COMMISSIONER OF INTERNAL G.R. No.
G.R. No. 159647 On April 15, 1997, respondent filed its Annual Income Tax Return for taxable
REVENUE,Petitioner,
- versus -
CENTRAL LUZON DRUG
CORPORATION, Respondent.
x -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- x
DECISION
PANGANIBAN, J.:
The 20 percent discount required by the law to be given to senior citizens is
a tax credit, not merely a tax deduction from the gross income or gross sale of
the establishment concerned. A tax credit is used by a private establishment
only after the tax has been computed; a tax deduction, before the tax is
computed. RA 7432 unconditionally grants a tax credit to all covered entities.
Thus, the provisions of the revenue regulation that withdraw or modify such
grant are void. Basic is the rule that administrative regulations cannot amend or
revoke the law.
The Case
Before us is a Petition for Review[1] under Rule 45 of the Rules of Court, seeking
to set aside the August 29, 2002 Decision[2] and the August 11, 2003
Resolution[3] of the Court of Appeals (CA) in CA-GR SP No. 67439. The assailed
Decision reads as follows:
WHEREFORE, premises considered, the Resolution appealed from
is AFFIRMED in toto. No costs.[4]
The assailed Resolution denied petitioners Motion for Reconsideration.
The Facts
The CA narrated the antecedent facts as follows:
Respondent is a domestic corporation primarily engaged in retailing of
medicines and other pharmaceutical products. In 1996, it operated six (6)
drugstores under the business name and style Mercury Drug.
From January to December 1996, respondent granted twenty (20%) percent
sales discount to qualified senior citizens on their purchases of medicines
pursuant to Republic Act No. [R.A.] 7432 and its Implementing Rules and
Regulations. For the said period, the amount allegedly representing the 20%
sales discount granted by respondent to qualified senior citizens
totaled P904,769.00.
year 1996 declaring therein that it incurred net losses from its operations.
On January 16, 1998, respondent filed with petitioner a claim for tax
refund/credit in the amount of P904,769.00 allegedly arising from the 20% sales
discount granted by respondent to qualified senior citizens in compliance with
Promulgated:
[R.A.] 7432. Unable to obtain affirmative response from petitioner, respondent
April 15, 2005 elevated its claim to the Court of Tax Appeals [(CTA or Tax Court)] via a Petition
for Review.
On February 12, 2001, the Tax Court rendered a Decision[5] dismissing
respondents Petition for lack of merit. In said decision, the [CTA] justified its
ruling with the following ratiocination:
x x x, if no tax has been paid to the government, erroneously or illegally, or if no
amount is due and collectible from the taxpayer, tax refund or tax credit is
unavailing. Moreover, whether the recovery of the tax is made by means of a
claim for refund or tax credit, before recovery is allowed[,] it must be first
established that there was an actual collection and receipt by the government
of the tax sought to be recovered. x x x.
xxxxxxxxx
Prescinding from the above, it could logically be deduced that tax credit is
premised on the existence of tax liability on the part of taxpayer. In other words,
if there is no tax liability, tax credit is not available.
Respondent lodged a Motion for Reconsideration. The [CTA], in its assailed
resolution,[6] granted respondents motion for reconsideration and ordered
herein petitioner to issue a Tax Credit Certificate in favor of respondent citing
the decision of the then Special Fourth Division of [the CA] in CA G.R. SP No.
60057 entitled Central [Luzon] Drug Corporation vs. Commissioner of Internal
Revenue promulgated on May 31, 2001, to wit:
However, Sec. 229 clearly does not apply in the instant case because the tax
sought to be refunded or credited by petitioner was not erroneously paid or
illegally collected. We take exception to the CTAs sweeping but unfounded
statement that both tax refund and tax credit are modes of recovering taxes
which are either erroneously or illegally paid to the government. Tax refunds or
credits do not exclusively pertain to illegally collected or erroneously paid
taxes as they may be other circumstances where a refund is warranted. The tax
refund provided under Section 229 deals exclusively with illegally collected or
erroneously paid taxes but there are other possible situations, such as the
refund of excess estimated corporate quarterly income tax paid, or that of
excess input tax paid by a VAT-registered person, or that of excise tax paid on
goods locally produced or manufactured but actually exported. The standards
and mechanics for the grant of a refund or credit under these situations are
different from that under Sec. 229. Sec. 4[.a)] of R.A. 7432, is yet another
instance of a tax credit and it does not in any way refer to illegally collected or
erroneously paid taxes, x x x.[7]
 Ruling of the Court of Appeals
The CA affirmed in toto the Resolution of the Court of Tax Appeals (CTA)
ordering petitioner to issue a tax credit certificate in favor of respondent in the
reduced amount of P903,038.39. It reasoned that Republic Act No. (RA) 7432
required neither a tax liability nor a payment of taxes by private establishments
prior to the availment of a tax credit. Moreover, such credit is not tantamount to
an unintended benefit from the law, but rather a just compensation for the
taking of private property for public use.
Hence this Petition.[8]
The Issues
Petitioner raises the following issues for our consideration:
Whether the Court of Appeals erred in holding that respondent may claim the
20% sales discount as a tax credit instead of as a deduction from gross income
or gross sales.
Whether the Court of Appeals erred in holding that respondent is entitled to a
refund.[9]
These two issues may be summed up in only one: whether respondent, despite
incurring a net loss, may still claim the 20 percent sales discount as a tax
credit.
The Courts Ruling
The Petition is not meritorious.
Sole Issue:
Claim of 20 Percent Sales Discount as Tax Credit Despite Net Loss
Section 4a) of RA 7432[10] grants to senior citizens the privilege of obtaining a 20
percent discount on their purchase of medicine from any private establishment
in the country.[11] The latter may then claim the cost of the discount as a tax
credit.[12] But can such credit be claimed, even though an establishment
operates at a loss?
We answer in the affirmative.
Tax Credit versus Tax Deduction
Although the term is not specifically defined in our Tax Code, [13] tax
credit generally refers to an amount that is subtracted directly from ones total
tax liability.[14] It is an allowance against the tax itself[15] or a deduction from
what is owed[16] by a taxpayer to the government. Examples of tax credits are
withheld taxes, payments of estimated tax, and investment tax credits.[17]
Tax credit should be understood in relation to other tax concepts. One of these
is tax deduction -- defined as a subtraction from income for tax purposes,[18] or
an amount that is allowed by law to reduce income prior to [the] application of
the tax rate to compute the amount of tax which is due. [19] An example of a tax
deduction is any of the allowable deductions enumerated in Section 34 [20] of the
Tax Code.
A tax credit differs from a tax deduction. On the one hand, a tax credit reduces
the tax due, including -- whenever applicable -- the income tax that is
determined after applying the corresponding tax rates to taxable income.
[21]
A tax deduction, on the other, reduces the income that is subject to tax [22] in
order to arrive at taxable income.[23] To think of the former as the latter is to
avoid, if not entirely confuse, the issue. A tax credit is used only after the tax
has been computed; a tax deduction, before.
Tax Liability Required for Tax Credit
Since a tax credit is used to reduce directly the tax that is due, there ought to
be a tax liability before the tax credit can be applied. Without that liability,
any tax credit application will be useless. There will be no reason for deducting
the latter when there is, to begin with, no existing obligation to the government.
However, as will be presented shortly, the existence of a tax credit or
its grant by law is not the same as the availment or use of such credit. While the
grant is mandatory, the availment or use is not.
If a net loss is reported by, and no other taxes are currently due from, a
business establishment, there will obviously be no tax liability against which
any tax credit can be applied.[24] For the establishment to choose the immediate
availment of a tax credit will be premature and impracticable. Nevertheless, the
irrefutable fact remains that, under RA 7432, Congress has granted without
conditions a tax credit benefit to all covered establishments.
Although this tax credit benefit is available, it need not be used by losing
ventures, since there is no tax liability that calls for its application. Neither can
it be reduced to nil by the quick yet callow stroke of an administrative pen,
simply because no reduction of taxes can instantly be effected. By its nature,
the tax creditmay still be deducted from a future, not a present, tax liability,
without which it does not have any use. In the meantime, it need not move. But
it breathes.
Prior Tax Payments Not Required for Tax Credit
While a tax liability is essential to the availment or use of any tax credit, prior
tax payments are not. On the contrary, for the existence or grant solely of such
credit, neither a tax liability nor a prior tax payment is needed. The Tax Code is
in fact replete with provisions granting or allowing tax credits, even though no
taxes have been previously paid.
For example, in computing the estate tax due, Section 86(E) allows a tax
credit -- subject to certain limitations -- for estate taxes paid to a foreign
country. Also found in Section 101(C) is a similar provision for donors taxes --
again when paid to a foreign country -- in computing for the donors tax due.
The tax credits in both instances allude to the prior payment of taxes, even if
not made to our government.
Under Section 110, a VAT (Value-Added Tax)- registered person engaging in
transactions -- whether or not subject to the VAT -- is also allowed a tax
credit that includes a ratable portion of any input tax not directly attributable to
either activity. This input tax may either be the VAT on the purchase or
importation of goods or services that is merely due from -- not necessarily paid
by -- such VAT-registered person in the course of trade or business; or the
transitional input tax determined in accordance with Section 111(A). The latter
type may in fact be an amount equivalent to only eight percent of the value of a
VAT-registered persons beginning inventory of goods, materials and supplies,
when such amount -- as computed -- is higher than the actual VAT paid on the
said items.[25]Clearly from this provision, the tax credit refers to an input tax that
is either due only or given a value by mere comparison with the VAT actually
paid -- then later prorated. No tax is actually paid prior to the availment of such
credit.
In Section 111(B), a one and a half percent input tax credit that is merely
presumptive is allowed. For the purchase of primary agricultural products used
as inputs -- either in the processing of sardines, mackerel and milk, or in the
manufacture of refined sugar and cooking oil -- and for the contract price of
public work contracts entered into with the government, again, no prior tax
payments are needed for the use of the tax credit.
More important, a VAT-registered person whose sales are zero-rated or
effectively zero-rated may, under Section 112(A), apply for the issuance of a tax
creditcertificate for the amount of creditable input taxes merely due -- again not
necessarily paid to -- the government and attributable to such sales, to the
extent that the input taxes have not been applied against output taxes.[26] Where
a taxpayer is engaged in zero-rated or effectively zero-rated sales and also in
taxable or exempt sales, the amount of creditable input taxes due that are not
directly and entirely attributable to any one of these transactions shall be
proportionately allocated on the basis of the volume of sales. Indeed, in
availing of such tax credit for VAT purposes, this provision -- as well as the one
earlier mentioned -- shows that the prior payment of taxes is not a requisite.
It may be argued that Section 28(B)(5)(b) of the Tax Code is another illustration
of a tax credit allowed, even though no prior tax payments are not required.
Specifically, in this provision, the imposition of a final withholding tax rate on
cash and/or property dividends received by a nonresident foreign corporation
from a domestic corporation is subjected to the condition that a foreign tax
credit will be given by the domiciliary country in an amount equivalent to taxes
that are merely deemed paid.[27] Although true, this provision actually refers to
the tax credit as a condition only for the imposition of a lower tax rate, not as
a deductionfrom the corresponding tax liability. Besides, it is not our
government but the domiciliary country that credits against the income tax
payable to the latter by the foreign corporation, the tax to be foregone or
spared.[28]
In contrast, Section 34(C)(3), in relation to Section 34(C)(7)(b), categorically
allows as credits, against the income tax imposable under Title II, the amount of
income taxes merely incurred -- not necessarily paid -- by a domestic
corporation during a taxable year in any foreign country. Moreover, Section
34(C)(5) provides that for such taxes incurred but not paid, a tax credit may be
allowed, subject to the condition precedent that the taxpayer shall simply give a
bond with sureties satisfactory to and approved by petitioner, in such sum as
may be required; and further conditioned upon payment by the taxpayer of any
tax found due, upon petitioners redetermination of it.
In addition to the above-cited provisions in the Tax Code, there are also tax
treaties and special laws that grant or allow tax credits, even though no prior
tax payments have been made.
Under the treaties in which the tax credit method is used as a relief to avoid
double taxation, income that is taxed in the state of source is also taxable in
the state of residence, but the tax paid in the former is merely allowed as a
credit against the tax levied in the latter.[29] Apparently, payment is made to
the state of source, not the state of residence. No tax, therefore, has
been previously paid to the latter.
Under special laws that particularly affect businesses, there can also be tax
credit incentives. To illustrate, the incentives provided for in Article 48 of
Presidential Decree No. (PD) 1789, as amended by Batas Pambansa Blg. (BP)
391, include tax credits equivalent to either five percent of the net value earned,
or five or ten percent of the net local content of exports. [30] In order to avail of
such credits under the said law and still achieve its objectives, no prior tax
payments are necessary.
From all the foregoing instances, it is evident that prior tax payments are not
indispensable to the availment of a tax credit. Thus, the CA correctly held that
the availment under RA 7432 did not require prior tax payments by private
establishments concerned.[31] However, we do not agree with its finding[32] that
the carry-over of tax credits under the said special law to succeeding taxable
periods, and even their application against internal revenue taxes, did not
necessitate the existence of a tax liability.
The examples above show that a tax liability is certainly important in
the availment or use, not the existence or grant, of a tax credit. Regarding this
matter, a private establishment reporting a net loss in its financial statements is
no different from another that presents a net income. Both are entitled to
the tax credit provided for under RA 7432, since the law itself accords that
unconditional benefit. However, for the losing establishment to immediately
apply such credit, where no tax is due, will be an improvident usance.
Sections 2.i and 4 of Revenue Regulations No. 2-94 Erroneous
RA 7432 specifically allows private establishments to claim as tax credit the
amount of discounts they grant.[33] In turn, the Implementing Rules and
Regulations, issued pursuant thereto, provide the procedures for its availment.
[34]
To deny such credit, despite the plain mandate of the law and the regulations
carrying out that mandate, is indefensible.
First, the definition given by petitioner is erroneous. It refers to tax credit as the
amount representing the 20 percent discount that shall be deducted by the said
establishments from their gross income for income tax purposes and from
their gross sales for value-added tax or other percentage tax purposes.[35] In
ordinary business language, the tax credit represents the amount of such
discount. However, the manner by which the discount shall be credited against
taxes has not been clarified by the revenue regulations.
By ordinary acceptation, a discount is an abatement or reduction made from
the gross amount or value of anything. [36] To be more precise, it is in business
parlance a deduction or lowering of an amount of money; [37] or a reduction from
the full amount or value of something, especially a price. [38] In business there
are many kinds of discount, the most common of which is that affecting
the income statement[39] or financial report upon which the income tax is based.
Business Discounts Deducted from Gross Sales
A cash discount, for example, is one granted by business establishments
to credit customers for their prompt payment.[40] It is a reduction in price offered
to the purchaser if payment is made within a shorter period of time than the
maximum time specified.[41] Also referred to as a sales discount on the part of
the seller and a purchase discount on the part of the buyer, it may be expressed
in such terms as 5/10, n/30.[42]
A quantity discount, however, is a reduction in price allowed for purchases
made in large quantities, justified by savings in packaging, shipping, and
handling.[43] It is also called a volume or bulk discount.[44]
A percentage reduction from the list price x x x allowed by manufacturers to
wholesalers and by wholesalers to retailers[45] is known as a trade discount. No
entry for it need be made in the manual or computerized books of accounts,
since the purchase or sale is already valued at the net price actually charged
the buyer.[46] The purpose for the discount is to encourage trading or increase
sales, and the prices at which the purchased goods may be resold are also
suggested.[47] Even a chain discount -- a series of discounts from one list price
-- is recorded at net.[48]
Finally, akin to a trade discount is a functional discount. It is a suppliers price
discount given to a purchaser based on the [latters] role in the [formers]
distribution system.[49] This role usually involves warehousing or advertising.
Based on this discussion, we find that the nature of a sales discount is peculiar.
Applying generally accepted accounting principles (GAAP) in the country, this
type of discount is reflected in the income statement[50] as a line item deducted
-- along with returns, allowances, rebates and other similar expenses --
from gross sales to arrive at net sales.[51] This type of presentation is resorted
to, because the accounts receivable and sales figures that arise from sales
discounts, -- as well as from quantity, volume or bulk discounts -- are recorded
in the manual and computerized books of accounts and reflected in the
financial statements at the gross amounts of the invoices.[52] This manner of
recording credit sales -- known as the gross method -- is most widely used,
because it is simple, more convenient to apply than the net method, and
produces no material errors over time.[53]
However, under the net method used in recording trade, chain or functional
discounts, only the net amounts of the invoices -- after the discounts have been
deducted -- are recorded in the books of accounts[54] and reflected in the
financial statements. A separate line item cannot be shown,[55] because the
transactions themselves involving both accounts receivable and sales have
already been entered into, net of the said discounts.
The term sales discounts is not expressly defined in the Tax Code, but one
provision adverts to amounts whose sum -- along with sales
returns, allowances and cost of goods sold[56] -- is deducted from gross sales to
come up with the gross income, profit or margin[57] derived from business.[58] In
another provision therein, sales discounts that are granted and indicated in the
invoices at the time of sale -- and that do not depend upon the happening of
any future event -- may be excluded from the gross sales within the same
quarter they were given.[59] While determinative only of the VAT, the latter
provision also appears as a suitable reference point for income tax purposes
already embraced in the former. After all, these two provisions affirm that sales
discounts are amounts that are always deductible from gross sales.
Reason for the Senior Citizen Discount: The Law, Not Prompt Payment
A distinguishing feature of the implementing rules of RA 7432 is the private
establishments outright deduction of the discount from the invoice price of the
medicine sold to the senior citizen.[60] It is, therefore, expected that for each
retail sale made under this law, the discount period lasts no more than a day,
because such discount is given -- and the net amount thereof collected --
immediately upon perfection of the sale.[61] Although prompt payment is made
for an arms-length transaction by the senior citizen, the real and compelling
reason for the private establishment giving the discount is that the law itself
makes it mandatory.
What RA 7432 grants the senior citizen is a mere discount privilege, not a sales
discount or any of the above discounts in particular. Prompt payment is not the
reason for (although a necessary consequence of) such grant. To be sure, the
privilege enjoyed by the senior citizen must be equivalent to the tax
credit benefit enjoyed by the private establishment granting the discount. Yet,
under the revenue regulations promulgated by our tax authorities, this benefit
has been erroneously likened and confined to a sales discount.
To a senior citizen, the monetary effect of the privilege may be the same as that
resulting from a sales discount. However, to a private establishment, the effect
is different from a simple reduction in price that results from such discount. In
other words, the tax credit benefit is not the same as a sales discount. To
repeat from our earlier discourse, this benefit cannot and should not be treated
as a tax deduction.
To stress, the effect of a sales discount on the income statement and income
tax return of an establishment covered by RA 7432 is different from that
resulting from the availment or use of its tax credit benefit. While the former is a
deduction before, the latter is a deduction after, the income tax is computed. As
mentioned earlier, a discount is not necessarily a sales discount, and a tax
credit for a simple discount privilege should not be automatically treated like
a sales discount. Ubi lex non distinguit, nec nos distinguere debemus. Where
the law does not distinguish, we ought not to distinguish.
Sections 2.i and 4 of Revenue Regulations No. (RR) 2-94 define tax credit as the
20 percent discount deductible from gross income for income tax purposes, or
from gross sales for VAT or other percentage tax purposes. In effect, the tax
credit benefit under RA 7432 is related to a sales discount. This contrived
definition is improper, considering that the latter has to be deducted from gross
sales in order to compute the gross income in the income statement and
cannot be deducted again, even for purposes of computing the income tax.
When the law says that the cost of the discount may be claimed as a tax credit,
it means that the amount -- when claimed -- shall be treated as a reduction from
any tax liability, plain and simple. The option to avail of the tax credit benefit
depends upon the existence of a tax liability, but to limit the benefit to a sales
discount-- which is not even identical to the discount privilege that is granted
by law -- does not define it at all and serves no useful purpose. The definition
must, therefore, be stricken down.
Laws Not Amended by Regulations
Second, the law cannot be amended by a mere regulation. In fact, a regulation
that operates to create a rule out of harmony with
the statute is a mere nullity;[62] it cannot prevail.
It is a cardinal rule that courts will and should respect the contemporaneous
construction placed upon a statute by the executive officers whose duty it is to
enforce it x x x.[63] In the scheme of judicial tax administration, the need for
certainty and predictability in the implementation of tax laws is crucial. [64] Our
tax authorities fill in the details that Congress may not have the opportunity or
competence to provide.[65] The regulations these authorities issue are relied
upon by taxpayers, who are certain that these will be followed by the courts.
[66]
Courts, however, will not uphold these authorities interpretations when
clearly absurd, erroneous or improper.
In the present case, the tax authorities have given the term tax
credit in Sections 2.i and 4 of RR 2-94 a meaning utterly in contrast to what RA
7432 provides. Their interpretation has muddled up the intent of Congress in
granting a mere discount privilege, not a sales discount. The administrative
agency issuing these regulations may not enlarge, alter or restrict the
provisions of the law it administers; it cannot engraft additional requirements
not contemplated by the legislature.[67]
In case of conflict, the law must prevail.[68] A regulation adopted pursuant to law
is law.[69] Conversely, a regulation or any portion thereof not adopted pursuant
to law is no law and has neither the force nor the effect of law.[70]
Availment of Tax Credit Voluntary
Third, the word may in the text of the statute[71] implies that the
availability of the tax credit benefit is neither unrestricted nor mandatory.
[72]
There is no absolute right conferred upon respondent, or any similar
taxpayer, to avail itself of the tax credit remedy whenever it chooses; neither
does it impose a duty on the part of the government to sit back and allow an
important facet of tax collection to be at the sole control and discretion of the
taxpayer.[73] For the tax authorities to compel respondent to deduct the 20
percent discount from either its gross income or its gross sales[74] is, therefore,
not only to make an imposition without basis in law, but also to blatantly
contravene the law itself.
What Section 4.a of RA 7432 means is that the tax credit benefit is merely
permissive, not imperative. Respondent is given two options -- either to claim
or not to claim the cost of the discounts as a tax credit. In fact, it may even
ignore the credit and simply consider the gesture as an act of beneficence, an
expression of its social conscience.
Granting that there is a tax liability and respondent claims such cost as a tax
credit, then the tax credit can easily be applied. If there is none, the credit
cannot be used and will just have to be carried over and
revalidated[75] accordingly. If, however, the business continues to operate at a
loss and no other taxes are due, thus compelling it to close shop, the credit can
never be applied and will be lost altogether.
In other words, it is the existence or the lack of a tax liability that determines
whether the cost of the discounts can be used as a tax credit. RA 7432 does not
give respondent the unfettered right to avail itself of the credit whenever it
pleases. Neither does it allow our tax administrators to expand or contract the
legislative mandate. The plain meaning rule or verba legis in statutory
construction is thus applicable x x x. Where the words of a statute are clear,
plain and free from ambiguity, it must be given its literal meaning and applied
without attempted interpretation.[76]
Tax Credit Benefit Deemed Just Compensation
Fourth, Sections 2.i and 4 of RR 2-94 deny the exercise by the State of its power
of eminent domain. Be it stressed that the privilege enjoyed by senior citizens
does not come directly from the State, but rather from the private
establishments concerned. Accordingly, the tax credit benefit granted to these
establishments can be deemed as their just compensation for private property
taken by the State for public use.[77]
The concept of public use is no longer confined to the traditional notion of use
by the public, but held synonymous with public interest, public benefit, public
welfare, and public convenience.[78] The discount privilege to which our senior
citizens are entitled is actually a benefit enjoyed by the general public to which
these citizens belong. The discounts given would have entered the coffers and
formed part of the gross sales of the private establishments concerned, were it
not for RA 7432. The permanent reduction in their total revenues is a forced
subsidy corresponding to the taking of private property for public use or
benefit.
As a result of the 20 percent discount imposed by RA 7432, respondent
becomes entitled to a just compensation. This term refers not only to the
issuance of a tax credit certificate indicating the correct amount of the
discounts given, but also to the promptness in its release. Equivalent to the
payment of property taken by the State, such issuance -- when not done within
a reasonable time from the grant of the discounts -- cannot be considered
as just compensation. In effect, respondent is made to suffer the consequences
of being immediately deprived of its revenues while awaiting actual receipt,
through the certificate, of the equivalent amount it needs to cope with the
reduction in its revenues.[79]
Besides, the taxation power can also be used as an implement for the exercise
of the power of eminent domain.[80] Tax measures are but enforced
contributions exacted on pain of penal sanctions[81] and clearly imposed for
a public purpose.[82] In recent years, the power to tax has indeed become a most
effective tool to realize social justice, public welfare, and the equitable
distribution of wealth.[83]
While it is a declared commitment under Section 1 of RA 7432, social justice
cannot be invoked to trample on the rights of property owners who under our
Constitution and laws are also entitled to protection. The social justice
consecrated in our [C]onstitution [is] not intended to take away rights from a
person and give them to another who is not entitled thereto. [84] For this reason,
a just compensation for income that is taken away from respondent becomes
necessary. It is in the tax credit that our legislators find support to realize social
justice, and no administrative body can alter that fact.
[85]
To put it differently, a private establishment that merely breaks even --
without the discounts yet -- will surely start to incur losses because of such
discounts. The same effect is expected if its mark-up is less than 20 percent,
and if all its sales come from retail purchases by senior citizens. Aside from the
observation we have already raised earlier, it will also be grossly unfair to an
establishment if the discounts will be treated merely as deductions from either
its gross income or its gross sales. Operating at a loss through no fault of its
own, it will realize that the tax credit limitation under RR 2-94 is inutile, if not
improper. Worse, profit-generating businesses will be put in a better position if
they avail themselves of tax credits denied those that are losing, because no
taxes are due from the latter.
Grant of Tax Credit Intended by the Legislature
Fifth, RA 7432 itself seeks to adopt measures whereby senior citizens are
assisted by the community as a whole and to establish a program beneficial to
them.[86]These objectives are consonant with the constitutional policy of making
health x x x services available to all the people at affordable cost[87] and of
giving priority for the needs of the x x x elderly.[88] Sections 2.i and 4 of RR 2-94,
however, contradict these constitutional policies and statutory objectives.
Furthermore, Congress has allowed all private establishments a simple tax
credit, not a deduction. In fact, no cash outlay is required from the government
for the availment or use of such credit. The deliberations on February 5, 1992 of
the Bicameral Conference Committee Meeting on Social Justice, which finalized
RA 7432, disclose the true intent of our legislators to treat the sales
discounts as a tax credit, rather than as a deduction from gross income. We
quote from those deliberations as follows:
"THE CHAIRMAN (Rep. Unico). By the way, before that ano, about deductions
from taxable income. I think we incorporated there a provision na - on the
responsibility of the private hospitals and drugstores, hindi ba?
SEN. ANGARA. Oo.
THE CHAIRMAN. (Rep. Unico), So, I think we have to put in also a provision
here about the deductions from taxable income of that private hospitals, di ba
ganon 'yan?
MS. ADVENTO. Kaya lang po sir, and mga discounts po nila affecting
government and public institutions, so, puwede na po nating hindi isama yung
mga less deductions ng taxable income.
THE CHAIRMAN. (Rep. Unico). Puwede na. Yung about the private hospitals.
Yung isiningit natin?
MS. ADVENTO. Singit na po ba yung 15% on credit. (inaudible/did not use the
microphone).
SEN. ANGARA. Hindi pa, hindi pa.
THE CHAIRMAN. (Rep. Unico) Ah, 'di pa ba naisama natin?
SEN. ANGARA. Oo. You want to insert that?
THE CHAIRMAN (Rep. Unico). Yung ang proposal ni Senator Shahani, e.
SEN. ANGARA. In the case of private hospitals they got the grant of 15%
discount, provided that, the private hospitals can claim the expense as a tax
credit.
REP. AQUINO. Yah could be allowed as deductions in the perpetrations of
(inaudible) income.
SEN. ANGARA. I-tax credit na lang natin para walang cash-out ano?
REP. AQUINO. Oo, tax credit. Tama, Okay. Hospitals ba o lahat ng
establishments na covered.
THE CHAIRMAN. (Rep. Unico). Sa kuwan lang yon, as private hospitals lang.
REP. AQUINO. Ano ba yung establishments na covered?
SEN. ANGARA. Restaurant lodging houses, recreation centers.
REP. AQUINO. All establishments covered siguro?
SEN. ANGARA. From all establishments. Alisin na natin 'Yung kuwan kung
ganon. Can we go back to Section 4 ha?
REP. AQUINO. Oho.
SEN. ANGARA. Letter A. To capture that thought, we'll say the grant of 20%
discount from all establishments et cetera, et cetera, provided that said
establishments - provided that private establishments may claim the cost as a
tax credit. Ganon ba 'yon?
REP. AQUINO. Yah.
SEN. ANGARA. Dahil kung government, they don't need to claim it.
THE CHAIRMAN. (Rep. Unico). Tax credit.
SEN. ANGARA. As a tax credit [rather] than a kuwan - deduction, Okay.
REP. AQUINO Okay.
SEN. ANGARA. Sige Okay. Di subject to style na lang sa Letter A". [89]
Special Law Over General Law
Sixth and last, RA 7432 is a special law that should prevail over the Tax Code --
a general law. x x x [T]he rule is that on a specific matter the special law shall
prevail over the general law, which shall
be resorted to only to supply deficiencies in the former.[90] In addition, [w]here
there are two statutes, the earlier special and the later general -- the terms of
the general broad enough to include the matter provided for in the special -- the
fact that one is special and the other is general creates a presumption that the
special is to be considered as remaining an exception to the general,[91] one as
a general law of the land, the other as the law of a particular case.[92] It is a
canon of statutory construction that a later statute, general in its terms and not
expressly repealing a prior special statute, will ordinarily not affect the special
provisions of such earlier statute.[93]
RA 7432 is an earlier law not expressly repealed by, and therefore remains an
exception to, the Tax Code -- a later law. When the former states that a tax
creditmay be claimed, then the requirement of prior tax payments under certain
provisions of the latter, as discussed above, cannot be made to apply. Neither
can the instances of or references to a tax deduction under the Tax Code[94] be
made to restrict RA 7432. No provision of any revenue regulation can supplant
or modify the acts of Congress.
WHEREFORE, the Petition is hereby DENIED. The assailed Decision and
Resolution of the Court of Appeals AFFIRMED. No pronouncement as to costs.
SO ORDERED.
Commissioner of Internal Revenue vs. Central Luzon Drug Corporation
GR No. 159647, April 15, 2005
Facts:
Respondent is a domestic corporation engaged in the retailing of medicines
and other pharmaceutical products. In 1996 it operated six (6) drugstores under
the business name and style Mercury Drug. From January to December 1996
respondent granted 20% sales discount to qualified senior citizens on their
purchases of medicines pursuant to RA 7432. For said period respondent
granted a total of 904,769.
On April 15, 1997, respondent filed its annual ITR for taxable year 1996
declaring therein net losses. On Jan. 16, 1998 respondent filed with petitioner a
claim for tax refund/credit of 904,769.00 alledgedly arising from the 20% sales
discount. Unable to obtain affirmative response from petitioner, respondent
elevated its claim to the CTA via Petition for Review. CTA dismissed the same
but on MR, CTA reversed its earlier ruling and ordered petitioner to issue a Tax
Credit Certificate in favor of respondent citing CA GR SP No. 60057 (May 31,
2001, Central Luzon Drug Corp. vs. CIR) citing that Sec. 229 of RA 7432 deals
exclusively with illegally collected or erroneously paid taxes but that there are
other situations which may warrant a tax credit/refund.
CA affirmed CTA decision reasoning that RA 7432 required neither a tax liability
nor a payment of taxes by private establishments prior to the availment of a tax
credit. Moreover, such credit is not tantamount to an unintended benefit from
the law, but rather a just compensation for the taking of private property for
public use.
ISSUE: W/N respondent, despite incurring a net loss, may still claim the 20%
sales discount as a tax credit.
RULING:
Yes, it is clear that Sec. 4a of RA 7432 grants to senior citizens the privilege of
obtaining a 20% discount on their purchase of medicine from any private
establishment in the country. The latter may then claim the cost of the discount
as a tax credit. Such credit can be claimed even if the establishment operates at
a loss.

