admitted
for treatment as free or charity patient, one must undergo a series of interviews and must submit all the requirements
needed by the Center, usually accompanied by endorsement by an influential agency or person known only to the
Center. These facts were heard and admitted by the Petitioner LCP during the hearings before the Honorable QC-BAA
and Honorable CBAA. These are the reasons of indigent patients, instead of seeking treatment with the Center, they
prefer to be treated at the Quezon Institute. Can such practice by the Center be called charitable?[10]
The Issues
The issues for resolution are the following: (a) whether the petitioner is a charitable institution within the context of
Presidential Decree No. 1823 and the 1973 and 1987 Constitutions and Section 234(b) of Republic Act No. 7160; and (b)
whether the real properties of the petitioner are exempt from real property taxes.
The Courts Ruling
The petition is partially granted.
On the first issue, we hold that the petitioner is a charitable institution within the context of the 1973 and 1987
Constitutions. To determine whether an enterprise is a charitable institution/entity or not, the elements which should
be considered include the statute creating the enterprise, its corporate purposes, its constitution and by-laws, the
methods of administration, the nature of the actual work performed, the character of the services rendered, the
indefiniteness of the beneficiaries, and the use and occupation of the properties.[11]
In the legal sense, a charity may be fully defined as a gift, to be applied consistently with existing laws, for the benefit of
an indefinite number of persons, either by bringing their minds and hearts under the influence of education or religion,
by assisting them to establish themselves in life or otherwise lessening the burden of government.[12] It may be applied
to almost anything that tend to promote the well-doing and well-being of social man. It embraces the improvement and
promotion of the happiness of man.[13] The word charitable is not restricted to relief of the poor or sick.[14] The test of
a charity and a charitable organization are in law the same. The test whether an enterprise is charitable or not is
whether it exists to carry out a purpose reorganized in law as charitable or whether it is maintained for gain, profit, or
private advantage.
Under P.D. No. 1823, the petitioner is a non-profit and non-stock corporation which, subject to the provisions of the
decree, is to be administered by the Office of the President of thePhilippines with the Ministry of Health and the
Ministry of Human Settlements. It was organized for the welfare and benefit of the Filipino people principally to help
combat the high incidence of lung and pulmonary diseases in the Philippines. The raison detre for the creation of the
petitioner is stated in the decree, viz:
Whereas, for decades, respiratory diseases have been a priority concern, having been the leading cause of illness and
death in the Philippines, comprising more than 45% of the total annual deaths from all causes, thus, exacting a

tremendous toll on human resources, which ailments are likely to increase and degenerate into serious lung diseases on
account of unabated pollution, industrialization and unchecked cigarette smoking in the country;
Whereas, the more common lung diseases are, to a great extent, preventable, and curable with early and adequate
medical care, immunization and through prompt and intensive prevention and health education programs;
Whereas, there is an urgent need to consolidate and reinforce existing programs, strategies and efforts at preventing,
treating and rehabilitating people affected by lung diseases, and to undertake research and training on the cure and
prevention of lung diseases, through a Lung Center which will house and nurture the above and related activities and
provide tertiary-level care for more difficult and problematical cases;
Whereas, to achieve this purpose, the Government intends to provide material and financial support towards the
establishment and maintenance of a Lung Center for the welfare and benefit of the Filipino people.[15]
The purposes for which the petitioner was created are spelled out in its Articles of Incorporation, thus:
SECOND: That the purposes for which such corporation is formed are as follows:
1.
To construct, establish, equip, maintain, administer and conduct an integrated medical institution which shall
specialize in the treatment, care, rehabilitation and/or relief of lung and allied diseases in line with the concern of the
government to assist and provide material and financial support in the establishment and maintenance of a lung center
primarily to benefit the people of the Philippines and in pursuance of the policy of the State to secure the well-being of
the people by providing them specialized health and medical services and by minimizing the incidence of lung diseases in
the country and elsewhere.
2.
To promote the noble undertaking of scientific research related to the prevention of lung or pulmonary ailments
and the care of lung patients, including the holding of a series of relevant congresses, conventions, seminars and
conferences;
3.
To stimulate and, whenever possible, underwrite scientific researches on the biological, demographic, social,
economic, eugenic and physiological aspects of lung or pulmonary diseases and their control; and to collect and publish
the findings of such research for public consumption;
4.
To facilitate the dissemination of ideas and public acceptance of information on lung consciousness or awareness,
and the development of fact-finding, information and reporting facilities for and in aid of the general purposes or
objects aforesaid, especially in human lung requirements, general health and physical fitness, and other relevant or
related fields;
5.
To encourage the training of physicians, nurses, health officers, social workers and medical and technical
personnel in the practical and scientific implementation of services to lung patients;
6.
To assist universities and research institutions in their studies about lung diseases, to encourage advanced training
in matters of the lung and related fields and to support educational programs of value to general health;
7.
To encourage the formation of other organizations on the national, provincial and/or city and local levels; and to
coordinate their various efforts and activities for the purpose of achieving a more effective programmatic approach on
the common problems relative to the objectives enumerated herein;
8.
To seek and obtain assistance in any form from both international and local foundations and organizations; and to
administer grants and funds that may be given to the organization;
9.
To extend, whenever possible and expedient, medical services to the public and, in general, to promote and
protect the health of the masses of our people, which has long been recognized as an economic asset and a social
blessing;
10. To help prevent, relieve and alleviate the lung or pulmonary afflictions and maladies of the people in any and all
walks of life, including those who are poor and needy, all without regard to or discrimination, because of race, creed,
color or political belief of the persons helped; and to enable them to obtain treatment when such disorders occur;
11. To participate, as circumstances may warrant, in any activity designed and carried on to promote the general
health of the community;
12. To acquire and/or borrow funds and to own all funds or equipment, educational materials and supplies by
purchase, donation, or otherwise and to dispose of and distribute the same in such manner, and, on such basis as the
Center shall, from time to time, deem proper and best, under the particular circumstances, to serve its general and nonprofit purposes and objectives;
13. To buy, purchase, acquire, own, lease, hold, sell, exchange, transfer and dispose of properties, whether real or
personal, for purposes herein mentioned; and
14. To do everything necessary, proper, advisable or convenient for the accomplishment of any of the powers herein
set forth and to do every other act and thing incidental thereto or connected therewith.[16]

