G.R. No.
119286 October 13, 2004
PASEO REALTY & DEVELOPMENT CORPORATION, petitioner,
vs.
COURT OF APPEALS, COURT OF TAX APPEALS and COMMISSIONER OF INTERNAL
REVENUE,respondents.
DECISION
TINGA, J.:
The changes in the reportorial requirements and payment schedules of corporate income taxes
from annual to quarterly have created problems, especially on the matter of tax refunds. 1 In
this case, the Court is called to resolve the question of whether alleged excess taxes paid by
a corporation during a taxable year should be refunded or credited against its tax liabilities for
the succeeding year.
Paseo Realty and Development Corporation, a domestic corporation engaged in the lease of
two (2) parcels of land at Paseo de Roxas in Makati City, seeks a review of the Decision2 of
the Court of Appeals dismissing its petition for review of the resolution 3 of the Court of Tax
Appeals (CTA) which, in turn, denied its claim for refund.
The factual antecedents4 are as follows:
On April 16, 1990, petitioner filed its Income Tax Return for the calendar year 1989 declaring
a gross income of P1,855,000.00, deductions of P1,775,991.00, net income of P79,009.00, an
income tax due thereon in the amount of P27,653.00, prior years excess credit
of P146,026.00, and creditable taxes withheld in 1989 of P54,104.00 or a total tax credit
of P200,130.00 and credit balance of P172,477.00.
On November 14, 1991, petitioner filed with respondent a claim for "the refund of excess
creditable withholding and income taxes for the years 1989 and 1990 in the aggregate amount
of P147,036.15."
On December 27, 1991 alleging that the prescriptive period for refunds for 1989 would expire
on December 30, 1991 and that it was necessary to interrupt the prescriptive period, petitioner
filed with the respondent Court of Tax Appeals a petition for review praying for the refund of
"P54,104.00 representing creditable taxes withheld from income payments of petitioner for the
calendar year ending December 31, 1989."
On February 25, 1992, respondent Commissioner filed an Answer and by way of special and/or
affirmative defenses averred the following: a) the petition states no cause of action for failure
to allege the dates when the taxes sought to be refunded were paid; b) petitioners claim for
refund is still under investigation by respondent Commissioner; c) the taxes claimed are
deemed to have been paid and collected in accordance with law and existing pertinent rules
and regulations; d) petitioner failed to allege that it is entitled to the refund or deductions
claimed; e) petitioners contention that it has available tax credit for the current and prior year
is gratuitous and does not ipso facto warrant the refund; f) petitioner failed to show that it has
complied with the provision of Section 230 in relation to Section 204 of the Tax Code.
After trial, the respondent Court rendered a decision ordering respondent Commissioner "to
refund in favor of petitioner the amount of P54,104.00, representing excess creditable
withholding taxes paid for January to July1989."
Respondent Commissioner moved for reconsideration of the decision, alleging that
the P54,104.00 ordered to be refunded "has already been included and is part and parcel of
the P172,477.00 which petitioner automatically applied as tax credit for the succeeding taxable
year 1990."
In a resolution dated October 21, 1993 Respondent Court reconsidered its decision of July 29,
1993 and dismissed the petition for review, stating that it has "overlooked the fact that the
petitioners 1989 Corporate Income Tax Return (Exh. "A") indicated that the amount
of P54,104.00 subject of petitioners claim for refund has already been included as part and
parcel of the P172,477.00 which the petitioner automatically applied as tax credit for the
succeeding taxable year 1990."
Petitioner filed a Motion for Reconsideration which was denied by respondent Court on March
10, 1994.5
Petitioner filed a Petition for Review6 dated April 3, 1994 with the Court of Appeals. Resolving
the twin issues of whether petitioner is entitled to a refund of P54,104.00 representing
creditable taxes withheld in 1989 and whether petitioner applied such creditable taxes withheld
to its 1990 income tax liability, the appellate court held that petitioner is not entitled to a refund
because it had already elected to apply the total amount of P172,447.00, which includes
the P54,104.00 refund claimed, against its income tax liability for 1990. The appellate court
elucidated on the reason for its dismissal of petitioners claim for refund, thus:
In the instant case, it appears that when petitioner filed its income tax return for the year 1989,
it filled up the box stating that the total amount of P172,477.00 shall be applied against its
income tax liabilities for the succeeding taxable year.
Petitioner did not specify in its return the amount to be refunded and the amount to be applied
as tax credit to the succeeding taxable year, but merely marked an "x" to the box indicating "to
be applied as tax credit to the succeeding taxable year." Unlike what petitioner had done when
it filed its income tax return for the year 1988, it specifically stated that out of the P146,026.00
the entire refundable amount, only P64,623.00 will be made available as tax credit, while the
amount of P81,403.00 will be refunded.
In its 1989 income tax return, petitioner filled up the box "to be applied as tax credit to
succeeding taxable year," which signified that instead of refund, petitioner will apply the total
amount of P172,447.00, which includes the amount of P54,104.00 sought to be refunded, as
tax credit for its tax liabilities in 1990. Thus, there is really nothing left to be refunded to
petitioner for the year 1989. To grant petitioners claim for refund is tantamount to granting
twice the refund herein sought to be refunded, to the prejudice of the Government.
The Court of Appeals denied petitioners Motion for Reconsideration7 dated November 8,
1994 in its Resolution8dated February 21, 1995 because the motion merely restated the
grounds which have already been considered and passed upon in its Decision.9
1
Petitioner thus filed the instant Petition for Review10 dated April 14, 1995 arguing that the
evidence presented before the lower courts conclusively shows that it did not apply
the P54,104.00 to its 1990 income tax liability; that the Decision subject of the instant petition
is inconsistent with a final decision11 of the Sixteenth Division of the appellate court in C.A.-
G.R. Sp. No. 32890 involving the same parties and subject matter; and that the affirmation of
the questioned Decision would lead to absurd results in the manner of claiming refunds or in
the application of prior years excess tax credits.
The Office of the Solicitor General (OSG) filed a Comment12 dated May 16, 1996 on behalf of
respondents asserting that the claimed refund of P54,104.00 was, by petitioners election in its
Corporate Annual Income Tax Return for 1989, to be applied against its tax liability for 1990.
Not having submitted its tax return for 1990 to show whether the said amount was indeed
applied against its tax liability for 1990, petitioners election in its tax return stands. The OSG
also contends that petitioners election to apply its overpaid income tax as tax credit against its
tax liabilities for the succeeding taxable year is mandatory and irrevocable.
On September 2, 1997, petitioner filed a Reply13 dated August 31, 1996 insisting that the issue
in this case is not whether the amount of P54,104.00 was included as tax credit to be applied
against its 1990 income tax liability but whether the same amount was actually applied as tax
credit for 1990. Petitioner claims that there is no need to show that the amount of P54,104.00
had not been automatically applied against its 1990 income tax liability because the appellate
courts decision in C.A.-G.R. Sp. No. 32890 clearly held that petitioner charged its 1990 income
tax liability against its tax credit for 1988 and not 1989. Petitioner also disputes the OSGs
assertion that the taxpayers election as to the application of excess taxes is irrevocable
averring that there is nothing in the law that prohibits a taxpayer from changing its mind
especially if subsequent events leave the latter no choice but to change its election.
The OSG filed a Rejoinder14 dated March 5, 1997 stating that petitioners 1988 tax return shows
a prior years excess credit of P81,403.00, creditable tax withheld of P92,750.00 and tax due
of P27,127.00. Petitioner indicated that the prior years excess credit of P81,403.00 was to be
refunded, while the remaining amount of P64,623.00 (P92,750.00 - P27,127.00) shall be
considered as tax credit for 1989. However, in its 1989 tax return, petitioner included
the P81,403.00 which had already been segregated for refund in the computation of its excess
credit, and specified that the full amount of P172,479.00* (P81,403.00 + P64,623.00
+ P54,104.00** - P27,653.00***) be considered as its tax credit for 1990. Considering that it had
obtained a favorable ruling for the refund of its excess credit for 1988 in CA-G.R. SP. No.
32890, its remaining tax credit for 1989 should be the excess credit to be applied against its
1990 tax liability. In fine, the OSG argues that by its own election, petitioner can no longer ask
for a refund of its creditable taxes withheld in 1989 as the same had been applied against its
1990 tax due.
In its Resolution15 dated July 16, 1997, the Court gave due course to the petition and required
the parties to simultaneously file their respective memoranda within 30 days from notice. In
compliance with this directive, petitioner submitted its Memorandum16 dated September 18,
1997 in due time, while the OSG filed itsMemorandum17 dated April 27, 1998 only on April 29,
1998 after several extensions.
2
The petition must be denied.
As a matter of principle, it is not advisable for this Court to set aside the conclusion reached by
an agency such as the CTA which is, by the very nature of its functions, dedicated exclusively
to the study and consideration of tax problems and has necessarily developed an expertise on
the subject, unless there has been an abuse or improvident exercise of its authority. 18
This interdiction finds particular application in this case since the CTA, after careful
consideration of the merits of the Commissioner of Internal Revenues motion for
reconsideration, reconsidered its earlier decision which ordered the latter to refund the amount
of P54,104.00 to petitioner. Its resolution cannot be successfully assailed based, as it is, on the
pertinent laws as applied to the facts.
Petitioners 1989 tax return indicates an aggregate creditable tax of P172,477.00, representing
its 1988 excess credit of P146,026.00 and 1989 creditable tax of P54,104.00 less tax due for
1989, which it elected to apply as tax credit for the succeeding taxable year. 19 According to
petitioner, it successively utilized this amount when it obtained refunds in CTA Case No. 4439
(C.A.-G.R. Sp. No. 32300) and CTA Case No. 4528 (C.A.-G.R. Sp. No. 32890), and applied its
1990 tax liability, leaving a balance of P54,104.00, the amount subject of the instant claim for
refund.20 Represented mathematically, petitioner accounts for its claim in this wise:
P172,477.00 Amount indicated in petitioners 1989 tax return to be applied as tax
credit for the succeeding taxable year
- 25,623.00 Claim for refund in CTA Case No. 4439 (C.A.-G.R. Sp. No. 32300)
P146,854.00 Balance as of April 16, 1990
- 59,510.00 Claim for refund in CTA Case No. 4528 (C.A.-G.R. Sp. No. 32890)
P87,344.00 Balance as of January 2, 1991
- 33,240.00 Income tax liability for calendar year 1990 applied as of April 15, 1991
P54,104.00 Balance as of April 15, 1991 now subject of the instant claim for
refund21
Other than its own bare allegations, however, petitioner offers no proof to the effect that its
creditable tax ofP172,477.00 was applied as claimed above. Instead, it anchors its assertion
of entitlement to refund on an alleged finding in C.A.-G.R. Sp. No. 3289022 involving the same
parties to the effect that petitioner charged its 1990 income tax liability to its tax credit for 1988
and not its 1989 tax credit. Hence, its excess creditable taxes withheld of P54,104.00 for 1989
was left untouched and may be refunded.
Note should be taken, however, that nowhere in the case referred to by petitioner did the Court
of Appeals make a categorical determination that petitioners tax liability for 1990 was applied
against its 1988 tax credit. The statement adverted to by petitioner was actually presented in
the appellate courts decision in CA-G.R. Sp No. 32890 as part of petitioners own narration of
facts. The pertinent portion of the decision reads:
It would appear from petitioners submission as follows:
x x x since it has already applied to its prior years excess credit of P81,403.00 (which petitioner
wanted refunded when it filed its 1988 Income Tax Return on April 14, 1989) the income tax
liability for 1988 ofP28,127.00 and the income tax liability for 1989 of P27,653.00, leaving a
balance refundable of P25,623.00 subject of C.T.A. Case No. 4439, the P92,750.00
(P64,623.00 plus P28,127.00, since this second amount was already applied to the amount
refundable of P81,403.00) should be the refundable amount. But since the taxpayer again used
part of it to satisfy its income tax liability of P33,240.00 for 1990, the amount refundable
was P59,510.00, which is the amount prayed for in the claim for refund and also in the petitioner
(sic) for review.
That the present claim for refund already consolidates its claims for refund for 1988, 1989, and
1990, when it filed a claim for refund of P59,510.00 in this case (CTA Case No. 4528). Hence,
the present claim should be resolved together with the previous claims. 23
The confusion as to petitioners entitlement to a refund could altogether have been avoided
had it presented its tax return for 1990. Such return would have shown whether petitioner
actually applied its 1989 tax credit ofP172,477.00, which includes the P54,104.00 creditable
taxes withheld for 1989 subject of the instant claim for refund, against its 1990 tax liability as it
had elected in its 1989 return, or at least, whether petitioners tax credit ofP172,477.00 was
applied to its approved refunds as it claims.
The return would also have shown whether there remained an excess credit refundable to
petitioner after deducting its tax liability for 1990. As it is, we only have petitioners allegation
that its tax due for 1990 wasP33,240.00 and that this was applied against its remaining tax
credits using its own "first in, first out" method of computation.
It would have been different had petitioner not included the P54,104.00 creditable taxes for
1989 in the total amount it elected to apply against its 1990 tax liabilities. Then, all that would
have been required of petitioner are: proof that it filed a claim for refund within the two (2)-year
prescriptive period provided under Section 230 of the NIRC; evidence that the income upon
which the taxes were withheld was included in its return; and to establish the fact of withholding
by a copy of the statement (BIR Form No. 1743.1) issued by the payor24 to the payee showing
the amount paid and the amount of tax withheld therefrom. However, since petitioner opted to
apply its aggregate excess credits as tax credit for 1990, it was incumbent upon it to present
its tax return for 1990 to show that the claimed refund had not been automatically credited and
applied to its 1990 tax liabilities.
The grant of a refund is founded on the assumption that the tax return is valid, i.e., that the
facts stated therein are true and correct.25 Without the tax return, it is error to grant a refund
since it would be virtually impossible to determine whether the proper taxes have been
assessed and paid.
Why petitioner failed to present such a vital piece of evidence confounds the Court. Petitioner
could very well have attached a copy of its final adjustment return for 1990 when it filed its claim
3
for refund on November 13, 1991. Annex "B" of its Petition for Review26 dated December 26,
1991 filed with the CTA, in fact, states that its annual tax return for 1990 was submitted in
support of its claim. Yet, petitioners tax return for 1990 is nowhere to be found in the records
of this case.
Had petitioner presented its 1990 tax return in refutation of respondent Commissioners
allegation that it did not present evidence to prove that its claimed refund had already been
automatically credited against its 1990 tax liability, the CTA would not have reconsidered its
earlier Decision. As it is, the absence of petitioners 1990 tax return was the principal basis of
the CTAs Resolution reconsidering its earlier Decision to grant petitioners claim for refund.
Petitioner could even still have attached a copy of its 1990 tax return to its petition for review
before the Court of Appeals. The appellate court, being a trier of facts, is authorized to receive
it in evidence and would likely have taken it into account in its disposition of the petition.
In BPI-Family Savings Bank v. Court of Appeals,27 although petitioner failed to present its 1990
tax return, it presented other evidence to prove its claim that it did not apply and could not have
applied the amount in dispute as tax credit. Importantly, petitioner therein attached a copy of
its final adjustment return for 1990 to its motion for reconsideration before the CTA buttressing
its claim that it incurred a net loss and is thus entitled to refund. Considering this fact, the Court
held that there is no reason for the BIR to withhold the tax refund.
In this case, petitioners failure to present sufficient evidence to prove its claim for refund is
fatal to its cause. After all, it is axiomatic that a claimant has the burden of proof to establish
the factual basis of his or her claim for tax credit or refund. Tax refunds, like tax exemptions,
are construed strictly against the taxpayer.28
Section 69, Chapter IX, Title II of the National Internal Revenue Code of the Philippines (NIRC)
provides:
Sec. 69. Final Adjustment Return.Every corporation liable to tax under Section 24 shall file a
final adjustment return covering the total net income for the preceding calendar or fiscal year.
If the sum of the quarterly tax payments made during the said taxable year is not equal to the
total tax due on the entire taxable net income of that year the corporation shall either:
(a) Pay the excess tax still due; or
(b) Be refunded the excess amount paid, as the case may be.
In case the corporation is entitled to a refund of the excess estimated quarterly income
taxes paid, the refundable amount shown on its final adjustment return may be credited
against the estimated quarterly income tax liabilities for the taxable quarters of the
succeeding taxable year. [Emphasis supplied]
Revenue Regulation No. 10-77 of the Bureau of Internal Revenue clarifies:
SEC. 7. Filing of final or adjustment return and final payment of income tax. A final or an
adjustment return on B.I.R. Form No. 1702 covering the total taxable income of the corporation
for the preceding calendar or fiscal year shall be filed on or before the 15th day of the fourth
month following the close of the calendar or fiscal year. The return shall include all the items of
gross income and deductions for the taxable year. The amount of income tax to be paid shall
be the balance of the total income tax shown on the final or adjustment return after deducting
therefrom the total quarterly income taxes paid during the preceding first three quarters of the
same calendar or fiscal year.
Any excess of the total quarterly payments over the actual income tax computed and shown in
the adjustment or final corporate income tax return shall either (a) be refunded to the
corporation, or (b) may be credited against the estimated quarterly income tax liabilities for the
quarters of the succeeding taxable year. The corporation must signify in its annual corporate
adjustment return its intention whether to request for refund of the overpaid income tax or claim
for automatic credit to be applied against its income tax liabilities for the quarters of the
succeeding taxable year by filling up the appropriate box on the corporate tax return (B.I.R.
Form No. 1702). [Emphasis supplied]
As clearly shown from the above-quoted provisions, in case the corporation is entitled to a
refund of the excess estimated quarterly income taxes paid, the refundable amount shown on
its final adjustment return may be credited against the estimated quarterly income tax liabilities
for the taxable quarters of the succeeding year. The carrying forward of any excess or overpaid
income tax for a given taxable year is limited to the succeeding taxable year only.
In the recent case of AB Leasing and Finance Corporation v. Commissioner of Internal
Revenue,29 where the Court declared that "[T]he carrying forward of any excess or overpaid
income tax for a given taxable year then islimited to the succeeding taxable year only," we ruled
that since the case involved a claim for refund of overpaid taxes for 1993, petitioner could only
have applied the 1993 excess tax credits to its 1994 income tax liabilities. To further carry-over
to 1995 the 1993 excess tax credits is violative of Section 69 of the NIRC.
In this case, petitioner included its 1988 excess credit of P146,026.00 in the computation of its
total excess credit for 1989. It indicated this amount, plus the 1989 creditable taxes withheld
of P54,104.00 or a total of P172,477.00, as its total excess credit to be applied as tax credit for
1990. By its own disclosure, petitioner effectively combined its 1988 and 1989 tax credits and
applied its 1990 tax due of P33,240.00 against the total, and not against its creditable taxes for
1989 only as allowed by Section 69. This is a clear admission that petitioners 1988 tax credit
was incorrectly and illegally applied against its 1990 tax liabilities.
Parenthetically, while a taxpayer is given the choice whether to claim for refund or have its
excess taxes applied as tax credit for the succeeding taxable year, such election is not final.
Prior verification and approval by the Commissioner of Internal Revenue is required. The
availment of the remedy of tax credit is not absolute and mandatory. It does not confer an
absolute right on the taxpayer to avail of the tax credit scheme if it so 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. 30
Contrary to petitioners assertion however, the taxpayers election, signified by the ticking of
boxes in Item 10 of BIR Form No. 1702, is not a mere technical exercise. It aids in the proper
management of claims for refund or tax credit by leading tax authorities to the direction they
should take in addressing the claim.
4
The amendment of Section 69 by what is now Section 76 of Republic Act No.
842431 emphasizes that it is imperative to indicate in the tax return or the final adjustment return
whether a tax credit or refund is sought by making the taxpayers choice irrevocable. Section
76 provides:
SEC. 76. Final Adjustment Return.Every corporation liable to tax under Section 27 shall file
a final adjustment return covering the total taxable income for the preceding calendar or fiscal
year. If the sum of the quarterly tax payments made during the said taxable year is not equal
to the total tax due on the entire taxable income of that year, the corporation shall either:
(A) Pay the balance of the tax still due; or
(B) Carry-over the excess credit; or
(C) Be credited or refunded with the excess amount paid, as the case may be.
In case the corporation is entitled to a tax credit or refund of the excess estimated quarterly
income taxes paid, the excess amount shown on its final adjustment return may be carried over
and credited against the estimated quarterly income tax liabilities for the taxable quarters of the
succeeding taxable years. Once the option to carry-over and apply the excess quarterly
income tax against income tax due for the taxable quarters of the succeeding taxable
years has been made, such option shall be considered irrevocable for that taxable
period and no application for cash refund or issuance of a tax credit certificate shall be
allowed therefore. [Emphasis supplied]
As clearly seen from this provision, the taxpayer is allowed three (3) options if the sum of its
quarterly tax payments made during the taxable year is not equal to the total tax due for that
year: (a) pay the balance of the tax still due; (b) carry-over the excess credit; or (c) be credited
or refunded the amount paid. If the taxpayer has paid excess quarterly income taxes, it may be
entitled to a tax credit or refund as shown in its final adjustment return which may be carried
over and applied against the estimated quarterly income tax liabilities for the taxable quarters
of the succeeding taxable years. However, once the taxpayer has exercised the option to carry-
over and to apply the excess quarterly income tax against income tax due for the taxable
quarters of the succeeding taxable years, such option is irrevocable for that taxable period and
no application for cash refund or issuance of a tax credit certificate shall be allowed.
Had this provision been in effect when the present claim for refund was filed, petitioners excess
credits for 1988 could have been properly applied to its 1990 tax liabilities. Unfortunately for
petitioner, this is not the case.
Taxation is a destructive power which interferes with the personal and property rights of the
people and takes from them a portion of their property for the support of the government. And
since taxes are what we pay for civilized society, or are the lifeblood of the nation, the law
frowns against exemptions from taxation and statutes granting tax exemptions are thus
construed strictissimi juris against the taxpayer and liberally in favor of the taxing authority. A
claim of refund or exemption from tax payments must be clearly shown and be based on
language in the law too plain to be mistaken. Elsewise stated, taxation is the rule, exemption
therefrom is the exception.32 WHEREFORE, the instant petition is DENIED. The challenged
decision of the Court of Appeals is herebyAFFIRMED. No pronouncement as to costs.
G.R. No. L-28896 February 17, 1988
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
ALGUE, INC., and THE COURT OF TAX APPEALS, respondents.
CRUZ, J.:
Taxes are the lifeblood of the government and so should be collected without unnecessary
hindrance On the other hand, such collection should be made in accordance with law as any
arbitrariness will negate the very reason for government itself. It is therefore necessary to
reconcile the apparently conflicting interests of the authorities and the taxpayers so that the
real purpose of taxation, which is the promotion of the common good, may be achieved.
The main issue in this case is whether or not the Collector of Internal Revenue correctly
disallowed the P75,000.00 deduction claimed by private respondent Algue as legitimate
business expenses in its income tax returns. The corollary issue is whether or not the appeal
of the private respondent from the decision of the Collector of Internal Revenue was made on
time and in accordance with law.
We deal first with the procedural question.
The record shows that on January 14, 1965, the private respondent, a domestic corporation
engaged in engineering, construction and other allied activities, received a letter from the
petitioner assessing it in the total amount of P83,183.85 as delinquency income taxes for the
years 1958 and 1959. 1 On January 18, 1965, Algue flied a letter of protest or request for
reconsideration, which letter was stamp received on the same day in the office of the
petitioner. 2 On March 12, 1965, a warrant of distraint and levy was presented to the private
respondent, through its counsel, Atty. Alberto Guevara, Jr., who refused to receive it on the
ground of the pending protest. 3 A search of the protest in the dockets of the case proved
fruitless. Atty. Guevara produced his file copy and gave a photostat to BIR agent Ramon Reyes,
who deferred service of the warrant. 4 On April 7, 1965, Atty. Guevara was finally informed that
the BIR was not taking any action on the protest and it was only then that he accepted the
warrant of distraint and levy earlier sought to be served. 5 Sixteen days later, on April 23, 1965,
Algue filed a petition for review of the decision of the Commissioner of Internal Revenue with
the Court of Tax Appeals. 6
The above chronology shows that the petition was filed seasonably. According to Rep. Act No.
1125, the appeal may be made within thirty days after receipt of the decision or ruling
challenged. 7 It is true that as a rule the warrant of distraint and levy is "proof of the finality of
the assessment" 8 and renders hopeless a request for reconsideration," 9being "tantamount to
an outright denial thereof and makes the said request deemed rejected." 10 But there is a
special circumstance in the case at bar that prevents application of this accepted doctrine.
The proven fact is that four days after the private respondent received the petitioner's notice of
assessment, it filed its letter of protest. This was apparently not taken into account before the
warrant of distraint and levy was issued; indeed, such protest could not be located in the office
of the petitioner. It was only after Atty. Guevara gave the BIR a copy of the protest that it was,
5
if at all, considered by the tax authorities. During the intervening period, the warrant was
premature and could therefore not be served.
As the Court of Tax Appeals correctly noted," 11 the protest filed by private respondent was
not pro forma and was based on strong legal considerations. It thus had the effect of
suspending on January 18, 1965, when it was filed, the reglementary period which started on
the date the assessment was received, viz., January 14, 1965. The period started running
again only on April 7, 1965, when the private respondent was definitely informed of the implied
rejection of the said protest and the warrant was finally served on it. Hence, when the appeal
was filed on April 23, 1965, only 20 days of the reglementary period had been consumed.
Now for the substantive question.
The petitioner contends that the claimed deduction of P75,000.00 was properly disallowed
because it was not an ordinary reasonable or necessary business expense. The Court of Tax
Appeals had seen it differently. Agreeing with Algue, it held that the said amount had been
legitimately paid by the private respondent for actual services rendered. The payment was in
the form of promotional fees. These were collected by the Payees for their work in the creation
of the Vegetable Oil Investment Corporation of the Philippines and its subsequent purchase of
the properties of the Philippine Sugar Estate Development Company.
Parenthetically, it may be observed that the petitioner had Originally claimed these promotional
fees to be personal holding company income 12 but later conformed to the decision of the
respondent court rejecting this assertion.13 In fact, as the said court found, the amount was
earned through the joint efforts of the persons among whom it was distributed It has been
established that the Philippine Sugar Estate Development Company had earlier appointed
Algue as its agent, authorizing it to sell its land, factories and oil manufacturing process.
Pursuant to such authority, Alberto Guevara, Jr., Eduardo Guevara, Isabel Guevara, Edith,
O'Farell, and Pablo Sanchez, worked for the formation of the Vegetable Oil Investment
Corporation, inducing other persons to invest in it. 14 Ultimately, after its incorporation largely
through the promotion of the said persons, this new corporation purchased the PSEDC
properties. 15 For this sale, Algue received as agent a commission of P126,000.00, and it was
from this commission that the P75,000.00 promotional fees were paid to the aforenamed
individuals. 16
There is no dispute that the payees duly reported their respective shares of the fees in their
income tax returns and paid the corresponding taxes thereon. 17 The Court of Tax Appeals also
found, after examining the evidence, that no distribution of dividends was involved. 18
The petitioner claims that these payments are fictitious because most of the payees are
members of the same family in control of Algue. It is argued that no indication was made as to
how such payments were made, whether by check or in cash, and there is not enough
substantiation of such payments. In short, the petitioner suggests a tax dodge, an attempt to
evade a legitimate assessment by involving an imaginary deduction.
We find that these suspicions were adequately met by the private respondent when its
President, Alberto Guevara, and the accountant, Cecilia V. de Jesus, testified that the
payments were not made in one lump sum but periodically and in different amounts as each
payee's need arose. 19 It should be remembered that this was a family corporation where strict discharged satisfactorily. The private respondent has proved that the payment of the fees was
business procedures were not applied and immediate issuance of receipts was not required. necessary and reasonable in the light of the efforts exerted by the payees in inducing investors
Even so, at the end of the year, when the books were to be closed, each payee made an and prominent businessmen to venture in an experimental enterprise and involve themselves
accounting of all of the fees received by him or her, to make up the total of in a new business requiring millions of pesos. This was no mean feat and should be, as it was,
P75,000.00. 20 Admittedly, everything seemed to be informal. This arrangement was sufficiently recompensed.
understandable, however, in view of the close relationship among the persons in the family It is said that taxes are what we pay for civilization society. Without taxes, the government
corporation. would be paralyzed for lack of the motive power to activate and operate it. Hence, despite the
We agree with the respondent court that the amount of the promotional fees was not excessive. natural reluctance to surrender part of one's hard earned income to the taxing authorities, every
The total commission paid by the Philippine Sugar Estate Development Co. to the private person who is able to must contribute his share in the running of the government. The
respondent was P125,000.00. 21After deducting the said fees, Algue still had a balance of government for its part, is expected to respond in the form of tangible and intangible benefits
P50,000.00 as clear profit from the transaction. The amount of P75,000.00 was 60% of the intended to improve the lives of the people and enhance their moral and material values. This
total commission. This was a reasonable proportion, considering that it was the payees who symbiotic relationship is the rationale of taxation and should dispel the erroneous notion that it
did practically everything, from the formation of the Vegetable Oil Investment Corporation to is an arbitrary method of exaction by those in the seat of power.
the actual purchase by it of the Sugar Estate properties. This finding of the respondent court is But even as we concede the inevitability and indispensability of taxation, it is a requirement in
in accord with the following provision of the Tax Code: all democratic regimes that it be exercised reasonably and in accordance with the prescribed
SEC. 30. Deductions from gross income.--In computing net income there shall be allowed as procedure. If it is not, then the taxpayer has a right to complain and the courts will then come
deductions to his succor. For all the awesome power of the tax collector, he may still be stopped in his
(a) Expenses: tracks if the taxpayer can demonstrate, as it has here, that the law has not been observed.
(1) In general.--All the ordinary and necessary expenses paid or incurred during the taxable We hold that the appeal of the private respondent from the decision of the petitioner was filed
year in carrying on any trade or business, including a reasonable allowance for salaries or other on time with the respondent court in accordance with Rep. Act No. 1125. And we also find that
compensation for personal services actually rendered; ... 22 the claimed deduction by the private respondent was permitted under the Internal Revenue
Code and should therefore not have been disallowed by the petitioner.
and Revenue Regulations No. 2, Section 70 (1), reading as follows:
ACCORDINGLY, the appealed decision of the Court of Tax Appeals is AFFIRMED in
SEC. 70. Compensation for personal services.--Among the ordinary and necessary expenses
toto, without costs.
paid or incurred in carrying on any trade or business may be included a reasonable allowance
for salaries or other compensation for personal services actually rendered. The test of SO ORDERED.
deductibility in the case of compensation payments is whether they are reasonable and are, in
fact, payments purely for service. This test and deductibility in the case of compensation
payments is whether they are reasonable and are, in fact, payments purely for service. This
test and its practical application may be further stated and illustrated as follows:
Any amount paid in the form of compensation, but not in fact as the purchase price of services,
is not deductible. (a) An ostensible salary paid by a corporation may be a distribution of a
dividend on stock. This is likely to occur in the case of a corporation having few stockholders,
Practically all of whom draw salaries. If in such a case the salaries are in excess of those
ordinarily paid for similar services, and the excessive payment correspond or bear a close
relationship to the stockholdings of the officers of employees, it would seem likely that the
salaries are not paid wholly for services rendered, but the excessive payments are a distribution
of earnings upon the stock. . . . (Promulgated Feb. 11, 1931, 30 O.G. No. 18, 325.)
It is worth noting at this point that most of the payees were not in the regular employ of Algue
nor were they its controlling stockholders. 23
The Solicitor General is correct when he says that the burden is on the taxpayer to prove the
validity of the claimed deduction. In the present case, however, we find that the onus has been

6
G.R. No. 134062 April 17, 2007 1. Your "deficiency assessments" are no assessments at all. The taxpayer is not informed,
COMMISSIONER OF INTERNAL REVENUE, Petitioner, even in the vaguest terms, why it is being assessed a deficiency. The very purpose of a
vs. deficiency assessment is to inform taxpayer why he has incurred a deficiency so that he can
BANK OF THE PHILIPPINE ISLANDS, Respondent. make an intelligent decision on whether to pay or to protest the assessment. This is all the
more so when the assessment involves astronomical amounts, as in this case.
DECISION
We therefore request that the examiner concerned be required to state, even in the briefest
CORONA, J.:
form, why he believes the taxpayer has a deficiency documentary and percentage taxes, and
This is a petition for review on certiorari1 of a decision2 of the Court of Appeals (CA) dated May as to the percentage tax, it is important that the taxpayer be informed also as to what particular
29, 1998 in CA-G.R. SP No. 41025 which reversed and set aside the decision 3 and percentage tax the assessment refers to.
resolution4 of the Court of Tax Appeals (CTA) dated November 16, 1995 and May 27, 1996,
2. As to the alleged deficiency documentary stamp tax, you are aware of the compromise
respectively, in CTA Case No. 4715.
forged between your office and the Bankers Association of the Philippines [BAP] on this issue
In two notices dated October 28, 1988, petitioner Commissioner of Internal Revenue (CIR) and of BPIs submission of its computations under this compromise. There is therefore no basis
assessed respondent Bank of the Philippine Islands (BPIs) deficiency percentage and whatsoever for this assessment, assuming it is on the subject of the BAP compromise. On the
documentary stamp taxes for the year 1986 in the total amount of P129,488,656.63: other hand, if it relates to documentary stamp tax on some other issue, we should like to be
1986 Deficiency Percentage Tax informed about what those issues are.
Deficiency percentage tax P 7, 270,892.88 3. As to the alleged deficiency percentage tax, we are completely at a loss on how such
assessment may be protested since your letter does not even tell the taxpayer what particular
Add: 25% surcharge 1,817,723.22 percentage tax is involved and how your examiner arrived at the deficiency. As soon as this is
explained and clarified in a proper letter of assessment, we shall inform you of the taxpayers
20% interest from 1-21-87 to 10-28-88 3,215,825.03 decision on whether to pay or protest the assessment.7
On June 27, 1991, BPI received a letter from CIR dated May 8, 1991 stating that:
15,000.00
Compromise penalty although in all respects, your letter failed to qualify as a protest under Revenue Regulations
No. 12-85 and therefore not deserving of any rejoinder by this office as no valid issue was
raised against the validity of our assessment still we obliged to explain the basis of the
TOTAL AMOUNT DUE AND COLLECTIBLE P12,319,441.13
assessments.
1986 Deficiency Documentary Stamp Tax xxx xxx xxx
Deficiency percentage tax P93,723,372.40 this constitutes the final decision of this office on the matter.8
On July 6, 1991, BPI requested a reconsideration of the assessments stated in the CIRs May
Add: 25% surcharge 23,430,843.10 8, 1991 letter.9 This was denied in a letter dated December 12, 1991, received by BPI on
January 21, 1992.10
15,000.00
Compromise penalty On February 18, 1992, BPI filed a petition for review in the CTA.11 In a decision dated
November 16, 1995, the CTA dismissed the case for lack of jurisdiction since the subject
TOTAL AMOUNT DUE AND COLLECTIBLE P117,169,215.50.5 assessments had become final and unappealable. The CTA ruled that BPI failed to protest on
time under Section 270 of the National Internal Revenue Code (NIRC) of 1986 and Section 7
Both notices of assessment contained the following note: in relation to Section 11 of RA 1125.12 It denied reconsideration in a resolution dated May 27,
Please be informed that your [percentage and documentary stamp taxes have] been assessed 1996.13
as shown above. Said assessment has been based on return (filed by you) (as verified) On appeal, the CA reversed the tax courts decision and resolution and remanded the case to
(made by this Office) (pending investigation) (after investigation). You are requested to pay the CTA14 for a decision on the merits.15 It ruled that the October 28, 1988 notices were not
the above amount to this Office or to our Collection Agent in the Office of the City or Deputy valid assessments because they did not inform the taxpayer of the legal and factual bases
Provincial Treasurer of xxx6 therefor. It declared that the proper assessments were those contained in the May 8, 1991
In a letter dated December 10, 1988, BPI, through counsel, replied as follows:

7
letter which provided the reasons for the claimed deficiencies.16 Thus, it held that BPI filed the
petition for review in the CTA on time.17 The CIR elevated the case to this Court.
This petition raises the following issues:
1) whether or not the assessments issued to BPI for deficiency percentage and documentary
stamp taxes for 1986 had already become final and unappealable and
2) whether or not BPI was liable for the said taxes.
The former Section 27018 (now renumbered as Section 228) of the NIRC stated:
Sec. 270. Protesting of assessment. When the [CIR] or his duly authorized
representative finds that proper taxes should be assessed, he shall first notify the
taxpayer of his findings. Within a period to be prescribed by implementing regulations, the
taxpayer shall be required to respond to said notice. If the taxpayer fails to respond, the
[CIR] shall issue an assessment based on his findings.
xxx xxx xxx (emphasis supplied)
Were the October 28, 1988 Notices Valid Assessments?
The first issue for our resolution is whether or not the October 28, 1988 notices 19 were valid
assessments. If they were not, as held by the CA, then the correct assessments were in the
May 8, 1991 letter, received by BPI on June 27, 1991. BPI, in its July 6, 1991 letter, seasonably
asked for a reconsideration of the findings which the CIR denied in his December 12, 1991
letter, received by BPI on January 21, 1992. Consequently, the petition for review filed by BPI
in the CTA on February 18, 1992 would be well within the 30-day period provided by law.20
The CIR argues that the CA erred in holding that the October 28, 1988 notices were invalid
assessments. He asserts that he used BIR Form No. 17.08 (as revised in November 1964)
which was designed for the precise purpose of notifying taxpayers of the assessed amounts
due and demanding payment thereof.21 He contends that there was no law or jurisprudence
then that required notices to state the reasons for assessing deficiency tax liabilities. 22
BPI counters that due process demanded that the facts, data and law upon which the
assessments were based be provided to the taxpayer. It insists that the NIRC, as worded now
(referring to Section 228), specifically provides that:
"[t]he taxpayer shall be informed in writing of the law and the facts on which the assessment is
made; otherwise, the assessment shall be void."
According to BPI, this is declaratory of what sound tax procedure is and a confirmation of what
due process requires even under the former Section 270.
BPIs contention has no merit. The present Section 228 of the NIRC provides:
Sec. 228. Protesting of Assessment. When the [CIR] or his duly authorized
representative finds that proper taxes should be assessed, he shall first notify the
taxpayer of his findings: Provided, however, That a preassessment notice shall not be
required in the following cases:
xxx xxx xxx
8
The taxpayer shall be informed in writing of the law and the facts on which the
assessment is made; otherwise, the assessment shall be void.
xxx xxx xxx (emphasis supplied)
Admittedly, the CIR did not inform BPI in writing of the law and facts on which the assessments
of the deficiency taxes were made. He merely notified BPI of his findings, consisting only of the
computation of the tax liabilities and a demand for payment thereof within 30 days after receipt.
In merely notifying BPI of his findings, the CIR relied on the provisions of the former Section
270 prior to its amendment by RA 8424 (also known as the Tax Reform Act of 1997). 23 In CIR
v. Reyes,24 we held that:
In the present case, Reyes was not informed in writing of the law and the facts on which the
assessment of estate taxes had been made. She was merely notified of the findings by the
CIR, who had simply relied upon the provisions of former Section 229 prior to its amendment
by [RA] 8424, otherwise known as the Tax Reform Act of 1997.
First, RA 8424 has already amended the provision of Section 229 on protesting an
assessment. The old requirement of merely notifying the taxpayer of the CIR's findings
was changed in 1998 to informing the taxpayer of not only the law, but also of the facts on
which an assessment would be made; otherwise, the assessment itself would be invalid.
It was on February 12, 1998, that a preliminary assessment notice was issued against the
estate. On April 22, 1998, the final estate tax assessment notice, as well as demand letter, was
also issued. During those dates, RA 8424 was already in effect. The notice required under
the old law was no longer sufficient under the new law.25 (emphasis supplied; italics in the
original)
Accordingly, when the assessments were made pursuant to the former Section 270, the only
requirement was for the CIR to "notify" or inform the taxpayer of his "findings." Nothing in the
old law required a written statement to the taxpayer of the law and facts on which the
assessments were based. The Court cannot read into the law what obviously was not intended
by Congress. That would be judicial legislation, nothing less.
Jurisprudence, on the other hand, simply required that the assessments contain a computation
of tax liabilities, the amount the taxpayer was to pay and a demand for payment within a
prescribed period.26 Everything considered, there was no doubt the October 28, 1988 notices
sufficiently met the requirements of a valid assessment under the old law and jurisprudence.
The sentence
[t]he taxpayers shall be informed in writing of the law and the facts on which the assessment is
made; otherwise, the assessment shall be void
was not in the old Section 270 but was only later on inserted in the renumbered Section 228 in
1997. Evidently, the legislature saw the need to modify the former Section 270 by inserting the
aforequoted sentence.27 The fact that the amendment was necessary showed that, prior to the
introduction of the amendment, the statute had an entirely different meaning.28
Contrary to the submission of BPI, the inserted sentence in the renumbered Section 228 was
not an affirmation of what the law required under the former Section 270. The amendment
introduced by RA 8424 was an innovation and could not be reasonably inferred from the old
law.29 Clearly, the legislature intended to insert a new provision regarding the form and
substance of assessments issued by the CIR.30
In ruling that the October 28, 1988 notices were not valid assessments, the CA explained:
xxx. Elementary concerns of due process of law should have prompted the [CIR] to inform [BPI]
of the legal and factual basis of the formers decision to charge the latter for deficiency
documentary stamp and gross receipts taxes.31
In other words, the CAs theory was that BPI was deprived of due process when the CIR failed
to inform it in writing of the factual and legal bases of the assessments even if these were
not called for under the old law.
We disagree.
Indeed, the underlying reason for the law was the basic constitutional requirement that "no
person shall be deprived of his property without due process of law."32 We note, however, what
the CTA had to say:
xxx xxx xxx
From the foregoing testimony, it can be safely adduced that not only was [BPI] given the
opportunity to discuss with the [CIR] when the latter issued the former a Pre-Assessment Notice
(which [BPI] ignored) but that the examiners themselves went to [BPI] and "we talk to them and
we try to [thresh] out the issues, present evidences as to what they need." Now, how can [BPI]
and/or its counsel honestly tell this Court that they did not know anything about the
assessments?
Not only that. To further buttress the fact that [BPI] indeed knew beforehand the assessments[,]
contrary to the allegations of its counsel[,] was the testimony of Mr. Jerry Lazaro, Assistant
Manager of the Accounting Department of [BPI]. He testified to the fact that he prepared
worksheets which contain his analysis regarding the findings of the [CIRs] examiner, Mr. San
Pedro and that the same worksheets were presented to Mr. Carlos Tan, Comptroller of [BPI].
xxx xxx xxx
From all the foregoing discussions, We can now conclude that [BPI] was indeed aware of the
nature and basis of the assessments, and was given all the opportunity to contest the same
but ignored it despite the notice conspicuously written on the assessments which states that
"this ASSESSMENT becomes final and unappealable if not protested within 30 days after
receipt." Counsel resorted to dilatory tactics and dangerously played with time. Unfortunately,
such strategy proved fatal to the cause of his client.33
The CA never disputed these findings of fact by the CTA:
[T]his Court recognizes that the [CTA], which by the very nature of its function is dedicated
exclusively to the consideration of tax problems, has necessarily developed an expertise on
the subject, and its conclusions will not be overturned unless there has been an abuse or
improvident exercise of authority. Such findings can only be disturbed on appeal if they are not
supported by substantial evidence or there is a showing of gross error or abuse on the part of
the [CTA].34
9
Under the former Section 270, there were two instances when an assessment became final
and unappealable: (1) when it was not protested within 30 days from receipt and (2) when the
adverse decision on the protest was not appealed to the CTA within 30 days from receipt of
the final decision:35
Sec. 270. Protesting of assessment.1a\^/phi1.net
xxx xxx xxx
Such assessment may be protested administratively by filing a request for reconsideration or
reinvestigation in such form and manner as may be prescribed by the implementing regulations
within thirty (30) days from receipt of the assessment; otherwise, the assessment shall become
final and unappealable.
If the protest is denied in whole or in part, the individual, association or corporation adversely
affected by the decision on the protest may appeal to the [CTA] within thirty (30) days from
receipt of the said decision; otherwise, the decision shall become final, executory and
demandable.
Implications Of A Valid Assessment
Considering that the October 28, 1988 notices were valid assessments, BPI should have
protested the same within 30 days from receipt thereof. The December 10, 1988 reply it sent
to the CIR did not qualify as a protest since the letter itself stated that "[a]s soon as this is
explained and clarified in a proper letter of assessment, we shall inform you of the taxpayers
decision on whether to pay or protest the assessment."36 Hence, by its own declaration,
BPI did not regard this letter as a protest against the assessments. As a matter of fact, BPI
never deemed this a protest since it did not even consider the October 28, 1988 notices as
valid or proper assessments.
The inevitable conclusion is that BPIs failure to protest the assessments within the 30-day
period provided in the former Section 270 meant that they became final and unappealable.
Thus, the CTA correctly dismissed BPIs appeal for lack of jurisdiction. BPI was, from then on,
barred from disputing the correctness of the assessments or invoking any defense that would
reopen the question of its liability on the merits. 37 Not only that. There arose a presumption of
correctness when BPI failed to protest the assessments:
Tax assessments by tax examiners are presumed correct and made in good faith. The taxpayer
has the duty to prove otherwise. In the absence of proof of any irregularities in the performance
of duties, an assessment duly made by a Bureau of Internal Revenue examiner and approved
by his superior officers will not be disturbed. All presumptions are in favor of the correctness of
tax assessments.38
Even if we considered the December 10, 1988 letter as a protest, BPI must nevertheless be
deemed to have failed to appeal the CIRs final decision regarding the disputed assessments
within the 30-day period provided by law. The CIR, in his May 8, 1991 response, stated that it
was his "final decision on the matter." BPI therefore had 30 days from the time it received
the decision on June 27, 1991 to appeal but it did not. Instead it filed a request for
reconsideration and lodged its appeal in the CTA only on February 18, 1992, way beyond the
reglementary period. BPI must now suffer the repercussions of its omission. We have already
declared that:
the [CIR] should always indicate to the taxpayer in clear and unequivocal language
whenever his action on an assessment questioned by a taxpayer constitutes his final
determination on the disputed assessment, as contemplated by Sections 7 and 11 of [RA
1125], as amended. On the basis of his statement indubitably showing that the
Commissioner's communicated action is his final decision on the contested
assessment, the aggrieved taxpayer would then be able to take recourse to the tax court
at the opportune time. Without needless difficulty, the taxpayer would be able to
determine when his right to appeal to the tax court accrues.
The rule of conduct would also obviate all desire and opportunity on the part of the
taxpayer to continually delay the finality of the assessment and, consequently, the
collection of the amount demanded as taxes by repeated requests for recomputation
and reconsideration. On the part of the [CIR], this would encourage his office to conduct a
careful and thorough study of every questioned assessment and render a correct and definite
decision thereon in the first instance. This would also deter the [CIR] from unfairly making the
taxpayer grope in the dark and speculate as to which action constitutes the decision appealable
to the tax court. Of greater import, this rule of conduct would meet a pressing need for fair play,
regularity, and orderliness in administrative action.39 (emphasis supplied)
Either way (whether or not a protest was made), we cannot absolve BPI of its liability under the
subject tax assessments.
We realize that these assessments (which have been pending for almost 20 years) involve a
considerable amount of money. Be that as it may, we cannot legally presume the existence of
something which was never there. The state will be deprived of the taxes validly due it and the
public will suffer if taxpayers will not be held liable for the proper taxes assessed against them:
Taxes are the lifeblood of the government, for without taxes, the government can neither exist
nor endure. A principal attribute of sovereignty, the exercise of taxing power derives its source
from the very existence of the state whose social contract with its citizens obliges it to promote
public interest and common good. The theory behind the exercise of the power to tax emanates
from necessity; without taxes, government cannot fulfill its mandate of promoting the general
welfare and well-being of the people.40
WHEREFORE, the petition is hereby GRANTED. The May 29, 1998 decision of the Court of
Appeals in CA-G.R. SP No. 41025 is REVERSED and SET ASIDE.
SO ORDERED

10
G.R. No. 185371 December 8, 2010 Gross Sales P1,697,718.90
COMMISSIONER OF INTERNAL REVENUE, Petitioner,
vs. Output Tax P 154,338.08
METRO STAR SUPERAMA, INC., Respondent.
DECISION Less: Input Tax _____________
MENDOZA, J.:
VAT Payable P 154,338.08
This petition for review on certiorari under Rule 45 of the Rules of Court filed by the petitioner
Commissioner of Internal Revenue (CIR) seeks to reverse and set aside the 1] September 16, Add: 25% Surcharge P 38,584.54
2008 Decision1 of the Court of Tax Appeals En Banc (CTA-En Banc), in C.T.A. EB No. 306 and
2] its November 18, 2008 Resolution2 denying petitioners motion for reconsideration. 20% Interest 79,746.49
The CTA-En Banc affirmed in toto the decision of its Second Division (CTA-Second Division) in
CTA Case No. 7169 reversing the February 8, 2005 Decision of the CIR which assessed Compromise Penalty
respondent Metro Star Superama, Inc.(Metro Star) of deficiency value-added tax and
withholding tax for the taxable year 1999. Late Payment P16,000.00
Based on a Joint Stipulation of Facts and Issues 3
of the parties, the CTA Second Division
summarized the factual and procedural antecedents of the case, the pertinent portions of which Failure to File VAT returns 2,400.00 18,400.00 136,731.01
read:
TOTAL P 291,069.09
Petitioner is a domestic corporation duly organized and existing by virtue of the laws of the
Republic of the Philippines, x x x. WITHHOLDING TAX
On January 26, 2001, the Regional Director of Revenue Region No. 10, Legazpi City, issued
Letter of Authority No. 00006561 for Revenue Officer Daisy G. Justiniana to examine Compensation 2,772.91
petitioners books of accounts and other accounting records for income tax and other internal
revenue taxes for the taxable year 1999. Said Letter of Authority was revalidated on August Expanded 110,103.92
10, 2001 by Regional Director Leonardo Sacamos.
For petitioners failure to comply with several requests for the presentation of records and Total Tax Due P 112,876.83
Subpoena Duces Tecum, [the] OIC of BIR Legal Division issued an Indorsement dated
September 26, 2001 informing Revenue District Officer of Revenue Region No. 67, Legazpi Less: Tax Withheld 111,848.27
City to proceed with the investigation based on the best evidence obtainable preparatory to the
issuance of assessment notice. Deficiency Withholding Tax P 1,028.56
On November 8, 2001, Revenue District Officer Socorro O. Ramos-Lafuente issued a
Add: 20% Interest p.a. 576.51
Preliminary 15-day Letter, which petitioner received on November 9, 2001. The said letter
stated that a post audit review was held and it was ascertained that there was deficiency value- Compromise Penalty 200.00
added and withholding taxes due from petitioner in the amount of P 292,874.16.
On April 11, 2002, petitioner received a Formal Letter of Demand dated April 3, 2002 from TOTAL P 1,805.07
Revenue District No. 67, Legazpi City, assessing petitioner the amount of Two Hundred Ninety
Two Thousand Eight Hundred Seventy Four Pesos and Sixteen Centavos (P292,874.16.) for *Expanded Withholding Tax P1,949,334.25 x 5% 97,466.71
deficiency value-added and withholding taxes for the taxable year 1999, computed as follows:
ASSESSMENT NOTICE NO. 067-99-003-579-072 Film Rental 10,000.25 x 10% 1,000.00

VALUE ADDED TAX Audit Fee 193,261.20 x 5% 9,663.00

11
 Rental Expense 41,272.73 x 1% 412.73 1.2. Whether the assessment has become final and executory and demandable for failure of
petitioner to protest the same within 30 days from its receipt thereof on April 11, 2002, pursuant
Security Service 156,142.01 x 1% 1,561.42 to Section 228 of the National Internal Revenue Code;
2. Whether the deficiency assessments issued by the respondent are void for failure to state
Service Contractor P 110,103.92 the law and/or facts upon which they are based.
2.2 Whether petitioner was informed of the law and facts on which the assessment is made in
Total compliance with Section 228 of the National Internal Revenue Code;
3. Whether or not petitioner, as owner/operator of a movie/cinema house, is subject to VAT on
SUMMARIES OF DEFICIENCIES
sales of services under Section 108(A) of the National Internal Revenue Code;
VALUE ADDED TAX P 291,069.09 4. Whether or not the assessment is based on the best evidence obtainable pursuant to Section
6(b) of the National Internal Revenue Code.
WITHHOLDING TAX 1,805.07 The CTA-Second Division found merit in the petition of Metro Star and, on March 21, 2007,
rendered a decision, the decretal portion of which reads:
TOTAL P 292,874.16 WHEREFORE, premises considered, the Petition for Review is hereby GRANTED.
Subsequently, Revenue District Office No. 67 sent a copy of the Final Notice of Seizure dated Accordingly, the assailed Decision dated February 8, 2005 is hereby REVERSED and SET
May 12, 2003, which petitioner received on May 15, 2003, giving the latter last opportunity to ASIDE and respondent is ORDERED TO DESIST from collecting the subject taxes against
settle its deficiency tax liabilities within ten (10) [days] from receipt thereof, otherwise petitioner.
respondent BIR shall be constrained to serve and execute the Warrants of Distraint and/or The CTA-Second Division opined that "[w]hile there [is] a disputable presumption that a mailed
Levy and Garnishment to enforce collection. letter [is] deemed received by the addressee in the ordinary course of mail, a direct denial of
On February 6, 2004, petitioner received from Revenue District Office No. 67 a Warrant of the receipt of mail shifts the burden upon the party favored by the presumption to prove that
Distraint and/or Levy No. 67-0029-23 dated May 12, 2003 demanding payment of deficiency the mailed letter was indeed received by the addressee."5 It also found that there was no clear
value-added tax and withholding tax payment in the amount of P292,874.16. showing that Metro Star actually received the alleged PAN, dated January 16, 2002. It,
accordingly, ruled that the Formal Letter of Demand dated April 3, 2002, as well as the Warrant
On July 30, 2004, petitioner filed with the Office of respondent Commissioner a Motion for
of Distraint and/or Levy dated May 12, 2003 were void, as Metro Star was denied due process.6
Reconsideration pursuant to Section 3.1.5 of Revenue Regulations No. 12-99.
The CIR sought reconsideration7 of the decision of the CTA-Second Division, but the motion
On February 8, 2005, respondent Commissioner, through its authorized representative,
was denied in the latters July 24, 2007 Resolution.8
Revenue Regional Director of Revenue Region 10, Legaspi City, issued a Decision denying
petitioners Motion for Reconsideration. Petitioner, through counsel received said Decision on Aggrieved, the CIR filed a petition for review9 with the CTA-En Banc, but the petition was
February 18, 2005. dismissed after a determination that no new matters were raised. The CTA-En Banc disposed:
x x x. WHEREFORE, the instant Petition for Review is hereby DENIED DUE COURSE and
DISMISSED for lack of merit. Accordingly, the March 21, 2007 Decision and July 27, 2007
Denying that it received a Preliminary Assessment Notice (PAN) and claiming that it was not
Resolution of the CTA Second Division in CTA Case No. 7169 entitled, "Metro Star Superama,
accorded due process, Metro Star filed a petition for review4 with the CTA. The parties then
Inc., petitioner vs. Commissioner of Internal Revenue, respondent" are hereby AFFIRMED in
stipulated on the following issues to be decided by the tax court:
toto.
1. Whether the respondent complied with the due process requirement as provided under the
SO ORDERED.
National Internal Revenue Code and Revenue Regulations No. 12-99 with regard to the
issuance of a deficiency tax assessment; The motion for reconsideration10 filed by the CIR was likewise denied by the CTA-En Banc in
its November 18, 2008 Resolution.11
1.1 Whether petitioner is liable for the respective amounts of P291,069.09 and P1,805.07 as
deficiency VAT and withholding tax for the year 1999; The CIR, insisting that Metro Star received the PAN, dated January 16, 2002, and that due
process was served nonetheless because the latter received the Final Assessment Notice
(FAN), comes now before this Court with the sole issue of whether or not Metro Star was denied
due process.

12
The general rule is that the Court will not lightly set aside the conclusions reached by the CTA
which, by the very nature of its functions, has accordingly developed an exclusive expertise on
the resolution unless there has been an abuse or improvident exercise of authority. 12 In
Barcelon, Roxas Securities, Inc. (now known as UBP Securities, Inc.) v. Commissioner of
Internal Revenue,13 the Court wrote:
Jurisprudence has consistently shown that this Court accords the findings of fact by the CTA
with the highest respect. In Sea-Land Service Inc. v. Court of Appeals [G.R. No. 122605, 30
April 2001, 357 SCRA 441, 445-446], this Court recognizes that the Court of Tax Appeals,
which by the very nature of its function is dedicated exclusively to the consideration of tax
problems, has necessarily developed an expertise on the subject, and its conclusions will not
be overturned unless there has been an abuse or improvident exercise of authority. Such
findings can only be disturbed on appeal if they are not supported by substantial evidence or
there is a showing of gross error or abuse on the part of the Tax Court. In the absence of any
clear and convincing proof to the contrary, this Court must presume that the CTA rendered a
decision which is valid in every respect.
On the matter of service of a tax assessment, a further perusal of our ruling in Barcelon is
instructive, viz:
Jurisprudence is replete with cases holding that if the taxpayer denies ever having received an
assessment from the BIR, it is incumbent upon the latter to prove by competent evidence that
such notice was indeed received by the addressee. The onus probandi was shifted to
respondent to prove by contrary evidence that the Petitioner received the assessment in the
due course of mail. The Supreme Court has consistently held that while a mailed letter is
deemed received by the addressee in the course of mail, this is merely a disputable
presumption subject to controversion and a direct denial thereof shifts the burden to the party
favored by the presumption to prove that the mailed letter was indeed received by the
addressee (Republic vs. Court of Appeals, 149 SCRA 351). Thus as held by the Supreme
Court in Gonzalo P. Nava vs. Commissioner of Internal Revenue, 13 SCRA 104, January 30,
1965:
"The facts to be proved to raise this presumption are (a) that the letter was properly addressed
with postage prepaid, and (b) that it was mailed. Once these facts are proved, the presumption
is that the letter was received by the addressee as soon as it could have been transmitted to
him in the ordinary course of the mail. But if one of the said facts fails to appear, the
presumption does not lie. (VI, Moran, Comments on the Rules of Court, 1963 ed, 56-57 citing
Enriquez vs. Sunlife Assurance of Canada, 41 Phil 269)."
x x x. What is essential to prove the fact of mailing is the registry receipt issued by the Bureau
of Posts or the Registry return card which would have been signed by the Petitioner or its
authorized representative. And if said documents cannot be located, Respondent at the very
least, should have submitted to the Court a certification issued by the Bureau of Posts and any
other pertinent document which is executed with the intervention of the Bureau of Posts. This
Court does not put much credence to the self serving documentations made by the BIR
personnel especially if they are unsupported by substantial evidence establishing the fact of
mailing. Thus:
13
"While we have held that an assessment is made when sent within the prescribed period, even
if received by the taxpayer after its expiration (Coll. of Int. Rev. vs. Bautista, L-12250 and L-
12259, May 27, 1959), this ruling makes it the more imperative that the release, mailing or
sending of the notice be clearly and satisfactorily proved. Mere notations made without the
taxpayers intervention, notice or control, without adequate supporting evidence cannot suffice;
otherwise, the taxpayer would be at the mercy of the revenue offices, without adequate
protection or defense." (Nava vs. CIR, 13 SCRA 104, January 30, 1965).
x x x.
The failure of the respondent to prove receipt of the assessment by the Petitioner leads to the
conclusion that no assessment was issued. Consequently, the governments right to issue an
assessment for the said period has already prescribed. (Industrial Textile Manufacturing Co. of
the Phils., Inc. vs. CIR CTA Case 4885, August 22, 1996). (Emphases supplied.)
The Court agrees with the CTA that the CIR failed to discharge its duty and present any
evidence to show that Metro Star indeed received the PAN dated January 16, 2002. It could
have simply presented the registry receipt or the certification from the postmaster that it mailed
the PAN, but failed. Neither did it offer any explanation on why it failed to comply with the
requirement of service of the PAN. It merely accepted the letter of Metro Stars chairman dated
April 29, 2002, that stated that he had received the FAN dated April 3, 2002, but not the PAN;
that he was willing to pay the tax as computed by the CIR; and that he just wanted to clarify
some matters with the hope of lessening its tax liability.
This now leads to the question: Is the failure to strictly comply with notice requirements
prescribed under Section 228 of the National Internal Revenue Code of 1997 and Revenue
Regulations (R.R.) No. 12-99 tantamount to a denial of due process? Specifically, are the
requirements of due process satisfied if only the FAN stating the computation of tax liabilities
and a demand to pay within the prescribed period was sent to the taxpayer?
The answer to these questions require an examination of Section 228 of the Tax Code which
reads:
SEC. 228. Protesting of Assessment. - When the Commissioner or his duly authorized
representative finds that proper taxes should be assessed, he shall first notify the taxpayer of
his findings: provided, however, that a preassessment notice shall not be required in the
following cases:
(a) When the finding for any deficiency tax is the result of mathematical error in the computation
of the tax as appearing on the face of the return; or
(b) When a discrepancy has been determined between the tax withheld and the amount
actually remitted by the withholding agent; or
(c) When a taxpayer who opted to claim a refund or tax credit of excess creditable withholding
tax for a taxable period was determined to have carried over and automatically applied the
same amount claimed against the estimated tax liabilities for the taxable quarter or quarters of
the succeeding taxable year; or
(d) When the excise tax due on exciseable articles has not been paid; or
(e) When the article locally purchased or imported by an exempt person, such as, but not limited
to, vehicles, capital equipment, machineries and spare parts, has been sold, traded or
transferred to non-exempt persons.
The taxpayers shall be informed in writing of the law and the facts on which the assessment is
made; otherwise, the assessment shall be void.
Within a period to be prescribed by implementing rules and regulations, the taxpayer shall be
required to respond to said notice. If the taxpayer fails to respond, the Commissioner or his
duly authorized representative shall issue an assessment based on his findings.
Such assessment may be protested administratively by filing a request for reconsideration or
reinvestigation within thirty (30) days from receipt of the assessment in such form and manner
as may be prescribed by implementing rules and regulations. Within sixty (60) days from filing
of the protest, all relevant supporting documents shall have been submitted; otherwise, the
assessment shall become final.
If the protest is denied in whole or in part, or is not acted upon within one hundred eighty (180)
days from submission of documents, the taxpayer adversely affected by the decision or inaction
may appeal to the Court of Tax Appeals within thirty (30) days from receipt of the said decision,
or from the lapse of one hundred eighty (180)-day period; otherwise, the decision shall become
final, executory and demandable. (Emphasis supplied).
Indeed, Section 228 of the Tax Code clearly requires that the taxpayer must first be informed
that he is liable for deficiency taxes through the sending of a PAN. He must be informed of the
facts and the law upon which the assessment is made. The law imposes a substantive, not
merely a formal, requirement. To proceed heedlessly with tax collection without first
establishing a valid assessment is evidently violative of the cardinal principle in administrative
investigations - that taxpayers should be able to present their case and adduce supporting
evidence.14
This is confirmed under the provisions R.R. No. 12-99 of the BIR which pertinently provide:
SECTION 3. Due Process Requirement in the Issuance of a Deficiency Tax Assessment.
3.1 Mode of procedures in the issuance of a deficiency tax assessment:
3.1.1 Notice for informal conference. The Revenue Officer who audited the taxpayer's
records shall, among others, state in his report whether or not the taxpayer agrees with his
findings that the taxpayer is liable for deficiency tax or taxes. If the taxpayer is not amenable,
based on the said Officer's submitted report of investigation, the taxpayer shall be informed, in
writing, by the Revenue District Office or by the Special Investigation Division, as the case may
be (in the case Revenue Regional Offices) or by the Chief of Division concerned (in the case
of the BIR National Office) of the discrepancy or discrepancies in the taxpayer's payment of his
internal revenue taxes, for the purpose of "Informal Conference," in order to afford the taxpayer
with an opportunity to present his side of the case. If the taxpayer fails to respond within fifteen
(15) days from date of receipt of the notice for informal conference, he shall be considered in
default, in which case, the Revenue District Officer or the Chief of the Special Investigation
Division of the Revenue Regional Office, or the Chief of Division in the National Office, as the
case may be, shall endorse the case with the least possible delay to the Assessment Division
14
of the Revenue Regional Office or to the Commissioner or his duly authorized representative,
as the case may be, for appropriate review and issuance of a deficiency tax assessment, if
warranted.
3.1.2 Preliminary Assessment Notice (PAN). If after review and evaluation by the
Assessment Division or by the Commissioner or his duly authorized representative, as the case
may be, it is determined that there exists sufficient basis to assess the taxpayer for any
deficiency tax or taxes, the said Office shall issue to the taxpayer, at least by registered mail,
a Preliminary Assessment Notice (PAN) for the proposed assessment, showing in detail, the
facts and the law, rules and regulations, or jurisprudence on which the proposed assessment
is based (see illustration in ANNEX A hereof). If the taxpayer fails to respond within fifteen (15)
days from date of receipt of the PAN, he shall be considered in default, in which case, a formal
letter of demand and assessment notice shall be caused to be issued by the said Office, calling
for payment of the taxpayer's deficiency tax liability, inclusive of the applicable penalties.
3.1.3 Exceptions to Prior Notice of the Assessment. The notice for informal conference and
the preliminary assessment notice shall not be required in any of the following cases, in which
case, issuance of the formal assessment notice for the payment of the taxpayer's deficiency
tax liability shall be sufficient:
(i) When the finding for any deficiency tax is the result of mathematical error in the computation
of the tax appearing on the face of the tax return filed by the taxpayer; or
(ii) When a discrepancy has been determined between the tax withheld and the amount actually
remitted by the withholding agent; or
(iii) When a taxpayer who opted to claim a refund or tax credit of excess creditable withholding
tax for a taxable period was determined to have carried over and automatically applied the
same amount claimed against the estimated tax liabilities for the taxable quarter or quarters of
the succeeding taxable year; or
(iv) When the excise tax due on excisable articles has not been paid; or
(v) When an article locally purchased or imported by an exempt person, such as, but not limited
to, vehicles, capital equipment, machineries and spare parts, has been sold, traded or
transferred to non-exempt persons.
3.1.4 Formal Letter of Demand and Assessment Notice. The formal letter of demand and
assessment notice shall be issued by the Commissioner or his duly authorized representative.
The letter of demand calling for payment of the taxpayer's deficiency tax or taxes shall state
the facts, the law, rules and regulations, or jurisprudence on which the assessment is based,
otherwise, the formal letter of demand and assessment notice shall be void (see illustration in
ANNEX B hereof).
The same shall be sent to the taxpayer only by registered mail or by personal delivery.
If sent by personal delivery, the taxpayer or his duly authorized representative shall
acknowledge receipt thereof in the duplicate copy of the letter of demand, showing the
following: (a) His name; (b) signature; (c) designation and authority to act for and in behalf of
the taxpayer, if acknowledged received by a person other than the taxpayer himself; and (d)
date of receipt thereof.
x x x. government for its part is expected to respond in the form of tangible and intangible benefits
From the provision quoted above, it is clear that the sending of a PAN to taxpayer to inform intended to improve the lives of the people and enhance their moral and material values. This
him of the assessment made is but part of the "due process requirement in the issuance of a symbiotic relationship is the rationale of taxation and should dispel the erroneous notion that it
deficiency tax assessment," the absence of which renders nugatory any assessment made by is an arbitrary method of exaction by those in the seat of power.
the tax authorities. The use of the word "shall" in subsection 3.1.2 describes the mandatory But even as we concede the inevitability and indispensability of taxation, it is a requirement in
nature of the service of a PAN. The persuasiveness of the right to due process reaches both all democratic regimes that it be exercised reasonably and in accordance with the prescribed
substantial and procedural rights and the failure of the CIR to strictly comply with the procedure. If it is not, then the taxpayer has a right to complain and the courts will then come
requirements laid down by law and its own rules is a denial of Metro Stars right to due to his succor. For all the awesome power of the tax collector, he may still be stopped in his
process.15 Thus, for its failure to send the PAN stating the facts and the law on which the tracks if the taxpayer can demonstrate x x x that the law has not been observed. 21 (Emphasis
assessment was made as required by Section 228 of R.A. No. 8424, the assessment made by supplied).
the CIR is void. WHEREFORE, the petition is DENIED.
The case of CIR v. Menguito16 cited by the CIR in support of its argument that only the non- SO ORDERED.
service of the FAN is fatal to the validity of an assessment, cannot apply to this case because
the issue therein was the non-compliance with the provisions of R. R. No. 12-85 which sought
to interpret Section 229 of the old tax law. RA No. 8424 has already amended the provision of
Section 229 on protesting an assessment. The old requirement of merelynotifying the taxpayer
of the CIRs findings was changed in 1998 to informing the taxpayer of not only the law, but
also of the facts on which an assessment would be made. Otherwise, the assessment itself
would be invalid.17The regulation then, on the other hand, simply provided that a notice be sent
to the respondent in the form prescribed, and that no consequence would ensue for failure to
comply with that form.1avvphi1
The Court need not belabor to discuss the matter of Metro Stars failure to file its protest, for it
is well-settled that a void assessment bears no fruit.18
It is an elementary rule enshrined in the 1987 Constitution that no person shall be deprived of
property without due process of law.19 In balancing the scales between the power of the State
to tax and its inherent right to prosecute perceived transgressors of the law on one side, and
the constitutional rights of a citizen to due process of law and the equal protection of the laws
on the other, the scales must tilt in favor of the individual, for a citizens right is amply protected
by the Bill of Rights under the Constitution. Thus, while "taxes are the lifeblood of the
government," the power to tax has its limits, in spite of all its plenitude. Hence in Commissioner
of Internal Revenue v. Algue, Inc.,20 it was said
Taxes are the lifeblood of the government and so should be collected without unnecessary
hindrance. On the other hand, such collection should be made in accordance with law as any
arbitrariness will negate the very reason for government itself. It is therefore necessary to
reconcile the apparently conflicting interests of the authorities and the taxpayers so that the
real purpose of taxation, which is the promotion of the common good, may be achieved.
xxx xxx xxx
It is said that taxes are what we pay for civilized society. Without taxes, the government would
be paralyzed for the lack of the motive power to activate and operate it. Hence, despite the
natural reluctance to surrender part of ones hard-earned income to taxing authorities, every
person who is able to must contribute his share in the running of the government. The