A tax credit generally refers to an amount that is subtracted directly from ones
total tax liability. It is an allowance against the tax itself or a deduction from
what is owed by a taxpayer to the government.

A tax credit should be understood in relation to other tax concepts. One of

these is tax deduction which is subtraction from income for tax purposes,
or an amount that is allowed by law to reduce income prior to the application
of the tax rate to compute the amount of tax which is due. In other words,
whereas a tax credit reduces the tax due, tax deduction reduces the income
subject to tax in order to arrive at the taxable income.

Since a tax credit is used to reduce directly the tax that is due, there ought to
be a tax liability before the tax credit can be applied. Without that liability,
any tax credit application will be useless. There will be no reason for deducting
the latter when there is, to begin with, no existing obligation to the
government. However, as will be presented shortly, the existence of a tax credit
or its grant by law is not the same as the availment or use of such credit. While
the grant is mandatory, the availment or use is not.

If a net loss is reported by, and no other taxes are currently due from, a
business establishment, there will obviously be no tax liability against which
any tax credit can be applied. For the establishment to choose the immediate
availment of a tax credit will be premature and impracticable. Nevertheless, the
irrefutable fact remains that, under RA 7432, Congress has granted without
conditions a tax credit benefit to all covered establishments. However, for the
losing establishment to immediately apply such credit, where no tax is due, will
be an improvident usance.

In addition, while a tax liability is essential to the availment or use of any tax
credit, prior tax payments are not. On the contrary, for the existence or
grant solely of such credit, neither a tax liability nor a prior tax payment is
needed. The Tax Code is in fact replete with provisions granting or allowing tax
credits, even though no taxes have been previously paid.

PLANTERS PRODUCTS, INC., G.R. No. 166006 Petitioner,

Petition is denied.
- versus - Promulgated:
FERTIPHIL CORPORATION, Respondent. March 14, 2008
x--------------------------------------------------x
DECISION
REYES, R.T., J.:
THE Regional Trial Courts (RTC) have the authority and jurisdiction to consider the
constitutionality of statutes, executive orders, presidential decrees and other
issuances. The Constitution vests that power not only in the Supreme Court but in all
Regional Trial Courts.
The principle is relevant in this petition for review on certiorari of the Decision[1] of the
Court of Appeals (CA) affirming with modification that of
the RTC in Makati City,[2] finding petitioner Planters Products, Inc. (PPI) liable to
private respondent Fertiphil Corporation (Fertiphil) for the levies it paid under Letter of
Instruction (LOI) No. 1465.
The Facts
Petitioner PPI and private respondent Fertiphil are private corporations incorporated
under Philippine laws.[3] They are both engaged in the importation and distribution of
fertilizers, pesticides and agricultural chemicals.
On June 3, 1985, then President Ferdinand Marcos, exercising his legislative powers,
issued LOI No. 1465 which provided, among others, for the imposition of a capital
recovery component (CRC) on the domestic sale of all grades of fertilizers in
the Philippines.[4] The LOI provides:
3. The Administrator of the Fertilizer Pesticide Authority to include in its fertilizer
pricing formula a capital contribution component of not less than P10 per bag. This
capital contribution shall be collected until adequate capital is raised to make PPI
viable. Such capital contribution shall be applied by FPA to all domestic sales of
fertilizers in the Philippines.[5] (Underscoring supplied)
Pursuant to the LOI, Fertiphil paid P10 for every bag of fertilizer it sold in the domestic
market to the Fertilizer and Pesticide Authority (FPA). FPA then remitted the amount
collected to the Far East Bank and Trust Company, the depositary bank of
PPI. Fertiphil paid P6,689,144 to FPA from July 8, 1985 to January 24, 1986.[6]
After the 1986 Edsa Revolution, FPA voluntarily stopped the imposition of the P10
levy. With the return of democracy, Fertiphil demanded from PPI a refund of the
amounts it paid under LOI No. 1465, but PPI refused to accede to the demand.[7]
Fertiphil filed a complaint for collection and damages[8] against FPA and PPI with the
RTC in Makati. It questioned the constitutionality of LOI No. 1465 for being unjust,
unreasonable, oppressive, invalid and an unlawful imposition that amounted to a
denial of due process of law.[9] Fertiphil alleged that the LOI solely favored PPI, a
privately owned corporation, which used the proceeds to maintain its monopoly of the
fertilizer industry.
In its Answer,[10] FPA, through the Solicitor General, countered that the issuance of
LOI No. 1465 was a valid exercise of the police power of the State in ensuring the
stability of the fertilizer industry in the country. It also averred that Fertiphil did not
sustain any damage from the LOI because the burden imposed by the levy fell on the
ultimate consumer, not the seller.
RTC Disposition
On November 20, 1991, the RTC rendered judgment in favor of Fertiphil, disposing as
follows:
WHEREFORE, in view of the foregoing, the Court hereby renders judgment in favor
of the plaintiff and against the defendant Planters Product, Inc., ordering the latter to
pay the former:
1) the sum of P6,698,144.00 with interest at 12% from the time of judicial demand;
2) the sum of P100,000 as attorneys fees;
3) the cost of suit.
SO ORDERED.[11]
Ruling that the imposition of the P10 CRC was an exercise of the States inherent
power of taxation, the RTC invalidated the levy for violating the basic principle that
taxes can only be levied for public purpose, viz.:
It is apparent that the imposition of P10 per fertilizer bag sold in the country by LOI
1465 is purportedly in the exercise of the power of taxation. It is a settled principle that
the power of taxation by the state is plenary. Comprehensive and supreme, the
principal check upon its abuse resting in the responsibility of the members of the
legislature to their constituents. However, there are two kinds of limitations on the
power of taxation: the inherent limitations and the constitutional limitations.
One of the inherent limitations is that a tax may be levied only for public purposes:
The power to tax can be resorted to only for a constitutionally valid public purpose. By
the same token, taxes may not be levied for purely private purposes, for building up of
private fortunes, or for the redress of private wrongs. They cannot be levied for the
improvement of private property, or for the benefit, and promotion of private
enterprises, except where the aid is incident to the public benefit. It is well-settled
principle of constitutional law that no general tax can be levied except for the purpose
of raising money which is to be expended for public use. Funds cannot be exacted
under the guise of taxation to promote a purpose that is not of public interest. Without
such limitation, the power to tax could be exercised or employed as an authority to
destroy the economy of the people. A tax, however, is not held void on the ground of
want of public interest unless the want of such interest is clear. (71 Am. Jur. pp. 371-
372)
In the case at bar, the plaintiff paid the amount of P6,698,144.00 to the Fertilizer and
Pesticide Authority pursuant to the P10 per bag of fertilizer sold imposition under LOI
1465 which, in turn, remitted the amount to the defendant Planters Products, Inc. thru
the latters depository bank, Far East Bank and Trust Co. Thus, by virtue of LOI 1465
the plaintiff, Fertiphil Corporation, which is a private domestic corporation, became
poorer by the amount of P6,698,144.00 and the defendant, Planters Product, Inc.,
another private domestic corporation, became richer by the amount of P6,698,144.00.
Tested by the standards of constitutionality as set forth in the afore-quoted
jurisprudence, it is quite evident that LOI 1465 insofar as it imposes the amount
of P10 per fertilizer bag sold in the country and orders that the said amount should go
to the defendant Planters Product, Inc. is unlawful because it violates the mandate
that a tax can be levied only for a public purpose and not to benefit, aid and promote
a private enterprise such as Planters Product, Inc.[12]
PPI moved for reconsideration but its motion was denied.[13] PPI then filed a notice of
appeal with the RTC but it failed to pay the requisite appeal docket fee. In a separate
but related proceeding, this Court[14] allowed the appeal of PPI and remanded the
case to the CA for proper disposition.
CA Decision
On November 28, 2003, the CA handed down its decision affirming with modification
that of the RTC, with the following fallo:
IN VIEW OF ALL THE FOREGOING, the decision appealed from is
hereby AFFIRMED, subject to the MODIFICATION that the award of attorneys fees is
hereby DELETED.[15]
In affirming the RTC decision, the CA ruled that the lis mota of the complaint for
collection was the constitutionality of LOI No. 1465, thus:
The question then is whether it was proper for the trial court to exercise its power to
judicially determine the constitutionality of the subject statute in the instant case.
As a rule, where the controversy can be settled on other grounds, the courts will not
resolve the constitutionality of a law (Lim v. Pacquing, 240 SCRA 649 [1995]). The
policy of the courts is to avoid ruling on constitutional questions and to presume that
the acts of political departments are valid, absent a clear and unmistakable showing
to the contrary.
However, the courts are not precluded from exercising such power when the following
requisites are obtaining in a controversy before it: First, there must be before the
court an actual case calling for the exercise of judicial review. Second, the question
must be ripe for adjudication. Third, the person challenging the validity of the act must
have standing to challenge. Fourth, the question of constitutionality must have been
raised at the earliest opportunity; and lastly, the issue of constitutionality must be the
very lis mota of the case (Integrated Bar of the Philippines v. Zamora, 338 SCRA 81
[2000]).
Indisputably, the present case was primarily instituted for collection and
damages. However, a perusal of the complaint also reveals
that the instant action is founded on the claim that the levy imposed was an unlawful
and unconstitutional special assessment. Consequently, the requisite that the
constitutionality of the law in question be the very lis mota of the case is present,
making it proper for the trial court to rule on the constitutionality of LOI 1465.[16]
The CA held that even on the assumption that LOI No. 1465 was issued under the
police power of the state, it is still unconstitutional because it did not promote public
welfare.The CA explained:
In declaring LOI 1465 unconstitutional, the trial court held that the levy imposed under
the said law was an invalid exercise of the States power of taxation inasmuch as it
violated the inherent and constitutional prescription that taxes be levied only for public
purposes. It reasoned out that the amount collected under the levy was remitted to
the depository bank of PPI, which the latter used to advance its private interest.
On the other hand, appellant submits that the subject statutes passage was a valid
exercise of police power. In addition, it disputes the court a quos findings arguing that
the collections under LOI 1465 was for the benefit of Planters Foundation,
Incorporated (PFI), a foundation created by law to hold in trust for millions of farmers,
the stock ownership of PPI.
Of the three fundamental powers of the State, the exercise of police power has been
characterized as the most essential, insistent and the least limitable of powers,
extending as it does to all the great public needs. It may be exercised as long as the
activity or the property sought to be regulated has some relevance to public welfare
(Constitutional Law, by Isagani A. Cruz, p. 38, 1995 Edition).
Vast as the power is, however, it must be exercised within the limits set by the
Constitution, which requires the concurrence of a lawful subject and a lawful
method. Thus, our courts have laid down the test to determine the validity of a police
measure as follows: (1) the interests of the public generally, as distinguished from
those of a particular class, requires its exercise; and (2) the means employed are
reasonably necessary for the accomplishment of the purpose and not unduly
oppressive upon individuals (National Development Company v. Philippine Veterans
Bank, 192 SCRA 257 [1990]).
It is upon applying this established tests that We sustain the trial courts holding LOI
1465 unconstitutional. To be sure, ensuring the continued supply and distribution of
fertilizer in the country is an undertaking imbued with public interest. However, the
method by which LOI 1465 sought to achieve this is by no means a measure that will
promote the public welfare. The governments commitment to support the successful
rehabilitation and continued viability of PPI, a private corporation, is an unmistakable
attempt to mask the subject statutes impartiality. There is no way to treat the self-
interest of a favored entity,
like PPI, as identical with the general interest of the countrys farmers or even the
Filipino people in general. Well to stress, substantive due process exacts fairness and
equal protection disallows distinction where none is needed. When a statutes public
purpose is spoiled by private interest, the use of police power becomes a travesty
which must be struck down for being an arbitrary exercise of government power. To
rule in favor of appellant would contravene the general principle that revenues derived
from taxes cannot be used for purely private purposes or for the exclusive benefit of
private individuals.[17]
The CA did not accept PPIs claim that the levy imposed under LOI No. 1465 was for
the benefit of Planters Foundation, Inc., a foundation created to hold in trust the stock
ownership of PPI. The CA stated:
Appellant next claims that the collections under LOI 1465 was for the benefit of
Planters Foundation, Incorporated (PFI), a foundation created by law to hold in trust
for millions of farmers, the stock ownership of PFI on the strength of Letter of
Undertaking (LOU) issued by then Prime Minister Cesar Virata on April 18, 1985 and
affirmed by the Secretary of Justice in an Opinion dated October 12, 1987, to wit:
2. Upon the effective date of this Letter of Undertaking, the Republic shall cause FPA
to include in its fertilizer pricing formula a capital recovery component, the proceeds
of which will be used initially for the purpose of funding the unpaid portion of the
outstanding capital stock of Planters presently held in trust by Planters Foundation,
Inc. (Planters Foundation), which unpaid capital is estimated at approximately P206
million (subject to validation by Planters and Planters Foundation) (such unpaid
portion of the outstanding capital stock of Planters being hereafter referred to as the
Unpaid Capital), and subsequently for such capital increases as may be required for
the continuing viability of Planters.
The capital recovery component shall be in the minimum amount of P10 per bag,
which will be added to the price of all domestic sales of fertilizer in the Philippines by
any importer and/or fertilizer mother company. In this connection, the Republic hereby
acknowledges that the advances by Planters to Planters Foundation which were
applied to the payment of the Planters shares now held in trust by Planters
Foundation, have been assigned to, among others, the Creditors. Accordingly, the
Republic, through FPA, hereby agrees to deposit the proceeds of the capital recovery
component in the special trust account designated in the notice dated April 2, 1985,
addressed by counsel for the Creditors to Planters Foundation. Such proceeds shall
be deposited by FPA on or before the 15th day of each month.
The capital recovery component shall continue to be charged and collected until
payment in full of (a) the Unpaid Capital and/or (b) any shortfall in the payment of the
Subsidy Receivables, (c) any carrying cost accruing from the date hereof on the
amounts which may be outstanding from time to time of the Unpaid Capital and/or the
Subsidy Receivables and (d) the capital increases contemplated in paragraph 2
hereof. For the purpose of the foregoing clause (c), the carrying cost shall be at such
rate as will represent the full and reasonable cost to Planters of servicing its debts,
taking into account both its peso and foreign currency-denominated obligations.
(Records, pp. 42-43)
Appellants proposition is open to question, to say the least. The LOU issued by then
Prime Minister Virata taken together with the Justice Secretarys Opinion does not
preponderantly demonstrate that the collections made were held in trust in favor of
millions of farmers. Unfortunately for appellant, in the absence of sufficient evidence
to establish its claims, this Court is constrained to rely on what is explicitly provided in
LOI 1465 that one of the primary aims in imposing the levy is to support the
successful rehabilitation and continued viability of PPI.[18]
PPI moved for reconsideration but its motion was denied.[19] It then filed the present
petition with this Court.
Issues
Petitioner PPI raises four issues for Our consideration, viz.:
I
THE CONSTITUTIONALITY OF LOI 1465 CANNOT BE COLLATERALLY
ATTACKED AND BE DECREED VIA A DEFAULT JUDGMENT IN A CASE FILED
FOR COLLECTION AND DAMAGES WHERE THE ISSUE OF
CONSTITUTIONALITY IS NOT THE VERY LIS MOTA OF THE CASE. NEITHER
CAN LOI 1465 BE CHALLENGED BY ANY PERSON OR ENTITY WHICH HAS NO
STANDING TO DO SO.
II
LOI 1465, BEING A LAW IMPLEMENTED FOR THE PURPOSE OF ASSURING THE
FERTILIZER SUPPLY AND DISTRIBUTION IN THE COUNTRY, AND FOR
BENEFITING A FOUNDATION CREATED BY LAW TO HOLD IN TRUST FOR
MILLIONS OF FARMERS THEIR STOCK OWNERSHIP IN PPI CONSTITUTES A
VALID LEGISLATION PURSUANT TO THE EXERCISE OF TAXATION AND POLICE
POWER FOR PUBLIC PURPOSES.
III
THE AMOUNT COLLECTED UNDER THE CAPITAL RECOVERY COMPONENT
WAS REMITTED TO THE GOVERNMENT, AND BECAME GOVERNMENT FUNDS
PURSUANT TO AN EFFECTIVE AND VALIDLY ENACTED LAW WHICH IMPOSED
DUTIES AND CONFERRED RIGHTS BY VIRTUE OF THE PRINCIPLE OF
OPERATIVE FACT PRIOR TO ANY DECLARATION OF UNCONSTITUTIONALITY
OF LOI 1465.
IV
THE PRINCIPLE OF UNJUST VEXATION (SHOULD BE ENRICHMENT) FINDS NO
APPLICATION IN THE INSTANT CASE.[20] (Underscoring supplied)
Our Ruling
We shall first tackle the procedural issues of locus standi and the jurisdiction of
the RTC to resolve constitutional issues.
Fertiphil has locus standi because it suffered direct injury; doctrine of standing
is a mere procedural technicality which may be waived.
PPI argues that Fertiphil has no locus standi to question the constitutionality of LOI
No. 1465 because it does not have a personal and substantial interest in the case or
will sustain direct injury as a result of its enforcement.[21] It asserts that Fertiphil did not
suffer any damage from the CRC imposition because incidence of the levy fell on the
ultimate consumer or the farmers themselves, not on the seller fertilizer company.[22]
We cannot agree. The doctrine of locus standi or the right of appearance in a court of
justice has been adequately discussed by this Court in a catena of cases. Succinctly
put, the doctrine requires a litigant to have a material interest in the outcome of a
case. In private suits, locus standi requires a litigant to be a real party in interest,
which is defined as the
party who stands to be benefited or injured by the judgment in the suit or the party
entitled to the avails of the suit.[23]
In public suits, this Court recognizes the difficulty of applying the doctrine especially
when plaintiff asserts a public right on behalf of the general public because of
conflicting public policy issues. [24] On one end, there is the right of the ordinary citizen
to petition the courts to be freed from unlawful government intrusion and illegal official
action. At the other end, there is the public policy precluding excessive judicial
interference in official acts, which may unnecessarily hinder the delivery of basic
public services.
In this jurisdiction, We have adopted the direct injury test to determine locus standi in
public suits. In People v. Vera,[25] it was held that a person who impugns the validity of
a statute must have a personal and substantial interest in the case such that he has
sustained, or will sustain direct injury as a result. The direct injury test in public suits is
similar to the real party in interest rule for private suits under Section 2, Rule 3 of the
1997 Rules of Civil Procedure.[26]
Recognizing that a strict application of the direct injury test may hamper public
interest, this Court relaxed the requirement in cases of transcendental importance or
with far reaching implications. Being a mere procedural technicality, it has also been
held that locus standi may be waived in the public interest.[27]
Whether or not the complaint for collection is characterized as a private or public suit,
Fertiphil has locus standi to file it. Fertiphil suffered a direct injury from the
enforcement of LOI No. 1465. It was required, and it did pay, the P10 levy imposed for
every bag of fertilizer sold on the domestic market. It may be true that Fertiphil has
passed some or all of the levy to the ultimate consumer, but that does not disqualify it
from attacking the constitutionality of the LOI or from seeking a refund. As seller, it
bore the ultimate burden of paying the levy. It faced the possibility of severe sanctions
for failure to pay the levy. The fact of payment is sufficient injury to Fertiphil.
Moreover, Fertiphil suffered harm from the enforcement of the LOI because it was
compelled to factor in its product the levy. The levy certainly rendered the fertilizer
products of Fertiphil and other domestic sellers much more expensive. The harm to
their business consists not only in fewer clients because of the increased price, but
also in adopting alternative corporate strategies to meet the demands of LOI No.
1465. Fertiphil and other fertilizer sellers may have shouldered all or part of the levy
just to be competitive in the market. The harm occasioned on the business of Fertiphil
is sufficient injury for purposes of locus standi.
Even assuming arguendo that there is no direct injury, We find that the liberal policy
consistently adopted by this Court on locus standi must apply. The issues raised by
Fertiphil are of paramount public importance. It involves not only the constitutionality
of a tax law but, more importantly, the use of taxes for public purpose. Former
President Marcos issued LOI No. 1465 with the intention of rehabilitating an ailing
private company. This is clear from the text of the LOI. PPI is expressly named in the
LOI as the direct beneficiary of the levy. Worse, the levy was made dependent and
conditional upon PPI becoming financially viable. The LOI provided that the capital
contribution shall be collected until adequate capital is raised to make PPI viable.
The constitutionality of the levy is already in doubt on a plain reading of the statute. It
is Our constitutional duty to squarely resolve the issue as the final arbiter of all
justiciable controversies. The doctrine of standing, being a mere procedural
technicality, should be waived, if at all, to adequately thresh out an important
constitutional issue.
RTC may resolve constitutional issues; the constitutional issue was adequately
raised in the complaint; it is the lis mota of the case.
PPI insists that the RTC and the CA erred in ruling on the constitutionality of the
LOI. It asserts that the constitutionality of the LOI cannot be collaterally attacked in a
complaint for collection.[28] Alternatively, the resolution of the constitutional issue is not
necessary for a determination of the complaint for collection.[29]
Fertiphil counters that the constitutionality of the LOI was adequately pleaded in its
complaint. It claims that the constitutionality of LOI No. 1465 is the very lis mota of the
case because the trial court cannot determine its claim without resolving the issue.[30]
It is settled that the RTC has jurisdiction to resolve the constitutionality of a statute,
presidential decree or an executive order. This is clear from Section 5, Article VIII of
the 1987 Constitution, which provides:
SECTION 5. The Supreme Court shall have the following powers:
xxxx
(2) Review, revise, reverse, modify, or affirm on appeal or certiorari, as the law or the
Rules of Court may provide, final judgments and orders of lower courts in:
(a) All cases in which the constitutionality or validity of any treaty, international or
executive agreement, law, presidential decree, proclamation, order, instruction,
ordinance, or regulation is in question. (Underscoring supplied)
In Mirasol v. Court of Appeals,[31] this Court recognized the power of the RTC to
resolve constitutional issues, thus:
On the first issue. It is settled that Regional Trial Courts have the authority and
jurisdiction to consider the constitutionality of a statute, presidential decree, or
executive order. The Constitution vests the power of judicial review or the power to
declare a law, treaty, international or executive agreement, presidential decree, order,
instruction, ordinance, or regulation not only in this Court, but in all Regional Trial
Courts.[32]
In the recent case of Equi-Asia Placement, Inc. v. Department of Foreign Affairs,
[33]
this Court reiterated:
There is no denying that regular courts have jurisdiction over cases involving the
validity or constitutionality of a rule or regulation issued by administrative
agencies. Such jurisdiction, however, is not limited to the Court of Appeals or to this
Court alone for even the regional trial courts can take cognizance of actions assailing
a specific rule or set of rules promulgated by administrative bodies. Indeed, the
Constitution vests the power of judicial review or the power to declare a law, treaty,
international or executive agreement, presidential decree, order, instruction,
ordinance, or regulation in the courts, including the regional trial courts.[34]
Judicial review of official acts on the ground of unconstitutionality may be sought or
availed of through any of the actions cognizable by courts of justice, not necessarily in
a suit for declaratory relief. Such review may be had in criminal actions, as in People
v. Ferrer[35] involving the constitutionality of the now defunct Anti-Subversion law, or in
ordinary actions, as in Krivenko v. Register of Deeds[36] involving the constitutionality
of laws prohibiting aliens from acquiring public lands. The constitutional issue,
however, (a) must be properly raised and presented in the case, and (b) its resolution
is necessary to a determination of the case, i.e., the issue of constitutionality must be
the very lis mota presented.[37]
Contrary to PPIs claim, the constitutionality of LOI No. 1465 was properly and
adequately raised in the complaint for collection filed with the RTC. The pertinent
portions of the complaint allege:
6. The CRC of P10 per bag levied under LOI 1465 on domestic sales of all grades of
fertilizer in the Philippines, is unlawful, unjust, uncalled for, unreasonable, inequitable
and oppressive because:
xxxx
(c) It favors only one private domestic corporation, i.e., defendant PPPI, and imposed
at the expense and disadvantage of the other fertilizer importers/distributors who
were themselves in tight business situation and were then exerting all efforts and
maximizing management and marketing skills to remain viable;
xxxx
(e) It was a glaring example of crony capitalism, a forced program through which the
PPI, having been presumptuously masqueraded as the fertilizer industry itself, was
the sole and anointed beneficiary;
7. The CRC was an unlawful; and unconstitutional special assessment and its
imposition is tantamount to illegal exaction amounting to a denial of due process
since the persons of entities which had to bear the burden of paying the CRC derived
no benefit therefrom; that on the contrary it was used by PPI in trying to regain its
former despicable monopoly of the fertilizer industry to the detriment of other
distributors and importers.[38] (Underscoring supplied)
The constitutionality of LOI No. 1465 is also the very lis mota of the complaint for
collection. Fertiphil filed the complaint to compel PPI to refund the levies paid under
the statute on the ground that the law imposing the levy is unconstitutional. The thesis
is that an unconstitutional law is void. It has no legal effect. Being void, Fertiphil had
no legal obligation to pay the levy. Necessarily, all levies duly paid pursuant to an
unconstitutional law should be refunded under the civil code principle against unjust
enrichment. The refund is a mere consequence of the law being declared
unconstitutional. The RTC surely cannot order PPI to refund Fertiphil if it does not
declare the LOI unconstitutional. It is the unconstitutionality of the LOI which triggers
the refund. The issue of constitutionality is the very lis mota of the complaint with
the RTC.
The P10 levy under LOI No. 1465 is an exercise of the power of taxation.
At any rate, the Court holds that the RTC and the CA did not err in ruling against the
constitutionality of the LOI.
PPI insists that LOI No. 1465 is a valid exercise either of the police power or the
power of taxation. It claims that the LOI was implemented for the purpose of assuring
the fertilizer supply and distribution in the country and for benefiting a foundation
created by law to hold in trust for millions of farmers their stock ownership in PPI.
Fertiphil counters that the LOI is unconstitutional because it was enacted to give
benefit to a private company. The levy was imposed to pay the corporate debt of
PPI. Fertiphil also argues that, even if the LOI is enacted under the police power, it is
still unconstitutional because it did not promote the general welfare of the people or
public interest.
Police power and the power of taxation are inherent powers of the State. These
powers are distinct and have different tests for validity. Police power is the power of
the State to enact legislation that may interfere with personal liberty or property in
order to promote the general welfare,[39] while the power of taxation is the power to
levy taxes to be used for public purpose. The main purpose of police power is the
regulation of a behavior or conduct, while taxation is revenue generation. The lawful
subjects and lawful means tests are used to determine the validity of a law enacted
under the police power.[40] The power of taxation, on the other hand, is circumscribed
by inherent and constitutional limitations.
We agree with the RTC that the imposition of the levy was an exercise by the State of
its taxation power. While it is true that the power of taxation can be used as an
implement of police power,[41] the primary purpose of the levy is revenue generation. If
the purpose is primarily revenue, or if revenue is, at least, one of the real and
substantial purposes, then the exaction is properly called a tax.[42]
In Philippine Airlines, Inc. v. Edu,[43] it was held that the imposition of a vehicle
registration fee is not an exercise by the State of its police power, but of its taxation
power, thus:
It is clear from the provisions of Section 73 of Commonwealth Act 123 and Section 61
of the Land Transportation and Traffic Code that the legislative intent and purpose
behind the law requiring owners of vehicles to pay for their registration is mainly to
raise funds for the construction and maintenance of highways and to a much lesser
degree, pay for the operating expenses of the administering agency. x x x Fees may
be properly regarded as taxes even though they also serve as an instrument of
regulation.
Taxation may be made the implement of the state's police power (Lutz v. Araneta, 98
Phil. 148). If the purpose is primarily revenue, or if revenue is, at least, one of the real
and substantial purposes, then the exaction is properly called a tax. Such is the case
of motor vehicle registration fees. The same provision appears as Section 59(b) in the
Land Transportation Code.It is patent therefrom that the legislators had in mind a
regulatory tax as the law refers to the imposition on the registration, operation or
ownership of a motor vehicle as a tax or fee. x x x Simply put, if the exaction under
Rep. Act 4136 were merely a regulatory fee, the imposition in Rep. Act 5448 need not
be an additional tax. Rep. Act 4136 also speaks of other fees such as the special
permit fees for certain types of motor vehicles (Sec. 10) and additional fees for
change of registration (Sec. 11). These are not to be understood as taxes because
such fees are very minimal to be revenue-raising. Thus, they are not mentioned by
Sec. 59(b) of the Code as taxes like the motor vehicle registration fee and chauffeurs
license fee. Such fees are to go into the expenditures of the Land Transportation
Commission as provided for in the last proviso of Sec. 61.[44] (Underscoring supplied)
The P10 levy under LOI No. 1465 is too excessive to serve a mere regulatory
purpose. The levy, no doubt, was a big burden on the seller or the ultimate
consumer. It increased the price of a bag of fertilizer by as much as five percent.[45] A
plain reading of the LOI also supports the conclusion that the levy was for revenue
generation. The LOI expressly provided that the levy was imposed until adequate
capital is raised to make PPI viable.
Taxes are exacted only for a public purpose. The P10 levy is unconstitutional
because it was not for a public purpose. The levy was imposed to give undue
benefit to PPI.
An inherent limitation on the power of taxation is public purpose. Taxes are exacted
only for a public purpose. They cannot be used for purely private purposes or for the
exclusive benefit of private persons.[46] The reason for this is simple. The power to tax
exists for the general welfare; hence, implicit in its power is the limitation that it should
be used only for a public purpose. It would be a robbery for the State to tax its citizens
and use the funds generated for a private purpose. As an old United States case
bluntly put it: To lay with one hand, the power of the government on the property of
the citizen, and with the other to bestow it upon favored individuals to aid private
enterprises and build up private fortunes, is nonetheless a robbery because it is done
under the forms of law and is called taxation.[47]
The term public purpose is not defined. It is an elastic concept that can be hammered
to fit modern standards. Jurisprudence states that public purpose should be given a
broad interpretation. It does not only pertain to those purposes which are traditionally
viewed as essentially government functions, such as building roads and delivery of
basic services, but also includes those purposes designed to promote social
justice. Thus, public money may now be used for the relocation of illegal settlers, low-
cost housing and urban or agrarian reform.
While the categories of what may constitute a public purpose are continually
expanding in light of the expansion of government functions, the inherent requirement
that taxes can only be exacted for a public purpose still stands. Public purpose is the
heart of a tax law. When a tax law is only a mask to exact funds from the public when
its true intent is to give undue benefit and advantage to a private enterprise, that law
will not satisfy the requirement of public purpose.
The purpose of a law is evident from its text or inferable from other secondary
sources. Here, We agree with the RTC and that CA that the levy imposed under LOI
No. 1465 was not for a public purpose.
First, the LOI expressly provided that the levy be imposed to benefit PPI, a private
company. The purpose is explicit from Clause 3 of the law, thus:
3. The Administrator of the Fertilizer Pesticide Authority to include in its fertilizer
pricing formula a capital contribution component of not less than P10 per bag. This
capital contribution shall be collected until adequate capital is raised to make PPI
viable. Such capital contribution shall be applied by FPA to all domestic sales of
fertilizers in the Philippines.[48] (Underscoring supplied)
It is a basic rule of statutory construction that the text of a statute should be given a
literal meaning. In this case, the text of the LOI is plain that the levy was imposed in
order to raise capital for PPI. The framers of the LOI did not even hide the insidious
purpose of the law. They were cavalier enough to name PPI as the ultimate
beneficiary of the taxes levied under the LOI. We find it utterly repulsive that a tax law
would expressly name a private company as the ultimate beneficiary of the taxes to
be levied from the public. This is a clear case of crony capitalism.
Second, the LOI provides that the imposition of the P10 levy was conditional and
dependent upon PPI becoming financially viable. This suggests that the levy was
actually imposed to benefit PPI. The LOI notably does not fix a maximum amount
when PPI is deemed financially viable. Worse, the liability of Fertiphil and other
domestic sellers of fertilizer to pay the levy is made indefinite. They are required to
continuously pay the levy until adequate capital is raised for PPI.
Third, the RTC and the CA held that the levies paid under the LOI were directly
remitted and deposited by FPA to Far East Bank and Trust Company, the depositary
bank of PPI.[49] This proves that PPI benefited from the LOI. It is also proves that the
main purpose of the law was to give undue benefit and advantage to PPI.
Fourth, the levy was used to pay the corporate debts of PPI. A reading of the Letter of
Understanding[50] dated May 18, 1985 signed by then Prime Minister Cesar Virata
reveals that PPI was in deep financial problem because of its huge corporate
debts. There were pending petitions for rehabilitation against PPI before the
Securities and Exchange Commission. The government guaranteed payment of PPIs
debts to its foreign creditors. To fund the payment, President Marcos issued LOI No.
1465. The pertinent portions of the letter of understanding read:
Republic of the Philippines
Office of the Prime Minister
Manila
LETTER OF UNDERTAKING
May 18, 1985
TO: THE BANKING AND FINANCIAL INSTITUTIONS
LISTED IN ANNEX A HERETO WHICH ARE
CREDITORS (COLLECTIVELY, THE CREDITORS)
OF PLANTERS PRODUCTS, INC. (PLANTERS)
Gentlemen:
This has reference to Planters which is the principal importer and distributor of
fertilizer, pesticides and agricultural chemicals in the Philippines. As regards Planters,
the Philippine Government confirms its awareness of the following: (1) that Planters
has outstanding obligations in foreign currency and/or pesos, to the Creditors, (2)
that Planters is currently experiencing financial difficulties, and (3) that there are
presently pending with the Securities and Exchange Commission of the Philippines a
petition filed at Planters own behest for the suspension of payment of all its
obligations, and a separate petition filed by Manufacturers Hanover Trust Company,
Manila Offshore Branch for the appointment of a rehabilitation receiver for Planters.
In connection with the foregoing, the Republic of the Philippines (the Republic)
confirms that it considers and continues to consider Planters as a major fertilizer
distributor. Accordingly, for and in consideration of your expressed willingness to
consider and participate in the effort to rehabilitate Planters, the Republic hereby
manifests its full and unqualified support of the successful rehabilitation and
continuing viability of Planters, and to that end, hereby binds and obligates itself to
the creditors and Planters, as follows:
xxxx
2. Upon the effective date of this Letter of Undertaking, the Republic shall cause FPA
to include in its fertilizer pricing formula a capital recovery component, the proceeds
of which will be used initially for the purpose of funding the unpaid portion of the
outstanding capital stock of Planters presently held in trust by Planters Foundation,
Inc. (Planters Foundation), which unpaid capital is estimated at approximately P206
million (subject to validation by Planters and Planters Foundation) such unpaid
portion of the outstanding capital stock of Planters being hereafter referred to as the
Unpaid Capital), and subsequently for such capital increases as may be required for
the continuing viability of Planters.
xxxx
The capital recovery component shall continue to be charged and collected until
payment in full of (a) the Unpaid Capital and/or (b) any shortfall in the payment of the
Subsidy Receivables, (c) any carrying cost accruing from the date hereof on the
amounts which may be outstanding from time to time of the Unpaid Capital and/or the
Subsidy Receivables, and (d) the capital increases contemplated in paragraph 2
hereof. For the purpose of the foregoing clause (c), the carrying cost shall be at such
rate as will represent the full and reasonable cost to Planters of servicing its debts,
taking into account both its peso and foreign currency-denominated obligations.
REPUBLIC OF THE PHILIPPINES
By:
(signed)
CESAR E. A. VIRATA
Prime Minister and Minister of Finance[51]
It is clear from the Letter of Understanding that the levy was imposed precisely to pay
the corporate debts of PPI. We cannot agree with PPI that the levy was imposed to
ensure the stability of the fertilizer industry in the country. The letter of understanding
and the plain text of the LOI clearly indicate that the levy was exacted for the benefit
of a private corporation.
All told, the RTC and the CA did not err in holding that the levy imposed under LOI
No. 1465 was not for a public purpose. LOI No. 1465 failed to comply with the public
purpose requirement for tax laws.
The LOI is still unconstitutional even if enacted under the police power; it did enrichment. The general rule is supported by Article 7 of the Civil Code, which
not promote public interest. provides:

Even if We consider LOI No. 1695 enacted under the police power of the State, it
would still be invalid for failing to comply with the test of lawful subjects and lawful
means. Jurisprudence states the test as follows: (1) the interest of the public
generally, as distinguished from those of particular class, requires its exercise; and (2)
the means employed are reasonably necessary for the accomplishment of the
purpose and not unduly oppressive upon individuals.[52]
For the same reasons as discussed, LOI No. 1695 is invalid because it did not
promote public interest. The law was enacted to give undue advantage to a private
corporation. We quote with approval the CA ratiocination on this point, thus:
It is upon applying this established tests that We sustain the trial courts holding LOI
1465 unconstitutional. To be sure, ensuring the continued supply and distribution of
fertilizer in the country is an undertaking imbued with public interest. However, the
method by which LOI 1465 sought to achieve this is by no means a measure that will
promote the public welfare. The governments commitment to support the successful
rehabilitation and continued viability of PPI, a private corporation, is an unmistakable
attempt to mask the subject statutes impartiality. There is no way to treat the self-
interest of a favored entity, like PPI, as identical with the general interest of the
countrys farmers or even the Filipino people in general. Well to stress, substantive
due process exacts fairness and equal protection disallows distinction where none is
needed. When a statutes public purpose is spoiled by private interest, the use of
police power becomes a travesty which must be struck down for being an arbitrary
exercise of government power. To rule in favor of appellant would contravene the
general principle that revenues derived from taxes cannot be used for purely private
purposes or for the exclusive benefit of private individuals. (Underscoring supplied)
The general rule is that an unconstitutional law is void; the doctrine of
operative fact is inapplicable.
PPI also argues that Fertiphil cannot seek a refund even if LOI No. 1465 is declared
unconstitutional. It banks on the doctrine of operative fact, which provides that an
unconstitutional law has an effect before being declared unconstitutional. PPI wants
to retain the levies paid under LOI No. 1465 even if it is subsequently declared to be
unconstitutional.
ART. 7. Laws are repealed only by subsequent ones, and their violation or non-
observance shall not be excused by disuse or custom or practice to the contrary.
When the courts declare a law to be inconsistent with the Constitution, the former
shall be void and the latter shall govern.
The doctrine of operative fact, as an exception to the general rule, only applies as a
matter of equity and fair play.[55] It nullifies the effects of an unconstitutional law by
recognizing that the existence of a statute prior to a determination of
unconstitutionality is an operative fact and may have consequences which cannot
always be ignored. The past cannot always be erased by a new judicial declaration.[56]
The doctrine is applicable when a declaration of unconstitutionality will impose an
undue burden on those who have relied on the invalid law. Thus, it was applied to a
criminal case when a declaration of unconstitutionality would put the accused in
double jeopardy[57] or would put in limbo the acts done by a municipality in reliance
upon a law creating it.[58]
Here, We do not find anything iniquitous in ordering PPI to refund the amounts paid
by Fertiphil under LOI No. 1465. It unduly benefited from the levy. It was proven
during the trial that the levies paid were remitted and deposited to its bank
account. Quite the reverse, it would be inequitable and unjust not to order a
refund. To do so would unjustly enrich PPI at the expense of Fertiphil. Article 22 of the
Civil Code explicitly provides that every person who, through an act of performance
by another comes into possession of something at the expense of the latter without
just or legal ground shall return the same to him. We cannot allow PPI to profit from
an unconstitutional law. Justice and equity dictate that PPI must refund the amounts
paid by Fertiphil.
WHEREFORE, the petition is DENIED. The Court of Appeals Decision
dated November 28, 2003 is AFFIRMED.
SO ORDERED.

We cannot agree. It is settled that no question, issue or argument will be entertained

on appeal, unless it has been raised in the court a quo.[53] PPI did not raise the
applicability of the doctrine of operative fact with the RTC and the CA. It cannot
belatedly raise the issue with Us in order to extricate itself from the dire effects of an
unconstitutional law.

At any rate, We find the doctrine inapplicable. The general rule is that an
unconstitutional law is void. It produces no rights, imposes no duties and affords no
protection. It has no legal effect. It is, in legal contemplation, inoperative as if it has
not been passed.[54] Being void, Fertiphil is not required to pay the levy. All levies paid
should be refunded in accordance with the general civil code principle against unjust
PLANTERS PRODUCTS VS FERTIPHIL
G.R. No. 166006
PLANTERS PRODUCTS, INC
Petitioner,
FERTIPHIL CORPORATION,
Respondent.
Petitioner PPI and private respondent Fertiphil are private corporations incorporated
under Philippine laws. They are both engaged in the importation and distribution of
fertilizers, pesticides and agricultural chemicals.
On June 3, 1985, then President Ferdinand Marcos, exercising his legislative powers,
issued LOI No. 1465 which provided, among others, for the imposition of a capital
recovery component (CRC) on the domestic sale of all grades of fertilizers in the
Philippines. The LOI provides:
The Administrator of the Fertilizer Pesticide Authority to include in its fertilizer pricing
formula a capital contribution component of not less than P10 per bag. This capital
contribution shall be collected until adequate capital is raised to make PPI viable.
Such capital contribution shall be applied by FPA to all domestic sales of fertilizers in
the Philippines.
Pursuant to the LOI, Fertiphil paid P10 for every bag of fertilizer it sold in the domestic
market to the Fertilizer and Pesticide Authority (FPA). FPA then remitted the amount
collected to the Far East Bank and Trust Company, the depositary bank of PPI.
Fertiphil paid P6,689,144 to FPA from July 8, 1985 to January 24, 1986.
After the 1986 Edsa Revolution, FPA voluntarily stopped the imposition of the P10
levy. With the return of democracy, Fertiphil demanded from PPI a refund of the
amounts it paid under LOI No. 1465, but PPI refused to accede to the demand.
Unreasonable, oppressive, invalid and an unlawful imposition that amounted to a
denial of due process of law. Fertiphil alleged that the LOI solely favored PPI, a
privately owned corporation, which used the proceeds to maintain its monopoly of the
fertilizer industry.
In its Answer, FPA, through the Solicitor General, countered that the issuance of LOI
No. 1465 was a valid exercise of the police power of the State in ensuring the stability
of the fertilizer industry in the country. It also averred that Fertiphil did not sustain any
damage from the LOI because the burden imposed by the levy fell on the ultimate
consumer, not the seller.
Issues:
THE CONSTITUTIONALITY OF LOI 1465 CANNOT BE COLLATERALLY
ATTACKED AND BE DECREED VIA A DEFAULT JUDGMENT IN A CASE FILED
FOR COLLECTIONAND DAMAGES WHERE THE ISSUE OF
CONSTITUTIONALITY IS NOT THE VERY LIS MOTA OF THE CASE. NEITHER
CAN LOI 1465 BE CHALLENGED BY ANY PERSON OR ENTITY WHICH HAS NO
STANDING TO DO SO.
In this jurisdiction,SC adopted the direct injury test to determine locus standi in
public suits. In People v. Vera, it was held that a person who impugns the validity of a
statute must have a personal and substantial interest in the case such that he has
sustained, or will sustain direct injury as a result. The direct injury test in public
suits is similar to the real party in interest rule for private suits under Section 2, Rule
3 of the 1997 Rules of Civil Procedure.
Recognizing that a strict application of the direct injury test may hamper public
interest, this Court relaxed the requirement in cases of transcendental importance or
with far reaching implications. Being a mere procedural technicality, it has also been
held that locus standi may be waived in the public interest.
Whether or not the complaint for collection is characterized as a private or public suit,
Fertiphil has locus standi to file it. Fertiphil suffered a direct injury from the
enforcement of LOI No. 1465. It was required, and it did pay, the P10 levy imposed
for every bag of fertilizer sold on the domestic market. It may be true that Fertiphil
has passed some or all of the levy to the ultimate consumer, but that does not
disqualify it from attacking the constitutionality of the LOI or from seeking a refund.
As seller, it bore the ultimate burden of paying the levy. It faced the possibility of
severe sanctions for failure to pay the levy. The fact of payment is sufficient injury to
Fertiphil.
Moreover, Fertiphil suffered harm from the enforcement of the LOI because it was
compelled to factor in its product the levy. The levy certainly rendered the fertilizer
products of Fertiphil and other domestic sellers much more expensive. The harm to
their business consists not only in fewer clients because of the increased price, but
also in adopting alternative corporate strategies to meet the demands of LOI No.
1465. Fertiphil and other fertilizer sellers may have shouldered all or part of the levy
just to be competitive in the market. The harm occasioned on the business of
Fertiphil is sufficient injury for purposes of locus standi.
II
LOI 1465, BEING A LAW IMPLEMENTED FOR THE PURPOSE OF ASSURING
THE FERTILIZER SUPPLY AND DISTRIBUTION IN THE COUNTRY, AND FOR
BENEFITING A FOUNDATION CREATED BY LAW TO HOLD IN TRUST FOR
MILLIONS OF FARMERS THEIR STOCK OWNERSHIP IN PPI CONSTITUTES A
VALID LEGISLATION PURSUANT TO THE EXERCISE OF TAXATION AND
POLICE POWER FOR PUBLIC PURPOSES.
The levy was imposed to pay the corporate debt of PPI. Fertiphil also argues that,
even if the LOI is enacted under the police power, it is still unconstitutional because it
did not promote the general welfare of the people or public interest.
Police power and the power of taxation are inherent powers of the State. These
powers are distinct and have different tests for validity. Police power is the power of
the State to enact legislation that may interfere with personal liberty or property in
order to promote the general welfare, while the power of taxation is the power to levy
taxes to be used for public purpose. The main purpose of police power is the
regulation of a behavior or conduct, while taxation is revenue generation. The lawful
subjects and lawful means tests are used to determine the validity of a law enacted
under the police power. The power of taxation, on the other hand, is circumscribed by
inherent and constitutional limitations.
While it is true that the power of taxation can be used as an implement of police
power, the primary purpose of the levy is revenue generation. If the purpose is
primarily revenue, or if revenue is, at least, one of the real and substantial purposes,
then the exaction is properly called a tax.
The doctrine of operative fact, as an exception to the general rule, only applies as a
matter of equity and fair play. It nullifies the effects of an unconstitutional law by
recognizing that the existence of a statute prior to a determination of
unconstitutionality is an operative fact and may have consequences which cannot
always be ignored. The past cannot always be erased by a new judicial declaration.
The doctrine is applicable when a declaration of unconstitutionality will impose an
undue burden on those who have relied on the invalid law. Thus, it was applied to a
criminal case when a declaration of unconstitutionality would put the accused in
double jeopardy or would put in limbo the acts done by a municipality in reliance upon
a law creating it.

III
THE AMOUNT COLLECTED UNDER THE CAPITAL RECOVERY COMPONENT
WAS REMITTED TO THE GOVERNMENT, AND BECAME GOVERNMENT FUNDS
PURSUANT TO AN EFFECTIVE AND VALIDLY ENACTED LAW WHICH IMPOSED
DUTIES AND CONFERRED RIGHTS BY VIRTUE OF THE PRINCIPLE OF
OPERATIVEFACT PRIOR TO ANY DECLARATION OF UNCONSTITUTIONALITY
OF LOI 1465.

The general rule is that an unconstitutional law is void. It produces no rights, imposes
no duties and affords no protection. It has no legal effect. It is, in legal contemplation,
inoperative as if it has not been passed. Being void, Fertiphil is not required to pay
the levy. All levies paid should be refunded in accordance with the general civil code
principle against unjust enrichment. The general rule is supported by Article 7 of the
Civil Code, which provides:

ART. 7. Laws are repealed only by subsequent ones, and their violation or non-
observance shall not be excused by disuse or custom or practice to the contrary.

When the courts declare a law to be inconsistent with the Constitution, the former
shall be void and the latter shall govern.