Hence, the medical services of the petitioner are to be rendered to the public in general in any and all walks of life
including those who are poor and the needy without discrimination. After all, any person, the rich as well as the poor,
may fall sick or be injured or wounded and become a subject of charity.[17]
As a general principle, a charitable institution does not lose its character as such and its exemption from taxes simply
because it derives income from paying patients, whether out-patient, or confined in the hospital, or receives subsidies
from the government, so long as the money received is devoted or used altogether to the charitable object which it is
intended to achieve; and no money inures to the private benefit of the persons managing or operating the
institution.[18] In Congregational Sunday School, etc. v. Board of Review,[19] the State Supreme Court of Illinois held, thus:
*A+n institution does not lose its charitable character, and consequent exemption from taxation, by reason of the fact
that those recipients of its benefits who are able to pay are required to do so, where no profit is made by the institution
and the amounts so received are applied in furthering its charitable purposes, and those benefits are refused to none on
account of inability to pay therefor. The fundamental ground upon which all exemptions in favor of charitable
institutions are based is the benefit conferred upon the public by them, and a consequent relief, to some extent, of the
burden upon the state to care for and advance the interests of its citizens.[20]
As aptly stated by the State Supreme Court of South Dakota in Lutheran Hospital Association of South Dakota v.
Baker:[21]
*T+he fact that paying patients are taken, the profits derived from attendance upon these patients being exclusively
devoted to the maintenance of the charity, seems rather to enhance the usefulness of the institution to the poor; for it
is a matter of common observation amongst those who have gone about at all amongst the suffering classes, that the
deserving poor can with difficulty be persuaded to enter an asylum of any kind confined to the reception of objects of
charity; and that their honest pride is much less wounded by being placed in an institution in which paying patients are
also received. The fact of receiving money from some of the patients does not, we think, at all impair the character of
the charity, so long as the money thus received is devoted altogether to the charitable object which the institution is
intended to further.[22]
The money received by the petitioner becomes a part of the trust fund and must be devoted to public trust purposes
and cannot be diverted to private profit or benefit.[23]
Under P.D. No. 1823, the petitioner is entitled to receive donations. The petitioner does not lose its character as a
charitable institution simply because the gift or donation is in the form of subsidies granted by the government. As held
by the State Supreme Court of Utah in Yorgason v. County Board of Equalization of Salt Lake County:[24]
Second, the government subsidy payments are provided to the project. Thus, those payments are like a gift or
donation of any other kind except they come from the government. In both Intermountain Health Care and the present
case, the crux is the presence or absence of material reciprocity. It is entirely irrelevant to this analysis that the
government, rather than a private benefactor, chose to make up the deficit resulting from the exchange between St.
Marks Tower and the tenants by making a contribution to the landlord, just as it would have been irrelevant
in Intermountain Health Care if the patients income supplements had come from private individuals rather than the
government.
Therefore, the fact that subsidization of part of the cost of furnishing such housing is by the government rather than
private charitable contributions does not dictate the denial of a charitable exemption if the facts otherwise support such
an exemption, as they do here.[25]
In this case, the petitioner adduced substantial evidence that it spent its income, including the subsidies from the
government for 1991 and 1992 for its patients and for the operation of the hospital. It even incurred a net loss in 1991
and 1992 from its operations.
Even as we find that the petitioner is a charitable institution, we hold, anent the second issue, that those portions of its
real property that are leased to private entities are not exempt from real property taxes as these are not actually,
directly and exclusively used for charitable purposes.
The settled rule in this jurisdiction is that laws granting exemption from tax are construed strictissimi juris against the
taxpayer and liberally in favor of the taxing power. Taxation is the rule and exemption is the exception. The effect of an
exemption is equivalent to an appropriation. Hence, a claim for exemption from tax payments must be clearly shown
and based on language in the law too plain to be mistaken.[26] As held in Salvation Army v. Hoehn:[27]
An intention on the part of the legislature to grant an exemption from the taxing power of the state will never be
implied from language which will admit of any other reasonable construction. Such an intention must be expressed in
clear and unmistakable terms, or must appear by necessary implication from the language used, for it is a well settled
principle that, when a special privilege or exemption is claimed under a statute, charter or act of incorporation, it is to be