15
G.R. No. 124043 October 14, 1998
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
COURT OF APPEALS, COURT OF TAX APPEALS and YOUNG MEN'S CHRISTIAN
ASSOCIATION OF THE PHILIPPINES, INC., respondents.
PANGANIBAN, J.:
Is the income derived from rentals of real property owned by the Young Men's Christian
Association of the Philippines, Inc. (YMCA) established as "a welfare, educational and
charitable non-profit corporation" subject to income tax under the National Internal Revenue
Code (NIRC) and the Constitution?
The Case
This is the main question raised before us in this petition for review on certiorari challenging
two Resolutions issued by the Court of Appeals 1 on September 28, 1995 2 and February 29,
1996 3 in CA-GR SP No. 32007. Both Resolutions affirmed the Decision of the Court of Tax
Appeals (CTA) allowing the YMCA to claim tax exemption on the latter's income from the lease
of its real property.
The Facts
The facts are undisputed. 4 Private Respondent YMCA is a non-stock, non-profit institution,
which conducts various programs and activities that are beneficial to the public, especially the
young people, pursuant to its religious, educational and charitable objectives.
In 1980, private respondent earned, among others, an income of P676,829.80 from leasing out
a portion of its premises to small shop owners, like restaurants and canteen operators, and
P44,259.00 from parking fees collected from non-members. On July 2, 1984, the commissioner
of internal revenue (CIR) issued an assessment to private respondent, in the total amount of
P415,615.01 including surcharge and interest, for deficiency income tax, deficiency expanded
withholding taxes on rentals and professional fees and deficiency withholding tax on wages.
Private respondent formally protested the assessment and, as a supplement to its basic
protest, filed a letter dated October 8, 1985. In reply, the CIR denied the claims of YMCA.
Contesting the denial of its protest, the YMCA filed a petition for review at the Court of Tax
Appeals (CTA) on March 14, 1989. In due course, the CTA issued this ruling in favor of the
YMCA:
. . . [T]he leasing of [private respondent's] facilities to small shop owners, to restaurant and
canteen operators and the operation of the parking lot are reasonably incidental to and
reasonably necessary for the accomplishment of the objectives of the [private respondents]. It
appears from the testimonies of the witnesses for the [private respondent] particularly Mr.
James C. Delote, former accountant of YMCA, that these facilities were leased to members
and that they have to service the needs of its members and their guests. The rentals were
minimal as for example, the barbershop was only charged P300 per month. He also testified
that there was actually no lot devoted for parking space but the parking was done at the sides
16
of the building. The parking was primarily for members with stickers on the windshields of their
cars and they charged P.50 for non-members. The rentals and parking fees were just enough
to cover the costs of operation and maintenance only. The earning[s] from these rentals and
parking charges including those from lodging and other charges for the use of the recreational
facilities constitute [the] bulk of its income which [is] channeled to support its many activities
and attainment of its objectives. As pointed out earlier, the membership dues are very
insufficient to support its program. We find it reasonably necessary therefore for [private
respondent] to make [the] most out [of] its existing facilities to earn some income. It would have
been different if under the circumstances, [private respondent] will purchase a lot and convert
it to a parking lot to cater to the needs of the general public for a fee, or construct a building
and lease it out to the highest bidder or at the market rate for commercial purposes, or should
it invest its funds in the buy and sell of properties, real or personal. Under these circumstances,
we could conclude that the activities are already profit oriented, not incidental and reasonably
necessary to the pursuit of the objectives of the association and therefore, will fall under the
last paragraph of Section 27 of the Tax Code and any income derived therefrom shall be
taxable.
Considering our findings that [private respondent] was not engaged in the business of operating
or contracting [a] parking lot, we find no legal basis also for the imposition of [a] deficiency fixed
tax and [a] contractor's tax in the amount[s] of P353.15 and P3,129.73, respectively.
xxx xxx xxx
WHEREFORE, in view of all the foregoing, the following assessments are hereby dismissed
for lack of merit:
1980 Deficiency Fixed Tax P353,15;
1980 Deficiency Contractor's Tax P3,129.23;
1980 Deficiency Income Tax P372,578.20.
While the following assessments are hereby sustained:
1980 Deficiency Expanded Withholding Tax P1,798.93;
1980 Deficiency Withholding Tax on Wages P33,058.82
plus 10% surcharge and 20% interest per annum from July 2, 1984 until fully paid but not to
exceed three (3) years pursuant to Section 51(e)(2) & (3) of the National Internal Revenue
Code effective as of 1984. 5
Dissatisfied with the CTA ruling, the CIR elevated the case to the Court of Appeals (CA). In its
Decision of February 16, 1994, the CA 6 initially decided in favor of the CIR and disposed of the
appeal in the following manner:
Following the ruling in the afore-cited cases of Province of Abra vs. Hernando and Abra Valley
College Inc. vs. Aquino, the ruling of the respondent Court of Tax Appeals that "the leasing of
petitioner's (herein respondent's) facilities to small shop owners, to restaurant and canteen
operators and the operation of the parking lot are reasonably incidental to and reasonably
necessary for the accomplishment of the objectives of the petitioners, and the income derived
therefrom are tax exempt, must be reversed.
WHEREFORE, the appealed decision is hereby REVERSED in so far as it dismissed the
assessment for:
1980 Deficiency Income Tax P 353.15
1980 Deficiency Contractor's Tax P 3,129.23, &
1980 Deficiency Income Tax P 372,578.20
but the same is AFFIRMED in all other respect. 7 Factual Findings of the CTA
Aggrieved, the YMCA asked for reconsideration based on the following grounds:
I
The findings of facts of the Public Respondent Court of Tax Appeals being supported by
substantial evidence [are] final and conclusive.
II
The conclusions of law of [p]ublic [r]espondent exempting [p]rivate [r]espondent from the
income on rentals of small shops and parking fees [are] in accord with the applicable law and
jurisprudence. 8
Finding merit in the Motion for Reconsideration filed by the YMCA, the CA reversed itself and
promulgated on September 28, 1995 its first assailed Resolution which, in part, reads:
The Court cannot depart from the CTA's findings of fact, as they are supported by evidence
beyond what is considered as substantial.
xxx xxx xxx
The second ground raised is that the respondent CTA did not err in saying that the rental from
small shops and parking fees do not result in the loss of the exemption. Not even the petitioner
would hazard the suggestion that YMCA is designed for profit. Consequently, the little income
from small shops and parking fees help[s] to keep its head above the water, so to speak, and
allow it to continue with its laudable work.
The Court, therefore, finds the second ground of the motion to be meritorious and in accord
with law and jurisprudence.
WHEREFORE, the motion for reconsideration is GRANTED; the respondent CTA's decision is
AFFIRMED in toto. 9
The internal revenue commissioner's own Motion for Reconsideration was denied by
Respondent Court in its second assailed Resolution of February 29, 1996. Hence, this petition
for review under Rule 45 of the Rules of Court. 10
The Issues
Before us, petitioner imputes to the Court of Appeals the following errors:
I Sec. 27. Exemptions from tax on corporations. The following organizations shall not be taxed
In holding that it had departed from the findings of fact of Respondent Court of Tax Appeals
when it rendered its Decision dated February 16, 1994; and
II
17
In affirming the conclusion of Respondent Court of Tax Appeals that the income of private
respondent from rentals of small shops and parking fees [is] exempt from taxation. 11
This Court's Ruling
The petition is meritorious.
First Issue:
Private respondent contends that the February 16, 1994 CA Decision reversed the factual
findings of the CTA. On the other hand, petitioner argues that the CA merely reversed the
"ruling of the CTA that the leasing of private respondent's facilities to small shop owners, to
restaurant and canteen operators and the operation of parking lots are reasonably incidental
to and reasonably necessary for the accomplishment of the objectives of the private respondent
and that the income derived therefrom are tax exempt." 12 Petitioner insists that what the
appellate court reversed was the legal conclusion, not the factual finding, of the CTA. 13 The
commissioner has a point.
Indeed, it is a basic rule in taxation that the factual findings of the CTA, when supported by
substantial evidence, will be disturbed on appeal unless it is shown that the said court
committed gross error in the appreciation of facts. 14 In the present case, this Court finds that
the February 16, 1994 Decision of the CA did not deviate from this rule. The latter merely
applied the law to the facts as found by the CTA and ruled on the issue raised by the CIR:
"Whether or not the collection or earnings of rental income from the lease of certain premises
and income earned from parking fees shall fall under the last paragraph of Section 27 of the
National Internal Revenue Code of 1977, as amended." 15
Clearly, the CA did not alter any fact or evidence. It merely resolved the aforementioned issue,
as indeed it was expected to. That it did so in a manner different from that of the CTA did not
necessarily imply a reversal of factual findings.
The distinction between a question of law and a question of fact is clear-cut. It has been held
that "[t]here is a question of law in a given case when the doubt or difference arises as to what
the law is on a certain state of facts; there is a question of fact when the doubt or difference
arises as to the truth or falsehood of alleged facts."16 In the present case, the CA did not doubt,
much less change, the facts narrated by the CTA. It merely applied the law to the facts. That
its interpretation or conclusion is different from that of the CTA is not irregular or abnormal.
Second Issue:
Is the Rental Income of the YMCA Taxable?
We now come to the crucial issue: Is the rental income of the YMCA from its real estate subject
to tax? At the outset, we set forth the relevant provision of the NIRC:
under this Title in respect to income received by them as such
xxx xxx xxx
(g) Civic league or organization not organized for profit but operated exclusively for the
promotion of social welfare;
(h) Club organized and operated exclusively for pleasure, recreation, and other non-profitable
purposes, no part of the net income of which inures to the benefit of any private stockholder or
member;
xxx xxx xxx
Notwithstanding the provisions in the preceding paragraphs, the income of whatever kind and
character of the foregoing organizations from any of their properties, real or personal, or from
any of their activities conducted for profit, regardless of the disposition made of such income,
shall be subject to the tax imposed under this Code. (as amended by Pres. Decree No. 1457)
Petitioner argues that while the income received by the organizations enumerated in Section
27 (now Section 26) of the NIRC is, as a rule, exempted from the payment of tax "in respect to
income received by them as such," the exemption does not apply to income derived ". . . from
any of their properties, real or personal, or from any of their activities conducted for profit,
regardless of the disposition made of such income . . . ."
Petitioner adds that "rental income derived by a tax-exempt organization from the lease of its
properties, real or personal, [is] not, therefore, exempt from income taxation, even if such
income [is] exclusively used for the accomplishment of its objectives." 17 We agree with the
commissioner.
Because taxes are the lifeblood of the nation, the Court has always applied the doctrine of strict
in interpretation in construing tax exemptions. 18 Furthermore, a claim of statutory exemption
from taxation should be manifest. and unmistakable from the language of the law on which it is
based. Thus, the claimed exemption "must expressly be granted in a statute stated in a
language too clear to be mistaken." 19
In the instant case, the exemption claimed by the YMCA is expressly disallowed by the very
wording of the last paragraph of then Section 27 of the NIRC which mandates that the income
of exempt organizations (such as the YMCA) from any of their properties, real or personal, be
subject to the tax imposed by the same Code. Because the last paragraph of said section
unequivocally subjects to tax the rent income of the YMCA from its real property, 20 the Court
is duty-bound to abide strictly by its literal meaning and to refrain from resorting to any
convoluted attempt at construction.
It is axiomatic that where the language of the law is clear and unambiguous, its express terms
must be applied. 21Parenthetically, a consideration of the question of construction must not
even begin, particularly when such question is on whether to apply a strict construction or a
liberal one on statutes that grant tax exemptions to "religious, charitable and educational
propert[ies] or institutions." 22
The last paragraph of Section 27, the YMCA argues, should be "subject to the qualification that
the income from the properties must arise from activities 'conducted for profit' before it may be
considered taxable." 23 This argument is erroneous. As previously stated, a reading of said
paragraph ineludibly shows that the income from any property of exempt organizations, as well
as that arising from any activity it conducts for profit, is taxable. The phrase "any of their
activities conducted for profit" does not qualify the word "properties." This makes from the
18
property of the organization taxable, regardless of how that income is used whether for profit
or for lofty non-profit purposes.
Verba legis non est recedendum. Hence, Respondent Court of Appeals committed reversible
error when it allowed, on reconsideration, the tax exemption claimed by YMCA on income it
derived from renting out its real property, on the solitary but unconvincing ground that the said
income is not collected for profit but is merely incidental to its operation. The law does not make
a distinction. The rental income is taxable regardless of whence such income is derived and
how it is used or disposed of. Where the law does not distinguish, neither should we.
Constitutional Provisions
On Taxation
Invoking not only the NIRC but also the fundamental law, private respondent submits that
Article VI, Section 28 of par. 3 of the 1987 Constitution, 24 exempts "charitable institutions" from
the payment not only of property taxes but also of income tax from any source. 25 In support of
its novel theory, it compares the use of the words "charitable institutions," "actually" and
"directly" in the 1973 and the 1987 Constitutions, on the one hand; and in Article VI, Section
22, par. 3 of the 1935 Constitution, on the other hand. 26
Private respondent enunciates three points. First, the present provision is divisible into two
categories: (1) "[c]haritable institutions, churches and parsonages or convents appurtenant
thereto, mosques and non-profit cemeteries," the incomes of which are, from whatever source,
all tax-exempt; 27 and (2) "[a]ll lands, buildings and improvements actually and directly used for
religious, charitable or educational purposes," which are exempt only from property
taxes. 28 Second, Lladoc v. Commissioner of Internal Revenue, 29 which limited the exemption
only to the payment of property taxes, referred to the provision of the 1935 Constitution and
not to its counterparts in the 1973 and the 1987 Constitutions. 30 Third, the phrase "actually,
directly and exclusively used for religious, charitable or educational purposes" refers not only
to "all lands, buildings and improvements," but also to the above-quoted first category which
includes charitable institutions like the private respondent. 31
The Court is not persuaded. The debates, interpellations and expressions of opinion of the
framers of the Constitution reveal their intent which, in turn, may have guided the people in
ratifying the Charter. 32 Such intent must be effectuated.
Accordingly, Justice Hilario G. Davide, Jr., a former constitutional commissioner, who is now a
member of this Court, stressed during the Concom debates that ". . . what is exempted is not
the institution itself . . .; those exempted from real estate taxes are lands, buildings and
improvements actually, directly and exclusively used for religious, charitable or educational
purposes." 33 Father Joaquin G. Bernas, an eminent authority on the Constitution and also a
member of the Concom, adhered to the same view that the exemption created by said provision
pertained only to property taxes. 34
In his treatise on taxation, Mr. Justice Jose C. Vitug concurs, stating that "[t]he tax exemption
covers propertytaxes only." 35 Indeed, the income tax exemption claimed by private respondent
finds no basis in Article VI, Section 26, par. 3 of the Constitution.
Private respondent also invokes Article XIV, Section 4, par. 3 of the Character, 36 claiming that
the YMCA "is a non-stock, non-profit educational institution whose revenues and assets are
used actually, directly and exclusively for educational purposes so it is exempt from taxes on
its properties and income." 37 We reiterate that private respondent is exempt from the payment
of property tax, but not income tax on the rentals from its property. The bare allegation alone
that it is a non-stock, non-profit educational institution is insufficient to justify its exemption from
the payment of income tax.
As previously discussed, laws allowing tax exemption are construed strictissimi juris. Hence,
for the YMCA to be granted the exemption it claims under the aforecited provision, it must prove
with substantial evidence that (1) it falls under the classification non-stock, non-profit
educational institution; and (2) the income it seeks to be exempted from taxation is
used actually, directly, and exclusively for educational purposes. However, the Court notes that
not a scintilla of evidence was submitted by private respondent to prove that it met the said
requisites.
Is the YMCA an educational institution within the purview of Article XIV, Section 4, par. 3 of the
Constitution? We rule that it is not. The term "educational institution" or "institution of learning"
has acquired a well-known technical meaning, of which the members of the Constitutional
Commission are deemed cognizant. 38 Under the Education Act of 1982, such term refers to
schools. 39 The school system is synonymous with formal education, 40 which "refers to the
hierarchically structured and chronologically graded learnings organized and provided by the
formal school system and for which certification is required in order for the learner to progress
through the grades or move to the higher levels." 41 The Court has examined the "Amended
Articles of Incorporation" and "By-Laws" 43 of the YMCA, but found nothing in them that even
hints that it is a school or an educational institution. 44
Furthermore, under the Education Act of 1982, even non-formal education is understood to be
school-based and "private auspices such as foundations and civic-spirited organizations" are
ruled out. 45 It is settled that the term "educational institution," when used in laws granting tax
exemptions, refers to a ". . . school seminary, college or educational establishment . . .
." 46 Therefore, the private respondent cannot be deemed one of the educational institutions
covered by the constitutional provision under consideration.
. . . Words used in the Constitution are to be taken in their ordinary acceptation. While in its
broadest and best sense education embraces all forms and phases of instruction, improvement
and development of mind and body, and as well of religious and moral sentiments, yet in the
common understanding and application it means a place where systematic instruction in any
or all of the useful branches of learning is given by methods common to schools and institutions
of learning. That we conceive to be the true intent and scope of the term [educational
institutions,] as used in the
Constitution. 47
Moreover, without conceding that Private Respondent YMCA is an educational institution, the
Court also notes that the former did not submit proof of the proportionate amount of the subject
income that was actually, directly and exclusively used for educational purposes. Article XIII,
Section 5 of the YMCA by-laws, which formed part of the evidence submitted, is patently
19
insufficient, since the same merely signified that "[t]he net income derived from the rentals of
the commercial buildings shall be apportioned to the Federation and Member Associations as
the National Board may decide." 48 In sum, we find no basis for granting the YMCA exemption
from income tax under the constitutional provision invoked.
Cases Cited by Private
Respondent Inapplicable
The cases 49 relied on by private respondent do not support its cause. YMCA of Manila v.
Collector of Internal Revenue 50and Abra Valley College, Inc. v. Aquino 51 are not applicable,
because the controversy in both cases involved exemption from the payment of property tax,
not income tax. Hospital de San Juan de Dios, Inc. v. Pasay City 52 is not in point either,
because it involves a claim for exemption from the payment of regulatory fees, specifically
electrical inspection fees, imposed by an ordinance of Pasay City an issue not at all related
to that involved in a claimed exemption from the payment of income taxes imposed on property
leases. In Jesus Sacred Heart College v. Com. of Internal Revenue, 53 the party therein, which
claimed an exemption from the payment of income tax, was an educational institution which
submitted substantial evidence that the income subject of the controversy had been devoted
or used solely for educational purposes. On the other hand, the private respondent in the
present case has not given any proof that it is an educational institution, or that part of its rent
income is actually, directly and exclusively used for educational purposes.
Epilogue
In deliberating on this petition, the Court expresses its sympathy with private respondent. It
appreciates the nobility of its cause. However, the Court's power and function are limited merely
to applying the law fairly and objectively. It cannot change the law or bend it to suit its
sympathies and appreciations. Otherwise, it would be overspilling its role and invading the
realm of legislation.
We concede that private respondent deserves the help and the encouragement of the
government. It needs laws that can facilitate, and not frustrate, its humanitarian tasks. But the
Court regrets that, given its limited constitutional authority, it cannot rule on the wisdom or
propriety of legislation. That prerogative belongs to the political departments of government.
Indeed, some of the members of the Court may even believe in the wisdom and prudence of
granting more tax exemptions to private respondent. But such belief, however well-meaning
and sincere, cannot bestow upon the Court the power to change or amend the law.
WHEREFORE, the petition is GRANTED. The Resolutions of the Court of Appeals dated
September 28, 1995 and February 29, 1996 are hereby REVERSED and SET ASIDE. The
Decision of the Court of Appeals dated February 16, 1995 is REINSTATED, insofar as it ruled
that the income derived by petitioner from rentals of its real property is subject to income tax.
No pronouncement as to costs.
SO ORDERED.
G.R. No. 120880 June 5, 1997
FERDINAND R. MARCOS II, petitioner,
vs.
COURT OF APPEALS, THE COMMISSIONER OF THE BUREAU OF INTERNAL REVENUE
and HERMINIA D. DE GUZMAN, respondents.
TORRES, JR., J.:
In this Petition for Review on Certiorari, Government action is once again assailed as
precipitate and unfair, suffering the basic and oftly implored requisites of due process of law.
Specifically, the petition assails the Decision1 of the Court of Appeals dated November 29, 1994
in CA-G.R. SP No. 31363, where the said court held:
In view of all the foregoing, we rule that the deficiency income tax assessments and estate tax
assessment, are already final and (u)nappealable-and-the subsequent levy of real properties
is a tax remedy resorted to by the government, sanctioned by Section 213 and 218 of the
National Internal Revenue Code. This summary tax remedy is distinct and separate from the
other tax remedies (such as Judicial Civil actions and Criminal actions), and is not affected or
precluded by the pendency of any other tax remedies instituted by the government.
WHEREFORE, premises considered, judgment is hereby rendered DISMISSING the petition
forcertiorari with prayer for Restraining Order and Injunction.
No pronouncements as to costs.
SO ORDERED.
More than seven years since the demise of the late Ferdinand E. Marcos, the former President
of the Republic of the Philippines, the matter of the settlement of his estate, and its dues to the
government in estate taxes, are still unresolved, the latter issue being now before this Court
for resolution. Specifically, petitioner Ferdinand R. Marcos II, the eldest son of the decedent,
questions the actuations of the respondent Commissioner of Internal Revenue in assessing,
and collecting through the summary remedy of Levy on Real Properties, estate and income tax
delinquencies upon the estate and properties of his father, despite the pendency of the
proceedings on probate of the will of the late president, which is docketed as Sp. Proc. No.
10279 in the Regional Trial Court of Pasig, Branch 156.
Petitioner had filed with the respondent Court of Appeals a Petition for Certiorari and
Prohibition with an application for writ of preliminary injunction and/or temporary restraining
order on June 28, 1993, seeking to
I. Annul and set aside the Notices of Levy on real property dated February 22, 1993 and May
20, 1993, issued by respondent Commissioner of Internal Revenue;
II. Annul and set aside the Notices of Sale dated May 26, 1993;
III. Enjoin the Head Revenue Executive Assistant Director II (Collection Service), from
proceeding with the Auction of the real properties covered by Notices of Sale.
After the parties had pleaded their case, the Court of Appeals rendered its Decision 2 on
November 29, 1994, ruling that the deficiency assessments for estate and income tax made
20
upon the petitioner and the estate of the deceased President Marcos have already become
final and unappealable, and may thus be enforced by the summary remedy of levying upon the
properties of the late President, as was done by the respondent Commissioner of Internal
Revenue.
WHEREFORE, premises considered judgment is hereby rendered DISMISSING the petition
forCertiorari with prayer for Restraining Order and Injunction.
No pronouncements as to cost.
SO ORDERED.
Unperturbed, petitioner is now before us assailing the validity of the appellate court's decision,
assigning the following as errors:
A. RESPONDENT COURT MANIFESTLY ERRED IN RULING THAT THE SUMMARY TAX
REMEDIES RESORTED TO BY THE GOVERNMENT ARE NOT AFFECTED AND
PRECLUDED BY THE PENDENCY OF THE SPECIAL PROCEEDING FOR THE
ALLOWANCE OF THE LATE PRESIDENT'S ALLEGED WILL. TO THE CONTRARY, THIS
PROBATE PROCEEDING PRECISELY PLACED ALL PROPERTIES WHICH FORM PART
OF THE LATE PRESIDENT'S ESTATE IN CUSTODIA LEGIS OF THE PROBATE COURT TO
THE EXCLUSION OF ALL OTHER COURTS AND ADMINISTRATIVE AGENCIES.
B. RESPONDENT COURT ARBITRARILY ERRED IN SWEEPINGLY DECIDING THAT
SINCE THE TAX ASSESSMENTS OF PETITIONER AND HIS PARENTS HAD ALREADY
BECOME FINAL AND UNAPPEALABLE, THERE WAS NO NEED TO GO INTO THE MERITS
OF THE GROUNDS CITED IN THE PETITION. INDEPENDENT OF WHETHER THE TAX
ASSESSMENTS HAD ALREADY BECOME FINAL, HOWEVER, PETITIONER HAS THE
RIGHT TO QUESTION THE UNLAWFUL MANNER AND METHOD IN WHICH TAX
COLLECTION IS SOUGHT TO BE ENFORCED BY RESPONDENTS COMMISSIONER AND
DE GUZMAN. THUS, RESPONDENT COURT SHOULD HAVE FAVORABLY CONSIDERED
THE MERITS OF THE FOLLOWING GROUNDS IN THE PETITION:
(1) The Notices of Levy on Real Property were issued beyond the period provided in the
Revenue Memorandum Circular No. 38-68.
(2) [a] The numerous pending court cases questioning the late President's ownership or
interests in several properties (both personal and real) make the total value of his estate, and
the consequent estate tax due, incapable of exact pecuniary determination at this time. Thus,
respondents' assessment of the estate tax and their issuance of the Notices of Levy and Sale
are premature, confiscatory and oppressive.
[b] Petitioner, as one of the late President's compulsory heirs, was never notified, much less
served with copies of the Notices of Levy, contrary to the mandate of Section 213 of the NIRC.
As such, petitioner was never given an opportunity to contest the Notices in violation of his right
to due process of law.
C. ON ACCOUNT OF THE CLEAR MERIT OF THE PETITION, RESPONDENT COURT
MANIFESTLY ERRED IN RULING THAT IT HAD NO POWER TO GRANT INJUNCTIVE
RELIEF TO PETITIONER. SECTION 219 OF THE NIRC NOTWITHSTANDING, COURTS
POSSESS THE POWER TO ISSUE A WRIT OF PRELIMINARY INJUNCTION TO RESTRAIN
RESPONDENTS COMMISSIONER'S AND DE GUZMAN'S ARBITRARY METHOD OF
COLLECTING THE ALLEGED DEFICIENCY ESTATE AND INCOME TAXES BY MEANS OF
LEVY.
The facts as found by the appellate court are undisputed, and are hereby adopted:
On September 29, 1989, former President Ferdinand Marcos died in Honolulu, Hawaii, USA.
On June 27, 1990, a Special Tax Audit Team was created to conduct investigations and
examinations of the tax liabilities and obligations of the late president, as well as that of his
family, associates and "cronies". Said audit team concluded its investigation with a
Memorandum dated July 26, 1991. The investigation disclosed that the Marcoses failed to file
a written notice of the death of the decedent, an estate tax returns [sic], as well as several
income tax returns covering the years 1982 to 1986, all in violation of the National Internal
Revenue Code (NIRC).
Subsequently, criminal charges were filed against Mrs. Imelda R. Marcos before the Regional
Trial of Quezon City for violations of Sections 82, 83 and 84 (has penalized under Sections 253
and 254 in relation to Section 252 a & b) of the National Internal Revenue Code (NIRC).
The Commissioner of Internal Revenue thereby caused the preparation and filing of the Estate
Tax Return for the estate of the late president, the Income Tax Returns of the Spouses Marcos
for the years 1985 to 1986, and the Income Tax Returns of petitioner Ferdinand "Bongbong"
Marcos II for the years 1982 to 1985.
On July 26, 1991, the BIR issued the following: (1) Deficiency estate tax assessment no. FAC-
2-89-91-002464 (against the estate of the late president Ferdinand Marcos in the amount of
P23,293,607,638.00 Pesos); (2) Deficiency income tax assessment no. FAC-1-85-91-002452
and Deficiency income tax assessment no. FAC-1-86-91-002451 (against the Spouses
Ferdinand and Imelda Marcos in the amounts of P149,551.70 and P184,009,737.40
representing deficiency income tax for the years 1985 and 1986); (3) Deficiency income tax
assessment nos. FAC-1-82-91-002460 to FAC-1-85-91-002463 (against petitioner Ferdinand
"Bongbong" Marcos II in the amounts of P258.70 pesos; P9,386.40 Pesos; P4,388.30 Pesos;
and P6,376.60 Pesos representing his deficiency income taxes for the years 1982 to 1985).
The Commissioner of Internal Revenue avers that copies of the deficiency estate and income
tax assessments were all personally and constructively served on August 26, 1991 and
September 12, 1991 upon Mrs. Imelda Marcos (through her caretaker Mr. Martinez) at her last
known address at No. 204 Ortega St., San Juan, M.M. (Annexes "D" and "E" of the Petition).
Likewise, copies of the deficiency tax assessments issued against petitioner Ferdinand
"Bongbong" Marcos II were also personally and constructively served upon him (through his
caretaker) on September 12, 1991, at his last known address at Don Mariano Marcos St. corner
P. Guevarra St., San Juan, M.M. (Annexes "J" and "J-1" of the Petition). Thereafter, Formal
Assessment notices were served on October 20, 1992, upon Mrs. Marcos c/o petitioner, at his
office, House of Representatives, Batasan Pambansa, Quezon City. Moreover, a notice to
Taxpayer inviting Mrs. Marcos (or her duly authorized representative or counsel), to a
conference, was furnished the counsel of Mrs. Marcos, Dean Antonio Coronel but to no
avail.
21
The deficiency tax assessments were not protested administratively, by Mrs. Marcos and the
other heirs of the late president, within 30 days from service of said assessments.
On February 22, 1993, the BIR Commissioner issued twenty-two notices of levy on real
property against certain parcels of land owned by the Marcoses to satisfy the alleged estate
tax and deficiency income taxes of Spouses Marcos.
On May 20, 1993, four more Notices of Levy on real property were issued for the purpose of
satisfying the deficiency income taxes.
On May 26, 1993, additional four (4) notices of Levy on real property were again issued. The
foregoing tax remedies were resorted to pursuant to Sections 205 and 213 of the National
Internal Revenue Code (NIRC).
In response to a letter dated March 12, 1993 sent by Atty. Loreto Ata (counsel of herein
petitioner) calling the attention of the BIR and requesting that they be duly notified of any action
taken by the BIR affecting the interest of their client Ferdinand "Bongbong" Marcos II, as well
as the interest of the late president copies of the aforesaid notices were, served on April 7,
1993 and on June 10, 1993, upon Mrs. Imelda Marcos, the petitioner, and their counsel of
record, "De Borja, Medialdea, Ata, Bello, Guevarra and Serapio Law Office".
Notices of sale at public auction were posted on May 26, 1993, at the lobby of the City Hall of
Tacloban City. The public auction for the sale of the eleven (11) parcels of land took place on
July 5, 1993. There being no bidder, the lots were declared forfeited in favor of the government.
On June 25, 1993, petitioner Ferdinand "Bongbong" Marcos II filed the instant petition
for certiorariand prohibition under Rule 65 of the Rules of Court, with prayer for temporary
restraining order and/or writ of preliminary injunction.
It has been repeatedly observed, and not without merit, that the enforcement of tax laws and
the collection of taxes, is of paramount importance for the sustenance of government. Taxes
are the lifeblood of the government and should be collected without unnecessary hindrance.
However, such collection should be made in accordance with law as any arbitrariness will
negate the very reason for government itself. It is therefore necessary to reconcile the
apparently conflicting interests of the authorities and the taxpayers so that the real purpose of
taxation, which is the promotion of the common good, may be achieved. 3
Whether or not the proper avenues of assessment and collection of the said tax obligations
were taken by the respondent Bureau is now the subject of the Court's inquiry.
Petitioner posits that notices of levy, notices of sale, and subsequent sale of properties of the
late President Marcos effected by the BIR are null and void for disregarding the established
procedure for the enforcement of taxes due upon the estate of the deceased. The case
of Domingo vs. Garlitos 4 is specifically cited to bolster the argument that "the ordinary
procedure by which to settle claims of indebtedness against the estate of a deceased, person,
as in an inheritance (estate) tax, is for the claimant to present a claim before the probate court
so that said court may order the administrator to pay the amount therefor." This remedy is
allegedly, exclusive, and cannot be effected through any other means.
Petitioner goes further, submitting that the probate court is not precluded from denying a
request by the government for the immediate payment of taxes, and should order the payment
of the same only within the period fixed by the probate court for the payment of all the debts of
the decedent. In this regard, petitioner cites the case of Collector of Internal Revenue vs. The
Administratrix of the Estate of Echarri (67 Phil 502), where it was held that:
The case of Pineda vs. Court of First Instance of Tayabas and Collector of Internal Revenue
(52 Phil 803), relied upon by the petitioner-appellant is good authority on the proposition that
the court having control over the administration proceedings has jurisdiction to entertain the
claim presented by the government for taxes due and to order the administrator to pay the tax
should it find that the assessment was proper, and that the tax was legal, due and collectible.
And the rule laid down in that case must be understood in relation to the case of Collector of
Customs vs. Haygood, supra., as to the procedure to be followed in a given case by the
government to effectuate the collection of the tax. Categorically stated, where during the
pendency of judicial administration over the estate of a deceased person a claim for taxes is
presented by the government, the court has the authority to order payment by the administrator;
but, in the same way that it has authority to order payment or satisfaction, it also has the
negative authority to deny the same. While there are cases where courts are required to
perform certain duties mandatory and ministerial in character, the function of the court in a case
of the present character is not one of them; and here, the court cannot be an organism endowed
with latitude of judgment in one direction, and converted into a mere mechanical contrivance
in another direction.
On the other hand, it is argued by the BIR, that the state's authority to collect internal revenue
taxes is paramount. Thus, the pendency of probate proceedings over the estate of the
deceased does not preclude the assessment and collection, through summary remedies, of
estate taxes over the same. According to the respondent, claims for payment of estate and
income taxes due and assessed after the death of the decedent need not be presented in the
form of a claim against the estate. These can and should be paid immediately. The probate
court is not the government agency to decide whether an estate is liable for payment of estate
of income taxes. Well-settled is the rule that the probate court is a court with special and limited
jurisdiction.
Concededly, the authority of the Regional Trial Court, sitting, albeit with limited jurisdiction, as
a probate court over estate of deceased individual, is not a trifling thing. The court's jurisdiction,
once invoked, and made effective, cannot be treated with indifference nor should it be ignored
with impunity by the very parties invoking its authority.
In testament to this, it has been held that it is within the jurisdiction of the probate court to
approve the sale of properties of a deceased person by his prospective heirs before final
adjudication; 5 to determine who are the heirs of the decedent; 6 the recognition of a natural
child; 7 the status of a woman claiming to be the legal wife of the decedent; 8the legality of
disinheritance of an heir by the testator; 9 and to pass upon the validity of a waiver of hereditary
rights. 10
The pivotal question the court is tasked to resolve refers to the authority of the Bureau of
Internal Revenue to collect by the summary remedy of levying upon, and sale of real properties
of the decedent, estate tax deficiencies, without the cognition and authority of the court sitting
in probate over the supposed will of the deceased.
22
The nature of the process of estate tax collection has been described as follows:
Strictly speaking, the assessment of an inheritance tax does not directly involve the
administration of a decedent's estate, although it may be viewed as an incident to the complete
settlement of an estate, and, under some statutes, it is made the duty of the probate court to
make the amount of the inheritance tax a part of the final decree of distribution of the estate. It
is not against the property of decedent, nor is it a claim against the estate as such, but it is
against the interest or property right which the heir, legatee, devisee, etc., has in the property
formerly held by decedent. Further, under some statutes, it has been held that it is not a suit or
controversy between the parties, nor is it an adversary proceeding between the state and the
person who owes the tax on the inheritance. However, under other statutes it has been held
that the hearing and determination of the cash value of the assets and the determination of the
tax are adversary proceedings. The proceeding has been held to be necessarily a
proceeding in rem. 11
In the Philippine experience, the enforcement and collection of estate tax, is executive in
character, as the legislature has seen it fit to ascribe this task to the Bureau of Internal Revenue.
Section 3 of the National Internal Revenue Code attests to this:
Sec. 3. Powers and duties of the Bureau. The powers and duties of the Bureau of Internal
Revenue shall comprehend the assessment and collection of all national internal revenue
taxes, fees, and charges, and the enforcement of all forfeitures, penalties, and fines connected
therewith, including the execution of judgments in all cases decided in its favor by the Court of
Tax Appeals and the ordinary courts. Said Bureau shall also give effect to and administer the
supervisory and police power conferred to it by this Code or other laws.
Thus, it was in Vera vs. Fernandez 12 that the court recognized the liberal treatment of claims
for taxes charged against the estate of the decedent. Such taxes, we said, were exempted from
the application of the statute of non-claims, and this is justified by the necessity of government
funding, immortalized in the maxim that taxes are the lifeblood of the government. Vectigalia
nervi sunt rei publicae taxes are the sinews of the state.
Taxes assessed against the estate of a deceased person, after administration is opened, need
not be submitted to the committee on claims in the ordinary course of administration. In the
exercise of its control over the administrator, the court may direct the payment of such taxes
upon motion showing that the taxes have been assessed against the estate.
Such liberal treatment of internal revenue taxes in the probate proceedings extends so far,
even to allowing the enforcement of tax obligations against the heirs of the decedent, even
after distribution of the estate's properties.
Claims for taxes, whether assessed before or after the death of the deceased, can be collected
from the heirs even after the distribution of the properties of the decedent. They are exempted
from the application of the statute of non-claims. The heirs shall be liable therefor, in proportion
to their share in the inheritance. 13
Thus, the Government has two ways of collecting the taxes in question. One, by going after all
the heirs and collecting from each one of them the amount of the tax proportionate to the
inheritance received. Another remedy, pursuant to the lien created by Section 315 of the Tax
Code upon all property and rights to property belong to the taxpayer for unpaid income tax, is
by subjecting said property of the estate which is in the hands of an heir or transferee to the
payment of the tax due the estate. (Commissioner of Internal Revenue vs. Pineda, 21 SCRA
105, September 15, 1967.)
From the foregoing, it is discernible that the approval of the court, sitting in probate, or as a
settlement tribunal over the deceased is not a mandatory requirement in the collection of estate
taxes. It cannot therefore be argued that the Tax Bureau erred in proceeding with the levying
and sale of the properties allegedly owned by the late President, on the ground that it was
required to seek first the probate court's sanction. There is nothing in the Tax Code, and in the
pertinent remedial laws that implies the necessity of the probate or estate settlement court's
approval of the state's claim for estate taxes, before the same can be enforced and collected.
On the contrary, under Section 87 of the NIRC, it is the probate or settlement court which is
bidden not to authorize the executor or judicial administrator of the decedent's estate to deliver
any distributive share to any party interested in the estate, unless it is shown a Certification by
the Commissioner of Internal Revenue that the estate taxes have been paid. This provision
disproves the petitioner's contention that it is the probate court which approves the assessment
and collection of the estate tax.
If there is any issue as to the validity of the BIR's decision to assess the estate taxes, this
should have been pursued through the proper administrative and judicial avenues provided for
by law.
Section 229 of the NIRC tells us how:
Sec. 229. Protesting of assessment. When the Commissioner of Internal Revenue or his
duly authorized representative finds that proper taxes should be assessed, he shall first notify
the taxpayer of his findings. Within a period to be prescribed by implementing regulations, the
taxpayer shall be required to respond to said notice. If the taxpayer fails to respond, the
Commissioner shall issue an assessment based on his findings.
Such assessment may be protested administratively by filing a request for reconsideration or
reinvestigation in such form and manner as may be prescribed by implementing regulations
within (30) days from receipt of the assessment; otherwise, the assessment shall become final
and unappealable.
If the protest is denied in whole or in part, the individual, association or corporation adversely
affected by the decision on the protest may appeal to the Court of Tax Appeals within thirty
(30) days from receipt of said decision; otherwise, the decision shall become final, executory
and demandable. (As inserted by P.D. 1773)
Apart from failing to file the required estate tax return within the time required for the filing of
the same, petitioner, and the other heirs never questioned the assessments served upon them,
allowing the same to lapse into finality, and prompting the BIR to collect the said taxes by
levying upon the properties left by President Marcos.
Petitioner submits, however, that "while the assessment of taxes may have been validly
undertaken by the Government, collection thereof may have been done in violation of the law.
Thus, the manner and method in which the latter is enforced may be questioned separately,
23
and irrespective of the finality of the former, because the Government does not have the
unbridled discretion to enforce collection without regard to the clear provision of law." 14
Petitioner specifically points out that applying Memorandum Circular No. 38-68, implementing
Sections 318 and 324 of the old tax code (Republic Act 5203), the BIR's Notices of Levy on the
Marcos properties, were issued beyond the allowed period, and are therefore null and void:
. . . the Notices of Levy on Real Property (Annexes O to NN of Annex C of this Petition) in
satisfaction of said assessments were still issued by respondents well beyond the period
mandated in Revenue Memorandum Circular No. 38-68. These Notices of Levy were issued
only on 22 February 1993 and 20 May 1993 when at least seventeen (17) months had already
lapsed from the last service of tax assessment on 12 September 1991. As no notices of distraint
of personal property were first issued by respondents, the latter should have complied with
Revenue Memorandum Circular No. 38-68 and issued these Notices of Levy not earlier than
three (3) months nor later than six (6) months from 12 September 1991. In accordance with the
Circular, respondents only had until 12 March 1992 (the last day of the sixth month) within
which to issue these Notices of Levy. The Notices of Levy, having been issued beyond the
period allowed by law, are thus void and of no effect. 15
We hold otherwise. The Notices of Levy upon real property were issued within the prescriptive
period and in accordance with the provisions of the present Tax Code. The deficiency tax
assessment, having already become final, executory, and demandable, the same can now be
collected through the summary remedy of distraint or levy pursuant to Section 205 of the NIRC.
The applicable provision in regard to the prescriptive period for the assessment and collection
of tax deficiency in this instance is Article 223 of the NIRC, which pertinently provides:
Sec. 223. Exceptions as to a period of limitation of assessment and collection of taxes. (a)
In the case of a false or fraudulent return with intent to evade tax or of a failure to file a return,
the tax may be assessed, or a proceeding in court for the collection of such tax may be begun
without assessment, at any time within ten (10) years after the discovery of the falsity, fraud,
or omission:Provided, That, in a fraud assessment which has become final and executory, the
fact of fraud shall be judicially taken cognizance of in the civil or criminal action for the collection
thereof.
xxx xxx xxx
(c) Any internal revenue tax which has been assessed within the period of limitation above
prescribed, may be collected by distraint or levy or by a proceeding in court within three years
following the assessment of the tax.
xxx xxx xxx
The omission to file an estate tax return, and the subsequent failure to contest or appeal the
assessment made by the BIR is fatal to the petitioner's cause, as under the above-cited
provision, in case of failure to file a return, the tax may be assessed at any time within ten years
after the omission, and any tax so assessed may be collected by levy upon real property within
three years following the assessment of the tax. Since the estate tax assessment had become
final and unappealable by the petitioner's default as regards protesting the validity of the said
assessment, there is now no reason why the BIR cannot continue with the collection of the said
tax. Any objection against the assessment should have been pursued following the avenue
paved in Section 229 of the NIRC on protests on assessments of internal revenue taxes.
Petitioner further argues that "the numerous pending court cases questioning the late
president's ownership or interests in several properties (both real and personal) make the total
value of his estate, and the consequent estate tax due, incapable of exact pecuniary
determination at this time. Thus, respondents' assessment of the estate tax and their issuance
of the Notices of Levy and sale are premature and oppressive." He points out the pendency of
Sandiganbayan Civil Case Nos. 0001-0034 and 0141, which were filed by the government to
question the ownership and interests of the late President in real and personal properties
located within and outside the Philippines. Petitioner, however, omits to allege whether the
properties levied upon by the BIR in the collection of estate taxes upon the decedent's estate
were among those involved in the said cases pending in the Sandiganbayan. Indeed, the court
is at a loss as to how these cases are relevant to the matter at issue. The mere fact that the
decedent has pending cases involving ill-gotten wealth does not affect the enforcement of tax
assessments over the properties indubitably included in his estate.
Petitioner also expresses his reservation as to the propriety of the BIR's total assessment of
P23,292,607,638.00, stating that this amount deviates from the findings of the Department of
Justice's Panel of Prosecutors as per its resolution of 20 September 1991. Allegedly, this is
clear evidence of the uncertainty on the part of the Government as to the total value of the
estate of the late President.
This is, to our mind, the petitioner's last ditch effort to assail the assessment of estate tax which
had already become final and unappealable.
It is not the Department of Justice which is the government agency tasked to determine the
amount of taxes due upon the subject estate, but the Bureau of Internal Revenue, 16 whose
determinations and assessments are presumed correct and made in good faith. 17 The
taxpayer has the duty of proving otherwise. In the absence of proof of any irregularities in the
performance of official duties, an assessment will not be disturbed. Even an assessment based
on estimates is prima facie valid and lawful where it does not appear to have been arrived at
arbitrarily or capriciously. The burden of proof is upon the complaining party to show clearly
that the assessment is erroneous. Failure to present proof of error in the assessment will justify
the judicial affirmance of said assessment. 18 In this instance, petitioner has not pointed out
one single provision in the Memorandum of the Special Audit Team which gave rise to the
questioned assessment, which bears a trace of falsity. Indeed, the petitioner's attack on the
assessment bears mainly on the alleged improbable and unconscionable amount of the taxes
charged. But mere rhetoric cannot supply the basis for the charge of impropriety of the
assessments made.
Moreover, these objections to the assessments should have been raised, considering the
ample remedies afforded the taxpayer by the Tax Code, with the Bureau of Internal Revenue
and the Court of Tax Appeals, as described earlier, and cannot be raised now via Petition
for Certiorari, under the pretext of grave abuse of discretion. The course of action taken by the
petitioner reflects his disregard or even repugnance of the established institutions for
governance in the scheme of a well-ordered society. The subject tax assessments having
24
become final, executory and enforceable, the same can no longer be contested by means of a
disguised protest. In the main, Certiorari may not be used as a substitute for a lost appeal or
remedy. 19 This judicial policy becomes more pronounced in view of the absence of sufficient
attack against the actuations of government.
On the matter of sufficiency of service of Notices of Assessment to the petitioner, we find the
respondent appellate court's pronouncements sound and resilient to petitioner's attacks.
Anent grounds 3(b) and (B) both alleging/claiming lack of notice We find, after considering
the facts and circumstances, as well as evidences, that there was sufficient, constructive and/or
actual notice of assessments, levy and sale, sent to herein petitioner Ferdinand "Bongbong"
Marcos as well as to his mother Mrs. Imelda Marcos.
Even if we are to rule out the notices of assessments personally given to the caretaker of Mrs.
Marcos at the latter's last known address, on August 26, 1991 and September 12, 1991, as
well as the notices of assessment personally given to the caretaker of petitioner also at his last
known address on September 12, 1991 the subsequent notices given thereafter could no
longer be ignored as they were sent at a time when petitioner was already here in the
Philippines, and at a place where said notices would surely be called to petitioner's attention,
and received by responsible persons of sufficient age and discretion.
Thus, on October 20, 1992, formal assessment notices were served upon Mrs. Marcos c/o the
petitioner, at his office, House of Representatives, Batasan Pambansa, Q.C. (Annexes "A", "A-
1", "A-2", "A-3"; pp. 207-210, Comment/Memorandum of OSG). Moreover, a notice to taxpayer
dated October 8, 1992 inviting Mrs. Marcos to a conference relative to her tax liabilities, was
furnished the counsel of Mrs. Marcos Dean Antonio Coronel (Annex "B", p. 211, ibid).
Thereafter, copies of Notices were also served upon Mrs. Imelda Marcos, the petitioner and
their counsel "De Borja, Medialdea, Ata, Bello, Guevarra and Serapio Law Office", on April 7,
1993 and June 10, 1993. Despite all of these Notices, petitioner never lifted a finger to protest
the assessments, (upon which the Levy and sale of properties were based), nor appealed the
same to the Court of Tax Appeals.
There being sufficient service of Notices to herein petitioner (and his mother) and it appearing
that petitioner continuously ignored said Notices despite several opportunities given him to file
a protest and to thereafter appeal to the Court of Tax Appeals, the tax assessments subject
of this case, upon which the levy and sale of properties were based, could no longer be
contested (directly or indirectly) via this instant petition for certiorari. 20
Petitioner argues that all the questioned Notices of Levy, however, must be nullified for having
been issued without validly serving copies thereof to the petitioner. As a mandatory heir of the
decedent, petitioner avers that he has an interest in the subject estate, and notices of levy upon
its properties should have been served upon him.
We do not agree. In the case of notices of levy issued to satisfy the delinquent estate tax, the
delinquent taxpayer is the Estate of the decedent, and not necessarily, and exclusively, the
petitioner as heir of the deceased. In the same vein, in the matter of income tax delinquency of
the late president and his spouse, petitioner is not the taxpayer liable. Thus, it follows that
service of notices of levy in satisfaction of these tax delinquencies upon the petitioner is not
required by law, as under Section 213 of the NIRC, which pertinently states:
xxx xxx xxx
. . . Levy shall be effected by writing upon said certificate a description of the property upon
which levy is made. At the same time, written notice of the levy shall be mailed to or served
upon the Register of Deeds of the province or city where the property is located and upon the
delinquent taxpayer, or if he be absent from the Philippines, to his agent or the manager of the
business in respect to which the liability arose, or if there be none, to the occupant of the
property in question.
xxx xxx xxx
The foregoing notwithstanding, the record shows that notices of warrants of distraint and levy
of sale were furnished the counsel of petitioner on April 7, 1993, and June 10, 1993, and the
petitioner himself on April 12, 1993 at his office at the Batasang Pambansa. 21 We cannot
therefore, countenance petitioner's insistence that he was denied due process. Where there
was an opportunity to raise objections to government action, and such opportunity was
disregarded, for no justifiable reason, the party claiming oppression then becomes the
oppressor of the orderly functions of government. He who comes to court must come with clean
hands. Otherwise, he not only taints his name, but ridicules the very structure of established
authority.
IN VIEW WHEREOF, the Court RESOLVED to DENY the present petition. The Decision of the
Court of Appeals dated November 29, 1994 is hereby AFFIRMED in all respects.
SO ORDERED.

25
G.R. No. L-29059 December 15, 1987
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
CEBU PORTLAND CEMENT COMPANY and COURT OF TAX APPEALS, respondents.
CRUZ, J.:
By virtue of a decision of the Court of Tax Appeals rendered on June 21, 1961, as modified on
appeal by the Supreme Court on February 27, 1965, the Commissioner of Internal Revenue
was ordered to refund to the Cebu Portland Cement Company the amount of P 359,408.98,
representing overpayments of ad valorem taxes on cement produced and sold by it after
October 1957. 1
On March 28, 1968, following denial of motions for reconsideration filed by both the petitioner
and the private respondent, the latter moved for a writ of execution to enforce the said judgment
.2
The motion was opposed by the petitioner on the ground that the private respondent had an
outstanding sales tax liability to which the judgment debt had already been credited. In fact, it
was stressed, there was still a balance owing on the sales taxes in the amount of P
4,789,279.85 plus 28% surcharge. 3
On April 22, 1968, the Court of Tax Appeals * granted the motion, holding that the alleged sales
tax liability of the private respondent was still being questioned and therefore could not be set-
off against the refund. 4
In his petition to review the said resolution, the Commissioner of Internal Revenue claims that
the refund should be charged against the tax deficiency of the private respondent on the sales
of cement under Section 186 of the Tax Code. His position is that cement is a manufactured
and not a mineral product and therefore not exempt from sales taxes. He adds that enforcement
of the said tax deficiency was properly effected through his power of distraint of personal
property under Sections 316 and 318 5 of the said Code and, moreover, the collection of any
national internal revenue tax may not be enjoined under Section 305, 6 subject only to the
exception prescribed in Rep. Act No. 1125. 7 This is not applicable to the instant case. The
petitioner also denies that the sales tax assessments have already prescribed because the
prescriptive period should be counted from the filing of the sales tax returns, which had not yet
been done by the private respondent.
For its part, the private respondent disclaims liability for the sales taxes, on the ground that
cement is not a manufactured product but a mineral product. 8 As such, it was exempted from
sales taxes under Section 188 of the Tax Code after the effectivity of Rep. Act No. 1299 on
June 16, 1955, in accordance with Cebu Portland Cement Co. v. Collector of Internal
Revenue, 9 decided in 1968. Here Justice Eugenio Angeles declared that "before the effectivity
of Rep. Act No. 1299, amending Section 246 of the National Internal Revenue Code, cement
was taxable as a manufactured product under Section 186, in connection with Section 194(4)
of the said Code," thereby implying that it was not considered a manufactured product
afterwards. Also, the alleged sales tax deficiency could not as yet be enforced against it
26
because the tax assessment was not yet final, the same being still under protest and still to be
definitely resolved on the merits. Besides, the assessment had already prescribed, not having
been made within the reglementary five-year period from the filing of the tax returns. 10
Our ruling is that the sales tax was properly imposed upon the private respondent for the reason
that cement has always been considered a manufactured product and not a mineral product.
This matter was extensively discussed and categorically resolved in Commissioner of Internal
Revenue v. Republic Cement Corporation, 11decided on August 10, 1983, where Justice Efren
L. Plana, after an exhaustive review of the pertinent cases, declared for a unanimous Court:
From all the foregoing cases, it is clear that cement qua cement was never considered as a
mineral product within the meaning of Section 246 of the Tax Code, notwithstanding that at
least 80% of its components are minerals, for the simple reason that cement is the product of
a manufacturingprocess and is no longer the mineral product contemplated in the Tax Code
(i.e.; minerals subjected to simple treatments) for the purpose of imposing the ad valorem tax.
What has apparently encouraged the herein respondents to maintain their present posture is
the case of Cebu Portland Cement Co. v. Collector of Internal Revenue, L-20563, Oct. 29, 1968
(28 SCRA 789) penned by Justice Eugenio Angeles. For some portions of that decision give
the impression that Republic Act No. 1299, which amended Section 246, reclassified cement
as a mineral product that was not subject to sales tax. ...
xxx xxx xxx
After a careful study of the foregoing, we conclude that reliance on the decision penned by
Justice Angeles is misplaced. The said decision is no authority for the proposition that after the
enactment of Republic Act No. 1299 in 1955 (defining mineral product as things with at least
80% mineral content), cement became a 'mineral product," as distinguished from a
"manufactured product," and therefore ceased to be subject to sales tax. It was not necessary
for the Court to so rule. It was enough for the Court to say in effect that even assuming Republic
Act No. 1299 had reclassified cement was a mineral product, the reclassification could not be
given retrospective application (so as to justify the refund of sales taxes paid before Republic
Act 1299 was adopted) because laws operate prospectively only, unless the legislative intent
to the contrary is manifest, which was not so in the case of Republic Act 1266. [The situation
would have been different if the Court instead had ruled in favor of refund, in which case it
would have been absolutely necessary (1) to make an unconditional ruling that Republic Act
1299 re-classified cement as a mineral product (not subject to sales tax), and (2) to declare the
law retroactive, as a basis for granting refund of sales tax paid before Republic Act 1299.]
In any event, we overrule the CEPOC decision of October 29, 1968 (G.R. No. L-20563) insofar
as its pronouncements or any implication therefrom conflict with the instant decision.
The above views were reiterated in the resolution 12 denying reconsideration of the said
decision, thus:
The nature of cement as a "manufactured product" (rather than a "mineral product") is well-
settled. The issue has repeatedly presented itself as a threshold question for determining the
basis for computing the ad valorem mining tax to be paid by cement Companies. No
pronouncement was made in these cases that as a "manufactured product" cement is subject the payment of taxes could be postponed by simply questioning their validity, the machinery of
to sales tax because this was not at issue. the state would grind to a halt and all government functions would be paralyzed. That is the
The decision sought to be reconsidered here referred to the legislative history of Republic Act reason why, save for the exception already noted, the Tax Code provides:
No. 1299 which introduced a definition of the terms "mineral" and "mineral products" in Sec. Sec. 291. Injunction not available to restrain collection of tax. No court shall have authority
246 of the Tax Code. Given the legislative intent, the holding in the CEPOC case (G.R. No. L- to grant an injunction to restrain the collection of any national internal revenue tax, fee or charge
20563) that cement was subject to sales tax prior to the effectivity f Republic Act No. 1299 imposed by this Code.
cannot be construed to mean that, after the law took effect, cement ceased to be so subject to It goes without saying that this injunction is available not only when the assessment is already
the tax. To erase any and all misconceptions that may have been spawned by reliance on the being questioned in a court of justice but more so if, as in the instant case, the challenge to the
case of Cebu Portland Cement Co. v. Collector of Internal Revenue, L-20563, October 29, assessment is still-and only-on the administrative level. There is all the more reason to apply
1968 (28 SCRA 789) penned by Justice Eugenio Angeles, the Court has expressly overruled the rule here because it appears that even after crediting of the refund against the tax
it insofar as it may conflict with the decision of August 10, 1983, now subject of these motions deficiency, a balance of more than P 4 million is still due from the private respondent.
for reconsideration.
To require the petitioner to actually refund to the private respondent the amount of the judgment
On the question of prescription, the private respondent claims that the five-year reglementary debt, which he will later have the right to distrain for payment of its sales tax liability is in our
period for the assessment of its tax liability started from the time it filed its gross sales returns view an Idle ritual. We hold that the respondent Court of Tax Appeals erred in ordering such a
on June 30, 1962. Hence, the assessment for sales taxes made on January 16, 1968 and charade.
March 4, 1968, were already out of time. We disagree. This contention must fail for what
WHEREFORE, the petition is GRANTED. The resolution dated April 22, 1968, in CTA Case
CEPOC filed was not the sales returns required in Section 183(n) but the ad valorem tax
No. 786 is SET ASIDE, without any pronouncement as to costs.
returns required under Section 245 of the Tax Code. As Justice Irene R. Cortes emphasized in
the aforestated resolution: SO ORDERED.
In order to avail itself of the benefits of the five-year prescription period under Section 331 of
the Tax Code, the taxpayer should have filed the required return for the tax involved, that is, a
sales tax return. (Butuan Sawmill, Inc. v. CTA, et al., G.R. No. L-21516, April 29, 1966, 16
SCRA 277). Thus CEPOC should have filed sales tax returns of its gross sales for the subject
periods. Both parties admit that returns were made for the ad valorem mining tax. CEPOC
argues that said returns contain the information necessary for the assessment of the sales tax.
The Commissioner does not consider such returns as compliance with the requirement for the
filing of tax returns so as to start the running of the five-year prescriptive period.
We agree with the Commissioner. It has been held in Butuan Sawmill Inc. v. CTA, supra, that
the filing of an income tax return cannot be considered as substantial compliance with the
requirement of filing sales tax returns, in the same way that an income tax return cannot be
considered as a return for compensating tax for the purpose of computing the period of
prescription under Sec. 331. (Citing Bisaya Land Transportation Co., Inc. v. Collector of Internal
Revenue, G.R. Nos. L-12100 and L-11812, May 29, 1959). There being no sales tax returns
filed by CEPOC, the statute of stations in Sec. 331 did not begin to run against the government.
The assessment made by the Commissioner in 1968 on CEPOC's cement sales during the
period from July 1, 1959 to December 31, 1960 is not barred by the five-year prescriptive
period. Absent a return or when the return is false or fraudulent, the applicable period is ten
(10) days from the discovery of the fraud, falsity or omission. The question in this case is: When
was CEPOC's omission to file tha return deemed discovered by the government, so as to start
the running of said period? 13
The argument that the assessment cannot as yet be enforced because it is still being contested
loses sight of the urgency of the need to collect taxes as "the lifeblood of the government." If

27
G.R. No. L-22074 April 30, 1965
1953
THE PHILIPPINE GUARANTY CO., INC., petitioner,
vs. Gross premium per investigation . . . . . . . . . . P768,580.00
THE COMMISSIONER OF INTERNAL REVENUE and THE COURT OF TAX
APPEALS, respondents. Withholding tax due thereon at 24% . . . . . . . . P184,459.00
Josue H. Gustilo and Ramirez and Ortigas for petitioner.
Office of the Solicitor General and Attorney V.G. Saldajena for respondents. 25% surcharge . . . . . . . . . . . . . . . . . . . . . . . . . . 46,114.00
BENGZON, J.P., J.:
Compromise for non-filing of withholding
The Philippine Guaranty Co., Inc., a domestic insurance company, entered into reinsurance 100.00
income tax return . . . . . . . . . . . . . . . . . . . . . . . . .
contracts, on various dates, with foreign insurance companies not doing business in the
Philippines namely: Imperio Compaia de Seguros, La Union y El Fenix Espaol, Overseas
Assurance Corp., Ltd., Socieded Anonima de Reaseguros Alianza, Tokio Marino & Fire
TOTAL AMOUNT DUE & COLLECTIBLE . . . . P230,673.00
Insurance Co., Ltd., Union Assurance Society Ltd., Swiss Reinsurance Company and Tariff
==========
Reinsurance Limited. Philippine Guaranty Co., Inc., thereby agreed to cede to the foreign
reinsurers a portion of the premiums on insurance it has originally underwritten in the
1954
Philippines, in consideration for the assumption by the latter of liability on an equivalent portion
of the risks insured. Said reinsurrance contracts were signed by Philippine Guaranty Co., Inc.
Gross premium per investigation . . . . . . . . . . P780.880.68
in Manila and by the foreign reinsurers outside the Philippines, except the contract with Swiss
Reinsurance Company, which was signed by both parties in Switzerland.
Withholding tax due thereon at 24% . . . . . . . . P184,411.00
The reinsurance contracts made the commencement of the reinsurers' liability simultaneous
with that of Philippine Guaranty Co., Inc. under the original insurance. Philippine Guaranty Co., 25% surcharge . . . . . . . . . . . . . . . . . . . . . . . . . . P184,411.00
Inc. was required to keep a register in Manila where the risks ceded to the foreign reinsurers
where entered, and entry therein was binding upon the reinsurers. A proportionate amount of Compromise for non-filing of withholding
taxes on insurance premiums not recovered from the original assured were to be paid for by 100.00
income tax return . . . . . . . . . . . . . . . . . . . . . . . . .
the foreign reinsurers. The foreign reinsurers further agreed, in consideration for managing or
administering their affairs in the Philippines, to compensate the Philippine Guaranty Co., Inc.,
in an amount equal to 5% of the reinsurance premiums. Conflicts and/or differences between TOTAL AMOUNT DUE & COLLECTIBLE . . . . P234,364.00
the parties under the reinsurance contracts were to be arbitrated in Manila. Philippine Guaranty ==========
Co., Inc. and Swiss Reinsurance Company stipulated that their contract shall be construed by
the laws of the Philippines. Philippine Guaranty Co., Inc., protested the assessment on the ground that reinsurance
Pursuant to the aforesaid reinsurance contracts, Philippine Guaranty Co., Inc. ceded to the premiums ceded to foreign reinsurers not doing business in the Philippines are not subject to
foreign reinsurers the following premiums: withholding tax. Its protest was denied and it appealed to the Court of Tax Appeals.
On July 6, 1963, the Court of Tax Appeals rendered judgment with this dispositive portion:
1953 . . . . . . . . . . . . . . . . . . . . . P842,466.71
IN VIEW OF THE FOREGOING CONSIDERATIONS, petitioner Philippine Guaranty Co., Inc.
1954 . . . . . . . . . . . . . . . . . . . . . 721,471.85 is hereby ordered to pay to the Commissioner of Internal Revenue the respective sums of
P202,192.00 and P173,153.00 or the total sum of P375,345.00 as withholding income taxes
Said premiums were excluded by Philippine Guaranty Co., Inc. from its gross income when it for the years 1953 and 1954, plus the statutory delinquency penalties thereon. With costs
file its income tax returns for 1953 and 1954. Furthermore, it did not withhold or pay tax on against petitioner.
them. Consequently, per letter dated April 13, 1959, the Commissioner of Internal Revenue Philippine Guaranty Co, Inc. has appealed, questioning the legality of the Commissioner of
assessed against Philippine Guaranty Co., Inc. withholding tax on the ceded reinsurance Internal Revenue's assessment for withholding tax on the reinsurance premiums ceded in 1953
premiums, thus: and 1954 to the foreign reinsurers.

28
Petitioner maintain that the reinsurance premiums in question did not constitute income from
sources within the Philippines because the foreign reinsurers did not engage in business in the
Philippines, nor did they have office here.
The reinsurance contracts, however, show that the transactions or activities that constituted
the undertaking to reinsure Philippine Guaranty Co., Inc. against loses arising from the original
insurances in the Philippines were performed in the Philippines. The liability of the foreign
reinsurers commenced simultaneously with the liability of Philippine Guaranty Co., Inc. under
the original insurances. Philippine Guaranty Co., Inc. kept in Manila a register of the risks ceded
to the foreign reinsurers. Entries made in such register bound the foreign resinsurers, localizing
in the Philippines the actual cession of the risks and premiums and assumption of the
reinsurance undertaking by the foreign reinsurers. Taxes on premiums imposed by Section 259
of the Tax Code for the privilege of doing insurance business in the Philippines were payable
by the foreign reinsurers when the same were not recoverable from the original assured. The
foreign reinsurers paid Philippine Guaranty Co., Inc. an amount equivalent to 5% of the ceded
premiums, in consideration for administration and management by the latter of the affairs of
the former in the Philippines in regard to their reinsurance activities here. Disputes and
differences between the parties were subject to arbitration in the City of Manila. All the
reinsurance contracts, except that with Swiss Reinsurance Company, were signed by
Philippine Guaranty Co., Inc. in the Philippines and later signed by the foreign reinsurers
abroad. Although the contract between Philippine Guaranty Co., Inc. and Swiss Reinsurance
Company was signed by both parties in Switzerland, the same specifically provided that its
provision shall be construed according to the laws of the Philippines, thereby manifesting a
clear intention of the parties to subject themselves to Philippine law.
Section 24 of the Tax Code subjects foreign corporations to tax on their income from sources
within the Philippines. The word "sources" has been interpreted as the activity, property or
service giving rise to the income.1 The reinsurance premiums were income created from the
undertaking of the foreign reinsurance companies to reinsure Philippine Guaranty Co., Inc.,
against liability for loss under original insurances. Such undertaking, as explained above, took
place in the Philippines. These insurance premiums, therefore, came from sources within the
Philippines and, hence, are subject to corporate income tax.
The foreign insurers' place of business should not be confused with their place of
activity. Business should not be continuity and progression of transactions 2 while activity may
consist of only a single transaction. An activity may occur outside the place of business. Section
24 of the Tax Code does not require a foreign corporation to engage in business in the
Philippines in subjecting its income to tax. It suffices that the activity creating the income is
performed or done in the Philippines. What is controlling, therefore, is not the place
of business but the place ofactivity that created an income.
Petitioner further contends that the reinsurance premiums are not income from sources within
the Philippines because they are not specifically mentioned in Section 37 of the Tax Code.
Section 37 is not an all-inclusive enumeration, for it merely directs that the kinds of income
mentioned therein should be treated as income from sources within the Philippines but it does
not require that other kinds of income should not be considered likewise.1wph1.t
29
The power to tax is an attribute of sovereignty. It is a power emanating from necessity. It is a
necessary burden to preserve the State's sovereignty and a means to give the citizenry an
army to resist an aggression, a navy to defend its shores from invasion, a corps of civil servants
to serve, public improvement designed for the enjoyment of the citizenry and those which come
within the State's territory, and facilities and protection which a government is supposed to
provide. Considering that the reinsurance premiums in question were afforded protection by
the government and the recipient foreign reinsurers exercised rights and privileges guaranteed
by our laws, such reinsurance premiums and reinsurers should share the burden of maintaining
the state.
Petitioner would wish to stress that its reliance in good faith on the rulings of the Commissioner
of Internal Revenue requiring no withholding of the tax due on the reinsurance premiums in
question relieved it of the duty to pay the corresponding withholding tax thereon. This defense
of petitioner may free if from the payment of surcharges or penalties imposed for failure to pay
the corresponding withholding tax, but it certainly would not exculpate if from liability to pay
such withholding tax The Government is not estopped from collecting taxes by the mistakes or
errors of its agents.3
In respect to the question of whether or not reinsurance premiums ceded to foreign reinsurers
not doing business in the Philippines are subject to withholding tax under Section 53 and 54 of
the Tax Code, suffice it to state that this question has already been answered in the affirmative
in Alexander Howden & Co., Ltd. vs. Collector of Internal Revenue, L-19393, April 14, 1965.
Finally, petitioner contends that the withholding tax should be computed from the amount
actually remitted to the foreign reinsurers instead of from the total amount ceded. And since it
did not remit any amount to its foreign insurers in 1953 and 1954, no withholding tax was due.
The pertinent section of the Tax Code States:
Sec. 54. Payment of corporation income tax at source. In the case of foreign corporations
subject to taxation under this Title not engaged in trade or business within the Philippines and
not having any office or place of business therein, there shall be deducted and withheld at the
source in the same manner and upon the same items as is provided in Section fifty-three a tax
equal to twenty-four per centum thereof, and such tax shall be returned and paid in the same
manner and subject to the same conditions as provided in that section.
The applicable portion of Section 53 provides:
(b) Nonresident aliens. All persons, corporations and general copartnerships
(compaias colectivas), in what ever capacity acting, including lessees or mortgagors of real
or personal property, trustees acting in any trust capacity, executors, administrators, receivers,
conservators, fiduciaries, employers, and all officers and employees of the Government of the
Philippines having the control, receipt, custody, disposal, or payment of interest, dividends,
rents, salaries, wages, premiums, annuities, compensation, remunerations, emoluments, or
other fixed or determinable annual or periodical gains, profits, and income of any nonresident
alien individual, not engaged in trade or business within the Philippines and not having any
office or place of business therein, shall (except in the case provided for in subsection [a] of
this section) deduct and withhold from such annual or periodical gains, profits, and income a
tax equal to twelve per centum thereof: Provided That no deductions or withholding shall be
required in the case of dividends paid by a foreign corporation unless (1) such corporation is
engaged in trade or business within the Philippines or has an office or place of business therein,
and (2) more than eighty-five per centum of the gross income of such corporation for the three-
year period ending with the close of its taxable year preceding the declaration of such dividends
(or for such part of such period as the corporation has been in existence)was derived from
sources within the Philippines as determined under the provisions of section thirty-
seven:Provided, further, That the Collector of Internal Revenue may authorize such tax to be
deducted and withheld from the interest upon any securities the owners of which are not known
to the withholding agent.
The above-quoted provisions allow no deduction from the income therein enumerated in
determining the amount to be withheld. According, in computing the withholding tax due on the
reinsurance premium in question, no deduction shall be recognized.
WHEREFORE, in affirming the decision appealed from, the Philippine Guaranty Co., Inc. is
hereby ordered to pay to the Commissioner of Internal Revenue the sums of P202,192.00 and
P173,153.00, or a total amount of P375,345.00, as withholding tax for the years 1953 and 1954,
respectively. If the amount of P375,345.00 is not paid within 30 days from the date this
judgement becomes final, there shall be collected a surcharged of 5% on the amount unpaid,
plus interest at the rate of 1% a month from the date of delinquency to the date of payment,
provided that the maximum amount that may be collected as interest shall not exceed the
amount corresponding to a period of three (3) years. With costs againsts petitioner.

30
G.R. No. 112024 January 28, 1999
PHILIPPINE BANK OF COMMUNICATIONS, petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, COURT OF TAX APPEALS and COURT OF
APPEALS,respondent.
QUISUMBING, J.:
This petition for review assails the Resolution 1 of the Court of Appeals dated September 22,
1993 affirming the Decision 2 and a Resolution 3 of the Court Of Tax Appeals which denied the
claims of the petitioner for tax refund and tax credits, and disposing as follows:
IN VIEW OF ALL, THE FOREGOING, the instant petition for review, is DENIED due course.
The Decision of the Court of Tax Appeals dated May 20, 1993 and its resolution dated July 20,
1993, are hereby AFFIRMED in toto.
SO ORDERED. 4
The Court of Tax Appeals earlier ruled as follows:
WHEREFORE, Petitioner's claim for refund/tax credits of overpaid income tax for 1985 in the
amount of P5,299,749.95 is hereby denied for having been filed beyond the reglementary
period. The 1986 claim for refund amounting to P234,077.69 is likewise denied since petitioner
has opted and in all likelihood automatically credited the same to the succeeding year. The
petition for review is dismissed for lack of merit.
5
SO ORDERED.
The facts on record show the antecedent circumstances pertinent to this case.
Petitioner, Philippine Bank of Communications (PBCom), a commercial banking corporation
duly organized under Philippine laws, filed its quarterly income tax returns for the first and
second quarters of 1985, reported profits, and paid the total income tax of P5,016,954.00. The
taxes due were settled by applying PBCom's tax credit memos and accordingly, the Bureau of
Internal Revenue (BIR) issued Tax Debit Memo Nos. 0746-85 and 0747-85 for P3,401,701.00
and P1,615,253.00, respectively.
Subsequently, however, PBCom suffered losses so that when it filed its Annual Income Tax
Returns for the year-ended December 31, 1986, the petitioner likewise reported a net loss of
P14,129,602.00, and thus declared no tax payable for the year.
But during these two years, PBCom earned rental income from leased properties. The lessees
withheld and remitted to the BIR withholding creditable taxes of P282,795.50 in 1985 and
P234,077.69 in 1986.
On August 7, 1987, petitioner requested the Commissioner of Internal Revenue, among others,
for a tax credit of P5,016,954.00 representing the overpayment of taxes in the first and second
quarters of 1985.
Thereafter, on July 25, 1988, petitioner filed a claim for refund of creditable taxes withheld by
their lessees from property rentals in 1985 for P282,795.50 and in 1986 for P234,077.69.
31
Pending the investigation of the respondent Commissioner of Internal Revenue, petitioner
instituted a Petition for Review on November 18, 1988 before the Court of Tax Appeals (CTA).
The petition was docketed as CTA Case No. 4309 entitled: "Philippine Bank of
Communications vs. Commissioner of Internal Revenue."
The losses petitioner incurred as per the summary of petitioner's claims for refund and tax
credit for 1985 and 1986, filed before the Court of Tax Appeals, are as follows:
1985 1986
Net Income (Loss) (P25,317,288.00) (P14,129,602.00)
Tax Due NIL NIL
Quarterly tax.
Payments Made 5,016,954.00
Tax Withheld at Source 282,795.50 234,077.69
Excess Tax Payments P5,299,749.50* P234,077.69
=============== =============
* CTA's decision reflects PBCom's 1985 tax claim as P5,299,749.95. A forty five centavo
difference was noted.
On May 20, 1993, the CTA rendered a decision which, as stated on the outset, denied the
request of petitioner for a tax refund or credit in the sum amount of P5,299,749.95, on the
ground that it was filed beyond the two-year reglementary period provided for by law. The
petitioner's claim for refund in 1986 amounting to P234,077.69 was likewise denied on the
assumption that it was automatically credited by PBCom against its tax payment in the
succeeding year.
On June 22, 1993, petitioner filed a Motion for Reconsideration of the CTA's decision but the
same was denied due course for lack of merit. 6
Thereafter, PBCom filed a petition for review of said decision and resolution of the CTA with
the Court of Appeals. However on September 22, 1993, the Court of Appeals affirmed in
toto the CTA's resolution dated July 20, 1993. Hence this petition now before us.
The issues raised by the petitioner are:
I. Whether taxpayer PBCom which relied in good faith on the formal assurances of BIR in
RMC No. 7-85 and did not immediately file with the CTA a petition for review asking for the
refund/tax credit of its 1985-86 excess quarterly income tax payments can be prejudiced by
the subsequent BIR rejection, applied retroactivity, of its assurances in RMC No. 7-85 that the
prescriptive period for the refund/tax credit of excess quarterly income tax payments is not two
years but ten (10). 7
II. Whether the Court of Appeals seriously erred in affirming the CTA decision which denied
PBCom's claim for the refund of P234,077.69 income tax overpaid in 1986 on the mere
speculation, without proof, that there were taxes due in 1987 and that PBCom availed of tax-
crediting that year. 8
Simply stated, the main question is: Whether or not the Court of Appeals erred in denying the
plea for tax refund or tax credits on the ground of prescription, despite petitioner's reliance on
RMC No. 7-85, changing the prescriptive period of two years to ten years?
Petitioner argues that its claims for refund and tax credits are not yet barred by prescription
relying on the applicability of Revenue Memorandum Circular No. 7-85 issued on April 1, 1985.
The circular states that overpaid income taxes are not covered by the two-year prescriptive
period under the tax Code and that taxpayers may claim refund or tax credits for the excess
quarterly income tax with the BIR within ten (10) years under Article 1144 of the Civil Code.
The pertinent portions of the circular reads:
REVENUE MEMORANDUM CIRCULAR NO. 7-85
SUBJECT: PROCESSING OF REFUND OR TAX CREDIT OF EXCESS CORPORATE
INCOME TAX RESULTING FROM THE FILING OF THE FINAL ADJUSTMENT RETURN.
TO: All Internal Revenue Officers and Others Concerned.
Sec. 85 And 86 Of the National Internal Revenue Code provide:
xxx xxx xxx
The foregoing provisions are implemented by Section 7 of Revenue Regulations Nos. 10-77
which provide;
xxx xxx xxx
It has been observed, however, that because of the excess tax payments, corporations file
claims for recovery of overpaid income tax with the Court of Tax Appeals within the two-year
period from the date of payment, in accordance with sections 292 and 295 of the National
Internal Revenue Code. It is obvious that the filing of the case in court is to preserve the judicial
right of the corporation to claim the refund or tax credit.
It should he noted, however, that this is not a case of erroneously or illegally paid tax under the
provisions of Sections 292 and 295 of the Tax Code.
In the above provision of the Regulations the corporation may request for the refund of the
overpaid income tax or claim for automatic tax credit. To insure prompt action on corporate
annual income tax returns showing refundable amounts arising from overpaid quarterly income
taxes, this Office has promulgated Revenue Memorandum Order No. 32-76 dated June 11,
1976, containing the procedure in processing said returns. Under these procedures, the returns
are merely pre-audited which consist mainly of checking mathematical accuracy of the figures
of the return. After which, the refund or tax credit is granted, and, this procedure was adopted
to facilitate immediate action on cases like this.
In this regard, therefore, there is no need to file petitions for review in the Court of Tax Appeals
in order to preserve the right to claim refund or tax credit the two year period. As already stated,
actions hereon by the Bureau are immediate after only a cursory pre-audit of the income tax
returns. Moreover, a taxpayer may recover from the Bureau of Internal Revenue excess income
tax paid under the provisions of Section 86 of the Tax Code within 10 years from the date of
32
payment considering that it is an obligation created by law (Article 1144 of the Civil
Code). 9 (Emphasis supplied.)
Petitioner argues that the government is barred from asserting a position contrary to its
declared circular if it would result to injustice to taxpayers. Citing ABS CBN Broadcasting
Corporation vs. Court of Tax Appeals 10petitioner claims that rulings or circulars promulgated
by the Commissioner of Internal Revenue have no retroactive effect if it would be prejudicial to
taxpayers, In ABS-CBN case, the Court held that the government is precluded from adopting
a position inconsistent with one previously taken where injustice would result therefrom or
where there has been a misrepresentation to the taxpayer.
Petitioner contends that Sec. 246 of the National Internal Revenue Code explicitly provides for
this rules as follows:
Sec. 246 Non-retroactivity of rulings Any revocation, modification or reversal of any of the
rules and regulations promulgated in accordance with the preceding section or any of the
rulings or circulars promulgated by the Commissioner shall not be given retroactive application
if the revocation, modification or reversal will be prejudicial to the taxpayers except in the
following cases:
a). where the taxpayer deliberately misstates or omits material facts from his return or in any
document required of him by the Bureau of Internal Revenue;
b). where the facts subsequently gathered by the Bureau of Internal Revenue are materially
different from the facts on which the ruling is based;
c). where the taxpayer acted in bad faith.
Respondent Commissioner of Internal Revenue, through Solicitor General, argues that the two-
year prescriptive period for filing tax cases in court concerning income tax payments of
Corporations is reckoned from the date of filing the Final Adjusted Income Tax Return, which
is generally done on April 15 following the close of the calendar year. As precedents,
respondent Commissioner cited cases which adhered to this principle, to wit ACCRA
Investments Corp. vs. Court of Appeals, et al., 11 and Commissioner of Internal
Revenue vs. TMX Sales, Inc., et al.. 12Respondent Commissioner also states that since the
Final Adjusted Income Tax Return of the petitioner for the taxable year 1985 was supposed to
be filed on April 15, 1986, the latter had only until April 15, 1988 to seek relief from the court.
Further, respondent Commissioner stresses that when the petitioner filed the case before the
CTA on November 18, 1988, the same was filed beyond the time fixed by law, and such failure
is fatal to petitioner's cause of action.
After a careful study of the records and applicable jurisprudence on the matter, we find that,
contrary to the petitioner's contention, the relaxation of revenue regulations by RMC 7-85 is not
warranted as it disregards the two-year prescriptive period set by law.
Basic is the principle that "taxes are the lifeblood of the nation." The primary purpose is to
generate funds for the State to finance the needs of the citizenry and to advance the common
weal. 13 Due process of law under the Constitution does not require judicial proceedings in tax
cases. This must necessarily be so because it is upon taxation that the government chiefly
relies to obtain the means to carry on its operations and it is of utmost importance that the
modes adopted to enforce the collection of taxes levied should be summary and interfered with
as little as possible. 14
From the same perspective, claims for refund or tax credit should be exercised within the time
fixed by law because the BIR being an administrative body enforced to collect taxes, its
functions should not be unduly delayed or hampered by incidental matters.
Sec. 230 of the National Internal Revenue Code (NIRC) of 1977 (now Sec. 229, NIRC of 1997)
provides for the prescriptive period for filing a court proceeding for the recovery of tax
erroneously or illegally collected, viz.:
Sec. 230. Recovery of tax erroneously or illegally collected. No suit or proceeding shall be
maintained in any court for the recovery of any national internal revenue tax hereafter alleged
to have been erroneously or illegally assessed or collected, or of any penalty claimed to have
been collected without authority, or of any sum alleged to have been excessive or in any
manner wrongfully collected, until a claim for refund or credit has been duly filed with the
Commissioner; but such suit or proceeding may be maintained, whether or not such tax,
penalty, or sum has been paid under protest or duress.
In any case, no such suit or proceedings shall begun after the expiration of two years from the
date of payment of the tax or penalty regardless of any supervening cause that may arise after
payment;Provided however, That the Commissioner may, even without a written claim therefor,
refund or credit any tax, where on the face of the return upon which payment was made, such
payment appears clearly to have been erroneously paid. (Emphasis supplied)
The rule states that the taxpayer may file a claim for refund or credit with the Commissioner of
Internal Revenue, within two (2) years after payment of tax, before any suit in CTA is
commenced. The two-year prescriptive period provided, should be computed from the time of
filing the Adjustment Return and final payment of the tax for the year.
In Commissioner of Internal Revenue vs. Philippine American Life Insurance Co., 15 this Court
explained the application of Sec. 230 of 1977 NIRC, as follows:
Clearly, the prescriptive period of two years should commence to run only from the time that
the refund is ascertained, which can only be determined after a final adjustment return is
accomplished. In the present case, this date is April 16, 1984, and two years from this date
would be April 16, 1986. . . . As we have earlier said in the TMX Sales case, Sections
68. 16 69, 17 and 70 18 on Quarterly Corporate Income Tax Payment and Section 321 should be
considered in conjunction with it 19
When the Acting Commissioner of Internal Revenue issued RMC 7-85, changing the
prescriptive period of two years to ten years on claims of excess quarterly income tax
payments, such circular created a clear inconsistency with the provision of Sec. 230 of 1977
NIRC. In so doing, the BIR did not simply interpret the law; rather it legislated guidelines
contrary to the statute passed by Congress.
It bears repeating that Revenue memorandum-circulars are considered administrative rulings
(in the sense of more specific and less general interpretations of tax laws) which are issued
from time to time by the Commissioner of Internal Revenue. It is widely accepted that the
interpretation placed upon a statute by the executive officers, whose duty is to enforce it, is
33
entitled to great respect by the courts. Nevertheless, such interpretation is not conclusive and
will be ignored if judicially found to be erroneous. 20 Thus, courts will not countenance
administrative issuances that override, instead of remaining consistent and in harmony with the
law they seek to apply and implement. 21
In the case of People vs. Lim, 22 it was held that rules and regulations issued by administrative
officials to implement a law cannot go beyond the terms and provisions of the latter.
Appellant contends that Section 2 of FAO No. 37-1 is void because it is not only inconsistent
with but is contrary to the provisions and spirit of Act. No 4003 as amended, because whereas
the prohibition prescribed in said Fisheries Act was for any single period of time not exceeding
five years duration, FAO No 37-1 fixed no period, that is to say, it establishes an absolute ban
for all time. This discrepancy between Act No. 4003 and FAO No. 37-1 was probably due to an
oversight on the part of Secretary of Agriculture and Natural Resources. Of course, in case of
discrepancy, the basic Act prevails, for the reason that the regulation or rule issued to
implement a law cannot go beyond the terms and provisions of the
latter. . . . In this connection, the attention of the technical men in the offices of Department
Heads who draft rules and regulation is called to the importance and necessity of closely
following the terms and provisions of the law which they intended to implement, this to avoid
any possible misunderstanding or confusion as in the present case. 23
Further, fundamental is the rule that the State cannot be put in estoppel by the mistakes or
errors of its officials or agents. 24 As pointed out by the respondent courts, the nullification of
RMC No. 7-85 issued by the Acting Commissioner of Internal Revenue is an administrative
interpretation which is not in harmony with Sec. 230 of 1977 NIRC. for being contrary to the
express provision of a statute. Hence, his interpretation could not be given weight for to do so
would, in effect, amend the statute.
It is likewise argued that the Commissioner of Internal Revenue, after promulgating RMC No.
7-85, is estopped by the principle of non-retroactively of BIR rulings. Again We do not agree.
The Memorandum Circular, stating that a taxpayer may recover the excess income tax paid
within 10 years from date of payment because this is an obligation created by law, was issued
by the Acting Commissioner of Internal Revenue. On the other hand, the decision, stating that
the taxpayer should still file a claim for a refund or tax credit and corresponding petition fro
review within the
two-year prescription period, and that the lengthening of the period of limitation on refund from
two to ten years would be adverse to public policy and run counter to the positive mandate of
Sec. 230, NIRC, - was the ruling and judicial interpretation of the Court of Tax Appeals.
Estoppel has no application in the case at bar because it was not the Commissioner of Internal
Revenue who denied petitioner's claim of refund or tax credit. Rather, it was the Court of Tax
Appeals who denied (albeit correctly) the claim and in effect, ruled that the RMC No. 7-85
issued by the Commissioner of Internal Revenue is an administrative interpretation which is
out of harmony with or contrary to the express provision of a statute (specifically Sec. 230,
NIRC), hence, cannot be given weight for to do so would in effect amend the statute. 25
Art. 8 of the Civil Code 26 recognizes judicial decisions, applying or interpreting statutes as part
of the legal system of the country. But administrative decisions do not enjoy that level of
recognition. A memorandum-circular of a bureau head could not operate to vest a taxpayer
with shield against judicial action. For there are no vested rights to speak of respecting a wrong
construction of the law by the administrative officials and such wrong interpretation could not
place the Government in estoppel to correct or overrule the same. 27 Moreover, the non-
retroactivity of rulings by the Commissioner of Internal Revenue is not applicable in this case
because the nullity of RMC No. 7-85 was declared by respondent courts and not by the
Commissioner of Internal Revenue. Lastly, it must be noted that, as repeatedly held by this
Court, a claim for refund is in the nature of a claim for exemption and should be construed
in strictissimi juris against the taxpayer. 28
On the second issue, the petitioner alleges that the Court of Appeals seriously erred in affirming
CTA's decision denying its claim for refund of P234,077.69 (tax overpaid in 1986), based on
mere speculation, without proof, that PBCom availed of the automatic tax credit in 1987.
Sec. 69 of the 1977 NIRC 29 (now Sec. 76 of the 1997 NIRC) provides that any excess of the
total quarterly payments over the actual income tax computed in the adjustment or final
corporate income tax return, shall either (a) be refunded to the corporation, or (b) may be
credited against the estimated quarterly income tax liabilities for the quarters of the succeeding
taxable year.
The corporation must signify in its annual corporate adjustment return (by marking the option
box provided in the BIR form) its intention, whether to request for a refund or claim for an
automatic tax credit for the succeeding taxable year. To ease the administration of tax
collection, these remedies are in the alternative, and the choice of one precludes the other.
As stated by respondent Court of Appeals:
Finally, as to the claimed refund of income tax over-paid in 1986 the Court of Tax Appeals,
after examining the adjusted final corporate annual income tax return for taxable year 1986,
found out that petitioner opted to apply for automatic tax credit. This was the basis used (vis-
avis the fact that the 1987 annual corporate tax return was not offered by the petitioner as
evidence) by the CTA in concluding that petitioner had indeed availed of and applied the
automatic tax credit to the succeeding year, hence it can no longer ask for refund, as to [sic]
the two remedies of refund and tax credit are alternative. 30
That the petitioner opted for an automatic tax credit in accordance with Sec. 69 of the 1977
NIRC, as specified in its 1986 Final Adjusted Income Tax Return, is a finding of fact which we
must respect. Moreover, the 1987 annual corporate tax return of the petitioner was not offered
as evidence to contovert said fact. Thus, we are bound by the findings of fact by respondent
courts, there being no showing of gross error or abuse on their part to disturb our reliance
thereon. 31
WHEREFORE, the, petition is hereby DENIED, The decision of the Court of Appeals appealed
from is AFFIRMED, with COSTS against the petitioner.1wphi1.nt
SO ORDERED.