Notes:

An inherent limitation on the power of taxation is public purpose. Taxes are exacted
only for a public purpose. They cannot be used for purely private purposes or for the
exclusive benefit of private persons. The reason for this is simple. The power to tax
exists for the general welfare; hence, implicit in its power is the limitation that it should
be used only for a public purpose. It would be a robbery for the State to tax its
citizens and use the funds generated for a private purpose. As an old United States
case bluntly put it: To lay with one hand, the power of the government on the
property of the citizen, and with the other to bestow it upon favored individuals to aid
private enterprises and build up private fortunes, is nonetheless a robbery because it
is done under the forms of law and is called taxation.
G.R. No. 155650 July 20, 2006

MANILA INTERNATIONAL AIRPORT AUTHORITY, petitioner,

E-016-01378 1992-2001 111,107,950.40 67,794,681.59
vs.
COURT OF APPEALS, CITY OF PARAAQUE, CITY MAYOR OF PARAAQUE,
E-016-01379 1992-2001 4,322,340.00 2,637,360.00
SANGGUNIANG PANGLUNGSOD NG PARAAQUE, CITY ASSESSOR OF
PARAAQUE, and CITY TREASURER OF PARAAQUE, respondents. E-016-01380 1992-2001 7,776,436.00 4,744,944.00
DECISION
*E-016-013-85 1998-2001 6,444,810.00 2,900,164.50
CARPIO, J.:
*E-016-01387 1998-2001 34,876,800.00 5,694,560.00
The Antecedents
*E-016-01396 1998-2001 75,240.00 33,858.00
Petitioner Manila International Airport Authority (MIAA) operates the Ninoy Aquino
International Airport (NAIA) Complex in Paraaque City under Executive Order No. GRAND TOTAL P392,435,861.95 P232,070,863.47
903, otherwise known as the Revised Charter of the Manila International Airport
Authority ("MIAA Charter"). Executive Order No. 903 was issued on 21 July 1983 by 1992-1997 RPT was paid on Dec. 24, 1997 as per O.R.#9476102 for P4,207,028.75
then President Ferdinand E. Marcos. Subsequently, Executive Order Nos. 9091 and
2982 amended the MIAA Charter. #9476101 for P28,676,480.00