construed strictly against the property owner and in favor of the public. This principle applies with peculiar force to a
claim of exemption from taxation . [28]
Section 2 of Presidential Decree No. 1823, relied upon by the petitioner, specifically provides that the petitioner shall
enjoy the tax exemptions and privileges:
SEC. 2. TAX EXEMPTIONS AND PRIVILEGES. Being a non-profit, non-stock corporation organized primarily to help
combat the high incidence of lung and pulmonary diseases in the Philippines, all donations, contributions, endowments
and equipment and supplies to be imported by authorized entities or persons and by the Board of Trustees of the Lung
Center of the Philippines, Inc., for the actual use and benefit of the Lung Center, shall be exempt from income and gift
taxes, the same further deductible in full for the purpose of determining the maximum deductible amount under Section
30, paragraph (h), of the National Internal Revenue Code, as amended.
The Lung Center of the Philippines shall be exempt from the payment of taxes, charges and fees imposed by the
Government or any political subdivision or instrumentality thereof with respect to equipment purchases made by, or for
the Lung Center.[29]
It is plain as day that under the decree, the petitioner does not enjoy any property tax exemption privileges for its real
properties as well as the building constructed thereon. If the intentions were otherwise, the same should have been
among the enumeration of tax exempt privileges under Section 2:
It is a settled rule of statutory construction that the express mention of one person, thing, or consequence implies the
exclusion of all others. The rule is expressed in the familiar maxim, expressio unius est exclusio alterius.
The rule of expressio unius est exclusio alterius is formulated in a number of ways. One variation of the rule is principle
that what is expressed puts an end to that which is implied. Expressium facit cessare tacitum. Thus, where a statute, by
its terms, is expressly limited to certain matters, it may not, by interpretation or construction, be extended to other
matters.
...
The rule of expressio unius est exclusio alterius and its variations are canons of restrictive interpretation. They are based
on the rules of logic and the natural workings of the human mind. They are predicated upon ones own voluntary act
and not upon that of others. They proceed from the premise that the legislature would not have made specified
enumeration in a statute had the intention been not to restrict its meaning and confine its terms to those expressly
mentioned.[30]
The exemption must not be so enlarged by construction since the reasonable presumption is that the State has granted
in express terms all it intended to grant at all, and that unless the privilege is limited to the very terms of the statute the
favor would be intended beyond what was meant.[31]
Section 28(3), Article VI of the 1987 Philippine Constitution provides, thus:
(3) Charitable institutions, churches and parsonages or convents appurtenant thereto, mosques, non-profit cemeteries,
and all lands, buildings, and improvements, actually, directly and exclusively used for religious, charitable or educational
purposes shall be exempt from taxation.[32]
The tax exemption under this constitutional provision covers property taxes only.[33] As Chief Justice Hilario G. Davide, Jr.,
then a member of the 1986 Constitutional Commission, explained: . . . what is exempted is not the institution itself . . .;
those exempted from real estate taxes are lands, buildings and improvements actually, directly and exclusively used for
religious, charitable or educational purposes.[34]
Consequently, the constitutional provision is implemented by Section 234(b) of Republic Act No. 7160 (otherwise known
as the Local Government Code of 1991) as follows:
SECTION 234. Exemptions from Real Property Tax. The following are exempted from payment of the real property tax:
...
(b) Charitable institutions, churches, parsonages or convents appurtenant thereto, mosques, non-profit or religious
cemeteries and all lands, buildings, and improvements actually, directly, and exclusively used for religious, charitable or
educational purposes.[35]
We note that under the 1935 Constitution, ... all lands, buildings, and improvements used exclusively for charitable
purposes shall be exempt from taxation.[36] However, under the 1973 and the present Constitutions, for lands,
buildings, and improvements of the charitable institution to be considered exempt, the same should not only be
exclusively used for charitable purposes; it is required that such property be used actually and directly for such
purposes.[37]

In light of the foregoing substantial changes in the Constitution, the petitioner cannot rely on our ruling in Herrera v.
Quezon City Board of Assessment Appeals which was promulgated on September 30, 1961 before the 1973 and 1987
Constitutions took effect.[38] As this Court held in Province of Abra v. Hernando:[39]
Under the 1935 Constitution: Cemeteries, churches, and parsonages or convents appurtenant thereto, and all lands,
buildings, and improvements used exclusively for religious, charitable, or educational purposes shall be exempt from
taxation. The present Constitution added charitable institutions, mosques, and non-profit cemeteries and required
that for the exemption of lands, buildings, and improvements, they should not only be exclusively but also actually
and directly used for religious or charitable purposes. The Constitution is worded differently. The change should not
be ignored. It must be duly taken into consideration. Reliance on past decisions would have sufficed were the words
actually as well as directly not added. There must be proof therefore of the actual and direct use of the lands,
buildings, and improvements for religious or charitable purposes to be exempt from taxation.
Under the 1973 and 1987 Constitutions and Rep. Act No. 7160 in order to be entitled to the exemption, the petitioner is
burdened to prove, by clear and unequivocal proof, that (a) it is a charitable institution; and (b) its real properties
are ACTUALLY, DIRECTLY and EXCLUSIVELY used for charitable purposes. Exclusive is defined as possessed and
enjoyed to the exclusion of others; debarred from participation or enjoyment; and exclusively is defined,
in a manner to exclude; as enjoying a privilege exclusively.[40] If real property is used for one or more commercial
purposes, it is not exclusively used for the exempted purposes but is subject to taxation.[41] The words dominant use
or principal use cannot be substituted for the words used exclusively without doing violence to the Constitutions
and the law.[42] Solely is synonymous with exclusively.[43]
What is meant by actual, direct and exclusive use of the property for charitable purposes is the direct and immediate
and actual application of the property itself to the purposes for which the charitable institution is organized. It is not the
use of the income from the real property that is determinative of whether the property is used for tax-exempt
purposes.[44]
The petitioner failed to discharge its burden to prove that the entirety of its real property is actually, directly and
exclusively used for charitable purposes. While portions of the hospital are used for the treatment of patients and the
dispensation of medical services to them, whether paying or non-paying, other portions thereof are being leased to
private individuals for their clinics and a canteen. Further, a portion of the land is being leased to a private individual for
her business enterprise under the business name Elliptical Orchids and Garden Center. Indeed, the petitioners
evidence shows that it collected P1,136,483.45 as rentals in 1991 and P1,679,999.28 for 1992 from the said lessees.
Accordingly, we hold that the portions of the land leased to private entities as well as those parts of the hospital leased
to private individuals are not exempt from such taxes.[45] On the other hand, the portions of the land occupied by the
hospital and portions of the hospital used for its patients, whether paying or non-paying, are exempt from real property
taxes.
IN LIGHT OF ALL THE FOREGOING, the petition is PARTIALLY GRANTED. The respondent Quezon City Assessor is hereby
DIRECTED to determine, after due hearing, the precise portions of the land and the area thereof which are leased to
private persons, and to compute the real property taxes due thereon as provided for by law.
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. S.C. JOHNSON AND SON, INC., and COURT OF APPEALS,
respondents.
This is a petition for review on certiorari under Rule 45 of the Rules of Court seeking to set aside the decision of the
Court of Appeals dated November 7, 1996 in CA-GR SP No. 40802 affirming the decision of the Court of Tax Appeals in
CTA Case No. 5136.
The antecedent facts as found by the Court of Tax Appeals are not disputed, to wit:
*Respondent+, a domestic corporation organized and operating under the Philippine laws, entered into a license
agreement with SC Johnson and Son, United States of America (USA), a non-resident foreign corporation based in the
U.S.A. pursuant to which the [respondent] was granted the right to use the trademark, patents and technology owned
by the latter including the right to manufacture, package and distribute the products covered by the Agreement and
secure assistance in management, marketing and production from SC Johnson and Son, U. S. A.
The said License Agreement was duly registered with the Technology Transfer Board of the Bureau of Patents, Trade
Marks and Technology Transfer under Certificate of Registration No. 8064 (Exh. A).