34
G.R. No. 117359 July 23, 1998
DAVAO GULF LUMBER CORPORATION, petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE and COURT OF APPEALS, respondents.
PANGANIBAN, J.:
Because taxes are the lifeblood of the nation, statutes that allow exemptions are construed
strictly against the grantee and liberally in favor of the government. Otherwise stated, any
exemption from the payment of a tax must be clearly stated in the language of the law; it cannot
be merely implied therefrom.
Statement of the Case
This principium is applied by the Court in resolving this petition for review under Rule 45 of the
Rules of Court, assailing the Decision 1 of Respondent Court of Appeals 2 in CA-GR SP No.
34581 dated September 26, 1994, which affirmed the June 21, 1994 Decision 3 of the Court of
Tax Appeals 4 in CTA Case No. 3574. The dispositive portion of the CTA Decision affirmed by
Respondent Court reads:
WHEREFORE, judgment is hereby rendered ordering the respondent to refund to the petitioner
the amount of P2,923.15 representing the partial refund of specific taxes paid on manufactured
oils and fuels. 5
The Antecedent Facts
The facts are undisputed. 6 Petitioner is a licensed forest concessionaire possessing a Timber
License Agreement granted by the Ministry of Natural Resources (now Department of
Environment and Natural Resources). From July 1, 1980 to January 31, 1982 petitioner
purchased, from various oil companies, refined and manufactured mineral oils as well as motor
and diesel fuels, which it used exclusively for the exploitation and operation of its forest
concession. Said oil companies paid the specific taxes imposed, under Sections 153 and
156 7 of the 1977 National Internal Revenue Code (NIRC), on the sale of said products. Being
included in the purchase price of the oil products, the specific taxes paid by the oil companies
were eventually passed on to the user, the petitioner in this case.
On December 13, 1982, petitioner filed before Respondent Commissioner of Internal Revenue
(CIR) a claim for refund in the amount of P120,825.11, representing 25% of the specific taxes
actually paid on the above-mentioned fuels and oils that were used by petitioner in its
operations as forest concessionaire. The claim was based on Insular Lumber Co. vs. Court of
Tax Appeals 8 and Section 5 of RA 1435 which reads:
Sec. 5. The proceeds of the additional tax on manufactured oils shall accrue to the road and
bridge funds of the political subdivision for whose benefit the tax is
collected: Provided, however, That whenever any oils mentioned above are used by miners or
forest concessionaires in their operations, twenty-five per centum of the specific tax paid
thereon shall be refunded by the Collector of Internal Revenue upon submission of proof of
actual use of oils and under similar conditions enumerated in subparagraphs one and two of
35
section one hereof, amending section one hundred forty-two of the Internal Revenue
Code: Provided, further, That no new road shall be constructed unless the routes or location
thereof shall have been approved by the Commissioner of Public Highways after a
determination that such road can be made part of an integral and articulated route in the
Philippine Highway System, as required in section twenty-six of the Philippine Highway Act of
1953.
It is an unquestioned fact that petitioner complied with the procedure for refund, including the
submission of proof of the actual use of the aforementioned oils in its forest concession as
required by the above-quoted law. Petitioner, in support of its claim for refund, submitted to the
CIR the affidavits of its general manager, the president of the Philippine Wood Products
Association, and three disinterested persons, all attesting that the said manufactured diesel
and fuel oils were actually used in the exploitation and operation of its forest concession.
On January 20, 1983, petitioner filed at the CTA a petition for review docketed as CTA Case
No. 3574. On June 21, 1994, the CTA rendered its decision finding petitioner entitled to a partial
refund of specific taxes the latter had paid in the reduced amount of P2,923.15. The CTA ruled
that the claim on purchases of lubricating oil (from July 1, 1980 to January 19, 1981) and on
manufactured oils other than lubricating oils (from July 1, 1980 to January 4, 1981) had
prescribed. Disallowed on the ground that they were not included in the original claim filed
before the CIR were the claims for refund on purchases of manufactured oils from January 1,
1980 to June 30, 1980 and from February 1, 1982 to June 30, 1982. In regard to the other
purchases, the CTA granted the claim, but it computed the refund based on rates deemed paid
under RA 1435, and not on the higher rates actualhy paid by petitioner under the NIRC.
Insisting that the basis for computing the refund should be the increased rates prescribed by
Sections 153 and 156 of the NIRC, petitioner elevated the matter to the Court of Appeals. As
noted earlier, the Court of Appeals affirmed the CTA Decision. Hence, this petition for review. 9
Public Respondent's Ruling
In its petition before the Court of Appeals, petitioner raised the following arguments:
I. The respondent Court of Tax Appeals failed to apply the Supreme Court's Decision in Insular
Lumber Co. v. Court of Tax Appeals which granted the claim for partial refund of specific taxes
paid by the claimant, without qualification or limitation.
II. The respondent Court of Tax Appeals ignored the increase in rates imposed by succeeding
amendatory laws,under which the petitioner paid the specific taxes on manufactured and diesel
fuels.
III. In its decision, the respondent Court of Tax Appeals ruled contrary to established tenets of
law when it lent itself to interpreting Section 5 of R.A. 1435, when the construction of said law
is not necessary.
IV. Sections 1 and 2 of R.A. 1435 are not the operative provisions to be applied but rather,
Sections 153 and 156 of the National Internal Revenue Code, as amended.
V. To rule that the basis for computation of the refunded taxes should be Sections 1 and 2 of
R.A. 1435 rather than Section 153 and 156 of the National Internal Revenue Code is unfair,
erroneous, arbitrary, inequitable and oppressive. 10
The Court of Appeals held that the claim for refund should indeed be computed on the basis of
the amounts deemed paid under Sections 1 and 2 of RA 1435. In so ruling, it cited our
pronouncement in Commissioner of Internal Revenue v. Rio Tuba Nickel Mining
Corporation 11 and subsequent Resolution dated June 15, 1992 clarifying the said Decision.
Respondent Court further ruled that the claims for refund which prescribed and those which
were not filed at the administrative level must be excluded.
The Issue
In its Memorandum, petitioner raises one critical issue:
Whether or not petitioner is entitled under Republic Act No. 1435 to the refund of 25% of the
amount of specific taxes it actually paid on various refined and manufactured mineral oils and
other oil products taxed under Sec. 153 and Sec. 156 of the 1977 (Sec. 142 and Sec. 145 of
the 1939) National Internal Revenue Code. 12
In the main, the question before us pertains only to the computation of the tax refund. Petitioner
argues that the refund should be based on the increased rates of specific taxes which it actually
paid, as prescribed in Sections 153 and 156 of the NIRC. Public respondent, on the other hand,
contends that it should be based on specific taxes deemed paid under Sections 1 and 2 of RA
1435.
The Court's Ruling
The petition is not meritorious.
Petitioner Entitled to Refund
Under Sec. 5 of RA 1435
At the outset, it must be stressed that petitioner is entitled to a partial refund under Section 5
of RA 1435, which was enacted to provide means for increasing the Highway Special Fund.
The rationale for this grant of partial refund of specific taxes paid on purchases of manufactured
diesel and fuel oils rests on the character of the Highway Special Fund. The specific taxes
collected on gasoline and fuel accrue to the Fund, which is to be used for the construction and
maintenance of the highway system. But because the gasoline and fuel purchased by mining
and lumber concessionaires are used within their own compounds and roads, and their vehicles
seldom use the national highways, they do not directly benefit from the Fund and its use.
Hence, the tax refund gives the mining and the logging companies a measure of relief in light
of their peculiar situation. 13 When the Highway Special Fund was abolished in 1985, the
reason for the refund likewise ceased to exist. 14Since petitioner purchased the subject
manufactured diesel and fuel oils from July 1, 1980 to January 31, 1982 and submitted the
required proof that these were actually used in operating its forest concession, it is entitled to
claim the refund under Section 5 of RA 1435.
Tax Refund Strictly Constrtued
Against the Grantee
Petitioner submits that it is entitled to the refund of 25 percent of the specific taxes it had actually
paid for the petroleum products used in its operations. In other words, it claims a refund based
on the increased rates under Sections 153 and 156 of the NIRC. 15 Petitioner argues that the
36
statutory grant of the refund privilege, specifically the phrase "twenty-five per centum of the
specific tax paid thereon shall be refunded by the Collector of Internal Revenue," is "clear and
unambiguous" enough to require construction or qualification thereof. 16 In addition, it cites our
pronouncement inInsular Lumber vs. Court of Tax Appeals: 17
. . . Sec. 5 [of RA 1435] makes reference to subparagraphs 1 and 2 of Section 1 only for the
purpose of prescribing the procedure for refund. This express reference cannot be expanded
in scope to include the limitation of the period of refund. If the limitation of the period of refund
of specific taxes paid on oils used in aviation and agriculture is intended to cover similar taxes
paid on oil used by miners and forest concessionaires, there would have been no need of
dealing with oil used by miners and forest concessions separately and Section 5 would very
well have been included in Section 1 of Republic Act No. 1435, notwithstanding the different
rate of exemption.
Petitioner then reasons that "the express mention of Section 1 of RA 1435 in Section 5 cannot
be expanded to include a limitation on the tax rates to be applied . . . [otherwise,] Section 5
should very well have been included in Section 1 . . . ." 18
The Court is nor persuaded. The relevant statutory provisions do not clearly support petitioner's
claim for refund. RA 1435 provides:
Sec. 1 Section one hundred and forty-two of the National Internal Revenue Code, as amended,
is further amended to read as follows:
Sec. 142. Specific tax on manufactured oils and other fuels. On refined and manufactured
mineral oils and motor fuels, there shall be collected the following taxes:
(a) Kerosene or petroleum, per liter of volume capacity, two and one-half centavos;
(b) Lubricating oils, per liter of volume capacity, seven centavos;
(c) Naptha, gasoline, and all other similar products of distillation, per liter of volume capacity,
eight centavos; and
(d) On denatured alcohol to be used for motive power, per liter of volume capacity, one
centavo:Provided, That if the denatured alcohol is mixed with gasoline, the specific tax on which
has already been paid, only the alcohol content shall be subject to the tax herein prescribed.
For the purpose of this subsection, the removal of denatured alcohol of not less than one
hundred eighty degrees proof (ninety per centum absolute alcohol) shall be deemed to have
been removed for motive power, unless shown to the contrary.
Whenever any of the oils mentioned above are, during the five years from June eighteen,
nineteen hundred and fifty two, used in agriculture and aviation, fifty per centum of the specific
tax paid thereon shall be refunded by the Collector of Internal Revenue upon the submission
of the following:
(1) A sworn affidavit of the producer and two disinterested persons proving that the said oils
were actually used in agriculture, or in lieu thereof.
(2) Should the producer belong to any producers' association or federation, duly registered with
the Securities and Exchange Commission, the affidavit of the president of the association or
federation, attesting to the fact that the oils were actually used in agriculture.
(3) In the case of aviation oils, a sworn certificate satisfactory to the Collector proving that the
said oils were actually used in aviation: Provided, That no such refunds shall be granted in
respect to the oils used in aviation by citizens and corporations of foreign countries which do
not grant equivalent refunds or exemptions in respect to similar oils used in aviation by citizens
and corporations of the Philippines.
Sec. 2 Section one hundred and forty-five of the National Internal Revenue Code, as amended,
is further amended to read as follows:
Sec. 145. Specific Tax on Diesel fuel oil. On fuel oil, commercially known as diesel fuel oil,
and on all similar fuel oils, having more or less the same generating power, there shall be
collected, per metric ton, one peso.
xxx xxx xxx
Sec. 5. The proceeds of the additional tax on manufactured oils shall accrue to the road and
bridge funds of the political subdivision for whose benefit the tax is
collected: Provided, however, That whenever any oils mentioned above are used by miners or
forest concessionaires in their operations, twenty-five per centum of the specific tax paid
thereon shall be refunded by the Collector of Internal Revenue upon submission of proof of
actual use of oils and under similar conditions enumerated in subparagraphs one and two of
section one hereof, amending section one hundred forty-two of the Internal Revenue
Code: Provided, further, That no new road shall be constructed unless the route or location
thereof shall have been approved by the Commissioner of Public Highways after a
determination that such road can be made part of an integral and articulated route in the
Philippine Highway System, as required in section twenty-six of the Philippine Highway Act of
1953.
Subsequently the 1977 NIRC, PD 1672 and EO 672 amended the first two provisions,
renumbering them and prescribing higher rates. Accordingly, petitioner paid specific taxes on
petroleum products purchased from July 1, 1980 to January 31, 1982 under the following
statutory provisions.
From February 8, 1980 to March 20, 1981, Sections 153 and 156 provided as follows:
Sec. 153. Specific tax on manufactured oils and other fuels. On refined and manufactured
mineral oils and motor fuels, there shall be collected the following taxes which shall attach to
the articles hereunder enumerated as soon as they are in existence as such:
(a) Kerosene, per liter of volume capacity, seven centavos;
(b) Lubricating oils, per liter of volume capacity, eighty centavos;
(c) Naphtha, gasoline and all other similar products of distillation, per liter of volume capacity,
ninety-one centavos: Provided, That on premium and aviation gasoline, the tax shall be one
peso per liter of volume capacity;
(d) On denatured alcohol to be used for motive power, per liter of volume capacity, one
centavo:Provided, That unless otherwise provided for by special laws, if the denatured alcohol
is mixed with gasoline, the specific tax on which has already been paid, only the alcohol content
shall be subject to the tax herein prescribed. For the purposes of this subsection, the removal
37
of denatured alcohol of not less than one hundred eighty degrees proof (ninety per centum
absolute alcohol) shall be deemed to have been removed for motive power, unless shown to
the contrary;
(e) Processed gas, per liter of volume capacity, three centavos;
(f) Thinners and solvents, per liter of volume capacity, fifty-seven centavos;
(g) Liquefied petroleum gas, per kilogram, fourteen centavos: Provided, That liquefied
petroleum gas used for motive power shall be taxed at the equivalent rate as the specific tax
on diesel fuel oil;
(h) Asphalts, per kilogram, eight centavos;
(i) Greases, waxes and petrolatum, per kilogram, fifty centavos;
(j) Aviation turbo jet fuel, per liter of volume capacity, fifty-five centavos. (As amended by Sec.
1, P.D. No. 1672.)
xxx xxx xxx
Sec. 156. Specific tax on diesel fuel oil. On fuel oil, commercially known as diesel fuel oil,
and on all similar fuel oils, having more or less the same generating power, per liter of volume
capacity, seventeen and one-half centavos, which tax shall attach to this fuel oil as soon as it
is in existence as such.
Then on March 21, 1981, these provisions were amended by EO 672 to read:
Sec. 153. Specific tax on manufactured oils and other fuels. On refined and manufactured
mineral oils and motor fuels, there shall be collected the following taxes which shall attach to
the articles hereunder enumerated as soon as they are in existence as such:
(a) Kerosene, per liter of volume capacity, nine centavos;
(b) Lubricating oils, per liter of volume capacity, eighty centavos;
(c) Naphtha, gasoline and all other similar products of distillation, per liter of volume capacity,
one peso and six centavos: Provided, That on premium and aviation gasoline, the tax shall be
one peso and ten centavos and one peso, respectively, per liter of volume capacity;
(d) On denatured alcohol to be used for motive power, per liter of volume capacity, one
centavo;Provided, That unless otherwise provided for by special laws, if the denatured alcohol
is mixed with gasoline, the specific tax on which has already been paid, only the alcohol content
shall be subject to the tax herein prescribed. For the purpose of this subsection, the removal
of denatured alcohol of not less than one hundred eighty degrees proof (ninety per
centum absolute alcohol) shall be deemed to have been removed for motive power, unless
shown to the contrary;
(e) Processed gas, per liter of volume capacity, three centavos;
(f) Thinners and solvents, per liter of volume capacity, sixty-one centavos;
(g) Liquefied petroleum gas, per kilogram, twenty-one centavos: Provided, That, liquified
petroleum gas used for motive power shall be taxed at the equivalent rate as the specific tax
on diesel fuel oil;
(h) Asphalts, per kilogram, twelve centavos;
(i) Greases, waxes and petrolatum, per kilogram, fifty centavos;
(j) Aviation turbo-jet fuel, per liter of volume capacity, sixty-four centavos.
xxx xxx xxx
Sec. 156. Specific tax on diesel fuel oil. On fuel oil, commercially known as diesel fuel oil,
and all similar fuel oils, having more or less the same generating power, per liter of volume
capacity, twenty-five and one-half centavos, which tax shall attach to this fuel oil as soon as it
is in existence as such.
A tax cannot be imposed unless it is supported by the clear and express language of a
statute; 19 on the other hand, once the tax is unquestionably imposed, "[a] claim of exemption
from tax payments must be clearly shown and based on language in the law too plain to be
mistaken." 20 Since the partial refund authorized under Section 5, RA 1435, is in the nature of
a tax exemption, 21 it must be construed strictissimi Juris against the grantee. Hence,
petitioner's claim of refund on the basis of the specific taxes it actually paid must expressly be
granted in a statute stated in a language too clear to be mistaken.
We have carefully scrutinized RA 1435 and the subsequent pertinent statutes and found no
expression of a legislative will authorizing a refund based on the higher rates claimed by
petitioner. The mere fact that the privilege of refund was included in Section 5, and not in
Section 1, is insufficient to support petitioner's claim. When the law itself does not explicitly
provide that a refund under RA 1435 may be based on higher rates which were nonexistent at
the time of its enactment, this Coure cannot presume otherwise. A legislative lacuna cannot be
filled by judicial fiat. 22
The issue is not really novel. In Commissioner of Internal Revenue vs. Court of Appeals and
Atlas Consolidated Mining and Development
Corporation 23 (the second Atlas case), the CIR contended that the refund should be based on
Sections 1 and 2 of RA 1435, not Sections 153 and 156 of the NIRC of 1977. In categorically
ruling that Private Respondent Atlas Consolidated Mining and Development Corporation was
entitled to a refund based on Sections 1 and 2 of RA 1435, the Court, through Mr. Justice
Hilario G. Davide, Jr., reiterated our pronouncement in Commissioner of Internal Revenue vs.
Rio Tuba Nickel and Mining Corporation:
Our Resolution of 25 March 1992 modifying our 30 September 1991 Decision in the Rio
Tuba case sets forth the controlling doctrine. In that Resolution, we stated:
Since the private respondent's claim for refund covers specific taxes paid from 1980 to July
1983 then we find that the private respondent is entitled to a refund. It should be made clear,
however, that Rio Tuba is not entitled to the whole amount it claims as refund.
The specific taxes on oils which Rio Tuba paid for the aforesaid period were no longer based
on the rates specified by Sections 1 and 2 of R.A. No. 1435 but on the increased rates
mandated under Sections 153 and 156 of the National Internal Revenue Code of 1977. We
note however, that the latter law does not specifically provide for a refund to these mining and
lumber companies of specific taxes paid on manufactured and diesel fuel oils.
In Insular Lumber Co. v. Court of Tax Appeals, (104 SCRA 710 [1981]), the Court held that the
authorized partial refund under Section 5 of R.A. No. 1435 partakes of the nature of a tax
38
exemption and therefore cannot be allowed unless granted in the most explicit and categorical
language. Since the grant of refund privileges must be strictly construed against the taxpayer,
the basis for the refund shall be the amounts deemed paid under Sections 1 and 2 of R.A. No.
1435.
ACCORDINGLY, the decision in G.R. Nos. 83583-84 is hereby MODIFIED. The private
respondent's CLAIM for REFUND is GRANTED, computed on the basis of the amounts
deemed paid under Sections 1 and 2 of R.A. No. 1435, without interest. 24
We rule, therefore, that since Atlas's claims for refund cover specific taxes paid before 1985, it
should be granted the refund based on the rates specified by Sections 1 and 2 of R.A. No.
1435 and not on the increased rates under Sections 153 and 156 of the Tax Code of 1977,
provided the claims are not yet barred by prescription. (Emphasis supplied.)
Insular Lumber Co. and First Atlas Case
Not Inconsistent With Rio Tuba
and Second Atlas Case
Petitioner argues that the applicable jurisprudence in this case should be Commissioner of
Internal Revenue vs. Atlas Consolidated and Mining Corp. (the first Atlas case), an unsigned
resolution, and Insular Lumber Co. vs. Court of Tax Appeals, an en banc decision. 25 Petitioner
also asks the Court to take a "second look" at Rio Tuba and the second Atlas case, both
decided by Divisions, in view of Insular which was decided en banc. Petitioner posits that "[I]n
view of the similarity of the situation of herein petitioner with Insular Lumber Company (claimant
in Insular Lumber) and Rio Tuba Nickel Mining Corporation (claimant in Rio Tuba), a dilemma
has been created as to whether or not Insular Lumber, which has been decided by the
Honorable Court en banc, or Rio Tuba, which was decided only [by] the Third Division of the
Honorable Court, should
apply." 26
We find no conflict between these two pairs of cases. Neither Insular Lumber Co. nor the first
Atlas case ruled on the issue of whether the refund privilege under Section 5 should be
computed based on the specific tax deemed paid under Sections 1 and 2 of RA 1435,
regardless of what was actually paid under the increased rates. Rio Tuba and the second Atlas
case did.
Insular Lumber Co. decided a claim for refund on specific tax paid on petroleum products
purchased in the year 1963, when the increased rates under the NIRC of 1977 were nor yet in
effect. Thus, the issue now before us did not exist at the time, since the applicable rates were
still those prescribed under Sections 1 and 2 of RA 1435.
On the other hand, the issue raised in the first Atlas case was whether the claimant was entitled
to the refund under Section 5, notwithstanding its failure to pay any additional tax under a
municipal or city ordinance. Although Atlas purchased petroleum products in the years, 1976
to 1978 when the rates had already been changed, the Court did not decide or make any
pronouncement on the issue in that case.
Clearly, it is impossible for these two decisions to clash with our pronouncement in Rio
Tuba and second Atlas case, in which we ruled that the refund granted be computed on the
basis of the amounts deemed paid under Sections 1 and 2 of RA 1435. In this light, we find no
basis for petitioner's invocation of the constitutional proscription that "no doctrine or principle
of law laid down by the Court in a decision rendered en banc or in division may be modified or
reversed except by the Court sitting en banc. 27
Finally, petitioner asserts that "equity and justice demand that the computation of the tax
refunds be based on actual amounts paid under Sections 153 and 156 of the NIRC." 28 We
disagree. According to an eminent authority on taxation, "there is no tax exemption solely on
the, ground of equity." 29
WHEREFORE, the petition is hereby DENIED and the assailed Decision of the Court of
Appeals is AFFIRMED.
SO ORDERED.

39
G.R. Nos. L-49839-46 April 26, 1991
JOSE B. L. REYES and EDMUNDO A. REYES, petitioners,
vs.
PEDRO ALMANZOR, VICENTE ABAD SANTOS, JOSE ROO, in their capacities as
appointed and Acting Members of the CENTRAL BOARD OF ASSESSMENT APPEALS;
TERESITA H. NOBLEJAS, ROMULO M. DEL ROSARIO, RAUL C. FLORES, in their
capacities as appointed and Acting Members of the BOARD OF ASSESSMENT
APPEALS of Manila; and NICOLAS CATIIL in his capacity as City Assessor of
Manila,respondents.
Barcelona, Perlas, Joven & Academia Law Offices for petitioners.
PARAS, J.:
This is a petition for review on certiorari to reverse the June 10, 1977 decision of the Central
Board of Assessment Appeals1 in CBAA Cases Nos. 72-79 entitled "J.B.L. Reyes, Edmundo
Reyes, et al. v. Board of Assessment Appeals of Manila and City Assessor of Manila" which
affirmed the March 29, 1976 decision of the Board of Tax Assessment Appeals 2 in BTAA Cases
Nos. 614, 614-A-J, 615, 615-A, B, E, "Jose Reyes, et al. v. City Assessor of Manila" and
"Edmundo Reyes and Milagros Reyes v. City Assessor of Manila" upholding the classification
and assessments made by the City Assessor of Manila.
The facts of the case are as follows:
Petitioners J.B.L. Reyes, Edmundo and Milagros Reyes are owners of parcels of land situated
in Tondo and Sta. Cruz Districts, City of Manila, which are leased and entirely occupied as
dwelling sites by tenants. Said tenants were paying monthly rentals not exceeding three
hundred pesos (P300.00) in July, 1971. On July 14, 1971, the National Legislature enacted
Republic Act No. 6359 prohibiting for one year from its effectivity, an increase in monthly rentals
of dwelling units or of lands on which another's dwelling is located, where such rentals do not
exceed three hundred pesos (P300.00) a month but allowing an increase in rent by not more
than 10% thereafter. The said Act also suspended paragraph (1) of Article 1673 of the Civil
Code for two years from its effectivity thereby disallowing the ejectment of lessees upon the
expiration of the usual legal period of lease. On October 12, 1972, Presidential Decree No. 20
amended R.A. No. 6359 by making absolute the prohibition to increase monthly rentals below
P300.00 and by indefinitely suspending the aforementioned provision of the Civil Code,
excepting leases with a definite period. Consequently, the Reyeses, petitioners herein, were
precluded from raising the rentals and from ejecting the tenants. In 1973, respondent City
Assessor of Manila re-classified and reassessed the value of the subject properties based on
the schedule of market values duly reviewed by the Secretary of Finance. The revision, as
expected, entailed an increase in the corresponding tax rates prompting petitioners to file a
Memorandum of Disagreement with the Board of Tax Assessment Appeals. They averred that
the reassessments made were "excessive, unwarranted, inequitable, confiscatory and
unconstitutional" considering that the taxes imposed upon them greatly exceeded the annual
40
income derived from their properties. They argued that the income approach should have been
used in determining the land values instead of the comparable sales approach which the City
Assessor adopted (Rollo, pp. 9-10-A). The Board of Tax Assessment Appeals, however,
considered the assessments valid, holding thus:
WHEREFORE, and considering that the appellants have failed to submit concrete evidence
which could overcome the presumptive regularity of the classification and assessments appear
to be in accordance with the base schedule of market values and of the base schedule of
building unit values, as approved by the Secretary of Finance, the cases should be, as they
are hereby, upheld.
SO ORDERED. (Decision of the Board of Tax Assessment Appeals, Rollo, p. 22).
The Reyeses appealed to the Central Board of Assessment Appeals.1wphi1 They submitted,
among others, the summary of the yearly rentals to show the income derived from the
properties. Respondent City Assessor, on the other hand, submitted three (3) deeds of sale
showing the different market values of the real property situated in the same vicinity where the
subject properties of petitioners are located. To better appreciate the locational and physical
features of the land, the Board of Hearing Commissioners conducted an ocular inspection with
the presence of two representatives of the City Assessor prior to the healing of the case.
Neither the owners nor their authorized representatives were present during the said ocular
inspection despite proper notices served them. It was found that certain parcels of land were
below street level and were affected by the tides (Rollo, pp. 24-25).
On June 10, 1977, the Central Board of Assessment Appeals rendered its decision, the
dispositive portion of which reads:
WHEREFORE, the appealed decision insofar as the valuation and assessment of the lots
covered by Tax Declaration Nos. (5835) PD-5847, (5839), (5831) PD-5844 and PD-3824 is
affirmed.
For the lots covered by Tax Declaration Nos. (1430) PD-1432, PD-1509, 146 and (1) PD-266,
the appealed Decision is modified by allowing a 20% reduction in their respective market values
and applying therein the assessment level of 30% to arrive at the corresponding assessed
value.
SO ORDERED. (Decision of the Central Board of Assessment Appeals, Rollo, p. 27)
Petitioner's subsequent motion for reconsideration was denied, hence, this petition.
The Reyeses assigned the following error:
THE HONORABLE BOARD ERRED IN ADOPTING THE "COMPARABLE SALES
APPROACH" METHOD IN FIXING THE ASSESSED VALUE OF APPELLANTS'
PROPERTIES.
The petition is impressed with merit.
The crux of the controversy is in the method used in tax assessment of the properties in
question. Petitioners maintain that the "Income Approach" method would have been more
realistic for in disregarding the effect of the restrictions imposed by P.D. 20 on the market value
of the properties affected, respondent Assessor of the City of Manila unlawfully and unjustifiably
set increased new assessed values at levels so high and successive that the resulting annual
real estate taxes would admittedly exceed the sum total of the yearly rentals paid or payable
by the dweller tenants under P.D. 20. Hence, petitioners protested against the levels of the
values assigned to their properties as revised and increased on the ground that they were
arbitrarily excessive, unwarranted, inequitable, confiscatory and unconstitutional (Rollo, p. 10-
A).
On the other hand, while respondent Board of Tax Assessment Appeals admits in its decision
that the income approach is used in determining land values in some vicinities, it maintains that
when income is affected by some sort of price control, the same is rejected in the consideration
and study of land values as in the case of properties affected by the Rent Control Law for they
do not project the true market value in the open market (Rollo, p. 21). Thus, respondents opted
instead for the "Comparable Sales Approach" on the ground that the value estimate of the
properties predicated upon prices paid in actual, market transactions would be a uniform and
a more credible standards to use especially in case of mass appraisal of properties (Ibid.).
Otherwise stated, public respondents would have this Court completely ignore the effects of
the restrictions of P.D. No. 20 on the market value of properties within its coverage. In any
event, it is unquestionable that both the "Comparable Sales Approach" and the "Income
Approach" are generally acceptable methods of appraisal for taxation purposes (The Law on
Transfer and Business Taxation by Hector S. De Leon, 1988 Edition). However, it is conceded
that the propriety of one as against the other would of course depend on several factors. Hence,
as early as 1923 in the case of Army & Navy Club, Manila v. Wenceslao Trinidad, G.R. No.
19297 (44 Phil. 383), it has been stressed that the assessors, in finding the value of the
property, have to consider all the circumstances and elements of value and must exercise a
prudent discretion in reaching conclusions.
Under Art. VIII, Sec. 17 (1) of the 1973 Constitution, then enforced, the rule of taxation must
not only be uniform, but must also be equitable and progressive.
Uniformity has been defined as that principle by which all taxable articles or kinds of property
of the same class shall be taxed at the same rate (Churchill v. Concepcion, 34 Phil. 969 [1916]).
Notably in the 1935 Constitution, there was no mention of the equitable or progressive aspects
of taxation required in the 1973 Charter (Fernando "The Constitution of the Philippines", p. 221,
Second Edition). Thus, the need to examine closely and determine the specific mandate of the
Constitution.
Taxation is said to be equitable when its burden falls on those better able to pay. Taxation is
progressive when its rate goes up depending on the resources of the person affected (Ibid.).
The power to tax "is an attribute of sovereignty". In fact, it is the strongest of all the powers of
government. But for all its plenitude the power to tax is not unconfined as there are restrictions.
Adversely effecting as it does property rights, both the due process and equal protection
clauses of the Constitution may properly be invoked to invalidate in appropriate cases a
revenue measure. If it were otherwise, there would be truth to the 1903 dictum of Chief Justice
Marshall that "the power to tax involves the power to destroy." The web or unreality spun from
Marshall's famous dictum was brushed away by one stroke of Mr. Justice Holmes pen, thus:
"The power to tax is not the power to destroy while this Court sits. So it is in the Philippines "
41
(Sison, Jr. v. Ancheta, 130 SCRA 655 [1984]; Obillos, Jr. v. Commissioner of Internal Revenue,
139 SCRA 439 [1985]).
In the same vein, the due process clause may be invoked where a taxing statute is so arbitrary
that it finds no support in the Constitution. An obvious example is where it can be shown to
amount to confiscation of property. That would be a clear abuse of power (Sison v.
Ancheta, supra).
The taxing power has the authority to make a reasonable and natural classification for purposes
of taxation but the government's act must not be prompted by a spirit of hostility, or at the very
least discrimination that finds no support in reason. It suffices then that the laws operate equally
and uniformly on all persons under similar circumstances or that all persons must be treated in
the same manner, the conditions not being different both in the privileges conferred and the
liabilities imposed (Ibid., p. 662).
Finally under the Real Property Tax Code (P.D. 464 as amended), it is declared that the first
Fundamental Principle to guide the appraisal and assessment of real property for taxation
purposes is that the property must be "appraised at its current and fair market value."
By no strength of the imagination can the market value of properties covered by P.D. No. 20
be equated with the market value of properties not so covered. The former has naturally a
much lesser market value in view of the rental restrictions.
Ironically, in the case at bar, not even the factors determinant of the assessed value of subject
properties under the "comparable sales approach" were presented by the public respondents,
namely: (1) that the sale must represent a bonafide arm's length transaction between a willing
seller and a willing buyer and (2) the property must be comparable property (Rollo, p. 27).
Nothing can justify or support their view as it is of judicial notice that for properties covered by
P.D. 20 especially during the time in question, there were hardly any willing buyers. As a
general rule, there were no takers so that there can be no reasonable basis for the conclusion
that these properties were comparable with other residential properties not burdened by P.D.
20. Neither can the given circumstances be nonchalantly dismissed by public respondents as
imposed under distressed conditions clearly implying that the same were merely temporary in
character. At this point in time, the falsity of such premises cannot be more convincingly
demonstrated by the fact that the law has existed for around twenty (20) years with no end to
it in sight.
Verily, taxes are the lifeblood of the government and so should be collected without
unnecessary hindrance. However, such collection should be made in accordance with law as
any arbitrariness will negate the very reason for government itself It is therefore necessary to
reconcile the apparently conflicting interests of the authorities and the taxpayers so that the
real purpose of taxations, which is the promotion of the common good, may be achieved
(Commissioner of Internal Revenue v. Algue Inc., et al., 158 SCRA 9 [1988]). Consequently, it
stands to reason that petitioners who are burdened by the government by its Rental Freezing
Laws (then R.A. No. 6359 and P.D. 20) under the principle of social justice should not now be
penalized by the same government by the imposition of excessive taxes petitioners can ill afford
and eventually result in the forfeiture of their properties.
By the public respondents' own computation the assessment by income approach would
amount to only P10.00 per sq. meter at the time in question.
PREMISES CONSIDERED, (a) the petition is GRANTED; (b) the assailed decisions of public
respondents are REVERSED and SET ASIDE; and (e) the respondent Board of Assessment
Appeals of Manila and the City Assessor of Manila are ordered to make a new assessment by
the income approach method to guarantee a fairer and more realistic basis of computation
(Rollo, p. 71).
SO ORDERED.

42
G.R. No. 167330 September 18, 2009 Petitioner protested the assessment in a letter dated February 23, 2000. As respondent did not
PHILIPPINE HEALTH CARE PROVIDERS, INC., Petitioner, act on the protest, petitioner filed a petition for review in the Court of Tax Appeals (CTA) seeking
vs. the cancellation of the deficiency VAT and DST assessments.
COMMISSIONER OF INTERNAL REVENUE, Respondent. On April 5, 2002, the CTA rendered a decision, the dispositive portion of which read:
RESOLUTION WHEREFORE, in view of the foregoing, the instant Petition for Review is PARTIALLY
CORONA, J.: 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
ARTICLE II
fully paid for the 1996 VAT deficiency and P31,094,163.87 inclusive of 25% surcharge plus
Declaration of Principles and State Policies
20% interest from January 20, 1998 until fully paid for the 1997 VAT deficiency. Accordingly,
Section 15. The State shall protect and promote the right to health of the people and instill VAT Ruling No. [231]-88 is declared void and without force and effect. The 1996 and 1997
health consciousness among them. deficiency DST assessment against petitioner is hereby CANCELLED AND SET ASIDE.
ARTICLE XIII Respondent is ORDERED to DESIST from collecting the said DST deficiency tax.
Social Justice and Human Rights SO ORDERED.
Section 11. The State shall adopt an integrated and comprehensive approach to health Respondent appealed the CTA decision to the [Court of Appeals (CA)] insofar as it cancelled
development which shall endeavor to make essential goods, health and other social services the DST assessment. He claimed that petitioners health care agreement was a contract of
available to all the people at affordable cost. There shall be priority for the needs of the insurance subject to DST under Section 185 of the 1997 Tax Code.
underprivileged sick, elderly, disabled, women, and children. The State shall endeavor to
On August 16, 2004, the CA rendered its decision. It held that petitioners health care
provide free medical care to paupers.1
agreement was in the nature of a non-life insurance contract subject to DST.
For resolution are a motion for reconsideration and supplemental motion for reconsideration
WHEREFORE, the petition for review is GRANTED. The Decision of the Court of Tax Appeals,
dated July 10, 2008 and July 14, 2008, respectively, filed by petitioner Philippine Health Care
insofar as it cancelled and set aside the 1996 and 1997 deficiency documentary stamp tax
Providers, Inc.2
assessment and ordered petitioner to desist from collecting the same is REVERSED and SET
We recall the facts of this case, as follows: ASIDE.
Petitioner is a domestic corporation whose primary purpose is "[t]o establish, maintain, conduct Respondent is ordered to pay the amounts of P55,746,352.19 and P68,450,258.73 as
and operate a prepaid group practice health care delivery system or a health maintenance deficiency Documentary Stamp Tax for 1996 and 1997, respectively, plus 25% surcharge for
organization to take care of the sick and disabled persons enrolled in the health care plan and late payment and 20% interest per annum from January 27, 2000, pursuant to Sections 248
to provide for the administrative, legal, and financial responsibilities of the organization." and 249 of the Tax Code, until the same shall have been fully paid.
Individuals enrolled in its health care programs pay an annual membership fee and are entitled
SO ORDERED.
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 Petitioner moved for reconsideration but the CA denied it. Hence, petitioner filed this case.
health delivery system at a hospital or clinic owned, operated or accredited by it. xxx xxx xxx
xxx xxx xxx In a decision dated June 12, 2008, the Court denied the petition and affirmed the CAs decision.
On January 27, 2000, respondent Commissioner of Internal Revenue [CIR] sent petitioner a We held that petitioners health care agreement during the pertinent period was in the nature
formal demand letter and the corresponding assessment notices demanding the payment of of non-life insurance which is a contract of indemnity, citing Blue Cross Healthcare, Inc. v.
deficiency taxes, including surcharges and interest, for the taxable years 1996 and 1997 in the Olivares3 and Philamcare Health Systems, Inc. v. CA.4We also ruled that petitioners
total amount of P224,702,641.18. xxxx contention that it is a health maintenance organization (HMO) and not an insurance company
is irrelevant because contracts between companies like petitioner and the beneficiaries under
The deficiency [documentary stamp tax (DST)] assessment was imposed on petitioners health
their plans are treated as insurance contracts. Moreover, DST is not a tax on the business
care agreement with the members of its health care program pursuant to Section 185 of the
transacted but an excise on the privilege, opportunity or facility offered at exchanges for the
1997 Tax Code xxxx
transaction of the business.
xxx xxx xxx
Unable to accept our verdict, petitioner filed the present motion for reconsideration and
supplemental motion for reconsideration, asserting the following arguments:

43
(a) The DST under Section 185 of the National Internal Revenue of 1997 is imposed only on a
company engaged in the business of fidelity bonds and other insurance policies. Petitioner, as
an HMO, is a service provider, not an insurance company.
(b) The Court, in dismissing the appeal in CIR v. Philippine National Bank, affirmed in effect
the CAs disposition that health care services are not in the nature of an insurance business.
(c) Section 185 should be strictly construed.
(d) Legislative intent to exclude health care agreements from items subject to DST is clear,
especially in the light of the amendments made in the DST law in 2002.
(e) Assuming arguendo that petitioners agreements are contracts of indemnity, they are not
those contemplated under Section 185.
(f) Assuming arguendo that petitioners agreements are akin to health insurance, health
insurance is not covered by Section 185.
(g) The agreements do not fall under the phrase "other branch of insurance" mentioned in
Section 185.
(h) The June 12, 2008 decision should only apply prospectively.
(i) Petitioner availed of the tax amnesty benefits under RA5 9480 for the taxable year 2005 and
all prior years. Therefore, the questioned assessments on the DST are now rendered moot and
academic.6
Oral arguments were held in Baguio City on April 22, 2009. The parties submitted their
memoranda on June 8, 2009.
In its motion for reconsideration, petitioner reveals for the first time that it availed of a tax
amnesty under RA 94807 (also known as the "Tax Amnesty Act of 2007") by fully paying the
amount of P5,127,149.08 representing 5% of its net worth as of the year ending December 31,
2005.8
We find merit in petitioners motion for reconsideration.
Petitioner was formally registered and incorporated with the Securities and Exchange
Commission on June 30, 1987.9 It is engaged in the dispensation of the following medical
services to individuals who enter into health care agreements with it:
Preventive medical services such as periodic monitoring of health problems, family planning
counseling, consultation and advices on diet, exercise and other healthy habits, and
immunization;
Diagnostic medical services such as routine physical examinations, x-rays, urinalysis,
fecalysis, complete blood count, and the like and
Curative medical services which pertain to the performing of other remedial and therapeutic
processes in the event of an injury or sickness on the part of the enrolled member. 10
Individuals enrolled in its health care program pay an annual membership fee. Membership is
on a year-to-year basis. The medical services are dispensed to enrolled members in a hospital
or clinic owned, operated or accredited by petitioner, through physicians, medical and dental
practitioners under contract with it. It negotiates with such health care practitioners regarding
44
payment schemes, financing and other procedures for the delivery of health services. Except
in cases of emergency, the professional services are to be provided only by petitioner's
physicians, i.e. those directly employed by it11 or whose services are contracted by
it.12 Petitioner also provides hospital services such as room and board accommodation,
laboratory services, operating rooms, x-ray facilities and general nursing care.13 If and when a
member avails of the benefits under the agreement, petitioner pays the participating physicians
and other health care providers for the services rendered, at pre-agreed rates.14
To avail of petitioners health care programs, the individual members are required to sign and
execute a standard health care agreement embodying the terms and conditions for the
provision of the health care services. The same agreement contains the various health care
services that can be engaged by the enrolled member, i.e., preventive, diagnostic and curative
medical services. Except for the curative aspect of the medical service offered, the enrolled
member may actually make use of the health care services being offered by petitioner at any
time.
Health Maintenance Organizations Are Not Engaged In The Insurance Business
We said in our 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.15
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.16
A second hard look at the relevant law and jurisprudence convinces the Court that the
arguments of petitioner are meritorious.
Section 185 of the National Internal Revenue Code of 1997 (NIRC of 1997) provides:
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, employers 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)
It is a cardinal rule in statutory construction that no word, clause, sentence, provision or part of
a statute shall be considered surplusage or superfluous, meaningless, void and insignificant.
To this end, a construction which renders every word operative is preferred over that which
makes some words idle and nugatory. 17 This principle is expressed in the maxim Ut magis
valeat quam pereat, that is, we choose the interpretation which gives effect to the whole of the
statute its every word.18
From the language of Section 185, it is evident that 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).
Petitioner is admittedly an HMO. Under RA 7875 (or "The National Health Insurance Act of
1995"), 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." 19 The payments do not vary
with the extent, frequency or type of services provided.
The question is: was petitioner, as an HMO, engaged in the business of insurance during the
pertinent taxable years? We rule that it was not.
Section 2 (2) of PD20 1460 (otherwise known as the Insurance Code) enumerates what
constitutes "doing an insurance business" or "transacting an insurance business:"
a) making or proposing to make, as insurer, any insurance contract;
b) 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;
c) 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;
d) 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.
In the application of the provisions of this Code, the fact that no profit is derived from the making
of insurance contracts, agreements or transactions or that no separate or direct consideration
is received therefore, shall not be deemed conclusive to show that the making thereof does not
constitute the doing or transacting of an insurance business.
Various courts in the United States, whose jurisprudence has a persuasive effect on our
decisions,21 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 (which are elements
of an insurance business) 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 they are merely incidental and service is the principal purpose, then
the business is not insurance.
Applying the "principal object and purpose test,"22 there is significant American case law
supporting the argument that a corporation (such as an HMO, whether or not organized for
profit), whose main object is to provide the members of a group with health services, is not
engaged in the insurance business.
45
The rule was enunciated in Jordan v. Group Health Association23 wherein the Court of Appeals
of the District of Columbia Circuit held that Group Health Association should not be considered
as engaged in insurance activities since it was created primarily for the distribution of health
care services rather than the assumption of insurance risk.
xxx Although Group Healths activities may be considered in one aspect as creating security
against loss from illness or accident more truly they constitute the quantity purchase of well-
rounded, continuous medical service by its members. xxx The functions of such an
organization are not identical with those of insurance or indemnity companies. The latter
are concerned primarily, if not exclusively, with risk and the consequences of its descent, not
with service, or its extension in kind, quantity or distribution; with the unusual occurrence, not
the daily routine of living. Hazard is predominant. On the other hand, the cooperative is
concerned principally with getting service rendered to its members and doing so at
lower prices made possible by quantity purchasing and economies in operation. Its
primary purpose is to reduce the cost rather than the risk of medical care; to broaden
the service to the individual in kind and quantity; to enlarge the number receiving it; to
regularize it as an everyday incident of living, like purchasing food and clothing or oil
and gas, rather than merely protecting against the financial loss caused by
extraordinary and unusual occurrences, such as death, disaster at sea, fire and
tornado. It is, in this instance, to take care of colds, ordinary aches and pains, minor ills and
all the temporary bodily discomforts as well as the more serious and unusual illness. To
summarize, the distinctive features of the cooperative are the rendering of service, its
extension, the bringing of physician and patient together, the preventive features, the
regularization of service as well as payment, the substantial reduction in cost by
quantity purchasing in short, getting the medical job done and paid for; not, except
incidentally to these features, the indemnification for cost after the services is rendered.
Except the last, these are not distinctive or generally characteristic of the insurance
arrangement. There is, therefore, a substantial difference between contracting in this way for
the rendering of service, even on the contingency that it be needed, and contracting merely to
stand its cost when or after it is rendered.
That an incidental element of risk distribution or assumption may be present should not
outweigh all other factors. If attention is focused only on that feature, the line between insurance
or indemnity and other types of legal arrangement and economic function becomes faint, if not
extinct. This is especially true when the contract is for the sale of goods or services on
contingency. But obviously it was not the purpose of the insurance statutes to regulate all
arrangements for assumption or distribution of risk. That view would cause them to engulf
practically all contracts, particularly conditional sales and contingent service agreements. The
fallacy is in looking only at the risk element, to the exclusion of all others present or
their subordination to it. The question turns, not on whether risk is involved or assumed,
but on whether that or something else to which it is related in the particular plan is its
principal object purpose.24 (Emphasis supplied)
In California Physicians Service v. Garrison,25 the California court felt that, after scrutinizing
the plan of operation as a whole of the corporation, it was service rather than indemnity which
stood as its principal purpose.
There is another and more compelling reason for holding that the service is not engaged in the
insurance business. Absence or presence of assumption of risk or peril is not the sole
test to be applied in determining its status. The question, more broadly, is whether,
looking at the plan of operation as a whole, service rather than indemnity is its
principal object and purpose. Certainly the objects and purposes of the corporation
organized and maintained by the California physicians have a wide scope in the field of social
service. Probably there is no more impelling need than that of adequate medical care on
a voluntary, low-cost basis for persons of small income. The medical profession unitedly
is endeavoring to meet that need. Unquestionably this is service of a high order and
not indemnity.26 (Emphasis supplied)
American courts have pointed out that the main difference between an HMO and an insurance
company is that HMOs undertake to provide or arrange for the provision of medical services
through participating physicians while insurance companies simply undertake to indemnify the
insured for medical expenses incurred up to a pre-agreed limit. Somerset Orthopedic
Associates, P.A. v. Horizon Blue Cross and Blue Shield of New Jersey27 is clear on this point:
The basic distinction between medical service corporations and ordinary health and accident
insurers is that the former undertake to provide prepaid medical services through
participating physicians, thus relieving subscribers of any further financial burden, while the
latter only undertake to indemnify an insured for medical expenses up to, but not beyond, the
schedule of rates contained in the policy.
xxx xxx xxx
The primary purpose of a medical service corporation, however, is an undertaking to provide
physicians who will render services to subscribers on a prepaid basis. Hence, if there are no
physicians participating in the medical service corporations plan, not only will the
subscribers be deprived of the protection which they might reasonably have expected
would be provided, but the corporation will, in effect, be doing business solely as a
health and accident indemnity insurer without having qualified as such and rendering itself
subject to the more stringent financial requirements of the General Insurance Laws.
A participating provider of health care services is one who agrees in writing to render health
care services to or for persons covered by a contract issued by health service corporation in
return for which the health service corporation agrees to make payment directly to the
participating provider.28 (Emphasis supplied)
Consequently, the mere presence of risk would be insufficient to override the primary purpose
of the business to provide medical services as needed, with payment made directly to the
provider of these services.29 In short, even if petitioner assumes the risk of paying the cost of
these services even if significantly more than what the member has prepaid, it nevertheless
cannot be considered as being engaged in the insurance business.
46
By the same token, any indemnification resulting from the payment for services rendered in
case of emergency by non-participating health providers would still be incidental to petitioners
purpose of providing and arranging for health care services and does not transform it into an
insurer. To fulfill its obligations to its members under the agreements, petitioner is required to
set up a system and the facilities for the delivery of such medical services. This indubitably
shows that indemnification is not its sole object.
In fact, a substantial portion of petitioners services covers preventive and diagnostic medical
services intended to keep members from developing medical conditions or diseases. 30 As an
HMO, it is its obligation to maintain the good health of its members. Accordingly, its health
care programs are designed to prevent or to minimize the possibility of any assumption
of risk on its part. Thus, its undertaking under its agreements is not to indemnify its members
against any loss or damage arising from a medical condition but, on the contrary, to provide
the health and medical services needed to prevent such loss or damage.31
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.
It is important to emphasize that, in adopting the "principal purpose test" used in the above-
quoted U.S. cases, we are not saying that petitioners operations are identical in every respect
to those of the HMOs or health providers which were parties to those cases. What we are
stating is that, for the purpose of determining what "doing an insurance business" means, we
have to scrutinize the operations of the business as a whole and not its mere components. This
is of course only prudent and appropriate, taking into account the burdensome and strict laws,
rules and regulations applicable to insurers and other entities engaged in the insurance
business. Moreover, we are also not unmindful that there are other American authorities who
have found particular HMOs to be actually engaged in insurance activities. 32
Lastly, it is significant that 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.33 In fact, in a letter dated September 3, 2000, the Insurance
Commissioner confirmed that petitioner is not engaged in the insurance business. This
determination of the commissioner must be accorded great weight. It is well-settled that the
interpretation of an administrative agency which is tasked to implement a statute is accorded
great respect and ordinarily controls the interpretation of laws by the courts. The reason behind
this rule was explained in Nestle Philippines, Inc. v. Court of Appeals:34
The rationale for this rule relates not only to the emergence of the multifarious needs of a
modern or modernizing society and the establishment of diverse administrative agencies for
addressing and satisfying those needs; it also relates to the accumulation of experience and
growth of specialized capabilities by the administrative agency charged with implementing a
particular statute. In Asturias Sugar Central, Inc. vs. Commissioner of Customs,35the Court
stressed that executive officials are presumed to have familiarized themselves with all the
considerations pertinent to the meaning and purpose of the law, and to have formed an
independent, conscientious and competent expert opinion thereon. The courts give much
weight to the government agency officials charged with the implementation of the law, their
competence, expertness, experience and informed judgment, and the fact that they frequently
are the drafters of the law they interpret.36
A Health Care Agreement Is Not An Insurance Contract Contemplated Under Section 185
Of The NIRC of 1997
Section 185 states that DST is imposed on "all policies of insurance or obligations of the
nature of indemnity for loss, damage, or liability." In our decision dated June 12, 2008, we
ruled that petitioners health care agreements are contracts of indemnity and are therefore
insurance contracts:
It is 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.37
We reconsider. We shall quote once again the pertinent portion of Section 185:
Section 185. Stamp tax on fidelity bonds and other insurance policies. On all policies of
insurance or bondsor 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), xxxx (Emphasis supplied)
In construing this provision, we should be guided by the principle that tax statutes are strictly
construed against the taxing authority.38 This is because taxation is a destructive power which
interferes with the personal and property rights of the people and takes from them a portion of
their property for the support of the government.39Hence, tax laws may not be extended by
47
implication beyond the clear import of their language, nor their operation enlarged so as to
embrace matters not specifically provided.40
We are aware that, in Blue Cross and Philamcare, the Court pronounced that a health care
agreement is in the nature of non-life insurance, which is primarily a contract of indemnity.
However, those cases did not involve the interpretation of a tax provision. Instead, they dealt
with the liability of a health service provider to a member under the terms of their health care
agreement. Such contracts, as contracts of adhesion, are liberally interpreted in favor of the
member and strictly against the HMO. For this reason, we reconsider our ruling that Blue
Crossand Philamcare are applicable here.
Section 2 (1) of the Insurance Code defines a contract of insurance as an agreement whereby
one undertakes for a consideration to indemnify another against loss, damage or liability arising
from an unknown or contingent event. An insurance contract exists where the following
elements concur:
1. The insured has an insurable interest;
2. The insured is subject to a risk of loss by the happening of the designed peril;
3. The insurer assumes the risk;
4. Such assumption of risk is part of a general scheme to distribute actual losses among a large
group of persons bearing a similar risk and
5. In consideration of the insurers promise, the insured pays a premium.41
Do the agreements between petitioner and its members possess all these elements? They do
not.
First. In our jurisdiction, a commentator of our insurance laws has pointed out that, even if a
contract contains all the elements of an insurance contract, if its primary purpose is the
rendering of service, it is not a contract of insurance:
It does not necessarily follow however, that a contract containing all the four elements
mentioned above would be an insurance contract. The primary purpose of the parties in
making the contract may negate the existence of an insurance contract. For example, a
law firm which enters into contracts with clients whereby in consideration of periodical
payments, it promises to represent such clients in all suits for or against them, is not engaged
in the insurance business. Its contracts are simply for the purpose of rendering personal
services. On the other hand, a contract by which a corporation, in consideration of a stipulated
amount, agrees at its own expense to defend a physician against all suits for damages for
malpractice is one of insurance, and the corporation will be deemed as engaged in the business
of insurance. Unlike the lawyers retainer contract, the essential purpose of such a contract is
not to render personal services, but to indemnify against loss and damage resulting from the
defense of actions for malpractice.42 (Emphasis supplied)
Second. Not all the necessary elements of a contract of insurance are present in petitioners
agreements. To begin with, 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 case of
availment by a member of the benefits under the agreement, petitioner does not reimburse or
indemnify the member as the latter does not pay any third party. Instead, it is the petitioner who
pays the participating physicians and other health care providers for the services rendered at
pre-agreed rates. The member does not make any such payment.
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" presuppose
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.
Third. According to the agreement, a member can take advantage of the bulk of the benefits
anytime, e.g.laboratory services, x-ray, routine annual physical 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.
Fourth. In case of emergency, 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.
In Michigan Podiatric Medical Association v. National Foot Care Program, Inc.,43 although the
health care contracts called for the defendant to partially reimburse a subscriber for treatment
received from a non-designated doctor, this did not make defendant an insurer. Citing Jordan,
the Court determined that "the primary activity of the defendant (was) the provision of podiatric
services to subscribers in consideration of prepayment for such services."44 Since indemnity of
the insured was not the focal point of the agreement but the extension of medical services to
the member at an affordable cost, it did not partake of the nature of a contract of insurance.
Fifth. Although risk is a primary element of an insurance contract, it is not necessarily true that
risk alone is sufficient to establish it. Almost anyone who undertakes a contractual obligation
always bears a certain degree of financial risk. Consequently, there is a need to distinguish
prepaid service contracts (like those of petitioner) from the usual insurance contracts.
Indeed, petitioner, as an HMO, undertakes a business risk when it offers to provide health
services: the risk that it might fail to earn a reasonable return on its investment. But it is not the
risk of the type peculiar only to insurance companies. Insurance risk, also known as actuarial
risk, is the risk that the cost of insurance claims might be higher than the premiums paid. The
amount of premium is calculated on the basis of assumptions made relative to the insured. 45
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 than the prepaid fees,
it still will not qualify as an insurance contract because petitioners objective is to provide
medical services at reduced cost, not to distribute risk like an insurer.
In sum, an examination of petitioners agreements with its members leads us to conclude that
it is not an insurance contract within the context of our Insurance Code.
48
There Was No Legislative Intent To Impose DST On Health Care Agreements Of HMOs
Furthermore, militating in convincing fashion against the imposition of DST on petitioners
health care agreements under Section 185 of the NIRC of 1997 is the provisions legislative
history. The text of Section 185 came into U.S. law as early as 1904 when HMOs and health
care agreements were not even in existence in this jurisdiction. It was imposed under Section
116, Article XI of Act No. 1189 (otherwise known as the "Internal Revenue Law of
1904")46 enacted on July 2, 1904 and became effective on August 1, 1904. Except for the rate
of tax, Section 185 of the NIRC of 1997 is a verbatim reproduction of the pertinent portion of
Section 116, to wit:
ARTICLE XI
Stamp Taxes on Specified Objects
Section 116. There shall be levied, collected, and paid for and in respect to the several bonds,
debentures, or certificates of stock and indebtedness, and other documents, instruments,
matters, and things mentioned and described in this section, or for or in respect to the vellum,
parchment, or paper upon which such instrument, matters, or things or any of them shall be
written or printed by any person or persons who shall make, sign, or issue the same, on and
after January first, nineteen hundred and five, the several taxes following:
xxx xxx xxx
Third xxx (c) on all policies of insurance or bond or obligation of the nature of indemnity
for loss, damage, or liability made or renewed by any person, association, company, or
corporation transacting the business of accident, fidelity, employers liability, plate
glass, steam boiler, burglar, elevator, automatic sprinkle, or other branch of insurance
(except life, marine, inland, and fire insurance) xxxx (Emphasis supplied)
On February 27, 1914, Act No. 2339 (the Internal Revenue Law of 1914) was enacted revising
and consolidating the laws relating to internal revenue. The aforecited pertinent portion of
Section 116, Article XI of Act No. 1189 was completely reproduced as Section 30 (l), Article III
of Act No. 2339. The very detailed and exclusive enumeration of items subject to DST was thus
retained.
On December 31, 1916, Section 30 (l), Article III of Act No. 2339 was again reproduced as
Section 1604 (l), Article IV of Act No. 2657 (Administrative Code). Upon its amendment on
March 10, 1917, the pertinent DST provision became Section 1449 (l) of Act No. 2711,
otherwise known as the Administrative Code of 1917.
Section 1449 (1) eventually became Sec. 222 of Commonwealth Act No. 466 (the NIRC of
1939), which codified all the internal revenue laws of the Philippines. In an amendment
introduced by RA 40 on October 1, 1946, the DST rate was increased but the provision
remained substantially the same.
Thereafter, on June 3, 1977, the same provision with the same DST rate was reproduced in
PD 1158 (NIRC of 1977) as Section 234. Under PDs 1457 and 1959, enacted on June 11,
1978 and October 10, 1984 respectively, the DST rate was again increased.1avvphi1
Effective January 1, 1986, pursuant to Section 45 of PD 1994, Section 234 of the NIRC of 1977
was renumbered as Section 198. And under Section 23 of EO 47 273 dated July 25, 1987, it
was again renumbered and became Section 185.
On December 23, 1993, under RA 7660, Section 185 was amended but, again, only with
respect to the rate of tax.
Notwithstanding the comprehensive amendment of the NIRC of 1977 by RA 8424 (or the NIRC
of 1997), the subject legal provision was retained as the present Section 185. In 2004,
amendments to the DST provisions were introduced by RA 924348 but Section 185 was
untouched.
On the other hand, the concept of an HMO was introduced in the Philippines with the formation
of Bancom Health Care Corporation in 1974. The same pioneer HMO was later reorganized
and renamed Integrated Health Care Services, Inc. (or Intercare). However, there are those
who claim that Health Maintenance, Inc. is the HMO industry pioneer, having set foot in the
Philippines as early as 1965 and having been formally incorporated in 1991. Afterwards, HMOs
proliferated quickly and currently, there are 36 registered HMOs with a total enrollment of more
than 2 million.49
We can clearly see from these two histories (of the DST on the one hand and HMOs on the
other) that when the law imposing the DST was first passed, HMOs were yet unknown in the
Philippines. However, when the various amendments to the DST law were enacted, they were
already in existence in the Philippines and the term had in fact already been defined by RA
7875. 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.50
Considering that Section 185 did not change since 1904 (except for the rate of tax), it would be
safe to say that health care agreements were never, at any time, recognized as insurance
contracts or deemed engaged in the business of insurance within the context of the provision.
The Power To Tax Is Not The Power To Destroy
As a general rule, the power to tax is an incident of sovereignty and is unlimited in its range,
acknowledging in its very nature no limits, so that security against its abuse is to be found only
in the responsibility of the legislature which imposes the tax on the constituency who is to pay
it.51 So potent indeed is the power that it was once opined that "the power to tax involves the
power to destroy."52
Petitioner claims that the assessed DST to date which amounts to P376 million53 is way beyond
its net worth ofP259 million.54 Respondent never disputed these assertions. Given the realities
on the ground, imposing the DST on petitioner would be highly oppressive. It is not the purpose
of the government to throttle private business. On the contrary, the government ought to
encourage private enterprise.55 Petitioner, just like any concern organized for a lawful
49
economic activity, has a right to maintain a legitimate business.56 As aptly held in Roxas, et al.
v. CTA, et al.:57
The power of taxation is sometimes called also the power to destroy. Therefore it should be
exercised with caution to minimize injury to the proprietary rights of a taxpayer. It must be
exercised fairly, equally and uniformly, lest the tax collector kill the "hen that lays the golden
egg."58
Legitimate enterprises enjoy the constitutional protection not to be taxed out of existence.
Incurring losses because of a tax imposition may be an acceptable consequence but killing the
business of an entity is another matter and should not be allowed. It is counter-productive and
ultimately subversive of the nations thrust towards a better economy which will ultimately
benefit the majority of our people.59
Petitioners Tax Liability Was Extinguished Under The Provisions Of RA 9840
Petitioner asserts that, regardless of the arguments, the DST assessment for taxable years
1996 and 1997 became moot and academic60 when it availed of the tax amnesty under RA
9480 on December 10, 2007. It paidP5,127,149.08 representing 5% of its net worth as of the
year ended December 31, 2005 and complied with all requirements of the tax amnesty. Under
Section 6(a) of RA 9480, it is entitled to immunity from payment of taxes as well as additions
thereto, and the appurtenant civil, criminal or administrative penalties under the 1997 NIRC, as
amended, arising from the failure to pay any and all internal revenue taxes for taxable year
2005 and prior years.61
Far from disagreeing with petitioner, respondent manifested in its memorandum:
Section 6 of [RA 9840] provides that availment of tax amnesty entitles a taxpayer to immunity
from payment of the tax involved, including the civil, criminal, or administrative penalties
provided under the 1997 [NIRC], for tax liabilities arising in 2005 and the preceding years.
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. This admission, however, is not meant to
preclude a revocation of the amnesty granted in case it is found to have been granted under
circumstances amounting to tax fraud under Section 10 of said amnesty law. 62(Emphasis
supplied)
Furthermore, we held in a recent case that DST is one of the taxes covered by the tax amnesty
program under RA 9480.63 There is no other conclusion to draw than that petitioners liability
for DST for the taxable years 1996 and 1997 was totally extinguished by its availment of the
tax amnesty under RA 9480.
Is The Court Bound By A Minute Resolution In Another Case?
Petitioner raises another interesting issue in its motion for reconsideration: whether this Court
is bound by the ruling of the CA64 in CIR v. Philippine National Bank65 that a health care
agreement of Philamcare Health Systems is not an insurance contract for purposes of the DST.
In support of its argument, petitioner cites the August 29, 2001 minute resolution of this Court
dismissing the appeal in Philippine National Bank (G.R. No. 148680).66 Petitioner argues that
the dismissal of G.R. No. 148680 by minute resolution was a judgment on the merits; hence, economies of scale. They offer advantages over the pay-for-service system (wherein
the Court should apply the CA ruling there that a health care agreement is not an insurance individuals are charged a fee each time they receive medical services), including the ability to
contract. control costs. They protect their members from exposure to the high cost of hospitalization and
It is true that, although contained in a minute resolution, our dismissal of the petition was a other medical expenses brought about by a fluctuating economy. Accordingly, they play an
disposition of the merits of the case. When we dismissed the petition, we effectively affirmed important role in society as partners of the State in achieving its constitutional mandate of
the CA ruling being questioned. As a result, our ruling in that case has already become providing its citizens with affordable health services.
final.67 When a minute resolution denies or dismisses a petition for failure to comply with formal The rate of DST under Section 185 is equivalent to 12.5% of the premium charged. 74 Its
and substantive requirements, the challenged decision, together with its findings of fact and imposition will elevate the cost of health care services. This will in turn necessitate an increase
legal conclusions, are deemed sustained.68 But what is its effect on other cases? in the membership fees, resulting in either placing health services beyond the reach of the
With respect to the same subject matter and the same issues concerning the same parties, it ordinary wage earner or driving the industry to the ground. At the end of the day, neither side
constitutes res judicata.69 However, if other parties or another subject matter (even with the wins, considering the indispensability of the services offered by HMOs.
same parties and issues) is involved, the minute resolution is not binding precedent. Thus, WHEREFORE, the motion for reconsideration is GRANTED. The August 16, 2004 decision of
in CIR v. Baier-Nickel,70 the Court noted that a previous case, CIR v. Baier-Nickel71 involving the Court of Appeals in CA-G.R. SP No. 70479 is REVERSED and SET ASIDE. The 1996 and
the same parties and the same issues, was previously disposed of by the Court thru a minute 1997 deficiency DST assessment against petitioner is hereby CANCELLED and SET
resolution dated February 17, 2003 sustaining the ruling of the CA. Nonetheless, the Court ASIDE. Respondent is ordered to desist from collecting the said tax.
ruled that the previous case "ha(d) no bearing" on the latter case because the two cases No costs.
involved different subject matters as they were concerned with the taxable income of different
SO ORDERED.
taxable years.72
Besides, there are substantial, not simply formal, distinctions between a minute resolution and
a decision. The constitutional requirement under the first paragraph of Section 14, Article VIII
of the Constitution that the facts and the law on which the judgment is based must be expressed
clearly and distinctly applies only to decisions, not to minute resolutions. A minute resolution is
signed only by the clerk of court by authority of the justices, unlike a decision. It does not require
the certification of the Chief Justice. Moreover, unlike decisions, minute resolutions are not
published in the Philippine Reports. Finally, the proviso of Section 4(3) of Article VIII speaks of
a decision.73 Indeed, as a rule, this Court lays down doctrines or principles of law which
constitute binding precedent in a decision duly signed by the members of the Court and certified
by the Chief Justice.
Accordingly, since petitioner was not a party in G.R. No. 148680 and since petitioners liability
for DST on its health care agreement was not the subject matter of G.R. No. 148680, petitioner
cannot successfully invoke the minute resolution in that case (which is not even binding
precedent) in its favor. Nonetheless, in view of the reasons already discussed, this does not
detract in any way from the fact that petitioners health care agreements are not subject to DST.
A Final Note
Taking into account that health care agreements are clearly not within the ambit of Section 185
of the NIRC and there was never any legislative intent to impose the same on HMOs like
petitioner, the same should not be arbitrarily and unjustly included in its coverage.
It is a matter of common knowledge that there is a great social need for adequate medical
services at a cost which the average wage earner can afford. HMOs arrange, organize and
manage health care treatment in the furtherance of the goal of providing a more efficient and
inexpensive health care system made possible by quantity purchasing of services and