As operator of the international airport, MIAA administers the land, improvements and #9476103 for P49,115.006
equipment within the NAIA Complex. The MIAA Charter transferred to MIAA On 17 July 2001, the City of Paraaque, through its City Treasurer, issued notices of
approximately 600 hectares of land,3 including the runways and buildings ("Airport levy and warrants of levy on the Airport Lands and Buildings. The Mayor of the City of
Lands and Buildings") then under the Bureau of Air Transportation.4 The MIAA Paraaque threatened to sell at public auction the Airport Lands and Buildings should
Charter further provides that no portion of the land transferred to MIAA shall be MIAA fail to pay the real estate tax delinquency. MIAA thus sought a clarification of
disposed of through sale or any other mode unless specifically approved by the OGCC Opinion No. 061.
President of the Philippines.5
On 9 August 2001, the OGCC issued Opinion No. 147 clarifying OGCC Opinion No.
On 21 March 1997, the Office of the Government Corporate Counsel (OGCC) issued 061. The OGCC pointed out that Section 206 of the Local Government Code requires
Opinion No. 061. The OGCC opined that the Local Government Code of 1991 persons exempt from real estate tax to show proof of exemption. The OGCC opined
withdrew the exemption from real estate tax granted to MIAA under Section 21 of the that Section 21 of the MIAA Charter is the proof that MIAA is exempt from real estate
MIAA Charter. Thus, MIAA negotiated with respondent City of Paraaque to pay the tax.
real estate tax imposed by the City. MIAA then paid some of the real estate tax
already due. On 1 October 2001, MIAA filed with the Court of Appeals an original petition for
prohibition and injunction, with prayer for preliminary injunction or temporary
On 28 June 2001, MIAA received Final Notices of Real Estate Tax Delinquency from restraining order. The petition sought to restrain the City of Paraaque from imposing
the City of Paraaque for the taxable years 1992 to 2001. MIAA's real estate tax real estate tax on, levying against, and auctioning for public sale the Airport Lands
delinquency is broken down as follows: and Buildings. The petition was docketed as CA-G.R. SP No. 66878.
TAX DECLARATION TAXABLE YEAR TAX DUE PENALTY On 5 October 2001, the Court of Appeals dismissed the petition because MIAA filed it
beyond the 60-day reglementary period. The Court of Appeals also denied on 27
E-016-01370 1992-2001 19,558,160.00 11,201,083.20 September 2002 MIAA's motion for reconsideration and supplemental motion for
reconsideration. Hence, MIAA filed on 5 December 2002 the present petition for
E-016-01374 1992-2001 111,689,424.90 68,149,479.59
review.7
E-016-01375 1992-2001 20,276,058.00 12,371,832.00 Meanwhile, in January 2003, the City of Paraaque posted notices of auction sale at
the Barangay Halls of Barangays Vitalez, Sto. Nio, and Tambo, Paraaque City; in
E-016-01376 1992-2001 58,144,028.00 35,477,712.00 the public market of Barangay La Huerta; and in the main lobby of the Paraaque City
Hall. The City of Paraaque published the notices in the 3 and 10 January 2003
E-016-01377 1992-2001 18,134,614.65 11,065,188.59
issues of the Philippine Daily Inquirer, a newspaper of general circulation in the
Philippines. The notices announced the public auction sale of the Airport Lands and
Buildings to the highest bidder on 7 February 2003, 10:00 a.m., at the Legislative
Session Hall Building of Paraaque City.
A day before the public auction, or on 6 February 2003, at 5:10 p.m., MIAA filed
before this Court an Urgent Ex-Parte and Reiteratory Motion for the Issuance of a
Temporary Restraining Order. The motion sought to restrain respondents the City
of Paraaque, City Mayor of Paraaque, Sangguniang Panglungsod ng Paraaque,
City Treasurer of Paraaque, and the City Assessor of Paraaque ("respondents")
from auctioning the Airport Lands and Buildings.
On 7 February 2003, this Court issued a temporary restraining order (TRO) effective
immediately. The Court ordered respondents to cease and desist from selling at
public auction the Airport Lands and Buildings. Respondents received the TRO on the
same day that the Court issued it. However, respondents received the TRO only at
1:25 p.m. or three hours after the conclusion of the public auction.
On 10 February 2003, this Court issued a Resolution confirming nunc pro tunc the
TRO.
On 29 March 2005, the Court heard the parties in oral arguments. In compliance with
the directive issued during the hearing, MIAA, respondent City of Paraaque, and the
Solicitor General subsequently submitted their respective Memoranda.
MIAA admits that the MIAA Charter has placed the title to the Airport Lands and
Buildings in the name of MIAA. However, MIAA points out that it cannot claim
ownership over these properties since the real owner of the Airport Lands and
Buildings is the Republic of the Philippines. The MIAA Charter mandates MIAA to
devote the Airport Lands and Buildings for the benefit of the general public. Since the
Airport Lands and Buildings are devoted to public use and public service, the
ownership of these properties remains with the State. The Airport Lands and Buildings
are thus inalienable and are not subject to real estate tax by local governments.
MIAA also points out that Section 21 of the MIAA Charter specifically exempts MIAA
from the payment of real estate tax. MIAA insists that it is also exempt from real
estate tax under Section 234 of the Local Government Code because the Airport
Lands and Buildings are owned by the Republic. To justify the exemption, MIAA
invokes the principle that the government cannot tax itself. MIAA points out that the
reason for tax exemption of public property is that its taxation would not inure to any
public advantage, since in such a case the tax debtor is also the tax creditor.
Respondents invoke Section 193 of the Local Government Code, which expressly
withdrew the tax exemption privileges of "government-owned and-controlled
corporations" upon the effectivity of the Local Government Code. Respondents also
argue that a basic rule of statutory construction is that the express mention of one
person, thing, or act excludes all others. An international airport is not among the
exceptions mentioned in Section 193 of the Local Government Code. Thus,
respondents assert that MIAA cannot claim that the Airport Lands and Buildings are
exempt from real estate tax.
Respondents also cite the ruling of this Court in Mactan International Airport v.
Marcos8 where we held that the Local Government Code has withdrawn the
exemption from real estate tax granted to international airports. Respondents further
argue that since MIAA has already paid some of the real estate tax assessments, it is
now estopped from claiming that the Airport Lands and Buildings are exempt from
real estate tax.
The Issue
This petition raises the threshold issue of whether the Airport Lands and
Buildings of MIAA are exempt from real estate tax under existing laws. If so
exempt, then the real estate tax assessments issued by the City of Paraaque,
and all proceedings taken pursuant to such assessments, are void. In such
event, the other issues raised in this petition become moot.
The Court's Ruling
We rule that MIAA's Airport Lands and Buildings are exempt from real estate tax
imposed by local governments.
First, MIAA is not a government-owned or controlled corporation but
an instrumentality of the National Government and thus exempt from local
taxation. Second, the real properties of MIAA are owned by the Republic of the
Philippines and thus exempt from real estate tax.
1. MIAA is Not a Government-Owned or Controlled Corporation
Respondents argue that MIAA, being a government-owned or controlled corporation,
is not exempt from real estate tax. Respondents claim that the deletion of the phrase
"any government-owned or controlled so exempt by its charter" in Section 234(e) of
the Local Government Code withdrew the real estate tax exemption of government-
owned or controlled corporations. The deleted phrase appeared in Section 40(a) of
the 1974 Real Property Tax Code enumerating the entities exempt from real estate
tax.
There is no dispute that a government-owned or controlled corporation is not exempt
from real estate tax. However, MIAA is not a government-owned or controlled
corporation. Section 2(13) of the Introductory Provisions of the Administrative Code of
1987 defines a government-owned or controlled corporation as follows:
SEC. 2. General Terms Defined. x x x x
(13) Government-owned or controlled corporation refers to any agency organized as
a stock or non-stock corporation, vested with functions relating to public needs
whether governmental or proprietary in nature, and owned by the Government directly
or through its instrumentalities either wholly, or, where applicable as in the case of
stock corporations, to the extent of at least fifty-one (51) percent of its capital stock: x
x x. (Emphasis supplied)
A government-owned or controlled corporation must be "organized as a stock or non-
stock corporation." MIAA is not organized as a stock or non-stock corporation. MIAA
is not a stock corporation because it has no capital stock divided into shares. MIAA
has no stockholders or voting shares. Section 10 of the MIAA Charter9provides:
SECTION 10. Capital. The capital of the Authority to be contributed by the National
Government shall be increased from Two and One-half Billion (P2,500,000,000.00)
Pesos to Ten Billion (P10,000,000,000.00) Pesos to consist of:
(a) The value of fixed assets including airport facilities, runways and equipment and
such other properties, movable and immovable[,] which may be contributed by the
National Government or transferred by it from any of its agencies, the valuation of
which shall be determined jointly with the Department of Budget and Management
and the Commission on Audit on the date of such contribution or transfer after making
due allowances for depreciation and other deductions taking into account the loans
and other liabilities of the Authority at the time of the takeover of the assets and other
properties;
(b) That the amount of P605 million as of December 31, 1986 representing about
seventy percentum (70%) of the unremitted share of the National Government from
1983 to 1986 to be remitted to the National Treasury as provided for in Section 11 of
E. O. No. 903 as amended, shall be converted into the equity of the National
Government in the Authority. Thereafter, the Government contribution to the capital of
the Authority shall be provided in the General Appropriations Act.
Clearly, under its Charter, MIAA does not have capital stock that is divided into
shares.
Section 3 of the Corporation Code10 defines a stock corporation as one whose "capital
stock is divided into shares and x x x authorized to distribute to the holders of such
shares dividends x x x." MIAA has capital but it is not divided into shares of stock.
MIAA has no stockholders or voting shares. Hence, MIAA is not a stock corporation.
MIAA is also not a non-stock corporation because it has no members. Section 87 of
the Corporation Code defines a non-stock corporation as "one where no part of its
income is distributable as dividends to its members, trustees or officers." A non-stock
corporation must have members. Even if we assume that the Government is
considered as the sole member of MIAA, this will not make MIAA a non-stock
corporation. Non-stock corporations cannot distribute any part of their income to their
members. Section 11 of the MIAA Charter mandates MIAA to remit 20% of its annual
gross operating income to the National Treasury.11 This prevents MIAA from qualifying
as a non-stock corporation.
Section 88 of the Corporation Code provides that non-stock corporations are
"organized for charitable, religious, educational, professional, cultural, recreational,
fraternal, literary, scientific, social, civil service, or similar purposes, like trade,
industry, agriculture and like chambers." MIAA is not organized for any of these
purposes. MIAA, a public utility, is organized to operate an international and domestic
airport for public use.
Since MIAA is neither a stock nor a non-stock corporation, MIAA does not qualify as a
government-owned or controlled corporation. What then is the legal status of MIAA
within the National Government?
MIAA is a government instrumentality vested with corporate powers to perform
efficiently its governmental functions. MIAA is like any other government
instrumentality, the only difference is that MIAA is vested with corporate powers.
Section 2(10) of the Introductory Provisions of the Administrative Code defines a
government "instrumentality" as follows:
SEC. 2. General Terms Defined. x x x x
(10) Instrumentality refers to any agency of the National Government, not integrated
within the department framework, vested with special functions or jurisdiction by
law, endowed with some if not all corporate powers, administering special funds, and
enjoying operational autonomy, usually through a charter. x x x (Emphasis supplied)
When the law vests in a government instrumentality corporate powers, the
instrumentality does not become a corporation. Unless the government
instrumentality is organized as a stock or non-stock corporation, it remains a
government instrumentality exercising not only governmental but also corporate
powers. Thus, MIAA exercises the governmental powers of eminent domain,12 police
authority13 and the levying of fees and charges.14 At the same time, MIAA exercises
"all the powers of a corporation under the Corporation Law, insofar as these powers
are not inconsistent with the provisions of this Executive Order."15
Likewise, when the law makes a government instrumentality operationally
autonomous, the instrumentality remains part of the National Government machinery
although not integrated with the department framework. The MIAA Charter expressly
states that transforming MIAA into a "separate and autonomous body"16 will make its
operation more "financially viable."17
Many government instrumentalities are vested with corporate powers but they do not
become stock or non-stock corporations, which is a necessary condition before an
agency or instrumentality is deemed a government-owned or controlled corporation.
Examples are the Mactan International Airport Authority, the Philippine Ports Authority,
the University of the Philippines and Bangko Sentral ng Pilipinas. All these
government instrumentalities exercise corporate powers but they are not organized
as stock or non-stock corporations as required by Section 2(13) of the Introductory
Provisions of the Administrative Code. These government instrumentalities are
sometimes loosely called government corporate entities. However, they are not
government-owned or controlled corporations in the strict sense as understood under
the Administrative Code, which is the governing law defining the legal relationship and
status of government entities.
A government instrumentality like MIAA falls under Section 133(o) of the Local
Government Code, which states:
SEC. 133. Common Limitations on the Taxing Powers of Local Government Units.
Unless otherwise provided herein, the exercise of the taxing powers of provinces,
cities, municipalities, and barangays shall not extend to the levy of the following:
xxxx
(o) Taxes, fees or charges of any kind on the National Government, its agencies and
instrumentalities and local government units.(Emphasis and underscoring supplied)
Section 133(o) recognizes the basic principle that local governments cannot tax the
national government, which historically merely delegated to local governments the
power to tax. While the 1987 Constitution now includes taxation as one of the powers
of local governments, local governments may only exercise such power "subject to
such guidelines and limitations as the Congress may provide."18
When local governments invoke the power to tax on national government
instrumentalities, such power is construed strictly against local governments. The rule
is that a tax is never presumed and there must be clear language in the law imposing
the tax. Any doubt whether a person, article or activity is taxable is resolved against
taxation. This rule applies with greater force when local governments seek to tax
national government instrumentalities.
Another rule is that a tax exemption is strictly construed against the taxpayer claiming
the exemption. However, when Congress grants an exemption to a national
government instrumentality from local taxation, such exemption is construed liberally
in favor of the national government instrumentality. As this Court declared in Maceda
v. Macaraig, Jr.:
The reason for the rule does not apply in the case of exemptions running to the
benefit of the government itself or its agencies. In such case the practical effect of an
exemption is merely to reduce the amount of money that has to be handled by
government in the course of its operations. For these reasons, provisions granting
exemptions to government agencies may be construed liberally, in favor of non tax-
liability of such agencies.19
There is, moreover, no point in national and local governments taxing each other,
unless a sound and compelling policy requires such transfer of public funds from one
government pocket to another.
There is also no reason for local governments to tax national government
instrumentalities for rendering essential public services to inhabitants of local
governments. The only exception is when the legislature clearly intended to tax
government instrumentalities for the delivery of essential public services for sound
and compelling policy considerations. There must be express language in the law
empowering local governments to tax national government instrumentalities. Any
doubt whether such power exists is resolved against local governments.
Thus, Section 133 of the Local Government Code states that "unless otherwise
provided" in the Code, local governments cannot tax national government
instrumentalities. As this Court held in Basco v. Philippine Amusements and Gaming
Corporation:
The states have no power by taxation or otherwise, to retard, impede, burden or in
any manner control the operation of constitutional laws enacted by Congress to carry
into execution the powers vested in the federal government. (MC Culloch v. Maryland,
4 Wheat 316, 4 L Ed. 579)
This doctrine emanates from the "supremacy" of the National Government over local
governments.
"Justice Holmes, speaking for the Supreme Court, made reference to the entire
absence of power on the part of the States to touch, in that way (taxation) at least, the
instrumentalities of the United States (Johnson v. Maryland, 254 US 51) and it can be
agreed that no state or political subdivision can regulate a federal instrumentality in
such a way as to prevent it from consummating its federal responsibilities, or even to
seriously burden it in the accomplishment of them." (Antieau, Modern Constitutional
Law, Vol. 2, p. 140, emphasis supplied)
Otherwise, mere creatures of the State can defeat National policies thru extermination
of what local authorities may perceive to be undesirable activities or enterprise using
the power to tax as "a tool for regulation" (U.S. v. Sanchez, 340 US 42).
The power to tax which was called by Justice Marshall as the "power to destroy" (Mc
Culloch v. Maryland, supra) cannot be allowed to defeat an instrumentality or creation
of the very entity which has the inherent power to wield it. 20
2. Airport Lands and Buildings of MIAA are Owned by the Republic
a. Airport Lands and Buildings are of Public Dominion
The Airport Lands and Buildings of MIAA are property of public dominion and
therefore owned by the State or the Republic of the Philippines. The Civil Code
provides:
ARTICLE 419. Property is either of public dominion or of private ownership.
ARTICLE 420. The following things are property of public dominion:
(1) Those intended for public use, such as roads, canals, rivers, torrents, ports and
bridges constructed by the State, banks, shores, roadsteads, and others of similar
character;
(2) Those which belong to the State, without being for public use, and are intended for
some public service or for the development of the national wealth. (Emphasis
supplied)
ARTICLE 421. All other property of the State, which is not of the character stated in
the preceding article, is patrimonial property.
ARTICLE 422. Property of public dominion, when no longer intended for public use or
for public service, shall form part of the patrimonial property of the State.
No one can dispute that properties of public dominion mentioned in Article 420 of the
Civil Code, like "roads, canals, rivers, torrents, ports and bridges constructed by the
State," are owned by the State. The term "ports" includes seaports and airports. The
MIAA Airport Lands and Buildings constitute a "port" constructed by the State. Under
Article 420 of the Civil Code, the MIAA Airport Lands and Buildings are properties of
public dominion and thus owned by the State or the Republic of the Philippines.
The Airport Lands and Buildings are devoted to public use because they are used by
the public for international and domestic travel and transportation. The fact that the
MIAA collects terminal fees and other charges from the public does not remove the
character of the Airport Lands and Buildings as properties for public use. The
operation by the government of a tollway does not change the character of the road
as one for public use. Someone must pay for the maintenance of the road, either the
public indirectly through the taxes they pay the government, or only those among the
public who actually use the road through the toll fees they pay upon using the road.
The tollway system is even a more efficient and equitable manner of taxing the public
for the maintenance of public roads.
The charging of fees to the public does not determine the character of the property
whether it is of public dominion or not. Article 420 of the Civil Code defines property of
public dominion as one "intended for public use." Even if the government collects toll
fees, the road is still "intended for public use" if anyone can use the road under the
same terms and conditions as the rest of the public. The charging of fees, the
limitation on the kind of vehicles that can use the road, the speed restrictions and
other conditions for the use of the road do not affect the public character of the road.
The terminal fees MIAA charges to passengers, as well as the landing fees MIAA
charges to airlines, constitute the bulk of the income that maintains the operations of
MIAA. The collection of such fees does not change the character of MIAA as an
airport for public use. Such fees are often termed user's tax. This means taxing those
among the public who actually use a public facility instead of taxing all the public
including those who never use the particular public facility. A user's tax is more
equitable a principle of taxation mandated in the 1987 Constitution.21
The Airport Lands and Buildings of MIAA, which its Charter calls the "principal airport
of the Philippines for both international and domestic air traffic,"22 are properties of
public dominion because they are intended for public use. As properties of public
dominion, they indisputably belong to the State or the Republic of the Philippines.
b. Airport Lands and Buildings are Outside the Commerce of Man
The Airport Lands and Buildings of MIAA are devoted to public use and thus are
properties of public dominion. As properties of public dominion, the Airport Lands and
Buildings are outside the commerce of man. The Court has ruled repeatedly that
properties of public dominion are outside the commerce of man. As early as 1915,
this Court already ruled in Municipality of Cavite v. Rojas that properties devoted to
public use are outside the commerce of man, thus:
According to article 344 of the Civil Code: "Property for public use in provinces and in
towns comprises the provincial and town roads, the squares, streets, fountains, and
public waters, the promenades, and public works of general service supported by said
towns or provinces."
The said Plaza Soledad being a promenade for public use, the municipal council of
Cavite could not in 1907 withdraw or exclude from public use a portion thereof in
order to lease it for the sole benefit of the defendant Hilaria Rojas. In leasing a portion
of said plaza or public place to the defendant for private use the plaintiff municipality
exceeded its authority in the exercise of its powers by executing a contract over a
thing of which it could not dispose, nor is it empowered so to do.
The Civil Code, article 1271, prescribes that everything which is not outside the
commerce of man may be the object of a contract, and plazas and streets are outside
of this commerce, as was decided by the supreme court of Spain in its decision of
February 12, 1895, which says: "Communal things that cannot be sold because they
are by their very nature outside of commerce are those for public use, such as the
plazas, streets, common lands, rivers, fountains, etc." (Emphasis supplied) 23
Again in Espiritu v. Municipal Council, the Court declared that properties of public
dominion are outside the commerce of man:
xxx Town plazas are properties of public dominion, to be devoted to public use and to
be made available to the public in general. They are outside the commerce of
man and cannot be disposed of or even leased by the municipality to private parties.
While in case of war or during an emergency, town plazas may be occupied
temporarily by private individuals, as was done and as was tolerated by the
Municipality of Pozorrubio, when the emergency has ceased, said temporary
occupation or use must also cease, and the town officials should see to it that the
town plazas should ever be kept open to the public and free from encumbrances or
illegal private constructions.24 (Emphasis supplied)
The Court has also ruled that property of public dominion, being outside the
commerce of man, cannot be the subject of an auction sale.25
Properties of public dominion, being for public use, are not subject to levy,
encumbrance or disposition through public or private sale. Any encumbrance, levy on
execution or auction sale of any property of public dominion is void for being contrary
to public policy. Essential public services will stop if properties of public dominion are
subject to encumbrances, foreclosures and auction sale. This will happen if the City of
Paraaque can foreclose and compel the auction sale of the 600-hectare runway of
the MIAA for non-payment of real estate tax.
Before MIAA can encumber26 the Airport Lands and Buildings, the President must
first withdraw from public use the Airport Lands and Buildings. Sections 83 and 88 of
the Public Land Law or Commonwealth Act No. 141, which "remains to this day the
existing general law governing the classification and disposition of lands of the public
domain other than timber and mineral lands,"27 provide:
SECTION 83. Upon the recommendation of the Secretary of Agriculture and Natural
Resources, the President may designate by proclamation any tract or tracts of land of
the public domain as reservations for the use of the Republic of the Philippines or of
any of its branches, or of the inhabitants thereof, in accordance with regulations
prescribed for this purposes, or for quasi-public uses or purposes when the public
interest requires it, including reservations for highways, rights of way for railroads,
hydraulic power sites, irrigation systems, communal pastures or lequas communales,
public parks, public quarries, public fishponds, working men's village and other
improvements for the public benefit.
SECTION 88. The tract or tracts of land reserved under the provisions of Section
eighty-three shall be non-alienable and shall not be subject to occupation, entry, sale,
lease, or other disposition until again declared alienable under the provisions of this
Act or by proclamation of the President. (Emphasis and underscoring supplied)
Thus, unless the President issues a proclamation withdrawing the Airport Lands and
Buildings from public use, these properties remain properties of public dominion and
are inalienable. Since the Airport Lands and Buildings are inalienable in their present
status as properties of public dominion, they are not subject to levy on execution or
foreclosure sale. As long as the Airport Lands and Buildings are reserved for public
use, their ownership remains with the State or the Republic of the Philippines.
The authority of the President to reserve lands of the public domain for public use,
and to withdraw such public use, is reiterated in Section 14, Chapter 4, Title I, Book III
of the Administrative Code of 1987, which states:
SEC. 14. Power to Reserve Lands of the Public and Private Domain of the
Government. (1) The President shall have the power to reserve for settlement or
public use, and for specific public purposes, any of the lands of the public domain, the
use of which is not otherwise directed by law. The reserved land shall thereafter
remain subject to the specific public purpose indicated until otherwise provided by law
or proclamation;
x x x x. (Emphasis supplied)
There is no question, therefore, that unless the Airport Lands and Buildings are
withdrawn by law or presidential proclamation from public use, they are properties of
public dominion, owned by the Republic and outside the commerce of man.
c. MIAA is a Mere Trustee of the Republic
MIAA is merely holding title to the Airport Lands and Buildings in trust for the
Republic. Section 48, Chapter 12, Book I of the Administrative Code allows
instrumentalities like MIAA to hold title to real properties owned by the Republic, thus:
SEC. 48. Official Authorized to Convey Real Property. Whenever real property of
the Government is authorized by law to be conveyed, the deed of conveyance shall
be executed in behalf of the government by the following:
(1) For property belonging to and titled in the name of the Republic of the Philippines,
by the President, unless the authority therefor is expressly vested by law in another
officer.
(2) For property belonging to the Republic of the Philippines but titled in the name of
any political subdivision or of any corporate agency or instrumentality, by the
executive head of the agency or instrumentality. (Emphasis supplied)
In MIAA's case, its status as a mere trustee of the Airport Lands and Buildings is
clearer because even its executive head cannot sign the deed of conveyance on
behalf of the Republic. Only the President of the Republic can sign such deed of
conveyance.28
d. Transfer to MIAA was Meant to Implement a Reorganization
The MIAA Charter, which is a law, transferred to MIAA the title to the Airport Lands
and Buildings from the Bureau of Air Transportation of the Department of
Transportation and Communications. The MIAA Charter provides:
SECTION 3. Creation of the Manila International Airport Authority. x x x x
The land where the Airport is presently located as well as the surrounding land area of
approximately six hundred hectares, are hereby transferred, conveyed and assigned
to the ownership and administration of the Authority, subject to existing rights, if any.
The Bureau of Lands and other appropriate government agencies shall undertake an
actual survey of the area transferred within one year from the promulgation of this
Executive Order and the corresponding title to be issued in the name of the
Authority. Any portion thereof shall not be disposed through sale or through any other
mode unless specifically approved by the President of the Philippines. (Emphasis
supplied)
SECTION 22. Transfer of Existing Facilities and Intangible Assets. All
existing public airport facilities, runways, lands, buildings and other property, movable
or immovable, belonging to the Airport, and all assets, powers, rights, interests and
privileges belonging to the Bureau of Air Transportation relating to airport works or air
operations, including all equipment which are necessary for the operation of crash fire
and rescue facilities, are hereby transferred to the Authority. (Emphasis supplied)
SECTION 25. Abolition of the Manila International Airport as a Division in the Bureau
of Air Transportation and Transitory Provisions. The Manila International Airport
including the Manila Domestic Airport as a division under the Bureau of Air
Transportation is hereby abolished.
x x x x.
The MIAA Charter transferred the Airport Lands and Buildings to MIAA without the
Republic receiving cash, promissory notes or even stock since MIAA is not a stock
corporation.
The whereas clauses of the MIAA Charter explain the rationale for the transfer of the
Airport Lands and Buildings to MIAA, thus:
WHEREAS, the Manila International Airport as the principal airport of the Philippines
for both international and domestic air traffic, is required to provide standards of
airport accommodation and service comparable with the best airports in the world;
WHEREAS, domestic and other terminals, general aviation and other facilities, have
to be upgraded to meet the current and future air traffic and other demands of aviation
in Metro Manila;
WHEREAS, a management and organization study has indicated that the objectives
of providing high standards of accommodation and service within the context of a
financially viable operation, will best be achieved by a separate and autonomous
body; and
WHEREAS, under Presidential Decree No. 1416, as amended by Presidential Decree
No. 1772, the President of the Philippines is given continuing authority to reorganize
the National Government, which authority includes the creation of new entities,
agencies and instrumentalities of the Government[.] (Emphasis supplied)
The transfer of the Airport Lands and Buildings from the Bureau of Air Transportation
to MIAA was not meant to transfer beneficial ownership of these assets from the
Republic to MIAA. The purpose was merely to reorganize a division in the Bureau of
Air Transportation into a separate and autonomous body. The Republic remains the
beneficial owner of the Airport Lands and Buildings. MIAA itself is owned solely by the
Republic. No party claims any ownership rights over MIAA's assets adverse to the
Republic.
The MIAA Charter expressly provides that the Airport Lands and Buildings "shall not
be disposed through sale or through any other mode unless specifically approved by
the President of the Philippines." This only means that the Republic retained the
beneficial ownership of the Airport Lands and Buildings because under Article 428 of
the Civil Code, only the "owner has the right to x x x dispose of a thing." Since MIAA
cannot dispose of the Airport Lands and Buildings, MIAA does not own the Airport
Lands and Buildings.
At any time, the President can transfer back to the Republic title to the Airport Lands
and Buildings without the Republic paying MIAA any consideration. Under Section 3
of the MIAA Charter, the President is the only one who can authorize the sale or
disposition of the Airport Lands and Buildings. This only confirms that the Airport
Lands and Buildings belong to the Republic.
e. Real Property Owned by the Republic is Not Taxable
Section 234(a) of the Local Government Code exempts from real estate tax any
"[r]eal property owned by the Republic of the Philippines." Section 234(a) provides:
SEC. 234. Exemptions from Real Property Tax. The following are exempted from
payment of the real property tax:
(a) Real property owned by the Republic of the Philippines or any of its political
subdivisions except when the beneficial use thereof has been granted, for
consideration or otherwise, to a taxable person;
x x x. (Emphasis supplied)
This exemption should be read in relation with Section 133(o) of the same Code,
which prohibits local governments from imposing "[t]axes, fees or charges of any kind
on the National Government, its agencies and instrumentalities x x x." The real
properties owned by the Republic are titled either in the name of the Republic itself or
in the name of agencies or instrumentalities of the National Government. The
Administrative Code allows real property owned by the Republic to be titled in the
name of agencies or instrumentalities of the national government. Such real
properties remain owned by the Republic and continue to be exempt from real estate
tax.
The Republic may grant the beneficial use of its real property to an agency or
instrumentality of the national government. This happens when title of the real
property is transferred to an agency or instrumentality even as the Republic remains
the owner of the real property. Such arrangement does not result in the loss of the tax
exemption. Section 234(a) of the Local Government Code states that real property
owned by the Republic loses its tax exemption only if the "beneficial use thereof has
been granted, for consideration or otherwise, to a taxable person." MIAA, as a
government instrumentality, is not a taxable person under Section 133(o) of the Local
Government Code. Thus, even if we assume that the Republic has granted to MIAA
the beneficial use of the Airport Lands and Buildings, such fact does not make these
real properties subject to real estate tax.
However, portions of the Airport Lands and Buildings that MIAA leases to private
entities are not exempt from real estate tax. For example, the land area occupied by
hangars that MIAA leases to private corporations is subject to real estate tax. In such
a case, MIAA has granted the beneficial use of such land area for a consideration to
a taxable person and therefore such land area is subject to real estate tax. In Lung
Center of the Philippines v. Quezon City, the Court ruled:
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. 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.29
3. Refutation of Arguments of Minority
The minority asserts that the MIAA is not exempt from real estate tax because Section
193 of the Local Government Code of 1991 withdrew the tax exemption of "all
persons, whether natural or juridical" upon the effectivity of the Code. Section 193
provides:
SEC. 193. Withdrawal of Tax Exemption Privileges Unless otherwise provided in
this Code, tax exemptions or incentives granted to, or presently enjoyed by all
persons, whether natural or juridical, including government-owned or controlled
corporations, except local water districts, cooperatives duly registered under R.A. No.
6938, non-stock and non-profit hospitals and educational institutions are hereby
withdrawn upon effectivity of this Code. (Emphasis supplied)
The minority states that MIAA is indisputably a juridical person. The minority argues
that since the Local Government Code withdrew the tax exemption of all juridical
persons, then MIAA is not exempt from real estate tax. Thus, the minority declares:
It is evident from the quoted provisions of the Local Government Code that the
withdrawn exemptions from realty tax cover not just GOCCs, but all persons. To
repeat, the provisions lay down the explicit proposition that the withdrawal of realty tax
exemption applies to all persons. The reference to or the inclusion of GOCCs is only
clarificatory or illustrative of the explicit provision.
The term "All persons" encompasses the two classes of persons recognized under
our laws, natural and juridical persons. Obviously, MIAA is not a natural person. Thus,
the determinative test is not just whether MIAA is a GOCC, but whether MIAA is a
juridical person at all. (Emphasis and underscoring in the original)
The minority posits that the "determinative test" whether MIAA is exempt from local
taxation is its status whether MIAA is a juridical person or not. The minority also
insists that "Sections 193 and 234 may be examined in isolation from Section 133(o)
to ascertain MIAA's claim of exemption."
The argument of the minority is fatally flawed. Section 193 of the Local Government
Code expressly withdrew the tax exemption of all juridical persons "[u]nless otherwise
provided in this Code." Now, Section 133(o) of the Local Government Code expressly
provides otherwise, specifically prohibiting local governments from imposing any kind
of tax on national government instrumentalities. Section 133(o) states:
SEC. 133. Common Limitations on the Taxing Powers of Local Government Units.
Unless otherwise provided herein, the exercise of the taxing powers of provinces,
cities, municipalities, and barangays shall not extend to the levy of the following:
xxxx
(o) Taxes, fees or charges of any kinds on the National Government, its agencies and
instrumentalities, and local government units. (Emphasis and underscoring supplied)
By express mandate of the Local Government Code, local governments cannot
impose any kind of tax on national government instrumentalities like the MIAA. Local
governments are devoid of power to tax the national government, its agencies and
instrumentalities. The taxing powers of local governments do not extend to the
national government, its agencies and instrumentalities, "[u]nless otherwise provided
in this Code" as stated in the saving clause of Section 133. The saving clause refers
to Section 234(a) on the exception to the exemption from real estate tax of real
property owned by the Republic.
The minority, however, theorizes that unless exempted in Section 193 itself, all
juridical persons are subject to tax by local governments. The minority insists that the
juridical persons exempt from local taxation are limited to the three classes of entities
specifically enumerated as exempt in Section 193. Thus, the minority states:
x x x Under Section 193, the exemption is limited to (a) local water districts; (b)
cooperatives duly registered under Republic Act No. 6938; and (c) non-stock and
non-profit hospitals and educational institutions. It would be belaboring the obvious
why the MIAA does not fall within any of the exempt entities under Section 193.
(Emphasis supplied)
The minority's theory directly contradicts and completely negates Section 133(o) of
the Local Government Code. This theory will result in gross absurdities. It will make
the national government, which itself is a juridical person, subject to tax by local
governments since the national government is not included in the enumeration of
exempt entities in Section 193. Under this theory, local governments can impose any
kind of local tax, and not only real estate tax, on the national government.
Under the minority's theory, many national government instrumentalities with juridical
personalities will also be subject to any kind of local tax, and not only real estate tax.
Some of the national government instrumentalities vested by law with juridical
personalities are: Bangko Sentral ng Pilipinas,30 Philippine Rice Research
Institute,31Laguna Lake
Development Authority,32 Fisheries Development Authority,33 Bases Conversion
Development Authority,34Philippine Ports Authority,35 Cagayan de Oro Port
Authority,36 San Fernando Port Authority,37 Cebu Port Authority,38 and Philippine
National Railways.39
The minority's theory violates Section 133(o) of the Local Government Code which
expressly prohibits local governments from imposing any kind of tax on national
government instrumentalities. Section 133(o) does not distinguish between national
government instrumentalities with or without juridical personalities. Where the law
does not distinguish, courts should not distinguish. Thus, Section 133(o) applies to all
national government instrumentalities, with or without juridical personalities. The
determinative test whether MIAA is exempt from local taxation is not whether MIAA is
a juridical person, but whether it is a national government instrumentality under
Section 133(o) of the Local Government Code. Section 133(o) is the specific
provision of law prohibiting local governments from imposing any kind of tax on the
national government, its agencies and instrumentalities.
Section 133 of the Local Government Code starts with the saving clause "[u]nless
otherwise provided in this Code." This means that unless the Local Government Code
grants an express authorization, local governments have no power to tax the national
government, its agencies and instrumentalities. Clearly, the rule is local governments
have no power to tax the national government, its agencies and instrumentalities. As
an exception to this rule, local governments may tax the national government, its
agencies and instrumentalities only if the Local Government Code expressly so
provides.
The saving clause in Section 133 refers to the exception to the exemption in Section
234(a) of the Code, which makes the national government subject to real estate tax
when it gives the beneficial use of its real properties to a taxable entity. Section 234(a)
of the Local Government Code provides:
SEC. 234. Exemptions from Real Property Tax The following are exempted from
payment of the real property tax:
(a) Real property owned by the Republic of the Philippines or any of its political
subdivisions except when the beneficial use thereof has been granted, for
consideration or otherwise, to a taxable person.
x x x. (Emphasis supplied)
Under Section 234(a), real property owned by the Republic is exempt from real estate
tax. The exception to this exemption is when the government gives the beneficial use
of the real property to a taxable entity.
The exception to the exemption in Section 234(a) is the only instance when the
national government, its agencies and instrumentalities are subject to any kind of tax
by local governments. The exception to the exemption applies only to real estate tax
and not to any other tax. The justification for the exception to the exemption is that the
real property, although owned by the Republic, is not devoted to public use or public
service but devoted to the private gain of a taxable person.
The minority also argues that since Section 133 precedes Section 193 and 234 of the
Local Government Code, the later provisions prevail over Section 133. Thus, the
minority asserts:
x x x Moreover, sequentially Section 133 antecedes Section 193 and 234. Following
an accepted rule of construction, in case of conflict the subsequent provisions should
prevail. Therefore, MIAA, as a juridical person, is subject to real property taxes, the
general exemptions attaching to instrumentalities under Section 133(o) of the Local
Government Code being qualified by Sections 193 and 234 of the same law.
(Emphasis supplied)
The minority assumes that there is an irreconcilable conflict between Section 133 on
one hand, and Sections 193 and 234 on the other. No one has urged that there is
such a conflict, much less has any one presenteda persuasive argument that there is
such a conflict. The minority's assumption of an irreconcilable conflict in the statutory
provisions is an egregious error for two reasons.
First, there is no conflict whatsoever between Sections 133 and 193 because Section
193 expressly admits its subordination to other provisions of the Code when Section
193 states "[u]nless otherwise provided in this Code." By its own words, Section 193
admits the superiority of other provisions of the Local Government Code that limit the
exercise of the taxing power in Section 193. When a provision of law grants a power
but withholds such power on certain matters, there is no conflict between the grant of
power and the withholding of power. The grantee of the power simply cannot exercise
the power on matters withheld from its power.
Second, Section 133 is entitled "Common Limitations on the Taxing Powers of Local
Government Units." Section 133 limits the grant to local governments of the power to
tax, and not merely the exercise of a delegated power to tax. Section 133 states that
the taxing powers of local governments "shall not extend to the levy" of any kind of tax
on the national government, its agencies and instrumentalities. There is no clearer
limitation on the taxing power than this.
Since Section 133 prescribes the "common limitations" on the taxing powers of local
governments, Section 133 logically prevails over Section 193 which grants local
governments such taxing powers. By their very meaning and purpose, the "common
limitations" on the taxing power prevail over the grant or exercise of the taxing power.
If the taxing power of local governments in Section 193 prevails over the limitations
on such taxing power in Section 133, then local governments can impose any kind of
tax on the national government, its agencies and instrumentalities a gross
absurdity.
Local governments have no power to tax the national government, its agencies and
instrumentalities, except as otherwise provided in the Local Government Code
pursuant to the saving clause in Section 133 stating "[u]nless otherwise provided in
this Code." This exception which is an exception to the exemption of the Republic
from real estate tax imposed by local governments refers to Section 234(a) of the
Code. The exception to the exemption in Section 234(a) subjects real property owned
by the Republic, whether titled in the name of the national government, its agencies
or instrumentalities, to real estate tax if the beneficial use of such property is given to
a taxable entity.
The minority also claims that the definition in the Administrative Code of the phrase
"government-owned or controlled corporation" is not controlling. The minority points
out that Section 2 of the Introductory Provisions of the Administrative Code admits
that its definitions are not controlling when it provides:
SEC. 2. General Terms Defined. Unless the specific words of the text, or the
context as a whole, or a particular statute, shall require a different meaning:
xxxx
The minority then concludes that reliance on the Administrative Code definition is
"flawed."
The minority's argument is a non sequitur. True, Section 2 of the Administrative Code
recognizes that a statute may require a different meaning than that defined in the
Administrative Code. However, this does not automatically mean that the definition in
the Administrative Code does not apply to the Local Government Code. Section 2 of
the Administrative Code clearly states that "unless the specific words x x x of a
particular statute shall require a different meaning," the definition in Section 2 of the
Administrative Code shall apply. Thus, unless there is specific language in the Local
Government Code defining the phrase "government-owned or controlled corporation"
differently from the definition in the Administrative Code, the definition in the
Administrative Code prevails.
The minority does not point to any provision in the Local Government Code defining
the phrase "government-owned or controlled corporation" differently from the
definition in the Administrative Code. Indeed, there is none. The Local Government
Code is silent on the definition of the phrase "government-owned or controlled
corporation." The Administrative Code, however, expressly defines the phrase
"government-owned or controlled corporation." The inescapable conclusion is that the
Administrative Code definition of the phrase "government-owned or controlled
corporation" applies to the Local Government Code.
The third whereas clause of the Administrative Code states that the Code
"incorporates in a unified document the major structural, functional and procedural
principles and rules of governance." Thus, the Administrative Code is the governing
law defining the status and relationship of government departments, bureaus, offices,
agencies and instrumentalities. Unless a statute expressly provides for a different
status and relationship for a specific government unit or entity, the provisions of the
Administrative Code prevail.
The minority also contends that the phrase "government-owned or controlled
corporation" should apply only to corporations organized under the Corporation Code,
the general incorporation law, and not to corporations created by special charters.
The minority sees no reason why government corporations with special charters
should have a capital stock. Thus, the minority declares:
I submit that the definition of "government-owned or controlled corporations" under
the Administrative Code refer to those corporations owned by the government or its
instrumentalities which are created not by legislative enactment, but formed and
organized under the Corporation Code through registration with the Securities and
Exchange Commission. In short, these are GOCCs without original charters.
xxxx
It might as well be worth pointing out that there is no point in requiring a capital
structure for GOCCs whose full ownership is limited by its charter to the State or
Republic. Such GOCCs are not empowered to declare dividends or alienate their
capital shares.
The contention of the minority is seriously flawed. It is not in accord with the
Constitution and existing legislations. It will also result in gross absurdities.
First, the Administrative Code definition of the phrase "government-owned or
controlled corporation" does not distinguish between one incorporated under the
Corporation Code or under a special charter. Where the law does not distinguish,
courts should not distinguish.
Second, Congress has created through special charters several government-owned
corporations organized as stock corporations. Prime examples are the Land Bank of
the Philippines and the Development Bank of the Philippines. The special charter40 of
the Land Bank of the Philippines provides:
SECTION 81. Capital. The authorized capital stock of the Bank shall be nine billion
pesos, divided into seven hundred and eighty million common shares with a par value
of ten pesos each, which shall be fully subscribed by the Government, and one
hundred and twenty million preferred shares with a par value of ten pesos each,
which shall be issued in accordance with the provisions of Sections seventy-seven
and eighty-three of this Code. (Emphasis supplied)
Likewise, the special charter41 of the Development Bank of the Philippines provides:
SECTION 7. Authorized Capital Stock Par value. The capital stock of the Bank
shall be Five Billion Pesos to be divided into Fifty Million common shares with par
value of P100 per share. These shares are available for subscription by the National
Government. Upon the effectivity of this Charter, the National Government shall
subscribe to Twenty-Five Million common shares of stock worth Two Billion Five
Hundred Million which shall be deemed paid for by the Government with the net asset
values of the Bank remaining after the transfer of assets and liabilities as provided in
Section 30 hereof. (Emphasis supplied)
Other government-owned corporations organized as stock corporations under their
special charters are the Philippine Crop Insurance Corporation,42 Philippine
International Trading Corporation,43 and the Philippine National Bank44 before it was
reorganized as a stock corporation under the Corporation Code. All these
government-owned corporations organized under special charters as stock
corporations are subject to real estate tax on real properties owned by them. To rule
that they are not government-owned or controlled corporations because they are not
registered with the Securities and Exchange Commission would remove them from
the reach of Section 234 of the Local Government Code, thus exempting them from
real estate tax.
Third, the government-owned or controlled corporations created through special
charters are those that meet the two conditions prescribed in Section 16, Article XII of
the Constitution. The first condition is that the government-owned or controlled
corporation must be established for the common good. The second condition is that
the government-owned or controlled corporation must meet the test of economic
viability. Section 16, Article XII of the 1987 Constitution provides:
SEC. 16. The Congress shall not, except by general law, provide for the formation,
organization, or regulation of private corporations. Government-owned or controlled
corporations may be created or established by special charters in the interest of the
common good and subject to the test of economic viability. (Emphasis and
underscoring supplied)
The Constitution expressly authorizes the legislature to create "government-owned or
controlled corporations" through special charters only if these entities are required to
meet the twin conditions of common good and economic viability. In other words,
Congress has no power to create government-owned or controlled corporations with
special charters unless they are made to comply with the two conditions of common
good and economic viability. The test of economic viability applies only to
government-owned or controlled corporations that perform economic or commercial
activities and need to compete in the market place. Being essentially economic
vehicles of the State for the common good meaning for economic development
purposes these government-owned or controlled corporations with special charters
are usually organized as stock corporations just like ordinary private corporations.
In contrast, government instrumentalities vested with corporate powers and
performing governmental or public functions need not meet the test of economic
viability. These instrumentalities perform essential public services for the common
good, services that every modern State must provide its citizens. These
instrumentalities need not be economically viable since the government may even
subsidize their entire operations. These instrumentalities are not the "government-
owned or controlled corporations" referred to in Section 16, Article XII of the 1987
Constitution.
Thus, the Constitution imposes no limitation when the legislature creates government
instrumentalities vested with corporate powers but performing essential governmental
or public functions. Congress has plenary authority to create government
instrumentalities vested with corporate powers provided these instrumentalities
perform essential government functions or public services. However, when the
legislature creates through special charters corporations that perform economic or
commercial activities, such entities known as "government-owned or controlled
corporations" must meet the test of economic viability because they compete in the
market place.
This is the situation of the Land Bank of the Philippines and the Development Bank of
the Philippines and similar government-owned or controlled corporations, which
derive their income to meet operating expenses solely from commercial transactions
in competition with the private sector. The intent of the Constitution is to prevent the
creation of government-owned or controlled corporations that cannot survive on their
own in the market place and thus merely drain the public coffers.
Commissioner Blas F. Ople, proponent of the test of economic viability, explained to
the Constitutional Commission the purpose of this test, as follows:
MR. OPLE: Madam President, the reason for this concern is really that when the
government creates a corporation, there is a sense in which this corporation becomes
exempt from the test of economic performance. We know what happened in the past.
If a government corporation loses, then it makes its claim upon the taxpayers' money
through new equity infusions from the government and what is always invoked is the
common good. That is the reason why this year, out of a budget of P115 billion for the
entire government, about P28 billion of this will go into equity infusions to support a
few government financial institutions. And this is all taxpayers' money which could
have been relocated to agrarian reform, to social services like health and education,
to augment the salaries of grossly underpaid public employees. And yet this is all
going down the drain.
Therefore, when we insert the phrase "ECONOMIC VIABILITY" together with the
"common good," this becomes a restraint on future enthusiasts for state capitalism to
excuse themselves from the responsibility of meeting the market test so that they
become viable. And so, Madam President, I reiterate, for the committee's
consideration and I am glad that I am joined in this proposal by Commissioner Foz,
the insertion of the standard of "ECONOMIC VIABILITY OR THE ECONOMIC TEST,"
together with the common good.45
Father Joaquin G. Bernas, a leading member of the Constitutional Commission,
explains in his textbook The 1987 Constitution of the Republic of the Philippines: A
Commentary:
The second sentence was added by the 1986 Constitutional Commission. The
significant addition, however, is the phrase "in the interest of the common good and
subject to the test of economic viability." The addition includes the ideas that they
must show capacity to function efficiently in business and that they should not go into
activities which the private sector can do better. Moreover, economic viability is more
than financial viability but also includes capability to make profit and generate benefits
not quantifiable in financial terms.46 (Emphasis supplied)
Clearly, the test of economic viability does not apply to government entities vested
with corporate powers and performing essential public services. The State is
obligated to render essential public services regardless of the economic viability of
providing such service. The non-economic viability of rendering such essential public
service does not excuse the State from withholding such essential services from the
public.
However, government-owned or controlled corporations with special charters,
organized essentially for economic or commercial objectives, must meet the test of
economic viability. These are the government-owned or controlled corporations that
are usually organized under their special charters as stock corporations, like the Land
Bank of the Philippines and the Development Bank of the Philippines. These are the
government-owned or controlled corporations, along with government-owned or
controlled corporations organized under the Corporation Code, that fall under the
definition of "government-owned or controlled corporations" in Section 2(10) of the
Administrative Code.
The MIAA need not meet the test of economic viability because the legislature did not
create MIAA to compete in the market place. MIAA does not compete in the market
place because there is no competing international airport operated by the private
sector. MIAA performs an essential public service as the primary domestic and
international airport of the Philippines. The operation of an international airport
requires the presence of personnel from the following government agencies:
1. The Bureau of Immigration and Deportation, to document the arrival and departure
of passengers, screening out those without visas or travel documents, or those with
hold departure orders;
2. The Bureau of Customs, to collect import duties or enforce the ban on prohibited
importations;
3. The quarantine office of the Department of Health, to enforce health measures
against the spread of infectious diseases into the country;
4. The Department of Agriculture, to enforce measures against the spread of plant
and animal diseases into the country;
5. The Aviation Security Command of the Philippine National Police, to prevent the
entry of terrorists and the escape of criminals, as well as to secure the airport
premises from terrorist attack or seizure;
6. The Air Traffic Office of the Department of Transportation and Communications, to
authorize aircraft to enter or leave Philippine airspace, as well as to land on, or take
off from, the airport; and
7. The MIAA, to provide the proper premises such as runway and buildings for
the government personnel, passengers, and airlines, and to manage the airport
operations.
All these agencies of government perform government functions essential to the
operation of an international airport.
MIAA performs an essential public service that every modern State must provide its
citizens. MIAA derives its revenues principally from the mandatory fees and charges
MIAA imposes on passengers and airlines. The terminal fees that MIAA charges
every passenger are regulatory or administrative fees47 and not income from
commercial transactions.
MIAA falls under the definition of a government instrumentality under Section 2(10) of
the Introductory Provisions of the Administrative Code, which provides:
SEC. 2. General Terms Defined. x x x x
(10) Instrumentality refers to any agency of the National Government, not integrated
within the department framework, vested with special functions or jurisdiction by law,
endowed with some if not all corporate powers, administering special funds, and
enjoying operational autonomy, usually through a charter. x x x (Emphasis supplied)
The fact alone that MIAA is endowed with corporate powers does not make MIAA a
government-owned or controlled corporation. Without a change in its capital structure,
MIAA remains a government instrumentality under Section 2(10) of the Introductory
Provisions of the Administrative Code. More importantly, as long as MIAA renders
essential public services, it need not comply with the test of economic viability. Thus,
MIAA is outside the scope of the phrase "government-owned or controlled
corporations" under Section 16, Article XII of the 1987 Constitution.
The minority belittles the use in the Local Government Code of the phrase
"government-owned or controlled corporation" as merely "clarificatory or illustrative."
This is fatal. The 1987 Constitution prescribes explicit conditions for the creation of
"government-owned or controlled corporations." The Administrative Code defines
what constitutes a "government-owned or controlled corporation." To belittle this
phrase as "clarificatory or illustrative" is grave error.
To summarize, MIAA is not a government-owned or controlled corporation under
Section 2(13) of the Introductory Provisions of the Administrative Code because it is
not organized as a stock or non-stock corporation. Neither is MIAA a government-
owned or controlled corporation under Section 16, Article XII of the 1987 Constitution
because MIAA is not required to meet the test of economic viability. MIAA is a
government instrumentality vested with corporate powers and performing essential
public services pursuant to Section 2(10) of the Introductory Provisions of the
Administrative Code. As a government instrumentality, MIAA is not subject to any kind
of tax by local governments under Section 133(o) of the Local Government Code. The
exception to the exemption in Section 234(a) does not apply to MIAA because MIAA
is not a taxable entity under the Local Government Code. Such exception applies only
if the beneficial use of real property owned by the Republic is given to a taxable entity.
Finally, the Airport Lands and Buildings of MIAA are properties devoted to public use
and thus are properties of public dominion. Properties of public dominion are owned
by the State or the Republic. Article 420 of the Civil Code provides:
Art. 420. The following things are property of public dominion:
(1) Those intended for public use, such as roads, canals, rivers, torrents, ports and
bridges constructed by the State, banks, shores, roadsteads, and others of similar
character;
(2) Those which belong to the State, without being for public use, and are intended for
some public service or for the development of the national wealth. (Emphasis
supplied)
The term "ports x x x constructed by the State" includes airports and seaports. The
Airport Lands and Buildings of MIAA are intended for public use, and at the very least
intended for public service. Whether intended for public use or public service, the
Airport Lands and Buildings are properties of public dominion. As properties of public
dominion, the Airport Lands and Buildings are owned by the Republic and thus
exempt from real estate tax under Section 234(a) of the Local Government Code.
4. Conclusion
Under Section 2(10) and (13) of the Introductory Provisions of the Administrative
Code, which governs the legal relation and status of government units, agencies and
offices within the entire government machinery, MIAA is a government instrumentality
and not a government-owned or controlled corporation. Under Section 133(o) of the
Local Government Code, MIAA as a government instrumentality is not a taxable
person because it is not subject to "[t]axes, fees or charges of any kind" by local
governments. The only exception is when MIAA leases its real property to a "taxable
person" as provided in Section 234(a) of the Local Government Code, in which case
the specific real property leased becomes subject to real estate tax. Thus, only
portions of the Airport Lands and Buildings leased to taxable persons like private
parties are subject to real estate tax by the City of Paraaque.
Under Article 420 of the Civil Code, the Airport Lands and Buildings of MIAA, being
devoted to public use, are properties of public dominion and thus owned by the State
or the Republic of the Philippines. Article 420 specifically mentions "ports x x x
constructed by the State," which includes public airports and seaports, as properties
of public dominion and owned by the Republic. As properties of public dominion
owned by the Republic, there is no doubt whatsoever that the Airport Lands and
Buildings are expressly exempt from real estate tax under Section 234(a) of the Local
Government Code. This Court has also repeatedly ruled that properties of public
dominion are not subject to execution or foreclosure sale.
WHEREFORE, we GRANT the petition. We SET ASIDE the assailed Resolutions of
the Court of Appeals of 5 October 2001 and 27 September 2002 in CA-G.R. SP No.
66878. We DECLARE the Airport Lands and Buildings of the Manila International
Airport Authority EXEMPT from the real estate tax imposed by the City of Paraaque.
We declare VOID all the real estate tax assessments, including the final notices of
real estate tax delinquencies, issued by the City of Paraaque on the Airport Lands
and Buildings of the Manila International Airport Authority, except for the portions that
the Manila International Airport Authority has leased to private parties. We also
declare VOID the assailed auction sale, and all its effects, of the Airport Lands and
Buildings of the Manila International Airport Authority.
No costs. endowed with some if not all corporate powers, administering special funds, and
enjoying operational autonomy, usually through a charter.
SO ORDERED.
When the law vests in a government instrumentality corporate powers, the
instrumentality does not become a corporation. Unless the government
instrumentality is organized as a stock or non-stock corporation, it remains a
Manila International Airport Authority vs Court of Appeals
government instrumentality exercising not only governmental but also corporate
GR No. 155650 July 20, 2006
powers. Thus, MIAA exercises the governmental powers of eminent domain, police
Facts: Petitioner Manila International Airport Authority (MIAA) operates the Ninoy authority and the surging of fees and charges. At the same time, MIAA exercises all
Aquino International Airport (NAIA) complex in Paraaque City under Executive Order the powers of a corporation under the corporation law, in so far as these powers are
No. 9303, otherwise known as the revised charter of the MIAA. EO 903 was issued on not inconsistent with the provisions of this executive order.
July 21, 1983 by then President Ferdinand E. Marcos. Subsequently EO 909 and 298
A government instrumentality like MIAA falls under section 133 (o) of the local
amended the MIAA charter as operator of the international operator, MIAA
government code, which states:
administers the land, improvements, and equipments within the NAIA complex. The
MIAA charter transferred to MIAA approximately 600 hectares of land, including the Sec 133 Common limitations on the taxing powers of the local government
runways and buildings then under the Bureau of Air Transportation. The MIAA charter units Unless otherwise provided herein, the exercise of the taxing power of the
provides that no portion of the land transferred to MIAA shall be disposed of through provinces, cities, municipalities and barangays shall not extend to the levy of the
sale or any other mode unless specifically approved by the President of the following:
Philippines. On March 21, 1997, the Office of the Government Corporate Counsel
issued opinion no. 061. The OGCC opined that the local government code of 1991 xxx
withdraw the exemption from real estate tax granted to MIAA under section 21 of the
MIAA charter. Thus, MIAA negotiated with respondent city of Paraaque to pay the o.) Taxes, fees or charges of any kind on the national government, its agencies and
real estate tax imposed by the city. MIAA then paid some of the real estate tax already instrumentalities and local government units.
due. On July 17, 2001, the City of Paraaque, through its city treasurer issued notices
Section 133 (0) recognizes the basic principles that local governments cannot tax the
of levy and warrants of levy on the airport lands and buildings. The mayor of the city
national government, which historically, merely delegated to the local governments
of Paraaque threatened to sell at public auction the airport lands and buildings
the power to tax. While the 1987 constitution now includes taxation as one of the
should MIAA fail to pay the real estate tax deliquency. MIAA thus sought clarification
powers of the local governments, local governments may only exercise such powers
of OGCC opinion no. 061. On August 9, 2001, the OGCC issued opinion no. 147
subject to such guidelines and limitations as the congress may provide.
clarifying OGCC opinion no. 061. The OGCC pointed out that section 206 of the local
government code requires persons exempt from real estate tax to show proof of
exemption. The OGCC opined that section 21 of the MIAA charter is the proof that
MIAA is exempt from real estate tax.