For the use of the trademark or technology, [respondent] was obliged to pay SC Johnson and Son, USA royalties based
on a percentage of net sales and subjected the same to 25% withholding tax on royalty payments which [respondent]
paid for the period covering July 1992 to May 1993 in the total amount of P1,603,443.00 (Exhs. B to L and
submarkings).
On October 29, 1993, [respondent] filed with the International Tax Affairs Division (ITAD) of the BIR a claim for refund of
overpaid withholding tax on royalties arguing that, the antecedent facts attending *respondents+ case fall squarely
within the same circumstances under which said MacGeorge and Gillete rulings were issued. Since the agreement was
approved by the Technology Transfer Board, the preferential tax rate of 10% should apply to the [respondent]. We
therefore submit that royalties paid by the [respondent] to SC Johnson and Son, USA is only subject to 10% withholding
tax pursuant to the most-favored nation clause of the RP-US Tax Treaty [Article 13 Paragraph 2 (b) (iii)] in relation to the
RP-West Germany Tax Treaty *Article 12 (2) (b)+ (Petition for Review *filed with the Court of Appeals+, par. 12).
The Commissioner did not act on said claim for refund. Private respondent S.C. Johnson & Son, Inc. (S.C. Johnson) then
filed a petition for review before the Court of Tax Appeals (CTA) where the case was docketed as CTA Case No. 5136, to
claim a refund of the overpaid withholding tax on royalty payments from July 1992 to May 1993.
On May 7, 1996, the Court of Tax Appeals rendered its decision in favor of S.C. Johnson and ordered the Commissioner
of Internal Revenue to issue a tax credit certificate in the amount of P963,266.00 representing overpaid withholding tax
on royalty payments beginning July, 1992 to May, 1993.[2]
The Commissioner of Internal Revenue thus filed a petition for review with the Court of Appeals which rendered the
decision subject of this appeal on November 7, 1996 finding no merit in the petition and affirming in toto the CTA
ruling.[3]
This petition for review was filed by the Commissioner of Internal Revenue raising the following issue:
THE COURT OF APPEALS ERRED IN RULING THAT SC JOHNSON AND SON, USA IS ENTITLED TO THE MOST FAVORED
NATION TAX RATE OF 10% ON ROYALTIES AS PROVIDED IN THE RP-US TAX TREATY IN RELATION TO THE RP-WEST
GERMANY TAX TREATY.
Petitioner contends that under Article 13(2) (b) (iii) of the RP-US Tax Treaty, which is known as the most favored
nation clause, the lowest rate of the Philippine tax at 10% may be imposed on royalties derived by a resident of the
United States from sources within the Philippines only if the circumstances of the resident of the United States are
similar to those of the resident of West Germany. Since the RP-US Tax Treaty contains no matching credit provision as
that provided under Article 24 of the RP-West Germany Tax Treaty, the tax on royalties under the RP-US Tax Treaty is
not paid under similar circumstances as those obtaining in the RP-West Germany Tax Treaty. Even assuming that the
phrase paid under similar circumstances refers to the payment of royalties, and not taxes, as held by the Court of
Appeals, still, the most favored nation clause cannot be invoked for the reason that when a tax treaty contemplates
circumstances attendant to the payment of a tax, or royalty remittances for that matter, these must necessarily refer to
circumstances that are tax-related. Finally, petitioner argues that since S.C. Johnsons invocation of the most favored
nation clause is in the nature of a claim for exemption from the application of the regular tax rate of 25% for royalties,
the provisions of the treaty must be construed strictly against it.
In its Comment, private respondent S.C. Johnson avers that the instant petition should be denied (1) because it contains
a defective certification against forum shopping as required under SC Circular No. 28-91, that is, the certification was not
executed by the petitioner herself but by her counsel; and (2) that the most favored nation clause under the RP-US Tax
Treaty refers to royalties paid under similar circumstances as those royalties subject to tax in other treaties; that the
phrase paid under similar circumstances does not refer to payment of the tax but to the subject matter of the tax, that
is, royalties, because the most favored nation clause is intended to allow the taxpayer in one state to avail of more
liberal provisions contained in another tax treaty wherein the country of residence of such taxpayer is also a party
thereto, subject to the basic condition that the subject matter of taxation in that other tax treaty is the same as that in
the original tax treaty under which the taxpayer is liable; thus, the RP-US Tax Treaty speaks of royalties of the same kind

paid under similar circumstances. S.C. Johnson also contends that the Commissioner is estopped from insisting on her
interpretation that the phrase paid under similar circumstances refers to the manner in which the tax is paid, for the
reason that said interpretation is embodied in Revenue Memorandum Circular (RMC) 39-92 which was already
abandoned by the Commissioners predecessor in 1993; and was expressly revoked in BIR Ruling No. 052-95 which
stated that royalties paid to an American licensor are subject only to 10% withholding tax pursuant to Art 13(2)(b)(iii) of
the RP-US Tax Treaty in relation to the RP-West Germany Tax Treaty. Said ruling should be given retroactive effect
except if such is prejudicial to the taxpayer pursuant to Section 246 of the National Internal Revenue Code.
Petitioner filed Reply alleging that the fact that the certification against forum shopping was signed by petitioners
counsel is not a fatal defect as to warrant the dismissal of this petition since Circular No. 28-91 applies only to original
actions and not to appeals, as in the instant case. Moreover, the requirement that the certification should be signed by
petitioner and not by counsel does not apply to petitioner who has only the Office of the Solicitor General as statutory
counsel. Petitioner reiterates that even if the phrase paid under similar circumstances embodied in the most favored
nation clause of the RP-US Tax Treaty refers to the payment of royalties and not taxes, still the presence or absence of a
matching credit provision in the said RP-US Tax Treaty would constitute a material circumstance to such payment and
would be determinative of the said clauses application.
We address first the objection raised by private respondent that the certification against forum shopping was not
executed by the petitioner herself but by her counsel, the Office of the Solicitor General (O.S.G.) through one of its
Solicitors, Atty. Tomas M. Navarro.
SC Circular No. 28-91 provides:
SUBJECT: ADDITIONAL REQUISITES FOR PETITIONS FILED WITH THE SUPREME COURT AND THE COURT OF APPEALS TO
PREVENT FORUM SHOPPING OR MULTIPLE FILING OF PETITIONS AND COMPLAINTS
TO :