50
G.R. No. L-15778 April 23, 1962
TAN TIONG BIO, ET AL., petitioners,
vs.
COMMISSIONER OF INTERNAL REVENUE, respondent.
Sycip, Salazar and Associates for petitioners.
Office of the Solicitor General for respondent.
BAUTISTA ANGELO, J.:
On October 19, 1946, the Central Syndicate, a corporation organized under the laws of the
Philippines, thru its General Manager, David Sycip, sent a letter to the Collector of Internal
Revenue advising the latter that it purchased from Dee Hong Lue the entire stock of surplus
properties which the said Dee Hong Lue had bought from the Foreign Liquidation Commission
and that as it assumed Dee Hong Lue's obligation to pay the 3-1/2% sales tax on said surplus
goods, it was remitting the sum of P43,750.00 in his behalf as deposit to answer for the payment
of said sales tax with the understanding that it would later be adjusted after the determination
of the exact consideration of the sale.
On January 31, 1948, the syndicate again wrote the Collector requesting the refund of
P1,103.28 representing alleged excess payment of sales tax due to the adjustment and
reduction of the purchase price in the amount of P31,522.18. Said letter was referred to an
agent for verification and report. On September 18, 1951, after a thorough investigation of the
facts and circumstances surrounding the transaction, the agent reported (1) that Dee Hong Lue
purchased the surplus goods as trustee for the Central Syndicate which was in the process of
organization at the time of the bidding; (2) that it was the representatives of the Central
Syndicate that removed the surplus goods from their base at Leyte on February 21, 1947; (3)
that the syndicate must have realized a gross profit of 18.8% from its sales thereof; and (4) that
if the sales tax were to be assessed on its gross sales it would still be liable for the amount of
P33,797.88 as deficiency sales tax and surcharge in addition to the amount of P43,750.00
which the corporation had deposited in the name of Dee Hong Lue as estimated sales tax due
from the latter.
Based on the above findings of the agent in charge of the investigation, the Collector decided
that the Central Syndicate was the importer and original seller of the surplus goods in question
and, therefore, the one liable to pay the sales tax. Accordingly, on January 4, 1952, the
Collector assessed against the syndicate the amount of P33,797.88 and P300.00 as deficiency
sales tax, inclusive of the 25% surcharge and compromise penalty, respectively, and on the
same date, in a separate letter, he denied the request of the syndicate for the refund of the
sum of P1,103.28.
On September 8, 1954, the Central Syndicate elevated the case to the Court of Tax Appeals
questioning the ruling of the Collector which denies its claim for refund as well as the
assessment made against it of the sum of P33,797.88, plus the sum of P300.00 as compromise
penalty, as stated above. The Collector filed his answer thereto wherein he reiterated his ruling
and prayed that the Central Syndicate be ordered to pay the deficiency sales tax and surcharge
as demanded in his letters dated January 4, 1952 and August 5, 1954. On October 28, 1954,
51
the syndicate filed a motion requesting that the issue of prescription it has raised against the
collection of the tax be first determined as a preliminary question, but action thereon was
deferred by the Court of Tax Appeals until after the trial of the case on the merits.
On November 5, 1954, the Collector filed a motion requiring the syndicate to file a bond to
guarantee the payment of the tax assessed against it which motion was denied by the Court of
Tax Appeals on the ground that cannot be legally done it appearing that the syndicate is already
a non-existing entity due to the expiration of its corporate existence. In view of this
development, the Collector filed a motion to dismiss the appeal on the ground of lack of
personality on the part of the syndicate, which met an opposition on the part of the latter, but
on January 25, 1955, the Court of Tax Appeals issued a resolution dismissing the appeal
primarily on the ground that the Central Syndicate has no personality to maintain the action
then pending before it. From this order the syndicate appealed to the Supreme Court wherein
it intimated that the appeal should not be dismissed because it could be substituted by its
successors-in-interest, to wit: Tan Tiong Bio, Yu Khe Thai, Alfonso Sycip, Dee Hong Lue, Lim
Shui Ty, Sy Seng Tong, Sy En, Co Giap and David Sycip. And taking cue from this suggestion,
this Court ruled against the dismissal and held: "The resolution appealed from is set aside and
the respondent court is ordered to permit the substitution of the officers and directors of the
defunct Central Syndicate as appellants, and to proceed with the hearing of the appeal upon
its merits." In permitting the substitution, this Court labored under the premise that said officers
and directors "may be held personally liable for the unpaid deficiency assessments made by
the Collector of Internal Revenue against the defunct syndicate."
After trial, the Court of Tax Appeals rendered decision the dispositive part of which reads as
follows:
WHEREFORE, in view of the foregoing considerations, the decision of the Collector of Internal
Revenue appealed from is hereby affirmed, except with regard to the imposition of the
compromise penalty of P300.00 the collection of which is unauthorized and illegal in the
absence of a compromise agreement between the parties. (Collector of Internal Revenue vs.
University of Sto. Tomas, G. R. No. L-11274, November 28, 1958; Collector of Internal
Revenue vs. Bautista & Tan, G.R. No. L-12250, May 27, 1959.) .
The petitioners Tan Tiong Bio, Yu Khe Thai, Lim Shui Ty, Alfonso Sycip, Sy En alias Sy Seng
Sui, Dee Hong Lue, and Sy Seng Tong, who appear in the Articles of Incorporation of the
Central Syndicate Annex A (pp. 60-66, CTA rec.) as incorporators and directors of the
corporation, the second named being in addition its President and the seventh its Treasurer,
are hereby ordered to pay jointly and severally, to the Collector of Internal Revenue, the sum
of P33,797.88 as deficiency sales tax and surcharge on the surplus goods purchased by them
from the Foreign Liquidation Commission on July 5, 1946, from which they realized an
estimated gross sales of P1,447,551.65, with costs. ..
Petitioners interposed the present appeal.
The important issues to be determined in this appeal are: (1) whether the importer of the surplus
goods in question the sale of which is subject to the present tax liability is Dee Hong Lue or the
Central Syndicate who has been substituted by the present petitioners; (2) whether the
deficiency sales tax which is now sought to be collected has already prescribed; and (3) the
Central Syndicate having already been dissolved because of the expiration of its corporate
existence, whether the sales tax in question can be enforced against its successors-in-interest
who are the present petitioners.
1. Petitioners contend that the Central Syndicate cannot be held liable for the deficiency sales
tax in question because it is not the importer of the surplus goods purchased from the Foreign
Liquidation Commission for the reason that said surplus goods were purchased by Dee Hong
Lue as shown by the contract executed between him and the Foreign Liquidation Commission
and the fact that the Central Syndicate only purchased the same from Dee Hong Lue and not
from the Foreign Liquidation Commission as shown by Exhibit 13.
This contention cannot be sustained. As correctly observed by the Court of Tax Appeals, the
overwhelming evidence presented by the Collector points to the conclusion that Dee Hong Lue
purchased the surplus goods in question not for himself but for the Central Syndicate which
was then in the process of incorporation such that the deed of sale Exhibit 13 which purports
to show that Dee Hong Lue sold said goods to the syndicate for a consideration of
P1,250,000.00 (the same amount paid by Dee Hong Lue to the Foreign Liquidation
Commission) "is but a ruse to evade payment of a greater amount of percentage tax." The
aforesaid conclusion of the lower court was arrived at after a thorough analysis of the evidence
on record, pertinent portion of which we quote hereunder with approval:
Exhibit "38-A" for the respondent (p. 178, BIR rec.) shows that as early as July 23, 1946, or
before the organization and incorporation of Central Syndicate, Mr. David Sycip, who was
subsequently appointed General Manager of the corporation, together with Messrs. Sy En alias
Sy Seng Sui (one of the incorporators of Central Syndicate), Serge Gordeof and Chin Siu Bun
(an employee of the same corporation), for and in the name of Central Syndicate then in the
process of organization, went to Leyte to take over the surplus properties sold by the FLC to
Dee Hong Lue, which the latter held in trust for the corporation. Exhibit 38-A, which is a
certificate issued by no less than David Sycip himself who was subsequently appointed General
Manager of the corporation admits in express terms the following "... the surplus property sold
by the Foreign Liquidation Commission to Dee Hong Lue (and held in trust by the latter for the
Syndicate ...." (Emphasis ours.) We give full weight and credence to the adverse admissions
made by David Sycip against the petitioners as appearing in his certificate Exhibit 38-A (p. 178,
BIR rec.) considering that at the time he made them, he was a person jointly interested with
the petitioners in the transaction over which there was yet no controversy over any sales tax
liability. (Secs. 11 and 33, Rule 123, Rules of Court; Clem vs. Forbeso, Tex. Cir App. 10 S.W.
2d 223; Street vs. Masterson, Tex. Cir. App. 277 S.W. 407.) .
Exhibit '39' for the respondent (pp. 184-187, BIR rec.) which is a letter of Mr. Yu Khe Thai
President, Director and biggest stockholder of Central Syndicate (Exhibit A, pp. 60-65, CTA
rec.) dated September 17, 1946 and addressed to the Commanding General AFWESPAC,
Manila, contains the following categorical admissions which corroborate the admissions made
by David Sycip; that the so-called Leyte 'Mystery Pile' surplus properties were owned by Central
Syndicate by virtue of a purchase from the FLC, effected in the name of Dee Hong Lue on July
5, 1946, inasmuch as Central Syndicate was then still in the process of organization; that Dee
Hong Lue held the said surplus properties in trust until the mere formal turnover to the
52
corporation on August 20, 1946, when the corporation had already been organized and
incorporated under the laws of the Philippines; and that on July 23, 1946 viz., twenty-two (22)
days before the incorporation of Central Syndicate on August 15, 1946 'our General Manager,
Mr. David Sycip accompanied by one of our directors, Mr. Sy En, arrived in Leyte to take over
the properties.'
Before passing on to the rest of the evidence supporting the finding of respondent, we would
like to call attention to this significant detail. It is stated in the letter, Exhibit 39 (pp. 184-187,
BIR rec.) of Mr. Yu Khe Thai that 'on July 23, 1946, our General Manager, Mr. David Sycip,
accompanied by one of our directors, Mr. Sy En, arrived in Leyte to take over the properties,'
We ask: Why was there such a hurry on the part of the promoters of Central Syndicate in taking
over the surplus properties when the formal agreement, Exhibit 13 (p. 66, BIR rec.), purporting
to be a contract of sale of the 'Mystery Pile' between Dee Hong Lue as vendor, and the Central
Syndicate, as vendee, for the amount of P1,250,000.00, was effected twenty-eight (28) days
later viz., on August 20, 1946? Is this not another clear and unmistakable indication that from
the very start, as is the theory of the respondent, the real purchasers of the 'Mystery Pile' from
the FLC and as such the 'importers' of the goods, were the Central Syndicate and/or the group
of big financiers composing it before said corporation was incorporated on August 15, 1946;
and, that Dee Hong Lue acted merely as agent of these persons when he purchased the pile
from the FLC? As a general rule, one does not exercise all the acts of ownership over a property
especially if it involves a big amount until after the documents evidencing such ownership are
fully accomplished.
Moreover, it appears that on October 3, 1946, Dee Hong Lue was investigated by Major
Primitivo San Agustin, Jr., G-2 of the Philippine Army, because of the discovery of some gun
parts found in his shipment of surplus material from Palo, Leyte.
In his sworn statement, Exhibit 16 (pp. 133-139, BIR rec.) before said officer, Dee Hong Lue
admitted the following: That he paid the FLC the amount of P1,250,000.00 "with the checks of
Yu Khe Thai, maybe also Alfonso Sycip and my checks with many others"; that "at the
beginning I was trying to buy the pile for myself without telling other people and other friends
of mine." "Watkins came to me and he bid for me for P600,000 or P700,000, but later on when
the price went up to P1,250,000, I talked to my friends who said I could get money." "So, I
bought it with their checks and mine" (Exhibit 16-B, p. 138, BIR rec.) and, that after buying the
"Mystery Pile", he (Dee Hong Lue) never inspected the same personally. (p. 141, BIR rec.)
In his affidavit, Exhibit 15 (p. 144, BIR rec.) Dee Hong Lue admitted that of the amount of
P1,250,000.00 which he paid in two installments sometime in July, 1946, to the FLC,
P1,181,250.00 (should be P1,181,000.00) of the amount came from the following: Yu Khe Thai
who advanced to him P250,000.00; Sy Seng Tong P375,000.00; Alfonso Z. Sycip -
P375,000.00; Tan Tiong Bio - P125,000.00; Robert Dee Se Wee P25,000.00; and, Jose S.
Lim P31,000.00 that his understanding with these persons was that should they eventually
join him in Central Syndicate, such advances would be adjusted to constitute their investments;
and, that soon after the "Mystery Pile" was purchased from the FLC, all the above-named
persons with the exception of Robert Dee Se Wee and Jose S. Lim, formed the Central
Syndicate and a re-allocation of shares was made corresponding to the amounts advanced by
them.
Added to these, we have before us other documentary evidence for the respondent consisting
of Exhibits 18, 19, 20, 21, 23, 24, 25, 26, 27, 28 and 29 (pp. 85, 88, 92-96, 99-103, 117-128,
119-120, 121-128, BIR rec.) all tending to prove the same thing - that the Central Syndicate
and/or the group of big financiers composing it and not Dee Hong Lue was the real purchaser
(importer) of the "Mystery Pile" from the FLC; that in the contract of sale between Dee Hong
Lue and the FLC the former acted principally as agent (Article 1930, New Civil Code) of the
petitioners Yu Khe Thai, Sy Seng Tong, Alfonso Z. Sycip and Tan Tiong Bio who advanced the
purchased price of P1,125,000.00 out of the P1,250,000.00 paid to the FLC, Dee Hong Lue
being the purchaser in his own right only with respect to the amount of P69,000.00; and, that
the deed, Exhibit 13 (p. 77, BIR rec.) purporting to show that Dee Hong Lue sold the "Mystery
Pile" to the Central Syndicate for consideration of P1,250.000.00 is but a ruse to evade
payment of a greater amount of percentage tax. 1wph1.t
To our mind, the deed of sale, Exhibit 13 (p. 66, BIR rec.) as well as the circumstances
surrounding the incorporation of the Central Syndicate, are shrouded with as much mystery as
the so-called "Mystery Pile" subject of the transaction. But, as oil is to water, the truth and
underlying motives behind these transactions have to surface in the end. Petitioners would
want us to believe that Dee Hong Lue bought in his own right and for himself the surplus goods
in question for P1,250,000.00 from the FLC and then, by virtue of a valid contract of sale,
Exhibit 13 (p. 66, BIR rec.) transferred and conveyed the same to the Central Syndicate at cost.
If this be so, what need was there for Dee Hong Lue to agree in the immediate organization
and incorporation of the Central Syndicate with six other capitalists when he could very well
have disposed of the surplus goods to the public in his individual capacity and keep all the
profits to himself without sharing 9/10th of it to the other six incorporators and stockholders of
the newly incorporated Syndicate.
It appears that Dee Hong Lue "sold" the pile to the Central Syndicate for exactly the same price
barely forty-six (46) days after acquiring it from FLC and exactly five (5) days after the Syndicate
was registered with the Securities and Exchange Commission on August 19, 1946. This is
indeed most unusual for a businessman like Dee Hong Lue who, it is to be presumed, was out
to make a killing when he acquired the surplus goods from the FLC for the staggering amount
of P1,750,000.00 in cash.
Again, why did Dee Hong Lue waste all his time and effort not to say his good connections with
the FLC by acquiring the goods from that agency only to sell it for the same amount to the
Central Syndicate? This would have been understandable if Dee Hong Lue were the biggest
and controlling stockholder of the Syndicate. He could perhaps reason out to himself, "the
profits which I am sacrificing now in this sale to the Syndicate, I will get it anyway in the form
of dividends from it after it shall have disposed of all the "Mystery Pile" to the public.' But then,
how could this be possible when Dee Hong Lue was the smallest subscriber to the capital stock
of the Syndicate? It appears from the Articles of Incorporation that of the authorized capital
stock of the corporation in the amount of P500,000.00, Dee Hong Lue subscribes to only
P20,000.00 or 1/25th of the capital stock authorized and of this amount only P5,000.00 was
53
paid by him at the time of incorporation. So here is an experienced businessman like Dee Hong
Lue who, following the theory of petitioners' counsel, bought the "'Mystery Pile" for himself for
P1,250,000.00 in cash, and after a few days sold the same at cost to a corporation wherein he
owned only 1/25th of the authorized capital stock and wherein he was not even an officer, thus
doling out to the other six incorporators and stockholders net profits in the sum conservatively
estimated by the respondent to be P206,116.45 out of a total of P229,073.83 which normally
could all go to him. We take judicial notice of the fact that as a result of our immense losses in
property throughout the archipelago the during the Japanese occupation, either through
destruction or systematic commandering by the enemy and our forces, surplus properties
commanded a very good price in the open market after the liberation and that quite a number
of surplus dealers made immense fortunes out of it. We believe the respondent was quite
charitable if not more than fair to the Central Syndicate in computing the profits realized by it in
the resale of the "Mystery Pile" to the public at only 18.8% of the acquisition price.
Now, from the side of the Central Syndicate. This corporation, as its articles of incorporation,
Exhibit A (pp. 60-66, CTA rec.) will show, was incorporated on August 15, 1946 with an
authorized capital stock of P500,000.00 of which P200,000.00 worth was subscribed by seven
(7) persons and P50,000.00 paid-up in cash at the time of incorporation. Five (5) days after its
incorporation, as the Deed of Sale, Exhibit 13 (p. 66, BIR rec.) purports to show, the said
corporation bought from Dee Hong Lue the "Mystery Pile" for P1,250,000.00 in cash. This is
indeed quite phenomenal and fantastic not to say the utmost degree of finance considering
that the corporation had a subscribed capital stock of only P200,000.00 of which only
P50,000.00 was paid-up at the time of incorporation and with not the least proof showing that
it never borrowed money in its own name from outside source to raise the enormous amount
allegedly paid to Dee Hong Lue nor evidence to show that it had by then in so short a time is
five (5) days accumulated a substantial reserve to meet Dee Hong Lue's selling price.
Furthermore, at first blush it would seem quite difficult to understand why the seven (7)
incorporators and stockholders of the Central Syndicate formed a corporation with a subscribed
capital stock of only P200,000.00, and with cash on hand of only P50,000.00 knowing fully well
that there was a transaction awaiting the newly registered corporation involving an outlay of
P1,250,000.00 in cash. We believe this was done after mature deliberation and for some
ulterior motive. As we see it, the only logical answer is that the incorporator wanted to limit
whatever civil liability that might arise in favor of third persons, as the present tax liability has
now arisen, up to the amount of their subscriptions, although the surplus deal they transacted
and which we believe was the only purpose in the incorporation of the Central Syndicate, was
very much over and above their authorized capital. Moreover, by limiting its capital, the
corporation was also able to save on incidental expenses, such as attorney's fee and the filing
fee paid to the Securities and Exchange Commission, which were based on the amount of the
authorized capital stock.
Another mystery worth unravelling is what happened to the P1,181,240.00 (should be
P1,181,000.00) which Dee Hong Lue in his affidavit, Exhibit 15 (p. 144, BIR rec.) claims to have
received from Messrs. Uy Khe Thai, Sy Seng Tong, Alfonso Z. Sycip, Tan Tiong Bio (all
incorporators of the Syndicate) and two others as 'advances' with which to pay the FLC. There
is no evidence on record to show that Dee Hong Lue ever returned this amount to those six (6)
persons after he supposedly received P1,250,000.00 from the newly incorporated Syndicate
by virtue of the Deed of Sale, Exhibit 13. This is the explanation that Dee Hong Lue gave in
this regard as appearing in his affidavit, Exhibit 15: "That soon after the above-mentioned
property was purchased, the above parties, with the exception of Robert Dee Se Wee and Jose
S. Lim decided to join the proposed Central Syndicate and a re-allocation of shares was made
for the reason that some of the above parties in turn had to get advances from third parties." If
this were true, why was it that Messrs. Yu Khe Thai, Sy Seng Tong, Alfonso Z. Sycip and Tan
Tiong Bio who advanced P250,000.00; P375,000.00 and P125,000.00 to Dee Hong Lue were
made to appear in the Articles of incorporation of the Central Syndicate as having subscribed
to shares worth only P40,000.00; P30,000.00; P30,000.00 and P20,000.00 and of having paid
only P10,000.00, P7,500.00, P7,500.00, and P5,000.00 on their subscriptions, respectively?
Would it not be more in keeping with corporate practice, following the explanation of Dee Hong
Lue, to just credit those four (4) persons in the corporation with shares worth the amount
advanced by them to Dee Hong Lue?
On the basis of the above figures, the re-allocation of shares in favor of the four (4)
incorporators who advanced enormous sums for the Syndicate seems at first glance to be
totally disproportionate and unfair to them. However, in the final analysis it is not so as we will
now show. Immediately after the incorporation of the Syndicate, as the evidence shows, Dee
Hong Lue was made to execute a deed of transfer under the guise of a contract of sale,
conveying full and complete ownership of the "Mystery Pile" to the newly organized corporation.
So we have, on the face of the Articles of Incorporation and Exhibit 13, a corporation with
assets worth only P50,000.00 cash owning properties worth over a million pesos. Obviously,
the incorporators of the Syndicate, particularly those four who advanced enormous sums to
Dee Hong Lue, are not ordinary businessmen who could easily be taken for a ride. With the
precipitated execution of the "Deed of Sale" by Dee Hong Lue in favor of the Syndicate,
transferring and conveying ownership over the entire pile to the latter, the recoupment of their
advances from the newly acquired assets of the corporation was sufficiently secured, and at
the same time, by making the document appear to be a deed of sale instead of a deed of
transfer as it should be under Article 1891 of the New Civil Code, they have reduced (at least
attempted to) their sales tax liability with the argument that Dee Hong Lue was the original
"purchaser" or "importer" of the goods and therefore the taxable sale was that one made by
him to the Syndicate and not the sales made by the latter to the public. After going over the
Articles of Incorporation of the Central Syndicate and the other circumstances of this case, we
draw the conclusion that it was organized just for this particular transaction that its life span
was expressly limited to two (2) years from and after the date of incorporation just to give it
time to dispose of the "Mystery Pile" to the public and then liquidate all its assets among the
seven incorporators-stockholders as in fact it was done on August 15, 1948; that from the very
start, the seven (7) incorporators had intended it to be a closed corporation without the least
intention of ever selling to other persons the remaining authorized capital stock of P300,000.00
still unsubscribed; and, that upon its liquidation, the seven (7) incorporators composing it got
much more than their investments including those who advanced P1,181,000.00 to the FLC
for the corporation.
54
Petitioners would dispute the finding that Dee Hong Lue merely acted as a trustee of the Central
Syndicate when he purchased the surplus goods in question from the Foreign Liquidation
Commission on July 5, 1946 considering that on that date the syndicate has not yet been
incorporated on the theory that no legal relation may exist between parties one of whom has
yet no legal existence. Technically this may be true, but the fact remains that it cannot be
denied that Dee Hong Lue purchased the goods on behalf of those who advanced the money
for the purchase thereof who later became the incorporators and only stockholders of the
syndicate with the understanding that the amounts they had respectively advanced would be
their investment and would represent their interest in the corporation. And this is further
evidenced by the fact that this purchase made by Dee Hong Lue was later approved and
adopted as the act of the Central Syndicate itself as can be gleaned from the certificate
executed by David Sycip, general manager of said syndicate, on September 16, 1946, wherein
he emphasized that the persons named therein (from whom Dee Hong Lue obtained the
money) merely acted on behalf of the syndicate and in fact were the ones who went to Leyte
to take over the aforesaid surplus goods. In any event, even if Dee Hong Lue may be deemed
as the purchaser of the surplus goods in his own right, nevertheless, the corporation still may
be regarded as the importer of the same goods for the reason that Dee Hong Lue transferred
to it all his rights and interests in the contract with the Foreign Liquidation Commission, and it
was said corporation that took delivery thereof from the place where they were stored in Leyte
as may be seen from the letter of Dee Hong Lue to the Foreign Liquidation Commission dated
September 2, 1946 and the letter of the Central Syndicate to the said Commission bearing the
same date. Under these facts, it is clear that the Central Syndicate is the importer of the surplus
goods as correctly observed by Judge Umali in his concurring opinion, from which we quote: .
It is now well settled that a person who bought surplus goods from the Foreign Liquidation
Commission and who removed the goods bought from the U.S. military bases in the Philippines
is considered an importer of such goods and is subject to the sales tax or compensating tax,
as the case may be. (Go Cheng Tee v. Meer, 47 O.G. 269; Saura Import and Export v. Meer,
G.R. No. L-2927, Jan. 26, 1951; P.M.P. Navigation v. Meer, G.R. No. L-4621, March 24, 1953;
Soriano y Cia v. Coll. of Int. Rev., 51 O.G. 4548.) In this case it appearing that the Central
Syndicate was the owner of the 'Mystery Pile' before its removal from Base K and that it was
the one which actually took delivery thereof and removed the same from the U.S. military base,
it is the importer within the meaning of Section 186 of the Revenue Code, as it stood before
the enactment of Republic Act No. 594, and its sales of the surplus goods are the original sales
taxable under said section and not the sale to it by Dee Hong Lue.
2. Since the Central Syndicate, as we have already pointed out, was the importer of the surplus
goods in question, it was its duty under Section 183 of the Internal Revenue Code to file a
return of its gross sales within 20 days after the end of each quarter in order that the office of
the internal revenue may assess the sales tax that may be due thereon, but, as the record
shows, the Central Syndicate failed to file any return of its quarterly sales on the pretext that it
was Dee Hong Lue who imported the surplus goods and it merely purchased them from said
importer. This is in fact what the syndicate intended to impress upon the Collector when it wrote
to him its letter of October 19, 1946 informing him that it purchased from Dee Hong Lue the
entire stock of the surplus goods which the latter had bought from the Foreign Liquidation
Commission and was therefore depositing in his name the sum of P43,750.00 to answer for
his sales tax liability, but this letter certainly cannot be considered as a return that may set in
operation the application of the prescriptive period provided for in Section 331 of the Tax Code,
for, evidently, said letter if at all could only be considered as such in behalf of Dee Hong Lue
and not in behalf of the Central Syndicate because such is the only nature and import of the
letter. Besides, how can such letter be considered as a return of the sales of the Central
Syndicate when it was only on February 21, 1947 when it removed the surplus goods in
question from their base at Leyte? How can such return inure to the benefit of the syndicate
when the same surplus goods which were removed on said date could not have been sold by
the corporation earlier than the aforesaid date? It is obvious that the letter of October 19, 1946
cannot possibly be considered as a return filed by the syndicate and so cannot serve as basis
for the computation of the prescriptive period of five years prescribed by law.
Nor can the fact that the Collector did not include in the assessment a surcharge of 50% serve
as an argument that a return had already been filed, for such failure can only mean that an
oversight had been committed in the non-inclusion of said surcharge. The syndicate having
failed to file its quarterly returns as required by Section 183 of the Tax Code, the period that
has to be reckoned with is that embodied in Section 332 of the same Code which provides that
in case of failure to file the return the tax may be assessed within 10 years after discovery of
the falsity, fraud or omission of the payment of the proper tax. Since it appears that the Collector
discovered the failure of the syndicate to file the return only on September 12, 1951 he has
therefore up to September 18, 1961 within which to assess or collect the deficiency tax in
question. Consequently the assessment made on January 4, 1952 was made within the
prescribed period.
3. Petitioners argue (1) that the Court of Tax Appeals acted in excess of its jurisdiction in holding
them liable as officers or directors of the defunct Central Syndicate for the tax liability of the
latter; (2) that petitioners cannot be held liable for said tax liability there being no statutory
provision in this jurisdiction authorizing the government to proceed against the stockholders of
a defunct corporation as transferees of the corporate assets upon liquidation; (3) that assuming
that the stockholders can be held so liable, they are only liable to the extent of the benefits
derived by them from the corporation and there is no evidence showing that petitioners had
been the beneficiaries of the defunct syndicate; (4) that considering that the Collector instituted
the present action on September 23, 1954 when he filed his answer to the appeal of petitioners,
said action was already barred by prescription pursuant to Sections 77 and 78 of the
Corporation Law which allows corporations to continue as a body corporate only for three years
from its dissolution; and (5) that assuming that petitioners are liable to pay the tax, their liability
is not solidary, but only limited to the benefits derived by them from the corporation.
It should be stated at the outset that it was petitioners themselves who caused their substitution
as parties in the present case, being the successors-in-interest of the defunct syndicate, when
they appealed this case to the Supreme Court for which reason the latter Court declared that
"the respondent Court of Tax Appeals should have allowed the substitution of its former officers
and directors is parties-appellants, since they are proper parties in interest insofar as they may
be (and in fact are) held personally liable for the unpaid deficiency assessments made by the
55
Collector of Internal Revenue against the defunct Syndicate." In fact, because of this directive
their substitution was effected. They cannot, therefore, be now heard to complain if they are
made responsible for the tax liability of the defunct syndicate whose representation they
assumed and whose assets were distributed among them.
In the second place, there is good authority to the effect that the creditor of a dissolved
corporation may follow its assets once they passed into the hands of the stockholders. Thus,
recognized are the following rules in American jurisprudence: The dissolution of a corporation
does not extinguish the debts due or owing to it (Bacon v. Robertson, 18 How. 480, 15 L. Ed.,
406; Curron v. State, 16 How. 304, 14 L. Ed., 705). A creditor of a dissolve corporation may
follow its assets, as in the nature of a trust fund, into the hands of its stockholders (MacWilliams
v. Excelsier Coal Co. [1924] 298 Fed. 384). An indebtedness of a corporation to the federal
government for income and excess profit taxes is not extinguished by the dissolution of the
corporation (Quinn v. McLeudon, 152 Ark. 271, 238 S.W., 32). And it has been stated, with
reference to the effect of dissolution upon taxes due from a corporation, "that the hands of the
government cannot, of course, collect taxes from a defunct corporation, it loses thereby none
of its rights to assess taxes which had been due from the corporation, and to collect them from
persons, who by reason of transactions with the corporation, hold property against which the
tax can be enforced and that the legal death of the corporation no more prevents such action
than would the physical death of an individual prevent the government from assessing taxes
against him and collecting them from his administrator, who holds the property which the
decedent had formerly possessed" (Wonder Bakeries Co. v. U.S. [1934] Ct. Cl. 6 F. Supp.
288). Bearing in mind that our corporation law is of American origin, the foregoing authorities
have persuasive effect in considering similar cases in this jurisdiction. This must have been
taken into account when in G.R. No. L-8800 this Court said that petitioners could be held
personally liable for the taxes in question as successors-in-interest of the defunct corporation.
Considering that the Central Syndicate realized from the sale of the surplus goods a net profit
of P229,073.83, and that the sale of said goods was the only transaction undertaken by said
syndicate, there being no evidence to the contrary, the conclusion is that said net profit
remained intact and was distributed among the stockholders when the corporation liquidated
and distributed its assets on August 15, 1948, immediately after the sale of the said surplus
goods. Petitioners are therefore the beneficiaries of the defunct corporation and as such should
be held liable to pay the taxes in question. However, there being no express provision requiring
the stockholders of the corporation to be solidarily liable for its debts which liability must be
express and cannot be presumed, petitioners should be held to be liable for the tax in
question only in proportion to their shares in the distribution of the assets of the defunct
corporation. The decision of the trial court should be modified accordingly.
WHEREFORE, with the above modification, we hereby affirm the decision appealed from, with
costs against petitioners.
G.R. No. L-31156 February 27, 1976
PEPSI-COLA BOTTLING COMPANY OF THE PHILIPPINES, INC., plaintiff-appellant,
vs.
MUNICIPALITY OF TANAUAN, LEYTE, THE MUNICIPAL MAYOR, ET AL., defendant
appellees.
Sabido, Sabido & Associates for appellant.
Provincial Fiscal Zoila M. Redona & Assistant Provincial Fiscal Bonifacio R Matol and Assistant
Solicitor General Conrado T. Limcaoco & Solicitor Enrique M. Reyes for appellees.
MARTIN, J.:
This is an appeal from the decision of the Court of First Instance of Leyte in its Civil Case No.
3294, which was certified to Us by the Court of Appeals on October 6, 1969, as involving only
pure questions of law, challenging the power of taxation delegated to municipalities under the
Local Autonomy Act (Republic Act No. 2264, as amended, June 19, 1959).
On February 14, 1963, the plaintiff-appellant, Pepsi-Cola Bottling Company of the Philippines,
Inc., commenced a complaint with preliminary injunction before the Court of First Instance of
Leyte for that court to declare Section 2 of Republic Act No. 2264. 1 otherwise known as the
Local Autonomy Act, unconstitutional as an undue delegation of taxing authority as well as to
declare Ordinances Nos. 23 and 27, series of 1962, of the municipality of Tanauan, Leyte, null
and void.
On July 23, 1963, the parties entered into a Stipulation of Facts, the material portions of which
state that, first, both Ordinances Nos. 23 and 27 embrace or cover the same subject matter
and the production tax rates imposed therein are practically the same, and second, that on
January 17, 1963, the acting Municipal Treasurer of Tanauan, Leyte, as per his letter
addressed to the Manager of the Pepsi-Cola Bottling Plant in said municipality, sought to
enforce compliance by the latter of the provisions of said Ordinance No. 27, series of 1962.
Municipal Ordinance No. 23, of Tanauan, Leyte, which was approved on September 25, 1962,
levies and collects "from soft drinks producers and manufacturers a tai of one-sixteenth (1/16)
of a centavo for every bottle of soft drink corked." 2 For the purpose of computing the taxes
due, the person, firm, company or corporation producing soft drinks shall submit to the
Municipal Treasurer a monthly report, of the total number of bottles produced and corked during
the month. 3
On the other hand, Municipal Ordinance No. 27, which was approved on October 28, 1962,
levies and collects "on soft drinks produced or manufactured within the territorial jurisdiction of
this municipality a tax of ONE CENTAVO (P0.01) on each gallon (128 fluid ounces, U.S.) of
volume capacity." 4 For the purpose of computing the taxes due, the person, fun company,
partnership, corporation or plant producing soft drinks shall submit to the Municipal Treasurer
a monthly report of the total number of gallons produced or manufactured during the month. 5
The tax imposed in both Ordinances Nos. 23 and 27 is denominated as "municipal production
tax.'
56
On October 7, 1963, the Court of First Instance of Leyte rendered judgment "dismissing the
complaint and upholding the constitutionality of [Section 2, Republic Act No. 2264] declaring
Ordinance Nos. 23 and 27 legal and constitutional; ordering the plaintiff to pay the taxes due
under the oft the said Ordinances; and to pay the costs."
From this judgment, the plaintiff Pepsi-Cola Bottling Company appealed to the Court of
Appeals, which, in turn, elevated the case to Us pursuant to Section 31 of the Judiciary Act of
1948, as amended.
There are three capital questions raised in this appeal:
1. Is Section 2, Republic Act No. 2264 an undue delegation of power, confiscatory and
oppressive?
2. Do Ordinances Nos. 23 and 27 constitute double taxation and impose percentage or
specific taxes?
3. Are Ordinances Nos. 23 and 27 unjust and unfair?
1. The power of taxation is an essential and inherent attribute of sovereignty, belonging as a
matter of right to every independent government, without being expressly conferred by the
people. 6 It is a power that is purely legislative and which the central legislative body cannot
delegate either to the executive or judicial department of the government without infringing
upon the theory of separation of powers. The exception, however, lies in the case of municipal
corporations, to which, said theory does not apply. Legislative powers may be delegated to
local governments in respect of matters of local concern. 7 This is sanctioned by immemorial
practice. 8 By necessary implication, the legislative power to create political corporations for
purposes of local self-government carries with it the power to confer on such local
governmental agencies the power to tax. 9 Under the New Constitution, local governments are
granted the autonomous authority to create their own sources of revenue and to levy taxes.
Section 5, Article XI provides: "Each local government unit shall have the power to create its
sources of revenue and to levy taxes, subject to such limitations as may be provided by law."
Withal, it cannot be said that Section 2 of Republic Act No. 2264 emanated from beyond the
sphere of the legislative power to enact and vest in local governments the power of local
taxation.
The plenary nature of the taxing power thus delegated, contrary to plaintiff-appellant's pretense,
would not suffice to invalidate the said law as confiscatory and oppressive. In delegating the
authority, the State is not limited 6 the exact measure of that which is exercised by itself. When
it is said that the taxing power may be delegated to municipalities and the like, it is meant that
there may be delegated such measure of power to impose and collect taxes as the legislature
may deem expedient. Thus, municipalities may be permitted to tax subjects which for reasons
of public policy the State has not deemed wise to tax for more general purposes. 10 This is not
to say though that the constitutional injunction against deprivation of property without due
process of law may be passed over under the guise of the taxing power, except when the taking
of the property is in the lawful exercise of the taxing power, as when (1) the tax is for a public
purpose; (2) the rule on uniformity of taxation is observed; (3) either the person or property
taxed is within the jurisdiction of the government levying the tax; and (4) in the assessment and
collection of certain kinds of taxes notice and opportunity for hearing are provided. 11 Due
process is usually violated where the tax imposed is for a private as distinguished from a public
purpose; a tax is imposed on property outside the State, i.e., extraterritorial taxation; and
arbitrary or oppressive methods are used in assessing and collecting taxes. But, a tax does not
violate the due process clause, as applied to a particular taxpayer, although the purpose of the
tax will result in an injury rather than a benefit to such taxpayer. Due process does not require
that the property subject to the tax or the amount of tax to be raised should be determined by
judicial inquiry, and a notice and hearing as to the amount of the tax and the manner in which
it shall be apportioned are generally not necessary to due process of law. 12
There is no validity to the assertion that the delegated authority can be declared
unconstitutional on the theory of double taxation. It must be observed that the delegating
authority specifies the limitations and enumerates the taxes over which local taxation may not
be exercised. 13 The reason is that the State has exclusively reserved the same for its own
prerogative. Moreover, double taxation, in general, is not forbidden by our fundamental law,
since We have not adopted as part thereof the injunction against double taxation found in the
Constitution of the United States and some states of the Union. 14 Double taxation becomes
obnoxious only where the taxpayer is taxed twice for the benefit of the same governmental
entity 15 or by the same jurisdiction for the same purpose, 16 but not in a case where one tax is
imposed by the State and the other by the city or municipality. 17
2. The plaintiff-appellant submits that Ordinance No. 23 and 27 constitute double taxation,
because these two ordinances cover the same subject matter and impose practically the same
tax rate. The thesis proceeds from its assumption that both ordinances are valid and legally
enforceable. This is not so. As earlier quoted, Ordinance No. 23, which was approved on
September 25, 1962, levies or collects from soft drinks producers or manufacturers a tax of
one-sixteen (1/16) of a centavo for .every bottle corked, irrespective of the volume contents of
the bottle used. When it was discovered that the producer or manufacturer could increase the
volume contents of the bottle and still pay the same tax rate, the Municipality of Tanauan
enacted Ordinance No. 27, approved on October 28, 1962, imposing a tax of one centavo
(P0.01) on each gallon (128 fluid ounces, U.S.) of volume capacity. The difference between
the two ordinances clearly lies in the tax rate of the soft drinks produced: in Ordinance No. 23,
it was 1/16 of a centavo for every bottle corked; in Ordinance No. 27, it is one centavo (P0.01)
on each gallon (128 fluid ounces, U.S.) of volume capacity. The intention of the Municipal
Council of Tanauan in enacting Ordinance No. 27 is thus clear: it was intended as a plain
substitute for the prior Ordinance No. 23, and operates as a repeal of the latter, even without
words to that effect. 18 Plaintiff-appellant in its brief admitted that defendants-appellees are only
seeking to enforce Ordinance No. 27, series of 1962. Even the stipulation of facts confirms the
fact that the Acting Municipal Treasurer of Tanauan, Leyte sought t6 compel compliance by the
plaintiff-appellant of the provisions of said Ordinance No. 27, series of 1962. The
aforementioned admission shows that only Ordinance No. 27, series of 1962 is being enforced
by defendants-appellees. Even the Provincial Fiscal, counsel for defendants-appellees admits
in his brief "that Section 7 of Ordinance No. 27, series of 1962 clearly repeals Ordinance No.
23 as the provisions of the latter are inconsistent with the provisions of the former."
57
That brings Us to the question of whether the remaining Ordinance No. 27 imposes a
percentage or a specific tax. Undoubtedly, the taxing authority conferred on local governments
under Section 2, Republic Act No. 2264, is broad enough as to extend to almost "everything,
accepting those which are mentioned therein." As long as the text levied under the authority of
a city or municipal ordinance is not within the exceptions and limitations in the law, the same
comes within the ambit of the general rule, pursuant to the rules of exclucion
attehus and exceptio firmat regulum in cabisus non excepti 19 The limitation applies,
particularly, to the prohibition against municipalities and municipal districts to impose "any
percentage tax or other taxes in any form based thereon nor impose taxes on articles subject
to specific tax except gasoline, under the provisions of the National Internal Revenue Code."
For purposes of this particular limitation, a municipal ordinance which prescribes a set ratio
between the amount of the tax and the volume of sale of the taxpayer imposes a sales tax and
is null and void for being outside the power of the municipality to enact. 20But, the imposition of
"a tax of one centavo (P0.01) on each gallon (128 fluid ounces, U.S.) of volume capacity" on
all soft drinks produced or manufactured under Ordinance No. 27 does not partake of the nature
of a percentage tax on sales, or other taxes in any form based thereon. The tax is levied on the
produce (whether sold or not) and not on the sales. The volume capacity of the taxpayer's
production of soft drinks is considered solely for purposes of determining the tax rate on the
products, but there is not set ratio between the volume of sales and the amount of the tax. 21
Nor can the tax levied be treated as a specific tax. Specific taxes are those imposed on
specified articles, such as distilled spirits, wines, fermented liquors, products of tobacco other
than cigars and cigarettes, matches firecrackers, manufactured oils and other fuels, coal,
bunker fuel oil, diesel fuel oil, cinematographic films, playing cards, saccharine, opium and
other habit-forming drugs. 22 Soft drink is not one of those specified.
3. The tax of one (P0.01) on each gallon (128 fluid ounces, U.S.) of volume capacity on all
softdrinks, produced or manufactured, or an equivalent of 1- centavos per case, 23 cannot be
considered unjust and unfair. 24 an increase in the tax alone would not support the claim that
the tax is oppressive, unjust and confiscatory. Municipal corporations are allowed much
discretion in determining the reates of imposable taxes. 25 This is in line with the constutional
policy of according the widest possible autonomy to local governments in matters of local
taxation, an aspect that is given expression in the Local Tax Code (PD No. 231, July 1, 1973).
26 Unless the amount is so excessive as to be prohibitive, courts will go slow in writing off an
ordinance as unreasonable. 27 Reluctance should not deter compliance with an ordinance
such as Ordinance No. 27 if the purpose of the law to further strengthen local autonomy were
to be realized. 28
Finally, the municipal license tax of P1,000.00 per corking machine with five but not more than
ten crowners or P2,000.00 with ten but not more than twenty crowners imposed on
manufacturers, producers, importers and dealers of soft drinks and/or mineral waters under
Ordinance No. 54, series of 1964, as amended by Ordinance No. 41, series of 1968, of
defendant Municipality, 29 appears not to affect the resolution of the validity of Ordinance No.
27. Municipalities are empowered to impose, not only municipal license taxes upon persons
engaged in any business or occupation but also to levy for public purposes, just and uniform
taxes. The ordinance in question (Ordinance No. 27) comes within the second power of a
municipality.
ACCORDINGLY, the constitutionality of Section 2 of Republic Act No. 2264, otherwise known
as the Local Autonomy Act, as amended, is hereby upheld and Municipal Ordinance No. 27 of
the Municipality of Tanauan, Leyte, series of 1962, re-pealing Municipal Ordinance No. 23,
same series, is hereby declared of valid and legal effect. Costs against petitioner-appellant.
SO ORDERED.

58
G.R. No. 149110 April 9, 2003
NATIONAL POWER CORPORATION, petitioner,
vs.
CITY OF CABANATUAN, respondent.
PUNO, J.:
This is a petition for review1 of the Decision2 and the Resolution3 of the Court of Appeals dated
March 12, 2001 and July 10, 2001, respectively, finding petitioner National Power Corporation
(NPC) liable to pay franchise tax to respondent City of Cabanatuan.
Petitioner is a government-owned and controlled corporation created under Commonwealth
Act No. 120, as amended.4 It is tasked to undertake the "development of hydroelectric
generations of power and the production of electricity from nuclear, geothermal and other
sources, as well as, the transmission of electric power on a nationwide basis."5 Concomitant to
its mandated duty, petitioner has, among others, the power to construct, operate and maintain
power plants, auxiliary plants, power stations and substations for the purpose of developing
hydraulic power and supplying such power to the inhabitants.6
For many years now, petitioner sells electric power to the residents of Cabanatuan City, posting
a gross income of P107,814,187.96 in 1992.7 Pursuant to section 37 of Ordinance No. 165-
92,8 the respondent assessed the petitioner a franchise tax amounting to P808,606.41,
representing 75% of 1% of the latter's gross receipts for the preceding year. 9
Petitioner, whose capital stock was subscribed and paid wholly by the Philippine
Government,10 refused to pay the tax assessment. It argued that the respondent has no
authority to impose tax on government entities. Petitioner also contended that as a non-profit
organization, it is exempted from the payment of all forms of taxes, charges, duties or fees 11 in
accordance with sec. 13 of Rep. Act No. 6395, as amended, viz:
"Sec.13. Non-profit Character of the Corporation; Exemption from all Taxes, Duties, Fees,
Imposts and Other Charges by Government and Governmental Instrumentalities.- The
Corporation shall be non-profit and shall devote all its return from its capital investment, as well
as excess revenues from its operation, for expansion. To enable the Corporation to pay its
indebtedness and obligations and in furtherance and effective implementation of the policy
enunciated in Section one of this Act, the Corporation is hereby exempt:
(a) From the payment of all taxes, duties, fees, imposts, charges, costs and service fees in any
court or administrative proceedings in which it may be a party, restrictions and duties to the
Republic of the Philippines, its provinces, cities, municipalities and other government agencies
and instrumentalities;
(b) From all income taxes, franchise taxes and realty taxes to be paid to the National
Government, its provinces, cities, municipalities and other government agencies and
instrumentalities;
(c) From all import duties, compensating taxes and advanced sales tax, and wharfage fees on
import of foreign goods required for its operations and projects; and
59
(d) From all taxes, duties, fees, imposts, and all other charges imposed by the Republic of the
Philippines, its provinces, cities, municipalities and other government agencies and
instrumentalities, on all petroleum products used by the Corporation in the generation,
transmission, utilization, and sale of electric power."12
The respondent filed a collection suit in the Regional Trial Court of Cabanatuan City,
demanding that petitioner pay the assessed tax due, plus a surcharge equivalent to 25% of the
amount of tax, and 2% monthly interest.13Respondent alleged that petitioner's exemption from
local taxes has been repealed by section 193 of Rep. Act No. 7160,14 which reads as follows:
"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 the effectivity of this Code."
On January 25, 1996, the trial court issued an Order15 dismissing the case. It ruled that the tax
exemption privileges granted to petitioner subsist despite the passage of Rep. Act No. 7160
for the following reasons: (1) Rep. Act No. 6395 is a particular law and it may not be repealed
by Rep. Act No. 7160 which is a general law; (2) section 193 of Rep. Act No. 7160 is in the
nature of an implied repeal which is not favored; and (3) local governments have no power to
tax instrumentalities of the national government. Pertinent portion of the Order reads:
"The question of whether a particular law has been repealed or not by a subsequent law is a
matter of legislative intent. The lawmakers may expressly repeal a law by incorporating therein
repealing provisions which expressly and specifically cite(s) the particular law or laws, and
portions thereof, that are intended to be repealed. A declaration in a statute, usually in its
repealing clause, that a particular and specific law, identified by its number or title is repealed
is an express repeal; all others are implied repeal. Sec. 193 of R.A. No. 7160 is an implied
repealing clause because it fails to identify the act or acts that are intended to be repealed. It
is a well-settled rule of statutory construction that repeals of statutes by implication are not
favored. The presumption is against inconsistency and repugnancy for the legislative is
presumed to know the existing laws on the subject and not to have enacted inconsistent or
conflicting statutes. It is also a well-settled rule that, generally, general law does not repeal a
special law unless it clearly appears that the legislative has intended by the latter general act
to modify or repeal the earlier special law. Thus, despite the passage of R.A. No. 7160 from
which the questioned Ordinance No. 165-92 was based, the tax exemption privileges of
defendant NPC remain.
Another point going against plaintiff in this case is the ruling of the Supreme Court in the case
of Basco vs. Philippine Amusement and Gaming Corporation, 197 SCRA 52, where it was held
that:
'Local governments have no power to tax instrumentalities of the National Government.
PAGCOR is a government owned or controlled corporation with an original charter, PD 1869.
All of its shares of stocks are owned by the National Government. xxx Being an instrumentality
of the government, PAGCOR should be and actually is exempt from local taxes. Otherwise, its
operation might be burdened, impeded or subjected to control by mere local government.'
Like PAGCOR, NPC, being a government owned and controlled corporation with an original
charter and its shares of stocks owned by the National Government, is beyond the taxing power
of the Local Government. Corollary to this, it should be noted here that in the NPC Charter's
declaration of Policy, Congress declared that: 'xxx (2) the total electrification of the Philippines
through the development of power from all services to meet the needs of industrial development
and dispersal and needs of rural electrification are primary objectives of the nations which shall
be pursued coordinately and supported by all instrumentalities and agencies of the
government, including its financial institutions.' (underscoring supplied). To allow plaintiff to
subject defendant to its tax-ordinance would be to impede the avowed goal of this government
instrumentality.
Unlike the State, a city or municipality has no inherent power of taxation. Its taxing power is
limited to that which is provided for in its charter or other statute. Any grant of taxing power is
to be construed strictly, with doubts resolved against its existence.
From the existing law and the rulings of the Supreme Court itself, it is very clear that the plaintiff
could not impose the subject tax on the defendant."16
On appeal, the Court of Appeals reversed the trial court's Order 17 on the ground that section
193, in relation to sections 137 and 151 of the LGC, expressly withdrew the exemptions granted
to the petitioner.18 It ordered the petitioner to pay the respondent city government the following:
(a) the sum of P808,606.41 representing the franchise tax due based on gross receipts for the
year 1992, (b) the tax due every year thereafter based in the gross receipts earned by NPC,
(c) in all cases, to pay a surcharge of 25% of the tax due and unpaid, and (d) the sum of P
10,000.00 as litigation expense.19
On April 4, 2001, the petitioner filed a Motion for Reconsideration on the Court of Appeal's
Decision. This was denied by the appellate court, viz:
"The Court finds no merit in NPC's motion for reconsideration. Its arguments reiterated therein
that the taxing power of the province under Art. 137 (sic) of the Local Government Code refers
merely to private persons or corporations in which category it (NPC) does not belong, and that
the LGC (RA 7160) which is a general law may not impliedly repeal the NPC Charter which is
a special lawfinds the answer in Section 193 of the LGC to the effect that '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 xxx are hereby
withdrawn.' The repeal is direct and unequivocal, not implied.
IN VIEW WHEREOF, the motion for reconsideration is hereby DENIED.
SO ORDERED."20
In this petition for review, petitioner raises the following issues:
"A. THE COURT OF APPEALS GRAVELY ERRED IN HOLDING THAT NPC, A PUBLIC NON-
PROFIT CORPORATION, IS LIABLE TO PAY A FRANCHISE TAX AS IT FAILED TO
CONSIDER THAT SECTION 137 OF THE LOCAL GOVERNMENT CODE IN RELATION TO
SECTION 131 APPLIES ONLY TO PRIVATE PERSONS OR CORPORATIONS ENJOYING A
FRANCHISE.
60
B. THE COURT OF APPEALS GRAVELY ERRED IN HOLDING THAT NPC'S EXEMPTION
FROM ALL FORMS OF TAXES HAS BEEN REPEALED BY THE PROVISION OF THE LOCAL
GOVERNMENT CODE AS THE ENACTMENT OF A LATER LEGISLATION, WHICH IS A
GENERAL LAW, CANNOT BE CONSTRUED TO HAVE REPEALED A SPECIAL LAW.
C. THE COURT OF APPEALS GRAVELY ERRED IN NOT CONSIDERING THAT AN
EXERCISE OF POLICE POWER THROUGH TAX EXEMPTION SHOULD PREVAIL OVER
THE LOCAL GOVERNMENT CODE."21
It is beyond dispute that the respondent city government has the authority to issue Ordinance
No. 165-92 and impose an annual tax on "businesses enjoying a franchise," pursuant to section
151 in relation to section 137 of the LGC, viz:
"Sec. 137. Franchise Tax. - Notwithstanding any exemption granted by any law or other special
law, the province may impose a tax on businesses enjoying a franchise, at a rate not exceeding
fifty percent (50%) of one percent (1%) of the gross annual receipts for the preceding calendar
year based on the incoming receipt, or realized, within its territorial jurisdiction.
In the case of a newly started business, the tax shall not exceed one-twentieth (1/20) of one
percent (1%) of the capital investment. In the succeeding calendar year, regardless of when
the business started to operate, the tax shall be based on the gross receipts for the preceding
calendar year, or any fraction thereof, as provided herein." (emphasis supplied)
x x x
Sec. 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
independent 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."
Petitioner, however, submits that it is not liable to pay an annual franchise tax to the respondent
city government. It contends that sections 137 and 151 of the LGC in relation to section 131,
limit the taxing power of the respondent city government to private entities that are engaged in
trade or occupation for profit.22
Section 131 (m) of the LGC defines a "franchise" as "a right or privilege, affected with public
interest which is conferred upon private persons or corporations, under such terms and
conditions as the government and its political subdivisions may impose in the interest of the
public welfare, security and safety." From the phraseology of this provision, the petitioner
claims that the word "private" modifies the terms "persons" and "corporations." Hence, when
the LGC uses the term "franchise," petitioner submits that it should refer specifically to
franchises granted to private natural persons and to private corporations.23 Ergo, its charter
should not be considered a "franchise" for the purpose of imposing the franchise tax in
question.
On the other hand, section 131 (d) of the LGC defines "business" as "trade or commercial
activity regularly engaged in as means of livelihood or with a view to profit." Petitioner claims
that it is not engaged in an activity for profit, in as much as its charter specifically provides that
it is a "non-profit organization." In any case, petitioner argues that the accumulation of profit is
merely incidental to its operation; all these profits are required by law to be channeled for
expansion and improvement of its facilities and services.24
Petitioner also alleges that it is an instrumentality of the National Government,25 and as such,
may not be taxed by the respondent city government. It cites the doctrine in Basco vs.
Philippine Amusement and Gaming Corporation26 where this Court held that local governments
have no power to tax instrumentalities of the National Government, viz:
"Local governments have no power to tax instrumentalities of the National Government.
PAGCOR has a dual role, to operate and regulate gambling casinos. The latter role is
governmental, which places it in the category of an agency or instrumentality of the
Government. Being an instrumentality of the Government, PAGCOR should be and actually is
exempt from local taxes. Otherwise, its operation might be burdened, impeded or subjected to
control by a mere local government.
'The states have no power by taxation or otherwise, to retard, impede, burden or in any manner
control the operation of constitutional laws enacted by Congress to carry into execution the
powers vested in the federal government. (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 seriously burden it from accomplishment of
them.' (Antieau, Modern Constitutional Law, Vol. 2, p. 140, italics 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 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."27
Petitioner contends that section 193 of Rep. Act No. 7160, withdrawing the tax privileges of
government-owned or controlled corporations, is in the nature of an implied repeal. A special
law, its charter cannot be amended or modified impliedly by the local government code which
is a general law. Consequently, petitioner claims that its exemption from all taxes, fees or
charges under its charter subsists despite the passage of the LGC, viz:
"It is a well-settled rule of statutory construction that repeals of statutes by implication are not
favored and as much as possible, effect must be given to all enactments of the legislature.
Moreover, it has to be conceded that the charter of the NPC constitutes a special law. Republic
61
Act No. 7160, is a general law. It is a basic rule in statutory construction that the enactment of
a later legislation which is a general law cannot be construed to have repealed a special law.
Where there is a conflict between a general law and a special statute, the special statute should
prevail since it evinces the legislative intent more clearly than the general statute."28
Finally, petitioner submits that the charter of the NPC, being a valid exercise of police power,
should prevail over the LGC. It alleges that the power of the local government to impose
franchise tax is subordinate to petitioner's exemption from taxation; "police power being the
most pervasive, the least limitable and most demanding of all powers, including the power of
taxation."29
The petition is without merit.
Taxes are the lifeblood of the government,30 for without taxes, the government can neither exist
nor endure. A principal attribute of sovereignty,31 the exercise of taxing power derives its source
from the very existence of the state whose social contract with its citizens obliges it to promote
public interest and common good. The theory behind the exercise of the power to tax emanates
from necessity;32 without taxes, government cannot fulfill its mandate of promoting the general
welfare and well-being of the people.
In recent years, the increasing social challenges of the times expanded the scope of state
activity, and taxation has become a tool to realize social justice and the equitable distribution
of wealth, economic progress and the protection of local industries as well as public welfare
and similar objectives.33 Taxation assumes even greater significance with the ratification of the
1987 Constitution. Thenceforth, the power to tax is no longer vested exclusively on Congress;
local legislative bodies are now given direct authority to levy taxes, fees and other
charges34 pursuant to Article X, section 5 of the 1987 Constitution, viz:
"Section 5.- Each Local Government unit shall have the power to create its own sources of
revenue, to levy taxes, fees and charges subject to such guidelines and limitations as the
Congress may provide, consistent with the basic policy of local autonomy. Such taxes, fees
and charges shall accrue exclusively to the Local Governments."
This paradigm shift results from the realization that genuine development can be achieved only
by strengthening local autonomy and promoting decentralization of governance. For a long
time, the country's highly centralized government structure has bred a culture of dependence
among local government leaders upon the national leadership. It has also "dampened the spirit
of initiative, innovation and imaginative resilience in matters of local development on the part
of local government leaders."35 The only way to shatter this culture of dependence is to give
the LGUs a wider role in the delivery of basic services, and confer them sufficient powers to
generate their own sources for the purpose. To achieve this goal, section 3 of Article X of the
1987 Constitution mandates Congress to enact a local government code that will, consistent
with the basic policy of local autonomy, set the guidelines and limitations to this grant of taxing
powers, viz:
"Section 3. The Congress shall enact a local government code which shall provide for a more
responsive and accountable local government structure instituted through a system of
decentralization with effective mechanisms of recall, initiative, and referendum, allocate among
the different local government units their powers, responsibilities, and resources, and provide
for the qualifications, election, appointment and removal, term, salaries, powers and functions
and duties of local officials, and all other matters relating to the organization and operation of
the local units."
To recall, prior to the enactment of the Rep. Act No. 7160, 36 also known as the Local
Government Code of 1991 (LGC), various measures have been enacted to promote local
autonomy. These include the Barrio Charter of 1959,37 the Local Autonomy Act of 1959,38 the
Decentralization Act of 196739 and the Local Government Code of 1983.40 Despite these
initiatives, however, the shackles of dependence on the national government remained. Local
government units were faced with the same problems that hamper their capabilities to
participate effectively in the national development efforts, among which are: (a) inadequate tax
base, (b) lack of fiscal control over external sources of income, (c) limited authority to prioritize
and approve development projects, (d) heavy dependence on external sources of income, and
(e) limited supervisory control over personnel of national line agencies. 41
Considered as the most revolutionary piece of legislation on local autonomy,42 the LGC
effectively deals with the fiscal constraints faced by LGUs. It widens the tax base of LGUs to
include taxes which were prohibited by previous laws such as the imposition of taxes on forest
products, forest concessionaires, mineral products, mining operations, and the like. The LGC
likewise provides enough flexibility to impose tax rates in accordance with their needs and
capabilities. It does not prescribe graduated fixed rates but merely specifies the minimum and
maximum tax rates and leaves the determination of the actual rates to the
respective sanggunian.43
One of the most significant provisions of the LGC is the removal of the blanket exclusion of
instrumentalities and agencies of the national government from the coverage of local taxation.
Although as a general rule, LGUs cannot impose taxes, fees or charges of any kind on the
National Government, its agencies and instrumentalities, this rule now admits an exception,
i.e., when specific provisions of the LGC authorize the LGUs to impose taxes, fees or charges
on the aforementioned entities, viz:
"Section 133. Common Limitations on the Taxing Powers of the 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:
x x x is not levied on the corporation simply for existing as a corporation, upon its property 54 or its
(o) Taxes, fees, or charges of any kind on the National Government, its agencies and
instrumentalities, and local government units." (emphasis supplied)
In view of the afore-quoted provision of the LGC, the doctrine in Basco vs. Philippine
Amusement and Gaming Corporation44 relied upon by the petitioner to support its claim no
longer applies. To emphasize, the Basco case was decided prior to the effectivity of the LGC,
when no law empowering the local government units to tax instrumentalities of the National
Government was in effect. However, as this Court ruled in the case of Mactan Cebu
International Airport Authority (MCIAA) vs. Marcos,45 nothing prevents Congress from
decreeing that even instrumentalities or agencies of the government performing governmental
62
functions may be subject to tax.46 In enacting the LGC, Congress exercised its prerogative to
tax instrumentalities and agencies of government as it sees fit. Thus, after reviewing the
specific provisions of the LGC, this Court held that MCIAA, although an instrumentality of the
national government, was subject to real property tax, viz:
"Thus, reading together sections 133, 232, and 234 of the LGC, we conclude that as a general
rule, as laid down in section 133, the taxing power of local governments cannot extend to the
levy of inter alia, 'taxes, fees and charges of any kind on the national government, its agencies
and instrumentalities, and local government units'; however, pursuant to section 232,
provinces, cities and municipalities in the Metropolitan Manila Area may impose the real
property tax except on, inter alia, 'real property owned by the Republic of the Philippines or any
of its political subdivisions except when the beneficial use thereof has been granted for
consideration or otherwise, to a taxable person as provided in the item (a) of the first paragraph
of section 12.'"47
In the case at bar, section 151 in relation to section 137 of the LGC clearly authorizes the
respondent city government to impose on the petitioner the franchise tax in question.
In its general signification, a franchise is a privilege conferred by government authority, which
does not belong to citizens of the country generally as a matter of common right.48 In its specific
sense, a franchise may refer to a general or primary franchise, or to a special or secondary
franchise. The former relates to the right to exist as a corporation, by virtue of duly approved
articles of incorporation, or a charter pursuant to a special law creating the corporation. 49 The
right under a primary or general franchise is vested in the individuals who compose the
corporation and not in the corporation itself.50 On the other hand, the latter refers to the right or
privileges conferred upon an existing corporation such as the right to use the streets of a
municipality to lay pipes of tracks, erect poles or string wires. 51 The rights under a secondary
or special franchise are vested in the corporation and may ordinarily be conveyed or mortgaged
under a general power granted to a corporation to dispose of its property, except such special
or secondary franchises as are charged with a public use.52
In section 131 (m) of the LGC, Congress unmistakably defined a franchise in the sense of a
secondary or special franchise. This is to avoid any confusion when the word franchise is used
in the context of taxation. As commonly used, a franchise tax is "a tax on the privilege of
transacting business in the state and exercising corporate franchises granted by the state."53 It
income,55 but on its exercise of the rights or privileges granted to it by the government. Hence,
a corporation need not pay franchise tax from the time it ceased to do business and exercise
its franchise.56 It is within this context that the phrase "tax on businesses enjoying a franchise"
in section 137 of the LGC should be interpreted and understood. Verily, to determine whether
the petitioner is covered by the franchise tax in question, the following requisites should concur:
(1) that petitioner has a "franchise" in the sense of a secondary or special franchise; and (2)
that it is exercising its rights or privileges under this franchise within the territory of the
respondent city government.
Petitioner fulfills the first requisite. Commonwealth Act No. 120, as amended by Rep. Act No.
7395, constitutes petitioner's primary and secondary franchises. It serves as the petitioner's
charter, defining its composition, capitalization, the appointment and the specific duties of its
corporate officers, and its corporate life span.57 As its secondary franchise, Commonwealth Act
No. 120, as amended, vests the petitioner the following powers which are not available to
ordinary corporations, viz:
"x x x
(e) To conduct investigations and surveys for the development of water power in any part of
the Philippines;
(f) To take water from any public stream, river, creek, lake, spring or waterfall in the Philippines,
for the purposes specified in this Act; to intercept and divert the flow of waters from lands of
riparian owners and from persons owning or interested in waters which are or may be
necessary for said purposes, upon payment of just compensation therefor; to alter, straighten,
obstruct or increase the flow of water in streams or water channels intersecting or connecting
therewith or contiguous to its works or any part thereof: Provided, That just compensation shall
be paid to any person or persons whose property is, directly or indirectly, adversely affected or
damaged thereby;
(g) To construct, operate and maintain power plants, auxiliary plants, dams, reservoirs, pipes,
mains, transmission lines, power stations and substations, and other works for the purpose of
developing hydraulic power from any river, creek, lake, spring and waterfall in the Philippines
and supplying such power to the inhabitants thereof; to acquire, construct, install, maintain,
operate, and improve gas, oil, or steam engines, and/or other prime movers, generators and
machinery in plants and/or auxiliary plants for the production of electric power; to establish,
develop, operate, maintain and administer power and lighting systems for the transmission and
utilization of its power generation; to sell electric power in bulk to (1) industrial enterprises, (2)
city, municipal or provincial systems and other government institutions, (3) electric
cooperatives, (4) franchise holders, and (5) real estate subdivisions x x x;
(h) To acquire, promote, hold, transfer, sell, lease, rent, mortgage, encumber and otherwise
dispose of property incident to, or necessary, convenient or proper to carry out the purposes
for which the Corporation was created: Provided, That in case a right of way is necessary for
its transmission lines, easement of right of way shall only be sought: Provided, however, That
in case the property itself shall be acquired by purchase, the cost thereof shall be the fair market
value at the time of the taking of such property;
(i) To construct works across, or otherwise, any stream, watercourse, canal, ditch, flume, street,
avenue, highway or railway of private and public ownership, as the location of said works may
require xxx;
(j) To exercise the right of eminent domain for the purpose of this Act in the manner provided
by law for instituting condemnation proceedings by the national, provincial and municipal
governments;
x x x least a majority of its outstanding voting capital stock x x x." (emphases supplied)
(m) To cooperate with, and to coordinate its operations with those of the National Electrification
Administration and public service entities;
63
(n) To exercise complete jurisdiction and control over watersheds surrounding the reservoirs
of plants and/or projects constructed or proposed to be constructed by the Corporation. Upon
determination by the Corporation of the areas required for watersheds for a specific project,
the Bureau of Forestry, the Reforestation Administration and the Bureau of Lands shall, upon
written advice by the Corporation, forthwith surrender jurisdiction to the Corporation of all areas
embraced within the watersheds, subject to existing private rights, the needs of waterworks
systems, and the requirements of domestic water supply;
(o) In the prosecution and maintenance of its projects, the Corporation shall adopt measures
to prevent environmental pollution and promote the conservation, development and maximum
utilization of natural resources xxx "58
With these powers, petitioner eventually had the monopoly in the generation and distribution
of electricity. This monopoly was strengthened with the issuance of Pres. Decree No.
40,59 nationalizing the electric power industry. Although Exec. Order No. 215 60 thereafter
allowed private sector participation in the generation of electricity, the transmission of electricity
remains the monopoly of the petitioner.
Petitioner also fulfills the second requisite. It is operating within the respondent city
government's territorial jurisdiction pursuant to the powers granted to it by Commonwealth Act
No. 120, as amended. From its operations in the City of Cabanatuan, petitioner realized a gross
income of P107,814,187.96 in 1992. Fulfilling both requisites, petitioner is, and ought to be,
subject of the franchise tax in question.
Petitioner, however, insists that it is excluded from the coverage of the franchise tax simply
because its stocks are wholly owned by the National Government, and its charter characterized
it as a "non-profit" organization.
These contentions must necessarily fail.
To stress, a franchise tax is imposed based not on the ownership but on the exercise by the
corporation of a privilege to do business. The taxable entity is the corporation which exercises
the franchise, and not the individual stockholders. By virtue of its charter, petitioner was created
as a separate and distinct entity from the National Government. It can sue and be sued under
its own name,61 and can exercise all the powers of a corporation under the Corporation Code. 62
To be sure, the ownership by the National Government of its entire capital stock does not
necessarily imply that petitioner is not engaged in business. Section 2 of Pres. Decree No.
202963 classifies government-owned or controlled corporations (GOCCs) into those performing
governmental functions and those performing proprietary functions, viz:
"A government-owned or controlled corporation is a stock or a non-stock corporation, whether
performing governmental or proprietary functions, which is directly chartered by special law or
if organized under the general corporation law is owned or controlled by the government
directly, or indirectly through a parent corporation or subsidiary corporation, to the extent of at
Governmental functions are those pertaining to the administration of government, and as such,
are treated as absolute obligation on the part of the state to perform while proprietary functions
are those that are undertaken only by way of advancing the general interest of society, and are
merely optional on the government.64 Included in the class of GOCCs performing proprietary
functions are "business-like" entities such as the National Steel Corporation (NSC), the
National Development Corporation (NDC), the Social Security System (SSS), the Government
Service Insurance System (GSIS), and the National Water Sewerage Authority
(NAWASA),65 among others.
Petitioner was created to "undertake the development of hydroelectric generation of power and
the production of electricity from nuclear, geothermal and other sources, as well as the
transmission of electric power on a nationwide basis." 66 Pursuant to this mandate, petitioner
generates power and sells electricity in bulk. Certainly, these activities do not partake of the
sovereign functions of the government. They are purely private and commercial undertakings,
albeit imbued with public interest. The public interest involved in its activities, however, does
not distract from the true nature of the petitioner as a commercial enterprise, in the same league
with similar public utilities like telephone and telegraph companies, railroad companies, water
supply and irrigation companies, gas, coal or light companies, power plants, ice plant among
others; all of which are declared by this Court as ministrant or proprietary functions of
government aimed at advancing the general interest of society.67
A closer reading of its charter reveals that even the legislature treats the character of the
petitioner's enterprise as a "business," although it limits petitioner's profits to twelve percent
(12%), viz:68
"(n) When essential to the proper administration of its corporate affairs or necessary for the
proper transaction of its business or to carry out the purposes for which it was organized, to
contract indebtedness and issue bonds subject to approval of the President upon
recommendation of the Secretary of Finance;
(o) To exercise such powers and do such things as may be reasonably necessary to carry out
the business and purposes for which it was organized, or which, from time to time, may be
declared by the Board to be necessary, useful, incidental or auxiliary to accomplish the said
purpose xxx."(emphases supplied)
It is worthy to note that all other private franchise holders receiving at least sixty percent (60%)
of its electricity requirement from the petitioner are likewise imposed the cap of twelve percent
(12%) on profits.69 The main difference is that the petitioner is mandated to devote "all its
returns from its capital investment, as well as excess revenues from its operation, for
expansion"70 while other franchise holders have the option to distribute their profits to its
stockholders by declaring dividends. We do not see why this fact can be a source of difference
in tax treatment. In both instances, the taxable entity is the corporation, which exercises the
franchise, and not the individual stockholders.
We also do not find merit in the petitioner's contention that its tax exemptions under its charter
subsist despite the passage of the LGC.
As a rule, tax exemptions are construed strongly against the claimant. Exemptions must be
shown to exist clearly and categorically, and supported by clear legal provisions. 71 In the case
at bar, the petitioner's sole refuge is section 13 of Rep. Act No. 6395 exempting from, among
others, "all income taxes, franchise taxes and realty taxes to be paid to the National
64
Government, its provinces, cities, municipalities and other government agencies and
instrumentalities." However, section 193 of the LGC withdrew, subject to limited exceptions,
the sweeping tax privileges previously enjoyed by private and public corporations. Contrary to
the contention of petitioner, section 193 of the LGC is an express, albeit general, repeal of all
statutes granting tax exemptions from local taxes.72 It reads:
"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 the effectivity of this Code." (emphases
supplied)
It is a basic precept of statutory construction that the express mention of one person, thing, act,
or consequence excludes all others as expressed in the familiar maxim expressio unius est
exclusio alterius.73 Not being a local water district, a cooperative registered under R.A. No.
6938, or a non-stock and non-profit hospital or educational institution, petitioner clearly does
not belong to the exception. It is therefore incumbent upon the petitioner to point to some
provisions of the LGC that expressly grant it exemption from local taxes.
But this would be an exercise in futility. Section 137 of the LGC clearly states that the LGUs
can impose franchise tax "notwithstanding any exemption granted by any law or other special
law." This particular provision of the LGC does not admit any exception. In City Government of
San Pablo, Laguna v. Reyes,74 MERALCO's exemption from the payment of franchise taxes
was brought as an issue before this Court. The same issue was involved in the subsequent
case of Manila Electric Company v. Province of Laguna.75 Ruling in favor of the local
government in both instances, we ruled that the franchise tax in question is imposable despite
any exemption enjoyed by MERALCO under special laws, viz:
"It is our view that petitioners correctly rely on provisions of Sections 137 and 193 of the LGC
to support their position that MERALCO's tax exemption has been withdrawn. The explicit
language of section 137 which authorizes the province to impose franchise tax 'notwithstanding
any exemption granted by any law or other special law' is all-encompassing and clear. The
franchise tax is imposable despite any exemption enjoyed under special laws.
Section 193 buttresses the withdrawal of extant tax exemption privileges. By stating that 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 (1) local water districts, (2) cooperatives duly registered under R.A. 6938,
(3) non-stock and non-profit hospitals and educational institutions, are withdrawn upon the
effectivity of this code, the obvious import is to limit the exemptions to the three enumerated
entities. It is a basic precept of statutory construction that the express mention of one person,
thing, act, or consequence excludes all others as expressed in the familiar maxim expressio
unius est exclusio alterius. In the absence of any provision of the Code to the contrary, and we
find no other provision in point, any existing tax exemption or incentive enjoyed by MERALCO
under existing law was clearly intended to be withdrawn.
Reading together sections 137 and 193 of the LGC, we conclude that under the LGC the local
government unit may now impose a local tax at a rate not exceeding 50% of 1% of the gross
annual receipts for the preceding calendar based on the incoming receipts realized within its
territorial jurisdiction. The legislative purpose to withdraw tax privileges enjoyed under existing
law or charter is clearly manifested by the language used on (sic) Sections 137 and 193
categorically withdrawing such exemption subject only to the exceptions enumerated. Since it
would be not only tedious and impractical to attempt to enumerate all the existing statutes
providing for special tax exemptions or privileges, the LGC provided for an express, albeit
general, withdrawal of such exemptions or privileges. No more unequivocal language could
have been used."76 (emphases supplied).
It is worth mentioning that section 192 of the LGC empowers the LGUs, through ordinances
duly approved, to grant tax exemptions, initiatives or reliefs. 77 But in enacting section 37 of
Ordinance No. 165-92 which imposes an annual franchise tax "notwithstanding any exemption
granted by law or other special law," the respondent city government clearly did not intend to
exempt the petitioner from the coverage thereof.
Doubtless, the power to tax is the most effective instrument to raise needed revenues to finance
and support myriad activities of the local government units for the delivery of basic services
essential to the promotion of the general welfare and the enhancement of peace, progress,
and prosperity of the people. As this Court observed in the Mactan case, "the original reasons
for the withdrawal of tax exemption privileges granted to government-owned or controlled
corporations and all other units of government were that such privilege resulted in serious tax
base erosion and distortions in the tax treatment of similarly situated enterprises."78 With the
added burden of devolution, it is even more imperative for government entities to share in the
requirements of development, fiscal or otherwise, by paying taxes or other charges due from
them.
IN VIEW WHEREOF, the instant petition is DENIED and the assailed Decision and Resolution
of the Court of Appeals dated March 12, 2001 and July 10, 2001, respectively, are hereby
AFFIRMED.
SO ORDERED.

65
G.R. No. 90776 June 3, 1991
PHILIPPINE PETROLEUM CORPORATION, petitioner,
vs.
MUNICIPALITY OF PILILLA, RIZAL, Represented by MAYOR NICOMEDES F.
PATENIA, respondent.
Quiason, Makalintal, Barot, Torres & Ibarra for petitioner.
PARAS, J.:
This is a petition for certiorari seeking to annul and set aside: (a) the March 17, 1989
decision * of the Regional Trial Court, Branch 80, Tanay, Rizal in Civil Case No. 057-T entitled,
"Municipality of Pililla, Rizal, represented by Mayor Nicomedes F. Patenia vs. Philippine
Petroleum Corporation", (PPC for short) upholding the legality of the taxes, fees and charges
being imposed in Pililla under Municipal Tax Ordinance No. 1 and directing the herein petitioner
to pay the amount of said taxes, fees and charges due the respondent: and (b) the November
2, 1989 resolution of the same court denying petitioner's motion for reconsideration of the said
decision.
The undisputed facts of the case are:
Petitioner, Philippine Petroleum Corporation (PPC for short) is a business enterprise engaged
in the manufacture of lubricated oil basestock which is a petroleum product, with its refinery
plant situated at Malaya, Pililla, Rizal, conducting its business activities within the territorial
jurisdiction of the Municipality of Pililla, Rizal and is in continuous operation up to the present
(Rollo p. 60). PPC owns and maintains an oil refinery including forty-nine storage tanks for its
petroleum products in Malaya, Pililla, Rizal (Rollo, p. 12).
Under Section 142 of the National Internal Revenue Code of 1939, manufactured oils and other
fuels are subject to specific tax.
On June 28, 1973, Presidential Decree No. 231, otherwise known as the Local Tax Code was
issued by former President Ferdinand E. Marcos governing the exercise by provinces, cities,
municipalities and barrios of their taxing and other revenue-raising powers. Sections 19 and 19
(a) thereof, provide among others, that the municipality may impose taxes on business, except
on those for which fixed taxes are provided on manufacturers, importers or producers of any
article of commerce of whatever kind or nature, including brewers, distillers, rectifiers,
repackers, and compounders of liquors, distilled spirits and/or wines in accordance with the
schedule listed therein.
The Secretary of Finance issued Provincial Circular No. 26-73 dated December 27, 1973,
directed to all provincial, city and municipal treasurers to refrain from collecting any local tax
imposed in old or new tax ordinances in the business of manufacturing, wholesaling, retailing,
or dealing in petroleum products subject to the specific tax under the National Internal Revenue
Code (Rollo, p. 76).
66
Likewise, Provincial Circular No. 26 A-73 dated January 9, 1973 was issued by the Secretary
of Finance instructing all City Treasurers to refrain from collecting any local tax imposed in tax
ordinances enacted before or after the effectivity of the Local Tax Code on July 1, 1973, on the
businesses of manufacturing, wholesaling, retailing, or dealing in, petroleum products subject
to the specific tax under the National Internal Revenue Code (Rollo, p. 79).
Respondent Municipality of Pililla, Rizal, through Municipal Council Resolution No. 25, S-1974
enacted Municipal Tax Ordinance No. 1, S-1974 otherwise known as "The Pililla Tax Code of
1974" on June 14, 1974, which took effect on July 1, 1974 (Rollo, pp. 181-182). Sections 9 and
10 of the said ordinance imposed a tax on business, except for those for which fixed taxes are
provided in the Local Tax Code on manufacturers, importers, or producers of any article of
commerce of whatever kind or nature, including brewers, distillers, rectifiers, repackers, and
compounders of liquors, distilled spirits and/or wines in accordance with the schedule found in
the Local Tax Code, as well as mayor's permit, sanitary inspection fee and storage permit fee
for flammable, combustible or explosive substances (Rollo, pp. 183-187), while Section 139 of
the disputed ordinance imposed surcharges and interests on unpaid taxes, fees or charges
(Ibid., p. 193).
On March 30, 1974, Presidential Decree No. 426 was issued amending certain provisions of
P.D. 231 but retaining Sections 19 and 19 (a) with adjusted rates and 22(b).
On April 13, 1974, P.D. 436 was promulgated increasing the specific tax on lubricating oils,
gasoline, bunker fuel oil, diesel fuel oil and other similar petroleum products levied under
Sections 142, 144 and 145 of the National Internal Revenue Code, as amended, and granting
provinces, cities and municipalities certain shares in the specific tax on such products in lieu of
local taxes imposed on petroleum products.
The questioned Municipal Tax Ordinance No. 1 was reviewed and approved by the Provincial
Treasurer of Rizal on January 13, 1975 (Rollo, p. 143), but was not implemented and/or
enforced by the Municipality of Pililla because of its having been suspended up to now in view
of Provincial Circular Nos. 26-73 and 26 A-73.
Provincial Circular No. 6-77 dated March 13, 1977 was also issued directing all city and
municipal treasurers to refrain from collecting the so-called storage fee on flammable or
combustible materials imposed under the local tax ordinance of their respective locality, said
fee partaking of the nature of a strictly revenue measure or service charge.
On June 3, 1977, P.D. 1158 otherwise known as the National Internal Revenue Code of 1977
was enacted, Section 153 of which specifically imposes specific tax on refined and
manufactured mineral oils and motor fuels.
Enforcing the provisions of the above-mentioned ordinance, the respondent filed a complaint
on April 4, 1986 docketed as Civil Case No. 057-T against PPC for the collection of the business
tax from 1979 to 1986; storage permit fees from 1975 to 1986; mayor's permit and sanitary
inspection fees from 1975 to 1984. PPC, however, have already paid the last-named fees
starting 1985 (Rollo, p. 74).
After PPC filed its answer, a pre-trial conference was held on August 24, 1988 where the parties
thru their respective counsel, after coming up with certain admissions and stipulations agreed
to the submission of the case for decision based on documentary evidence offered with their
respective comments (Rollo, p. 41).
On March 17, 1987, the trial court rendered a decision against the petitioner, the dispositive
part of which reads as follows:
WHEREFORE, premises considered, this Court hereby renders judgment in favor of the
plaintiffs as against the defendants thereby directing the defendants to 1) pay the plaintiffs the
amount of P5,301,385.00 representing the Tax on Business due from the defendants under
Sec. 9 (A) of the Municipal Tax Ordinance of the plaintiffs for the period from 1979 to 1983
inclusive plus such amount of tax that may accrue until final determination of case; 2) to pay
storage permit fee in the amount of P3,321,730.00 due from the defendants under Sec. 10,
par. z (13) (b) (1 C) of the Municipal Tax Ordinance of the plaintiffs for the period from 1975 to
1986 inclusive plus such amount of fee that may accrue until final determination of case; 3) to
pay Mayor's Permit Fee due from the defendants under Sec. 10, par. (P) (2) of the Municipal
Tax Ordinance of the plaintiffs from 1975 to 1984 inclusive in the amount of P12,120.00 plus
such amount of fee that may accrue until final determination of the case; and 4) to pay sanitary
inspection fee in the amount of P1,010.00 for the period from 1975 to 1984 plus such amount
that may accrue until final determination of case and 5) to pay the costs of suit.
SO ORDERED. (Rollo, pp. 49-50)
PPC moved for reconsideration of the decision, but this was denied by the lower court in a
resolution of November 2, 1989, hence, the instant petition.
The Court resolved to give due course to the petition and required both parties to submit
simultaneous memoranda (June 21, 1990 Resolution; Rollo, p. 305).
PPC assigns the following alleged errors:
1. THE RTC ERRED IN ORDERING THE PAYMENT OF THE BUSINESS TAX UNDER
SECTION 9 (A) OF THE TAX ORDINANCE IN THE LIGHT OF PROVINCIAL CIRCULARS
NOS. 26-73 AND 26 A-73;.
2. THE RTC ERRED IN HOLDING THAT PETITIONER WAS LIABLE FOR THE PAYMENT
OF STORAGE PERMIT FEE UNDER SECTION 10 Z (13) (b) (1-c) OF THE TAX ORDINANCE
CONSIDERING THE ISSUANCE OF PROVINCIAL CIRCULAR NO. 6-77;
3. THE RTC ERRED IN FAILING TO HOLD THAT RESPONDENTS COMPUTATION OF TAX
LIABILITY HAS ABSOLUTELY NO BASIS;
4. THE RTC ERRED IN ORDERING THE PAYMENT OF MAYOR'S PERMIT AND SANITARY
INSPECTION FEES CONSIDERING THAT THE SAME HAS BEEN VALIDLY AND LEGALLY
WAIVED BY THE MAYOR;
5. THE RTC ERRED IN FAILING TO HOLD THAT THE TAXES AND DUTIES NOT
COLLECTED FROM PETITIONER PRIOR TO THE FIVE (5) YEAR PERIOD FROM THE
FILING OF THIS CASE ON APRIL 4, 1986 HAS ALREADY PRESCRIBED.
The crucial issue in this case is whether or not petitioner PPC whose oil products are subject
to specific tax under the NIRC, is still liable to pay (a) tax on business and (b) storage fees,
67
considering Provincial Circular No. 6-77; and mayor's permit and sanitary inspection fee unto
the respondent Municipality of Pililla, Rizal, based on Municipal Ordinance No. 1.
Petitioner PPC contends that: (a) Provincial Circular No. 2673 declared as contrary to national
economic policy the imposition of local taxes on the manufacture of petroleum products as they
are already subject to specific tax under the National Internal Revenue Code; (b) the above
declaration covers not only old tax ordinances but new ones, as well as those which may be
enacted in the future; (c) both Provincial Circulars (PC) 26-73 and 26 A-73 are still effective,
hence, unless and until revoked, any effort on the part of the respondent to collect the
suspended tax on business from the petitioner would be illegal and unauthorized; and (d)
Section 2 of P.D. 436 prohibits the imposition of local taxes on petroleum products.
PC No. 26-73 and PC No. 26 A-73 suspended the effectivity of local tax ordinances imposing
a tax on business under Section 19 (a) of the Local Tax Code (P.D. No. 231), with regard to
manufacturers, retailers, wholesalers or dealers in petroleum products subject to the specific
tax under the National Internal Revenue Code NIRC, in view of Section 22 (b) of the Code
regarding non-imposition by municipalities of taxes on articles, subject to specific tax under the
provisions of the NIRC.
There is no question that Pililla's Municipal Tax Ordinance No. 1 imposing the assailed taxes,
fees and charges is valid especially Section 9 (A) which according to the trial court "was lifted in
toto and/or is a literal reproduction of Section 19 (a) of the Local Tax Code as amended by P.D.
No. 426." It conforms with the mandate of said law.
But P.D. No. 426 amending the Local Tax Code is deemed to have repealed Provincial Circular
Nos. 26-73 and 26 A-73 issued by the Secretary of Finance when Sections 19 and 19 (a), were
carried over into P.D. No. 426 and no exemptions were given to manufacturers, wholesalers,
retailers, or dealers in petroleum products.
Well-settled is the rule that administrative regulations must be in harmony with the provisions
of the law. In case of discrepancy between the basic law and an implementing rule or
regulation, the former prevails (Shell Philippines, Inc. v. Central Bank of the Philippines, 162
SCRA 628 [1988]). As aptly held by the court a quo:
Necessarily, there could not be any other logical conclusion than that the framers of P.D. No.
426 really and actually intended to terminate the effectivity and/or enforceability of Provincial
Circulars Nos. 26-73 and 26 A-73 inasmuch as clearly these circulars are in contravention with
Sec. 19 (a) of P.D. 426-the amendatory law to P.D. No. 231. That intention to terminate is very
apparent and in fact it is expressed in clear and unequivocal terms in the effectivity and
repealing clause of P.D. 426 . . .
Furthermore, while Section 2 of P.D. 436 prohibits the imposition of local taxes on petroleum
products, said decree did not amend Sections 19 and 19 (a) of P.D. 231 as amended by P.D.
426, wherein the municipality is granted the right to levy taxes on business of manufacturers,
importers, producers of any article of commerce of whatever kind or nature. A tax on business
is distinct from a tax on the article itself. Thus, if the imposition of tax on business of
manufacturers, etc. in petroleum products contravenes a declared national policy, it should
have been expressly stated in P.D. No. 436.
The exercise by local governments of the power to tax is ordained by the present not also to be paid by PPC (for the storage tanks are owned by PPC and not by the municipality,
Constitution.1wphi1 To allow the continuous effectivity of the prohibition set forth in PC No. and therefore cannot be a charge for service by the municipality), the assailed DECISION is
26-73 (1) would be tantamount to restricting their power to tax by mere administrative hereby AFFIRMED.
issuances. Under Section 5, Article X of the 1987 Constitution, only guidelines and limitations SO ORDERED.
that may be established by Congress can define and limit such power of local governments.
Thus:
Each local government unit shall have the power to create its own sources of revenues and to
levy taxes, fees, and charges subject to such guidelines and limitations as the Congress may
provide, consistent with the basic policy of local autonomy . . .
Provincial Circular No. 6-77 enjoining all city and municipal treasurers to refrain from collecting
the so-called storage fee on flammable or combustible materials imposed in the local tax
ordinance of their respective locality frees petitioner PPC from the payment of storage permit
fee.
The storage permit fee being imposed by Pililla's tax ordinance is a fee for the installation and
keeping in storage of any flammable, combustible or explosive substances. Inasmuch as said
storage makes use of tanks owned not by the municipality of Pililla, but by petitioner PPC,
same is obviously not a charge for any service rendered by the municipality as what is
envisioned in Section 37 of the same Code.
Section 10 (z) (13) of Pililla's Municipal Tax Ordinance No. 1 prescribing a permit fee is a permit
fee allowed under Section 36 of the amended Code.
As to the authority of the mayor to waive payment of the mayor's permit and sanitary inspection
fees, the trial court did not err in holding that "since the power to tax includes the power to
exempt thereof which is essentially a legislative prerogative, it follows that a municipal mayor
who is an executive officer may not unilaterally withdraw such an expression of a policy thru
the enactment of a tax." The waiver partakes of the nature of an exemption. It is an ancient rule
that exemptions from taxation are construed in strictissimi juris against the taxpayer and
liberally in favor of the taxing authority (Esso Standard Eastern, Inc. v. Acting Commissioner of
Customs, 18 SCRA 488 [1966]). Tax exemptions are looked upon with disfavor (Western
Minolco Corp. v. Commissioner of Internal Revenue, 124 SCRA 121 [1983]). Thus, in the
absence of a clear and express exemption from the payment of said fees, the waiver cannot
be recognized. As already stated, it is the law-making body, and not an executive like the
mayor, who can make an exemption. Under Section 36 of the Code, a permit fee like the
mayor's permit, shall be required before any individual or juridical entity shall engage in any
business or occupation under the provisions of the Code.
However, since the Local Tax Code does not provide the prescriptive period for collection of
local taxes, Article 1143 of the Civil Code applies. Said law provides that an action upon an
obligation created by law prescribes within ten (10) years from the time the right of action
accrues. The Municipality of Pililla can therefore enforce the collection of the tax on business
of petitioner PPC due from 1976 to 1986, and NOT the tax that had accrued prior to 1976.
PREMISES CONSIDERED, with the MODIFICATION that business taxes accruing PRIOR to
1976 are not to be paid by PPC (because the same have prescribed) and that storage fees are

68
G.R. No. 115455 October 30, 1995 G.R. No. 115852 October 30, 1995
ARTURO M. TOLENTINO, petitioner, PHILIPPINE AIRLINES, INC., petitioner,
vs. vs.
THE SECRETARY OF FINANCE and THE COMMISSIONER OF INTERNAL THE SECRETARY OF FINANCE and COMMISSIONER OF INTERNAL
REVENUE, respondents. REVENUE, respondents.
G.R. No. 115525 October 30, 1995 G.R. No. 115873 October 30, 1995
JUAN T. DAVID, petitioner, COOPERATIVE UNION OF THE PHILIPPINES, petitioner,
vs. vs.
TEOFISTO T. GUINGONA, JR., as Executive Secretary; ROBERTO DE OCAMPO, as HON. LIWAYWAY V. CHATO, in her capacity as the Commissioner of Internal Revenue,
Secretary of Finance; LIWAYWAY VINZONS-CHATO, as Commissioner of Internal HON. TEOFISTO T. GUINGONA, JR., in his capacity as Executive Secretary, and HON.
Revenue; and their AUTHORIZED AGENTS OR REPRESENTATIVES, respondents. ROBERTO B. DE OCAMPO, in his capacity as Secretary of Finance, respondents.
G.R. No. 115543 October 30, 1995 G.R. No. 115931 October 30, 1995
RAUL S. ROCO and the INTEGRATED BAR OF THE PHILIPPINES, petitioners, PHILIPPINE EDUCATIONAL PUBLISHERS ASSOCIATION, INC. and ASSOCIATION OF
vs. PHILIPPINE BOOK SELLERS, petitioners,
THE SECRETARY OF THE DEPARTMENT OF FINANCE; THE COMMISSIONERS OF THE vs.
BUREAU OF INTERNAL REVENUE AND BUREAU OF CUSTOMS, respondents. HON. ROBERTO B. DE OCAMPO, as the Secretary of Finance; HON. LIWAYWAY V.
G.R. No. 115544 October 30, 1995 CHATO, as the Commissioner of Internal Revenue; and HON. GUILLERMO PARAYNO,
JR., in his capacity as the Commissioner of Customs, respondents.
PHILIPPINE PRESS INSTITUTE, INC.; EGP PUBLISHING CO., INC.; KAMAHALAN
PUBLISHING CORPORATION; PHILIPPINE JOURNALISTS, INC.; JOSE L. PAVIA; and RESOLUTION
OFELIA L. DIMALANTA, petitioners,
vs. MENDOZA, J.:
HON. LIWAYWAY V. CHATO, in her capacity as Commissioner of Internal Revenue; HON.
These are motions seeking reconsideration of our decision dismissing the petitions filed in
TEOFISTO T. GUINGONA, JR., in his capacity as Executive Secretary; and HON.
these cases for the declaration of unconstitutionality of R.A. No. 7716, otherwise known as the
ROBERTO B. DE OCAMPO, in his capacity as Secretary of Finance, respondents.
Expanded Value-Added Tax Law. The motions, of which there are 10 in all, have been filed by
G.R. No. 115754 October 30, 1995 the several petitioners in these cases, with the exception of the Philippine Educational
CHAMBER OF REAL ESTATE AND BUILDERS ASSOCIATIONS, INC., Publishers Association, Inc. and the Association of Philippine Booksellers, petitioners in G.R.
(CREBA), petitioner, No. 115931.
vs. The Solicitor General, representing the respondents, filed a consolidated comment, to which
THE COMMISSIONER OF INTERNAL REVENUE, respondent. the Philippine Airlines, Inc., petitioner in G.R. No. 115852, and the Philippine Press Institute,
G.R. No. 115781 October 30, 1995 Inc., petitioner in G.R. No. 115544, and Juan T. David, petitioner in G.R. No. 115525, each
KILOSBAYAN, INC., JOVITO R. SALONGA, CIRILO A. RIGOS, ERME CAMBA, EMILIO C. filed a reply. In turn the Solicitor General filed on June 1, 1995 a rejoinder to the PPI's reply.
CAPULONG, JR., JOSE T. APOLO, EPHRAIM TENDERO, FERNANDO SANTIAGO, JOSE On June 27, 1995 the matter was submitted for resolution.
ABCEDE, CHRISTINE TAN, FELIPE L. GOZON, RAFAEL G. FERNANDO, RAOUL V. I. Power of the Senate to propose amendments to revenue bills. Some of the petitioners
VICTORINO, JOSE CUNANAN, QUINTIN S. DOROMAL, MOVEMENT OF ATTORNEYS (Tolentino, Kilosbayan, Inc., Philippine Airlines (PAL), Roco, and Chamber of Real Estate and
FOR BROTHERHOOD, INTEGRITY AND NATIONALISM, INC. ("MABINI"), FREEDOM Builders Association (CREBA)) reiterate previous claims made by them that R.A. No. 7716 did
FROM DEBT COALITION, INC., and PHILIPPINE BIBLE SOCIETY, INC. and WIGBERTO not "originate exclusively" in the House of Representatives as required by Art. VI, 24 of the
TAADA,petitioners, Constitution. Although they admit that H. No. 11197 was filed in the House of Representatives
vs. where it passed three readings and that afterward it was sent to the Senate where after first
THE EXECUTIVE SECRETARY, THE SECRETARY OF FINANCE, THE COMMISSIONER reading it was referred to the Senate Ways and Means Committee, they complain that the
OF INTERNAL REVENUE and THE COMMISSIONER OF CUSTOMS, respondents. Senate did not pass it on second and third readings. Instead what the Senate did was to pass