Issue: Whether or not the airport lands and buildings are exempt from real estate tax.

Held: Yes. MIAA is a government instrumentality vested with corporate powers to

perform efficiently its governmental functions. MIAA is like any other government
instrumentality, the only difference is that MIAA is vested with corporate powers.
Section 21 (10) of the introductory provisions of the administrative code defines a
government instrumentality as follows:

Sec 2 General terms defined

xxx

10.) Instrumentality refers to any agency of the national government, not integrated G.R. No. 167330 June 12, 2008
within the department framework, vested with special functions or jurisdiction by law,
PHILIPPINE HEALTH CARE PROVIDERS, INC., petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, respondent.
DECISION
CORONA, J.:
Is a health care agreement in the nature of an insurance contract and therefore
subject to the documentary stamp tax (DST) imposed under Section 185 of Republic
Act 8424 (Tax Code of 1997)?
This is an issue of first impression. The Court of Appeals (CA) answered it
affirmatively in its August 16, 2004 decision1 in CA-G.R. SP No. 70479. Petitioner
Philippine Health Care Providers, Inc. believes otherwise and assails the CA decision
in this petition for review under Rule 45 of the Rules of Court.
Petitioner is a domestic corporation whose primary purpose is "[t]o establish,
maintain, conduct and operate a prepaid group practice health care delivery system
or a health maintenance organization to take care of the sick and disabled persons
enrolled in the health care plan and to provide for the administrative, legal, and
financial responsibilities of the organization."2 Individuals enrolled in its health care
programs pay an annual membership fee and are entitled to various preventive,
diagnostic and curative medical services provided by its duly licensed physicians,
specialists and other professional technical staff participating in the group practice
health delivery system at a hospital or clinic owned, operated or accredited by it.3
The pertinent part of petitioner's membership or health care agreement4 provides:
VII BENEFITS
Subject to paragraphs VIII [on pre-existing medical condition] and X [on claims for
reimbursement] of this Agreement, Members shall have the following Benefits under
this Agreement:
In-Patient Services. In the event that a Member contract[s] sickness or suffers injury
which requires confinement in a participating Hospital[,] the services or benefits
stated below shall be provided to the Member free of charge, but in no case shall
[petitioner] be liable to pay more than P75,000.00 in benefits with respect to anyone
sickness, injury or related causes. If a member has exhausted such maximum
benefits with respect to a particular sickness, injury or related causes, all accounts in
excess of P75,000.00 shall be borne by the enrollee. It is[,] however, understood that
the payment by [petitioner] of the said maximum in In-Patient Benefits to any one
member shall preclude a subsequent payment of benefits to such member in respect
of an unrelated sickness, injury or related causes happening during the remainder of
his membership term.
(a) Room and Board
(b) Services of physician and/or surgeon or specialist
(c) Use of operating room and recovery room
(d) Standard Nursing Services
(e) Drugs and Medication for use in the hospital except those which are used to
dissolve blood clots in the vascular systems (i.e., trombolytic agents)
(f) Anesthesia and its administration
(g) Dressings, plaster casts and other miscellaneous supplies
(h) Laboratory tests, x-rays and other necessary diagnostic services
(i) Transfusion of blood and other blood elements
Condition for in-Patient Care. The provision of the services or benefits mentioned in
the immediately preceding paragraph shall be subject to the following conditions:
(a) The Hospital Confinement must be approved by [petitioner's] Physician,
Participating Physician or [petitioner's] Medical Coordinator in that Hospital prior to
confinement.
(b) The confinement shall be in a Participating Hospital and the accommodation shall
be in accordance with the Member[']s benefit classification.
(c) Professional services shall be provided only by the [petitioner's] Physicians or
Participating Physicians.
(d) If discharge from the Hospital has been authorized by [petitioner's] attending
Physician or Participating Physician and the Member shall fail or refuse to do so,
[petitioner] shall not be responsible for any charges incurred after discharge has been
authorized.
Out-Patient Services. A Member is entitled free of charge to the following services or
benefits which shall be rendered or administered either in [petitioner's] Clinic or in a
Participating Hospital under the direction or supervision of [petitioner's] Physician,
Participating Physician or [petitioner's] Medical Coordinator.
(a) Gold Plan Standard Annual Physical Examination on the anniversary date of
membership, to be done at [petitioner's] designated hospital/clinic, to wit:
(i) Taking a medical history
(ii) Physical examination
(iii) Chest x-ray
(iv) Stool examination
(v) Complete Blood Count
(vi) Urinalysis
(vii) Fasting Blood Sugar (FBS)
(viii) SGPT emergency. For this purpose, all hospitals and all attending physician(s) in the
Emergency Room automatically become accredited. In participating hospitals, the
(ix) Creatinine member shall be entitled to the following services free of charge: (a) doctor's fees, (b)
emergency room fees, (c) medicines used for immediate relief and during treatment,
(x) Uric Acid
(d) oxygen, intravenous fluids and whole blood and human blood products, (e)
(xi) Resting Electrocardiogram dressings, casts and sutures and (f) x-rays, laboratory and diagnostic examinations
and other medical services related to the emergency treatment of the
(xii) Pap Smear (Optional for women 40 years and above) patient.]5Provided, however, that in no case shall the total amount payable by
[petitioner] for said Emergency, inclusive of hospital bill and professional fees, exceed
(b) Platinum Family Plan/Gold Family Plan and Silver Annual Physical Examination.
P75,000.00.
The following tests are to be done as part of the Member[']s Annual check-up program
If the Member received care in a non-participating hospital, [petitioner] shall
at [petitioner's] designated clinic, to wit:
reimburse [him]6 80% of the hospital bill or the amount of P5,000.00[,] whichever is
1) Routine Physical Examination lesser, and 50% of the professional fees of non-participating physicians based on
[petitioner's] schedule of fees provided that the total amount[,] inclusive of hospital
2) CBC (Complete Blood Count) bills and professional fee shall not exceed P5,000.00.

* Hemoglobin * Hematocrit On January 27, 2000, respondent Commissioner of Internal Revenue sent petitioner a
formal demand letter and the corresponding assessment notices demanding the
* Differential * RBC/WBC payment of deficiency taxes, including surcharges and interest, for the taxable years
1996 and 1997 in the total amount of P224,702,641.18. The assessment represented
3) Chest X-ray
the following:
4) Urinalysis
Value Added Tax (VAT) DST
5) Fecalysis
1996 P 45,767,596.23 P 55,746,352.19
(c) Preventive Health Care, which shall include:
1997 54,738,434.03 68,450,258.73
(i) Periodic Monitoring of Health Problems
P 100,506,030.26 P 124,196,610.92
(ii) Family planning counseling

(iii) Consultation and advices on diet, exercise and other healthy habits The deficiency DST assessment was imposed on petitioner's health care agreement
with the members of its health care program pursuant to Section 185 of the 1997 Tax
(iv) Immunization but excluding drugs for vaccines used Code which provides:

(d) Out-Patient Care, which shall include:
(i) Consultation, including specialist evaluation
(ii) Treatment of injury or illness
(iii) Necessary x-ray and laboratory examination
(iv) Emergency medicines needed for the immediate
relief of symptoms
(v) Minor surgery not requiring confinement
Emergency Care. Subject to the conditions and limitations in this Agreement and
those specified below, a Member is entitled to receive emergency care [in case of
Section 185. Stamp tax on fidelity bonds and other insurance policies. - On all
policies of insurance or bonds or obligations of the nature of indemnity for loss,
damage, or liability made or renewed by any person, association or company or
corporation transacting the business of accident, fidelity, employer's liability, plate,
glass, steam boiler, burglar, elevator, automatic sprinkler, or other branch of
insurance (except life, marine, inland, and fire insurance), and all bonds,
undertakings, or recognizances, conditioned for the performance of the duties of any
office or position, for the doing or not doing of anything therein specified, and on all
obligations guaranteeing the validity or legality of any bond or other obligations issued
by any province, city, municipality, or other public body or organization, and on all
obligations guaranteeing the title to any real estate, or guaranteeing any mercantile
credits, which may be made or renewed by any such person, company or corporation,
there shall be collected a documentary stamp tax of fifty centavos (P0.50) on each
four pesos (P4.00), or fractional part thereof, of the premium charged. (emphasis
supplied)
Petitioner protested the assessment in a letter dated February 23, 2000. As
respondent did not act on the protest, petitioner filed a petition for review in the Court
of Tax Appeals (CTA) seeking the cancellation of the deficiency VAT and DST
assessments.
On April 5, 2002, the CTA rendered a decision,7 the dispositive portion of which read:
WHEREFORE, in view of the foregoing, the instant Petition for Review is PARTIALLY
GRANTED. Petitioner is hereby ORDERED to PAY the deficiency VAT amounting
to P22,054,831.75 inclusive of 25% surcharge plus 20% interest from January 20,
1997 until fully paid for the 1996 VAT deficiency and P31,094,163.87 inclusive of 25%
surcharge plus 20% interest from January 20, 1998 until fully paid for the 1997 VAT
deficiency. Accordingly, VAT Ruling No. [231]-88 is declared void and without force
and effect. The 1996 and 1997 deficiency DST assessment against petitioner is
hereby CANCELLED AND SET ASIDE. Respondent is ORDERED to DESIST from
collecting the said DST deficiency tax.
SO ORDERED.8
Respondent appealed the CTA decision to the CA9 insofar as it cancelled the DST
assessment. He claimed that petitioner's health care agreement was a contract of
insurance subject to DST under Section 185 of the 1997 Tax Code.
On August 16, 2004, the CA rendered its decision.10 It held that petitioner's health
care agreement was in the nature of a non-life insurance contract subject to DST:
WHEREFORE, the petition for review is GRANTED. The Decision of the Court of Tax
Appeals, insofar as it cancelled and set aside the 1996 and 1997 deficiency
documentary stamp tax assessment and ordered petitioner to desist from collecting
the same is REVERSED and SET ASIDE.
Respondent is ordered to pay the amounts of P55,746,352.19 and P68,450,258.73 as
deficiency Documentary Stamp Tax for 1996 and 1997, respectively, plus 25%
surcharge for late payment and 20% interest per annum from January 27, 2000,
pursuant to Sections 248 and 249 of the Tax Code, until the same shall have been
fully paid.
SO ORDERED.11
Petitioner moved for reconsideration but the CA denied it. Hence, this petition.
Petitioner essentially argues that its health care agreement is not a contract of
insurance but a contract for the provision on a prepaid basis of medical services,
including medical check-up, that are not based on loss or damage. Petitioner also
insists that it is not engaged in the insurance business. It is a health maintenance
organization regulated by the Department of Health, not an insurance company under
the jurisdiction of the Insurance Commission. For these reasons, petitioner asserts
that the health care agreement is not subject to DST.
We do not agree.
The DST is levied on the exercise by persons of certain privileges conferred by law
for the creation, revision, or termination of specific legal relationships through the
execution of specific instruments.12 It is an excise upon the privilege, opportunity, or
facility offered at exchanges for the transaction of the business.13 In particular, the
DST under Section 185 of the 1997 Tax Code is imposed on the privilege of
making or renewing any policy of insurance (except life, marine, inland and fire
insurance), bond or obligation in the nature of indemnity for loss, damage, or
liability.
Under the law, a contract of insurance is an agreement whereby one undertakes for a
consideration to indemnify another against loss, damage or liability arising from an
unknown or contingent event.14 The event insured against must be designated in the
contract and must either be unknown or contingent.15
Petitioner's health care agreement is primarily a contract of indemnity. And in the
recent case of Blue Cross Healthcare, Inc. v. Olivares,16 this Court ruled that a health
care agreement is in the nature of a non-life insurance policy.
Contrary to petitioner's claim, its health care agreement is not a contract for the
provision of medical services. Petitioner does not actually provide medical or hospital
services but merely arranges for the same17 and pays for them up to the stipulated
maximum amount of coverage. It is also incorrect to say that the health care
agreement is not based on loss or damage because, under the said agreement,
petitioner assumes the liability and indemnifies its member for hospital, medical and
related expenses (such as professional fees of physicians). The term "loss or
damage" is broad enough to cover the monetary expense or liability a member will
incur in case of illness or injury.
Under the health care agreement, the rendition of hospital, medical and professional
services to the member in case of sickness, injury or emergency or his availment of
so-called "out-patient services" (including physical examination, x-ray and laboratory
tests, medical consultations, vaccine administration and family planning counseling) is
the contingent event which gives rise to liability on the part of the member. In case of
exposure of the member to liability, he would be entitled to indemnification by
petitioner.
Furthermore, the fact that petitioner must relieve its member from liability by paying
for expenses arising from the stipulated contingencies belies its claim that its services
are prepaid. The expenses to be incurred by each member cannot be predicted
beforehand, if they can be predicted at all. Petitioner assumes the risk of paying for
the costs of the services even if they are significantly and substantially more than
what the member has "prepaid." Petitioner does not bear the costs alone but
distributes or spreads them out among a large group of persons bearing a similar risk,
that is, among all the other members of the health care program. This is insurance.
Petitioner's health care agreement is substantially similar to that involved
in Philamcare Health Systems, Inc. v. CA.18 The health care agreement in that case
entitled the subscriber to avail of the hospitalization benefits, whether ordinary or
emergency, listed therein. It also provided for "out-patient benefits" such as annual
physical examinations, preventive health care and other out-patient services. This
Court ruled in Philamcare Health Systems, Inc.:
[T]he insurable interest of [the subscriber] in obtaining the health care agreement was
his own health. The health care agreement was in the nature of non-life
insurance, which is primarily a contract of indemnity. Once the member incurs
hospital, medical or any other expense arising from sickness, injury or other stipulated
contingency, the health care provider must pay for the same to the extent agreed
upon under the contract.19 (emphasis supplied)
Similarly, the insurable interest of every member of petitioner's health care program in
obtaining the health care agreement is his own health. Under the agreement,
petitioner is bound to indemnify any member who incurs hospital, medical or any
other expense arising from sickness, injury or other stipulated contingency to the
extent agreed upon under the contract.
Petitioner's contention that it is a health maintenance organization and not an
insurance company is irrelevant. Contracts between companies like petitioner and the
beneficiaries under their plans are treated as insurance contracts.20
Moreover, DST is not a tax on the business transacted but an excise on the privilege,
opportunity, or facility offered at exchanges for the transaction of the business.21 It is
an excise on the facilities used in the transaction of the business, separate and
apart from the business itself.22
WHEREFORE, the petition is hereby DENIED. The August 16, 2004 decision of the
Court of Appeals in CA-G.R. SP No. 70479 is AFFIRMED.
Petitioner is ordered to pay the amounts of P55,746,352.19 and P68,450,258.73 as
deficiency documentary stamp tax for 1996 and 1997, respectively, plus 25%
surcharge for late payment and 20% interest per annum from January 27, 2000 until
full payment thereof.
Costs against petitioner.
SO ORDERED.
Philippine Health Care v CIR G.R. No. 167330 September 18, 2009
J. Corona
Facts:
Philippine Health Cares objectives were:
"[t]o establish, maintain, conduct and operate a prepaid group practice health
care delivery system or a health maintenance organization to take care of the sick
and disabled persons enrolled in the health care plan and to provide for the
administrative, legal, and financial responsibilities of the organization.
It lost the case in 2004 when it was made to pay over 100 million in VAT deficiencies.
At the time the MFR was filed, it was able to avail of tax amnesty under RA 9840 by
paying 5 percent of the tax or 5 million pesos.
Petitioner passed an MFR but the CA denied. Hence, this case.
Issue:
Was petitioner, as an HMO, engaged in the business of insurance during the pertinent
taxable years, and was thus liable for DST?
Held: No. Mfr granted. CIR must desist from collecting tax.
Ratio:
Section 185 of the NIRC . Stamp tax on fidelity bonds and other insurance policies.
On all policies of insurance or bonds or obligations of the nature of indemnity for loss,
damage, or liability made or renewed by any person, association or company or
corporation transacting the business of accident, fidelity, employers liability, plate,
glass, steam boiler, burglar, elevator, automatic sprinkler, or other branch of insurance
(except life, marine, inland, and fire insurance).
Two requisites must concur before the DST can apply, namely: (1) the document must
be a policy of insurance or an obligation in the nature of indemnity and (2) the maker
should be transacting the business of accident, fidelity, employers liability, plate,
glass, steam boiler, burglar, elevator, automatic sprinkler, or other branch of insurance
(except life, marine, inland, and fire insurance).
Under RA 7875, an HMO is "an entity that provides, offers or arranges for coverage of
designated health services needed by plan members for a fixed prepaid premium."
Various courts in the United States have determined that HMOs are not in the
insurance business. One test that they have applied is whether the assumption of risk
and indemnification of loss are the principal object and purpose of the organization or
whether they are merely incidental to its business. If these are the principal
objectives, the business is that of insurance. But if such is incidental and service is
the principal purpose, then the business is not insurance.
Applying the "principal object and purpose test," there is significant American case
law supporting the argument that a corporation, whose main object is to provide the
members of a group with health services, is not engaged in the insurance business.
For the purpose of determining what "doing an insurance business" means, we have
to scrutinize the operations of the business as a whole. This is of course only prudent
and appropriate, taking into account laws applicable to those in the insurance
business.
Petitioner, as an HMO, is not part of the insurance industry. This is evident from the
fact that it is not supervised by the Insurance Commission but by the Department of
Health. In fact, in a letter dated September 3, 2000, the Insurance Commissioner
confirmed that petitioner is not engaged in the insurance business.
As to whether the business is covered by the DST, we can see that while the contract
did contains all the elements of an insurance contract, as stated in Sec 2., Par 1 of
the Insurance Code, the primary purpose of the company is to render service. The
primary purpose of the parties in making the contract may negate the existence of an
insurance contract.
petitioners objective is to provide medical services at reduced cost, not to distribute
risk like an insurer.
If it had been the intent of the legislature to impose DST on health care agreements, it
could have done so in clear and categorical terms. It had many opportunities to do so.
But it did not. The fact that the NIRC contained no specific provision on the DST
liability of health care agreements of HMOs at a time they were already known as
such, belies any legislative intent to impose it on them. As a matter of fact, petitioner
was assessed its DST liability only on January 27, 2000, after more than a decade in
the business as an HMO.
In view of petitioners availment of the benefits of [RA 9840], and without conceding
the merits of this case as discussed above, respondent concedes that such tax
amnesty extinguishes the tax liabilities of petitioner.
21 Our Insurance Code was based on California and New York laws. When a statute
has been adopted from some other state or country and said statute has previously
been construed by the courts of such state or country, the statute is deemed to have
been adopted with the construction given.

Also, there is no loss, damage or liability on the part of the member that should be
indemnified by petitioner as an HMO. Under the agreement, the member pays
petitioner a predetermined consideration in exchange for the hospital, medical and
professional services rendered by the petitioners physician or affiliated physician to
him.

In other words, there is nothing in petitioner's agreements that gives rise to a

monetary liability on the part of the member to any third party-provider of medical
services which might in turn necessitate indemnification from petitioner. The terms
"indemnify" or "indemnity" presume that a liability or claim has already been incurred.
There is no indemnity precisely because the member merely avails of medical
services to be paid or already paid in advance at a pre-agreed price under the
agreements.

Also, a member can take advantage of the bulk of the benefits anytime, e.g.
laboratory services, x-ray, routine annualphysical examination and consultations,
vaccine administration as well as family planning counseling, even in the absence of
any peril, loss or damage on his or her part.

Petitioner is obliged to reimburse the member who receives care from a non-
participating physician or hospital. However, this is only a very minor part of the list of
services available. The assumption of the expense by petitioner is not confined to the
happening of a contingency but includes incidents even in the absence of illness or
injury.

Consequently, there is a need to distinguish prepaid service contracts (like those of

petitioner) from the usual insurance contracts.
Philippine Health Care v CIR G.R. No. 167330 September 18, 2009
However, assuming that petitioners commitment to provide medical services to its
members can be construed as an acceptance of the risk that it will shell out more FACTS:
than the prepaid fees, it still will not qualify as an insurance contract because
Petitioner is a domestic corporation whose primary purpose is to establish, maintain,
conduct and operate a prepaid group practice health care delivery system or a health
maintenance organization to take care of the sick and disabled persons enrolled in
the health care plan and to provide for the administrative, legal, and financial
responsibilities of the organization. On January 27, 2000, respondent CIR sent
petitioner a formal deman letter and the corresponding assessment notices
demanding the payment of deficiency taxes, including surcharges and interest, for the
taxable years 1996 and 1997 in the total amount of P224,702,641.18. The deficiency
assessment was imposed on petitioners health care agreement with the members of
its health care program pursuant to Section 185 of the 1997 Tax Code. Petitioner
protested the assessment in a letter dated February 23, 2000. As respondent did not
act on the protest, petitioner filed a petition for review in the Court of Tax Appeals
(CTA) seeking the cancellation of the deficiency VAT and DST assessments. On April
5, 2002, the CTA rendered a decision, ordering the petitioner to PAY the deficiency
VAT amounting to P22,054,831.75 inclusive of 25% surcharge plus 20% interest from
January 20, 1997 until fully paid for the 1996 VAT deficiency and P31,094,163.87
inclusive of 25% surcharge plus 20% interest from January 20, 1998 until fully paid for
the 1997 VAT deficiency. Accordingly, VAT Ruling No. [231]-88 is declared void and
without force and effect. The 1996 and 1997 deficiency DST assessment against
petitioner is hereby CANCELLED AND SET ASIDE. Respondent is ORDERED to
DESIST from collecting the said DST deficiency tax. Respondent appealed the CTA
decision to the (CA) insofar as it cancelled the DST assessment. He claimed that
petitioners health care agreement was a contract of insurance subject to DST under
Section 185 of the 1997 Tax Code.
On August 16, 2004, the CA rendered its decision which held that petitioners health
care agreement was in the nature of a non-life insurance contract subject to DST.
Respondent is ordered to pay the deficiency Documentary Stamp Tax. Petitioner
moved for reconsideration but the CA denied it.
offers or arranges for coverage of designated health services needed by plan
members for a fixed prepaid premium. The payments do not vary with the extent,
frequency or type of services provided. Section 2 (2) of PD 1460 enumerates what
constitutes doing an insurance business or transacting an insurance
businesswhich are making or proposing to make, as insurer, any insurance contract;
making or proposing to make, as surety, any contract of suretyship as a vocation and
not as merely incidental to any other legitimate business or activity of the surety;
doing any kind of business, including a reinsurance business, specifically recognized
as constituting the doing of an insurance business within the meaning of this Code;
doing or proposing to do any business in substance equivalent to any of the foregoing
in a manner designed to evade the provisions of this Code.
Overall, petitioner appears to provide insurance-type benefits to its members (with
respect to its curative medical services), but these are incidental to the principal
activity of providing them medical care. The insurance-like aspect of petitioners
business is miniscule compared to its noninsurance activities. Therefore, since it
substantially provides health care services rather than insurance services, it cannot
be considered as being in the insurance business.

ISSUES:

(1) Whether or not Philippine Health Care Providers, Inc. engaged in insurance
business.

(2) Whether or not the agreements between petitioner and its members possess all
elements necessary in the insurance contract.