xxx

xxx

xxx

The attention of the Court has been called to the filing of multiple petitions and complaints involving the same issues in
the Supreme Court, the Court of Appeals or other tribunals or agencies, with the result that said courts, tribunals or
agencies have to resolve the same issues.
(1) To avoid the foregoing, in every petition filed with the Supreme Court or the Court of Appeals, the petitioner aside
from complying with pertinent provisions of the Rules of Court and existing circulars, must certify under oath to all of
the following facts or undertakings: (a) he has not theretofore commenced any other action or proceeding involving the
same issues in the Supreme Court, the Court of Appeals, or any tribunal or agency; xxx
(2) Any violation of this revised Circular will entail the following sanctions: (a) it shall be a cause for the summary
dismissal of the multiple petitions or complaints; xxx
The circular expressly requires that a certificate of non-forum shopping should be attached to petitions filed before this
Court and the Court of Appeals. Petitioners allegation that Circular No. 28-91 applies only to original actions and not to
appeals as in the instant case is not supported by the text nor by the obvious intent of the Circular which is to prevent
multiple petitions that will result in the same issue being resolved by different courts.
Anent the requirement that the party, not counsel, must certify under oath that he has not commenced any other action
involving the same issues in this Court or the Court of Appeals or any other tribunal or agency, we are inclined to accept
petitioners submission that since the OSG is the only lawyer for the petitioner, which is a government agency
mandated under Section 35, Chapter 12, title III, Book IV of the 1987 Administrative Code[4] to be represented only by
the Solicitor General, the certification executed by the OSG in this case constitutes substantial compliance with Circular
No. 28-91.

With respect to the merits of this petition, the main point of contention in this appeal is the interpretation of Article 13
(2) (b) (iii) of the RP-US Tax Treaty regarding the rate of tax to be imposed by the Philippines upon royalties received by a
non-resident foreign corporation. The provision states insofar as pertinent that1) Royalties derived by a resident of one of the Contracting States from sources within the other Contracting State may
be taxed by both Contracting States.
2) However, the tax imposed by that Contracting State shall not exceed.
a) In the case of the United States, 15 percent of the gross amount of the royalties, and
b) In the case of the Philippines, the least of:
(i) 25 percent of the gross amount of the royalties;
(ii) 15 percent of the gross amount of the royalties, where the royalties are paid by a corporation registered with the
Philippine Board of Investments and engaged in preferred areas of activities; and
(iii) the lowest rate of Philippine tax that may be imposed on royalties of the same kind paid under similar circumstances
to a resident of a third State.
xxx xxx

xxx

(italics supplied)
Respondent S. C. Johnson and Son, Inc. claims that on the basis of the quoted provision, it is entitled to the concessional
tax rate of 10 percent on royalties based on Article 12 (2) (b) of the RP-Germany Tax Treaty which provides:
(2) However, such royalties may also be taxed in the Contracting State in which they arise, and according to the law of
that State, but the tax so charged shall not exceed:
xxx
b) 10 percent of the gross amount of royalties arising from the use of, or the right to use, any patent, trademark, design
or model, plan, secret formula or process, or from the use of or the right to use, industrial, commercial, or scientific
equipment, or for information concerning industrial, commercial or scientific experience.
For as long as the transfer of technology, under Philippine law, is subject to approval, the limitation of the tax rate
mentioned under b) shall, in the case of royalties arising in the Republic of the Philippines, only apply if the contract
giving rise to such royalties has been approved by the Philippine competent authorities.
Unlike the RP-US Tax Treaty, the RP-Germany Tax Treaty allows a tax credit of 20 percent of the gross amount of such
royalties against German income and corporation tax for the taxes payable in the Philippines on such royalties where the
tax rate is reduced to 10 or 15 percent under such treaty. Article 24 of the RP-Germany Tax Treaty states1) Tax shall be determined in the case of a resident of the Federal Republic of Germany as follows:
xxx

xxx

xxx

b) Subject to the provisions of German tax law regarding credit for foreign tax, there shall be allowed as a credit against
German income and corporation tax payable in respect of the following items of income arising in the Republic of the
Philippines, the tax paid under the laws of the Philippines in accordance with this Agreement on:

xxx

xxx

xxx

dd) royalties, as defined in paragraph 3 of Article 12;

xxx

xxx

xxx

c) For the purpose of the credit referred in subparagraph b) the Philippine tax shall be deemed to be
xxx

xxx

xxx

cc) in the case of royalties for which the tax is reduced to 10 or 15 per cent according to paragraph 2 of Article 12, 20
percent of the gross amount of such royalties.
xxx