69
its own version (S. No. 1630) which it approved on May 24, 1994. Petitioner Tolentino adds
that what the Senate committee should have done was to amend H. No. 11197 by striking out
the text of the bill and substituting it with the text of S. No. 1630. That way, it is said, "the bill
remains a House bill and the Senate version just becomes the text (only the text) of the House
bill."
The contention has no merit.
The enactment of S. No. 1630 is not the only instance in which the Senate proposed an
amendment to a House revenue bill by enacting its own version of a revenue bill. On at least
two occasions during the Eighth Congress, the Senate passed its own version of revenue bills,
which, in consolidation with House bills earlier passed, became the enrolled bills. These were:
R.A. No. 7369 (AN ACT TO AMEND THE OMNIBUS INVESTMENTS CODE OF 1987 BY
EXTENDING FROM FIVE (5) YEARS TO TEN YEARS THE PERIOD FOR TAX AND DUTY
EXEMPTION AND TAX CREDIT ON CAPITAL EQUIPMENT) which was approved by the
President on April 10, 1992. This Act is actually a consolidation of H. No. 34254, which was
approved by the House on January 29, 1992, and S. No. 1920, which was approved by the
Senate on February 3, 1992.
R.A. No. 7549 (AN ACT GRANTING TAX EXEMPTIONS TO WHOEVER SHALL GIVE
REWARD TO ANY FILIPINO ATHLETE WINNING A MEDAL IN OLYMPIC GAMES) which
was approved by the President on May 22, 1992. This Act is a consolidation of H. No. 22232,
which was approved by the House of Representatives on August 2, 1989, and S. No. 807,
which was approved by the Senate on October 21, 1991.
On the other hand, the Ninth Congress passed revenue laws which were also the result of the
consolidation of House and Senate bills. These are the following, with indications of the dates
on which the laws were approved by the President and dates the separate bills of the two
chambers of Congress were respectively passed:
1. R.A. NO. 7642
AN ACT INCREASING THE PENALTIES FOR TAX EVASION, AMENDING FOR THIS
PURPOSE THE PERTINENT SECTIONS OF THE NATIONAL INTERNAL REVENUE CODE
(December 28, 1992).
House Bill No. 2165, October 5, 1992
Senate Bill No. 32, December 7, 1992
2. R.A. NO. 7643
AN ACT TO EMPOWER THE COMMISSIONER OF INTERNAL REVENUE TO REQUIRE
THE PAYMENT OF THE VALUE-ADDED TAX EVERY MONTH AND TO ALLOW LOCAL
GOVERNMENT UNITS TO SHARE IN VAT REVENUE, AMENDING FOR THIS PURPOSE
CERTAIN SECTIONS OF THE NATIONAL INTERNAL REVENUE CODE (December 28,
1992)
House Bill No. 1503, September 3, 1992
Senate Bill No. 968, December 7, 1992
3. R.A. NO. 7646
70
AN ACT AUTHORIZING THE COMMISSIONER OF INTERNAL REVENUE TO PRESCRIBE
THE PLACE FOR PAYMENT OF INTERNAL REVENUE TAXES BY LARGE TAXPAYERS,
AMENDING FOR THIS PURPOSE CERTAIN PROVISIONS OF THE NATIONAL INTERNAL
REVENUE CODE, AS AMENDED (February 24, 1993)
House Bill No. 1470, October 20, 1992
Senate Bill No. 35, November 19, 1992
4. R.A. NO. 7649
AN ACT REQUIRING THE GOVERNMENT OR ANY OF ITS POLITICAL SUBDIVISIONS,
INSTRUMENTALITIES OR AGENCIES INCLUDING GOVERNMENT-OWNED OR
CONTROLLED CORPORATIONS (GOCCS) TO DEDUCT AND WITHHOLD THE VALUE-
ADDED TAX DUE AT THE RATE OF THREE PERCENT (3%) ON GROSS PAYMENT FOR
THE PURCHASE OF GOODS AND SIX PERCENT (6%) ON GROSS RECEIPTS FOR
SERVICES RENDERED BY CONTRACTORS (April 6, 1993)
House Bill No. 5260, January 26, 1993
Senate Bill No. 1141, March 30, 1993
5. R.A. NO. 7656
AN ACT REQUIRING GOVERNMENT-OWNED OR CONTROLLED CORPORATIONS TO
DECLARE DIVIDENDS UNDER CERTAIN CONDITIONS TO THE NATIONAL
GOVERNMENT, AND FOR OTHER PURPOSES (November 9, 1993)
House Bill No. 11024, November 3, 1993
Senate Bill No. 1168, November 3, 1993
6. R.A. NO. 7660
AN ACT RATIONALIZING FURTHER THE STRUCTURE AND ADMINISTRATION OF THE
DOCUMENTARY STAMP TAX, AMENDING FOR THE PURPOSE CERTAIN PROVISIONS
OF THE NATIONAL INTERNAL REVENUE CODE, AS AMENDED, ALLOCATING FUNDS
FOR SPECIFIC PROGRAMS, AND FOR OTHER PURPOSES (December 23, 1993)
House Bill No. 7789, May 31, 1993
Senate Bill No. 1330, November 18, 1993
7. R.A. NO. 7717
AN ACT IMPOSING A TAX ON THE SALE, BARTER OR EXCHANGE OF SHARES OF
STOCK LISTED AND TRADED THROUGH THE LOCAL STOCK EXCHANGE OR THROUGH
INITIAL PUBLIC OFFERING, AMENDING FOR THE PURPOSE THE NATIONAL INTERNAL
REVENUE CODE, AS AMENDED, BY INSERTING A NEW SECTION AND REPEALING
CERTAIN SUBSECTIONS THEREOF (May 5, 1994)
House Bill No. 9187, November 3, 1993
Senate Bill No. 1127, March 23, 1994
Thus, the enactment of S. No. 1630 is not the only instance in which the Senate, in the exercise
of its power to propose amendments to bills required to originate in the House, passed its own
version of a House revenue measure. It is noteworthy that, in the particular case of S. No. 1630,
petitioners Tolentino and Roco, as members of the Senate, voted to approve it on second and
third readings.
On the other hand, amendment by substitution, in the manner urged by petitioner Tolentino,
concerns a mere matter of form. Petitioner has not shown what substantial difference it would
make if, as the Senate actually did in this case, a separate bill like S. No. 1630 is instead
enacted as a substitute measure, "taking into Consideration . . . H.B. 11197."
Indeed, so far as pertinent, the Rules of the Senate only provide:
RULE XXIX
AMENDMENTS
xxx xxx xxx
68. Not more than one amendment to the original amendment shall be considered.
No amendment by substitution shall be entertained unless the text thereof is submitted in
writing.
Any of said amendments may be withdrawn before a vote is taken thereon.
69. No amendment which seeks the inclusion of a legislative provision foreign to the subject
matter of a bill (rider) shall be entertained.
xxx xxx xxx
70-A. A bill or resolution shall not be amended by substituting it with another which covers a
subject distinct from that proposed in the original bill or resolution. (emphasis added).
Nor is there merit in petitioners' contention that, with regard to revenue bills, the Philippine
Senate possesses less power than the U.S. Senate because of textual differences between
constitutional provisions giving them the power to propose or concur with amendments.
Art. I, 7, cl. 1 of the U.S. Constitution reads:
All Bills for raising Revenue shall originate in the House of Representatives; but the Senate
may propose or concur with amendments as on other Bills.
Art. VI, 24 of our Constitution reads:
All appropriation, revenue or tariff bills, bills authorizing increase of the public debt, bills of local
application, and private bills shall originate exclusively in the House of Representatives, but the
Senate may propose or concur with amendments.
The addition of the word "exclusively" in the Philippine Constitution and the decision to drop
the phrase "as on other Bills" in the American version, according to petitioners, shows the
intention of the framers of our Constitution to restrict the Senate's power to propose
amendments to revenue bills. Petitioner Tolentino contends that the word "exclusively" was
inserted to modify "originate" and "the words 'as in any other bills' (sic) were eliminated so as
to show that these bills were not to be like other bills but must be treated as a special kind."
The history of this provision does not support this contention. The supposed indicia of
constitutional intent are nothing but the relics of an unsuccessful attempt to limit the power of
the Senate. It will be recalled that the 1935 Constitution originally provided for a unicameral
71
National Assembly. When it was decided in 1939 to change to a bicameral legislature, it
became necessary to provide for the procedure for lawmaking by the Senate and the House of
Representatives. The work of proposing amendments to the Constitution was done by the
National Assembly, acting as a constituent assembly, some of whose members, jealous of
preserving the Assembly's lawmaking powers, sought to curtail the powers of the proposed
Senate. Accordingly they proposed the following provision:
All bills appropriating public funds, revenue or tariff bills, bills of local application, and private
bills shall originate exclusively in the Assembly, but the Senate may propose or concur with
amendments. In case of disapproval by the Senate of any such bills, the Assembly may repass
the same by a two-thirds vote of all its members, and thereupon, the bill so repassed shall be
deemed enacted and may be submitted to the President for corresponding action. In the event
that the Senate should fail to finally act on any such bills, the Assembly may, after thirty days
from the opening of the next regular session of the same legislative term, reapprove the same
with a vote of two-thirds of all the members of the Assembly. And upon such reapproval, the
bill shall be deemed enacted and may be submitted to the President for corresponding action.
The special committee on the revision of laws of the Second National Assembly vetoed the
proposal. It deleted everything after the first sentence. As rewritten, the proposal was approved
by the National Assembly and embodied in Resolution No. 38, as amended by Resolution No.
73. (J. ARUEGO, KNOW YOUR CONSTITUTION 65-66 (1950)). The proposed amendment
was submitted to the people and ratified by them in the elections held on June 18, 1940.
This is the history of Art. VI, 18 (2) of the 1935 Constitution, from which Art. VI, 24 of the
present Constitution was derived. It explains why the word "exclusively" was added to the
American text from which the framers of the Philippine Constitution borrowed and why the
phrase "as on other Bills" was not copied. Considering the defeat of the proposal, the power of
the Senate to propose amendments must be understood to be full, plenary and complete "as
on other Bills." Thus, because revenue bills are required to originate exclusively in the House
of Representatives, the Senate cannot enact revenue measures of its own without such bills.
After a revenue bill is passed and sent over to it by the House, however, the Senate certainly
can pass its own version on the same subject matter. This follows from the coequality of the
two chambers of Congress.
That this is also the understanding of book authors of the scope of the Senate's power to concur
is clear from the following commentaries:
The power of the Senate to propose or concur with amendments is apparently without
restriction. It would seem that by virtue of this power, the Senate can practically re-write a bill
required to come from the House and leave only a trace of the original bill. For example, a
general revenue bill passed by the lower house of the United States Congress contained
provisions for the imposition of an inheritance tax . This was changed by the Senate into a
corporation tax. The amending authority of the Senate was declared by the United States
Supreme Court to be sufficiently broad to enable it to make the alteration. [Flint v. Stone Tracy
Company, 220 U.S. 107, 55 L. ed. 389].
(L. TAADA AND F. CARREON, POLITICAL LAW OF THE PHILIPPINES 247 (1961))
The above-mentioned bills are supposed to be initiated by the House of Representatives
because it is more numerous in membership and therefore also more representative of the
people. Moreover, its members are presumed to be more familiar with the needs of the country
in regard to the enactment of the legislation involved.
The Senate is, however, allowed much leeway in the exercise of its power to propose or concur
with amendments to the bills initiated by the House of Representatives. Thus, in one case, a
bill introduced in the U.S. House of Representatives was changed by the Senate to make a
proposed inheritance tax a corporation tax. It is also accepted practice for the Senate to
introduce what is known as an amendment by substitution, which may entirely replace the bill
initiated in the House of Representatives.
(I. CRUZ, PHILIPPINE POLITICAL LAW 144-145 (1993)).
In sum, while Art. VI, 24 provides that all appropriation, revenue or tariff bills, bills authorizing
increase of the public debt, bills of local application, and private bills must "originate exclusively
in the House of Representatives," it also adds, "but the Senate may propose or concur with
amendments." In the exercise of this power, the Senate may propose an entirely new bill as a
substitute measure. As petitioner Tolentino states in a high school text, a committee to which
a bill is referred may do any of the following:
(1) to endorse the bill without changes; (2) to make changes in the bill omitting or adding
sections or altering its language; (3) to make and endorse an entirely new bill as a substitute,
in which case it will be known as a committee bill; or (4) to make no report at all.
(A. TOLENTINO, THE GOVERNMENT OF THE PHILIPPINES 258 (1950))
To except from this procedure the amendment of bills which are required to originate in the
House by prescribing that the number of the House bill and its other parts up to the enacting
clause must be preserved although the text of the Senate amendment may be incorporated in
place of the original body of the bill is to insist on a mere technicality. At any rate there is no
rule prescribing this form. S. No. 1630, as a substitute measure, is therefore as much an
amendment of H. No. 11197 as any which the Senate could have made.
II. S. No. 1630 a mere amendment of H. No. 11197. Petitioners' basic error is that they assume
that S. No. 1630 is an independent and distinct bill. Hence their repeated references to its
certification that it was passed by the Senate "in substitution of S.B. No. 1129, taking into
consideration P.S. Res. No. 734 and H.B. No. 11197," implying that there is something
substantially different between the reference to S. No. 1129 and the reference to H. No. 11197.
From this premise, they conclude that R.A. No. 7716 originated both in the House and in the
Senate and that it is the product of two "half-baked bills because neither H. No. 11197 nor S.
No. 1630 was passed by both houses of Congress."
In point of fact, in several instances the provisions of S. No. 1630, clearly appear to be mere
amendments of the corresponding provisions of H. No. 11197. The very tabular comparison of
the provisions of H. No. 11197 and S. No. 1630 attached as Supplement A to the basic petition
of petitioner Tolentino, while showing differences between the two bills, at the same time
indicates that the provisions of the Senate bill were precisely intended to be amendments to
the House bill.
72
Without H. No. 11197, the Senate could not have enacted S. No. 1630. Because the Senate
bill was a mere amendment of the House bill, H. No. 11197 in its original form did not have to
pass the Senate on second and three readings. It was enough that after it was passed on first
reading it was referred to the Senate Committee on Ways and Means. Neither was it required
that S. No. 1630 be passed by the House of Representatives before the two bills could be
referred to the Conference Committee.
There is legislative precedent for what was done in the case of H. No. 11197 and S. No. 1630.
When the House bill and Senate bill, which became R.A. No. 1405 (Act prohibiting the
disclosure of bank deposits), were referred to a conference committee, the question was raised
whether the two bills could be the subject of such conference, considering that the bill from one
house had not been passed by the other and vice versa. As Congressman Duran put the
question:
MR. DURAN. Therefore, I raise this question of order as to procedure: If a House bill is passed
by the House but not passed by the Senate, and a Senate bill of a similar nature is passed in
the Senate but never passed in the House, can the two bills be the subject of a conference,
and can a law be enacted from these two bills? I understand that the Senate bill in this particular
instance does not refer to investments in government securities, whereas the bill in the House,
which was introduced by the Speaker, covers two subject matters: not only investigation of
deposits in banks but also investigation of investments in government securities. Now, since
the two bills differ in their subject matter, I believe that no law can be enacted.
Ruling on the point of order raised, the chair (Speaker Jose B. Laurel, Jr.) said:
THE SPEAKER. The report of the conference committee is in order. It is precisely in cases like
this where a conference should be had. If the House bill had been approved by the Senate,
there would have been no need of a conference; but precisely because the Senate passed
another bill on the same subject matter, the conference committee had to be created, and we
are now considering the report of that committee.
(2 CONG. REC. NO. 13, July 27, 1955, pp. 3841-42 (emphasis added))
III. The President's certification. The fallacy in thinking that H. No. 11197 and S. No. 1630 are
distinct and unrelated measures also accounts for the petitioners' (Kilosbayan's and PAL's)
contention that because the President separately certified to the need for the immediate
enactment of these measures, his certification was ineffectual and void. The certification had
to be made of the version of the same revenue bill which at the momentwas being considered.
Otherwise, to follow petitioners' theory, it would be necessary for the President to certify as
many bills as are presented in a house of Congress even though the bills are merely versions
of the bill he has already certified. It is enough that he certifies the bill which, at the time he
makes the certification, is under consideration. Since on March 22, 1994 the Senate was
considering S. No. 1630, it was that bill which had to be certified. For that matter on June 1,
1993 the President had earlier certified H. No. 9210 for immediate enactment because it was
the one which at that time was being considered by the House. This bill was later substituted,
together with other bills, by H. No. 11197.
As to what Presidential certification can accomplish, we have already explained in the main
decision that the phrase "except when the President certifies to the necessity of its immediate
enactment, etc." in Art. VI, 26 (2) qualifies not only the requirement that "printed copies [of a
bill] in its final form [must be] distributed to the members three days before its passage" but
also the requirement that before a bill can become a law it must have passed "three readings
on separate days." There is not only textual support for such construction but historical basis
as well.
Art. VI, 21 (2) of the 1935 Constitution originally provided:
(2) No bill shall be passed by either House unless it shall have been printed and copies thereof
in its final form furnished its Members at least three calendar days prior to its passage, except
when the President shall have certified to the necessity of its immediate enactment. Upon the
last reading of a bill, no amendment thereof shall be allowed and the question upon its passage
shall be taken immediately thereafter, and the yeas and nays entered on the Journal.
When the 1973 Constitution was adopted, it was provided in Art. VIII, 19 (2):
(2) No bill shall become a law unless it has passed three readings on separate days, and
printed copies thereof in its final form have been distributed to the Members three days before
its passage, except when the Prime Minister certifies to the necessity of its immediate
enactment to meet a public calamity or emergency. Upon the last reading of a bill, no
amendment thereto shall be allowed, and the vote thereon shall be taken immediately
thereafter, and the yeas and nays entered in the Journal.
This provision of the 1973 document, with slight modification, was adopted in Art. VI, 26 (2)
of the present Constitution, thus:
(2) No bill passed by either House shall become a law unless it has passed three readings on
separate days, and printed copies thereof in its final form have been distributed to its Members
three days before its passage, except when the President certifies to the necessity of its
immediate enactment to meet a public calamity or emergency. Upon the last reading of a bill,
no amendment thereto shall be allowed, and the vote thereon shall be taken immediately
thereafter, and the yeasand nays entered in the Journal.
The exception is based on the prudential consideration that if in all cases three readings on
separate days are required and a bill has to be printed in final form before it can be passed,
the need for a law may be rendered academic by the occurrence of the very emergency or
public calamity which it is meant to address.
Petitioners further contend that a "growing budget deficit" is not an emergency, especially in a
country like the Philippines where budget deficit is a chronic condition. Even if this were the
case, an enormous budget deficit does not make the need for R.A. No. 7716 any less urgent
or the situation calling for its enactment any less an emergency.
Apparently, the members of the Senate (including some of the petitioners in these cases)
believed that there was an urgent need for consideration of S. No. 1630, because they
responded to the call of the President by voting on the bill on second and third readings on the
same day. While the judicial department is not bound by the Senate's acceptance of the
President's certification, the respect due coequal departments of the government in matters
73
committed to them by the Constitution and the absence of a clear showing of grave abuse of
discretion caution a stay of the judicial hand.
At any rate, we are satisfied that S. No. 1630 received thorough consideration in the Senate
where it was discussed for six days. Only its distribution in advance in its final printed form was
actually dispensed with by holding the voting on second and third readings on the same day
(March 24, 1994). Otherwise, sufficient time between the submission of the bill on February 8,
1994 on second reading and its approval on March 24, 1994 elapsed before it was finally voted
on by the Senate on third reading.
The purpose for which three readings on separate days is required is said to be two-fold: (1) to
inform the members of Congress of what they must vote on and (2) to give them notice that a
measure is progressing through the enacting process, thus enabling them and others
interested in the measure to prepare their positions with reference to it. (1 J. G. SUTHERLAND,
STATUTES AND STATUTORY CONSTRUCTION 10.04, p. 282 (1972)). These purposes
were substantially achieved in the case of R.A. No. 7716.
IV. Power of Conference Committee. It is contended (principally by Kilosbayan, Inc. and the
Movement of Attorneys for Brotherhood, Integrity and Nationalism, Inc. (MABINI)) that in
violation of the constitutional policy of full public disclosure and the people's right to know (Art.
II, 28 and Art. III, 7) the Conference Committee met for two days in executive session with
only the conferees present.
As pointed out in our main decision, even in the United States it was customary to hold such
sessions with only the conferees and their staffs in attendance and it was only in 1975 when a
new rule was adopted requiring open sessions. Unlike its American counterpart, the Philippine
Congress has not adopted a rule prescribing open hearings for conference committees.
It is nevertheless claimed that in the United States, before the adoption of the rule in 1975, at
least staff members were present. These were staff members of the Senators and
Congressmen, however, who may be presumed to be their confidential men, not stenographers
as in this case who on the last two days of the conference were excluded. There is no showing
that the conferees themselves did not take notes of their proceedings so as to give petitioner
Kilosbayan basis for claiming that even in secret diplomatic negotiations involving state
interests, conferees keep notes of their meetings. Above all, the public's right to know was fully
served because the Conference Committee in this case submitted a report showing the
changes made on the differing versions of the House and the Senate.
Petitioners cite the rules of both houses which provide that conference committee reports must
contain "a detailed, sufficiently explicit statement of the changes in or other amendments."
These changes are shown in the bill attached to the Conference Committee Report. The
members of both houses could thus ascertain what changes had been made in the original bills
without the need of a statement detailing the changes.
The same question now presented was raised when the bill which became R.A. No. 1400 (Land
Reform Act of 1955) was reported by the Conference Committee. Congressman Bengzon
raised a point of order. He said:
MR. BENGZON. My point of order is that it is out of order to consider the report of the
conference committee regarding House Bill No. 2557 by reason of the provision of Section 11,
Article XII, of the Rules of this House which provides specifically that the conference report
must be accompanied by a detailed statement of the effects of the amendment on the bill of
the House. This conference committee report is not accompanied by that detailed statement,
Mr. Speaker. Therefore it is out of order to consider it.
Petitioner Tolentino, then the Majority Floor Leader, answered:
MR. TOLENTINO. Mr. Speaker, I should just like to say a few words in connection with the
point of order raised by the gentleman from Pangasinan.
There is no question about the provision of the Rule cited by the gentleman from Pangasinan,
butthis provision applies to those cases where only portions of the bill have been amended. In
this case before us an entire bill is presented; therefore, it can be easily seen from the reading
of the bill what the provisions are. Besides, this procedure has been an established practice.
After some interruption, he continued:
MR. TOLENTINO. As I was saying, Mr. Speaker, we have to look into the reason for the
provisions of the Rules, and the reason for the requirement in the provision cited by the
gentleman from Pangasinan is when there are only certain words or phrases inserted in or
deleted from the provisions of the bill included in the conference report, and we cannot
understand what those words and phrases mean and their relation to the bill. In that case, it is
necessary to make a detailed statement on how those words and phrases will affect the bill as
a whole; but when the entire bill itself is copied verbatim in the conference report, that is not
necessary. So when the reason for the Rule does not exist, the Rule does not exist.
(2 CONG. REC. NO. 2, p. 4056. (emphasis added))
Congressman Tolentino was sustained by the chair. The record shows that when the ruling
was appealed, it was upheld by viva voce and when a division of the House was called, it was
sustained by a vote of 48 to 5. (Id.,
p. 4058)
Nor is there any doubt about the power of a conference committee to insert new provisions as
long as these are germane to the subject of the conference. As this Court held in Philippine
Judges Association v. Prado, 227 SCRA 703 (1993), in an opinion written by then Justice Cruz,
the jurisdiction of the conference committee is not limited to resolving differences between the
Senate and the House. It may propose an entirely new provision. What is important is that its
report is subsequently approved by the respective houses of Congress. This Court ruled that it
would not entertain allegations that, because new provisions had been added by the
conference committee, there was thereby a violation of the constitutional injunction that "upon
the last reading of a bill, no amendment thereto shall be allowed."
Applying these principles, we shall decline to look into the petitioners' charges that an
amendment was made upon the last reading of the bill that eventually became R.A. No. 7354
and that copiesthereof in its final form were not distributed among the members of each House.
Both the enrolled bill and the legislative journals certify that the measure was duly enacted i.e.,
in accordance with Article VI, Sec. 26 (2) of the Constitution. We are bound by such official
74
assurances from a coordinate department of the government, to which we owe, at the very
least, a becoming courtesy.
(Id. at 710. (emphasis added))
It is interesting to note the following description of conference committees in the Philippines in
a 1979 study:
Conference committees may be of two types: free or instructed. These committees may be
given instructions by their parent bodies or they may be left without instructions. Normally the
conference committees are without instructions, and this is why they are often critically referred
to as "the little legislatures." Once bills have been sent to them, the conferees have almost
unlimited authority to change the clauses of the bills and in fact sometimes introduce new
measures that were not in the original legislation. No minutes are kept, and members' activities
on conference committees are difficult to determine. One congressman known for his idealism
put it this way: "I killed a bill on export incentives for my interest group [copra] in the conference
committee but I could not have done so anywhere else." The conference committee submits a
report to both houses, and usually it is accepted. If the report is not accepted, then the
committee is discharged and new members are appointed.
(R. Jackson, Committees in the Philippine Congress, in COMMITTEES AND LEGISLATURES:
A COMPARATIVE ANALYSIS 163 (J. D. LEES AND M. SHAW, eds.)).
In citing this study, we pass no judgment on the methods of conference committees. We cite it
only to say that conference committees here are no different from their counterparts in the
United States whose vast powers we noted in Philippine Judges Association v. Prado, supra.
At all events, under Art. VI, 16(3) each house has the power "to determine the rules of its
proceedings," including those of its committees. Any meaningful change in the method and
procedures of Congress or its committees must therefore be sought in that body itself.
V. The titles of S. No. 1630 and H. No. 11197. PAL maintains that R.A. No. 7716 violates Art.
VI, 26 (1) of the Constitution which provides that "Every bill passed by Congress shall embrace
only one subject which shall be expressed in the title thereof." PAL contends that the
amendment of its franchise by the withdrawal of its exemption from the VAT is not expressed
in the title of the law.
Pursuant to 13 of P.D. No. 1590, PAL pays a franchise tax of 2% on its gross revenue "in lieu
of all other taxes, duties, royalties, registration, license and other fees and charges of any kind,
nature, or description, imposed, levied, established, assessed or collected by any municipal,
city, provincial or national authority or government agency, now or in the future."
PAL was exempted from the payment of the VAT along with other entities by 103 of the
National Internal Revenue Code, which provides as follows:
103. Exempt transactions. The following shall be exempt from the value-added tax:
xxx xxx xxx
(q) Transactions which are exempt under special laws or international agreements to which the
Philippines is a signatory.
R.A. No. 7716 seeks to withdraw certain exemptions, including that granted to PAL, by
amending 103, as follows:
103. Exempt transactions. The following shall be exempt from the value-added tax:
xxx xxx xxx
(q) Transactions which are exempt under special laws, except those granted under Presidential
Decree Nos. 66, 529, 972, 1491, 1590. . . .
The amendment of 103 is expressed in the title of R.A. No. 7716 which reads:
AN ACT RESTRUCTURING THE VALUE-ADDED TAX (VAT) SYSTEM, WIDENING ITS TAX
BASE AND ENHANCING ITS ADMINISTRATION, AND FOR THESE PURPOSES
AMENDING AND REPEALING THE RELEVANT PROVISIONS OF THE NATIONAL
INTERNAL REVENUE CODE, AS AMENDED, AND FOR OTHER PURPOSES.
By stating that R.A. No. 7716 seeks to "[RESTRUCTURE] THE VALUE-ADDED TAX (VAT)
SYSTEM [BY] WIDENING ITS TAX BASE AND ENHANCING ITS ADMINISTRATION, AND
FOR THESE PURPOSES AMENDING AND REPEALING THE RELEVANT PROVISIONS OF
THE NATIONAL INTERNAL REVENUE CODE, AS AMENDED AND FOR OTHER
PURPOSES," Congress thereby clearly expresses its intention to amend any provision of the
NIRC which stands in the way of accomplishing the purpose of the law.
PAL asserts that the amendment of its franchise must be reflected in the title of the law by
specific reference to P.D. No. 1590. It is unnecessary to do this in order to comply with the
constitutional requirement, since it is already stated in the title that the law seeks to amend the
pertinent provisions of the NIRC, among which is 103(q), in order to widen the base of the
VAT. Actually, it is the bill which becomes a law that is required to express in its title the subject
of legislation. The titles of H. No. 11197 and S. No. 1630 in fact specifically referred to 103 of
the NIRC as among the provisions sought to be amended. We are satisfied that sufficient notice
had been given of the pendency of these bills in Congress before they were enacted into what
is now
No. 7716.
In Philippine Judges Association v. Prado, supra, a similar argument as that now made by PAL
was rejected. R.A. No. 7354 is entitled AN ACT CREATING THE PHILIPPINE POSTAL
CORPORATION, DEFINING ITS POWERS, FUNCTIONS AND RESPONSIBILITIES,
PROVIDING FOR REGULATION OF THE INDUSTRY AND FOR OTHER PURPOSES
CONNECTED THEREWITH. It contained a provision repealing all franking privileges. It was
contended that the withdrawal of franking privileges was not expressed in the title of the law.
In holding that there was sufficient description of the subject of the law in its title, including the
repeal of franking privileges, this Court held:
To require every end and means necessary for the accomplishment of the general objectives
of the statute to be expressed in its title would not only be unreasonable but would actually
render legislation impossible. [Cooley, Constitutional Limitations, 8th Ed., p. 297] As has been
correctly explained:
The details of a legislative act need not be specifically stated in its title, but matter germane to
the subject as expressed in the title, and adopted to the accomplishment of the object in view,
may properly be included in the act. Thus, it is proper to create in the same act the machinery
by which the act is to be enforced, to prescribe the penalties for its infraction, and to remove
obstacles in the way of its execution. If such matters are properly connected with the subject
as expressed in the title, it is unnecessary that they should also have special mention in the
title. (Southern Pac. Co. v. Bartine, 170 Fed. 725)
(227 SCRA at 707-708)
VI. Claims of press freedom and religious liberty. We have held that, as a general proposition,
the press is not exempt from the taxing power of the State and that what the constitutional
guarantee of free press prohibits are laws which single out the press or target a group belonging
to the press for special treatment or which in any way discriminate against the press on the
basis of the content of the publication, and R.A. No. 7716 is none of these.
Now it is contended by the PPI that by removing the exemption of the press from the VAT while
maintaining those granted to others, the law discriminates against the press. At any rate, it is
averred, "even nondiscriminatory taxation of constitutionally guaranteed freedom is
unconstitutional."
With respect to the first contention, it would suffice to say that since the law granted the press
a privilege, the law could take back the privilege anytime without offense to the Constitution.
The reason is simple: by granting exemptions, the State does not forever waive the exercise
of its sovereign prerogative.
Indeed, in withdrawing the exemption, the law merely subjects the press to the same tax burden
to which other businesses have long ago been subject. It is thus different from the tax involved
in the cases invoked by the PPI. The license tax in Grosjean v. American Press Co., 297 U.S.
233, 80 L. Ed. 660 (1936) was found to be discriminatory because it was laid on the gross
advertising receipts only of newspapers whose weekly circulation was over 20,000, with the
result that the tax applied only to 13 out of 124 publishers in Louisiana. These large papers
were critical of Senator Huey Long who controlled the state legislature which enacted the
R.A.
license tax. The censorial motivation for the law was thus evident.
On the other hand, in Minneapolis Star & Tribune Co. v. Minnesota Comm'r of Revenue, 460
U.S. 575, 75 L. Ed. 2d 295 (1983), the tax was found to be discriminatory because although it
could have been made liable for the sales tax or, in lieu thereof, for the use tax on the privilege
of using, storing or consuming tangible goods, the press was not. Instead, the press was
exempted from both taxes. It was, however, later made to pay a specialuse tax on the cost of
paper and ink which made these items "the only items subject to the use tax that were
component of goods to be sold at retail." The U.S. Supreme Court held that the differential
treatment of the press "suggests that the goal of regulation is not related to suppression of
expression, and such goal is presumptively unconstitutional." It would therefore appear that
even a law that favors the press is constitutionally suspect. (See the dissent of Rehnquist, J. in
that case)
Nor is it true that only two exemptions previously granted by E.O. No. 273 are withdrawn
"absolutely and unqualifiedly" by R.A. No. 7716. Other exemptions from the VAT, such as those
previously granted to PAL, petroleum concessionaires, enterprises registered with the Export
75
Processing Zone Authority, and many more are likewise totally withdrawn, in addition to
exemptions which are partially withdrawn, in an effort to broaden the base of the tax.
The PPI says that the discriminatory treatment of the press is highlighted by the fact that
transactions, which are profit oriented, continue to enjoy exemption under R.A. No. 7716. An
enumeration of some of these transactions will suffice to show that by and large this is not so
and that the exemptions are granted for a purpose. As the Solicitor General says, such
exemptions are granted, in some cases, to encourage agricultural production and, in other
cases, for the personal benefit of the end-user rather than for profit. The exempt transactions
are:
(a) Goods for consumption or use which are in their original state (agricultural, marine and
forest products, cotton seeds in their original state, fertilizers, seeds, seedlings, fingerlings, fish,
prawn livestock and poultry feeds) and goods or services to enhance agriculture (milling of
palay, corn, sugar cane and raw sugar, livestock, poultry feeds, fertilizer, ingredients used for
the manufacture of feeds).
(b) Goods used for personal consumption or use (household and personal effects of citizens
returning to the Philippines) or for professional use, like professional instruments and
implements, by persons coming to the Philippines to settle here.
(c) Goods subject to excise tax such as petroleum products or to be used for manufacture of
petroleum products subject to excise tax and services subject to percentage tax.
(d) Educational services, medical, dental, hospital and veterinary services, and services
rendered under employer-employee relationship.
(e) Works of art and similar creations sold by the artist himself.
(f) Transactions exempted under special laws, or international agreements.
(g) Export-sales by persons not VAT-registered.
(h) Goods or services with gross annual sale or receipt not exceeding P500,000.00.
(Respondents' Consolidated Comment on the Motions for Reconsideration, pp. 58-60)
The PPI asserts that it does not really matter that the law does not discriminate against the
press because "even nondiscriminatory taxation on constitutionally guaranteed freedom is
unconstitutional." PPI cites in support of this assertion the following statement in Murdock
v. Pennsylvania, 319 U.S. 105, 87 L. Ed. 1292 (1943):
The fact that the ordinance is "nondiscriminatory" is immaterial. The protection afforded by the
First Amendment is not so restricted. A license tax certainly does not acquire constitutional
validity because it classifies the privileges protected by the First Amendment along with the
wares and merchandise of hucksters and peddlers and treats them all alike. Such equality in
treatment does not save the ordinance. Freedom of press, freedom of speech, freedom of
religion are in preferred position.
The Court was speaking in that case of a license tax, which, unlike an ordinary tax, is mainly
for regulation. Its imposition on the press is unconstitutional because it lays a prior restraint on
the exercise of its right. Hence, although its application to others, such those selling goods, is
valid, its application to the press or to religious groups, such as the Jehovah's Witnesses, in
76
connection with the latter's sale of religious books and pamphlets, is unconstitutional. As the
U.S. Supreme Court put it, "it is one thing to impose a tax on income or property of a preacher.
It is quite another thing to exact a tax on him for delivering a sermon."
A similar ruling was made by this Court in American Bible Society v. City of Manila, 101 Phil.
386 (1957) which invalidated a city ordinance requiring a business license fee on those
engaged in the sale of general merchandise. It was held that the tax could not be imposed on
the sale of bibles by the American Bible Society without restraining the free exercise of its right
to propagate.
The VAT is, however, different. It is not a license tax. It is not a tax on the exercise of a privilege,
much less a constitutional right. It is imposed on the sale, barter, lease or exchange of goods
or properties or the sale or exchange of services and the lease of properties purely for revenue
purposes. To subject the press to its payment is not to burden the exercise of its right any more
than to make the press pay income tax or subject it to general regulation is not to violate its
freedom under the Constitution.
Additionally, the Philippine Bible Society, Inc. claims that although it sells bibles, the proceeds
derived from the sales are used to subsidize the cost of printing copies which are given free to
those who cannot afford to pay so that to tax the sales would be to increase the price, while
reducing the volume of sale. Granting that to be the case, the resulting burden on the exercise
of religious freedom is so incidental as to make it difficult to differentiate it from any other
economic imposition that might make the right to disseminate religious doctrines costly.
Otherwise, to follow the petitioner's argument, to increase the tax on the sale of vestments
would be to lay an impermissible burden on the right of the preacher to make a sermon.
On the other hand the registration fee of P1,000.00 imposed by 107 of the NIRC, as amended
by 7 of R.A. No. 7716, although fixed in amount, is really just to pay for the expenses of
registration and enforcement of provisions such as those relating to accounting in 108 of the
NIRC. That the PBS distributes free bibles and therefore is not liable to pay the VAT does not
excuse it from the payment of this fee because it also sells some copies. At any rate whether
the PBS is liable for the VAT must be decided in concrete cases, in the event it is assessed
this tax by the Commissioner of Internal Revenue.
VII. Alleged violations of the due process, equal protection and contract clauses and the rule
on taxation. CREBA asserts that R.A. No. 7716 (1) impairs the obligations of contracts, (2)
classifies transactions as covered or exempt without reasonable basis and (3) violates the rule
that taxes should be uniform and equitable and that Congress shall "evolve a progressive
system of taxation."
With respect to the first contention, it is claimed that the application of the tax to existing
contracts of the sale of real property by installment or on deferred payment basis would result
in substantial increases in the monthly amortizations to be paid because of the 10% VAT. The
additional amount, it is pointed out, is something that the buyer did not anticipate at the time
he entered into the contract.
The short answer to this is the one given by this Court in an early case: "Authorities from
numerous sources are cited by the plaintiffs, but none of them show that a lawful tax on a new
subject, or an increased tax on an old one, interferes with a contract or impairs its obligation,
within the meaning of the Constitution. Even though such taxation may affect particular
contracts, as it may increase the debt of one person and lessen the security of another, or may
impose additional burdens upon one class and release the burdens of another, still the tax must
be paid unless prohibited by the Constitution, nor can it be said that it impairs the obligation of
any existing contract in its true legal sense." (La Insular v. Machuca Go-Tauco and Nubla Co-
Siong, 39 Phil. 567, 574 (1919)). Indeed not only existing laws but also "the reservation of the
essential attributes of sovereignty, is . . . read into contracts as a postulate of the legal order."
(Philippine-American Life Ins. Co. v. Auditor General, 22 SCRA 135, 147 (1968)) Contracts
must be understood as having been made in reference to the possible exercise of the rightful
authority of the government and no obligation of contract can extend to the defeat of that
authority. (Norman v. Baltimore and Ohio R.R., 79 L. Ed. 885 (1935)).
It is next pointed out that while 4 of R.A. No. 7716 exempts such transactions as the sale of
agricultural products, food items, petroleum, and medical and veterinary services, it grants no
exemption on the sale of real property which is equally essential. The sale of real property for
socialized and low-cost housing is exempted from the tax, but CREBA claims that real estate
transactions of "the less poor," i.e., the middle class, who are equally homeless, should likewise
be exempted.
The sale of food items, petroleum, medical and veterinary services, etc., which are essential
goods and services was already exempt under 103, pars. (b) (d) (1) of the NIRC before the
enactment of R.A. No. 7716. Petitioner is in error in claiming that R.A. No. 7716 granted
exemption to these transactions, while subjecting those of petitioner to the payment of the VAT.
Moreover, there is a difference between the "homeless poor" and the "homeless less poor" in
the example given by petitioner, because the second group or middle class can afford to rent
houses in the meantime that they cannot yet buy their own homes. The two social classes are
thus differently situated in life. "It is inherent in the power to tax that the State be free to select
the subjects of taxation, and it has been repeatedly held that 'inequalities which result from a
singling out of one particular class for taxation, or exemption infringe no constitutional
limitation.'" (Lutz v. Araneta, 98 Phil. 148, 153 (1955). Accord, City of Baguio v. De Leon, 134
Phil. 912 (1968); Sison, Jr. v. Ancheta, 130 SCRA 654, 663 (1984); Kapatiran ng mga
Naglilingkod sa Pamahalaan ng Pilipinas, Inc. v. Tan, 163 SCRA 371 (1988)).
Finally, it is contended, for the reasons already noted, that R.A. No. 7716 also violates Art. VI,
28(1) which provides that "The rule of taxation shall be uniform and equitable. The Congress
shall evolve a progressive system of taxation."
Equality and uniformity of taxation means that all taxable articles or kinds of property of the
same class be taxed at the same rate. The taxing power has the authority to make reasonable
and natural classifications for purposes of taxation. To satisfy this requirement it is enough that
the statute or ordinance applies equally to all persons, forms and corporations placed in similar
situation. (City of Baguio v. De Leon, supra; Sison, Jr. v. Ancheta, supra)
Indeed, the VAT was already provided in E.O. No. 273 long before R.A. No. 7716 was enacted.
R.A. No. 7716 merely expands the base of the tax. The validity of the original VAT Law was
questioned in Kapatiran ng Naglilingkod sa Pamahalaan ng Pilipinas, Inc. v. Tan, 163 SCRA
77
383 (1988) on grounds similar to those made in these cases, namely, that the law was
"oppressive, discriminatory, unjust and regressive in violation of Art. VI, 28(1) of the
Constitution." (At 382) Rejecting the challenge to the law, this Court held:
As the Court sees it, EO 273 satisfies all the requirements of a valid tax. It is uniform. . . .
The sales tax adopted in EO 273 is applied similarly on all goods and services sold to the
public, which are not exempt, at the constant rate of 0% or 10%.
The disputed sales tax is also equitable. It is imposed only on sales of goods or services by
persons engaged in business with an aggregate gross annual sales exceeding P200,000.00.
Small corner sari-sari stores are consequently exempt from its application. Likewise exempt
from the tax are sales of farm and marine products, so that the costs of basic food and other
necessities, spared as they are from the incidence of the VAT, are expected to be relatively
lower and within the reach of the general public.
(At 382-383)
The CREBA claims that the VAT is regressive. A similar claim is made by the Cooperative
Union of the Philippines, Inc. (CUP), while petitioner Juan T. David argues that the law
contravenes the mandate of Congress to provide for a progressive system of taxation because
the law imposes a flat rate of 10% and thus places the tax burden on all taxpayers without
regard to their ability to pay.
The Constitution does not really prohibit the imposition of indirect taxes which, like the VAT,
are regressive. What it simply provides is that Congress shall "evolve a progressive system of
taxation." The constitutional provision has been interpreted to mean simply that "direct taxes
are . . . to be preferred [and] as much as possible, indirect taxes should be minimized." (E.
FERNANDO, THE CONSTITUTION OF THE PHILIPPINES 221 (Second ed. (1977)). Indeed,
the mandate to Congress is not to prescribe, but to evolve, a progressive tax system.
Otherwise, sales taxes, which perhaps are the oldest form of indirect taxes, would have been
prohibited with the proclamation of Art. VIII, 17(1) of the 1973 Constitution from which the
present Art. VI, 28(1) was taken. Sales taxes are also regressive.
Resort to indirect taxes should be minimized but not avoided entirely because it is difficult, if
not impossible, to avoid them by imposing such taxes according to the taxpayers' ability to pay.
In the case of the VAT, the law minimizes the regressive effects of this imposition by providing
for zero rating of certain transactions (R.A. No. 7716, 3, amending 102 (b) of the NIRC),
while granting exemptions to other transactions. (R.A. No. 7716, 4, amending 103 of the
NIRC).
Thus, the following transactions involving basic and essential goods and services are
exempted from the VAT:
(a) Goods for consumption or use which are in their original state (agricultural, marine and
forest products, cotton seeds in their original state, fertilizers, seeds, seedlings, fingerlings, fish,
prawn livestock and poultry feeds) and goods or services to enhance agriculture (milling of
palay, corn sugar cane and raw sugar, livestock, poultry feeds, fertilizer, ingredients used for
the manufacture of feeds).
(b) Goods used for personal consumption or use (household and personal effects of citizens
returning to the Philippines) and or professional use, like professional instruments and
implements, by persons coming to the Philippines to settle here.
(c) Goods subject to excise tax such as petroleum products or to be used for manufacture of
petroleum products subject to excise tax and services subject to percentage tax.
(d) Educational services, medical, dental, hospital and veterinary services, and services
rendered under employer-employee relationship.
(e) Works of art and similar creations sold by the artist himself.
(f) Transactions exempted under special laws, or international agreements.
(g) Export-sales by persons not VAT-registered.
(h) Goods or services with gross annual sale or receipt not exceeding P500,000.00.
(Respondents' Consolidated Comment on the Motions for Reconsideration, pp. 58-60)
On the other hand, the transactions which are subject to the VAT are those which involve goods
and services which are used or availed of mainly by higher income groups. These include real
properties held primarily for sale to customers or for lease in the ordinary course of trade or
business, the right or privilege to use patent, copyright, and other similar property or right, the
right or privilege to use industrial, commercial or scientific equipment, motion picture films,
tapes and discs, radio, television, satellite transmission and cable television time, hotels,
restaurants and similar places, securities, lending investments, taxicabs, utility cars for rent,
tourist buses, and other common carriers, services of franchise grantees of telephone and
telegraph.
The problem with CREBA's petition is that it presents broad claims of constitutional violations
by tendering issues not at retail but at wholesale and in the abstract. There is no fully developed
record which can impart to adjudication the impact of actuality. There is no factual foundation
to show in the concrete the application of the law to actual contracts and exemplify its effect on
property rights. For the fact is that petitioner's members have not even been assessed the VAT.
Petitioner's case is not made concrete by a series of hypothetical questions asked which are
no different from those dealt with in advisory opinions.
The difficulty confronting petitioner is thus apparent. He alleges arbitrariness. A mere
allegation, as here, does not suffice. There must be a factual foundation of such
unconstitutional taint. Considering that petitioner here would condemn such a provision as void
on its face, he has not made out a case. This is merely to adhere to the authoritative doctrine
that where the due process and equal protection clauses are invoked, considering that they
are not fixed rules but rather broad standards, there is a need for proof of such persuasive
character as would lead to such a conclusion. Absent such a showing, the presumption of
validity must prevail.
(Sison, Jr. v. Ancheta, 130 SCRA at 661)
Adjudication of these broad claims must await the development of a concrete case. It may be
that postponement of adjudication would result in a multiplicity of suits. This need not be the
78
case, however. Enforcement of the law may give rise to such a case. A test case, provided it
is an actual case and not an abstract or hypothetical one, may thus be presented.
Nor is hardship to taxpayers alone an adequate justification for adjudicating abstract issues.
Otherwise, adjudication would be no different from the giving of advisory opinion that does not
really settle legal issues.
We are told that it is our duty under Art. VIII, 1, 2 to decide whenever a claim is made that
"there has been a grave abuse of discretion amounting to lack or excess of jurisdiction on the
part of any branch or instrumentality of the government." This duty can only arise if an actual
case or controversy is before us. Under Art . VIII, 5 our jurisdiction is defined in terms of
"cases" and all that Art. VIII, 1, 2 can plausibly mean is that in the exercise of
that jurisdiction we have the judicial power to determine questions of grave abuse of discretion
by any branch or instrumentality of the government.
Put in another way, what is granted in Art. VIII, 1, 2 is "judicial power," which is "the power
of a court to hear and decide cases pending between parties who have the right to sue and be
sued in the courts of law and equity" (Lamb v. Phipps, 22 Phil. 456, 559 (1912)), as
distinguished from legislative and executive power. This power cannot be directly appropriated
until it is apportioned among several courts either by the Constitution, as in the case of Art. VIII,
5, or by statute, as in the case of the Judiciary Act of 1948 (R.A. No. 296) and the Judiciary
Reorganization Act of 1980 (B.P. Blg. 129). The power thus apportioned constitutes the court's
"jurisdiction," defined as "the power conferred by law upon a court or judge to take cognizance
of a case, to the exclusion of all others." (United States v. Arceo, 6 Phil. 29 (1906)) Without an
actual case coming within its jurisdiction, this Court cannot inquire into any allegation of grave
abuse of discretion by the other departments of the government.
VIII. Alleged violation of policy towards cooperatives. On the other hand, the Cooperative Union
of the Philippines (CUP), after briefly surveying the course of legislation, argues that it was to
adopt a definite policy of granting tax exemption to cooperatives that the present Constitution
embodies provisions on cooperatives. To subject cooperatives to the VAT would therefore be
to infringe a constitutional policy. Petitioner claims that in 1973, P.D. No. 175 was promulgated
exempting cooperatives from the payment of income taxes and sales taxes but in 1984,
because of the crisis which menaced the national economy, this exemption was withdrawn by
P.D. No. 1955; that in 1986, P.D. No. 2008 again granted cooperatives exemption from income
and sales taxes until December 31, 1991, but, in the same year, E.O. No. 93 revoked the
exemption; and that finally in 1987 the framers of the Constitution "repudiated the previous
actions of the government adverse to the interests of the cooperatives, that is, the repeated
revocation of the tax exemption to cooperatives and instead upheld the policy of strengthening
the cooperatives by way of the grant of tax exemptions," by providing the following in Art. XII:
1. The goals of the national economy are a more equitable distribution of opportunities,
income, and wealth; a sustained increase in the amount of goods and services produced by
the nation for the benefit of the people; and an expanding productivity as the key to raising the
quality of life for all, especially the underprivileged.
The State shall promote industrialization and full employment based on sound agricultural
development and agrarian reform, through industries that make full and efficient use of human
and natural resources, and which are competitive in both domestic and foreign markets. electorally responsible, remembering that, as Justice Holmes has said, "legislators are the
However, the State shall protect Filipino enterprises against unfair foreign competition and ultimate guardians of the liberties and welfare of the people in quite as great a degree as are
trade practices. the courts." (Missouri, Kansas & Texas Ry. Co. v. May, 194 U.S. 267, 270, 48 L. Ed. 971, 973
In the pursuit of these goals, all sectors of the economy and all regions of the country shall be (1904)). It is not right, as petitioner in G.R. No. 115543 does in arguing that we should enforce
given optimum opportunity to develop. Private enterprises, including corporations, the public accountability of legislators, that those who took part in passing the law in question
cooperatives, and similar collective organizations, shall be encouraged to broaden the base of by voting for it in Congress should later thrust to the courts the burden of reviewing measures
their ownership. in the flush of enactment. This Court does not sit as a third branch of the legislature, much less
exercise a veto power over legislation.
15. The Congress shall create an agency to promote the viability and growth of cooperatives
as instruments for social justice and economic development. WHEREFORE, the motions for reconsideration are denied with finality and the temporary
restraining order previously issued is hereby lifted.
Petitioner's contention has no merit. In the first place, it is not true that P.D. No. 1955 singled
out cooperatives by withdrawing their exemption from income and sales taxes under P.D. No. SO ORDERED.
175, 5. What P.D. No. 1955, 1 did was to withdraw the exemptions and preferential
treatments theretofore granted to private business enterprises in general, in view of the
economic crisis which then beset the nation. It is true that after P.D. No. 2008, 2 had restored
the tax exemptions of cooperatives in 1986, the exemption was again repealed by E.O. No. 93,
1, but then again cooperatives were not the only ones whose exemptions were
withdrawn. The withdrawal of tax incentives applied to all, including government and private
entities. In the second place, the Constitution does not really require that cooperatives be
granted tax exemptions in order to promote their growth and viability. Hence, there is no basis
for petitioner's assertion that the government's policy toward cooperatives had been one of
vacillation, as far as the grant of tax privileges was concerned, and that it was to put an end to
this indecision that the constitutional provisions cited were adopted. Perhaps as a matter of
policy cooperatives should be granted tax exemptions, but that is left to the discretion of
Congress. If Congress does not grant exemption and there is no discrimination to cooperatives,
no violation of any constitutional policy can be charged.
Indeed, petitioner's theory amounts to saying that under the Constitution cooperatives are
exempt from taxation. Such theory is contrary to the Constitution under which only the following
are exempt from taxation: charitable institutions, churches and parsonages, by reason of Art.
VI, 28 (3), and non-stock, non-profit educational institutions by reason of Art. XIV, 4 (3).
CUP's further ground for seeking the invalidation of R.A. No. 7716 is that it denies cooperatives
the equal protection of the law because electric cooperatives are exempted from the VAT. The
classification between electric and other cooperatives (farmers cooperatives, producers
cooperatives, marketing cooperatives, etc.) apparently rests on a congressional determination
that there is greater need to provide cheaper electric power to as many people as possible,
especially those living in the rural areas, than there is to provide them with other necessities in
life. We cannot say that such classification is unreasonable.
We have carefully read the various arguments raised against the constitutional validity of R.A.
No. 7716. We have in fact taken the extraordinary step of enjoining its enforcement pending
resolution of these cases. We have now come to the conclusion that the law suffers from none
of the infirmities attributed to it by petitioners and that its enactment by the other branches of
the government does not constitute a grave abuse of discretion. Any question as to its
necessity, desirability or expediency must be addressed to Congress as the body which is

79
G.R. No. L-7859 December 22, 1955
WALTER LUTZ, as Judicial Administrator of the Intestate Estate of the deceased Antonio
Jayme Ledesma, plaintiff-appellant,
vs.
J. ANTONIO ARANETA, as the Collector of Internal Revenue, defendant-appellee.
Ernesto J. Gonzaga for appellant.
Office of the Solicitor General Ambrosio Padilla, First Assistant Solicitor General Guillermo E.
Torres and Solicitor Felicisimo R. Rosete for appellee.
REYES, J.B L., J.:
This case was initiated in the Court of First Instance of Negros Occidental to test the legality of
the taxes imposed by Commonwealth Act No. 567, otherwise known as the Sugar Adjustment
Act.
Promulgated in 1940, the law in question opens (section 1) with a declaration of emergency,
due to the threat to our industry by the imminent imposition of export taxes upon sugar as
provided in the Tydings-McDuffe Act, and the "eventual loss of its preferential position in the
United States market"; wherefore, the national policy was expressed "to obtain a readjustment
of the benefits derived from the sugar industry by the component elements thereof" and "to
stabilize the sugar industry so as to prepare it for the eventuality of the loss of its preferential
position in the United States market and the imposition of the export taxes."
In section 2, Commonwealth Act 567 provides for an increase of the existing tax on the
manufacture of sugar, on a graduated basis, on each picul of sugar manufactured; while section
3 levies on owners or persons in control of lands devoted to the cultivation of sugar cane and
ceded to others for a consideration, on lease or otherwise
a tax equivalent to the difference between the money value of the rental or consideration
collected and the amount representing 12 per centum of the assessed value of such land.
According to section 6 of the law
SEC. 6. All collections made under this Act shall accrue to a special fund in the Philippine
Treasury, to be known as the 'Sugar Adjustment and Stabilization Fund,' and shall be paid out
only for any or all of the following purposes or to attain any or all of the following objectives, as
may be provided by law.
First, to place the sugar industry in a position to maintain itself, despite the gradual loss of the
preferntial position of the Philippine sugar in the United States market, and ultimately to insure
its continued existence notwithstanding the loss of that market and the consequent necessity
of meeting competition in the free markets of the world;
Second, to readjust the benefits derived from the sugar industry by all of the component
elements thereof the mill, the landowner, the planter of the sugar cane, and the laborers in
the factory and in the field so that all might continue profitably to engage therein;lawphi1.net
Third, to limit the production of sugar to areas more economically suited to the production
thereof; and
80
Fourth, to afford labor employed in the industry a living wage and to improve their living and
working conditions: Provided, That the President of the Philippines may, until the adjourment
of the next regular session of the National Assembly, make the necessary disbursements from
the fund herein created (1) for the establishment and operation of sugar experiment station or
stations and the undertaking of researchers (a) to increase the recoveries of the centrifugal
sugar factories with the view of reducing manufacturing costs, (b) to produce and propagate
higher yielding varieties of sugar cane more adaptable to different district conditions in the
Philippines, (c) to lower the costs of raising sugar cane, (d) to improve the buying quality of
denatured alcohol from molasses for motor fuel, (e) to determine the possibility of utilizing the
other by-products of the industry, (f) to determine what crop or crops are suitable for rotation
and for the utilization of excess cane lands, and (g) on other problems the solution of which
would help rehabilitate and stabilize the industry, and (2) for the improvement of living and
working conditions in sugar mills and sugar plantations, authorizing him to organize the
necessary agency or agencies to take charge of the expenditure and allocation of said funds
to carry out the purpose hereinbefore enumerated, and, likewise, authorizing the disbursement
from the fund herein created of the necessary amount or amounts needed for salaries, wages,
travelling expenses, equipment, and other sundry expenses of said agency or agencies.
Plaintiff, Walter Lutz, in his capacity as Judicial Administrator of the Intestate Estate of Antonio
Jayme Ledesma, seeks to recover from the Collector of Internal Revenue the sum of
P14,666.40 paid by the estate as taxes, under section 3 of the Act, for the crop years 1948-
1949 and 1949-1950; alleging that such tax is unconstitutional and void, being levied for the
aid and support of the sugar industry exclusively, which in plaintiff's opinion is not a public
purpose for which a tax may be constitutioally levied. The action having been dismissed by the
Court of First Instance, the plaintifs appealed the case directly to this Court (Judiciary Act,
section 17).
The basic defect in the plaintiff's position is his assumption that the tax provided for in
Commonwealth Act No. 567 is a pure exercise of the taxing power. Analysis of the Act, and
particularly of section 6 (heretofore quoted in full), will show that the tax is levied with a
regulatory purpose, to provide means for the rehabilitation and stabilization of the threatened
sugar industry. In other words, the act is primarily an exercise of the police power.
This Court can take judicial notice of the fact that sugar production is one of the great industries
of our nation, sugar occupying a leading position among its export products; that it gives
employment to thousands of laborers in fields and factories; that it is a great source of the
state's wealth, is one of the important sources of foreign exchange needed by our government,
and is thus pivotal in the plans of a regime committed to a policy of currency stability. Its
promotion, protection and advancement, therefore redounds greatly to the general welfare.
Hence it was competent for the legislature to find that the general welfare demanded that the
sugar industry should be stabilized in turn; and in the wide field of its police power, the
lawmaking body could provide that the distribution of benefits therefrom be readjusted among
its components to enable it to resist the added strain of the increase in taxes that it had to
sustain (Sligh vs. Kirkwood, 237 U. S. 52, 59 L. Ed. 835; Johnson vs. State ex rel. Marey, 99
Fla. 1311, 128 So. 853; Maxcy Inc. vs. Mayo, 103 Fla. 552, 139 So. 121).
As stated in Johnson vs. State ex rel. Marey, with reference to the citrus industry in Florida
The protection of a large industry constituting one of the great sources of the state's wealth and
therefore directly or indirectly affecting the welfare of so great a portion of the population of the
State is affected to such an extent by public interests as to be within the police power of the
sovereign. (128 Sp. 857).
Once it is conceded, as it must, that the protection and promotion of the sugar industry is a
matter of public concern, it follows that the Legislature may determine within reasonable
bounds what is necessary for its protection and expedient for its promotion. Here, the legislative
discretion must be allowed fully play, subject only to the test of reasonableness; and it is not
contended that the means provided in section 6 of the law (above quoted) bear no relation to
the objective pursued or are oppressive in character. If objective and methods are alike
constitutionally valid, no reason is seen why the state may not levy taxes to raise funds for their
prosecution and attainment. Taxation may be made the implement of the state's police power
(Great Atl. & Pac. Tea Co. vs. Grosjean, 301 U. S. 412, 81 L. Ed. 1193; U. S. vs. Butler, 297
U. S. 1, 80 L. Ed. 477; M'Culloch vs. Maryland, 4 Wheat. 316, 4 L. Ed. 579).
That the tax to be levied should burden the sugar producers themselves can hardly be a ground
of complaint; indeed, it appears rational that the tax be obtained precisely from those who are
to be benefited from the expenditure of the funds derived from it. At any rate, it is inherent in
the power to tax that a state be free to select the subjects of taxation, and it has been repeatedly
held that "inequalities which result from a singling out of one particular class for taxation, or
exemption infringe no constitutional limitation" (Carmichael vs. Southern Coal & Coke Co., 301
U. S. 495, 81 L. Ed. 1245, citing numerous authorities, at p. 1251).
From the point of view we have taken it appears of no moment that the funds raised under the
Sugar Stabilization Act, now in question, should be exclusively spent in aid of the sugar
industry, since it is that very enterprise that is being protected. It may be that other industries
are also in need of similar protection; that the legislature is not required by the Constitution to
adhere to a policy of "all or none." As ruled in Minnesota ex rel. Pearson vs. Probate Court,
309 U. S. 270, 84 L. Ed. 744, "if the law presumably hits the evil where it is most felt, it is not
to be overthrown because there are other instances to which it might have been applied;" and
that "the legislative authority, exerted within its proper field, need not embrace all the evils
within its reach" (N. L. R. B. vs. Jones & Laughlin Steel Corp. 301 U. S. 1, 81 L. Ed. 893).
Even from the standpoint that the Act is a pure tax measure, it cannot be said that the devotion
of tax money to experimental stations to seek increase of efficiency in sugar production,
utilization of by-products and solution of allied problems, as well as to the improvements of
living and working conditions in sugar mills or plantations, without any part of such money being
channeled directly to private persons, constitutes expenditure of tax money for private
purposes, (compare Everson vs. Board of Education, 91 L. Ed. 472, 168 ALR 1392, 1400).
The decision appealed from is affirmed, with costs against appellant. So ordered.
Paras, C. J., Bengzon, Padilla, Reyes, A., Jugo, Bautista Angelo, Labrador, and Concepcion,
JJ., concur.

81
G.R. No. L-23645 October 29, 1968
BENJAMIN P. GOMEZ, petitioner-appellee,
vs.
ENRICO PALOMAR, in his capacity as Postmaster General, HON. BRIGIDO R.
VALENCIA, in his capacity as Secretary of Public Works and Communications, and
DOMINGO GOPEZ, in his capacity as Acting Postmaster of San Fernando,
Pampanga, respondent-appellants.
Lorenzo P. Navarro and Narvaro Belar S. Navarro for petitioner-appellee.
Office of the Solicitor General Arturo A. Alafriz, Assistant Solicitor General Frine C. Zaballero
and Solicitor Dominador L. Quiroz for respondents-appellants.
CASTRO, J.:
This appeal puts in issue the constitutionality of Republic Act 1635, 1 as amended by Republic
Act 2631,2 which provides as follows:
To help raise funds for the Philippine Tuberculosis Society, the Director of Posts shall order for
the period from August nineteen to September thirty every year the printing and issue of semi-
postal stamps of different denominations with face value showing the regular postage charge
plus the additional amount of five centavos for the said purpose, and during the said period, no
mail matter shall be accepted in the mails unless it bears such semi-postal stamps: Provided,
That no such additional charge of five centavos shall be imposed on newspapers. The
additional proceeds realized from the sale of the semi-postal stamps shall constitute a special
fund and be deposited with the National Treasury to be expended by the Philippine
Tuberculosis Society in carrying out its noble work to prevent and eradicate tuberculosis.
The respondent Postmaster General, in implementation of the law, thereafter issued four (4)
administrative orders numbered 3 (June 20, 1958), 7 (August 9, 1958), 9 (August 28, 1958),
and 10 (July 15, 1960). All these administrative orders were issued with the approval of the
respondent Secretary of Public Works and Communications.
The pertinent portions of Adm. Order 3 read as follows:
Such semi-postal stamps could not be made available during the period from August 19 to
September 30, 1957, for lack of time. However, two denominations of such stamps, one at "5
+ 5" centavos and another at "10 + 5" centavos, will soon be released for use by the public on
their mails to be posted during the same period starting with the year 1958.
xxx xxx xxx
During the period from August 19 to September 30 each year starting in 1958, no mail matter
of whatever class, and whether domestic or foreign, posted at any Philippine Post Office and
addressed for delivery in this country or abroad, shall be accepted for mailing unless it bears
at least one such semi-postal stamp showing the additional value of five centavos intended for
the Philippine Tuberculosis Society.
In the case of second-class mails and mails prepaid by means of mail permits or impressions
of postage meters, each piece of such mail shall bear at least one such semi-postal stamp if
posted during the period above stated starting with the year 1958, in addition to being charged
82
the usual postage prescribed by existing regulations. In the case of business reply envelopes
and cards mailed during said period, such stamp should be collected from the addressees at
the time of delivery. Mails entitled to franking privilege like those from the office of the President,
members of Congress, and other offices to which such privilege has been granted, shall each
also bear one such semi-postal stamp if posted during the said period.
Mails posted during the said period starting in 1958, which are found in street or post-office
mail boxes without the required semi-postal stamp, shall be returned to the sender, if known,
with a notation calling for the affixing of such stamp. If the sender is unknown, the mail matter
shall be treated as nonmailable and forwarded to the Dead Letter Office for proper disposition.
Adm. Order 7, amending the fifth paragraph of Adm. Order 3, reads as follows:
In the case of the following categories of mail matter and mails entitled to franking privilege
which are not exempted from the payment of the five centavos intended for the Philippine
Tuberculosis Society, such extra charge may be collected in cash, for which official receipt
(General Form No. 13, A) shall be issued, instead of affixing the semi-postal stamp in the
manner hereinafter indicated:
1. Second-class mail. Aside from the postage at the second-class rate, the extra charge of
five centavos for the Philippine Tuberculosis Society shall be collected on each separately-
addressed piece of second-class mail matter, and the total sum thus collected shall be entered
in the same official receipt to be issued for the postage at the second-class rate. In making
such entry, the total number of pieces of second-class mail posted shall be stated, thus: "Total
charge for TB Fund on 100 pieces . .. P5.00." The extra charge shall be entered separate from
the postage in both of the official receipt and the Record of Collections.
2. First-class and third-class mail permits. Mails to be posted without postage affixed under
permits issued by this Bureau shall each be charged the usual postage, in addition to the five-
centavo extra charge intended for said society. The total extra charge thus received shall be
entered in the same official receipt to be issued for the postage collected, as in subparagraph
1.
3. Metered mail. For each piece of mail matter impressed by postage meter under metered
mail permit issued by this Bureau, the extra charge of five centavos for said society shall be
collected in cash and an official receipt issued for the total sum thus received, in the manner
indicated in subparagraph 1.
4. Business reply cards and envelopes. Upon delivery of business reply cards and envelopes
to holders of business reply permits, the five-centavo charge intended for said society shall be
collected in cash on each reply card or envelope delivered, in addition to the required postage
which may also be paid in cash. An official receipt shall be issued for the total postage and total
extra charge received, in the manner shown in subparagraph 1.
5. Mails entitled to franking privilege. Government agencies, officials, and other persons
entitled to the franking privilege under existing laws may pay in cash such extra charge
intended for said society, instead of affixing the semi-postal stamps to their mails, provided that
such mails are presented at the post-office window, where the five-centavo extra charge for
said society shall be collected on each piece of such mail matter. In such case, an official
receipt shall be issued for the total sum thus collected, in the manner stated in subparagraph
1.
Mail under permits, metered mails and franked mails not presented at the post-office window
shall be affixed with the necessary semi-postal stamps. If found in mail boxes without such
stamps, they shall be treated in the same way as herein provided for other mails.
Adm. Order 9, amending Adm. Order 3, as amended, exempts "Government and its Agencies
and Instrumentalities Performing Governmental Functions." Adm. Order 10, amending Adm.
Order 3, as amended, exempts "copies of periodical publications received for mailing under
any class of mail matter, including newspapers and magazines admitted as second-class mail."
The FACTS. On September l5, 1963 the petitioner Benjamin P. Gomez mailed a letter at the
post office in San Fernando, Pampanga. Because this letter, addressed to a certain Agustin
Aquino of 1014 Dagohoy Street, Singalong, Manila did not bear the special anti-TB stamp
required by the statute, it was returned to the petitioner.
In view of this development, the petitioner brough suit for declaratory relief in the Court of First
Instance of Pampanga, to test the constitutionality of the statute, as well as the implementing
administrative orders issued, contending that it violates the equal protection clause of the
Constitution as well as the rule of uniformity and equality of taxation. The lower court declared
the statute and the orders unconstitutional; hence this appeal by the respondent postal
authorities.
For the reasons set out in this opinion, the judgment appealed from must be reversed.
I.
Before reaching the merits, we deem it necessary to dispose of the respondents' contention
that declaratory relief is unavailing because this suit was filed after the petitioner had committed
a breach of the statute. While conceding that the mailing by the petitioner of a letter without the
additional anti-TB stamp was a violation of Republic Act 1635, as amended, the trial court
nevertheless refused to dismiss the action on the ground that under section 6 of Rule 64 of the
Rules of Court, "If before the final termination of the case a breach or violation of ... a statute
... should take place, the action may thereupon be converted into an ordinary action."
The prime specification of an action for declaratory relief is that it must be brought "before
breach or violation" of the statute has been committed. Rule 64, section 1 so provides. Section
6 of the same rule, which allows the court to treat an action for declaratory relief as an ordinary
action, applies only if the breach or violation occurs after the filing of the action but before the
termination thereof.3
Hence, if, as the trial court itself admitted, there had been a breach of the statute before the
firing of this action, then indeed the remedy of declaratory relief cannot be availed of, much
less can the suit be converted into an ordinary action.
Nor is there merit in the petitioner's argument that the mailing of the letter in question did not
constitute a breach of the statute because the statute appears to be addressed only to postal
authorities. The statute, it is true, in terms provides that "no mail matter shall be accepted in
the mails unless it bears such semi-postal stamps." It does not follow, however, that only postal
authorities can be guilty of violating it by accepting mails without the payment of the anti-TB
83
stamp. It is obvious that they can be guilty of violating the statute only if there are people who
use the mails without paying for the additional anti-TB stamp. Just as in bribery the mere offer
constitutes a breach of the law, so in the matter of the anti-TB stamp the mere attempt to use
the mails without the stamp constitutes a violation of the statute. It is not required that the mail
be accepted by postal authorities. That requirement is relevant only for the purpose of fixing
the liability of postal officials.
Nevertheless, we are of the view that the petitioner's choice of remedy is correct because this
suit was filed not only with respect to the letter which he mailed on September 15, 1963, but
also with regard to any other mail that he might send in the future. Thus, in his complaint, the
petitioner prayed that due course be given to "other mails without the semi-postal stamps which
he may deliver for mailing ... if any, during the period covered by Republic Act 1635, as
amended, as well as other mails hereafter to be sent by or to other mailers which bear the
required postage, without collection of additional charge of five centavos prescribed by the
same Republic Act." As one whose mail was returned, the petitioner is certainly interested in a
ruling on the validity of the statute requiring the use of additional stamps.
II.
We now consider the constitutional objections raised against the statute and the implementing
orders.
1. It is said that the statute is violative of the equal protection clause of the Constitution. More
specifically the claim is made that it constitutes mail users into a class for the purpose of the
tax while leaving untaxed the rest of the population and that even among postal patrons the
statute discriminatorily grants exemption to newspapers while Administrative Order 9 of the
respondent Postmaster General grants a similar exemption to offices performing governmental
functions. .
The five centavo charge levied by Republic Act 1635, as amended, is in the nature of an excise
tax, laid upon the exercise of a privilege, namely, the privilege of using the mails. As such the
objections levelled against it must be viewed in the light of applicable principles of taxation.
To begin with, it is settled that the legislature has the inherent power to select the subjects of
taxation and to grant exemptions.4 This power has aptly been described as "of wide range and
flexibility."5 Indeed, it is said that in the field of taxation, more than in other areas, the legislature
possesses the greatest freedom in classification.6 The reason for this is that traditionally,
classification has been a device for fitting tax programs to local needs and usages in order to
achieve an equitable distribution of the tax burden.7
That legislative classifications must be reasonable is of course undenied. But what the
petitioner asserts is that statutory classification of mail users must bear some reasonable
relationship to the end sought to be attained, and that absent such relationship the selection of
mail users is constitutionally impermissible. This is altogether a different proposition. As
explained in Commonwealth v. Life Assurance Co.:8
While the principle that there must be a reasonable relationship between classification made
by the legislation and its purpose is undoubtedly true in some contexts, it has no application to
a measure whose sole purpose is to raise revenue ... So long as the classification imposed is
based upon some standard capable of reasonable comprehension, be that standard based
upon ability to produce revenue or some other legitimate distinction, equal protection of the law
has been afforded. See Allied Stores of Ohio, Inc. v. Bowers, supra, 358 U.S. at 527, 79 S. Ct.
at 441; Brown Forman Co. v. Commonwealth of Kentucky, 2d U.S. 56, 573, 80 S. Ct. 578, 580
(1910).
We are not wont to invalidate legislation on equal protection grounds except by the clearest
demonstration that it sanctions invidious discrimination, which is all that the Constitution
forbids. The remedy for unwise legislation must be sought in the legislature. Now, the
classification of mail users is not without any reason. It is based on ability to pay, let alone the
enjoyment of a privilege, and on administrative convinience. In the allocation of the tax burden,
Congress must have concluded that the contribution to the anti-TB fund can be assured by
those whose who can afford the use of the mails.
The classification is likewise based on considerations of administrative convenience. For it is
now a settled principle of law that "consideration of practical administrative convenience and
cost in the administration of tax laws afford adequate ground for imposing a tax on a well
recognized and defined class."9 In the case of the anti-TB stamps, undoubtedly, the single most
important and influential consideration that led the legislature to select mail users as subjects
of the tax is the relative ease and convenienceof collecting the tax through the post offices. The
small amount of five centavos does not justify the great expense and inconvenience of
collecting through the regular means of collection. On the other hand, by placing the duty of
collection on postal authorities the tax was made almost self-enforcing, with as little cost and
as little inconvenience as possible.
And then of course it is not accurate to say that the statute constituted mail users into a class.
Mail users were already a class by themselves even before the enactment of the statue and all
that the legislature did was merely to select their class. Legislation is essentially empiric and
Republic Act 1635, as amended, no more than reflects a distinction that exists in fact. As Mr.
Justice Frankfurter said, "to recognize differences that exist in fact is living law; to disregard
[them] and concentrate on some abstract identities is lifeless logic."10
Granted the power to select the subject of taxation, the State's power to grant exemption must
likewise be conceded as a necessary corollary. Tax exemptions are too common in the law;
they have never been thought of as raising issues under the equal protection clause.
It is thus erroneous for the trial court to hold that because certain mail users are exempted from
the levy the law and administrative officials have sanctioned an invidious discrimination
offensive to the Constitution. The application of the lower courts theory would require all mail
users to be taxed, a conclusion that is hardly tenable in the light of differences in status of mail
users. The Constitution does not require this kind of equality.
As the United States Supreme Court has said, the legislature may withhold the burden of the
tax in order to foster what it conceives to be a beneficent enterprise.11 This is the case of
newspapers which, under the amendment introduced by Republic Act 2631, are exempt from
the payment of the additional stamp.
84
As for the Government and its instrumentalities, their exemption rests on the State's sovereign
immunity from taxation. The State cannot be taxed without its consent and such consent, being
in derogation of its sovereignty, is to be strictly construed. 12 Administrative Order 9 of the
respondent Postmaster General, which lists the various offices and instrumentalities of the
Government exempt from the payment of the anti-TB stamp, is but a restatement of this well-
known principle of constitutional law.
The trial court likewise held the law invalid on the ground that it singles out tuberculosis to the
exclusion of other diseases which, it is said, are equally a menace to public health. But it is
never a requirement of equal protection that all evils of the same genus be eradicated or none
at all.13 As this Court has had occasion to say, "if the law presumably hits the evil where it is
most felt, it is not to be overthrown because there are other instances to which it might have
been applied."14
2. The petitioner further argues that the tax in question is invalid, first, because it is not levied
for a public purpose as no special benefits accrue to mail users as taxpayers, and second,
because it violates the rule of uniformity in taxation.
The eradication of a dreaded disease is a public purpose, but if by public purpose the petitioner
means benefit to a taxpayer as a return for what he pays, then it is sufficient answer to say that
the only benefit to which the taxpayer is constitutionally entitled is that derived from his
enjoyment of the privileges of living in an organized society, established and safeguarded by
the devotion of taxes to public purposes. Any other view would preclude the levying of taxes
except as they are used to compensate for the burden on those who pay them and would
involve the abandonment of the most fundamental principle of government that it exists
primarily to provide for the common good.15
Nor is the rule of uniformity and equality of taxation infringed by the imposition of a flat rate
rather than a graduated tax. A tax need not be measured by the weight of the mail or the extent
of the service rendered. We have said that considerations of administrative convenience and
cost afford an adequate ground for classification. The same considerations may induce the
legislature to impose a flat tax which in effect is a charge for the transaction, operating equally
on all persons within the class regardless of the amount involved.16 As Mr. Justice Holmes said
in sustaining the validity of a stamp act which imposed a flat rate of two cents on every $100
face value of stock transferred:
One of the stocks was worth $30.75 a share of the face value of $100, the other $172. The
inequality of the tax, so far as actual values are concerned, is manifest. But, here again equality
in this sense has to yield to practical considerations and usage. There must be a fixed and
indisputable mode of ascertaining a stamp tax. In another sense, moreover, there is equality.
When the taxes on two sales are equal, the same number of shares is sold in each case; that
is to say, the same privilege is used to the same extent. Valuation is not the only thing to be
considered. As was pointed out by the court of appeals, the familiar stamp tax of 2 cents on
checks, irrespective of income or earning capacity, and many others, illustrate the necessity
and practice of sometimes substituting count for weight ...17
According to the trial court, the money raised from the sales of the anti-TB stamps is spent for
the benefit of the Philippine Tuberculosis Society, a private organization, without appropriation
by law. But as the Solicitor General points out, the Society is not really the beneficiary but only
the agency through which the State acts in carrying out what is essentially a public function.
The money is treated as a special fund and as such need not be appropriated by law.18
3. Finally, the claim is made that the statute is so broadly drawn that to execute it the
respondents had to issue administrative orders far beyond their powers. Indeed, this is one of
the grounds on which the lower court invalidated Republic Act 1631, as amended, namely, that
it constitutes an undue delegation of legislative power.
Administrative Order 3, as amended by Administrative Orders 7 and 10, provides that for
certain classes of mail matters (such as mail permits, metered mails, business reply cards,
etc.), the five-centavo charge may be paid in cash instead of the purchase of the anti-TB stamp.
It further states that mails deposited during the period August 19 to September 30 of each year
in mail boxes without the stamp should be returned to the sender, if known, otherwise they
should be treated as nonmailable.
It is true that the law does not expressly authorize the collection of five centavos except through
the sale of anti-TB stamps, but such authority may be implied in so far as it may be necessary
to prevent a failure of the undertaking. The authority given to the Postmaster General to raise
funds through the mails must be liberally construed, consistent with the principle that where the
end is required the appropriate means are given.19
The anti-TB stamp is a distinctive stamp which shows on its face not only the amount of the
additional charge but also that of the regular postage. In the case of business reply cards, for
instance, it is obvious that to require mailers to affix the anti-TB stamp on their cards would be
to make them pay much more because the cards likewise bear the amount of the regular
postage.
It is likewise true that the statute does not provide for the disposition of mails which do not bear
the anti-TB stamp, but a declaration therein that "no mail matter shall be accepted in the mails
unless it bears such semi-postal stamp" is a declaration that such mail matter is nonmailable
within the meaning of section 1952 of the Administrative Code. Administrative Order 7 of the
Postmaster General is but a restatement of the law for the guidance of postal officials and
employees. As for Administrative Order 9, we have already said that in listing the offices and
entities of the Government exempt from the payment of the stamp, the respondent Postmaster
General merely observed an established principle, namely, that the Government is exempt
from taxation.
ACCORDINGLY, the judgment a quo is reversed, and the complaint is dismissed, without
pronouncement as to costs.
Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal, Sanchez, Angeles and Capistrano,
JJ., concur.
Zaldivar, J., is on leave.

85
G.R. No. L-41631 December 17, 1976
HON. RAMON D. BAGATSING, as Mayor of the City of Manila; ROMAN G. GARGANTIEL,
as Secretary to the Mayor; THE MARKET ADMINISTRATOR; and THE MUNICIPAL
BOARD OF MANILA, petitioners,
vs.
HON. PEDRO A. RAMIREZ, in his capacity as Presiding Judge of the Court of First
Instance of Manila, Branch XXX and the FEDERATION OF MANILA MARKET VENDORS,
INC., respondents.
Santiago F. Alidio and Restituto R. Villanueva for petitioners.
Antonio H. Abad, Jr. for private respondent.
Federico A. Blay for petitioner for intervention.
MARTIN, J.:
The chief question to be decided in this case is what law shall govern the publication of a tax
ordinance enacted by the Municipal Board of Manila, the Revised City Charter (R.A. 409, as
amended), which requires publication of the ordinance before its enactment and after its
approval, or the Local Tax Code (P.D. No. 231), which only demands publication after approval.
On June 12, 1974, the Municipal Board of Manila enacted Ordinance No. 7522, "AN
ORDINANCE REGULATING THE OPERATION OF PUBLIC MARKETS AND PRESCRIBING
FEES FOR THE RENTALS OF STALLS AND PROVIDING PENALTIES FOR VIOLATION
THEREOF AND FOR OTHER PURPOSES." The petitioner City Mayor, Ramon D. Bagatsing,
approved the ordinance on June 15, 1974.
On February 17, 1975, respondent Federation of Manila Market Vendors, Inc. commenced Civil
Case 96787 before the Court of First Instance of Manila presided over by respondent Judge,
seeking the declaration of nullity of Ordinance No. 7522 for the reason that (a) the publication
requirement under the Revised Charter of the City of Manila has not been complied with; (b)
the Market Committee was not given any participation in the enactment of the ordinance, as
envisioned by Republic Act 6039; (c) Section 3 (e) of the Anti-Graft and Corrupt Practices Act
has been violated; and (d) the ordinance would violate Presidential Decree No. 7 of September
30, 1972 prescribing the collection of fees and charges on livestock and animal products.
Resolving the accompanying prayer for the issuance of a writ of preliminary injunction,
respondent Judge issued an order on March 11, 1975, denying the plea for failure of the
respondent Federation of Manila Market Vendors, Inc. to exhaust the administrative remedies
outlined in the Local Tax Code.
After due hearing on the merits, respondent Judge rendered its decision on August 29, 1975,
declaring the nullity of Ordinance No. 7522 of the City of Manila on the primary ground of non-
compliance with the requirement of publication under the Revised City Charter. Respondent
Judge ruled:
There is, therefore, no question that the ordinance in question was not published at all in two
daily newspapers of general circulation in the City of Manila before its enactment. Neither was
86
it published in the same manner after approval, although it was posted in the legislative hall
and in all city public markets and city public libraries. There being no compliance with the
mandatory requirement of publication before and after approval, the ordinance in question is
invalid and, therefore, null and void.
Petitioners moved for reconsideration of the adverse decision, stressing that (a) only a post-
publication is required by the Local Tax Code; and (b) private respondent failed to exhaust all
administrative remedies before instituting an action in court.
On September 26, 1975, respondent Judge denied the motion.
Forthwith, petitioners brought the matter to Us through the present petition for review on
certiorari.
We find the petition impressed with merits.
1. The nexus of the present controversy is the apparent conflict between the Revised Charter
of the City of Manila and the Local Tax Code on the manner of publishing a tax ordinance
enacted by the Municipal Board of Manila. For, while Section 17 of the Revised Charter
provides:
Each proposed ordinance shall be published in two daily newspapers of general circulation in
the city, and shall not be discussed or enacted by the Board until after the third day following
such publication. * * * Each approved ordinance * * * shall be published in two daily newspapers
of general circulation in the city, within ten days after its approval; and shall take effect and be
in force on and after the twentieth day following its publication, if no date is fixed in the
ordinance.
Section 43 of the Local Tax Code directs:
Within ten days after their approval, certified true copies of all provincial, city, municipal and
barrioordinances levying or imposing taxes, fees or other charges shall be published for three
consecutive days in a newspaper or publication widely circulated within the jurisdiction of the
local government, or posted in the local legislative hall or premises and in two other
conspicuous places within the territorial jurisdiction of the local government. In either case,
copies of all provincial, city, municipal and barrio ordinances shall be furnished the treasurers
of the respective component and mother units of a local government for dissemination.
In other words, while the Revised Charter of the City of Manila requires publication before the
enactment of the ordinance and after the approval thereof in two daily newspapers of general
circulation in the city, the Local Tax Code only prescribes for publication after the approval of
"ordinances levying or imposing taxes, fees or other charges" either in a newspaper or
publication widely circulated within the jurisdiction of the local government or by posting the
ordinance in the local legislative hall or premises and in two other conspicuous places within
the territorial jurisdiction of the local government. Petitioners' compliance with the Local Tax
Code rather than with the Revised Charter of the City spawned this litigation.
There is no question that the Revised Charter of the City of Manila is a special act since it
relates only to the City of Manila, whereas the Local Tax Code is a general law because it
applies universally to all local governments. Blackstone defines general law as a universal rule
affecting the entire community and special law as one relating to particular persons or things
of a class. 1 And the rule commonly said is that a prior special law is not ordinarily repealed by
a subsequent general law. The fact that one is special and the other general creates a
presumption that the special is to be considered as remaining an exception of the general, one
as a general law of the land, the other as the law of a particular case. 2 However, the rule readily
yields to a situation where the special statute refers to a subject in general, which the general
statute treats in particular. The exactly is the circumstance obtaining in the case at bar. Section
17 of the Revised Charter of the City of Manila speaks of "ordinance" in general, i.e.,
irrespective of the nature and scope thereof,whereas, Section 43 of the Local Tax Code relates
to "ordinances levying or imposing taxes, fees or other charges" in particular. In regard,
therefore, to ordinances in general, the Revised Charter of the City of Manila is doubtless
dominant, but, that dominant force loses its continuity when it approaches the realm of
"ordinances levying or imposing taxes, fees or other charges" in particular. There, the Local
Tax Code controls. Here, as always, a general provision must give way to a particular
provision. 3 Special provision governs. 4 This is especially true where the law containing the
particular provision was enacted later than the one containing the general provision. The City
Charter of Manila was promulgated on June 18, 1949 as against the Local Tax Code which
was decreed on June 1, 1973. The law-making power cannot be said to have intended the
establishment of conflicting and hostile systems upon the same subject, or to leave in force
provisions of a prior law by which the new will of the legislating power may be thwarted and
overthrown. Such a result would render legislation a useless and Idle ceremony, and subject
the law to the reproach of uncertainty and unintelligibility. 5
The case of City of Manila v. Teotico 6 is opposite. In that case, Teotico sued the City of Manila
for damages arising from the injuries he suffered when he fell inside an uncovered and
unlighted catchbasin or manhole on P. Burgos Avenue. The City of Manila denied liability on
the basis of the City Charter (R.A. 409) exempting the City of Manila from any liability for
damages or injury to persons or property arising from the failure of the city officers to enforce
the provisions of the charter or any other law or ordinance, or from negligence of the City Mayor,
Municipal Board, or other officers while enforcing or attempting to enforce the provisions of the
charter or of any other law or ordinance. Upon the other hand, Article 2189 of the Civil Code
makes cities liable for damages for the death of, or injury suffered by any persons by reason
of the defective condition of roads, streets, bridges, public buildings, and other public works
under their control or supervision. On review, the Court held the Civil Code controlling. It is true
that, insofar as its territorial application is concerned, the Revised City Charter is a special law
and the subject matter of the two laws, the Revised City Charter establishes a general rule of
liability arising from negligence in general, regardless of the object thereof, whereas the Civil
Code constitutes a particularprescription for liability due to defective streets in particular. In the
same manner, the Revised Charter of the City prescribes a rule for the publication of
"ordinance" in general, while the Local Tax Code establishes a rule for the publication of
"ordinance levying or imposing taxes fees or other charges in particular.
In fact, there is no rule which prohibits the repeal even by implication of a special or specific
act by a general or broad one. 7 A charter provision may be impliedly modified or superseded
by a later statute, and where a statute is controlling, it must be read into the charter
notwithstanding any particular charter provision. 8 A subsequent general law similarly
87
applicable to all cities prevails over any conflicting charter provision, for the reason that a
charter must not be inconsistent with the general laws and public policy of the state. 9 A
chartered city is not an independent sovereignty. The state remains supreme in all matters not
purely local. Otherwise stated, a charter must yield to the constitution and general laws of the
state, it is to have read into it that general law which governs the municipal corporation and
which the corporation cannot set aside but to which it must yield. When a city adopts a charter,
it in effect adopts as part of its charter general law of such character. 10
2. The principle of exhaustion of administrative remedies is strongly asserted by petitioners as
having been violated by private respondent in bringing a direct suit in court. This is because
Section 47 of the Local Tax Code provides that any question or issue raised against the legality
of any tax ordinance, or portion thereof, shall be referred for opinion to the city fiscal in the case
of tax ordinance of a city. The opinion of the city fiscal is appealable to the Secretary of Justice,
whose decision shall be final and executory unless contested before a competent court within
thirty (30) days. But, the petition below plainly shows that the controversy between the parties
is deeply rooted in a pure question of law: whether it is the Revised Charter of the City of Manila
or the Local Tax Code that should govern the publication of the tax ordinance. In other words,
the dispute is sharply focused on the applicability of the Revised City Charter or the Local Tax
Code on the point at issue, and not on the legality of the imposition of the tax. Exhaustion of
administrative remedies before resort to judicial bodies is not an absolute rule. It admits of
exceptions. Where the question litigated upon is purely a legal one, the rule does not
apply. 11 The principle may also be disregarded when it does not provide a plain, speedy and
adequate remedy. It may and should be relaxed when its application may cause great and
irreparable damage. 12
3. It is maintained by private respondent that the subject ordinance is not a "tax ordinance,"
because the imposition of rentals, permit fees, tolls and other fees is not strictly a taxing power
but a revenue-raising function, so that the procedure for publication under the Local Tax Code
finds no application. The pretense bears its own marks of fallacy. Precisely, the raising of
revenues is the principal object of taxation. Under Section 5, Article XI of the New Constitution,
"Each local government unit shall have the power to create its own sources of revenue and to
levy taxes, subject to such provisions as may be provided by law." 13 And one of those sources
of revenue is what the Local Tax Code points to in particular: "Local governments may collect
fees or rentals for the occupancy or use of public markets and premises * * *." 14 They can
provide for and regulate market stands, stalls and privileges, and, also, the sale, lease or
occupancy thereof. They can license, or permit the use of, lease, sell or otherwise dispose of
stands, stalls or marketing privileges. 15
It is a feeble attempt to argue that the ordinance violates Presidential Decree No. 7, dated
September 30, 1972, insofar as it affects livestock and animal products, because the said
decree prescribes the collection of other fees and charges thereon "with the exception of ante-
mortem and post-mortem inspection fees, as well as the delivery, stockyard and slaughter fees
as may be authorized by the Secretary of Agriculture and Natural Resources." 16Clearly, even
the exception clause of the decree itself permits the collection of the proper fees for livestock.
And the Local Tax Code (P.D. 231, July 1, 1973) authorizes in its Section 31: "Local
governments may collect fees for the slaughter of animals and the use of corrals * * * "
4. The non-participation of the Market Committee in the enactment of Ordinance No. 7522
supposedly in accordance with Republic Act No. 6039, an amendment to the City Charter of
Manila, providing that "the market committee shall formulate, recommend and adopt, subject
to the ratification of the municipal board, and approval of the mayor, policies and rules or
regulation repealing or maneding existing provisions of the market code" does not infect the
ordinance with any germ of invalidity. 17 The function of the committee is purely
recommendatory as the underscored phrase suggests, its recommendation is without binding
effect on the Municipal Board and the City Mayor. Its prior acquiescence of an intended or
proposed city ordinance is not a condition sine qua non before the Municipal Board could enact
such ordinance. The native power of the Municipal Board to legislate remains undisturbed even
in the slightest degree. It can move in its own initiative and the Market Committee cannot
demur. At most, the Market Committee may serve as a legislative aide of the Municipal Board
in the enactment of city ordinances affecting the city markets or, in plain words, in the gathering
of the necessary data, studies and the collection of consensus for the proposal of ordinances
regarding city markets. Much less could it be said that Republic Act 6039 intended to delegate
to the Market Committee the adoption of regulatory measures for the operation and
administration of the city markets. Potestas delegata non delegare potest.
5. Private respondent bewails that the market stall fees imposed in the disputed ordinance are
diverted to the exclusive private use of the Asiatic Integrated Corporation since the collection
of said fees had been let by the City of Manila to the said corporation in a "Management and
Operating Contract." The assumption is of course saddled on erroneous premise. The fees
collected do not go direct to the private coffers of the corporation. Ordinance No. 7522 was not
made for the corporation but for the purpose of raising revenues for the city. That is the object
it serves. The entrusting of the collection of the fees does not destroy the public purpose of the
ordinance. So long as the purpose is public, it does not matter whether the agency through
which the money is dispensed is public or private. The right to tax depends upon the ultimate
use, purpose and object for which the fund is raised. It is not dependent on the nature or
character of the person or corporation whose intermediate agency is to be used in applying it.
The people may be taxed for a public purpose, although it be under the direction of an individual
or private corporation. 18
Nor can the ordinance be stricken down as violative of Section 3(e) of the Anti-Graft and
Corrupt Practices Act because the increased rates of market stall fees as levied by the
ordinance will necessarily inure to the unwarranted benefit and advantage of the
corporation. 19 We are concerned only with the issue whether the ordinance in question is intra
vires. Once determined in the affirmative, the measure may not be invalidated because of
consequences that may arise from its enforcement. 20
ACCORDINGLY, the decision of the court below is hereby reversed and set aside. Ordinance
No. 7522 of the City of Manila, dated June 15, 1975, is hereby held to have been validly
enacted. No. costs.
SO ORDERED.