HELD:

NO. Health Maintenance Organizations are not engaged in the insurance business.
The SC said in June 12, 2008 decision that it is irrelevant that petitioner is an HMO
and not an insurer because its agreements are treated as insurance contracts and the
DST is not a tax on the business but an excise on the privilege, opportunity or facility
used in the transaction of the business. Petitioner, however, submits that it is of critical
importance to characterize the business it is engaged in, that is, to determine whether
it is an HMO or an insurance company, as this distinction is indispensable in turn to
the issue of whether or not it is liable for DST on its health care agreements. QUEZON CITY and THE CITY G.R. No. 166408
Petitioner is admittedly an HMO. Under RA 7878 an HMO is an entity that provides,
TREASURER OF QUEZON CITY,Petitioners,
- versus -
ABS-CBN BROADCASTING Promulgated:
CORPORATION,
Respondent. October 6, 2008
x--------------------------------------------------x
DECISION
REYES, R.T., J.:
CLAIMS for tax exemption must be based on language in law too plain to be
mistaken. It cannot be made out of inference or implication.
The principle is relevant in this petition for review on certiorari of the Decision[1] of the
Court of Appeals (CA) and that[2] of the Regional Trial Court (RTC) ordering the refund
and declaring invalid the imposition and collection of local franchise tax by the City
Treasurer of Quezon City on ABS-CBN Broadcasting Corporation (ABS-CBN).
The Facts
Petitioner City Government of Quezon City is a local government unit duly organized
and existing by virtue of Republic Act (R.A.) No. 537, otherwise known as the Revised
Charter of Quezon City. Petitioner City Treasurer of Quezon City is primarily
responsible for the imposition and collection of taxes within the territorial jurisdiction
of Quezon City.
Under Section 31, Article 13 of the Quezon City Revenue Code of 1993,[3] a franchise
tax was imposed on businesses operating within its jurisdiction. The provision states:
Section 31. Imposition of Tax. Any provision of special laws or grant of tax exemption
to the contrary notwithstanding, any person, corporation, partnership or association
enjoying a franchise whether issued by the national government or local government
and, doing business in Quezon City, shall pay a franchise tax at the rate of ten
percent (10%) of one percent (1%) for 1993-1994, twenty percent (20%) of one
percent (1%) for 1995, and thirty percent (30%) of one percent (1%) for 1996 and the
succeeding years thereafter, of gross receipts and sales derived from the operation of
the business in Quezon City during the preceding calendar year.
On May 3, 1995, ABS-CBN was granted the franchise to install and operate radio and
television broadcasting stations in the Philippines under R.A. No. 7966.[4] Section 8 of
R.A. No. 7966 provides the tax liabilities of ABS-CBN which reads:
Section 8. Tax Provisions. The grantee, its successors or assigns, shall be liable to
pay the same taxes on their real estate, buildings and personal property, exclusive of
this franchise, as other persons or corporations are now hereafter may be required by
law to pay. In addition thereto, the grantee, its successors or assigns, shall pay a
franchise tax equivalent to three percent (3%) of all gross receipts of the
radio/television business transacted under this franchise by the grantee, its
successors or assigns, and the said percentage tax shall be in lieu of all taxes
on this franchise or earnings thereof; Provided that the grantee, its successors or
assigns shall continue to be liable for income taxes under Title II of the National
Internal Revenue Code pursuant to Section 2 of Executive No. 72 unless the latter
enactment is amended or repealed, in which case the amendment or repeal shall be
applicable thereto. (Emphasis added)
ABS-CBN had been paying local franchise tax imposed by Quezon City. However, in
view of the above provision in R.A. No. 9766 that it shall pay a franchise tax x x x in
lieu of all taxes, the corporation developed the opinion that it is not liable to pay the
local franchise tax imposed by Quezon City. Consequently, ABS-CBN paid under
protest the local franchise tax imposed by Quezon City on the dates, in the amounts
and under the official receipts as follows:
O.R. No. Date Amount Paid
2464274 07-18-95 P 1,489,977.28
2484651 10-20-95 1,489,977.28
2536134 1-22-96 2,880,975.65
8354906 1-23-97 8,621,470.83
0048756 1-23-97 2,731,135.81
0067352 4-03-97 2,731,135.81
Total P19,944,672.66[5]
On January 29, 1997, ABS-CBN filed a written claim for refund for local franchise tax
paid to Quezon City for 1996 and for the first quarter of 1997 in the total amount of
Fourteen Million Two Hundred Thirty-Three Thousand Five Hundred Eighty-Two and
29/100 centavos (P14,233,582.29) broken down as follows:
O.R. No Date Amount Paid
2536134 1-22-96 P 2,880,975.65
8354906 1-23-97 8,621,470.83
0048756 1-23-97 2,731,135.81
Total P14,233,582.29[6]
In a letter dated March 3, 1997 to the Quezon City Treasurer, ABS-CBN reiterated its
claim for refund of local franchise taxes paid.
On June 25, 1997, for failure to obtain any response from the Quezon City Treasurer,
ABS-CBN filed a complaint before the RTC in Quezon City seeking the declaration of
nullity of the imposition of local franchise tax by the City Government of Quezon City
for being unconstitutional. It likewise prayed for the refund of local franchise tax in the
amount of Nineteen Million Nine Hundred Forty-Four Thousand Six Hundred Seventy-
Two and 66/100 centavos (P19,944,672.66) broken down as follows:
O.R. No. Date Amount Paid
2464274 7-18-95 P 1,489,977.28
2484651 10-20-95 1,489,977.28
2536134 1-22-96 2,880,975.65
8354906 1-23-97 8,621,470.83
0048756 1-23-97 2,731,135.81
0067352 4-03-97 2,731,135.81
Total P19,944,672.66[7]
Quezon City argued that the in lieu of all taxes provision in R.A. No. 9766 could not
have been intended to prevail over a constitutional mandate which ensures the
viability and self-sufficiency of local government units. Further, that taxes collectible
by and payable to the local government were distinct from taxes collectible by and
payable to the national government, considering that the Constitution specifically
declared that the taxes imposed by local government units shall accrue exclusively to
the local governments. Lastly, the City contended that the exemption claimed by ABS-
CBN under R.A. No. 7966 was withdrawn by Congress when the Local Government
Code (LGC) was passed.[8] Section 193 of the LGC provides:
Section 193. Withdrawal of Tax Exemption Privileges. Unless otherwise provided in
this Code, tax exemptions or incentives granted to, or presently enjoyed by all
persons, whether natural or juridical, including government-owned or
-controlled corporations, except local water districts, cooperatives duly registered
under R.A. 6938, non-stock and non-profit hospitals and educational institutions, are
hereby withdrawn upon the effectivity of this Code. (Emphasis added)
On August 13, 1997, ABS-CBN filed a supplemental complaint adding to its claim for
refund the local franchise tax paid for the third quarter of 1997 in the amount of Two
Million Seven Hundred Thirty-One Thousand One Hundred Thirty-Five and 81/100
centavos (P2,731,135.81) and of other amounts of local franchise tax as may have
been and will be paid by ABS-CBN until the resolution of the case.
Quezon City insisted that the claim for refund must fail because of the absence of a
prior written claim for it.
RTC and CA Dispositions
On January 20, 1999, the RTC rendered judgment declaring as invalid the imposition
on and collection from ABS-CBN of local franchise tax paid pursuant to Quezon City
Ordinance No. SP-91, S-93, after the enactment of R.A. No. 7966, and ordered the
refund of all payments made. The dispositive portion of the RTC decision reads:
WHEREFORE, judgment is hereby rendered declaring the imposition on and
collection from plaintiff ABS-CBN BROADCASTING CORPORATION of local
franchise taxes pursuant to Quezon City Ordinance No. SP-91, S-93 after the
enactment of Republic Act No. 7966 to be invalid, and, accordingly, the Court hereby
orders the defendants to refund all its payments made after the effectivity of its
legislative franchise on May 3, 1995.
SO ORDERED.[9]
In its decision, the RTC ruled that the in lieu of all taxes provision contained in Section
8 of R.A. No. 7966 absolutely excused ABS-CBN from the payment of local franchise
tax imposed under Quezon City Ordinance No. SP-91, S-93. The intent of the
legislature to excuse ABS-CBN from payment of local franchise tax could be
discerned from the usage of the in lieu of all taxes provision and from the absence of
any qualification except income taxes. Had Congress intended to exclude taxes
imposed from the exemption, it would have expressly mentioned so in a fashion
similar to the proviso on income taxes.
The RTC also based its ruling on the 1990 case of Province of Misamis Oriental v.
Cagayan Electric Power and Light Company, Inc. (CEPALCO).[10] In said case, the
exemption of respondent electric company CEPALCO from payment of provincial
franchise tax was upheld on the ground that the franchise of CEPALCO was a special
law, while the Local Tax Code, on which the provincial ordinance imposing the local
franchise tax was based, was a general law. Further, it was held that whenever there
is a conflict between two laws, one special and particular and the other general, the
special law must be taken as intended to constitute an exception to the general act.
The RTC noted that the legislative franchise of ABS-CBN was granted years after the
effectivity of the LGC. Thus, it was unavoidable to conclude that Section 8 of R.A. No.
7966 was an exception since the legislature ought to be presumed to have enacted it
with the knowledge and awareness of the existence and prior enactment of Section
137[11] of the LGC.
In addition, the RTC, again citing the case of Province of Misamis Oriental v. Cagayan
Electric Power and Light Company, Inc. (CEPALCO),[12] ruled that the imposition of the
local franchise tax was an impairment of ABS-CBNs contract with the
government. The imposition of another franchise on the corporation by the local
authority would constitute an impairment of the formers charter, which is in the nature
of a private contract between it and the government.
As to the amounts to be refunded, the RTC rejected Quezon Citys position that a
written claim for refund pursuant to Section 196 of the LGC was a condition sine qua
non before filing the case in court. The RTC ruled that although Fourteen Million Two
Hundred Thirty-Three Thousand Five Hundred Eighty-Two and 29/100 centavos
(P14,233,582.29) was the only amount stated in the letter to the Quezon City
Treasurer claiming refund, ABS-CBN should nonetheless be also refunded of all
payments made after the effectivity of R.A. No. 7966. The inaction of the City
Treasurer on the claim for refund of ABS-CBN legally rendered any further claims for
refund on the part of plaintiff absurd and futile in relation to the succeeding payments.
The City of Quezon and its Treasurer filed a motion for reconsideration which was
subsequently denied by the RTC. Thus, appeal was made to the CA. On September
1, 2004, the CA dismissed the petition of Quezon City and its Treasurer. According
to the appellate court, the issues raised were purely legal questions cognizable only
by the Supreme Court. The CA ratiocinated:
For another, the issues which appellants submit for this Courts consideration are
more of legal query necessitating a legal opinion rather than a call for adjudication on
the matter in dispute.
xxxx
The first issue has earlier been categorized in Province of Misamis Oriental v.
Cagayan Electric and Power Co., Inc. to be a legal one. There is no more argument
to this.
The next issue although it may need the reexamination of the pertinent provisions of
the local franchise and the legislative franchise given to appellee, also needs no
evaluation of facts. It suffices that there may be a conflict which may need to be
reconciled, without regard to the factual backdrop of the case.
The last issue deals with a legal question, because whether or not there is a prior
written claim for refund is no longer in dispute. Rather, the question revolves on
whether the said requirement may be dispensed with, which obviously is not a factual
issue.[13]
On September 23, 2004, petitioner moved for reconsideration. The motion was,
however, denied by the CA in its Resolution dated December 16, 2004. Hence, the
present recourse.
Issues
Petitioner submits the following issues for resolution:
I.
Whether or not the phrase in lieu of all taxes indicated in the franchise of the
respondent appellee (Section 8 of RA 7966) serves to exempt it from the payment of
the local franchise tax imposed by the petitioners-appellants.
II.
Whether or not the petitioners-appellants raised factual and legal issues before the
Honorable Court of Appeals.[14]
Our Ruling
The second issue, being procedural in nature, shall be dealt with immediately. But
there are other resultant issues linked to the first.
I. The dismissal by the CA of petitioners appeal is in order because it raised
purely legal issues, namely:
1) Whether appellee, whose franchise expressly provides that its payment of
franchise tax shall be in lieu of all taxes in this franchise or earnings thereof, is
absolutely excused from paying the franchise tax imposed by appellants;
2) Whether appellants imposition of local franchise tax is a violation of appellees
legislative franchise; and
3) Whether one can do away with the requirement on prior written claim for refund.[15]
Obviously, these are purely legal questions, cognizable by this Court, to the exclusion
of all other courts. There is a question of law when the doubt or difference arises as to
what the law is pertaining to a certain state of facts.[16]
Section 2, Rule 50 of the Rules of Court provides that an appeal taken to the CA
under Rule 41 raising only questions of law is erroneous and shall be dismissed,
issues of pure law not being within its jurisdiction.[17] Consequently, the dismissal by
the CA of petitioners appeal was in order.
In the recent case of Sevilleno v. Carilo,[18] this Court ruled that the dismissal of the
appeal of petitioner was valid, considering the issues raised there were pure
questions of law, viz.:
Petitioners interposed an appeal to the Court of Appeals but it was dismissed for
being the wrong mode of appeal. The appellate court held that since the issue being
raised is whether the RTChas jurisdiction over the subject matter of the case, which is
a question of law, the appeal should have been elevated to the Supreme Court under
Rule 45 of the 1997 Rules of Civil Procedure, as amended. Section 2, Rule 41 of the
same Rules which governs appeals from judgments and final orders of the RTC to the
Court of Appeals, provides:
SEC. 2. Modes of appeal.
(a) Ordinary appeal. The appeal to the Court of Appeals in cases decided by the
Regional Trial Court in the exercise of its original jurisdiction shall be taken by
filing a notice of appeal with the court which rendered the judgment or final order
appealed from and serving a copy thereof upon the adverse party. No record on
appeal shall be required except in special proceedings and other cases of multiple or
separate appeals where the law or these Rules so require. In such cases, the record
on appeal shall be filed and served in like manner.
(b) Petition for review. The appeal to the Court of Appeals in cases decided by the
Regional Trial Court in the exercise of its appellate jurisdiction shall be by petition for
review in accordance with Rule 42.
(c) Appeal by certiorari. In all cases where only questions of law are raised or
involved, the appeal shall be to the Supreme Court by petition for review
on certiorari in accordance with Rule 45.
In Macawili Gold Mining and Development Co., Inc. v. Court of Appeals, we
summarized the rule on appeals as follows:
(1) In all cases decided by the RTC in the exercise of its original jurisdiction, appeal
may be made to the Court of Appeals by mere notice of appeal where the appellant
raises questions of fact or mixed questions of fact and law;
(2) In all cases decided by the RTC in the exercise of its original jurisdiction where the
appellant raises only questions of law, the appeal must be taken to the Supreme
Court on a petition for review on certiorari under Rule 45;
(3) All appeals from judgments rendered by the RTC in the exercise of its appellate
jurisdiction, regardless of whether the appellant raises questions of fact, questions of
law, or mixed questions of fact and law, shall be brought to the Court of Appeals by
filing a petition for review under Rule 42.
It is not disputed that the issue brought by petitioners to the Court of Appeals involves
the jurisdiction of the RTC over the subject matter of the case. We have a long
standing rule that a courts jurisdiction over the subject matter of an action is conferred
only by the Constitution or by statute. Otherwise put, jurisdiction of a court over the
subject matter of the action is a matter of law. Consequently, issues which deal with
the jurisdiction of a court over the subject matter of a case are pure questions of
law. As petitioners appeal solely involves a question of law, they should have directly
taken their appeal to this Court by filing a petition for review on certiorari under Rule
45, not an ordinary appeal with the Court of Appeals under Rule 41. Clearly, the
appellate court did not err in holding that petitioners pursued the wrong mode of
appeal.
Indeed, the Court of Appeals did not err in dismissing petitioners appeal. Section 2,
Rule 50 of the same Rules provides that an appeal from the RTC to the Court of
Appeals raising only questions of law shall be dismissed; and that an appeal
erroneously taken to the Court of Appeals shall be dismissed outright, x x x.
[19]
(Emphasis added)
However, to serve the demands of substantial justice and equity, the Court opts to
relax procedural rules and rule upon on the merits of the case. In Ong Lim Sing Jr. v.
FEB Leasing and Finance Corporation,[20] this Court stated:
Courts have the prerogative to relax procedural rules of even the most mandatory
character, mindful of the duty to reconcile both the need to speedily put an end to
litigation and the parties right to due process. In numerous cases, this
Court has allowed liberal construction of the rules when to do so would serve the
demands of substantial justice and equity. In Aguam v. Court of Appeals, the Court
explained:
The court has the discretion to dismiss or not to dismiss an appellants appeal. It is a
power conferred on the court, not a duty. The discretion must be a sound one, to be
exercised in accordance with the tenets of justice and fair play, having in mind the
circumstances obtaining in each case. Technicalities, however, must be avoided. The
law abhors technicalities that impede the cause of justice. The courts primary duty is
to render or dispense justice. A litigation is not a game of technicalities. Lawsuits
unlike duels are not to be won by a rapiers thrust. Technicality, when it deserts its
proper office as an aid to justice and becomes its great hindrance and chief enemy,
deserves scant consideration from courts. Litigations must be decided on their merits
and not on technicality. Every party litigant must be afforded the amplest opportunity
for the proper and just determination of his cause, free from the unacceptable plea of
technicalities. Thus, dismissal of appeals purely on technical grounds is frowned upon
where the policy of the court is to encourage hearings of appeals on their merits and
the rules of procedure ought not to be applied in a very rigid, technical sense; rules of
procedure are used only to help secure, not override substantial justice. It is a far
better and more prudent course of action for the court to excuse a technical lapse and
afford the parties a review of the case on appeal to attain the ends of justice rather
than dispose of the case on technicality and cause a grave injustice to the parties,
giving a false impression of speedy disposal of cases while actually resulting in more
delay, if not a miscarriage of justice.[21]
II. The in lieu of all taxes provision in its franchise does not exempt ABS-
CBN from payment of local franchise tax.
A. The present controversy essentially boils down to a dispute between the inherent
taxing power of Congress and the delegated authority to tax of local governments
under the 1987 Constitution and effected under the LGC of 1991.
The power of the local government of Quezon City to impose franchise tax is based
on Section 151 in relation to Section 137 of the LGC, to wit:
Section 137. Franchise Tax. Notwithstanding any exemption granted by any law or
other special law, the province may impose a tax on businesses enjoying a franchise,
at the rate not exceeding fifty percent (50%) of one percent (1%) of the gross annual
receipts for the preceding calendar year based on the incoming receipt, or realized
within its territorial jurisdiction. x x x
xxxx
Section 151. Scope of Taxing Powers. Except as otherwise provided in this Code, the
city may levy the taxes, fees and charges which the province or municipality may
impose: Provided, however, That the taxes, fees and charges levied and collected by
highly urbanized and component cities shall accrue to them and distributed in
accordance with the provisions of this Code.
The rates of taxes that the city may levy may exceed the maximum rates allowed for
the province or municipality by not more than fifty percent (50%) except the rates of
professional and amusement taxes. (Emphasis supplied)
Such taxing power by the local government, however, is limited in the sense that
Congress can enact legislation granting exemptions. This principle was upheld in City
Government of Quezon City, et al. v. Bayan Telecommunications, Inc.[22] Said this
Court:
This thus raises the question of whether or not the Citys Revenue Code pursuant to
which the city treasurer of Quezon City levied real property taxes against Bayantels
real properties located within the City effectively withdrew the tax exemption enjoyed
by Bayantel under its franchise, as amended.
Bayantel answers the poser in the negative arguing that once again it is only liable to
pay the same taxes, as any other persons or corporations on all its real or personal
properties, exclusive of its franchise.
Bayantels posture is well-taken. While the system of local government taxation has
changed with the onset of the 1987 Constitution, the power of local government units
to tax is still limited. As we explained in Mactan Cebu International Airport Authority:
The power to tax is primarily vested in the Congress; however, in our jurisdiction, it
may be exercised by local legislative bodies, no longer merely be virtue of a valid
delegation as before, but pursuant to direct authority conferred by Section 5, Article X
of the Constitution. Under the latter, the exercise of the power may be subject to such
guidelines and limitations as the Congress may provide which, however, must be
consistent with the basic policy of local autonomy. x x x
Clearly then, while a new slant on the subject of local taxation now prevails in the
sense that the former doctrine of local government units delegated power to tax had
been effectively modified with Article X, Section 5 of the 1987 Constitution now in
place, the basic doctrine on local taxation remains essentially the same. For as the
Court stressed in Mactan, the power to tax is [still] primarily vested in the Congress.
This new perspective is best articulated by Fr. Joaquin G. Bernas, S.J., himself a
Commissioner of the 1986 Constitutional Commission which crafted the 1987
Constitution, thus:
What is the effect of Section 5 on the fiscal position of municipal
corporations? Section 5 does not change the doctrine that municipal corporations do
not possess inherent powers of taxation. What it does is to confer municipal
corporations a general power to levy taxes and otherwise create sources of
revenue. They no longer have to wait for a statutory grant of these powers. The power
of the legislative authority relative to the fiscal powers of local governments has been
reduced to the authority to impose limitations on municipal powers. Moreover, these
limitations must be consistent with the basic policy of local autonomy. The important
legal effect of Section 5 is thus to reverse the principle that doubts are resolved
against municipal corporations. Henceforth, in interpreting statutory provisions on
municipal fiscal powers, doubts will be resolved in favor of municipal corporations. It is
understood, however, that taxes imposed by local government must be for a public
purpose, uniform within a locality, must not be confiscatory, and must be within the
jurisdiction of the local unit to pass.
In net effect, the controversy presently before the Court involves, at bottom, a clash
between the inherent taxing power of the legislature, which necessarily includes the
power to exempt, and the local governments delegated power to tax under the aegis
of the 1987 Constitution.
Now to go back to the Quezon City Revenue Code which imposed real estate taxes
on all real properties within the citys territory and removed exemptions theretofore
previously granted to, or presently enjoyed by all persons, whether natural or juridical
[x x x] there can really be no dispute that the power of the Quezon City Government
to tax is limited by Section 232 of the LGC which expressly provides that a province or
city or municipality within the Metropolitan Manila Area may levy an annual ad
valorem tax on real property such as land, building, machinery, and other
improvement not hereinafter specifically exempted. Under this law, the Legislature
highlighted its power to thereafter exempt certain realties from the taxing power of
local government units. An interpretation denying Congress such power to exempt
would reduce the phrase not hereinafter specifically exempted as a pure jargon,
without meaning whatsoever. Needless to state, such absurd situation is
unacceptable.
For sure, in Philippine Long Distance Telephone Company, Inc. (PLDT) vs. City of
Davao, this Court has upheld the power of Congress to grant exemptions over the
power of local government units to impose taxes. There, the Court wrote:
Indeed, the grant of taxing powers to local government units under the Constitution
and the LGC does not affect the power of Congress to grant exemptions to certain
persons, pursuant to a declared national policy. The legal effect of the constitutional
grant to local governments simply means that in interpreting statutory provisions on
municipal taxing powers, doubts must be resolved in favor of municipal corporations.
[23]
(Emphasis supplied)
In the case under review, the Philippine Congress enacted R.A. No. 7966 on March
30, 1995, subsequent to the effectivity of the LGC on January 1, 1992. Under it, ABS-
CBNwas granted the franchise to install and operate radio and television
broadcasting stations in the Philippines. Likewise, Section 8 imposed on ABS-
CBN the duty of paying 3% franchise tax. It bears stressing, however, that payment of
the percentage franchise tax shall be in lieu of all taxes on the said franchise.[24]
Congress has the inherent power to tax, which includes the power to grant tax
exemptions. On the other hand, the power of Quezon City to tax is prescribed by
Section 151 in relation to Section 137 of the LGC which expressly provides that
notwithstanding any exemption granted by any law or other special law, the City may
impose a franchise tax. It must be noted that Section 137 of the LGC does not
prohibit grant of future exemptions. As earlier discussed, this Court in City
Government of Quezon City v. Bayan Telecommunications, Inc.[25] sustained the
power of Congress to grant tax exemptions over and above the power of the local
governments delegated power to tax.
B. The more pertinent issue now to consider is whether or not by passing R.A. No.
7966, which contains the in lieu of all taxes provision, Congress intended to
exempt ABS-CBN from local franchise tax.
Petitioners argue that the in lieu of all taxes provision in ABS-CBNs franchise does
not expressly exempt it from payment of local franchise tax. They contend that a tax
exemption cannot be created by mere implication and that one who claims tax
exemptions must be able to justify his claim by clearest grant of organic law or
statute.
Taxes are what civilized people pay for civilized society. They are the lifeblood of the
nation. Thus, statutes granting tax exemptions are construed stricissimi juris against
the taxpayer and liberally in favor of the taxing authority. A claim of tax exemption
must be clearly shown and based on language in law too plain to be
mistaken. Otherwise stated, taxation is the rule, exemption is the exception.[26] The
burden of proof rests upon the party claiming the exemption to prove that it is in fact
covered by the exemption so claimed.[27]
The basis for the rule on strict construction to statutory provisions granting tax
exemptions or deductions is to minimize differential treatment and foster impartiality,
fairness and equality of treatment among taxpayers.[28] He who claims an exemption
from his share of common burden must justify his claim that the legislature intended
to exempt him by unmistakable terms. For exemptions from taxation are not favored
in law, nor are they presumed. They must be expressed in the clearest and most
unambiguous language and not left to mere implications. It has been held that
exemptions are never presumed, the burden is on the claimant to establish clearly his
right to exemption and cannot be made out of inference or implications but must be
laid beyond reasonable doubt. In other words, since taxation is the rule and
exemption the exception, the intention to make an exemption ought to be expressed
in clear and unambiguous terms.[29]
Section 8 of R.A. No. 7966 imposes on ABS-CBN a franchise tax equivalent to three
(3) percent of all gross receipts of the radio/television business transacted under the
franchise and the franchise tax shall be in lieu of all taxes on the franchise or earnings
thereof.
The in lieu of all taxes provision in the franchise of ABS-CBN does not expressly
provide what kind of taxes ABS-CBN is exempted from. It is not clear whether the
exemption would include both local, whether municipal, city or provincial, and national
tax. What is clear is that ABS-CBN shall be liable to pay three (3) percent franchise
tax and income taxes under Title II of the NIRC. But whether the in lieu of all taxes
provision would include exemption from local tax is not unequivocal.
As adverted to earlier, the right to exemption from local franchise tax must be clearly
established and cannot be made out of inference or implications but must be laid
beyond reasonable doubt. Verily, the uncertainty in the in lieu of all taxes provision
should be construed against ABS-CBN. ABS-CBN has the burden to prove that it is in
fact covered by the exemption so claimed. ABS-CBN miserably failed in this regard.
ABS-CBN cites the cases Carcar Electric & Ice Plant v. Collector of Internal Revenue,
[30]
Manila Railroad v. Rafferty,[31] Philippine Railway Co. v. Collector of Internal
Revenue,[32] and Visayan Electric Co. v. David[33] to support its claim that that the in
lieu of all taxes clause includes exemption from all taxes.
However, a review of the foregoing case law reveals that the grantees respective
franchises expressly exempt them from municipal and provincial taxes. Said the Court
in Manila Railroad v. Rafferty:[34]
On the 7th day of July 1906, by an Act of the Philippine Legislature, a special charter
was granted to the Manila Railroad Company. Subsection 12 of Section 1 of said Act
(No. 1510) provides that:
In consideration of the premises and of the granting of this concession or franchise,
there shall be paid by the grantee to the Philippine Government, annually, for the
period of thirty (30) years from the date hereof, an amount equal to one-half (1/2) of
one per cent of the gross earnings of the grantee in respect of the lines covered
hereby for the preceding year; after said period of thirty (30) years, and for the fifty
(50) years thereafter, the amount so to be paid annually shall be an amount equal to
one and one-half (1) per cent of such gross earnings for the preceding year; and after
such period of eighty (80) years, the percentage and amount so to be paid annually
by the grantee shall be fixed by the Philippine Government.
Such annual payments, when promptly and fully made by the grantee, shall be in lieu
of all taxes of every name and nature municipal, provincial or central upon its capital
stock, franchises, right of way, earnings, and all other property owned or operated by
the grantee under this concession or franchise.[35] (Underscoring supplied)
In the case under review, ABS-CBNs franchise did not embody an exemption similar
to those in Carcar, Manila Railroad, Philippine Railway, and Visayan Electric. Too, the
franchise failed to specify the taxing authority from whose jurisdiction the taxing power
is withheld, whether municipal, provincial, or national. In fine, since ABS-CBNfailed to
justify its claim for exemption from local franchise tax, by a grant expressed in terms
too plain to be mistaken its claim for exemption for local franchise tax must fail.
C. The in lieu of all taxes clause in the franchise of ABS-CBN has become functus
officio with the abolition of the franchise tax on broadcasting companies with yearly
gross receipts exceeding Ten Million Pesos.
In its decision dated January 20, 1999, the RTC held that pursuant to the in lieu of all
taxes provision contained in Section 8 of R.A. No. 7966, ABS-CBN is exempt from the
payment of the local franchise tax. The RTC further pronounced that ABS-CBN shall