xxx

xxx

According to petitioner, the taxes upon royalties under the RP-US Tax Treaty are not paid under circumstances similar to
those in the RP-West Germany Tax Treaty since there is no provision for a 20 percent matching credit in the former
convention and private respondent cannot invoke the concessional tax rate on the strength of the most favored nation
clause in the RP-US Tax Treaty. Petitioners position is explained thus:
Under the foregoing provision of the RP-West Germany Tax Treaty, the Philippine tax paid on income from sources
within the Philippines is allowed as a credit against German income and corporation tax on the same income. In the
case of royalties for which the tax is reduced to 10 or 15 percent according to paragraph 2 of Article 12 of the RP-West
Germany Tax Treaty, the credit shall be 20% of the gross amount of such royalty. To illustrate, the royalty income of a
German resident from sources within the Philippines arising from the use of, or the right to use, any patent, trade mark,
design or model, plan, secret formula or process, is taxed at 10% of the gross amount of said royalty under certain
conditions. The rate of 10% is imposed if credit against the German income and corporation tax on said royalty is
allowed in favor of the German resident. That means the rate of 10% is granted to the German taxpayer if he is similarly
granted a credit against the income and corporation tax of West Germany. The clear intent of the matching credit is to
soften the impact of double taxation by different jurisdictions.
The RP-US Tax Treaty contains no similar matching credit as that provided under the RP-West Germany Tax Treaty.
Hence, the tax on royalties under the RP-US Tax Treaty is not paid under similar circumstances as those obtaining in the
RP-West Germany Tax Treaty. Therefore, the most favored nation clause in the RP-West Germany Tax Treaty cannot
be availed of in interpreting the provisions of the RP-US Tax Treaty.*5+
The petition is meritorious.
We are unable to sustain the position of the Court of Tax Appeals, which was upheld by the Court of Appeals, that the
phrase paid under similar circumstances in Article 13 (2) (b), (iii) of the RP-US Tax Treaty should be interpreted to refer
to payment of royalty, and not to the payment of the tax, for the reason that the phrase paid under similar
circumstances is followed by the phrase to a resident of a third state. The respondent court held that Words are to
be understood in the context in which they are used, and since what is paid to a resident of a third state is not a tax but
a royalty logic instructs that the treaty provision in question should refer to royalties of the same kind paid under
similar circumstances.
The above construction is based principally on syntax or sentence structure but fails to take into account the purpose
animating the treaty provisions in point. To begin with, we are not aware of any law or rule pertinent to the payment of
royalties, and none has been brought to our attention, which provides for the payment of royalties under dissimilar
circumstances. The tax rates on royalties and the circumstances of payment thereof are the same for all the recipients
of such royalties and there is no disparity based on nationality in the circumstances of such payment.[6] On the other
hand, a cursory reading of the various tax treaties will show that there is no similarity in the provisions on relief from or
avoidance of double taxation[7] as this is a matter of negotiation between the contracting parties.[8] As will be shown

later, this dissimilarity is true particularly in the treaties between the Philippines and the United States and between the
Philippines and West Germany.
The RP-US Tax Treaty is just one of a number of bilateral treaties which the Philippines has entered into for the
avoidance of double taxation.[9] The purpose of these international agreements is to reconcile the national fiscal
legislations of the contracting parties in order to help the taxpayer avoid simultaneous taxation in two different
jurisdictions.[10] More precisely, the tax conventions are drafted with a view towards the elimination of international
juridical double taxation, which is defined as the imposition of comparable taxes in two or more states on the same
taxpayer in respect of the same subject matter and for identical periods.[11], citing the Committee on Fiscal Affairs of
the Organization for Economic Co-operation and Development (OECD).11 The apparent rationale for doing away with
double taxation is to encourage the free flow of goods and services and the movement of capital, technology and
persons between countries, conditions deemed vital in creating robust and dynamic economies.[12] Foreign
investments will only thrive in a fairly predictable and reasonable international investment climate and the protection
against double taxation is crucial in creating such a climate.[13]
Double taxation usually takes place when a person is resident of a contracting state and derives income from, or owns
capital in, the other contracting state and both states impose tax on that income or capital. In order to eliminate double
taxation, a tax treaty resorts to several methods. First, it sets out the respective rights to tax of the state of source or
situs and of the state of residence with regard to certain classes of income or capital. In some cases, an exclusive right
to tax is conferred on one of the contracting states; however, for other items of income or capital, both states are given
the right to tax, although the amount of tax that may be imposed by the state of source is limited.[14]
The second method for the elimination of double taxation applies whenever the state of source is given a full or limited
right to tax together with the state of residence. In this case, the treaties make it incumbent upon the state of residence
to allow relief in order to avoid double taxation. There are two methods of relief- the exemption method and the credit
method. In the exemption method, the income or capital which is taxable in the state of source or situs is exempted in
the state of residence, although in some instances it may be taken into account in determining the rate of tax applicable
to the taxpayers remaining income or capital. On the other hand, in the credit method, although the income or capital
which is taxed in the state of source is still taxable in the state of residence, the tax paid in the former is credited against
the tax levied in the latter. The basic difference between the two methods is that in the exemption method, the focus is
on the income or capital itself, whereas the credit method focuses upon the tax.[15]
In negotiating tax treaties, the underlying rationale for reducing the tax rate is that the Philippines will give up a part of
the tax in the expectation that the tax given up for this particular investment is not taxed by the other country.[16] Thus
the petitioner correctly opined that the phrase royalties paid under similar circumstances in the most favored nation
clause of the US-RP Tax Treaty necessarily contemplated circumstances that are tax-related.
In the case at bar, the state of source is the Philippines because the royalties are paid for the right to use property or
rights, i.e. trademarks, patents and technology, located within the Philippines.[17] The United States is the state of
residence since the taxpayer, S. C. Johnson and Son, U. S. A., is based there. Under the RP-US Tax Treaty, the state of
residence and the state of source are both permitted to tax the royalties, with a restraint on the tax that may be
collected by the state of source.[18] Furthermore, the method employed to give relief from double taxation is the
allowance of a tax credit to citizens or residents of the United States (in an appropriate amount based upon the taxes
paid or accrued to the Philippines) against the United States tax, but such amount shall not exceed the limitations
provided by United States law for the taxable year.[19] Under Article 13 thereof, the Philippines may impose one of
three rates- 25 percent of the gross amount of the royalties; 15 percent when the royalties are paid by a corporation
registered with the Philippine Board of Investments and engaged in preferred areas of activities; or the lowest rate of
Philippine tax that may be imposed on royalties of the same kind paid under similar circumstances to a resident of a
third state.
Given the purpose underlying tax treaties and the rationale for the most favored nation clause, the concessional tax rate
of 10 percent provided for in the RP-Germany Tax Treaty should apply only if the taxes imposed upon royalties in the RPUS Tax Treaty and in the RP-Germany Tax Treaty are paid under similar circumstances. This would mean that private