88
G.R. No. L-75697 June 18, 1987
VALENTIN TIO doing business under the name and style of OMI
ENTERPRISES, petitioner,
vs.
VIDEOGRAM REGULATORY BOARD, MINISTER OF FINANCE, METRO MANILA
COMMISSION, CITY MAYOR and CITY TREASURER OF MANILA, respondents.
Nelson Y. Ng for petitioner.
The City Legal Officer for respondents City Mayor and City Treasurer.
MELENCIO-HERRERA, J.:
This petition was filed on September 1, 1986 by petitioner on his own behalf and purportedly
on behalf of other videogram operators adversely affected. It assails the constitutionality of
Presidential Decree No. 1987 entitled "An Act Creating the Videogram Regulatory Board" with
broad powers to regulate and supervise the videogram industry (hereinafter briefly referred to
as the BOARD). The Decree was promulgated on October 5, 1985 and took effect on April 10,
1986, fifteen (15) days after completion of its publication in the Official Gazette.
On November 5, 1985, a month after the promulgation of the abovementioned decree,
Presidential Decree No. 1994 amended the National Internal Revenue Code providing, inter
alia:
SEC. 134. Video Tapes. There shall be collected on each processed video-tape cassette,
ready for playback, regardless of length, an annual tax of five pesos; Provided, That locally
manufactured or imported blank video tapes shall be subject to sales tax.
On October 23, 1986, the Greater Manila Theaters Association, Integrated Movie Producers,
Importers and Distributors Association of the Philippines, and Philippine Motion Pictures
Producers Association, hereinafter collectively referred to as the Intervenors, were permitted
by the Court to intervene in the case, over petitioner's opposition, upon the allegations that
intervention was necessary for the complete protection of their rights and that their "survival
and very existence is threatened by the unregulated proliferation of film piracy." The Intervenors
were thereafter allowed to file their Comment in Intervention.
The rationale behind the enactment of the DECREE, is set out in its preambular clauses as
follows:
1. WHEREAS, the proliferation and unregulated circulation of videograms including, among
others, videotapes, discs, cassettes or any technical improvement or variation thereof, have
greatly prejudiced the operations of moviehouses and theaters, and have caused a sharp
decline in theatrical attendance by at least forty percent (40%) and a tremendous drop in the
collection of sales, contractor's specific, amusement and other taxes, thereby resulting in
substantial losses estimated at P450 Million annually in government revenues;
2. WHEREAS, videogram(s) establishments collectively earn around P600 Million per annum
from rentals, sales and disposition of videograms, and such earnings have not been subjected
to tax, thereby depriving the Government of approximately P180 Million in taxes each year;
89
3. WHEREAS, the unregulated activities of videogram establishments have also affected the
viability of the movie industry, particularly the more than 1,200 movie houses and theaters
throughout the country, and occasioned industry-wide displacement and unemployment due to
the shutdown of numerous moviehouses and theaters;
4. "WHEREAS, in order to ensure national economic recovery, it is imperative for the
Government to create an environment conducive to growth and development of all business
industries, including the movie industry which has an accumulated investment of about P3
Billion;
5. WHEREAS, proper taxation of the activities of videogram establishments will not only
alleviate the dire financial condition of the movie industry upon which more than 75,000 families
and 500,000 workers depend for their livelihood, but also provide an additional source of
revenue for the Government, and at the same time rationalize the heretofore uncontrolled
distribution of videograms;
6. WHEREAS, the rampant and unregulated showing of obscene videogram features
constitutes a clear and present danger to the moral and spiritual well-being of the youth, and
impairs the mandate of the Constitution for the State to support the rearing of the youth for civic
efficiency and the development of moral character and promote their physical, intellectual, and
social well-being;
7. WHEREAS, civic-minded citizens and groups have called for remedial measures to curb
these blatant malpractices which have flaunted our censorship and copyright laws;
8. WHEREAS, in the face of these grave emergencies corroding the moral values of the people
and betraying the national economic recovery program, bold emergency measures must be
adopted with dispatch; ... (Numbering of paragraphs supplied).
Petitioner's attack on the constitutionality of the DECREE rests on the following grounds:
1. Section 10 thereof, which imposes a tax of 30% on the gross receipts payable to the local
government is a RIDER and the same is not germane to the subject matter thereof;
2. The tax imposed is harsh, confiscatory, oppressive and/or in unlawful restraint of trade in
violation of the due process clause of the Constitution;
3. There is no factual nor legal basis for the exercise by the President of the vast powers
conferred upon him by Amendment No. 6;
4. There is undue delegation of power and authority;
5. The Decree is an ex-post facto law; and
6. There is over regulation of the video industry as if it were a nuisance, which it is not.
We shall consider the foregoing objections in seriatim.
1. The Constitutional requirement that "every bill shall embrace only one subject which shall be
expressed in the title thereof" 1 is sufficiently complied with if the title be comprehensive
enough to include the general purpose which a statute seeks to achieve. It is not necessary
that the title express each and every end that the statute wishes to accomplish. The
requirement is satisfied if all the parts of the statute are related, and are germane to the subject
matter expressed in the title, or as long as they are not inconsistent with or foreign to the general
subject and title.2 An act having a single general subject, indicated in the title, may contain any
number of provisions, no matter how diverse they may be, so long as they are not inconsistent
with or foreign to the general subject, and may be considered in furtherance of such subject by
providing for the method and means of carrying out the general object." 3 The rule also is that
the constitutional requirement as to the title of a bill should not be so narrowly construed as to
cripple or impede the power of legislation. 4 It should be given practical rather than technical
construction. 5
Tested by the foregoing criteria, petitioner's contention that the tax provision of the DECREE
is a rider is without merit. That section reads, inter alia:
Section 10. Tax on Sale, Lease or Disposition of Videograms. Notwithstanding any provision
of law to the contrary, the province shall collect a tax of thirty percent (30%) of the purchase
price or rental rate, as the case may be, for every sale, lease or disposition of a videogram
containing a reproduction of any motion picture or audiovisual program. Fifty percent (50%) of
the proceeds of the tax collected shall accrue to the province, and the other fifty percent (50%)
shall acrrue to the municipality where the tax is collected; PROVIDED, That in Metropolitan
Manila, the tax shall be shared equally by the City/Municipality and the Metropolitan Manila
Commission.
xxx xxx xxx
The foregoing provision is allied and germane to, and is reasonably necessary for the
accomplishment of, the general object of the DECREE, which is the regulation of the video
industry through the Videogram Regulatory Board as expressed in its title. The tax provision is
not inconsistent with, nor foreign to that general subject and title. As a tool for regulation 6 it is
simply one of the regulatory and control mechanisms scattered throughout the DECREE. The
express purpose of the DECREE to include taxation of the video industry in order to regulate
and rationalize the heretofore uncontrolled distribution of videograms is evident from
Preambles 2 and 5, supra. Those preambles explain the motives of the lawmaker in presenting
the measure. The title of the DECREE, which is the creation of the Videogram Regulatory
Board, is comprehensive enough to include the purposes expressed in its Preamble and
reasonably covers all its provisions. It is unnecessary to express all those objectives in the title
or that the latter be an index to the body of the DECREE. 7
2. Petitioner also submits that the thirty percent (30%) tax imposed is harsh and oppressive,
confiscatory, and in restraint of trade. However, it is beyond serious question that a tax does
not cease to be valid merely because it regulates, discourages, or even definitely deters the
activities taxed. 8 The power to impose taxes is one so unlimited in force and so searching in
extent, that the courts scarcely venture to declare that it is subject to any restrictions whatever,
except such as rest in the discretion of the authority which exercises it. 9 In imposing a tax, the
legislature acts upon its constituents. This is, in general, a sufficient security against erroneous
and oppressive taxation. 10
The tax imposed by the DECREE is not only a regulatory but also a revenue measure prompted
by the realization that earnings of videogram establishments of around P600 million per annum
have not been subjected to tax, thereby depriving the Government of an additional source of
revenue. It is an end-user tax, imposed on retailers for every videogram they make available
90
for public viewing. It is similar to the 30% amusement tax imposed or borne by the movie
industry which the theater-owners pay to the government, but which is passed on to the entire
cost of the admission ticket, thus shifting the tax burden on the buying or the viewing public. It
is a tax that is imposed uniformly on all videogram operators.
The levy of the 30% tax is for a public purpose. It was imposed primarily to answer the need
for regulating the video industry, particularly because of the rampant film piracy, the flagrant
violation of intellectual property rights, and the proliferation of pornographic video tapes. And
while it was also an objective of the DECREE to protect the movie industry, the tax remains a
valid imposition.
The public purpose of a tax may legally exist even if the motive which impelled the legislature
to impose the tax was to favor one industry over another. 11
It is inherent in the power to tax that a state be free to select the subjects of taxation, and it has
been repeatedly held that "inequities which result from a singling out of one particular class for
taxation or exemption infringe no constitutional limitation". 12 Taxation has been made the
implement of the state's police power. 13
At bottom, the rate of tax is a matter better addressed to the taxing legislature.
3. Petitioner argues that there was no legal nor factual basis for the promulgation of the
DECREE by the former President under Amendment No. 6 of the 1973 Constitution providing
that "whenever in the judgment of the President ... , there exists a grave emergency or a threat
or imminence thereof, or whenever the interim Batasang Pambansa or the regular National
Assembly fails or is unable to act adequately on any matter for any reason that in his judgment
requires immediate action, he may, in order to meet the exigency, issue the necessary decrees,
orders, or letters of instructions, which shall form part of the law of the land."
In refutation, the Intervenors and the Solicitor General's Office aver that the 8th "whereas"
clause sufficiently summarizes the justification in that grave emergencies corroding the moral
values of the people and betraying the national economic recovery program necessitated bold
emergency measures to be adopted with dispatch. Whatever the reasons "in the judgment" of
the then President, considering that the issue of the validity of the exercise of legislative power
under the said Amendment still pends resolution in several other cases, we reserve resolution
of the question raised at the proper time.
4. Neither can it be successfully argued that the DECREE contains an undue delegation of
legislative power. The grant in Section 11 of the DECREE of authority to the BOARD to "solicit
the direct assistance of other agencies and units of the government and deputize, for a fixed
and limited period, the heads or personnel of such agencies and units to perform enforcement
functions for the Board" is not a delegation of the power to legislate but merely a conferment
of authority or discretion as to its execution, enforcement, and implementation. "The true
distinction is between the delegation of power to make the law, which necessarily involves a
discretion as to what it shall be, and conferring authority or discretion as to its execution to be
exercised under and in pursuance of the law. The first cannot be done; to the latter, no valid
objection can be made." 14 Besides, in the very language of the decree, the authority of the
BOARD to solicit such assistance is for a "fixed and limited period" with the deputized agencies
concerned being "subject to the direction and control of the BOARD." That the grant of such
authority might be the source of graft and corruption would not stigmatize the DECREE as
unconstitutional. Should the eventuality occur, the aggrieved parties will not be without
adequate remedy in law.
5. The DECREE is not violative of the ex post facto principle. An ex post facto law is, among
other categories, one which "alters the legal rules of evidence, and authorizes conviction upon
less or different testimony than the law required at the time of the commission of the offense."
It is petitioner's position that Section 15 of the DECREE in providing that:
All videogram establishments in the Philippines are hereby given a period of forty-five (45) days
after the effectivity of this Decree within which to register with and secure a permit from the
BOARD to engage in the videogram business and to register with the BOARD all their
inventories of videograms, including videotapes, discs, cassettes or other technical
improvements or variations thereof, before they could be sold, leased, or otherwise disposed
of. Thereafter any videogram found in the possession of any person engaged in the videogram
business without the required proof of registration by the BOARD, shall be prima facie evidence
of violation of the Decree, whether the possession of such videogram be for private showing
and/or public exhibition.
raises immediately a prima facie evidence of violation of the DECREE when the required proof
of registration of any videogram cannot be presented and thus partakes of the nature of an ex
post facto law.
The argument is untenable. As this Court held in the recent case of Vallarta vs. Court of
Appeals, et al. 15
... it is now well settled that "there is no constitutional objection to the passage of a law providing
that the presumption of innocence may be overcome by a contrary presumption founded upon
the experience of human conduct, and enacting what evidence shall be sufficient to overcome
such presumption of innocence" (People vs. Mingoa 92 Phil. 856 [1953] at 858-59, citing 1
COOLEY, A TREATISE ON THE CONSTITUTIONAL LIMITATIONS, 639-641). And the
"legislature may enact that when certain facts have been proved that they shall be prima facie
evidence of the existence of the guilt of the accused and shift the burden of proof provided
there be a rational connection between the facts proved and the ultimate facts presumed so
that the inference of the one from proof of the others is not unreasonable and arbitrary because
of lack of connection between the two in common experience". 16
Applied to the challenged provision, there is no question that there is a rational connection
between the fact proved, which is non-registration, and the ultimate fact presumed which is
violation of the DECREE, besides the fact that the prima facie presumption of violation of the
DECREE attaches only after a forty-five-day period counted from its effectivity and is, therefore,
neither retrospective in character.
6. We do not share petitioner's fears that the video industry is being over-regulated and being
eased out of existence as if it were a nuisance. Being a relatively new industry, the need for its
regulation was apparent. While the underlying objective of the DECREE is to protect the
moribund movie industry, there is no question that public welfare is at bottom of its enactment,
91
considering "the unfair competition posed by rampant film piracy; the erosion of the moral fiber
of the viewing public brought about by the availability of unclassified and unreviewed video
tapes containing pornographic films and films with brutally violent sequences; and losses in
government revenues due to the drop in theatrical attendance, not to mention the fact that the
activities of video establishments are virtually untaxed since mere payment of Mayor's permit
and municipal license fees are required to engage in business. 17
The enactment of the Decree since April 10, 1986 has not brought about the "demise" of the
video industry. On the contrary, video establishments are seen to have proliferated in many
places notwithstanding the 30% tax imposed.
In the last analysis, what petitioner basically questions is the necessity, wisdom and expediency
of the DECREE. These considerations, however, are primarily and exclusively a matter of
legislative concern.
Only congressional power or competence, not the wisdom of the action taken, may be the basis
for declaring a statute invalid. This is as it ought to be. The principle of separation of powers
has in the main wisely allocated the respective authority of each department and confined its
jurisdiction to such a sphere. There would then be intrusion not allowable under the Constitution
if on a matter left to the discretion of a coordinate branch, the judiciary would substitute its own.
If there be adherence to the rule of law, as there ought to be, the last offender should be courts
of justice, to which rightly litigants submit their controversy precisely to maintain unimpaired the
supremacy of legal norms and prescriptions. The attack on the validity of the challenged
provision likewise insofar as there may be objections, even if valid and cogent on its wisdom
cannot be sustained. 18
In fine, petitioner has not overcome the presumption of validity which attaches to a challenged
statute. We find no clear violation of the Constitution which would justify us in pronouncing
Presidential Decree No. 1987 as unconstitutional and void.
WHEREFORE, the instant Petition is hereby dismissed.
No costs.
SO ORDERED.
G.R. No. L-2947 January 11, 1951
MANILA RACE HORSE TRAINERS ASSOCIATION, INC., and JUAN T. SORDAN, plaintiffs-
appellants,
vs.
MANUEL DE LA FUENTE, defendant-appellee.
Soriano, Garde and Cervania for appellants.
City Fiscal Eugenio Angeles and Assistant Fiscal Arsenio Naawa for appellee.
TUASON, J.:
This action was instituted for a declaratory relief by the Manila Race Horses Trainers
Association, Inc., a non-stock corporation duly organized and existing under and by virtue of
the laws of the Philippines, who allege that they are owners of boarding stables for race horses
and that their rights as such are affected by Ordinance No. 3065 of the City of Manila approved
on July 1, 1947.1 They made the Mayor of Manila defendant and prayed that said ordinance
be declared invalid as violative of the Philippine Constitution.
The case was submitted on the pleadings, and the decision was that the ordinance in question
"is constitutional and valid and has been enacted in accordance with the powers of the
Municipal Board granted by the Charter of the City of Manila."
On appeal, the plaintiffs as appellants make three assignments of error, the first two of which
are discussed jointly in their brief under two separate topics.
First, it is maintained that the ordinance under consideration is a tax on race horses as distinct
from boarding stables. It is argued that by section 2 the basis of the license fees "is the number
of race horses kept or maintained in the boarding stables to be paid by the maintainers at the
rate of P10.00 a year for each race horse;" that "the fee is increased correspondingly P10 for
each additional race horse maintained or fed in the stable;" and that "by the same token, an
empty stable for race horse pays no license fee at all."
The spirit, rather than the letter, of an ordinance determines the construction thereof, and the
court looks less to its words and more to the context, subject matter, consequence and effect.
Accordingly, what is within the spirit is within the ordinance although it is not within the letter
thereof, while that which is in the letter, although not within the spirit, is not within the ordinance.
(62 C. J. S., 845.) From the context of Ordinance No. 3065, the intent to tax or license stables
and not horses is clearly manifest. The tax is assessed not on the owners of the horses but on
the owners of the stables, as counsel admit in their brief, although there is nothing, of course,
to stop stable owners from shifting the tax to the horse owners in the form of increased rents
or fees, which is generally the case.
It is also plain from the text of the whole ordinance that the number of horses is used in the
assessment purely as a method of fixing an equitable and practical distribution of the burden
imposed by the measure. Far from being obnoxious, the method is fair and just. It is but fair
and just that for a boarding stable where only one horse is maintained proportionately less
amount should be exacted than for a stable where more horses are kept and from which greater
income is derived.
92
We do not share plaintiff's opinion, apropos the second proposition, that the ordinance in
question is discriminatory and savors of class legislation. In taxing only boarding stables for
race horses, we do not believe that the ordinance, makes arbitrary classification. In the case
of Eastern Theatrical Co. Inc., vs. Alfonso, 46 Off. Gaz. Supp. to No. 11, p. 303,* it was said
there is equality and uniformity in taxation if all articles or kinds of property of the same class
are taxed at the same rate. Thus, it was held in that case, that "the fact that some places of
amusement are not taxed while others, such as cinematographs, theaters, vaudeville
companies, theatrical shows, and boxing exhibitions and other kinds of amusements or places
of amusement are taxed, is not argument at all against the equality and uniformity of tax
imposition." Applying this criterion to the present case, there would be discrimination if some
boarding stables of the same class used for the same number of horses were not taxed or were
made to pay less or more than others.
From the viewpoint of economics and public policy the taxing of boarding stables for race
horses to the exclusion of boarding stables for horses dedicated to other purposes is not
indefensible. The owners of boarding stables for race horses and, for that matter, the race
horse owners themselves, who in the scheme of shifting may carry the taxation burden, are a
class by themselves and appropriately taxed where owners of other kinds of horses are taxed
less or not at all, considering that equity in taxation is generally conceived in terms of ability to
pay in relation to the benefits received by the taxpayer and by the public from the business or
property taxed. Race horses are devoted to gambling if legalized, their owners derive fat
income and the public hardly any profit from horse racing, and this business demands relatively
heavy police supervision. Taking everything into account, the differentiation against which the
plaintiffs complain conforms to the practical dictates of justice and equity and is not discrimatory
within the meaning of the Constitution.
One ground of attack in the court below on the constitutionality of the ordinance variance
between the title and the subject matter apparently has been abandoned. In its place a new
question is brought up on the appeal in the third and last assignment of error. It is now
contended, for the first time, that "the Municipal Board of Manila (is) without power to enact
ordinance taxing private stables for race horses," and that the lower court erred in not so
declaring. This assignment of error has reference to Class B or the second sub-paragraph of
section 1 of the ordinance.
Not having been raised in the pleading, this question was properly ignored, not to say that even
it had been raised it would not have been available as basis for a declaration of nullity of the
ordinance. The clause of the ordinance taxing or licensing boarding stables for race horses
does not prejudice the plaintiffs in any material way, and it is well settled that a person who is
not adversely affected by a licensing ordinance may not attack its validity. Stated differently,
he may not complain that a licensing ordinance is invalid as against a class other than that to
which he belongs. (62 C. J. S.830, 831.) By analogy, where a municipal ordinance is valid in
some of its parts and invalid as to others and the valid parts are separable from the invalid ones
in which latter case the valid provisions stand as operative the plaintiff may contest the
validity of the provisions that injure his interest but not those that do not. JUDGMENT
AFFIRMED.
G.R. No. 159796 July 17, 2007
ROMEO P. GEROCHI, KATULONG NG BAYAN (KB) and ENVIRONMENTALIST
CONSUMERS NETWORK, INC. (ECN), Petitioners,
vs.
DEPARTMENT OF ENERGY (DOE), ENERGY REGULATORY COMMISSION (ERC),
NATIONAL POWER CORPORATION (NPC), POWER SECTOR ASSETS AND LIABILITIES
MANAGEMENT GROUP (PSALM Corp.), STRATEGIC POWER UTILITIES GROUP (SPUG),
and PANAY ELECTRIC COMPANY INC. (PECO),Respondents.
DECISION
NACHURA, J.:
Petitioners Romeo P. Gerochi, Katulong Ng Bayan (KB), and Environmentalist Consumers
Network, Inc. (ECN) (petitioners), come before this Court in this original action praying that
Section 34 of Republic Act (RA) 9136, otherwise known as the "Electric Power Industry Reform
Act of 2001" (EPIRA), imposing the Universal Charge,1and Rule 18 of the Rules and
Regulations (IRR)2 which seeks to implement the said imposition, be declared unconstitutional.
Petitioners also pray that the Universal Charge imposed upon the consumers be refunded and
that a preliminary injunction and/or temporary restraining order (TRO) be issued directing the
respondents to refrain from implementing, charging, and collecting the said charge. 3 The
assailed provision of law reads:
SECTION 34. Universal Charge. Within one (1) year from the effectivity of this Act, a
universal charge to be determined, fixed and approved by the ERC, shall be imposed on all
electricity end-users for the following purposes:
(a) Payment for the stranded debts4 in excess of the amount assumed by the National
Government and stranded contract costs of NPC5 and as well as qualified stranded contract
costs of distribution utilities resulting from the restructuring of the industry;
(b) Missionary electrification;6
(c) The equalization of the taxes and royalties applied to indigenous or renewable sources of
energy vis--vis imported energy fuels;
(d) An environmental charge equivalent to one-fourth of one centavo per kilowatt-hour
(P0.0025/kWh), which shall accrue to an environmental fund to be used solely for watershed
rehabilitation and management. Said fund shall be managed by NPC under existing
arrangements; and
(e) A charge to account for all forms of cross-subsidies for a period not exceeding three (3)
years.
The universal charge shall be a non-bypassable charge which shall be passed on and collected
from all end-users on a monthly basis by the distribution utilities. Collections by the distribution
utilities and the TRANSCO in any given month shall be remitted to the PSALM Corp. on or
before the fifteenth (15th) of the succeeding month, net of any amount due to the distribution
utility. Any end-user or self-generating entity not connected to a distribution utility shall remit its
corresponding universal charge directly to the TRANSCO. The PSALM Corp., as administrator
93
of the fund, shall create a Special Trust Fund which shall be disbursed only for the purposes
specified herein in an open and transparent manner. All amount collected for the universal
charge shall be distributed to the respective beneficiaries within a reasonable period to be
provided by the ERC.
The Facts
Congress enacted the EPIRA on June 8, 2001; on June 26, 2001, it took effect.7
On April 5, 2002, respondent National Power Corporation-Strategic Power Utilities
Group8 (NPC-SPUG) filed with respondent Energy Regulatory Commission (ERC) a petition
for the availment from the Universal Charge of its share for Missionary Electrification, docketed
as ERC Case No. 2002-165.9
On May 7, 2002, NPC filed another petition with ERC, docketed as ERC Case No. 2002-194,
praying that the proposed share from the Universal Charge for the Environmental charge
of P0.0025 per kilowatt-hour (/kWh), or a total of P119,488,847.59, be approved for withdrawal
from the Special Trust Fund (STF) managed by respondent Power Sector Assets and
Liabilities Management Group (PSALM)10 for the rehabilitation and management of watershed
areas.11
On December 20, 2002, the ERC issued an Order12 in ERC Case No. 2002-165 provisionally
approving the computed amount of P0.0168/kWh as the share of the NPC-SPUG from the
Universal Charge for Missionary Electrification and authorizing the National Transmission
Corporation (TRANSCO) and Distribution Utilities to collect the same from its end-users on a
monthly basis.
On June 26, 2003, the ERC rendered its Decision13 (for ERC Case No. 2002-165) modifying
its Order of December 20, 2002, thus:
WHEREFORE, the foregoing premises considered, the provisional authority granted to
petitioner National Power Corporation-Strategic Power Utilities Group (NPC-SPUG) in the
Order dated December 20, 2002 is hereby modified to the effect that an additional amount
of P0.0205 per kilowatt-hour should be added to the P0.0168 per kilowatt-hour provisionally
authorized by the Commission in the said Order. Accordingly, a total amount ofP0.0373 per
kilowatt-hour is hereby APPROVED for withdrawal from the Special Trust Fund managed by
PSALM as its share from the Universal Charge for Missionary Electrification (UC-ME) effective
on the following billing cycles:
(a) June 26-July 25, 2003 for National Transmission Corporation (TRANSCO); and
(b) July 2003 for Distribution Utilities (Dus).
Relative thereto, TRANSCO and Dus are directed to collect the UC-ME in the amount
of P0.0373 per kilowatt-hour and remit the same to PSALM on or before the 15th day of the
succeeding month.
In the meantime, NPC-SPUG is directed to submit, not later than April 30, 2004, a detailed
report to include Audited Financial Statements and physical status (percentage of completion)
of the projects using the prescribed format.1avvphi1
Let copies of this Order be furnished petitioner NPC-SPUG and all distribution utilities (Dus).
SO ORDERED.
On August 13, 2003, NPC-SPUG filed a Motion for Reconsideration asking the ERC, among
others,14 to set aside the above-mentioned Decision, which the ERC granted in its Order dated
October 7, 2003, disposing:
WHEREFORE, the foregoing premises considered, the "Motion for Reconsideration" filed by
petitioner National Power Corporation-Small Power Utilities Group (NPC-SPUG) is hereby
GRANTED. Accordingly, the Decision dated June 26, 2003 is hereby modified accordingly.
Relative thereto, NPC-SPUG is directed to submit a quarterly report on the following:
1. Projects for CY 2002 undertaken;
2. Location
3. Actual amount utilized to complete the project;
4. Period of completion;
5. Start of Operation; and
6. Explanation of the reallocation of UC-ME funds, if any.
SO ORDERED.15
Meanwhile, on April 2, 2003, ERC decided ERC Case No. 2002-194, authorizing the NPC to
draw up toP70,000,000.00 from PSALM for its 2003 Watershed Rehabilitation Budget subject
to the availability of funds for the Environmental Fund component of the Universal Charge. 16
On the basis of the said ERC decisions, respondent Panay Electric Company, Inc. (PECO)
charged petitioner Romeo P. Gerochi and all other end-users with the Universal Charge as
reflected in their respective electric bills starting from the month of July 2003. 17
Hence, this original action.
Petitioners submit that the assailed provision of law and its IRR which sought to implement the
same are unconstitutional on the following grounds:
1) The universal charge provided for under Sec. 34 of the EPIRA and sought to be implemented
under Sec. 2, Rule 18 of the IRR of the said law is a tax which is to be collected from all electric
end-users and self-generating entities. The power to tax is strictly a legislative function and as
such, the delegation of said power to any executive or administrative agency like the ERC is
unconstitutional, giving the same unlimited authority. The assailed provision clearly provides
that the Universal Charge is to be determined, fixed and approved by the ERC, hence leaving
to the latter complete discretionary legislative authority.
2) The ERC is also empowered to approve and determine where the funds collected should be
used.
3) The imposition of the Universal Charge on all end-users is oppressive and confiscatory and
amounts to taxation without representation as the consumers were not given a chance to be
heard and represented.18
Petitioners contend that the Universal Charge has the characteristics of a tax and is collected
to fund the operations of the NPC. They argue that the cases 19 invoked by the respondents
clearly show the regulatory purpose of the charges imposed therein, which is not so in the case
94
at bench. In said cases, the respective funds 20 were created in order to balance and stabilize
the prices of oil and sugar, and to act as buffer to counteract the changes and adjustments in
prices, peso devaluation, and other variables which cannot be adequately and timely monitored
by the legislature. Thus, there was a need to delegate powers to administrative
bodies.21 Petitioners posit that the Universal Charge is imposed not for a similar purpose.
On the other hand, respondent PSALM through the Office of the Government Corporate
Counsel (OGCC) contends that unlike a tax which is imposed to provide income for public
purposes, such as support of the government, administration of the law, or payment of public
expenses, the assailed Universal Charge is levied for a specific regulatory purpose, which is
to ensure the viability of the country's electric power industry. Thus, it is exacted by the State
in the exercise of its inherent police power. On this premise, PSALM submits that there is no
undue delegation of legislative power to the ERC since the latter merely exercises a limited
authority or discretion as to the execution and implementation of the provisions of the EPIRA. 22
Respondents Department of Energy (DOE), ERC, and NPC, through the Office of the Solicitor
General (OSG), share the same view that the Universal Charge is not a tax because it is levied
for a specific regulatory purpose, which is to ensure the viability of the country's electric power
industry, and is, therefore, an exaction in the exercise of the State's police power. Respondents
further contend that said Universal Charge does not possess the essential characteristics of a
tax, that its imposition would redound to the benefit of the electric power industry and not to the
public, and that its rate is uniformly levied on electricity end-users, unlike a tax which is imposed
based on the individual taxpayer's ability to pay. Moreover, respondents deny that there is
undue delegation of legislative power to the ERC since the EPIRA sets forth sufficient
determinable standards which would guide the ERC in the exercise of the powers granted to
it. Lastly, respondents argue that the imposition of the Universal Charge is not oppressive and
confiscatory since it is an exercise of the police power of the State and it complies with the
requirements of due process.23
On its part, respondent PECO argues that it is duty-bound to collect and remit the amount
pertaining to the Missionary Electrification and Environmental Fund components of the
Universal Charge, pursuant to Sec. 34 of the EPIRA and the Decisions in ERC Case Nos.
2002-194 and 2002-165. Otherwise, PECO could be held liable under Sec. 46 24 of the EPIRA,
which imposes fines and penalties for any violation of its provisions or its IRR. 25
The Issues
The ultimate issues in the case at bar are:
1) Whether or not, the Universal Charge imposed under Sec. 34 of the EPIRA is a tax; and
2) Whether or not there is undue delegation of legislative power to tax on the part of the ERC. 26
Before we discuss the issues, the Court shall first deal with an obvious procedural lapse.
Petitioners filed before us an original action particularly denominated as a Complaint assailing
the constitutionality of Sec. 34 of the EPIRA imposing the Universal Charge and Rule 18 of the
EPIRA's IRR. No doubt, petitioners have locus standi. They impugn the constitutionality of Sec.
34 of the EPIRA because they sustained a direct injury as a result of the imposition of the
Universal Charge as reflected in their electric bills.
However, petitioners violated the doctrine of hierarchy of courts when they filed this "Complaint"
directly with us. Furthermore, the Complaint is bereft of any allegation of grave abuse of
discretion on the part of the ERC or any of the public respondents, in order for the Court to
consider it as a petition for certiorari or prohibition.
Article VIII, Section 5(1) and (2) of the 1987 Constitution27 categorically provides that:
SECTION 5. The Supreme Court shall have the following powers:
1. Exercise original jurisdiction over cases affecting ambassadors, other public ministers and
consuls, and over petitions for certiorari, prohibition, mandamus, quo warranto, and habeas
corpus.
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.
But this Court's jurisdiction to issue writs of certiorari, prohibition, mandamus, quo warranto,
and habeas corpus, while concurrent with that of the regional trial courts and the Court of
Appeals, does not give litigants unrestrained freedom of choice of forum from which to seek
such relief.28 It has long been established that this Court will not entertain direct resort to it
unless the redress desired cannot be obtained in the appropriate courts, or where exceptional
and compelling circumstances justify availment of a remedy within and call for the exercise of
our primary jurisdiction.29 This circumstance alone warrants the outright dismissal of the
present action.
This procedural infirmity notwithstanding, we opt to resolve the constitutional issue raised
herein. We are aware that if the constitutionality of Sec. 34 of the EPIRA is not resolved now,
the issue will certainly resurface in the near future, resulting in a repeat of this litigation, and
probably involving the same parties. In the public interest and to avoid unnecessary delay, this
Court renders its ruling now.
The instant complaint is bereft of merit.
The First Issue
To resolve the first issue, it is necessary to distinguish the States power of taxation from the
police power.
The power to tax is an incident of sovereignty and is unlimited in its range, acknowledging in
its very nature no limits, so that security against its abuse is to be found only in the responsibility
of the legislature which imposes the tax on the constituency that is to pay it. 30 It is based on the
principle that taxes are the lifeblood of the government, and their prompt and certain availability
is an imperious need.31 Thus, the theory behind the exercise of the power to tax emanates from
necessity; without taxes, government cannot fulfill its mandate of promoting the general welfare
and well-being of the people.32
On the other hand, police power is the power of the state to promote public welfare by
restraining and regulating the use of liberty and property. 33 It is the most pervasive, the least
95
limitable, and the most demanding of the three fundamental powers of the State. The
justification is found in the Latin maxims salus populi est suprema lex (the welfare of the people
is the supreme law) and sic utere tuo ut alienum non laedas (so use your property as not to
injure the property of others). As an inherent attribute of sovereignty which virtually extends to
all public needs, police power grants a wide panoply of instruments through which the State,
as parens patriae, gives effect to a host of its regulatory powers.34 We have held that the power
to "regulate" means the power to protect, foster, promote, preserve, and control, with due
regard for the interests, first and foremost, of the public, then of the utility and of its patrons. 35
The conservative and pivotal distinction between these two powers rests in the purpose for
which the charge is made. If generation of revenue is the primary purpose and regulation is
merely incidental, the imposition is a tax; but if regulation is the primary purpose, the fact that
revenue is incidentally raised does not make the imposition a tax.36
In exacting the assailed Universal Charge through Sec. 34 of the EPIRA, the State's police
power, particularly its regulatory dimension, is invoked. Such can be deduced from Sec. 34
which enumerates the purposes for which the Universal Charge is imposed 37 and which can
be amply discerned as regulatory in character. The EPIRA resonates such regulatory
purposes, thus:
SECTION 2. Declaration of Policy. It is hereby declared the policy of the State:
(a) To ensure and accelerate the total electrification of the country;
(b) To ensure the quality, reliability, security and affordability of the supply of electric power;
(c) To ensure transparent and reasonable prices of electricity in a regime of free and fair
competition and full public accountability to achieve greater operational and economic
efficiency and enhance the competitiveness of Philippine products in the global market;
(d) To enhance the inflow of private capital and broaden the ownership base of the power
generation, transmission and distribution sectors;
(e) To ensure fair and non-discriminatory treatment of public and private sector entities in the
process of restructuring the electric power industry;
(f) To protect the public interest as it is affected by the rates and services of electric utilities and
other providers of electric power;
(g) To assure socially and environmentally compatible energy sources and infrastructure;
(h) To promote the utilization of indigenous and new and renewable energy resources in power
generation in order to reduce dependence on imported energy;
(i) To provide for an orderly and transparent privatization of the assets and liabilities of the
National Power Corporation (NPC);
(j) To establish a strong and purely independent regulatory body and system to ensure
consumer protection and enhance the competitive operation of the electricity market; and
(k) To encourage the efficient use of energy and other modalities of demand side management.
From the aforementioned purposes, it can be gleaned that the assailed Universal Charge is
not a tax, but an exaction in the exercise of the State's police power. Public welfare is surely
promoted.
Moreover, it is a well-established doctrine that the taxing power may be used as an implement
of police power.38In Valmonte v. Energy Regulatory Board, et al.39 and in Gaston v. Republic
Planters Bank,40 this Court held that the Oil Price Stabilization Fund (OPSF) and the Sugar
Stabilization Fund (SSF) were exactions made in the exercise of the police power. The doctrine
was reiterated in Osmea v. Orbos41 with respect to the OPSF. Thus, we disagree with
petitioners that the instant case is different from the aforementioned cases. With the Universal
Charge, a Special Trust Fund (STF) is also created under the administration of PSALM. 42 The
STF has some notable characteristics similar to the OPSF and the SSF, viz.:
1) In the implementation of stranded cost recovery, the ERC shall conduct a review to
determine whether there is under-recovery or over recovery and adjust (true-up) the level of
the stranded cost recovery charge. In case of an over-recovery, the ERC shall ensure that any
excess amount shall be remitted to the STF. A separate account shall be created for these
amounts which shall be held in trust for any future claims of distribution utilities for stranded
cost recovery. At the end of the stranded cost recovery period, any remaining amount in this
account shall be used to reduce the electricity rates to the end-users.43
2) With respect to the assailed Universal Charge, if the total amount collected for the same is
greater than the actual availments against it, the PSALM shall retain the balance within the
STF to pay for periods where a shortfall occurs.44
3) Upon expiration of the term of PSALM, the administration of the STF shall be transferred to
the DOF or any of the DOF attached agencies as designated by the DOF Secretary.45
The OSG is in point when it asseverates:
Evidently, the establishment and maintenance of the Special Trust Fund, under the last
paragraph of Section 34, R.A. No. 9136, is well within the pervasive and non-waivable power
and responsibility of the government to secure the physical and economic survival and well-
being of the community, that comprehensive sovereign authority we designate as the police
power of the State.46
This feature of the Universal Charge further boosts the position that the same is an exaction
imposed primarily in pursuit of the State's police objectives. The STF reasonably serves and
assures the attainment and perpetuity of the purposes for which the Universal Charge is
imposed, i.e., to ensure the viability of the country's electric power industry.
The Second Issue
The principle of separation of powers ordains that each of the three branches of government
has exclusive cognizance of and is supreme in matters falling within its own constitutionally
allocated sphere. A logical corollary to the doctrine of separation of powers is the principle of
non-delegation of powers, as expressed in the Latin maxim potestas delegata non delegari
potest (what has been delegated cannot be delegated). This is based on the ethical principle
that such delegated power constitutes not only a right but a duty to be performed by the
96
delegate through the instrumentality of his own judgment and not through the intervening mind
of another. 47
In the face of the increasing complexity of modern life, delegation of legislative power to various
specialized administrative agencies is allowed as an exception to this principle. 48 Given the
volume and variety of interactions in today's society, it is doubtful if the legislature can
promulgate laws that will deal adequately with and respond promptly to the minutiae of
everyday life. Hence, the need to delegate to administrative bodies - the principal agencies
tasked to execute laws in their specialized fields - the authority to promulgate rules and
regulations to implement a given statute and effectuate its policies. All that is required for the
valid exercise of this power of subordinate legislation is that the regulation be germane to the
objects and purposes of the law and that the regulation be not in contradiction to, but in
conformity with, the standards prescribed by the law. These requirements are denominated as
the completeness test and the sufficient standard test.
Under the first test, the law must be complete in all its terms and conditions when it leaves the
legislature such that when it reaches the delegate, the only thing he will have to do is to enforce
it. The second test mandates adequate guidelines or limitations in the law to determine the
boundaries of the delegate's authority and prevent the delegation from running riot. 49
The Court finds that the EPIRA, read and appreciated in its entirety, in relation to Sec. 34
thereof, is complete in all its essential terms and conditions, and that it contains sufficient
standards.
Although Sec. 34 of the EPIRA merely provides that "within one (1) year from the effectivity
thereof, a Universal Charge to be determined, fixed and approved by the ERC, shall be
imposed on all electricity end-users," and therefore, does not state the specific amount to be
paid as Universal Charge, the amount nevertheless is made certain by the legislative
parameters provided in the law itself. For one, Sec. 43(b)(ii) of the EPIRA provides:
SECTION 43. Functions of the ERC. The ERC shall promote competition, encourage market
development, ensure customer choice and penalize abuse of market power in the restructured
electricity industry. In appropriate cases, the ERC is authorized to issue cease and desist order
after due notice and hearing. Towards this end, it shall be responsible for the following key
functions in the restructured industry:
xxxx
(b) Within six (6) months from the effectivity of this Act, promulgate and enforce, in accordance
with law, a National Grid Code and a Distribution Code which shall include, but not limited to
the following:
xxxx
(ii) Financial capability standards for the generating companies, the TRANSCO, distribution
utilities and suppliers: Provided, That in the formulation of the financial capability standards,
the nature and function of the entity shall be considered: Provided, further, That such standards
are set to ensure that the electric power industry participants meet the minimum financial
standards to protect the public interest. Determine, fix, and approve, after due notice and public
hearings the universal charge, to be imposed on all electricity end-users pursuant to Section
34 hereof;
Moreover, contrary to the petitioners contention, the ERC does not enjoy a wide latitude of
discretion in the determination of the Universal Charge. Sec. 51(d) and (e) of the
EPIRA50 clearly provides:
SECTION 51. Powers. The PSALM Corp. shall, in the performance of its functions and for
the attainment of its objective, have the following powers:
xxxx
(d) To calculate the amount of the stranded debts and stranded contract costs of NPC
which shall form the basis for ERC in the determination of the universal charge;
(e) To liquidate the NPC stranded contract costs, utilizing the proceeds from sales and other
property contributed to it, including the proceeds from the universal charge.
Thus, the law is complete and passes the first test for valid delegation of legislative power.
As to the second test, this Court had, in the past, accepted as sufficient standards the following:
"interest of law and order;"51 "adequate and efficient instruction;"52 "public interest;"53 "justice
and equity;"54 "public convenience and welfare;"55 "simplicity, economy and
efficiency;" "standardization and regulation of medical education;"57and "fair and equitable
56
employment practices."58 Provisions of the EPIRA such as, among others, "to ensure the total
electrification of the country and the quality, reliability, security and affordability of the supply
of electric power"59 and "watershed rehabilitation and management"60 meet the requirements
for valid delegation, as they provide the limitations on the ERCs power to formulate the IRR.
These are sufficient standards.
It may be noted that this is not the first time that the ERC's conferred powers were challenged.
In Freedom from Debt Coalition v. Energy Regulatory Commission,61 the Court had occasion
to say:
In determining the extent of powers possessed by the ERC, the provisions of the EPIRA must
not be read in separate parts. Rather, the law must be read in its entirety, because a statute is
passed as a whole, and is animated by one general purpose and intent. Its meaning cannot to
be extracted from any single part thereof but from a general consideration of the statute as a
whole. Considering the intent of Congress in enacting the EPIRA and reading the statute in its
entirety, it is plain to see that the law has expanded the jurisdiction of the regulatory body, the
ERC in this case, to enable the latter to implement the reforms sought to be accomplished by
the EPIRA. When the legislators decided to broaden the jurisdiction of the ERC, they did not
intend to abolish or reduce the powers already conferred upon ERC's predecessors. To sustain
the view that the ERC possesses only the powers and functions listed under Section 43 of the
EPIRA is to frustrate the objectives of the law.
In his Concurring and Dissenting Opinion62 in the same case, then Associate Justice, now Chief
Justice, Reynato S. Puno described the immensity of police power in relation to the delegation
of powers to the ERC and its regulatory functions over electric power as a vital public utility, to
wit:
97
Over the years, however, the range of police power was no longer limited to the preservation
of public health, safety and morals, which used to be the primary social interests in earlier
times. Police power now requires the State to "assume an affirmative duty to eliminate the
excesses and injustices that are the concomitants of an unrestrained industrial economy."
Police power is now exerted "to further the public welfare a concept as vast as the good of
society itself." Hence, "police power is but another name for the governmental authority to
further the welfare of society that is the basic end of all government." When police power is
delegated to administrative bodies with regulatory functions, its exercise should be given a
wide latitude. Police power takes on an even broader dimension in developing countries such
as ours, where the State must take a more active role in balancing the many conflicting interests
in society. The Questioned Order was issued by the ERC, acting as an agent of the State in
the exercise of police power. We should have exceptionally good grounds to curtail its exercise.
This approach is more compelling in the field of rate-regulation of electric power rates. Electric
power generation and distribution is a traditional instrument of economic growth that affects not
only a few but the entire nation. It is an important factor in encouraging investment and
promoting business. The engines of progress may come to a screeching halt if the delivery of
electric power is impaired. Billions of pesos would be lost as a result of power outages or
unreliable electric power services. The State thru the ERC should be able to exercise its police
power with great flexibility, when the need arises.
This was reiterated in National Association of Electricity Consumers for Reforms v. Energy
Regulatory Commission63 where the Court held that the ERC, as regulator, should have
sufficient power to respond in real time to changes wrought by multifarious factors affecting
public utilities.
From the foregoing disquisitions, we therefore hold that there is no undue delegation of
legislative power to the ERC.
Petitioners failed to pursue in their Memorandum the contention in the Complaint that the
imposition of the Universal Charge on all end-users is oppressive and confiscatory, and
amounts to taxation without representation. Hence, such contention is deemed waived or
abandoned per Resolution64 of August 3, 2004.65 Moreover, the determination of whether or
not a tax is excessive, oppressive or confiscatory is an issue which essentially involves
questions of fact, and thus, this Court is precluded from reviewing the same.66
As a penultimate statement, it may be well to recall what this Court said of EPIRA:
One of the landmark pieces of legislation enacted by Congress in recent years is the EPIRA. It
established a new policy, legal structure and regulatory framework for the electric power
industry. The new thrust is to tap private capital for the expansion and improvement of the
industry as the large government debt and the highly capital-intensive character of the industry
itself have long been acknowledged as the critical constraints to the program. To attract private
investment, largely foreign, the jaded structure of the industry had to be addressed. While the
generation and transmission sectors were centralized and monopolistic, the distribution side
was fragmented with over 130 utilities, mostly small and uneconomic. The pervasive flaws have
caused a low utilization of existing generation capacity; extremely high and uncompetitive
power rates; poor quality of service to consumers; dismal to forgettable performance of the
government power sector; high system losses; and an inability to develop a clear strategy for
overcoming these shortcomings.
Thus, the EPIRA provides a framework for the restructuring of the industry, including the
privatization of the assets of the National Power Corporation (NPC), the transition to a
competitive structure, and the delineation of the roles of various government agencies and the
private entities. The law ordains the division of the industry into four (4) distinct sectors, namely:
generation, transmission, distribution and supply.
Corollarily, the NPC generating plants have to privatized and its transmission business spun
off and privatized thereafter.67
Finally, every law has in its favor the presumption of constitutionality, and to justify its
nullification, there must be a clear and unequivocal breach of the Constitution and not one that
is doubtful, speculative, or argumentative.68Indubitably, petitioners failed to overcome this
presumption in favor of the EPIRA. We find no clear violation of the Constitution which would
warrant a pronouncement that Sec. 34 of the EPIRA and Rule 18 of its IRR are unconstitutional
and void.
WHEREFORE, the instant case is hereby DISMISSED for lack of merit.
SO ORDERED.

98
G.R. No. 159647 April 15, 2005
COMMISSIONER OF INTERNAL REVENUE, Petitioners,
vs.
CENTRAL LUZON DRUG CORPORATION, Respondent.
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 Review1 under Rule 45 of the Rules of Court, seeking to set aside
the August 29, 2002 Decision2 and the August 11, 2003 Resolution3 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.
"On April 15, 1997, respondent filed its Annual Income Tax Return for taxable 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 [R.A.] 7432. Unable to obtain affirmative response
from petitioner, respondent 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 Decision5 dismissing respondents Petition
for lack of merit. In said decision, the [CTA] justified its ruling with the following ratiocination:
99
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.
x x x x x x x x x
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 743210 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 3420 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 Atax deduction, on the other, reduces the income
that is subject to tax22 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 creditcan 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
100
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 credit may 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 credit certificate 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 deduction from 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 atax 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 finding32 that the carry-over of tax creditsunder 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.
101
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 statement39 or financial report upon which theincome 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 statement50 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.52This 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 accounts54 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 sold56 -- is
deducted from gross sales to come up with the gross income, profit or margin57 derived from
business.58 In another provision therein, sales discountsthat 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
102
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 theincome 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 statute71 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 sales74 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 revalidated75accordingly. 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
103
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 asjust
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.
To put it differently, a private establishment that merely breaks even85 -- 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
thetax 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 REP. AQUINO. Yah.
2.i and 4 of RR 2-94, however, contradict these constitutional policies and statutory objectives. SEN. ANGARA. Dahil kung government, they don't need to claim it.
Furthermore, Congress has allowed all private establishments a simple tax credit, not a THE CHAIRMAN. (Rep. Unico). Tax credit.
deduction. In fact, no cash outlay is required from the government for the availment or use of
SEN. ANGARA. As a tax credit [rather] than a kuwan - deduction, Okay.
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 REP. AQUINO Okay.
to treat the sales discounts as a tax credit, rather than as a deduction from gross income. We SEN. ANGARA. Sige Okay. Di subject to style na lang sa Letter A".89
quote from those deliberations as follows: Special Law
"THE CHAIRMAN (Rep. Unico). By the way, before that ano, about deductions from taxable Over General Law
income. I think we incorporated there a provision na - on the responsibility of the private
Sixth and last, RA 7432 is a special law that should prevail over the Tax Code -- a general law.
hospitals and drugstores, hindi ba?
"x x x [T]he rule is that on a specific matter the special law shall prevail over the general law,
SEN. ANGARA. Oo. which shall
THE CHAIRMAN. (Rep. Unico), So, I think we have to put in also a provision here about the be resorted to only to supply deficiencies in the former." 90 In addition, "[w]here there are two
deductions from taxable income of that private hospitals, di ba ganon 'yan? statutes, the earlier special and the later general -- the terms of the general broad enough to
MS. ADVENTO. Kaya lang po sir, and mga discounts po nila affecting government and public include the matter provided for in the special -- the fact that one is special and the other is
institutions, so, puwede na po nating hindi isama yung mga less deductions ng taxable income. 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
THE CHAIRMAN. (Rep. Unico). Puwede na. Yung about the private hospitals. Yung isiningit
is a canon of statutory construction that a later statute, general in its terms and not expressly
natin?
repealing a prior special statute, will ordinarily not affect the special provisions of such earlier
MS. ADVENTO. Singit na po ba yung 15% on credit. (inaudible/did not use the microphone). statute."93
SEN. ANGARA. Hindi pa, hindi pa. RA 7432 is an earlier law not expressly repealed by, and therefore remains an exception to,
THE CHAIRMAN. (Rep. Unico) Ah, 'di pa ba naisama natin? the Tax Code -- a later law. When the former states that a tax credit may be claimed, then the
SEN. ANGARA. Oo. You want to insert that? 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 CHAIRMAN (Rep. Unico). Yung ang proposal ni Senator Shahani, e.
the Tax Code94 be made to restrict RA 7432. No provision of any revenue regulation can
SEN. ANGARA. In the case of private hospitals they got the grant of 15% discount, provided supplant or modify the acts of Congress.
that, the private hospitals can claim the expense as a tax credit.
WHEREFORE, the Petition is hereby DENIED. The assailed Decision and Resolution of the
REP. AQUINO. Yah could be allowed as deductions in the perpetrations of (inaudible) income. Court of Appeals AFFIRMED. No pronouncement as to costs.
SEN. ANGARA. I-tax credit na lang natin para walang cash-out ano? SO ORDERED.
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?

104
G.R. No. 76778 June 6, 1990
FRANCISCO I. CHAVEZ, petitioner,
vs.
JAIME B. ONGPIN, in his capacity as Minister of Finance and FIDELINA CRUZ, in her
capacity as Acting Municipal Treasurer of the Municipality of Las Pias, respondents,
REALTY OWNERS ASSOCIATION OF THE PHILIPPINES, INC., petitioner-intervenor.
Brotherhood of Nationalistic, Involved and Free Attorneys to Combat Injustice and Oppression
(Bonifacio) for petitioner.
Ambrosia Padilla, Mempin and Reyes Law Offices for movant Realty Owners Association.
MEDIALDEA, J.:
The petition seeks to declare unconstitutional Executive Order No. 73 dated November 25,
1986, which We quote in full, as follows (78 O.G. 5861):
EXECUTIVE ORDER No. 73
PROVIDING FOR THE COLLECTION OF REAL PROPERTY TAXES BASED ON THE 1984
REAL PROPERTY VALUES, AS PROVIDED FOR UNDER SECTION 21 OF THE REAL
PROPERTY TAX CODE, AS AMENDED
WHEREAS, the collection of real property taxes is still based on the 1978 revision of property
values;
WHEREAS, the latest general revision of real property assessments completed in 1984 has
rendered the 1978 revised values obsolete;
WHEREAS, the collection of real property taxes based on the 1984 real property values was
deferred to take effect on January 1, 1988 instead of January 1, 1985, thus depriving the local
government units of an additional source of revenue;
WHEREAS, there is an urgent need for local governments to augment their financial resources
to meet the rising cost of rendering effective services to the people;
NOW, THEREFORE, I. CORAZON C. AQUINO, President of the Philippines, do hereby order:
SECTION 1. Real property values as of December 31, 1984 as determined by the local
assessors during the latest general revision of assessments shall take effect beginning January
1, 1987 for purposes of real property tax collection.
SEC. 2. The Minister of Finance shall promulgate the necessary rules and regulations to
implement this Executive Order.
SEC. 3. Executive Order No. 1019, dated April 18, 1985, is hereby repealed.
SEC. 4. All laws, orders, issuances, and rules and regulations or parts thereof inconsistent with
this Executive Order are hereby repealed or modified accordingly.
SEC. 5. This Executive Order shall take effect immediately.
On March 31, 1987, Memorandum Order No. 77 was issued suspending the implementation
of Executive Order No. 73 until June 30, 1987.
105
The petitioner, Francisco I. Chavez, 1 is a taxpayer and an owner of three parcels of land. He
alleges the following: that Executive Order No. 73 accelerated the application of the general
revision of assessments to January 1, 1987 thereby mandating an excessive increase in real
property taxes by 100% to 400% on improvements, and up to 100% on land; that any increase
in the value of real property brought about by the revision of real property values and
assessments would necessarily lead to a proportionate increase in real property taxes; that
sheer oppression is the result of increasing real property taxes at a period of time when harsh
economic conditions prevail; and that the increase in the market values of real property as
reflected in the schedule of values was brought about only by inflation and economic recession.
The intervenor Realty Owners Association of the Philippines, Inc. (ROAP), which is the national
association of owners-lessors, joins Chavez in his petition to declare unconstitutional Executive
Order No. 73, but additionally alleges the following: that Presidential Decree No. 464 is
unconstitutional insofar as it imposes an additional one percent (1%) tax on all property owners
to raise funds for education, as real property tax is admittedly a local tax for local governments;
that the General Revision of Assessments does not meet the requirements of due process as
regards publication, notice of hearing, opportunity to be heard and insofar as it authorizes
"replacement cost" of buildings (improvements) which is not provided in Presidential Decree
No. 464, but only in an administrative regulation of the Department of Finance; and that the
Joint Local Assessment/Treasury Regulations No. 2-86 2 is even more oppressive and
unconstitutional as it imposes successive increase of 150% over the 1986 tax.
The Office of the Solicitor General argues against the petition.
The petition is not impressed with merit.
Petitioner Chavez and intervenor ROAP question the constitutionality of Executive Order No.
73 insofar as the revision of the assessments and the effectivity thereof are concerned. It
should be emphasized that Executive Order No. 73 merely directs, in Section 1 thereof, that:
SECTION 1. Real property values as of December 31, 1984 as determined by the local
assessors during the latest general revision of assessments shall take effect beginning January
1, 1987 for purposes of real property tax collection. (emphasis supplied)
The general revision of assessments completed in 1984 is based on Section 21 of Presidential
Decree No. 464 which provides, as follows:
SEC. 21. General Revision of Assessments. Beginning with the assessor shall make a
calendar year 1978, the provincial or city general revision of real property assessments in the
province or city to take effect January 1, 1979, and once every five years thereafter: Provided;
however, That if property values in a province or city, or in any municipality, have greatly
changed since the last general revision, the provincial or city assesor may, with the approval
of the Secretary of Finance or upon bis direction, undertake a general revision of assessments
in the province or city, or in any municipality before the fifth year from the effectivity of the last
general revision.
Thus, We agree with the Office of the Solicitor General that the attack on Executive Order No.
73 has no legal basis as the general revision of assessments is a continuing process mandated
by Section 21 of Presidential Decree No. 464. If at all, it is Presidential Decree No. 464 which
should be challenged as constitutionally infirm. However, Chavez failed to raise any objection
against said decree. It was ROAP which questioned the constitutionality thereof. Furthermore,
Presidential Decree No. 464 furnishes the procedure by which a tax assessment may be
questioned:
SEC. 30. Local Board of Assessment Appeals. Any owner who is not satisfied with the action
of the provincial or city assessor in the assessment of his property may, within sixty days from
the date of receipt by him of the written notice of assessment as provided in this Code, appeal
to the Board of Assessment Appeals of the province or city, by filing with it a petition under oath
using the form prescribed for the purpose, together with copies of the tax declarations and such
affidavit or documents submitted in support of the appeal.
xxx xxx xxx
SEC. 34. Action by the Local Board of assessment Appeals. The Local Board of Assessment
Appeals shall decide the appeal within one hundred and twenty days from the date of receipt
of such appeal. The decision rendered must be based on substantial evidence presented at
the hearing or at least contained in the record and disclosed to the parties or such relevant
evidence as a reasonable mind might accept as adequate to support the conclusion.
In the exercise of its appellate jurisdiction, the Board shall have the power to summon
witnesses, administer oaths, conduct ocular inspection, take depositions, and issue subpoena
and subpoenaduces tecum. The proceedings of the Board shall be conducted solely for the
purpose of ascertaining the truth without-necessarily adhering to technical rules applicable in
judicial proceedings.
The Secretary of the Board shall furnish the property owner and the Provincial or City Assessor
with a copy each of the decision of the Board. In case the provincial or city assessor concurs
in the revision or the assessment, it shall be his duty to notify the property owner of such fact
using the form prescribed for the purpose. The owner or administrator of the property or the
assessor who is not satisfied with the decision of the Board of Assessment Appeals, may,
within thirty days after receipt of the decision of the local Board, appeal to the Central Board of
Assessment Appeals by filing his appeal under oath with the Secretary of the proper provincial
or city Board of Assessment Appeals using the prescribed form stating therein the grounds and
the reasons for the appeal, and attaching thereto any evidence pertinent to the case. A copy
of the appeal should be also furnished the Central Board of Assessment Appeals, through its
Chairman, by the appellant.
Within ten (10) days from receipt of the appeal, the Secretary of the Board of Assessment
Appeals concerned shall forward the same and all papers related thereto, to the Central Board
of Assessment Appeals through the Chairman thereof.
xxx xxx xxx
SEC. 36. Scope of Powers and Functions. The Central Board of Assessment Appeals shall
have jurisdiction over appealed assessment cases decided by the Local Board of Assessment
Appeals. The said Board shall decide cases brought on appeal within twelve (12) months from
the date of receipt, which decision shall become final and executory after the lapse of fifteen
(15) days from the date of receipt of a copy of the decision by the appellant.
106
In the exercise of its appellate jurisdiction, the Central Board of Assessment Appeals, or upon
express authority, the Hearing Commissioner, shall have the power to summon witnesses,
administer oaths, take depositions, and issue subpoenas and subpoenas duces tecum.
The Central Board of assessment Appeals shall adopt and promulgate rules of procedure
relative to the conduct of its business.
Simply stated, within sixty days from the date of receipt of the, written notice of assessment,
any owner who doubts the assessment of his property, may appeal to the Local Board of
Assessment Appeals. In case the, owner or administrator of the property or the assessor is not
satisfied with the decision of the Local Board of Assessment Appeals, he may, within thirty
days from the receipt of the decision, appeal to the Central Board of Assessment Appeals. The
decision of the Central Board of Assessment Appeals shall become final and executory after
the lapse of fifteen days from the date of receipt of the decision.
Chavez argues further that the unreasonable increase in real property taxes brought about by
Executive Order No. 73 amounts to a confiscation of property repugnant to the constitutional
guarantee of due process, invoking the cases of Ermita-Malate Hotel, et al. v. Mayor of
Manila (G.R. No. L-24693, July 31, 1967, 20 SCRA 849) andSison v. Ancheta, et al. (G.R. No.
59431, July 25, 1984, 130 SCRA 654).
The reliance on these two cases is certainly misplaced because the due process requirement
called for therein applies to the "power to tax." Executive Order No. 73 does not impose new
taxes nor increase taxes.
Indeed, the government recognized the financial burden to the taxpayers that will result from
an increase in real property taxes. Hence, Executive Order No. 1019 was issued on April 18,
1985, deferring the implementation of the increase in real property taxes resulting from the
revised real property assessments, from January 1, 1985 to January 1, 1988. Section 5 thereof
is quoted herein as follows:
SEC. 5. The increase in real property taxes resulting from the revised real property
assessments as provided for under Section 21 of Presidential Decree No. 464, as amended by
Presidential Decree No. 1621, shall be collected beginning January 1, 1988 instead of January
1, 1985 in order to enable the Ministry of Finance and the Ministry of Local Government to
establish the new systems of tax collection and assessment provided herein and in order to
alleviate the condition of the people, including real property owners, as a result of temporary
economic difficulties. (emphasis supplied)
The issuance of Executive Order No. 73 which changed the date of implementation of the
increase in real property taxes from January 1, 1988 to January 1, 1987 and therefore repealed
Executive Order No. 1019, also finds ample justification in its "whereas' clauses, as follows:
WHEREAS, the collection of real property taxes based on the 1984 real property values was
deferred to take effect on January 1, 1988 instead of January 1, 1985, thus depriving the local
government units of an additional source of revenue;
WHEREAS, there is an urgent need for local governments to augment their financial resources
to meet the rising cost of rendering effective services to the people; (emphasis supplied)
xxx xxx xxx
The other allegation of ROAP that Presidential Decree No. 464 is unconstitutional, is not proper
to be resolved in the present petition. As stated at the outset, the issue here is limited to the
constitutionality of Executive Order No. 73. Intervention is not an independent proceeding, but
an ancillary and supplemental one which, in the nature of things, unless otherwise provided for
by legislation (or Rules of Court), must be in subordination to the main proceeding, and it may
be laid down as a general rule that an intervention is limited to the field of litigation open to the
original parties (59 Am. Jur. 950. Garcia, etc., et al. v. David, et al., 67 Phil. 279).
We agree with the observation of the Office of the Solicitor General that without Executive
Order No. 73, the basis for collection of real property taxes win still be the 1978 revision of
property values. Certainly, to continue collecting real property taxes based on valuations
arrived at several years ago, in disregard of the increases in the value of real properties that
have occurred since then, is not in consonance with a sound tax system. Fiscal adequacy,
which is one of the characteristics of a sound tax system, requires that sources of revenues
must be adequate to meet government expenditures and their variations.
ACCORDINGLY, the petition and the petition-in-intervention are hereby DISMISSED.
SO ORDERED.

107
G.R. No. 193007 July 19, 2011
RENATO V. DIAZ and AURORA MA. F. TIMBOL, Petitioners,
vs.
THE SECRETARY OF FINANCE and THE COMMISSIONER OF INTERNAL
REVENUE, Respondents.
DECISION
ABAD, J.:
May toll fees collected by tollway operators be subjected to value- added tax?
The Facts and the Case
Petitioners Renato V. Diaz and Aurora Ma. F. Timbol (petitioners) filed this petition for
declaratory relief1 assailing the validity of the impending imposition of value-added tax (VAT)
by the Bureau of Internal Revenue (BIR) on the collections of tollway operators.
Petitioners claim that, since the VAT would result in increased toll fees, they have an interest
as regular users of tollways in stopping the BIR action. Additionally, Diaz claims that he
sponsored the approval of Republic Act 7716 (the 1994 Expanded VAT Law or EVAT Law) and
Republic Act 8424 (the 1997 National Internal Revenue Code or the NIRC) at the House of
Representatives. Timbol, on the other hand, claims that she served as Assistant Secretary of
the Department of Trade and Industry and consultant of the Toll Regulatory Board (TRB) in the
past administration.
Petitioners allege that the BIR attempted during the administration of President Gloria
Macapagal-Arroyo to impose VAT on toll fees. The imposition was deferred, however, in view
of the consistent opposition of Diaz and other sectors to such move. But, upon President
Benigno C. Aquino IIIs assumption of office in 2010, the BIR revived the idea and would impose
the challenged tax on toll fees beginning August 16, 2010 unless judicially enjoined.
Petitioners hold the view that Congress did not, when it enacted the NIRC, intend to include
toll fees within the meaning of "sale of services" that are subject to VAT; that a toll fee is a
"users tax," not a sale of services; that to impose VAT on toll fees would amount to a tax on
public service; and that, since VAT was never factored into the formula for computing toll fees,
its imposition would violate the non-impairment clause of the constitution.
On August 13, 2010 the Court issued a temporary restraining order (TRO), enjoining the
implementation of the VAT. The Court required the government, represented by respondents
Cesar V. Purisima, Secretary of the Department of Finance, and Kim S. Jacinto-Henares,
Commissioner of Internal Revenue, to comment on the petition within 10 days from
notice.2 Later, the Court issued another resolution treating the petition as one for prohibition. 3
On August 23, 2010 the Office of the Solicitor General filed the governments comment.4
The
government avers that the NIRC imposes VAT on all kinds of services of franchise grantees,
including tollway operations, except where the law provides otherwise; that the Court should
seek the meaning and intent of the law from the words used in the statute; and that the
imposition of VAT on tollway operations has been the subject as early as 2003 of several BIR
rulings and circulars.5
108
The government also argues that petitioners have no right to invoke the non-impairment of
contracts clause since they clearly have no personal interest in existing toll operating
agreements (TOAs) between the government and tollway operators. At any rate, the non-
impairment clause cannot limit the States sovereign taxing power which is generally read into
contracts.
Finally, the government contends that the non-inclusion of VAT in the parametric formula for
computing toll rates cannot exempt tollway operators from VAT. In any event, it cannot be
claimed that the rights of tollway operators to a reasonable rate of return will be impaired by
the VAT since this is imposed on top of the toll rate. Further, the imposition of VAT on toll fees
would have very minimal effect on motorists using the tollways.
In their reply6 to the governments comment, petitioners point out that tollway operators cannot
be regarded as franchise grantees under the NIRC since they do not hold legislative franchises.
Further, the BIR intends to collect the VAT by rounding off the toll rate and putting any excess
collection in an escrow account. But this would be illegal since only the Congress can modify
VAT rates and authorize its disbursement. Finally, BIR Revenue Memorandum Circular 63-
2010 (BIR RMC 63-2010), which directs toll companies to record an accumulated input VAT of
zero balance in their books as of August 16, 2010, contravenes Section 111 of the NIRC which
grants entities that first become liable to VAT a transitional input tax credit of 2% on beginning
inventory. For this reason, the VAT on toll fees cannot be implemented.
The Issues Presented
The case presents two procedural issues:
1. Whether or not the Court may treat the petition for declaratory relief as one for prohibition;
and
2. Whether or not petitioners Diaz and Timbol have legal standing to file the action.
The case also presents two substantive issues:
1. Whether or not the government is unlawfully expanding VAT coverage by including tollway
operators and tollway operations in the terms "franchise grantees" and "sale of services" under
Section 108 of the Code; and
2. Whether or not the imposition of VAT on tollway operators a) amounts to a tax on tax and
not a tax on services; b) will impair the tollway operators right to a reasonable return of
investment under their TOAs; and c) is not administratively feasible and cannot be
implemented.
The Courts Rulings
A. On the Procedural Issues:
On August 24, 2010 the Court issued a resolution, treating the petition as one for prohibition
rather than one for declaratory relief, the characterization that petitioners Diaz and Timbol gave
their action. The government has sought reconsideration of the Courts resolution, 7 however,
arguing that petitioners allegations clearly made out a case for declaratory relief, an action
over which the Court has no original jurisdiction. The government adds, moreover, that the
petition does not meet the requirements of Rule 65 for actions for prohibition since the BIR did
not exercise judicial, quasi-judicial, or ministerial functions when it sought to impose VAT on
toll fees. Besides, petitioners Diaz and Timbol has a plain, speedy, and adequate remedy in
the ordinary course of law against the BIR action in the form of an appeal to the Secretary of
Finance.
But there are precedents for treating a petition for declaratory relief as one for prohibition if the
case has far-reaching implications and raises questions that need to be resolved for the public
good.8 The Court has also held that a petition for prohibition is a proper remedy to prohibit or
nullify acts of executive officials that amount to usurpation of legislative authority.9
Here, the imposition of VAT on toll fees has far-reaching implications. Its imposition would
impact, not only on the more than half a million motorists who use the tollways everyday, but
more so on the governments effort to raise revenue for funding various projects and for
reducing budgetary deficits.
To dismiss the petition and resolve the issues later, after the challenged VAT has been
imposed, could cause more mischief both to the tax-paying public and the government. A
belated declaration of nullity of the BIR action would make any attempt to refund to the
motorists what they paid an administrative nightmare with no solution. Consequently, it is not
only the right, but the duty of the Court to take cognizance of and resolve the issues that the
petition raises.
Although the petition does not strictly comply with the requirements of Rule 65, the Court has
ample power to waive such technical requirements when the legal questions to be resolved are
of great importance to the public. The same may be said of the requirement of locus standi
which is a mere procedural requisite.10
B. On the Substantive Issues:
One. The relevant law in this case is Section 108 of the NIRC, as amended. VAT is levied,
assessed, and collected, according to Section 108, on the gross receipts derived from the sale
or exchange of services as well as from the use or lease of properties. The third paragraph of
Section 108 defines "sale or exchange of services" as follows:
The phrase sale or exchange of services means the performance of all kinds of services in
the Philippines for others for a fee, remuneration or consideration, including those performed
or rendered by construction and service contractors; stock, real estate, commercial, customs
and immigration brokers; lessors of property, whether personal or real; warehousing services;
lessors or distributors of cinematographic films; persons engaged in milling, processing,
manufacturing or repacking goods for others; proprietors, operators or keepers of hotels,
motels, resthouses, pension houses, inns, resorts; proprietors or operators of restaurants,
refreshment parlors, cafes and other eating places, including clubs and caterers; dealers in
securities; lending investors; transportation contractors on their transport of goods or cargoes,
including persons who transport goods or cargoes for hire and other domestic common carriers
by land relative to their transport of goods or cargoes; common carriers by air and sea relative
to their transport of passengers, goods or cargoes from one place in the Philippines to another
place in the Philippines; sales of electricity by generation companies, transmission, and
distribution companies;services of franchise grantees of electric utilities, telephone and
109
telegraph, radio and television broadcasting and all other franchise grantees except those
under Section 119 of this Code and non-life insurance companies (except their crop
insurances), including surety, fidelity, indemnity and bonding companies; and similar services
regardless of whether or not the performance thereof calls for the exercise or use of the
physical or mental faculties. (Underscoring supplied)
It is plain from the above that the law imposes VAT on "all kinds of services" rendered in the
Philippines for a fee, including those specified in the list. The enumeration of affected services
is not exclusive.11 By qualifying "services" with the words "all kinds," Congress has given the
term "services" an all-encompassing meaning. The listing of specific services are intended to
illustrate how pervasive and broad is the VATs reach rather than establish concrete limits to
its application. Thus, every activity that can be imagined as a form of "service" rendered for a
fee should be deemed included unless some provision of law especially excludes it.
Now, do tollway operators render services for a fee? Presidential Decree (P.D.) 1112 or the
Toll Operation Decree establishes the legal basis for the services that tollway operators render.
Essentially, tollway operators construct, maintain, and operate expressways, also called
tollways, at the operators expense. Tollways serve as alternatives to regular public highways
that meander through populated areas and branch out to local roads. Traffic in the regular
public highways is for this reason slow-moving. In consideration for constructing tollways at
their expense, the operators are allowed to collect government-approved fees from motorists
using the tollways until such operators could fully recover their expenses and earn reasonable
returns from their investments.
When a tollway operator takes a toll fee from a motorist, the fee is in effect for the latters use
of the tollway facilities over which the operator enjoys private proprietary rights 12 that its
contract and the law recognize. In this sense, the tollway operator is no different from the
following service providers under Section 108 who allow others to use their properties or
facilities for a fee:
1. Lessors of property, whether personal or real;
2. Warehousing service operators;
3. Lessors or distributors of cinematographic films;
4. Proprietors, operators or keepers of hotels, motels, resthouses, pension houses, inns,
resorts;
5. Lending investors (for use of money);
6. Transportation contractors on their transport of goods or cargoes, including persons who
transport goods or cargoes for hire and other domestic common carriers by land relative to
their transport of goods or cargoes; and
7. Common carriers by air and sea relative to their transport of passengers, goods or cargoes
from one place in the Philippines to another place in the Philippines.
It does not help petitioners cause that Section 108 subjects to VAT "all kinds of services"
rendered for a fee "regardless of whether or not the performance thereof calls for the exercise
or use of the physical or mental faculties." This means that "services" to be subject to VAT
need not fall under the traditional concept of services, the personal or professional kinds that
require the use of human knowledge and skills.
And not only do tollway operators come under the broad term "all kinds of services," they also
come under the specific class described in Section 108 as "all other franchise grantees" who
are subject to VAT, "except those under Section 119 of this Code."
Tollway operators are franchise grantees and they do not belong to exceptions (the low-income
radio and/or television broadcasting companies with gross annual incomes of less than P10
million and gas and water utilities) that Section 119 13 spares from the payment of VAT. The
word "franchise" broadly covers government grants of a special right to do an act or series of
acts of public concern.14
Petitioners of course contend that tollway operators cannot be considered "franchise grantees"
under Section 108 since they do not hold legislative franchises. But nothing in Section 108
indicates that the "franchise grantees" it speaks of are those who hold legislative franchises.
Petitioners give no reason, and the Court cannot surmise any, for making a distinction between
franchises granted by Congress and franchises granted by some other government agency.
The latter, properly constituted, may grant franchises. Indeed, franchises conferred or granted
by local authorities, as agents of the state, constitute as much a legislative franchise as though
the grant had been made by Congress itself.15 The term "franchise" has been broadly
construed as referring, not only to authorizations that Congress directly issues in the form of a
special law, but also to those granted by administrative agencies to which the power to grant
franchises has been delegated by Congress.16
Tollway operators are, owing to the nature and object of their business, "franchise grantees."
The construction, operation, and maintenance of toll facilities on public improvements are
activities of public consequence that necessarily require a special grant of authority from the
state. Indeed, Congress granted special franchise for the operation of tollways to the Philippine
National Construction Company, the former tollway concessionaire for the North and South
Luzon Expressways. Apart from Congress, tollway franchises may also be granted by the TRB,
pursuant to the exercise of its delegated powers under P.D. 1112.17 The franchise in this case
is evidenced by a "Toll Operation Certificate."18
Petitioners contend that the public nature of the services rendered by tollway operators
excludes such services from the term "sale of services" under Section 108 of the Code. But,
again, nothing in Section 108 supports this contention. The reverse is true. In specifically
including by way of example electric utilities, telephone, telegraph, and broadcasting
companies in its list of VAT-covered businesses, Section 108 opens other companies rendering
public service for a fee to the imposition of VAT. Businesses of a public nature such as public
utilities and the collection of tolls or charges for its use or service is a franchise. 19
Nor can petitioners cite as binding on the Court statements made by certain lawmakers in the
course of congressional deliberations of the would-be law. As the Court said in South African
Airways v. Commissioner of Internal Revenue,20 "statements made by individual members of
Congress in the consideration of a bill do not necessarily reflect the sense of that body and are,
consequently, not controlling in the interpretation of law." The congressional will is ultimately
determined by the language of the law that the lawmakers voted on. Consequently, the
110
meaning and intention of the law must first be sought "in the words of the statute itself, read
and considered in their natural, ordinary, commonly accepted and most obvious significations,
according to good and approved usage and without resorting to forced or subtle construction."
Two. Petitioners argue that a toll fee is a "users tax" and to impose VAT on toll fees is
tantamount to taxing a tax.21 Actually, petitioners base this argument on the following
discussion in Manila International Airport Authority (MIAA) v. Court of Appeals: 22
No one can dispute that properties of public dominion mentioned in Article 420 of the Civil
Code, like "roads, canals, rivers, torrents, ports and bridges constructed by the State," are
owned by the State. The term "ports" includes seaports and airports. The MIAA Airport Lands
and Buildings constitute a "port" constructed by the State. Under Article 420 of the Civil Code,
the MIAA Airport Lands and Buildings are properties of public dominion and thus owned by the
State or the Republic of the Philippines.
x x x The operation by the government of a tollway does not change the character of the road
as one for public use. Someone must pay for the maintenance of the road, either the public
indirectly through the taxes they pay the government, or only those among the public who
actually use the road through the toll fees they pay upon using the road. The tollway system is
even a more efficient and equitable manner of taxing the public for the maintenance of public
roads.
The charging of fees to the public does not determine the character of the property whether it
is for public dominion or not. Article 420 of the Civil Code defines property of public dominion
as "one intended for public use."Even if the government collects toll fees, the road is still
"intended for public use" if anyone can use the road under the same terms and conditions as
the rest of the public. The charging of fees, the limitation on the kind of vehicles that can use
the road, the speed restrictions and other conditions for the use of the road do not affect the
public character of the road.
The terminal fees MIAA charges to passengers, as well as the landing fees MIAA charges to
airlines, constitute the bulk of the income that maintains the operations of MIAA. The collection
of such fees does not change the character of MIAA as an airport for public use. Such fees are
often termed users 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 users tax is more equitable a principle of taxation mandated in the 1987
Constitution."23 (Underscoring supplied)
Petitioners assume that what the Court said above, equating terminal fees to a "users tax"
must also pertain to tollway fees. But the main issue in the MIAA case was whether or not
Paraaque City could sell airport lands and buildings under MIAA administration at public
auction to satisfy unpaid real estate taxes. Since local governments have no power to tax the
national government, the Court held that the City could not proceed with the auction sale. MIAA
forms part of the national government although not integrated in the department
framework."24 Thus, its airport lands and buildings are properties of public dominion beyond
the commerce of man under Article 420(1)25 of the Civil Code and could not be sold at public
auction.
As can be seen, the discussion in the MIAA case on toll roads and toll fees was made, not to
establish a rule that tollway fees are users tax, but to make the point that airport lands and
buildings are properties of public dominion and that the collection of terminal fees for their use
does not make them private properties. Tollway fees are not taxes. Indeed, they are not
assessed and collected by the BIR and do not go to the general coffers of the government.
It would of course be another matter if Congress enacts a law imposing a users tax, collectible
from motorists, for the construction and maintenance of certain roadways. The tax in such a
case goes directly to the government for the replenishment of resources it spends for the
roadways. This is not the case here. What the government seeks to tax here are fees collected
from tollways that are constructed, maintained, and operated by private tollway operators at
their own expense under the build, operate, and transfer scheme that the government has
adopted for expressways.26 Except for a fraction given to the government, the toll fees
essentially end up as earnings of the tollway operators.
In sum, fees paid by the public to tollway operators for use of the tollways, are not taxes in any
sense. A tax is imposed under the taxing power of the government principally for the purpose
of raising revenues to fund public expenditures.27 Toll fees, on the other hand, are collected by
private tollway operators as reimbursement for the costs and expenses incurred in the
construction, maintenance and operation of the tollways, as well as to assure them a
reasonable margin of income. Although toll fees are charged for the use of public facilities,
therefore, they are not government exactions that can be properly treated as a tax. Taxes may
be imposed only by the government under its sovereign authority, toll fees may be demanded
by either the government or private individuals or entities, as an attribute of ownership.28
Parenthetically, VAT on tollway operations cannot be deemed a tax on tax due to the nature of
VAT as an indirect tax. In indirect taxation, a distinction is made between the liability for the tax
and burden of the tax. The seller who is liable for the VAT may shift or pass on the amount of
VAT it paid on goods, properties or services to the buyer. In such a case, what is transferred is
not the sellers liability but merely the burden of the VAT.29
Thus, the seller remains directly and legally liable for payment of the VAT, but the buyer bears
its burden since the amount of VAT paid by the former is added to the selling price. Once
shifted, the VAT ceases to be a tax30 and simply becomes part of the cost that the buyer must
pay in order to purchase the good, property or service.
Consequently, VAT on tollway operations is not really a tax on the tollway user, but on the
tollway operator. Under Section 105 of the Code, 31 VAT is imposed on any person who, in the
course of trade or business, sells or renders services for a fee. In other words, the seller of
services, who in this case is the tollway operator, is the person liable for VAT. The latter merely
shifts the burden of VAT to the tollway user as part of the toll fees.
For this reason, VAT on tollway operations cannot be a tax on tax even if toll fees were deemed
as a "users tax." VAT is assessed against the tollway operators gross receipts and not
necessarily on the toll fees. Although the tollway operator may shift the VAT burden to the
tollway user, it will not make the latter directly liable for the VAT. The shifted VAT burden simply
becomes part of the toll fees that one has to pay in order to use the tollways. 32
111
Three. Petitioner Timbol has no personality to invoke the non-impairment of contract clause on
behalf of private investors in the tollway projects. She will neither be prejudiced by nor be
affected by the alleged diminution in return of investments that may result from the VAT
imposition. She has no interest at all in the profits to be earned under the TOAs. The interest
in and right to recover investments solely belongs to the private tollway investors.
Besides, her allegation that the private investors rate of recovery will be adversely affected by
imposing VAT on tollway operations is purely speculative. Equally presumptuous is her
assertion that a stipulation in the TOAs known as the Material Adverse Grantor Action will be
activated if VAT is thus imposed. The Court cannot rule on matters that are manifestly
conjectural. Neither can it prohibit the State from exercising its sovereign taxing power based
on uncertain, prophetic grounds.
Four. Finally, petitioners assert that the substantiation requirements for claiming input VAT
make the VAT on tollway operations impractical and incapable of implementation. They cite
the fact that, in order to claim input VAT, the name, address and tax identification number of
the tollway user must be indicated in the VAT receipt or invoice. The manner by which the BIR
intends to implement the VAT by rounding off the toll rate and putting any excess collection
in an escrow account is also illegal, while the alternative of giving "change" to thousands of
motorists in order to meet the exact toll rate would be a logistical nightmare. Thus, according
to them, the VAT on tollway operations is not administratively feasible.33
Administrative feasibility is one of the canons of a sound tax system. It simply means that the
tax system should be capable of being effectively administered and enforced with the least
inconvenience to the taxpayer. Non-observance of the canon, however, will not render a tax
imposition invalid "except to the extent that specific constitutional or statutory limitations are
impaired."34 Thus, even if the imposition of VAT on tollway operations may seem burdensome
to implement, it is not necessarily invalid unless some aspect of it is shown to violate any law
or the Constitution.
Here, it remains to be seen how the taxing authority will actually implement the VAT on tollway
operations. Any declaration by the Court that the manner of its implementation is illegal or
unconstitutional would be premature. Although the transcript of the August 12, 2010 Senate
hearing provides some clue as to how the BIR intends to go about it, 35 the facts pertaining to
the matter are not sufficiently established for the Court to pass judgment on. Besides, any
concern about how the VAT on tollway operations will be enforced must first be addressed to
the BIR on whom the task of implementing tax laws primarily and exclusively rests. The Court
cannot preempt the BIRs discretion on the matter, absent any clear violation of law or the
Constitution.
For the same reason, the Court cannot prematurely declare as illegal, BIR RMC 63-2010 which
directs toll companies to record an accumulated input VAT of zero balance in their books as of
August 16, 2010, the date when the VAT imposition was supposed to take effect. The issuance
allegedly violates Section 111(A)36 of the Code which grants first time VAT payers a transitional
input VAT of 2% on beginning inventory.
In this connection, the BIR explained that BIR RMC 63-2010 is actually the product of
negotiations with tollway operators who have been assessed VAT as early as 2005, but failed
to charge VAT-inclusive toll fees which by now can no longer be collected. The tollway
operators agreed to waive the 2% transitional input VAT, in exchange for cancellation of their
past due VAT liabilities. Notably, the right to claim the 2% transitional input VAT belongs to the
tollway operators who have not questioned the circulars validity. They are thus the ones who
have a right to challenge the circular in a direct and proper action brought for the purpose.
Conclusion
In fine, the Commissioner of Internal Revenue did not usurp legislative prerogative or expand
the VAT laws coverage when she sought to impose VAT on tollway operations. Section 108(A)
of the Code clearly states that services of all other franchise grantees are subject to VAT,
except as may be provided under Section 119 of the Code. Tollway operators are not among
the franchise grantees subject to franchise tax under the latter provision. Neither are their
services among the VAT-exempt transactions under Section 109 of the Code.
If the legislative intent was to exempt tollway operations from VAT, as petitioners so strongly
allege, then it would have been well for the law to clearly say so. Tax exemptions must be
justified by clear statutory grant and based on language in the law too plain to be
mistaken.37 But as the law is written, no such exemption obtains for tollway operators. The
Court is thus duty-bound to simply apply the law as it is found.1avvphi1
Lastly, the grant of tax exemption is a matter of legislative policy that is within the exclusive
prerogative of Congress. The Courts role is to merely uphold this legislative policy, as reflected
first and foremost in the language of the tax statute. Thus, any unwarranted burden that may
be perceived to result from enforcing such policy must be properly referred to Congress. The
Court has no discretion on the matter but simply applies the law.
The VAT on franchise grantees has been in the statute books since 1994 when R.A. 7716 or
the Expanded Value-Added Tax law was passed. It is only now, however, that the executive
has earnestly pursued the VAT imposition against tollway operators. The executive exercises
exclusive discretion in matters pertaining to the implementation and execution of tax laws.
Consequently, the executive is more properly suited to deal with the immediate and practical
consequences of the VAT imposition.
WHEREFORE, the Court DENIES respondents Secretary of Finance and Commissioner of
Internal Revenues motion for reconsideration of its August 24, 2010 resolution, DISMISSES
the petitioners Renato V. Diaz and Aurora Ma. F. Timbols petition for lack of merit, and SETS
ASIDE the Courts temporary restraining order dated August 13, 2010.
SO ORDERED.