instead be liable to pay a franchise tax of 3% of all gross receipts in lieu of all other
taxes.
On this score, the RTC ruling is flawed. In keeping with the laws that have been
passed since the grant of ABS-CBNs franchise, the corporation should now be
subject to VAT, instead of the 3% franchise tax.
At the time of the enactment of its franchise on May 3, 1995, ABS-CBN was subject to
3% franchise tax under Section 117(b) of the 1977 National Internal Revenue Code
(NIRC), as amended, viz.:
SECTION 117. Tax on franchises. Any provision of general or special laws to the
contrary notwithstanding, there shall be levied, assessed and collected in respect to
all franchise, upon the gross receipts from the business covered by the law granting
the franchise, a tax in accordance with the schedule prescribed hereunder:
(a) On electric utilities, city gas, and water supplies Two (2%) percent
(b) On telephone and/or telegraph systems, radio and/or broadcasting stations Three
(3%) percent
(c) On other franchises Five (5%) percent. (Emphasis supplied)
On January 1, 1996, R.A. No. 7716, otherwise known as the Expanded Value Added
Tax Law,[36] took effect and subjected to VAT those services rendered by radio and/or
broadcasting stations. Section 3 of R.A. No. 7716 provides:
Section 3. Section 102 of the National Internal Revenue Code, as amended is hereby
further amended to read as follows:
SEC. 102. Value-added tax on sale of services and use or lease of properties.
(a) Rate and base of tax. There shall be levied, assessed and collected, as value-
added tax equivalent to 10% of gross receipts derived from the sale or exchange of
services, including the use or lease of properties.
The phrase sale or exchange of services means the performance of all kinds of
services in the Philippines, for others for a fee, remuneration or consideration,
including those performed or rendered by construction and service contractors; x x
x services of franchise grantees of telephone and telegraph, radio and television
broadcasting and all other franchise grantees except those under Section 117 of this
Code; x x x (Emphasis supplied)
Notably, under the same law, telephone and/or telegraph systems, broadcasting
stations and other franchise grantees were omitted from the list of entities subject to
franchise tax. The impression was that these entities were subject to 10% VAT but not
to franchise tax. Only the franchise tax on electric, gas and water utilities
remained. Section 12 of R.A. No. 7716 provides:
Section 12. Section 117 of the National Internal Revenue Code, as amended, is
hereby further amended to read as follows:
SEC. 117. Tax on Franchises. Any provision of general or special law to the contrary
notwithstanding there shall be levied, assessed and collected in respect to all
franchises on electric, gas and water utilities a tax of two percent (2%) on the gross
receipts derived from the business covered by the law granting the franchise.
(Emphasis added)
Subsequently, R.A. No. 8241[37] took effect on January 1, 1997[38] containing more
amendments to the NIRC. Radio and/or television companies whose annual gross
receipts do not exceed P10,000,000.00 were granted the option to choose between
paying 3% national franchise tax or 10% VAT. Section 9 of R.A. No. 8241 provides:
SECTION 9. Section 12 of Republic Act No. 7716 is hereby amended to read as
follows:
Sec. 12. Section 117 of the National Internal Revenue Code, as amended, is hereby
further amended to read as follows:
Sec. 117. Tax on franchise. Any provision of general or special law to the contrary,
notwithstanding, there shall be levied, assessed and collected in respect to
allfranchises on radio and/or television broadcasting companies whose annual gross
receipts of the preceding year does not exceed Ten million
pesos (P10,000,000.00), subject to Section 107(d) of this Code, a tax of three
percent (3%) and on electric, gas and water utilities, a tax of two percent (2%) on the
gross receipts derived from the business covered by the law granting the franchise:
Provided, however, That radio and television broadcasting companies referred to in
this section, shall have an option to be registered as a value-added tax payer and pay
the tax due thereon: Provided, further, That once the option is exercised, it shall not
be revoked. (Emphasis supplied)
On the other hand, radio and/or television companies with yearly gross
receipts exceeding P10,000,000.00 were subject to 10% VAT, pursuant to Section
102 of the NIRC.
On January 1, 1998, R.A. No. 8424[39] was passed confirming the 10% VAT liability of
radio and/or television companies with yearly gross receipts
exceeding P10,000,000.00.
R.A. No. 9337 was subsequently enacted and became effective on July 1, 2005. The
said law further amended the NIRC by increasing the rate of VAT to 12%. The
effectivity of the imposition of the 12% VAT was later moved from January 1,
2006 to February 1, 2006.
In consonance with the above survey of pertinent laws on the matter, ABS-CBN is
subject to the payment of VAT. It does not have the option to choose between the
payment of franchise tax or VAT since it is a broadcasting company with yearly gross
receipts exceeding Ten Million Pesos (P10,000,000.00).
VAT is a percentage tax imposed on any person whether or not a franchise grantee,
who in the course of trade or business, sells, barters, exchanges, leases, goods or
properties, renders services. It is also levied on every importation of goods whether or
not in the course of trade or business. The tax base of the VAT is limited only to the
value added to such goods, properties, or services by the seller, transferor or
lessor. Further, the VAT is an indirect tax and can be passed on to the buyer.
The franchise tax, on the other hand, is a percentage tax imposed only on franchise
holders. It is imposed under Section 119 of the Tax Code and is a direct liability of the
franchise grantee.
The clause in lieu of all taxes does not pertain to VAT or any other tax. It cannot apply
when what is paid is a tax other than a franchise tax. Since the franchise tax on the
broadcasting companies with yearly gross receipts exceeding ten million pesos has
been abolished, the in lieu of all taxes clause has now become functus officio,
rendered inoperative.
In sum, ABS-CBNs claims for exemption must fail on twin grounds. First, the in lieu of
all taxes clause in its franchise failed to specify the taxes the company is sought to be
exempted from. Neither did it particularize the jurisdiction from which the taxing power
is withheld. Second, the clause has become functus officio because as the law now
stands, ABS-CBN is no longer subject to a franchise tax. It is now liable for VAT.
WHEREFORE, the petition is GRANTED and the appealed
Decision REVERSED AND SET ASIDE. The petition in the trial court for refund
of local franchise tax is DISMISSED.
SO ORDERED.
QUEZON CITY vs. ABS-CBN G.R. No. 166408, October 6, 2008)
Facts: Petitioner City Government of Quezon City is a local government unit duly
organized and existing by virtue of Republic Act (R.A.) No.537, otherwise known as
the Revised Charter of Quezon City. Petitioner City Treasurer of Quezon City is
primarily responsible for the imposition and collection of taxes within the territorial
jurisdiction of Quezon City. ABS-CBN was granted the franchise to install and operate
radio and television broadcasting stations in the Philippines under R.A. No.7966.
ABS-CBN had been paying local franchise tax imposed by Quezon City. However,
in view of the provision in R.A. No. 9766 that it shall pay a franchise tax x x x in lieu
of all taxes, the corporation developed the opinion that it is not liable to pay the local
franchise tax imposed by Quezon City. ABS-CBN filed a written claim for refund for
local franchise tax paid to Quezon City for 1996and for the first quarter of 1997. For
failure to obtain any response from the Quezon City Treasurer, ABS-CBN filed a
complaint before the RTC in Quezon City seeking the declaration of nullity of the
imposition of local franchise tax by the City Government of Quezon City for being
unconstitutional. The RTC rendered judgment declaring as invalid the imposition on
and collection from ABS-CBN of local franchise tax and ordered the refund of all
payments made. The City of Quezon and its Treasurer filed a motion for
reconsideration which was subsequently denied by the RTC. Thus, appeal was made
to the CA. The CA dismissed the petition of Quezon City and its Treasurer. According
to the appellate court, the issues raised were purely legal questions cognizable only
by the Supreme Court.
ISSUE: Whether or not the phrase "in lieu of all taxes" indicated in the franchise of the
respondent appellee (Section 8 of RA 7966) serves to exempt it from the payment of
the local franchise tax imposed by the petitioners-appellants.
HELD: NO
The "in lieu of all taxes" provision in its franchise does not exempt ABS-CBN
from payment of local franchise tax.
The present controversy essentially boils down to a dispute between the inherent
taxing power of Congress and the delegated authority to tax of local governments
under the 1987 Constitution and effected under the LGC of 1991. Petitioners argue
that the "in lieu of all taxes" provision in ABS-CBN's franchise does not expressly
exempt it from payment of local franchise tax. They contend that a tax exemption
cannot be created by mere implication and that one who claims tax exemptions must
be able to justify his claim by clearest grant of organic law or statute.
Taxes are what civilized people pay for civilized society. They are the lifeblood of the
nation. Thus, statutes granting tax exemptions are construed stricissimi juris against
the taxpayer and liberally in favor of the taxing authority. A claim of tax exemption
must be clearly shown and based on language in law too plain to be mistaken.
Otherwise stated, taxation is the rule, exemption is the exception. The burden of proof
rests upon the party claiming the exemption to prove that it is in fact covered by the
exemption so claimed. The basis for the rule on strict construction to statutory
provisions granting tax exemptions or deductions is to minimize differential treatment
and foster impartiality, fairness and equality of treatment among taxpayers. He who
claims an exemption from his share of common burden must justify his claim that the
legislature intended to exempt him by unmistakable terms. For exemptions from
taxation are not favored in law, nor are they presumed. They must be expressed in
the clearest and most unambiguous language and not left to mere implications. It has
been held that "exemptions are never presumed, the burden is on the claimant to
establish clearly his right to exemption and cannot be made out of inference or
implications but must be laid beyond reasonable doubt. In other words, since taxation
is the rule and exemption the exception, the intention to make an exemption ought to
be expressed in clear and unambiguous terms.
Section 8 of R.A. No. 7966 imposes on ABS-CBN a franchise tax equivalent to three
(3) percent of all gross receipts of the radio/television business transacted under the
franchise and the franchise tax shall be "in lieu of all taxes" on the franchise or
earnings thereof. The "in lieu of all taxes" provision in the franchise of ABS-CBN does
not expressly provide what kind of taxes ABS-CBN is exempted from. It is not clear
whether the exemption would include both local, whether municipal, city or provincial,
and national tax. What is clear is that ABS-CBN shall be liable to pay three (3) percent
franchise tax and income taxes under Title II of the NIRC. But whether the "in lieu of
all taxes provision" would include exemption from local tax is not unequivocal.
As adverted to earlier, the right to exemption from local franchise tax must be clearly
established and cannot be made out of inference or implications but must be laid
beyond reasonable doubt. Verily, the uncertainty in the "in lieu of all taxes" provision
should be construed against ABS-CBN. ABS-CBN has the burden to prove that it is in
fact covered by the exemption so claimed. ABS-CBN miserably failed in this regard.
ABS-CBN cites several cases to support its claim that that the "in lieu of all taxes"
clause includes exemption from all taxes. However, a review of the case laws reveals
that the grantees' respective franchises expressly exempt them from municipal and
provincial taxes and ABS-CBN's franchise did not embody an exemption similar to
those cases. Too, the franchise failed to specify the taxing authority from whose
jurisdiction the taxing power is withheld, whether municipal, provincial, or national. In
fine, since ABS-CBN failed to justify its claim for exemption from local franchise tax,
by a grant expressed in terms "too plain to be mistaken" its claim for exemption for
local franchise tax must fail.
G.R. No. L-69259 January 26, 1988
DELPHER TRADES CORPORATION, and DELPHIN PACHECO, petitioners,
vs.
INTERMEDIATE APPELLATE COURT and HYDRO PIPES PHILIPPINES,
INC., respondents.
GUTIERREZ, JR., J.:
The petitioners question the decision of the Intermediate Appellate Court which
sustained the private respondent's contention that the deed of exchange whereby
Delfin Pacheco and Pelagia Pacheco conveyed a parcel of land to Delpher Trades
Corporation in exchange for 2,500 shares of stock was actually a deed of sale which
violated a right of first refusal under a lease contract.
Briefly, the facts of the case are summarized as follows:
In 1974, Delfin Pacheco and his sister, Pelagia Pacheco, were the owners of 27,169
square meters of real estate Identified as Lot. No. 1095, Malinta Estate, in the
Municipality of Polo (now Valenzuela), Province of Bulacan (now Metro Manila) which
is covered by Transfer Certificate of Title No. T-4240 of the Bulacan land registry.
On April 3, 1974, the said co-owners leased to Construction Components
International Inc. the same property and providing that during the existence or after
the term of this lease the lessor should he decide to sell the property leased shall first
offer the same to the lessee and the letter has the priority to buy under similar
conditions (Exhibits A to A-5)
On August 3, 1974, lessee Construction Components International, Inc. assigned its
rights and obligations under the contract of lease in favor of Hydro Pipes Philippines,
Inc. with the signed conformity and consent of lessors Delfin Pacheco and Pelagia
Pacheco (Exhs. B to B-6 inclusive)
The contract of lease, as well as the assignment of lease were annotated at he back
of the title, as per stipulation of the parties (Exhs. A to D-3 inclusive)
On January 3, 1976, a deed of exchange was executed between lessors Delfin and
Pelagia Pacheco and defendant Delpher Trades Corporation whereby the former
conveyed to the latter the leased property (TCT No.T-4240) together with another
parcel of land also located in Malinta Estate, Valenzuela, Metro Manila (TCT No.
4273) for 2,500 shares of stock of defendant corporation with a total value of
P1,500,000.00 (Exhs. C to C-5, inclusive) (pp. 44-45, Rollo)
On the ground that it was not given the first option to buy the leased property
pursuant to the proviso in the lease agreement, respondent Hydro Pipes Philippines,
Inc., filed an amended complaint for reconveyance of Lot. No. 1095 in its favor under
conditions similar to those whereby Delpher Trades Corporation acquired the property
from Pelagia Pacheco and Delphin Pacheco.
After trial, the Court of First Instance of Bulacan ruled in favor of the plaintiff. The
dispositive portion of the decision reads:
ACCORDINGLY, the judgment is hereby rendered declaring the valid existence of the
plaintiffs preferential right to acquire the subject property (right of first refusal) and
ordering the defendants and all persons deriving rights therefrom to convey the said
property to plaintiff who may offer to acquire the same at the rate of P14.00 per
square meter, more or less, for Lot 1095 whose area is 27,169 square meters only.
Without pronouncement as to attorney's fees and costs. (Appendix I; Rec., pp. 246-
247). (Appellant's Brief, pp. 1-2; p. 134, Rollo)
The lower court's decision was affirmed on appeal by the Intermediate Appellate
Court.
The defendants-appellants, now the petitioners, filed a petition for certiorari to review
the appellate court's decision.
We initially denied the petition but upon motion for reconsideration, we set aside the
resolution denying the petition and gave it due course.
The petitioners allege that:
The denial of the petition will work great injustice to the petitioners, in that:
1. Respondent Hydro Pipes Philippines, Inc, ("private respondent") will acquire from
petitioners a parcel of industrial land consisting of 27,169 square meters or 2.7
hectares (located right after the Valenzuela, Bulacan exit of the toll expressway) for
only P14/sq. meter, or a total of P380,366, although the prevailing value thereof is
approximately P300/sq. meter or P8.1 Million;
2. Private respondent is allowed to exercise its right of first refusal even if there is no
"sale" or transfer of actual ownership interests by petitioners to third parties; and
3. Assuming arguendo that there has been a transfer of actual ownership interests,
private respondent will acquire the land not under "similar conditions" by which it was
transferred to petitioner Delpher Trades Corporation, as provided in the same
contractual provision invoked by private respondent. (pp. 251-252, Rollo)
The resolution of the case hinges on whether or not the "Deed of Exchange" of the
properties executed by the Pachecos on the one hand and the Delpher Trades
Corporation on the other was meant to be a contract of sale which, in effect,
prejudiced the private respondent's right of first refusal over the leased property
included in the "deed of exchange."
Eduardo Neria, a certified public accountant and son-in-law of the late Pelagia
Pacheco testified that Delpher Trades Corporation is a family corporation; that the
corporation was organized by the children of the two spouses (spouses Pelagia
Pacheco and Benjamin Hernandez and spouses Delfin Pacheco and Pilar Angeles)
who owned in common the parcel of land leased to Hydro Pipes Philippines in order
to perpetuate their control over the property through the corporation and to avoid
taxes; that in order to accomplish this end, two pieces of real estate, including Lot No.
1095 which had been leased to Hydro Pipes Philippines, were transferred to the
corporation; that the leased property was transferred to the corporation by virtue of a
deed of exchange of property; that in exchange for these properties, Pelagia and
Delfin acquired 2,500 unissued no par value shares of stock which are equivalent to a
55% majority in the corporation because the other owners only owned 2,000 shares;
and that at the time of incorporation, he knew all about the contract of lease of Lot.
No. 1095 to Hydro Pipes Philippines. In the petitioners' motion for reconsideration,
they refer to this scheme as "estate planning." (p. 252, Rollo)
Under this factual backdrop, the petitioners contend that there was actually no
transfer of ownership of the subject parcel of land since the Pachecos remained in
control of the property. Thus, the petitioners allege: "Considering that the beneficial
ownership and control of petitioner corporation remained in the hands of the original
co-owners, there was no transfer of actual ownership interests over the land when the
same was transferred to petitioner corporation in exchange for the latter's shares of
stock. The transfer of ownership, if anything, was merely in form but not in substance.
In reality, petitioner corporation is a mere alter ego or conduit of the Pacheco co-
owners; hence the corporation and the co-owners should be deemed to be the same,
there being in substance and in effect an Identity of interest." (p. 254, Rollo)
The petitioners maintain that the Pachecos did not sell the property. They argue that
there was no sale and that they exchanged the land for shares of stocks in their own
corporation. "Hence, such transfer is not within the letter, or even spirit of the contract.
There is a sale when ownership is transferred for a price certain in money or its
equivalent (Art. 1468, Civil Code) while there is a barter or exchange when one thing
is given in consideration of another thing (Art. 1638, Civil Code)." (pp. 254-255, Rollo)
On the other hand, the private respondent argues that Delpher Trades Corporation is
a corporate entity separate and distinct from the Pachecos. Thus, it contends that it
cannot be said that Delpher Trades Corporation is the Pacheco's same alter ego or
conduit; that petitioner Delfin Pacheco, having treated Delpher Trades Corporation as
such a separate and distinct corporate entity, is not a party who may allege that this
separate corporate existence should be disregarded. It maintains that there was
actual transfer of ownership interests over the leased property when the same was
transferred to Delpher Trades Corporation in exchange for the latter's shares of stock.
We rule for the petitioners.
After incorporation, one becomes a stockholder of a corporation by subscription or by
purchasing stock directly from the corporation or from individual owners thereof
(Salmon, Dexter & Co. v. Unson, 47 Phil, 649, citing Bole v. Fulton [1912], 233 Pa.,
609). In the case at bar, in exchange for their properties, the Pachecos acquired
2,500 original unissued no par value shares of stocks of the Delpher Trades
Corporation. Consequently, the Pachecos became stockholders of the corporation by
subscription "The essence of the stock subscription is an agreement to take and pay
for original unissued shares of a corporation, formed or to be formed." (Rohrlich 243,
cited in Agbayani, Commentaries and Jurisprudence on the Commercial Laws of the
Philippines, Vol. III, 1980 Edition, p. 430) It is significant that the Pachecos took no
par value shares in exchange for their properties.
A no-par value share does not purport to represent any stated proportionate interest
in the capital stock measured by value, but only an aliquot part of the whole number
of such shares of the issuing corporation. The holder of no-par shares may see from
the certificate itself that he is only an aliquot sharer in the assets of the corporation.
But this character of proportionate interest is not hidden beneath a false appearance
of a given sum in money, as in the case of par value shares. The capital stock of a
corporation issuing only no-par value shares is not set forth by a stated amount of
money, but instead is expressed to be divided into a stated number of shares, such
as, 1,000 shares. This indicates that a shareholder of 100 such shares is an aliquot
sharer in the assets of the corporation, no matter what value they may have, to the
extent of 100/1,000 or 1/10. Thus, by removing the par value of shares, the attention
of persons interested in the financial condition of a corporation is focused upon the
value of assets and the amount of its debts. (Agbayani, Commentaries and
Jurisprudence on the Commercial Laws of the Philippines, Vol. III, 1980 Edition, p.
107).
Moreover, there was no attempt to state the true or current market value of the real
estate. Land valued at P300.00 a square meter was turned over to the family's
corporation for only P14.00 a square meter.
It is to be stressed that by their ownership of the 2,500 no par shares of stock, the
Pachecos have control of the corporation. Their equity capital is 55% as against 45%
of the other stockholders, who also belong to the same family group.
In effect, the Delpher Trades Corporation is a business conduit of the Pachecos. What
they really did was to invest their properties and change the nature of their ownership
from unincorporated to incorporated form by organizing Delpher Trades Corporation
to take control of their properties and at the same time save on inheritance taxes.
As explained by Eduardo Neria:
xxx xxx xxx
ATTY. LINSANGAN:
Q Mr. Neria, from the point of view of taxation, is there any benefit to the spouses
Hernandez and Pacheco in connection with their execution of a deed of exchange on
the properties for no par value shares of the defendant corporation?
A Yes, sir.
COURT:
Q What do you mean by "point of view"?
A To take advantage for both spouses and corporation in entering in the deed of
exchange.
ATTY. LINSANGAN:
Q (What do you mean by "point of view"?) What are these benefits to the spouses of
this deed of exchange?
A Continuous control of the property, tax exemption benefits, and other inherent
benefits in a corporation.
Q What are these advantages to the said spouses from the point of view of taxation in
entering in the deed of exchange?
A Having fulfilled the conditions in the income tax law, providing for tax free exchange
of property, they were able to execute the deed of exchange free from income tax and
acquire a corporation.
Q What provision in the income tax law are you referring to?
A I refer to Section 35 of the National Internal Revenue Code under par. C-sub-par.
(2) Exceptions regarding the provision which I quote: "No gain or loss shall also be
recognized if a person exchanges his property for stock in a corporation of which as a
result of such exchange said person alone or together with others not exceeding four
persons gains control of said corporation."
Q Did you explain to the spouses this benefit at the time you executed the deed of
exchange?
A Yes, sir
Q You also, testified during the last hearing that the decision to have no par value
share in the defendant corporation was for the purpose of flexibility. Can you explain
flexibility in connection with the ownership of the property in question?
A There is flexibility in using no par value shares as the value is determined by the
board of directors in increasing capitalization. The board can fix the value of the
shares equivalent to the capital requirements of the corporation.
Q Now also from the point of taxation, is there any flexibility in the holding by the
corporation of the property in question?
A Yes, since a corporation does not die it can continue to hold on to the property
indefinitely for a period of at least 50 years. On the other hand, if the property is held
by the spouse the property will be tied up in succession proceedings and the
consequential payments of estate and inheritance taxes when an owner dies.
Q Now what advantage is this continuity in relation to ownership by a particular
person of certain properties in respect to taxation?
A The property is not subjected to taxes on succession as the corporation does not
die.
Q So the benefit you are talking about are inheritance taxes?
A Yes, sir. (pp. 3-5, tsn., December 15, 1981)
The records do not point to anything wrong or objectionable about this "estate
planning" scheme resorted to by the Pachecos. "The legal right of a taxpayer to
decrease the amount of what otherwise could be his taxes or altogether avoid them,
by means which the law permits, cannot be doubted." (Liddell & Co., Inc. v. The
collector of Internal Revenue, 2 SCRA 632 citing Gregory v. Helvering, 293 U.S. 465,
7 L. ed. 596).
The "Deed of Exchange" of property between the Pachecos and Delpher Trades
Corporation cannot be considered a contract of sale. There was no transfer of actual
ownership interests by the Pachecos to a third party. The Pacheco family merely
changed their ownership from one form to another. The ownership remained in the
same hands. Hence, the private respondent has no basis for its claim of a light of first
refusal under the lease contract.
WHEREFORE, the instant petition is hereby GRANTED, The questioned decision and
resolution of the then Intermediate Appellate Court are REVERSED and SET ASIDE.
The amended complaint in Civil Case No. 885-V-79 of the then Court of First Instance
of Bulacan is DISMISSED. No costs.
SO ORDERED.
DELPHER TRADES CORPORATION, and DELPHIN PACHECO vs.
INTERMEDIATE APPELLATE COURT and HYDRO PIPES PHILIPPINES, INC.,
G.R. No. L-69259, January 26, 1988
FACTS:
In 1974, Delfin Pacheco and his sister, Pelagia Pacheco, were the owners of 27,169
square meters of real estate Identified as Lot. No. 1095, Malinta Estate, in the
Municipality of Polo (now Valenzuela), Province of Bulacan (now Metro Manila) which
is covered by Transfer Certificate of Title No. T-4240 of the Bulacan land registry.
On April 3, 1974, the said co-owners leased to Construction Components
International Inc. the same property and providing that during the existence or after
the term of this lease the lessor should he decide to sell the property leased shall first
offer the same to the lessee and the letter has the priority to buy under similar
conditions.
4 months later, lessee Construction Components International, Inc. assigned its rights
and obligations under the contract of lease in favor of Hydro Pipes Philippines, Inc.
with the signed conformity and consent of lessors Delfin Pacheco and Pelagia
Pacheco.
The contract of lease, as well as the assignment of lease were annotated at the back
of the title, as per stipulation of the parties.
On January 3, 1976, a deed of exchange was executed between lessors Delfin and
Pelagia Pacheco and defendant Delpher Trades Corporation whereby the former
conveyed to the latter the leased property together with another parcel of land for
2,500 shares of stock of defendant corporation with a total value of P1,500,000.00
On the ground that it was not given the first option to buy the leased property
pursuant to the proviso in the lease agreement, respondent Hydro Pipes Philippines,
Inc., filed an amended complaint for reconveyance of Lot. No. 1095 in its favor under
conditions similar to those whereby Delpher Trades Corporation acquired the property
from Pelagia Pacheco and Delphin Pacheco.
The CFI of Bulacan ruled in favor of the plaintiff.
The IAC affirmed the decision of the CFI.
ISSUE:
Whether or not the "Deed of Exchange" of the properties executed by the Pachecos
on the one hand and the Delpher Trades Corporation on the other was meant to be a
contract of sale which, in effect, prejudiced the private respondent's right of first
refusal over the leased property included in the "deed of exchange."
ARGUMENTS:
Eduardo Neria, a CPA and son-in-law of the late Pelagia Pacheco testified
that Delpher Trades Corporation is a family corporation and that the corporation was
organized by the children of the two spouses (spouses Pelagia Pacheco and
Benjamin Hernandez and spouses Delfin Pacheco and Pilar Angeles in order to
perpetuate their control over the property through the corporation and as a means to
avoid taxes.
Under this factual backdrop, the petitioners contend that there was actually no
transfer of ownership of the subject parcel of land since the Pachecos remained in
control of the property. Thus, the petitioners allege: "Considering that the beneficial
ownership and control of Petitioner Corporation remained in the hands of the original
co-owners, there was no transfer of actual ownership interests over the land when the
same was transferred to Petitioner Corporation in exchange for the latter's shares of
stock. The transfer of ownership, if anything, was merely in form but not in substance.
In reality, Petitioner Corporation is a mere alter ego or conduit of the Pacheco co-
owners
On the other hand, the private respondent argues that Delpher Trades Corporation is
a corporate entity separate and distinct from the Pachecosn and that there was actual
transfer of ownership interests over the leased property when the same was
transferred to Delpher Trades Corporation in exchange for the latter's shares of stock.
RULING:
No, it was not meant to be a contract of sale.
After incorporation, one becomes a stockholder of a corporation by subscription or by
purchasing stock directly from the corporation or from individual owners thereof
(Salmon, Dexter & Co. v. Unson, 47 Phil, 649, citing Bole v. Fulton [1912], 233 Pa.,
609). In the case at bar, in exchange for their properties, the Pachecos acquired
2,500 original unissued no par value shares of stocks of the Delpher Trades
Corporation. Consequently, the Pachecos became stockholders of the corporation by
subscription "The essence of the stock subscription is an agreement to take and pay
for original unissued shares of a corporation, formed or to be formed.
It is to be stressed that by their ownership of the 2,500 no par shares of stock, the
Pachecos have control of the corporation. Their equity capital is 55% as against 45%
of the other stockholders, who also belong to the same family group.
In effect, the Delpher Trades Corporation is a business conduit of the Pachecos. What
they really did was to invest their properties and change the nature of their ownership
from unincorporated to incorporated form by organizing Delpher Trades Corporation
to take control of their properties and at the same time save on inheritance taxes.
The records do not point to anything wrong or objectionable about this "estate
planning" scheme resorted to by the Pachecos. "The legal right of a taxpayer to
decrease the amount of what otherwise could be his taxes or altogether avoid them,
by means which the law permits, cannot be doubted.
The "Deed of Exchange" of property between the Pachecos and Delpher Trades
Corporation cannot be considered a contract of sale. There was no transfer of actual
ownership interests by the Pachecos to a third party. The Pacheco family merely
changed their ownership from one form to another. The ownership remained in the
same hands. Hence, the private respondent has no basis for its claim of a light of first
refusal under the lease contract.
DISPOSITIVE PORTION
WHEREFORE, the instant petition is hereby GRANTED, The questioned decision and
resolution of the then Intermediate Appellate Court are REVERSED and SET ASIDE.
The amended complaint in Civil Case No. 885-V-79 of the then Court of First Instance
of Bulacan is DISMISSED. No costs.