respondent must prove that the RP-US Tax Treaty grants similar tax reliefs to residents of the United States in respect of
the taxes imposable upon royalties earned from sources within the Philippines as those allowed to their German
counterparts under the RP-Germany Tax Treaty.
The RP-US and the RP-West Germany Tax Treaties do not contain similar provisions on tax crediting. Article 24 of the
RP-Germany Tax Treaty, supra, expressly allows crediting against German income and corporation tax of 20% of the
gross amount of royalties paid under the law of the Philippines. On the other hand, Article 23 of the RP-US Tax Treaty,
which is the counterpart provision with respect to relief for double taxation, does not provide for similar crediting of
20% of the gross amount of royalties paid. Said Article 23 reads:
Article 23
Relief from double taxation
Double taxation of income shall be avoided in the following manner:
1) In accordance with the provisions and subject to the limitations of the law of the United States (as it may be
amended from time to time without changing the general principle thereof), the United States shall allow to a citizen or
resident of the United States as a credit against the United States tax the appropriate amount of taxes paid or accrued to
the Philippines and, in the case of a United States corporation owning at least 10 percent of the voting stock of a
Philippine corporation from which it receives dividends in any taxable year, shall allow credit for the appropriate amount
of taxes paid or accrued to the Philippines by the Philippine corporation paying such dividends with respect to the profits
out of which such dividends are paid. Such appropriate amount shall be based upon the amount of tax paid or accrued
to the Philippines, but the credit shall not exceed the limitations (for the purpose of limiting the credit to the United
States tax on income from sources within the Philippines or on income from sources outside the United States) provided
by United States law for the taxable year. xxx.
The reason for construing the phrase paid under similar circumstances as used in Article 13 (2) (b) (iii) of the RP-US Tax
Treaty as referring to taxes is anchored upon a logical reading of the text in the light of the fundamental purpose of such
treaty which is to grant an incentive to the foreign investor by lowering the tax and at the same time crediting against
the domestic tax abroad a figure higher than what was collected in the Philippines.
In one case, the Supreme Court pointed out that laws are not just mere compositions, but have ends to be achieved and
that the general purpose is a more important aid to the meaning of a law than any rule which grammar may lay
down.[20] It is the duty of the courts to look to the object to be accomplished, the evils to be remedied, or the purpose
to be subserved, and should give the law a reasonable or liberal construction which will best effectuate its purpose.[21]
The Vienna Convention on the Law of Treaties states that a treaty shall be interpreted in good faith in accordance with
the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and
purpose.[22]
As stated earlier, the ultimate reason for avoiding double taxation is to encourage foreign investors to invest in the
Philippines - a crucial economic goal for developing countries.[23] The goal of double taxation conventions would be
thwarted if such treaties did not provide for effective measures to minimize, if not completely eliminate, the tax burden
laid upon the income or capital of the investor. Thus, if the rates of tax are lowered by the state of source, in this case,
by the Philippines, there should be a concomitant commitment on the part of the state of residence to grant some form
of tax relief, whether this be in the form of a tax credit or exemption.[24] Otherwise, the tax which could have been
collected by the Philippine government will simply be collected by another state, defeating the object of the tax treaty
since the tax burden imposed upon the investor would remain unrelieved. If the state of residence does not grant some
form of tax relief to the investor, no benefit would redound to the Philippines, i.e., increased investment resulting from
a favorable tax regime, should it impose a lower tax rate on the royalty earnings of the investor, and it would be better
to impose the regular rate rather than lose much-needed revenues to another country.

At the same time, the intention behind the adoption of the provision on relief from double taxation in the two tax
treaties in question should be considered in light of the purpose behind the most favored nation clause.
The purpose of a most favored nation clause is to grant to the contracting party treatment not less favorable than that
which has been or may be granted to the most favored among other countries.*25+ The most favored nation clause is
intended to establish the principle of equality of international treatment by providing that the citizens or subjects of the
contracting nations may enjoy the privileges accorded by either party to those of the most favored nation.[26] The
essence of the principle is to allow the taxpayer in one state to avail of more liberal provisions granted in another tax
treaty to which the country of residence of such taxpayer is also a party provided that the subject matter of taxation, in
this case royalty income, is the same as that in the tax treaty under which the taxpayer is liable. Both Article 13 of the
RP-US Tax Treaty and Article 12 (2) (b) of the RP-West Germany Tax Treaty, above-quoted, speaks of tax on royalties for
the use of trademark, patent, and technology. The entitlement of the 10% rate by U.S. firms despite the absence of a
matching credit (20% for royalties) would derogate from the design behind the most favored nation clause to grant
equality of international treatment since the tax burden laid upon the income of the investor is not the same in the two
countries. The similarity in the circumstances of payment of taxes is a condition for the enjoyment of most favored
nation treatment precisely to underscore the need for equality of treatment.
We accordingly agree with petitioner that since the RP-US Tax Treaty does not give a matching tax credit of 20 percent
for the taxes paid to the Philippines on royalties as allowed under the RP-West Germany Tax Treaty, private respondent
cannot be deemed entitled to the 10 percent rate granted under the latter treaty for the reason that there is no
payment of taxes on royalties under similar circumstances.
It bears stress that tax refunds are in the nature of tax exemptions. As such they are regarded as in derogation of
sovereign authority and to be construed strictissimi juris against the person or entity claiming the exemption.[27] The
burden of proof is upon him who claims the exemption in his favor and he must be able to justify his claim by the
clearest grant of organic or statute law.[28] Private respondent is claiming for a refund of the alleged overpayment of
tax on royalties; however, there is nothing on record to support a claim that the tax on royalties under the RP-US Tax
Treaty is paid under similar circumstances as the tax on royalties under the RP-West Germany Tax Treaty.
WHEREFORE, for all the foregoing, the instant petition is GRANTED. The decision dated May 7, 1996 of the Court of Tax
Appeals and the decision dated November 7, 1996 of the Court of Appeals are hereby SET ASIDE.
G.R. No. L-18994