112
G.R. No. 166006 March 14, 2008
PLANTERS PRODUCTS, INC., Petitioner,
vs.
FERTIPHIL CORPORATION, Respondent.
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.
113
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 Court14 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
114
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 issues. 24 On one end, there is the right of the ordinary citizen to petition the courts to be freed
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
115
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
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, theP10 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:
116
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 Deeds36 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, isunlawful, 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
117
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 PPI was in deep financial problem because of its huge corporate debts. There were pending
modern standards. Jurisprudence states that "public purpose" should be given a broad petitions for rehabilitation against PPI before the Securities and Exchange Commission. The
interpretation. It does not only pertain to those purposes which are traditionally viewed as government guaranteed payment of PPIs debts to its foreign creditors. To fund the payment,
essentially government functions, such as building roads and delivery of basic services, but President Marcos issued LOI No. 1465. The pertinent portions of the letter of understanding
also includes those purposes designed to promote social justice. Thus, public money may now read:
be used for the relocation of illegal settlers, low-cost housing and urban or agrarian reform. Republic of the Philippines
While the categories of what may constitute a public purpose are continually expanding in light Office of the Prime Minister
of the expansion of government functions, the inherent requirement that taxes can only be Manila
exacted for a public purpose still stands. Public purpose is the heart of a tax law. When a tax LETTER OF UNDERTAKING
law is only a mask to exact funds from the public when its true intent is to give undue benefit
May 18, 1985
and advantage to a private enterprise, that law will not satisfy the requirement of "public
purpose." TO: THE BANKING AND FINANCIAL INSTITUTIONS
LISTED IN ANNEX A HERETO WHICH ARE
The purpose of a law is evident from its text or inferable from other secondary sources. Here,
CREDITORS (COLLECTIVELY, THE "CREDITORS")
We agree with the RTC and that CA that the levy imposed under LOI No. 1465 was not for a
OF PLANTERS PRODUCTS, INC. ("PLANTERS")
public purpose.
Gentlemen:
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: 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
3. The Administrator of the Fertilizer Pesticide Authority to include in its fertilizer pricing formula
Government confirms its awareness of the following: (1) that Planters has outstanding
a capital contribution component of not less than P10 per bag. This capital contribution shall
obligations in foreign currency and/or pesos, to the Creditors, (2) that Planters is currently
be collected until adequate capital is raised to make PPI viable. Such capital contribution shall
experiencing financial difficulties, and (3) that there are presently pending with the Securities
be applied by FPA to all domestic sales of fertilizers in the Philippines. 48 (Underscoring
and Exchange Commission of the Philippines a petition filed at Planters own behest for the
supplied)
suspension of payment of all its obligations, and a separate petition filed by Manufacturers
It is a basic rule of statutory construction that the text of a statute should be given a literal Hanover Trust Company, Manila Offshore Branch for the appointment of a rehabilitation
meaning. In this case, the text of the LOI is plain that the levy was imposed in order to raise receiver for Planters.
capital for PPI. The framers of the LOI did not even hide the insidious purpose of the law. They
In connection with the foregoing, the Republic of the Philippines (the "Republic") confirms that
were cavalier enough to name PPI as the ultimate beneficiary of the taxes levied under the
it considers and continues to consider Planters as a major fertilizer distributor. Accordingly, for
LOI. We find it utterly repulsive that a tax law would expressly name a private company as the
and in consideration of your expressed willingness to consider and participate in the effort to
ultimate beneficiary of the taxes to be levied from the public. This is a clear case of crony
rehabilitate Planters, the Republic hereby manifests its full and unqualified support of the
capitalism.
successful rehabilitation and continuing viability of Planters, and to that end, hereby binds and
Second, the LOI provides that the imposition of the P10 levy was conditional and dependent obligates itself to the creditors and Planters, as follows:
upon PPI becoming financially "viable." This suggests that the levy was actually imposed to
xxxx
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 2. Upon the effective date of this Letter of Undertaking, the Republic shall cause FPA to include
made indefinite. They are required to continuously pay the levy until adequate capital is raised in its fertilizer pricing formula a capital recovery component, the proceeds of which will be used
for PPI. 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
Third, the RTC and the CA held that the levies paid under the LOI were directly remitted and
capital is estimated at approximately P206 million (subject to validation by Planters and
deposited by FPA to Far East Bank and Trust Company, the depositary bank of PPI. 49 This
Planters Foundation) such unpaid portion of the outstanding capital stock of Planters being
proves that PPI benefited from the LOI. It is also proves that the main purpose of the law was
hereafter referred to as the "Unpaid Capital"), and subsequently for such capital increases as
to give undue benefit and advantage to PPI.
may be required for the continuing viability of Planters.
Fourth, the levy was used to pay the corporate debts of PPI. A reading of the Letter of
xxxx
Understanding50 dated May 18, 1985 signed by then Prime Minister Cesar Virata reveals that

118
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 Finance51
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 not promote public
interest.
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.1awphil 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
119
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.
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 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.
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.
G.R. No. 166494 June 29, 2007
CARLOS SUPERDRUG CORP., doing business under the name and style "Carlos
Superdrug," ELSIE M. CANO, doing business under the name and style "Advance Drug,"
Dr. SIMPLICIO L. YAP, JR., doing business under the name and style "City Pharmacy,"
MELVIN S. DELA SERNA, doing business under the name and style "Botica dela Serna,"
and LEYTE SERV-WELL CORP., doing business under the name and style "Leyte Serv-
Well Drugstore," petitioners,
vs.
DEPARTMENT OF SOCIAL WELFARE and DEVELOPMENT (DSWD), DEPARTMENT OF
HEALTH (DOH), DEPARTMENT OF FINANCE (DOF), DEPARTMENT OF JUSTICE (DOJ),
and DEPARTMENT OF INTERIOR and LOCAL GOVERNMENT (DILG), respondents.
DECISION
AZCUNA, J.:
This is a petition1 for Prohibition with Prayer for Preliminary Injunction assailing the
constitutionality of Section 4(a) of Republic Act (R.A.) No. 9257, 2 otherwise known as the
"Expanded Senior Citizens Act of 2003."
Petitioners are domestic corporations and proprietors operating drugstores in the Philippines.
Public respondents, on the other hand, include the Department of Social Welfare and
Development (DSWD), the Department of Health (DOH), the Department of Finance (DOF),
the Department of Justice (DOJ), and the Department of Interior and Local Government (DILG)
which have been specifically tasked to monitor the drugstores compliance with the law;
promulgate the implementing rules and regulations for the effective implementation of the law;
and prosecute and revoke the licenses of erring drugstore establishments.
The antecedents are as follows:
On February 26, 2004, R.A. No. 9257, amending R.A. No. 7432, 3 was signed into law by
President Gloria Macapagal-Arroyo and it became effective on March 21, 2004. Section 4(a)
of the Act states:
SEC. 4. Privileges for the Senior Citizens. The senior citizens shall be entitled to the following:
(a) the grant of twenty percent (20%) discount from all establishments relative to the utilization
of services in hotels and similar lodging establishments, restaurants and recreation centers,
and purchase of medicines in all establishments for the exclusive use or enjoyment of senior
citizens, including funeral and burial services for the death of senior citizens;
...
The establishment may claim the discounts granted under (a), (f), (g) and (h) as tax
deduction based on the net cost of the goods sold or services rendered: Provided, That the
cost of the discount shall be allowed as deduction from gross income for the same taxable year
that the discount is granted. Provided, further, That the total amount of the claimed tax
deduction net of value added tax if applicable, shall be included in their gross sales receipts for
tax purposes and shall be subject to proper documentation and to the provisions of the National
Internal Revenue Code, as amended.4
120
On May 28, 2004, the DSWD approved and adopted the Implementing Rules and Regulations
of R.A. No. 9257, Rule VI, Article 8 of which states:
Article 8. Tax Deduction of Establishments. The establishment may claim the discounts
granted under Rule V, Section 4 Discounts for Establishments;5 Section 9, Medical and
Dental Services in Private Facilities[,]6 and Sections 107 and 118 Air, Sea and Land
Transportation as tax deduction based on the net cost of the goods sold or services
rendered. Provided, That the cost of the discount shall be allowed as deduction from gross
income for the same taxable year that the discount is granted; Provided, further, That the total
amount of the claimed tax deduction net of value added tax if applicable, shall be included in
their gross sales receipts for tax purposes and shall be subject to proper documentation and
to the provisions of the National Internal Revenue Code, as amended; Provided, finally, that
the implementation of the tax deduction shall be subject to the Revenue Regulations to be
issued by the Bureau of Internal Revenue (BIR) and approved by the Department of Finance
(DOF).9
On July 10, 2004, in reference to the query of the Drug Stores Association of the Philippines
(DSAP) concerning the meaning of a tax deduction under the Expanded Senior Citizens Act,
the DOF, through Director IV Ma. Lourdes B. Recente, clarified as follows:
1) The difference between the Tax Credit (under the Old Senior Citizens Act) and Tax
Deduction (under the Expanded Senior Citizens Act).
1.1. The provision of Section 4 of R.A. No. 7432 (the old Senior Citizens Act) grants twenty
percent (20%) discount from all establishments relative to the utilization of transportation
services, hotels and similar lodging establishment, restaurants and recreation centers and
purchase of medicines anywhere in the country, the costs of which may be claimed by the
private establishments concerned as tax credit.
Effectively, a tax credit is a peso-for-peso deduction from a taxpayers tax liability due to the
government of the amount of discounts such establishment has granted to a senior citizen. The
establishment recovers the full amount of discount given to a senior citizen and hence, the
government shoulders 100% of the discounts granted.
It must be noted, however, that conceptually, a tax credit scheme under the Philippine tax
system, necessitates that prior payments of taxes have been made and the taxpayer is
attempting to recover this tax payment from his/her income tax due. The tax credit scheme
under R.A. No. 7432 is, therefore, inapplicable since no tax payments have previously
occurred.
1.2. The provision under R.A. No. 9257, on the other hand, provides that the establishment
concerned may claim the discounts under Section 4(a), (f), (g) and (h) as tax deduction from
gross income, based on the net cost of goods sold or services rendered.
Under this scheme, the establishment concerned is allowed to deduct from gross income, in
computing for its tax liability, the amount of discounts granted to senior citizens. Effectively, the
government loses in terms of foregone revenues an amount equivalent to the marginal tax rate
the said establishment is liable to pay the government. This will be an amount equivalent to
32% of the twenty percent (20%) discounts so granted. The establishment shoulders the
remaining portion of the granted discounts.
It may be necessary to note that while the burden on [the] government is slightly diminished in
terms of its percentage share on the discounts granted to senior citizens, the number of
potential establishments that may claim tax deductions, have however, been broadened. Aside
from the establishments that may claim tax credits under the old law, more establishments
were added under the new law such as: establishments providing medical and dental services,
diagnostic and laboratory services, including professional fees of attending doctors in all private
hospitals and medical facilities, operators of domestic air and sea transport services, public
railways and skyways and bus transport services.
A simple illustration might help amplify the points discussed above, as follows:
Tax Deduction Tax Credit
Gross Sales x x x x x x x x x x x x
Less : Cost of goods sold x x x x x x x x x x
Net Sales x x x x x x x x x x x x
Less: Operating Expenses:
Tax Deduction on Discounts x x x x --
Other deductions: x x x x x x x x
Net Taxable Income x x x x x x x x x x
Tax Due x x x x x x
Less: Tax Credit -- ______x x
Net Tax Due -- x x
As shown above, under a tax deduction scheme, the tax deduction on discounts was
subtracted from Net Sales together with other deductions which are considered as operating
expenses before the Tax Due was computed based on the Net Taxable Income. On the other
hand, under a tax credit scheme, the amount of discounts which is the tax credit item, was
deducted directly from the tax due amount.10
Meanwhile, on October 1, 2004, Administrative Order (A.O.) No. 171 or the Policies and
Guidelines to Implement the Relevant Provisions of Republic Act 9257, otherwise known as
the "Expanded Senior Citizens Act of 2003"11was issued by the DOH, providing the grant of
twenty percent (20%) discount in the purchase of unbranded generic medicines from all
establishments dispensing medicines for the exclusive use of the senior citizens.
On November 12, 2004, the DOH issued Administrative Order No 177 12amending A.O. No.
171. Under A.O. No. 177, the twenty percent discount shall not be limited to the purchase of
unbranded generic medicines only, but shall extend to both prescription and non-prescription
medicines whether branded or generic. Thus, it stated that "[t]he grant of twenty percent (20%)
discount shall be provided in the purchase of medicines from all establishments dispensing
medicines for the exclusive use of the senior citizens."
121
Petitioners assail the constitutionality of Section 4(a) of the Expanded Senior Citizens Act
based on the following grounds:13
1) The law is confiscatory because it infringes Art. III, Sec. 9 of the Constitution which provides
that private property shall not be taken for public use without just compensation;
2) It violates the equal protection clause (Art. III, Sec. 1) enshrined in our Constitution which
states that "no person shall be deprived of life, liberty or property without due process of law,
nor shall any person be denied of the equal protection of the laws;" and
3) The 20% discount on medicines violates the constitutional guarantee in Article XIII, Section
11 that makes "essential goods, health and other social services available to all people at
affordable cost."14
Petitioners assert that Section 4(a) of the law is unconstitutional because it constitutes
deprivation of private property. Compelling drugstore owners and establishments to grant the
discount will result in a loss of profit
and capital because 1) drugstores impose a mark-up of only 5% to 10% on branded medicines;
and 2) the law failed to provide a scheme whereby drugstores will be justly compensated for
the discount.
Examining petitioners arguments, it is apparent that what petitioners are ultimately questioning
is the validity of the tax deduction scheme as a reimbursement mechanism for the twenty
percent (20%) discount that they extend to senior citizens.
Based on the afore-stated DOF Opinion, the tax deduction scheme does not fully reimburse
petitioners for the discount privilege accorded to senior citizens. This is because the discount
is treated as a deduction, a tax-deductible expense that is subtracted from the gross income
and results in a lower taxable income. Stated otherwise, it is an amount that is allowed by
law15 to reduce the income prior to the application of the tax rate to compute the amount of tax
which is due.16 Being a tax deduction, the discount does not reduce taxes owed on a peso for
peso basis but merely offers a fractional reduction in taxes owed.
Theoretically, the treatment of the discount as a deduction reduces the net income of the private
establishments concerned. The discounts given would have entered the coffers and formed
part of the gross sales of the private establishments, were it not for R.A. No. 9257.
The permanent reduction in their total revenues is a forced subsidy corresponding to the taking
of private property for public use or benefit.17 This constitutes compensable taking for which
petitioners would ordinarily become entitled to a just compensation.
Just compensation is defined as the full and fair equivalent of the property taken from its owner
by the expropriator. The measure is not the takers gain but the owners loss. The word just is
used to intensify the meaning of the word compensation, and to convey the idea that the
equivalent to be rendered for the property to be taken shall be real, substantial, full and ample.18
A tax deduction does not offer full reimbursement of the senior citizen discount. As such, it
would not meet the definition of just compensation.19
Having said that, this raises the question of whether the State, in promoting the health and
welfare of a special group of citizens, can impose upon private establishments the burden of
partly subsidizing a government program.
The Court believes so.
The Senior Citizens Act was enacted primarily to maximize the contribution of senior citizens
to nation-building, and to grant benefits and privileges to them for their improvement and well-
being as the State considers them an integral part of our society.20
The priority given to senior citizens finds its basis in the Constitution as set forth in the law itself.
Thus, the Act provides:
SEC. 2. Republic Act No. 7432 is hereby amended to read as follows:
SECTION 1. Declaration of Policies and Objectives. Pursuant to Article XV, Section 4 of the
Constitution, it is the duty of the family to take care of its elderly members while the State may
design programs of social security for them. In addition to this, Section 10 in the Declaration of
Principles and State Policies provides: "The State shall provide social justice in all phases of
national development." Further, Article XIII, Section 11, provides: "The State shall adopt an
integrated and comprehensive approach to health development which shall endeavor to make
essential goods, health and other social services available to all the people at affordable cost.
There shall be priority for the needs of the underprivileged sick, elderly, disabled, women and
children." Consonant with these constitutional principles the following are the declared policies
of this Act:
...
(f) To recognize the important role of the private sector in the improvement of the welfare
of senior citizens and to actively seek their partnership.21
To implement the above policy, the law grants a twenty percent discount to senior citizens for
medical and dental services, and diagnostic and laboratory fees; admission fees charged by
theaters, concert halls, circuses, carnivals, and other similar places of culture, leisure and
amusement; fares for domestic land, air and sea travel; utilization of services in hotels and
similar lodging establishments, restaurants and recreation centers; and purchases of
medicines for the exclusive use or enjoyment of senior citizens. As a form of reimbursement,
the law provides that business establishments extending the twenty percent discount to senior
citizens may claim the discount as a tax deduction.
The law is a legitimate exercise of police power which, similar to the power of eminent domain,
has general welfare for its object. Police power is not capable of an exact definition, but has
been purposely veiled in general terms to underscore its comprehensiveness to meet all
exigencies and provide enough room for an efficient and flexible response to conditions and
circumstances, thus assuring the greatest benefits. 22 Accordingly, it has been described as
"the most essential, insistent and the least limitable of powers, extending as it does to all the
great public needs."23 It is "[t]he power vested in the legislature by the constitution to make,
ordain, and establish all manner of wholesome and reasonable laws, statutes, and ordinances,
either with penalties or without, not repugnant to the constitution, as they shall judge to be for
the good and welfare of the commonwealth, and of the subjects of the same."24
122
For this reason, when the conditions so demand as determined by the legislature, property
rights must bow to the primacy of police power because property rights, though sheltered by
due process, must yield to general welfare.25
Police power as an attribute to promote the common good would be diluted considerably if on
the mere plea of petitioners that they will suffer loss of earnings and capital, the questioned
provision is invalidated. Moreover, in the absence of evidence demonstrating the alleged
confiscatory effect of the provision in question, there is no basis for its nullification in view of
the presumption of validity which every law has in its favor.26
Given these, it is incorrect for petitioners to insist that the grant of the senior citizen discount is
unduly oppressive to their business, because petitioners have not taken time to calculate
correctly and come up with a financial report, so that they have not been able to show properly
whether or not the tax deduction scheme really works greatly to their disadvantage. 27
In treating the discount as a tax deduction, petitioners insist that they will incur losses because,
referring to the DOF Opinion, for every P1.00 senior citizen discount that petitioners would
give, P0.68 will be shouldered by them as only P0.32 will be refunded by the government by
way of a tax deduction.
To illustrate this point, petitioner Carlos Super Drug cited the anti-hypertensive maintenance
drug Norvasc as an example. According to the latter, it acquires Norvasc from the distributors
at P37.57 per tablet, and retails it atP39.60 (or at a margin of 5%). If it grants a 20% discount
to senior citizens or an amount equivalent to P7.92, then it would have to
sell Norvasc at P31.68 which translates to a loss from capital of P5.89 per tablet. Even if the
government will allow a tax deduction, only P2.53 per tablet will be refunded and not the full
amount of the discount which is P7.92. In short, only 32% of the 20% discount will be
reimbursed to the drugstores.28
Petitioners computation is flawed. For purposes of reimbursement, the law states that the cost
of the discount shall be deducted from gross income,29 the amount of income derived from all
sources before deducting allowable expenses, which will result in net income. Here, petitioners
tried to show a loss on a per transaction basis, which should not be the case. An income
statement, showing an accounting of petitioners sales, expenses, and net profit (or loss) for a
given period could have accurately reflected the effect of the discount on their income. Absent
any financial statement, petitioners cannot substantiate their claim that they will be operating
at a loss should they give the discount. In addition, the computation was erroneously based on
the assumption that their customers consisted wholly of senior citizens. Lastly, the 32% tax
rate is to be imposed on income, not on the amount of the discount.
Furthermore, it is unfair for petitioners to criticize the law because they cannot raise the prices
of their medicines given the cutthroat nature of the players in the industry. It is a business
decision on the part of petitioners to peg the mark-up at 5%. Selling the medicines below
acquisition cost, as alleged by petitioners, is merely a result of this decision. Inasmuch as
pricing is a property right, petitioners cannot reproach the law for being oppressive, simply
because they cannot afford to raise their prices for fear of losing their customers to competition.
The Court is not oblivious of the retail side of the pharmaceutical industry and the competitive
pricing component of the business. While the Constitution protects property rights, petitioners
must accept the realities of business and the State, in the exercise of police power, can
intervene in the operations of a business which may result in an impairment of property rights
in the process.
Moreover, the right to property has a social dimension. While Article XIII of the Constitution
provides the precept for the protection of property, various laws and jurisprudence, particularly
on agrarian reform and the regulation of contracts and public utilities, continuously serve as a
reminder that the right to property can be relinquished upon the command of the State for the
promotion of public good.30
Undeniably, the success of the senior citizens program rests largely on the support imparted
by petitioners and the other private establishments concerned. This being the case, the means
employed in invoking the active participation of the private sector, in order to achieve the
purpose or objective of the law, is reasonably and directly related. Without sufficient proof that
Section 4(a) of R.A. No. 9257 is arbitrary, and that the continued implementation of the same
would be unconscionably detrimental to petitioners, the Court will refrain from quashing a
legislative act.31
WHEREFORE, the petition is DISMISSED for lack of merit.
No costs.
SO ORDERED.

123
G.R. No. 175356 December 3, 2013
MANILA MEMORIAL PARK, INC. AND LA FUNERARIA PAZ-SUCAT, INC., Petitioners,
vs.
SECRETARY OF THE DEPARTMENT OF SOCIAL WELFARE AND DEVELOPMENT and
THE SECRETARY OF THE DEPARTMENT OF FINANCE, Respondents.
DECISION
DEL CASTILLO, J.:
When a party challeges the constitutionality of a law, the burden of proof rests upon him.
Before us is a Petition for Prohibition2 under Rule 65 of the Rules of Court filed by petitioners
Manila Memorial Park, Inc. and La Funeraria Paz-Sucat, Inc., domestic corporations engaged
in the business of providing funeral and burial services, against public respondents Secretaries
of the Department of Social Welfare and Development (DSWD) and the Department of Finance
(DOF).
Petitioners assail the constitutionality of Section 4 of Republic Act (RA) No. 7432, 3 as amended
by RA 9257,4 and the implementing rules and regulations issued by the DSWD and DOF
insofar as these allow business establishments to claim the 20% discount given to senior
citizens as a tax deduction.
Factual Antecedents
On April 23, 1992, RA 7432 was passed into law, granting senior citizens the following
privileges:
SECTION 4. Privileges for the Senior Citizens. The senior citizens shall be entitled to the
following:
a) the grant of twenty percent (20%) discount from all establishments relative to utilization of
transportation services, hotels and similar lodging establishment[s], restaurants and recreation
centers and purchase of medicine anywhere in the country: Provided, That private
establishments may claim the cost as tax credit;
b) a minimum of twenty percent (20%) discount on admission fees charged by theaters, cinema
houses and concert halls, circuses, carnivals and other similar places of culture, leisure, and
amusement;
c) exemption from the payment of individual income taxes: Provided, That their annual taxable
income does not exceed the property level as determined by the National Economic and
Development Authority (NEDA) for that year;
d) exemption from training fees for socioeconomic programs undertaken by the OSCA as part
of its work;
e) free medical and dental services in government establishment[s] anywhere in the country,
subject to guidelines to be issued by the Department of Health, the Government Service
Insurance System and the Social Security System;
124
f) to the extent practicable and feasible, the continuance of the same benefits and privileges
given by the Government Service Insurance System (GSIS), Social Security System (SSS) and
PAG-IBIG, as the case may be, as are enjoyed by those in actual service.
On August 23, 1993, Revenue Regulations (RR) No. 02-94 was issued to implement RA 7432.
Sections 2(i) and 4 of RR No. 02-94 provide:
Sec. 2. DEFINITIONS. For purposes of these regulations: i. Tax Credit refers to the amount
representing the 20% discount granted to a qualified senior citizen by all establishments relative
to their utilization of transportation services, hotels and similar lodging establishments,
restaurants, drugstores, recreation centers, theaters, cinema houses, concert halls, circuses,
carnivals and other similar places of culture, leisure and amusement, which discount 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. x x x x Sec. 4.
RECORDING/BOOKKEEPING REQUIREMENTS FOR PRIVATE ESTABLISHMENTS.
Private establishments, i.e., transport services, hotels and similar lodging establishments,
restaurants, recreation centers, drugstores, theaters, cinema houses, concert halls, circuses,
carnivals and other similar places of culture[,] leisure and amusement, giving 20% discounts to
qualified senior citizens are required to keep separate and accurate record[s] of sales made to
senior citizens, which shall include the name, identification number, gross sales/receipts,
discounts, dates of transactions and invoice number for every transaction. The amount of 20%
discount shall be deducted from the gross income for income tax purposes and from gross
sales of the business enterprise concerned for purposes of the VAT and other percentage
taxes.
In Commissioner of Internal Revenue v. Central Luzon Drug Corporation,5 the Court declared
Sections 2(i) and 4 of RR No. 02-94 as erroneous because these contravene RA 7432,6 thus:
RA 7432 specifically allows private establishments to claim as tax credit the amount of
discounts they grant. In turn, the Implementing Rules and Regulations, issued pursuant thereto,
provide the procedures for its availment. 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." 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." To be more precise, it is in business parlance "a
deduction or lowering of an amount of money;" or "a reduction from the full amount or value of
something, especially a price." In business there are many kinds of discount, the most common
of which is that affecting the income statement or financial report upon which the income tax is
based.
xxxx
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;" 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." In the scheme of judicial
tax administration, the need for certainty and predictability in the implementation of tax laws is
crucial. Our tax authorities fill in the details that "Congress may not have the opportunity or
competence to provide." The regulations these authorities issue are relied upon by taxpayers,
who are certain that these will be followed by the courts. 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 x x x 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.
In case of conflict, the law must prevail. A "regulation adopted pursuant to law is law."
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.7
On February 26, 2004, RA 92578 amended certain provisions of RA 7432, to wit:
SECTION 4. Privileges for the Senior Citizens. The senior citizens shall be entitled to the
following:
(a) the grant of twenty percent (20%) discount from all establishments relative to the utilization
of services in hotels and similar lodging establishments, restaurants and recreation centers,
and purchase of medicines in all establishments for the exclusive use or enjoyment of senior
citizens, including funeral and burial services for the death of senior citizens;
xxxx
The establishment may claim the discounts granted under (a), (f), (g) and (h) as tax deduction
based on the net cost of the goods sold or services rendered: Provided, That the cost of the
discount shall be allowed as deduction from gross income for the same taxable year that the
discount is granted. Provided, further, That the total amount of the claimed tax deduction net
of value added tax if applicable, shall be included in their gross sales receipts for tax purposes
125
and shall be subject to proper documentation and to the provisions of the National Internal
Revenue Code, as amended.
To implement the tax provisions of RA 9257, the Secretary of Finance issued RR No. 4-2006,
the pertinent provision of which provides:
SEC. 8. AVAILMENT BY ESTABLISHMENTS OF SALES DISCOUNTS AS DEDUCTION
FROM GROSS INCOME. Establishments enumerated in subparagraph (6) hereunder
granting sales discounts to senior citizens on the sale of goods and/or services specified
thereunder are entitled to deduct the said discount from gross income subject to the following
conditions:
(1) Only that portion of the gross sales EXCLUSIVELY USED, CONSUMED OR ENJOYED BY
THE SENIOR CITIZEN shall be eligible for the deductible sales discount.
(2) The gross selling price and the sales discount MUST BE SEPARATELY INDICATED IN
THE OFFICIAL RECEIPT OR SALES INVOICE issued by the establishment for the sale of
goods or services to the senior citizen.
(3) Only the actual amount of the discount granted or a sales discount not exceeding 20% of
the gross selling price can be deducted from the gross income, net of value added tax, if
applicable, for income tax purposes, and from gross sales or gross receipts of the business
enterprise concerned, for VAT or other percentage tax purposes.
(4) The discount can only be allowed as deduction from gross income for the same taxable
year that the discount is granted.
(5) The business establishment giving sales discounts to qualified senior citizens is required to
keep separate and accurate record[s] of sales, which shall include the name of the senior
citizen, TIN, OSCA ID, gross sales/receipts, sales discount granted, [date] of [transaction] and
invoice number for every sale transaction to senior citizen.
(6) Only the following business establishments which granted sales discount to senior citizens
on their sale of goods and/or services may claim the said discount granted as deduction from
gross income, namely:
xxxx
(i) Funeral parlors and similar establishments The beneficiary or any person who shall
shoulder the funeral and burial expenses of the deceased senior citizen shall claim the
discount, such as casket, embalmment, cremation cost and other related services for the senior
citizen upon payment and presentation of [his] death certificate.
The DSWD likewise issued its own Rules and Regulations Implementing RA 9257, to wit:
RULE VI DISCOUNTS AS TAX DEDUCTION OF ESTABLISHMENTS
Article 8. Tax Deduction of Establishments. The establishment may claim the discounts
granted under Rule V, Section 4 Discounts for Establishments, Section 9, Medical and Dental
Services in Private Facilities and Sections 10 and 11 Air, Sea and Land Transportation as
tax deduction based on the net cost of the goods sold or services rendered.
Provided, That the cost of the discount shall be allowed as deduction from gross income for
the same taxable year that the discount is granted; Provided, further, That the total amount of
the claimed tax deduction net of value added tax if applicable, shall be included in their gross
sales receipts for tax purposes and shall be subject to proper documentation and to the
provisions of the National Internal Revenue Code, as amended; Provided, finally, that the
implementation of the tax deduction shall be subject to the Revenue Regulations to be issued
by the Bureau of Internal Revenue (BIR) and approved by the Department of Finance (DOF).
Feeling aggrieved by the tax deduction scheme, petitioners filed the present recourse, praying
that Section 4 of RA 7432, as amended by RA 9257, and the implementing rules and
regulations issued by the DSWD and the DOF be declared unconstitutional insofar as these
allow business establishments to claim the 20% discount given to senior citizens as a tax
deduction; that the DSWD and the DOF be prohibited from enforcing the same; and that the
tax credit treatment of the 20% discount under the former Section 4 (a) of RA 7432 be
reinstated.
Issues
Petitioners raise the following issues:
A.
WHETHER THE PETITION PRESENTS AN ACTUAL CASE OR CONTROVERSY.
B.
WHETHER SECTION 4 OF REPUBLIC ACT NO. 9257 AND X X X ITS IMPLEMENTING
RULES AND REGULATIONS, INSOFAR AS THEY PROVIDE THAT THE TWENTY
PERCENT (20%) DISCOUNT TO SENIOR CITIZENS MAY BE CLAIMED AS A TAX
DEDUCTION BY THE PRIVATE ESTABLISHMENTS, ARE INVALID AND
UNCONSTITUTIONAL.9
Petitioners Arguments
Petitioners emphasize that they are not questioning the 20% discount granted to senior citizens
but are only assailing the constitutionality of the tax deduction scheme prescribed under RA
9257 and the implementing rules and regulations issued by the DSWD and the DOF. 10
Petitioners posit that the tax deduction scheme contravenes Article III, Section 9 of the
Constitution, which provides that: "[p]rivate property shall not be taken for public use without
just compensation."11
In support of their position, petitioners cite Central Luzon Drug Corporation, 12 where it was
ruled that the 20% discount privilege constitutes taking of private property for public use which
requires the payment of just compensation,13 and Carlos Superdrug Corporation v. Department
of Social Welfare and Development,14 where it was acknowledged that the tax deduction
scheme does not meet the definition of just compensation.15
Petitioners likewise seek a reversal of the ruling in Carlos Superdrug Corporation 16 that the tax
deduction scheme adopted by the government is justified by police power.17
They assert that "[a]lthough both police power and the power of eminent domain have the
general welfare for their object, there are still traditional distinctions between the two" 18 and
that "eminent domain cannot be made less supreme than police power."19
126
Petitioners further claim that the legislature, in amending RA 7432, relied on an erroneous
contemporaneous construction that prior payment of taxes is required for tax credit.20
Petitioners also contend that the tax deduction scheme violates Article XV, Section 4 21 and
Article XIII, Section 1122of the Constitution because it shifts the States constitutional mandate
or duty of improving the welfare of the elderly to the private sector.23
Under the tax deduction scheme, the private sector shoulders 65% of the discount because
only 35%24 of it is actually returned by the government.25
Consequently, the implementation of the tax deduction scheme prescribed under Section 4 of
RA 9257 affects the businesses of petitioners.26
Thus, there exists an actual case or controversy of transcendental importance which deserves
judicious disposition on the merits by the highest court of the land. 27
Respondents Arguments
Respondents, on the other hand, question the filing of the instant Petition directly with the
Supreme Court as this disregards the hierarchy of courts.28
They likewise assert that there is no justiciable controversy as petitioners failed to prove that
the tax deduction treatment is not a "fair and full equivalent of the loss sustained" by them. 29
As to the constitutionality of RA 9257 and its implementing rules and regulations, respondents
contend that petitioners failed to overturn its presumption of constitutionality. 30
More important, respondents maintain that the tax deduction scheme is a legitimate exercise
of the States police power.31
Our Ruling
The Petition lacks merit.
There exists an actual case or controversy.
We shall first resolve the procedural issue. When the constitutionality of a law is put in issue,
judicial review may be availed of only if the following requisites concur: "(1) the existence of an
actual and appropriate case; (2) the existence of personal and substantial interest on the part
of the party raising the [question of constitutionality]; (3) recourse to judicial review is made at
the earliest opportunity; and (4) the [question of constitutionality] is the lis mota of the case." 32
In this case, petitioners are challenging the constitutionality of the tax deduction scheme
provided in RA 9257 and the implementing rules and regulations issued by the DSWD and the
DOF. Respondents, however, oppose the Petition on the ground that there is no actual case
or controversy. We do not agree with respondents. An actual case or controversy exists when
there is "a conflict of legal rights" or "an assertion of opposite legal claims susceptible of judicial
resolution."33
The Petition must therefore show that "the governmental act being challenged has a direct
adverse effect on the individual challenging it."34
In this case, the tax deduction scheme challenged by petitioners has a direct adverse effect on
them. Thus, it cannot be denied that there exists an actual case or controversy.
The validity of the 20% senior citizen discount and tax deduction scheme under RA 9257,
as an exercise of police power of the State, has already been settled in Carlos Superdrug
Corporation.
Petitioners posit that the resolution of this case lies in the determination of whether the legally
mandated 20% senior citizen discount is an exercise of police power or eminent domain. If it is
police power, no just compensation is warranted. But if it is eminent domain, the tax deduction
scheme is unconstitutional because it is not a peso for peso reimbursement of the 20% discount
given to senior citizens. Thus, it constitutes taking of private property without payment of just
compensation. At the outset, we note that this question has been settled in Carlos Superdrug
Corporation.35
In that case, we ruled:
Petitioners assert that Section 4(a) of the law is unconstitutional because it constitutes
deprivation of private property. Compelling drugstore owners and establishments to grant the
discount will result in a loss of profit and capital because 1) drugstores impose a mark-up of
only 5% to 10% on branded medicines; and 2) the law failed to provide a scheme whereby
drugstores will be justly compensated for the discount. Examining petitioners arguments, it is
apparent that what petitioners are ultimately questioning is the validity of the tax deduction
scheme as a reimbursement mechanism for the twenty percent (20%) discount that they extend
to senior citizens. Based on the afore-stated DOF Opinion, the tax deduction scheme does not
fully reimburse petitioners for the discount privilege accorded to senior citizens. This is because
the discount is treated as a deduction, a tax-deductible expense that is subtracted from the
gross income and results in a lower taxable income. Stated otherwise, it is an amount that is
allowed by law to reduce the income prior to the application of the tax rate to compute the
amount of tax which is due. Being a tax deduction, the discount does not reduce taxes owed
on a peso for peso basis but merely offers a fractional reduction in taxes owed. Theoretically,
the treatment of the discount as a deduction reduces the net income of the private
establishments concerned. The discounts given would have entered the coffers and formed
part of the gross sales of the private establishments, were it not for R.A. No. 9257. The
permanent reduction in their total revenues is a forced subsidy corresponding to the taking of
private property for public use or benefit. This constitutes compensable taking for which
petitioners would ordinarily become entitled to a just compensation. Just compensation is
defined as the full and fair equivalent of the property taken from its owner by the expropriator.
The measure is not the takers gain but the owners loss. The word just is used to intensify the
meaning of the word compensation, and to convey the idea that the equivalent to be rendered
for the property to be taken shall be real, substantial, full and ample. A tax deduction does not
offer full reimbursement of the senior citizen discount. As such, it would not meet the definition
of just compensation. Having said that, this raises the question of whether the State, in
promoting the health and welfare of a special group of citizens, can impose upon private
establishments the burden of partly subsidizing a government program. The Court believes so.
The Senior Citizens Act was enacted primarily to maximize the contribution of senior citizens
to nation-building, and to grant benefits and privileges to them for their improvement and well-
being as the State considers them an integral part of our society. The priority given to senior
127
citizens finds its basis in the Constitution as set forth in the law itself. Thus, the Act provides:
SEC. 2. Republic Act No. 7432 is hereby amended to read as follows:
SECTION 1. Declaration of Policies and Objectives. Pursuant to Article XV, Section 4 of the
Constitution, it is the duty of the family to take care of its elderly members while the State may
design programs of social security for them. In addition to this, Section 10 in the Declaration of
Principles and State Policies provides: "The State shall provide social justice in all phases of
national development." Further, Article XIII, Section 11, provides: "The State shall adopt an
integrated and comprehensive approach to health development which shall endeavor to make
essential goods, health and other social services available to all the people at affordable cost.
There shall be priority for the needs of the underprivileged sick, elderly, disabled, women and
children." Consonant with these constitutional principles the following are the declared policies
of this Act:
(f) To recognize the important role of the private sector in the improvement of the welfare of
senior citizens and to actively seek their partnership.
To implement the above policy, the law grants a twenty percent discount to senior citizens for
medical and dental services, and diagnostic and laboratory fees; admission fees charged by
theaters, concert halls, circuses, carnivals, and other similar places of culture, leisure and
amusement; fares for domestic land, air and sea travel; utilization of services in hotels and
similar lodging establishments, restaurants and recreation centers; and purchases of
medicines for the exclusive use or enjoyment of senior citizens. As a form of reimbursement,
the law provides that business establishments extending the twenty percent discount to senior
citizens may claim the discount as a tax deduction. The law is a legitimate exercise of police
power which, similar to the power of eminent domain, has general welfare for its object. Police
power is not capable of an exact definition, but has been purposely veiled in general terms to
underscore its comprehensiveness to meet all exigencies and provide enough room for an
efficient and flexible response to conditions and circumstances, thus assuring the greatest
benefits. Accordingly, it has been described as "the most essential, insistent and the least
limitable of powers, extending as it does to all the great public needs." It is "[t]he power vested
in the legislature by the constitution to make, ordain, and establish all manner of wholesome
and reasonable laws, statutes, and ordinances, either with penalties or without, not repugnant
to the constitution, as they shall judge to be for the good and welfare of the commonwealth,
and of the subjects of the same." For this reason, when the conditions so demand as
determined by the legislature, property rights must bow to the primacy of police power because
property rights, though sheltered by due process, must yield to general welfare. Police power
as an attribute to promote the common good would be diluted considerably if on the mere plea
of petitioners that they will suffer loss of earnings and capital, the questioned provision is
invalidated. Moreover, in the absence of evidence demonstrating the alleged confiscatory effect
of the provision in question, there is no basis for its nullification in view of the presumption of
validity which every law has in its favor. Given these, it is incorrect for petitioners to insist that
the grant of the senior citizen discount is unduly oppressive to their business, because
petitioners have not taken time to calculate correctly and come up with a financial report, so
that they have not been able to show properly whether or not the tax deduction scheme really
works greatly to their disadvantage. In treating the discount as a tax deduction, petitioners insist
that they will incur losses because, referring to the DOF Opinion, for every P1.00 senior citizen
discount that petitioners would give, P0.68 will be shouldered by them as only P0.32 will be
refunded by the government by way of a tax deduction. To illustrate this point, petitioner Carlos
Super Drug cited the anti-hypertensive maintenance drug Norvasc as an example. According
to the latter, it acquires Norvasc from the distributors at P37.57 per tablet, and retails it
at P39.60 (or at a margin of 5%). If it grants a 20% discount to senior citizens or an amount
equivalent to P7.92, then it would have to sell Norvasc at P31.68 which translates to a loss
from capital of P5.89 per tablet. Even if the government will allow a tax deduction, only P2.53
per tablet will be refunded and not the full amount of the discount which is P7.92. In short, only
32% of the 20% discount will be reimbursed to the drugstores. Petitioners computation is
flawed. For purposes of reimbursement, the law states that the cost of the discount shall be
deducted from gross income, the amount of income derived from all sources before deducting
allowable expenses, which will result in net income. Here, petitioners tried to show a loss on a
per transaction basis, which should not be the case. An income statement, showing an
accounting of petitioners' sales, expenses, and net profit (or loss) for a given period could have
accurately reflected the effect of the discount on their income. Absent any financial statement,
petitioners cannot substantiate their claim that they will be operating at a loss should they give
the discount. In addition, the computation was erroneously based on the assumption that their
customers consisted wholly of senior citizens. Lastly, the 32% tax rate is to be imposed on
income, not on the amount of the discount.
Furthermore, it is unfair for petitioners to criticize the law because they cannot raise the prices
of their medicines given the cutthroat nature of the players in the industry. It is a business
decision on the part of petitioners to peg the mark-up at 5%. Selling the medicines below
acquisition cost, as alleged by petitioners, is merely a result of this decision. Inasmuch as
pricing is a property right, petitioners cannot reproach the law for being oppressive, simply
because they cannot afford to raise their prices for fear of losing their customers to competition.
The Court is not oblivious of the retail side of the pharmaceutical industry and the competitive
pricing component of the business. While the Constitution protects property rights, petitioners
must accept the realities of business and the State, in the exercise of police power, can
intervene in the operations of a business which may result in an impairment of property rights
in the process.
Moreover, the right to property has a social dimension. While Article XIII of the Constitution
provides the precept for the protection of property, various laws and jurisprudence, particularly
on agrarian reform and the regulation of contracts and public utilities, continuously serve as x
x x reminder[s] that the right to property can be relinquished upon the command of the State
for the promotion of public good. Undeniably, the success of the senior citizens program rests
largely on the support imparted by petitioners and the other private establishments concerned.
This being the case, the means employed in invoking the active participation of the private
sector, in order to achieve the purpose or objective of the law, is reasonably and directly related.
Without sufficient proof that Section 4 (a) of R.A. No. 9257 is arbitrary, and that the continued
128
implementation of the same would be unconscionably detrimental to petitioners, the Court will
refrain from quashing a legislative act.36 (Bold in the original; underline supplied)
We, thus, found that the 20% discount as well as the tax deduction scheme is a valid exercise
of the police power of the State.
No compelling reason has been proffered to overturn, modify or abandon the ruling in
Carlos Superdrug Corporation.
Petitioners argue that we have previously ruled in Central Luzon Drug Corporation 37 that the
20% discount is an exercise of the power of eminent domain, thus, requiring the payment of
just compensation. They urge us to re-examine our ruling in Carlos Superdrug
Corporation38 which allegedly reversed the ruling in Central Luzon Drug Corporation.39
They also point out that Carlos Superdrug Corporation40 recognized that the tax deduction
scheme under the assailed law does not provide for sufficient just compensation. We agree
with petitioners observation that there are statements in Central Luzon Drug
Corporation41 describing the 20% discount as an exercise of the power of eminent domain, viz.:
[T]he 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. 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. 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. Besides, the taxation power can also be used
as an implement for the exercise of the power of eminent domain. Tax measures are but
"enforced contributions exacted on pain of penal sanctions" and "clearly imposed for a public
purpose." 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. 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." 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. 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.42 (Italics in
the original; emphasis supplied)
The above was partly incorporated in our ruling in Carlos Superdrug Corporation43 when we
stated preliminarily that
Petitioners assert that Section 4(a) of the law is unconstitutional because it constitutes
deprivation of private property. Compelling drugstore owners and establishments to grant the
discount will result in a loss of profit and capital because 1) drugstores impose a mark-up of
only 5% to 10% on branded medicines; and 2) the law failed to provide a scheme whereby
drugstores will be justly compensated for the discount. Examining petitioners arguments, it is
apparent that what petitioners are ultimately questioning is the validity of the tax deduction
scheme as a reimbursement mechanism for the twenty percent (20%) discount that they extend
to senior citizens. Based on the afore-stated DOF Opinion, the tax deduction scheme does not
fully reimburse petitioners for the discount privilege accorded to senior citizens. This is because
the discount is treated as a deduction, a tax-deductible expense that is subtracted from the
gross income and results in a lower taxable income. Stated otherwise, it is an amount that is
allowed by law to reduce the income prior to the application of the tax rate to compute the
amount of tax which is due. Being a tax deduction, the discount does not reduce taxes owed
on a peso for peso basis but merely offers a fractional reduction in taxes owed. Theoretically,
the treatment of the discount as a deduction reduces the net income of the private
establishments concerned. The discounts given would have entered the coffers and formed
part of the gross sales of the private establishments, were it not for R.A. No. 9257. The
permanent reduction in their total revenues is a forced subsidy corresponding to the taking of
private property for public use or benefit. This constitutes compensable taking for which
petitioners would ordinarily become entitled to a just compensation. Just compensation is
defined as the full and fair equivalent of the property taken from its owner by the expropriator.
The measure is not the takers gain but the owners loss. The word just is used to intensify the
meaning of the word compensation, and to convey the idea that the equivalent to be rendered
for the property to be taken shall be real, substantial, full and ample. A tax deduction does not
offer full reimbursement of the senior citizen discount. As such, it would not meet the definition
of just compensation. Having said that, this raises the question of whether the State, in
promoting the health and welfare of a special group of citizens, can impose upon private
establishments the burden of partly subsidizing a government program. The Court believes
so.44
129
This, notwithstanding, we went on to rule in Carlos Superdrug Corporation 45 that the 20%
discount and tax deduction scheme is a valid exercise of the police power of the State. The
present case, thus, affords an opportunity for us to clarify the above-quoted statements in
Central Luzon Drug Corporation46 and Carlos Superdrug Corporation.47
First, we note that the above-quoted disquisition on eminent domain in Central Luzon Drug
Corporation48 is obiter dicta and, thus, not binding precedent. As stated earlier, in Central
Luzon Drug Corporation,49 we ruled that the BIR acted ultra vires when it effectively treated the
20% discount as a tax deduction, under Sections 2.i and 4 of RR No. 2-94, despite the clear
wording of the previous law that the same should be treated as a tax credit. We were, therefore,
not confronted in that case with the issue as to whether the 20% discount is an exercise of
police power or eminent domain. Second, although we adverted to Central Luzon Drug
Corporation50 in our ruling in Carlos Superdrug Corporation,51 this referred only to preliminary
matters. A fair reading of Carlos Superdrug Corporation52 would show that we categorically
ruled therein that the 20% discount is a valid exercise of police power. Thus, even if the current
law, through its tax deduction scheme (which abandoned the tax credit scheme under the
previous law), does not provide for a peso for peso reimbursement of the 20% discount given
by private establishments, no constitutional infirmity obtains because, being a valid exercise of
police power, payment of just compensation is not warranted. We have carefully reviewed the
basis of our ruling in Carlos Superdrug Corporation53 and we find no cogent reason to overturn,
modify or abandon it. We also note that petitioners arguments are a mere reiteration of those
raised and resolved in Carlos Superdrug Corporation.54 Thus, we sustain Carlos Superdrug
Corporation.55
Nonetheless, we deem it proper, in what follows, to amplify our explanation in Carlos Superdrug
Corporation56 as to why the 20% discount is a valid exercise of police power and why it may
not, under the specific circumstances of this case, be considered as an exercise of the power
of eminent domain contrary to the obiter in Central Luzon Drug Corporation.57
Police power versus eminent domain.
Police power is the inherent power of the State to regulate or to restrain the use of liberty and
property for public welfare.58
The only limitation is that the restriction imposed should be reasonable, not oppressive. 59
In other words, to be a valid exercise of police power, it must have a lawful subject or objective
and a lawful method of accomplishing the goal.60
Under the police power of the State, "property rights of individuals may be subjected to
restraints and burdens in order to fulfill the objectives of the government."61
The State "may interfere with personal liberty, property, lawful businesses and occupations to
promote the general welfare [as long as] the interference [is] reasonable and not arbitrary." 62
Eminent domain, on the other hand, is the inherent power of the State to take or appropriate
private property for public use.63
The Constitution, however, requires that private property shall not be taken without due process
of law and the payment of just compensation.64
Traditional distinctions exist between police power and eminent domain. In the exercise of
police power, a property right is impaired by regulation, 65 or the use of property is merely
prohibited, regulated or restricted66 to promote public welfare. In such cases, there is no
compensable taking, hence, payment of just compensation is not required. Examples of these
regulations are property condemned for being noxious or intended for noxious purposes (e.g.,
a building on the verge of collapse to be demolished for public safety, or obscene materials to
be destroyed in the interest of public morals)67 as well as zoning ordinances prohibiting the use
of property for purposes injurious to the health, morals or safety of the community (e.g., dividing
a citys territory into residential and industrial areas).68
It has, thus, been observed that, in the exercise of police power (as distinguished from eminent
domain), although the regulation affects the right of ownership, none of the bundle of rights
which constitute ownership is appropriated for use by or for the benefit of the public. 69
On the other hand, in the exercise of the power of eminent domain, property interests are
appropriated and applied to some public purpose which necessitates the payment of just
compensation therefor. Normally, the title to and possession of the property are transferred to
the expropriating authority. Examples include the acquisition of lands for the construction of
public highways as well as agricultural lands acquired by the government under the agrarian
reform law for redistribution to qualified farmer beneficiaries. However, it is a settled rule that
the acquisition of title or total destruction of the property is not essential for "taking" under the
power of eminent domain to be present.70
Examples of these include establishment of easements such as where the land owner is
perpetually deprived of his proprietary rights because of the hazards posed by electric
transmission lines constructed above his property71 or the compelled interconnection of the
telephone system between the government and a private company.72
In these cases, although the private property owner is not divested of ownership or possession,
payment of just compensation is warranted because of the burden placed on the property for
the use or benefit of the public.
The 20% senior citizen discount is an exercise of police power.
It may not always be easy to determine whether a challenged governmental act is an exercise
of police power or eminent domain. The very nature of police power as elastic and responsive
to various social conditions 73 as well as the evolving meaning and scope of public use 74 and
just compensation75 in eminent domain evinces that these are not static concepts. Because of
the exigencies of rapidly changing times, Congress may be compelled to adopt or experiment
with different measures to promote the general welfare which may not fall squarely within the
traditionally recognized categories of police power and eminent domain. The judicious
approach, therefore, is to look at the nature and effects of the challenged governmental act
and decide, on the basis thereof, whether the act is the exercise of police power or eminent
domain. Thus, we now look at the nature and effects of the 20% discount to determine if it
constitutes an exercise of police power or eminent domain. The 20% discount is intended to
improve the welfare of senior citizens who, at their age, are less likely to be gainfully employed,
more prone to illnesses and other disabilities, and, thus, in need of subsidy in purchasing basic
commodities. It may not be amiss to mention also that the discount serves to honor senior
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citizens who presumably spent the productive years of their lives on contributing to the
development and progress of the nation. This distinct cultural Filipino practice of honoring the
elderly is an integral part of this law. As to its nature and effects, the 20% discount is a
regulation affecting the ability of private establishments to price their products and services
relative to a special class of individuals, senior citizens, for which the Constitution affords
preferential concern.76
In turn, this affects the amount of profits or income/gross sales that a private establishment can
derive from senior citizens. In other words, the subject regulation affects the pricing, and,
hence, the profitability of a private establishment. However, it does not purport to appropriate
or burden specific properties, used in the operation or conduct of the business of private
establishments, for the use or benefit of the public, or senior citizens for that matter, but merely
regulates the pricing of goods and services relative to, and the amount of profits or
income/gross sales that such private establishments may derive from, senior citizens. The
subject regulation may be said to be similar to, but with substantial distinctions from, price
control or rate of return on investment control laws which are traditionally regarded as police
power measures.77
These laws generally regulate public utilities or industries/enterprises imbued with public
interest in order to protect consumers from exorbitant or unreasonable pricing as well as temper
corporate greed by controlling the rate of return on investment of these corporations
considering that they have a monopoly over the goods or services that they provide to the
general public. The subject regulation differs therefrom in that (1) the discount does not prevent
the establishments from adjusting the level of prices of their goods and services, and (2) the
discount does not apply to all customers of a given establishment but only to the class of senior
citizens. Nonetheless, to the degree material to the resolution of this case, the 20% discount
may be properly viewed as belonging to the category of price regulatory measures which affect
the profitability of establishments subjected thereto. On its face, therefore, the subject
regulation is a police power measure. The obiter in Central Luzon Drug Corporation, 78 however,
describes the 20% discount as an exercise of the power of eminent domain and the tax credit,
under the previous law, equivalent to the amount of discount given as the just compensation
therefor. The reason is that (1) the discount would have formed part of the gross sales of the
establishment were it not for the law prescribing the 20% discount, and (2) the permanent
reduction in total revenues is a forced subsidy corresponding to the taking of private property
for public use or benefit. The flaw in this reasoning is in its premise. It presupposes that the
subject regulation, which impacts the pricing and, hence, the profitability of a private
establishment, automatically amounts to a deprivation of property without due process of law.
If this were so, then all price and rate of return on investment control laws would have to be
invalidated because they impact, at some level, the regulated establishments profits or
income/gross sales, yet there is no provision for payment of just compensation. It would also
mean that overnment cannot set price or rate of return on investment limits, which reduce the
profits or income/gross sales of private establishments, if no just compensation is paid even if
the measure is not confiscatory. The obiter is, thus, at odds with the settled octrine that the
State can employ police power measures to regulate the pricing of goods and services, and,
hence, the profitability of business establishments in order to pursue legitimate State objectives
for the common good, provided that the regulation does not go too far as to amount to "taking." 79
In City of Manila v. Laguio, Jr.,80 we recognized that x x x a taking also could be found if
government regulation of the use of property went "too far." When regulation reaches a certain
magnitude, in most if not in all cases there must be an exercise of eminent domain and
compensation to support the act. While property may be regulated to a certain extent, if
regulation goes too far it will be recognized as a taking. No formula or rule can be devised to
answer the questions of what is too far and when regulation becomes a taking. In Mahon,
Justice Holmes recognized that it was "a question of degree and therefore cannot be disposed
of by general propositions." On many other occasions as well, the U.S. Supreme Court has
said that the issue of when regulation constitutes a taking is a matter of considering the facts
in each case. The Court asks whether justice and fairness require that the economic loss
caused by public action must be compensated by the government and thus borne by the public
as a whole, or whether the loss should remain concentrated on those few persons subject to
the public action.81
The impact or effect of a regulation, such as the one under consideration, must, thus, be
determined on a case-to-case basis. Whether that line between permissible regulation under
police power and "taking" under eminent domain has been crossed must, under the specific
circumstances of this case, be subject to proof and the one assailing the constitutionality of the
regulation carries the heavy burden of proving that the measure is unreasonable, oppressive
or confiscatory. The time-honored rule is that the burden of proving the unconstitutionality of a
law rests upon the one assailing it and "the burden becomes heavier when police power is at
issue."82
The 20% senior citizen discount has not been shown to be unreasonable, oppressive or
confiscatory.
In Alalayan v. National Power Corporation,83 petitioners, who were franchise holders of electric
plants, challenged the validity of a law limiting their allowable net profits to no more than 12%
per annum of their investments plus two-month operating expenses. In rejecting their plea, we
ruled that, in an earlier case, it was found that 12% is a reasonable rate of return and that
petitioners failed to prove that the aforesaid rate is confiscatory in view of the presumption of
constitutionality.84
We adopted a similar line of reasoning in Carlos Superdrug Corporation 85 when we ruled that
petitioners therein failed to prove that the 20% discount is arbitrary, oppressive or confiscatory.
We noted that no evidence, such as a financial report, to establish the impact of the 20%
discount on the overall profitability of petitioners was presented in order to show that they would
be operating at a loss due to the subject regulation or that the continued implementation of the
law would be unconscionably detrimental to the business operations of petitioners. In the case
at bar, petitioners proceeded with a hypothetical computation of the alleged loss that they will
suffer similar to what the petitioners in Carlos Superdrug Corporation 86 did. Petitioners went
directly to this Court without first establishing the factual bases of their claims. Hence, the
present recourse must, likewise, fail. Because all laws enjoy the presumption of
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constitutionality, courts will uphold a laws validity if any set of facts may be conceived to sustain
it.87
On its face, we find that there are at least two conceivable bases to sustain the subject
regulations validity absent clear and convincing proof that it is unreasonable, oppressive or
confiscatory. Congress may have legitimately concluded that business establishments have
the capacity to absorb a decrease in profits or income/gross sales due to the 20% discount
without substantially affecting the reasonable rate of return on their investments considering
(1) not all customers of a business establishment are senior citizens and (2) the level of its
profit margins on goods and services offered to the general public. Concurrently, Congress
may have, likewise, legitimately concluded that the establishments, which will be required to
extend the 20% discount, have the capacity to revise their pricing strategy so that whatever
reduction in profits or income/gross sales that they may sustain because of sales to senior
citizens, can be recouped through higher mark-ups or from other products not subject of
discounts. As a result, the discounts resulting from sales to senior citizens will not be
confiscatory or unduly oppressive. In sum, we sustain our ruling in Carlos Superdrug
Corporation88 that the 20% senior citizen discount and tax deduction scheme are valid
exercises of police power of the State absent a clear showing that it is arbitrary, oppressive or
confiscatory.
Conclusion
In closing, we note that petitioners hypothesize, consistent with our previous ratiocinations, that
the discount will force establishments to raise their prices in order to compensate for its impact
on overall profits or income/gross sales. The general public, or those not belonging to the senior
citizen class, are, thus, made to effectively shoulder the subsidy for senior citizens. This, in
petitioners view, is unfair.
As already mentioned, Congress may be reasonably assumed to have foreseen this
eventuality. But, more importantly, this goes into the wisdom, efficacy and expediency of the
subject law which is not proper for judicial review. In a way, this law pursues its social equity
objective in a non-traditional manner unlike past and existing direct subsidy programs of the
government for the poor and marginalized sectors of our society. Verily, Congress must be
given sufficient leeway in formulating welfare legislations given the enormous challenges that
the government faces relative to, among others, resource adequacy and administrative
capability in implementing social reform measures which aim to protect and uphold the interests
of those most vulnerable in our society. In the process, the individual, who enjoys the rights,
benefits and privileges of living in a democratic polity, must bear his share in supporting
measures intended for the common good. This is only fair. In fine, without the requisite showing
of a clear and unequivocal breach of the Constitution, the validity of the assailed law must be
sustained.
Refutation of the Dissent
The main points of Justice Carpios Dissent may be summarized as follows: (1) the discussion
on eminent domain in Central Luzon Drug Corporation89 is not obiter dicta ; (2) allowable
taking, in police power, is limited to property that is destroyed or placed outside the commerce
of man for public welfare; (3) the amount of mandatory discount is private property within the
ambit of Article III, Section 990 of the Constitution; and (4) the permanent reduction in a private
establishments total revenue, arising from the mandatory discount, is a taking of private
property for public use or benefit, hence, an exercise of the power of eminent domain requiring
the payment of just compensation. I We maintain that the discussion on eminent domain in
Central Luzon Drug Corporation91 is obiter dicta. As previously discussed, in Central Luzon
Drug Corporation,92 the BIR, pursuant to Sections 2.i and 4 of RR No. 2-94, treated the senior
citizen discount in the previous law, RA 7432, as a tax deduction instead of a tax credit despite
the clear provision in that law which stated
SECTION 4. Privileges for the Senior Citizens. The senior citizens shall be entitled to the
following:
a) The grant of twenty percent (20%) discount from all establishments relative to utilization of
transportation services, hotels and similar lodging establishment, restaurants and recreation
centers and purchase of medicines anywhere in the country: Provided, That private
establishments may claim the cost as tax credit; (Emphasis supplied)
Thus, the Court ruled that the subject revenue regulation violated the law, viz:
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.93
As can be readily seen, the discussion on eminent domain was not necessary in order to arrive
at this conclusion. All that was needed was to point out that the revenue regulation contravened
the law which it sought to implement. And, precisely, this was done in Central Luzon Drug
Corporation94 by comparing the wording of the previous law vis--vis the revenue regulation;
employing the rules of statutory construction; and applying the settled principle that a regulation
cannot amend the law it seeks to implement. A close reading of Central Luzon Drug
Corporation95 would show that the Court went on to state that the tax credit "can be deemed"
as just compensation only to explain why the previous law provides for a tax credit instead of
a tax deduction. The Court surmised that the tax credit was a form of just compensation given
to the establishments covered by the 20% discount. However, the reason why the previous law
provided for a tax credit and not a tax deduction was not necessary to resolve the issue as to
whether the revenue regulation contravenes the law. Hence, the discussion on eminent domain
is obiter dicta.
A court, in resolving cases before it, may look into the possible purposes or reasons that
impelled the enactment of a particular statute or legal provision. However, statements made
relative thereto are not always necessary in resolving the actual controversies presented before
it. This was the case in Central Luzon Drug Corporation96resulting in that unfortunate statement
that the tax credit "can be deemed" as just compensation. This, in turn, led to the erroneous
conclusion, by deductive reasoning, that the 20% discount is an exercise of the power of
eminent domain. The Dissent essentially adopts this theory and reasoning which, as will be
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shown below, is contrary to settled principles in police power and eminent domain analysis. II
The Dissent discusses at length the doctrine on "taking" in police power which occurs when
private property is destroyed or placed outside the commerce of man. Indeed, there is a whole
class of police power measures which justify the destruction of private property in order to
preserve public health, morals, safety or welfare. As earlier mentioned, these would include a
building on the verge of collapse or confiscated obscene materials as well as those mentioned
by the Dissent with regard to property used in violating a criminal statute or one which
constitutes a nuisance. In such cases, no compensation is required. However, it is equally true
that there is another class of police power measures which do not involve the destruction of
private property but merely regulate its use. The minimum wage law, zoning ordinances, price
control laws, laws regulating the operation of motels and hotels, laws limiting the working hours
to eight, and the like would fall under this category. The examples cited by the Dissent, likewise,
fall under this category: Article 157 of the Labor Code, Sections 19 and 18 of the Social Security
Law, and Section 7 of the Pag-IBIG Fund Law. These laws merely regulate or, to use the term
of the Dissent, burden the conduct of the affairs of business establishments. In such cases,
payment of just compensation is not required because they fall within the sphere of permissible
police power measures. The senior citizen discount law falls under this latter category. III The
Dissent proceeds from the theory that the permanent reduction of profits or income/gross sales,
due to the 20% discount, is a "taking" of private property for public purpose without payment of
just compensation. At the outset, it must be emphasized that petitioners never presented any
evidence to establish that they were forced to suffer enormous losses or operate at a loss due
to the effects of the assailed law. They came directly to this Court and provided a hypothetical
computation of the loss they would allegedly suffer due to the operation of the assailed law.
The central premise of the Dissents argument that the 20% discount results in a permanent
reduction in profits or income/gross sales, or forces a business establishment to operate at a
loss is, thus, wholly unsupported by competent evidence. To be sure, the Court can invalidate
a law which, on its face, is arbitrary, oppressive or confiscatory. 97
But this is not the case here.
In the case at bar, evidence is indispensable before a determination of a constitutional violation
can be made because of the following reasons. First, the assailed law, by imposing the senior
citizen discount, does not take any of the properties used by a business establishment like,
say, the land on which a manufacturing plant is constructed or the equipment being used to
produce goods or services. Second, rather than taking specific properties of a business
establishment, the senior citizen discount law merely regulates the prices of the goods or
services being sold to senior citizens by mandating a 20% discount. Thus, if a product is sold
at P10.00 to the general public, then it shall be sold at P8.00 ( i.e., P10.00 less 20%) to senior
citizens. Note that the law does not impose at what specific price the product shall be sold, only
that a 20% discount shall be given to senior citizens based on the price set by the business
establishment. A business establishment is, thus, free to adjust the prices of the goods or
services it provides to the general public. Accordingly, it can increase the price of the above
product to P20.00 but is required to sell it at P16.00 (i.e. , P20.00 less 20%) to senior citizens.
Third, because the law impacts the prices of the goods or services of a particular establishment
relative to its sales to senior citizens, its profits or income/gross sales are affected. The extent
of the impact would, however, depend on the profit margin of the business establishment on a
particular good or service. If a product costs P5.00 to produce and is sold at P10.00, then the
profit98 is P5.0099 or a profit margin100 of 50%.101
Under the assailed law, the aforesaid product would have to be sold at P8.00 to senior citizens
yet the business would still earn P3.00102 or a 30%103 profit margin. On the other hand, if the
product costs P9.00 to produce and is required to be sold at P8.00 to senior citizens, then the
business would experience a loss of P1.00.104
But note that since not all customers of a business establishment are senior citizens, the
business establishment may continue to earn P1.00 from non-senior citizens which, in turn,
can offset any loss arising from sales to senior citizens.
Fourth, when the law imposes the 20% discount in favor of senior citizens, it does not prevent
the business establishment from revising its pricing strategy.
By revising its pricing strategy, a business establishment can recoup any reduction of profits or
income/gross sales which would otherwise arise from the giving of the 20% discount. To
illustrate, suppose A has two customers: X, a senior citizen, and Y, a non-senior citizen. Prior
to the law, A sells his products at P10.00 a piece to X and Y resulting in income/gross sales
of P20.00 (P10.00 + P10.00). With the passage of the law, A must now sell his product to X
at P8.00 (i.e., P10.00 less 20%) so that his income/gross sales would be P18.00 (P8.00
+P10.00) or lower by P2.00. To prevent this from happening, A decides to increase the price
of his products toP11.11 per piece. Thus, he sells his product to X at P8.89 (i.e. , P11.11 less
20%) and to Y at P11.11. As a result, his income/gross sales would still be P20.00105 (P8.89
+ P11.11). The capacity, then, of business establishments to revise their pricing strategy makes
it possible for them not to suffer any reduction in profits or income/gross sales, or, in the
alternative, mitigate the reduction of their profits or income/gross sales even after the passage
of the law. In other words, business establishments have the capacity to adjust their prices so
that they may remain profitable even under the operation of the assailed law.
The Dissent, however, states that The explanation by the majority that private establishments
can always increase their prices to recover the mandatory discount will only encourage private
establishments to adjust their prices upwards to the prejudice of customers who do not enjoy
the 20% discount. It was likewise suggested that if a company increases its prices, despite the
application of the 20% discount, the establishment becomes more profitable than it was before
the implementation of R.A. 7432. Such an economic justification is self-defeating, for more
consumers will suffer from the price increase than will benefit from the 20% discount. Even
then, such ability to increase prices cannot legally validate a violation of the eminent domain
clause.106
But, if it is possible that the business establishment, by adjusting its prices, will suffer no
reduction in its profits or income/gross sales (or suffer some reduction but continue to operate
profitably) despite giving the discount, what would be the basis to strike down the law? If it is
possible that the business establishment, by adjusting its prices, will not be unduly burdened,
how can there be a finding that the assailed law is an unconstitutional exercise of police power
or eminent domain? That there may be a burden placed on business establishments or the
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consuming public as a result of the operation of the assailed law is not, by itself, a ground to
declare it unconstitutional for this goes into the wisdom and expediency of the law.
The cost of most, if not all, regulatory measures of the government on business establishments
is ultimately passed on to the consumers but that, by itself, does not justify the wholesale
nullification of these measures. It is a basic postulate of our democratic system of government
that the Constitution is a social contract whereby the people have surrendered their sovereign
powers to the State for the common good.107
All persons may be burdened by regulatory measures intended for the common good or to
serve some important governmental interest, such as protecting or improving the welfare of a
special class of people for which the Constitution affords preferential concern. Indubitably, the
one assailing the law has the heavy burden of proving that the regulation is unreasonable,
oppressive or confiscatory, or has gone "too far" as to amount to a "taking." Yet, here, the
Dissent would have this Court nullify the law without any proof of such nature.
Further, this Court is not the proper forum to debate the economic theories or realities that
impelled Congress to shift from the tax credit to the tax deduction scheme. It is not within our
power or competence to judge which scheme is more or less burdensome to business
establishments or the consuming public and, thereafter, to choose which scheme the State
should use or pursue. The shift from the tax credit to tax deduction scheme is a policy
determination by Congress and the Court will respect it for as long as there is no showing, as
here, that the subject regulation has transgressed constitutional limitations. Unavoidably, the
lack of evidence constrains the Dissent to rely on speculative and hypothetical argumentation
when it states that the 20% discount is a significant amount and not a minimal loss (which
erroneously assumes that the discount automatically results in a loss when it is possible that
the profit margin is greater than 20% and/or the pricing strategy can be revised to prevent or
mitigate any reduction in profits or income/gross sales as illustrated above), 108 and not all
private establishments make a 20% profit margin (which conversely implies that there are those
who make more and, thus, would not be greatly affected by this regulation). 109
In fine, because of the possible scenarios discussed above, we cannot assume that the 20%
discount results in a permanent reduction in profits or income/gross sales, much less that
business establishments are forced to operate at a loss under the assailed law. And, even if
we gratuitously assume that the 20% discount results in some degree of reduction in profits or
income/gross sales, we cannot assume that such reduction is arbitrary, oppressive or
confiscatory. To repeat, there is no actual proof to back up this claim, and it could be that the
loss suffered by a business establishment was occasioned through its fault or negligence in
not adapting to the effects of the assailed law. The law uniformly applies to all business
establishments covered thereunder. There is, therefore, no unjust discrimination as the
aforesaid business establishments are faced with the same constraints. The necessity of proof
is all the more pertinent in this case because, as similarly observed by Justice Velasco in his
Concurring Opinion, the law has been in operation for over nine years now. However, the grim
picture painted by petitioners on the unconscionable losses to be indiscriminately suffered by
business establishments, which should have led to the closure of numerous business
establishments, has not come to pass. Verily, we cannot invalidate the assailed law based on
assumptions and conjectures. Without adequate proof, the presumption of constitutionality
must prevail. IV At this juncture, we note that the Dissent modified its original arguments by
including a new paragraph, to wit:
Section 9, Article III of the 1987 Constitution speaks of private property without any distinction.
It does not state that there should be profit before the taking of property is subject to just
compensation. The private property referred to for purposes of taking could be inherited,
donated, purchased, mortgaged, or as in this case, part of the gross sales of private
establishments. They are all private property and any taking should be attended by
corresponding payment of just compensation. The 20% discount granted to senior citizens
belong to private establishments, whether these establishments make a profit or suffer a loss.
In fact, the 20% discount applies to non-profit establishments like country, social, or golf clubs
which are open to the public and not only for exclusive membership. The issue of profit or loss
to the establishments is immaterial.110
Two things may be said of this argument. First, it contradicts the rest of the arguments of the
Dissent. After it states that the issue of profit or loss is immaterial, the Dissent proceeds to
argue that the 20% discount is not a minimal loss111 and that the 20% discount forces business
establishments to operate at a loss.112
Even the obiter in Central Luzon Drug Corporation,113 which the Dissent essentially adopts and
relies on, is premised on the permanent reduction of total revenues and the loss that business
establishments will be forced to suffer in arguing that the 20% discount constitutes a "taking"
under the power of eminent domain. Thus, when the Dissent now argues that the issue of profit
or loss is immaterial, it contradicts itself because it later argues, in order to justify that there is
a "taking" under the power of eminent domain in this case, that the 20% discount forces
business establishments to suffer a significant loss or to operate at a loss. Second, this
argument suffers from the same flaw as the Dissent's original arguments. It is an erroneous
characterization of the 20% discount. According to the Dissent, the 20% discount is part of the
gross sales and, hence, private property belonging to business establishments. However, as
previously discussed, the 20% discount is not private property actually owned and/or used by
the business establishment. It should be distinguished from properties like lands or buildings
actually used in the operation of a business establishment which, if appropriated for public use,
would amount to a "taking" under the power of eminent domain. Instead, the 20% discount is
a regulatory measure which impacts the pricing and, hence, the profitability of business
establishments. At the time the discount is imposed, no particular property of the business
establishment can be said to be "taken." That is, the State does not acquire or take anything
from the business establishment in the way that it takes a piece of private land to build a public
road. While the 20% discount may form part of the potential profits or income/gross sales 114 of
the business establishment, as similarly characterized by Justice Bersamin in his Concurring
Opinion, potential profits or income/gross sales are not private property, specifically cash or
money, already belonging to the business establishment. They are a mere expectancy because
they are potential fruits of the successful conduct of the business. Prior to the sale of goods or
services, a business establishment may be subject to State regulations, such as the 20% senior
citizen discount, which may impact the level or amount of profits or income/gross sales that
134
can be generated by such establishment. For this reason, the validity of the discount is to be
determined based on its overall effects on the operations of the business establishment.
Again, as previously discussed, the 20% discount does not automatically result in a 20%
reduction in profits, or, to align it with the term used by the Dissent, the 20% discount does not
mean that a 20% reduction in gross sales necessarily results. Because (1) the profit margin of
a product is not necessarily less than 20%, (2) not all customers of a business establishment
are senior citizens, and (3) the establishment may revise its pricing strategy, such reduction in
profits or income/gross sales may be prevented or, in the alternative, mitigated so that the
business establishment continues to operate profitably. Thus, even if we gratuitously assume
that some degree of reduction in profits or income/gross sales occurs because of the 20%
discount, it does not follow that the regulation is unreasonable, oppressive or confiscatory
because the business establishment may make the necessary adjustments to continue to
operate profitably. No evidence was presented by petitioners to show otherwise. In fact, no
evidence was presented by petitioners at all. Justice Leonen, in his Concurring and Dissenting
Opinion, characterizes "profits" (or income/gross sales) as an inchoate right. Another way to
view it, as stated by Justice Velasco in his Concurring Opinion, is that the business
establishment merely has a right to profits. The Constitution adverts to it as the right of an
enterprise to a reasonable return on investment.115
Undeniably, this right, like any other right, may be regulated under the police power of the State
to achieve important governmental objectives like protecting the interests and improving the
welfare of senior citizens. It should be noted though that potential profits or income/gross sales
are relevant in police power and eminent domain analyses because they may, in appropriate
cases, serve as an indicia when a regulation has gone "too far" as to amount to a "taking" under
the power of eminent domain. When the deprivation or reduction of profits or income/gross
sales is shown to be unreasonable, oppressive or confiscatory, then the challenged
governmental regulation may be nullified for being a "taking" under the power of eminent
domain. In such a case, it is not profits or income/gross sales which are actually taken and
appropriated for public use. Rather, when the regulation causes an establishment to incur
losses in an unreasonable, oppressive or confiscatory manner, what is actually taken is capital
and the right of the business establishment to a reasonable return on investment. If the
business losses are not halted because of the continued operation of the regulation, this
eventually leads to the destruction of the business and the total loss of the capital invested
therein. But, again, petitioners in this case failed to prove that the subject regulation is
unreasonable, oppressive or confiscatory.
V.
The Dissent further argues that we erroneously used price and rate of return on investment
control laws to justify the senior citizen discount law. According to the Dissent, only profits from
industries imbued with public interest may be regulated because this is a condition of their
franchises. Profits of establishments without franchises cannot be regulated permanently
because there is no law regulating their profits. The Dissent concludes that the permanent
reduction of total revenues or gross sales of business establishments without franchises is a
taking of private property under the power of eminent domain. In making this argument, it is
unfortunate that the Dissent quotes only a portion of the ponencia The subject regulation may
be said to be similar to, but with substantial distinctions from, price control or rate of return on
investment control laws which are traditionally regarded as police power measures. These laws
generally regulate public utilities or industries/enterprises imbued with public interest in order
to protect consumers from exorbitant or unreasonable pricing as well as temper corporate
greed by controlling the rate of return on investment of these corporations considering that they
have a monopoly over the goods or services that they provide to the general public. The subject
regulation differs therefrom in that (1) the discount does not prevent the establishments from
adjusting the level of prices of their goods and services, and (2) the discount does not apply to
all customers of a given establishment but only to the class of senior citizens. x x x 116
The above paragraph, in full, states
The subject regulation may be said to be similar to, but with substantial distinctions from, price
control or rate of return on investment control laws which are traditionally regarded as police
power measures. These laws generally regulate public utilities or industries/enterprises imbued
with public interest in order to protect consumers from exorbitant or unreasonable pricing as
well as temper corporate greed by controlling the rate of return on investment of these
corporations considering that they have a monopoly over the goods or services that they
provide to the general public. The subject regulation differs therefrom in that (1) the discount
does not prevent the establishments from adjusting the level of prices of their goods and
services, and (2) the discount does not apply to all customers of a given establishment but only
to the class of senior citizens.
Nonetheless, to the degree material to the resolution of this case, the 20% discount may be
properly viewed as belonging to the category of price regulatory measures which affects the
profitability of establishments subjected thereto. (Emphasis supplied)
The point of this paragraph is to simply show that the State has, in the past, regulated prices
and profits of business establishments. In other words, this type of regulatory measures is
traditionally recognized as police power measures so that the senior citizen discount may be
considered as a police power measure as well. What is more, the substantial distinctions
between price and rate of return on investment control laws vis--vis the senior citizen discount
law provide greater reason to uphold the validity of the senior citizen discount law. As previously
discussed, the ability to adjust prices allows the establishment subject to the senior citizen
discount to prevent or mitigate any reduction of profits or income/gross sales arising from the
giving of the discount. In contrast, establishments subject to price and rate of return on
investment control laws cannot adjust prices accordingly. Certainly, there is no intention to say
that price and rate of return on investment control laws are the justification for the senior citizen
discount law. Not at all. The justification for the senior citizen discount law is the plenary powers
of Congress. The legislative power to regulate business establishments is broad and covers a
wide array of areas and subjects. It is well within Congress legislative powers to regulate the
profits or income/gross sales of industries and enterprises, even those without franchises. For
what are franchises but mere legislative enactments? There is nothing in the Constitution that
prohibits Congress from regulating the profits or income/gross sales of industries and
enterprises without franchises. On the contrary, the social justice provisions of the Constitution
135
enjoin the State to regulate the "acquisition, ownership, use, and disposition" of property and
its increments.117
This may cover the regulation of profits or income/gross sales of all businesses, without
qualification, to attain the objective of diffusing wealth in order to protect and enhance the right
of all the people to human dignity.118
Thus, under the social justice policy of the Constitution, business establishments may be
compelled to contribute to uplifting the plight of vulnerable or marginalized groups in our society
provided that the regulation is not arbitrary, oppressive or confiscatory, or is not in breach of
some specific constitutional limitation. When the Dissent, therefore, states that the "profits of
private establishments which are non-franchisees cannot be regulated permanently, and there
is no such law regulating their profits permanently,"119 it is assuming what it ought to prove.
First, there are laws which, in effect, permanently regulate profits or income/gross sales of
establishments without franchises, and RA 9257 is one such law. And, second, Congress can
regulate such profits or income/gross sales because, as previously noted, there is nothing in
the Constitution to prevent it from doing so. Here, again, it must be emphasized that petitioners
failed to present any proof to show that the effects of the assailed law on their operations has
been unreasonable, oppressive or confiscatory. The permanent regulation of profits or
income/gross sales of business establishments, even those without franchises, is not as
uncommon as the Dissent depicts it to be. For instance, the minimum wage law allows the
State to set the minimum wage of employees in a given region or geographical area. Because
of the added labor costs arising from the minimum wage, a permanent reduction of profits or
income/gross sales would result, assuming that the employer does not increase the prices of
his goods or services. To illustrate, suppose it costs a company P5.00 to produce a product
and it sells the same at P10.00 with a 50% profit margin. Later, the State increases the
minimum wage. As a result, the company incurs greater labor costs so that it now costs P7.00
to produce the same product. The profit per product of the company would be reduced to P3.00
with a profit margin of 30%. The net effect would be the same as in the earlier example of
granting a 20% senior citizen discount. As can be seen, the minimum wage law could, likewise,
lead to a permanent reduction of profits. Does this mean that the minimum wage law should,
likewise, be declared unconstitutional on the mere plea that it results in a permanent reduction
of profits? Taking it a step further, suppose the company decides to increase the price of its
product in order to offset the effects of the increase in labor cost; does this mean that the
minimum wage law, following the reasoning of the Dissent, is unconstitutional because the
consuming public is effectively made to subsidize the wage of a group of laborers, i.e., minimum
wage earners? The same reasoning can be adopted relative to the examples cited by the
Dissent which, according to it, are valid police power regulations. Article 157 of the Labor Code,
Sections 19 and 18 of the Social Security Law, and Section 7 of the Pag-IBIG Fund Law would
effectively increase the labor cost of a business establishment. This would, in turn, be
integrated as part of the cost of its goods or services. Again, if the establishment does not
increase its prices, the net effect would be a permanent reduction in its profits or income/gross
sales. Following the reasoning of the Dissent that "any form of permanent taking of private
property (including profits or income/gross sales)120 is an exercise of eminent domain that
requires the State to pay just compensation,"121 then these statutory provisions would, likewise,
have to be declared unconstitutional. It does not matter that these benefits are deemed part of summarily invalidated on a mere allegation that it reduces the profits or income/gross sales of
the employees legislated wages because the net effect is the same, that is, it leads to higher business establishments.
labor costs and a permanent reduction in the profits or income/gross sales of the business WHEREFORE, the Petition is hereby DISMISSED for lack of merit.
establishments.122
SO ORDERED.
The point then is this most, if not all, regulatory measures imposed by the State on business
establishments impact, at some level, the latters prices and/or profits or income/gross sales.123
If the Court were to sustain the Dissents theory, then a wholesale nullification of such
measures would inevitably result. The police power of the State and the social justice provisions
of the Constitution would, thus, be rendered nugatory. There is nothing sacrosanct about profits
or income/gross sales. This, we made clear in Carlos Superdrug Corporation: 124
Police power as an attribute to promote the common good would be diluted considerably if on
the mere plea of petitioners that they will suffer loss of earnings and capital, the questioned
provision is invalidated. Moreover, in the absence of evidence demonstrating the alleged
confiscatory effect of the provision in question, there is no basis for its nullification in view of
the presumption of validity which every law has in its favor.
xxxx
The Court is not oblivious of the retail side of the pharmaceutical industry and the competitive
pricing component of the business. While the Constitution protects property rights petitioners
must the realities of business and the State, in the exercise of police power, can intervene in
the operations of a business which may result in an impairment of property rights in the process.
Moreover, the right to property has a social dimension. While Article XIII of the Constitution
provides the percept for the protection of property, various laws and jurisprudence, particularly
on agrarian reform and the regulation of contracts and public utilities, continously serve as a
reminder for the promotion of public good.
Undeniably, the success of the senior citizens program rests largely on the support imparted
by petitioners and the other private establishments concerned. This being the case, the means
employed in invoking the active participation of the private sector, in order to achieve the
purpose or objective of the law, is reasonably and directly related. Without sufficient proof that
Section 4(a) of R.A. No. 9257 is arbitrary, and that the continued implementation of the same
would be unconscionably detrimental to petitioners, the Court will refrain form quashing a
legislative act.125
In conclusion, we maintain that the correct rule in determining whether the subject regulatory
measure has amounted to a "taking" under the power of eminent domain is the one laid down
in Alalayan v. National Power Corporation126 and followed in Carlos Superdurg
Corporation127 consistent with long standing principles in police power and eminent domain
analysis. Thus, the deprivation or reduction of profits or income. Gross sales must be clearly
shown to be unreasonable, oppressive or confiscatory. Under the specific circumstances of
this case, such determination can only be made upon the presentation of competent proof
which petitioners failed to do. A law, which has been in operation for many years and promotes
the welfare of a group accorded special concern by the Constitution, cannot and should not be