June 29, 1963

MELECIO R. DOMINGO, as Commissioner of Internal Revenue, petitioner, vs.HON. LORENZO C. GARLITOS, in his capacity
as Judge of the Court of First Instance of Leyte, and SIMEONA K. PRICE, as Administratrix of the Intestate Estate of the
late Walter Scott Price, respondents.
This is a petition for certiorari and mandamus against the Judge of the Court of First Instance of Leyte, Ron. Lorenzo C.
Garlitos, presiding, seeking to annul certain orders of the court and for an order in this Court directing the respondent
court below to execute the judgment in favor of the Government against the estate of Walter Scott Price for internal
revenue taxes.
It appears that in Melecio R. Domingo vs. Hon. Judge S. C. Moscoso, G.R. No. L-14674, January 30, 1960, this Court
declared as final and executory the order for the payment by the estate of the estate and inheritance taxes, charges and
penalties, amounting to P40,058.55, issued by the Court of First Instance of Leyte in, special proceedings No. 14 entitled
"In the matter of the Intestate Estate of the Late Walter Scott Price." In order to enforce the claims against the estate
the fiscal presented a petition dated June 21, 1961, to the court below for the execution of the judgment. The petition
was, however, denied by the court which held that the execution is not justifiable as the Government is indebted to the
estate under administration in the amount of P262,200. The orders of the court below dated August 20, 1960 and
September 28, 1960, respectively, are as follows:

Atty. Benedicto submitted a copy of the contract between Mrs. Simeona K. Price, Administratrix of the estate of her late
husband Walter Scott Price and Director Zoilo Castrillo of the Bureau of Lands dated September 19, 1956 and
acknowledged before Notary Public Salvador V. Esguerra, legal adviser in Malacaang to Executive Secretary De Leon
dated December 14, 1956, the note of His Excellency, Pres. Carlos P. Garcia, to Director Castrillo dated August 2, 1958,
directing the latter to pay to Mrs. Price the sum ofP368,140.00, and an extract of page 765 of Republic Act No. 2700
appropriating the sum of P262.200.00 for the payment to the Leyte Cadastral Survey, Inc., represented by the
administratrix Simeona K. Price, as directed in the above note of the President. Considering these facts, the Court orders
that the payment of inheritance taxes in the sum of P40,058.55 due the Collector of Internal Revenue as ordered paid by
this Court on July 5, 1960 in accordance with the order of the Supreme Court promulgated July 30, 1960 in G.R. No. L14674, be deducted from the amount of P262,200.00 due and payable to the Administratrix Simeona K. Price, in this
estate, the balance to be paid by the Government to her without further delay. (Order of August 20, 1960)
The Court has nothing further to add to its order dated August 20, 1960 and it orders that the payment of the claim of
the Collector of Internal Revenue be deferred until the Government shall have paid its accounts to the administratrix
herein amounting to P262,200.00. It may not be amiss to repeat that it is only fair for the Government, as a debtor, to its
accounts to its citizens-creditors before it can insist in the prompt payment of the latter's account to it, specially taking
into consideration that the amount due to the Government draws interests while the credit due to the present state
does not accrue any interest. (Order of September 28, 1960)
The petition to set aside the above orders of the court below and for the execution of the claim of the Government
against the estate must be denied for lack of merit. The ordinary procedure by which to settle claims of indebtedness
against the estate of a deceased person, as an inheritance tax, is for the claimant to present a claim before the probate
court so that said court may order the administrator to pay the amount thereof. To such effect is the decision of this
Court in Aldamiz vs. Judge of the Court of First Instance of Mindoro, G.R. No. L-2360, Dec. 29, 1949, thus:
. . . a writ of execution is not the proper procedure allowed by the Rules of Court for the payment of debts and expenses
of administration. The proper procedure is for the court to order the sale of personal estate or the sale or mortgage of
real property of the deceased and all debts or expenses of administrator and with the written notice to all the heirs
legatees and devisees residing in the Philippines, according to Rule 89, section 3, and Rule 90, section 2. And when sale
or mortgage of real estate is to be made, the regulations contained in Rule 90, section 7, should be complied
with.1wph1.t
Execution may issue only where the devisees, legatees or heirs have entered into possession of their respective portions
in the estate prior to settlement and payment of the debts and expenses of administration and it is later ascertained
that there are such debts and expenses to be paid, in which case "the court having jurisdiction of the estate may, by
order for that purpose, after hearing, settle the amount of their several liabilities, and order how much and in what
manner each person shall contribute, and may issue execution if circumstances require" (Rule 89, section 6; see also
Rule 74, Section 4; Emphasis supplied.) And this is not the instant case.
The legal basis for such a procedure is the fact that in the testate or intestate proceedings to settle the estate of a
deceased person, the properties belonging to the estate are under the jurisdiction of the court and such jurisdiction
continues until said properties have been distributed among the heirs entitled thereto. During the pendency of the
proceedings all the estate is in custodia legis and the proper procedure is not to allow the sheriff, in case of the court
judgment, to seize the properties but to ask the court for an order to require the administrator to pay the amount due
from the estate and required to be paid.
Another ground for denying the petition of the provincial fiscal is the fact that the court having jurisdiction of the estate
had found that the claim of the estate against the Government has been recognized and an amount of P262,200 has
already been appropriated for the purpose by a corresponding law (Rep. Act No. 2700). Under the above circumstances,
both the claim of the Government for inheritance taxes and the claim of the intestate for services rendered have already
become overdue and demandable is well as fully liquidated. Compensation, therefore, takes place by operation of law,
in accordance with the provisions of Articles 1279 and 1290 of the Civil Code, and both debts are extinguished to the
concurrent amount, thus:

ART. 1200. When all the requisites mentioned in article 1279 are present, compensation takes effect by operation of
law, and extinguished both debts to the concurrent amount, eventhough the creditors and debtors are not aware of the
compensation.
It is clear, therefore, that the petitioner has no clear right to execute the judgment for taxes against the estate of the
deceased Walter Scott Price. Furthermore, the petition for certiorari and mandamus is not the proper remedy for the
petitioner. Appeal is the remedy.
The petition is, therefore, dismissed, without costs.