136
G.R. No. 204429 February 18, 2014
SMART COMMUNICATIONS, INC., Petitioner,
vs.
MUNICIPALITY OF MALVAR, BATANGAS, Respondent.
DECISION
CARPIO, J.:
The Case
This petition for review1 challenges the 26 June 2012 Decision 2 and 13 November 2012
Resolution3 of the Court of Tax. Appeals (CTA) En Banc.
Th e CTA En Banc affirmed the 17 December 2010 Decision 4 and 7 April 2011 Resolution5 of
the CTA First Division, which in turn affirmed the 2 December 2008 Decision6 and 21 May 2009
Order7 of the Regional Trial Court of Tanauan City, Batangas, Branch 6. The trial court declared
void the assessment imposed by respondent Municipality of Malvar, Batangas against
petitioner Smart Communications, Inc. for its telecommunications tower for 2001 to July 2003
and directed respondent to assess petitioner only for the period starting 1 October 2003.
The Facts
Petitioner Smart Communications, Inc. (Smart) is a domestic corporation engaged in the
business of providing telecommunications services to the general public while respondent
Municipality of Malvar, Batangas (Municipality) is a local government unit created by law.
In the course of its business, Smart constructed a telecommunications tower within the
territorial jurisdiction of the Municipality. The construction of the tower was for the purpose of
receiving and transmitting cellular communications within the covered area.
On 30 July 2003, the Municipality passed Ordinance No. 18, series of 2003, entitled "An
Ordinance Regulating the Establishment of Special Projects."
On 24 August 2004, Smart received from the Permit and Licensing Division of the Office of the
Mayor of the Municipality an assessment letter with a schedule of payment for the total amount
of P389,950.00 for Smarts telecommunications tower. The letter reads as follows:
This is to formally submit to your good office your schedule of payments in the Municipal
Treasury of the Local Government Unit of Malvar, province of Batangas which corresponds to
the tower of your company built in the premises of the municipality, to wit:
TOTAL PROJECT COST: PHP
11,000,000.00
For the Year 2001-2003
50% of 1% of the total project cost Php55,000.00
Add: 45% surcharge 24,750.00
137
Php79,750.00
Multiply by 3 yrs. (2001, 2002, 2003) Php239,250.00
For the year 2004
1% of the total project cost Php110,000.00
37% surcharge 40,700.00
==========
Php150,700.00
TOTAL Php389,950.00
Hoping that you will give this matter your preferential attention. 8
Due to the alleged arrears in the payment of the assessment, the Municipality also caused the
posting of a closure notice on the telecommunications tower.
On 9 September 2004, Smart filed a protest, claiming lack of due process in the issuance of
the assessment and closure notice. In the same protest, Smart challenged the validity of
Ordinance No. 18 on which the assessment was based.
In a letter dated 28 September 2004, the Municipality denied Smarts protest.
On 17 November 2004, Smart filed with Regional Trial Court of Tanauan City, Batangas,
Branch 6, an "Appeal/Petition" assailing the validity of Ordinance No. 18. The case was
docketed as SP Civil Case No. 04-11-1920.
On 2 December 2008, the trial court rendered a Decision partly granting Smarts
Appeal/Petition. The trial court confined its resolution of the case to the validity of the
assessment, and did not rule on the legality of Ordinance No. 18. The trial court held that the
assessment covering the period from 2001 to July 2003 was void since Ordinance No. 18 was
approved only on 30 July 2003. However, the trial court declared valid the assessment starting
1 October 2003, citing Article 4 of the Civil Code of the Philippines,9 in relation to the provisions
of Ordinance No. 18 and Section 166 of Republic Act No. 7160 or the Local Government Code
of 1991 (LGC).10 The dispositive portion of the trial courts Decision reads:
WHEREFORE, in light of the foregoing, the Petition is partly GRANTED. The assessment dated
August 24, 2004 against petitioner is hereby declared null and void insofar as the assessment
made from year 2001 to July 2003 and respondent is hereby prohibited from assessing and
collecting, from petitioner, fees during the said period and the Municipal Government of Malvar,
Batangas is directed to assess Smart Communications, Inc. only for the period starting October
1, 2003.
No costs.
SO ORDERED.11
The trial court denied the motion for reconsideration in its Order of 21 May 2009.
On 8 July 2009, Smart filed a petition for review with the CTA First Division, docketed as CTA
AC No. 58.
On 17 December 2010, the CTA First Division denied the petition for review. The dispositive
portion of the decision reads:
WHEREFORE, the Petition for Review is hereby DENIED, for lack of merit. Accordingly, the
assailed Decision dated December 2, 2008 and the Order dated May 21, 2009 of Branch 6 of
the Regional Trial Court of Tanauan City, Batangas in SP. Civil Case No. 04-11-1920 entitled
"Smart Communications, Inc. vs. Municipality of Malvar, Batangas" are AFFIRMED.
SO ORDERED.12
On 7 April 2011, the CTA First Division issued a Resolution denying the motion for
reconsideration.
Smart filed a petition for review with the CTA En Banc, which affirmed the CTA First Divisions
decision and resolution. The dispositive portion of the CTA En Bancs 26 June 2012 decision
reads:
WHEREFORE, premises considered, the present Petition for Review is hereby DISMISSED
for lack of merit.1wphi1
Accordingly, the assailed Decision dated December 17, 2010 and Resolution dated April 7,
2011 are hereby AFFIRMED.
SO ORDERED.13
The CTA En Banc denied the motion for reconsideration.
Hence, this petition.
The Ruling of the CTA En Banc
The CTA En Banc dismissed the petition on the ground of lack of jurisdiction. The CTA En
Banc declared that it is a court of special jurisdiction and as such, it can take cognizance only
of such matters as are clearly within its jurisdiction. Citing Section 7(a), paragraph 3, of
Republic Act No. 9282, the CTA En Banc held that the CTA has exclusive appellate jurisdiction
to review on appeal, decisions, orders or resolutions of the Regional Trial Courts in local tax
cases originally resolved by them in the exercise of their original or appellate jurisdiction.
However, the same provision does not confer on the CTA jurisdiction to resolve cases where
the constitutionality of a law or rule is challenged.
The Issues
The petition raises the following arguments:
1. The [CTA En Banc Decision and Resolution] should be reversed and set aside for being
contrary to law and jurisprudence considering that the CTA En Banc should have exercised its
jurisdiction and declared the Ordinance as illegal.
2. The [CTA En Banc Decision and Resolution] should be reversed and set aside for being
contrary to law and jurisprudence considering that the doctrine of exhaustion of administrative
remedies does not apply in [this case].
138
3. The [CTA En Banc Decision and Resolution] should be reversed and set aside for being
contrary to law and jurisprudence considering that the respondent has no authority to impose
the so-called "fees" on the basis of the void ordinance. 14
The Ruling of the Court
The Court denies the petition.
On whether the CTA has jurisdiction over the present case
Smart contends that the CTA erred in dismissing the case for lack of jurisdiction. Smart
maintains that the CTA has jurisdiction over the present case considering the "unique" factual
circumstances involved.
The CTA refuses to take cognizance of this case since it challenges the constitutionality of
Ordinance No. 18, which is outside the province of the CTA.
Jurisdiction is conferred by law. Republic Act No. 1125, as amended by Republic Act No. 9282,
created the Court of Tax Appeals. Section 7, paragraph (a), sub-paragraph (3)15 of the law
vests the CTA with the exclusive appellate jurisdiction over "decisions, orders or resolutions of
the Regional Trial Courts in local tax cases originally decided or resolved by them in the
exercise of their original or appellate jurisdiction."
The question now is whether the trial court resolved a local tax case in order to fall within the
ambit of the CTAs appellate jurisdiction This question, in turn, depends ultimately on whether
the fees imposed under Ordinance No. 18 are in fact taxes.
Smart argues that the "fees" in Ordinance No. 18 are actually taxes since they are not
regulatory, but revenue-raising. Citing Philippine Airlines, Inc. v. Edu,16 Smart contends that
the designation of "fees" in Ordinance No. 18 is not controlling.
The Court finds that the fees imposed under Ordinance No. 18 are not taxes.
Section 5, Article X of the 1987 Constitution provides that "each local government unit shall
have the power to create its own sources of revenues and to levy taxes, fees, and charges
subject to such guidelines and limitations as the Congress may provide, consistent with the
basic policy of local autonomy. Such taxes, fees, and charges shall accrue exclusively to the
local government."
Consistent with this constitutional mandate, the LGC grants the taxing powers to each local
government unit. Specifically, Section 142 of the LGC grants municipalities the power to levy
taxes, fees, and charges not otherwise levied by provinces. Section 143 of the LGC provides
for the scale of taxes on business that may be imposed by municipalities 17 while Section
14718 of the same law provides for the fees and charges that may be imposed by municipalities
on business and occupation.
The LGC defines the term "charges" as referring to pecuniary liability, as rents or fees against
persons or property, while the term "fee" means "a charge fixed by law or ordinance for the
regulation or inspection of a business or activity."19
In this case, the Municipality issued Ordinance No. 18, which is entitled "An Ordinance
Regulating the Establishment of Special Projects," to regulate the "placing, stringing, attaching,
installing, repair and construction of all gas mains, electric, telegraph and telephone wires,
conduits, meters and other apparatus, and provide for the correction, condemnation or removal
of the same when found to be dangerous, defective or otherwise hazardous to the welfare of
the inhabitant[s]."20 It was also envisioned to address the foreseen "environmental depredation"
to be brought about by these "special projects" to the Municipality. 21 Pursuant to these
objectives, the Municipality imposed fees on various structures, which included
telecommunications towers.
As clearly stated in its whereas clauses, the primary purpose of Ordinance No. 18 is to regulate
the "placing, stringing, attaching, installing, repair and construction of all gas mains, electric,
telegraph and telephone wires, conduits, meters and other apparatus" listed therein, which
included Smarts telecommunications tower. Clearly, the purpose of the assailed Ordinance is
to regulate the enumerated activities particularly related to the construction and maintenance
of various structures. The fees in Ordinance No. 18 are not impositions on the building or
structure itself; rather, they are impositions on the activity subject of government regulation,
such as the installation and construction of the structures. 22
Since the main purpose of Ordinance No. 18 is to regulate certain construction activities of the
identified special projects, which included "cell sites" or telecommunications towers, the fees
imposed in Ordinance No. 18 are primarily regulatory in nature, and not primarily revenue-
raising. While the fees may contribute to the revenues of the Municipality, this effect is merely
incidental. Thus, the fees imposed in Ordinance No. 18 are not taxes.
In Progressive Development Corporation v. Quezon City,23 the Court declared that "if the
generating of revenue is the primary purpose and regulation is merely incidental, the imposition
is a tax; but if regulation is the primary purpose, the fact that incidentally revenue is also
obtained does not make the imposition a tax."
In Victorias Milling Co., Inc. v. Municipality of Victorias, 24 the Court reiterated that the purpose
and effect of the imposition determine whether it is a tax or a fee, and that the lack of any
standards for such imposition gives the presumption that the same is a tax.
We accordingly say that the designation given by the municipal authorities does not decide
whether the imposition is properly a license tax or a license fee. The determining factors are
the purpose and effect of the imposition as may be apparent from the provisions of the
ordinance. Thus, "[w]hen no police inspection, supervision, or regulation is provided, nor any
standard set for the applicant to establish, or that he agrees to attain or maintain, but any and
all persons engaged in the business designated, without qualification or hindrance, may come,
and a license on payment of the stipulated sum will issue, to do business, subject to no
prescribed rule of conduct and under no guardian eye, but according to the unrestrained
judgment or fancy of the applicant and licensee, the presumption is strong that the power of
taxation, and not the police power, is being exercised."
Contrary to Smarts contention, Ordinance No. 18 expressly provides for the standards which
Smart must satisfy prior to the issuance of the specified permits, clearly indicating that the fees
are regulatory in nature.
These requirements are as follows:
SECTION 5. Requirements and Procedures in Securing Preliminary Development Permit.
139
The following documents shall be submitted to the SB Secretary in triplicate:
a) zoning clearance
b) Vicinity Map
c) Site Plan
d) Evidence of ownership
e) Certificate true copy of NTC Provisional Authority in case of Cellsites, telephone or telegraph
line, ERB in case of gasoline station, power plant, and other concerned national agencies
f) Conversion order from DAR is located within agricultural zone.
g) Radiation Protection Evaluation.
h) Written consent from subdivision association or the residence of the area concerned if the
special projects is located within the residential zone.
i) Barangay Council Resolution endorsing the special projects.
SECTION 6. Requirement for Final Development Permit Upon the expiration of 180 days and
the proponents of special projects shall apply for final [development permit] and they are
require[d] to submit the following:
a) evaluation from the committee where the Vice Mayor refers the special project
b) Certification that all local fees have been paid.
Considering that the fees in Ordinance No. 18 are not in the nature of local taxes, and Smart
is questioning the constitutionality of the ordinance, the CTA correctly dismissed the petition
for lack of jurisdiction. Likewise, Section 187 of the LGC, 25 which outlines the procedure for
questioning the constitutionality of a tax ordinance, is inapplicable, rendering unnecessary the
resolution of the issue on non-exhaustion of administrative remedies.
On whether the imposition of the fees in Ordinance No. 18 is ultra vire Smart argues that the
Municipality exceeded its power to impose taxes and fees as provided in Book II, Title One,
Chapter 2, Article II of the LGC. Smart maintains that the mayors permit fees in Ordinance No.
18 (equivalent to 1% of the project cost) are not among those expressly enumerated in the
LGC.
As discussed, the fees in Ordinance No.18 are not taxes. Logically, the imposition does not
appear in the enumeration of taxes under Section 143 of the LGC.
Moreover, even if the fees do not appear in Section 143 or any other provision in the LGC, the
Municipality is empowered to impose taxes, fees and charges, not specifically enumerated in
the LGC or taxed under the Tax Code or other applicable law. Section 186 of the LGC, granting
local government units wide latitude in imposing fees, expressly provides:
Section 186. Power To Levy Other Taxes, Fees or Charges. - Local government units may
exercise the power to levy taxes, fees or charges on any base or subject not otherwise
specifically enumerated herein or taxed under the provisions of the National Internal Revenue
Code, as amended, or other applicable laws: Provided, That the taxes, fees, or charges shall
not be unjust, excessive, oppressive, confiscatory or contrary to declared national policy:
Provided, further, That the ordinance levying such taxes, fees or charges shall not be enacted
without any prior public hearing conducted for the purpose.
Smart further argues that the Municipality is encroaching on the regulatory powers of the
National Telecommunications Commission (NTC). Smart cites Section 5(g) of Republic Act No.
7925 which provides that the National Telecommunications Commission (NTC), in the exercise
of its regulatory powers, shall impose such fees and charges as may be necessary to cover
reasonable costs and expenses for the regulation and supervision of the operations of
telecommunications entities. Thus, Smart alleges that the regulation of telecommunications
entities and all aspects of its operations is specifically lodged by law on the NTC.
To repeat, Ordinance No. 18 aims to regulate the "placing, stringing, attaching, installing, repair
and construction of all gas mains, electric, telegraph and telephone wires, conduits, meters and
other apparatus" within the Municipality. The fees are not imposed to regulate the
administrative, technical, financial, or marketing operations of telecommunications entities,
such as Smarts; rather, to regulate the installation and maintenance of physical structures
Smarts cell sites or telecommunications tower. The regulation of the installation and
maintenance of such physical structures is an exercise of the police power of the Municipality.
Clearly, the Municipality does not encroach on NTCs regulatory powers.
The Court likewise rejects Smarts contention that the power to fix the fees for the issuance of
development permits and locational clearances is exercised by the Housing and Land Use
Regulatory Board (HLURB). Suffice it to state that the HLURB itself recognizes the local
government units power to collect fees related to land use and development. Significantly, the
HLURB issued locational guidelines governing telecommunications
infrastructure.1wphi1 Guideline No. VI relates to the collection of locational clearance fees
either by the HLURB or the concerned local government unit, to wit:
VI. Fees
The Housing and Land Use Regulatory Board in the performance of its functions shall collect
the locational clearance fee based on the revised schedule of fees under the special use project
as per Resolution No. 622, series of 1998 or by the concerned LGUs subject to EO 72.26
On whether Ordinance No. 18 is valid and constitutional
Smart contends that Ordinance No. 18 violates Sections 130(b)(3) 27 and 186 of the LGC since
the fees are unjust, excessive, oppressive and confiscatory. Aside from this bare allegation,
Smart did not present any evidence substantiating its claims. In Victorias Milling Co., Inc. v.
Municipality of Victorias,28 the Court rejected the argument that the fees imposed by
respondent therein are excessive for lack of evidence supporting such claim, to wit:
An ordinance carries with it the presumption of validity. The question of reasonableness though
is open to judicial inquiry. Much should be left thus to the discretion of municipal authorities.
Courts will go slow in writing off an ordinance as unreasonable unless the amount is so
excessive as to be prohibitive, arbitrary, unreasonable, oppressive, or confiscatory. A rule
which has gained acceptance is that factors relevant to such an inquiry are the municipal
conditions as a whole and the nature of the business made subject to imposition.
140
Plaintiff, has however not sufficiently proven that, taking these factors together, the license
taxes are unreasonable. The presumption of validity subsists. For, plaintiff has limited itself to
insisting that the amounts levied exceed the cost of regulation and the municipality has
adequate funds for the alleged purposes as evidenced by the municipalitys cash surplus for
the fiscal year ending 1956.
On the constitutionality issue, Smart merely pleaded for the declaration of unconstitutionality
of Ordinance No. 18 in the Prayer of the Petition, without any argument or evidence to support
its plea. Nowhere in the body of the Petition was this issue specifically raised and discussed.
Significantly, Smart failed to cite any constitutional provision allegedly violated by respondent
when it issued Ordinance No. 18.
Settled is the rule that every law, in this case an ordinance, is presumed valid. To strike down
a law as unconstitutional, Smart has the burden to prove a clear and unequivocal breach of the
Constitution, which Smart miserably failed to do. In Lawyers Against Monopoly and Poverty
(LAMP) v. Secretary of Budget and Management,29 the Court held, thus:
To justify the nullification of the law or its implementation, there must be a clear and
unequivocal, not a doubtful, breach of the Constitution. In case of doubt in the sufficiency of
proof establishing unconstitutionality, the Court must sustain legislation because "to invalidate
[a law] based on xx x baseless supposition is an affront to the wisdom not only of the legislature
that passed it but also of the executive which approved it." This presumption of constitutionality
can be overcome only by the clearest showing that there was indeed an infraction of the
Constitution, and only when such a conclusion is reached by the required majority may the
Court pronounce, in the discharge of the duty it cannot escape, that the challenged act must
be struck down.
WHEREFORE, the Court DENIES the petition.
SO ORDERED.
G.R. No. 189999 June 27, 2012 "xxx the Department of Finance, thru this Bureau, has no authority to review the resolution or
ANGELES UNIVERSITY FOUNDATION, Petitioner, the decision of the DOJ."7
vs. Petitioner wrote the respondents reiterating its request to reverse the disputed assessments
CITY OF ANGELES, JULIET G. QUINSAAT, in her capacity as Treasurer of Angeles City and invoking the DOJ legal opinions which have been affirmed by Secretary Gonzalez. Despite
and ENGR. DONATO N. DIZON, in his capacity as Acting Angeles City Building petitioners plea, however, respondents refused to issue the building permits for the
Official, Respondents. construction of the AUF Medical Center in the main campus and renovation of a school building
DECISION located at Marisol Village. Petitioner then appealed the matter to City Mayor Carmelo F. Lazatin
but no written response was received by petitioner.8
VILLARAMA, JR., J.:
Consequently, petitioner paid under protest9 the following:
Before us is a petition for review on certiorari under Rule 45 of the 1997 Rules of Civil
Procedure, as amended, which seeks to reverse and set aside the Decision 1 dated July 28, Medical Center (new construction)
2009 and Resolution2 dated October 12, 2009 of the Court of Appeals (CA) in CA-G.R. CV No.
90591. The CA reversed the Decision3 dated September 21, 2007 of the Regional Trial Court
Building Permit and Electrical Fee P 217,475.20
of Angeles City, Branch 57 in Civil Case No. 12995 declaring petitioner exempt from the
payment of building permit and other fees and ordering respondents to refund the same with Locational Clearance Fee 283,741.64
interest at the legal rate. Fire Code Fee 144,690.00
The factual antecedents: Total - P 645,906.84
Petitioner Angeles University Foundation (AUF) is an educational institution established on
May 25, 1962 and was converted into a non-stock, non-profit education foundation under the
provisions of Republic Act (R.A.) No. 60554on December 4, 1975. School Building (renovation)
Sometime in August 2005, petitioner filed with the Office of the City Building Official an
application for a building permit for the construction of an 11-storey building of the Angeles Building Permit and Electrical Fee P 37,857.20
University Foundation Medical Center in its main campus located at MacArthur Highway,
Angeles City, Pampanga. Said office issued a Building Permit Fee Assessment in the amount Locational Clearance Fee 6,000.57
of P126,839.20. An Order of Payment was also issued by the City Planning and Development Fire Code Fee 5,967.74
Office, Zoning Administration Unit requiring petitioner to pay the sum of P238,741.64 as
Total - P 49,825.51
Locational Clearance Fee.5
Petitioner likewise paid the following sums as required by the City Assessors Office:
In separate letters dated November 15, 2005 addressed to respondents City Treasurer Juliet
G. Quinsaat and Acting City Building Official Donato N. Dizon, petitioner claimed that it is Real Property Tax Basic Fee P 86,531.10
exempt from the payment of the building permit and locational clearance fees, citing legal SEF 43,274.54
opinions rendered by the Department of Justice (DOJ). Petitioner also reminded the
Locational Clearance Fee 1,125.00
respondents that they have previously issued building permits acknowledging such exemption
from payment of building permit fees on the construction of petitioners 4-storey AUF Total P130,930.6410
Information Technology Center building and the AUF Professional Schools building on July 27, [GRAND TOTAL - P 826,662.99]
2000 and March 15, 2004, respectively.6
Respondent City Treasurer referred the matter to the Bureau of Local Government Finance
(BLGF) of the Department of Finance, which in turn endorsed the query to the DOJ. Then By reason of the above payments, petitioner was issued the corresponding Building Permit,
Justice Secretary Raul M. Gonzalez, in his letter-reply dated December 6, 2005, cited previous Wiring Permit, Electrical Permit and Sanitary Building Permit. On June 9, 2006, petitioner
issuances of his office (Opinion No. 157, s. 1981 and Opinion No. 147, s. 1982) declaring formally requested the respondents to refund the fees it paid under protest. Under letters dated
petitioner to be exempt from the payment of building permit fees. Under the 1st Indorsement June 15, 2006 and August 7, 2006, respondent City Treasurer denied the claim for refund. 11
dated January 6, 2006, BLGF reiterated the aforesaid opinion of the DOJ stating further that

141
On August 31, 2006, petitioner filed a Complaint12 before the trial court seeking the refund of
P826,662.99 plus interest at the rate of 12% per annum, and also praying for the award of
attorneys fees in the amount of P300,000.00 and litigation expenses.
In its Answer,13 respondents asserted that the claim of petitioner cannot be granted because
its structures are not among those mentioned in Sec. 209 of the National Building Code as
exempted from the building permit fee. Respondents argued that R.A. No. 6055 should be
considered repealed on the basis of Sec. 2104 of the National Building Code. Since the
disputed assessments are regulatory in nature, they are not taxes from which petitioner is
exempt. As to the real property taxes imposed on petitioners property located in Marisol
Village, respondents pointed out that said premises will be used as a school dormitory which
cannot be considered as a use exclusively for educational activities.
Petitioner countered that the subject building permit are being collected on the basis of Art. 244
of theImplementing Rules and Regulations of the Local Government Code, which impositions
are really taxes considering that they are provided under the chapter on "Local Government
Taxation" in reference to the "revenue raising power" of local government units (LGUs).
Moreover, petitioner contended that, as held in Philippine Airlines, Inc. v. Edu, 14 fees may be
regarded as taxes depending on the purpose of its exaction. In any case, petitioner pointed out
that the Local Government Code of 1991 provides in Sec. 193 that non-stock and non-profit
educational institutions like petitioner retained the tax exemptions or incentives which have
been granted to them. Under Sec. 8 of R.A. No. 6055 and applicable jurisprudence and DOJ
rulings, petitioner is clearly exempt from the payment of building permit fees.15
On September 21, 2007, the trial court rendered judgment in favor of the petitioner and against
the respondents. The dispositive portion of the trial courts decision16 reads:
WHEREFORE, premises considered, judgment is rendered as follows:
a. Plaintiff is exempt from the payment of building permit and other fees Ordering the
Defendants to refund the total amount of Eight Hundred Twenty Six Thousand Six Hundred
Sixty Two Pesos and 99/100 Centavos (P826,662.99) plus legal interest thereon at the rate of
twelve percent (12%) per annum commencing on the date of extra-judicial demand or June 14,
2006, until the aforesaid amount is fully paid.
b. Finding the Defendants liable for attorneys fees in the amount of Seventy Thousand Pesos
(Php70,000.00), plus litigation expenses.
c. Ordering the Defendants to pay the costs of the suit.
SO ORDERED.17
Respondents appealed to the CA which reversed the trial court, holding that while petitioner is
a tax-free entity, it is not exempt from the payment of regulatory fees. The CA noted that under
R.A. No. 6055, petitioner was granted exemption only from income tax derived from its
educational activities and real property used exclusively for educational purposes. Regardless
of the repealing clause in the National Building Code, the CA held that petitioner is still not
exempt because a building permit cannot be considered as the other "charges" mentioned in
Sec. 8 of R.A. No. 6055 which refers to impositions in the nature of tax, import duties,
assessments and other collections for revenue purposes, following the ejusdem generisrule.
142
The CA further stated that petitioner has not shown that the fees collected were excessive and
more than the cost of surveillance, inspection and regulation. And while petitioner may be
exempt from the payment of real property tax, petitioner in this case merely alleged that "the
subject property is to be used actually, directly and exclusively for educational purposes,"
declaring merely that such premises is intended to house the sports and other facilities of the
university but by reason of the occupancy of informal settlers on the area, it cannot yet utilize
the same for its intended use. Thus, the CA concluded that petitioner is not entitled to the refund
of building permit and related fees, as well as real property tax it paid under protest.
Petitioner filed a motion for reconsideration which was denied by the CA.
Hence, this petition raising the following grounds:
THE COURT OF APPEALS COMMITTED REVERSIBLE ERROR AND DECIDED A
QUESTION OF SUBSTANCE IN A WAY NOT IN ACCORDANCE WITH LAW AND THE
APPLICABLE DECISIONS OF THE HONORABLE COURT AND HAS DEPARTED FROM
THE ACCEPTED AND USUAL COURSE OF JUDICIAL PROCEEDINGS NECESSITATING
THE HONORABLE COURTS EXERCISE OF ITS POWER OF SUPERVISION
CONSIDERING THAT:
I. IN REVERSING THE TRIAL COURTS DECISION DATED 21 SEPTEMBER 2007, THE
COURT OF APPEALS EFFECTIVELY WITHDREW THE PRIVILEGE OF EXEMPTION
GRANTED TO NON-STOCK, NON-PROFIT EDUCATIONAL FOUNDATIONS BY VIRTUE OF
RA 6055 WHICH WITHDRAWAL IS BEYOND THE AUTHORITY OF THE COURT OF
APPEALS TO DO.
A. INDEED, RA 6055 REMAINS VALID AND IS IN FULL FORCE AND EFFECT. HENCE, THE
COURT OF APPEALS ERRED WHEN IT RULED IN THE QUESTIONED DECISION THAT
NON-STOCK, NON-PROFIT EDUCATIONAL FOUNDATIONS ARE NOT EXEMPT.
B. THE COURT OF APPEALS APPLICATION OF THE PRINCIPLE OF EJUSDEM GENERIS
IN RULING IN THE QUESTIONED DECISION THAT THE TERM "OTHER CHARGES
IMPOSED BY THE GOVERNMENT" UNDER SECTION 8 OF RA 6055 DOES NOT INCLUDE
BUILDING PERMIT AND OTHER RELATED FEES AND/OR CHARGES IS BASED ON ITS
ERRONEOUS AND UNWARRANTED ASSUMPTION THAT THE TAXES, IMPORT DUTIES
AND ASSESSMENTS AS PART OF THE PRIVILEGE OF EXEMPTION GRANTED TO NON-
STOCK, NON-PROFIT EDUCATIONAL FOUNDATIONS ARE LIMITED TO COLLECTIONS
FOR REVENUE PURPOSES.
C. EVEN ASSUMING THAT THE BUILDING PERMIT AND OTHER RELATED FEES AND/OR
CHARGES ARE NOT INCLUDED IN THE TERM "OTHER CHARGES IMPOSED BY THE
GOVERNMENT" UNDER SECTION 8 OF RA 6055, ITS IMPOSITION IS GENERALLY A TAX
MEASURE AND THEREFORE, STILL COVERED UNDER THE PRIVILEGE OF EXEMPTION.
II. THE COURT OF APPEALS DENIAL OF PETITIONER AUFS EXEMPTION FROM REAL
PROPERTY TAXES CONTAINED IN ITS QUESTIONED DECISION AND QUESTIONED
RESOLUTION IS CONTRARY TO APPLICABLE LAW AND JURISPRUDENCE.18
Petitioner stresses that the tax exemption granted to educational stock corporations which have
converted into non-profit foundations was broadened to include any other charges imposed by
the Government as one of the incentives for such conversion. These incentives necessarily
included exemption from payment of building permit and related fees as otherwise there would
have been no incentives for educational foundations if the privilege were only limited to
exemption from taxation, which is already provided under the Constitution.
Petitioner further contends that this Court has consistently held in several cases that the
primary purpose of the exaction determines its nature. Thus, a charge of a fixed sum which
bears no relation to the cost of inspection and which is payable into the general revenue of the
state is a tax rather than an exercise of the police power. The standard set by law in the
determination of the amount that may be imposed as license fees is such that is commensurate
with the cost of regulation, inspection and licensing. But in this case, the amount representing
the building permit and related fees and/or charges is such an exorbitant amount as to warrant
a valid imposition; such amount exceeds the probable cost of regulation. Even with the alleged
criteria submitted by the respondents (e.g., character of occupancy or use of building/structure,
cost of construction, floor area and height), and the construction by petitioner of an 11-storey
building, the costs of inspection will not amount to P645,906.84, presumably for the salary of
inspectors or employees, the expenses of transportation for inspection and the preparation and
reproduction of documents. Petitioner thus concludes that the disputed fees are substantially
and mainly for purposes of revenue rather than regulation, so that even these fees cannot be
deemed "charges" mentioned in Sec. 8 of R.A. No. 6055, they should properly be treated as
tax from which petitioner is exempt.
In their Comment, respondents maintain that petitioner is not exempt from the payment of
building permit and related fees since the only exemptions provided in the National Building
Code are public buildings and traditional indigenous family dwellings. Inclusio unius est
exclusio alterius. Because the law did not include petitioners buildings from those structures
exempt from the payment of building permit fee, it is therefore subject to the regulatory fees
imposed under the National Building Code.
Respondents assert that the CA correctly distinguished a building permit fee from those "other
charges" mentioned in Sec. 8 of R.A. No. 6055. As stated by petitioner itself, charges refer to
pecuniary liability, as rents, and fees against persons or property. Respondents point out that
a building permit is classified under the term "fee." A fee is generally imposed to cover the cost
of regulation as activity or privilege and is essentially derived from the exercise of police power;
on the other hand, impositions for services rendered by the local government units or for
conveniences furnished, are referred to as "service charges".
Respondents also disagreed with petitioners contention that the fees imposed and collected
are exorbitant and exceeded the probable expenses of regulation. These fees are based on
computations and assessments made by the responsible officials of the City Engineers Office
in accordance with the Schedule of Fees and criteria provided in the National Building Code.
The bases of assessment cited by petitioner (e.g. salary of employees, expenses of
transportation and preparation and reproduction of documents) refer to charges and fees on
business and occupation under Sec. 147 of the Local Government Code, which do not apply
to building permit fees. The parameters set by the National Building Code can be considered
as complying with the reasonable cost of regulation in the assessment and collection of building
143
permit fees. Respondents likewise contend that the presumption of regularity in the
performance of official duty applies in this case. Petitioner should have presented evidence to
prove its allegations that the amounts collected are exorbitant or unreasonable.
For resolution are the following issues: (1) whether petitioner is exempt from the payment of
building permit and related fees imposed under the National Building Code; and (2) whether
the parcel of land owned by petitioner which has been assessed for real property tax is likewise
exempt.
R.A. No. 6055 granted tax exemptions to educational institutions like petitioner which converted
to non-stock, non-profit educational foundations. Section 8 of said law provides:
SECTION 8. The Foundation shall be exempt from the payment of all taxes, import duties,
assessments, and other charges imposed by the Government onall income derived from or
property, real or personal, used exclusively for the educational activities of the
Foundation.(Emphasis supplied.)
On February 19, 1977, Presidential Decree (P.D.) No. 1096 was issued adopting the National
Building Code of the Philippines. The said Code requires every person, firm or corporation,
including any agency or instrumentality of the government to obtain a building permit for any
construction, alteration or repair of any building or structure.19Building permit refers to "a
document issued by the Building Official x x x to an owner/applicant to proceed with the
construction, installation, addition, alteration, renovation, conversion, repair, moving,
demolition or other work activity of a specific project/building/structure or portions thereof after
the accompanying principal plans, specifications and other pertinent documents with the duly
notarized application are found satisfactory and substantially conforming with the National
Building Code of the Philippines x x x and its Implementing Rules and Regulations
(IRR)."20 Building permit fees refers to the basic permit fee and other charges imposed under
theNational Building Code.
Exempted from the payment of building permit fees are: (1) public buildings and (2) traditional
indigenous family dwellings.21 Not being expressly included in the enumeration of structures to
which the building permit fees do not apply, petitioners claim for exemption rests solely on its
interpretation of the term "other charges imposed by the National Government" in the tax
exemption clause of R.A. No. 6055.
A "charge" is broadly defined as the "price of, or rate for, something," while the word "fee"
pertains to a "charge fixed by law for services of public officers or for use of a privilege under
control of government."22 As used in the Local Government Code of 1991 (R.A. No. 7160),
charges refers to pecuniary liability, as rents or fees against persons or property, while fee
means a charge fixed by law or ordinance for the regulation or inspection of a business or
activity.23
That "charges" in its ordinary meaning appears to be a general term which could cover a
specific "fee" does not support petitioners position that building permit fees are among those
"other charges" from which it was expressly exempted. Note that the "other charges" mentioned
in Sec. 8 of R.A. No. 6055 is qualified by the words "imposed by the Government on all x x x
property used exclusively for the educational activities of the foundation." Building permit fees
are not impositions on property but on the activity subject of government regulation. While it
may be argued that the fees relate to particular properties, i.e., buildings and structures, they
are actually imposed on certain activities the owner may conduct either to build such structures
or to repair, alter, renovate or demolish the same. This is evident from the following provisions
of the National Building Code:
Section 102. Declaration of Policy
It is hereby declared to be the policy of the State to safeguard life, health, property, and public
welfare, consistent with theprinciples of sound environmental management and control; and
tothis end, make it the purpose of this Code to provide for allbuildings and structures, a
framework of minimum standards and requirements to regulate and control their location, site,
design quality of materials, construction, use, occupancy, and maintenance.
Section 103. Scope and Application
(a) The provisions of this Code shall apply to the design,location, sitting, construction,
alteration, repair,conversion, use, occupancy, maintenance, moving, demolitionof, and addition
to public and private buildings andstructures, except traditional indigenous family dwellingsas
defined herein.
xxxx
Section 301. Building Permits
No person, firm or corporation, including any agency orinstrumentality of the government shall
erect, construct, alter, repair, move, convert or demolish any building or structure or causethe
same to be done without first obtaining a building permittherefor from the Building Official
assigned in the place where thesubject building is located or the building work is to be done.
(Italics supplied.)
That a building permit fee is a regulatory imposition is highlighted by the fact that in processing
an application for a building permit, the Building Official shall see to it that the applicant satisfies
and conforms with approved standard requirements on zoning and land use, lines and grades,
structural design, sanitary and sewerage, environmental health, electrical and mechanical
safety as well as with other rules and regulations implementing the National Building
Code.24 Thus, ancillary permits such as electrical permit, sanitary permit and zoning clearance
must also be secured and the corresponding fees paid before a building permit may be issued.
And as can be gleaned from the implementing rules and regulations of the National Building
Code, clearances from various government authorities exercising and enforcing regulatory
functions affecting buildings/structures, like local government units, may be further required
before a building permit may be issued.25
Since building permit fees are not charges on property, they are not impositions from which
petitioner is exempt.
As to petitioners argument that the building permit fees collected by respondents are in reality
taxes because the primary purpose is to raise revenues for the local government unit, the same
does not hold water.
144
A charge of a fixed sum which bears no relation at all to the cost of inspection and regulation
may be held to be a tax rather than an exercise of the police power.26 In this case, the Secretary
of Public Works and Highways who is mandated to prescribe and fix the amount of fees and
other charges that the Building Official shall collect in connection with the performance of
regulatory functions,27 has promulgated and issued the Implementing Rules and
Regulations28 which provide for the bases of assessment of such fees, as follows:
1. Character of occupancy or use of building
2. Cost of construction " 10,000/sq.m (A,B,C,D,E,G,H,I), 8,000 (F), 6,000 (J)
3. Floor area
4. Height
Petitioner failed to demonstrate that the above bases of assessment were arbitrarily
determined or unrelated to the activity being regulated. Neither has petitioner adduced
evidence to show that the rates of building permit fees imposed and collected by the
respondents were unreasonable or in excess of the cost of regulation and inspection.
In Chevron Philippines, Inc. v. Bases Conversion Development Authority, 29 this Court
explained:
In distinguishing tax and regulation as a form of police power, the determining factor is the
purpose of the implemented measure. If the purpose is primarily to raise revenue, then it will
be deemed a tax even though the measure results in some form of regulation. On the other
hand, if the purpose is primarily to regulate, then it is deemed a regulation and an exercise of
the police power of the state, even though incidentally, revenue is generated. Thus, in Gerochi
v. Department of Energy, the Court stated:
"The conservative and pivotal distinction between these two (2) powers rests in the purpose
for which the charge is made. If generation of revenue is the primary purpose and regulation is
merely incidental, the imposition is a tax; but if regulation is the primary purpose, the fact that
revenue is incidentally raised does not make the imposition a tax."30 (Emphasis supplied.)
Concededly, in the case of building permit fees imposed by the National Government under
the National Building Code, revenue is incidentally generated for the benefit of local
government units. Thus:
Section 208. Fees
Every Building Official shall keep a permanent record and accurate account of all fees and
other charges fixed and authorized by the Secretary to be collected and received under this
Code.
Subject to existing budgetary, accounting and auditing rules and regulations, the Building
Official is hereby authorized to retain not more than twenty percent of his collection for the
operating expenses of his office.
The remaining eighty percent shall be deposited with the provincial, city or municipal treasurer
and shall accrue to the General Fund of the province, city or municipality concerned.
Petitioners reliance on Sec. 193 of the Local Government Code of 1991 is likewise misplaced.
Said provision states:
SECTION 193. Withdrawal of Tax Exemption Privileges. -- Unless otherwise provided in this used for the exempted purposes but is subject to taxation. The words "dominant use" or
Code, tax exemptions or incentives granted to, or presently enjoyed by all persons, whether "principal use" cannot be substituted for the words "used exclusively" without doing violence to
natural or juridical, including government-owned or controlled corporations, except local water the Constitutions and the law. Solely is synonymous with exclusively.1wphi1
districts, cooperatives duly registered under R.A. No. 6938, non-stock and non-profit hospitals What is meant by actual, direct and exclusive use of the property for charitable purposes is the
and educational institutions, are hereby withdrawn upon the effectivity of this Code. (Emphasis direct and immediate and actual application of the property itself to the purposes for which the
supplied.) charitable institution is organized. It is not the use of the income from the real property that is
Considering that exemption from payment of regulatory fees was not among those "incentives" determinative of whether the property is used for tax-exempt purposes.32 (Emphasis and
granted to petitioner under R.A. No. 6055, there is no such incentive that is retained under underscoring supplied.)
the Local Government Code of 1991. Consequently, no reversible error was committed by the Petitioner failed to discharge its burden to prove that its real property is actually, directly and
CA in ruling that petitioner is liable to pay the subject building permit and related fees. exclusively used for educational purposes. While there is no allegation or proof that petitioner
Now, on petitioners claim that it is exempted from the payment of real property tax assessed leases the land to its present occupants, still there is no compliance with the constitutional and
against its real property presently occupied by informal settlers. statutory requirement that said real property is actually, directly and exclusively used for
Section 28(3), Article VI of the 1987 Constitution provides: educational purposes. The respondents correctly assessed the land for real property taxes for
the taxable period during which the land is not being devoted solely to petitioners educational
xxxx
activities. Accordingly, the CA did not err in ruling that petitioner is likewise not entitled to a
(3) Charitable institutions, churches and parsonages or convents appurtenant thereto, refund of the real property tax it paid under protest.
mosques, non-profit cemeteries, and all lands, buildings, and improvements, actually, directly
WHEREFORE, the petition is DENIED. The Decision dated July 28, 2009 and Resolution dated
and exclusively used for religious, charitable or educational purposes shall be exempt from
October 12, 2009 of the Court of Appeals in CA-G.R. CV No. 90591 are AFFIRMED.
taxation.
No pronouncement as to costs.
x x x x (Emphasis supplied.)
SO ORDERED.
Section 234(b) of the Local Government Code of 1991 implements the foregoing constitutional
provision by declaring that --
SECTION 234. Exemptions from Real Property Tax. The following are exempted from
payment of the real property tax:
xxxx
(b) Charitable institutions, churches, parsonages or convents appurtenant thereto, mosques,
non-profit or religious cemeteries and all lands, buildings, and improvements actually, directly,
and exclusively used for religious, charitable or educational purposes;
x x x x (Emphasis supplied.)
In Lung Center of the Philippines v. Quezon City,31 this Court held that only portions of the
hospital actually, directly and exclusively used for charitable purposes are exempt from real
property taxes, while those portions leased to private entities and individuals are not exempt
from such taxes. We explained the condition for the tax exemption privilege of charitable and
educational institutions, as follows:
Under the 1973 and 1987 Constitutions and Rep. Act No. 7160 in order to be entitled to the
exemption, the petitioner is burdened to prove, by clear and unequivocal proof, that (a) it is a
charitable institution; and (b) its real properties
are ACTUALLY, DIRECTLY and EXCLUSIVELY used for charitable purposes. "Exclusive" is
defined as possessed and enjoyed to the exclusion of others; debarred from participation or
enjoyment; and "exclusively" is defined, "in a manner to exclude; as enjoying a privilege
exclusively." If real property is used for one or more commercial purposes, it is not exclusively

145
G.R. No. L-67649 June 28, 1988
ENGRACIO FRANCIA, petitioner,
vs.
INTERMEDIATE APPELLATE COURT and HO FERNANDEZ, respondents.
GUTIERREZ, JR., J.:
The petitioner invokes legal and equitable grounds to reverse the questioned decision of the
Intermediate Appellate Court, to set aside the auction sale of his property which took place on
December 5, 1977, and to allow him to recover a 203 square meter lot which was, sold at public
auction to Ho Fernandez and ordered titled in the latter's name.
The antecedent facts are as follows:
Engracio Francia is the registered owner of a residential lot and a two-story house built upon it
situated at Barrio San Isidro, now District of Sta. Clara, Pasay City, Metro Manila. The lot, with
an area of about 328 square meters, is described and covered by Transfer Certificate of Title
No. 4739 (37795) of the Registry of Deeds of Pasay City.
On October 15, 1977, a 125 square meter portion of Francia's property was expropriated by
the Republic of the Philippines for the sum of P4,116.00 representing the estimated amount
equivalent to the assessed value of the aforesaid portion.
Since 1963 up to 1977 inclusive, Francia failed to pay his real estate taxes. Thus, on December
5, 1977, his property was sold at public auction by the City Treasurer of Pasay City pursuant
to Section 73 of Presidential Decree No. 464 known as the Real Property Tax Code in order to
satisfy a tax delinquency of P2,400.00. Ho Fernandez was the highest bidder for the property.
Francia was not present during the auction sale since he was in Iligan City at that time helping
his uncle ship bananas.
On March 3, 1979, Francia received a notice of hearing of LRC Case No. 1593-P "In re: Petition
for Entry of New Certificate of Title" filed by Ho Fernandez, seeking the cancellation of TCT
No. 4739 (37795) and the issuance in his name of a new certificate of title. Upon verification
through his lawyer, Francia discovered that a Final Bill of Sale had been issued in favor of Ho
Fernandez by the City Treasurer on December 11, 1978. The auction sale and the final bill of
sale were both annotated at the back of TCT No. 4739 (37795) by the Register of Deeds.
On March 20, 1979, Francia filed a complaint to annul the auction sale. He later amended his
complaint on January 24, 1980.
On April 23, 1981, the lower court rendered a decision, the dispositive portion of which reads:
WHEREFORE, in view of the foregoing, judgment is hereby rendered dismissing the amended
complaint and ordering:
(a) The Register of Deeds of Pasay City to issue a new Transfer Certificate of Title in favor of
the defendant Ho Fernandez over the parcel of land including the improvements thereon,
subject to whatever encumbrances appearing at the back of TCT No. 4739 (37795) and
ordering the same TCT No. 4739 (37795) cancelled.
146
(b) The plaintiff to pay defendant Ho Fernandez the sum of P1,000.00 as attorney's fees. (p.
30, Record on Appeal)
The Intermediate Appellate Court affirmed the decision of the lower court in toto.
Hence, this petition for review.
Francia prefaced his arguments with the following assignments of grave errors of law:
I
RESPONDENT INTERMEDIATE APPELLATE COURT COMMITTED A GRAVE ERROR OF
LAW IN NOT HOLDING PETITIONER'S OBLIGATION TO PAY P2,400.00 FOR SUPPOSED
TAX DELINQUENCY WAS SET-OFF BY THE AMOUNT OF P4,116.00 WHICH THE
GOVERNMENT IS INDEBTED TO THE FORMER.
II
RESPONDENT INTERMEDIATE APPELLATE COURT COMMITTED A GRAVE AND
SERIOUS ERROR IN NOT HOLDING THAT PETITIONER WAS NOT PROPERLY AND DULY
NOTIFIED THAT AN AUCTION SALE OF HIS PROPERTY WAS TO TAKE PLACE ON
DECEMBER 5, 1977 TO SATISFY AN ALLEGED TAX DELINQUENCY OF P2,400.00.
III
RESPONDENT INTERMEDIATE APPELLATE COURT FURTHER COMMITTED A SERIOUS
ERROR AND GRAVE ABUSE OF DISCRETION IN NOT HOLDING THAT THE PRICE OF
P2,400.00 PAID BY RESPONTDENT HO FERNANDEZ WAS GROSSLY INADEQUATE AS
TO SHOCK ONE'S CONSCIENCE AMOUNTING TO FRAUD AND A DEPRIVATION OF
PROPERTY WITHOUT DUE PROCESS OF LAW, AND CONSEQUENTLY, THE AUCTION
SALE MADE THEREOF IS VOID. (pp. 10, 17, 20-21, Rollo)
We gave due course to the petition for a more thorough inquiry into the petitioner's allegations
that his property was sold at public auction without notice to him and that the price paid for the
property was shockingly inadequate, amounting to fraud and deprivation without due process
of law.
A careful review of the case, however, discloses that Mr. Francia brought the problems raised
in his petition upon himself. While we commiserate with him at the loss of his property, the law
and the facts militate against the grant of his petition. We are constrained to dismiss it.
Francia contends that his tax delinquency of P2,400.00 has been extinguished by legal
compensation. He claims that the government owed him P4,116.00 when a portion of his land
was expropriated on October 15, 1977. Hence, his tax obligation had been set-off by operation
of law as of October 15, 1977.
There is no legal basis for the contention. By legal compensation, obligations of persons, who
in their own right are reciprocally debtors and creditors of each other, are extinguished (Art.
1278, Civil Code). The circumstances of the case do not satisfy the requirements provided by
Article 1279, to wit:
(1) that each one of the obligors be bound principally and that he be at the same time a principal
creditor of the other;
xxx xxx xxx
(3) that the two debts be due.
xxx xxx xxx
This principal contention of the petitioner has no merit. We have consistently ruled that there
can be no off-setting of taxes against the claims that the taxpayer may have against the
government. A person cannot refuse to pay a tax on the ground that the government owes him
an amount equal to or greater than the tax being collected. The collection of a tax cannot await
the results of a lawsuit against the government.
In the case of Republic v. Mambulao Lumber Co. (4 SCRA 622), this Court ruled that Internal
Revenue Taxes can not be the subject of set-off or compensation. We stated that:
A claim for taxes is not such a debt, demand, contract or judgment as is allowed to be set-off
under the statutes of set-off, which are construed uniformly, in the light of public policy, to
exclude the remedy in an action or any indebtedness of the state or municipality to one who is
liable to the state or municipality for taxes. Neither are they a proper subject of recoupment
since they do not arise out of the contract or transaction sued on. ... (80 C.J.S., 7374). "The
general rule based on grounds of public policy is well-settled that no set-off admissible against
demands for taxes levied for general or local governmental purposes. The reason on which the
general rule is based, is that taxes are not in the nature of contracts between the party and
party but grow out of duty to, and are the positive acts of the government to the making and
enforcing of which, the personal consent of individual taxpayers is not required. ..."
We stated that a taxpayer cannot refuse to pay his tax when called upon by the collector
because he has a claim against the governmental body not included in the tax levy.
This rule was reiterated in the case of Corders v. Gonda (18 SCRA 331) where we stated that:
"... internal revenue taxes can not be the subject of compensation: Reason: government and
taxpayer are not mutually creditors and debtors of each other' under Article 1278 of the Civil
Code and a "claim for taxes is not such a debt, demand, contract or judgment as is allowed to
be set-off."
There are other factors which compel us to rule against the petitioner. The tax was due to the
city government while the expropriation was effected by the national government. Moreover,
the amount of P4,116.00 paid by the national government for the 125 square meter portion of
his lot was deposited with the Philippine National Bank long before the sale at public auction
of his remaining property. Notice of the deposit dated September 28, 1977 was received by the
petitioner on September 30, 1977. The petitioner admitted in his testimony that he knew about
the P4,116.00 deposited with the bank but he did not withdraw it. It would have been an easy
matter to withdraw P2,400.00 from the deposit so that he could pay the tax obligation thus
aborting the sale at public auction.
Petitioner had one year within which to redeem his property although, as well be shown later,
he claimed that he pocketed the notice of the auction sale without reading it.
Petitioner contends that "the auction sale in question was made without complying with the
mandatory provisions of the statute governing tax sale. No evidence, oral or otherwise, was
presented that the procedure outlined by law on sales of property for tax delinquency was
147
followed. ... Since defendant Ho Fernandez has the affirmative of this issue, the burden of proof
therefore rests upon him to show that plaintiff was duly and properly notified ... .(Petition for
Review, Rollo p. 18; emphasis supplied)
We agree with the petitioner's claim that Ho Fernandez, the purchaser at the auction sale, has
the burden of proof to show that there was compliance with all the prescribed requisites for a
tax sale.
The case of Valencia v. Jimenez (11 Phil. 492) laid down the doctrine that:
xxx xxx xxx
... [D]ue process of law to be followed in tax proceedings must be established by proof and
thegeneral rule is that the purchaser of a tax title is bound to take upon himself the burden of
showing the regularity of all proceedings leading up to the sale. (emphasis supplied)
There is no presumption of the regularity of any administrative action which results in depriving
a taxpayer of his property through a tax sale. (Camo v. Riosa Boyco, 29 Phil. 437); Denoga v.
Insular Government, 19 Phil. 261). This is actually an exception to the rule that administrative
proceedings are presumed to be regular.
But even if the burden of proof lies with the purchaser to show that all legal prerequisites have
been complied with, the petitioner can not, however, deny that he did receive the notice for the
auction sale. The records sustain the lower court's finding that:
[T]he plaintiff claimed that it was illegal and irregular. He insisted that he was not properly
notified of the auction sale. Surprisingly, however, he admitted in his testimony that he received
the letter dated November 21, 1977 (Exhibit "I") as shown by his signature (Exhibit "I-A")
thereof. He claimed further that he was not present on December 5, 1977 the date of the
auction sale because he went to Iligan City. As long as there was substantial compliance with
the requirements of the notice, the validity of the auction sale can not be assailed ... .
We quote the following testimony of the petitioner on cross-examination, to wit:
Q. My question to you is this letter marked as Exhibit I for Ho Fernandez notified you that the
property in question shall be sold at public auction to the highest bidder on December 5, 1977
pursuant to Sec. 74 of PD 464. Will you tell the Court whether you received the original of this
letter?
A. I just signed it because I was not able to read the same. It was just sent by mail carrier.
Q. So you admit that you received the original of Exhibit I and you signed upon receipt thereof
but you did not read the contents of it?
A. Yes, sir, as I was in a hurry.
Q. After you received that original where did you place it?
A. I placed it in the usual place where I place my mails.
Petitioner, therefore, was notified about the auction sale. It was negligence on his part when
he ignored such notice. By his very own admission that he received the notice, his now coming
to court assailing the validity of the auction sale loses its force.
Petitioner's third assignment of grave error likewise lacks merit. As a general rule, gross And finally, even if we are inclined to give relief to the petitioner on equitable grounds, there
inadequacy of price is not material (De Leon v. Salvador, 36 SCRA 567; Ponce de Leon v. are no strong considerations of substantial justice in his favor. Mr. Francia failed to pay his
Rehabilitation Finance Corporation, 36 SCRA 289; Tolentino v. Agcaoili, 91 Phil. 917 Unrep.). taxes for 14 years from 1963 up to the date of the auction sale. He claims to have pocketed
See also Barrozo Vda. de Gordon v. Court of Appeals (109 SCRA 388) we held that "alleged the notice of sale without reading it which, if true, is still an act of inexplicable negligence. He
gross inadequacy of price is not material when the law gives the owner the right to redeem as did not withdraw from the expropriation payment deposited with the Philippine National Bank
when a sale is made at public auction, upon the theory that the lesser the price, the easier it is an amount sufficient to pay for the back taxes. The petitioner did not pay attention to another
for the owner to effect redemption." In Velasquez v. Coronel (5 SCRA 985), this Court held: notice sent by the City Treasurer on November 3, 1978, during the period of redemption,
... [R]espondent treasurer now claims that the prices for which the lands were sold are regarding his tax delinquency. There is furthermore no showing of bad faith or collusion in the
unconscionable considering the wide divergence between their assessed values and the purchase of the property by Mr. Fernandez. The petitioner has no standing to invoke equity in
amounts for which they had been actually sold. However, while in ordinary sales for reasons his attempt to regain the property by belatedly asking for the annulment of the sale.
of equity a transaction may be invalidated on the ground of inadequacy of price, or when such WHEREFORE, IN VIEW OF THE FOREGOING, the petition for review is DISMISSED. The
inadequacy shocks one's conscience as to justify the courts to interfere, such does not follow decision of the respondent court is affirmed.
when the law gives to the owner the right to redeem, as when a sale is made at public auction, SO ORDERED.
upon the theory that the lesser the price the easier it is for the owner to effect the redemption.
And so it was aptly said: "When there is the right to redeem, inadequacy of price should not be
material, because the judgment debtor may reacquire the property or also sell his right to
redeem and thus recover the loss he claims to have suffered by reason of the price obtained
at the auction sale."
The reason behind the above rulings is well enunciated in the case of Hilton et. ux. v. De Long,
et al. (188 Wash. 162, 61 P. 2d, 1290):
If mere inadequacy of price is held to be a valid objection to a sale for taxes, the collection of
taxes in this manner would be greatly embarrassed, if not rendered altogether impracticable.
In Black on Tax Titles (2nd Ed.) 238, the correct rule is stated as follows: "where land is sold
for taxes, the inadequacy of the price given is not a valid objection to the sale." This rule arises
from necessity, for, if a fair price for the land were essential to the sale, it would be useless to
offer the property. Indeed, it is notorious that the prices habitually paid by purchasers at tax
sales are grossly out of proportion to the value of the land. (Rothchild Bros. v. Rollinger, 32
Wash. 307, 73 P. 367, 369).
In this case now before us, we can aptly use the language of McGuire, et al. v. Bean, et al.
(267 P. 555):
Like most cases of this character there is here a certain element of hardship from which we
would be glad to relieve, but do so would unsettle long-established rules and lead to uncertainty
and difficulty in the collection of taxes which are the life blood of the state. We are convinced
that the present rules are just, and that they bring hardship only to those who have invited it by
their own neglect.
We are inclined to believe the petitioner's claim that the value of the lot has greatly appreciated
in value. Precisely because of the widening of Buendia Avenue in Pasay City, which
necessitated the expropriation of adjoining areas, real estate values have gone up in the area.
However, the price quoted by the petitioner for a 203 square meter lot appears quite
exaggerated. At any rate, the foregoing reasons which answer the petitioner's claims lead us
to deny the petition.

148
G.R. No. L-18994 June 29, 1963
MELECIO R. DOMINGO, as Commissioner of Internal Revenue, petitioner,
vs.
HON. LORENZO C. GARLITOS, in his capacity as Judge of the Court of First Instance of
Leyte,
and SIMEONA K. PRICE, as Administratrix of the Intestate Estate of the late Walter Scott
Price,respondents.
Office of the Solicitor General and Atty. G. H. Mantolino for petitioner.
Benedicto and Martinez for respondents.
LABRADOR, J.:
This is a petition for certiorari and mandamus against the Judge of the Court of First Instance
of Leyte, Ron. Lorenzo C. Garlitos, presiding, seeking to annul certain orders of the court and
for an order in this Court directing the respondent court below to execute the judgment in favor
of the Government against the estate of Walter Scott Price for internal revenue taxes.
It appears that in Melecio R. Domingo vs. Hon. Judge S. C. Moscoso, G.R. No. L-14674,
January 30, 1960, this Court declared as final and executory the order for the payment by the
estate of the estate and inheritance taxes, charges and penalties, amounting to P40,058.55,
issued by the Court of First Instance of Leyte in, special proceedings No. 14 entitled "In the
matter of the Intestate Estate of the Late Walter Scott Price." In order to enforce the claims
against the estate the fiscal presented a petition dated June 21, 1961, to the court below for
the execution of the judgment. The petition was, however, denied by the court which held that
the execution is not justifiable as the Government is indebted to the estate under administration
in the amount of P262,200. The orders of the court below dated August 20, 1960 and
September 28, 1960, respectively, are as follows:
Atty. Benedicto submitted a copy of the contract between Mrs. Simeona K. Price, Administratrix
of the estate of her late husband Walter Scott Price and Director Zoilo Castrillo of the Bureau
of Lands dated September 19, 1956 and acknowledged before Notary Public Salvador V.
Esguerra, legal adviser in Malacaang to Executive Secretary De Leon dated December 14,
1956, the note of His Excellency, Pres. Carlos P. Garcia, to Director Castrillo dated August 2,
1958, directing the latter to pay to Mrs. Price the sum ofP368,140.00, and an extract of page
765 of Republic Act No. 2700 appropriating the sum of P262.200.00 for the payment to the
Leyte Cadastral Survey, Inc., represented by the administratrix Simeona K. Price, as directed
in the above note of the President. Considering these facts, the Court orders that the payment
of inheritance taxes in the sum of P40,058.55 due the Collector of Internal Revenue as ordered
paid by this Court on July 5, 1960 in accordance with the order of the Supreme Court
promulgated July 30, 1960 in G.R. No. L-14674, be deducted from the amount of P262,200.00
due and payable to the Administratrix Simeona K. Price, in this estate, the balance to be paid
by the Government to her without further delay. (Order of August 20, 1960)
The Court has nothing further to add to its order dated August 20, 1960 and it orders that the
payment of the claim of the Collector of Internal Revenue be deferred until the Government
shall have paid its accounts to the administratrix herein amounting to P262,200.00. It may not
149
be amiss to repeat that it is only fair for the Government, as a debtor, to its accounts to its
citizens-creditors before it can insist in the prompt payment of the latter's account to it, specially
taking into consideration that the amount due to the Government draws interests while the
credit due to the present state does not accrue any interest. (Order of September 28, 1960)
The petition to set aside the above orders of the court below and for the execution of the claim
of the Government against the estate must be denied for lack of merit. The ordinary procedure
by which to settle claims of indebtedness against the estate of a deceased person, as an
inheritance tax, is for the claimant to present a claim before the probate court so that said court
may order the administrator to pay the amount thereof. To such effect is the decision of
this Court in Aldamiz vs. Judge of the Court of First Instance of Mindoro, G.R. No. L-2360, Dec.
29, 1949, thus:
. . . a writ of execution is not the proper procedure allowed by the Rules of Court for the payment
of debts and expenses of administration. The proper procedure is for the court to order the sale
of personal estate or the sale or mortgage of real property of the deceased and all debts or
expenses of administrator and with the written notice to all the heirs legatees and devisees
residing in the Philippines, according to Rule 89, section 3, and Rule 90, section 2. And when
sale or mortgage of real estate is to be made, the regulations contained in Rule 90, section 7,
should be complied with.1wph1.t
Execution may issue only where the devisees, legatees or heirs have entered into possession
of their respective portions in the estate prior to settlement and payment of the debts and
expenses of administration and it is later ascertained that there are such debts and expenses
to be paid, in which case "the court having jurisdiction of the estate may, by order for that
purpose, after hearing, settle the amount of their several liabilities, and order how much and in
what manner each person shall contribute, and mayissue execution if circumstances require"
(Rule 89, section 6; see also Rule 74, Section 4; Emphasis supplied.) And this is not the instant
case.
The legal basis for such a procedure is the fact that in the testate or intestate proceedings to
settle the estate of a deceased person, the properties belonging to the estate are under the
jurisdiction of the court and such jurisdiction continues until said properties have been
distributed among the heirs entitled thereto. During the pendency of the proceedings all the
estate is in custodia legis and the proper procedure is not to allow the sheriff, in case of the
court judgment, to seize the properties but to ask the court for an order to require the
administrator to pay the amount due from the estate and required to be paid.
Another ground for denying the petition of the provincial fiscal is the fact that the court having
jurisdiction of the estate had found that the claim of the estate against the Government has
been recognized and an amount of P262,200 has already been appropriated for the purpose
by a corresponding law (Rep. Act No. 2700). Under the above circumstances, both the claim
of the Government for inheritance taxes and the claim of the intestate for services rendered
have already become overdue and demandable is well as fully liquidated. Compensation,
therefore, takes place by operation of law, in accordance with the provisions of Articles 1279
and 1290 of the Civil Code, and both debts are extinguished to the concurrent amount, thus:
ART. 1200. When all the requisites mentioned in article 1279 are present, compensation takes
effect by operation of law, and extinguished both debts to the concurrent amount, eventhough
the creditors and debtors are not aware of the compensation.
It is clear, therefore, that the petitioner has no clear right to execute the judgment for taxes
against the estate of the deceased Walter Scott Price. Furthermore, the petition
for certiorari and mandamus is not the proper remedy for the petitioner. Appeal is the remedy.
The petition is, therefore, dismissed, without costs.
Padilla, Bautista Angelo, Concepcion, Barrera, Paredes, Dizon, Regala and Makalintal, JJ.,
concur.
Bengzon, C.J., took no part.

150
G.R. No. 125704 August 28, 1998
PHILEX MINING CORPORATION, petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, COURT OF APPEALS, and THE COURT OF
TAX APPEALS,respondents.
ROMERO, J.:
Petitioner Philex Mining Corp. assails the decision of the Court of Appeals promulgated on April
8, 1996 in CA-G.R. SP No. 36975 1 affirming the Court of Tax Appeals decision in CTA Case
No. 4872 dated March 16, 1995 2 ordering it to pay the amount of P110,677,668.52 as excise
tax liability for the period from the 2nd quarter of 1991 to the 2nd quarter of 1992 plus 20%
annual interest from August 6, 1994 until fully paid pursuant to Sections 248 and 249 of the
Tax Code of 1977.
The facts show that on August 5, 1992, the BIR sent a letter to Philex asking it to settle its tax
liabilities for the 2nd, 3rd and 4th quarter of 1991 as well as the 1st and 2nd quarter of 1992 in
the total amount of P123,821.982.52 computed as follows:
PERIOD COVERED BASIC TAX 25% SURCHARGE INTEREST TOTAL EXCISE
TAX DUE
2nd Qtr., 1991 12,911,124.60 3,227,781.15 3,378,116.16 19,517,021.91
3rd Qtr., 1991 14,994,749.21 3,748,687.30 2,978,409.09 21,721,845.60
4th Qtr., 1991 19,406,480.13 4,851,620.03 2,631,837.72 26,889,937.88
47,312,353.94 11,828,088.48 8,988,362.97 68,128,805.39
Aggrieved with the decision, Philex appealed the case before the Court of Appeals docketed
1st Qtr., 1992 23,341,849.94 5,835,462.49 1,710,669.82 30,887,982.25
2nd Qtr., 1992 19,671,691.76 4,917,922.94 215,580.18 24,805,194.88
WHEREFORE, the appeal by way of petition for review is hereby DISMISSED and the decision
43,013,541.70 10,753,385.43 1,926,250.00 55,693,177.13
3
90,325,895.64 22,581,473.91 10,914,612.97 123,821,982.52
========= ========= ========= =========
In a letter dated August 20, 1992, 4 Philex protested the demand for payment of the tax
liabilities stating that it has pending claims for VAT input credit/refund for the taxes it paid for
the years 1989 to 1991 in the amount of P119,977,037.02 plus interest. Therefore these claims
for tax credit/refund should be applied against the tax liabilities, citing our ruling
inCommissioner of Internal Revenue v. Itogon-Suyoc Mines, Inc. 5
6
In reply, the BIR, in a letter dated September 7, 1992, found no merit in Philex's position.
Since these pending claims have not yet been established or determined with certainty, it
151
follows that no legal compensation can take place. Hence, the BIR reiterated its demand that
Philex settle the amount plus interest within 30 days from the receipt of the letter.
In view of the BIR's denial of the offsetting of Philex's claim for VAT input credit/refund against
its excise tax obligation, Philex raised the issue to the Court of Tax Appeals on November 6,
1992. 7 In the course of the proceedings, the BIR issued Tax Credit Certificate SN 001795 in
the amount of P13,144,313.88 which, applied to the total tax liabilities of Philex of
P123,821,982.52; effectively lowered the latter's tax obligation to P110,677,688.52.
Despite the reduction of its tax liabilities, the CTA still ordered Philex to pay the remaining
balance of P110,677,688.52 plus interest, elucidating its reason, to wit:
Thus, for legal compensation to take place, both obligations must be liquidated and
demandable. "Liquidated" debts are those where the exact amount has already been
determined (PARAS, Civil Code of the Philippines, Annotated, Vol. IV, Ninth Edition, p. 259).
In the instant case, the claims of the Petitioner for VAT refund is still pending litigation, and still
has to be determined by this Court (C.T.A. Case No. 4707). A fortiori, the liquidated debt of the
Petitioner to the government cannot, therefore, be set-off against the unliquidated claim which
Petitioner conceived to exist in its favor (see Compaia General de Tabacos vs. French and
Unson, No. 14027, November 8, 1918, 39 Phil. 34). 8
Moreover, the Court of Tax Appeals ruled that "taxes cannot be subject to set-off on
compensation since claim for taxes is not a debt or contract." 9 The dispositive portion of the
CTA decision 10 provides:
In all the foregoing, this Petition for Review is hereby DENIED for lack of merit and Petitioner
is hereby ORDERED to PAY the Respondent the amount of P110,677,668.52 representing
excise tax liability for the period from the 2nd quarter of 1991 to the 2nd quarter of 1992 plus
20% annual interest from August 6, 1994 until fully paid pursuant to Section 248 and 249 of the
Tax Code, as amended.
as CA-GR. CV No. 36975. 11 Nonetheless, on April 8, 1996, the Court of Appeals a Affirmed
the Court of Tax Appeals observation. The pertinent portion of which reads: 12
dated March 16, 1995 is AFFIRMED.
Philex filed a motion for reconsideration which was, nevertheless, denied in a Resolution dated
July 11, 1996. 13
However, a few days after the denial of its motion for reconsideration, Philex was able to obtain
its VAT input credit/refund not only for the taxable year 1989 to 1991 but also for 1992 and
1994, computed as follows: 14
Period Covered Tax Credit Date
By Claims For Certificate of
VAT refund/credit Number Issue Amount
1994 (2nd Quarter) 007730 11 July 1996 P25,317,534.01
1994 (4th Quarter) 007731 11 July 1996 P21,791,020.61
1989 007732 11 July 1996 P37,322,799.19
1990-1991 007751 16 July 1996 P84,662,787.46
1992 (1st-3rd Quarter) 007755 23 July 1996 P36,501,147.95
In view of the grant of its VAT input credit/refund, Philex now contends that the same
should, ipso jure, off-set its excise tax liabilities 15 since both had already become "due and
demandable, as well as fully liquidated;" 16 hence, legal compensation can properly take place.
We see no merit in this contention.
In several instances prior to the instant case, we have already made the pronouncement that
taxes cannot be subject to compensation for the simple reason that the government and the
taxpayer are not creditors and debtors of each other. 17 There is a material distinction between
a tax and debt. Debts are due to the Government in its corporate capacity, while taxes are due
to the Government in its sovereign capacity. 18 We find no cogent reason to deviate from the
aforementioned distinction.
Prescinding from this premise, in Francia v. Intermediate Appellate Court, 19 we categorically
held that taxes cannot be subject to set-off or compensation, thus:
We have consistently ruled that there can be no off-setting of taxes against the claims that the
taxpayer may have against the government. A person cannot refuse to pay a tax on the ground
that the government owes him an amount equal to or greater than the tax being collected. The
collection of a tax cannot await the results of a lawsuit against the government.
The ruling in Francia has been applied to the subsequent case of Caltex Philippines, Inc. v.
Commission on Audit,20 which reiterated that:
. . . a taxpayer may not offset taxes due from the claims that he may have against the
government. Taxes cannot be the subject of compensation because the government and
taxpayer are not mutually creditors and debtors of each other and a claim for taxes is not such
a debt, demand, contract or judgment as is allowed to be set-off.
Further, Philex's reliance on our holding in Commissioner of Internal Revenue v. Itogon-Suyoc
Mines Inc., wherein we ruled that a pending refund may be set off against an existing tax liability
even though the refund has not yet been approved by the Commissioner, 21 is no longer without
any support in statutory law.
It is important to note, that the premise of our ruling in the aforementioned case was anchored
on Section 51 (d) of the National Revenue Code of 1939. However, when the National Internal
Revenue Code of 1977 was enacted, the same provision upon which the Itogon-
Suyoc pronouncement was based was omitted. 22 Accordingly, the doctrine enunciated
in Itogon-Suyoc cannot be invoked by Philex.
Despite the foregoing rulings clearly adverse to Philex's position, it asserts that the imposition
of surcharge and interest for the non-payment of the excise taxes within the time prescribed
was unjustified. Philex posits the theory that it had no obligation to pay the excise tax liabilities
within the prescribed period since, after all, it still has pending claims for VAT input credit/refund
with BIR. 23
152
We fail to see the logic of Philex's claim for this is an outright disregard of the basic principle in
tax law that taxes are the lifeblood of the government and so should be collected without
unnecessary hindrance. 24 Evidently, to countenance Philex's whimsical reason would render
ineffective our tax collection system. Too simplistic, it finds no support in law or in jurisprudence.
To be sure, we cannot allow Philex to refuse the payment of its tax liabilities on the ground that
it has a pending tax claim for refund or credit against the government which has not yet been
granted. It must be noted that a distinguishing feature of a tax is that it is compulsory rather
than a matter of bargain. 25 Hence, a tax does not depend upon the consent of the
taxpayer. 26 If any taxpayer can defer the payment of taxes by raising the defense that it still
has a pending claim for refund or credit, this would adversely affect the government revenue
system. A taxpayer cannot refuse to pay his taxes when they fall due simply because he has
a claim against the government or that the collection of the tax is contingent on the result of the
lawsuit it filed against the government. 27 Moreover, Philex's theory that would automatically
apply its VAT input credit/refund against its tax liabilities can easily give rise to confusion and
abuse, depriving the government of authority over the manner by which taxpayers credit and
offset their tax liabilities.
Corollarily, the fact that Philex has pending claims for VAT input claim/refund with the
government is immaterial for the imposition of charges and penalties prescribed under Section
248 and 249 of the Tax Code of 1977. The payment of the surcharge is mandatory and the BIR
is not vested with any authority to waive the collection thereof. 28 The same cannot be
condoned for flimsy reasons, 29 similar to the one advanced by Philex in justifying its non-
payment of its tax liabilities.
Finally, Philex asserts that the BIR violated Section 106 (e) 30 of the National Internal Revenue
Code of 1977, which requires the refund of input taxes within 60 days, 31 when it took five years
for the latter to grant its tax claim for VAT input credit/refund. 32
In this regard, we agree with Philex. While there is no dispute that a claimant has the burden
of proof to establish the factual basis of his or her claim for tax credit or refund, 33 however,
once the claimant has submitted all the required documents it is the function of the BIR to
assess these documents with purposeful dispatch. After all, since taxpayers owe honestly to
government it is but just that government render fair service to the taxpayers. 34
In the instant case, the VAT input taxes were paid between 1989 to 1991 but the refund of
these erroneously paid taxes was only granted in 1996. Obviously, had the BIR been more
diligent and judicious with their duty, it could have granted the refund earlier. We need not
remind the BIR that simple justice requires the speedy refund of wrongly-held taxes. 35 Fair
dealing and nothing less, is expected by the taxpayer from the BIR in the latter's discharge of
its function. As aptly held inRoxas v. Court of Tax Appeals: 36
The power of taxation is sometimes called also the power to destroy. Therefore it should be
exercised with caution to minimize injury to the proprietary rights of a taxpayer. It must be
exercised fairly, equally and uniformly, lest the tax collector kill the "hen that lays the golden
egg" And, in order to maintain the general public's trust and confidence in the Government this
power must be used justly and not treacherously.
Despite our concern with the lethargic manner by which the BIR handled Philex's tax claim, it
is a settled rule that in the performance of governmental function, the State is not bound by the
neglect of its agents and officers. Nowhere is this more true than in the field of
taxation. 37 Again, while we understand Philex's predicament, it must be stressed that the same
is not a valid reason for the non-payment of its tax liabilities.
To be sure, this is not to state that the taxpayer is devoid of remedy against public servants or
employees, especially BIR examiners who, in investigating tax claims are seen to drag their
feet needlessly. First, if the BIR takes time in acting upon the taxpayer's claim for refund, the
latter can seek judicial remedy before the Court of Tax Appeals in the manner prescribed by
law. 38 Second, if the inaction can be characterized as willful neglect of duty, then recourse
under the Civil Code and the Tax Code can also be availed of.
Art. 27 of the Civil Code provides:
Art. 27. Any person suffering material or moral loss because a public servant or employee
refuses or neglects, without just cause, to perform his official duty may file an action for
damages and other relief against the latter, without prejudice to any disciplinary action that may
be taken.
More importantly, Section 269 (c) of the National Internal Revenue Act of 1997 states:
xxx xxx xxx
(c) Wilfully neglecting to give receipts, as by law required for any sum collected in the
performance of duty or wilfully neglecting to perform, any other duties enjoyed by law.
Simply put, both provisions abhor official inaction, willful neglect and unreasonable delay in the
performance of official duties. 39 In no uncertain terms must we stress that every public
employee or servant must strive to render service to the people with utmost diligence and
efficiency. Insolence and delay have no place in government service. The BIR, being the
government collecting arm, must and should do no less. It simply cannot be apathetic and
laggard in rendering service to the taxpayer if it wishes to remain true to its mission of hastening
the country's development. We take judicial notice of the taxpayer's generally negative
perception towards the BIR; hence, it is up to the latter to prove its detractors wrong.
In sum, while we can never condone the BIR's apparent callousness in performing its duties,
still, the same cannot justify Philex's non-payment of its tax liabilities. The adage "no one should
take the law into his own hands" should have guided Philex's action.
WHEREFORE, in view of the foregoing, the instant petition is hereby DISMISSED. The
assailed decision of the Court of Appeals dated April 8, 1996 is hereby AFFIRMED.
SO ORDERED.

153
154